10-Q 1 dla20220615_10q.htm FORM 10-Q dla20220615_10q.htm
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Table of Contents

 



 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended July 2, 2022

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)

 

(678775-6900

 


(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 ☑ 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. 

 

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 July 19, 2022, there were outstanding 6,914,939 shares of the registrant’s common stock, par value of $0.01 per share, which is the only class of outstanding common or voting stock of the registrant.

 



 

 

TABLE OF CONTENTS

 

 

 

Page

PART I.

Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets — June 2022 and September 2021

3

 

 

 

 

Condensed Consolidated Statements of Operations — Three and Nine months ended June 2022 and June 2021

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income — Three and Nine months ended June 2022 and June 2021

5

 

 

 

 

Condensed Consolidated Statements of Shareholders' Equity — Three and Nine months ended June 2022 and June 2021

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows — Nine months ended June 2022 and June 2021

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

Note A—Basis of Presentation and Description of Business

8

  Note B—Accounting Policies 9
  Note C—New Accounting Standards 9
  Note D—Revenue Recognition 10
  Note E—Inventories 11
  Note F—Debt 11
  Note G—Selling, General and Administrative Expense 11
  Note H—Stock-Based Compensation 12
  Note I—Purchase Contracts 12
  Note J—Business Segments 13
  Note K—Income Taxes 14
  Note L—Derivatives and Fair Value Measurements 14
  Note M—Legal Proceedings 15
  Note N—Repurchase of Common Stock 15
  Note O—Goodwill and Intangible Assets 16
  Note P—Subsequent Events 16
     

Item 2.

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

17

     

Item 4.

Controls and Procedures

20

 

 

 

PART II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A. Risk Factors 20
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

 

 

 

Item 5.

Other Information

20

 

 

 

Item 6.

Exhibits

21

 

 

 

Signatures

 

22

 

 

 

Exhibits

 

 

EX-10.1  

EX-31.1

 

EX-31.2

 

EX-32.1

 

EX-32.2

 

 

 

PART 1.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

(Unaudited)

 

  

June 2022

  

September 2021

 

Assets

        

Cash and cash equivalents

 $542  $9,376 

Accounts receivable, less allowances of $91 and $251, respectively

  68,435   66,973 

Other receivables

  1,433   761 

Income tax receivable

  -   356 

Inventories, net

  227,671   161,703 

Prepaid expenses and other current assets

  3,798   3,794 

Total current assets

  301,879   242,963 
         

Property, plant and equipment, net of accumulated depreciation of $105,998 and $99,225, respectively

  75,144   67,564 

Goodwill

  37,897   37,897 

Intangibles, net

  24,627   26,291 

Deferred income taxes

  1,164   1,854 

Operating lease assets

  47,570   45,279 

Equity method investment

  10,277   10,433 

Other assets

  2,893   2,007 

Total assets

 $501,451  $434,288 
         

Liabilities and Equity

        

Liabilities:

        

Accounts payable

 $76,244  $52,936 

Accrued expenses

  25,936   29,949 

Income taxes payable

  666   379 

Current portion of finance leases

  8,265   6,621 

Current portion of operating leases

  8,044   8,509 

Current portion of long-term debt

  7,615   7,067 

Current portion of contingent consideration

  563   - 

Total current liabilities

  127,333   105,461 
         

Long-term income taxes payable

  2,841   3,220 

Long-term finance leases

  18,802   15,669 

Long-term operating leases

  40,940   38,546 

Long-term debt

  128,230   101,680 

Long-term contingent consideration

  -   1,897 

Other non-current liabilities

  1,591   3,621 

Total liabilities

 $319,737  $270,094 
         

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 6,914,939 and 6,974,660 shares outstanding as of June 2022 and September 2021, respectively

  96   96 

Additional paid-in capital

  60,822   60,831 

Retained earnings

  166,882   146,860 

Accumulated other comprehensive loss

  (7)  (786)

Treasury stock - 2,732,033 and 2,672,312 shares as of June 2022 and September 2021, respectively

  (45,432)  (42,149)

Equity attributable to Delta Apparel, Inc.

  182,361   164,852 

Equity attributable to non-controlling interest

  (647)  (658)

Total equity

  181,714   164,194 

Total liabilities and equity

 $501,451  $434,288 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations 

(Amounts in thousands, except per share data)

(Unaudited)

 

  

Three Months Ended

  

Nine Months Ended

 
  

June 2022

  

June 2021

  

June 2022

  

June 2021

 
                 

Net sales

 $126,875  $118,666  $369,319  $322,015 

Cost of goods sold

  96,182   88,427   282,100   246,677 

Gross profit

  30,693   30,239   87,219   75,338 
                 

Selling, general and administrative expenses

  22,416   19,914   59,613   53,005 

Other (income), net

  (1,018)  (1,578)  (1,947)  (218)

Operating income

  9,295   11,903   29,553   22,551 
                 

Interest expense, net

  1,971   1,735   5,370   5,225 

Earnings before provision for income taxes

  7,324   10,168   24,183   17,326 

Provision for income taxes

  1,087   2,019   4,149   4,032 

Consolidated net earnings

  6,237   8,149   20,034   13,294 

Net (loss) income attributable to non-controlling interest

  (3)  (12)  11   (149)

Net earnings attributable to shareholders

 $6,240  $8,161  $20,023  $13,443 
                 

Basic earnings per share

 $0.90  $1.17  $2.87  $1.93 

Diluted earnings per share

 $0.88  $1.14  $2.84  $1.90 
                 

Weighted average number of shares outstanding

  6,946   6,975   6,966   6,956 

Dilutive effect of stock awards

  119   153   95   121 

Weighted average number of shares assuming dilution

  7,065   7,128   7,061   7,077 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

 

  

Three Months Ended

  

Nine Months Ended

 
  

June 2022

  

June 2021

  

June 2022

  

June 2021

 
                 

Net earnings attributable to shareholders

 $6,240  $8,161  $20,023  $13,443 

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

  186   105   779   429 

Consolidated comprehensive income

 $6,426  $8,266  $20,802  $13,872 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

(Unaudited)

 

                  

Accumulated

                 
          

Additional

      

Other

          

Non-

     
  Common Stock  Paid-In  Retained  Comprehensive  Treasury Stock  Controlling     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Interest

  

Total

 

Balance as of September 2020

  9,646,972  $96  $61,005  $126,564  $(1,322)  2,756,854  $(43,133) $(524) $142,686 
                                     

Net earnings

  -   -   -   883   -   -   -   -   883 

Other comprehensive income

  -   -   -   -   125   -   -   -   125 

Net loss attributable to non-controlling interest

  -   -   -   -   -   -   -   (40)  (40)

Vested stock awards

  -   -   (2,117)  -   -   (84,542)  984   -   (1,133)

Stock based compensation

  -   -   676   -   -   -   -   -   676 

Balance as of December 2020

  9,646,972  $96  $59,564  $127,447  $(1,197)  2,672,312  $(42,149) $(564) $143,197 
                                     

Net earnings

  -   -   -   4,398   -   -   -   -   4,398 

Other comprehensive income

  -   -   -   -   199   -   -   -   199 

Net loss attributable to non-controlling interest

  -   -   -   -   -   -   -   (97)  (97)

Vested stock awards

  -   -   -   -   -   -   -   -   - 

Purchase of common stock

  -   -   -   -   -   -   -   -   - 

Stock based compensation

  -   -   278   -   -   -   -   -   278 

Balance as of March 2021

  9,646,972  $96  $59,842  $131,845  $(998)  2,672,312  $(42,149) $(661) $147,975 
                                     

Net earnings

  -   -   -   8,161   -   -   -   -   8,161 

Other comprehensive income

  -   -   -   -   105   -   -   -   105 

Net loss attributable to non-controlling interest

  -   -   -   -   -   -   -   (12)  (12)

Stock based compensation

  -   -   442   -   -   -   -   -   442 

Balance as of June 2021

  9,646,972  $96  $60,284  $140,006  $(893)  2,672,312  $(42,149) $(673) $156,671 

 

                                   

Accumulated

                                 
                   

Additional

           

Other

                   

Non-

         
   

Common Stock

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury Stock

   

Controlling

         
   

Shares

   

Amount

   

Capital

   

Earnings

    Income (Loss)    

Shares

   

Amount

   

Interest

   

Total

 

Balance as of September 2021

    9,646,972     $ 96     $ 60,831     $ 146,860     $ (786 )     2,672,312     $ (42,149 )   $ (658 )   $ 164,194  
                                                                         

Net earnings

    -       -       -       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 earnings

    -       -       -       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  
                                                                         

Net earnings

    -       -       -       6,240       -       -       -       -       6,240  

Other comprehensive income

    -       -       -       -       186       -       -       -       186  

Net loss attributable to non-controlling interest

    -       -       -       -       -       -       -       (3 )     (3 )

Purchase of common stock

    -       -       -       -       -       33,934       (968 )     -       (968 )

Stock based compensation

    -       -       903       -       -       -       -       -       903  

Balance as of June 2022

    9,646,972     $ 96     $ 60,822     $ 166,882     $ (7 )     2,732,033     $ (45,432 )   $ (647 )   $ 181,714  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

 

  

Nine Months Ended

 
  

June 2022

  

June 2021

 

Operating activities:

        

Consolidated net earnings

 $20,034  $13,294 

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

        

Depreciation and amortization

  11,272   10,212 

Amortization of deferred financing fees

  244   244 

Provision for inventory market reserves

  1,484   1,447 

Change in reserves for allowances on accounts receivable, net

  (160)  (511)

Provision for deferred income taxes

  488   912 

Non-cash stock compensation

  1,756   1,396 

Loss (gain) on disposal of equipment

  348   (2)

Other, net

  (2,263)  (1,672)

Changes in operating assets and liabilities:

        

Accounts receivable, net

  (1,251)  (5,458)

Inventories, net

  (67,452)  (8,244)

Prepaid expenses and other current assets

  602   (2,136)

Other non-current assets

  199   1,264 

Accounts payable

  23,390   (5,191)

Accrued expenses

  (1,737)  3,592 

Net operating lease liabilities

  409   543 

Income taxes

  264   1,939 

Other liabilities

  (1,049)  (626)

Net cash (used in) provided by operating activities

  (13,422)  11,003 

Investing activities:

        

Purchases of property and equipment

  (10,931)  (1,676)

Proceeds from equipment purchased under finance leases

  -   2,312 

Proceeds from sale of equipment

  33   422 

Cash paid for intangible asset

  (132)  (6,655)

Cash paid for business

  (583)  (2,527)

Net cash used in investing activities

  (11,613)  (8,124)

Financing activities:

        

Proceeds from long-term debt

  411,600   346,841 

Repayment of long-term debt

  (383,919)  (346,131)

Repayment of finance lease obligations

  (5,604)  (5,415)

Payment of contingent consideration

  -   (2,110)

Payment of deferred financing cost

  (850)   

Repurchase of common stock

  (3,934)  - 

Payment of withholding taxes on stock awards

  (1,092)  (1,133)

Net cash provided by (used in) financing activities

  16,201   (7,948)

Net decrease in cash and cash equivalents

  (8,834)  (5,069)

Cash and cash equivalents at beginning of period

  9,376   16,458 

Cash and cash equivalents at end of period

 $542  $11,389 
         

Supplemental cash flow information

        

Finance lease assets exchanged for finance lease liabilities

 $10,381  $12,290 

Operating lease assets exchanged for operating lease liabilities

 $6,869  $1,032 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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 9,100 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®, 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 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 digital platform. Our products are also made available direct-to-consumer on our ecommerce sites and in our branded retail stores. Our diversified distribution model allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels. 

 

We design and internally manufacture the majority of our products. More than 90% of the apparel 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 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 2022 fiscal year is a 52-week year and will end on October 1, 2022 ("fiscal 2022"). Accordingly, this Form 10-Q presents our third quarter of fiscal 2022. Our 2021 fiscal year was a 52-week year and ended on October 2, 2021 ("fiscal 2021").

 

For presentation purposes herein, all references to period ended relate to the following fiscal years and dates:

 

Period EndedFiscal YearDate Ended
June 2021Fiscal 2021 July 3, 2021
September 2021

Fiscal 2021

October 2, 2021
December 2021Fiscal 2022 January 1, 2022
March 2022Fiscal 2022 April 2, 2022
June 2022Fiscal 2022 July 2, 2022

 

We prepared the accompanying interim Condensed Consolidated Financial Statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month and nine-month periods ended June 2022 are not necessarily indicative of the results that may be expected for our fiscal 2022. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal 2021, 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 nine-months ended June 2022 and June 2021, we received dividends from the investment of $1.1 million and $0.9 million, respectively. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with this Honduran company. During the nine-months ended June 2022, we paid approximately $1.3 million under this arrangement. Payments of approximately $1.8 million were made during the nine-months ended June 2021, which included payment of rent deferrals related to the June 2020 quarter as a result of the COVID pandemic.

 

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 2021, filed with the SEC. See Note C for consideration of recently issued accounting standards.

 

Note C—New Accounting Standards

 

Recently Adopted Standards

 

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification ("ASC") 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective as of the beginning of our fiscal year 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The impact of the adoption of provision of ASU 2019-12 did not have a material impact to our financial condition, results of operations, cash flows, and disclosures.

 

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.

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting and financial reporting impacts of reference rate reform, including the expected transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This new guidance includes temporary optional practical expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met.  These transactions include contract modifications, hedging relationships and the sale or transfer of debt securities classified as held-to-maturity.  Entities may apply the provisions of the new standard at the beginning of the reporting period when the election is made. This guidance may be applied through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and does not currently intend to early adopt the new rules.

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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 web sites; and sales from wholesale channels, which includes our business-to-business ecommerce and DTG2Go sales.  The table below identifies the amount and percentage of net sales by distribution channel (in thousands):

 

  

Three Months Ended

 
  

June 2022

  

June 2021

 

Retail

 $4,412   3% $3,543   3%

Direct-to-consumer ecommerce

  1,145   1%  2,105   2%

Wholesale

  121,318   96%  113,018   95%

Net sales

 $126,875   100% $118,666   100%

 

  

Nine Months Ended

 
  

June 2022

  

June 2021

 

Retail

 $9,685   3% $8,429   3%

Direct-to-consumer ecommerce

  3,199   1%  5,393   2%

Wholesale

  356,435   96%  308,193   95%

Net sales

 $369,319   100% $322,015   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 June 2022

 
  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $106,020   0.1%  0.4%  99.5%

Salt Life Group

  20,855   20.8%  3.4%  75.8%

Total

 $126,875             

 

  

Three Months Ended June 2021

 
  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $102,562   0.2%  0.3%  99.5%

Salt Life Group

  16,104   20.6%  11.1%  68.3%

Total

 $118,666             

 

  

Nine Months Ended June 2022

 
  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $323,276   0.1%  0.3%  99.6%

Salt Life Group

  46,043   20.3%  5.0%  74.7%

Total

 $369,319             

 

  

Nine Months Ended June 2021

 
  

Net Sales

  

Retail

  

Direct-to-consumer ecommerce

  

Wholesale

 

Delta Group

 $284,404   0.3%  0.3%  99.4%

Salt Life Group

  37,611   20.6%  12.1%  67.3%

Total

 $322,015             

 

10

 
 

Note E—Inventories

 

Inventories, net of reserves of $17.4 million and $15.9 million as of June 2022 and September 2021, respectively, consisted of the following (in thousands):

 

  

June 2022

  

September 2021

 

Raw materials

 $23,660  $17,204 

Work in process

  23,005   20,954 

Finished goods

  181,006   123,545 
  $227,671  $161,703 

 

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, 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, and August 28, 2020.

 

On June 2, 2022, the Borrowers entered into a Seventh Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Seventh Amendment”). The Seventh Amendment, (i) removes 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 bps for 1 month and 15 bps for 3-month tenors, (iii) sets the SOFR floor to 0 bps, (iv) reloads the fair market value of real estate and intellectual property within the borrowing base calculation and resets their respective amortization schedules, (v) sets the maturity date to 5 years from the closing date, and (vi) updates the requirement for our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month period must not be less than 1.0 (previously 1.1).

 

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. The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in ASC 470, Debt ("ASC 470")) whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. We classify borrowings under the Amended Credit Agreement as long-term debt with consideration of current maturities.

 

As of June 2022, we had $122.8 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.4%. Our cash on hand combined with the availability under the U.S. credit facility totaled $30.8 million. At  June 2022 and September 2021 there was $25.0 million and $19.0 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

 

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 beared interest at 6% with quarterly installments, which began January 2, 2019, with the final installment due October 1, 2021. The final payment, in accordance with the promissory note agreement, was made during the three-months ended December 2021. 

 

Honduran Debt

 

Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance both the operations and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with five-year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances at the time of settlement of $1.1 million and $9.5 million, respectively. Additionally, in May 2022, we entered into a new term loan with a five-year term with a principal amount of $3.7 million. Each of these loans are 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. 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 have been classified as long-term debt. Additional information about these loans and the outstanding balances as of  June 2022 is as follows (in thousands):

 

  

June 2022

 

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

 $2,000 

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

  7,100 

Term loan established May 2022, interest at 7.5%, quarterly installments beginning March 2023 through May 2027

  3,656 
 

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 $5.6 million and $5.2 million for the June 2022 and 2021 quarters, respectively. Distribution costs included in SG&A expenses totaled $16.8 million and $15.6 million for the nine-months ended June 2022 and 2021, 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 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. Unvested awards, while employed by the Company or servings as a director, 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 becoming disabled. 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 June 2022 and 2021 quarters, we recognized $1.1 million and $0.5 million in stock-based compensation expense, respectively. Associated with the compensation cost are income tax benefits recognized of $0.2 million and $0.1 million, respectively, for each of the three-month periods ended June 2022 and June 2021, respectively. During the nine-months ended June 2022 and June 2021, we recognized $2.4 million and $2.0 million, respectively, in stock-based compensation expense. Associated with the compensation cost are income tax benefits recognized of $0.4 million and $0.5 million, respectively, for each of the nine-months periods ended June 2022 and June 2021. 

 

During the December 2021 quarter, performance stock units and restricted stock units representing 47,700 and 95,000 shares of our common stock, respectively, vested with the filing of our Annual Report on Form 10-K for fiscal 2021, and were issued in accordance with their respective agreements. Of these vested awards, 96,350 were payable in common stock and 46,350 were payable in cash.

 

During the December 2021 quarter, restricted stock units representing 5,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2022 and are payable in common stock.

 

During the December 2021 quarter, performance stock units and restricted stock units representing 59,625 and 59,625 shares of our common stock, respectively, were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 64,625 are payable in common stock and 54,625 are payable in cash.

 

During the December 2021 quarter, restricted stock units representing 13,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2024 and are payable in common stock.

 

During the March 2022 quarter, restricted stock units representing 42,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 21,000 are payable in common stock and 21,000 are payable in cash.

 

During the March 2022 quarter, restricted stock units representing 42,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2024. Of these shares, 21,000 are payable in common stock and 21,000 are payable in cash.

 

During the June 2022 quarter, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2022 and are payable in common stock. Additionally, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. Additionally, restricted stock units representing 10,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2024. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash.

 

During the June 2022 quarter, performance stock units representing 10,000 were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2023. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. Additionally, performance stock units representing 10,000 were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2024. Of these shares, 5,000 are payable in common stock and 5,000 are payable in cash. 

 

As of June 2022, there was $4.9 million of total unrecognized compensation cost related to unvested awards granted under the 2020 Stock Plan. This cost is expected to be recognized over a period of 2.4 years.

 

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 June 2022, minimum payments under these contracts were as follows (in thousands):

 

Yarn

 $30,480 

Finished fabric

  7,620 

Finished products

  11,059 
  $49,159 

 

 

 

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 our business units primarily focused on core activewear styles, and includes our DTG2Go and Delta Activewear business units. We are a market leader in the on-demand, 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. Our Activewear business is organized around key customer channels and how they source their various apparel needs. Delta Activewear is a preferred supplier of activewear apparel to regional and global brands, direct to retail and through wholesale markets. We offer a broad portfolio of apparel and accessories under the Delta, Delta Platinum, Soffe, and sourced-branded products that we distribute utilizing our network of fulfillment centers. Delta Direct services key channels, such as the screen print, promotional, and eRetailer channels as well as the retail licensing channel, whose customers sell through to many mid-tier and mass market retailers.  In our Global Brands & Retail Direct business we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products being sold with value-added services including embellishment, hangtags, and ticketing. We also serve retailers by providing our portfolio of products directly to their retail stores and through their ecommerce channels.  We sell our products to a diversified audience, including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. We also service custom apparel to major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces. We also offer our Soffe products direct to consumers at www.soffe.com.

 

The Salt Life Group is comprised of our lifestyle brand focused on a broad range of apparel garments, headwear and related accessories to meet consumer preferences and fashion trends, and includes our Salt Life business unit. 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 brand of Salt Life®.

 

Our Chief Operating Decision Maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges ("segment operating earnings"). Our segment operating earnings  may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note 2 in our Annual Report on Form 10-K for fiscal 2021, 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

  

Nine Months Ended

 
  

June 2022

  

June 2021

  

June 2022

  

June 2021

 

Segment net sales:

                

Delta Group

 $106,020  $102,562  $323,276  $284,404 

Salt Life Group

  20,855   16,104   46,043   37,611 

Total net sales

 $126,875  $118,666  $369,319  $322,015 
                 

Segment operating earnings:

                

Delta Group (1)

 $10,701  $13,869  $33,557  $28,394 

Salt Life Group

  3,574   2,916   7,037   4,726 

Total segment operating earnings

 $14,275  $16,785  $40,594  $33,120 

 

(1) In fiscal 2021, the Delta Group operating earnings included $1.3 million of expense, reported within "Other loss (income), net", related to two catastrophic hurricanes that disrupted operations during the December 2020 quarter.

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

June 2022

  

June 2021

  

June 2022

  

June 2021

 

Segment operating earnings

 $14,275  $16,785  $40,594  $33,120 

Unallocated corporate expenses

  4,980   4,882   11,041   10,569 

Unallocated interest expense

  1,971   1,735   5,370   5,225 

Consolidated earnings before provision for income taxes

 $7,324  $10,168  $24,183  $17,326 

 

13

 
 

Note K—Income Taxes

 

The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted on December 22, 2017, which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings of foreign subsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section 163(j)"). 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 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). 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 nine-months ended June 2022 was 17.2% compared to a rate of 23.1% in the same period of the prior year, and an effective rate of 21.9% for fiscal 2021. 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.

 

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  June 2022, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest.  Outstanding instruments as of  June 2022 are as follows: