Table of Contents

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended December 28, 2019January 2, 2021

OR

 

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

 

For the transition period from                     to                     

 

Commission File Number 1-15583

 

DELTA APPAREL, INC.


(Exact name of registrant as specified in its charter)

 

GEORGIAGeorgia

 

58-2508794

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

322 South Main Street

 

 

Greenville, SC

 

29601

(Address of principal executive offices)

 

(Zip Code)

 

(864) 232-5200

 


(Registrant’s telephone number, including area code)

 


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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01

DLA

NYSE American

 

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

 

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

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (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 ☐ No ☑

 

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

As of January 22, 2020,27, 2021, there were outstanding 6,988,8236,974,660 shares of the registrant’s common stock, par value of $0.01 per share, which is the only class of outstanding common or voting stock of the registrant.

 



 


 


TABLE OF CONTENTS

 

 

 

Page

PART I.

Financial Information

 

 

 

 

Item 1.

Financial Statements:Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets — December 28, 2019,2020 and September 28, 2019 (unaudited)2020

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three months ended December 28, 2019,2020 and December 29, 2018 (unaudited)2019

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) — Three months ended December 28, 2019,2020 and December 29, 2018 (unaudited)2019

5

 

 

 

 

Condensed Consolidated Statements of Shareholders' Equity — Three months ended December 28, 2019,2020 and December 29, 2018 (unaudited)2019

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Three months ended December 28, 2019,2020 and December 29, 2018 (unaudited)2019

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

Note A—Basis of Presentation and Description of Business

8

 Note B—Accounting Policies8
 Note C—New Accounting Standards8
 Note D—Revenue Recognition9
 Note E—Inventories9
 Note F—Debt910
 Note G—LeasesSelling, General and Administrative Expense10
 Note H—Selling, General and Administrative ExpenseStock-Based Compensation1110
 Note I—Stock-Based CompensationPurchase Contracts1110
 Note J—Purchase ContractsBusiness Segments11
 Note K—Business SegmentsIncome Taxes1211
 Note L—Income TaxesDerivatives and Fair Value Measurements12
 Note M—Derivatives and Fair Value MeasurementsLegal Proceedings1312
 Note N—Legal ProceedingsRepurchase of Common Stock13
 Note O—Repurchase of Common StockGoodwill and Intangible Assets1413
 Note P—Goodwill and Intangible Assets14
Note Q—Subsequent Events1413
   

Item 2.

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

1514

   

Item 4.

Controls and Procedures

1815

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

1815

 

 

 

Item 1A.Risk Factors1815
   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

1815

 

 

 

Item 5.

Other Information

1815

 

 

 

Item 6.

Exhibits

1815

 

 

 

Signatures

 

1916

 

Exhibits

 

 

Exhibits

EX-31.1

 

EX-31.1EX-31.2

 

EX-31.2EX-32.1

 

EX-32.1EX-32.2

 

EX-32.2

 

 


 

 

PART 1.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

 

December 28,

  

September 28,

 
 

2019

  

2019

  

December 2020

 

September 2020

 

Assets

             

Current Assets:

      

Cash and cash equivalents

 $433  $605  $10,255  $16,458 

Accounts receivable, less allowances of $596 and $327, respectively

  54,819   59,337 

Accounts receivable, less allowances of $854 and $684, respectively

 62,592  60,146 

Other receivables

  658   1,550  1,054  854 
Income tax receivable 1,180 983 

Inventories, net

  197,315   179,107  148,521  145,515 

Prepaid expenses and other current assets

  3,698   2,999   3,609   2,812 

Total current assets

  256,923   243,598  227,211  226,768 
         

Property, plant and equipment, net of accumulated depreciation of $84,285 and $81,807, respectively

  61,255   61,404 

Property, plant and equipment, net of accumulated depreciation of $93,283 and $92,123, respectively

 67,779  63,950 

Goodwill

  37,897   37,897  37,897  37,897 

Intangible assets, net

  21,155   21,607 

Intangibles, net

 19,555  19,948 

Deferred income taxes

  1,514   1,514  3,313  4,052 

Operating lease assets

  41,996     52,171  54,645 

Equity method investment

  10,689   10,388  10,462  10,573 

Other assets

  2,584   1,580   2,233   2,398 

Total assets

 $434,013  $377,988  $420,621  $420,231 
         

Liabilities and Equity

             

Current liabilities:

             

Accounts payable

 $57,291  $52,320  $55,023  $49,800 

Accrued expenses

  16,798   20,791  18,130  20,174 

Current portion of contingent consideration

  2,700   2,790 
Income taxes payable  383 379 

Current portion of finance leases

  6,822   6,434  6,915  6,956 
Current portion of operating leases  8,497     8,892 9,039 

Current portion of long-term debt

  7,337   6,540  7,112  7,559 

Current portion of contingent consideration

  0   2,120 

Total current liabilities

  99,445   88,875  96,455  96,027 
         

Long-term income taxes payable

  3,875   3,977  3,599  3,599 

Long-term contingent consideration

  5,970   6,304 

Long-term finance leases, less current maturities

  12,734   12,836  13,409  11,328 

Long-term operating leases, less current maturities

  34,430     44,522  46,570 

Long-term debt, less current maturities

  120,468   109,296  112,595  112,782 

Deferred income taxes

  1,561   1,519 

Long-term contingent consideration

 4,310  4,300 

Other non-current liabilities

  1,119   1,293   2,534   2,939 

Total liabilities

 $279,602  $224,100  $277,424  $277,545 
         

Shareholders’ equity:

        

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

      

Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares issued, and 6,988,823 and 6,921,417 shares outstanding as of December 28, 2019, and September 28, 2019, respectively

  96   96 

Shareholder's equity:

     

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

 0  0 

Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,974,660 and 6,890,118 shares outstanding as of December 2020 and September 2020, respectively

 96  96 

Additional paid-in capital

  58,825   59,855  59,564  61,005 

Retained earnings

  137,860   136,937  127,447  126,564 

Accumulated other comprehensive loss

  (838)  (969) (1,197) (1,322)

Treasury stock —2,658,149 and 2,725,555 shares as of December 28, 2019, and September 28, 2019, respectively

  (41,119)  (41,750)

Treasury stock - 2,672,312 and 2,756,854 shares as of December 2020, and September 2020, respectively

  (42,149)  (43,133)

Equity attributable to Delta Apparel, Inc.

  154,824   154,169  143,761  143,210 

Equity attributable to non-controlling interest

  (413)  (281)  (564)  (524)

Total equity

  154,411   153,888   143,197   142,686 

Total liabilities and equity

 $434,013  $377,988  $420,621  $420,231 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 


3

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations 

(Amounts in thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

  

Three Months Ended

 
 

December 28,

  

December 29,

  

December 2020

  

December 2019

 
 

2019

  

2018

  

Net sales

 $95,889  $101,675  $94,723  $95,889 

Cost of goods sold

  75,996   83,105   74,434   75,996 

Gross profit

  19,893   18,570  20,289  19,893 
         

Selling, general and administrative expenses

  18,073   16,784  16,030  18,073 

Other (income) expense, net

  (817)  1,745 

Other loss (income), net

  1,190   (817)

Operating income

  2,637   41  3,069  2,637 
         

Interest expense, net

  1,802   1,765   1,654   1,802 

Earnings (loss) before provision for (benefit from) income taxes

  835   (1,724)

Provision for (benefit from) income taxes

  44   (499)

Consolidated net income (loss)

  791   (1,225)

Less: Net loss attributable to non-controlling interest

  (132)  (76)

Net earnings (loss) attributable to shareholders

 $923  $(1,149)

Earnings before provision for income taxes

 1,415  835 

Provision for income taxes

  572   44 

Consolidated net earnings

 843  791 

Net loss attributable to non-controlling interest

  40   132 

Net earnings attributable to shareholders

 $883  $923 
         

Basic earnings (loss) per share

 $0.13  $(0.17)

Diluted earnings (loss) per share

 $0.13  $(0.17)

Basic earnings per share

 $0.13  $0.13 

Diluted earnings per share

 $0.13  $0.13 
         

Weighted average number of shares outstanding

  6,950   6,924  6,920  6,950 

Dilutive effect of stock awards

  122      80   122 

Weighted average number of shares assuming dilution

  7,072   6,924   7,000   7,072 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 


4

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

(Unaudited)

 

  

Three Months Ended

 
  

December 28,

  

December 29,

 
  

2019

  

2018

 

Net earnings (loss) attributable to shareholders

 $923  $(1,149)
Other comprehensive income (loss) related to unrealized gain (loss) on derivatives, net of income tax  131   (373)

Consolidated comprehensive income (loss)

 $1,054  $(1,522)
  

Three Months Ended

 
  

December 2020

  

December 2019

 
         

Net earnings attributable to shareholders

 $883  $923 

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

  125   131 

Consolidated comprehensive income

 $1,008  $1,054 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 


5

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

(Unaudited)

 

                  

Accumulated

                 
          

Additional

      

Other

          

Non-

     
  

Common Stock

  

Paid-In

  

Retained

  

Comprehensive

  

Treasury Stock

  

Controlling

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Interest

  

Total

 

Balance at September 29, 2018

  9,646,972  $96  $61,979  $128,695  $136   2,737,526  $(40,881) $93  $150,118 

Net loss

           (1,149)              (1,149)

Other comprehensive loss

              (373)           (373)

Net loss attributable to non-controlling interest

                       (76)  (76)

Vested stock awards

        (3,983)        (153,472)  1,867      (2,116)

Stock based compensation

        662                  662 

Purchase of common stock

                 92,148   (1,711)     (1,711)

Balance at December 29, 2018

  9,646,972  $96  $58,658  $127,546  $(237)  2,676,202  $(40,725) $17  $145,355 

                 

Accumulated

                              

Accumulated

            
         

Additional

      

Other

          

Non-

            

Additional

    

Other

       

Non-

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

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Interest

  

Total

  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Interest

  

Total

 

Balance at September 28, 2019

  9,646,972  $96  $59,855  $136,937  $(969)  2,725,555  $(41,750) $(281) $153,888 

Balance as of September 2019

 9,646,972  $96  $59,855  $136,937  $(969) 2,725,555  $(41,750) $(281) $153,888 
                   

Net earnings

           923               923  -  0  0  923  0  -  0  0  923 

Other comprehensive income

              131            131  -  0  0  0  131  -  0  0  131 

Net loss attributable to non-controlling interest

                       (132)  (132) -  0  0  0  0  -  0  (132) (132)

Vested stock awards

        (1,615)        (67,406)  631      (984) 0  0  (1,615) 0  0  (67,406) 631  0  (984)

Stock based compensation

        585                  585   -   0   585   0   0   -   0   0   585 

Balance at December 28, 2019

  9,646,972  $96  $58,825  $137,860  $(838)  2,658,149  $(41,119) $(413) $154,411 
Balance as of December 2019  9,646,972 $96 $58,825 $137,860 $(838)  2,658,149 $(41,119) $(413) $154,411 
                   
         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 2020  9,646,972 $96 $61,005 $126,564 $(1,322)  2,756,854 $(43,133) $(524) $142,686 
                   
Net earnings -  0  0  883  0  -  0  0  883 
Other comprehensive income - 0 0 0 125 - 0 0 125 
Net loss attributable to non-controlling interest - 0 0 0 0 - 0 (40) (40)
Vested stock awards 0 0 (2,117) 0 0 (84,542) 984 0 (1,133)
Stock based compensation  -  0  676  0  0  -  0  0  676 
Balance as of December 2020  9,646,972  $96  $59,564  $127,447  $(1,197)  2,672,312  $(42,149) $(564) $143,197 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 


6

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

 

Three Months Ended

 
 

December 28,

  

December 29,

  

Three Months Ended

 
 

2019

  

2018

  

December 2020

  

December 2019

 

Operating activities:

         

Consolidated net earnings (loss)

 $791  $(1,225)

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

        
Consolidated net earnings $843  $791 

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

 

Depreciation and amortization

  3,161   2,919  3,368  3,161 

Amortization of deferred financing fees

  73   78  81  73 

Benefit from deferred income taxes

     (278)
Provision for inventory market reserves (405) (385)

Provision for deferred income taxes

 740  0 

Non-cash stock compensation

  601   662  676  601 

Loss (gain) on disposal of equipment

 30  (37)

Other, net

  (725)  (679) (200) (725)

Gain on disposal of equipment

  (37)   

Changes in operating assets and liabilities, net of effect of acquisition:

        

Changes in operating assets and liabilities:

 

Accounts receivable, net

  5,410   (8,794) (2,598) 5,410 

Inventories, net

  (18,208)  (11,543) (2,601) (17,823)

Prepaid expenses and other assets

  70   (504)

Prepaid expenses and other current assets

 (797) 70 

Other non-current assets

  (1,004)  (17) 394  (1,004)

Accounts payable

  7,985   13,615  387  7,985 

Accrued expenses

  (3,920)  2,055  (2,044) (3,920)

Change in net operating lease liabilities

  931    
Net operating lease liabilities 279  931 

Income taxes

  16   (377) (193) 16 

Other liabilities

  (1)  122   (447)  (1)

Net cash used in operating activities

  (4,857)  (3,966)  (2,487)  (4,857)
        

Investing activities:

         

Purchases of property and equipment, net

  (3,747)  (989) (408) (3,747)
Proceeds from equipment under financed leases 2,312 0 

Proceeds from sale of equipment

 196  0 

Cash paid for business

  (828)  (2,000)  (838)  (828)

Net cash used in investing activities

  (4,575)  (2,989)
        

Net cash provided by (used in) investing activities

  1,262   (4,575)

Financing activities:

         

Proceeds from long-term debt

  117,763   114,934  112,506  117,763 

Repayment of long-term debt

  (105,211)  (102,896) (112,557) (105,211)

Repayment of capital financing

  (1,259)  (1,158) (1,684) (1,259)

Payment of deferred financing fees

  (1,079)   

Repurchase of common stock

     (1,714)
Payment of contingent consideration (2,110) 0 

Payment of deferred financing costs

 0  (1,079)

Payment of withholding taxes on stock awards

  (954)  (2,113)  (1,133)  (954)

Net cash provided by financing activities

  9,260   7,053 

Net (decrease) increase in cash and cash equivalents

  (172)  98 

Net cash (used in) provided by financing activities

  (4,978)  9,260 
Net decrease in cash and cash equivalents (6,203) (172)

Cash and cash equivalents at beginning of period

  605   460   16,458   605 

Cash and cash equivalents at end of period

 $433  $558  $10,255  $433 
         
Supplemental cash flow information 
Finance lease assets exchanged for finance lease liabilities $3,976 $3,037 
Operating lease assets exchanged for operating lease liabilities $0 $531 
         
 
 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 


7

 

Delta Apparel, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

Note A— Description of Business and Basis of Presentation and Description of Business

We prepared the accompanying interim Condensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month period ended December 28, 2019, are not necessarily indicative of the results that may be expected for our fiscal year ending October 3, 2020. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. For more information regarding our results of operations and financial position, refer to the Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal year ended September 28, 2019, filed with the United States Securities and Exchange Commission (“SEC”).

 

Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 8,5007,700 employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, COAST®, Soffe®, and Delta. We are a market leader in the direct-to-garmenton-demand, digital print and fulfillment industry, bringing DTG2GoDTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military, and through our business-to-business ecommerce sites.digital platform. Our products are also made available direct-to-consumer on our websitesecommerce sites and in our branded retail stores. ThisOur diversified distribution model allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

 

We design and internally manufacture the majority of our products. More than 90% of the apparel unitsgarments that we sell are sewn in our owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers.

We were incorporated in Georgia in 1999, and our headquarters is located in Greenville, South Carolina. We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our common stock trades on the NYSE American under the symbol “DLA."

We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30.  Our 20202021 fiscal year is a 53-week52-week year and will end on October 3, 2020.2, 2021, ("fiscal 2021"). Accordingly, this Form 10-Q presents our first quarter of fiscal 2021. Our 20192020 fiscal year was a 52-week53-week year and ended on October 3, 2020, ("fiscal 2020").  For presentation purposes herein, all references to periods ended December 2020 and December 2019 relate to the fiscal periods ended on January 2, 2021, and December 28, 2019, respectively.  References to September 28, 2019.2020 and September 2021 relate to information as of October 3, 2020 and October 2, 2021, respectively.

We prepared the accompanying interim Condensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month periods ended December 2020 are not necessarily indicative of the results that may be expected for our fiscal year ending September 2021. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal year ended September 2020, filed with the United States Securities and Exchange Commission (“SEC”).

Our Condensed Consolidated Financial Statements include the accounts of Delta Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries. We apply the equity method of accounting for our investment in 31% of the outstanding capital stock of a Honduran company. During the December 2020 quarter, we received dividends from the investment of $0.3 million. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with this Honduran company. During the December 2020 quarter, we paid approximately $0.8 million under this arrangement which included repayment of rent deferrals related to the June 2020 quarter. Payments of approximately $0.4 million were made during the December 2019 quarter.

 

We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not part of this, or any other, report that we file with, or furnish to, the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 322 South Main Street, Greenville, South Carolina 29601. Requests can also be made by telephone to 864-232-5200,864-232-5200, or via email at investor.relations@deltaapparel.com.

 

 

Note B—Accounting Policies

 

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K10-K for the fiscal year ended September 28, 2019,2020, filed with the SEC. See Note C for consideration of recently issued accounting standards.

 

 

Note C—New Accounting Standards

 

Recently Adopted Standards

 

In August 2017, 2018, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU"), No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, ("ASU 2017-12"). The amendments in ASU 2017-12 apply to any entity that elects to apply hedge accounting in accordance with U.S. GAAP. ASU 2017-12 permits more flexibility in hedging interest rate risk for both variable rate and fixed rate financial instruments, and the ability to hedge risk components for nonfinancial hedges. In addition, this ASU requires an entity to present the earnings effect of hedging the instrument in the same income statement line in which the earnings effect of the hedge item is reported. In addition, companies no longer need to separately measure and report hedge ineffectiveness and can use an amortization approach or continue with mark-to-market accounting. We adopted ASU 2017-12 as of September 29, 2019. The provisions of ASU 2017-12 did not have a material effect on our financial condition, results of operations, cash flows or disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles 2018- Goodwill and other (Topic 350), Simplifying the Test for Goodwill Impairment, ("ASU 2017-04"). To simplify the subsequent measurement of goodwill, ASU 2017-04 eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. We early adopted ASU 2017-04 as of September 29, 2019. The provisions of ASU 2017-04 did not have a material effect on our financial condition, results of operations, cash flows or disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to include most leases on the balance sheet as lease liabilities with an associated right-of-use ("ROU") asset. Since the issuance of ASU 2016-02, the FASB released several amendments to improve and clarify the implementation guidance, as well as to change the allowable adoption methods. These standards have been collectively codified within ASC 842, Leases (“ASC 842”). We adopted ASC 842 using the modified retrospective method and applied the standard to all leases existing as of September 29, 2019. Information for prior years presented has not been restated and continues to reflect the authoritative accounting standards in effect for those periods. We elected the package of transition practical expedients that allows us to carryforward our historical assessments of whether existing contracts contain leases, determinations of lease classification, and treatments of initial direct costs. As of September 29, 2019, we recognized total operating lease liabilities of $44.6 million in our Consolidated Balance Sheets, of which $36.1 million was recorded within Long-term operating leases, less current maturities and $8.5 million was recorded within Current portion of operating leases. We additionally derecognized $0.8 million of previously recorded net deferred rent balances and recorded operating lease ROU assets of $43.8 million related to our operating leases, which are reflected within Operating lease assets in our Consolidated Balance Sheets. The adoption of the new leasing standard had no significant impact on covenants or other provisions of our secured credit facility.


Standards Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15,15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”2018-15”), which will requirerequires customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs will beare required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. We adopted ASU 2018-152018-15 prospectively as of the beginning of fiscal 2021, and the provisions did not have a material effect on our financial condition, results of operations, cash flows, or disclosures.

Standards Not Yet Adopted

In December 2019, the FASB issued ASU No.2019-12,Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification ("ASC") 740,Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those annual periods. ASU 2018-15 will therefore be effective for us as of October 4, 2020 including the interim periods withinbeginning of our fiscal year 2021 annual period. The2022. Most amendments within the standard allows changesare required to be applied either retrospectivelyon a prospective basis, while certain amendments must be applied on a retrospective or prospectively.modified retrospective basis. We are currently evaluating the effect thatimpacts of the provisions of ASU 2018-15 will have2019-12 on our financial statementscondition, results of operations, cash flows, and related disclosures.

 

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

8

 Note D—Revenue Recognition

We only recognize revenue to the extent that it is probable that we will not recognize a significant reversal of revenue when the uncertainties related to the variability are ultimately resolved. In determining our estimates for discounts, allowances, chargebacks, and returns, we consider historical and current trends, agreements with our customers and retailer performance. We record these discounts, returns and allowances as a reduction to net sales in our Condensed Consolidated Statements of Operations and as a refund liability in our accrued expenses in our Condensed Consolidated Balance Sheets, with the estimated value of inventory expected to be returned in prepaid and other current assets in our Condensed Consolidated Balance Sheets. As of December 28, 2019, and September 28, 2019, there was $1.1 million and $1.0 million, respectively, in refund liabilities for customer returns, allowances, markdowns and discounts within accrued expenses.

 

Our revenue streams consist of wholesale,retail stores, direct-to-consumer ecommerce, and retail storeswholesale channels which are included in our Condensed Consolidated Statements of Operations. The table below identifies the amount and percentage of net sales by distribution channel (in thousands):

 

 

Three Months Ended

  

Three Months Ended

 
 

December 28, 2019

  

December 29, 2018

  

December 2020

 

December 2019

 
 

$

 

%

  

$

 

%

  $ 

%

 $ 

%

 

Retail

 

$

1,234

 

1

%

 

$

1,012

 

1

%

 $2,438  3% $1,234  1%

Direct-to-consumer ecommerce

 

1,683

 

2

%

 

1,582

 

2

%

 1,809  2% 1,683  2%

Wholesale

  

92,972

 

97

%

  

99,081

 

97

%

  90,476  95%  92,972  97%

Net Sales

 

$

95,889

 

100

%

 

$

101,675

 

100

%

Net sales

 $94,723  100% $95,889  100%

 

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

 

 

First Quarter Fiscal Year 2020

 
      

Direct-to-Consumer

     

December 2020 Quarter

 
 

Net Sales

 

Retail

  

ecommerce

  

Wholesale

  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 

$

88,950

 

0.3

%

  

0.3

%

  

99.4

%

 $87,624  0.2% 0.4% 99.4%

Salt Life Group

  

6,939

 

13.5

%

  

20.7

%

  

65.8

%

  7,099  31.4% 21.1% 47.5%

Total

 

$

95,889

            $94,723          

 

 

First Quarter Fiscal Year 2019

 
      Direct-to-Consumer     

December 2019 Quarter

 
 

Net Sales

 

Retail

  

ecommerce

  

Wholesale

  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 

$

94,391

 

0.4

%

  

0.4

%

  

99.2

%

 $88,950  0.3% 0.3% 99.4%

Salt Life Group

  

7,284

 

9.3

%

  

17.2

%

  

73.5

%

  6,939  13.5% 20.7% 65.8%

Total

 

$

101,675

            $95,889          

 

 

 

Note E—Inventories

 

Inventories, net of reserves of $9.7$14.6 million and $10.0$15.0 million, as of December 28, 2019, 2020 and September 28, 2019, 2020, respectively, consisted of the following (in thousands):

 

        
 

December 28, 2019

  

September 28, 2019

  

December 2020

 

September 2020

 

Raw materials

 $12,990  $12,022  $15,047  $13,571 

Work in process

  15,811   17,765  12,415  13,984 

Finished goods

  168,514   149,320   121,059   117,960 
 $197,315  $179,107  $148,521  $145,515 

 

Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and direct embellishment materials for the Salt Life Group.

 

9

 

Note F—Debt

 

Credit Facility

 

On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (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 DTG2Go, LLC (f/k/a Art Gun, LLC) (collectively, the "Borrowers"), are co-borrowers under the Amended Credit Agreement. The Borrowers entered into amendments to Thethe Amended Credit Agreement with Wells Fargo and the other lenders on November 27, 2017, March 9, 2018, and October 8, 2018.

On 2018, November 19, 2019, the Borrowers entered into a Consent April 27, 2020, and Fourth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the "Fourth Amendment"). The Fourth Amendment, among other things, (i) increased the borrowing capacity under the Amended Credit Agreement from $145.0 million to $170.0 million (subject to borrowing base limitations), (ii) extended the maturity date from May 21, 2021 to November 19, 2024, (iii) reduced pricing on the revolver and first-in last-out "FILO" borrowing components by 25 basis points, and (iv) added 25% of the fair value of eligible intellectual property to the borrowing base calculation. In addition, the Fourth Amendment amended the definition of Fixed Charge Coverage Ratio to exclude up to $10.0 million of capital expenditures incurred by the Borrowers in connection with the expansion of their distribution facility located within the Town of Clinton, Anderson County, Tennessee.August 28, 2020.

 

The Amended Credit Agreement allows us to borrow up to $170.0$170 million (subject to borrowing base limitations), including a maximum of $25.0$25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit to $200.0$200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in ASC 470,Debt ("ASC 470")) whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. We classify borrowings under the Amended Credit Agreement as long-term debt with consideration of current maturities.


 

As of December 28, 2019, there was $115.02020, we had $107.1 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.9% and additional borrowing3.4%. Our cash on hand combined with the availability of $38.3 million. Thisunder the U.S. credit facility includes a financial covenant requiring that if the amount of availability falls below the threshold amounts set forth in the Amended Credit Agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in the Amended Credit Agreement) for the preceding 12-month period must not be less than 1.1 to 1.0. We were not subject to the FCCR covenant at totaled $43.7 million. At December 28, 2019, because our availability was above the minimum required under the Amended Credit Agreement, but we would have satisfied our financial covenant had we been subject to it. At December 28, 2019, 2020 and September 28, 2019, 2020 there was $16.6$9.2 million and $16.1$8.8 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

 

The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB Codification No. 470, Debt ("ASC 470")) whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the Amended Credit Agreement as long-term debt.

Promissory Note

 

On October 8, 2018, we acquired substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. In conjunction with the acquisition, we issued a promissory note in the principal amount of $7.0 million. The promissory note bears interest at 6% with quarterly installments which began January 2, 2019, with the final installment due October 1, 2021. As of December 28, 2019, 2020 there was $4.7$2.3 million outstanding on the promissory note.

 

Honduran Debt

 

Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance both the operations and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with five-year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances of $1.1 million and $9.5 million, respectively. Each of these new loans is secured by a first-priorityfirst-priority lien on the assets of our Honduran operations and is not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. 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 been classified as long-term debt.

Additional information about these loans and the outstanding balances as of December 28, 2019, 2020 is as follows (in thousands):

 

  

December 28,

 
  

2019

 

Revolving credit facility established March 2011, interest at 6.3% expiring August 2025

 $5,000 

Term loan established November 2014, interest at 6.0%, payable monthly with a six-year term

  650 

Term loan established June 2016, interest at 6.0%, payable monthly with a six-year term

  703 

Term loan established October 2017, interest at 6.0%, payable monthly with a six-year term

  1,687 
    
  

December 2020

 

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

 $1,000 

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

  9,128 

 

 

 

Note G—Leases

We lease property and equipment under operating lease arrangements, most of which relate to distribution centers and manufacturing facilities in the U.S., Honduras, El Salvador, and Mexico. We also lease machinery and equipment under finance lease arrangements in the U.S. We include both the contractual term as well as any renewal option that we are reasonably certain to exercise in the determination of our lease terms. For leases with a term of greater than 12 months, we value lease liabilities and the related assets as the present value of the lease payments over the related term. We apply the short-term lease exception to leases with a term of 12 months or less and exclude such leases from our Condensed Consolidated Balance Sheets. Payments related to these short-term leases are expensed on a straight-line basis over the lease term and reflected as a component of lease cost within our Condensed Consolidated Statements of Comprehensive Income (Loss). Lease payments generally consist of fixed amounts, and variable amounts based on a market rate or an index are not material to our consolidated lease cost. Our operating lease agreements for buildings generally include provisions for the payment of our proportional share of operating costs, property taxes, and other variable payments. These incremental payments are excluded from our calculation of operating lease liabilities and right of use assets. We have elected to use the practical expedient present in ASC 842 to not separate lease and non-lease components for all significant underlying asset classes and instead account for them together as a single lease component in the measurement of our lease liabilities.

Generally, the rate implicit in our operating leases is not readily determinable. Therefore, we discount future lease payments using our estimated incremental borrowing rate at lease commencement. We determine this rate based on a credit-adjusted risk-free rate, which approximates a secured rate over the lease term. The weighted average discount rate for operating leases as of December 28, 2019, was 4.2%. We discount our finance lease payments based on the rate implicit and stated in the lease. The weighted average discount rate for finance leases as of December 28, 2019, was 5.2%.

The following table presents the future undiscounted payments due on our operating and finance lease liabilities as well as a reconciliation of those payments to our operating and finance lease liabilities, recorded as of December 28, 2019 (in thousands):

  

Operating

  

Finance

 
  

Leases

  

Leases

 

2020

 $

7,740

  $5,758 

2021

  8,616   6,384 

2022

  7,260   4,176 

2023

  5,526   3,164 

2024

  4,355   1,666 

Thereafter

  15,937   - 

Undiscounted fixed lease payments

 $49,434  $21,148 

Discount due to interest

  (6,507)  

(1,592)

 
Total lease liabilities $42,927  $19,556 

Less current maturities

  (8,497)  (6,822)

Lease liabilities, excluding current maturities

 $34,430  $12,734 

 

As of December 28, 2019, we have entered into certain operating leases that have not yet commenced and which will result in annual fixed lease payments that range from $1.0 million to $1.3 million for a 10-year period.

Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with a Honduran company, of which we own 31% of the outstanding capital stock of the lessor at December 28, 2019. During the three-months ended December 28, 2019, and December 29, 2018, we paid approximately $0.4 million in lease payments under this arrangement.

As of December 28, 2019, we recorded $42.0 million of operating lease ROU assets, which were reflected within Operating lease assets in our Condensed Consolidated Balance Sheets, and $23.9 million of finance lease ROU assets, which were reflected within Property, plant, and equipment, net in our Condensed Consolidated Balance Sheets.

The weighted average remaining lease terms for our operating leases and finance leases were approximately 7 years and 4 years, respectively, as of December 28, 2019.


The components of total lease cost were as follows for the three months ended December 28, 2019, (in thousands):

Operating lease cost

 $2,750 

Finance leases - amortization of ROU assets

  768 

Finance leases - interest

  235 

Variable lease costs

  410 

Total lease cost

 $4,163 

Total rent expense recognized during the three months ended December 29, 2018, prior to the adoption of ASC 842, was $0.3 million.

Operating cash outflows for operating lease payments during the three months ended December 28, 2019, was $2.6 million.  Financing cash outflows for finance lease payments during the three months ended December 28, 2019, was $1.5 million.  Operating cash outflows for interest payments for finance leases during the three months ended December 28, 2019, was $0.2 million.

ROU assets obtained in exchange for operating lease and finance lease liabilities during the three months ended December 28, 2019, were $0.5 million and $1.8 million, respectively. During the three-month period ended December 29, 2018, ROU assets obtained for finance lease liabilities were $4.6 million.

We do not have significant leasing transactions in which we are the lessor.

Note H—G—Selling, General and Administrative Expense

 

We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled $4.9$5.2 million and $4.2$4.9 million for the three-month periods ended December 28, 2019, 2020 and December 29, 2018,2019 quarters, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses and other general and administrative expenses.

 

 

Note I—H—Stock-Based Compensation

 

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. February 4, 2015 and was scheduled to expire by its terms on September 14, 2020. The re-approval2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of the 20102020 Stock Plan including the material terms of the performance goals included in the 2010 Stock Plan, enabled usis to continue to grant equity incentive compensationgive our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards that are structured in a manner intendeddesigned to qualify as tax deductible, performance-based compensation under Section 162(m) ofenhance the Internal Revenue Code of 1986, as applicable.  Recently enacted tax legislation in 2017 changed several conclusions under Section 162(m), including that there will no longer be a performance-based compensation exemption,Company’s long-term success by encouraging stock ownership among its executives, key employees and the Chief Financial Officer position is now included in the applicable calculation along with the next three highest-paid officers.  This reform impacted taxes related to fiscal years 2020 and 2019.

Since November 2010, no additional awards have been or will be granted under either the Delta Apparel Stock Option Plan ("Option Plan") or the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stock awards have been granted under the 2010 Stock Plan.

Shares are generally issued from treasury stock upon exercise of the options or the vesting of the restricted stock units, performance units or other awards under the 2010 Stock Plan.

Compensation expense is recorded on the SG&A expense line item in our Condensed Consolidated Statements of Operations over the vesting periods. During the three-month periods ended December 28, 2019, and December 29, 2018, we recognized $0.9 million and $0.6 million, respectively, in stock-based compensation expense.

2010 Stock Plan

directors. Under the 20102020 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted, and the size and type of each award and manner in which such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards. The aggregate number of shares of common stock that may be delivered under the 2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the Option Plan or Award Plan that are subsequently forfeited or terminated for any reason before being exercised. The 2010 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. If a participant dies or becomes disabled (as defined in the 20102020 Stock Plan) while employed by the Company or serving as a director, all unvested awards become fully vested. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 20102020 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 20102020 Stock Plan, and to make any other determinations that it deems necessary.

During Similar to the three-month period ended December 28, 2019,2010 Stock Plan, the 2020 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. Shares are generally issued from treasury stock upon the vesting of the restricted stock units, each consistingperformance units or other awards under the 2020 Stock Plan.

Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of 60,000Operations over the vesting periods. During both the December 2020 and 2019 quarters, we recognized $0.9 million in stock-based compensation expense.  Associated with the compensation cost are income tax benefits recognized of $0.3 million and $0.4 million for the December 2020 and 2019 quarters, respectively.

During the December 2020 quarter, performance stock units and restricted stock units representing 42,000 and 74,000 shares of our common stock, were granted and are eligible to vest uponrespectively, vested with the filing of our Annual Report on Form 10-K10-K for the fiscal year ended October 2, 2021. One-half of the restricted stock units and one-half of the performance units are payable in common stock with the remainder payable in cash.

During the three-month period ended December 28, 2019, restricted stock units and performance units representing 54,750 and 78,106 shares of our common stock, respectively, vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019, and were issued in accordance with their respective agreements. One-half of the restricted stock units were paid in common stock and one-half were paid in cash. Of the performance units, 59,213 were paid in common stock and 18,893 were paid in cash.

During the three-month period ended December 29, 2018, restricted stock units and performance units representing 205,000 and 42,000 shares of our common stock, respectively, vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 29, 2018,2020, and were issued in accordance with their respective agreements. All vested awards were paid in common stock.

 

As of December 28, 2019, 2020, there was $3.6$3.2 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 1.9 years.

 

 

Note J—I—Purchase Contracts

 

We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At December 28, 2019, 2020, minimum payments under these contracts were as follows (in thousands):

 

Yarn

 $10,488  $12,878 

Finished fabric

  2,833  2,955 

Finished products

  13,261   16,420 
 $26,582  $32,253 

 


 

Note K—J—Business Segments

 

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

 

The Delta Group is comprised of our business units primarily focused on core activewear styles, and includes our DTG2Go,Delta Activewear, (encompassing our Delta Catalog and FunTees businesses), Soffe and DTG2Go business units. We are a market distributeleader in the on-demand, digital print and manufacture unembellished knitfulfillment industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. Delta Activewear is a preferred supplier of activewear apparel to the wholesale and private label markets. We offer a broad range of apparel and accessories through our catalog business under the mainDelta and Soffe brands as well as other brands that we distribute utilizing our digital platform and network of Soffe®, Delta Platinum, Delta Pro Weight®, and Delta Magnum Weight® for salefulfillment centers. In addition to a diversified audience ranging from large licensed screen printers to small independent businesses. Through our FunTeescatalog business, we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products being sold with value-added services including embellishment, hangers, hangtags, and ticketing, so that they are ready for retail sale to the end customers. We assist our customers in managing their production and inventory needs and provide technology tools to help them manage and grow their business. We sell our products to a diversified audience, including sporting goods retailers, large licensed screen printers, specialty and resort stores, and ad-specialty and promotional products businesses. We also service major branded sportswear companies, trendy regional brands, retailers, and sports-licensed apparel marketers. Our DTG2Go business is a market leader in the direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chain of our many customers. We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Utilizing its seven fulfillment facilities throughout the United States, DTG2Go offers a robust digital supply chain to ship custom graphic products within 24 to 48 hours to consumers in the United States and to over 100 countries worldwide.consumers.

 

The Salt Life Group is comprised of our lifestyle brands focused on a broad range of apparel garments, headwear and related accessories to meet consumer preferences and fashion trends, and includes our Salt Life and Coast business units. These products are sold through specialty and boutique shops, outdoor retailers and traditional department stores, and outdoor retailers, as well as direct-to-consumer through branded ecommerce sites and branded retail stores. Products in this segment are marketed under our lifestyle brands of Salt Life® and COAST®, as well as other labels.

 

Our Chief Operating Decision Maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges ("segment operating earnings"). Our segment operating income earnings may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note 2 in our Annual Report on Form 10-K10-K for the fiscal year ended September 28, 2019,2020, filed with the SEC. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands).

 

 

Three Months Ended

  

Three Months Ended

 
 

December 28, 2019

  

December 29, 2018

  

December 2020

  

December 2019

 

Segment net sales:

              

Delta Group

 $88,950  $94,391  $87,624  $88,950 

Salt Life Group

  6,939   7,284   7,099   6,939 

Total net sales

 $95,889  $101,675  $94,723  $95,889 
         

Segment operating income:

        

Segment operating income (loss):

      

Delta Group (1)

 $7,266  $2,779  $6,276  $7,266 

Salt Life Group

  (668)  277   (136)  (668)

Total segment operating income

 $6,598  $3,056  $6,140  $6,598 

 

(1)(1) In the quarter ended December 29, 2018,fiscal 2021, the Delta Group operating income included $2.5$1.3 million of expense, incurred in connection with the settlement of litigationreported within "Other loss/(income), net", related to two hurricanes that disrupted operations during the 2016 bankruptcy filing of a customer.December 2020 quarter.

 

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

 

  

Three Months Ended

 
  

December 2020

  

December 2019

 

Segment operating income

 $6,140  $6,598 

Unallocated corporate expenses

  3,071   3,961 

Unallocated interest expense

  1,654   1,802 

Consolidated earnings before provision for income taxes

 $1,415  $835 

  

Three Months Ended

 
  

December 28, 2019

  

December 29, 2018

 

Segment operating income

 $6,598  $3,056 

Unallocated corporate expenses

  3,961   3,015 

Unallocated interest expense

  1,802   1,765 

Consolidated income (loss) before provision for (benefit from) income taxes

 $835  $(1,724)

 

The Delta Group segment assets have increased by $47.0 million since September 28, 2019, to $362.7 million as of December 28, 2019, primarily as a result of the adoption of ASU 2016-02 and increases in working capital due to the seasonality of the business. The Salt Life Group segment assets have increased by $8.2 million since September 28, 2019, to $65.8 million as of December 28, 2019, primarily due to seasonal inventory build.

Note L—K—Income Taxes

 

The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted on December 22, 2017, which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings of foreign subsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section 163(j)163(j)"). GILTI is the excess of the shareholder’s net controlled foreign corporations ("CFC") net tested income over the net deemed tangible income.  GILTI income is eligible for a deduction of up to 50% of the income inclusion, but the deduction is limited to the amount of U.S. adjusted taxable income.  The Section 163(j)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, and the taxpayer’s floor plan financing interest expense for the year.income. We have included in our calculation of our effective tax rate the estimated impact of GILTI and Section 163(j) which were effective for us beginning in fiscal year 2019.163(j). We have elected to account for the tax on GILTI as a period cost and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries.

 

The Coronavirus Aid, Relief, and Economic Security (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including some provisions which were previously enacted under the New Tax Legislation. The CARES Act revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income. We have included the estimated impact of these provisions in our effective tax rate calculation.

Our effective income tax rate on operations for the three-month period ended December 28, 2019,2020 quarter was 5.2%39.3% compared to a rate of 28.9%4.6% in the same period of the prior year, and an effective rate of 5.5%23.6% for fiscal year 2019.

2020.We generally benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. However,As such, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate. Furthermore, we may be limited in our ability to deduct 50% of applicable foreign earnings under the GILTI income inclusion or to deduct U.S. interest expense based on our U.S. taxable income. In addition, the future impact of the CARES Act and New Tax Legislation may differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the CARES Act and New Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and New Tax Legislation.

 


 

Note M—L—Derivatives and Fair Value Measurements

 

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments are made. As of December 28, 2019, 2020, all of our other comprehensive income werewas attributable to shareholders; none related to the non-controlling interest.  Outstanding instruments as of December 28, 2019, 2020 are as follows:

 

  

NotationalNotional

   
 

Effective Date

 

Amount

  

Fixed LIBOR Rate

 

Maturity Date

Interest Rate Swap

July 19, 2017

 

$10.0 million

  1.99% 

May 10, 2021

Interest Rate Swap

July 25, 2018

 

$20.0 million

  3.18% 

July 25, 2023

No interest rate swap agreements were settled during the three-month period ended December 28, 2019, or the three-month period ended December 29, 2018, and therefore, no amounts were reclassified into income during those periods.

 

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 December 28, 2019, 2020 and September 28, 2019 (in2020 (in thousands):

 

 

December 28,

 

September 28,

  

December 2020

 

September 2020

 
 

2019

 

2019

 

Deferred tax liabilities

 

$

280

 

$

324

 

Deferred tax assets

 

$

401

 

$

442

 
Accrued expenses  (65) (108)

Other non-current liabilities

  

(1,118

)

  

(1,293

)

  

(1,533

)

  

(1,656

)

Accumulated other comprehensive loss

 

$

(838

)

 

$

(969

)

 

$

(1,197

)

 

$

(1,322

)

 

 

From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations. No such cotton contracts were outstanding at December 28, 2019, or 2020 and September 28, 2019.2020.

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

 

 

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

   
 

Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.

   
 

Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.

 

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

 

  

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

                

December 28, 2019

 $(1,118)    $(1,118)   

September 28, 2019

 $(1,293)    $(1,293)   
                 

Contingent Consideration

                

December 28, 2019

 $(8,670)       $(8,670)

September 28, 2019

 $(9,094)       $(9,094)
  

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

                

December 2020

 $(1,598)  0  $(1,598)  0 

September 2020

 $(1,764)  0  $(1,764)  0 
                 

Contingent Consideration

                

December 2020

 $(4,310)  0   0  $(4,310)

September 2020

 $(6,420)  0   0  $(6,420)

 

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 28, 2019, 2020 and September 28, 2019,2020, book value for fixed rate debt approximates fair value based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).

 

The DTG2Go acquisition purchase price consisted of additional payments contingent on the combined business’s achievement of certain performance targets related to sales and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period from April 1, 2018, through September 29, 2018, as well as for our fiscal years 2019,2020,2021 and 2022. The valuation of the fair value of the contingent consideration is based upon inputs into the Monte Carlo model, including projected results, which then are discounted to a present value to derive the fair value. The fair value of the contingent consideration is sensitive to changes in our projected results. At results and discount rates.  As of December 28, 2019, 2020, we estimatedestimate the fair value of contingent consideration to be $8.5$4.3 million, a $2.1 million decrease of $0.4 million from September 2020 due to the September 28, 2019 balance of $8.9 million. The decrease inpayment made during the accrual was related to lower operating results inDecember 2020 quarter for the first quarter fiscal 2020.2020 period.

 

In August 2013, we acquired Salt Life, which included contingent consideration as part of the purchase price and which is payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are met during the 2019 calendar year. At December 28, 2019, and September 28, 2019, we had $0.2 million accrued in contingent consideration related to the acquisition of Salt Life.

 

Note N—M—Legal Proceedings

 

At times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material adverse effect on our operations, financial condition, or liquidity. 

 


 

Note O—N—Repurchase of Common Stock

 

As of September 28, 2019, our Board of Directors authorized management to use up to $60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.

 

No shares of our common stock were repurchased in the December 2020 quarter. Through December 28, 2019, 2020, we have purchased 3,498,9623,598,933 shares of our common stock for an aggregate of $50.5$52.5 million since the inception ofunder our Stock Repurchase Program.Program since its inception. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18.10b-18. As of December 28, 2019, $9.52020, $7.5 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date. There were no repurchases of our common stock for the quarter ended December 28, 2019.

 

 

Note P—O—Goodwill and Intangible Assets

 

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

 

 

December 28, 2019

  

September 28, 2019

    

December 2020

 

September 2020

   
 

Cost

  

Accumulated Amortization

  

Net Value

  

Cost

  

Accumulated Amortization

  

Net Value

 Economic Life  

Cost

 

Accumulated Amortization

 

Net Value

 

Cost

 

Accumulated Amortization

 

Net Value

 Economic Life 
                                           

Goodwill

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

Intangibles:

                                         

Tradename/trademarks

 $16,090  $(3,414) $12,676  $16,090  $(3,278) $12,812 

20 – 30 yrs

  $16,090  $(3,956) $12,134  $16,090  $(3,820) $12,270 

20 – 30 yrs

 

Customer relationships

  7,400   (1,178)  6,222   7,400   (993)  6,407 

8 – 10 yrs

  7,400  (1,918) 5,482  7,400  (1,733) 5,667 

20 yrs

 

Technology

  1,720   (1,335)  385   1,720   (1,289)  431 

10 yrs

  1,720  (1,396) 324  1,720  (1,380) 340 

10 yrs

 

License agreements

  2,100   (655)  1,445   2,100   (630)  1,470 

15 – 30 yrs

  2,100  (759) 1,341  2,100  (733) 1,367 

15 – 30 yrs

 

Non-compete agreements

  1,657   (1,230)  427   1,657   (1,170)  487 

4 – 8.5 yrs

   1,657  (1,383) 274   1,657  (1,353) 304 

4 – 8.5 yrs

 

Total intangibles

 $28,967  $(7,812) $21,155  $28,967  $(7,360) $21,607    $28,967  $(9,412) $19,555  $28,967  $(9,019) $19,948   

 

Goodwill represents the acquired goodwill net of the $0.6 million cumulative impairment losses recorded in fiscal year 2011. The goodwill recorded on our financial statements is included in both2011 of our segments, with $18.0 million and $19.9 million included in $0.6 million. As of December 2020, the Delta Group segment assets include $18.0 million of goodwill, and the Salt Life Group, respectively.segment assets include $19.9 million.

 

Depending on the type of intangible asset, amortization is recorded under cost of goods sold or selling, general and administrative expenses. Amortization expense for intangible assets was $0.4 million during the December 2020 quarter and $0.5 million forduring the three-month periods ended December 28, 2019, and December 29, 2018.quarter. Amortization expense is estimated to be approximately $1.7$1.6 million for fiscal year 2020, $1.6 million for each of fiscal years 2021 and 2022, $1.5 million for fiscal year 2023, and approximately $1.4 million for fiscal year 2024.years 2024 and 2025.

 

 

Note Q—P—Subsequent Events

 

NoneOn January 26, 2021, Belk, Inc. (“Belk”), a department store chain and Delta Apparel customer, announced that it has entered into a Restructuring Support Agreement with its majority owner, Sycamore Partners, as well as the majority of its lenders to recapitalize the business, significantly reduce debt by approximately $450 million, and extend maturities on all term loans to July 2025. Belk expects to complete the financial restructuring transaction through an expedited “pre-packaged” reorganization under Chapter 11 of the U.S. Bankruptcy Code by the end of February 2021. Per the announcement, suppliers will be unimpaired and will continue to be paid in the ordinary course for all goods and services provided to the company. At December 2020, we had approximately $1.1 million of accounts receivable from Belk. We have followed our normal policy of estimating reserves for doubtful accounts and have not established a specific reserve for this receivable based on our assessment of the customer’s ability to meet its financial obligations pursuant to this announcement.

 


 

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

 

Cautionary Note Regarding Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, “outlook”, “anticipate”, “expect”, “intend”, “remain”, “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:

 

 

the volatility and uncertainty of cotton and other raw material prices and availability;

the general U.S. and international economic conditions;

conditions:
 

the competitive conditions in the apparel industry;COVID-19 pandemic impact on our operations, financial condition, liquidity, and capital investments:

 

restrictions onsignificant interruptions or disruptions within our ability to borrow capitalmanufacturing, distribution or service our indebtedness;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;

 

changes in economic, political or social stability at our offshore locations;

significant interruptions or disruptions within our manufacturing, distribution or other operations;

our ability to attract and retain key management;

significant changes in our effective tax rate;

interest rate fluctuations increasing our obligations under our variable rate indebtedness;

the ability to raise additional capital;

the ability to grow, achieve synergies and realize the expected profitability of acquisitions;

 

changes in economic, political or social stability at our offshore locations;

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;

 

the impairment of acquired intangible assets;

changes in international trade regulations;

 

our ability to comply with trade regulations;

 

changes in employment laws or regulations or our relationship with employees;

 

foreign currency exchange rate fluctuations;

negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors;

 

restrictions on our ability to borrow capital or service our indebtedness;

interest rate fluctuations increasing our obligations under our variable rate indebtedness;

the ability to raise additional capital;

the impairment of acquired intangible assets;

foreign currency exchange rate fluctuations;

the illiquidity of our shares; and

 

price volatility in our shares and the general volatility of the stock market.

 

A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is set forth in Part 1 under the subheading "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended September 28, 2019,2020, 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.

 

Business Outlook

 

Our first quarter results provided a strong start to deliver on our fiscal 2021 goals.  Through a combination of strong order demand and impeccable manufacturing and operational execution at all levels, our December 2020 quarter sales results were impacted bynearly flat with prior year levels, despite the shortenednotable headwinds from inventory constraints, hurricane-related disruptions in Central America, and freight carrier limitations during the holiday calendar combinedseason. Furthermore, we were able to improve gross margins 70 basis points, with an earlier shipping cut-off for in-hands holiday receipts. However, we are pleased to have delivered strong gross margin performance from ourexpansion in both the Delta Group segment that more than offset our sales performance during the quarter. We continue to drive efficiencies throughout our business while scaling our integrated vertical manufacturing platform. Our investments in new manufacturing technologies, speed-to-market distribution strategies, and additional sales channels continue to generate growth opportunities across our businesses and differentiate us from competitors. We see a variety of strategic growth opportunities across our business, and our team remains focused on the initiatives we have in place to take advantage of them. In addition to the accelerating momentum in our DTG2Go and Salt Life businesses,Group segments.  Operating income for the current quarter increased 16% from the prior year, and adjusted for the $1.3 million of pre-tax expense related to the Honduran hurricane disruptions, adjusted operating income increased 67%, or $1.8 million, in the firstDecember 2020 quarter from the prior year.  The higher operating income was offset from a significantly higher tax rate, resulting in diluted earnings of $0.13 per share in both the December 2020 we launchedand 2019 quarters.  Excluding the impact of the hurricane disruptions, adjusted diluted EPS was $0.28, a full-service, vertical distributor model in our Activewear business. This includes a broad offering of nationally recognized branded products comprised of polos, outerwear, headwear and accessories. We believe this additional go-to-market strategy will allow us to further leverage our distribution centers and customer relationships and drive growth over time.115% improvement from the prior year.

 

Through meaningful investments in manufacturing capacity, proprietary fulfillment systems, and new facilities, along with two strategic acquisitions, DTG2Go has risen as an industryremains a market leader in the on-demand, direct-to-garment digital print space. DTG2Go isand fulfillment industry. We are the only digital print supplier in the world providing customersthat can offer a seamless, fulfillmentvertically-integrated solution, integratedutilizing our proprietary software and internal supply chain to offer a fully-decorated, on-demand product shipped directly to the consumer. This unique model eliminates non-value-added costs and reduces the risks involved with third-party supply chains. Despite the shipping limitations and earlier guaranteed holiday delivery cut-offs imposed by major freight carriers, the DTG2Go business had a strong holiday season. DTG2Go saw double digit growth in units shipped during holiday, with a vertical manufacturing platformsignificant amount of the growth coming from new customers.  During this holiday season, we digitally printed and shipped to consumers in all 50 U.S. states and over 130 countries worldwide.

Digital print demand this holiday season was particularly strong in the retail channel with our new 'On-Demand DC' service model, which provides retailers immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering a reliable supplythe scalability to integrate digital fulfillment within the retailer’s own distribution facility. With the launch of high quality fashion and core basic garments. DuringDTG2Go’s first ‘On-Demand DC’, our customer was able to more than double their on-demand business during the first quarter 2020, we expandedfrom a year ago, providing a better consumer experience while also benefiting from reduced shipping costs. We believe our unique positioning'On-Demand DC' solution is a compelling value proposition to traditional brick and mortal retailers and brands alike, offering their consumers limitless merchandise selections, personalization options, and seamless fulfillment across a broader supply chain with the addition of two new facilities, strategically integrating DTG2Go’s state-of-the-art digital print and fulfillment platform with Delta Apparel’s blank garment distribution network. This model has significantly improved our speed-to-market and elevated our customer service levels with one-day shipping to over half of all U.S. consumers, including the key New York City and Dallas metropolitan markets. no excess inventory risk.

Our customers are seeingcontinue to realize the advantage we offer with ourbenefits of the seamless supply chain as many migratedof Delta Apparel garments within our on-demand model, with DTG2Go’s usage of Delta Catalog blanks reaching a new record high of approximately 45% utilization in the firstDecember 2020 quarter to using our Delta Catalog blanks. In the first quarter of fiscal 2020, approximately 27% of DTG2Go's fulfillment was utilizing a Delta garment, compared to only 7%28% in the prior year first quarter. We see an encouraging pipeline of new accountsThis trend is promising as it creates a more efficient operation, reduces garment costs for our customers, and additional non-holiday sales volume, which we anticipate bringing on boardlowers working capital needs in the upcoming quartersbusiness.

We continue to reachsee a steep recovery in our goals of double-digit compoundedDelta Activewear business with year-over-year sales growth with healthy double-digit operating margins in our DTG2GoDecember quarter, overcoming the challenges caused by inventory constraints. We are seeing notable strength in the retail licensing channel as well as our recently launched e-retailer channel. We also saw year-over-year growth in our private label business. The diversification of our customer base is serving us well, and we are encouraged by the new programs we have secured in the direct-to-retail channel and future opportunities we see in this channel.  In order to meet the broad-based demand we have in Activewear, our team is focused on efficiently manufacturing and replenishing inventory levels, ultimately expecting to achieve all-time record-level production outputs in the back half of fiscal 2021.

 


Market conditions inOur Delta Group integration strategies, designed to foster sales growth and improve operating efficiencies, are on schedule. The recently published 2021 Delta Activewear print and digital editions of our core Activewear business are solid, with demandcatalog not only feature our Delta products, including our more fashion-forward Platinum Collection, but also for the first time includes our higher-margin fashion basics productsentire Soffe product line.  With the inclusion of Soffe, we have expanded our activewear and athleisure product categories, with our Western Hemisphere manufacturing platform continuing to accelerate.Military Collection, including the Soffe ranger panties, our Fundamentals and Essentials, including the iconic Soffe short, and our Core Layers, which includes warm-ups and other layering products.  We have experienced rapid expansion of our fashion basics line, particularlyalso highlight Intensity by Soffe, which focuses on outfitting the female athlete.  Complementing the Delta Platinum, over the last several years with growth expected to continue across multiple sales channels. We remain focused on building internal manufacturing capacity to satisfy the Activewear demand and better service customers with speed of delivery. The vast majority of our new product development continues to be focused on fashion basics, adding product diversification and expanding offerings across silhouettes and fabrications. In January 2020,Soffe brands, we launched a full-service, vertical distributor model in our Activewear business, which providesprovide our customers with a broaderbroad range of product categories with nationally recognized branded products.products including polos, outerwear, headwear, bags and other accessories. As previously announced and to further leverage the one-stop shop offering, we have merged our Delta Catalog and Soffe sales, customer service, marketing, merchandising and inventory planning teams to better position Soffe for growth and to reduce redundant costs. During the December quarter, we began the transition of Soffe into our new Phoenix distribution facility, which will now serve as Soffe’s primary distribution center in addition to being a key Delta Catalog distribution location and DTG2Go digital print fulfillment center. We viewsuccessfully launched the distributor model as a low risk, large opportunity proposition, which adds another growth legfirst phase of Soffe’s transition to the Delta Apparel story. Our diversified salesActivewear ERP system in early January, and anticipate completing all phases of the integration by the end of fiscal 2021.  As this final piece is completed, the Soffe brand will be fully merged within the Activewear operations, creating opportunities to focus on the growth of the brand while benefitting from significant operating efficiencies.

Demand for the Salt Life brand remained strong during the fall season, resulting in growth for the December quarter compared to prior year. Consumers sought out the Salt Life brand through direct-to-consumer channels, coupled with cross-selling opportunities involving the DTG2Go and Soffe decoration platforms, should continue to drive new business along with valuable customer diversification. Our FunTees business had strong performancewhich grew over 60% year-over-year in the currentquarter.  Sales performance at our recently opened branded retail stores in Destin, Estero, and Palm Beach Gardens, Florida, drove retail sales growth of over 150% compared to the prior year December quarter. Salt Life enthusiasts actively engaged with the brand through all our online channels during the quarter, resulting in 13% more followers on social media and 50% more YouTube subscribers compared to the prior year.  We also added over 150% more email subscribers during the December 2020 quarter than we added in the December 2019 quarter. As we prepare for the forthcoming spring and summer seasons, we see growth opportunities with solid momentum ahead for 2020our Salt Life consumer ecommerce site, opening additional retail doors in select markets, and beyond. The continued strength incontinuing to partner with our FunTees business iswholesale customers to expand the culmination of several initiatives overfloor space and enhance the past year to grow this business and gain volume. Our strategy of being a “supply chain partner” to our customers continues to pay-off and has enabled us to grow and diversify our customer base with brands and retailers who are interested in full-service supply chain management and technology. Within our FunTees business over the past few years we have successfully diversified across brands and channels, and we expect further diversification in 2020. In fact, we recently began shipping several new direct-to-retail programs and expect that business to continue to grow. Our manufacturing capacity expansion strategy is ahead of schedule, which is expected to support anticipated growth in our Activewear business in fiscal 2020, including additional FunTees volume.Salt Life experience within their doors.

 

We are encouraged by the broad-based demand we see strong opportunities foracross our Salt Life business in fiscal year 2020businesses, and beyond. Inour proven ability to execute at the first quarter, we delivered strong double-digit growthoperational level to meet that demand. Although the environment in the direct-to-consumer channels in both our branded retail stores and our recently enhanced www.saltlife.com ecommerce site. We also continue to see good momentum with Salt Life product placement from test doors with new national and regional retailers. Additional product categories remain an important pillarcoming months includes a level of growth for Salt Life for our wholesale partners, as well as our branded direct-to-consumer channels. Our newest Salt Life store, which opened during the first quarter in Key West, Florida, is performing exceptionally well and contributed to the strong direct-to-consumer results. We plan to open an additional store later this month in Charleston, South Carolina, which will provide us with nine branded retail stores.

We remain uniquely positioned to compete and grow profitably in today’s dynamic retail environment. We are continuously focused on building our foundational capabilities and expertise to best serve our existing customers, while also attracting new customers. The diversification of our customer base and expansion of our sales channels, including this quarter's launch of our full service, vertically-integrated distributor model, remain key pillars of our success and fuels the growth we see ahead for our business. Given the strength in our underlying business,uncertainty, we believe we are well positioned to deliver againstcapitalize on multiple market demand opportunities across our goals forbusinesses. There are many factors outside of our control that can influence how the full year continues to unfold, including double-digit topline growth inlevels of consumer spending, higher unemployment rates, potential future COVID-19 disruptions and the speed and effectiveness of related vaccines, and the overall U.S. and global economic conditions. We remain confident that our DTG2Godiversified sales channels and Salt Life businessesuniquely positioned business models provide the optimal strategy that should allow us to successfully navigate near-term challenges and mid-single digit growth collectively in our other business units, along with overall improving profitability.continue to drive future profitable growth.

 

 

Results of Operations

 

Our financialFinancial 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 and reconciled in the sections entitled “Non-GAAP Financial Measures.”

 

Net sales for the December quarter were $95.9$94.7 million compared to sales of $101.7$95.9 million in the prior year December quarter, having been impacted by the shortened holiday calendar combined with an earlier shipping cut-off for in-hands holiday receipts.year. Our direct-to-consumer sales channels, comprised of consumer-facing ecommerce sites and our branded retail stores, and ecommerce sales, including our direct-to-consumer and business-to-business ecommerce sites, increased 6.5% over13% in the current quarter compared to the prior year three-month period. The growth was driven by increased sales on our Activewearyear. Retail and Salt Life ecommerce sites as well as at our Salt Life retail stores. Retail andtotal ecommerce sales represented 8.7%10% and 9% of total revenues for the three-month period ended December 28,2020 and December 2019 compared to 7.7% for the three-month period ended December 29, 2018.quarters, respectively.

 

Net sales in the Delta Group segment were $89.0$87.6 million compared to $94.4$89.0 million in the prior year. The Delta Group represented nearly 93%Sales orders in Activewear were strong for the quarter, but delivery was hindered by inventory shortages and the impact of two major hurricanes in Central America. Our FunTees business had strong growth both within our firsttraditional brand direct channel as well as our fast-growing retail direct channel. Catalog sales continued to realize year-over-year growth with strong sales in the retail licensing channel as well as our recently launched e-retailer channel. DTG2Go’s orders were down to begin the quarter, sales withbut quickly returned to strong growth in our FunTees business partially offsetting the decline in our Catalog business, which was negatively impactedNovember, only to be hampered by freight carrier constraints during the holiday calendar.  In our DTG2Go business, the first quarter was more challenging than anticipated, due to a combination of having nearly 20% fewer holiday shopping days compared to the prior year combined with an earlier holiday shipping cut-off resulting in fewer production days which impacted revenue.season.

 

The Salt Life Group segment first quarter revenue was $6.9grew to $7.1 million compared to $7.3$6.9 million in the prior year period. Sales for cold weather apparelThe segment’s growth was driven by an increase in certain regional department stores were impacted by warmer weather.  Ouroverall direct-to-consumer sales, with growth in our brandedboth ecommerce and retail stores and website increased over 20% during the quarter.sales.

 

Gross margins in the first fiscal quarter expanded 240improved 70 basis points from the prior year first quarter increasing to 20.7%.21.4% of sales, with margin expansion in both business segments.

 

The Delta Group segment gross margins grew to 18.6%improved 50 basis points from 15.9% in the prior year from the continued processto 19.1% driven by favorable product mix, lower raw material costs, and manufacturing efficiencies and further leveraging of the segment’s integrated vertical manufacturing platform.process improvements.

 

The Salt Life Group segment gross margins were 48.8% in the first quarter comparedimproved 140 basis points to 49.0% in the prior year quarter with the slight difference due to50.2% driven by a change in thestronger mix of direct-to-consumer sales.

 

Selling, general, and administrative expenses ("SG&A") were $18.1$16.0 million, or 18.8%16.9% of sales, compared to $16.8$18.1 million, or 16.5%18.8% of sales, in the prior year.  The increase is primarily resulted from by investments in our distribution expansion not fully leveraged against revenues, coupled with higher equity consideration costs.Expenses decreased due to cost reductions implemented during the pandemic that have continued, including lower personnel costs, reduced travel expenses, and a more digitally-focused sales and marketing strategy.

 

Other income from both yearsexpense includes $1.3 million of expenses related to the impact of two hurricanes that disrupted our Honduran manufacturing facilities in the December 2020 quarter.  In addition, the December 2020 quarter includes profits related to our Honduran equity method investment andinvestment. The December 2019 quarter included valuation changes in our contingent consideration liabilities. The prior year included a discrete expense of $2.5 million associated with the resolution of the litigation stemming from a 2016 customer bankruptcy.liabilities as well as profits related to our Honduran equity method investment.

 

Operating incomeprofit in the first quarter was $2.6increased 16% to $3.1 million compared to $41 thousand$2.6 million in the prior year.  Operating income, inadjusted for $1.3 million of hurricane-related expenses, was $4.4 million for the current quarter, an increase of 67% from the prior year was impacted by the $2.5 million discrete impact of the resolution of litigation stemming from a former customer's bankruptcy.year.

 

The Delta Group segment had operating income increased in the current fiscal year quarter by $4.5of $6.3 million, or 7.2% of net sales, compared to $7.3 million, or 8.2% of net sales, compared to $2.8 million, or 2.9% of net sales in the prior year. Adjusting for $1.3 million of hurricane-related disruption costs, operating income was $7.6 million, or 8.7% of sales, in the December 2020 quarter. The increase is primarily attributable to theexpanded operating profitability was driven by favorable gross margin expansion due to continued process efficiencies and further leveraging of the segment’s integrated vertical manufacturing platformmargins as well as the $2.5 million discrete impact in the prior year due to a 2016 customer bankruptcy.continuing cost controls.

 

The Salt Life Group segment incurred an operating loss of $0.1 million compared to the prior year loss of $0.7 million. Operating income decreased by $0.9 million in the current fiscal year quarter primarilyimproved due to the decrease in net sales and change in sales mix.stronger mix of direct-to-consumer sales.

 

Net interest expense for the first quarter of both fiscal yearsyear 2021 was $1.7 million as compared to $1.8 million.million in the prior year period due to lower interest rates. 

 

Our effective tax ratebenefit on operations for the three-month period ended December 28, 2019,quarter was 5.2%39.3%. This compares to an effective tax rate of 28.9%4.6% for the same period in the prior year and 5.5%a 23.6% rate for the full fiscal year ended September 28, 2019.2020. See Note L—K—Income Taxestaxes for more information. 

 

We achieved netNet income for both the first quarter ofDecember 2020 and 2019 quarters was $0.9 million, or $0.13 per diluted share, compared toshare. Adjusted for the prior year net loss of $1.1 million or $0.17 per diluted share. When adjusted for the discrete $2.5 million pre-taxafter-tax expense, or $0.31$0.15 per diluted share, impact of the discrete litigation settlement, net of tax, prior year first quarterhurricane disruptions, net income for the December 2020 quarter was $1.0$2.0 million, or $0.14$0.28 per diluted share.

 

Accounts receivable were $54.8$63.6 million at December 28, 2019,2020, compared to $59.3$61.0 million as of September 28, 2019.2020. Days sales outstanding ("DSO") as of December 28, 2019,2020 were 4657 days an improvement from 48compared to 51 days at September 28, 2019.2020.

 

Net inventory was $197.3 million as of December 28, 2019,2020 was $148.5 million, an increase of $18.2$3 million from September 28, 2019.2020, but down $48.8 million from a year ago.  The higher inventory levels resulted from ourstronger than anticipated December 2020 quarter sales, along with the temporary hurricane disruptions, slowed the normal seasonal build of inventory for our spring selling season as well as the stronger mix of fashion basics, fleece and performance products in inventory to support the growth in these categories.


Capital spending was $2.5 million during the December quarterquarter.  We have already ramped up production at an accelerated pace in January and expect to be producing at record levels in the back half of fiscal year 2020 and primarily related to investments in our distribution expansion as well as machinery and equipment.  Depreciation and amortization expense, including non-cash compensation, was $3.8 million for the first three months of fiscal year 2020.year.

 

Total net debt, including capital lease financing as of the end of first quarter fiscaland cash on hand, increased $7.6 million from September 2020 was $147.4to $129.8 million up approximately 9%at December 2020. Cash on hand and availability under our U.S. revolving credit facility totaled $43.7 million at December 2020, a $3.4 million decrease from the fiscal 2019 year-endSeptember 2020 due primarily to the seasonal higher marketingworking capital along with investments in distribution facilities.build.

 

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 adjustedoperating income, net earnings (loss) attributable to shareholdersincome and earnings (loss) per diluted share as 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 limitationsimitations 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 ofor our results as reported under U.S. GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

Operating activities used $4.9$2.5 million and $4.0$4.9 million in cash in the first three months of fiscal yearDecember 2020 and 2019 quarters, respectively. The additional use ofimproved operating cash flows in the current year is primarilyare due to additionallower inventory levels drivenas manufacturing production was hampered by broader product offerings within Activewear and Salt Life, partiallydisruptions from hurricanes during the December 2020 quarter. This was offset by higherslower customer collections from customers and improved operating income.than the prior year.   

 

Investing Cash Flows

 

Total capital expenditures for the December 2020 quarter were $6.9 million and primarily related to investments in digital printing capacity and our new Phoenix, Arizona distribution center.  Cash outflows for capital expenditures were $3.7$0.4 million during the first three months of fiscal yearDecember 2020 quarter compared to $1.0$3.7 million in the same period lastin the prior year. CapitalAs of December 2020, there were $4.0 million in current year expenditures financed under a capital lease arrangement and $7.6 million in both periodsunpaid expenditures.  In addition, we received proceeds of $2.3 million during the December 2020 quarter upon entering into finance leases for prior capital expenditure cash outflows. In the December 2019 quarter, total capital expenditures were $2.5 million and primarily related to machinery and equipment. In addition, during the first quarter of 2020, additional investments were made in our distribution expansion.  There was an additional $1.8 million in expenditures financed under capital lease arrangementsexpansion, improvements to facilities, and $0.1 million in unpaid expenditures as of December 28, 2019. 

On October 8, 2018, our DTG2Go, LLC subsidiary purchased substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services ("SSI"), a premium provider of direct-to-garment digital printed products. The SSI acquisition purchase price consisted of $2.0 million in cash, a promissory note for $7.0 million and $3.0 million in capital lease funding secured by the acquired fixed assets. The cash portion of the purchase price included: (i) a payment at closing of $2.0 million, and (ii) a post-closing net working capital adjustment of $0.7 million. In the current fiscal year quarter, we repaid approximately $0.8 million under the promissory note and capital lease funding.manufacturing initiatives.

 

We anticipate our fiscal year 20202021 capital expenditures, including those financed under capital leases, to be approximately $25 million to $28$20 million and to be focused primarily on our distribution expansion, including the expansion of our Clinton, Tennessee distribution center to support the growth within the Delta Group segment business. Additional expenditures will be focused ondigital print equipment, manufacturing equipment, information technology, and direct-to-consumer investments including additional Salt Life retail store openings.

 

Financing Activities

 

During the three months ended December 28,2020 quarter, cash used by financing activities was $5.0 million and primarily related to the annual payment of the DTG2Go contingent consideration related to the fiscal year 2020 period. During the December 2019 quarter, cash provided by financing activities was $9.3 million compared to $7.1 million provided by financing activities for the three months ended December 29, 2018. The cash provided by our financing activities during the first three months of fiscal years 2020 and 2019 was used to fund our operating activities and capital expendituresexpenditures. 

Future Liquidity and Capital Resources

See Note F – Debt to the Condensed Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our revolving U.S. credit facility.

Prior to the amendments executed on April 27, 2020 and August 28, 2020 (collectively, the "Bridge Amendments"), our U.S. revolving credit facility included 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. The Bridge Amendments amend the financial covenant provisions from the amendment dates through July 3, 2021, including effectively lowering the minimum availability thresholds and removing the requirement that our FCCR for the preceding 12-month period must not be less than 1.1 to 1.0. Our availability at December 2020 was above both the minimum availability threshold per the Bridge Amendments as well as the SSI acquisitionhigher thresholds in fiscal year 2019.the U.S. credit agreement that would trigger an FCCR covenant requirement. Had we been subject to the FCCR requirements at December 2020, we would have been in compliance with this covenant.

 

Based on our current expectations, we believe that ourOur credit facility, should be sufficientas amended on August 28, 2020, as well as cash flows from operations, are intended to satisfy our foreseeable working capital needs, and that cash flow generated by our operations and funds available under our credit facility should be sufficient to service our debt payment requirements, to satisfyfund our day-to-day working capital needs, and along with finance lease arrangements, to fund our planned capital expenditures. AnyHowever, any material deterioration in our results of operations, however,such as those that could occur due to the COVID-19 pandemic, may result in the loss of our ability to borrow or issue letters of credit to suppliers 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 our availability at December 28, 2019, was above the minimum thresholds specified in our credit agreement,Additionally, a significant deterioration in our business results could cause our availability to fall below suchminimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement.agreement, which we may not be able to maintain.

 

Purchases By Delta Apparel Of Its Own Shares

 

There were no repurchasesDuring the December 2020 quarter, we did not purchase any shares of our common stock for the quarter ended December 28, 2019.(see Note N—Repurchase of Common Stock). As of December 28, 2019,2020, there was $9.5$7.5 million of repurchase authorization remaining 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 repurchase of our stock is a sound investment opportunity that we can pursue without sacrificing future growth plans.

 

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 28, 2019,2020, and there have been no changes in those policies since the filing of that Annual Report on Form 10-K with the SEC, except as disclosed in Note C—New Accounting Standards related to the adoption of the new revenue recognition standard, since the filing of that Annual Report on Form 10-K with the SEC.cloud computing standard.

 


 

Environmental and Other Regulatory Matters

 

We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions and solid waste disposal. SomeThe labeling, distribution, importation, marketing, and sale of our facilities generate small quantities of hazardous waste thatproducts are either recycled or disposed of off-site.subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti-bribery laws applicable to our operations.

 

The environmental and other regulations applicable to our business are becoming increasingly stringent, and we incur capital and other expenditures annually to achieve compliance with these environmental standards.standards and regulations. We currently do not expect that the amount of expenditures required to comply with these environmental laws and regulationsstandards or other regulatory matters will have a material adverse effect on our operations, financial condition or liquidity. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, while we believe that we are currently in material compliance with all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to comply with laws, regulations and permits applicable to our operations cannot be determined and could have a material adverse effect on our operations, financial condition and liquidity.

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 28, 2019,the end of period covered by this quarterly report ("the Evaluation Date") and, based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures were effective as of December 28, 2019.the Evaluation Date.

 

Changes in Internal Control Over Financial Reporting

 

There waswere no changechanges during the firstDecember 2020 quarter of fiscal year 2020 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

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

 

 

Item 1A.

Risk Factors

 

None

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

(c) Repurchases of Common Stock

 

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

 

Item 5.

Other Information

 

None

 

Item 6.

Exhibits

 

Exhibits

 

31.1

 

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

   

31.2

 

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

   

32.1

 

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

   

32.2

 

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

   

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

104Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)

 


 

SIGNATURES

 

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

 

 

 

 

 

DELTA APPAREL, INC.

(Registrant)

    

Date

February 3, 20208, 2021

By:

/s/ Deborah H. Merrill

 

 

 

Deborah H. Merrill

Chief Financial Officer and President, Delta Group

 

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