DELTA APPAREL, INC - Quarter Report: 2020 March (Form 10-Q)

 

Table of Contents

 

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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 March 28, 2020

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.

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(Exact name of registrant as specified in its charter)

 

GEORGIA		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

 

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(Registrant’s telephone number, including area code)

 

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(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 ☑

 

As of April 23, 2020, there were outstanding 6,890,118 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.

 

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		March 28, 2020				September 28, 2019
Assets
Current Assets:
Cash and cash equivalents		$	9,568			$	605
Accounts receivable, less allowances of $366 and $327, respectively			58,682				59,337
Other receivables			725				1,550
Income tax receivable			703				729
Inventories, net			197,333				179,107
Prepaid expenses and other current assets			3,369				2,270
Total current assets			270,380				243,598
Property, plant and equipment, net of accumulated depreciation of $86,893 and $81,787, respectively			62,587				61,404
Goodwill			37,897				37,897
Intangibles, net			20,734				21,607
Deferred income taxes			1,514				1,514
Operating lease assets			43,226				-
Equity method investment			10,309				10,388
Other assets			2,484				1,580
Total assets		$	449,131			$	377,988
Liabilities and Equity
Current liabilities:
Accounts payable		$	56,022			$	52,320
Accrued expenses			15,033				20,791
Current portion of contingent consideration			1,970				2,790
Current portion of finance leases			6,965				6,434
Current portion of operating leases			8,525				-
Current portion of long-term debt			7,577				6,540
Total current liabilities			96,092				88,875
Long-term taxes payable			3,585				3,977
Long-term contingent consideration			3,610				6,304
Long-term finance leases, less current maturities			12,239				12,836
Long-term operating leases, less current maturities			35,611				-
Long-term debt, less current maturities			141,088				109,296
Deferred income taxes			1,355				1,519
Other non-current liabilities			1,914				1,293
Total liabilities		$	295,494			$	224,100
Shareholder's equity:
Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding			-				-
Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,890,118 and 6,921,417 shares outstanding as of March 28, 2020, and September 28, 2019, respectively			96				96
Additional paid-in capital			59,440				59,855
Retained earnings			139,171				136,937
Accumulated other comprehensive loss			(1,433	)			(969	)
Treasury stock - 2,756,854 and 2,725,555 shares as of March 28, 2020, and September 28, 2019, respectively			(43,133	)			(41,750	)
Equity attributable to Delta Apparel, Inc.			154,141				154,169
Equity attributable to non-controlling interest			(504	)			(281	)
Total equity			153,637				153,888
Total liabilities and equity		$	449,131			$	377,988

 

		Three Months Ended								Six Months Ended
		March 28, 2020				March 30, 2019				March 28, 2020				March 30, 2019
Net sales		$	96,660			$	102,838			$	192,550			$	204,513
Cost of goods sold			76,079				83,930				152,075				167,036
Gross profit			20,581				18,908				40,475				37,477
Selling, general and administrative expenses			17,941				17,056				36,147				33,841
Other (income) loss, net			(914	)			(843	)			(1,863	)			902
Operating income			3,554				2,695				6,191				2,734
Interest expense, net			1,808				1,985				3,610				3,750
Earnings (loss) before provision for (benefit from) income taxes			1,746				710				2,581				(1,016	)
Provision for (benefit from) income taxes			526				(115	)			570				(614	)
Consolidated net earnings (loss)			1,220				825				2,011				(402	)
Net loss attributable to non-controlling interest			91				117				223				193
Net earnings (loss) attributable to shareholders		$	1,311			$	942			$	2,234			$	(209	)
Basic earnings (loss) per share		$	0.19			$	0.14			$	0.32			$	(0.03	)
Diluted earnings (loss) per share		$	0.19			$	0.13			$	0.32			$	(0.03	)
Weighted average number of shares outstanding			6,957				6,943				6,953				6,933
Dilutive effect of stock awards			98				160				110				-
Weighted average number of shares assuming dilution			7,055				7,103				7,063				6,933

 

		Three Months Ended								Six Months Ended
		March 28, 2020				March 30, 2019				March 28, 2020				March 30, 2019
Net earnings (loss) attributable to shareholders		$	1,311			$	942			$	2,234			$	(209	)
Other comprehensive loss related to unrealized loss on derivatives, net of income tax			(595	)			(257	)			(464	)			(629	)
Consolidated comprehensive income (loss)		$	716			$	685			$	1,770			$	(838	)

 

																		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 29, 2018			9,646,972			$	96			$	61,979			$	128,695			$	136				2,737,526			$	(40,881	)		$	93			$	150,118
Net loss			-				-				-				(1,151	)			-				-				-				-				(1,151	)
Other comprehensive loss			-				-				-				-				(372	)			-				-				-				(372	)
Net loss attributable to non-controlling interest			-				-				-				-				-				-				-				(76	)			(76	)
Vested stock awards			-				-				(3,981	)			-				-				(153,472	)			1,867				-				(2,114	)
Purchase of common stock			-				-				-				-				-				92,148				(1,711	)			-				(1,711	)
Stock based compensation			-				-				660				-				-				-				-				-				660
Balance as of December 29, 2018			9,646,972				96				58,658				127,544				(236	)			2,676,202				(40,725	)			17				145,354
Net earnings			-				-				-				942				-				-				-				-				942
Other comprehensive loss			-				-				-				-				(257	)			-				-				-				(257	)
Net loss attributable to non-controlling interest			-				-				-				-				-				-				-				(117	)			(117	)
Purchase of common stock			-				-				-				-				-				35,353				(718	)			-				(718	)
Stock based compensation			-				-				463				-				-				-				-				-				463
Balance as of March 30, 2019			9,646,972			$	96			$	59,121			$	128,486			$	(493	)			2,711,555			$	(41,443	)		$	(100	)		$	145,667
																		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 28, 2019			9,646,972			$	96			$	59,855			$	136,937			$	(969	)			2,725,555			$	(41,750	)		$	(281	)		$	153,888
Net earnings			-				-				-				923				-				-				-				-				923
Other comprehensive loss			-				-				-				-				131				-				-				-				131
Net loss attributable to non-controlling interest			-				-				-				-				-				-				-				(132	)			(132	)
Vested stock awards			-				-				(1,615	)			-				-				(67,406	)			631				-				(984	)
Stock based compensation			-				-				585				-				-				-				-				-				585
Balance as of December 28, 2019			9,646,972				96				58,825				137,860				(838	)			2,658,149				(41,119	)			(413	)			154,411
Net earnings			-				-				-				1,311				-				-				-				-				1,311
Other comprehensive loss			-				-				-				-				(595	)			-				-				-				(595	)
Net loss attributable to non-controlling interest			-				-				-				-				-				-				-				(91	)			(91	)
Vested stock awards			-				-				4				-				-				(1,266	)			15				-				19
Purchase of common stock			-				-				-				-				-				99,971				(2,029	)			-				(2,029	)
Stock based compensation			-				-				611				-				-				-				-				-				611
Balance as of March 28, 2020			9,646,972			$	96			$	59,440			$	139,171			$	(1,433	)			2,756,854			$	(43,133	)		$	(504	)		$	153,637

 

		Six Months Ended
		March 28, 2020				March 30, 2019
Operating activities:
Consolidated net earnings (loss)		$	2,011			$	(402	)
Adjustment to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation and amortization			6,381				5,859
Amortization of deferred financing fees			157				153
Benefit from deferred income taxes			-				(490	)
Non-cash stock compensation			1,196				1,123
(Gain) loss on disposal of equipment			(28	)			2
Other, net			(1,555	)			(1,435	)
Changes in operating assets and liabilities, net of effect of acquisition
Accounts receivable			1,480				(11,882	)
Inventories, net			(18,226	)			(10,416	)
Prepaid expenses and other current assets			(176	)			147
Other non-current assets			(285	)			(20	)
Accounts payable			4,065				10,920
Accrued expenses			(5,640	)			(1,283	)
Change in net operating lease liabilities			910				-
Income taxes			(485	)			(770	)
Other liabilities			(7	)			212
Net cash used in operating activities			(10,202	)			(8,282	)
Investing activities:
Purchases of property and equipment, net			(3,886	)			(2,102	)
Cash paid for business			(1,660	)			(3,699	)
Net cash used in investing activities			(5,546	)			(5,801	)
Financing activities:
Proceeds from long-term debt			237,622				233,864
Repayment of long-term debt			(203,622	)			(211,265	)
Repayment of capital financing			(2,714	)			(2,031	)
Payment of contingent consideration			(2,500	)			(564	)
Payment of deferred financing costs			(1,079	)			-
Repurchase of common stock			(2,029	)			(2,488	)
Payment of withholding taxes on stock awards			(967	)			(2,116	)
Net cash provided by financing activities			24,711				15,400
Net (decrease) increase in cash and cash equivalents			8,963				1,317
Cash and cash equivalents at beginning of period			605				460
Cash and cash equivalents at end of period		$	9,568			$	1,777

 

Note A—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 and six-month periods ended March 28, 2020, 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. The COVID-19 pandemic is occurring during the seasonally strongest months of the business. As such, the historic seasonality may not be indicative of future results. 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 8,400 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-garment digital print and fulfillment industry, bringing DTG2Go 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. Our products are also made available direct-to-consumer on our websites and in our branded retail stores. This diversified distribution 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 units 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. 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 2020 fiscal year is a 53-week year and will end on October 3, 2020. Our 2019 fiscal year was a 52-week year and ended on September 28, 2019.

 

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, 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-K for the fiscal year ended September 28, 2019, 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, 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 - 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 Accounting Standard Codification, ("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, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which will require customers to apply internal-use software guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs will be required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. ASU 2018-15 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 within our fiscal year 2021 annual period. The standard allows changes to be applied either retrospectively or prospectively. We are evaluating the effect that ASU 2018-15 will have on our financial statements and related disclosures.

 

 

 

 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 March 28, 2020, and September 28, 2019, there was $1.0 million in refund liabilities for customer returns, allowances, markdowns and discounts within accrued expenses.

 

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

 

 

 

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

 

 

 

 

 

 

Note E—Inventories

 

Inventories, net of reserves of $9.4 million and $10.0 million, as of March 28, 2020, and September 28, 2019, respectively, consisted of the following (in thousands):

 

 

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.

 

 

 

Note F—Debt

 

Credit Facility

 

On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (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 the Amended Credit Agreement with Wells Fargo and the other lenders on November 27, 2017, March 9, 2018, and October 8, 2018.

 

On November 19, 2019, the Borrowers entered into a Consent and Fourth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set forth therein (the "Fourth Amendment"). The Fourth Amendment, among other things, (i) increased the borrowing capacity under the Amended Credit Agreement from $145 million to $170 million (subject to borrowing base limitations), (ii) extended the maturity date from May 21, 2021 to November 19, 2024, (iii) reduced pricing on the revolver and first-in last-out "FILO" borrowing components by 25 basis points, and (iv) added 25% of the fair value of eligible intellectual property to the borrowing base calculation. In addition, the Fourth Amendment amended the definition of Fixed Charge Coverage Ratio to exclude up to $10 million of capital expenditures incurred by the Borrowers in connection with the expansion of their distribution facility located within the Town of Clinton, Anderson County, Tennessee.

 

The Amended Credit Agreement allows us to borrow up to $170 million (subject to borrowing base limitations), including a maximum of $25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. 

 

As of March 28, 2020, there was $135.7 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.2%. Our cash on hand combined with the additional borrowing availability under the U.S. credit facility totaled $30.5 million. This 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 March 28, 2020, 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 March 28, 2020, and September 28, 2019, there was $15.2 million and $16.1 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 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.

 

See Note Q—Subsequent Events for a discussion of the Fifth Amendment to the Fifth Amended and Restated Credit Agreement entered into on April 27, 2020.

 

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 March 28, 2020, there was $4.1 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. Each of these loans is secured by a first-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. The revolving credit facility requires minimum payments during each six-month period of the 12 to 18-month terms; however, the loan agreement permits additional drawdowns to the extent payments are made and certain objective covenants are met. The current revolving Honduran debt, by its nature, is not long-term, as it requires scheduled payments each six months. However, as the loan permits us to re-borrow funds up to the amount repaid, subject to certain covenants, and we intend to re-borrow funds, subject to those covenants, the amounts have been classified as long-term debt.

 

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

 

 

 

 

 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 Sheet. 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 Operations. 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 March 28, 2020, 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 March 28, 2020, was 5.1%.

 

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 March 28, 2020 (in thousands):

 

 

As of March 28, 2020, 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 per year 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 March 28, 2020. During the six-months ended March 28, 2020, and March 30, 2019, we paid approximately $0.9 million in lease payments under this arrangement.

 

As of March 28, 2020, we recorded $43.2 million of operating lease, ROU assets which were reflected within Operating lease assets in our Condensed Consolidated Balance Sheet, and $25.3 million of finance lease ROU assets, which were reflected within Property, plant, and equipment, net in our Condensed Consolidated Balance Sheet.

 

The weighted average remaining lease terms for our operating leases and finance leases were approximately 7 years and 4 years, respectively, as of March 28, 2020.

 

The components of total lease expense were as follows for the six months ended March 28, 2020 (in thousands):

 

 

Total operating lease expense, excluding variable lease costs, recognized during the six months ended March 30, 2019, prior to the adoption of ASC 842, was $5.2 million. In addition, during the six months ended March 30, 2019, we also incurred expenses related to finance leases, including interest expense and depreciation expense of financed Property, plant and equipment.

 

Cash outflows for operating lease payments and interest payments for finance leases during the six months ended March 28, 2020, were $5.4 million and $0.5 million, respectively, and are classified within Net cash used in operating activities on the Condensed Consolidated Statement of Cash Flows. Cash outflows for finance lease payments during the six months ended March 28, 2020, were $3.2 million and are classified within Net cash provided by financing activities on the Condensed Consolidated Statement of Cash Flows.

 

ROU assets obtained in exchange for operating lease and finance lease liabilities during the six months ended March 28, 2020, were $4.1 million and $4.4 million, respectively. During the six-month period ended March 30, 2019, prior to the adoption of ASC 842, we entered into new finance lease obligations totaling $5.7 million.

 

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

 

 

 

Note H—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 $4.8 million and $4.2 million for the three-month periods ended March 28, 2020, and March 30, 2019, respectively. Distribution costs included in SG&A expenses totaled $9.7 million and $8.4 million for the six-month periods ended March 28, 2020, and March 30, 2019, 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—Stock-Based Compensation

 

On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010 Stock Plan, which was previously re-approved by our shareholders on February 4, 2015 and was scheduled to expire by its terms on September 14, 2020. The 2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the 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. If a participant dies or becomes disabled (as defined in the 2020 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 2020 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other determinations that it deems necessary. The aggregate number of shares of common stock that may be delivered under the 2020 Stock Plan is 449,714 plus any shares of common stock subject to outstanding awards under the 2010 Stock Plan that are subsequently forfeited or terminated for any reason before being exercised. Similar to the 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. The 2010 Stock Plan terminated and the 2020 Stock Plan became effective on February 6, 2020, the date of shareholders’ approval.

 

Shares are generally issued from treasury stock upon the vesting of the restricted stock units, performance units or other awards under the 2010 Stock Plan and 2020 Stock Plan.

 

Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the three-month periods ended March 28, 2020, and March 30, 2019, we recognized $0.5 million and $0.6 million, respectively, in stock-based compensation expense. During the six-month periods ended March 28, 2020, and March 30, 2019, we recognized $1.4 million and $1.3 million, respectively, in stock-based compensation expense.

 

On February 5, 2020, restricted stock units representing 74,000 shares of our common stock were granted under the 2010 Stock Plan and are eligible to vest upon the filing of our Annual Report on Form 10-K for the fiscal year ending October 1, 2022 and are payable in common stock.

 

On September 29, 2019, restricted stock units and performance units, each consisting of 60,000 shares of our common stock, were granted under the 2010 Stock Plan and are eligible to vest upon the filing of our Annual Report on Form 10-K for the fiscal year ending 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.

 

As of March 28, 2020, there was $4.0 million of total unrecognized compensation cost related to unvested awards granted under the 2010 Stock Plan. This cost is expected to be recognized over a period of 2.6 years. No awards have been granted under the 2020 Stock Plan.

 

 

Note J—Purchase Contracts

 

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

 

 

 

 

Note K—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 Delta Activewear (encompassing our Delta Catalog and FunTees businesses), Soffe, and DTG2Go business units. We market, distribute and manufacture unembellished knit apparel under the main brands of Soffe^®, Delta Platinum, Delta Pro Weight^®, and Delta Magnum Weight^® for sale to a diversified audience ranging from large licensed screen printers to small independent businesses. Through our FunTees business, we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products 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 typically within 24 to 48 hours to consumers in the United States and to over 100 countries worldwide.

 

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, 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 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-K for the fiscal year ended September 28, 2019, 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).

 

 

⁽¹⁾In the quarter ended March 28, 2020, the Delta Group operating income included $1.9 million of cost of goods sold expense from plant curtailments caused by government mandated country closures in El Salvador and Honduras in March 2020. In the quarter ended December 29, 2018, the Delta Group operating income included $2.5 million of expense incurred in connection with the settlement of litigation related to the 2016 bankruptcy filing of a customer.

 

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

 

 

The Delta Group segment assets have increased by $48.0 million since September 28, 2019, to $363.7 million as of March 28, 2020, 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 $13.4 million since September 28, 2019, to $71.0 million as of March 28, 2020, primarily due to seasonal inventory build and the adoption of ASU 2016-02. The working capital of both segments increased as well due to the impact of slower sales and collections in late March 2020 due to the COVID-19 pandemic.

 

 

Note L—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)"). 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) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income, 30% of the taxpayer’s adjusted taxable income, and the taxpayer’s floor plan financing interest expense for the year. 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. 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.

 

Certain tax deductions, including many of those provided under the New Tax Legislation and the CARES Act, include limitations based on U.S. taxable income, which may be impacted due to anticipated lower pre-tax income as a result of the impacts of the COVID-19 pandemic. Our effective income tax rate on operations for the six-month period ended March 28, 2020, was 20.3% compared to a rate of 74.6% in the same period of the prior year and an effective rate of 5.5% for fiscal year 2019.

 

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, 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 based on anticipated lower U.S. taxable income due to the COVID-19 pandemic. 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—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 March 28, 2020, all of other comprehensive income was attributable to shareholders; none related to the non-controlling interest.  Outstanding instruments as of March 28, 2020, are as follows:

 

 

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 March 28, 2020, and September 28, 2019 (in thousands):

 

 

 

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 March 28, 2020, or September 28, 2019.

 

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):

 

 

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 March 28, 2020 and September 28, 2019, 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 and discount rates. At September 28, 2019, the fair value of contingent consideration was estimated at $8.9 million. During the six-months ended March 28, 2020, $2.5 million was paid related to the 2019 period. As of March 28, 2020, we estimate the fair value of contingent consideration to be $5.6 million, a $0.8 million reduction from September 28, 2019, resulting from changes in the projections and adjustments to the discount rate.

 

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. During the quarter ended March 28, 2020, it was determined that the calendar year 2019 performance targets were not achieved and, as a result, the $0.2 million accrual as of September 28, 2019, was reversed. At March 28, 2020, no amount was accrued for contingent consideration in relation to the acquisition of Salt Life.

 

 

Note N—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—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.

 

Through March 28, 2020, we have purchased 3,598,933 shares of our common stock for an aggregate of $52.5 million under our Stock Repurchase 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. As of March 28, 2020, $7.5 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date.

 

The following table summarizes the purchases of our common stock for the quarter ended March 28, 2020:

 

 

 

 

Note P—Goodwill and Intangible Assets

 

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

 

 

Goodwill was recorded in conjunction with our acquisitions of Salt Life and DTG2Go businesses and represents the acquired goodwill, net of the $0.6 million cumulative impairment losses recorded in fiscal year 2011. At March 28, 2020, the Salt Life reporting within the Salt Life Group segment and DTG2Go reporting unit within the Delta Group segment had goodwill of $19.9 million and $18.0 million, respectively. We evaluate the carrying value of goodwill annually on the first day of our third fiscal quarter or more frequently if events or circumstances indicate that an impairment loss may have occurred. Such circumstances could include, but are not limited to, a significant adverse change in business climate, increased competition or other economic conditions.

 

As of March 28, 2020, we performed an interim goodwill impairment evaluation using the optional qualitative assessment provided within ASC 350, Intangibles - Goodwill and Other and concluded that it is more likely than not that the fair value of the Salt Life and DTG2Go reporting units are greater than the carrying value at March 28, 2020. In reaching this conclusion, we applied various management judgments and estimates, including the results of prior annual impairment tests and the drivers of the near-term reduced projected results. In the annual goodwill impairment evaluation performed during the fiscal 2019 June quarter, we estimated the fair value of the reporting units using a discounted cash flow methodology using key assumptions as described in the fiscal 2019 Form 10-K, Critical Accounting Policies. As a result of this analysis, we estimated that the fair value of the reporting units exceeded their carrying values by significant margins.

 

Prior to the COVID-19 pandemic, we anticipated double-digit topline growth in our DTG2Go and Salt Life businesses for fiscal year 2020 compared to the prior year. For the Salt Life reporting unit, we expect results to be negatively impacted in the short term by the temporary closure of retail channels, including the Salt Life-branded retail stores, as a result of the COVID-19 pandemic impact in the U.S. There remains uncertainty as to when these channels will re-open and to what level they will be restored. We have seen continued strength in ecommerce sales channels, including our Salt Life consumer site. During the March quarter ended March 28, 2020, Salt Life web sales increased 20% over the prior year. In April, we have experienced further acceleration of Salt Life ecommerce sales, with sales more than doubling over the same period in the prior year. This continuing revenue stream provides support of the underlying strength of the Salt Life brand and expectations regarding future performance as the U.S economy re-opens. We have also taken actions to improve cash flows and operating income in the short and long-term. The DTG2Go business has experienced a notable increase in sales orders in the final week of the fiscal 2020 March quarter that has further accelerated into April. In April 2020, the average daily orders received is more than double that of March 2020 and approximates the average daily orders received during the December 2019 holiday period.  Greater than 90% of DTG2Go sales come through ecommerce sales channels, which show positive sales trends during the COVID-19 pandemic. Considering the significant excess of fair value over carrying value in the prior year impairment evaluations and the leading indicators of strong Salt Life ecommerce and DTG2Go sales in recent weeks, we concluded that it is more likely than not that the fair values of the Salt Life and DTG2Go reporting units are greater than the carrying value.

 

Although we are aggressively managing our response to the recent COVID-19 pandemic, its impact on the Salt Life and DTG2Go reporting units' full year fiscal 2020 and beyond results and cash flows is uncertain. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on retailers as well as the ability of our customers, supply chain, and distribution to operate with minimal disruption for the remainder of fiscal 2020 and beyond, all of which could negatively impact the reporting units' financial position, results of operations, cash flows, and outlook. Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the future. If our assumptions regarding fair value are not achieved, it is possible that an impairment review may be triggered and goodwill or other intangible assets may be impaired in a future period.

 

Amortization expense for intangible assets was $0.4 million and $0.5 million for the three-month periods ended March 28, 2020, and March 30, 2019, respectively, and $0.9 million and $1.0 million for the six-month periods ended March 28, 2020, and March 30, 2019, respectively. Amortization expense is estimated to be approximately $1.7 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.

 

 

Note Q—Subsequent Events

 

On April 27, 2020, Delta Apparel, Inc. and its 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) entered into a Fifth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Fifth Amendment”). The Fifth Amendment amends the financial covenant provisions from the amendment date through October 3, 2020, including effectively lowering the minimum availability thresholds and removing the requirement that our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month period must not be less than 1.1 to 1.0. The Fifth Amendment also, among other things, (i) allows for an additional 30 days of aged receivables from customers in the borrowing base through August 1, 2020, (ii) ceases amortization of real estate and machinery and equipment assets in the borrowing base through August 1, 2020, (iii) postpones amortization of trademark assets in the borrowing base until October 4, 2020; (iv) amends the definition of Fixed Charge Coverage Ratio to reference the monthly amortization of the borrowing bases that were amended as part of the Fourth Amendment to the Fifth Amended and Restated Credit Agreement on November 19, 2019, (v) amends the LIBOR rate definition to include a floor rate of 1.0%, and (vi) requires weekly reporting of accounts receivable to the Agent through October 3, 2020.

 

We expect the Fifth Amendment will enhance our borrowing base and allow us to access more of our availability under the Amended Credit Agreement while easing the financial covenant restrictions for the remainder of fiscal 2020.

 

See Part II, Item 5. Other Information for additional detail regarding the Fifth Amendment.