UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ | |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 30, 2017
OR
☐ | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
toCommission File Number 1-15583
DELTA APPAREL, INC.
Georgia | 58-2508794 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
2750 Premier Parkway, Suite 100 | ||
Duluth, Georgia | 30097 | |
(Address of principal executive offices) | (Zip Code) |
(678) 775-6900
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.01 | DLA | NYSE American |
Indicate by check mark whether the registrant (1) 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.
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, a smaller reporting company, or an emerging growth company. See the definitions of a “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of
FINANCIAL INFORMATION |
Item 1. | Financial Statements |
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
June 2023 | September 2022 | |||||||
Assets | ||||||||
Cash and cash equivalents | $ | 296 | $ | 300 | ||||
Accounts receivable, less allowances of $98 and $109, respectively | 41,733 | 68,215 | ||||||
Other receivables | 889 | 1,402 | ||||||
Income tax receivable | 1,898 | 1,969 | ||||||
Inventories, net | 226,196 | 248,538 | ||||||
Prepaid expenses and other current assets | 4,221 | 2,755 | ||||||
Total current assets | 275,233 | 323,179 | ||||||
Property, plant and equipment, net of accumulated depreciation of $115,383 and $108,534, respectively | 69,040 | 74,109 | ||||||
Goodwill | 37,897 | 37,897 | ||||||
Intangibles, net | 22,264 | 24,026 | ||||||
Deferred income taxes | 3,105 | 1,342 | ||||||
Operating lease assets | 54,054 | 50,275 | ||||||
Equity method investment | 9,356 | 9,886 | ||||||
Other assets | 2,020 | 2,967 | ||||||
Total assets | $ | 472,969 | $ | 523,681 | ||||
Liabilities and Equity | ||||||||
Liabilities: | ||||||||
Accounts payable | $ | 63,897 | $ | 83,553 | ||||
Accrued expenses | 17,424 | 27,414 | ||||||
Income taxes payable | 695 | 379 | ||||||
Current portion of finance leases | 8,942 | 8,163 | ||||||
Current portion of operating leases | 8,980 | 8,876 | ||||||
Current portion of long-term debt | 10,180 | 9,176 | ||||||
Total current liabilities | 110,118 | 137,561 | ||||||
Long-term income taxes payable | 2,131 | 2,841 | ||||||
Long-term finance leases | 15,871 | 16,776 | ||||||
Long-term operating leases | 46,664 | 42,721 | ||||||
Long-term debt | 131,461 | 136,750 | ||||||
Deferred income taxes | - | 4,310 | ||||||
Total liabilities | $ | 306,245 | $ | 340,959 | ||||
Shareholder's equity: | ||||||||
Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding | - | - | ||||||
Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 7,001,020 and 6,915,663 shares outstanding as of June 2023 and September 2022, respectively | 96 | 96 | ||||||
Additional paid-in capital | 61,448 | 61,961 | ||||||
Retained earnings | 149,756 | 166,600 | ||||||
Accumulated other comprehensive income | 21 | 141 | ||||||
Treasury stock - 2,645,952 and 2,731,309 shares as of June 2023 and September 2022, respectively | (43,896 | ) | (45,420 | ) | ||||
Equity attributable to Delta Apparel, Inc. | 167,425 | 183,378 | ||||||
Equity attributable to non-controlling interest | (701 | ) | (656 | ) | ||||
Total equity | 166,724 | 182,722 | ||||||
Total liabilities and equity | $ | 472,969 | $ | 523,681 |
December 30, 2017 | September 30, 2017 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 603 | $ | 572 | |||
Accounts receivable, less allowances of $1,502 and $1,433, respectively | 51,010 | 47,557 | |||||
Income tax receivable | 404 | 352 | |||||
Inventories, net | 174,505 | 174,551 | |||||
Note receivable | 1,031 | 2,016 | |||||
Prepaid expenses and other current assets | 3,885 | 2,646 | |||||
Total current assets | 231,438 | 227,694 | |||||
Property, plant and equipment, net of accumulated depreciation of $69,320 and $67,780, respectively | 45,449 | 42,706 | |||||
Goodwill | 19,917 | 19,917 | |||||
Intangibles, net | 15,925 | 16,151 | |||||
Deferred income taxes | 2,656 | 5,002 | |||||
Other assets | 6,277 | 6,332 | |||||
Total assets | $ | 321,662 | $ | 317,802 | |||
Liabilities and Shareholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 45,597 | $ | 47,183 | |||
Accrued expenses | 13,503 | 17,704 | |||||
Current portion of long-term debt | 6,600 | 7,548 | |||||
Total current liabilities | 65,700 | 72,435 | |||||
Long-term debt, less current maturities | 99,360 | 85,306 | |||||
Income tax payable | 8,058 | — | |||||
Other liabilities | 4,734 | 2,574 | |||||
Contingent consideration | 1,300 | 1,600 | |||||
Total liabilities | $ | 179,152 | $ | 161,915 | |||
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 7,227,374 and 7,300,297 shares outstanding as of December 30, 2017, and September 30, 2017, respectively | 96 | 96 | |||||
Additional paid-in capital | 59,856 | 61,065 | |||||
Retained earnings | 117,402 | 127,358 | |||||
Accumulated other comprehensive income (loss) | 51 | (35 | ) | ||||
Treasury stock —2,419,598 and 2,346,675 shares as of December 30, 2017, and September 30, 2016, respectively | (34,895 | ) | (32,597 | ) | |||
Total shareholders’ equity | 142,510 | 155,887 | |||||
Total liabilities and shareholders' equity | $ | 321,662 | $ | 317,802 |
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | |||||||||||||
Net sales | $ | 106,319 | $ | 126,875 | $ | 323,949 | $ | 369,319 | ||||||||
Cost of goods sold | 92,384 | 96,182 | 280,181 | 282,100 | ||||||||||||
Gross profit | 13,935 | 30,693 | 43,768 | 87,219 | ||||||||||||
Selling, general and administrative expenses | 18,491 | 22,416 | 56,658 | 59,613 | ||||||||||||
Other (income), net | (95 | ) | (1,018 | ) | (452 | ) | (1,947 | ) | ||||||||
Operating (loss) income | (4,461 | ) | 9,295 | (12,438 | ) | 29,553 | ||||||||||
Interest expense, net | 4,049 | 1,971 | 10,662 | 5,370 | ||||||||||||
(Loss) earnings before (benefit from) provision for income taxes | (8,510 | ) | 7,324 | (23,100 | ) | 24,183 | ||||||||||
(Benefit from) provision for income taxes | (2,218 | ) | 1,087 | (6,214 | ) | 4,149 | ||||||||||
Consolidated net (loss) earnings | (6,292 | ) | 6,237 | (16,886 | ) | 20,034 | ||||||||||
Net (loss) income attributable to non-controlling interest | (5 | ) | (3 | ) | (45 | ) | 11 | |||||||||
Net (loss) earnings attributable to shareholders | $ | (6,287 | ) | $ | 6,240 | $ | (16,841 | ) | $ | 20,023 | ||||||
Basic (loss) earnings per share | $ | (0.90 | ) | $ | 0.90 | $ | (2.41 | ) | $ | 2.87 | ||||||
Diluted (loss) earnings per share | $ | (0.90 | ) | $ | 0.88 | $ | (2.41 | ) | $ | 2.84 | ||||||
Weighted average number of shares outstanding | 7,001 | 6,946 | 6,985 | 6,966 | ||||||||||||
Dilutive effect of stock awards | - | 119 | - | 95 | ||||||||||||
Weighted average number of shares assuming dilution | 7,001 | 7,065 | 6,985 | 7,061 |
Three Months Ended | |||||||
December 30, 2017 | December 31, 2016 | ||||||
Net sales | $ | 90,342 | $ | 85,335 | |||
Cost of goods sold | 73,972 | 67,777 | |||||
Gross profit | 16,370 | 17,558 | |||||
Selling, general and administrative expenses | 14,979 | 17,311 | |||||
Change in fair value of contingent consideration | (300 | ) | (100 | ) | |||
Other income, net | (47 | ) | (122 | ) | |||
Operating income | 1,738 | 469 | |||||
Interest expense, net | 1,334 | 1,301 | |||||
Income (loss) before provision for income taxes | 404 | (832 | ) | ||||
Provision for (benefit from) income taxes | 10,356 | (225 | ) | ||||
Net loss | $ | (9,952 | ) | $ | (607 | ) | |
Basic loss per share | $ | (1.37 | ) | $ | (0.08 | ) | |
Diluted loss per share | $ | (1.37 | ) | $ | (0.08 | ) | |
Weighted average number of shares outstanding | 7,268 | 7,598 | |||||
Dilutive effect of stock options and awards | — | — | |||||
Weighted average number of shares assuming dilution | 7,268 | 7,598 |
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Comprehensive Loss
(Amounts in thousands)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | |||||||||||||
Net (loss) earnings attributable to shareholders | $ | (6,287 | ) | $ | 6,240 | $ | (16,841 | ) | $ | 20,023 | ||||||
Other comprehensive (loss) income related to unrealized (loss) gain on derivatives, net of income tax | (159 | ) | 186 | (121 | ) | 779 | ||||||||||
Consolidated comprehensive (loss) income | $ | (6,446 | ) | $ | 6,426 | $ | (16,962 | ) | $ | 20,802 |
Three Months Ended | |||||||
December 30, 2017 | December 31, 2016 | ||||||
Net loss | $ | (9,952 | ) | $ | (607 | ) | |
Other comprehensive income related to unrealized gain on derivatives, net of income tax | 85 | 49 | |||||
Comprehensive loss | $ | (9,867 | ) | $ | (558 | ) |
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)thousands, except share amounts)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | Controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Interest | Total | ||||||||||||||||||||||||||||
Balance as of September 2022 | 9,646,972 | $ | 96 | $ | 61,961 | $ | 166,600 | $ | 141 | 2,731,309 | $ | (45,420 | ) | $ | (656 | ) | $ | 182,722 | ||||||||||||||||||
Net loss | - | - | - | (3,565 | ) | - | - | - | - | (3,565 | ) | |||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 69 | - | - | - | 69 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (34 | ) | (34 | ) | |||||||||||||||||||||||||
Vested stock awards | - | - | (2,067 | ) | - | - | (85,357 | ) | 1,524 | - | (543 | ) | ||||||||||||||||||||||||
Stock based compensation | - | - | 665 | - | - | - | - | - | 665 | |||||||||||||||||||||||||||
Balance as of December 2022 | 9,646,972 | $ | 96 | $ | 60,559 | $ | 163,035 | $ | 210 | 2,645,952 | $ | (43,896 | ) | $ | (690 | ) | $ | 179,314 | ||||||||||||||||||
Net loss | - | - | - | (6,992 | ) | - | - | - | - | (6,992 | ) | |||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (30 | ) | - | - | - | (30 | ) | |||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (6 | ) | (6 | ) | |||||||||||||||||||||||||
Stock based compensation | - | - | 353 | - | - | - | - | - | 353 | |||||||||||||||||||||||||||
Balance as of March 2023 | 9,646,972 | $ | 96 | $ | 60,912 | $ | 156,043 | $ | 180 | 2,645,952 | $ | (43,896 | ) | $ | (696 | ) | $ | 172,639 | ||||||||||||||||||
Net loss | - | - | - | (6,287 | ) | - | - | - | - | (6,287 | ) | |||||||||||||||||||||||||
Other comprehensive loss | - | - | - | - | (159 | ) | - | - | - | (159 | ) | |||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (5 | ) | (5 | ) | |||||||||||||||||||||||||
Stock based compensation | - | - | 536 | - | - | - | - | - | 536 | |||||||||||||||||||||||||||
Balance as of June 2023 | 9,646,972 | $ | 96 | $ | 61,448 | $ | 149,756 | $ | 21 | 2,645,952 | $ | (43,896 | ) | $ | (701 | ) | $ | 166,724 |
Three Months Ended | |||||||
December 30, 2017 | December 31, 2016 | ||||||
Operating activities: | |||||||
Net loss | $ | (9,952 | ) | $ | (607 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 2,433 | 2,415 | |||||
Amortization of deferred financing fees | 76 | 78 | |||||
Provision for deferred income taxes | 2,346 | (194 | ) | ||||
Non-cash stock compensation | 437 | 369 | |||||
Change in the fair value of contingent consideration | (300 | ) | (100 | ) | |||
Loss on disposal of equipment | — | 5 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable, net | (3,453 | ) | 15,448 | ||||
Inventories, net | 46 | (14,791 | ) | ||||
Prepaid expenses and other assets | (1,252 | ) | (770 | ) | |||
Other non-current assets | 61 | — | |||||
Accounts payable | (1,902 | ) | 3,063 | ||||
Accrued expenses | (4,290 | ) | (5,264 | ) | |||
Income taxes | 8,007 | (150 | ) | ||||
Other liabilities | (71 | ) | 44 | ||||
Net cash used in operating activities | (7,814 | ) | (454 | ) | |||
Investing activities: | |||||||
Purchases of property and equipment, net | (2,162 | ) | (1,883 | ) | |||
Proceeds from sale of Junkfood assets | 1,000 | — | |||||
Proceeds from sale of fixed assets | 1 | — | |||||
Net cash used in investing activities | (1,161 | ) | (1,883 | ) | |||
Financing activities: | |||||||
Proceeds from long-term debt | 119,529 | 115,707 | |||||
Repayment of long-term debt | (106,424 | ) | (111,749 | ) | |||
Repayment of capital financing | (257 | ) | (101 | ) | |||
Repurchase of common stock | (2,897 | ) | (965 | ) | |||
Payment of withholding taxes on stock awards | (945 | ) | (542 | ) | |||
Net cash provided by financing activities | 9,006 | 2,350 | |||||
Net increase in cash and cash equivalents | 31 | 13 | |||||
Cash and cash equivalents at beginning of period | 572 | 397 | |||||
Cash and cash equivalents at end of period | $ | 603 | $ | 410 | |||
Supplemental cash flow information: | |||||||
Cash paid during the period for interest | $ | 1,094 | $ | 1,209 | |||
Cash paid during the period for income taxes | $ | 19 | $ | 94 | |||
Non-cash financing activity - capital lease agreements | $ | 3,050 | $ | 1,619 |
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury Stock | Controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Interest | Total | ||||||||||||||||||||||||||||
Balance as of September 2021 | 9,646,972 | $ | 96 | $ | 60,831 | $ | 146,860 | $ | (786 | ) | 2,672,312 | $ | (42,149 | ) | $ | (658 | ) | $ | 164,194 | |||||||||||||||||
Net income | - | - | - | 3,645 | - | - | - | - | 3,645 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 212 | - | - | - | 212 | |||||||||||||||||||||||||||
Net income attributable to non-controlling interest | - | - | - | - | - | - | - | 25 | 25 | |||||||||||||||||||||||||||
Purchase of common stock | - | - | - | - | - | 74,232 | (2,143 | ) | - | (2,143 | ) | |||||||||||||||||||||||||
Vested stock awards | - | - | (1,766 | ) | - | - | (76,460 | ) | 674 | - | (1,092 | ) | ||||||||||||||||||||||||
Stock based compensation | - | - | 140 | - | - | - | - | - | 140 | |||||||||||||||||||||||||||
Balance as of December 2021 | 9,646,972 | $ | 96 | $ | 59,205 | $ | 150,505 | $ | (574 | ) | 2,670,084 | $ | (43,618 | ) | $ | (633 | ) | $ | 164,981 | |||||||||||||||||
Net income | - | - | - | 10,137 | - | - | - | - | 10,137 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 381 | - | - | - | 381 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (11 | ) | (11 | ) | |||||||||||||||||||||||||
Vested stock awards | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Purchase of common stock | - | - | - | - | - | 28,015 | (846 | ) | - | (846 | ) | |||||||||||||||||||||||||
Stock based compensation | - | - | 714 | - | - | - | - | - | 714 | |||||||||||||||||||||||||||
Balance as of March 2022 | 9,646,972 | $ | 96 | $ | 59,919 | $ | 160,642 | $ | (193 | ) | 2,698,099 | $ | (44,464 | ) | $ | (644 | ) | $ | 175,356 | |||||||||||||||||
Net income | - | - | - | 6,240 | - | - | - | - | 6,240 | |||||||||||||||||||||||||||
Other comprehensive income | - | - | - | - | 186 | - | - | - | 186 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interest | - | - | - | - | - | - | - | (3 | ) | (3 | ) | |||||||||||||||||||||||||
Purchase of common stock | - | - | - | - | - | 33,934 | (968 | ) | - | (968 | ) | |||||||||||||||||||||||||
Stock based compensation | - | - | 903 | - | - | - | - | - | 903 | |||||||||||||||||||||||||||
Balance as of June 2022 | 9,646,972 | $ | 96 | $ | 60,822 | $ | 166,882 | $ | (7 | ) | 2,732,033 | $ | (45,432 | ) | $ | (647 | ) | $ | 181,714 |
See accompanying Notes to Condensed Consolidated Financial Statements.
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Nine Months Ended | ||||||||
June 2023 | June 2022 | |||||||
Operating activities: | ||||||||
Consolidated net (loss) earnings | $ | (16,886 | ) | $ | 20,034 | |||
Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 11,397 | 11,272 | ||||||
Amortization of deferred financing fees | 519 | 244 | ||||||
Provision for inventory market reserves | (3,707 | ) | 1,484 | |||||
Change in reserves for allowances on accounts receivable | (11 | ) | (160 | ) | ||||
(Benefit from) provision for deferred income taxes | (6,033 | ) | 488 | |||||
Non-cash stock compensation | 1,554 | 1,756 | ||||||
Loss on disposal of equipment | 135 | 348 | ||||||
Loss on impairment | 831 | - | ||||||
Other, net | (710 | ) | (2,263 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 27,006 | (1,251 | ) | |||||
Inventories | 26,049 | (67,452 | ) | |||||
Prepaid expenses and other current assets | (1,985 | ) | 602 | |||||
Other non-current assets | 2,023 | 199 | ||||||
Accounts payable | (19,524 | ) | 23,390 | |||||
Accrued expenses | (9,816 | ) | (1,737 | ) | ||||
Net operating lease liabilities | 268 | 409 | ||||||
Income taxes | (323 | ) | 264 | |||||
Other liabilities | - | (1,049 | ) | |||||
Net cash provided by (used in) operating activities | 10,787 | (13,422 | ) | |||||
Investing activities: | ||||||||
Purchases of property and equipment | (3,551 | ) | (10,931 | ) | ||||
Proceeds from sale/leaseback | 4,417 | - | ||||||
Proceeds from sale of equipment | 19 | 33 | ||||||
Cash paid for intangible asset | - | (132 | ) | |||||
Cash paid for business | - | (583 | ) | |||||
Net cash used in investing activities | 885 | (11,613 | ) | |||||
Financing activities: | ||||||||
Proceeds from long-term debt | 363,438 | 411,600 | ||||||
Repayment of long-term debt | (367,723 | ) | (383,919 | ) | ||||
Repayment of finance lease obligations | (6,849 | ) | (5,604 | ) | ||||
Payment of deferred financing cost | - | (850 | ) | |||||
Repurchase of common stock | - | (3,934 | ) | |||||
Payment of withholding taxes on stock awards | (542 | ) | (1,092 | ) | ||||
Net cash (used in) provided by financing activities | (11,676 | ) | 16,201 | |||||
Net decrease in cash and cash equivalents | (4 | ) | (8,834 | ) | ||||
Cash and cash equivalents at beginning of period | 300 | 9,376 | ||||||
Cash and cash equivalents at end of period | $ | 296 | $ | 542 | ||||
Supplemental cash flow information | ||||||||
Finance lease assets exchanged for finance lease liabilities | $ | 6,708 | $ | 10,381 | ||||
Operating lease assets exchanged for operating lease liabilities | $ | 11,039 | $ | 6,869 |
See accompanying Notes to Condensed Consolidated Financial Statements.
Delta Apparel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and Descriptionother subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company with approximately 7,100 employees worldwide. We design, manufacture, source, and market a diverse portfolio of Business
We design and internally manufacture the majority of our products, with more than 90% of the apparel units that we sell sewn in our own facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers. We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American exchange under the symbol “DLA."
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our 2023 fiscal year is a 52-week year and will end on September 30, 2023 ("fiscal 2023"). Accordingly, this Quarterly Report on Form 10-Q presents our results for our third quarter of fiscal 2023. Our 2022 fiscal year was a 52-week year and ended on October 1, 2022 ("fiscal 2022").
For presentation purposes herein, all references to period ended relate to the following fiscal years and dates:
Period Ended | Fiscal Year | Date Ended |
June 2022 | Fiscal 2022 | July 2, 2022 |
September 2022 | Fiscal 2022 | October 1, 2022 |
December 2022 | Fiscal 2023 | December 31, 2022 |
March 2023 | Fiscal 2023 | April 1, 2023 |
June 2023 | Fiscal 2023 | July 1, 2023 |
We prepared the accompanying interim condensed consolidated financial statementsCondensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q10-Q and Article 10 of Regulation S-X.S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month periodthree and nine months ended
Our Condensed Consolidated Financial Statements include the “Company”, “we”, “us” and “our” are used interchangeably to refer toaccounts of Delta Apparel Inc. together with our domesticand its wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Culver City Clothing Company (f/k/a Junkfood Clothing Company) (“Junkfood”), Salt Life, LLC (“Salt Life”), and Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to the context. On March 31, 2017, we sold substantially all of the assets comprising our Junkfood business to JMJD Ventures, LLC. See Note D—Divestitures, for further information on this transaction.
We make available copies of materials we file with, or furnish to, better serve our customers with same-day shippingthe SEC free of charge at https://ir.deltaapparelinc.com. The information found on our catalog productswebsite 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 weekly replenishmentsother 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 retailers.
Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K10-K for theour fiscal year ended September 30, 2017,2022, filed with the SEC. See Note C for consideration of recently issued accounting standards.
Standards Not Yet Adopted Standards
In July 2015, June 2016, the FASB issued ASU No.2016-13,Financial Accounting Standards Board ("FASB"Instruments - Credit Losses (Topic 326) issued Accounting Standards Update ("ASU") No. 2015-11,
Our Condensed Consolidated Statements of Operations include revenue streams from Contracts with Customers, ("ASU 2014-09"). This new guidance requires an entity to recognizeretail sales at our branded retail stores; direct-to-consumer ecommerce sales on our consumer-facing websites; and sales from wholesale channels, which includes our business-to-business ecommerce and DTG2Go sales. The table below identifies the amount and percentage of revenue to which it expects to be entitlednet sales by distribution channel (in thousands):
Three Months Ended | ||||||||||||||||
June 2023 | June 2022 | |||||||||||||||
Retail | $ | 4,830 | 5 | % | $ | 4,412 | 3 | % | ||||||||
Direct-to-consumer ecommerce | 1,870 | 2 | % | 1,145 | 1 | % | ||||||||||
Wholesale | 99,619 | 93 | % | 121,318 | 96 | % | ||||||||||
Net sales | $ | 106,319 | 100 | % | $ | 126,875 | 100 | % |
Nine Months Ended | ||||||||||||||||
June 2023 | June 2022 | |||||||||||||||
Retail | $ | 11,441 | 4 | % | $ | 9,685 | 3 | % | ||||||||
Direct-to-consumer ecommerce | 4,542 | 1 | % | 3,199 | 1 | % | ||||||||||
Wholesale | 307,966 | 95 | % | 356,435 | 96 | % | ||||||||||
Net sales | $ | 323,949 | 100 | % | $ | 369,319 | 100 | % |
The table below provides net sales by reportable segment and the percentage of net sales by distribution channel for the transfereach reportable segment (in thousands):
Three Months Ended June 2023 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 89,118 | 0.0 | % | 0.4 | % | 99.6 | % | ||||||||
Salt Life Group | 17,201 | 28.0 | % | 8.9 | % | 63.1 | % | |||||||||
Total | $ | 106,319 |
Three Months Ended June 2022 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 106,020 | 0.1 | % | 0.4 | % | 99.5 | % | ||||||||
Salt Life Group | 20,855 | 20.8 | % | 3.4 | % | 75.8 | % | |||||||||
Total | $ | 126,875 |
Nine Months Ended June 2023 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 277,471 | 0.1 | % | 0.3 | % | 99.6 | % | ||||||||
Salt Life Group | 46,478 | 24.4 | % | 8.2 | % | 67.4 | % | |||||||||
Total | $ | 323,949 |
Nine Months Ended June 2022 | ||||||||||||||||
Net Sales | Retail | Direct-to-consumer ecommerce | Wholesale | |||||||||||||
Delta Group | $ | 323,276 | 0.1 | % | 0.3 | % | 99.6 | % | ||||||||
Salt Life Group | 46,043 | 20.3 | % | 5.0 | % | 74.7 | % | |||||||||
Total | $ | 369,319 |
Inventories, net of $9.9reserves of $14.0 million and $9.8$17.7 million in reserves, as of December 30, 2017, June 2023 and September 30, 2017, 2022, respectively, consisted of the following (in thousands):
June 2023 | September 2022 | |||||||
Raw materials | $ | 20,500 | $ | 22,603 | ||||
Work in process | 18,684 | 23,501 | ||||||
Finished goods | 187,012 | 202,434 | ||||||
$ | 226,196 | $ | 248,538 |
Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and direct embellishment materials for the Salt Life Group.
December 30, 2017 | September 30, 2017 | ||||||
Raw materials | $ | 8,639 | $ | 8,973 | |||
Work in process | 16,179 | 18,543 | |||||
Finished goods | 149,687 | 147,035 | |||||
$ | 174,505 | $ | 174,551 |
Credit Facility
On May 10,2016, we entered into a Fifth Amended and Restated Credit Agreement (the(as further amended, the “Amended Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, National Association and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company, (f/k/a Junkfood Clothing Company), Salt Life, LLC, and Art Gun,DTG2Go, LLC (together with(collectively, the Company, the “Companies”"Borrowers"), are co-borrowers under the Amended Credit Agreement.
On June 2,2022, the Borrowers entered into the Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the “First“Seventh Amendment”).
On January 3, 2023, the Borrowers entered into the Eighth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the “Eighth Amendment”). The Eighth Amendment essentially clarifies the Amended Credit Agreement’s provisions regarding the inclusion of eligible in-transit inventory in the borrowing base and amends the definition of Fixed Charge Coverage Ratio withinIncreased Reporting Event to include 12.5% of the lesser of the borrowing base and the maximum revolver amount as opposed to 12.5% of the line cap.
On February 3, 2023, the Borrowers entered into the Ninth Amendment to the Fifth Amended and Restated Credit Agreement to permit up to $10 million ofwith Wells Fargo and the proceeds received fromother lenders set forth therein (“Ninth Amendment”). The Ninth Amendment adds an Accommodation Period beginning on the March 31, 2017, sale of certain assets of the Junkfood business to be used towards share repurchases for up to one year fromamendment date and continuing through the date of that transaction. In addition,following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds and during which: (i) 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 partyminimum borrowing availability thresholds applicable to the Amended Credit Agreement in an aggregate amount of upare (a) through (and including) April 1, 2023, $7,500,000, (b) on and after April 2, 2023 through (and including) June 4, 2023, $9,000,000, (c) on and after June 5, 2023, through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds, $10,000,000; and (d) at all times thereafter, $0; (ii) the FCCR covenant is suspended; (iii) Borrowers must maintain specified minimum EBITDA levels for trailing three-month periods starting March 4, 2023; (iv) the Applicable Margin with respect to $2 million. The Firstloans under the Amended Credit Agreement is increased by 50 basis points; and (v) a Cash Dominion Trigger Event occurs if availability is less than $2,000,000.
On March 23, 2023, the Borrowers entered into the Tenth Amendment also allows the change in the name of our Junkfood Clothing Company subsidiary to Culver City Clothing Company. There were no changes to the Fifth Amended and Restated Credit Agreement relatedwith Wells Fargo and the other lenders set forth therein to interest rate, borrowing capacity, or maturity.
The Amended Credit Agreement allows us to borrow up to $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
As of June 2023, we acquired Salt Life and issued two promissory notes in the aggregate principal amounthad $126.4 million outstanding under our U.S. revolving credit facility at an average interest rate of $22.0 million, which included a one-time installment of $9.0 million that was due and paid as required7.8%. Our cash on September 30, 2014, and quarterly installments commencing on March 31, 2015,hand combined with the final installment due on availability under the U.S. revolving credit facility totaled $14.4 million. At June 30, 2019. The promissory notes are zero-interest notes 2023 and state that interest will be imputed as requiredSeptember 2022, there was $16.4 million and $24.9 million, respectively, of retained earnings free of restrictions to make cash dividend payments or stock repurchases to the extent permitted under Section 1274 of the Internal Revenue Code. We imputed interest at 1.92% on the promissory note that matured June 30, 2016, and was paid in full as required. We impute interest at 3.62% on the promissory note that matures on June 30, 2019. At December 30, 2017, the discounted value of the promissory note outstanding was $3.9 million.
Honduran Debt
Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance investments in both the operations and capital expansion of our Honduran facilities. EachIn 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 thesesettlement of $1.1 million and $9.5 million, respectively. Additionally, in May 2022, we entered into a new term loan with a five-year term with a principal amount of $3.7 million. These loans isare secured by a first-priorityfirst-priority lien on the assets of our Honduran operations and is are not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. TheAs 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 objective covenants, and we intend to re-borrow funds, subject to those covenants, the amounts have beenborrowed are classified as long-term debt.
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 investments in 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 March 2023 is listed as part of the long-term debt schedule below.
Additional information about these loans and the outstanding balances as of December 30, 2017, June 2023 is as follows (in thousands):
June 2023 | ||||
Revolving credit facility with Banco Ficohsa, a Honduran bank, with interest at 7.9%, due August 2025 | $ | 3,909 | ||
Term loan with Banco Ficohsa, a Honduran bank, interest at 7.75%, quarterly installments which began September 2021 and are due through December 2025. | 5,072 | |||
Term loan with Banco Ficohsa, a Honduran bank, interest at 7.75%, quarterly installments which began March 2023 and are due through May 2027. | 3,308 | |||
Term loan with Banco Ficohsa, a Panamanian bank, interest at the prevailing market rate within the Panamanian Banking Market, monthly installments which began October 2022 and are due through August 2027. | 2,627 |
December 30, 2017 | |||
Revolving credit facility established March 2011, interest at 8.0% due March 2019 | $ | 4,804 | |
Term loan established March 2011, interest at 7.0%, payable monthly with a seven-year term | 243 | ||
Term loan established November 2014, interest at 7.5%, payable monthly with a six-year term | 1,850 | ||
Term loan established June 2016, interest at 8.0%, payable monthly with a six-year term | 1,286 | ||
Term loan established September 2017, interest at 8.0%, payable monthly with a six-year term | 3,817 |
We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled $3.9$5.2 million and $3.5$5.6 million for the three-month periodsJune 2023 and June 2022 quarters, respectively. Distribution costs included in SG&A expenses totaled $16.3 million and $16.8 million for the nine months ended December 30, 2017, June 2023 and December 31, 2016, June 2022, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses, royalty payments on licensed productsretail store build-outs, and other general and administrative expenses.
On February 4, 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.
Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the June 2023 and June 2022 quarters, we recognized $0.6 million and $1.1 million in stock-based compensation expense, respectively. Associated with this compensation cost are income tax benefits recognized of $0.2 million and $0.2 million, respectively, for each of the three-month periods ended June 2023 and June 2022. During the nine-months ended June 2023 and June 2022, we recognized $1.6 million and $2.4 million respectively, in stock-based compensation expense. Associated with the compensation cost are income tax benefits recognized of $0.5 million and $0.4 million, respectively, for each of the nine-months periods ended June 2023 and June 2022.
During the December 2022 quarter, restricted stock units representing 54,602 and 92,068105,000 shares of our common stock respectively, vested uponwith the filing of our Annual Report on Form 10-K10-K for the fiscal year ended September 30, 2017,2022 and were issued in accordance with their respective agreements. One-half of the restricted stock unitsOf these vested awards, all were payable in common stock and one-half were payable in cash. Of the performance units, 72,138 were payable in common stock and 19,930 were payable in cash.
During the three-month period ended December 30, 2017,2022 quarter, performance stock units and restricted stock units representing 5,000 and performance stock units, each consisting of 55,750 shares of our common stock, were issued and are eligible to vest upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019. One-half of the restricted stock units and one-half of the performance units are payable in common stock and one-half are payable in cash.
As of December 30, 2017, June 2023, there was $4.1$2.0 million of total unrecognized compensation cost related to unvested awards granted under the 20102020 Stock Plan. This cost is expected to be recognized over a period of 32.4 years.
We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At December 30, 2017,June 2023, minimum payments under these contracts were as follows (in thousands):
Yarn | $ | 19,123 | ||
Finished fabric | 1,952 | |||
Finished products | 7,542 | |||
$ | 28,617 |
Yarn | $ | 3,252 | |
Finished fabric | 2,271 | ||
Finished products | 21,995 | ||
$ | 27,518 |
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 following business units, which are primarily focused on core activewear styles: DTG2Go and Delta Activewear.
DTG2Go is a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chains of our many customers. Our ‘On-Demand DC’ digital solution provides retailers and brands with immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate digital fulfillment within the customer's own distribution facilities. We operate our business in two distinct segments: branded and basics.
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 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.
The iconic Soffe brand offers activewear for salespirit 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 diversified audience rangingproud 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 offer customers a broad range of 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 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 the shipment of branded products are sold with “retail-ready” value-added services such asincluding embellishment, hangtags, ticketing, hangers, and embellishment so that
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 and mass retailers. As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offer a seamless solution for retail. Usingreplenishment strategies, small-run decoration needs, and quick reaction programs with on-demand digital print equipment and 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.
The branded segmentSalt Life Group is comprised of our Salt Life business, units focusedwhich is built on specialized apparel garments, headwear,the 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. 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. ecommerce site at www.saltlife.com.
Our branded segment also included our Junkfood business unit prior to its disposition on March 31, 2017. These branded products are sold through specialty and boutique shops, traditional department stores and 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.
Three Months Ended | |||||||
December 30, 2017 | December 31, 2016 | ||||||
Segment net sales: | |||||||
Basics | $ | 73,176 | $ | 60,838 | |||
Branded | 17,166 | 24,497 | |||||
Total net sales | $ | 90,342 | $ | 85,335 | |||
Segment operating income (loss): | |||||||
Basics | $ | 4,189 | $ | 4,684 | |||
Branded | 458 | (1,000 | ) | ||||
Total segment operating income | $ | 4,647 | $ | 3,684 |
Three Months Ended | Nine Months Ended | |||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | |||||||||||||
Segment net sales: | ||||||||||||||||
Delta Group | $ | 89,118 | $ | 106,020 | $ | 277,471 | $ | 323,276 | ||||||||
Salt Life Group | 17,201 | 20,855 | 46,478 | 46,043 | ||||||||||||
Total net sales | $ | 106,319 | $ | 126,875 | $ | 323,949 | $ | 369,319 | ||||||||
Segment operating earnings: | ||||||||||||||||
Delta Group | $ | (3,616 | ) | $ | 10,701 | $ | (10,974 | ) | $ | 33,557 | ||||||
Salt Life Group | 1,642 | 3,574 | 6,509 | 7,037 | ||||||||||||
Total segment operating (loss) earnings | $ | (1,974 | ) | $ | 14,275 | $ | (4,465 | ) | $ | 40,594 |
The following table reconciles the segment operating income(loss) earnings to the consolidated income (loss)earnings before (benefit from) provision for (benefit from) income taxes (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | |||||||||||||
Segment operating (loss) earnings | $ | (1,974 | ) | $ | 14,275 | $ | (4,465 | ) | $ | 40,594 | ||||||
Unallocated corporate expenses | 2,487 | 4,980 | 7,973 | 11,041 | ||||||||||||
Unallocated interest expense | 4,049 | 1,971 | 10,662 | 5,370 | ||||||||||||
Consolidated (loss) earnings before (benefit from) provision for income taxes | $ | (8,510 | ) | $ | 7,324 | $ | (23,100 | ) | $ | 24,183 |
Three Months Ended | |||||||
December 30, 2017 | December 31, 2016 | ||||||
Segment operating income | $ | 4,647 | $ | 3,684 | |||
Unallocated corporate expenses | 2,909 | 3,215 | |||||
Unallocated interest expense | 1,334 | 1,301 | |||||
Consolidated income (loss) before provision for (benefit from) income taxes | $ | 404 | $ | (832 | ) |
The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted. The New Tax Legislation enacted on December 22,2017, 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. Duringsubsidiaries 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 three-month period ended December 30, 2017, we recognized provisional amounts totaling $10.6 milliondeduction for business interest expense (“Section 163(j)"). GILTI is the excess of tax expense.the shareholder’s net controlled foreign corporations net tested income over the net deemed tangible income. GILTI income is eligible for a deduction of up to 50% of the income inclusion, but the deduction is limited to the amount of U.S. adjusted taxable income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income and 30% of the taxpayer’s adjusted taxable income. We have made reasonable estimatesincluded in our calculation of our effective tax rate the effectsestimated impact of GILTI and Section 163(j). In addition, 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 existing deferred tax balances and the one-time transition tax; however, these amounts may change as more information becomes available. We accounted for the $10.6 million provisional amount as a discrete item for tax provision purposes, recording tax expense on our best estimate of the effect of the New Tax Legislation. Excluding the effect of this discrete item, theforeign subsidiaries.
Our effective income tax rate on operations for the three-month periodnine-months ended December 30, 2017, June 2023 was (46.4%). This tax benefit relates27.0% compared to stock option excess benefits as a result from our adoption of ASU 2016-09. This compares to an effective income tax rate of 27.0% for17.2% in the same period inof the prior year, and 5.9%an effective rate of 17.9% for the fiscal year ended September 30, 2017.
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 June 2023, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest. Outstanding instruments as of December 30, 2017, June 2023 are as follows:
Notional | ||||||||
Effective Date | Amount | Fixed LIBOR Rate | Maturity Date | |||||
Interest Rate Swap | July | $ | 3.18% | July | ||||
The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivatives related to our interest swap agreements as of June 2023 and September 2022 (in thousands):
June 2023 | September 2022 | |||||||
Deferred tax assets | $ | (7 | ) | $ | (48 | ) | ||
Other assets | 28 |
| 189 |
| ||||
Accumulated other comprehensive gain | $ | 21 |
| $ | 141 |
|
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations.
ASC 820,
Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:○ | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
○ | Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active. |
○ | Level 3 – Unobservable inputs that are supported by little ornomarket activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques. |
The following financial assets (liabilities)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 Swaps | |||||||||||||||
December 30, 2017 | $ | 83 | — | $ | 83 | — | |||||||||
September 30, 2017 | (56 | ) | — | (56 | ) | — | |||||||||
Cotton Options | |||||||||||||||
December 30, 2017 | $ | (1 | ) | $ | (1 | ) | — | — | |||||||
September 30, 2017 | (125 | ) | (125 | ) | — | — | |||||||||
Contingent Consideration | |||||||||||||||
December 30, 2017 | $ | (1,300 | ) | — | — | $ | (1,300 | ) | |||||||
September 30, 2017 | (1,600 | ) | — | — | (1,600 | ) |
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices in | Significant Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Period Ended | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest Rate Swaps | ||||||||||||||||
June 2023 | $ | 21 | — | $ | 21 | — | ||||||||||
September 2022 | $ | 141 | — | $ | 141 | — | ||||||||||
The fair value of the interest rate swap agreements was derived from a discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. At December 31, 2017,June 2023 and September 2022, book value for fixed rate debt approximates fair value based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).
December 30, 2017 | September 30, 2017 | ||||||
Other assets | $ | 83 | $ | — | |||
Deferred tax assets | — | 21 | |||||
Accrued expenses | — | (56 | ) | ||||
Deferred tax liabilities | (32 | ) | — | ||||
Accumulated other comprehensive income (loss) | $ | 51 | $ | (35 | ) |
At times, we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material adverse effect on our operations, financial condition, or liquidity.
As of December 30, 2017,September 28,2019, our Board of Directors authorized management to use up to $50.0$60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.
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 | ||||||||
October 1, 2017 to November 4, 2017 | 29,081 | $21.04 | 29,081 | $10.7 | million | |||||||
November 5, 2017 to December 2, 2017 | 46,444 | 20.67 | 46,444 | 9.7 | million | |||||||
December 3, 2017 to December 30, 2017 | 69,599 | 20.56 | 69,599 | 8.3 | million | |||||||
Total | 145,124 | $20.69 | 145,124 | $8.3 | million |
Components of intangible assets consist of the following (in thousands):
December 30, 2017 | September 30, 2017 | ||||||||||||||||||||
Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | Economic Life | |||||||||||||||
Goodwill | $ | 19,917 | $ | — | $ | 19,917 | $ | 19,917 | $ | — | $ | 19,917 | N/A | ||||||||
Intangibles: | |||||||||||||||||||||
Tradename/trademarks | $ | 16,090 | $ | (2,329 | ) | $ | 13,761 | $ | 16,090 | $ | (2,193 | ) | $ | 13,897 | 20 – 30 yrs | ||||||
Technology | 1,220 | (978 | ) | 242 | 1,220 | (947 | ) | 273 | 10 yrs | ||||||||||||
License agreements | 2,100 | (449 | ) | 1,651 | 2,100 | (423 | ) | 1,677 | 15 – 30 yrs | ||||||||||||
Non-compete agreements | 1,037 | (766 | ) | 271 | 1,037 | (733 | ) | 304 | 4 – 8.5 yrs | ||||||||||||
Total intangibles | $ | 20,447 | $ | (4,522 | ) | $ | 15,925 | $ | 20,447 | $ | (4,296 | ) | $ | 16,151 |
June 2023 | September 2022 | |||||||||||||||||||||||||
Cost | Accumulated Amortization | Net Value | Cost | Accumulated Amortization | Net Value | Economic Life | ||||||||||||||||||||
Goodwill | $ | 37,897 | $ | — | $ | 37,897 | $ | 37,897 | $ | — | $ | 37,897 | N/A | |||||||||||||
Intangibles: | ||||||||||||||||||||||||||
Tradename/trademarks | $ | 16,000 | $ | (5,251 | ) | $ | 10,749 | $ | 16,000 | $ | (4,851 | ) | $ | 11,149 | 20 – 30 yrs | |||||||||||
Customer relationships | 7,400 | (3,768 | ) | 3,632 | 7,400 | (3,213 | ) | 4,187 | 20 yrs | |||||||||||||||||
Technology | 10,083 | (3,284 | ) | 6,799 | 10,083 | (2,610 | ) | 7473 | 10 yrs | |||||||||||||||||
License agreements | 2,100 | (1,017 | ) | 1,083 | 2,100 | (940 | ) | 1,160 | 15 – 30 yrs | |||||||||||||||||
Non-compete agreements | 1,657 | (1,656 | ) | 1 | 1,657 | (1,600 | ) | 57 | 4 – 8.5 yrs | |||||||||||||||||
Total intangibles | $ | 37,240 | $ | (14,976 | ) | $ | 22,264 | $ | 37,240 | $ | (13,214 | ) | $ | 24,026 |
Goodwill represents the acquired goodwill net of the cumulative$0.6 million impairment losses recorded in fiscal year 20112011. As of $0.6 million. TheJune 2023, the Delta Group segment assets include $18.0 million of goodwill, and the Salt Life Group segment assets include $19.9 million of goodwill.
Depending on the type of intangible asset, amortization is recorded on our financial statements is included in the branded segment.
None.
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, “outlook”, “anticipate”, “expect”, “intend”, “seek’“remain”, “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:
● | the general U.S. and international economic conditions; | |
● | the impact of the COVID-19 pandemic and government/social actions taken to contain its spread on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions; |
● | significant interruptions or disruptions within our manufacturing, distribution or other operations; |
● | deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers; |
● | the volatility and uncertainty of cotton and other raw material prices and availability; |
● | the competitive conditions in the apparel industry; |
● | our ability to predict or react to changing consumer preferences or trends; |
● | our ability to successfully open and operate new retail stores in a timely and cost-effective manner; |
● | the ability to grow, achieve synergies and realize the expected profitability of acquisitions; |
● | changes in economic, political or social stability at our offshore locations or in areas in which we, or our suppliers or vendors, operate; |
● | our ability to attract and retain key management; |
● | the volatility and uncertainty of energy, fuel and related costs; |
● | material disruptions in our information systems related to our business operations; |
● | compromises of our data security; |
● | significant changes in our effective tax rate; |
● | significant litigation in either domestic or international jurisdictions; |
● | recalls, claims and negative publicity associated with product liability issues; |
● | the ability to protect our trademarks and other intellectual property; |
● | changes in international trade regulations; |
● | our ability to comply with trade regulations; |
● | changes in employment laws or regulations or our relationship with employees; |
● | negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors; |
● | the inability of suppliers or other third-parties, including those related to transportation, to fulfill the terms of their contracts with us; | |
● | restrictions on our ability to borrow capital or service our indebtedness; |
● | interest rate fluctuations increasing our obligations under our variable rate indebtedness; |
● | the ability to raise additional capital; |
● | the impairment of acquired intangible assets; |
● | foreign currency exchange rate fluctuations; |
● | the illiquidity of our shares; and |
● | price volatility in our shares and the general volatility of the stock market. |
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is describedset forth in Part 1 under the subheading "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended September 30, 2017,2022, filed with the SEC. Any forward-looking statements in this Quarterly Report on Form 10-Q do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements are made only as of the date of this Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities laws.law.
Business Outlook
We are seeing indications of stabilizing demand in the activewear market and believe that the elevated inventory levels in the retail supply chain following last year’s heavy buying activity may be moderating. In addition, we continue to make steady progress towards a more normalized operating environment for our strong firstbusiness, with our decision last year to reduce production levels to align with the lower demand environment and purchase less price-inflated cotton proving effective in positioning Delta Apparel for improved operating results going forward.
During our third quarter results, including double-digit sales growth across allwe were able to work through much of the trailing expense impacts of our businessescurtailed production levels and pre-tax profitabilitylast year’s historically high-priced cotton flowing through our cost of sales. Our Activewear business, which houses our nearshore manufacturing platform and serves the channels hit hardest by the over-inventoried retail environment, was the most directly impacted by these unique cost-driving events. Now that we are inputting lower cotton cost in whatour inventory and running our manufacturing facilities at levels closer to capacity, we believe our Activewear business is seasonally our most challenging period, provide solid momentum as we move further into our fiscal year 2018. That momentum, coupled with our recent efforts to rationalize our business, should have us well-positioned to take advantage of opportunities wherever and whenever they may arise.
We expect to complete a significant strategic initiative before the end of our fiscal year involving the transition of our more expensive offshore production capacity into our lower cost Central American platform. This initiative, along with several other recent restructuring activities, should generate annual cost savings of up to $6 million. We also made substantial progress during the quarter facilitated bothon inventory and debt reduction initiatives intended to counteract the challenging operating environment seen in recent periods, including an approximately 20% reduction in inventory and an approximately 15% reduction in long-term debt from our most recent high points. We expect further inventory and debt reductions as we move through our fourth quarter and plan to continue to tightly manage our spending and reduce capital expenditures year-over-year.
Our Salt Life business continued to expand its direct-to-consumer footprint during the quarter, opening its 24th and 25th retail locations across the country. Salt Life’s branded retail footprint now extends across nine states including California, Texas, Alabama, Georgia, Florida, South Carolina, Delaware, New Jersey and, most recently, two locations in New York. In addition, Salt Life’s ecommerce business grew over 100% during the June quarter and achieved significant gains across key metrics including site traffic and conversion rates. Salt Life’s four new retail locations in the Northeast U.S. market are a returngreat example of our omni-channel consumer strategy and data-driven approach to retail store site selection, with ecommerce order activity in New Jersey and New York and adjacent states consistently among the most active on our site in recent periods. We expect for Salt Life’s direct-to-consumer retail and ecommerce channels to continue to expand and anticipate additional sales growth at Salt Life going forward.
Our DTG2Go business recently achieved a variety of key milestones, including the recalibration of our entire “Digital First” technology fleet, a consumer satisfaction initiative involving the rationalization of size and color offerings within our “Digital First” channel, and the launch of a proprietary online portal geared towards quick reaction programs not suited for traditional decoration platforms. The gains flowing from these initiatives and the near-term demand creation opportunities from the new portal should provide a solid foundation for improved operating results and double-digit sales growth at DTG2Go going forward. Moreover, DTG2Go is poised to further capitalize on the ongoing digital disruption in the decorated apparel market through its traditional high-growth trajectoryindustry-leading print capacity, nationwide fulfillment network, proprietary technology and processes, and vertical blank supply through Delta Direct.
With two very significant cost-driving trends now moving behind us and a streamlined cost structure in place moving ahead, Delta Apparel is in an excellent position to take advantage of favorable changes in demand as they arise across our five go-to-market channels. We expect to see steady improvement in our overall operating results as we close out our fourth quarter and move into our next fiscal year. For fiscal year 2024, we currently anticipate net sales in a range of $410 to $425 million generating operating profit margins of 3.25% to 4.25%, with gross margins sequentially increasing into the low-to-mid 20% range and improving operating profit margins beginning in the second quarter, as well as record sales and profitability. Its new production facility, which fully integrates with our Activewear business’s vertical manufacturing platform, should serve as a valuable differentiator for Art Gunrevenue growth in the digital print and fulfillment marketplace. We believe that the flexibility provided by the new facility, along with capacity expansions and new business opportunities, will enable Art Gun to continue to gain market share and further increase profitability as the year unfolds.
Results of Operations
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP") basis and, in certain limited instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further described in the sections entitled “Non-GAAP Financial Measures.”
Net sales were $106.3 million in the third quarter of fiscal 2023, a decline of 16% compared to the prior year third quarter net sales of $126.9 million. For the first nine months, net sales were $323.9 million compared to prior year period net sales of $369.3 million.
Net sales in the Delta Group segment declined 16% to $89.1 million in the third quarter of fiscal 2023 compared to $106.0 million in the prior year third quarter. Delta Direct channel sales were down from the prior year but sequentially grew 9% from the March quarter. Retail Direct and Global Brand channel sales declined primarily due to customers being overstocked. Net sales in the Delta Group segment for the first nine months of fiscal 2023 were $277.5 million, a 14% decrease from the prior year.
Net sales in the Salt Life Group segment for the third quarter of fiscal 2023 declined 18% to $17.2 million compared to $20.9 million in the prior year third quarter. Salt Life direct-to-consumer sales continued their strong growth trend with over 100% sales growth in ecommerce and 11% sales growth in the branded Salt Life stores over the prior year. This was offset by lower wholesale sales year-over-year due to sales in the prior year quarter being skewed by significant sales shifting from the March quarter to the June quarter in connection with successestransportation delays. For the first nine months of 2023, net sales were $46.5 million, up $0.5 million from the prior year's net sales of $46.0 million.
Gross margins were 13.1% for the third quarter of fiscal 2023, a decline from 24.2% in the military and strategic sporting goods channels provides good velocity in that business moving forward. Soffe’s growth was augmentedprior year third quarter driven by significantproduction curtailments to match manufacturing output with market demand as well as inflationary cotton costs (collectively "Production Curtailment & Cotton Costs"). Excluding these Production Curtailment & Cotton Costs, third quarter adjusted gross margin expansion and profitability improvement duringmargins were 22.7%. Gross margins for the quarter. Soffe has many ongoing initiativesfirst nine months were 13.5% compared to continue its growth and further bolster its top and bottom-line performance23.6% in the coming quarters. In addition, Soffe's latestprior year period, driven primarily by the Production Curtailment & Cotton Costs coupled with the impacts of the restructuring actions actions we undertook to better optimize our overall cost structure (collectively "Restructuring Costs"). Excluding the Production Curtailment & Cotton Costs and Restructuring Costs, adjusted gross margins for the first nine months were 22.7%.
The Delta Group segment gross margins were 5.9% for the third quarter of fiscal 2023 compared to 19.1% in the prior year third quarter. Excluding the Production Curtailment & Cotton Costs, adjusted gross margins were 17.4%. Gross margins for the first nine months of fiscal 2023 declined from 19.6% in the prior year to 6.5% in the current year. However, when excluding the Production Curtailment & Cotton Costs and Restructuring Costs we took earlier this year, Delta Group segment adjusted gross margins were 17.2%.
The Salt Life Group segment gross margins were 50.5% in the third quarter of fiscal 2023, an improvement of 30 basis points compared to 50.2% in the prior year third quarter resulting from a favorable mix of sales, including increased Salt Life branded retail location, recently openedstore sales. For the first nine months of fiscal year 2023, gross margins grew to 55.4% of sales from 51.6% in Jacksonville, North Carolina,
Selling, general, and administrative expenses ("SG&A") were $18.5 million in the third quarter of fiscal 2023, or 17.4% of sales, compared to $22.4 million, or 17.7% of sales, in the prior year's third quarter. The decrease in SG&A expenses of $3.9 million compared to the prior year third quarter was primarily driven by lower variable selling and distribution costs as well with military consumersas lower compensation costs. SG&A expenses for the first nine months of fiscal 2023 were $56.7 million, or 17.5% of sales, compared to $59.6 million, or 16.1% of sales, in that marketthe prior year.
Other income for the 2023 and serve as another valuable consumer touch-point2022 third fiscal quarters include profits related to our Green Valley Industrial Park equity method investment. Other income for the third fiscal quarter of 2022 also includes a valuation change in its omni-channel strategy.
Operating loss in the third quarter of fiscal 2023 was $4.5 million, or (4.2)% of sales. This is a decrease of 148.0% over the prior year 2018 were $90.3third fiscal quarter's $9.3 million of operating profit. However, excluding the Production Curtailment & Cotton Costs, third quarter adjusted operating income was $5.8 million, or 5.5% of sales. Operating income for the first nine months of fiscal 2023 declined year-over-year from $29.6 million, or 8% of sales, to an operating loss of $12.4 million, or (3.8%) of sales. However, excluding the Production Curtailment & Cotton Costs and Restructuring Costs, operating income was $20.5 million, or 6.3% of sales. For the first nine months of fiscal year 2022, operating income was $29.6 million.
The Delta Group segment experienced an operating loss of $3.6 million in the third fiscal quarter of 2023, or (4.1%) of net sales, compared to $85.3operating profit of $10.7 million, or 10.1% of net sales, in the prior year period. After adjusting forthird quarter. Excluding the $9.4 million of sales from the since-divested Junkfood business in the prior yearProduction Curtailment & Cotton Costs, third quarter first quarter sales grew 19% year-over-year. Each business unit achieved double-digit sales growth over the prior year quarter.
The Salt Life Group segment achieved operating income of $1.6 million in the since-divested Junkfood businessthird fiscal quarter of 2023, or 9.6% of net sales, compared to $3.6 million, or 17% of net sales, in the prior year quarter, such expenses were $14.2third quarter. The lower operating income was driven by lower sales volume and increased selling costs partially offset by increased gross margins as a percentage of sales. For the first nine months of fiscal 2023, operating income was $6.6 million, or 18.7%14.1% of sales, with the quarter's increase of $0.8 million primarily due to variable selling costs on significantly higher sales volumes.
Net interest expense for the reduced remaining time in the measurement period. The sales expectations for calendarthird quarters of fiscal year 2019 have been reduced from the sales expectations used in the valuation of contingent consideration at acquisition due to our current view of the retail environment. Our expectations are consistent with those at September 30, 2017.
Our effective tax rate on operations for the three-monthnine-month period ended December 30, 2017,June 2023 was (46.4%)27.0%. This tax benefit relates to stock option excess benefits as a result from our adoption of ASU 2016-09. This compares to an effective income tax rate of 27.0%17.2% for the same period in the prior year and 5.9%17.9% for the full fiscal year ended September 30, 2017.
Net loss attributable to among other things, changes in interpretations and assumptions made regarding the New Tax Legislation, guidance that may be issued and actions we may take as a result of the New Tax Legislation.
Accounts receivable were $51.0$41.7 million at June 2023, compared to $48.2 million at December 31, 2016, and $47.6$68.2 million as of September 30, 2017.2022. Days sales outstanding ("DSO") decreased from 53as of June 2023 were 36 days in the prior yearcompared to 48 days, and was in line with the 49
Net inventory as of June 2023 was $226.2 million, a decrease of $22.3 million from September 2022. The improvement in DSO frominventory value is lower than both the prior third quarter and fiscal year resultsend as a result of lower input costs impacting materials, transportation and labor combined with a decrease in units on hand.
Total net debt, including capital lease financing and cash on hand, was $166.2 million at June 2023, a decrease of $4.4 million from the since-divested Junkfood business, which carried higher DSO thanSeptember 2022. Cash on hand and availability under our other business units.
Non-GAAP Financial Measures
We provide all information required in accordance with U.S. GAAP, but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only U.S. GAAP financial measures. In an effort to provide investors with additional information regarding the Company'sour results, we also provide non-GAAP information that management believes is useful to investors. We discuss adjustedgross margins, operating income adjusted earnings per share, adjusted gross margin, adjusted selling general and administrative expensesnet income performance measures that are, for comparison purposes, adjusted to eliminate items or results stemming from discrete events. We do this because management uses these measures in evaluating the Company'sour underlying performance on a consistent basis across periods. We also believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Company'sour ongoing performance. These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the Company'sor our results as reported under U.S. GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
Reconciliation of GAAP gross margins to non-GAAP gross margins, GAAP operating income to non-GAAP operating income, and GAAP net income to non-GAAP net income are presented below. A description of the amounts excluded on a non-GAAP basis are provided in conjunction with the below information. Non-GAAP gross margin, non-GAAP operating income, and non-GAAP net income should be evaluated in light of the Company's financial statements prepared in accordance with GAAP.
Reconciliation of Gross Margin, Operating Income and Net Income to Non-GAAP Measures Adjusted Gross Margin, Adjusted Operating Income, and Adjusted Net Income
Unaudited
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | ||||||||||||||
| |||||||||||||||||
Gross Margin | $ | 13,935 | $ | 30,693 | $ | 43,768 | $ | 87,219 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 |
| - | ||||||||||||
Adjusted Gross Margin | $ | 24,181 | $ | 30,693 | $ | 73,384 | $ | 87,219 | |||||||||
Percent of Sales | 22.7% | 24.2% | 22.7% | 23.6% | |||||||||||||
Operating (Loss) Income | $ | (4,461) | $ | 9,295 | $ | (12,438) | $ | 29,553 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3,344 |
| - | ||||||||||||
Adjusted Operating Income | $ | 5,817 | $ | 9,295 | $ | 20,522 | $ | 29,553 | |||||||||
Net (Loss) Income | $ | (6,287) | $ | 6,240 | $ | (16,841) | $ | 20,023 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3.344 | - | |||||||||||||
Tax Impact | (2,775) | - | (8,950) |
| - | ||||||||||||
Adjusted Operating Income | $ | 1,216 | $ | 6,240 | $ | 7,169 | $ | 20,023 |
Reconciliation of Delta Group Segment Gross Margin and Operating Income to Delta Group Segment Adjusted Gross Margin and Adjusted Operating Income
Unaudited
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||||
June 2023 | June 2022 | June 2023 | June 2022 | ||||||||||||||
| |||||||||||||||||
Gross Margin | $ | 5,254 | $ | 20,227 | $ | 18,013 | $ | 63,470 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 |
| - | ||||||||||||
Adjusted Gross Margin | $ | 15,500 | $ | 20,227 | $ | 47,629 | $ | 63,470 | |||||||||
Percent of Sales | 17.4% | 19.1% | 17.2% | 19.6% | |||||||||||||
Operating (Loss) Income | $ | (3,621) | $ | 10,701 | $ | (10,979) | $ | 33,557 | |||||||||
Production Curtailment Costs (1) | 3,340 | - | 7,589 | - | |||||||||||||
Cotton Costs (2) | 6,906 | - | 22,027 | - | |||||||||||||
Restructuring Costs (3) | 32 | - | 3,344 |
| - | ||||||||||||
Adjusted Operating Income | $ | 6,657 | $ | 10,701 | $ | 21,981 | $ | 33,557 | |||||||||
Percent of Sales | 7.5% | 10.1% | 7.9% | 10.4% |
(1) Production Curtailment Costs consist of unabsorbed fixed costs, temporary unemployment benefit payments, and other expense items resulting from the Company's decision to reduce production levels to better align with the significantly reduced demand across the activewear industry due to high inventory levels stemming from the heavy replenishment activity following pandemic-related supply chain challenges.
(2) Cotton Costs consist of the amount of the cotton component of the Company's cost of sales in excess of the average price per pound of cotton over a recent 10-year period ($0.78 per pound) as well as a reasonable estimate of the additional cost for what the industry refers to as "basis" typically required to be purchased in connection with the delivery of cotton ($0.15 per pound). As such, Cotton Costs consist of the cotton component of the Company's cost of sales in excess of $0.93 per pound.
(3) Restructuring Costs consist of employee severance benefits paid in connection with the transition of our more expensive Mexico manufacturing capacity to our more efficient Central America manufacturing platform, employee severance benefits paid in connection of leadership restructuring, expenses incurred in connection with the closure of a legacy facility we acquired via acquisition and the absorption of the print capacity at that facility into our nationwide network of dual purpose digital print and blank garment distribution facilities, and additional cost items incurred from restructuring activities.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities resulted in cash provided of $10.8 million for the nine months ended June 2023 compared to net cash used $7.8 million and $0.5in operations of $13.4 million in the prior year period. The increase in cash provided by operating cash flows in the first three months of fiscal years 2018 and 2017, respectively. The increased use of cash from the priorcurrent year is due to increased payments to suppliers to improve timing of payments and higher receivables from our customers from the higher salesa decline in inventory compared to the prior year.year build from increased input costs and manufacturing output. This iswas partially offset partially by decreased earnings in the prior year having a larger seasonal inventory build.
Investing Cash Flows
Cash outflows for capital expenditures were $3.5 million during the first threenine months of fiscal year 2018 were $2.2 million2023 compared to $1.9$11.6 million in the same period last year. Capital expenditures in both periods primarily related to machinery and equipment, along with investments in our direct-to-consumer initiatives and information technology systems. There were $3.1 million in expenditures financed under a capital lease arrangement and
Financing Activities
During the threenine months ended December 30, 2017,June 2023, cash provided byused in financing activities was $9.0$11.7 million comparedand primarily related to $2.4 million providedrepayments of debt partially offset by financing activities for the three months ended December 31, 2016. The cash provided by our financing activities during the first three months of fiscal year 2018 was useddebt drawdowns to fund our operating activities, as well as share repurchases.
Future Liquidity and Capital Resources
See Note F – Debt to the Condensed Consolidated Financial Statements for discussion of our operations and funds available undervarious financing arrangements, including the terms of our revolving U.S. credit facility.
Our credit facility, should be sufficientas well as cash flows from operations, are intended to service our debt payment requirements, to satisfyfund our day-to-day working capital needs, and along with capital lease financing arrangements, to fund our planned capital expenditures. AnyHowever, any material deterioration in our results of operations, however, 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. Moreover, our credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified in our U.S. credit agreement, our fixed charge coverage ratio (FCCR) for the preceding 12-month period must not be less than 1.1 to 1.0. While ourOur availability at December 30, 2017,June 2023 was above the applicable minimum thresholds specified in our credit agreement, a significant deteriorationand we were in compliance with the applicable EBITDA covenant minimum thresholds.
We currently believe that our results of operations should be sufficient to allow us to satisfy our liquidity needs and comply with the covenants in our business could causeU.S. revolving credit facility. Our ability to satisfy our availabilityliquidity needs and meet the covenants in our U.S. revolving credit facility is dependent upon our ability to fall below such thresholds, thereby requiring us to maintainachieve operating results that reflect improvement over our results for the nine months ended June 2023. Although we are currently in compliance with the applicable EBITDA covenant in our U.S. revolving credit facility as of June 2023, the minimum FCCR specifiedthresholds applicable to that covenant increase in the coming quarter. Means for improving our credit agreement.
Share Repurchase Program
We did not purchase any shares under our previously announced share repurchase program in the June 2023 quarter. The total amount repurchased during the life of our common stock for an aggregate amountthe program is $56.4 million. At the end of $3.0 million (see Note N-Repurchasethe third quarter of Common Stock). As of December 30, 2017, there was $8.3fiscal 2023, we had $3.6 million of remaining repurchase authorization remainingcapacity under our Stock Repurchase Program. We evaluate current leverage, working capital requirements, our free cash flow outlook, stock valuation and future business opportunities to determine when we believe the repurchaseexisting authorization.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and the accounting for income taxes.
A detailed discussion of critical accounting policies is contained in the Significant Accounting Policies included in Note 2 to the Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2022, and there have been no changes in those policies since the filing of that Annual Report on Form 10-K with the SEC.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions and solid waste disposal. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our 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 lawsstandards or other regulatory matters will have a material adverse affecteffect 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 material compliance with all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to
Controls and Procedures Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to reasonably assure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s requirements. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Our management, with the participation of our Chief Executive Officer and Changes in Internal Control Over Financial Reporting There OTHER INFORMATION Legal Proceedings See Note M—Legal Proceedings, in Part I, Item 1, which is incorporated herein by reference. Risk Factors None Unregistered Sales of Equity Securities and Use of Proceeds (c) Repurchases of Common Stock See Note N—Repurchase of Common Stock, Part I, in Item 1, which is incorporated herein by reference. Other Information Amendment to Delta Apparel, Inc. 2020 Stock Plan to Include "Double Trigger" Vesting Provisions On August 2, 2023 (“Effective Date”), the Board of The Amendment essentially operates to add “double trigger” vesting provisions to the Plan in the event of The foregoing summary of the Amendment does not purport to be complete and is qualified in its entirety by reference to the text of the Amendment, which Exhibits Exhibits 31.1 31.2 32.1 32.2 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase 101.LAB Inline XBRL Taxonomy Extension Label Linkbase 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DELTA APPAREL, INC. (Registrant) Date August 9, 2023 By: /s/ Nancy P. Bubanich |