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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
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
☑
 
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
 
April 28, 2023,
 
there were outstanding
7,001,020
 
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.
 
 
 
 
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
 
and $
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
 
and $
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
 
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
7,001,020
 
and
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
 
and
2,731,309
 
shares as of March 2023 and September 2022,
 
 
respectively
(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
 
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 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
 
million and $
1.1
 
million, respectively.
 
Our Ceiba Textiles
 
manufacturing facility is
 
leased
under an operating lease
 
arrangement with this Honduran
 
company. During the six months
 
ended March 2023
 
and March 2022, we
 
paid approximately $
0.9
 
million under
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
 
million and $
17.7
 
million as of March 2023 and September 2022, respectively, consisted of the
 
following (in thousands):
 
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
 
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 to not be less than
1.0
 
(previously
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
 
basis points; and (v) a Cash Dominion Trigger
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
 
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) 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
 
million outstanding under our U.S. revolving credit facility
 
at an average interest rate of
7.6
%. Our cash on hand combined
 
with the
availability under the U.S. revolving
 
credit facility totaled $
12.8
 
million. At March 2023 and September
 
2022, there was $
19.6
 
million and $
24.9
 
million, respectively, of
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
 
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. These loans are
 
secured by a first-
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
 
million with Banco Ficohsa, a Panamanian bank,
 
to finance
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
 
million
and $
5.6
 
million for the March 2023 and March 2022
 
quarters, respectively. Distribution costs included in SG&A expenses
 
totaled $
11.2
 
million for both the six-months
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
 
million and $
0.9
 
million in stock-based compensation expense, respectively.
 
Associated with this compensation cost are
 
income tax
benefits recognized of $
0.2
 
million and $
0.2
 
million, respectively, for each of the three-month periods ended March 2023 and March
 
2022. During the six-months ended
March 2023 and March
 
2022, we recognized $
1.0
 
million and $
1.3
 
respectively, in stock-based compensation
 
expense. Associated with
 
the compensation cost
 
are income
tax benefits recognized of $
0.3
 
million and $
0.2
 
million, respectively, for each of the six-months periods ended March 2023 and March
 
2022.
During the December 2022 quarter, restricted
 
stock units representing
105,000
 
shares of our common stock
 
vested with the filing of
 
our Annual Report on Form
 
10-K for
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
 
and
18,000
 
shares of our
 
common stock, respectively,
 
were
forfeited.
As of March 2023, there was $
2.7
 
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
2.7
 
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
 
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
 
million
 
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
 
million to repurchase stock
 
in open market
 
transactions under our Stock
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
 
shares
of our common stock
 
for an aggregate
 
of $
56.4
 
million under our
 
Stock Repurchase Program
 
since its inception.
 
All purchases were
 
made at the
 
discretion of management
and pursuant to
 
the safe harbor
 
provisions of SEC
 
Rule 10b-18. As
 
of March 2023,
 
$
3.6
 
million remained available
 
for future purchases
 
under our Stock
 
Repurchase
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
 
Value
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
 
yrs
Customer relationships
7,400
(3,583)
3,817
7,400
(3,213)
4,187
20
 
yrs
Technology
10,083
(3,059)
7,024
10,083
(2,610)
7,473
10
 
yrs
License agreements
2,100
(992)
1,108
2,100
(940)
1,160
15
 
–
30
 
yrs
Non-compete
 
 
agreements
1,657
(1,655)
2
1,657
(1,600)
57
4
 
–
8.5
 
yrs
Total intangibles
$
37,240
$
(14,406)
$
22,834
$
37,240
$
(13,214)
$
24,026
 
Goodwill represents the
 
acquired goodwill net
 
of the $
0.6
 
million impairment losses recorded
 
in fiscal year
 
2011. As
 
of March 2023,
 
the Delta Group
 
segment assets
include $
18.0
 
million of goodwill, and the Salt Life Group segment assets
 
include $
19.9
 
million.
 
Depending on the type
 
of intangible asset, amortization is
 
recorded under cost of goods
 
sold or selling, general and
 
administrative expenses. Amortization expense for
intangible assets for
 
the March 2023
 
and March 2022
 
quarters was $
0.6
 
million and $
0.6
 
million, respectively. Amortization
 
expense for the
 
six-months ended March
2023 and March 2022 was $
1.2
 
million and $
1.2
 
million, respectively. Amortization expense is estimated to be
 
approximately $
1.4
 
million for the year ended September
2023, approximately $
1.4
 
million for the year ended September 2024, and approximately
 
$
1.4
 
million for the years ended September 2025, 2026, and
 
2027.
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