DELTA APPAREL, INC - Quarter Report: 2023 April (Form 10-Q)
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
April 1, 2023
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)
Georgia
58-2508794
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
2750 Premier Parkway
,
Suite 100
Duluth
,
Georgia
30097
(Address of principal executive offices)
(Zip Code)
(
678
)
775-6900
______________________________
(Registrant’s telephone number, including area code)
______________________________
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01
DLA
NYSE American
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
☑
☐
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
☑
☐
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.
Large accelerated filer
☐
Accelerated filer
☑
Non-accelerated filer
☐
Smaller reporting company
☑
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
☑
As of April 28, 2023, there were outstanding
7,001,020
common or voting stock of the registrant.
TABLE OF CONTENTS
Page
PART I.
Item 1.
3
4
5
6
7
8
8
8
8
9
9
10
11
11
11
11
12
13
13
13
14
14
Item 2.
15
Item 4.
18
PART II.
18
Item 1.
18
Item 1A.
18
Item 2.
18
Item 5.
18
Item 6.
18
20
3
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)
March 2023
September 2022
Assets
Cash and cash equivalents
$
625
$
300
Accounts receivable, less allowances of $
124
109
, respectively
62,020
68,215
Other receivables
1,125
1,402
Income tax receivable
1,680
1,969
Inventories, net
243,167
248,538
Prepaid expenses and other current assets
4,096
2,755
Total current assets
312,713
323,179
Property, plant and equipment, net of accumulated depreciation of $
114,569
108,565
, respectively
70,739
74,109
Goodwill
37,897
37,897
Intangibles, net
22,834
24,026
Deferred income taxes
1,342
1,342
Operating lease assets
56,174
50,275
Equity method investment
9,036
9,886
Other assets
2,239
2,967
Total assets
$
512,974
$
523,681
Liabilities and Equity
Liabilities:
Accounts payable
$
66,071
$
83,553
Accrued expenses
18,581
27,414
Income taxes payable
671
379
Current portion of finance leases
8,843
8,163
Current portion of operating leases
8,861
8,876
Current portion of long-term debt
8,962
9,176
Total current liabilities
111,989
137,561
Long-term income taxes payable
2,131
2,841
Long-term finance leases
17,483
16,776
Long-term operating leases
48,804
42,721
Long-term debt
159,591
136,750
Deferred income taxes
337
4,310
Total liabilities
$
340,335
$
340,959
Shareholder's equity:
Preferred stock - $
0.01
2,000,000
-
-
Common stock $
0.01
15,000,000
9,646,972
7,001,020
6,915,663
shares outstanding as of March 2023 and September 2022, respectively
96
96
Additional paid-in capital
60,912
61,961
Retained earnings
156,043
166,600
Accumulated other comprehensive income
180
141
Treasury stock -
2,645,952
2,731,309
(43,896)
(45,420)
Equity attributable to Delta Apparel, Inc.
173,335
183,378
Equity attributable to non-controlling interest
(696)
(656)
Total equity
172,639
182,722
Total liabilities and equity
$
512,974
$
523,681
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended
Six Months Ended
March 2023
March 2022
March 2023
March 2022
Net sales
$
110,335
$
131,698
$
217,630
$
242,444
Cost of goods sold
94,126
98,176
187,798
185,919
Gross profit
16,209
33,522
29,832
56,525
Selling, general and administrative expenses
19,298
19,714
38,168
37,197
Other expense (income), net
2,265
(533)
(356)
(929)
Operating (loss) income
(5,354)
14,341
(7,980)
20,257
Interest expense, net
3,723
1,801
6,613
3,399
(Loss) income before (benefit from) provision for income taxes
(9,077)
12,540
(14,593)
16,858
(Benefit from) provision for income taxes
(2,079)
2,414
(3,996)
3,062
Consolidated net (loss) income
(6,998)
10,126
(10,597)
13,796
Net (loss) income attributable to non-controlling interest
(6)
(11)
(40)
14
Net (loss) earnings attributable to shareholders
$
(6,992)
$
10,137
$
(10,557)
$
13,782
Basic (loss) income per share
$
(1.00)
$
1.46
$
(1.51)
$
1.98
Diluted (loss) income per share
$
(1.00)
$
1.44
$
(1.51)
$
1.95
Weighted average number of shares outstanding
7,001
6,953
6,978
6,976
Dilutive effect of stock awards
-
87
-
87
Weighted average number of shares assuming dilution
7,001
7,040
6,978
7,063
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)
(Unaudited)
Three Months Ended
Six Months Ended
March 2023
March 2022
March 2023
March 2022
Net (loss) income attributable to shareholders
$
(6,992)
$
10,137
$
(10,557)
$
13,782
Other comprehensive (loss) gain related to unrealized (loss) gain on
derivatives, net of income tax
(30)
381
39
593
Consolidated comprehensive (loss) income
$
(7,022)
$
10,518
$
(10,518)
$
14,375
See accompanying Notes to Condensed Consolidated Financial Statements.
6
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
Shares
Amount
Interest
Total
Balance as of September
2022
9,646,972
$
96
$
61,961
$
166,600
$
141
2,731,309
$
(45,420)
$
(656)
$
182,722
Net loss
-
-
-
(3,565)
-
-
-
-
(3,565)
Other comprehensive income
-
-
-
-
69
-
-
-
69
Net loss attributable to non-
controlling interest
-
-
-
-
-
-
-
(34)
(34)
Vested stock awards
-
-
(2,067)
-
-
(85,357)
1,524
-
(543)
Stock based compensation
-
-
665
-
-
-
-
-
665
Balance as of December
2022
9,646,972
$
96
$
60,559
$
163,035
$
210
2,645,952
$
(43,896)
$
(690)
$
179,314
Net loss
-
-
-
(6,992)
-
-
-
-
(6,992)
Other comprehensive loss
-
-
-
-
(30)
-
-
-
(30)
Net loss attributable to non-
controlling interest
-
-
-
-
-
-
-
(6)
(6)
Stock based compensation
-
-
353
-
-
-
-
-
353
Balance as of March 2023
9,646,972
$
96
$
60,912
$
156,043
$
180
2,645,952
$
(43,896)
$
(696)
$
172,639
Accumulated
Additional
Other
Non-
Common Stock
Paid-In
Retained
Comprehensive
Treasury Stock
Controlling
Shares
Amount
Capital
Earnings
(Loss)
Shares
Amount
Interest
Total
Balance as of September 2021
9,646,972
$
96
$
60,831
$
146,860
$
(786)
2,672,312
$
(42,149)
$
(658)
$
164,194
Net income
-
-
-
3,645
-
-
-
-
3,645
Other comprehensive income
-
-
-
-
212
-
-
-
212
Net income attributable to
non-controlling interest
-
-
-
-
-
-
-
25
25
Purchase of common stock
-
-
-
-
-
74,232
(2,143)
-
(2,143)
Vested stock awards
-
-
(1,766)
-
-
(76,460)
674
-
(1,092)
Stock based compensation
-
-
140
-
-
-
-
-
140
Balance as of December 2021
9,646,972
$
96
$
59,205
$
150,505
$
(574)
2,670,084
$
(43,618)
$
(633)
$
164,981
Net income
-
-
-
10,137
-
-
-
-
10,137
Other comprehensive income
-
-
-
-
381
-
-
-
381
Net loss attributable to non-
controlling interest
-
-
-
-
-
-
-
(11)
(11)
Purchase of common stock
-
-
-
-
-
28,015
(846)
-
(846)
Stock based compensation
-
-
714
-
-
-
-
-
714
Balance as of March 2022
9,646,972
$
96
$
59,919
$
160,642
$
(193)
2,698,099
$
(44,464)
$
(644)
$
175,356
See accompanying Notes to Condensed Consolidated Financial Statements.
7
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Six Months Ended
March 2023
March 2022
Operating activities:
Consolidated net (loss) earnings
$
(10,597)
$
13,796
Adjustments to reconcile net (loss) earnings to net cash used in operating activities:
Depreciation and amortization
7,642
7,434
Amortization of deferred financing fees
268
162
Change in inventory market reserves
(3,540)
1,290
(Benefit from) provision for deferred income taxes
(3,986)
583
Non-cash stock compensation
1,018
854
Loss on disposal of equipment
69
383
Loss on impairment of equipment
860
-
Other, net
(390)
(1,180)
Changes in operating assets and liabilities:
Accounts receivable
6,472
(10,524)
Inventories
8,911
(37,278)
Prepaid expenses and other current assets
(1,609)
(66)
Other non-current assets
2,019
1,014
Accounts payable
(17,657)
11,742
Accrued expenses
(8,659)
(3,215)
Change in net operating lease liabilities
169
243
Income taxes
(129)
1,352
Other liabilities
-
(1,049)
Net cash used in operating activities
(19,139)
(14,459)
Investing activities:
Purchases of property and equipment, net
(2,495)
(7,670)
Proceeds from sale of property and equipment
-
33
Proceeds from equipment under financed leases
4,417
-
Cash paid for intangible asset
-
(109)
Cash paid for business
-
(583)
Net cash provided by (used in) investing activities
1,922
(8,329)
Financing activities:
Proceeds from long-term debt
254,103
265,034
Repayment of long-term debt
(231,476)
(243,483)
Repayment of capital financing
(4,543)
(3,630)
Repurchase of common stock
-
(2,989)
Payment of withholding taxes on stock awards
(542)
(1,092)
Net cash provided by financing activities
17,542
13,840
Net increase (decrease) in cash and cash equivalents
325
(8,948)
Cash and cash equivalents at beginning of period
300
9,376
Cash and cash equivalents at end of period
$
625
$
428
Supplemental cash flow information
Finance lease assets exchanged for finance lease liabilities
$
5,930
$
5,379
Operating lease assets exchanged for operating lease liabilities
$
10,991
$
4,397
See accompanying Notes to Condensed Consolidated Financial Statements.
8
Delta Apparel, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A— Description of Business and Basis of Presentation
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
7,000
of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and
fulfillment industry, bringing DTG2Go's proprietary technology and innovation to our customers' supply chains. We specialize in selling casual and athletic products
through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier
retailers, mass merchants, eRetailers, the U.S. military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer
on our ecommerce sites and in our branded retail stores. Our diversified go-to-market strategy allows us to capitalize on our strengths in providing 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, with more than
90
% of the apparel units that we sell sewn in our own facilities. This allows us to offer
a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations
located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution
facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments
to retailers. We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American under the
symbol “DLA."
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our 2023 fiscal year is a 52-week year and will end on September 30, 2023 ("fiscal
2023"). Accordingly, this Quarterly Report on Form 10-Q presents our results for our second quarter of fiscal 2023. Our 2022 fiscal year was a 52-week year and ended
on October 1, 2022 ("fiscal 2022").
For presentation purposes herein, all references to period ended relate to the following fiscal years and dates:
Period Ended
Fiscal Year
Date Ended
March 2022
Fiscal 2022
April 2, 2022
June 2022
Fiscal 2022
July 2, 2022
September 2022
Fiscal 2022
October 1, 2022
December 2022
Fiscal 2023
December 31, 2022
March 2023
Fiscal 2023
April 1, 2023
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 months ended March 2023 are not necessarily indicative of the results that may be expected for our fiscal 2023. Although our
various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality. By diversifying our product lines and go-to-
market strategies over the years, we have reduced the overall seasonality of our business. Consumer demand for apparel is cyclical and dependent upon the overall level
of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic
and international economic conditions change. Therefore, the distribution of sales by quarter in fiscal 2023 may not be indicative of the distribution in future years. 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 2022, 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 six months ended March
2023 and March 2022, we received dividends from this investment of $
1.2
1.1
under an operating lease arrangement with this Honduran company. During the six months ended March 2023 and March 2022, we paid approximately $
0.9
this arrangement.
We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not
part of this, or any other, report that we file with, or furnish to, the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports
and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 2750 Premiere Parkway, Suite 100, Duluth,
Georgia 30097. Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.
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 our fiscal 2022, filed with the
SEC. See Note C for consideration of recently issued accounting standards.
Note C—New Accounting Standards
Standards Not Yet Adopted
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.
9
Note D—Revenue Recognition
Our Condensed Consolidated Statements of Operations include revenue streams from retail sales at our branded retail stores; direct-to-consumer ecommerce sales on our
consumer-facing websites; and sales from wholesale channels, which includes our business-to-business ecommerce sales and sales in our DTG2Go business. The table
below identifies the amount and percentage of net sales by distribution channel (in thousands):
Three Months Ended
March 2023
March 2022
Retail
$
3,157
3
%
$
2,370
1
%
Direct-to-consumer ecommerce
1,509
1
%
710
1
%
Wholesale
105,669
96
%
128,618
98
%
Net sales
$
110,335
100
%
$
131,698
100
%
Six Months Ended
March 2023
March 2022
Retail
$
6,611
3
%
$
5,273
2
%
Direct-to-consumer ecommerce
2,672
1
%
2,054
1
%
Wholesale
208,347
96
%
235,117
97
%
Net sales
$
217,630
100
%
$
242,444
100
%
The table below provides net sales by reportable segment and the percentage of net sales by distribution channel for each reportable segment (in thousands):
Three Months Ended March 2023
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
91,344
0.0
%
0.3
%
99.7
%
Salt Life Group
18,991
16.5
%
6.9
%
76.6
%
Total
$
110,335
Three Months Ended March 2022
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
115,335
0.1
%
0.1
%
99.8
%
Salt Life Group
16,363
14.1
%
3.3
%
82.6
%
Total
$
131,698
Six Months Ended March 2023
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
188,354
0.1
%
0.2
%
99.7
%
Salt Life Group
29,276
22.3
%
7.8
%
69.9
%
Total
$
217,630
Six Months Ended March 2022
Net Sales
Retail
Direct-to-consumer
ecommerce
Wholesale
Delta Group
$
217,256
0.1
%
0.2
%
99.7
%
Salt Life Group
25,188
19.8
%
6.3
%
73.9
%
Total
$
242,444
Note E—Inventories
Inventories, net of reserves of $
14.1
17.7
March 2023
September 2022
Raw materials
$
18,796
$
22,603
Work in process
18,574
23,501
Finished goods
205,797
202,434
$
243,167
$
248,538
Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and direct embellishment materials for the
Salt Life Group.
10
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, and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, 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, October 8, 2018, November 19, 2019, April 27, 2020, August 28, 2020, June 2, 2022, January 3, 2023,
February 3, 2023, and March 23, 2023.
On June 2, 2022, the Borrowers entered into the Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set
forth therein (the “Seventh Amendment”). The Seventh Amendment, (i) removes LIBOR based borrowing and utilizes SOFR (Secured Overnight Financing Rate) as the
primary pricing structure, (ii) amends the pricing structure based on SOFR plus a CSA (Credit Spread Adjustment) defined as
10
15
tenors, (iii) sets the SOFR floor to
0
respective amortization schedules, (v) sets the maturity date to
5
(“FCCR”) for the preceding 12-month period to not be less than
1.0
1.1
).
On January 3, 2023, the Borrowers entered into the Eighth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set
forth therein (the “Eighth Amendment”). The Eighth Amendment essentially clarifies the Amended Credit Agreement’s provisions regarding the inclusion of eligible in-
transit inventory in the borrowing base and amends the definition of Increased Reporting Event to include
12.5
% of the lesser of the borrowing base and the maximum
revolver amount as opposed to
12.5
% of the line cap.
On February 3, 2023, the Borrowers entered into the Ninth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set
forth therein (“Ninth Amendment”). The Ninth Amendment adds an Accommodation Period beginning on the amendment date and continuing through the date following
September 30, 2023, upon which Borrowers satisfy minimum availability thresholds and during which: (i) the minimum borrowing availability thresholds applicable to
the Amended Credit Agreement are (a) through (and including) April 1, 2023, $
7,500,000
, (b) on and after April 2, 2023 through (and including) June 4, 2023, $
9,000,000
,
(c) on and after June 5, 2023, through the date following September 30, 2023, upon which Borrowers satisfy minimum availability thresholds, $
10,000,000
; and (d) at all
times thereafter, $
0
; (ii) the FCCR covenant is suspended; (iii) Borrowers must maintain specified minimum EBITDA levels for trailing three-month periods starting
March 4, 2023; (iv) the Applicable Margin with respect to loans under the Amended Credit Agreement is increased by
50
Event occurs if availability is less than $
2,000,000
.
On March 23, 2023, the Borrowers entered into the Tenth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo and the other lenders set
forth therein to account for specified costs and expenses in calculating EBITDA for purposes of the Amended Credit Agreement.
The Amended Credit Agreement allows us to borrow up to $
170
25
Provided that no event of default exists, we have the option to increase the maximum credit to $
200
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) 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 March 2023, we had $
153.1
7.6
%. Our cash on hand combined with the
availability under the U.S. revolving credit facility totaled $
12.8
19.6
24.9
retained earnings free of restrictions to make cash dividend payments or stock repurchases to the extent permitted under our U.S. revolving credit facility.
Honduran Debt
Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance investments in both the operations
and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with
five
-
year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances at the time of settlement of $
1.1
9.5
respectively. Additionally, in May 2022, we entered into a new term loan with a
five
-year term with a principal amount of $
3.7
priority lien on the assets of our Honduran operations and are not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of
the debt approximates its fair value. As the revolving credit facility 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 borrowed are classified as long-term debt.
El Salvador Debt
In September 2022, we entered into a new term loan with a
five
-year term with a principal amount of $
3.0
investments in our El Salvador operations. This loan is secured by a first-priority lien on the assets of our El Salvador operations and is not guaranteed by our U.S. entities.
The loan is denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. Information about this loan and the outstanding balance as of
March 2023 is listed as part of the long-term debt schedule below.
Additional information about these loans and the outstanding balances as of March 2023 is as follows (in thousands):
March 2023
Revolving credit facility with Banco Ficohsa, a Honduran bank, with interest at
7.9
%, due August 2025
$
3,300
Term loan with Banco Ficohsa, a Honduran bank, interest at
7.75
%, quarterly installments which began September 2021 and are due through
December 2025
5,579
Term loan with Banco Ficohsa, a Honduran bank, interest at
7.75
%, quarterly installments which began March 2023 and are due through May
2027
3,483
Term loan with Banco Ficohsa, a Panamanian bank, interest at the prevailing market rate within the Panamanian Banking Market, monthly
installments which began October 2022 and are due through August 2027
2,754
11
Note 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 $
5.7
and $
5.6
11.2
ended March 2023 and 2022. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses, retail
store build-outs, and other general and administrative expenses.
Note H—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, stock performance units, and other stock and cash awards. While employed by the
Company or serving as a director, unvested awards become fully vested under certain circumstances as defined in the 2020 Stock Plan. Such circumstances include, but
are not limited to, the participant’s death or disability. 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. 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. Shares are generally issued from treasury stock upon
the vesting of the restricted stock units, performance units or other awards under the 2020 Stock Plan.
Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the March 2023 and March
2022 quarters, we recognized $
0.4
0.9
benefits recognized of $
0.2
0.2
March 2023 and March 2022, we recognized $
1.0
1.3
tax benefits recognized of $
0.3
0.2
During the December 2022 quarter, restricted stock units representing
105,000
fiscal 2022 and were issued in accordance with their respective agreements. Of these vested awards, all were payable in common stock.
During the December 2022 quarter, performance stock units and restricted stock units representing
5,000
18,000
forfeited.
As of March 2023, there was $
2.7
to be recognized over a period of
2.7
Note I—Purchase Contracts
We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At March 2023, minimum
payments under these contracts were as follows (in thousands):
Yarn
$
14,985
Finished fabric
4,102
Finished products
4,797
$
23,884
Note 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 the following business units, which are primarily focused on core activewear styles: DTG2Go and Delta Activewear.
DTG2Go is a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chains of our
many customers. Our ‘On-Demand DC’ digital solution provides retailers and brands with immediate access to utilize DTG2Go’s broad network of print and fulfillment
facilities, while offering the scalability to integrate digital fulfillment within the customer's own distribution facilities. We use highly-automated factory processes and
our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Via our seven digital fulfillment facilities
throughout the United States, DTG2Go offers a robust digital supply chain, shipping custom graphic products within 24 to 48 hours to consumers in the United States
and to over 100 countries worldwide. DTG2Go has made significant investments in its “digital-first” retail model providing digital graphic prints that meet the high-
quality standards required for brands, retailers and intellectual property holders. Through integration with Delta Activewear, DTG2Go also services the eRetailer, ad-
specialty, promotional and screen print marketplaces, among others.
Delta Activewear is a preferred supplier of activewear apparel to regional and global brands as well as direct to retail and wholesale markets. The Activewear business is
organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their go-to-market strategies and how their respective
customer bases source their various apparel needs. Our Delta Direct channel services the screen print, promotional, and eRetailer markets as well as retail licensing
customers that sell through to many mid-tier and mass market retailers. Delta Direct products include a broad portfolio of apparel and accessories under the Delta, Delta
Platinum, and Soffe brands as well as sourced items from select third party brands. Our fashion basics line includes our Platinum Collection, which offers fresh, fashionable
silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel products, including the Delta Dri line of performance shirts
built with moisture-wicking material to keep athletes dry and comfortable; ringspun garments with superior comfort, style and durability; and Delta Soft, a collection with
an incredible feel and price. We also offer our heritage, mid- and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.
The iconic Soffe brand offers activewear for spirit makers and record breakers and is widely known for the original "cheer short" with the signature roll-down waistband.
Soffe carries a wide range of activewear for the entire family. Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and
veteran United States military personnel worldwide. The Soffe men's assortment features the tagline "anchored in the military, grounded in training" and offers everything
12
from physical training gear certified by the respective branches of the military, classic base layers that include the favored 3-pack tees, and the iconic "ranger panty."
Complementing the Delta and Soffe brand apparel, we offer our customers a broad range of product categories with nationally recognized brands including polos,
outerwear, headwear, bags and other accessories. Our Soffe products are also available direct to consumers at www.soffe.com.
Our Global Brands channel serves as a key supply chain partner to large multi-national brands, major branded sportswear companies, trendy regional brands, and all
branches of the United States armed forces, providing services ranging from custom product development to shipment of branded products with “retail-ready” value-
added services including embellishment, hangtags, and ticketing.
Our Retail Direct channel serves brick and mortar and online retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to the retail locations
and ecommerce fulfillment centers of a diversified customer base including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores,
department stores, and mid-tier retailers. As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offer a seamless solution for
small-run decoration needs with on-demand digital print services, powered by DTG2Go.
The Salt Life Group is comprised of our Salt Life business, which is built on the authentic, aspirational Salt Life lifestyle brand that represents a passion for the ocean,
the salt air, and, more importantly, a way of life and all it offers, from surfing, fishing, and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines
function and fashion with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the
cotton graphic tees and logo decals that originally drove awareness for the brand, and expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and
accessories. Consumers can also seamlessly experience the Salt Life brand through retail partners including surf shops, specialty stores, department stores, and outdoor
merchants or by accessing our Salt Life ecommerce site at www.saltlife.com.
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 (loss) earnings"). Our segment operating (loss) 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-K for fiscal 2022, 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
Six Months Ended
March 2023
March 2022
March 2023
March 2022
Segment net sales:
Delta Group
$
91,344
$
115,335
$
188,354
$
217,256
Salt Life Group
18,991
16,363
29,276
25,188
Total net sales
$
110,335
$
131,698
$
217,630
$
242,444
Segment operating (loss) earnings:
Delta Group
$
(7,487)
$
14,417
$
(7,363)
$
22,854
Salt Life Group
4,649
3,306
4,866
3,463
Total segment operating (loss) earnings
$
(2,838)
$
17,723
$
(2,497)
$
26,317
The following table reconciles the segment operating (loss) earnings to the consolidated (loss) earnings before (benefit from) provision for income taxes (in thousands):
Three Months Ended
Six Months Ended
March 2023
March 2022
March 2023
March 2022
Segment operating (loss) earnings
$
(2,838)
$
17,723
$
(2,497)
$
26,317
Unallocated corporate expenses
2,516
3,382
5,483
6,060
Unallocated interest expense
3,723
1,801
6,613
3,399
Consolidated (loss) earnings before (benefit from) provision for income
taxes
$
(9,077)
$
12,540
$
(14,593)
$
16,858
Note K—Income Taxes
The Tax Cuts and Jobs Act of 2017 enacted on December 22, 2017, significantly revised the U.S. corporate income tax code by, among other things, lowering federal
corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings
of foreign subsidiaries 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 net tested income over the net deemed tangible income. GILTI income is eligible for a deduction of up to 50% of the income inclusion, but the deduction is
limited to the amount of U.S. adjusted taxable income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's
business interest income and 30% of the taxpayer’s adjusted taxable income. We have included in our calculation of our effective tax rate the estimated impact of GILTI
and Section 163(j). In addition, we have elected to account for the tax on GILTI as a period cost and, therefore, do not record deferred taxes related to GILTI on our
foreign subsidiaries.
Our effective income tax rate on operations for the six-months ended March 2023 was
27.5
% compared to a rate of
18.2
% in the same period of the prior year, and an
effective rate of
17.9
% for fiscal 2022. We generally benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that
are lower than those in the United States. As such, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a
significant impact on our overall effective tax rate. The current year tax rate decreased relative to prior periods due US losses expected to generate a US tax benefit.
13
Note 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 March 2023, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling
interest. Outstanding instruments as of March 2023 are as follows:
Effective Date
Notional Amount
Fixed LIBOR
Rate
Maturity Date
Interest Rate Swap
July 25, 2018
$
20.0
3.18%
July 25, 2023
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 2023 and September 2022 (in thousands):
March 2023
September 2022
Deferred tax assets
$
(60)
$
(48)
Other non-current liabilities
240
189
Accumulated other comprehensive income
$
180
$
141
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We
do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of
goods sold on the Condensed Consolidated Statement of Operations. No such cotton contracts were outstanding at March 2023 and September 2022.
ASC 820, Fair Value Measurements and Disclosures 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
Active Markets
Other
Significant
for
Observable
Unobservable
Identical Assets
Inputs
Inputs
Period Ended
Total
(Level 1)
(Level 2)
(Level 3)
Interest Rate Swaps
March 2023
$
240
-
$
240
-
September 2022
$
189
-
$
189
-
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 2023 and September 2022, book value for fixed rate debt approximated 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).
Note 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 N—Repurchase of Common Stock
As of September 28, 2019, our Board of Directors authorized management to use up to $
60.0
Repurchase Program. We did
no
t purchase any shares of our common stock during the March 2023 quarter. Through March 2023, we have purchased
3,735,114
of our common stock for an aggregate of $
56.4
and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of March 2023, $
3.6
Program, which does not have an expiration date.
14
Note O—Goodwill and Intangible Assets
Components of intangible assets consist of the following (in thousands):
March 2023
September 2022
Accumulated
Net
Accumulated
Net
Economic
Cost
Amortization
Value
Cost
Amortization
Life
Goodwill
$
37,897
$
-
$
37,897
$
37,897
$
-
$
37,897
N/A
Intangibles:
Tradename/trademarks
$
16,000
$
(5,117)
$
10,883
$
16,000
$
(4,851)
$
11,149
20
30
Customer relationships
7,400
(3,583)
3,817
7,400
(3,213)
4,187
20
Technology
10,083
(3,059)
7,024
10,083
(2,610)
7,473
10
License agreements
2,100
(992)
1,108
2,100
(940)
1,160
15
30
Non-compete
1,657
(1,655)
2
1,657
(1,600)
57
4
8.5
Total intangibles
$
37,240
$
(14,406)
$
22,834
$
37,240
$
(13,214)
$
24,026
Goodwill represents the acquired goodwill net of the $
0.6
include $
18.0
19.9
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 for the March 2023 and March 2022 quarters was $
0.6
0.6
2023 and March 2022 was $
1.2
1.2
1.4
2023, approximately $
1.4
1.4
Note P—Subsequent Events
None.
15
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 general U.S. and international economic conditions;
●
the impact of the COVID-19 pandemic on our operations, financial condition, liquidity, and capital investments, including recent labor shortages,
inventory constraints, and supply chain disruptions;
●
significant interruptions or disruptions within our manufacturing, distribution or other operations;
●
deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers;
●
the volatility and uncertainty of cotton and other raw material prices and availability;
●
the competitive conditions in the apparel industry;
●
our ability to predict or react to changing consumer preferences or trends;
●
our ability to successfully open and operate new retail stores in a timely and cost-effective manner;
●
the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
●
changes in economic, political or social stability at our offshore locations or in areas in which we, or our suppliers or vendors, operate;
●
our ability to attract and retain key management;
●
the volatility and uncertainty of energy, fuel and related costs;
●
material disruptions in our information systems related to our business operations;
●
compromises of our data security;
●
significant changes in our effective tax rate;
●
significant litigation in either domestic or international jurisdictions;
●
recalls, claims and negative publicity associated with product liability issues;
●
the ability to protect our trademarks and other intellectual property;
●
changes in international trade regulations;
●
our ability to comply with trade regulations;
●
changes in employment laws or regulations or our relationship with employees; or our ability to attract and retain employees;
●
negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers or independent
contractors;
●
the inability of suppliers or other third-parties, including those providing key equipment, transportation, and other services, to perform their obligations
or fulfill the terms of their contracts with us;
●
restrictions on our ability to borrow capital or service our indebtedness;
●
interest rate fluctuations increasing our obligations under our variable rate indebtedness;
●
the ability to raise additional capital;
●
the impairment of acquired intangible assets;
●
foreign currency exchange rate fluctuations;
●
the illiquidity of our shares; and
●
price volatility in our shares and the general volatility of the stock market.
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 fiscal 2022, filed with the SEC. Any forward-looking statements in this Quarterly Report on Form 10-
Q do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements are made only as of the date of this
Quarterly Report on Form 10-Q, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities law.
16
Business Outlook
Our second quarter performance showcases the resiliency in our operating model and the versatility provided by our multiple market strategies. We were pleased to report
double-digit revenue growth across three of our five channels, including record second quarter performance at Salt Life and DTG2Go with year-over-year sales growth
of 16% and 19%, respectively, as well as double-digit sales growth in our Retail Direct channel.
Salt Life’s success during the quarter spanned across all channels of distribution and consumer recognition of the brand continues to proliferate across the United States
and internationally. Salt Life just recently opened its 23rd branded retail store and first in the state of New Jersey and plans to further expand its footprint in the northeast
market later this year with its first locations in New York. Salt Life’s wholesale channel continues to expand geographically, with approximately 1,800 retail doors spread
across 48 states and other territories, and the www.saltlife.com eCommerce site receives orders from all 50 states.
Salt Life also entered the multi-billion dollar home furnishings market during the quarter through a license agreement for the Salt Life Home collection to be offered to
consumers across the country. We expect the future royalty income generated by Salt Life’s expanding license portfolio to serve as another primary revenue channel
going forward.
DTG2Go’s exceptional top line results during the quarter were accompanied by a strategic consolidation of more digital capacity into its locations integrated with our
Delta Direct channel’s vertical blank garment supply and the related closing of a single-purpose location acquired in connection with a prior acquisition. DTG2Go
continues to enhance selling price strategies, make productivity gains, and grow sales outside of the December holiday quarter. DTG2Go’s digital first strategy has been
particularly instrumental in increasing sales throughout the year and we are seeing greater adoption of Delta Direct blank tees in that channel. In addition, the print quality
and consistency on the first generation technology used in DTG2Go’s digital first program is improving and DTG2Go continues to tailor its strategies and product
offerings to meet the requirements of its key digital first customer base.
DTG2Go expects to launch an exciting new on-demand portal in the third fiscal quarter designed to allow customers to seamlessly submit orders for small run, quick
reaction, and overflow replenishment orders. The portal will provide DTG2Go with another avenue to capitalize on the cost and speed limitations of traditional screenprint
operations as well as the growing market for personalized on-demand apparel documenting consumer experiences and events.
In our Delta Direct channel, the well-publicized high inventory levels and lower demand across the blank tee industry continued to impact our business and drove overall
sales below our expectations for the quarter. The retail license customer base selling into mid-tier and mass retail supply chains continues to be the primary area of softness
in this channel.
We are also seeing indications of an over-inventoried supply chain in parts of our Global Brands channel where we provide custom decorated product to large brands and
sportswear companies as well as all branches of the United States military, among others. While the high inventory levels among brands and retailers is currently pressuring
our demand, we continue to see positive macrotrends from brand and retailer nearshore sourcing strategies targeting manufacturing and fulfillment platforms like ours in
Central America.
The double-digit sales growth during the quarter in our Retail Direct channel, where we provide decorated, “retail ready” products to brick and mortar and e-commerce
merchants, is indicative of the momentum we see in nearshoring strategies. This channel is one of several areas of our business, including Salt Life, DTG2Go, and Global
Brands, where we sell decorated products directly to consumers or to customers adjacent to the consumer point-of-sale. Sales in these channels typically carry more
consistent margins due to the decoration and other value-adding services they require, along with the potential to pass through raw material cost risks in selling prices.
These channels are also more working capital friendly given they turn our inventory quicker. We plan to prioritize these sales opportunities as we look for more ways to
optimize the return on our capital investments in the current high interest rate environment.
Looking ahead, we believe our decisive action throughout the last three quarters in calibrating our production levels to the lower demand for blank tees, moderating our
inventory build, and streamlining our offshore manufacturing cost structure have us well-positioned to capitalize on upticks in demand and improve our operating results
as we move through the second half of our fiscal year. We will continue to focus on incrementally reducing our inventory and debt levels in the coming quarters and
believe we should see sequential improvement in our margins as we cycle through our higher-cost inventory through the back half of our fiscal year.
Results of Operations
Financial results included herein have been presented on a generally accepted accounting principles ("GAAP") basis.
Net sales were $110.3 million in the second quarter of fiscal 2023, a decrease of 16% compared to the prior year second quarter net sales of $131.7 million.
Net sales in the Delta Group segment decreased 21% to $91.3 million in the second quarter of fiscal 2023 compared to $115.3 million in the prior year second
quarter. Sales in our Delta Direct and Global Brands channels declined from the prior year period. This was offset by record second quarter DTG2Go sales, up 18%
from prior year, and increased sales in our Retail Direct channel during the quarter. Net sales for the first six months of 2023 were $188.4 million, a 13% decline
from the prior year period.
The Salt Life Group segment’s net sales for the second quarter of fiscal 2023 grew 16% and reached a second quarter record $19.0 million compared to $16.4 million
in the prior year second quarter. The segment’s growth was driven by increases in both our wholesale and direct to consumer channels. For the first six months of
fiscal 2023, net sales in the Salt Life segment were $29.3 million, up 16% from prior year period net sales of $25.2 million.
Gross margins were 14.7% for the second quarter of fiscal 2023, declining from the prior year second quarter gross margin of 25.5%.
Delta Group segment gross margins were 5.5% for the second quarter of fiscal 2023, a decline from prior year second quarter margins of 21.6%. Gross margins
were primarily impacted by higher inventory costs from inflationary raw material and other input pricing in fiscal 2022 flowing through sales during the quarter.
Plant curtailment costs of $0.9 million in the second quarter of fiscal 2023 also impacted gross margins, and second quarter gross margins adjusted for these costs
were 6.5%. Gross margins for the first six months of fiscal 2023 declined from 19.9% in the prior year period to 6.8% of sales. Adjusted for $4.3 million of plant
curtailment costs, gross margins for the six-months ended March 2023 were 9.1%.
Salt Life Group segment gross margins improved to 59.0% in the second quarter of fiscal 2023, an improvement of 660 basis points compared to 52.4% in the
prior year second quarter resulting from a favorable mix of sales, including increased direct-to-consumer sales through both our ecommerce and retail channels. For
the first six months of fiscal year 2023, gross margins grew to 58.3% of sales from 52.7% in the prior year period.
Selling, general, and administrative expenses ("SG&A") were $19.3 million in the second quarter of fiscal 2023, or 17.5% of sales, compared to $19.7 million, or 15.0%
of sales, in the prior year second quarter. The increase in SG&A as a percentage of sales was driven by the further expansion of Salt Life’s branded retail store footprint
and the deleveraging effect of overall lower sales relative to the prior year period. SG&A expenses for the first six months of fiscal 2023 were $38.2 million, or 17.5% of
sales, compared to $37.2 million, or 15.3% of sales, and driven by fixed costs period-over-period compared to lower sales in the current year.
17
Other loss for the 2023 second fiscal quarter includes $1.6 million of expenses incurred in our Central American and Mexican manufacturing operations to better align
our cost structure with market demand. We also incurred $0.9 million in expense in our DTG2Go business as we shifted the digital production capacity from our legacy,
single-purpose Clearwater, Florida facility into our national footprint of dual-purpose facilities housing digital printing and blank garment distribution under one roof to
advance our integrated on-demand model and further leverage the distinct competitive advantages it provides DTG2Go. In addition, the second fiscal quarter includes
profits of $0.3 million related to our Honduran equity method investment. Other income for the second quarter of fiscal 2022 included a valuation change in our contingent
consideration liabilities of $0.5 million, a loss on disposal of assets of $0.4 million, as well as profits related to our Honduran equity method investment of $0.3 million.
Other income for the first six months of fiscal includes a discrete gain of $2.5 million from the settlement of a commercial litigation matter recorded in the first quarter of
fiscal 2023 as well as profits in our Honduran equity method investment, which were offset by the above-referenced costs incurred to better align our offshore
manufacturing cost structure with market demand. Other income for the first six months of fiscal 2022 was $0.9 million, including profits related to our Honduran equity
method investment and a valuation adjustment of our contingent consideration.
Operating loss in the second quarter of fiscal 2023 was $5.3 million, a decrease from the prior year second fiscal quarter operating profit of $14.4 million. For the first six
months of fiscal year 2023, operating loss was $7.9 million, declining from the prior year operating income of $20.2 million.
The Delta Group segment experienced an operating loss of $7.5 million in the second quarter of fiscal 2023, or 8.2% of net sales, compared to operating income of
$14.4 million, or 12.5% of net sales, in the prior year second quarter. The decline in operating profit was driven by lower gross margins. Operating loss was $7.4
million, or 3.9% of sales, for the first half of fiscal 2023, compared to operating income of $22.9 million, or 10.5% of sales in the prior year period.
The Salt Life Group segment earned operating income of $4.6 million in the second quarter of fiscal 2023, or 24.5% of net sales, compared to $3.3 million, or 20.2%
of net sales, in the prior year second quarter. The increase in operating income as a percentage of sales was driven by improved gross margins. For the first six
months of fiscal 2023, operating income improved by $1.4 million to $4.8 million.
Net interest expense for the second quarter of fiscal year 2023 was $3.7 million, and for the second quarter of fiscal year 2022 was $1.8 million. Net interest expense for
the first six months of fiscal 2023 was $6.6 million compared to $3.4 million in the prior year first six months.
Our effective tax rate on operations for the six-month period ended March 2023 was 27.5%. This compares to an effective tax rate of 18.2% for the same period in the
prior year and 17.9 % for the full fiscal year 2022. See Note K—Income taxes for more information.
Net loss attributable to shareholders for the second fiscal quarter of 2023 was $7.0 million, or $1.00 per diluted share, compared to net income of $10.1 million, or $1.44
per diluted share, in the prior year. Net loss attributable to shareholders for the first six months of fiscal 2023 was $10.6 million, or $1.51 per diluted share, compared to
net income of $13.8 million, or $1.95 per diluted share, in the prior year.
Accounts receivable were $62.0 million at March 2023, compared to $68.2 million as of September 2022. Days sales outstanding ("DSO") as of March 2023 were 45
days compared to 52 days at September 2022.
Net inventory as of March 2023 was $243.2 million, a decrease of $5.4 million from September 2022 and an increase of $45.5 million from March 2022. The inventory
value is higher than the prior year second quarter as a result of increased input costs; however, it represents a sequential decline from the December 2022 quarter as a
result of production adjustments to align with demand during the second quarter of fiscal 2023.
Total net debt, including capital lease financing and cash on hand, was $194.3 million at March 2023, an increase of $23.7 million from September 2022. Cash on hand
and availability under our U.S. revolving credit facility totaled $12.8 million at March 2023, a $21.9 million decrease from September 2022 principally driven by working
capital needs due to reduced consumer demand impacting our customers as well as inflationary input costs.
Liquidity and Capital Resources
Operating Cash Flows
Operating activities resulted in a cash usage of $19.1 million for the six months ended March 2023 compared to $14.5 million of cash used in the prior year. The increase
in cash used in operating cash flows in the current year is due to the timing of payments from customers and to vendors, in addition to the decreased earnings in the
business in the first half of fiscal 2023.
Investing Cash Flows
Cash outflows for capital expenditures were $2.5 million during the first six months of 2023 compared to $7.7 million in the same period in the prior year. We currently
expect to spend less on capital expenditures in 2023 compared to 2022, with our expenditures expected to focus on direct-to-consumer investments including new Salt
Life retail store openings, information technology, and manufacturing efficiencies.
Financing Activities
During the six months ended March 2023, cash provided by financing activities was $17.5 million compared to $13.8 million in the prior year, primarily related to funding
our operating activities, working capital needs, and certain capital investments offset by scheduled loan principal payments.
Future Liquidity and Capital Resources
See Note F – Debt to the Condensed Consolidated Financial Statements for a discussion of our various financing arrangements, including the terms of our revolving U.S.
credit facility.
Our credit facility, as well as cash flows from operations, are intended to fund our day-to-day working capital needs, and along with capital lease financing arrangements,
to fund our planned capital expenditures. However, any material deterioration in our results of operations may result in the loss of our ability to borrow under our U.S.
revolving credit facility and to issue letters of credit to suppliers, or may cause the borrowing availability under that facility to be insufficient for our needs. Availability
under our credit facility is primarily a function of the levels of our accounts receivable and inventory. A significant deterioration in our accounts receivable or inventory
levels could restrict our ability to borrow additional funds or service our indebtedness. Our availability at March 2023 was above the minimum thresholds specified in our
credit agreement, and we were compliant with the applicable EBITDA covenant minimum thresholds. We note that the execution of the Ninth Amendment to the Fifth
Amended and Restated Credit Agreement suspended application of the FCCR covenant until the expiration of its Accommodation Period. Refer to Note F for further
information.
18
Share Repurchase Program
The Company did not purchase any shares under our previously announced share repurchase program in the March 2023 quarter. The total amount repurchased during
the life of the program is $56.4 million. At the end of the second quarter of fiscal 2023, the Company had $3.6 million of remaining repurchase capacity under its existing
authorization.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which were prepared
in accordance with U.S. GAAP. The preparation of our Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, accounts
receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and the accounting for income taxes.
A detailed discussion of critical accounting policies is contained in the Significant Accounting Policies included in Note 2 to the Audited Consolidated Financial
Statements included in our Annual Report on Form 10-K for fiscal 2022, and there have been no changes in those policies since the filing of that Annual Report on Form
10-K with the SEC.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air
emissions and solid waste disposal. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal
agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys general in the United States. Our 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 and regulations. We currently do not expect that the amount of expenditures required to comply with these environmental
standards or other regulatory matters will have a material adverse effect on our operations, financial condition or liquidity. There can be no assurance, however, that future
changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require
substantial additional expenditures. Similarly, while we believe that we are currently in compliance with all applicable environmental and other regulatory requirements,
the extent of our liability, if any, for past failures to comply with laws, regulations and permits applicable to our operations cannot be determined and could have a material
adverse effect on our operations, financial condition and liquidity.
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 principal accounting officer, as
appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and principal accounting officer, has evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this quarterly report ("the Evaluation Date") and, based on their evaluation, our Chief Executive Officer and principal
accounting officer have concluded that these controls and procedures were effective as of the Evaluation Date.
Changes in Internal Control Over Financial Reporting
There were no changes during the March 2023 quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 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 N—Repurchase of Common Stock, Part I, in Item 1, which is incorporated herein by reference.
Item 5. Other Information
None
19
Item 6. Exhibits
Exhibits
10.1
31.1
31.2
32.1
32.2
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the
Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
104
Cover Page Interactive Data File - (formatted as Inline XBRL and contained in Exhibit 101)
20
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
May 4, 2023
By:
/s/Nancy P. Bubanich
Nancy P. Bubanich
Chief Accounting Officer