SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For The Fiscal Year Ended | |||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-15583
DELTA APPAREL, INC.
(Exact name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) | 58-2508794 (I.R.S. Employer Identification No.) |
2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (864) 232-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.01 | DLA | NYSE |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned filer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company ☐ | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
Based on the closing price of
the registrant's common stock of $29.94 as quoted by the NYSE American on AprilThe number of outstanding shares of the registrant’s Common Stockcommon stock was 6,915,663 as of
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Annual Meeting of Shareholders is currently scheduled for February 9, 2023. Portions of the registrant's Proxy Statement for its annual meeting are incorporated by reference in Part III of this Annual Report on Form 10-K shall be incorporated from the registrant’s definitive Proxy Statement towhere indicated. Such proxy statement will be filed pursuant to Regulation 14A forwith the registrant’s Annual MeetingSecurities and Exchange Commission ("SEC") within 120 days of Shareholders currently scheduled to be held on Februarythe registrant's fiscal year ended October 1, 2018.
EX-10.10 EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2 Cautionary Note Regarding Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following: ● the impact of the COVID-19 pandemic on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions; A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is Overview Delta Apparel, Inc. 11 18 18 19 19 20 20 20 25 25 25 26 28 Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 28 28 28 28 29 29 29 33 34 EX-10.22 EX-10.23 EX-21 Securities and Exchange Commission (the “SEC”),SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, "outlook", “anticipate”, “expect”, “intend”, “seek’"remain", “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.the volatility and uncertainty of cotton and other raw material prices;the general U.S. and international economic conditions;the competitive conditions in the apparel industry;restrictions on our ability to borrow capital or service our indebtedness;deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers;our ability to predict or react to changing consumer preferences or trends;our ability to successfully open and operate new retail stores in a timely and cost-effective manner;pricing pressures and the implementation of cost reduction strategies;changes in economic, political or social stability at our offshore locations;disruptions at our manufacturing and other facilities;our ability to attract and retain key management;the effect of unseasonable or significant weather conditions on purchases of our products;significant changes in our effective tax rate;interest rate fluctuations increasing our obligations under our variable rate indebtedness;the ability to raise additional capital;the ability to grow, achieve synergies and realize the expected profitability of acquisitions;the volatility and uncertainty of energy and fuel prices;material disruptions in our information systems related to our business operations;data security or privacy breaches;significant interruptions within our manufacturing or distribution operations;changes in or our ability to comply with safety, health and environmental regulations;significant litigation in either domestic or international jurisdictions;the ability to protect our trademarks and other intellectual property;the ability to obtain and renew our significant license agreements;the impairment of acquired intangible assets;changes in ecommerce laws and regulations;changes in international trade regulations;our ability to comply with trade regulations;changes in employment laws or regulations or our relationship with employees;cost increases and reduction in future profitability due to the effects of healthcare legislation;foreign currency exchange rate fluctuations;violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors;the illiquidity of our shares;price volatility in our shares and the general volatility of the stock market; andthe costs required to comply with the regulatory landscape regarding public company governance and disclosure.● the general U.S. and international economic conditions; ● significant interruptions or disruptions within our manufacturing, distribution or other operations; ● deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers; ● the volatility and uncertainty of cotton and other raw material prices and availability; ● the competitive conditions in the apparel industry; ● our ability to predict or react to changing consumer preferences or trends; ● our ability to successfully open and operate new retail stores in a timely and cost-effective manner; ● the ability to grow, achieve synergies and realize the expected profitability of acquisitions; ● changes in economic, political or social stability at our offshore locations in areas in which we, or our suppliers or vendors, operate; ● our ability to attract and retain key management; ● the volatility and uncertainty of energy, fuel and related costs; ● material disruptions in our information systems related to our business operations; ● compromises of our data security; ● significant changes in our effective tax rate; ● significant litigation in either domestic or international jurisdictions; ● recalls, claims and negative publicity associated with product liability issues; ● the ability to protect our trademarks and other intellectual property; ● changes in international trade regulations; ● our ability to comply with trade regulations; ● changes in employment laws or regulations, our relationship with employees; or our ability to attract and retain employees; ● negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors; ● the inability of suppliers or other third-parties, including those providing properly functioning key equipment, transportation, and other services, to perform their obligations or fulfill the terms of their contracts with us; ● restrictions on our ability to borrow capital or service our indebtedness; ● interest rate fluctuations increasing our obligations under our variable rate indebtedness; ● the ability to raise additional capital; ● the impairment of acquired intangible assets; ● foreign currency exchange rate fluctuations; ● the illiquidity of our shares; and ● price volatility in our shares and the general volatility of the stock market. describedset forth in Part 1 under the heading of “Risksubheading "Risk Factors.”" Any forward-looking statements in this Annual Report on Form 10-K 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 on Form 10-K, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities laws.
1PART IITEM 1.BUSINESS“Delta Apparel”, the “Company”, “we”, “us” and “our” are used interchangeably to refer to together(collectively with our domestic wholly-owned subsidiaries, includingDTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, (“Soffe”), Junkfood Clothing Company (“Junkfood”), Salt Life, LLC (“Salt Life”), Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to"Delta Apparel," "we," "us," "our," or the context. On March 31, 2017, we sold our Junkfood business to JMJD Ventures, LLC. See Note 3—Divestitures for further information on this transaction.
We design and internally manufacture the majority of our products whichwith more than 90% of the apparel units that we sell are sewn in our own facilities. This allows us to offer a high degree of consistency and quality, controls as well as leverage scale efficiencies. One of our strengths isefficiencies, and react quickly to changes in trends within the speed with which we can reach the market from design to delivery.
We became a diversified branded apparel company through acquisitions that added well-recognized brands towere incorporated in Georgia in 1999, and our portfolio, expanded our product offerings and broadened our distribution channels and customer base.
We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not part of this, or any other, report that we file with or furnish to the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097. Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.
Segments, Products, Brands, and Customers
Our operations are managed and reported in two distinct segments: basicssegments, Delta Group and branded.
Delta Group
The basics segmentDelta Group is comprised of ourthe following 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
Delta Activewear
Delta Activewear is a preferred supplier of activewear apparel to regional and global brands as well as direct to retail and wholesale markets. The Activewear business is organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their go-to-market strategies and how their respective customer bases source their various apparel needs. Our Delta Direct channel services the screen print, promotional, and eRetailer markets as well as retail licensing customers that sell through to many mid-tier and mass market retailers. Delta Direct products include a broad portfolio of apparel and accessories under the Delta, Delta Platinum, and Soffe brands as well as sourced items from select third party brands. Our fashion basics line includes our Platinum Collection, which offers fresh, fashionable silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel products, including the Delta Dri line of performance shirts built with moisture-wicking material to keep athletes dry and comfortable; ringspun garments with superior comfort, style and durability; and Delta Soft, a collection with an incredible feel and price. We also offer our heritage, mid- and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.
The iconic Soffe brand offers activewear for spirit makers and record breakers and is widely known for the original "cheer short" with the signature roll-down waistband. Soffe carries a wide range of activewear for the entire family. Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and veteran United States military personnel worldwide. The Soffe men's assortment features the tagline "anchored in the military, grounded in training" and offers everything from physical training gear certified by the respective branches of the military, classic base layers that include the favored 3-pack tees, and the iconic "ranger panty." Complementing the Delta and Soffe brand apparel, we provide our customers with a broad range of product categories with nationally recognized branded products including polos, outerwear, headwear, bags and other accessories. Our Soffe products are also available direct to consumers at www.soffe.com.
Our Global Brands channel serves as a key supply chain partner to large multi-national brands, major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces, providing services ranging from custom product development to shipment of branded products with “retail-ready” value-added services including embellishment, hangtags, and ticketing.
Our Retail Direct channel serves brick and mortar and online retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to the retail locations and ecommerce fulfillment centers of a diversified customer base including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers.
As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offers a seamless solution for small-run decoration needs with on-demand digital print services, powered by DTG2Go.
Salt Life Group
Salt Life
Salt Life is an authentic, aspirational lifestyle brand that represents a passion for the ocean, the salt air, and, more importantly, a way of life and all it offers, from surfing, fishing, and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines function and fashion with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the cotton graphic tees and logo decals that originally drove awareness for the brand, and expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories. In fiscal 2022, Salt Life grew its retail footprint to include twenty-one stores across the U.S. coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware. Consumers can also seamlessly experience the Salt Life brand through one of our businesses isretail partners which include surf shops, specialty stores, department stores, and outdoor merchants or by accessing our abilitySalt Life ecommerce site at www.saltlife.com.
See Note 13 to anticipatethe Consolidated Financial Statements and quickly respond to changing consumer preferences. Our art team reviews trend analyses, concepts"Management's Discussion and color trends to keepAnalysis of Financial Condition and Results of Operation" for additional information regarding reportable segments.
Manufacturing, Sourcing, and Distribution
The vast majority of our products are manufactured or sewn in facilities that we own or lease and designs in style. This information is used byoperate to support both the Delta Group and Salt Life Group. To a lesser extent, we also use third-party contractors and suppliers to supplement our in-house designersrequirements. Our vertically-integrated manufacturing operations include a textile facility and merchandisers, alongmultiple sew and decoration facilities.
Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We have operated with a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively "Parkdale") to supply our yarn requirements since 2005, with our existing agreement running through December 31, 2024. Under the supply agreement, we purchase all of our yarn requirements for use in our manufacturing operations from Parkdale, 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, as reported by the New York Cotton Exchange, plus a fixed conversion cost. We set future cotton prices with purchase commitments as a component of the purchase price in advance of the shipment of finished yarn from Parkdale.
We manufacture fabrics in our leased textile facility located near San Pedro Sula, Honduras. We also purchase fabric sourced in Mexico for use in our Campeche, Mexico sew facility, 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. In 2022 and 2021, we manufactured approximately 80% of fabrics used in our internally-produced garments. The manufacturing process continues at one of our six apparel manufacturing facilities where fabric is cut and sewn into finished garments. These owned or leased facilities are located domestically (two in North Carolina) and internationally (two in Honduras, one in El Salvador and one in Mexico). In 2022 and 2021, approximately 95% or more of our manufactured products were sewn in our owned or leased manufacturing facilities. The remaining products were sewn by third-party contractors located primarily in the Caribbean Basin. To supplement our internal manufacturing platform, we purchase products from third-party global suppliers. In 2022 and 2021, we sourced less than 10% of our total products from third parties.
Many of the garments we produce will be decorated using screen printing or digital printing technology, and will be retail-packaged, including ticketing, hang tags, and hangers. These services can be performed domestically for quick-turn service or internationally in our facilities in El Salvador and Mexico. We offer digital fulfillment services, powered by DTG2Go, at eight domestic facilities, including five such facilities that are integrated with Delta Group distribution centers. These facilities support our strategy of establishing integrated fulfillment locations that combine our DTG2Go state-of-the-art digital platform with our Delta Activewear supply of fashion and core basic garments. Furthermore, these facilities create a seamless nationwide footprint allowing us to reach approximately 95% of all U.S. consumers with two-day shipping.
Sales & Marketing
Our sales and marketing personnel, who review market trends,functions consist of both employed and independent sales resultsrepresentatives and agencies located throughout the country. Our sales teams service specialty and resort shops; department, mid-tier and mass retailers; sporting goods stores; eRetailers and the popularityU.S. military. Our brands leverage both in-house and outsourced marketing communication professionals to amplify their lifestyle statements.
The majority of our latestapparel products are produced based on forecasts to permit quick shipments to our customers; however, our custom programs are generally made only to order. During 2022, we shipped our products to design new merchandise to meet the expected future demandsapproximately 7,300 customers, many of whom have numerous retail doors. No single customer accounted for more than 10% 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 lifestyle 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. Our other registered trademarks include COAST®, Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design.Design logo trademark. Our trademarks are valuable assets that differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against infringement.
Environmental, Sustainability, and have termsGovernance
We aim to disclose and communicate transparently any material risks that range from onecould affect our investors, and we strive to three years. We are not dependent on any single licenseimplement policies and practices that continuously improve the transparency and sustainability of our supply chain. The Environmental, Sustainability, and Governance (“ESG”) disclosures within this Annual Report and our license agreements collectively are of valuedefinitive Proxy Statement align with the standards issued by the Sustainability Accounting Standards Board (“SASB”) for the Apparel, Accessories, and Footwear industry and with regulations and guidance issued by the Securities and Exchange Commission. The indicators in the Annual Report and definitive Proxy Statement have been carefully selected to our branded segment.
Conserving the Environment
We believe that efficiently and sustainably managing natural resources is a smart business practice and a responsible decision for the planet. By effectively and safely managing the materials used 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 less than 1% in fiscal year 2017, and approximately 2% in each of fiscal years 2016 and 2015.
Reducing our Environmental Impact
Environmental problems such as climate change and resource depletion are escalating worldwide. Therefore, understanding and managing greenhouse gas emissions is important to effectively mitigate our impact to the environment. We are committed to monitoring our greenhouse gas emissions and adopting innovative technologies to improve the energy efficiency of our facilities strategically located throughout the United States that carry in-stock inventoryand reduce our overall energy intensity, which is measured as primary energy consumption in kilowatt-hours per unit of gross domestic product.
The focus on reducing our overall energy intensity is driven by our goal to establish an energy efficient operation and reduce greenhouse gas emissions, which will contribute to lowering our operating costs as well as reducing our carbon footprint. The operations at our Ceiba Textiles facility account 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 quantity. Because a significant portion of the fuel and electricity used in our business consistsmanufacturing network and, as such, are our largest contributors of at-once replenishment,carbon dioxide (CO2) emissions. In May 2022 Ceiba Textiles began receiving 100 percent clean, renewable energy from a 14.7-megawatt solar power array installed by the industrial park in which the facility is located. Not only is solar energy sustainable, it does not emit greenhouse gases, air, or water pollution when producing electricity, contributing to our goal to establish an energy efficient operation and reduce greenhouse gas emissions.
When comparing 2022 to our 2018 baseline year, we have reduced our total greenhouse gas emissions by 3.5 percent and reduced our emissions intensity by 12 percent in 2022. These reductions avoid the equivalent of 1,637 metric tons of CO2 emissions, which is comparable to the energy used by approximately 206 homes for one year or the carbon sequestered by 1,937 acres of U.S. forests in one year.
In recent years we implemented several energy efficiency projects such as installing a heat exchanger at our Ceiba Textiles facility in Honduras that plays an essential role in reducing the environmental impact of manufacturing processes by recovering and reusing energy. We also continue to replace compact florescent light bulbs with LED lighting, which is known to emit less heat and use less energy than conventional bulbs, decrease the temperature on factory floors, and thus potentially raise productivity, particularly on hot days. In the sewing area, we improved the performance of our sewing machines by installing new motors that use significantly less energy due to advanced technology. In the knitting operations area, we modified the cooling system to turn off automatically when the outside temperature and humidity reaches the optimum environment inside.
In February 2022, we removed 27 older model circular knitting machines and installed 18 large capacity knitting machines. Each new machine is much more energy efficient in addition to being more productive; with each new machine capable of knitting one and one-half times more greige fabric in less time than one of the older knitting machines. The new knitting machines were directly responsible for reducing our electricity usage by approximately 393,000 kilowatt hours in 2022. Additional energy saving initiatives at Ceiba Textiles included the purchase of a new steam textile dryer that replaced two existing thermal oil dryers. The steam dryer is capable of drying 66 percent more pounds of fabric per week than the thermal dryers and uses 25 percent less energy. Over a four-month service period in 2022, the new steam dryer was responsible for reducing our electricity usage by approximately 250,000 kilowatt hours and we anticipate its energy savings to double next year. Together, these two energy-saving initiatives reduced our total electricity usage by 641,875 kilowatt hours and avoided 455 metric tons of carbon dioxide (CO2) emissions, which is comparable to the carbon sequestered by 538 acres of forest in one full year. In addition, compared to our 2018 baseline year, we produced 9.7 percent more finished fabric in 2022 while using 7.5 percent less fuel and 8.6 percent less electricity. Overall, this has improved our fuel intensity by approximately 16 percent and electricity intensity by approximately 17 percent compared to the 2018 baseline year.
Managing Water
Water is one of the world’s most precious and vital resources. Access to water is essential to Delta Apparel’s manufacturing operations, and we are committed to managing our water use in an efficient and responsible manner. Treating textile wastewater is necessary not only to protect the local ecosystems, but also to make the recycled water available to reuse in manufacturing processes or irrigation. To properly treat problematic substances before the water is discharged, our vertically integrated manufacturing facilities, as well as our third-party fabric suppliers, comply with wastewater discharge requirements through currently active licenses and permits issued by local governments. In each of the last five years, none of these wastewater treatment facilities have received a compliance citation or violation.
During manufacturing the most significant amount of water consumption occurs during the fabric washing, dyeing, and rinsing processes. To reduce our water consumption at Ceiba Textiles, we implemented a system in 2018 that reuses the leftover dye water for use in future batches of similar-colored fabric. This system saves approximately 4 million gallons or 15,000 cubic meters of water per year while maintaining the quality of our dyed fabrics. We also improved our dye formulas to further reduce water consumption and reduce the amount of contaminates remaining in the wastewater. Compared to our 2018 baseline, these initiatives reduced our water intensity by 9.1 percent in 2021 and 7.3 percent in 2022.
Wastewater from Ceiba Textiles is transferred to the Green Valley water treatment facility, which operates on an environmental license issued by the Honduras Ministry of Energy, Natural Resources, Environment, and Mines. Over 87 percent of our 2022 water consumption at Ceiba Textiles was recycled. The Green Valley wastewater treatment facility uses the industry standard primary, secondary, and tertiary water treatment methods based on the types of effluents being discharged as well as regulatory and environmental standards. Treatment procedures are also in place to neutralize and remove additional substances that may potentially be harmful, but are not necessarily regulated. The following information describes the primary, secondary, and tertiary water treatment methods.
● | Primary – Primary treatment methods include screening, sedimentation, homogenization, pH neutralization, and mechanical and chemical flocculation, which is a chemical added to the water that binds suspended solids into heavier particles that are easier to remove. Nano and cross-flow nano filtration techniques are also used to reduce the vast majority of sodium chloride and dyes. |
● | Secondary – Secondary treatment is designed to substantially degrade the biological content of the wastewater by using a combination of physical and aerobic biological processes. Secondary treatment methods include various types of filtration along with an activated sludge process, which stabilizes and converts potentially toxic contaminates into less harmful forms such as carbon dioxide and water, which are safe for the environment. |
● | Tertiary – Tertiary treatment is the final cleaning process that purifies wastewater before it is reused, recycled, or discharged into the environment. Treatment methods include a combination of physical and chemical techniques to decontaminate and purify the water. |
Managing Waste
Our waste management strategy is to reduce, reuse, and recycle, which increases the likelihood that the waste materials we generate during the manufacturing process never reach landfills, lakes, rivers, streams, or municipal water systems. We are committed to full compliance with local, regional, and national environmental laws and regulations in the countries in which we operate as it relates to responsible recycling and disposal of hazardous and non-hazardous waste.
Pre-consumer textile waste is created during the cutting and sewing processes and includes small pieces of fabric trimmed away and other fabric scraps. We have modified sewing patterns to significantly reduce fabric waste during cutting. We also invested in sewing machines capable of folding excess fabric inside the sleeve and bottom hems to eliminate trimming. This initiative not only reduces textile waste but also lowers fabric production needs, which saves water, electricity, and fuel.
We have multiple reuse and recycle programs that help limit the waste that would otherwise be disposed in landfills:
● | We partner with several companies that collect our fabric waste and sell it to manufacturers in the automotive industry, among others, that can mix the fabric with other materials to create alternate applications for the fabric, such as for automotive seats and windshield wipers. |
● | Our offshore screen-printing facilities recycle colors of ink that remain at the end of a production project for use in future production. In one year, this recycling program can recover as much as 75 percent of the residual plastisol ink and 50 percent of the residual water-based ink that otherwise would have been discarded. |
● | All of our manufacturing, sewing, and distribution facilities participate in cardboard recycling programs. Each facility flattens and places all cardboard in an outside container for recycling companies to then collect on a regular schedule. |
Using Safe Chemistry
Textile operations use various chemicals, cleaners, dyes, and inks throughout the manufacturing, finishing, and decorating processes. We strive to use non-hazardous, bioeliminable ingredients in our apparel products and throughout our manufacturing processes to protect the safety of our customers and employees as well as reduce negative impacts on the environment. For example, our DTG2Go digital printing facilities use water-based biodegradable inks that are 100 percent non-hazardous and adhere to the strictest human health and environmental standards.
We have a robust, hazard-based chemicals management system throughout our manufacturing processes. Our commitment to safe chemistry begins in the design and development stage of our products, which are conceived from the latest fashion trends and are fully compliant with statutory, industry, and customer-specific safety requirements. We are proud that the chemicals we use comply with the restricted substance list (“RSL”) published by the American Apparel & Footwear Association (“AAFA”). AAFA is the industry’s leading resource for maintaining and publishing banned and restricted substances lists for finished apparel products around the world. We continuously monitor our RSL, which includes additional substances that may be harmful, but are not necessarily regulated. We also control against the procurement of restricted substances through our purchase approval processes and arrangements with dye and chemical vendors.
The dyes and chemicals used in our manufacturing facilities are tested annually by a third-party laboratory that uses a scoring system to determine the level of compliance. Since 2017 we have maintained a “Green” status, which is the highest level of compliance. Annual tests are also conducted by a third-party laboratory to ensure our compliance with The Consumer Product Safety Improvement Act (“CPSIA”) of 2008 and The Safe Drinking Water and Toxic Enforcement Act of 1986 (“Proposition 65 of California State Law”), in addition to adherence to any customer-supplied RSL. Our manufacturing employees are provided training on compliance with our RSL as well as training on how to safely handle potentially hazardous substances throughout the manufacturing process.
It is also important to us that all our significant third-party yarn and fabric suppliers share our high compliance standards and operate in a legal and responsible manner. We require these suppliers to provide, at least annually, certification or self-declaration documents that demonstrate compliance with industry standard parameters for safe chemistry. We take immediate corrective actions in instances where non-compliance may be identified.
Responsible Sourcing
As a vertically-integrated apparel company, we believe it is important to have a high degree of oversight into all aspects of sourcing, manufacturing, and distribution. To that backlog orderend, the lifecycle of a Delta Apparel garment begins with high quality, sustainable cotton, which is the primary ingredient for the majority of apparel products across our brand portfolio. Over 90 percent of our garments are created with U.S. cotton, which is known for both the quality of its fibers as well as the sustainability practices of the cotton farmers who harvest it. Cotton is not considered a water-intensive crop and more than 60 percent of the cotton grown in the U.S. is produced without irrigation. Cotton is also highly tolerant of soil and water salinity levels, so it can be grown with water and soil resources unsuitable for most other crops. We do not source cotton from regions that regularly experience water stress, and we do not source conflict minerals in the production of our products.
Delta Apparel is a member of the Cotton LEADS program, which is committed to sustainable and traceable cotton production. This partnership enables us to broaden our support of the cotton farmers who supply our Company with high-quality cotton, allowing us to continue transforming sustainably-sourced cotton into high quality, responsible apparel products for our customers. We serve as a supply chain partner for many customers who expect high quality raw materials and require the ability to trace those raw materials back to the source. With cotton traceability, we are now able to trace the fiber used in our garments all the way back to harvest.
The vast majority of the yarn we use in our textile operations is sourced from Parkdale Mills, whose products are independently certified to Standard 100 established by the International Oeko-Tex Association ("OEKO-TEX"), which is one of our industry's most well-known and trusted certifications for product safety. In addition, our significant suppliers of external fabric are certified to Standard 100 by OEKO-TEX.
Monitoring Progress
We use the Sustainable Apparel Coalition’s Higg Index to measure the environmental impact of all our offshore manufacturing facilities and the facilities of our key external fabric suppliers. The Higg Index tool provides transparency of our efforts to reduce our environmental impact, and it identifies areas for continued improvement. Our Ceiba Textiles facility has been using this tool for several years, and our 2021 self-assessment resulted in a total score in the upper quartile as compared to our industry competitors. Our most recent self-assessment was completed in April 2022 and the results will be available in April 2023. We retain the services of an external consultant to verify our assessments for a sample of facilities and to provide guidance for any areas of improvement.
Social Responsibility and Human Capital Management
Our employees are our most important and valuable asset. Our diverse and talented workforce helps drive our culture of high performance, close teamwork, and deep caring for each other across geographies and functions. We have an impact on the lives of over 8,600 employees across the globe as well as their families and communities. We support the livelihoods of our people through competitive wages and benefits, providing them with a safe and healthy workspace, supporting the communities in which they live, and, most importantly, treating all employees with dignity and respect.
Our People
The table below provides an overview of the approximate number of our employees by geographic location as well as the tenure of that employee base as of September 2022:
Tenure | ||||||||
Country | Number of Employees | 5 Years or Less | 6 - 10 Years | 10 Years or More | ||||
El Salvador | 3,245 | 62% | 20% | 19% | ||||
Honduras | 3,229 | 53% | 27% | 21% | ||||
Mexico | 986 | 59% | 15% | 27% | ||||
United States | 1,163 | 74% | 9% | 18% | ||||
Total | 8,623 | 60% | 20% | 20% |
Our employee base fluctuates based on seasonal labor requirements within our distribution and fulfillment centers, as well as based on production levels within our manufacturing facilities. These personnel changes generally trend with the overall demand for our products and services.
Approximately 80 percent of the employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are positive.
The table below provides an overview of the approximate percentage of our employees by gender and region as of September 2022:
Region | Male | Female | ||
Offshore | 49% | 51% | ||
United States | 35% | 65% | ||
Total | 47% | 53% |
Diversity and Inclusion
We are committed to fostering an inclusive culture where every employee is treated with dignity and respect, regardless of their gender, age, race, abilities, sexual orientation, or other legally protected characteristic. We believe that our employees’ contributions are richer because of their diverse backgrounds and experiences, which strengthens the collaboration of our cross-functional, global teams and leads to improved performance.
Wages and Benefits
Investing in our people is critical for their personal and professional success, and we believe this investment enhances engagement and performance levels. Our compensation philosophy is to provide a general indicationfair living wage that is also scalable to the performance of future sales.the business. We provide our employees with at least the legal minimum wage or the prevailing industry wage in the countries where we operate, whichever is higher, complying with all legal requirements. We also provide fringe benefits, some of which are required by law, contract, or as per established collective bargaining agreements, while others are more favorable than required.
In recognition of the importance of raising the standard of living in certain communities in which we operate, we provide additional benefits, such as free onsite medical care from fully licensed physicians and nurses that encompass clinics and wellness programs. In these locations, we also provide subsidized meal assistance as well as free transportation to and from our facilities.
We invest in the professional development of our employees through various training programs. In 2022, we provided more than 230,400 hours of professional development and safety training for our employees, which is a 6 percent increase from the previous year.
Health and Safety
Our responsibility is to provide our employees with a safe and healthy work environment that meets or exceeds the applicable environmental and health and safety laws and regulations. All our manufacturing facilities in El Salvador, Honduras, and Mexico are Worldwide Responsible Accredited Production (“WRAP”) certified. We are a Category C affiliate with the Fair Labor Association (“FLA”), an organization that supports human rights compliance monitoring for our plants and our third-party contractors.
Because textile manufacturing can contain various hazards and risks to workers, we have proactive programs in place to promote workplace safety, personal health, and employee wellness. Our culture promotes and rewards safety-first in all aspects of manufacturing, materials handling, and distribution of our apparel products. Safety training and awareness is embedded in employee orientation and onboarding, job performance and evaluation, and ongoing training based on a set safety training calendar by topic. We standardize, document, and improve our manufacturing and distribution safety procedures that require activities to be performed in the safest manner possible.
We are proud that our safety records are consistently better than OSHA’s benchmarks for the apparel manufacturing sector. For example, Delta Apparel’s 2022 incident rate for total recordable cases dropped to 0.19 percent compared to the apparel industry average incident rate of 1.7 percent.
Our production and distribution processes incorporate ergonomic material handling equipment to reduce physical risks, protect employee health, and optimize productivity. In our cut and sew facilities, we use ergonomically-friendly chairs and floor mats in addition to facilitating frequent group stretching and movement exercises. In several of our manufacturing and distribution facilities we provide lightweight slip sheet material handling equipment, which has the dual benefit of reducing manual labor and potential back strain on employees.
At the onset of the COVID-19 pandemic, we quickly implemented a comprehensive series of protocols and safety measures across all our facilities to protect the health and safety of our employees and contractors. We also created our own COVID-19 safety videos to promote healthy behaviors at home and in the workplace. Today, these COVID-19 safety measures are still in place at our offshore facilities, including maintaining plexiglass partitions to separate cafeteria seating areas and requiring all employees to observe safe distancing. We also continue to provide all employees with personal protective equipment, sanitizing products, and COVID-19 informational materials.
Monitoring
We conduct annual audits of all our internal manufacturing facilities as well as our significant third-party fabric suppliers to evaluate compliance with the FLA Workplace Code of Conduct. These audits cover labor topics, such as forced or child labor, compensation policies, and nondiscrimination, as well as environmental health and safety topics, such as fire safety, processes for safe chemistry, and environmental permits. These audits are important in identifying and preventing human rights and environmental health and safety violations.
The annual audits are conducted by Delta Apparel employees in our human resources or compliance departments, and they follow predefined audit programs and checklists that involve a mix of in-person site visits and walkthroughs of the facility, observations of processes, interviews with employees, and inspection of records and applicable permits. The audit results are documented with supporting photographs for any non-conformance findings. The internal auditors then report the findings to management, including the recommended corrective actions, and the date by which the corrective actions must be complete. The audits performed in 2022 resulted in no priority non-conformance findings, which are defined as severe violations of code of conduct in the areas of labor or environmental health and safety. For minor violations identified, we put corrective action plans in place to remediate the findings.
Community Outreach
Delta Apparel is committed to giving back to the communities where our employees live and work through volunteer service and community outreach. In 2022, our employees were involved in programs to promote environmental responsibility and improve the way of life for nearby communities. For example, Salt Life sponsored a number of national organizations, in addition to offering a variety of t-shirts for which donations were collected for various relief efforts. In addition, our US employees were directly involved with the community through both the donation of merchandise to fundraisers and sponsorship of individual volunteer efforts with nearby organizations. Additionally, our offshore employees in Mexico, Honduras, and El Salvador were involved in numerous activities throughout the year including the following:
● | Our facilities in Mexico and Honduras continue to support COVID-19 campaigns in local communities by donating personal protection items such as sanitizing gel and face masks. Schools in Mexico that received donations were the 21 de Agosto Primary School in the town of Villa Madero, which is south of Seybaplaya, Campeche, and the Lazaro Cardenas Primary School in Seybaplaya where some of our employees’ children attend. Our Mexico facilities employ 210 people who live in these communities. In Honduras, donations of items such as bleach, sanitizing gel, alcohol, and face masks were made to the San Raphael Orphanage located in Villanueva, Cortes, and Dos Caminos Health Care Center located in Dos Caminos, Cortes. The Delta Honduras and Delta Cortes facilities employ 203 people who live in Dos Caminos. | |
● | For the second year, Mexico employees joined with the “Together We Will Win” civil association and the Una Caricia Humana, IAP organization to collect and donate thousands of plastic bottle caps that are sold to companies that grind and reuse the plastic to make new products. The proceeds from the sale of the caps are used to help cover the cost of comprehensive treatment for children with cancer. Una Caricia Humana provides free support to families of children with cancer such as food, lodging, medicines, treatment supplies, and transportation. | |
● | For the second year, Delta Campeche employees participated in the Campeche Turtle Project to help save the critically endangered Hawksbill sea turtle by cleaning the plastic waste from beaches in Seybaplaya where the turtles come to lay their eggs for six months per year. On average, a sea turtle lays around 100 eggs; however, only 1 percent of the hatchlings actually makes its way out into the ocean and survives, making it critical to remove any obstacles that would prevent the hatchling from reaching the water. The beach cleanup resulted in one full trash bag for approximately every five yards of beach. | |
● | Delta Cortes employees installed trash cans and environmental signs, and cleaned litter in an area of the Mico Quemado mountain range, which is an ecological reserve located in the department of Yoro. More than 280 square kilometers of this mountain chain are protected by the Central Government of Honduras due to its ecological importance to surrounding communities. Not only are the forests and valleys filled with rare plants and exotic animals, this area contains rivers and natural springs that are the primary water source for over 450,000 people in the cities of Santa Rita and El Negrito. | |
● | Employees at Ceiba Textiles donated a gas-powered trimmer to the Quimistán Municipal Environmental Unit to support the maintenance of the area reforested as a result of the annual “United for a Greener Honduras” campaign in which Ceiba Textiles employees previously participated. Reforestation in this area of western Honduras was a critical factor in increasing the region’s water retention capacity as it reduced the impact to nearby communities when rivers would overflow during the rain and hurricane seasons. | |
● | In the town of Santiago Nonualco in the department of La Paz, Textiles La Paz employees painted the entrance of the Caserio Ojo de Agua school and installed four fans in two classrooms. Out of the approximately 270 children who attend this school, 50 of those are the children of employees at the Textiles La Paz facility. |
Competition
As a vertically-integrated apparel company, we have numerous competitors with respect to the sale of apparel and headwear products in both domestic and international markets, many of which are larger and have more brand recognition and greater marketing budgets thanbudgets. Some of these competitors may benefit from lower production costs that can result from greater operational scale, a differing supply chain footprint, or trade-related agreements and other macroeconomic factors that may enable them to compete more effectively.
Competition in our Delta Group segment is generally based upon price, service, delivery time, and quality, with the relative importance of each factor dependent upon the needs of the particular customer and the specific product offering. Our Delta Direct products generally are highly price competitive, and competitor actions can greatly influence pricing and demand for our products. While price is still important in our Global Brands and Retail Direct channels, quality and service are generally more important factors for customer choice. Our ability to consistently service the needs of our Global Brand and Retail Direct customers greatly impacts future business in these channels. We believe our U.S. market-adjacent manufacturing platform enables us to compete with our competitors by providing an outlet for customers to diversify their sourcing footprints and reduce time to market. Furthermore, as an integrated entity with design, manufacturing, sourcing, and marketing capabilities, we do.
We believe that competition within our brandedSalt Life Group segment is based primarily upon brand recognition, design, and consumer preference. We focus on sustaining the strong reputation of our lifestyle 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.
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 expandseasonality. By diversifying our product offerings,lines and go-to-market strategies over the years, we have reduced the overall seasonality inof our business has become less pronounced. The percentage of net sales by quarter for the year ended September 30, 2017, was 23%, 26%, 27% and 24% for the first, second, third, and fourth fiscal quarters, respectively.business. 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 20172022 may not be indicative of the distribution in future years.
Environmental and branded segments. Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We manufacture fabrics in our leased textile facility located near San Pedro Sula, Honduras and purchase fabric domestically and internationally to supplement our internal production. The manufacturing process continues at one of our six apparel manufacturing facilities where products are ultimately sewn into finished
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions and solid waste disposal. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our plants generate small quantities of hazardous waste, whichinternational operations are either recycled or disposed of off-site.
The environmental and other regulations applicable to our business are becoming increasingly stringent, and we incur capital and other expenditures annually to achieve compliance with these environmental standards.standards and regulations. We currently do not expect that the amount of expenditures required to comply with these environmental standards or other regulatory matters will have a material adverse effect on our operations, financial condition or liquidity. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, while we believe that we are currently in compliance with all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to comply with laws, regulations and permits applicable to our operations cannot be determined and could have a material adverse effect on our operations, financial condition and liquidity.
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.
Risks Related to our Strategy
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, inflation, the cost of labor and transportation, and other factors that are generally unpredictable and beyond our control. As described under the headingIn 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.
We also source fabric in Mexico for use in our Campeche, Mexico sew facility, 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 business and results of operations.
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.The apparel industry is highly competitive, and we face significant competitive threats to our business. business. The market for athletic and activewear apparel and headwearthe related accessory and other items we provide 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.resources. Many of our competitors also have larger sales forces, stronger brand recognition among consumers, bigger advertising budgets, and greater economies of scale. We compete with these companies primarily on the basis of price, quality, service and brand recognition, all of which are important competitive factors in the apparel industry. Our ability to maintain our competitive edge depends upon these factors, as well as our ability to deliver new products at the best value for the customer, maintain positive brand recognition, and obtain sufficient retail floor space and effective product presentation at retail. If we are unable to compete successfully with our competitors, our business and results of operations will be adversely affected.
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 andOur strategy to grow our direct-to-consumer retailbusiness depends upon our ability to successfully open and operate new stores in a timely and cost-effective manner.
Our strategy to grow our “brick and mortar” retail footprint depends on many factors including, among others, our ability to: identify desirable store locations; negotiate acceptable lease terms; hire, train and retain a growing workforce of store managers, sales associates and other personnel; successfully integrate new stores into our existing control structure and operations, including our information technology systems; and coordinate well with ourRisks Related to significant pricing pressures which may decrease our gross profit margins if we are unableOperations
The COVID-19 pandemic has had, and could continue to implement or achievehave, a material adverse effect our ability to operate, results of operations, financial condition, liquidity, and capital investments. The COVID-19 pandemic has had an adverse effect and could continue to adversely affect our performance, results of operations, financial condition, liquidity, and capital investments. The virus has impacted all regions around the expected cost savings associated with certainworld, resulting in restrictions and shutdowns implemented by national, state, and local authorities. During fiscal 2020, these requirements resulted in temporary closures of all of our branded retail locations and, our manufacturing facilities in El Salvador, Honduras Mexico, and North Carolina. Throughout fiscal years 2022 and 2021, the vast majority of our branded retail locations and manufacturing facilities have continued to operate.
Many of our customers and suppliers also face these and other challenges, which has resulted in ongoing supply chain and logistic constraints, closure of certain third-party manufacturers and increased freight cost reduction strategies.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including the ultimate duration, severity and sustained geographic resurgence of the virus, the emergence of new variants and strains of the virus, and the success of actions to contain the virus and its variants, or treat its impact. The COVID-19 pandemic has and will likely continue to result in social, economic, and labor instability in the countries in which we, or the third parties with whom we engage, operate. The long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, possible impairment, restructuring, and other charges, as well as overall impact on our business, results of operations, financial condition, liquidity, or capital resources and investments, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.
Our operations are subject to political, social, economic, and climateeconomic risks in Honduras, El Salvador and Mexico.The majority of our products are manufactured in Honduras, El Salvador and Mexico, with concentrations in Honduras and El Salvador. These countries from time to timetime-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. Governments have changed, and may continue to change, and employment, wage and other laws and regulations may change, thereby increasing our costs to operate in those countries. In addition, fire or natural disasters such as hurricanes, earthquakes, or floods can occur in these countries. Any of these political, social, economic or climaticeconomic events or conditions could disrupt our supply chain or increase our costs, adversely affecting our financial position and results of operations.
If we experience disruptions ator interruptions within any of our facilities, we may not be able to meet our obligations and may lose sales and customers.
The talents and continued contributions of our key management are important to our success. 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 complywork together effectively as a team and to execute our business strategy. Our inability to accomplish any of these goals could have a material adverse effect on our results of operations.
We rely on third parties to provide us with safety, healthcertain key equipment and environmental regulationsservices for our business. If any of these third parties fails to perform their obligations to us or declines to provide properly functioning equipment or services to us in the future, we may suffer a disruption to our business. We rely on certain key equipment and services provided by various third parties, including logistics partners and equipment suppliers. For example, we rely on third parties to provide certain inbound and outbound transportation and delivery services and other third parties to provide us with key equipment to support our manufacturing and fulfillment platforms, including our DTG2Go digital platform. If any of these or other third parties fails to perform their obligations to us or declines to provide properly functioning equipment or services to us in the future, we may suffer a disruption to our business or increased costs. Furthermore, we may be unable to implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.
Energy, fuel and related 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, 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, supply disruptions, inflation, and weather conditions. Many of these factors impacted such cost in fiscal year 2022 and are expected to have an impact in the near term. We continue to focus on methods that will reduce the amount of energy used in the manufacture of products to mitigate risks of fluctuations in the cost of energy. However, significant increases in energy and fuel prices, 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 safety, healthour systems could cause operational delays, reputational harm, or loss of revenue. We depend on information systems to, among other things, manage our inventory, process transactions, operate our websites, respond to customer inquiries, purchase, sell and environmental pollution controls. There can be no assuranceship goods on a timely basis, and maintain cost-effective operations. Management uses information systems to support decision-making and to monitor business performance. If we experience any disruptions or slowdowns with our information systems, we may fail to generate accurate and complete financial and operational reports essential for making decisions at various levels of management, which could lead to decisions being made that interpretationshave adverse results. We have invested significant capital and expect future capital expenditures associated with the implementation and integration of existing regulations, futureour 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 implement or convert our operations to the new systems could cause delays in product fulfillment and reduced efficiency in our operations. Further, if changes in existing laws,technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose customers. We are also subject to risks and uncertainties associated with the enactmentinternet, including changes in required technology interfaces, website downtime and other technical failures. Our failure to successfully respond to these risks and uncertainties could reduce sales, increase costs and damage the reputation of new laws and regulations will not require substantial additional expenditures. Althoughour brands. In addition, we believe thatinteract with many of our customers through our websites. Customers increasingly utilize our online platforms to purchase our merchandise. If we are in compliance in all material respects with existing regulatory requirements in these areas,unable to continue to provide consumers a user-friendly experience and evolve our platforms to satisfy consumer preferences, the extentgrowth of our liability, if any, for the discovery of currently unknown problemsecommerce and other businesses and our sales may be negatively impacted. If our websites contain errors or conditions,other vulnerabilities which impede or past failures to comply with laws, regulations and permits applicablehalt service, it could result in damage to our operations, cannot be determinedbrands’ images and a loss of revenue. In addition, we may experience operational problems with our information systems as a result of system failures, "cyber-attacks," computer viruses, security breaches, disasters or other causes. Any material disruption or slowdown of our information systems could cause operational delays and increased costs that could have a material adverse effect on our financial positionbusiness and results of operations.
Compromises of our data security could lead to liability and reputational damage. In the ordinary course of our business, we often collect, retain, transmit, and use sensitive and confidential information regarding customers and employees, and we process customer payment card and check information. There can be no assurance that we will not suffer a data compromise, that unauthorized parties will not gain access to personal information, or that any such data compromise or access will be discovered in a timely manner. Further, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and controlled by the payment card industry, not by us. Our computer systems, software and networks may be vulnerable to breaches (including via computer hackings), unauthorized access, misuse, computer viruses, phishing or other failures or disruptions that could result in disruption to our business or the loss or theft of confidential information, including customer information. Any failure, interruption, or breach in security of these systems, could result in the misappropriation of personal information, payment card or check information or confidential business information of our Company. In addition, there may be non-technical issues, such as our employees, contractors or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information.
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 other malicious software code, or human error or malfeasance, could occur. Actual or anticipated attacks may cause us to incur significant costs to rectify the consequences of the security breach or cyber-attack, including costs to deploy additional personnel and protection technologies, repair damage to our systems, train employees and engage third-party experts and consultants. The collection, retention, transmission, and use of personal information is subject to contractual requirements and is highly regulated by a multitude of state, federal, and foreign laws. 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. Any compromise of our customer, employee or company data, failure to prevent or mitigate the loss of personal or business information, or delay in detecting or providing prompt notice of any such compromise could attract media attention, damage our customer or other business relationships and reputation, result in lost sales, fines, liability for stolen assets or information, costs of incentives we may be required to offer to our customers or business partners to retain their business, significant litigation 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.
Extreme weather conditions, natural disasters, and other catastrophic events, including those caused by climate change, could negatively impact our results of operations and financial condition. Extreme weather conditions in the areas in which our manufacturing facilities, retail stores, suppliers, customers, distribution centers, data centers, and offices are located could adversely affect our results of operations and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, floods, or wildfires, public health crises, such as pandemics and epidemics (including, for example, the COVID-19 pandemic), political crises, such as terrorist attacks, war and other political instability, or other catastrophic events, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages, could disrupt our operations, the operations of our suppliers or customers or result in economic instability that could negatively impact customer spending, any or all of which would negatively impact our results of operations and financial condition. In addition, fire and other natural disasters such as hurricanes, earthquakes, or floods have occurred and can recur in the countries in which we operate. These types of events could impact our global supply chain, including the ability of suppliers to provide raw materials where and when needed, the ability of third parties to ship merchandise, and our ability to ship products from or to the impacted region(s).
In addition, climate change and the increased focus by governments, organizations, customers, and investors on sustainability issues, including those related to climate change and socially responsible activities, may adversely affect our reputation, business, and financial results. Investor advocacy groups, certain institutional investors, investment funds, other market participants, shareholders, and stakeholders have focused increasingly on environmental, social, and governance, or ESG, and related sustainability practices of companies. These parties have placed increased importance on the implications of the social cost of their investments. If our ESG practices do not meet investor or other stakeholder expectations and standards (which are continually evolving and may emphasize different priorities than the ones we choose to focus on), then our brand, reputation, and potential employee retention may be negatively impacted. We could also incur additional costs and require additional resources to monitor, report, and comply with various ESG practices and regulations. Also, our failure, or perceived failure, to manage reputational threats and meet expectations with respect to socially responsible activities and sustainability commitments could negatively impact our brand credibility, employee retention, and the willingness of our customers and suppliers to do business with us.
Risks Related to Legal and Regulatory Matters
Changes in U.S. or other tax laws or regulations may cause us to incur additional tax liability. We are subject to income tax in the United States and in certain foreign jurisdictions where we generate net operating profits. We generally benefit from a lower overall effective income tax rate due to the majority of our manufacturing operations being located in foreign tax-free jurisdictions or foreign jurisdictions with tax rates that are lower than those in the United States. 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.
The December 22, 2017, Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings of foreign subsidiaries. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income ("GILTI") as well as a limitation on the deduction for business interest expense ("Section 163(j)"). GILTI is the excess of the shareholder's net controlled foreign corporations (“CFCs”) net tested income over the deemed tangible income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income, of 30% of the taxpayer's adjusted taxable income. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including some provisions which were previously enacted under the New Tax Legislation. The CARES Act revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income.
Our effective tax rate could be adversely affected by changes in the mix of earnings between the U.S. and tax-free or lower-tax foreign jurisdictions. We may be limited in our ability to deduct 50% of applicable foreign earnings under the GILTI income inclusion or to deduct U.S. interest expense based on the amount of U.S. taxable income earned in a particular fiscal year. In addition, the future impact of the CARES Act and New Tax Legislation may differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the CARES Act and New Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and New Tax Legislation.
Further changes to U.S. tax laws impacting how U.S. multinational corporations are taxed on U.S. and foreign earnings, including any potential increase in the U.S. corporate income tax rate, the doubling of the rate of tax on certain earnings of foreign subsidiaries, and a 15% minimum tax on worldwide book income, among other things, could have a material adverse effect on our tax expense and cash flow.
We are subject to periodic litigation in both domestic and international jurisdictions that may adversely affect our financial positioncondition 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.litigation or enforcement matters. 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 positioncondition and results of operations. For a description of current material legal proceedings, see Part I, Item 3, Legal Proceedings.
Product liability issues could lead to recalls, claims and negative publicity, and adversely affect our results of operations. Our operations are subject to certain product liability risks common to most brands and manufacturers and our ability to maintain consumer confidence in the safety and quality of our products is vital to our success. We have implemented product safety and quality programs and standards that we follow and we expect our supplier partners to strictly adhere to applicable requirements and best practices. In addition to selling apparel and accessory products, we participate in a joint venture involving the sale of a branded alcoholic beverage, and we also license one of our brands for use in connection with restaurant, food and beverage services. Selling products intended for human consumption carries inherent risks and uncertainties. If we or our supplier or license partners fail to comply with applicable product safety and quality standards and our products or those otherwise associated with our brands are, or become, unsafe, non-compliant, contaminated or adulterated, we may be required to recall our products and encounter product liability claims and negative publicity. Any of these events could adversely affect our reputation, business or results of operations.
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®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 TradeU.S.-Mexico-Canada Agreement (“NAFTA”USMCA”), and the Central America Free Trade Agreement (“CAFTA”). Our claims for duty free or reduced duty treatment under CAFTA, NAFTAUSMCA 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. Recent changes in the United States federal government have caused uncertainty about the future of tradeTrade partnerships and treaties ascan be subjected to negotiations and modifications by domestic and foreign governments, which could result in new or increased tariffs on goods we import into the current administration has expressed its desireUnited States. Subsequent repeal or further modification of USMCA or CAFTA, further increases to specifically modify NAFTA and other existing trade agreements and has raised the possibility of imposing significant increases on tariffs on goods imported into the United States. Subsequent repeal or modification of NAFTA or CAFTA,States, 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 reduction or elimination of import protections for domestic apparel producers could significantly increase global competition, which could adversely affect our business and results of operations.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.
The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and stateOur international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with the FCPA and similar laws, some of our agents or other channel partners, as well as those companies to which we outsource certain of our business operations, could take actions in violation of our policies. Any such violation could have a material and adverse effect on our business.
Changes in domestic or foreign employment regulations, or changes in our relationship with our employees, and changes in our ability to attract and retain employees could adversely affect our results of operations.
Our business is dependent on attracting and retaining a large number of quality employees with staffing needs especially high during the holiday season. Competition for personnel is highly competitive, and there is no assurance we will be able to increase our costs and reduce our future profitability.
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 weRisks Related to Financial Matters
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 repurchases under our share repurchase program and to pay dividends should we choose to do so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness. Cash on hand and availability under our U.S. revolving credit facility totaled $34.6 million at October 1, 2022, well above the minimum thresholds specified in our credit agreement. In addition, we were above our credit facility's 1.0 fixed charge coverage ratio ("FCCR") threshold for the preceding 12-month period. A significant deterioration in our business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement, which we may not be able to maintain. The covenants in our credit facility include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates. If an event of default under our credit facility occurred or became imminent, we may request our credit agreement lenders to provide a waiver. If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility and may not be available. If we were unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to make acquisitions, fund share repurchases or pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance would have a material adverse effect on our financial position and 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, disruption in the apparel retail environment, or the inability 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 consolidations, restructurings, bankruptcies and liquidations as well as retail shutdowns as a result of the COVID-19 pandemic. The inability of retailers and other customers to overcome these difficulties may continue or even increase due to the current economic and retail market conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current conditions, historical trends, estimates and other available information, which involves judgments and uncertainties. During fiscal year 2022, customers generally paid on the credit extended to them, and we ended fiscal year 2022 with days sales outstanding at 51.7 days, up from 47.4 days at September 2021. Although our historical allowances have been materially accurate, if market conditions change, additional reserves may be required. 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, merchandising and/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 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. Reference rates used to determine the applicable interest rates for our variable rate debt began to rise significantly in the second half of fiscal 2022. If interest rates continue to increase, the debt service obligations on such indebtedness will continue to increase even if the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. In addition, as a result of our latest debt amendment certain of the variable rate indebtedness extended to us uses the Secured Overnight Financing Rate (SOFR) as a benchmark for establishing the interest rate. While we believe we will continue to use SOFR through fiscal 2022 and into fiscal 2023, other factors may impact SOFR including factors causing SOFR to cease to exist, new methods of calculating SOFR to be established, or the use of an alternative reference rate(s). These consequences are not entirely predictable and could have an adverse impact on our financing costs, returns on investments, valuation of derivative contracts and our financial results.
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 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 September 2022 and September 2021, our goodwill and other intangible assets were approximately $61.9 million and $64.2 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 complete our annual impairment test of goodwill on the first day of our third fiscal quarter. For fiscal year 2022, we concluded based on the assessment performed that there was no indication of 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.
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 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, orand 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 has led and could continue to lead to our shares trading at prices that are significantly lower than our estimate of their inherent value.
As of November 14, 2017,2022, we had 7,244,6866,915,663 shares of common stock outstanding. We believe that approximately 62%37% 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 62% are institutionalInstitutional investors that each beneficially own more than 5% of the outstanding shares. These institutional investorsshares collectively own approximately 46%25% 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, strategicNone.
Our principal executive office is located in a leased facility in Greenville, South Carolina.Duluth, Georgia. We own and lease properties supporting our administrative, manufacturing, distribution, and direct retail, and administrative activities. The majority of our products are manufactured through a combination of facilities that we either own or lease and operate. The following listing summarizes the significant categories as of September 2022:
Owned | Leased | Other | Total | |||||||||
Manufacturing | 2 | 6 | — | 8 | ||||||||
Distribution | 2 | 1 | 1 | 4 | ||||||||
Decoration/distribution | 1 | 6 | 1 | 8 | ||||||||
Retail stores/showroom | 1 | 23 | — | 24 | ||||||||
Offices | — | 5 | — | 5 | ||||||||
Total | 6 | 41 | 2 | 49 |
Our primary manufacturing locations as of September 2022, are as follows:
Name | Location | Utilization | Segment | |||
Ceiba Textiles | Naco, Quimistan, Santa Barbara Honduras | Knit/dye/finish/cut | Delta Group | |||
Honduras Plant | San Pedro Sula, Honduras | Sew | Delta Group | |||
Cortes Plant | San Pedro Sula, Honduras | Sew | Delta Group | |||
Campeche Plant | Seybaplaya, Campeche Mexico | Cut/sew | Delta Group/Salt Life Group | |||
Campeche Sportswear | Campeche, Mexico | Decoration | Delta Group/Salt Life Group | |||
Textiles LaPaz | La Paz, El Salvador | Cut/sew/decoration | Delta Group | |||
Fayetteville Plant | Fayetteville, North Carolina | Cut/sew/decoration | Delta Group/Salt Life Group | |||
Rowland Plant | Rowland, North Carolina | Sew | Delta Group |
As of
SeptemberOur primary distribution centers, including those integrated with decoration operations, as of September 30, 2017, we operated 11 branded retail stores and a leased showroom.
Location | Utilization | Segment | ||
Clinton, TN | Distribution | Delta Group | ||
Fayetteville, NC | Distribution | Salt Life Group | ||
Opelika, AL | Distribution | Delta Group | ||
Clearwater, FL | Decoration/distribution | Delta Group | ||
Cranbury, NJ | Decoration/distribution | Delta Group | ||
Fayetteville, NC | Decoration/distribution | Delta Group | ||
Decoration/distribution | ||||
Miami, FL | Decoration/distribution | Delta Group | ||
Nashville, TN | Decoration/distribution | Delta Group | ||
Storm Lake, IA | Decoration/distribution | Delta Group | ||
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 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 credit facility, and our Salvadoran credit facility.
At times, we are party to various legal claims, actions and complaints. There are currently no material pending legal proceedings to which we are a party or of which any of our property is involved in several related litigation matters stemming from The Sports Authority's ("TSA") March 2, 2016, filingsubject, and we are not aware of a voluntary petition(s) for relief under Chapter 11 of the United States Bankruptcy Code (the "TSA Bankruptcy"). Prior toany such filing, Soffe provided TSA with products to be sold on a consignment basis pursuant to a "payproceedings that are contemplated by scan" agreement and the litigation 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").
Not applicable.
Item 5. Market for Registrant's Common Equity, Related Shareholder 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 NYSEHigh | Low | |||
Sale Price | Sale Price | |||
Fiscal Year 2017: | ||||
September Quarter | $22.88 | $18.00 | ||
June Quarter | $23.47 | $16.95 | ||
March Quarter | $21.84 | $15.55 | ||
December Quarter | $21.93 | $14.85 | ||
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 |
Dividends:
Our Board of Directors did not declare, nor were any dividends paid, duringPurchases of our Own Shares of Common Stock: See Note 14— Repurchase of Common Stock - Debt, in Item 15, which is currently outstanding)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.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial measures included herein have been presented on a generally accepted accounting principles ("GAAP") basis.
Business Outlook
Fiscal year 2022 marked another year of strong organic growth for Delta Apparel and highlighted the collective reach of our multiple go-to-market strategies. The combination of our vertically integrated manufacturing and service platforms with our diversified distribution allowed us to successfully navigate what was a dynamic business and economic environment throughout the year. All five of our market channels – Delta Direct, Global Brands, Retail Direct, DTG2Go, and Salt Life – delivered year-over-year sales increases and drove overall sales growth of 11%. For the year, we achieved a 6.6% operating margin on $484.7 million in net sales, and earnings of $2.80 per diluted share.
Our Delta Group segment’s fully integrated Activewear and DTG2Go businesses continue to offer solutions to a broadening spectrum of customers across the apparel industry. Our Activewear business is organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their market approaches and customer bases. Our Delta Direct channel offers the screen print, promotional, eRetailer and retail licensing markets a broad portfolio of apparel and accessories under the Delta, Delta Platinum, and Soffe brands, including basic, performance, fashion basic and other elevated product offerings, as well as sourced items from select third party brands.
Our Global Brands channel serves as a key supply chain partner to large multi-national brands, providing services ranging from custom product development to value-added “retail-ready” enhancements, and our Retail Direct channel provides our portfolio of Delta, Delta Platinum, and Soffe products with value-added “retail-ready” enhancements directly to the brick and mortar retail locations and ecommerce fulfillment centers of a customer base ranging from sporting goods and outdoor retailers, specialty and resort shops, and farm and fleet stores to department stores and mid-tier retailers. Our onshore and nearshore manufacturing and fulfillment platforms, coupled with a distribution network spanning the United States, continue to become more integral to brand and retailer sourcing strategies and generate new interest from customers looking to reach the United States market more efficiently and manage supply chain risks associated with international trade policy, ESG priorities, inflationary pressures, and supply chain disruptions.
Our DTG2Go business and its leadership position in digital print and fulfillment give us the unique ability to offer customers across all of our channels a seamless make-on-demand solution. DTG2Go continues to grow through its “digital first” strategy, achieving strong double-digit sales growth in fiscal year 2022, including increased units and revenue. More and more customers across the apparel industry see the compelling economics of DTG2Go’s digital make-on-demand model as a desirable alternative to traditional make-to-forecast models, particularly when integrated with our Delta Direct channel’s vertical supply of blank garments.
Profitability at DTG2Go was impacted during the year by additional costs for equipment to further its “digital first” model and the tight domestic labor market, but we expect operating margins to improve materially over time. We see more exciting growth potential at DTG2Go going forward as the apparel industry migrates more towards the DTG2Go model, selling prices continue to grow, and we increase our output to meet elevating demand.
Our Delta Group segment achieved significant overall growth for the year even as demand between its various market channels shifted, with strong order flow in our Global Brands and DTG2Go channels helping to offset slowness in our Delta Direct channel to end the year. Our Delta Direct channel was heavily impacted by strong inflationary pressures on both input and labor costs that resulted in some downward pressure on gross margins in the second half of year. We expect this market fluidity and inflationary cost environment to continue in fiscal year 2023, and we will continue to leverage the flexibility of our vertical platform and adjust production levels to manage inventory, mitigate higher input costs, and stay aligned with customer demand.
Our Salt Life Group segment continued to excel in fiscal year 2022, producing record revenues of $60.3 million and a strong double-digit sales increase of 21% percent over the prior year. Growing consumer awareness and engagement with the Salt Life lifestyle brand, together with the Salt Life team’s ability to manage supply chain issues and shipping delays, culminated in organic growth across all three Salt Life omnichannel markets – wholesale, retail, and ecommerce – in the fourth quarter of fiscal year 2022. We look for that growth trend to continue in fiscal year 2023.
With the milestone achievement of eight new store openings in fiscal year 2022, there are now 21 Salt Life branded retail doors open for business across the United States coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware. We expect to continue to expand Salt Life’s retail footprint with six to eight planned store openings in 2023, including a new location in Long Branch, New Jersey in the coming months to further Salt Life’s geographic reach in the northeast.
We continue to invest in marketing initiatives designed to elevate the Salt Life brand and drive increased engagement. Salt Life’s YouTube channel reached 7.1 million views in fiscal 2022, a 36% increase over the prior year. Beyond YouTube, Salt Life’s social media channel net audience spanning Facebook, Instagram, Twitter, LinkedIn and Pinterest grew nearly 85% on the year. Salt Life also continues to interact with consumers through its online content portal, The Daily Salt, and its Salt Life-branded podcast, Above and Below.
Overall fiscal 2022 was another excellent year for Delta Apparel. Our performance highlights the strong foundation across our business segments and the benefits of our broad channels of distribution, the demand for our unique product and service offerings, the efficiencies of our vertically integrated operations, and the emotional connection our lifestyle brand, Salt Life, has with a broad range of consumers. Although we move into fiscal year 2023 with some unsettled economic conditions, we believe that we continue to be well-positioned to take advantage of opportunities as they arise and win additional market share.
Results of Operations
Net sales for 2022 were $484.9 million, up 11.0% from $436.8 million in the prior year. Our growth was broad-based with sales increasing year-over year in both the Delta Group and Salt Life Group segments.
Delta Group segment net sales increased 10% to $424.8 million in 2022 compared to prior year net sales of $387.0 million. Within the Activewear business, our Global Brand and Retail Direct channels both achieved double-digit year over year growth, and our Delta Direct channel achieved single-digit year over year growth. Our DTG2Go business achieved both unit and sales dollar growth, resulting in sales growth of 17% over the prior year.
Salt Life Group segment net sales were $60.1 million in 2022, increasing 21% from $49.7 million in the prior year. During fiscal 2022, the segment saw both wholesale and direct-to-consumer retail channel growth over the prior year. Salt Life also opened eight new branded retail doors, bringing our total retail store locations to 21.
Overall gross profit increased by 7% to $108.8 million from $101.9 million in the prior year. Gross margins were 22.4% of sales, a decline of 90 basis points from prior year gross margins of 23.3% of sales. The decline from the prior year is a result of increased input costs in the Delta Group, offset by favorable sales mix in the Salt Life group.
Delta Group segment gross margins were 18.3% compared to 20.2% in the prior year. Margins were negatively impacted by increasing input costs and labor costs.
Salt Life Group segment gross margins improved by 370 basis points to 51.6% compared to 47.9% in 2021. Margins were favorably impacted by a stronger mix of direct-to-consumer sales and favorable mix of higher profit products.
Selling, general and administrative (“SG&A”) expenses in 2022 were $79.5 million, or 16.4% of sales, compared to $70.7 million, or 16.2% of sales, in 2021. Expenses increased in 2022 due to higher selling costs associated with the expansion of Salt Life’s retail footprint and higher distribution labor costs.
Other income of $2.4 million in 2022 included $0.9 million in profits related to our equity investment in Green Valley Industrial Park, S.A. de C.V., the holdersHonduran entity that owns and operates the industrial park in Naco, Quimistan, Santa Barbara Honduras, where our Ceiba Textiles facility is located ("Honduran Equity Method Investment"), as well as $1.9 million in income from the net reduction in contingent consideration liabilities, offset by a loss on the disposal of fixed assets of $0.4 million. In the prior year, other income of $1.6 million included $0.5 million of profits related to our Honduran Equity Method investment as well as $2.4 million income from the net reduction in contingent consideration liabilities, partially offset by $1.3 million of expenses related to the impact of the two hurricanes that disrupted our Honduran manufacturing facilities in the December quarter.
Operating income for 2022 was $31.8 million. This compares to an operating income of $32.7 million in the prior year.
Delta Group segment operating income for 2022 was $38.0 million, or 9.0% of sales, compared to $40.0 million, or 10.3% of sales, in 2021. The decline in operating income is attributable to gross margin decline from increasing input costs.
Salt Life Group segment operating income was $8.2 million for 2022 compared to prior year operating income of $5.8 million. Operating income improved due to higher sales volume coupled with favorable product mix.
Interest expense for 2022 was $7.7 million compared to $6.8 million in 2021. The increase is primarily due to higher average debt levels.
Our 2022 effective income tax rate is 17.9% compared to 21.9% in the prior year. See Note 9—Income Taxes for more information.
Net income attributable to shareholders in 2022 was $19.7 million, or $2.80 per diluted share. Our prior year net income was $20.3 million, or $2.86 per diluted share.
Liquidity and Capital Resources
Operating Cash Flows
Cash used by operating activities in 2022 was $20.1 million, compared to cash provided by operating activities of $25.5 million in 2021. The lower operating cash flows in 2022 primarily relate to increasing input costs and higher ending inventory levels at year-end.
Investing Cash Flows
Cash used in investing activities in 2022 and 2021 was $13.0 million. Capital expenditures during 2022 and 2021 were $19.9 and $15.8 million, respectively. Capital expenditures in both periods primarily related to investments in our distribution expansion, digital print equipment, information technology, and retail stores. There were $10.4 million in expenditures financed under capital lease arrangements and $1.0 million in unpaid expenditures as of September 2022.
We currently expect to spend less on capital expenditures in 2023 as compared to 2022. These projects would be focused on digital print equipment, information technology, manufacturing efficiency, and direct-to-consumer investments, including new Salt Life retail store openings.
Financing Activities
Cash provided by financing activities was $24.1 million in 2022 compared to cash used of $19.5 million in 2021. In 2022, we increased the amount outstanding on our U.S credit facility and utilized cash proceeds to fund operating activities and certain capital investments, as well as the required payments on our capital lease financing. Additionally, in the current year we entered into a new Honduran term loan with a principal of $3.7 million and a new term loan related to our El Salvador facility for $3.0 million, both with five-year terms. We repurchased $4.0 million shares of our common stock during 2022 compared to no share repurchases in 2021.
Future Liquidity and Capital Resources
See Note 8 – Long-Term Debt to the Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our revolving U.S. credit facility.
Our asset-based U.S. revolving credit facility, as amended on June 2, 2022, as well as cash flows from operations, are entitledintended to receive whatever dividends,fund our day-to-day working capital needs, along with capital lease financing arrangements, to fund our planned capital expenditures. However, any material deterioration in our results of operations may result in the loss of our ability to borrow under our U.S. revolving credit facility and to issue letters of credit to suppliers, or may cause the borrowing availability under that facility to be insufficient for our needs. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness.
Our credit facility includes a financial covenant that if any, thatthe 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 1.0. Our availability at September 2022, was above the minimum thresholds specified in our credit agreement, and we were above the 1.0 FCCR for the preceding 12-month period. A significant deterioration in our business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement, which we may not be declared fromable to maintain.
Derivative Instruments
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There were no material option agreements that were outstanding at September 2022.
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments are made. As of September 2022, all of other comprehensive income was attributable to shareholders and; none related to the non-controlling interest. The changes in fair value of the interest rate swap agreements resulted in other comprehensive gain, net of taxes, of $0.9 million for the year ended September 2022, and other comprehensive gain, net of taxes, of $0.5 million for the year ended September 2021.
Off-Balance Sheet Arrangements
As of September 2022, 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 letters of credit, and purchase obligations. We have disclosed letters of credit and purchase obligations in Note 15—Commitments and Contingencies.
Dividends and Purchases of 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 15% 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 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the Amended Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of determination.
Our Board of Directors did not declare, nor were any dividends paid, during 2022 and 2021. Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.
2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||
Delta Apparel, Inc. | $ | 100.00 | $ | 103.22 | $ | 64.42 | $ | 131.41 | $ | 120.50 | $ | 157.47 | ||||||||||||
CRSP NYSE MKT Index (US) | $ | 100.00 | $ | 100.04 | $ | 128.99 | $ | 100.13 | $ | 103.57 | $ | 111.49 | ||||||||||||
CRSP NYSE MKT Wholesale & Retail Trade Index | $ | 100.00 | $ | 132.74 | $ | 137.75 | $ | 186.04 | $ | 158.89 | $ | 463.36 |
Period Ended | |||||||||||||||||||||||
September 30, 2017 | October 1, 2016 | October 3, 2015 | September 27, 2014 | September 28, 2013* | June 29, 2013 | ||||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||||||
Net sales | $ | 385,082 | $ | 425,249 | $ | 449,142 | $ | 452,901 | $ | 122,559 | $ | 490,523 | |||||||||||
Cost of goods sold | (304,360 | ) | (331,750 | ) | (360,823 | ) | (367,160 | ) | (95,439 | ) | (381,014 | ) | |||||||||||
Selling, general and administrative expenses | (67,408 | ) | (76,578 | ) | (81,086 | ) | (86,275 | ) | (26,588 | ) | (94,944 | ) | |||||||||||
Restructuring costs | — | (1,741 | ) | — | — | — | — | ||||||||||||||||
Change in fair value of contingent consideration | 900 | 600 | 500 | (200 | ) | — | — | ||||||||||||||||
Gain on sale of business | 1,295 | — | 7,704 | — | — | — | |||||||||||||||||
Other income (expense), net | 670 | 552 | 682 | (927 | ) | 24 | (662 | ) | |||||||||||||||
Operating income (loss) | 16,179 | 16,332 | 16,119 | (1,661 | ) | 556 | 13,903 | ||||||||||||||||
Interest expense, net | 5,011 | 5,287 | 6,021 | 5,792 | 1,033 | 3,997 | |||||||||||||||||
Earnings (loss) before income taxes | 11,168 | 11,045 | 10,098 | (7,453 | ) | (477 | ) | 9,906 | |||||||||||||||
Provision for (benefit from) income taxes | 657 | 2,081 | 2,005 | (6,493 | ) | (1,045 | ) | 722 | |||||||||||||||
Net earnings (loss) | $ | 10,511 | $ | 8,964 | $ | 8,093 | $ | (960 | ) | $ | 568 | $ | 9,184 | ||||||||||
Basic earnings (loss) per common share: | $ | 1.40 | $ | 1.16 | $ | 1.03 | $ | (0.12 | ) | $ | 0.07 | $ | 1.12 | ||||||||||
Diluted earnings (loss) per common share: | $ | 1.33 | $ | 1.12 | $ | 1.00 | $ | (0.12 | ) | $ | 0.07 | $ | 1.08 | ||||||||||
Dividends declared per common share | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Balance Sheet Data (at year end): | |||||||||||||||||||||||
Working capital | $ | 155,259 | $ | 150,191 | $ | 131,485 | $ | 156,258 | $ | 171,681 | $ | 173,435 | |||||||||||
Total assets | 317,802 | 344,652 | 324,903 | 354,578 | 351,762 | 311,910 | |||||||||||||||||
Total long-term debt, less current maturities | 85,306 | 106,603 | 93,872 | 114,469 | 131,030 | 94,763 | |||||||||||||||||
Shareholders’ equity | 155,887 | 152,015 | 144,499 | 138,207 | 138,872 | 141,066 |
Year Ended | |||||||
September 30, 2017 | October 1, 2016 | ||||||
Net sales | $ | 385,082 | $ | 425,249 | |||
Adjustment for: | |||||||
Sales from the since-divested Junkfood business | (15,648 | ) | (50,495 | ) | |||
Adjusted net sales | $ | 369,434 | $ | 374,754 | |||
Gross profit | $ | 80,722 | $ | 93,499 | |||
Adjustment for manufacturing realignment expenses | — | 1,096 | |||||
Adjustment for the since-divested Junkfood business | (3,997 | ) | (16,064 | ) | |||
Adjusted gross profit | $ | 76,725 | $ | 78,531 | |||
Gross margins | 21.0 | % | 22.0 | % | |||
Adjustment for manufacturing realignment expenses | — | % | 0.2 | % | |||
Adjustment for the since-divested Junkfood business | (0.2 | )% | (1.3 | )% | |||
Adjusted gross margins | 20.8 | % | 20.9 | % | |||
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 |
As of September 30, 2017, we had a total of $12.9 million
Payments Due by Period (in thousands) | |||||||||||||||||||
Total | Less than 1 year | 1 - 3 years | 3 – 5 years | After 5 years | |||||||||||||||
Contractual Obligations: | |||||||||||||||||||
Long-term debt (a) | $ | 92,854 | $ | 7,548 | $ | 15,443 | $ | 69,863 | $ | — | |||||||||
Operating leases | 44,966 | 8,259 | 14,559 | 7,762 | 14,386 | ||||||||||||||
Capital leases | 3,330 | 840 | 1,670 | 806 | 14 | ||||||||||||||
Purchase obligations | 32,681 | 32,681 | — | — | — | ||||||||||||||
Total (b) | $ | 173,831 | $ | 49,328 | $ | 31,672 | $ | 78,431 | $ | 14,400 |
Critical Accounting Policies
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. 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. We have no reason to believe that our past estimates have not been appropriate. Our most critical accounting estimates, discussed
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.
Revenue Recognition
Revenue is recognized when ownershipperformance obligations under the terms of the contracts are satisfied. Our performance obligations primarily consist of delivering products to our customers. Control is transferred upon providing the products to customers in our retail stores, upon shipment of our products to the consumers from our ecommerce sites, and upon shipment from our distribution centers to our customers in our wholesale operations. Once control is transferred to the customer, which includes not only the passage of title, but also the transfer of the risk of loss related to the product. At this point, the sales price is fixed and determinable, and we are reasonably assured of the collectibility of the sale. The majorityhave completed our performance obligation.
In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these arrangements are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are shipped FOB or Ex Works shipping pointrecorded net of discounts, allowances, and revenue is therefore recognized when the goodsoperational chargebacks. As certain allowances and other deductions are shipped to the customer. For sales that are shipped FOB or Ex Works destination point, we do not recognize the revenuefinalized until the goods are received by the customer. Shippingend of a season, program or other event which may not have occurred, we estimate such discounts, allowances, and handling charges billedreturns that we expect to our customers are included in netprovide.
We record reductions to revenue for estimated customer returns, allowances, markdowns and the related costs are included in cost of goods sold. Revenues are reported on a net sales basis, which is computed by deducting product returns, discounts and estimated returns and allowances.discounts. We estimate these reductions based on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by us. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which we make such a determination. Reserves for returns, allowances, markdowns and discounts are included within accrued expenses as refund liabilities, and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on an ongoing basis by considering historicalthe Consolidated Balance Sheets. As of September 2022, and current trends.
Accounts Receivable and Related Reserves
Accounts receivable consists primarily of business, we extend credit toreceivables from our customers based upon definedarising from the sale of our products, and we generally do not require collateral from our customers. We actively monitor our exposure to credit criteria.risk through the use of credit approvals and credit limits. Accounts receivable as shown on our Consolidated Balance Sheets, areis presented net of related reserves. reserves for doubtful accounts.
We estimate the net collectibilitycollectability 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, we assess the need for 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, reservesdebts. 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 thatAlthough our historical allowances have been extended to customers, including advertising, markdownsmaterially accurate, if market conditions change, additional reserves may be required. Bad debt expense was less than 1% of net sales in each of 2022 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.
Inventories and Related Reserves
We state inventories at the lower of cost or marketand net realizable value using the first-in, first-out method. Inventory cost includes materials, labor and manufacturing overhead on manufactured inventory and all direct and associated costs, including inbound freight, to acquire sourced products. See Note 2(y) for further information regarding yarn procurements. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value.
Goodwill
Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Salt Life, Junkfood, Art Gun,DTG2Go, and Coast.Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services, (“SSI”). We did not record any separately identifiable indefinite-lived intangibles associated with any of these acquisitions. On March 31, 2017, we sold our Junkfood business to JMJD Ventures, LLC. See Note 3—Divestitures for further information on this transaction. Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired.acquired and liabilities assumed. Goodwill must be tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired, and goodwill is required to be written down when impaired.
The Company’s goodwill impairment testing process involvesloss calculations contain uncertainties because they require management to make significant judgments in estimating the usefair value of significant assumptions, estimates and judgments with respect to a varietythe Company’s reporting units, including the projection of factors, including sales, gross margins, selling, general and administrative expenses, capital expenditures,future cash flows and the selection of an appropriate discount rate, allrates. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors, including the profitability of which are subject to inherent uncertaintiesfuture business operations 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 estimatesif necessary, the fair value of the risks associated withreporting unit’s assets and liabilities. Further, the projectedCompany’s ability to realize the future cash flows based onused in its fair value calculations is affected by factors such as changes in economic conditions, changes in the best information available asCompany’s operating performance, and changes in the Company’s business strategies. Significant changes in any of the dateassumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting units and could result in impairment assessment.
Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, andas well as operating loss, interest deductions, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
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. As of September 30, 2017,2022, we had state NOLs of approximately $41.6 million, with deferred tax assets of $1.6$2.0 million related to these state NOLs, and related valuation allowances against them of approximately $0.5$0.6 million. These state net loss carryforwards expire at various intervals from 20192027 through 2036.
Recent Accounting Standards
For information regarding recently issued accounting standards, refer to Note 2(aa)2(ad) and Note 2(ab)2(ae) to our Consolidated Financial Statements.
We haveare a supply agreement with 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.
Item 8. Financial Statements for more information on our derivatives.
Our Consolidated Financial Statements for each of our fiscal yearsperiods ended September 30, 2017, October 1, 2016,2022, and October 3, 2015,September 2021, 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.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
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 September 30, 2017,2022, 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’s Annual Report on Internal Control over Financial Reporting
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.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2017.2022. In this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) ("COSO") in
The effectiveness of our internal control over financial reporting as of September 30, 2017,2022, has been audited by Ernst & Young, LLP ("EY"), our independent registered public accounting firm, who also audited our Consolidated Financial Statements. EY’s attestation report on our internal controls over financial reporting is included herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter of fiscal year 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
To the Shareholders and the Board of Directors and Stockholders of Delta Apparel, Inc. and subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Delta Apparel, Inc. and subsidiaries’Subsidiaries’ internal control over financial reporting as of September 30, 2017,October 1, 2022, based on criteria established in
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 1, 2022, and October 2, 2021, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the two years in the period ended October 1, 2022, and the related notes and our report dated November 21, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, GA
November 28, 201721, 2022
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 10. Directors, Executive Officers and Restated Credit Agreement
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 20172022 fiscal year under the headings "Proposal No. 1: Election of Directors", “Corporate Governance”, “Executive Officers” and “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance.Reports.”
All of our employees, including our Chief Executive Officer, and Chief Financial Officer, (who is also our principal accounting officer),and Chief Accounting Officer, are required to abide by our business conduct policies so that our business is conducted in a consistently legal and ethical manner. We have adopted a code of business conduct and ethics known as our Ethics Policy Statement. The Ethics Policy Statement is available without charge on our website. In the event that we amend or waive any of the provisions of the Ethics Policy Statement applicable to our Chief Executive Officer, Chief Financial Officer, or Chief FinancialAccounting Officer, we intend to disclose the same on our website at
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 20172022 fiscal year under the headings “Compensation Discussion and Analysis”,“Executive Compensation,” “Compensation Tables,” “Compensation Committee Interlocks and Insider Participation”"Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and “Compensation Committee Report.”
The information relating to security ownership by certain beneficial owners and management 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 20172022 fiscal year under the headingheadings “Equity Compensation Plan Information" and “Stock Ownership of Management and Principal Shareholders."
On February 4, 2015,6, 2020, our shareholders re-approvedapproved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010 Stock Plan, ("2010 Stock Plan") thatwhich was originally approvedpreviously re-approved by our shareholders on November 11, 2010.February 4, 2015, and was scheduled to expire by its terms on September 14, 2020. The re-approval of2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan, including the material termsPlan. The purpose of the performance goals included in the 20102020 Stock Plan enables usis to continue to grant equity incentive compensationgive our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards that are structured in a manner intendeddesigned to qualify as tax deductible, performance-based compensation under Section 162(m)enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the Internal Revenue Code of 1986. Since November 2010, no additionalauthority to determine the employees and directors to whom awards have been or willmay be granted and the size and type of each award and manner in which such awards will vest. The awards available under either the Delta Apparelplan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards. If a participant dies or becomes disabled (as defined in the 2020 Stock Option Plan ("Option Plan")Plan) while employed by the Company or serving as a director, all unvested awards become fully vested. The Compensation Committee is authorized to establish the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stockterms and conditions of awards have been and will continue to be granted under the 20102020 Stock Plan.
Set forth in the table below is certain information about securities issuable under our equity compensation plans as of September 30, 2017.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||
(a) | (b) | (c) | ||||||||
Equity compensation plans approved by security holders | 512,856 | $ | 13.09 | 514,027 | ||||||
Equity compensation plans not approved by security holders | 6,000 | $ | 8.30 | — | ||||||
Total | 518,856 | $ | 13.03 | 514,027 |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (1) | Weighted-average exercise price of outstanding options, warrants and rights (2) | Number of securities remaining available for future issuance under equity compensation plans (excluding those currently outstanding) | |||||||||
Equity compensation plans approved by security holders | 274,625 | $ | — | 276,464 | ||||||||
Equity compensation plans not approved by security holders | — | — | — | |||||||||
Total | 274,625 | $ | — | 276,464 |
(1) Includes all outstanding restricted stock units that have a performance-based vesting condition that would vest in equity shares, and assumes 100% vesting of performance-based targets.
(2) Not applicable, as there are no outstanding stock options at period end.
For additional information on our stock-based compensation plans, see Note 1312 - Stock-Based Compensation to the Consolidated Financial Statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
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 20172022 fiscal year under the headings “Related Party Transactions” andheading "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 20172022 fiscal year under the heading “Proposal No. 3: Ratification of Appointment of Independent Registered Public Accounting Firm”.
Financial Statements:
Report of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of
SeptemberConsolidated Statements of Operations for the years ended
SeptemberConsolidated Statements of Comprehensive Income for the years ended
SeptemberConsolidated Statements of Shareholders’ Equity for the years ended
SeptemberConsolidated Statements of Cash Flows for the years ended
SeptemberNotes to Consolidated Financial Statements.
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.
(a)(3) Listing of Exhibits*
4.1 | See Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5, and 3.2.6. |
November 21, 2019. | |
10.1 | See Exhibit |
Runner: Incorporated by reference to Exhibit 10.2.5 to the Company’s Annual Report on Form 10-K filed on November 28, 2017. | |
Delta Apparel, Inc. 2020 Stock Plan: Incorporated by reference to Exhibit 1 to the Company's Proxy Statement filed on December 17, 2019.*** | |
November 22, 2021+ | |
November 22, 2021.+ | |
November 22, 2021.+ | |
November 22, 2021.+ | |
of Restricted Stock Unit Award Agreement.*** | |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
Inline XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* | All reports previously filed by the Company with the Commission pursuant to the Securities Exchange Act, and the rules and regulations promulgated thereunder, exhibits of which are incorporated to this Report by reference thereto, were filed under Commission File Number 1-15583. | |
+ | Portions of this exhibit (indicated therein by asterisk) have been omitted | |
*** | This is a management contract or compensatory plan or arrangement. |
The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit to any of the above filed exhibits upon request of the Commission.
(b) Exhibits
See Item 15(a)(3) above.
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DELTA APPAREL, INC. | |||
(Registrant) | |||
/s/Simone Walsh | |||
Date | Simone Walsh | ||
Chief Financial Officer | |||
(principal financial and accounting officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.
/s/Anita D. Britt | 11/21/22 | /s/Sonya E. Medina | 11/21/22 | ||||
Anita D. Britt | Date | Sonya E. Medina | Date | ||||
Director | Director | ||||||
/s/J. Bradley Campbell | 11/ | /s/ | 11/ | ||||
J. Bradley Campbell | Date | Date | |||||
Director | Director | ||||||
/s/ | 11/ | /s/ | 11/ | ||||
Date | Date | ||||||
Director | Chief Financial Officer | ||||||
(principal financial and accounting officer) | |||||||
/s/ | 11/ | /s/David G. Whalen | 11/ | ||||
Glenda E. Hood | Date | David G. Whalen | Date | ||||
Director | Director | ||||||
/s/ | 11/ | ||||||
Robert W. Humphreys | Date | ||||||
Chairman and Chief Executive Officer | |||||||
(principal executive officer) | |||||||
Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
F-9 | |
F-14 | |
F-14 | |
F-15 | |
F-15 | |
F-16 | |
F-16 | |
F-18 | |
F-20 | |
F-22 | |
F-22 | |
F-24 | |
F-26 | |
F-26 | |
Note 16—Subsequent Events | F-28 |
To the Shareholders and the Board of Directors and Stockholders of Delta Apparel, Inc. and subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and subsidiariesSubsidiaries (the Company) as of September 30, 2017,October 1, 2022 and October 1, 2016, and2, 2021, the related consolidated statements of operations, comprehensive income, (loss)
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 1, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 21, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements referredthat was communicated or required to above present fairly, in all material respects, the consolidated financial position of Delta Apparel, Inc. and subsidiaries at September 30, 2017, and October 1, 2016, and the consolidated results of their operations and their cash flows for each of the two years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relationbe communicated to the basic financial statements taken as a whole, presents fairly in allaudit committee and that: (1) relates to accounts or disclosures that are material respectsto the information set forth therein.
Inventory Reserve Valuation | |
Description of the Matter | As described in Note 4 to the Company’s consolidated financial statements, the Company’s inventories totaled approximately $248.5 million as of October 1, 2022, net of approximately $17.7 million of inventory reserves. As discussed in Note 2 to the consolidated financial statements, the Company states inventories at the lower of cost or net realizable value. In connection with this policy, the Company periodically reviews inventory quantities on hand and records reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value. The Company’s evaluation of inventory valuation includes consideration of the life cycle of the individual products and historical sales and margin information based on such life cycles. Auditing management’s estimate of certain inventory reserves was complex and required significant judgment due to estimation uncertainty in the assumptions about the life cycle of the individual products. Changes in these assumptions can lead to a material effect of the amount of recorded inventory reserves. |
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated design, and tested the operating effectiveness of controls over the Company’s process to determine the valuation of the Company’s inventory reserves. This included internal controls over the Company’s review of significant assumptions underlying the inventory reserve estimate. To test the adequacy of the Company’s inventory reserve, our substantive audit procedures included, among others, assessing methodologies and assumptions used, testing the accuracy and completeness of the underlying data used in management’s estimation calculations, including aging of inventory and historical margins, and performing sensitivity analysis on the significant assumptions used. |
/s/ Ernst & Young, LLP
We have served as the date isCompany’s auditor since 2016.
Atlanta, Georgia
November 29, 201621, 2022
Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
September 2022 | September 2021 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 300 | $ | 9,376 | ||||
Accounts receivable, less allowances of $109 and $251, respectively | 68,215 | 66,973 | ||||||
Other receivables | 1,402 | 761 | ||||||
Income tax receivable | 1,969 | 356 | ||||||
Inventories, net | 248,538 | 161,703 | ||||||
Prepaid expenses and other current assets | 2,755 | 3,794 | ||||||
Total current assets | 323,179 | 242,963 | ||||||
Property, plant and equipment, net | 74,109 | 67,564 | ||||||
Goodwill | 37,897 | 37,897 | ||||||
Intangible assets, net | 24,026 | 26,291 | ||||||
Deferred income taxes | 1,342 | 1,854 | ||||||
Operating lease assets | 50,275 | 45,279 | ||||||
Equity method investment | 9,886 | 10,433 | ||||||
Other assets | 2,967 | 2,007 | ||||||
Total assets | $ | 523,681 | $ | 434,288 | ||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 83,553 | $ | 52,936 | ||||
Accrued expenses | 27,414 | 29,949 | ||||||
Income taxes payable | 379 | 379 | ||||||
Current portion of finance leases | 8,163 | 6,621 | ||||||
Current portion of operating leases | 8,876 | 8,509 | ||||||
Current portion of long-term debt | 9,176 | 7,067 | ||||||
Total current liabilities | 137,561 | 105,461 | ||||||
Long-term income taxes payable | 2,841 | 3,220 | ||||||
Long-term finance leases, less current maturities | 16,776 | 15,669 | ||||||
Long-term operating leases, less current maturities | 42,721 | 38,546 | ||||||
Long-term debt, less current maturities | 136,750 | 101,680 | ||||||
Long-term contingent consideration | — | 1,897 | ||||||
Deferred income taxes | 4,310 | 1,520 | ||||||
Other liabilities | — | 2,101 | ||||||
Total liabilities | $ | 340,959 | $ | 270,094 | ||||
Shareholders’ equity: | ||||||||
Preferred stock—$0.01 par value, 2,000,000 shares authorized, none issued and outstanding | — | — | ||||||
Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares issued, and 6,915,663 and 6,974,660 shares outstanding as of September 2022, and September 2021, respectively | 96 | 96 | ||||||
Additional paid-in capital | 61,961 | 60,831 | ||||||
Retained earnings | 166,600 | 146,860 | ||||||
Accumulated other comprehensive gain (loss) | 141 | (786 | ) | |||||
Treasury stock —2,731,309 and 2,672,312 shares as of September 2022, and September 2021, respectively | (45,420 | ) | (42,149 | ) | ||||
Equity attributable to Delta Apparel, Inc. | 183,378 | 164,852 | ||||||
Equity attributable to non–controlling interest | (656 | ) | (658 | ) | ||||
Total equity | 182,722 | 164,194 | ||||||
Total liabilities and equity | $ | 523,681 | $ | 434,288 |
September 30, 2017 | October 1, 2016 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 572 | $ | 397 | |||
Accounts receivable, net | 47,304 | 63,013 | |||||
Other receivables | 253 | 596 | |||||
Income tax receivable | 352 | 86 | |||||
Inventories, net | 174,551 | 164,247 | |||||
Note receivable | 2,016 | — | |||||
Prepaid expenses and other current assets | 2,646 | 4,145 | |||||
Total current assets | 227,694 | 232,484 | |||||
Property, plant and equipment, net | 42,706 | 43,503 | |||||
Goodwill | 19,917 | 36,729 | |||||
Intangible assets, net | 16,151 | 20,922 | |||||
Deferred income taxes | 5,002 | 5,246 | |||||
Other assets | 6,332 | 5,768 | |||||
Total assets | $ | 317,802 | $ | 344,652 | |||
Liabilities and Shareholders’ Equity | |||||||
Liabilities: | |||||||
Accounts payable | $ | 47,183 | $ | 51,395 | |||
Accrued expenses | 17,704 | 21,706 | |||||
Current portion of long-term debt | 7,548 | 9,192 | |||||
Total current liabilities | 72,435 | 82,293 | |||||
Long-term debt, less current maturities | 85,306 | 106,603 | |||||
Other liabilities | 2,574 | 1,241 | |||||
Contingent consideration | 1,600 | 2,500 | |||||
Total liabilities | $ | 161,915 | $ | 192,637 | |||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Preferred stock—$0.01 par value, 2,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares issued, and 7,300,297 and 7,609,727 shares outstanding as of September 30, 2017, and October 1, 2016, respectively | 96 | 96 | |||||
Additional paid-in capital | 61,065 | 60,847 | |||||
Retained earnings | 127,358 | 116,679 | |||||
Accumulated other comprehensive loss | (35 | ) | (112 | ) | |||
Treasury stock —2,346,675 and 2,037,245 shares as of September 30, 2017, and October 1, 2016, respectively | (32,597 | ) | (25,495 | ) | |||
Total shareholders’ equity | 155,887 | 152,015 | |||||
Total liabilities and shareholders’ equity | $ | 317,802 | $ | 344,652 |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Year Ended | ||||||||
September 2022 | September 2021 | |||||||
Net sales | $ | 484,859 | $ | 436,750 | ||||
Cost of goods sold | 376,016 | 334,870 | ||||||
Gross profit | 108,843 | 101,880 | ||||||
Selling, general and administrative expenses | 79,455 | 70,743 | ||||||
Other income, net | (2,393 | ) | (1,574 | ) | ||||
Operating income | 31,781 | 32,711 | ||||||
Interest expense | 7,732 | 6,844 | ||||||
Earnings before provision for income taxes | 24,049 | 25,867 | ||||||
Provision for income taxes | 4,307 | 5,705 | ||||||
Consolidated earnings, net | $ | 19,742 | $ | 20,162 | ||||
Net income (loss) attributable to non-controlling interest | 2 | (134 | ) | |||||
Net earnings attributable to shareholders | 19,740 | 20,296 | ||||||
Basic earnings per share | $ | 2.84 | $ | 2.92 | ||||
Diluted earnings per share | $ | 2.80 | $ | 2.86 | ||||
Weighted average number of shares outstanding | 6,953 | 6,961 | ||||||
Dilutive effect of stock options and awards | 94 | 132 | ||||||
Weighted average number of shares assuming dilution | 7,047 | 7,093 |
Fiscal Year Ended | |||||||||||
September 30, 2017 | October 1, 2016 | October 3, 2015 | |||||||||
Net sales | $ | 385,082 | $ | 425,249 | $ | 449,142 | |||||
Cost of goods sold | 304,360 | 331,750 | 360,823 | ||||||||
Gross profit | 80,722 | 93,499 | 88,319 | ||||||||
Selling, general and administrative expenses | 67,408 | 76,578 | 81,086 | ||||||||
Change in fair value of contingent consideration | (900 | ) | (600 | ) | (500 | ) | |||||
Gain on sale of business | (1,295 | ) | — | (7,704 | ) | ||||||
Other income, net | (670 | ) | (552 | ) | (682 | ) | |||||
Restructuring costs | — | 1,741 | — | ||||||||
Operating income | 16,179 | 16,332 | 16,119 | ||||||||
Interest expense | 5,011 | 5,287 | 6,021 | ||||||||
Earnings before provision for income taxes | 11,168 | 11,045 | 10,098 | ||||||||
Provision for income taxes | 657 | 2,081 | 2,005 | ||||||||
Net earnings | $ | 10,511 | $ | 8,964 | $ | 8,093 | |||||
Basic earnings per share | $ | 1.40 | $ | 1.16 | $ | 1.03 | |||||
Diluted earnings per share | $ | 1.33 | $ | 1.12 | $ | 1.00 | |||||
Weighted average number of shares outstanding | 7,531 | 7,726 | 7,874 | ||||||||
Dilutive effect of stock options and awards | 351 | 253 | 206 | ||||||||
Weighted average number of shares assuming dilution | 7,882 | 7,979 | 8,080 |
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income (Amounts in thousands) Year Ended September 2022 September 2021 Net earnings attributable to shareholders Other comprehensive income related to unrealized gain on derivatives, net of income tax Consolidated comprehensive income See accompanying Notes to Consolidated Financial Statements Delta Apparel, Inc. and Subsidiaries Consolidated Statements of Shareholders’ Equity (Amounts in thousands, except share amounts) Accumulated Additional Other Non- Common Stock Paid-In Retained Comprehensive Treasury Stock Controlling Shares Amount Capital Earnings Income (Loss) Shares Amount Interest Total Balance at September 2020 Net earnings Other comprehensive income Net loss attributable to non-controlling interest Vested stock awards Stock based compensation Balance at September 2021 Net earnings Other comprehensive income Net income attributable to non-controlling interest Stock buyback Vested stock awards Stock based compensation Balance at September 2022 See accompanying Notes to Consolidated Financial Statements. Consolidated Statements of (Amounts in Year Ended September 2022 September 2021 Operating activities: Consolidated net earnings Adjustments to consolidated net earnings attributable to net cash (used in) provided by operating activities: Depreciation Amortization of intangibles Amortization of deferred financing fees Provision for deferred income taxes Provision for market reserves Non-cash stock compensation Loss (gain) on disposal of equipment Contingent consideration earn out adjustment Other, net Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable, net Inventories, net Prepaid expenses and other current assets Other non-current assets Accounts payable Accrued expenses Change in net operating lease liabilities Income taxes Other liabilities Net cash (used in) provided by operating activities Investing activities: Purchases of property and equipment Proceeds from sale of property and equipment Proceeds from equipment under financed leases Cash paid for intangible asset Cash paid for business Net cash used in investing activities Financing activities: Proceeds from long-term debt Repayment of long-term debt Payment of capital financing Payment of contingent consideration Repurchase of common stock Payment of deferred financing costs Payment of withholding taxes on stock awards Net cash provided by (used in) financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Supplemental cash flow information: Cash paid during the period for interest Cash paid during the period for income taxes, net of refunds received See accompanying Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements September Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is We design and internally manufacture the majority of our products, (a) Basis of Presentation: We operate our business in two distinct segments: (b) Fiscal Year: (c) Use of Estimates: (d) Cash and Cash Equivalents: (e) Accounts Receivable: We estimate the net (f) Inventories:We state inventories at the lower of cost or (g) Property, Plant and Equipment: (h) Internally Developed Software (i) Impairment of Long-Lived Assets (Including Amortizable Intangible Assets): (j) Goodwill and Intangible Assets: (k) Impairment of Goodwill: We complete our annual impairment test of goodwill on the first day of our third fiscal During the third quarter of fiscal 2022, the Company qualitatively assessed whether it was more likely than not that goodwill was impaired. Based on this assessment, the Company determined that its goodwill was not impaired as of April 3, 2022. No events or changes in circumstances have occurred since the date of the Company's most recent annual impairment test that would more likely than not reduce the fair value of the The Company’s goodwill impairment loss calculations contain uncertainties because they require management to make significant judgments in estimating the fair value (l) Contingent Consideration: At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration related to the (m) Revenue Recognition: Revenue is recognized when performance obligations under the terms of the Our receivables resulting from wholesale customers are generally collected within three months, in accordance with our established credit terms. Our direct-to-consumer ecommerce and retail store receivables are collected within a few days. Our revenue, including freight income, is recognized net of applicable taxes in our Consolidated Statements of Operations. In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these arrangements are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are recorded net of discounts, allowances, and operational chargebacks. As certain allowances and other deductions are not finalized until the end of a season, program or other event which We only recognize revenue to the We record shipping and handling charges incurred by us before and after the customer obtains control as a fulfillment cost rather than an additional promised service. Our customers' terms are less than one year from the transfer of (n) Sales Tax: (o) Cost of Goods Sold: (p) Selling, General and Administrative Expense: (q) Advertising Costs: (r) Stock-Based Compensation: Stock-based compensation (s) Income Taxes: (t) Earnings per Share: (u) Foreign Currency Translation: (v) Fair Value of Financial Instruments: (w) Other Comprehensive (x) Yarn and Cotton Procurements: (y) Derivatives: We account for derivatives and hedging activities in accordance with We are exposed to counterparty credit risks on all derivatives. Because these amounts are recorded at fair value, the full amount of our exposure is the carrying value of these instruments. We only enter into derivative transactions with From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There were (z) Equity Method Accounting: As of September 2022, we owned 31% of the outstanding capital stock in our Honduran Equity Method Investment. We apply the equity method of accounting for our investment, as we have less than a 50% ownership interest and can exert significant influence. We do not exercise control over this company and do not have substantive participating rights. As such, this entity is not considered a variable interest entity. (aa) Net Income Attributable to Non-Controlling Interest: The net income attributable to non-controlling interest represents the share of net income allocated to members of our consolidated affiliates. In (ab) Business Combinations: Business combinations completed by Delta Apparel have been accounted for under the acquisition method of accounting. The acquisition method requires the assets acquired and (ac) Recently Adopted Accounting Pronouncements: In March 2020, the FASB issued ASU 2020-04,Reference Rate Reform (Topic848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to (ad) Recently Issued Accounting Pronouncements Not Yet Adopted: Our revenue streams consist of Year Ended September 2022 % % Retail % % Direct-to-consumer ecommerce % % Wholesale % % Net Sales % % The table below provides net sales by reportable segment (in thousands) and the Year Ended September 2022 Net Sales Retail Direct-to-Consumer ecommerce Wholesale Delta Group % % % Salt Life Group % % % Total Year Ended September 2021 Net Sales Retail Direct-to-Consumer ecommerce Wholesale Delta Group % % % Salt Life Group % % % Total Inventories, net of reserves of September 2022 September 2021 Raw materials Work in process Finished goods Raw materials include finished yarn and direct materials for the Note 5—Property, Plant and Property, plant and equipment consist of the following (in thousands, except economic life data): September 2022 September 2021 Land and land improvements Buildings Machinery and equipment Computers and software Furniture and fixtures Leasehold improvements Vehicles and related equipment Construction in progress Less accumulated depreciation and amortization Total property, plant and equipment, net Note 6—Goodwill and Intangible Assets Goodwill and components of intangible assets consist of the following (in thousands): September 2022 September 2021 Cost Accumulated Amortization Net Value Cost Accumulated Amortization Net Value Economic Life Goodwill Intangibles: Tradename/trademarks 20 - 30 yrs Customer relationships 20 yrs Technology 10 yrs License agreements 15 - 30 yrs Non-compete agreements 4 – 8.5 yrs Total intangibles, net Goodwill represents the acquired goodwill net of the cumulative impairment losses recorded in fiscal year 2011 of $0.6 million. Depending on Accrued expenses consist of the following (in thousands): September 2022 September 2021 Accrued employee compensation and benefits Taxes accrued and withheld Refund liabilities Accrued freight Accrued capital expenditures Deferred purchase price (1) Accrued interest Other (1) Unsecured liability associated with the purchase of intangible technology, of which the final quarterly installment of $500 was paid in the first quarter of fiscal 2023. Revolving U.S. credit facility, interest at base rate or adjusted SOFR rate plus an applicable margin (interest at 5.3% on September 2022) due June 2027 Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 7.25% as of September 2022 and 7.7% as of September 2021, due August 2025 Term loan with Banco Ficohsa, a Honduran bank, interest at 7.5%, quarterly installments beginning September 2021 through December 2025 Term loan with Banco Ficohsa, a Honduran bank, interest at 7.5%, quarterly installments beginning March 2023 through May 2027 Term loan with Banco Ficohsa, a Panamanian bank, interest at the prevailing market rate within the Panamanian Banking Market (interest at 8.6% on September 2022), monthly installments beginning October 2022 through August 2027 DTG2Go, LLC acquisition promissory note, interest at 6.0%, quarterly payments beginning January 2019 through October 2021 Salt Life Beverage, LLC promissory note, interest at 4.0% Less current portion of long-term debt Long-term debt, excluding current maturities Credit Facility On May 10, 2016, we On November 19, 2019, the Borrowers entered into a Consent and Fourth Amendment to the On April 27, 2020, the Borrowers entered into a Fifth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Fifth Amendment”). The Fifth Amendment amends the financial covenant provisions from the amendment date through September 2020, including effectively lowering the minimum availability thresholds and removing the requirement that our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month period must not be less than 1.1 to 1.0. The Fifth Amendment also, among other things, (i) allowed for an additional 30 days of aged receivables from customers in the borrowing base through August 1, 2020, (ii) ceased amortization of real estate and machinery and equipment assets in the borrowing base through August 1, 2020, (iii) postponed amortization of trademark assets in the borrowing base until October 4, 2020; (iv) amends the definition of Fixed Charge Coverage Ratio to reference the monthly amortization of the On August 28, 2020, the Borrowers entered into a Sixth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Sixth Amendment”). The Sixth Amendment, (i) maintained lower minimum availability thresholds from the amendment date through July 3, 2021, (ii) allowed for an additional 30 days of aged receivables from customers in the borrowing base through April 3, 2021, (iii) increased the advance rate to 70% of real estate assets in the borrowing base and commences amortization on October 4, 2020, (iv) ceased amortization of machinery and equipment assets in the borrowing base through April 3, 2021, (v) postponed amortization of trademark assets in the borrowing base until April 4, 2021, (vi) required the Applicable Margin to be set at Level III through July 3, 2021 and increased the Applicable Margin by 50 basis points across all Levels within the Applicable Margin table for the remaining term of the Amended Credit Agreement, and (vii) required continued weekly reporting of accounts receivable to the Agent through July 3, 2021. On June 2, 2022, the Borrowers entered into a Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Seventh Amendment”). The Seventh Amendment, (i) removes obsolete LIBOR based borrowing and replaces it with SOFR (Secured Overnight Financing Rate) as an alternative elective pricing structure, (ii) amends the pricing structure based on SOFR plus a CSA (Credit Spread Adjustment) defined as 10 bps for 1 month and 15 bps for 3-month tenors, (iii) sets the SOFR floor to 0 bps, (iv) reloads the fair market value of real estate and intellectual property within the borrowing base calculation and resets their respective amortization schedules, (v) sets the maturity date to 5 years from the closing date, and (vi) reduces our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month period, if and when applicable, from 1.1 to 1.0. The Amended Credit Agreement allows us to borrow up to Our U.S. revolving credit facility is secured by a At September Our credit facility includes Proceeds of the loans made pursuant to the Amended Credit Agreement may be used for permitted acquisitions (as defined in the Amended Credit Agreement), general operating expenses, working capital, other corporate purposes, and to finance credit facility fees and expenses. 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 15% 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 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the Amended Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of determination.At September Promissory Notes On October 8, 2018, we acquired Honduran Debt Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, El Salvador Debt In September 2022 we entered into a new term loan with a five-year term with a principal amount of $3.0 million with Banco Ficohsa, a Panamanian bank, to finance our El Salvador operations. This loan is secured by a first-priority lien on the assets of our El Salvador operations and is not guaranteed by our U.S. entities. The loan is denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. Information about this loan and the outstanding balance as of September 2022, is listed as part of the long-term debt schedule above. Total Debt The aggregate maturities of debt at September September Amount 2023 2024 2025 2026 2027 Thereafter The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted on December 22, 2017, which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax, ("transition tax"), on deemed repatriated cumulative earnings of foreign subsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section 163(j)"). GILTI is the excess of the shareholder’s net controlled foreign corporations, ("CFC") net tested income over the net deemed tangible income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income or 30% of the taxpayer’s adjusted taxable income. We have included in our calculation of our effective tax rate the estimated impact of GILTI and Section 163(j) which were effective for us beginning fiscal year 2019. We have elected to account for the tax on GILTI as a period cost and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including some provisions which were previously enacted under the New Tax Legislation. The CARES Act revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income. We have included the estimated impact of these provisions in our effective tax rate calculation. The provision for income taxes consists of the following (in thousands): Year Ended September 2022 September 2021 Current: Federal State Foreign Total current Deferred: Federal State Total deferred Provision for income taxes For financial reporting purposes our income before provision for income taxes includes the following components (in thousands): Year Ended September 2022 September 2021 United States, net of (income) loss attributable to non-controlling interest Foreign Our effective income tax rate on operations for 2022 was 17.9% compared to a rate of 21.9% in the prior year. We generally benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. As such, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate. In addition, the future impact of the CARES Act and New Tax Legislation may differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the CARES Act and New Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and New Tax Legislation. A reconciliation between the actual provision for income taxes and the provision for income taxes computed using the federal statutory income tax rate of Year Ended September 2022 September 2021 Income tax expense at the statutory rate of 21.0% State income tax benefits, net of federal income tax benefit Impact of foreign earnings in tax-free zone GILTI inclusion Other permanent differences Impact of state rate changes Permanent reinvestment of foreign earnings Other Provision for income taxes Significant components of our deferred tax assets and liabilities are as follows (in thousands): September 2022 September 2021 Deferred tax assets: State net operating loss carryforwards Receivable allowances and reserves Inventories and reserves Accrued compensation and benefits Operating lease liabilities Other Gross deferred tax assets Less valuation allowance — state net operating loss carryforwards Net deferred tax assets Deferred tax liabilities: Depreciation Goodwill and intangibles Operating lease assets Other Gross deferred tax liabilities Net deferred tax (liabilities) assets As of September For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable income or tax planning strategies during the periods in which those temporary differences become deductible or when the carryforwards are available. ASC 740, As of September 2022, We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years We lease property and equipment under operating lease arrangements, most of which relate to distribution centers and manufacturing facilities in the U.S., Honduras, El Salvador, and Mexico. We also lease machinery and equipment in the U.S. under finance lease arrangements. We include both the contractual term as well as any renewal option that we are reasonably certain to exercise in the determination of our lease terms. For leases with a term of greater than 12 months, we value lease liabilities and the related assets as the present value of the lease payments over the related term. We apply the short-term lease exception to leases with a term of 12 months or less and exclude such leases from our Condensed Consolidated Balance Sheet. Payments related to these short-term leases are expensed on a straight-line basis over the lease term and are reflected as a component of lease cost within our Condensed Consolidated Statements of Operations. Our operating lease agreements for buildings generally include provisions for the payment of our proportional share of operating costs, property taxes, and other variable payments. These incremental payments are excluded from our calculation of operating lease liabilities and right of use assets. We have Generally, the rate implicit in our operating leases The following table presents the future undiscounted payments due on our operating and finance lease liabilities as well as a reconciliation of those payments to Operating Finance Leases Leases 2023 2024 2025 2026 2027 Thereafter Undiscounted fixed lease payments Discount due to interest ) Total lease liabilities Less current maturities ) ) Lease liabilities, excluding current maturities As of September 2022, we have entered into certain operating leases that have not yet commenced, but the annual fixed lease payments are not significant. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with a Honduran company, of which we own 31% of the outstanding capital stock of the lessor at September 2022. During 2022 and As of September 2022, and September 2021, we had $50.3 million and $45.3 million, respectively, of operating lease ROU assets which were reflected within Operating lease assets in our Consolidated Balance Sheet, and $32.1 million and $26.7 million, respectively, of finance lease ROU assets, which were reflected within Property, plant, and equipment, net in our Consolidated Balance Sheet. The weighted average remaining lease terms for our operating leases and finance leases were approximately 6 years and 3 years, respectively, as of The components of total lease expense were as follows Operating lease fixed expense Operating lease variable cost expense Finance lease amortization of ROU assets expense Finance lease interest expense Total lease expense Cash outflows for operating lease payments were $12.0 million during 2022 and $11.0 million during 2021. Cash outflows for interest payments on finance leases were $1.4 million and $1.2 million during 2022 and 2021, respectively. These outflows are classified within net cash provided by (used in) operating activities on the Consolidated Statement of Cash Flows. Cash outflows for finance lease payments during 2022 and 2021 were $7.7 million and $7.0 million, respectively, and are classified within net cash used in financing activities on the Consolidated Statement of Cash Flows. ROU assets obtained in exchange for operating lease liabilities during 2022 and 2021 were $13.9 million and $1.2 million, respectively. ROU assets obtained in exchange for finance lease liabilities during 2022 and 2021 were $10.4 million and $12.3 million, respectively. We do not have significant leasing transactions in which we are the lessor. We sponsor and maintain a We provide post-retirement life insurance benefits for certain retired employees. The plan is noncontributory and is unfunded, and therefore, benefits and expenses are paid from our general assets as they are incurred. All of the employees in the plan are fully vested, and the plan was closed to new employees in 1990. The discount rate used in determining the liability was September 2022 September 2021 Balance at beginning of year Interest expense Benefits paid Balance at end of year On February Shares are generally issued from treasury stock upon Compensation expense is recorded on the selling, general and administrative expense line item in our Consolidated Statements of Operations over the vesting periods. Total employee stock-based compensation expense for The following table summarizes the restricted stock unit and performance unit award activity during the periods ended September Year Ended September 2022 September 2021 Number of Units Weighted average grant date fair value Number of Units Weighted average grant date fair value Units outstanding, beginning of fiscal period Units granted Units issued Units forfeited Units outstanding, end of fiscal period During During During 2021, restricted stock units representing 12,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 2022. These restricted stock units are payable in common stock. During 2022, restricted stock units representing 15,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 2022. These restricted stock units are payable in common stock. During 2022, restricted stock units and performance units representing 110,625 and 68,625 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 2023. These restricted stock units and performance units are payable pone-half in common stock and one-half in cash. During 2022, restricted stock units and performance units representing 52,000 and 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 2024. These restricted stock units and performance units are payable one-half in common stock and one-half in cash. In addition, restricted stock units representing 59,000 shares were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 2024. These restricted stock units are payable in common stock. As of The following table summarizes information about the unvested restricted stock units and performance units as of Restricted Stock Units/Performance Units Number of Units Average Market Price on Date of Grant Vesting Date* Fiscal Year 2022 Restricted Units November 2022 Fiscal Year 2023 Restricted Units November 2023 Fiscal Year 2023 Performance Units November 2023 Fiscal Year 2024 Restricted Units November 2024 Fiscal Year 2024 Performance Units November 2024 * These awards are eligible to vest upon the filing of our Annual Report on Form Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which the business is managed, and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker. The Delta Group is comprised of the DTG2Go a market leader in the Delta Activewear is a preferred supplier of The iconic Soffe brand offers activewear for spirit makers and record breakers and is widely known for the original "cheer short" with the signature roll-down waistband. Soffe carries a wide range of activewear for the entire family. Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and veteran United States military personnel worldwide. The Soffe men's assortment features the tagline "anchored in the military, grounded in training" and offers everything from physical training gear certified by the respective branches of the military, classic base layers that include the favored 3-pack tees, and the iconic "ranger panty." Complementing the Delta Our Global Brands channel serves as a Our Retail Direct channel serves brick and mortar and online retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to the retail locations and ecommerce fulfillment centers of a diversified customer base including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offer a seamless solution for The Our Chief Operating Decision Maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges ("segment operating earnings"). Our segment operating earnings may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note 2. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands). Year Ended September 2022 September 2021 Segment net sales: Delta Group Salt Life Group Total net sales Segment operating income: Delta Group Salt Life Group Total segment operating income Purchases of property, plant and equipment: Delta Group Salt Life Group Total purchases of property, plant and equipment Depreciation and amortization: Delta Group Salt Life Group Total depreciation and amortization The following reconciles the segment operating income to the consolidated income before provision for income taxes (in thousands): Year Ended September 2022 September 2021 Segment operating income Unallocated corporate expenses Unallocated interest expense Consolidated income before provision for income taxes Our revenues include sales to domestic and foreign customers. Foreign customers are composed of companies whose headquarters are located outside of the United States. Our total assets and equity investment by segment are as follows (in thousands): As of September 2022 September 2021 Total assets by segment: Delta Group Salt Life Group Corporate Total assets Equity investment in joint venture: Delta Group Salt Life Group Total equity investment in joint venture We attribute our property, plant and equipment to a particular country based on the location of As of September 2022 September 2021 United States Honduras El Salvador Mexico All foreign countries Total property, plant and equipment, net Our Board of Directors (a) Litigation At times, we are party to various legal claims, actions and complaints. We believe that, as a result of legal (b) Purchase Contracts We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At September Yarn Finished fabric Finished products (c) Letters of Credit As of September (d) From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. The following financial instruments were outstanding as of September Effective Date Notional Amount LIBOR Rate Maturity Date Interest Rate Swap July 25, 2018 $20 million 3.18% July From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the ASC 820, ○ Level 1 ○ Level 2 ○ Level 3 The following financial liabilities are measured at fair value on a recurring basis (in thousands): Fair Value Measurements Using Period Ended Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Interest Rate Swap September 2022 September 2021 Contingent Consideration September 2022 September 2021 The fair value of the interest rate swap agreements The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of September September 2022 September 2021 Deferred tax asset Other assets Other liabilities Accumulated other comprehensive gain (loss) The DTG2Go acquisition purchase price consisted of additional payments contingent on the combined businesses' achievement of certain performance targets related to sales and earnings before interest, taxes, depreciation and amortization for the period from April 1, None. $ 19,740 $ 20,296 927 536 $ 20,667 $ 20,832 Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Net earnings $ 10,511 $ 8,964 $ 8,093 Other comprehensive income (loss) related to unrealized gain (loss) on derivatives, net of income tax 77 317 (160 ) Comprehensive income $ 10,588 $ 9,281 $ 7,933 9,646,972 $ 96 $ 61,005 $ 126,564 $ (1,322 ) 2,756,854 $ (43,133 ) $ (524 ) $ 142,686 — — — 20,296 — — — — 20,296 — — — — 536 — — — 536 — — — — — — — (134 ) (134 ) — — (2,117 ) — — (84,542 ) 984 — (1,133 ) — — 1,943 — — — — — 1,943 9,646,972 $ 96 $ 60,831 $ 146,860 $ (786 ) 2,672,312 $ (42,149 ) $ (658 ) $ 164,194 — — — 19,740 — — — — 19,740 — — — — 927 — — — 927 — — — — — — — 2 2 — — — — — 136,181 (3,957 ) — (3,957 ) — — (1,783 ) — — (77,184 ) 686 — (1,097 ) — — 2,913 — — — — — 2,913 9,646,972 $ 96 $ 61,961 $ 166,600 $ 141 2,731,309 $ (45,420 ) $ (656 ) $ 182,722 Shareholders’ Equitythousands, except share amounts)thousands) $ 19,742 $ 20,162 12,636 11,913 2,396 1,841 336 325 2,988 3,542 1,804 898 2,913 1,943 354 (54 ) (1,897 ) (2,413 ) (848 ) (615 ) (1,438 ) (6,734 ) (88,639 ) (17,086 ) 1,593 (1,307 ) 624 1,368 30,435 3,030 (415 ) 8,039 342 493 (1,992 ) 248 (1,049 ) (126 ) (20,115 ) 25,467 (12,378 ) (5,586 ) 40 453 — 2,312 (131 ) (6,567 ) (583 ) (3,665 ) (13,052 ) (13,053 ) 542,613 453,830 (504,851 ) (463,092 ) (7,732 ) (6,991 ) — (2,110 ) (3,957 ) — (890 ) — (1,092 ) (1,133 ) 24,091 (19,496 ) (9,076 ) (7,082 ) 9,376 16,458 $ 300 $ 9,376 $ 7,404 $ 6,554 $ 3,044 $ 1,759 Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Treasury Stock Shares Amount Capital Earnings Income (Loss) Shares Amount Total Balance at September 27, 2014 9,646,972 $ 96 $ 59,649 $ 99,622 $ (269 ) 1,769,298 $ (20,891 ) $ 138,207 Net earnings and other comprehensive loss — — — 8,093 (160 ) — — 7,933 Stock grant — — (663 ) — — (42,244 ) 208 (455 ) Stock options exercised — — (304 ) — — (17,584 ) 502 198 Reduction of tax benefits recognized from stock options — — (673 ) — — — — (673 ) Purchase of common stock — — — — — 140,336 (2,101 ) (2,101 ) Stock based compensation — — 1,390 — — — — 1,390 Balance at October 3, 2015 9,646,972 96 59,399 107,715 (429 ) 1,849,806 (22,282 ) 144,499 Net earnings and other comprehensive income — — — 8,964 317 — — 9,281 Stock grant — — (493 ) — — (30,129 ) 330 (163 ) Excess tax benefits from stock awards — — 89 — — — — 89 Purchase of common stock — — — — — 217,568 (3,543 ) (3,543 ) Stock based compensation — — 1,852 — — — — 1,852 Balance at October 1, 2016 9,646,972 96 60,847 116,679 (112 ) 2,037,245 (25,495 ) 152,015 Net earnings and other comprehensive income — — — 10,511 77 — — 10,588 Stock grant — — (1,476 ) — — (72,991 ) 639 (837 ) Stock options exercised — — (385 ) — — (30,916 ) 54 (331 ) Excess tax benefits from stock options and awards — — (89 ) 168 — — — 79 Purchase of common stock — — — — — 413,337 (7,795 ) (7,795 ) Stock based compensation — — 2,168 — — — — 2,168 Balance at September 30, 2017 9,646,972 $ 96 $ 61,065 $ 127,358 $ (35 ) 2,346,675 $ (32,597 ) $ 155,887 Consolidated Statements of Cash Flows(Amounts in thousands) Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Operating activities: Net earnings $ 10,511 $ 8,964 $ 8,093 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 8,489 8,295 8,204 Amortization of intangibles 1,120 1,330 1,338 Amortization of deferred financing fees 323 413 517 Excess tax benefits (deficit) from stock awards and option exercises 89 (89 ) (2 ) Provision for deferred income taxes 322 2,048 786 Benefit from allowances on accounts receivable, net (544 ) (1,007 ) (175 ) Non-cash stock compensation 1,872 1,852 1,390 Change in the fair value of contingent consideration (900 ) (600 ) (500 ) Loss on disposal of equipment 65 108 29 Fixed asset impairment charge — 607 — Gain on sale of Junkfood assets after transaction costs (1,295 ) — — Gain on sale of The Game assets before transaction costs — — (8,114 ) Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable 16,596 140 6,236 Inventories, net (13,782 ) (15,662 ) 7,730 Prepaid expenses and other current assets 863 (1,302 ) 376 Other non-current assets (894 ) (346 ) (308 ) Accounts payable (4,201 ) (2,217 ) (4,370 ) Accrued expenses (4,451 ) (420 ) 158 Income taxes (355 ) (84 ) 1,447 Other liabilities 110 170 (528 ) Net cash provided by operating activities 13,938 2,200 22,307 Investing activities: Purchases of property and equipment (7,085 ) (12,315 ) (7,773 ) Proceeds from sale of property and equipment 1 1,861 470 Proceeds from sale of Junkfood assets 26,000 — — Proceeds from sale of The Game assets — — 14,913 Cash paid for businesses, net of cash acquired — (313 ) — Net cash provided by (used in) investing activities 18,916 (10,767 ) 7,610 Financing activities: Proceeds from long-term debt 453,860 488,093 497,364 Repayment of long-term debt (476,801 ) (474,510 ) (525,125 ) Payment of capital financing (633 ) (350 ) (150 ) Payment of financing fees — (1,018 ) (42 ) Repurchase of common stock (7,938 ) (3,477 ) (2,023 ) Proceeds from exercise of stock options — — 59 Payment of withholding taxes on stock awards and option exercises (1,167 ) (163 ) (314 ) — 89 2 Net cash (used in) provided by financing activities (32,679 ) 8,664 (30,229 ) Net increase (decrease) in cash and cash equivalents 175 97 (312 ) Cash and cash equivalents at beginning of period 397 300 612 Cash and cash equivalents at end of period $ 572 $ 397 $ 300 Supplemental cash flow information: Cash paid during the period for interest $ 4,372 $ 4,273 $ 4,803 Cash paid (received) during the period for income taxes, net of refunds received $ 506 $ 308 $ (328 ) Non-cash financing activity—shortfall to excess tax benefit pool $ — $ — $ 673 Non-cash financing activity—capital lease agreement $ 2,347 $ 781 $ — Accrued capital expenditures $ — $ 1,615 $ — See accompanying Notes to Consolidated Financial Statements.Delta Apparel, Inc. and Subsidiaries30, 2017NOTE Note 1—THE COMPANYana vertically-integrated, international apparel company. With approximately 8,600 employees worldwide, we design, marketing, manufacturingmanufacture, source, and sourcing company that featuresmarket a diverse portfolio of core activewear and lifestyle basicsapparel products under our primary brands of Salt Life®, Soffe®, and branded activewear apparel, headwearDelta. We are a market leader in the on-demand, digital print and related accessory products.fulfillment industry, bringing DTG2Go's proprietary technology and innovation to our customers' supply chains. We specialize in selling casual and athletic products through a variety of distribution channels and distribution tiers, including department stores, midoutdoor and mass channels, e-retailers, sporting goods and outdoor retailers, independent and specialty stores, department stores and mid-tier retailers, mass merchants and eRetailers, the U.S. military.military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our websitesecommerce sites and in our branded retail stores. We believe thisOur diversified distribution allowsgo-to-market strategies allow us to capitalize on our strengths to provide casualour activewear and lifestyle apparel products to consumers purchasing from most types of retailers. whichwith more than 90% of the apparel that we sell sewn in our own facilities. This allows us to offer a high degree of consistency and quality, controls as well as leverage scale efficiencies. One of our strengths isefficiencies, and react quickly to changes in trends within the speed with which we can reach the market from design to delivery.NOTE Note 2—SIGNIFICANT ACCOUNTING POLICIESsubsidiaries.subsidiaries, as well as its majority-owned subsidiary, Salt Life Beverage, LLC ("Salt Life Beverage"). All significant intercompany accounts and transactions have been eliminated in consolidation. We apply the equity method of accounting for investments in companies where we have less than a 50% ownership interest and over which we exert significant influence. We do not exercise control over these companies and do not have substantive participating rights. As such, these entities are not considered variable interest entities.basicsDelta Group and branded.Salt Life Group. 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.52-5352-53 week fiscal year ending on the Saturday closest to September 30. The 2017All references to "2022" and 2016"2021" relate to the 52-week fiscal years were 52-week years thatyear ended on September 30, 2017,2022, and October 1, 2016, respectively. The 2015the 52-week fiscal year was a 53-week year that ended on October 3, 2015.U.S. generally accepted accounting principlesGAAP requires management to make certain estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in our financial statements; for example:statements, such as allowance for doubtful trade receivables, sales returns and allowances,accounts receivable, refund liabilities, inventory obsolescence, the carrying value of goodwill, income tax assets, and their related valuation allowance. Our actual results may differ from our estimates.consistsconsist of cash and temporary investments with original maturities of three months or less.allowances which include allowance for doubtful accounts, returns and allowances. The reserves for allowances were $1.4 million and $2.0 million as of September 30, 2017, and October 1, 2016, respectively.collectibilitycollectability 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, we assess the need for 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, reservesdebts. 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. Bad debt expense was less than 1% of net sales in each of fiscal years 2017, 2016,the twelve months ended September 2022 and 2015.2021.marketnet realizable value using the first-in, first-outfirst-in, first-out method. Inventory cost includes materials, labor and manufacturing overhead on manufactured inventory, and all direct and associated costs, including inbound freight, to acquire sourced products. See Note 2(y)2 for further information regarding yarn procurements. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value.AssetsRight of use assets that we acquire under non-cancelable leases that meet the criteria of capitalfinance leases are capitalized in property, plant and equipment and amortized over the useful lives of the related assets. When we retire or dispose of assets, the costs and accumulated depreciation or amortization are removed from the respective accounts, and we recognize any related gain or loss. Repairs and maintenance costs are charged to expense whenexpensed as incurred. Major replacements that substantially extend the useful life of an asset are capitalized and depreciated.Costs.FASB Codification No. 350-40, ASC 350-40,Intangibles-Goodwill and Other, Internal-Use Software. After technical feasibility has been established, we capitalize the cost of our software development process, including payroll and payroll benefits, by tracking the software development hours invested in the software projects. We amortize our software development costs in accordance with the estimated economic life of the software, which is generally three to ten years.FASB Codification No. ASC 360,Property, Plant, and Equipment, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When evaluating assets for potential impairment, we compare the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. If impairment is indicated, the asset is permanently written down to its estimated fair value (based upon future discounted cash flows) and an impairment loss is recognized.in conjunction with the acquisitionsas a result of Salt Life, Junkfood, Art Gun, and Coast. On March 31, 2017, we sold the Junkfood business to JMJD Ventures, LLC. See Note 3—Divestitures for further information on this transaction.several acquisitions. Intangible assets are amortized based on their estimated economic lives, ranging from four to twenty years. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets acquired and liabilities acquired,assumed, and is not amortized. The total amount of goodwill is expected to be deductible for tax purposes. See Note 76 — Goodwill and Intangible Assets for further details.quarter.quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable utilizing the one-step qualitative assessment. We estimateassess the value of our goodwill under either a qualitative or quantitative approach. Under a qualitative approach, the Company evaluates various market and other factors to determine whether it is more likely than not that the Company’s goodwill has been impaired. In performing the qualitative assessment, the Company considers the carrying value of its reporting units compared to its fair value as well as events and changes in circumstances that could include, but are not limited to, a significant adverse change in customer demand or business climate, an adverse action or assessment by a regulator, and significant adverse changes in the price of the Company’s common stock. If such qualitative assessment indicates that impairment may have occurred, an additional quantitative assessment is performed by comparing the carrying value of the assets to their respective estimated fair values. If the recorded carrying value of goodwill exceeds its estimated fair value, an impairment charge is recorded to write the asset down to its estimated fair value.applicable reporting unit or units using a discounted cash flow methodology. This methodology represents a level 3below its carrying amount.measurement as defined under ASC 820, Fair Value Measurements and Disclosures, sinceof the inputs are not readily observable inCompany’s reporting units, including the marketplace. The goodwill impairment testing process involves the useprojection of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margins, selling, general and administrative expenses, capital expenditures,future cash flows and the selection of an appropriate discount rate, allrates. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors, including the profitability of which are subject to inherent uncertaintiesfuture business operations 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 estimatesif necessary, the fair value of the risks associated withreporting unit’s assets and liabilities. Further, the projectedCompany’s ability to realize the future cash flows based onused in its fair value calculations is affected by factors such as changes in economic conditions, changes in the best information available asCompany’s operating performance, and changes in the Company’s business strategies. Significant changes in any of the dateassumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting units and could result in impairment assessment. Based on the annual impairment analysis, there is not an impairment on the goodwill associated with Salt Life, the only goodwill recorded on our financial statements.Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be no assurance that our estimates and assumptions usedcharges in our impairment tests will prove to be accurate predictionsa future period.Salt Life and Art Gun acquisitionsDTG2Go acquisition in March 2018. We remeasure contingent consideration in accordance with FASB Codification No. ASC 805,Business Combinations (“ASC 805”). Basedbased on thehistorical operating results and projections we analyzedfor the fair valuefuture. At September 2022, no amount was accrued for contingent consideration related to the acquisition of DTG2Go, compared to the accrual of $1.9 million at September 2021. See Note 15—Commitments and Contingencies for further details.contingent consideration for Salt Life ascontracts are satisfied. Our performance obligation primarily consists of September 30, 2017. The estimated fair valuetransferring control of our products to our customers. Control is transferred upon providing the contingent consideration for Salt Life was $1.6 millionproducts to customers in our retail stores, upon shipment of our products to the consumers from our ecommerce sites, and $2.5 million at September 30, 2017, and October 1, 2016, respectively. The Art Gun contingent consideration agreement concluded during fiscal year 2017 and no contingent consideration was paid.(m) Self-Insurance Reserves: Priorupon shipment from our distribution centers to January 1, 2015, our medical, prescription and dental care benefits were primarily self-insured. Effective January 1, 2015,customers in our medical and prescription benefits became fully insured, but our dental insurance remained self-insured. Our prior self-insurance accruals were based on claims filed and estimates of claims incurred but not reported. We develop estimates of claims incurred but not reported based upon the historical time it takes for a claim to be reported and paid, and historical claim amounts. Self-insurance reserves were less than $0.1 million as of September 30, 2017, and October 1, 2016.(n) Revenue Recognition:Revenues from product sales are recognized when ownershipwholesale operations. Once control is transferred to the customer, we have completed our performance obligation.includes may not have occurred, we estimate such discounts, allowances, and returns that we expect to provide.passageextent that it is probable that we will not recognize a significant reversal of title, but alsorevenue due to the resolution of variable uncertainties at the time of sale. In determining our estimates for discounts, allowances, chargebacks, and returns, we consider historical and current trends, agreements with our customers and retailer performance. We record these discounts, returns and allowances as a reduction to net sales in our Consolidated Statements of Operations and as a refund liability in our accrued expenses in our Consolidated Balance Sheets, with the estimated value of inventory expected to be returned in prepaid and other current assets in our Consolidated Balance Sheets. As of September 2022, and September 2021, there was $1.1 million and $1.0 million, respectively, in refund liabilities for customer returns, allowances, markdowns and discounts included within accrued expenses.the risk of loss related to the product. At this point, the sales price is fixed and determinable,goods, and we are reasonably assureddo not adjust receivable amounts for the impact of the collectibilitytime value of money. We do not capitalize costs of obtaining a contract which we expect to recover, such as commissions, as the amortization period of the sale. The majority of our sales are shipped FOBasset recognized would be one year or Ex Worksshipping point and revenue is therefore recognized when the goods are shipped to the customer. For sales that are shipped FOB or Ex Works destination point, we do not recognize the revenue until the goods are received by the customer. Shipping and handling charges billed to our customers are included in net revenue and the related costs are included in cost of goods sold. Revenues are reported on a net sales basis, which is computed by deducting product returns, discounts and estimated returns and allowances. We estimate returns and allowances on an ongoing basis by considering historical and current trends.Royalty revenue is primarily derived from royalties paid to us by licensees of our intellectual property rights, which include, among other things, trademarks and copyrights. We execute license agreements with our licensees detailing the terms of the licensing arrangement. Royalties are generally recognized upon receipt of the licensees' royalty report in accordance with the terms of the executed license agreement and when all other revenue recognition criteria have been met.(o)less. (p)cost,costs, manufacturing labor costs, purchasing costs, inbound freight charges, insurance, inventory write-downs, and depreciation and amortization expense associated with our manufacturing and sourcing operations. Our gross margins may not be comparable to other companies, since some entities may include costs related to their distribution network in cost of goods sold, and we excludeinclude them from gross margin, including them instead in selling, general and administrative expenses.(q)$14.6 million, $15.1$22.2 million and $16.8$20.5 million in fiscal years 2017, 2016,2022 and 2015,2021, respectively. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel, cost, advertising and marketing expenses, royalty payments on licensed products, and other general and administrative expenses.(r)yearperiod in which they are incurred and are included in selling, general and administrative expenses in the Consolidated Statements of Operations. We participate in cooperative advertising programs with some of our customers. Depending on the customer, our defined cooperative programs allow the customer to use from 2% to 5% of its net purchases from us towards advertisements of our products. Because our products are being specifically advertised, we are receiving an identifiable benefit resulting from the consideration for cooperative advertising. Therefore, pursuant to FASB Codification No. 605-50, Revenue Recognition, Customers Payments and Incentives, weWe record cooperative advertising costs as a selling expense and the related cooperative advertising reserve as an accrued liability. Advertising costs totaled $4.6 million, $4.4$5.6 million and $4.7$3.7 million in fiscal years 2017, 2016,2022 and 2015,2021, respectively. IncludedIn 2022 and 2021, cooperative advertising costs of $0.7 million and $0.6 million, respectively, were included in these costs were $1.1 million in fiscal years 2017, 2016, and 2015 related to our cooperative advertising programs.costs. cost is accounted for under the provisions of FASB Codification No. ASC 718,Compensation – Stock Compensation, (“ASC 718”), the Securities and Exchange Commission Staff Accounting Bulletin No. 107 ("SAB 107"), and the Securities and Exchange Commission Staff Accounting Bulletin No. 110 ("SAB 110"). ASC 718 which requires all stock-based payments to employees, including grants of employee stock options,awards, to be recognized as expense over the vesting period using a fair value method. The fair value of our restricted stock awards is the quoted market value of our stock on the grant date. For performance-based stock awards, in the event we determine it is no longer probable that we will achieve the minimum performance criteria specified in the award, we reverse all of the previously recognized compensation expense in the period such a determination is made. We recognize the fair value, net of estimated forfeitures, as a component of selling, general and administrative expense in the Consolidated Statements of Operations over the vesting period. We early adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, (ASU 2016-09). For more information, see (aa) Recently Adopted Accounting Pronouncements within Note 2 — Significant Accounting Policies.(t)andas well as operating loss, interest deduction limitations, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.(u)FASB Codification No. ASC 260,Earnings Per Share (“ASC 260”). Basic EPS includes no dilution. Diluted EPS is calculated, as set forth in ASC 260, by dividing net income by the weighted average number of common shares outstanding adjusted for the issuance of potentially dilutive shares. PotentialPotentially dilutive shares consist of common stock issuable under the assumed exercise of outstanding stock options and awards using the treasury stock method. This method as required by ASC 718, assumes that the potential common shares are issued and the proceeds from the exercise, along with the amount of compensation expense attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the number of shares purchased is added as incremental shares to the actual number of shares outstanding to options and awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of diluted EPS since their inclusion would have an anti-dilutive effect on EPS.(v)and expensenet in the Consolidated Statements of Operations. These gains and losses are immaterial for all periods presented.(w)(x)Income (Loss): (Loss) consists of net earnings (loss) and unrealized gains (losses) from cash flow hedges, net of tax. Accumulated other comprehensive lossincome contained in the shareholders’ equity section of the Consolidated Balance Sheets was $35 thousand and $0.1 million as of September 30, 2017, and October 1, 2016, respectively, and was related to interest rate swap agreements.(y)agreements and was a gain as of September 2022 of $0.1 million and a loss as of September 2021 of $0.8 million.until that has been in place since 2005, with our existing agreement running through December 31, 2018.2024. 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. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of the purchase price of yarn, pursuant to the supply agreement, 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 elect to fix specific cotton prices.(z)FASB Codification No. ASC 815, (“ASC 815”), as amended. ASC 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair value depends upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. We include all derivative instruments at fair value in our Consolidated Balance Sheets. For derivative financial instruments related to the production of our products that are not designated as a hedge, we recognize the changes in fair value in cost of sales. For derivatives designated as cash flow hedges, to the extent effective, we recognize the changes in fair value in accumulated other comprehensive income (loss) until the hedged item is recognized in income. Any ineffectiveness in the hedge is recognized immediately in income in the line item that is consistent with the nature of the hedged risk. We formally document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions, at the inception of the transactions.well establishedwell-established institutions, and, therefore, we believe the counterparty credit risk is minimal. significant raw material option agreements that were purchased during fiscal years 2017, 2016,outstanding at September 2022 or 2015.September 2013,January 2018, Delta Apparel, Inc. established Salt Life Beverage, LLC, ("Salt Life Beverage"), of which Delta Apparel, through its subsidiary, holds a 60% ownership interest. Salt Life Beverage was formed to manufacture, market and sell Salt Life-branded alcoholic beverage products. We have concluded we entered into fourhave a controlling financial interest rate swap agreements, as follows:Effective DateNotationalAmountLIBOR RateMaturity DateInterest Rate SwapSeptember 9, 2013$15 million1.1700%September 9, 2016Interest Rate SwapSeptember 9, 2013$15 million1.6480%September 11, 2017Interest Rate SwapSeptember 19, 2013$15 million1.0030%September 19, 2016Interest Rate SwapSeptember 19, 2013$15 million1.4490%September 19, 2017During fiscal years 2017, 2016,in Salt Life Beverage and have consolidated its results in accordance with Accounting Standards Codification ("ASC") ASC-810,Consolidations, and Accounting Standards Update ("ASU") No.2015 these-02, Consolidation (Topic 810); Amendments to Consolidations. The non–controlling interest rate swap agreements had minimal ineffectivenessrepresents the 40% proportionate share of the results of Salt Life Beverage. All significant intercompany accounts and were considered highly-effective hedges.In July 2017, we entered into two interest rate swap agreements, as follows:Effective DateNotationalAmountLIBOR RateMaturity DateInterest Rate SwapJuly 19, 2017$10 million1.7400%July 19, 2019Interest Rate SwapJuly 19, 2017$10 million1.9900%May 10, 2021During fiscal year 2017, these interest rate swap agreements had minimal ineffectivenesstransactions have been eliminated in consolidation. were considered highly effective hedges.Theliabilities assumed, including contingencies, to be recorded at the fair value determined at the acquisition date and changes thereafter recorded in income. We generally obtain independent third-party valuation studies for certain assets acquired and liabilities assumed to assist us in determining the fair value. Goodwill represents the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed. The results of acquired businesses are included in our results of operations from the interest rate swap agreements resulted in AOCI gains, netdate of taxes, of $0.1 million and $0.3 million for the years ended September 30, 2017, and October 1, 2016, respectively, and an AOCI loss, net of taxes, of $0.2 million for the year ended October 3, 2015. See Note 16(d) - Derivatives for further details.(aa)acquisition.March 2016, December 2019, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment2019-12,Simplifying the Accounting (for Income Taxes (“ASU 2016-09). ASU 2016-092019-12”), which simplifies variousthe accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification ("ASC") 740, Income Taxes, and clarifies certain aspects of accounting for share-based payment transactions. The most significant change from this update amends the presentation of excess tax benefits and deficiencies incurrent guidance to promote consistency among reporting entities. Most amendments within the financial statements by eliminating tax pools and requiring these benefits and deficienciesstandard are required to be reflected inapplied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We adopted ASU 2019-12 as of the income statement. It also allows employer withholdingbeginning of fiscal 2022, and the provisions did not have a material effect on share based compensation upour financial condition, results of operations, cash flows, or disclosures.the maximum statutory rate without the possibility of triggering liabilityease potential accounting and allows companies to make a policy election as it relates to forfeitures. Additionally,financial reporting impacts of reference rate reform, including the ASU provides definitive guidance related to presentation of income tax benefit/deficiencies as an operating activity and payment of taxes for employee withholding from stock compensation as a financing activity within the Consolidated Statements of Cash Flows. ASU 2016-09 was adopted in our fiscal year beginning October 2, 2016, and we have elected to continue our policy of estimating forfeitures. As a result of this adoption, we recalculated previously released diluted earnings per share with updated calculations depicted in Note 17—Quarterly Financial Information. This resultedexpected transition from the exclusionLondon Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This new guidance includes temporary optional practical expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships and the sale or transfer of excess tax benefits and tax deficiencies fromdebt securities classified as held-to-maturity. Entities may apply the calculationprovisions of assumed proceeds. Diluted earnings per share declined $0.01 per share inthe new standard at the beginning of the reporting period when the election is made. This guidance may be applied through December 31, 2022. The Company transitioned their LIBOR based loans to an alternative reference rate during the fiscal year. This change did not have a material effect on our March and June fiscal quarters and remained unchanged in our December quarter.(ab)financial condition, results of operations, cash flows or disclosures. See Note 8—Long-Term Debt for further information. May 2014, June 2016, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), ("ASU 2014-09"). This new guidancewhich requires an entity to recognizeassess impairment of its financial instruments based on the amountentity's estimate of revenueexpected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to which it expects to be entitled forimprove and clarify the transferimplementation guidance. These standards have been collectively codified within ASC Topic 326, Credit Losses (“ASC 326”). As a smaller reporting company as defined by the SEC, the provisions of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 isASC 326 are effective for annual periodsas of the beginning after December 15, 2017, for public business entities and permits the use of either the retrospective or cumulative effect transition method. Early application is permitted only for annual reporting periods beginning after December 15, 2016. ASU 2014-09 will therefore be effective in our fiscal year beginning September 30, 2018. Although we have not yet determined our adoption method, we have identified a committee, agreed on a methodology for review of our revenue arrangements and initiated the review process for adoption of this ASU, and2024. We are currently evaluating the effect that ASU 2014-09 will haveimpacts of the provisions of ASC 326 on our Consolidated Financial Statementsfinancial condition, results of operations, cash flows, and related disclosures.In July 2015, the FASB issued ASU No. 2015-11, Simplifying the MeasurementInventory, ("ASU 2015-11"). This new guidance requires an entity to measure inventory at the lower of costwholesale, direct-to-consumer ecommerce and net realizable value. Currently, entities measure inventory at the lower of cost or market. ASU 2015-11 replaces market with net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method. ASU 2015-11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. ASU 2015-11 will therefore be effective in our fiscal year beginning October 1, 2017. Westores which are evaluating the effect that ASU 2015-11 will have on our Consolidated Financial Statements and related disclosures, but do not believe it will have a material impact.In February 2016, the FASB issued ASU No. 2016-02, Leases, (ASU 2016-02). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. All leases will be required to be recorded on the balance sheet with the exception of short-term leases. Earlyapplication is permitted. The guidance must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. ASU 2016-02 will therefore be effective in our fiscal year beginning September 29, 2019. We are evaluating the effect that ASU 2016-02 will have on our Consolidated Financial Statements and related disclosures.NOTE 3—DIVESTITURESJunkfood DivestitureOn March 31, 2017, we completed the sale of our Junkfood business to JMJD Ventures, LLC for $27.9 million. The business sold consisted of vintage-inspired Junk Food branded and private label products sold in the United States and internationally. We received cash at closing of $25.0 million and recorded a $2.9 million note receivable with payments due between June 30, 2017, and March 30, 2018. The note receivable was amended on June 29, 2017, to revise the repayment schedule for payments to be made between September 29, 2017, and March 30, 2018.We realized a $1.3 million pre-tax gain on the sale of the Junkfood business resulting from the proceeds of $27.9 million less the costs of assets sold and other expenses, and less direct selling costs associated with the transaction. The pre-tax gain was recorded in the Condensed Consolidated Statement of Operations as Gain on sale of business.The Game DivestitureOn March 2, 2015, we completed the sale of our The Game branded collegiate headwear and apparel business to David Peyser Sportswear, Inc., owner of MV Sport, Inc., for $14.9 million. The business sold consisted of The Game branded products sold nationally in college bookstores and through team dealers. This transaction further strengthened our balance sheet and enabled us to focus on areas of our business that are more strategic to our long-term goals. Our Salt Life business and corporate business, Kudzu, previously operated within To The Game, LLC (now Salt Life, LLC) were not included in the sale of the collegiate part of the business.The sale included finished goods inventory of $6.0 million, $0.4 million in fixed assets, and $0.1 million in other assets, along with the requirement that we indemnify up to $0.3 million of legal costs associated with a particular litigation matter which was subsequently settled. The transaction did not include accounts receivable which we subsequently collected in the normal course of business, and certain undecorated apparel inventory. We incurred $0.4 million in direct selling expenses associated with the transaction. In addition, we incurred certain indirect costs associated with the transaction, including a $0.8 million devaluation of the inventory not included in the sale and $1.4 million in indirect incentive-based expenses.The pre-tax gain on the sale of The Game assets, inclusive of the direct and indirect expenses, was $5.6 million. The transaction and associated indirect expenses were recorded in our Consolidated Statements of Operations inOperations. The table below identifies the year ended October 3, 2015, as follows: (i) proceedsamount and percentage of $14.9 million less costs of assets sold and direct selling costs resulting in a gain of $7.7 million recorded as a gain on sale of business; (ii) $1.4 million in indirect expenses recorded in our selling, general and administrative expense; and (iii) $0.8 million of indirect expenses recorded in our cost of goods sold.NOTE 4—RESTRUCTURING PLANOn May 10, 2016, in connection with certain strategic manufacturing initiatives, we announced plans to restructure our manufacturing operations with the closing of our textile manufacturing facility in Maiden, North Carolina, the consolidation of sew facilities in Mexico,net sales by distribution channel (in thousands): September 2021 $ $ $ 13,970 3 $ 11,222 3 4,647 1 6,662 2 466,242 96 418,866 95 $ 484,859 100 $ 436,750 100 expansionpercentage of production at our lower-cost Ceiba Textiles facility in Honduras. In September 2016, we sold the Maiden facility real estate and certain machinery, equipment and supply parts used in the Maiden facilitynet sales by distribution channel for approximately $1.7 million. As part of the closing of the Maiden facility and the expansion of operations at our offshore facilities, we incurred the following costs (in thousands):each reportable segment: $ 424,799 0.1 0.3 99.6 60,060 22.6 5.6 71.8 $ 484,859 $ 387,015 0.2 0.3 99.5 49,735 20.8 11.0 68.2 $ 436,750 Fiscal Year Ended October 1, 2016 Excess manufacturing costs related to the shutdown and start-up operations $ 1,096 Total expenses included in cost of goods sold 1,096 Employee termination costs 597 Fixed asset impairment 607 Inventory and supply part impairment 144 Other costs to exit facility 393 Total restructuring costs 1,741 Total manufacturing realignment expenses $ 2,837 All of these expenses were recorded in our basics segment. We did not incur any significant additional costs related to the manufacturing initiative in fiscal year 2017. We paid $0.1 million and $0.4 million in employee termination benefits in fiscal years 2017 and 2016, respectively.NOTE 5—INVENTORIES$9.8$17.7 million and $8.8$15.9 million as of September 30, 2017,2022, and October 1, 2016,September 2021, respectively, consist of the following (in thousands): September 30,
2017 October 1,
2016Raw materials $ 8,973 $ 11,442 Work in process 18,543 18,158 Finished goods 147,035 134,647 $ 174,551 $ 164,247 $ 22,603 $ 17,204 23,501 20,954 202,434 123,545 $ 248,538 $ 161,703 basics segment,Delta Group, undecorated garments for the Art GunDTG2Go business, and direct embellishment materials for the branded segment. The fiscal year ended October 1, 2016, included $2.6 millionSalt Life Group.$1.7 million of finished goods related to the since-divested Junkfood business.NOTE 6—PROPERTY, PLANT AND EQUIPMENT Estimated Useful Life (in years) 25 $ 636 $ 605 20 4,002 3,741 10 128,937 113,193 3-10 24,420 24,373 7-25 12,410 11,493 3-10 7,876 7,366 5 494 587 N/A 3,899 5,477 182,674 166,835 (108,565 ) (99,271 ) $ 74,109 $ 67,564 September 30,
2017 October 1,
2016Land and land improvements 25 years $ 572 $ 572 Buildings 20 years 2,989 3,369 Machinery and equipment 10 years 75,838 72,068 Computers and software 3-10 years 20,128 20,889 Furniture and fixtures 7 years 2,251 1,977 Leasehold improvements 3-10 years 5,275 3,686 Vehicles and related equipment 5 years 791 808 Construction in progress N/A 3,035 3,719 110,879 107,088 Less accumulated depreciation and amortization (68,173 ) (63,585 ) $ 42,706 $ 43,503 NOTE 7—GOODWILL AND INTANGIBLE ASSETS September 30, 2017 October 1, 2016 Cost Accumulated Amortization Net Value Cost Accumulated Amortization Net Value Economic Life Goodwill $ 19,917 $ — $ 19,917 $ 36,729 $ — $ 36,729 N/A Intangibles: Tradename/trademarks $ 16,090 $ (2,193 ) $ 13,897 $ 17,620 $ (2,514 ) $ 15,106 20 - 30 yrs Customer relationships — — — 7,220 (4,016 ) 3,204 20 yrs Technology 1,220 (947 ) 273 1,220 (826 ) 394 10 yrs License Agreements 2,100 (423 ) 1,677 2,100 (320 ) 1,780 15 - 30 yrs Non-compete agreements 1,037 (733 ) 304 1,287 (849 ) 438 4 – 8.5 yrs Total intangibles $ 20,447 $ (4,296 ) $ 16,151 $ 29,447 $ (8,525 ) $ 20,922 $ 37,897 $ — $ 37,897 $ 37,897 $ — $ 37,897 N/A $ 16,000 $ (4,851 ) $ 11,149 $ 16,000 $ (4,317 ) $ 11,683 7,400 (3,213 ) 4,187 7,400 (2,473 ) 4,927 10,083 (2,610 ) 7,473 9,952 (1,715 ) 8,237 2,100 (940 ) 1,160 2,100 (837 ) 1,263 1,657 (1,600 ) 57 1,657 (1,476 ) 181 $ 37,240 $ (13,214 ) $ 24,026 $ 37,109 $ (10,818 ) $ 26,291 TheAs of September 2022, the Delta Group segment assets include $18.0 million of goodwill, recordedand the Salt Life Group segment assets include $19.9 million of goodwill.our financial statements is all included in the branded segment. Goodwill was reduced by $16.8 million associated with the Junkfood divestiture. The saletype of Junkfood, completed on March 31, 2017, included intangible assets, netamortization is recorded under cost of accumulated amortization, consisting of trademarks of $0.6 milliongoods sold or selling, general and customer relationships of $3.0 million. In August 2016, we acquired substantially all of the assets of Coast Apparel, LLC for $313 thousand, which resulted in additional intangible assets of $0.1 million.$1.1$2.4 million for the year ended September 30, 20172022, and $1.3$1.8 million for each of the yearsyear ended October 1, 2016, and October 3, 2015September 2021. Amortization expense is estimated to be approximately $0.9$2.3 million for each of fiscalthe years 2018ended September 2023, 2024, and 2019,2025, and approximately $0.7$2.2 million for fiscal year 2020,the years ended September 2026 and approximately $0.6 million for each2027.NOTE 8—ACCRUED EXPENSES $ 18,550 $ 17,374 1,856 2,960 1,067 991 2,272 1,662 174 2,299 500 1,500 613 506 2,382 2,657 $ 27,414 $ 29,949 September 30,
2017 October 1,
2016Accrued employee compensation and benefits $ 12,683 $ 12,899 Taxes accrued and withheld 931 1,003 Accrued insurance 126 263 Accrued advertising 524 256 Accrued royalties 113 1,653 Accrued commissions 327 460 Accrued freight 1,060 1,105 Other 1,940 4,067 $ 17,704 $ 21,706 NOTE 9—LONG-TERM DEBT September 30,
2017 October 1,
2016Revolving U.S. credit facility, interest at base rate or adjusted LIBOR rate plus an applicable margin (interest at 2.9% on September 30, 2017) due May 2021 $ 74,608 $ 92,137 Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 8% due March 2019 (denominated in U.S. dollars) 4,975 5,000 Term loan with Banco Ficohsa, a Honduran bank, interest at 7%, monthly installments beginning March, 2011 through March 2018 (denominated in U.S. dollars) 486 1,459 Term loan with Banco Ficohsa, a Honduran bank, interest at 7.5%, monthly installments beginning November 2014 through December 2020 (denominated in U.S. dollars) 2,000 2,600 Term loan with Banco Ficohsa, a Honduran bank, interest at 8%, monthly installments beginning June 2016 through April 2022 (denominated in U.S. dollars) 1,358 1,650 Term loan with Banco Ficohsa, a Honduran bank, interest at 8%, monthly installments beginning June 2016 through July 2017 (denominated in U.S. dollars) — 4,833 Term loan with Banco Ficohsa, a Honduran bank, interest at 8%, monthly installments beginning October 2017 through September 2021 (denominated in U.S. dollars) 4,083 — Salt Life acquisition promissory note, imputed interest at 3.62%, quarterly payments beginning September 2016 through June 2019 5,344 8,116 92,854 115,795 Less current installments (7,548 ) (9,192 ) Long-term debt, excluding current installments $ 85,306 $ 106,603 September 2022 September 2021 $ 129,024 $ 98,575 3,300 667 6,593 8,621 3,656 — 3,000 — — 583 353 301 145,926 108,747 (9,176 ) (7,067 ) $ 136,750 $ 101,680 amended our U.S. revolving credit facility and entered into a Fifth Amended and Restated Credit Agreement (the "Amended(as further amended, the “Amended Credit Agreement"Agreement”) with Wells Fargo Bank, National Association ("(“Wells Fargo"Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, National Association and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood Clothing Company,Company), Salt Life, LLC, and DTG2Go, LLC (f/k/a Art Gun, LLC (together withLLC) (collectively, the Company, the "Companies""Borrowers"), are co-borrowers under the Amended Credit Agreement.was subsequently amended on November 27, 2017. For further information refer to Item 9B. Other Information.The Amended Credit Agreement amends and restates our Fourth Amended and Restated Loan and Security Agreement dated May 27, 2011, which was amended on four occasions and had a maturity date of May 27, 2017. Bank of America, N.A. departed the syndicate of Lenders and Regions Bank joined the syndicate of Lenders for the Amended Credit Agreement. Bank of America, N.A. also ceased to serve as the syndication agent for the facility, and Merrill Lynch, Pierce, Fenner and Smith Incorporated is no longer a joint book runner with Wells Fargo. Wells Fargo and the above-referenced Lenders consentedother lenders on November 27, 2017, March 9, 2018, October 8, 2018, November 19, 2019, April 27, 2020, August 28, 2020 and June 2, 2022. saleFifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the "Fourth Amendment"). The Fourth Amendment, among other things, (i) increased the borrowing capacity under the Amended Credit Agreement from $145 million to $170 million (subject to borrowing base limitations), (ii) extended the maturity date from May 21, 2021 to November 19, 2024, (iii) reduced pricing on the revolver and first-in last-out "FILO" borrowing components by 25 basis points, and (iv) added 25% of our Junkfood business priorthe fair value of eligible intellectual property to the March 31, 2017, closingborrowing base calculation. In addition, the Fourth Amendment amended the definition of Fixed Charge Coverage Ratio to exclude up to $10 million of capital expenditures incurred by the Borrowers in connection with the expansion of their distribution facility located within the Town of Clinton, Anderson County, Tennessee.transaction.$145$170 million (subject to borrowing base limitations), including a maximum of $25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit to $200 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.first-priorityfirst-priority lien on substantially all of the real and personal property of Delta Apparel, Junkfood, Soffe, Salt Life, and Art Gun.DTG2Go. All loans bear interest at rates, at the Company's option, based on either (a) an adjusted LIBORSOFR rate, subject to a floor of 0%, plus an applicable margin or (b) a base rate plus an applicable margin, with the base rate equal to the greater of (i) the Floor, (ii) the federal funds rate plus (ii)(iii) the LIBOR rateAdjusted Term SOFR for a one month tenor in effect on such day plus 1.0%, or (iii) the prime rate announced by Wells Fargo, National Association. The facility requires monthly installment payments of approximately $0.2$0.2 to $0.3 million beginning October 4, 2020, in connection with fixed asset and intellectual property amortizations, and these amounts reduce the amount of availability under the facility. Annual facility fees are 0.25% or 0.375% (subject to average excess availability) of the amount by which $145170 million exceeds the average daily principal balance of the outstanding loans and letters of credit accommodations. The annual facility fees are charged monthly based on the principal balances during the immediately preceding month.30, 2017,2022, we had $74.6$129.0 million outstanding under our U.S. revolving credit facility at an average interest rate of 2.9%, and had5.3%. Our cash on hand combined with the ability to borrow an additional $37.5availability under the U.S. credit facility totaled $34.6 million. Thisthea financial covenant that if the amount of availability under our credit facility falls below the threshold amounts set forthspecified in the Amended Credit Agreement,our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in the Amended Credit Agreement)our credit agreement) for the preceding 12-month period must not be less than 1.1 to 1.0. We were not subject to the FCCR covenant as of Our availability at September 30, 2017, because our availability2022, was above the minimum required under the Amended Credit Agreement. At September 30, 2017,thresholds specified in our FCCR wascredit agreement, and we were above the required 1.1 to 1.0 ratio and, therefore, we would have satisfied our financial covenanthad we been subject to it. In addition, FCCR for the credit facility includes customary conditions to funding, representations and warranties, covenants, and eventspreceding 12-month period.30, 2017,2022, and October 1, 2016,September 2021, there was $7.7$24.9 million and $10.7$19.0 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB Codification No. 470, Debt ("ASC 470")), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the facility as long-term debt.In August 2013, Salt Life andsubstantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. In conjunction with this acquisition, we issued twoa promissory notesnote in the aggregate principal amount of $22.0 million, which included a one-time installment$7.0 million. The promissory note bears interest of $9.0 million6% with quarterly payments that was paid as required on September 30, 2014, and quarterly installments commencing on March 31, 2015, began January 2, 2019, with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as required under Section 1274 of the Internal Revenue Code. We have imputed interest at 1.92% and 3.62% on the promissory notes that matured on June 30, 2016, and will mature on June 30, 2019, respectively. At September 30, 2017, the discounted value of the promissory note was $5.3 million.On December 6, 2013, we entered into an agreement (the "IMG Agreement") with IMG Worldwide, Inc. ("IMG") that provided for the termination of the Salt Life brand license agreements entered into between Delta and IMG (as agent on behalf of Salt Life Holdings) prior to the acquisition of Salt Life as well as the agency agreement entered into between Salt Life Holdings and IMG prior to the acquisition of Salt Life. In addition, the IMG Agreement provides that Delta and Salt Life Holdings are released from all obligations and liabilities under those agreements or relating to the acquisition of Salt Life. Pursuant to the IMG Agreement, Salt Life and IMG entered into a separate, multi-year agency agreement, which has since been terminated, whereby IMG represented Salt Life with respect to the licensing of the Salt Life brand in connection with certain product and service categories. Salt Life agreed to pay IMG installments totaling $3,500,000 to terminate the existing arrangements. There was a $3,000,000 indemnification asset that was recorded as part of the purchase of Salt Life that was released from escrow during the quarter ended December 28, 2013, and applied towards these payment obligations, along with additional amounts previously accrued for royalty obligations under the above-referenced Salt Life brand license agreements. During the year ended paid October 3, 2015, we made payments of $0.8 million in accordance with the terms of the agreement. 4, 2021. As of October 3, 2015,September 2022, there were 3 quarterly installments of $195 thousand remaining, and we had recorded the fair value of the liability as of October 3, 2015, in our financials with $0.6 million in accrued expenses. During the year ended October 1, 2016, we made the final payments of $0.6 million in accordance with the terms of the agreement andwas no amounts remain accrued in our financial statements as of October 1, 2016.in order to finance both the operations and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with five-year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances at the time of settlement of $1.1 million and $9.5 million, respectively. In May 2022, we entered into a new term loan with a five-year term with a principal amount of $3.7 million. Each of these loans are secured by a first-priorityfirst-priority lien on the assets of our Honduran operations and are is not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of the debt approximates theits fair value. The revolving credit facility requires minimum payments during each six-month period of the 18-month term; however the loan agreement permits additional drawdowns to the extent payments are made and certain objective covenants are met. The current revolving Honduran debt, by its nature, is not long-term, as it requires scheduled payments each six months. However, as the loan permits us to re-borrow funds up to the amount repaid, subject to certain covenants, and we intend to re-borrow funds, subject to the objective covenants, the amounts have been classified as long-term debt. Information about these loans and the outstanding balance as of September 30, 2017,2022, is listed as part of the long-term debt schedule above.30, 2017,2022, are as follows (in thousands): $ 9,176 7,702 6,853 5,450 116,745 — $ 145,926 Fiscal Year Amount 2018 $ 7,548 2019 11,381 2020 4,062 2021 69,669 2022 194 Thereafter — $ 92,854 NOTE 10—INCOME TAXES Period ended September 30, 2017 October 1, 2016 October 3, 2015 Current: Federal $ 215 $ 36 $ — State 47 78 60 Foreign 127 179 186 Total current $ 389 $ 293 $ 246 Deferred: Federal $ (112 ) $ 1,462 $ 1,320 State 380 326 439 Total deferred 268 1,788 1,759 Provision for income taxes $ 657 $ 2,081 $ 2,005 $ 921 $ 1,579 203 449 195 135 $ 1,319 $ 2,163 $ 2,532 $ 3,327 456 215 2,988 3,542 $ 4,307 $ 5,705 Period ended September 30, 2017 October 1, 2016 October 3, 2015 United States $ 1,767 $ 3,966 $ 3,434 Foreign 9,401 7,079 6,664 $ 11,168 $ 11,045 $ 10,098 $ 10,746 $ 15,505 13,301 10,496 $ 24,047 $ 26,001 34.0%21.0% for fiscal years 2022 and 2021 is as follows (in thousands): $ 5,050 $ 5,460 553 653 (2,598 ) (2,070 ) 1,237 1,063 (179 ) (69 ) 10 (70 ) 178 728 56 10 $ 4,307 $ 5,705 Period ended September 30, 2017 October 1, 2016 October 3, 2015 Income tax expense at the statutory rate $ 3,797 $ 3,755 $ 3,433 State income tax (benefit) expense, net of federal income tax effect (80 ) 447 374 Impact of state rate changes 115 116 — Rate difference and nondeductible items in foreign jurisdictions 33 54 (30 ) Impact of foreign earnings in tax-free zone (3,052 ) (2,319 ) (2,168 ) Valuation allowance adjustments 362 (71 ) — Nondeductible compensation — — 335 Nondeductible amortization and other permanent differences (496 ) 96 81 Other (22 ) 3 (20 ) Provision for income taxes $ 657 $ 2,081 $ 2,005 September 30,
2017 October 1,
2016 Deferred tax assets: Federal net operating loss carryforwards $ 2,902 $ 6,256 State net operating loss carryforwards 1,573 1,784 Derivative — interest rate contracts 21 70 Alternative minimum tax credit carryforward 404 135 Inventories and reserves 3,681 3,426 Accrued compensation and benefits 3,139 3,331 Receivable allowances and reserves 543 767 Other 98 89 Gross deferred tax assets 12,361 15,858 Less valuation allowance — state net operating loss (493 ) (131 ) Net deferred tax assets 11,868 15,727 Deferred tax liabilities: Depreciation (3,501 ) (2,868 ) Goodwill and intangibles (3,319 ) (7,463 ) Other (46 ) (150 ) Gross deferred tax liabilities (6,866 ) (10,481 ) Net deferred tax asset 5,002 5,246 $ 1,997 $ 2,239 300 314 1,649 883 2,948 3,002 10,039 8,801 4,670 4,258 $ 21,603 $ 19,497 (640 ) (586 ) $ 20,963 $ 18,911 $ (7,242 ) $ (4,647 ) (6,038 ) (4,943 ) (9,720 ) (8,367 ) (931 ) (620 ) $ (23,931 ) $ (18,577 ) $ (2,968 ) $ 334 30, 2017, and October 1, 2016,2022, we had federalstate net operating loss carryforwardslosses of approximately $8.5$41.6 million, and $18.3 million, respectively. Thewith deferred tax assets resulting from federalof $2.0 million related to these state NOLs, and related valuation allowances against them of approximately $0.6 million. These state net operating losses for September 30, 2017, and October 1, 2016, were $2.9 million and $6.3 million, respectively. There is no carryback opportunity for these losses and theloss carryforwards expire at various intervals from 2033 to 2035. We determined that no valuation allowance is required, as we expect that all such carryforwards more likely than not will be realized within statutory periods of carryover and utilization.As of September 30, 2017, and October 1, 2016, we had state net operating loss carryforwards of approximately $41.6 million and $45.4 million, respectively. These carryforwards expire at various intervals from 20192027 through 2036.2040. Our deferred tax asset related to state netFASB Codification No. (“ASC 740”) requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than more-likely-than-not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% percent likely of being realized upon ultimate settlement. Accrued interest and penalties related to unrecognized tax benefits would also be recorded. We did not have any material unrecognized tax benefits as of September 30, 20172022 or September 2021.or October 1, 2016.Thewe are indefinitely reinvested in the cumulative undistributed earnings of and original investments in our foreign subsidiaries, with the exception of our equity method investment, which has been properly accounted for. Future remittances could be subject to additional foreign withholding taxes, U.S. state taxes, and certain tax impacts relating to foreign currency exchange effects. It is not practicable to estimate the amount of any unrecognized tax effects on these reinvested earnings and original investments in foreign subsidiaries.2013 to 2015,2018,2019,2020, and 2021, according to statute and with few exceptions, remain open to examination by various federal, state, local, and foreign jurisdictions.NOTE 11—LEASESseveral non-cancelableelected to use the practical expedient present in ASC 842 to not separate lease and non-lease components for all significant underlying asset classes and instead account for them together as a single lease component in the measurement of our lease liabilities.primarily relatedis not readily determinable. Therefore, we discount future lease payments using our estimated incremental borrowing rate at lease commencement. We determine this rate based on a credit-adjusted risk-free rate, which approximates a secured rate over the lease term. The weighted average discount rate for operating leases was 4.6% and 4.3% as of September 2022 and September 2021, respectively. We discount our finance lease payments based on the rate implicit and stated in the lease. The weighted average discount rate for finance leases was 5.7% and 5.8% as of September 2022 and September 2021, respectively.buildings, office equipmentour operating and computer systems. Certain landfinance lease liabilities, recorded as of September 2022 (in thousands): $ 10,919 $ 9,339 9,891 7,859 9,855 5,944 8,195 3,342 6,589 881 14,368 - $ 59,817 $ 27,365 (8,220 (2,426 ) $ 51,597 $ 24,939 (8,876 (8,163 $ 42,721 $ 16,776 building leases have renewal options generally for periods ranging from 5 to 10 years.Future minimum2021, we paid approximately $1.8 million respectively in lease payments under non-cancelablethis arrangement.30, 2017,2022. As of September 2021, the average remaining lease terms were 7 years and 3 years, respectively.(infor the period ended September 2022 (in thousands): $ 11,568 2,536 4,468 1,391 $ 19,963 Fiscal Year Amount 2018 $ 8,259 2019 7,856 2020 6,703 2021 4,542 2022 3,220 Thereafter 14,386 $ 44,966 Rent expense for all operating leases was $8.8 million, $9.3 million and $9.4 million for fiscal years 2017, 2016, and 2015, respectively.NOTE 12—EMPLOYEE BENEFIT PLANS401(k)401(k) retirement savings plan (the “401(k)“401(k) Plan”) for our employees who meet certain requirements. The 401(k)401(k) Plan permits participants to make pre-tax contributions by salary reduction pursuant to Section 401(k)401(k) of the Internal Revenue Code, as well as a Roth Plan that allows for after tax contributions. The 401(k)401(k) Plan providesrequires for us to make a guaranteed match of a defined portion of the employee’s contributions. During fiscal years 2017, 2016, and 2015 weWe contributed approximately $0.9 million $1.1 million, and $1.1 million, respectively, to the 401(k) Plan.fiscal years 20172022 and 2016.2021. The following table presents the benefit obligation, which is included in accrued expenses in the accompanying balance sheets (in thousands). $ 271 $ 289 — — (7 ) (18 ) $ 264 $ 271 September 30,
2017 October 1,
2016Balance at beginning of year $ 344 $ 412 Interest expense 5 6 Benefits paid (6 ) (81 ) Adjustment — 7 Balance at end of year $ 343 $ 344 NOTE 13—STOCK-BASED COMPENSATION4, 2015, 6, 2020, our shareholders re-approvedapproved the Delta Apparel, Inc. 20102020 Stock Plan ("2010("2020 Stock Plan") thatto replace the 2010 Stock Plan, which was originally approvedpreviously re-approved by our shareholders on November 11, 2010. February 4, 2015, and was scheduled to expire by its terms on September 14, 2020. The re-approval2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of the 20102020 Stock Plan including the material terms of the performance goals included in the 2010 Stock Plan, enables usis to continue to grant equity incentive compensationgive our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards that are structured in a manner intendeddesigned to qualify as tax deductible, performance-based compensation under Section 162(m)enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the Internal Revenue Codeof 1986. Since November 2010, no additionalauthority to determine the employees and directors to whom awards have been or will may be granted and the size and type of each award and manner in which such awards will vest. The awards available under either the Delta Apparelplan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards. If a participant dies or becomes disabled (as defined in the 2020 Stock Option Plan ("Option Plan")Plan) while employed by the Company or serving as a director, all unvested awards become fully vested. The Compensation Committee is authorized to establish the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stockterms and conditions of awards have been and will continue to be granted under the 20102020 Stock Plan.We accountPlan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other determinations that it deems necessary. The aggregate number of shares of common stock that may be delivered under the 2020 Stock Plan is 449,714 plus any shares of common stock subject to outstanding awards under the 2010 Stock Plan that are subsequently forfeited or terminated for these plans pursuantany reason before being exercised. Similar to ASC 718, SAB 107the 2010 Stock Plan, the 2020 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and SAB 110. also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. The 2010 Stock Plan terminated and the 2020 Stock Plan became effective on February 6, 2020, the date of shareholders’ approval.exercise of the options or the vesting of the restricted stock units, and performance units. We early adopted ASU 2016-09 in our fiscal year beginning October 2, 2016. See Note 2—Significant Accounting Policies (aa) Recently Adopted Accounting Pronouncements for further detail. This new guidance requires all income tax effects ofunits or other awards to be recognized inunder the income statement when the awards vest or are settled. All excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period.fiscal years 2017, 2016,2022 and 20152021 was $2.3 million, $2.0$3.2 million and $1.9$2.5 million, respectively. Associated with the compensation cost are income tax benefits recognized of $0.9$0.6 million $0.8for 2022 and $0.6 million and $0.7 million in fiscal years 2017, 2016, and 2015, respectively.for 2021.2010 Stock PlanUnder the 2010 Stock Plan, the Compensation CommitteeStock OptionsNo stock options were granted during fiscal year 2017. All outstanding options granted by the Company have vested and are exercisable.A summary of the stock option activity during the periods ended September 30, 2017, October 1, 2016, and October 3, 2015, is as follows: Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Stock options outstanding, beginning of period 10,000 $ 13.07 10,000 $ 13.07 50,000 $ 13.47 Stock options granted — — — — — — Stock options exercised — — — — — — Stock options forfeited — — — — (40,000 ) 13.56 Stock options outstanding, end of period 10,000 $ 13.07 10,000 $ 13.07 10,000 $ 13.07 Stock options outstanding and exercisable, end of period 10,000 $ 13.07 10,000 $ 13.07 10,000 $ 13.07 The following table summarizes information about our stock options outstanding, all of which are vested and exercisable as of September 30, 2017:Date of Option Grant Number of Options Outstanding and Exercisable Exercise Price Grant-Date Fair Value Expiration Date February 2, 2011 10,000 $ 13.07 $ 6.35 February 18, 2018 10,000 Restricted Stock Units and Performance Units30, 2017, October 1, 2016,2022 and October 3, 2015: Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Number of Units Weighted average grant date fair value Number of Units Weighted average grant date fair value Number of Units Weighted average grant date fair value Units outstanding, beginning of fiscal period 585,638 $ 11.54 518,800 $ 10.80 215,352 $ 14.31 Units granted 126,000 $ 17.97 159,138 $ 14.03 524,000 $ 10.81 Units issued (64,846 ) $ 11.14 (49,529 ) $ 12.32 (69,657 ) $ 14.31 Units forfeited (133,936 ) $ 12.02 (42,771 ) $ 10.87 (150,895 ) $ 14.26 Units outstanding, end of fiscal period 512,856 $ 13.09 585,638 $ 11.54 518,800 $ 10.80 260,000 $ 20.38 406,000 $ 20.16 319,950 $ 30.09 12,000 $ 30.80 (144,700 ) $ 19.42 (116,000 ) $ 18.96 (50,000 ) $ 27.72 (42,000 ) $ 25.17 385,250 $ 27.85 260,000 $ 20.38 fiscal year 2017,2022, performance units and restricted stock units representing 126,000 shares of our common stock were granted. Of these units,47,700 and subject to satisfaction of the applicable performance criteria at target levels, 42,000 will vest with the filing of our Annual Report on Form 10-K for our fiscal year ending September, 29, 2018, 42,000 will vest with the filing of our Annual Report on Form 10-K for our fiscal year ending September, 28, 2019, and 42,000 will vest with the filing of our Annual Report on Form 10-K for our fiscal year ending October 3, 2020.During fiscal year 2017, restricted stock units and performance units representing 8,438 and 53,24895,000 shares of our common stock, respectively, vested upon the filing of our Annual Report on Form 10-K10-K for the fiscal year ended October 1, 2016, September 2021, and were issued in accordance with their respective agreements. One-half of the restricted stockOf these vested units, 96,350 were payablepaid in common stock and one-half46,350 were payablepaid in cash. All of the performance units were payable in common stock.fiscal year 2017, in association with the sale of our Junkfood business (see Note 3—Divestitures),2022, restricted stock units and performance units representing 45,0001,000 and 5,0001,000 shares of our common stock, respectively, vested on an accelerated basis as a result of the sale of the Junkfood business and were issued in accordance with their respective agreements. One-half of the performance units were payable in common stock and one-half were payable in cash. Of the restricted stock units, 42,500 were payable in common stock and 2,500 were payable in cash. The $0.3 million expense relatedanticipated to the accelerated vesting of equity awards in connection with the sale of the Junkfood business was recorded in the Gain on sale of business line item in our Condensed Consolidated Statements of Operations.During fiscal year 2016, restricted stock units representing 83,788 shares of our common stock were granted. These restricted stock units are service-based and 8,438 units were eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended October 1, 2016. The remaining 75,350 units are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 30, 2017. Upon vesting, one-half of these awards are payable in the common stock of Delta Apparel, Inc. and are accounted for under the equity method pursuant to ASC 718, and one-half are payable in cash and are accounted for under the liability method pursuant to ASC 718.During fiscal year 2016, performance units representing 75,350 shares of our common stock were granted. These performance units are based on the achievement of certain performance criteria for the fiscal years ended October 1, 2016, and September 30, 2017, and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ended September 30, 2017. Upon vesting, one-half of these awards are payable in the common stock of Delta Apparel, Inc. and are accounted for under the equity method pursuant to ASC 718 and one-half are payable in cash and are accounted for under the liability method pursuant to ASC 718.During fiscal year 2016, previously issued performance units representing 49,529 shares of our common stock vested upon the filing of our Annual Report on Form 10-K10-K for the fiscal year ended October 3, 2015.September 2022, vested immediately due to a change in employee status and were issued. Of these performance units, one-half1,000 were payablepaid in common stock and one-half1,000 were payablepaid in cash and were issued in accordance with their agreement.During fiscal year 2015, restricted stock units representing 355,000 shares of our common stock were granted. These restricted stock units are serviced-based and vest upon the filing of our Annual Report on Form 10-K for the period ending September 29, 2018, assuming applicable vesting requirements are satisfied. Upon vesting, these units are payable in the common stock of Delta Apparel, Inc. and are therefore accounted for under the equity method pursuant to ASC 718.During fiscal year 2015, performance units representing 169,000 shares of our common stock were granted. Of these performance units, 65,000 were based on the achievement of certain performance criteria forcash. Additionally, during the fiscal year, ended October 3, 2015, and were eligible to vest upon the filing of our Annual Report on Form 10-K for such year. Of these units, one-half were payable in the common stock of Delta Apparel, Inc. and were therefore accounted for under the equity method pursuant to ASC 718, and one-half were payable in cash and were therefore accounted for under the liability method pursuant to ASC 718. Of the remaining units, 52,000 were based on the achievement of certain performance criteria for the fiscal year ended October 1, 2016, and vested upon the filing of our Annual Report on Form 10-K for that year, and 52,000 units are based on the achievement of certain performance criteria for the fiscal year ended September 30, 2017, and are eligible to vest upon the filing of our Annual Report on Form 10-K for that year. Upon vesting, these units were paid or are payable (as applicable) in the common stock of Delta Apparel, Inc. and are therefore accounted for under the equity method pursuant to ASC 718. Based upon the performance achieved for fiscal year 2015, 49,529 units were issued upon the filing of our Annual Report on Form 10-K for fiscal year 2015 and 5,200 units were forfeited on October 3, 2015. Based upon the performance achieved for fiscal year 2016, 53,248 units were issued upon the filing of our Annual Report on Form 10-K for fiscal year 2016.During fiscal year 2015, previously issued restricted stock unitsawards representing 69,657 shares of our common stock vested upon the filing of our Quarterly Report on Form 10-Q for the period ended June 27, 2015, and were issued in accordance with their agreement, either in shares of common stock or cash. The total fair value of vested restricted stock units was $1.0 million in fiscal year 2015. No restricted stock units vested during fiscal years 2014 or 2013. In addition, during fiscal year 2015, previously issued restricted stock units representing 12,019 shares of our common stock were forfeited. During fiscal year 2015, previously issued performance units representing 133,67650,000 shares of our common stock were forfeited due to the failure to achieve the performance criteria specified in the award agreement.30, 20172022, there was $2.8$4.7 million of total unrecognized compensation cost related to unvested restricted stock units and performance units under the 20102020 Stock Plan. This cost is expected to be recognized over a period of 3.22.2 years.30, 20172022.Restricted Stock Units/Performance Units Number of Units Average Market Price on Date of Grant Vesting Date* Fiscal Year 2015 Restricted Stock Units 95,000 $10.52 December 2018 Fiscal Year 2015 Restricted Stock Units 140,000 $10.73 December 2018 Fiscal Year 2015 Performance Units 52,208 $10.52 November 2017 Fiscal Year 2016 Restricted Stock Units 57,600 $14.04 November 2017 Fiscal Year 2016 Performance Units 42,048 $14.04 November 2017 Fiscal Year 2017 Performance Units 42,000 $17.97 December 2018 Fiscal Year 2017 Performance Units 42,000 $17.97 December 2019 Fiscal Year 2017 Performance Units 42,000 $17.97 December 2020 512,856 105,000 $ 21.04 98,126 $ 30.07 61,124 $ 27.94 111,000 $ 30.07 10,000 $ 30.15 385,250 10-K10-K for the applicable fiscal year, which is anticipated to be during the month and year indicated in this column.Option PlanPrior to expirationOption Plan,following business units, which are primarily focused on core activewear styles: DTG2Go and Delta Activewear.Compensation Committeeon-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chains of our Boardmany customers. Our ‘On-Demand DC’ digital solution provides retailers and brands with immediate access to utilize DTG2Go’s broad network of Directors hadprint and fulfillment facilities, while offering the discretionscalability to grant options for upintegrate digital fulfillment within the customer's own distribution facilities. We use highly-automated factory processes and our proprietary software to 2,000,000 shares of common stockdeliver on-demand, digitally printed apparel direct to officers and key and middle-level executives for the purchaseconsumers on behalf of our stock at prices not less than fifty percent ofcustomers. Via our eight fulfillment facilities throughout the fair market value of the shares on the dates of grant, with an exercise term (as determined by the Compensation Committee) notUnited States, DTG2Go offers a robust digital supply chain, shipping custom graphic products within 24 to exceed 10 years. The Compensation Committee determined the vesting period for the stock options, which generally became exercisable over three48 hours to four years. Certain option awardsconsumers in the Option Plan providedUnited States and to over 100 countries worldwide. DTG2Go has made significant investments in its “digital-first” retail model providing digital graphic prints that meet the high-quality standards required for accelerated vesting upon meeting specific retirement, death or disability criteria.Compensation expense was recorded on the selling, generalbrands, retailers and administrative expense line itemintellectual property holders. In fiscal 2022, we continued to invest in our Consolidated Statementsproprietary software, new digital print equipment, and research and development initiatives related to the setups, formulas and processes needed to serve our customers. Through integration with Delta Activewear, DTG2Go also services the eRetailer, ad-specialty, promotional and screen print marketplaces, among others.Operations on a straight-line basis over the vesting periods.A summary of our stock option activity during the periods ended September 30, 2017, October 1, 2016,activewear apparel to regional and October 3, 2015,global brands as well as direct to retail and wholesale markets. The Activewear business is as follows: Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price Stock options outstanding, beginning of period 86,000 $ 8.30 86,000 $ 8.30 502,000 $ 12.27 Stock options exercised (80,000 ) $ 8.30 — $ — (350,000 ) $ 13.12 Stock options forfeited — $ — — $ — (66,000 ) $ 12.94 Stock options outstanding, end of period 6,000 $ 8.30 86,000 $ 8.30 86,000 $ 8.30 Stock options outstanding and exercisable, end of period 6,000 $ 8.30 86,000 $ 8.30 86,000 $ 8.30 The total intrinsic value of options exercised during fiscal year 2017 was $1.0 million. No stock options were exercised during fiscal year 2016. The total intrinsic value of options exercised during fiscal year 2015 was $0.3 million. During fiscal year 2017, stock option exercises resulted in a reduction of deferred excess tax benefits by $0.1 million. During fiscal year 2015, stock option exercises resulted in a reduction of deferred excess tax benefits by $0.7 million.The following table summarizes information about our stock options outstanding, all of which are vestedorganized around three key customer channels – Delta Direct, Global Brands, and exercisable as of September 30, 2017:Date of Option Grant Number of Options Outstanding and Exercisable Exercise Price Grant-Date Fair Value Expiration Date February 8, 2008 6,000 $ 8.30 $ 2.95 February 8, 2018 6,000 NOTE 14—BUSINESS SEGMENTSWe operate our business in two distinct segments: basics and branded.Although the two segments are similar in their production processes and regulatory environments, theyRetail Direct – that are distinct in their economic characteristics,go-to-market strategies and how their respective customer bases source their various apparel needs. Our Delta Direct channel services the screen print, promotional, and eRetailer markets as well as retail licensing customers that sell through to many mid-tier and mass market retailers. Delta Direct products marketing,include a broad portfolio of apparel and distribution methods.Theaccessories under the Delta, Delta Platinum, and Soffe brands as well as sourced items from select third party brands. Our fashion basics segment is comprised of our business units primarily focused on garment styles characterized by low fashion risk, andline includes our Platinum Collection, which offers fresh, fashionable silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel products, including the Delta Activewear (which includesDri line of performance shirts built with moisture-wicking material to keep athletes dry and comfortable; ringspun garments with superior comfort, style and durability; and Delta CatalogSoft, a collection with an incredible feel and FunTees)price. We also offer our heritage, mid- and Art Gun business units. We market, distribute and manufacture unembellished knit apparel under the main brands ofheavier-weight Delta Pro Weight® Weight® and Magnum Weight® tee shirts.Magnum Weight® for saleand Soffe brand apparel, we provide our customers with a broad range of product categories with nationally recognized branded products including polos, outerwear, headwear, bags and other accessories. Our Soffe products are also available direct to consumers at www.soffe.com.diversified audience ranging fromkey supply chain partner to large licensed screen printers to small independent businesses. We also manufacture private label products formulti-national brands, major branded sportswear companies, trendy regional brands, retailers, and sports licensed apparel marketers. Typically, our private labelall branches of the United States armed forces, providing services ranging from custom product development to shipment of branded products are sold with “retail-ready” value-added services such asincluding embellishment, hangtags, ticketing, hangers, and embellishment so that they are fully readyticketing.retail. Usingsmall-run decoration needs with on-demand 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, as well as the ad specialty, promotional products and retail marketplaces.branded segmentSalt Life Group is comprised of our Salt Life business, units focusedwhich is built on specialized apparel garments, headwearthe authentic, aspirational Salt Life lifestyle brand that represents a passion for the ocean, the salt air, and, related accessoriesmore importantly, a way of life and all it offers, from surfing, fishing, and diving to meet consumer preferencesbeach fun and sun-soaked relaxation. The Salt Life brand combines function and fashion trends,with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the cotton graphic tees and includeslogo decals that originally drove awareness for the brand, and expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories. In fiscal 2022, Salt Life grew its retail footprint to include 21 stores across the U.S. coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware. Consumers can also seamlessly experience the Salt Life brand through retail partners including surf shops, specialty stores, department stores, and outdoor merchants or by accessing our Salt Life Soffe, and Coast business units. Our branded segment also included our The Game and Junkfood business units prior to their dispositions on March 2, 2015, and March 31, 2017, respectively. These branded 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, as well as direct-to-consumer through branded ecommerce sites and "brick and mortar" retail stores. Products in this segment are marketed under our lifestyle brands of Salt Life®, Soffe®, and COAST®, as well as other labels. On August 30, 2016, we purchased substantially all of the assets comprising our Coast Apparel business ("Coast"), continuing our strategy of building lifestyle brands that take advantage of our creative capabilities, direct-to-consumer infrastructure, vertical manufacturing platform and sourcing competencies. The results of the Coast business have been included in the branded segment since its acquisition on August 30, 2016. Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Segment net sales: Basics $ 280,283 $ 277,146 $ 282,467 Branded 104,799 148,103 166,675 Total net sales 385,082 425,249 449,142 Segment operating income: Basics 24,189 22,307 13,060 Branded 3,943 6,950 12,379 Total segment operating income 28,132 29,257 25,439 Purchases of property, plant and equipment: Basics 4,829 10,734 6,037 Branded 2,111 1,501 689 Corporate 145 80 1,047 Total purchases of property, plant and equipment 7,085 12,315 7,773 Depreciation and amortization: Basics 6,553 6,437 6,208 Branded 2,647 2,772 2,902 Corporate 409 416 432 Total depreciation and amortization 9,609 9,625 9,542 $ 424,799 $ 387,015 60,060 49,735 $ 484,859 $ 436,750 $ 38,045 $ 39,956 8,187 5,793 $ 46,232 $ 45,749 $ 8,400 $ 5,115 3,978 471 $ 12,378 $ 5,586 $ 13,376 $ 12,133 1,656 1,621 $ 15,032 $ 13,754 Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 Segment operating income $ 28,132 $ 29,257 $ 25,439 Unallocated corporate expenses 11,953 12,925 9,320 Unallocated interest expense 5,011 5,287 6,021 Consolidated income before provision for income taxes $ 11,168 $ 11,045 $ 10,098 $ 46,232 $ 45,749 14,451 13,038 7,732 6,844 $ 24,049 $ 25,867 Supplemental information regardingSales to foreign customers represented less than 1% of our revenues by geographic area based on the locationconsolidated net sales for both fiscal years 2022 and 2021. Fiscal Year Ended September 30, 2017 October 1, 2016 October 3, 2015 United States $ 383,672 $ 418,627 $ 442,207 Foreign 1,410 6,622 6,935 Total net sales $ 385,082 $ 425,249 $ 449,142 As of September 30, 2017 October 1, 2016 Total assets by segment: Basics 191,585 178,347 Branded 117,437 156,119 Corporate 8,780 10,186 Total assets 317,802 344,652 Equity investment in joint venture: Basics 4,140 3,593 Branded — — Total equity investment in joint venture 4,140 3,593 Our long-lived assets, excluding goodwill and intangible assets, consist of property, plant and equipment for all locations. $ 426,406 $ 366,518 90,580 63,184 6,695 4,586 $ 523,681 $ 434,288 $ 9,886 $ 10,433 — — $ 9,886 $ 10,433 the long-livedthese assets. Summarized financial information by geographic area is as follows (in thousands): $ 54,200 $ 50,945 13,366 12,247 5,381 3,253 1,162 1,119 19,909 16,619 $ 74,109 $ 67,564 As of September 30, 2017 October 1, 2016 United States $ 19,587 $ 18,523 Honduras 18,151 19,650 El Salvador 3,853 4,215 Mexico 1,115 1,115 All foreign countries 23,119 24,980 Total long-lived assets, excluding goodwill and intangibles $ 42,706 $ 43,503 NOTE 15—REPURCHASE OF COMMON STOCKAsNote 14—Repurchase of September 30, 2017, ourCommon Stockhadhas authorized management to use up to $50.0$60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.the September 2017 quarter, our Board of Directors approved management to repurchase an additional $10 million of the Company’s outstanding common stock, bringing the total amount authorized under the program to the above-referenced $50 million.During fiscal years 2017, 2016, and 2015,2022, we purchased 413,337136,181 shares 217,568 shares, and 140,336 shares, respectively, of our common stock for a total cost of $7.8 million, $3.5 million, and $2.1 million, respectively.$4.0 million. There were no purchases of our common stock during 2021. As of September 30, 2017,2022, we have purchased 2,893,4873,735,114 shares of common stock for an aggregate of $38.7$56.4 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-18.10b-18. As of September 30, 2017, $11.32022, $3.6 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date. The following table summarizes the purchases of our common stock for the quarter ended September 30, 2017:Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans Dollar Value of Shares that May Yet Be Purchased Under the Plans July 2 to August 5, 2017 66,319 $ 20.20 66,319 $3.8 million August 6 to September 2, 2017 128,710 $ 19.21 128,710 $1.3 million September 3 to September 30, 2017 — $ — — $11.3 million Total 195,029 $ 19.54 195,029 $11.3 million NOTE 16—COMMITMENTS AND CONTINGENCIESThe Sports Authority Bankruptcy LitigationSoffe 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 United States Bankruptcy Code (the "TSA Bankruptcy"). Prior to such filing, Soffe provided TSA with products to be sold on a consignment basis pursuant to a "pay by scan" agreement and the litigation 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 the 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 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. 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.U.S. Consumer Product Safety CommissionWe 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. 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 disputed the Commission's allegations and subsequently responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses and mitigating factors that could have resulted in a much lower penalty, if any, ultimately imposed by a court had the matter proceeded to litigation.We believe that any claims brought by the Commission seeking enforcement of the recommended penalty would be time-barred under any reasonable interpretation of the applicable civil statute of limitations. Accordingly, we consider this matter to be resolved, and during the quarter ended October 1, 2016, we reversed the liability previously recorded in connection with this matter.California Wage and Hour LitigationWe 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 was brought as a class action and sought 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 named 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. The Complaint sought 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 was brought as a class action and sought 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.On September 17, 2015, an agreement in principle was reached between all parties to settle the above-referenced wage and hour matters, with the defendants in the matters agreeing 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 collectively agreed to contribute $200,000 towards the aggregate settlement amount, and we had this amount included in our accrued expenses as of October 1, 2016, and October 3, 2015. The settlement agreement was approved by the applicable court and these matters have been finally resolved, with the agreed amounts funded subsequent to the 2016 fiscal year-end.In addition, atdefenses,defense, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material adverse effect on our operations, financial condition, or liquidity.30, 2017,2022, minimum payments under these contracts were as follows (in thousands):Yarn $ 6,679 Finished fabric 5,142 Finished products 20,860 $ 32,681 $ 23,677 7,823 31,580 $ 63,080 30, 2017,2022, we had outstanding standby letters of credit totaling $0.4 million.Derivatives and Contingent Consideration30, 2017: NotationalAmount LIBOR Maturity DateInterest Rate SwapJuly 19, 2017 $10 million1.74%19, 201925, 2023Interest Rate SwapJuly 19, 2017$10 million1.99%May 10, 2021Condensed Consolidated Statement of Operations.FASB Codification No. No such cotton contracts were outstanding as of September 2022, or September 2021. (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:◦◦◦ Fair Value Measurements Using Period Ended Total Interest Rate Swap September 30, 2017 $ (56 ) — $ (56 ) — October 1, 2016 $ (182 ) — $ (182 ) — October 3, 2015 $ (697 ) — $ (697 ) — Cotton Options September 30, 2017 $ (125 ) (125 ) — $ — October 1, 2016 $ — — — $ — October 3, 2015 $ — — — $ — Contingent Consideration September 30, 2017 $ (1,600 ) — — $ (1,600 ) October 1, 2016 $ (2,500 ) — — $ (2,500 ) October 3, 2015 $ (3,100 ) — — $ (3,100 ) $ 189 $ — $ 189 $ — $ (1,052 ) $ — $ (1,052 ) $ — $ — $ — $ — $ — $ (1,897 ) $ — $ — $ (1,897 ) werewas derived from a discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. Fair valuesAt September 2022 and September 2021, book value for fixed rate debt areapproximates fair value based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).In August 2013, we acquired Salt Life and issued contingent consideration payable in cash after the endAt September 30, 2017, we had $1.6 million accrued in contingent consideration related to the acquisition of Salt Life, a $0.9 million reduction from the accrual at October 1, 2016. The reduction in the fair value of contingent consideration is based on the inputs into the Monte Carlo model, including the time remaining in the measurement period. The sales expectations for calendar year 2019 have been reduced from the sales expectations used in the valuation of contingent consideration at acquisition due to overall softness in the retail environment.The Art Gun contingent consideration agreement concluded in fiscal year 2017, and no contingent consideration was paid under the terms of our acquisition of the Art Gun business.30, 2017,2022, and OctoberSeptember 2021. $ (48 ) $ 266 189 — — (1,052 ) $ 141 $ (786 ) 2016. September 30,
2017 October 1,
2016 Accrued expenses $ — $ (182 ) Deferred tax liabilities 21 70 Other liabilities (56 ) — Accumulated other comprehensive loss $ (35 ) $ (112 ) (e) License AgreementsWe have entered into license agreements that provide2018, through September 29, 2018, as well as for royalty payments of net sales of licensed products as set forth in the agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in selling, general and administrative expenses) of approximately $2.2 million, $8.2 million and $10.1 million during fiscal years 2017, 2016,2019,2020,2021 and 2015, respectively. The reduction in royalty expense is due to the March 31, 2017, sale of the Junkfood business to JMJD Ventures, LLC. See Note 3—Divestitures2022. At September 2022, no amount was accrued for further information on this transaction.NOTE 17—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)Presented below is a summary of our unaudited consolidated quarterly financial information for the fiscal years ended September 30, 2017, and October 1, 2016 (in thousands, except per share amounts): 2017 Quarter Ended 2016 Quarter Ended December 31, 2016 April 1, 2017 July 1, 2017 September 30, 2017 January 2, 2016 April 2, 2016 July 2, 2016 October 1, 2016 Net sales $ 85,336 $ 104,138 $ 104,281 $ 91,327 $ 90,171 $ 109,160 $ 111,552 $ 114,366 Gross profit 17,559 24,230 22,269 16,664 18,879 25,726 24,986 23,908 Operating income 471 7,520 5,851 2,337 2,227 5,931 4,227 3,947 Net earnings (loss) (602 ) 4,546 4,468 2,099 681 3,436 2,542 2,305 Basic EPS $ (0.08 ) $ 0.60 $ 0.59 $ 0.28 $ 0.09 $ 0.44 $ 0.33 $ 0.30 Diluted EPS $ (0.08 ) $ 0.57 $ 0.56 $ 0.27 $ 0.09 $ 0.43 $ 0.32 $ 0.29 For fiscal year 2017, diluted earnings per share have been adjusted to reflect the impact of adopting ASU 2016-9. See Note 2—Significant Accounting Policies (aa) Recently Adopted Accounting Pronouncements for further detail. As discussed in Note 4, gross profit and operating income in the quarters ended July 2, 2016, and October 1, 2016, included restructuring expensescontingent consideration related to the manufacturing realignment.NOTE 18—SUBSEQUENT EVENTSFirst Amendment to Fifth Amended and Restated Credit AgreementOn November 27, 2017, Delta Apparel, Soffe, Junkfood, Salt Life, and Art Gun (collectively, the “Borrowers”) entered into a First Amendment to Fifth Amended and Restated Credit Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and the other lenders set forth therein (the “First Amendment”).The Fifth Amended and Restated Credit Agreement dated asacquisition of May 10, 2016, was filed as Exhibit 10.1 to a Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016.The First Amendment amends the definition of Fixed Charge Coverage Ratio within the Amended Credit Agreement to permit up to $10 million of the proceeds received from the March 31, 2017, sale of certain assets of Junkfood to be used towards share repurchases for up to one year from the date of that transaction. In addition, the definition of Permitted Purchase Money Indebtedness is amended to extend the time period within which the Borrowers may enter into capital leases and to increase the aggregate principal amount of such leases into which the Borrowers may enter to up to $15 million. The definition of Permitted Investments is also amended to permit the Borrowers to make investments in entities that are not a partyDTG2Go, compared to the Amended Credit Agreement in an aggregate amountaccrual of up to $2 million. The First Amendment also permits Junkfood to change its name. See Part II, Item 9B. Other Information, for additional detail regarding the First Amendment.$1.9 million at September 2021.Section 15 (a)(2) SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTSDELTA APPAREL, INC. AND SUBSIDIARIES(In thousands)ALLOWANCE FOR DOUBTFUL ACCOUNTS Expense 2017 $ 569 $ 86 $ (248 ) $ 407 2016 1,470 195 (1,096 ) 569 2015 1,047 771 (348 ) 1,470 RETURNS AND ALLOWANCES Expense 2017 $ 1,409 $ 8,980 $ (9,362 ) $ 1,027 2016 1,515 7,822 (7,928 ) 1,409 2015 2,113 12,173 (12,771 ) 1,515 TOTAL RESERVES FOR ALLOWANCES Expense 2017 $ 1,978 $ 9,066 $ (9,610 ) $ 1,434 2016 2,985 8,017 (9,024 ) 1,978 2015 3,160 12,944 (13,119 ) 2,985 F-32