UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 Premiere Parkway, Suite 100
Duluth, Georgia 30097
------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(678) 775-6900
------------
(Registrant's telephone number, including area code)
(Not Applicable)
----------------
(Former name, former address and former fiscal year, if changed since last
report.)
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 [X] No [ ].
As of April 12, 2001, there were outstanding 2,411,743 shares of the
registrant's common stock, par value of $0.01, which is the only class of the
outstanding common or voting stock of the registrant.
INDEX
PART I. Financial Information Page
------
Item 1. Financial Statements
Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets--
March 31, 2001 and July 1, 2000 3
Condensed Consolidated Statements of Operations--
Three months and nine months ended
March 31, 2001 and April 1, 2000 4
Condensed Consolidated Statements of Cash Flows--
Nine months ended March 31, 2001 and
April 1, 2000 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 8-9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
(Unaudited)
March 31, July 1,
2001 2000
------------------- ---------------
Assets
Current assets:
Cash $ 25 415
Accounts receivable, net 19,373 22,115
Inventories 48,277 28,207
Prepaid expenses and other current assets 1,583 1,186
Deferred income taxes 1,108 -
Income tax receivable 70 -
------------------- ---------------
Total current assets 70,436 51,923
Property, plant and equipment, net 24,036 26,871
Other assets 165 313
------------------- ---------------
Total assets $ 94,637 79,107
=================== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,132 15,116
Current portion of long-term debt 2,000 2,000
------------------- ---------------
Total current liabilities 16,132 17,116
Long-term debt 16,945 7,667
Other liabilities 703 522
Noncurrent deferred income taxes 145 -
------------------- ---------------
Total liabilities 33,925 25,305
------------------- ---------------
Stockholders' equity:
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $0.01 a share, 7,500,000
shares authorized, 2,411,743 and 2,399,863 issued and
outstanding at March 31, 2001 and July 1, 2000, respectively. 24 24
Additional paid-in capital 53,889 53,778
Retained earnings 7,096 -
------------------- ---------------
61,009 53,802
Less treasury stock, at cost (16,000 shares) (297) -
------------------- ---------------
Total stockholders' equity 60,712 53,802
------------------- ---------------
Total liabilities and stockholders' equity $ 94,637 79,107
=================== ===============
See accompanying notes to condensed consolidated financial statements.
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- ------------------------------
March 31, April 1, March 31, April 1,
2001 2000 2001 2000
---------------- ------------ --------------- -----------
Net sales $ 27,975 27,292 $ 84,994 77,513
Cost of goods sold 22,185 22,336 67,247 65,847
---------------- ------------ --------------- -----------
Gross profit 5,790 4,956 17,747 11,666
Selling, general and administrative expenses 2,582 1,986 7,371 5,549
Provision for bad debts 163 35 796 151
Other (income)/expense (3) 9 (17) 21
---------------- ------------ --------------- -----------
Operating income 3,048 2,926 9,597 5,945
Interest expense, net 386 2,145 942 6,431
---------------- ------------ --------------- -----------
Income (loss) before income taxes 2,662 781 8,655 (486)
Provision (benefit) for income taxes 479 46 1,558 (13)
---------------- ------------ --------------- -----------
Net income (loss) $ 2,183 735 $ 7,097 (473)
================ ============ =============== ===========
Weighted average shares outstanding (2000 Proforma):
Basic 2,411,743 2,351,400 2,410,453 2,372,700
Diluted 2,479,729 2,351,400 2,478,439 2,372,700
================ ============ =============== ===========
Net income (loss) per common share (2000 Proforma):
Basic $ 0.91 $ 0.31 $ 2.94 $ (0.20)
Diluted $ 0.88 $ 0.31 $ 2.86 $ (0.20)
================ ============ =============== ===========
See accompanying notes to condensed consolidated financial statements.
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended
--------------------------------------------
March 31, April 1,
2001 2000
---------------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 7,097 (473)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,765 4,922
Deferred income taxes (963) -
Loss on sale of property and equipment 4 1
Other - 40
Changes in operating assets and liabilities:
Accounts receivable 2,742 6,817
Inventories (20,070) (4,183)
Prepaid expenses and other current assets (438) (160)
Income taxes receivable (70) -
Other noncurrent assets 148 69
Accounts payable and accrued expenses (874) 1,422
Other liabilities 181 -
Income taxes payable 358
---------------------- ------------------
Net cash (used in) provided by operating activities (7,478) 8,813
Cash flows used in investing activities:
Purchases of property, plant and equipment (1,934) (1,261)
Proceeds from sale of property, plant and equipment 43 -
---------------------- ------------------
Net cash used in investing activities (1,891) (1,261)
Cash flows provided by (used in) financing activities:
Proceeds from/(repayment of) long-term financing 9,278 (339)
Change in due to related parties, net - (7,499)
Dividends paid (2) -
Repurchase common stock (297) -
---------------------- ------------------
Net cash provided by (used in) financing activities 8,979 (7,838)
---------------------- ------------------
Net decrease in cash (390) (286)
Cash balance at beginning of period 415 402
---------------------- ------------------
Cash balance at end of period $ 25 116
====================== ==================
Supplemental cash flow information:
Cash paid during the period for interest $ 883 27
====================== ==================
Cash paid during the period for income taxes $ 2,592 -
====================== ==================
Noncash financing activity--issuance of common stock $ 110 -
====================== ==================
See accompanying notes to condensed consolidated financial statements.
DELTA APPAREL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A--Basis of Presentation
Prior to June 30, 2000, Delta Apparel, Inc. (together with its predecessors, the
"Company") was a wholly owned subsidiary of Delta Woodside Industries, Inc.
("Delta Woodside" or the "Parent"). In connection with a plan to separate its
two apparel businesses, Delta Woodside transferred to the Company the assets,
liabilities, and operations of its apparel business previously conducted by the
following divisions or subsidiaries of Delta Woodside: Delta Apparel Company and
the Edgefield yarn plant. Effective June 30, 2000, Delta Woodside distributed
all the common stock of the Company to the Delta Woodside stockholders (the
"Distribution"). In connection with the Distribution, Delta Woodside
contributed, as contributions to capital, all net debt amounts owed to it by the
Company, with certain exceptions. Borrowings related to the Company under Delta
Woodside's credit agreement were repaid with the proceeds from borrowings under
the Company's new credit agreement.
The interim condensed consolidated financial statements for the three months and
nine months ended March 31, 2001 and April 1, 2000, included herein, have been
prepared 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months and nine months ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended July 1, 2000, filed with
the Securities and Exchange Commission.
Note B--Inventories
Inventories consist of the following:
March 31, July 1,
2001 2000
------------- ------------
Raw materials $ 3,184 2,785
Work in process 19,032 11,903
Finished goods 26,061 13,519
---------- ------------
$ 48,277 28,207
========== ============
Note C--Income Taxes
The effective income tax rate on pretax income for the nine months ended March
31, 2001 was 18.0%, compared to 1.3% for the fiscal year ended July 1, 2000.
Based on results to date and projections for the remainder of fiscal year 2001,
the Company expects to use its remaining federal net operating loss
carryforwards and be subject to income taxes on a portion of its income. Based
on these projections, management estimates that the valuation allowances on the
tax benefit resulting from net operating loss carryforwards will be reduced or
eliminated, resulting in an annualized forecasted effective income tax rate of
18.0%.
Note D--Cotton Procurements
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At March 31, 2001, minimum
payments under these contracts with non-cancelable contract terms were $22,124.
Note E--Computation of Basic and Diluted Net Earnings per Share (EPS) and
Proforma EPS
Basic net earnings per share is calculated by dividing the net earnings by the
weighted average common shares outstanding of Delta Apparel, Inc. For the
purposes of diluted earnings per share, the diluted weighted average common
shares outstanding includes the shares covered by options or awards granted
under the Company's Stock Option Plan and the Company's Incentive Stock Award
Plan.
Proforma net earnings per share is calculated by dividing the net earnings by
the weighted average common shares outstanding of Delta Woodside Industries,
Inc., adjusted for the distribution ratio assuming that shares distributed in
the Distribution were outstanding for the three and nine months ended April 1,
2000.
The weighted average shares do not include securities that would be
anti-dilutive for each of the periods presented.
Note F--Stockholders' Equity
On November 1, 2000, the Board of Directors authorized the repurchase by the
Company in open market transactions of up to $3.0 million of Delta Apparel
common stock ("Stock Repurchase Program"). All purchases are made at the
discretion of management in accordance with IRS guidelines for share repurchases
after a spin-off. In connection with the Stock Repurchase Program, during the
three months ended March 31, 2001, the Company purchased 12,700 shares of Delta
Apparel common stock for an aggregate of $0.2 million. Since the inception of
the Stock Repurchase Program, the Company has purchased 16,000 shares of Delta
Apparel common stock for an aggregate of $0.3 million.
The Company also issued a $2,412 dividend on November 30, 2000 in connection
with the redemption of all of its outstanding rights under the Shareholder
Rights Agreement dated January 27, 2000. The Redemption occurred pursuant to
resolutions adopted by the Company's Board of Directors on November 1, 2000,
which set the record date for the Redemption at November 16, 2000. Pursuant to
the provisions of the Rights Agreement, the redemption price was $0.001 per
Right. The effect of the Redemption is that the Rights are no longer outstanding
or exercisable.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains various "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future are forward-looking statements. Examples are statements that
concern future revenues, future costs, future capital expenditures, business
strategy, competitive strengths, competitive weaknesses, goals, plans,
references to future success or difficulties and other similar information. The
words "estimate", "project", "forecast", "anticipate", "expect", "intend",
"believe" and similar expressions, and discussions of strategy or intentions,
are intended to identify forward-looking statements.
The forward-looking statements in this Quarterly Report are based on the
Company's expectations and are necessarily dependent upon assumptions, estimates
and data that the Company believes are reasonable and accurate but may be
incorrect, incomplete or imprecise. Forward-looking statements are also subject
to a number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the
forward-looking statements. The risks and uncertainties include, among others,
changes in the retail demand for apparel products, the cost of raw materials,
competitive conditions in the apparel and textile industries, the relative
strength of the United States dollar as against other currencies, changes in
United States trade regulations and the discovery of unknown conditions (such as
with respect to environmental matters and similar items). Accordingly, any
forward-looking statements do not purport to be predictions of future events or
circumstances and may not be realized.
The Company does not undertake publicly to update or revise the forward-looking
statements even if it becomes clear that any projected results will not be
realized.
RESULTS OF OPERATIONS
Net sales in the third quarter of fiscal year 2001 were $28.0 million, an
increase of $0.7 million from the third quarter of the prior fiscal year. The
increase in net sales was due to increased unit sales (up 9.9%, accounting for
$2.7 million) offset by lower prices (down 6.8%, accounting for $2.0 million).
The price decrease was the result of various price promotions in the activewear
market. For the nine months ended March 31, 2001, net sales increased 9.7% to
$85.0 million from the nine months ended April 1, 2000. The increase in net
sales for the nine month period is the result of increased unit sales (up 12.8%,
accounting for $9.9 million) offset by slightly lower prices (down 2.8%,
accounting for $2.4 million). For fiscal year 2001, the Company currently
projects sales growth at an annualized rate of approximately 10% and an
operating profit growth of approximately 20% over the prior fiscal year. It is
uncertain to what extent, if any, the challenging retail conditions and current
price promotions will affect our fourth quarter results.
Gross profit increased to $5.8 million, or 20.7% of sales, in the three months
ended March 31, 2001 from $5.0 million, or 18.2% of sales, in the same period of
fiscal 2000. For the first nine months of fiscal year 2001, gross profit was
$17.7 million, or 20.9% of sales, an increase of $6.1 million from the first
nine months of fiscal year 2000. The increased gross profit in the three and
nine months ended March 31, 2001 was the result of increased volume, improved
sales mix and lower manufacturing costs, offset slightly by the lower pricing.
The lower manufacturing costs were driven by higher efficiencies and overhead
utilization compared to the prior year. The impact of the U.S. Caribbean Trade
Partnership Act also contributed to the lower manufacturing costs due to the
elimination of duties.
Selling, general and administrative expenses for the quarter ended March 31,
2001 were $2.7 million, or 9.8% of sales, an increase of $0.7 million from the
$2.0 million, or 7.4% of sales, in the same quarter of last year. The shift of
sales from distributors to direct customers has resulted in smaller average
orders. This caused an increase in distribution expenses of $0.2 million for the
three months ended March 31, 2001. The Company also incurred increased expenses
during the quarter of $0.3 million related to the Incentive Stock Program, $0.1
million in public reporting expenses and $0.1 million in bad debt expense. For
the nine months ended March 31, 2001, selling, general and administrative
expenses were 9.6% of sales, an increase from 7.4% of sales for the nine months
ended April 1, 2000. The increase was primarily due to the move of the corporate
headquarters, the proxy contest, higher commission expense resulting from the
increased sales of higher margin products, public reporting expenses, an
increase in distribution expense and increased bad debt expense.
The Company's operating income was $3.0 million for the third quarter of fiscal
year 2001, an increase of 4.2% from the same quarter of fiscal year 2000. For
the nine months ended March 31, 2001, operating income increased 61.4% to $9.6
million from the nine months ended April 1, 2000. Improved gross profit, offset
by slightly higher selling, general and administrative costs contributed to the
improvement in operating income.
For the three months ended March 31, 2001, net interest expense was $0.4
million, as compared to $2.1 million for the three months ended April 1, 2000.
Net interest expense for the nine months ended March 31, 2001 was $0.9 million,
a decrease of $5.5 million from the same period of fiscal year 2000. This
reduction was a result of the contribution to equity of intercompany debt in
connection with the spin-off from Delta Woodside Industries, Inc. on June 30,
2000.
The effective income tax rate on pretax income for the three months and nine
months ended March 31, 2001 was 18.0% compared to 1.3% for the fiscal year ended
July 1, 2000. Based on results to date and projections for the remainder of
fiscal year 2001, the Company expects to use its remaining federal net operating
loss carryforwards and be subject to income taxes on a portion of its income.
Based on these projections, management estimates that the valuation allowances
on the tax benefit resulting from net operating loss carryforwards will be
reduced or eliminated, resulting in an annualized forecasted effective income
tax rate of 18.0%.
Net income for the third quarter of fiscal year 2001 was $2.2 million, or 7.8%
of sales, compared to $0.7 million for the third quarter of fiscal year 2001.
For the nine months ended March 31, 2001, net income increased $7.6 million to
$7.1 million from the loss in the nine months ended April 1, 2000. The improved
net income was due to the factors described above.
Delta Apparel's order backlog at March 31, 2001 was $13.2 million, a $5.1
million decrease from the $18.3 million order backlog at April 1, 2000. The
decrease in backlog is due to the reduction of forward purchase commitments
given by distributors and the increase in short notice orders from catalog
customers. This is the result of the decrease in sales to distributors from
approximately 38% of sales in the first nine months of fiscal 2000 to 22% of
sales in the first nine months of fiscal 2001. As a growing percentage of the
Company's goods are sold on an immediate shipment basis, Delta Apparel believes
that backlog order levels may no longer give a general indication of future
sales.
Inventories at March 31, 2001 totaled $48.3 million, compared to $28.2 million
at July 1, 2000. The increased inventory at March 31, 2001 is mainly due to the
additional inventory required to meet the fourth quarter sales demand, resulting
from the seasonality of the business. In addition, the Company increased its
manufacturing capacity in order to build additional inventory in anticipation of
the projected sales growth over the prior fiscal year.
Capital expenditures in the three months ended March 31, 2001 were $0.8 million
as compared to $0.2 million in the three months ended April 1, 2000. For the
first nine months of fiscal year 2001, capital expenditures were $1.9 million,
an increase of $0.6 million from the $1.3 million in the first nine months of
fiscal year 2000. The expenditures in fiscal year 2001 were primarily related to
the new internet site which integrates customer service, inventory and shipping
and offers our customers the ability to check the status of their orders, view
inventory availability and place new orders. The expenditures also related to
the Company's expansion into Mexico.
LIQUIDITY AND CAPITAL RESOURCES
Delta Apparel's operating activities used cash of $7.5 million in the first nine
months of fiscal year 2001. The cash used was primarily the result of an
increase in inventory, offset by net income, depreciation and a reduction in
receivables.
In mid-May 2000, Delta Apparel entered into a credit agreement with a lending
institution, under which the lender provided Delta Apparel with a $10 million
term loan and a 3-year $25 million revolving credit facility. All loans under
the credit agreement bear interest at rates based on an adjusted LIBOR rate plus
an applicable margin or a bank's prime rate plus an applicable margin. Delta
Apparel granted the lender a first mortgage lien on or security interest in
substantially all of its assets. Delta Apparel has the option to increase the
revolving credit facility from $25 million to $30 million, provided that no
event of default exists under the facility.
Delta Apparel's peak borrowing needs were in the three months ended March 31,
2001. During the fourth fiscal quarter, Delta Apparel expects that its
borrowings for working capital purposes and letters of credit under its
revolving credit facility will decrease. At March 31, 2001, the Company had
$10.8 million outstanding under the revolving credit facility at an average
interest rate of 7.33%. The interest rate at March 31, 2001 on the term loan was
7.4%.
Based on these expectations, Delta Apparel believes that its $25 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs, and that the cash flow generated by its operations and
funds available under its revolving credit line should be sufficient to service
its debt payment requirements, to satisfy its day-to-day working capital needs
and to fund its planned capital expenditures. Any material deterioration in
Delta Apparel's results of operations, however, may result in Delta Apparel
losing its ability to borrow under its revolving credit facility and to issue
letters of credit to suppliers or may cause the borrowing availability under
that facility to be insufficient for Delta Apparel's needs.
On November 1, 2000, the Board of Directors authorized the repurchase by the
Company in open market transactions of up to $3.0 million of Delta Apparel
common stock ("Stock Repurchase Program"). All purchases are made at the
discretion of management in accordance with IRS guidelines for share repurchases
after a spin-off. In connection with the Stock Repurchase Program, during the
three months ended March 31, 2001, the Company purchased 12,700 shares of Delta
Apparel common stock for an aggregate of $0.2 million. Since the inception of
the Stock Repurchase Program, the Company has purchased 16,000 shares of Delta
Apparel common stock for an aggregate of $0.3 million.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
COMMODITY RISK SENSITIVITY
The Company purchases cotton from approximately seven established merchants with
whom it has long standing relationships. The majority of the Company's purchases
are executed using "on-call" contracts. These on-call arrangements are used to
insure that an adequate supply of cotton is available for the Company's
requirements. Under on-call contracts, the Company agrees to purchase specific
quantities for delivery on specific dates, with pricing to be determined at a
later time. Prices are set according to prevailing prices, as reported by the
New York Cotton Exchange, at the time of the Company's election to fix specific
contracts.
Cotton on-call with a fixed price at March 31, 2001 was valued at $22.1 million,
and is scheduled for delivery between April, 2001 and March, 2002. At March 31,
2001, the Company had unpriced contracts for deliveries between January, 2002
and March, 2002. Based on the prevailing price at March 31, 2001, the value of
these unpriced commitments is approximately $0.8 million. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton for Delta Apparel. Delta Apparel does not use
financial instruments to hedge commodity price risk. At March 31, 2001, a 10%
decline in the market price of the cotton covered by Delta Apparel's fixed price
contracts would have had a negative impact of approximately $2.2 million on the
value of the contracts.
INTEREST RATE SENSITIVITY
Delta Apparel's credit agreement provides that the interest rate on outstanding
amounts owed shall bear interest at variable rates. If the amount of outstanding
indebtedness at March 31, 2001 under the revolver and term loan had been the
amount outstanding during the entire three months ended March 31, 2001 and the
interest rate on this outstanding indebtedness had been increased by 1%, Delta
Apparel's expense would have been approximately $47,000, or 12.3%, higher during
the quarter. The actual increase in interest expense resulting from a change in
interest rates would depend on the magnitude of the increase in rates and the
average principal balance outstanding.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed by the Company during the fiscal quarter
ended March 31, 2001.
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)
April 26, 2001 /s/ Herbert M. Mueller
------------------------ ----------------------------
By: Herbert M. Mueller
Vice President, Chief Financial Officer
and Treasurer