0001101396 DELTA APPAREL, INC false --09-30 FY 2023 119 109 0.01 0.01 2,000,000 2,000,000 0 0 0 0 0.01 0.01 15,000,000 15,000,000 9,646,972 9,646,972 7,001,020 6,915,663 2,645,952 2,731,309 2 1 3 25 3 10 4 20 0 1 0 20 20 10 15 4 2.3 8.2 8.2 June 30, 2027 June 30, 2027 8.6 7.25 August 31, 2025 August 31, 2025 9.0 9.0 December 31, 2025 December 31, 2025 8.75 8.75 May 31, 2027 May, 31 2027 9.8 9.8 August 31, 2027 August 31, 2027 4.0 4.0 5 10,000,000 0 5 5 5 21.0 21.0 21.0 0 0 2019 2020 2021 2022 9,709 2,317 9,124 8,442 1.8 6.0 29.07 31.19 22.82 10.61 10.61 1 0.4 150,000,000 10,000,000 In 2020, the Salt Life Group operating income included approximately $0.3 million of increased accounts receivable and inventory reserves related to the heightened risks in the market as the U.S. continues its recovery from the COVID-19 pandemic, as well as $0.5 million of other expenses. These costs are included within net sales ($0.1 million), SG&A expenses ($0.6 million), and other loss (income), net ($0.1 million). Unsecured liability associated with the purchase of intangible technology, of which the final quarterly installment of $0.5 million was paid in the first quarter of fiscal year 2023. In 2020, the Delta Group operating income included $23.7 million of expenses related to the COVID-19 pandemic. These costs primarily related to the curtailment of manufacturing operations ($11.9 million), incremental costs to right size production to new forecasted demand ($2.6 million), increased accounts receivable and inventory reserves related to the heightened risks in the market as the U.S. continues its recovery ($6.3 million), and other expenses ($2.9 million). These costs are included within net sales ($0.4 million), cost of goods sold ($14.2 million), SG&A expenses ($1.1 million), and other loss (income), net ($8.0 million). 00011013962022-10-022023-09-30 iso4217:USD 00011013962023-04-01 xbrli:shares 00011013962023-12-21 thunderdome:item 00011013962023-09-30 00011013962022-09-30 iso4217:USDxbrli:shares 00011013962021-10-032022-10-01 0001101396us-gaap:CommonStockMember2021-10-02 0001101396us-gaap:AdditionalPaidInCapitalMember2021-10-02 0001101396us-gaap:RetainedEarningsMember2021-10-02 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-10-02 0001101396us-gaap:TreasuryStockCommonMember2021-10-02 0001101396us-gaap:NoncontrollingInterestMember2021-10-02 00011013962021-10-02 0001101396us-gaap:CommonStockMember2021-10-032022-10-01 0001101396us-gaap:AdditionalPaidInCapitalMember2021-10-032022-10-01 0001101396us-gaap:RetainedEarningsMember2021-10-032022-10-01 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-10-032022-10-01 0001101396us-gaap:TreasuryStockCommonMember2021-10-032022-10-01 0001101396us-gaap:NoncontrollingInterestMember2021-10-032022-10-01 0001101396us-gaap:CommonStockMember2022-10-01 0001101396us-gaap:AdditionalPaidInCapitalMember2022-10-01 0001101396us-gaap:RetainedEarningsMember2022-10-01 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-10-01 0001101396us-gaap:TreasuryStockCommonMember2022-10-01 0001101396us-gaap:NoncontrollingInterestMember2022-10-01 00011013962022-10-01 0001101396us-gaap:CommonStockMember2022-10-022023-09-30 0001101396us-gaap:AdditionalPaidInCapitalMember2022-10-022023-09-30 0001101396us-gaap:RetainedEarningsMember2022-10-022023-09-30 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-10-022023-09-30 0001101396us-gaap:TreasuryStockCommonMember2022-10-022023-09-30 0001101396us-gaap:NoncontrollingInterestMember2022-10-022023-09-30 0001101396us-gaap:CommonStockMember2023-09-30 0001101396us-gaap:AdditionalPaidInCapitalMember2023-09-30 0001101396us-gaap:RetainedEarningsMember2023-09-30 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-09-30 0001101396us-gaap:TreasuryStockCommonMember2023-09-30 0001101396us-gaap:NoncontrollingInterestMember2023-09-30 xbrli:pure 0001101396dla:SanPedroSulaHondurasMember2023-09-30 utr:Y 0001101396srt:MinimumMember2023-09-30 0001101396srt:MaximumMember2023-09-30 0001101396us-gaap:ComputerSoftwareIntangibleAssetMembersrt:MinimumMember2023-09-30 0001101396us-gaap:ComputerSoftwareIntangibleAssetMembersrt:MaximumMember2023-09-30 00011013962023-04-022023-04-02 00011013962023-07-012023-09-30 0001101396dla:CooperativeAdvertisingProgramMember2022-10-022023-09-30 0001101396dla:CooperativeAdvertisingProgramMember2021-10-032022-10-01 0001101396us-gaap:InterestRateSwapMember2022-10-022023-09-30 0001101396us-gaap:InterestRateSwapMember2021-10-032022-10-01 0001101396dla:HonduranEquityMethodInvestmentMember2023-09-30 0001101396dla:SaltLifeBeverageMember2023-09-30 0001101396us-gaap:RetailMember2022-10-022023-09-30 0001101396us-gaap:RetailMember2021-10-032022-10-01 0001101396dla:EcommerceMember2022-10-022023-09-30 0001101396dla:EcommerceMember2021-10-032022-10-01 0001101396dla:WholesaleMember2022-10-022023-09-30 0001101396dla:WholesaleMember2021-10-032022-10-01 0001101396dla:DeltaGroupMember2022-10-022023-09-30 0001101396us-gaap:RetailMemberdla:DeltaGroupMember2022-10-022023-09-30 0001101396dla:EcommerceMemberdla:DeltaGroupMember2022-10-022023-09-30 0001101396dla:WholesaleMemberdla:DeltaGroupMember2022-10-022023-09-30 0001101396dla:SaltLifeGroupMember2022-10-022023-09-30 0001101396us-gaap:RetailMemberdla:SaltLifeGroupMember2022-10-022023-09-30 0001101396dla:EcommerceMemberdla:SaltLifeGroupMember2022-10-022023-09-30 0001101396dla:WholesaleMemberdla:SaltLifeGroupMember2022-10-022023-09-30 0001101396dla:DeltaGroupMember2021-10-032022-10-01 0001101396us-gaap:RetailMemberdla:DeltaGroupMember2021-10-032022-10-01 0001101396dla:EcommerceMemberdla:DeltaGroupMember2021-10-032022-10-01 0001101396dla:WholesaleMemberdla:DeltaGroupMember2021-10-032022-10-01 0001101396dla:SaltLifeGroupMember2021-10-032022-10-01 0001101396us-gaap:RetailMemberdla:SaltLifeGroupMember2021-10-032022-10-01 0001101396dla:EcommerceMemberdla:SaltLifeGroupMember2021-10-032022-10-01 0001101396dla:WholesaleMemberdla:SaltLifeGroupMember2021-10-032022-10-01 0001101396us-gaap:LandAndLandImprovementsMember2023-09-30 0001101396us-gaap:LandAndLandImprovementsMember2022-10-01 0001101396us-gaap:BuildingMember2023-09-30 0001101396us-gaap:BuildingMember2022-10-01 0001101396us-gaap:MachineryAndEquipmentMember2023-09-30 0001101396us-gaap:MachineryAndEquipmentMember2022-10-01 0001101396us-gaap:ComputerEquipmentMembersrt:MinimumMember2023-09-30 0001101396us-gaap:ComputerEquipmentMembersrt:MaximumMember2023-09-30 0001101396us-gaap:ComputerEquipmentMember2023-09-30 0001101396us-gaap:ComputerEquipmentMember2022-10-01 0001101396us-gaap:FurnitureAndFixturesMember2023-09-30 0001101396us-gaap:FurnitureAndFixturesMember2022-10-01 0001101396us-gaap:LeaseholdImprovementsMembersrt:MinimumMember2023-09-30 0001101396us-gaap:LeaseholdImprovementsMembersrt:MaximumMember2023-09-30 0001101396us-gaap:LeaseholdImprovementsMember2023-09-30 0001101396us-gaap:LeaseholdImprovementsMember2022-10-01 0001101396us-gaap:VehiclesMember2023-09-30 0001101396us-gaap:VehiclesMember2022-10-01 0001101396us-gaap:ConstructionInProgressMember2023-09-30 0001101396us-gaap:ConstructionInProgressMember2022-10-01 0001101396dla:DeltaGroupMember2023-09-30 0001101396dla:DeltaGroupMember2022-09-30 0001101396dla:SaltLifeGroupMember2023-09-30 0001101396dla:SaltLifeGroupMember2022-09-30 0001101396us-gaap:TrademarksAndTradeNamesMember2023-09-30 0001101396us-gaap:TrademarksAndTradeNamesMember2022-09-30 0001101396us-gaap:CustomerRelationshipsMember2023-09-30 0001101396us-gaap:CustomerRelationshipsMember2022-09-30 0001101396us-gaap:TechnologyBasedIntangibleAssetsMember2023-09-30 0001101396us-gaap:TechnologyBasedIntangibleAssetsMember2022-09-30 0001101396us-gaap:LicensingAgreementsMember2023-09-30 0001101396us-gaap:LicensingAgreementsMember2022-09-30 0001101396us-gaap:NoncompeteAgreementsMember2023-09-30 0001101396us-gaap:NoncompeteAgreementsMember2022-09-30 00011013962010-10-032011-10-01 0001101396dla:DTG2GoMember2023-07-012023-09-30 00011013962022-12-31 0001101396us-gaap:RevolvingCreditFacilityMemberdla:WellsFargoMemberus-gaap:LineOfCreditMember2023-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:WellsFargoMemberus-gaap:LineOfCreditMember2022-10-01 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2023-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2022-10-01 0001101396dla:TermLoanEstablishedDecember2020Member2023-09-30 0001101396dla:TermLoanEstablishedDecember2020Member2022-10-01 0001101396dla:TermLoanEstablishedMay2022Member2023-09-30 0001101396dla:TermLoanEstablishedMay2022Member2022-10-01 0001101396dla:TermLoanEstablishedSeptember2022Member2023-09-30 0001101396dla:TermLoanEstablishedSeptember2022Member2022-10-01 0001101396dla:PromissoryNoteMaturityDateJanuary2020Member2023-09-30 0001101396dla:PromissoryNoteMaturityDateJanuary2020Member2022-10-01 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2018-10-08 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2019-11-19 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2019-11-192019-11-19 utr:M 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2020-04-272020-04-27 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2020-04-27 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMembersrt:MinimumMember2020-04-27 utr:D 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2020-08-282020-08-28 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberdla:OneMonthSofrMember2022-06-022022-06-02 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberdla:ThreeMonthSofrMember2022-06-022022-06-02 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2022-06-02 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2022-06-022022-06-02 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2023-01-03 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2023-02-03 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2023-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2022-10-022023-09-30 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2018-10-082018-10-08 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:SubsequentEventMember2023-10-062023-10-06 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:SubsequentEventMember2023-10-06 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2023-09-30 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2022-10-01 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedDecember2020Member2020-12-012020-12-31 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2020-12-012020-12-31 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedDecember2020Member2022-05-012022-05-31 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedDecember2020Member2022-05-31 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedDecember2020Member2023-09-30 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedSeptember2022Member2022-09-012022-09-30 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedSeptember2022Member2022-09-30 0001101396us-gaap:StateAndLocalJurisdictionMember2023-09-30 0001101396dla:CeibaTextilesManufacturingFacilityLeasedWithHonduranCompanyMember2021-10-032022-10-01 0001101396dla:CeibaTextilesManufacturingFacilityLeasedWithHonduranCompanyMember2022-10-022023-09-30 0001101396dla:PropertyPlantAndEquipmentNetMember2023-09-30 0001101396dla:PropertyPlantAndEquipmentNetMember2022-10-01 0001101396dla:The2020StockPlanMember2020-02-06 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMember2022-10-022023-09-30 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMember2021-10-032022-10-01 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2022Member2022-10-022023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2023Member2022-10-022023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2023Member2022-10-022023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2024Member2022-10-022023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2024Member2022-10-022023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2025Member2022-10-022023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2025Member2022-10-022023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2021Member2021-10-032022-10-01 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2021Member2021-10-032022-10-01 0001101396dla:RestrictedStockUnitsAndPerformanceUnitsMemberdla:UponFilingOfAnnualReportIn2021PaidInStockMember2021-10-032022-10-01 0001101396dla:RestrictedStockUnitsAndPerformanceUnitsMemberdla:UponFilingOfAnnualReportIn2021PaidInCashMember2021-10-032022-10-01 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2022Member2021-10-032022-10-01 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2023Member2021-10-032022-10-01 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2023Member2021-10-032022-10-01 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2024Member2021-10-032022-10-01 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2024Member2021-10-032022-10-01 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2024PaidInStockMember2021-10-032022-10-01 0001101396dla:The2020StockPlanMember2023-09-30 0001101396dla:The2020StockPlanMember2022-10-022023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2020StockPlanMemberdla:VestingOnNovember2023Member2023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2020StockPlanMemberdla:VestingOnNovember2024Member2023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:The2020StockPlanMemberdla:VestingOnNovember2024Member2023-09-30 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2020StockPlanMemberdla:VestingNovember2025Member2023-09-30 0001101396us-gaap:PerformanceSharesMemberdla:The2020StockPlanMemberdla:VestingNovember2025Member2023-09-30 0001101396dla:The2020StockPlanMember2023-09-30 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2022-10-022023-09-30 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2021-10-032022-10-01 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2022-10-022023-09-30 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2021-10-032022-10-01 0001101396us-gaap:OperatingSegmentsMember2022-10-022023-09-30 0001101396us-gaap:OperatingSegmentsMember2021-10-032022-10-01 0001101396us-gaap:CorporateNonSegmentMember2022-10-022023-09-30 0001101396us-gaap:CorporateNonSegmentMember2021-10-032022-10-01 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2023-09-30 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2022-10-01 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2023-09-30 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2022-10-01 0001101396us-gaap:NonUsMember2021-10-032022-10-01 0001101396us-gaap:NonUsMember2022-10-022023-09-30 0001101396us-gaap:CorporateNonSegmentMember2023-09-30 0001101396us-gaap:CorporateNonSegmentMember2022-10-01 0001101396country:US2023-09-30 0001101396country:US2022-10-01 0001101396country:HN2023-09-30 0001101396country:HN2022-10-01 0001101396country:SV2023-09-30 0001101396country:SV2022-10-01 0001101396country:MX2023-09-30 0001101396country:MX2022-10-01 0001101396us-gaap:NonUsMember2023-09-30 0001101396us-gaap:NonUsMember2022-10-01 00011013962019-09-28 00011013962019-09-292023-09-30 0001101396dla:YarnMember2023-09-30 0001101396dla:FinishedFabricMember2023-09-30 0001101396dla:FinishedProductsMember2023-09-30 0001101396us-gaap:StandbyLettersOfCreditMember2022-10-01 0001101396us-gaap:StandbyLettersOfCreditMember2023-09-30 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2023-09-30 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2023-09-30 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2023-09-30 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2023-09-30 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2022-10-01 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2022-10-01 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2022-10-01 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2022-10-01 0001101396dla:DeferredTaxAssetsMember2023-09-30 0001101396dla:DeferredTaxAssetsMember2022-10-01 0001101396us-gaap:OtherAssetsMember2023-09-30 0001101396us-gaap:OtherAssetsMember2022-10-01 0001101396us-gaap:OtherNoncurrentLiabilitiesMember2023-09-30 0001101396us-gaap:OtherNoncurrentLiabilitiesMember2022-10-01 0001101396dla:AccumulatedOtherComprehensiveIncomeLossMember2023-09-30 0001101396dla:AccumulatedOtherComprehensiveIncomeLossMember2022-10-01 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:SubsequentEventMember2023-12-05 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:SubsequentEventMember2023-12-052023-12-05 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:SubsequentEventMember2023-12-28 0001101396dla:SaleLeasebackOfFayettevilleCampusMemberus-gaap:SubsequentEventMember2023-11-22 0001101396dla:SaleLeasebackOfFayettevilleCampusMemberus-gaap:SubsequentEventMember2023-11-222023-11-22 0001101396dla:SalesLeasebackOfClintonPropertyMemberus-gaap:SubsequentEventMember2023-11-22 0001101396dla:SalesLeasebackOfClintonPropertyMemberus-gaap:SubsequentEventMember2023-11-222023-11-22
 

Table of Contents



 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

 

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

 

 

For The Fiscal Year Ended September 30, 2023

 

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

Commission File No. 1-15583

 

DELTA APPAREL, INC.

(Exact name of registrant as specified in its charter)

Georgia

(State or other jurisdiction of incorporation or organization)

58-2508794

(I.R.S. Employer Identification No.)

2750 Premiere Parkway, Suite 100

Duluth, Georgia 30097

(Address of principal executive offices) (zip code)

Registrant’s telephone number, including area code: (864232-5200

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

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned filer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑.

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No ☑.

 

Based on the closing price of the registrant’s common stock of $11.00 as quoted by the NYSE American on April 1, 2023, which is the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $69.8 million. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates.

 

The number of outstanding shares of the registrant’s common stock was 7,001,020 as of December 21, 2023.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrants Annual Meeting of Shareholders is currently scheduled for February 8, 2024. Portions of the registrant’s Proxy Statement for its annual meeting are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission (“SEC”) within 120 days of the registrant’s fiscal year ended September 30, 2023.



 

 

 

TABLE OF CONTENTS

 

Part I

   

Item 1.

Business

2

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

19

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

20

Part II

   

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

Item 6.

[Reserved]

21

Item 7.

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

21

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

29

Item 9A.

Controls and Procedures

29

Item 9B.

Other Information

32
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 33

Part III

   

Item 10.

Directors, Executive Officers and Corporate Governance

34

Item 11.

Executive Compensation

34

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

Item 13.

Certain Relationships and Related Transactions, and Director Independence

35

Item 14.

Principal Accountant Fees and Services

35

Part IV

   

Item 15.

Exhibits and Financial Statement Schedules

35
Item 16. Form 10-K Summary 39

Signatures

  40

EX-10.2.14

   
EX-10.27    
EX-21    

EX-23.1

   

EX-31.1

   

EX-31.2

   

EX-32.1

   

EX-32.2

   

 

 

 

 

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,” “will,” “see,” “should,” “aim,” “will likely result,” “will continue,” 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 or the advent of similar pandemics or events on our operations, financial condition, liquidity, and capital investments, including 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;
  a cybersecurity incident or other disruptions in the availability of our computer systems or privacy breaches;
  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, 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 properly functioning 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.” Any forward-looking statements in this Annual Report on Form 10-K 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 Annual Report on Form 10-K, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities laws.

 

1

 

Part I

Item 1. Business

 

Overview

 

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 6,800 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 to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

 

We design and internally manufacture the majority of our products 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 (our Mexico operations will cease early in our 2024 fiscal year in connection with our decision to close our sewing and screenprint operations there), 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 stock exchange under the symbol “DLA.” We operate on a 52- or 53-week fiscal year ending on the Saturday closest to September 30. All references to “2023” refer to the 52-week fiscal year ended September 30, 2023. All references to “2022” relate to the 52-week fiscal year ended October 1, 2022. We are filing as a smaller reporting company for 2023 as our public float was less than the applicable $250 million threshold on the last day of our second quarter.

 

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.

 

Segments, Products, Brands, and Customers

 

Our operations are managed and reported in two reportable 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.

 

Delta Group

 

The Delta Group is comprised of the following business units primarily focused on core activewear styles: DTG2Go and Delta Activewear.

 

DTG2Go
We are 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 s oftware to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Via our seven 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 many 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. Throughout fiscal year 2023, we continued to invest in research and development initiatives related to the setups, formulas and processes needed to serve our customers. Through integration with Delta Activewear, DTG2Go also services the eRetailer, ad-specialty, promotional and screen print marketplaces, among others.

 

Delta Activewear

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.

 

2

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.

 

Our 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 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 our Delta and Soffe branded apparel, we provide our customers with a broad range of product categories from 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 offers a seamless solution for small-run decoration needs with on-demand digital print services, powered by DTG2Go.  

 

Salt Life Group

 

Salt Life

Salt Life is an authentic, aspirational 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. Our apparel takes you from the boat to the beach and is constantly evolving to fit our customers’ needs. 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 also expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories.

 

Our Salt Life business is organized around three Salt Life omnichannel markets - wholesale, ecommerce, and branded retail stores – that are distinct in their go-to-market strategies and how their respective customer bases source their various apparel needs. Salt Life’s wholesale channel allows consumers to seamlessly experience the Salt Life brand through one of our retail partners, which include surf shops, specialty stores, department stores, and outdoor merchants. Salt Life’s ecommerce channel allows customers to purchase merchandise by accessing our Salt Life ecommerce site at www.saltlife.com. Salt Life’s branded retail store channel allows customers to purchase merchandise at retail stores owned and operated by Salt Life. Salt Life’s branded retail store footprint now includes 27 locations spanning across the U.S. coastline from Southern California to Key West and up the eastern seaboard to Riverhead, New York.

 

See Note 13 to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for additional information regarding reportable segments.

 

Manufacturing, Sourcing, and Distribution

 

The vast majority of our products are manufactured or sewn in facilities that we own or lease and operate to support both the Delta Group and Salt Life Group. To a lesser extent, we also use third-party contractors and suppliers to supplement our requirements. Our vertically integrated manufacturing operations include a textile facility and multiple sew and decoration facilities.

 

Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We have operated with a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively “Parkdale”) to supply our yarn requirements since 2005, with our existing agreement running through December 31, 2024. Under that supply agreement, we purchase all of our yarn requirements for use in our manufacturing operations from Parkdale, excluding yarns that Parkdale does not manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of cotton, as reported by the New York Cotton Exchange, plus a fixed conversion cost. We set future cotton prices with purchase commitments as a component of the purchase price in advance of the shipment of finished yarn from Parkdale. 

 

3

We manufacture fabrics in our leased textile facility located near San Pedro Sula, Honduras. In fiscal years 2023 and 2022, we manufactured approximately 60% and 80%, respectively, of the fabrics used in our internally produced garments. The manufacturing process continues at one of our five apparel manufacturing facilities where fabric is cut and sewn into finished garments. These owned or leased facilities are located domestically (two in North Carolina) and internationally (two in Honduras and one in El Salvador). In fiscal years 2023 and 2022, approximately 95% or more of our manufactured products were sewn in our owned or leased manufacturing facilities. The remaining products were sewn by third-party contractors located primarily in the Caribbean Basin. To supplement our internal manufacturing platform, we purchase products from third-party global suppliers. In fiscal years 2023 and 2022, we sourced less than 10% of our total products from third parties.

 

Many of the garments we produce will be decorated using screen printing or digital printing technology, and will be retail-packaged, including ticketing, hang tags, and hangers. These services can be performed domestically for quick-turn service or internationally in our El Salvador facility. We offer digital fulfillment services, powered by DTG2Go, at seven domestic facilities, including five such facilities that are integrated with Delta Group distribution centers. These facilities support our strategy of establishing integrated fulfillment locations that combine our DTG2Go state-of-the-art digital platform with our Delta Activewear supply of fashion and core basic garments. Furthermore, these facilities create a seamless nationwide footprint allowing us to reach the vast majority of all U.S. consumers within a two-day shipping window.

 

We operate seven distribution facilities strategically located throughout the United States that carry in-stock inventory for shipment to customers, with most shipments made via third-party carriers. To better serve customers, we allow products to be ordered by the piece, dozen, or full case quantity, and we aggressively leverage our strengths and efficiencies to meet the quick-turn needs of our customers. Because a significant portion of our business consists of at-once replenishment orders, we believe that backlog order levels do not provide a general indication of future sales.
 
See Item 2. Properties for more information about each of our primary manufacturing and distribution facilities.

 

Sales & Marketing

 

Our sales and marketing functions consist of both employed and independent sales representatives and agencies located throughout the country. Our sales teams service specialty and resort shops; department, mid-tier and mass retailers; sporting goods stores; eRetailers and the U.S. military, as well as other sales channels. Our brands leverage both in-house and outsourced marketing communication professionals to amplify their lifestyle statements.

 

The majority of our apparel products are produced based on forecasts to permit quick shipments to our customers; however, our custom programs are generally made only to order. During fiscal year 2023, we shipped our products to approximately 6,600 customers, many of whom have numerous retail doors. No single customer accounted for more than 10% of our sales in 2023 or 2022, and our strategy is to not become dependent on any single customer. Revenues attributable to sales of our products in foreign countries represented less than 1% of consolidated net sales in both fiscal years 2023 and 2022.

 

Trademarks and License Agreements

 

We own several well-recognized trademarks that are important to our business. Salt Life® is an authentic, aspirational lifestyle brand that embraces those who love the ocean and everything associated with living the “Salt Life.” Soffe® has stood for quality and value in the athletic and activewear market for more than 60 years. Our other registered trademarks include Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design logo trademark. Our trademarks are valuable assets that differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against infringement. While our strategy is to own the intellectual property we use within our business, we are an official intellectual property licensee for branches of the United States military which we operate within our Soffe branded business. We believe these license agreements are important given the military heritage of Soffe.

 

Environmental, Sustainability, and Governance

 

We aim to disclose and communicate transparently any material risks that could affect our investors, and we strive to implement policies and practices that continuously improve the transparency and sustainability of our supply chain. The Environmental, Sustainability, and Governance (“ESG”) disclosures within this Annual Report and our definitive Proxy Statement align with the standards issued by the Sustainability Accounting Standards Board (“SASB”) for the Apparel, Accessories, and Footwear industry and with regulations and guidance issued by the Securities and Exchange Commission. The indicators in the Annual Report and definitive Proxy Statement have been carefully selected to show the most relevant aspects of our performance in the areas of environmental impact, health and safety, responsible raw material sourcing, safe chemical management, and responsible corporate governance.

 

4

Conserving the Environment

 

We believe that efficiently and sustainably managing natural resources is a smart business practice and a responsible decision for the planet. By effectively and safely managing the materials used to manufacture our apparel products, we also protect the health and safety of our customers and employees. Our commitment to environmental sustainability includes compliance with safe chemistry practices and implementing technology and processes that reduce energy and water consumption, reuse and effectively treat wastewater, and reduce and recycle waste. We are committed to full compliance with local, regional, and national environmental laws and regulations.

 

Reducing our Environmental Impact

 

Environmental problems such as climate change and resource depletion are escalating worldwide. Therefore, understanding and managing greenhouse gas emissions is important to effectively mitigate our impact to the environment. We are committed to monitoring our greenhouse gas emissions and adopting innovative technologies to improve the energy efficiency of our facilities and reduce our overall energy intensity, which is measured as primary energy consumption in kilowatt-hours per unit of gross domestic product.

 

The focus on reducing our overall energy intensity is driven by our goal to establish an energy efficient operation and reduce greenhouse gas emissions, which will contribute to lowering our operating costs as well as reducing our carbon footprint. The operations at our Ceiba Textiles facility in Honduras account for a significant portion of the fuel and electricity used in our manufacturing network and, as such, are our largest contributors of carbon dioxide (CO2) emissions. In May 2022 Ceiba Textiles began receiving 100% clean, renewable energy from a 14.7-megawatt solar power array installed by the industrial park in which the facility is located. This new solar installation significantly reduces dependence on oil, coal, and natural gas for electricity production. Not only is solar energy sustainable, it does not emit greenhouse gases, air, or water pollution when producing electricity, contributing to our goal to establish an energy efficient operation and reduce greenhouse gas emissions. As a result of the solar power array installation, electricity usage at Ceiba Textiles during 2023 was reduced by 30.8% when compared to our 2018 baseline, which was the year we first began collecting data.

 

When comparing total greenhouse gas emissions in 2023 to our 2018 baseline year, we reduced our total emissions by 26.7%. This reduction avoids the equivalent of 12,634 metric tons of CO2 emissions, which is comparable to the electricity used by approximately 2,458 homes for one year or the carbon sequestered by 15,066 acres of U.S. forest in one year.

 

In recent years we implemented several energy efficiency projects such as installing a heat exchanger at our Ceiba Textiles facility that plays an essential role in reducing the environmental impact of manufacturing processes by recovering and reusing energy. We also continue to replace compact florescent light bulbs with LED lighting, which is known to emit less heat and use less energy than conventional bulbs, decrease the temperature on factory floors, and thus raise productivity, particularly on hot days. In the sewing area, we improved the performance of our sewing machines by installing new motors that use significantly less energy due to advanced technology. In the knitting operations area, we modified the cooling system to turn off automatically when the outside temperature and humidity reach the optimum environment inside.

 

In 2022 we removed 27 older model circular knitting machines and installed 18 large capacity knitting machines. Each new machine is much more energy efficient in addition to being more productive, with each machine capable of knitting one and one-half times more greige fabric in less time than one of the older knitting machines. These large capacity knitting machines were directly responsible for reducing our electricity usage by approximately 360,539 kilowatt-hours in 2023.

 

Additional energy saving initiatives at Ceiba Textiles included the 2022 installation of a new steam textile dryer that replaced two existing thermal oil dryers. The steam dryer is capable of drying 66% more pounds of fabric per week than the thermal dryers and uses 25% less energy. During 2023, the steam dryer was responsible for reducing our electricity usage by approximately 239,742 kilowatt-hours. Together, these two energy-saving initiatives reduced our total electricity usage by 600,281 kilowatt-hours and avoided 425 metric tons of carbon dioxide (CO2) emissions, which is comparable to the carbon sequestered by 507 acres of forest in one full year.

 

Managing Water

 

Water is one of the world’s most precious and vital resources. Access to water is essential to Delta Apparel’s manufacturing operations, and we are committed to managing our water use in an efficient and responsible manner. Treating textile wastewater is necessary not only to protect the local ecosystems, but also to make the recycled water available to reuse in manufacturing processes or irrigation. To properly treat problematic substances before the water is discharged, our vertically integrated manufacturing facilities, as well as our third-party fabric suppliers, must comply with wastewater discharge requirements through currently active licenses and permits issued by local governments. In each of the last five years, none of our wastewater treatment facilities have received a compliance citation or violation.

 

During manufacturing the most significant amount of water consumption occurs during the fabric washing, dyeing, and rinsing processes. To reduce our water consumption at Ceiba Textiles, we implemented a system in 2018 that reuses the leftover dye water in future batches of similar-colored fabric. This system saves approximately four million gallons or 15,000 cubic meters of water per year while maintaining the quality of our dyed fabrics. We also improved our dye formulas to further reduce water consumption and reduce the amount of contaminates remaining in the wastewater. In 2023, water intensity rose 2.6% against our 2018 baseline, which was mainly due to reduced fabric production, as absolute water consumption from all locations was down 26.6% compared to our 2018 baseline.

 

5

Wastewater from Ceiba Textiles is transferred to the Green Valley water treatment facility, which operates on an environmental license issued by the Honduras Ministry of Energy, Natural Resources, Environment, and Mines. Over 87% of our 2023 water consumption at Ceiba Textiles was recycled. The Green Valley wastewater treatment facility uses the industry standard primary, secondary, and tertiary water treatment methods based on the types of effluents being discharged as well as regulatory and environmental standards. Treatment procedures are also in place to neutralize and remove additional substances that may potentially be harmful, but are not necessarily regulated. The following information describes the primary, secondary, and tertiary water treatment methods:

 

 

Primary – Primary treatment methods include screening, sedimentation, homogenization, pH neutralization, and mechanical and chemical flocculation, which is a chemical added to the water that binds suspended solids into heavier particles that are easier to remove. Nano and cross-flow nano filtration techniques are also used to reduce the vast majority of sodium chloride and dyes.

 

 

Secondary – Secondary treatment is designed to substantially degrade the biological content of the wastewater by using a combination of physical and aerobic biological processes. Secondary treatment methods include various types of filtration along with an activated sludge process, which stabilizes and converts potentially toxic contaminates into less harmful forms such as carbon dioxide and water, which are safe for the environment.

 

 

Tertiary – Tertiary treatment is the final cleaning process that purifies wastewater before it is reused, recycled, or discharged into the environment. Treatment methods include a combination of physical and chemical techniques to decontaminate and purify the water.

 

Managing Waste

 

Our waste management strategy is to reduce, reuse, and recycle, which increases the likelihood that the waste materials we generate during the manufacturing process never reach landfills, lakes, rivers, streams, or municipal water systems. We are committed to full compliance with local, regional, and national environmental laws and regulations in the countries in which we operate, including as they relate to responsible recycling and disposal of hazardous and non-hazardous waste.

 

Pre-consumer textile waste is created during the cutting and sewing processes and includes small pieces of fabric trimmed away and other fabric scraps. We have modified sewing patterns to significantly reduce fabric waste during cutting. We also invested in sewing machines capable of folding excess fabric inside the sleeve and bottom hems to eliminate trimming. This initiative not only reduces textile waste but also lowers fabric production needs, which saves water, electricity, and fuel. 

 

We have multiple reuse and recycle programs that help limit the waste that would otherwise be disposed in landfills:

 

 

We partner with several companies that collect our fabric waste and sell it to manufacturers in the automotive industry, among others, that can mix the fabric with other materials to create alternate applications for the fabric, such as for automotive seats and windshield wipers.

 

 

Our offshore screen-printing facilities recycle colors of ink that remain at the end of a production project for use in future production. In one year, this recycling program can recover as much as 75% of the residual plastisol ink and 50% of the residual water-based ink that otherwise would have been discarded.

 

 

All of our manufacturing, sewing, and distribution facilities participate in cardboard recycling programs. Each facility flattens and places all cardboard in an outside container for recycling companies to then collect on a regular schedule.

 

Using Safe Chemistry

 

Textile operations use various chemicals, cleaners, dyes, and inks throughout the manufacturing, finishing, and decorating processes. We strive to use non-hazardous, bioeliminable ingredients in our apparel products and throughout our manufacturing processes to protect the safety of our customers and employees as well as reduce negative impacts on the environment. For example, our DTG2Go digital printing facilities use water-based biodegradable inks that are 100% non-hazardous and adhere to strict human health and environmental standards.

 

We have a robust, hazard-based chemicals management system throughout our manufacturing processes. Our commitment to safe chemistry begins in the design and development stage of our products, which are conceived from the latest fashion trends and are fully compliant with statutory, industry, and customer-specific safety requirements. We are proud that the chemicals we use comply with the restricted substance list (“RSL”) published by the American Apparel & Footwear Association (“AAFA”). AAFA is the industry’s leading resource for maintaining and publishing banned and restricted substances lists for finished apparel products around the world. We continuously monitor our RSL, which includes additional substances that may be harmful, but are not necessarily regulated. We also control against the procurement of restricted substances through our purchase approval processes and arrangements with dye and chemical vendors.

 

6

The dyes and chemicals used in our manufacturing facilities are tested annually by a third-party laboratory that uses a scoring system to determine the level of compliance. Since 2017 we have maintained a “Green” status, which is the highest level of compliance. Annual tests are also conducted by a third-party laboratory to ensure our compliance with The Consumer Product Safety Improvement Act (“CPSIA”) of 2008 and The Safe Drinking Water and Toxic Enforcement Act of 1986 (“Proposition 65 of California State Law”) as well as our adherence to any customer-supplied RSL. Our manufacturing employees are provided training on compliance with our RSL as well as training on how to safely handle potentially hazardous substances throughout the manufacturing process.

 

It is also important to us that all of our significant third-party yarn and fabric suppliers share our high compliance standards and operate in a legal and responsible manner. We require these suppliers to provide, at least annually, certification or self-declaration documents that demonstrate compliance with industry standard parameters for safe chemistry. We take immediate corrective actions in instances where non-compliance may be identified.

 

Responsible Sourcing

 

As a vertically integrated apparel company, we believe it is important to have a high degree of oversight into all aspects of sourcing, manufacturing, and distribution. To that end, the lifecycle of a Delta Apparel garment begins with high quality, sustainable cotton, which is the primary ingredient for the majority of apparel products across our brand portfolio. Over 90% of our garments are created with U.S. cotton, which is known for both the quality of its fibers as well as the sustainability practices of the cotton farmers who harvest it. Cotton is not considered a water-intensive crop and more than 60% of the cotton grown in the U.S. is produced without irrigation. Cotton is also highly tolerant of soil and water salinity levels, so it can be grown with water and soil resources unsuitable for most other crops. We do not source cotton from regions with water stress, and we do not source conflict minerals in the production of our products.

 

Delta Apparel is a member of the Cotton LEADS program, which is committed to sustainable and traceable cotton production. This partnership enables us to broaden our support of the cotton farmers who supply our Company with high-quality cotton, allowing us to continue transforming sustainably-sourced cotton into high quality, responsible apparel products for our customers. We serve as a supply chain partner for many customers who expect high quality raw materials and require the ability to trace those raw materials back to the source. With cotton traceability, we are now able to trace the fiber used in our garments all the way back to harvest.

 

The vast majority of the yarn we use in our textile operations is sourced from Parkdale Mills, whose products are independently certified to Standard 100 by OEKO-TEX. In addition, our significant suppliers of external fabric are certified to Standard 100 by OEKO-TEX.

 

We purchase cotton from Parkdale Mills based upon the price reported by the New York Cotton Exchange at the time we enter into a purchase commitment, along with a fixed conversion cost. Cotton pricing is impacted by weather, consumer demand, commodities market speculation, inflation, labor and transportation costs, and other variable factors beyond our control. As such, we are subject to the risk of fluctuating cotton prices, with sudden price decreases potentially resulting in our inventory costs exceeding the cost of new production, which may result in downward selling price pressures and a negative impact to profitability. We take measures designed to mitigate these risks including hedging and forward purchase commitment strategies, production volume adjustments, price increases and other strategies. In addition to risks related to pricing, we are also subject to availability risks with respect to cotton. If Parkdale Mills is unable to provide us with our cotton and poly cotton yarn requirements, we may need to obtain yarn from alternative sources who may not be amenable to short-term arrangements with terms similar to those we have with Parkdale Mills. In addition, we may not be able to obtain sufficient quantities of U.S. yarn from alternative sources, which could require us to use cotton grown with lower quality and/or environmental sustainability characteristics and potentially require us to adjust manufacturing levels. We purchased approximately 13,276 metric tons of yarn during our fiscal year 2023.

 

Monitoring Progress

 

We use the Sustainable Apparel Coalition’s Higg Index to measure the environmental impact of all our offshore manufacturing facilities and the facilities of our key external fabric suppliers. The Higg Index tool provides transparency of our efforts to reduce our environmental impact, and it identifies areas for continued improvement. Our Ceiba Textiles facility has been using this tool for several years, and our 2022 self-assessment resulted in a total score in the upper quartile as compared to our industry competitors. Our most recent self-assessment was completed in April 2023 and the results will be available in April 2024. We retain the services of an external consultant to verify our assessments for a sample of facilities and to provide guidance for any areas of improvement.

 

Social Responsibility and Human Capital Management

 

Our employees are our most important and valuable asset. Our diverse and talented workforce helps drive our culture of high performance, close teamwork, and deep caring for each other across geographies and functions. We have an impact on the lives of over 6,800 employees across the globe as well as their families and communities. We support the livelihoods of our people through competitive wages and benefits, providing them with a safe and healthy workspace, supporting the communities in which they live, and, most importantly, treating all employees with dignity and respect.

 

7

Our People

 

The table below provides an overview of the approximate number of our employees by geographic location as well as the tenure of that employee base as of September 2023:

 

            Tenure    
Country   Number of Employees   5 Years or Less   6 - 10 Years   10 Years or More

El Salvador

  2,871   54%   24%   22%
Honduras   2,593   46%   30%   24%
Mexico   357   41%   17%   42%
United States   990   70%   10%   20%
Total   6,811   53%   24%   23%

 

Our employee base fluctuates based on seasonal labor requirements within our distribution and fulfillment centers, as well as based on production levels within our manufacturing facilities. These personnel changes generally trend with the overall demand for our products and services.

 

Approximately 90% of the employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are positive.

 

The table below provides an overview of the approximate percentage of employees by gender and region as of September 2023.

 

Region   Male   Female
Offshore   49%   51%
United States   36%   64%
Total   47%   53%

 

Diversity and Inclusion

 

We are committed to fostering an inclusive culture where every employee is treated with dignity and respect, regardless of their gender, age, race, abilities, or sexual orientation. We believe that our employees’ contributions are richer because of their diverse backgrounds and experiences, which strengthens the collaboration of our cross-functional, global teams and leads to improved performance.

 

Wages and Benefits

 

Investing in our people is critical for their personal and professional success, and we believe this investment enhances engagement and performance levels. Our compensation philosophy is to provide a fair living wage that is also scalable to the performance of the business. We provide our employees with at least the legal minimum wage or the prevailing industry wage in the countries where we operate, whichever is higher, complying with all legal wage requirements. We also provide fringe benefits, some of which are required by law, contract, or as per established collective bargaining agreements, while others are more favorable than required.

 

In recognition of the importance of raising the standard of living in certain communities in which we operate, we provide additional benefits such as free onsite medical care from fully licensed physicians and nurses that encompass clinics and wellness programs. In these locations, we also provide subsidized meal assistance as well as free transportation to and from our facilities.

 

We invest in the professional development of our employees through various training programs. In 2023, we provided more than 114,000 hours of professional development and safety training for our employees.

 

Health and Safety

 

Our responsibility is to provide our employees with a safe and healthy work environment that meets or exceeds applicable environmental and health and safety laws and regulations. All of our manufacturing facilities in El Salvador, Honduras, and Mexico are Worldwide Responsible Accredited Production (“WRAP”) certified. We are a Category C affiliate with the Fair Labor Association (“FLA”), an organization that supports human rights compliance monitoring for our plants and our third-party contractors.

 

8

Because textile manufacturing can contain various hazards and risks to workers, we have proactive programs in place to promote workplace safety, personal health, and employee wellness. Our culture promotes and rewards safety-first in all aspects of manufacturing, materials handling, and distribution of our apparel products. Safety training and awareness is embedded in employee orientation and onboarding, job performance and evaluation, and ongoing training based on a set safety training calendar by topic. We standardize, document, and improve our manufacturing and distribution safety procedures that require activities to be performed in the safest manner possible.

 

We are proud that our safety records are consistently better than OSHA’s benchmarks for the apparel manufacturing sector. For example, Delta Apparel’s 2023 incident rate for total recordable cases was 0.2% compared to the apparel industry average incident rate of 1.7%.

 

Our production and distribution processes incorporate ergonomic material handling equipment to reduce physical risks, protect employee health, and optimize productivity. In our cut and sew facilities, we use ergonomically-friendly chairs and floor mats in addition to facilitating frequent group stretching and movement exercises. In several of our manufacturing and distribution facilities we provide lightweight slip sheet material handling equipment, which has the dual benefit of reducing manual labor and potential back strain on employees.

 

Monitoring

 

We conduct annual audits of our internal manufacturing facilities as well as our significant third-party fabric suppliers to evaluate compliance with the FLA Workplace Code of Conduct. These audits cover labor topics such as forced or child labor, compensation policies, and nondiscrimination, as well as environmental health and safety topics such as fire safety, processes for safe chemistry, and environmental permits. These audits are important in identifying and preventing human rights and environmental health and safety violations.

 

The annual audits are conducted by Delta Apparel employees in our human resources or compliance departments, and they follow predefined audit programs and checklists that involve a mix of in-person site visits and walkthroughs of the facility, observations of processes, interviews with employees, and inspection of records and applicable permits. The audit results are documented with supporting photographs for any non-conformance findings. The internal auditors then report the findings to management, including the recommended corrective actions and the date by which the corrective actions must be complete. The audits performed in 2023 resulted in no priority non-conformance findings, defined as severe violations of code of conduct in the areas of labor or environmental health and safety. For minor violations identified, we put corrective action plans in place to remediate the findings.

 

Community Outreach

 

Delta Apparel is committed to giving back to the communities where our employees live and work through volunteer service and community outreach. In 2023, our employees were involved in programs to promote environmental responsibility and improve the way of life for nearby communities. For example, Salt Life sponsored a number of national organizations, in addition to offering a variety of t-shirts for which donations were collected for various relief efforts. In addition, our U.S. employees were directly involved with the community through both the donation of merchandise to fundraisers and sponsorship of individual volunteer efforts with nearby organizations. Additionally, our offshore employees in Mexico and Honduras were involved in numerous activities throughout the year including the following:

 

 

For the second year, our Honduras sewing facilities donated groceries, toys, and clothes to the San Raphael Orphanage located in Villanueva, Cortes. The San Raphael Orphanage provides housing and education for approximately 90 children.
     
 

Employees from Delta Honduras visited the Arturo Castro Kindergarten located in San Antonio de Cortes and cleaned the green areas, painted restrooms and classrooms, repaired benches, and donated two trash cans. Approximately 17% of the school’s population are children of Delta Honduras and Delta Cortes employees. Employees also visited the Jose Trinidad Cabañas School in Villanueva, Cortes and cleaned the green areas and donated cleaning supplies for the restrooms. Approximately 5% of the school’s population are children of Delta Honduras and Delta Cortes employees. Additionally, employees from Delta Honduras rehabilitated the restroom area for the local fire station that serves the community near the Delta Honduras sewing facility.
     
  Delta Cortes employees reforested the green areas and donated trash cans for the Church of God in Villanueva, Cortes. During the activity, the team also organized games and donated toys and candy for the children. Approximately 2% of the church population are Delta Honduras and Delta Cortes employees. Employees from Delta Cortes also reforested the green areas at the Union and Effort School in Villanueva, Cortes. The team donated and installed trash cans, and donated cleaning supplies for the restroom area. Approximately 5% of the school population are children of Delta Honduras and Delta Cortes employees.
     
  Employees at Ceiba Textiles donated a gas-powered trimmer and brush cutter to the Quimistán Municipal Environmental Unit to support the maintenance of the area reforested as a result of the annual “United for a Greener Honduras” campaign in which Ceiba Textiles employees previously participated. Reforestation in this area of western Honduras was a critical factor in increasing the region’s water retention capacity as it reduced the impact to nearby communities when rivers would overflow during the rain and hurricane seasons. In addition, Ceiba Textiles employees donated toys, snacks, and sodas in celebration of Children’s Day at the Pedro Nufio School located in Tierra Amarilla, Santa Barbara and the Benjamin Trochez School located in Pinalejo, Santa Barbara. Approximately 23% of Ceiba Textiles employees reside in these towns.
     
  Mexico employees donated toys, snacks, and sodas in celebration of Children’s Day in the towns of Hampolol and Xkeulil, Campeche. Approximately 4% of Mexico employees reside in the towns of Hampolol and Xkeulil. Mexico employees also donated t-shirts in support of the campaign at the Women’s Institute of Campeche (Instituto de la Mujer del Estado de Campeche) to end violence against women. The Women’s Institute provides legal, psychological, and medical care services to more than 29,000 people in the state of Campeche.

 

9

Competition

 

As a vertically integrated apparel company, we have numerous competitors in both domestic and international markets, many of which are larger and have more brand recognition and greater marketing budgets. Some of these competitors may benefit from lower production costs that can result from greater operational scale, a differing supply chain footprint, or trade-related agreements and other macroeconomic factors that may enable them to compete more effectively.

 

Competition in our Delta Group segment is generally based upon price, service, delivery time, and quality, with the relative importance of each factor dependent upon the needs of the particular customer and the specific product offering. Our Delta Direct products generally are highly price competitive, and competitor actions can greatly influence pricing and demand for our products. While price is still important in our Global Brands and Retail Direct channels, quality and service are generally more important factors for customer choice. Our ability to consistently service the needs of our Global Brand and Retail Direct customers greatly impacts future business in these channels. We believe our U.S. market-adjacent manufacturing platform enables us to compete effectively by providing an outlet for customers to diversify their sourcing footprints and reduce time to market. Furthermore, as an integrated entity with design, manufacturing, sourcing, and marketing capabilities, we believe the interdependencies within our portfolio provide cost, quality, and speed-to-market advantages that enable us to be more competitive.

 

We believe that competition within our Salt Life Group segment is based primarily upon brand recognition, design, and consumer preference. We focus on sustaining the strong reputation of our lifestyle brands by adapting our product offerings to changes in fashion trends and consumer preferences. We aim to keep our merchandise offerings fresh with unique artwork and new designs and support the integrated lifestyle statement of our products through effective consumer marketing. We believe that our favorable competitive position stems from strong consumer recognition and brand loyalty, the high quality of our products, and our flexibility and process control, which drive product consistency. We believe that our ability to remain competitive in the areas of quality, price, design, marketing, product development, manufacturing, technology and distribution will, in large part, determine our future success.

 

Seasonality

 

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 year 2023 may not be indicative of the distribution in future years.

 

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 1A. Risk Factors

 

We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties, including, but not limited to, the risks identified below. The following risks, as well as risks described elsewhere in this report or in our other filings with the SEC, could materially affect our business, financial condition or operating results and the value of Company securities held by investors and should be carefully considered in evaluating our Company and the forward-looking statements contained in this report or future reports. The risks described below are not the only risks facing Delta Apparel. Additional risks not presently known to us or that we currently do not view as material may become material and may impair our business operations. Any of these risks could cause, or contribute to causing, our actual results to differ materially from expectations.

 

10

Risks Related to our Strategy

 

Our future success depends in part on our ability to successfully implement our strategic plan and achieve our business strategies.

We continue to focus on strategic initiatives designed to enhance our capabilities, strengthen the foundation of our Company, and accelerate profitable growth across our business segments. There can be no assurance that these or other future strategic initiatives will be successful to the extent we expect, or at all. Additionally, we are investing resources in these initiatives and the costs of the initiatives may outweigh their benefits. If we miscalculate the resources we need to complete these strategic initiatives or fail to implement them effectively, our business and operating results could be adversely affected.

 

Our strategy to grow our direct-to-consumer retail business depends upon our ability to successfully open and operate new stores in a timely and cost-effective manner. 

Our strategy to grow our “brick and mortar” retail footprint depends on many factors including, among others, our ability to: identify desirable store locations; negotiate acceptable lease terms; hire, train and retain a growing workforce of store managers, sales associates and other personnel; successfully integrate new stores into our existing control structure and operations, including our information technology systems; and coordinate well with our digital platforms and wholesale customers to minimize the competition within our sales channels. As we expand into new geographic areas, we need to successfully identify and satisfy the consumer preferences in these areas. In addition, we need to address competitive, merchandising, marketing, distribution and other challenges encountered in connection with any expansion. Finally, we cannot ensure that any newly-opened stores will be received as well as, or achieve net sales or profitability levels comparable to those of, our existing stores in our estimated time periods, or at all. If our stores fail to achieve, or are unable to sustain, acceptable net sales and profitability levels, our business overall may be materially harmed, and we may incur significant costs associated with closing or relocating stores.

 

The apparel industry is highly competitive, and we face significant competitive threats to our business.

The market for activewear apparel and the related accessory and other items we provide is highly competitive and includes many new participants as well as increased competition from established companies, some of which are larger or more diversified and may have greater financial resources. Many of our competitors also have larger sales forces, stronger brand recognition among consumers, bigger advertising budgets, and/or greater economies of scale. We compete with these companies primarily on the basis of price, quality, service and brand recognition, all of which are important competitive factors in the apparel industry. Our ability to maintain our competitive edge depends upon these factors, as well as our ability to deliver new products at the best value for the customer, maintain positive brand recognition, and obtain sufficient retail floor space and effective product presentation at retail.  If we are unable to compete successfully with our competitors, our business and results of operations will be adversely affected.

 

The availability of our key raw materials or raw material price volatility may interrupt our supply chains and materially harm our business.

Cotton is the primary raw material used in the manufacture of our apparel products. As is the case with other commodities, the price of cotton fluctuates and is affected by weather, consumer demand, speculation on the commodities market, inflation, the cost of labor and transportation, and other factors that are generally unpredictable and beyond our control. As described under the heading “Manufacturing, Sourcing, and Distribution,” the price of yarn purchased from Parkdale, our key supplier, is based upon the cost of cotton plus a fixed conversion cost. We set future cotton prices with purchase commitments as a component of the purchase price of yarn in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we enter into the commitments. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. In the past, the Company, and the apparel industry as a whole, has experienced periods of increased cotton costs and price volatility.  By way of example, the price of cotton per pound increased almost 50% in a five-month period and reached a high of over $1.50 in our fiscal year 2022.  In some instances, we were unable to pass through these higher costs to our customers, with the gross margins in our Activewear and other businesses negatively impacted as a result.  In addition, sudden decreases in the price of cotton and other raw materials may result in the cost of inventory exceeding the cost of new production, which may result in downward selling price pressures, negatively impacting the gross margins in our Activewear and other businesses by significant amounts.

 

Additionally, if Parkdale’s operations are disrupted and Parkdale is not able to provide us with our yarn requirements, we may need to obtain yarn from alternative sources. We may not be able to enter into short-term arrangements with substitute suppliers on terms as favorable as our current terms with Parkdale, which could negatively affect our business. In addition, we may not be able to obtain sufficient quantities of yarn from alternative sources, which could require us to adjust manufacturing levels, negatively impacting our business and results of operations.

 

Our operations also require significant amounts of dyes and chemicals that we purchase from several third-party suppliers. While historically we have not had difficulty obtaining sufficient quantities of dyes and chemicals for manufacturing, the availability of products can change, which could require us to adjust dye and chemical formulations. In certain instances, these adjustments can increase manufacturing costs, negatively impacting our business and results of operations.

 

11

Our success depends, in part, on our ability to predict or effectively react to changing consumer preferences and trends.

The success of our businesses depends on our ability to anticipate and respond quickly to changing consumer demand and preferences in apparel and other items we provide. We believe that our brands are recognized by consumers across many demographics and geographies. The popularity of particular products can change significantly from year-to-year based on prevailing fashion trends (particularly in our lifestyle businesses) and on other factors and, accordingly, our ability to adapt to fashion trends in designing products is important to the success of our brands. If we are unable to quickly adapt to changes in consumer preferences in the design of our products, our results of operations could be adversely affected.  Moreover, because we and our customers project demand for our products based on estimated sales and fashion trends, the actual demand for our products sometimes falls short of what was projected.  This can lead to higher inventory levels than desired.  Excess inventory levels increase our working capital needs, and sometimes excess inventory must be sold at discounted prices, all of which could have an adverse impact on our business, financial condition and results of operations.

 

If our advertising, marketing and promotional programs are ineffective, or if our competitors are more effective with their programs, our sales could be negatively affected.

Ineffective marketing, advertising and promotional programs could inhibit our ability to maintain brand relevance and could ultimately decrease sales. While we market our products and attract customers, some of our competitors may expend more for their programs than we do, or use different approaches than we do that prove more successful, any of which may provide them with a competitive advantage. If our programs are not effective or require increased expenditures that are not offset by increased sales, our revenue and results of operations could be negatively impacted.

 

Risks Related to our Operations

 

The COVID-19 pandemic has had a material adverse effect on our ability to operate, results of operations, financial condition, liquidity, and capital investments, and it or any other global or regional pandemic or similar event could have material adverse impacts on our business going forward.

The COVID-19 pandemic adversely effected our performance, results of operations, financial condition, liquidity, and capital investments and also impacted all regions around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities. During our fiscal year 2020, these requirements resulted in temporary closures of all of our branded retail locations and our manufacturing facilities in El Salvador, Honduras Mexico, and North Carolina. Many of our customers and suppliers also faced these and other challenges, which resulted in supply chain and logistic constraints, closure of certain third-party manufacturers and increased freight costs at various stages of the pandemic. Any further or similar temporary or long-term disruption in our supply chain due to the COVID-19 pandemic or other global or regional pandemic or similar event could lead to reduced demand for our products and services and could impair our customers’ ability to pay all or portion of the amounts owed to us. We rely on suppliers and third-parties to deliver raw materials and transport our finished goods. Prolonged inventory shortages may result in significant lost business or delay in shipments which could have a material adverse effect on our results of operations and financial condition.

 

The extent to which the COVID-19 pandemic or any similar global or regional event impacts or continues to impact our business will depend on future developments that are highly uncertain and cannot be predicted, including the ultimate duration, severity and sustained geographic resurgence of the virus or any similar event, the emergence of new variants and strains of the virus or any similar dynamic, and the success of actions to contain the virus and its variants or any similar event, or treat their respective impacts. Any resurgence of the COVID-19 pandemic or the occurrence of any similar global or regional event would likely result in social, economic, and labor instability in the countries in which we, or the third parties with whom we engage, operate. The long-term economic impact and near-term financial impacts of any such event, including but not limited to, possible impairment, restructuring, and other charges, as well as overall impact on our business, results of operations, financial condition, liquidity, capital resources and investments, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

 

Our operations are subject to political, social, and economic risks in Honduras, El Salvador and Mexico.

The majority of our products are manufactured in Honduras and, El Salvador and, previously, Mexico before we began the process of closing our sewing and screenprint operations in Mexico during fiscal year 2023 that we will finalize in the early part of fiscal year 2024. These countries from time-to-time experience political, social and economic instability, and we cannot be certain of their future stability. Instability in a country can lead to protests, riots and labor unrest. Governments have changed, and may continue to change, and employment, wage and other laws and regulations may change, thereby increasing our costs to operate in those countries. Any of these political, social, or economic events or conditions could disrupt our supply chain or increase our costs, adversely affecting our financial position and results of operations. For example, in fiscal years 2022 and 2021, our operations in and around San Pedro Sula, Honduras, were partially disrupted by protests and strikes related to increasing fuel costs and the impact related to higher ticket prices on public transportation. These disruptions temporarily restricted the ability of our employees and suppliers to access our manufacturing facilities as well as our ability to ship products from our facilities, and negatively impacted our operations from cost and other standpoints.  

 

12

If we experience disruptions or interruptions within any of our facilities, operations, or distribution networks, we may be unable to deliver our products to the market and may lose sales and customers.

We own or lease manufacturing facilities in the United States, Honduras, El Salvador and Mexico (our Mexico leases will terminate in early 2024 in connection with our decision to close our sewing and screenprint operations there). We also own or lease distribution facilities located throughout the United States and maintain inventory at certain third-party locations. Any casualty or other circumstance that damages or destroys any of these material facilities or significantly limits their ability to function could have a material adverse effect on our business.  Similarly, any significant interruption in the operation of any of these facilities or our related sourcing and transportation logistics functions, whether within or outside of our control, may delay shipment of merchandise to our customers, potentially damaging our reputation and customer relationships and causing a loss of revenue. Moreover, in the event of a regional disruption where we manufacture our products, we may not be able to shift our operations to a different geographic region, and we may have to cease or curtail our operations in a selected area. This may cause us to lose sales and customers. The types of disruptions that may occur include foreign trade disruptions, import restrictions, labor disruptions, embargoes, government intervention, natural disasters, regional or global pandemics and political disruptions such as those referenced in the immediately preceding paragraph of this section. In addition, if we are unable to successfully coordinate the planning of inventory across these facilities and the related distribution activities, it could have a material adverse effect on our business, financial condition and results of operations.

 

The talents and continued contributions of our key management team are important to our success.

We believe our future success depends on our ability to retain and motivate our key management team, our ability to attract and integrate new members of management into our operations, and the ability of all personnel to work together effectively as a team and to execute our business strategy. Our inability to accomplish any of these objectives could have a material adverse effect on our results of operations.

 

If any of the third parties upon whom we rely to provide certain key equipment and services fails to satisfy their obligations to us in the future, we may suffer a disruption to our business.

We rely on certain key equipment and services provided by various third parties, including logistics partners and equipment suppliers. For example, we rely on third parties to provide certain inbound and outbound transportation and delivery services and other third parties to provide us with key equipment to support our manufacturing and fulfillment platforms, including our DTG2Go digital platform. If any of these or other third parties fail to satisfy their obligations to us or does not provide properly functioning equipment or services to us in the future, we may suffer a disruption to our business or increased costs. Further, we may be unable to implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

 

Energy, fuel and related costs are prone to significant fluctuations and volatility, which could adversely affect our results of operations.

Our manufacturing operations require high inputs of energy, and changes in energy prices directly impact our gross profits. In addition, we incur significant freight costs to transport goods between our offshore facilities and the United States, along with transportation expenses to ship products to our customers. The cost of energy and fuel fluctuates due to a number of factors outside of our control, including government policy and regulation, supply disruptions, inflation, and weather conditions. Many of these factors impacted such cost in fiscal years 2023 and 2022 and may have an impact going forward. To mitigate the risk of fluctuations in energy costs, we continue to focus on methods that will reduce the amount of energy used in the manufacture of our products. However, significant increases in energy and fuel prices may have a material adverse effect on our financial position and results of operations, especially if such increases make us less competitive compared to others in our industry.

 

Our business operations rely on our information systems and any material disruption or slowdown of our systems could cause operational delays, reputational harm, or loss of revenue.

We depend on information systems to, among other things, manage our inventory, process transactions, operate our websites, respond to customer inquiries, purchase, sell and ship goods on a timely basis, and maintain cost-effective operations. Management uses information systems to support decision-making and to monitor business performance. If we experience any disruptions or slowdowns with our information systems, we may fail to generate accurate and complete financial and operational reports essential for making decisions at various levels of management, which could lead to decisions being made that have adverse results. We have invested significant capital and expect future capital expenditures associated with the implementation and integration of our information technology systems across our businesses. This process involves the replacement and consolidation of technology platforms so that our businesses are served by fewer platforms, resulting in operational efficiencies and reduced costs. Our inability to effectively implement or convert our operations to the new systems could cause delays in product fulfillment and reduced efficiency in our operations. Further, if changes in technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth, we could lose customers. We are also subject to risks and uncertainties associated with the internet, including changes in required technology interfaces, website downtime and other technical failures. Our failure to successfully respond to these risks and uncertainties could reduce sales, increase costs and damage the reputation of our brands.  In addition, we interact with many of our customers through our websites. Customers increasingly utilize our online platforms to purchase our merchandise. If we are unable to continue to provide consumers a user-friendly experience and evolve our platforms to satisfy consumer preferences, the growth of our ecommerce and other businesses and our sales may be negatively impacted. If our websites contain errors or other vulnerabilities which impede or halt service, it could result in damage to our brands’ images and a loss of revenue. In addition, we may experience operational problems with our information systems as a result of system failures, “cyber-attacks,” computer viruses, security breaches, disasters or other causes. Any material disruption or slowdown of our information systems could cause operational delays and increased costs that could have a material adverse effect on our business and results of operations.

 

13

Compromises of our data security could lead to liability and reputational damage. 

In the ordinary course of our business, we often collect, retain, transmit, and use sensitive and confidential information regarding customers and employees, and we process customer payment card and check information. There can be no assurance that we will not suffer a data compromise, that unauthorized parties will not gain access to personal information, or that any such data compromise or access will be discovered in a timely manner. Further, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and controlled by the payment card industry, not by us. Our computer systems, software and networks may be vulnerable to breaches (including via computer hackings), unauthorized access, misuse, computer viruses, phishing or other failures or disruptions that could result in disruption to our business or the loss or theft of confidential information, including customer information. Any failure, interruption, or breach in security of these systems could result in the misappropriation of personal information, payment card or check information or confidential business information of our Company. In addition, there may be non-technical issues, such as our employees, contractors or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures in order to misappropriate such information and may purposefully or inadvertently cause a breach involving such information.

 

The methods used by third parties to obtain unauthorized access change frequently and may not be anticipated or immediately detected. Thus, despite the security measures we may have in place, an actual or perceived information security breach, whether due to “cyber-attack," computer viruses or other malicious software code, or human error or malfeasance, could occur. Actual or anticipated attacks may cause us to incur significant costs to rectify the consequences of the security breach or cyber-attack, including costs to deploy additional personnel and protection technologies, repair damage to our systems, train employees and engage third-party experts and consultants. The collection, retention, transmission, and use of personal information is subject to contractual requirements and is highly regulated by a multitude of state, federal, and foreign laws. Privacy and information security laws are complex and constantly changing. Compliance with these laws and regulations may result in additional costs due to new systems and processes, and our non-compliance could lead to legal liability. Any compromise of our customer, employee or company data, failure to prevent or mitigate the loss of personal or business information, or delay in detecting or providing prompt notice of any such compromise could attract media attention, damage our customer or other business relationships and reputation, result in lost sales, fines, liability for stolen assets or information, costs of incentives we may be required to offer to our customers or business partners to retain their business, significant litigation or other costs and involve the loss of confidential company information, any or all of which could have a material adverse effect on our business, financial condition and results of operations.

 

Extreme weather conditions, natural disasters, and other catastrophic events, including those caused by climate change, could negatively impact our results of operations and financial condition.

Extreme weather conditions in the areas in which our manufacturing facilities, retail stores, suppliers, customers, distribution centers, data centers, and offices are located could adversely affect our results of operations and financial condition. Moreover, natural disasters such as earthquakes, hurricanes, floods, or wildfires, public health crises, such as pandemics and epidemics (including, for example, the COVID-19 pandemic), political crises, such as terrorist attacks, war and other political instability, or other catastrophic events, whether occurring in the United States or abroad, and their related consequences and effects, including energy shortages, could disrupt our operations, the operations of our suppliers or customers or result in economic instability that could negatively impact customer spending, any or all of which would negatively impact our results of operations and financial condition. In addition, fire and other natural disasters such as hurricanes, earthquakes, or floods have occurred and can recur in the countries in which we operate. These types of events could impact our global supply chain, including the ability of suppliers to provide raw materials where and when needed, the ability of third parties to ship merchandise, and our ability to ship products from or to the impacted region(s). 

 

In addition, climate change and the increased focus by governments, organizations, customers, and investors on sustainability issues, including those related to climate change and socially responsible activities, may adversely affect our reputation, business, and financial results. Investor advocacy groups, certain institutional investors, investment funds, other market participants, shareholders, and stakeholders have focused increasingly on environmental, social, and governance, or ESG, and related sustainability practices of companies. These parties have placed increased importance on the implications of the social cost of their investments. If our ESG practices do not meet investor or other stakeholder expectations and standards (which are continually evolving and may emphasize different priorities than the ones we choose to focus on), then our brand, reputation, and potential employee retention may be negatively impacted. We could also incur additional costs and require additional resources to monitor, report, and comply with various ESG practices and regulations. Also, our failure, or perceived failure, to manage reputational threats and meet expectations with respect to socially responsible activities and sustainability commitments could negatively impact our brand credibility, employee retention, and the willingness of our customers and suppliers to do business with us.

 

Risks Related to Legal and Regulatory Matters

 

Changes in U.S. or other tax laws or regulations may cause us to incur additional tax liability.

We are subject to income tax in the United States and in certain foreign jurisdictions where we generate net operating profits. We generally benefit from a lower overall effective income tax rate due to the majority of our manufacturing operations being located in foreign tax-free jurisdictions or foreign jurisdictions with tax rates that are lower than those in the United States. Our U.S. legal entity contracts with our foreign subsidiaries to manufacture products on its behalf, with the intercompany prices paid for the manufacturing services and manufactured products based on an arms-length standard and supported by an economic study.

 

14

The December 22, 2017, Tax Cuts and Jobs Act of 2017 (the “2017 Tax Legislation”) 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. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”), a limitation on the deduction for business interest expense (“Section 163(j)”), and a limitation on the deductibility of a company’s net operating losses (“NOLs”). GILTI is the excess of the shareholder’s net controlled foreign corporations' (“CFCs”) net tested income over the deemed tangible 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 or 30% of the taxpayer’s adjusted taxable income. U.S. federal NOLs cannot fully offset taxable income and carryforward indefinitely. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including some provisions which were previously enacted under the 2017 Tax Legislation. The CARES Act also revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income.

 

Our effective tax rate could be adversely affected by changes in the mix of earnings between the U.S. and tax-free or lower-tax foreign jurisdictions. We may be limited in our ability to deduct 50% of applicable foreign earnings under the GILTI income inclusion or to deduct U.S. interest expense based on the amount of U.S. taxable income earned in a particular fiscal year. In addition, the future impact of the CARES Act and 2017 Tax Legislation may differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the CARES Act and 2017 Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and 2017 Tax Legislation.

 

Further changes to U.S. tax laws, including those impacting how U.S. multinational corporations are taxed on U.S. and foreign earnings, such as any potential increase in the U.S. corporate income tax rate, the doubling of the rate of tax on certain earnings of foreign subsidiaries, and a minimum tax on worldwide book income, among other things, could have a material adverse effect on our tax expense and cash flow.

 

We are subject to periodic litigation in both domestic and international jurisdictions that may adversely affect our financial condition and results of operations.

From time to time we may be involved in legal or regulatory actions regarding product liability, employment practices, intellectual property infringement, bankruptcies and other litigation or enforcement matters. Due to the inherent uncertainties of litigation in both domestic and foreign jurisdictions, we cannot accurately predict the ultimate outcome of any such proceedings. These proceedings could cause us to incur costs and may require us to devote resources to defend against these claims and could ultimately result in a loss or other remedies such as product recalls, which could adversely affect our financial condition and results of operations. For a description of current material legal proceedings, see Part I, Item 3, Legal Proceedings.


Product liability issues could lead to recalls, claims and negative publicity, and adversely affect our results of operations.

Our operations are subject to certain product liability risks common to most brands and manufacturers and our ability to maintain consumer confidence in the safety and quality of our products is vital to our success. We have implemented product safety and quality programs and standards that we follow and we expect our supplier partners to strictly adhere to applicable requirements and best practices. In addition to selling apparel and accessory products, we also license one of our brands for use in connection with restaurant, food, and beverage services and home furnishings. We also previously participated in a joint venture involving the sale of a branded alcoholic beverage and previously licensed one of our brands for use in connection with a branded alcoholic beverage. Selling products intended for human consumption carries inherent risks and uncertainties. If we or our supplier or license partners fail to comply with applicable product safety and quality standards and our products or those otherwise associated with our brands are, or become, unsafe, non-compliant, contaminated or adulterated, we may be required to recall our products and encounter product liability claims and negative publicity. Any of these events could adversely affect our reputation, business or results of operations.

 

We rely on the strength of our trademarks and could incur significant costs to protect these trademarks and our other intellectual property.

Our trademarks, including Salt Life®, Soffe®, Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design, among others, are important to our marketing efforts and have substantial value. We aggressively protect these trademarks and have incurred legal costs in the past to establish and protect these trademarks. We may in the future be required to expend significant additional resources to protect these trademarks and our other intellectual property. Intellectual property litigation may be costly and may divert management's attention from the operation of our business. Adverse determinations in any litigation may result in the loss of our proprietary rights, subject us to significant liabilities or require us to seek licenses from third parties, which may not be available on commercially reasonable terms, if at all. Any of these outcomes may have a material adverse effect on our financial condition, results of operations or cash flows.

 

Significant changes to international trade regulations could adversely affect our results of operations.

The majority of our products are manufactured in Honduras and El Salvador and, previously, Mexico before we began the process of closing our sewing and screenprint operations in Mexico during fiscal year 2023 that we will finalize in the early part of fiscal year 2024. We therefore benefit from current free trade agreements and other duty preference programs, including the Central America Free Trade Agreement (“CAFTA”). Our claims for duty free or reduced duty treatment under CAFTA and other available programs are largely conditioned on our ability to produce or obtain accurate records (some of which are provided to us by third parties) about production processes and sources of raw materials. Trade partnerships and treaties can be subjected to negotiations and modifications by domestic and foreign governments, which could result in new or increased tariffs on goods we import into the United States. Subsequent repeal or further modification of CAFTA, further increases to tariffs on goods imported into the United States, or the inadequacy or unavailability of supporting records, could have a material adverse effect on our results of operations.

 

15

In addition, our products are subject to foreign competition, which in the past has been faced with significant U.S. government import restrictions. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain, subject to political considerations. The reduction or elimination of import protections for domestic apparel producers could significantly increase global competition, which could adversely affect our business and results of operations.

 

Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity.

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. Any failure to comply with such regulations could cause us to become subject to investigation and enforcement actions resulting in significant penalties or claims or in our inability to conduct business, adversely affecting our results of operations.

 

Our international operations are also subject to compliance with the FCPA and other anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S. and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with the FCPA and similar laws, some of our agents or other channel partners, as well as those companies to which we outsource certain of our business operations, could take actions in violation of our policies.  Any such violation could have a material and adverse effect on our business.

 

Changes in domestic or foreign employment regulations, changes in our relationship with our employees, and changes in our ability to attract and retain employees could adversely affect our results of operations.

As of September 30, 2023, we employed approximately 6,800 employees worldwide, with approximately 5,800 of these employees located in Honduras, El Salvador, and Mexico. Changes in domestic and foreign laws and regulations governing our relationships with our employees, including wage and human resources laws and regulations, labor standards, overtime pay, unemployment tax rates, workers compensation rates, and payroll taxes could impact our relationship with our employees and adversely impact the productivity and ultimate cost of our manufacturing operations. A total of approximately 2,000 employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are generally good. However, a change in labor relations could adversely affect the productivity and ultimate cost of our manufacturing operations.

 

Our business is dependent on attracting and retaining a large number of quality employees with staffing needs especially high during the holiday season. Competition for personnel is highly competitive, and there is no assurance we will be able to attract and retain a sufficient number of qualified personnel in future periods. Our ability to meet our labor needs is subject to many factors such as prevailing wage rates, minimum wage legislation, unemployment levels, and actions by our competitors with respect to compensation levels. Wage rates have increased significantly in the U.S. and wage increases have also occurred in foreign countries in which we operate. Any further significant increases in wage rates in these countries in which we operate could have a material adverse impact on our operating results. In addition, changes in federal, state, or local laws and regulations relating to employee benefits, including, but not limited to, sick time, paid time off, leave of absence, wage-and-hour, overtime, and meal-and-break time could cause us to incur additional costs. Competitive and regulatory pressures have already significantly increased our labor costs and we may be unable to fully pass these costs to our customers through increased selling prices, which could deteriorate our profitability. In addition, further changes that hurt our ability to attract and retain personnel could adversely affect our results of operations in the future.

 

The value of our brands, sales of our products and our licensing relationships could be impacted by negative publicity resulting from violations of manufacturing or employee safety standards or labor laws or unethical business practices by our suppliers and independent contractors.

We are committed to ensuring that all of our manufacturing facilities comply with our strict internal code of conduct, applicable laws and regulations, and the codes and principles to which we subscribe. In addition, we require our suppliers and independent contractors to operate their businesses in compliance with the laws and regulations that apply to them. However, we do not control these suppliers and independent contractors. A violation of our policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations by our suppliers or independent contractors could interrupt or otherwise disrupt our operations. Negative publicity regarding the production or operating methods of any of our suppliers or independent contractors or their failure to comply with our policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations could adversely affect our reputation, brands, sales and licensing relationships, which could adversely affect our business and results of operations.

 

16

Risks Related to Financial Matters

 

Economic conditions may adversely impact demand for our products.

The apparel industry 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. These economic conditions include, but are not limited to, employment levels, energy costs, interest rates, tax rates, inflation, personal debt levels, and uncertainty about the future, with many of these factors outside of our control. Recent distress in global credit markets, rising interest rates, foreign exchange rate fluctuations, significant geopolitical conflicts, volatility in energy prices, constraints on the global supply chain and other factors continue to affect the global economy and adversely impact demand for our products. In 2022 and 2023, the U.S. experienced significantly heightened inflationary pressures. We may not be able to fully mitigate the impact of inflation through price increases, productivity initiatives and cost savings, which could have a material adverse effect on our financial results. In addition, if the U.S. economy enters a recession, we may experience sales declines and may have to decrease prices, all of which could have a material adverse impact on our financial results. Historically, during recessionary periods, the demand for casual and activewear apparel has been strong and our business has performed well. However, there can be no assurances that this correlation will continue in future recessions. Sometimes, the timing of increases or decreases in consumer purchases of soft goods can differ from the timing of increases or decreases in the overall level of economic activity.

 

Weakening sales may require us to reduce manufacturing operations to match our output to demand or expected demand and reductions in our manufacturing operations may increase unit and other costs and lower our gross margins, causing a material adverse effect on our results of operations. For example, during fiscal year 2023 we experienced significant reductions in demand across our Activewear business due to high inventory levels across the supply chain, particularly channels serving mass retailers, and we made the decision to curtail our production levels to maintain balance with the declining demand. We incurred expenses in connection with our decision to reduce production that amounted to approximately $8.0 million in excess cost during fiscal year 2023, with most of that cost driven by lower fixed cost absorption due to lower production volume and the payment of temporary unemployment benefits to idled employees at our offshore locations.

 

We may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness.

Significant operating losses or significant uses of cash in our operations could cause us to default on our asset-based revolving credit facility. We rely on our credit facility, as well as on cash generated by our operations, to fund our working capital and capital expenditure needs, to make acquisitions, to fund repurchases under our share repurchase program and to pay dividends should we choose to do so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness. Cash on hand and availability under our U.S. revolving credit facility totaled $14.2 million at September 30, 2023. A significant deterioration in our business could cause us not to satisfy availability, fixed charge coverage ratio (FCCR), EBITDA and/or other thresholds in our asset-based revolving credit facility. Moreover, if we failed to satisfy our minimum availability threshold, we would be required to maintain the minimum FCCR specified in our credit agreement, which we may not be able to maintain. The covenants in our credit facility include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates as well as requirements to complete transactions related to certain assets. If an event of default under our credit facility occurred or became imminent, we may request our credit agreement lenders to provide a waiver.  If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility and may not be available.  If we were unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to fund our working capital and capital expenditure needs, make acquisitions, fund share repurchases or pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance would have a material adverse effect on our financial position and results of operations.

 

Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our customers or suppliers could adversely affect our financial position and results of operations.

We extend credit to our customers, generally without requiring collateral. The extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history. We monitor credit risk exposure by periodically obtaining credit reports and updated financial statements on our customers. Deterioration in the economy, declines in consumer purchases of apparel, disruption in the apparel retail environment, or the inability of our customers to access liquidity could have an adverse effect on the financial condition of our customers. During the past several years, various retailers and other customers have experienced significant difficulties, including consolidations, restructurings, bankruptcies and liquidations as well as retail shutdowns as a result of the COVID-19 pandemic. The inability of retailers and other customers to overcome these difficulties may continue or even increase due to the current economic and retail market conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current conditions, historical trends, estimates and other available information, which involves judgments and uncertainties. During fiscal year 2023, customers generally paid on the credit extended to them, and we ended fiscal year 2023 with days sales outstanding at 45.8 days, down from 51.7 days at September 2022. Although our historical allowances have been materially accurate, if market conditions change additional reserves may be required. The inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our financial condition and results of operations. Significant changes in the financial condition of any of our suppliers or other parties with which we do business could result in disruption to our business and have a material adverse effect on our financial condition and results of operations.

 

17

In addition, significant changes in the retail, merchandising and/or operational strategies employed by our customers may result in decreased sales of our products to such customers and could have a material adverse effect on our financial condition and results of operations.  Likewise, significant changes in the operations of any of our suppliers or other parties with which we do business could result in disruption to our business and have a material adverse effect on our financial condition and results of operations.

 

Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly.

The debt we incur under our asset-based revolving credit facility is at variable rates of interest, which exposes us to interest rate risk. Reference rates used to determine the applicable interest rates for our variable rate debt began to rise significantly in the second half of fiscal year 2022 and continued into fiscal year 2023. If interest rates continue to increase, the debt service obligations on such indebtedness will continue to increase even if the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. In addition, as a result of a recent amendment to our asset-based revolving credit facility, certain of the variable rate indebtedness extended to us uses the Secured Overnight Financing Rate (SOFR) as a benchmark for establishing the interest rate. While we will continue to use SOFR, other factors may impact SOFR including factors causing SOFR to cease to exist, new methods of calculating SOFR to be established, or the use of an alternative reference rate(s). These consequences are not entirely predictable and could have an adverse impact on our financing costs, returns on investments, valuation of derivative contracts and our financial results.

 

We may need to raise additional capital to grow our business.

The rate of our growth, especially through acquisitions, depends, in part, on the availability of debt and equity capital. We may not be able to raise capital on terms acceptable to us or at all. If new sources of financing are required, but are insufficient or unavailable, we may be required to modify our growth and operating plans based on available funding, which could adversely affect our ability to operate and/or grow the business.

 

We may be subject to the impairment of acquired intangible assets.

When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At September 2023 and September 2022, our goodwill and other intangible assets were approximately $50.4 million and $61.9 million, respectively. We conduct an annual review, and more frequent reviews if events or circumstances dictate, to determine whether goodwill is impaired. We also determine whether impairment indicators are present related to our identifiable intangible assets. If we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We completed our annual impairment test of goodwill on the first day of our third fiscal quarter and concluded that there was no indication of impairment.  However, based upon the operating results and projections for our DTG2Go business, during our fourth fiscal quarter we concluded that the goodwill associated with that business was impaired. Due to this impairment, we recorded an impairment charge of $9.2 million in fiscal year 2023. 

 

At September 2023, we concluded based on the assessment performed that there was no additional indication of impairment on the goodwill to be recorded on our financial statements. We also concluded that there are no additional indicators of impairment related to our intangible assets. There can, however, be no assurance that we will not be required to take an impairment charge in the future, which could have a material adverse effect on our results of operations. 

 

We are subject to foreign currency exchange rate fluctuations.

We manufacture the majority of our products outside of the United States, exposing us to currency exchange rate fluctuations. In addition, movements in foreign exchange rates can affect transaction costs because we source products from various countries. We may seek to mitigate our exposure to currency exchange rate fluctuations, but our efforts may not be successful. Accordingly, changes in the relative strength of the United States dollar against other currencies could adversely affect our business.

 

The market price of our shares is affected by the illiquidity of our shares, which could lead to our shares trading at prices that are significantly lower than expected.

Various investment banking firms have informed us that public companies with relatively small market capitalizations have difficulty generating institutional interest, research coverage, and trading volume. This illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the market perceives us to have a relatively small market capitalization. This has led and could continue to lead to our shares trading at prices that are significantly lower than our estimate of their inherent value.

 

As of November 30, 2023, we had 7,001,020 shares of common stock outstanding. We believe that approximately 51% of our stock is beneficially owned by entities and individuals who each own more than 5% of the outstanding shares of our common stock. Institutional investors that each beneficially own more than 5% of the outstanding shares collectively own approximately 39% of the outstanding shares of our common stock. Sales of substantial amounts of our common stock in the public market by any of these large holders could adversely affect the market price of our common stock, especially in light of the limited trading volumes.

 

18

The market price of our shares may be highly volatile, and the stock market in general can be highly volatile.

Fluctuations in our stock price may be influenced by, among other things, general economic and market conditions, conditions or trends in our industry, changes in the market valuations of other apparel companies, announcements by us or our competitors of significant acquisitions, strategic partnerships or other strategic initiatives, and trading volumes. Many of these factors are beyond our control but may cause the market price of our common stock to decline, regardless of our operating performance.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Our principal executive office is located in a leased facility in Duluth, Georgia. We own and lease properties supporting our manufacturing, distribution, direct retail, and administrative activities. The majority of our products are manufactured through a combination of facilities that we either own or lease and operate. The following listing summarizes the significant categories as of September 2023:  

 

   

Owned

   

Leased

   

Other

    Total  

Manufacturing

  2     6         8  

Distribution

  2     1     1     4  

Decoration/distribution

  1     5     1     7  

Retail stores/showroom

  1     25         26  

Offices

      5         5  

Total

  6     42     2     50  

 

Our primary manufacturing locations as of September 2023, are as follows:

 

Name

 

Location

 

Utilization

 

Segment

Ceiba Textiles

 

Naco, Quimistan, Santa Barbara Honduras

 

Knit/dye/finish/cut

 

Delta Group

Honduras Plant

 

San Pedro Sula, Honduras

 

Sew

 

Delta Group

Cortes Plant

 

San Pedro Sula, Honduras

 

Sew

 

Delta Group

Campeche Plant*   Seybaplaya, Campeche Mexico   Cut/sew   Delta Group/Salt Life Group
Campeche Sportswear*   Campeche, Mexico   Decoration   Delta Group/Salt Life Group

Textiles LaPaz

 

La Paz, El Salvador

 

Cut/sew/decoration

 

Delta Group/Salt Life Group

Fayetteville Plant

 

Fayetteville, North Carolina

 

Cut/sew/decoration

 

Delta Group/Salt Life Group

Rowland Plant

 

Rowland, North Carolina

 

Sew

 

Delta Group

 

* Closure to be completed in fiscal year 2024.

 

As of September 2023, and 2022, our long-lived assets in Honduras, El Salvador and Mexico collectively encompassed approximately 25% and 27%, respectively, of our consolidated net property, plant and equipment, of which 17% was in Honduras.  See Item 1A. Risk Factors for a description of risks associated with our operations located outside of the United States.

 

Our primary distribution centers, including those integrated with decoration operations, as of September 2023, are as follows:

 

Location

 

Utilization

 

Segment

Clinton, TN

 

Distribution

 

Delta Group

Fayetteville, NC

 

Distribution

 

Salt Life Group

Hebron, OH   Distribution   Delta Group

Opelika, AL*

 

Distribution

 

Delta Group

Cranbury, NJ

 

Decoration/distribution

 

Delta Group

Fayetteville, NC

 

Decoration/distribution

 

Delta Group

Lewisville, TX   Decoration/distribution   Delta Group

Miami, FL

 

Decoration/distribution

 

Delta Group

Nashville, TN

 

Decoration/distribution

 

Delta Group

Phoenix, AZ   Decoration/distribution   Delta Group

Storm Lake, IA

 

Decoration/distribution

 

Delta Group

 

* Operated by third party.

 

19

Our primary retail stores as of September 2023, are as follows:

 

Location

Utilization Segment

Boca Raton, FL

Retail Store Salt Life Group
Charleston, SC Retail Store Salt Life Group
Columbus, GA Retail Store Salt Life Group
Daytona Beach, FL Retail Store Salt Life Group
Deer Park, NY Retail Store Salt Life Group
Destin, FL Retail Store Salt Life Group
Estero, FL Retail Store Salt Life Group
Fayetteville, NC Retail Store Delta Group
Foley, AL Retail Store Salt Life Group
Fort Lauderdale, FL Retail Store Salt Life Group
Hilton Head, SC Retail Store Salt Life Group
Huntington Beach, CA Retail Store Salt Life Group

Jacksonville, FL

Retail Store Salt Life Group
Jupiter, FL Retail Store Salt Life Group
Key West, FL Retail Store Salt Life Group
Long Branch, NJ Retail Store Salt Life Group
Myrtle Beach, SC Retail Store Salt Life Group
Orlando, FL Retail Store Salt Life Group
Palm Beach Gardens, FL Retail Store Salt Life Group
Pembroke, FL Retail Store Salt Life Group
Rehoboth Beach, DE Retail Store Salt Life Group
Riverhead, NY Retail Store Salt Life Group
San Clemente, CA Retail Store Salt Life Group
Sarasota, FL Retail Store Salt Life Group
Tampa, FL Retail Store Salt Life Group
Texas City, TX Retail Store Salt Life Group

 

We believe that all of our facilities are suitable for the purposes for which they are designed and are generally adequate to allow us to remain competitive. We continue to maintain a sharp focus on improving our supply chain, lowering our product costs and reducing the operating capital required in our business. We will continue to take necessary actions to balance capacities with demand as needed. Substantially all of our assets are subject to liens in favor of our lenders under our U.S. asset-based secured credit facility, our Honduran credit facility, and our Salvadoran credit facility.

 

ITEM 3. Legal Proceedings

 

At times, we are party to various legal claims, actions and complaints. There are currently no material pending legal proceedings to which we are a party or of which any of our property is subject, and we are not aware of any such proceedings that are contemplated by any governmental authority.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

20

Part II

 

 

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

Market Information for Common Stock: 

The common stock of Delta Apparel, Inc. is listed and traded on the NYSE American under the symbol “DLA.” As of December 2, 2023, there were approximately 765 record holders of our common stock.

 

Dividends:

Our Board of Directors did not declare, nor were any dividends paid, during 2023 or 2022. Subject to certain restrictions, our credit facility allows stock repurchases and cash dividends from two sources: (1) legally available funds other than cash from certain sale/leaseback transactions, and (2) legally available funds solely from certain recent sale/leaseback transactions. In each case, at least 15% of the maximum revolver amount and borrowing base must be available both for 30 days before the transaction and after giving effect to it.  There is also a restriction on the total amount of such payments from April 3, 2016 to the date of determination. For payments from funds other than sale/lease backs, the amount is $10,000,000 plus 50% of net income since April 3, 2016. For payments solely from sale/leasebacks, the amount is limited to $10,000,000 since April 3, 2016. Also, payments from sale/leasebacks must be in excess of the subject real property’s contribution to the borrowing base.  Subsidiaries of the Borrowers (as defined in the credit facility) are not subject to these restrictions on dividends to the Borrowers. Notwithstanding the foregoing, the Amended Credit Agreement currently restricts us from making cash dividends or stock repurchases until the later of (x) November 4, 2023 and (y) the date upon which (a) our availability (as defined in the Amended Credit Agreement) and (b) our average availability (as defined in the Amended Credit Agreement) for the immediately preceding 30 consecutive days, is equal to or more than the greater of (i) 17.50% of the lesser of (A) our borrowing base (as defined in the Amended Credit Agreement) or (B)  the maximum revolver amount (as defined in the Amended Credit Agreement) and (ii) $25,000,000 and (II) certification that (x) our FCCR is equal to or greater than 1.00:1.00 for the trailing 12-month period and (y) as of such date, no default (as defined in the Amended Credit Agreement) or event of default exists. For purposes of this definition, availability and average availability will be calculated (x) after giving effect to the availability block (as defined in the Amended Credit Agreement) and (y) without giving effect to the application of the net cash proceeds from certain sale-leaseback transactions. Absent the restrictions referenced in the preceding two sentences, at September 2023, and September 2022, there was $8.3 million and $24.9 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.  Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.

 

Purchases of our Own Shares of Common Stock: 

See Note 14 Repurchase of Common Stock - Debt, in Item 15, which is incorporated herein by reference.

 

Securities Authorized for Issuance Under Equity Compensation Plans:

The information required by Item 201(d) of Regulation S-K is set forth under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report, which information is incorporated herein by reference.

 

Item 6. Reserved

 

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of Delta Apparel’s financial condition and results of operations for the fiscal years ended September 30, 2023 and October 1, 2022 should be read in conjunction with our audited consolidated financial statements and the notes to those statements. Financial measures included herein have been presented on a generally accepted accounting principles (“GAAP”) basis. In the following discussion and analysis of financial condition and results of operations, certain financial measures may be considered “non-GAAP financial measures” under SEC rules. These rules require supplemental explanation and reconciliation, which is provided elsewhere in this Annual Report.

 

Business Outlook

 

During fiscal year 2023, we were able to work through most of the trailing expense impacts of our curtailed production levels and last year’s historically high-priced cotton flowing through our cost of sales. Our Activewear business, which houses our nearshore manufacturing platform and serves the channels hit hardest by the much-publicized over-inventoried retail environment in 2023, was the most directly impacted by these unique cost-driving events. Now that we are inputting lower cotton cost in our inventory and running our manufacturing facilities at more consistent levels closer to capacity, we believe our Activewear business is well-positioned to take advantage of market improvements and see more indications that the elevated inventory levels in the retail supply chain following heavy buying activity in 2022 may be moderating. We continue to make steady progress towards a more normalized operating environment for our overall business, with our decision last year to reduce production levels to align with the lower demand environment and purchase less price-inflated cotton proving effective in positioning Delta Apparel for improved operating results going forward.

 

21

We will complete a significant strategic initiative involving the transition of our more expensive Mexico production capacity into our lower-cost Central American platform in the next few months. This initiative, along with several other restructuring activities completed in 2023, should generate annual cost savings of up to $6 million and position our Company to generate better returns on the capital we invest in our business in the current higher interest rate environment. In addition, we made substantial progress on inventory and debt reduction initiatives intended to counteract the challenging operating environment seen in recent periods, including an approximately 16% reduction in inventory from our most recent high in December 2022 and an approximately 17% reduction in long-term debt from our most recent high in February 2023. We expect further inventory and debt reductions as we move through fiscal year 2024 and plan to continue to tightly manage our spending and reduce capital expenditures year-over-year.

 

Our Delta Group segment’s fully integrated Activewear and DTG2Go businesses continue to offer solutions to a broadening spectrum of customers across the apparel industry. The two largest channels in Activewear’s Delta Direct business, Retail License and Regional Screenprint, showed signs of improvement during the fourth quarter and to start the new fiscal year, while Delta Direct’s eRetail and promotional channels continue to strengthen. We expect Activewear’s Global Brands and Retail Direct businesses to steadily pick up as we move into the second half of this fiscal year and get past some of the current headwinds from lower demand and excess global manufacturing capacity. Our onshore and nearshore manufacturing and fulfillment platforms, coupled with a distribution network spanning the United States, continue to become more integral to brand and retailer sourcing strategies and generate interest from customers looking to reach the United States market more efficiently and manage supply chain risks associated with international trade policy, ESG priorities, inflationary pressures, and supply chain disruptions.

 

Our DTG2Go business recently achieved a variety of key milestones including the recalibration of our entire “Digital First” technology fleet and the launch of a proprietary online portal geared towards quick reaction programs not suited for traditional decoration platforms. We also advanced several significant research and development initiatives including a proprietary fabric optimized for digital printing that should accelerate customer usage of Delta Direct blank garments at DTG2Go and a proprietary textile manufacturing process designed to solve well-known quality challenges arising during digital printing. The gains flowing from these initiatives should provide a solid foundation for improved operating results and sales growth at DTG2Go going forward. We believe that DTG2Go is well-positioned to capitalize on the ongoing digital disruption in the decorated apparel market through its industry-leading print capacity, nationwide fulfillment network, proprietary technology and processes, and vertical blank supply through Delta Direct.

 

Our Salt Life business generated significant operating profitability in fiscal year 2023 despite some temporary softness in its wholesale channel stemming from higher inventory levels at retail. We expect a return to sales growth at Salt Life going forward, including more direct-to-consumer growth in both the branded retail and eCommerce channels. Salt Life continues to expand its branded retail footprint with the recent opening of two new retail doors in Florida and the brand’s first location in Virginia set to open in the second quarter of fiscal year 2024. It will finish the calendar year with six new retail stores and a total owned retail footprint comprising 27 stores, including 15 full-price stores and 12 outlet stores across the country and over 55,000 square feet of retail floor space.

 

Salt Life’s ecommerce website sales continue to outperform and grew 52% for the year. We believe there is ample room for more growth in the ecommerce channel as we develop more data analytics and targeted marketing strategies. We were also pleased to see the initial market interest in Salt Life’s newly licensed home furnishings line exceed expectations and expect Salt Life’s license royalty revenue stream to more than double this fiscal year as the new line sells through. We continue to invest in marketing initiatives designed to elevate the Salt Life brand and drive increased engagement. Salt Life’s YouTube channel, www.youtube.com/@saltlife, currently has over 53 million total views and over 125,000 subscribers. In addition, Salt Life’s social media audience spanning Facebook, Instagram, X (formerly Twitter), LinkedIn, and Pinterest continues to grow, and Salt Life continues to interact with consumers through its online content portal, The Daily Salt, and its Salt Life-branded podcast, Above and Below.

 

With two very significant cost-driving trends now moving behind us and a streamlined cost structure in place moving ahead, Delta Apparel is in excellent position to take advantage of favorable changes in demand as they arise across our five go-to-market channels. We expect to see steady improvement in our overall operating results in fiscal year 2024 and will remain keenly focused on growth, profitability, and above all, creating value for shareholders for many years to come.

 

Results of Operations

 

Net sales for 2023 were $415.4 million, a decline of 14.3% from $484.9 million in the prior year when the apparel industry was a “seller’s market” with retailers and their suppliers accumulating inventory amid the rebound from COVID-related supply chain delays.

 

Delta Group segment net sales decreased 16.1% to $356.3 million in 2023 compared to prior year net sales of $424.8 million. Within the Activewear business, our Delta Direct, Global Brands and Retail Direct channels all experienced double-digit year-over-year declines as customers right-sized inventory levels from fiscal year 2022. The Activewear business was heavily impacted by the over-inventoried environment in the retail and other supply chains following the notable buying activity in fiscal year 2022 due to economic conditions, supply-chain constraints, and product availability.

 

22

Salt Life Group segment net sales were $59.0 million in 2023, a decrease of 1.7% from $60.1 million in the prior year. During fiscal year 2023, the segment saw growth in its direct-to-consumer sales through retail stores and ecommerce channels offset by a decline in the wholesale channel. Salt Life opened four new branded retail doors during the fiscal year, bringing our total retail store locations to 25 as of fiscal year end. Salt Life has since opened two additional retail stores and plans to open another location in second quarter of fiscal year 2024, bringing its total branded retail stores to 28.

 

Gross margins were 13.0% for fiscal year 2023, a decline from 22.4% in fiscal year 2022 driven by production curtailments to match manufacturing output with market demand as well as inflationary cotton costs (collectively "Production Curtailment & Cotton Costs"). Excluding these Production Curtailment & Cotton Costs, fiscal year 2023 adjusted gross margins were 21.2%. 

 

Delta Group segment gross margins were 6.1% for fiscal year 2023, a decrease of 1,220 basis points from gross margins of 18.3% in fiscal year 2022. Excluding the Production Curtailment & Cotton Costs, adjusted gross margins were 15.6% for fiscal year 2023. 

 

Salt Life Group segment gross margins were 54.6% in fiscal year 2023, an improvement of 300 basis points compared to 51.6% in fiscal year 2022 resulting from a favorable mix of sales, including increased Salt Life branded retail store sales, which offset a decline in wholesale sales from recent market softness. 

 

Selling, general and administrative (“SG&A”) expenses in fiscal year 2023 were $73.7 million, or 17.8% of sales, compared to $79.5 million, or 16.4% of sales, in 2022. SG&A expenses decreased in 2023 due to lower wages and wage-related expenses, offset by an increase in expenses due to costs associated with the expansion of Salt Life’s retail store footprint.

 

Other expense of $9.7 million in 2023 includes $9.2 million in goodwill impairment charges, $1.0 million in other impairment charges and $0.6 million severance charges, offset by $1.0 million in profits related to our equity investment in Green Valley Industrial Park, S.A. de C.V., the Honduran entity that owns and operates the industrial park in Naco, Quimistan, Santa Barbara Honduras, where our Ceiba Textiles facility is located (“Honduran Equity Method Investment”). The other impairment charges stem from the closure of our legacy single-purpose DTG2Go facility in Clearwater, Florida and shift of its' digital production capacity into our national footprint of dual-purpose facilities housing digital printing and blank garment distribution under one roof, as well as long-lived asset impairment of our Mexico facilities in connection with their closure. Severance charges related to expected employee severance at our Mexico facilities. In the prior year, other income of $2.4 million included $0.9 million in profits related to the Honduran Equity Method Investment, as well as $1.9 million in income from the net reduction in contingent consideration liabilities, offset by a loss on the disposal of fixed assets of $0.4 million.

 

Operating loss for fiscal year 2023 was $29.4 million. Excluding the Production Curtailment, Cotton Costs, Restructuring Costs and Goodwill Impairment Charges, fiscal year 2023 adjusted operating income was $9.2 million, or 2.2% of net sales. This compares to operating income of $31.8 million in the prior year.

 

The Delta Group segment experienced an operating loss of $26.2 million in fiscal year 2023, or (7.3%) of Delta Group net sales, compared to operating profit of $38.0 million, or 9.0% of Delta Group net sales, in fiscal year 2022. Excluding the Production Curtailment, Cotton Costs, Restructuring Costs and Goodwill Impairment Charges fiscal year 2023 Delta Group segment adjusted operating income was $21.7 million, or 6.1% of Delta Group net sales. 

 

The Salt Life Group segment achieved operating income of $6.2 million in fiscal year 2023, or 10.4% of Salt Life Group net sales, compared to $8.2 million, or 13.6% of Salt Life Group net sales, in fiscal year 2022. The lower operating income was driven by lower sales volume, accompanied by a favorable product sales mix and increased selling costs partially offset by increased gross margins as a percentage of sales.

 

Net interest expense for fiscal years 2023 and 2022 was $14.2 million and $7.7 million, respectively. The increases in interest expense over the prior year periods is primarily due to increased interest rates.

 

Our effective tax rate on operations for fiscal year 2023 is 23.8%. This compares to an effective tax rate of 17.9% for fiscal year 2022. Changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions drove this change in our effective tax rate. See Note 9—Income Taxes for more information.

 

Net loss attributable to shareholders for fiscal year 2023 was $33.2 million, or $4.75 per share, compared to net income of $19.7 million, or $2.80 per diluted share, for fiscal year 2022. Excluding the Production Curtailment, Cotton Costs, Restructuring Costs and Goodwill Impairment Charges fiscal year 2023 adjusted net income was $3.3 million, or $0.47 per share.

 

Accounts receivable was $45.1 million on September 2023, as compared to $68.2 million as of September 2022. Days sales outstanding (DSO) as of September 2023 were 46 days compared to 52 days at September 2022.

 

Net inventory as of September 2023 was $212.4 million, a decrease of $36.2 million from September 2022. The reductions in inventory reflects the Companys success with initiatives to right-size inventories and counteract the challenging operating environment going forward. In addition, the inventory value is lower than the prior fiscal year end as a result of lower input costs impacting materials, transportation and labor combined with a decrease in units on hand.

 

23

Non-GAAP Financial Measures

 

We provide all information required in accordance with U.S. GAAP, but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only U.S. GAAP financial measures. In an effort to provide investors with additional information regarding our results, we also provide non-GAAP information that management believes is useful to investors. We discuss gross margins, operating income and net income performance measures that are, for comparison purposes, adjusted to eliminate items or results stemming from discrete events. We do this because management uses these measures in evaluating our underlying performance on a consistent basis across periods. We also believe these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of our ongoing performance. These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis or our results as reported under U.S. GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.

 

Reconciliation of GAAP gross margins to non-GAAP gross margins, GAAP operating income to non-GAAP operating income, and GAAP net income to non-GAAP net income are presented below. A description of the amounts excluded on a non-GAAP basis are provided in conjunction with the below information. Non-GAAP gross margin, non-GAAP operating income, and non-GAAP net income should be evaluated in light of the Company’s financial statements prepared in accordance with GAAP.

 

Reconciliation of Gross Margin, Operating Income and Net Income to Non-GAAP Measures Adjusted Gross Margin, Adjusted Operating Income, and Adjusted Net Income - Unaudited

 

(in thousands)

   

For the year ended September

   

2023

   

2022

 
             

Gross Margin (GAAP)

$ 54,013   $ 108,843  

Production Curtailment Costs (1)

  8,019      

Cotton Costs (2)

  25,929      

Adjusted Gross Margin (non-GAAP)

$ 87,961   $ 108,843  

Percent of Sales

  21.2 %   22.4 %
             

Operating (Loss) Income (GAAP)

$ (29,442 ) $ 31,781  

Production Curtailment Costs (1)

  8,019      

Cotton Costs (2)

  25,929      

Restructuring Costs (3)

  4,723      
Goodwill Impairment Charges (4)   9,200      

Adjusted Operating Income (non-GAAP)

$ 18,429   $ 31,871  
             
Net (Loss) Income (GAAP) $ (33,213 ) $ 19,740  
Production Curtailment Costs (1)   8,019      
Cotton Costs (2)   25,929      
Restructuring Costs (3)   4,723      
Goodwill Impairment Charges (4)   9,200      
Tax Impact   (11,393 )    

Adjusted Net Income (non-GAAP)

$ 3,265   $ 19,740  

 

 

24

Reconciliation of Delta Group Segment Gross Margin and Operating Income to Delta Group Segment Adjusted Gross Margin and Adjusted Operating Income - Unaudited

 

(in thousands)

 

For the year ended September

 

2023

 

2022

 
             

Gross Margin (GAAP)

$

21,773

 

$

77,823

 

Production Curtailment Costs (1)

 

8,019

   

 

Cotton Costs (2)

 

25,929

   

 

Adjusted Gross Margin (non-GAAP)

$

55,721

 

$

77,823

 

Percent of Sales

 

15.6%

   

18.3%

 
             

Operating (Loss) Income (GAAP)

$

(26,179)

 

$

38,045

 

Production Curtailment Costs (1)

 

8,019

   

 

Cotton Costs (2)

 

25,929

   

 

Restructuring Costs (3)

 

4,723

   

 
Goodwill Impairment Charges (4)   9,200      

Adjusted Operating Income (non-GAAP)

$

21,692

 

$

38,045

 

Percent of Sales

 

6.1%

   

9.0%

 

 

(1) Production Curtailment Costs consist of unabsorbed fixed costs, temporary unemployment benefit payments, and other expense items resulting from the Company’s decision to reduce production levels to better align with the significantly reduced demand across the activewear industry due to high inventory levels stemming from the heavy replenishment activity following pandemic-related supply chain challenges.

 

(2) Cotton Costs consist of the amount of the cotton component of the Company's cost of sales in excess of the average price per pound of cotton over a recent 10-year period ($0.78 per pound) as well as a reasonable estimate of the additional cost for what the industry refers to as “basis” typically required to be purchased in connection with the delivery of cotton ($0.15 per pound). As such, Cotton Costs consist of the cotton component of the Company's cost of sales in excess of $0.93 per pound.

 

(3)  Restructuring Costs consist of employee severance benefits paid in connection with the transition of our more expensive Mexico manufacturing capacity to our more efficient Central America manufacturing platform, employee severance benefits paid in connection with leadership restructuring, expenses incurred in connection with the closure of a legacy facility we acquired via acquisition and the absorption of the print capacity at that facility into our nationwide network of dual purpose digital print and blank garment distribution facilities, and additional cost items incurred from restructuring activities.

 

(4) Goodwill Impairment Charges consists of a non-cash charge associated with our DTG2Go business.

 

Liquidity and Capital Resources

 

We have funded our working capital requirements, capital expenditures, mergers, acquisitions and investments, restructuring activities, and stock repurchases from net cash provided by operating activities, borrowings under our credit facilities, proceeds from the sale of property, plant and equipment removed from service, if any. See Note 8 - Long-Term Debt of the Notes to Consolidated Financial Statements for detailed information regarding our debt.

 

Operating Cash Flows

 

Cash provided by operating activities in fiscal year 2023 was $11.2 million, compared to cash used by operating activities of $20.1 million in fiscal year 2022. The increase in operating cash flows in 2023 primarily relate to increasing accounts receivable collection and a decline in inventory compared to the prior year build from increased input costs and manufacturing output. This was partially offset by decreased earnings in the business and change in the timing of payments to suppliers in the current period.

 

Investing Cash Flows

 

Cash provided by investing activities in fiscal year 2023 was $1.6 million and cash used in investing activities was $13.0 million in fiscal year 2022. Capital expenditures during fiscal years 2023 and 2022 were $5.5 and $19.9 million, respectively. Capital expenditures in both periods primarily related to investments in our distribution expansion, digital print equipment, information technology, and retail stores. There were $2.3 million in expenditures financed under capital lease arrangements and $1.3 million in unpaid expenditures as of September 2023

 

We currently expect to spend less on capital expenditures in fiscal year 2024 as compared to fiscal year 2023, with these expenditures focused on information technology, manufacturing efficiency, and direct-to-consumer investments, including new Salt Life retail store openings. 

 

25

Financing Activities

 

Cash used by financing activities was $13.0 million in fiscal year 2023 as compared to cash provided by financing activities of $24.1 million in fiscal year 2022. In fiscal year 2023, we concentrated on the reduction of debt. In fiscal year 2022, we increased the amount outstanding on our U.S credit facility and utilized cash proceeds to fund operating activities and certain capital investments, as well as the required payments on our capital lease financing. Additionally, in fiscal year 2022, we entered into a new Honduran term loan with a principal of $3.7 million and a new term loan related to our El Salvador operations for $3.0 million, both with five-year terms. In fiscal year 2023, there were no share repurchases. In fiscal year 2022, we repurchased $4.0 million in shares of our common stock.

 

Future Liquidity and Capital Resources

 

See Note 8 – Long-Term Debt to the Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our revolving U.S. credit facility.

 

Our asset-based U.S. revolving credit facility and 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 term loan and revolving credit facility in Honduras and our term loan in El Salvador allow the Company to finance both operations and capital expenses. Each of these loans are secured by a first-priority lien on the assets of our Honduran and El Salvador operations and is not guaranteed by our U.S. entities.  The Honduran revolving credit facility permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants. While we intend to re-borrow funds, subject to those covenants, we have classified the explicit repayment amounts included within the loan agreement as long-term if due more than a year after September 30, 2023.
 

Derivative Instruments

 

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 gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. At September 2023, there were no material option agreements that were outstanding.

 

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 September 2023, and September 2022, all of other comprehensive (loss) income was attributable to shareholders and none related to the non-controlling interest. The changes in fair value of the interest rate swap agreements resulted in other comprehensive loss, net of taxes, of $0.1 million and other comprehensive gain, net of taxes, of $0.9 million for the years ended September 2023, and September 2022, respectively.

 

Off-Balance Sheet Arrangements

 

As of September 2023, we did not have any off-balance sheet arrangements that were material to our financial condition, results of operations or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the SEC other than letters of credit and purchase obligations. We have disclosed letters of credit and purchase obligations in Note 15—Commitments and Contingencies.

 

Dividends and Purchases of our Own Shares

 

Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than 15% of the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that date of not less than 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the Amended Credit Agreement) from the first day of the third quarter of 2016 to the date of determination. Notwithstanding the foregoing, the Amended Credit Agreement currently restricts us from making cash dividends or stock repurchases until the later of (x) November 4, 2023 and (y) the date upon which (a) our availability (as defined in the Amended Credit Agreement) and (b) our average availability (as defined in the Amended Credit Agreement) for the immediately preceding 30 consecutive days, is equal to or more than the greater of (i) 17.50% of the lesser of (A) our borrowing base (as defined in the Amended Credit Agreement) or (B)  the maximum revolver amount (as defined in the Amended Credit Agreement) and (ii) $25,000,000 and (II) certification that (x) our FCCR is equal to or greater than 1.00:1.00 for the trailing 12-month period and (y) as of such date, no default (as defined in the Amended Credit Agreement) or event of default exists. For purposes of this definition, availability and average availability will be calculated (x) after giving effect to the availability block (as defined in the Amended Credit Agreement) and (y) without giving effect to the application of the net cash proceeds from certain sale-leaseback transactions. Absent the restrictions referenced in the preceding two sentences, at September 2023, and September 2022, there was $8.3 million and $24.9 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases. 

 

26

Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2023 and 2022. Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant factors.

 

As of September 2023, our Board of Directors had authorized management to use up to $60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program. During 2022, we purchased 136,181 shares of our common stock for a total cost of $4.0 million. There were no repurchases of our common stock in 2023. As of September 2023, we had purchased 3,735,114 shares of common stock for an aggregate of $56.4 million since the inception of the Stock Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of September 2023, $3.6 million remained authorized by our Board of Directors for future purchases under our Stock Repurchase Program, which does not have an expiration date.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. The preparation of our 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. We have no reason to believe that our past estimates have not been appropriate. Our most critical accounting estimates, discussed below, pertain to revenue recognition, accounts receivable and related reserves, inventories and related reserves, the carrying value of goodwill, and the accounting for income taxes.

 

Note 2 to our Consolidated Financial Statements includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.

 

Revenue Recognition

 

Revenue is recognized when performance obligations under the terms of the contracts are satisfied. Our performance obligations primarily consist of delivering products to our customers. Control is transferred upon providing the products to customers in our retail stores, upon shipment of our products to consumers from our ecommerce sites, and upon shipment from our distribution centers to our customers in our wholesale operations. Once control is transferred to the customer, we have completed our performance obligation.

 

In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these arrangements are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are recorded net of discounts, allowances, and operational chargebacks. As certain allowances and other deductions are not finalized until the end of a season, program or other event which may not have occurred, we estimate such discounts, allowances, and returns that we expect to provide.

 

We record reductions to revenue for estimated customer returns, allowances, markdowns and discounts. We estimate these reductions based on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns and allowances that have not yet been received by us. The actual amount of customer returns and allowances, which is inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which we make such a determination. Reserves for returns, allowances, markdowns and discounts are included within accrued expenses as refund liabilities, and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other current assets on the Consolidated Balance Sheets. As of September 2023, and September 2022, there was $0.8 million and $1.1 million, respectively, in refund liabilities for customer returns, allowances, markdowns and discounts included within accrued expenses.

 

Accounts Receivable and Related Reserves

 

Accounts receivable consists primarily of receivables from our customers arising from the sale of our products, and we generally do not require collateral from our customers.  We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for doubtful accounts.

 

27

We estimate the net collectability of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment.  In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, we assess the need for a specific reserve for bad debts.  Reserves are determined through analysis of the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. Although our historical allowances have been materially accurate, if market conditions change, additional reserves may be required. Bad debt expense was less than 1% of net sales in each of fiscal years 2023 and 2022.

 

Inventories and Related Reserves

 

We state inventories at the lower of cost and net realizable value using the first-in, first-out method.  Inventory cost includes materials, labor and manufacturing overhead on manufactured inventory and all direct and associated costs, including inbound freight, to acquire sourced products. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value. Although our historical reserves have been materially accurate, if actual selling prices are less favorable than those projected or if sell-through of the inventory is more difficult than anticipated, additional inventory reserves may be required.

 

Impairment of Long-Lived Assets

 

We recorded restructuring and impairment charges in fiscal year 2023 in the amount of $1.1 million, no charges were incurred in fiscal year 2022. The charges in fiscal year 2023 relate to $0.8 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. Additionally, $0.2 million in fixed asset impairment charges related to the Campeche, Mexico assets as we implemented strategic actions to better optimize our overall cost structure, including the transition of our more expensive production capacity in Mexico, where we have to purchase third party textile fabric to our lower cost Central American platform served by our own textile manufacturing operations. These other Central American platforms will absorb the Mexican production. This transition requires significant reductions in our offshore manufacturing workforce and associated severance benefit payments. The remaining fixed assets related to Campeche, Mexico are fully recoverable and were not impaired.

 

Goodwill

 

Goodwill was recorded in conjunction with our acquisitions of Salt Life, DTG2Go, and Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services, (“SSI”). We did not record any separately identifiable indefinite-lived intangibles associated with any of these acquisitions. Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired and liabilities assumed. Goodwill must be tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired, and goodwill is required to be written down when impaired. The Company tests goodwill for impairment annually on the first day of our third fiscal quarter, or more often if events occur or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. We assess the value of our goodwill under either a qualitative or quantitative approach. Under a qualitative approach, the Company evaluates various market and other factors to determine whether it is more likely than not that the Company’s goodwill has been impaired. In performing the qualitative assessment, the Company considers the carrying value of its reporting units compared to its fair value as well as events and changes in circumstances that could include, but are not limited to, a significant adverse change in customer demand or business climate, an adverse action or assessment by a regulator, and significant adverse changes in the price of the Company’s common stock. If such qualitative assessment indicates that impairment may have occurred, an additional quantitative assessment is performed by comparing the carrying value of the assets to their respective estimated fair values. If the recorded carrying value of goodwill exceeds its estimated fair value, an impairment charge is recorded to write the reporting unit down to its estimated fair value.

 

The Company’s goodwill impairment loss calculations contain uncertainties because they require management to make significant judgments in estimating the fair value of the Company’s reporting units, including the projection of future cash flows and the selection of discount rates. These calculations contain uncertainties because they require management to make assumptions such as estimating economic factors, including the profitability of future business operations. Further, the Company’s ability to realize the future cash flows used in its fair value calculations is affected by factors such as changes in economic conditions, changes in the Company’s operating performance, and changes in the Company’s business strategies. Significant changes in any of the assumptions involved in calculating these estimates could affect the estimated fair value of the Company’s reporting units and could result in impairment charges in a future period.

 

Income Taxes

 

We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss, interest deductions, and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is required to reduce the carrying value of deferred tax assets to the amount that is more-likely-than-not to be realized.  In making this final determination, we follow the Accounting Standards Codification 740, Income Taxes (“ASC 740”), and look to taxable income in prior carryback years, reversals of existing temporary book/tax differences, tax planning strategies and future taxable income exclusive of reversals of existing temporary differences. By its very nature, future taxable income requires estimates and judgments about future events that may be predictable but are far less certain than past events that can be objectively measured.

 

28

We established a valuation allowance related to certain of our state operating loss carryforward amounts in accordance with the provisions of ASC 740. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts in the respective state tax jurisdictions. As of September 2023, we had state net operating losses of approximately $79.3 million, with deferred tax assets of $4.1 million related to these state NOLs, and related valuation allowances against them of approximately $1.1 million. These state net loss carryforwards expire at various intervals from 2027 through 2040. Our deferred tax asset related to state net operating loss carryforwards is reduced by a valuation allowance to result in net deferred tax assets we consider more likely than not to be realized.

 

Recent Accounting Standards

 

For information regarding recently issued accounting standards, refer to Note 2(ad) and Note 2(ae) to our Consolidated Financial Statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are not required to provide the information under this item.

 

 

Item 8. Financial Statements and Supplementary Data

 

Our Consolidated Financial Statements for each of our periods ended September 2023, and September 2022, together with the Reports of Independent Registered Public Accounting Firms thereon, are included in this report commencing on page F-1 and are listed under Part IV, Item 15 in this report.

 

 

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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 September 2023, and, based on their evaluation, our Chief Executive Officer and principal accounting officer have concluded that these controls and procedures were effective at the evaluation date.

 

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 Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that 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.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management of Delta Apparel, Inc. is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 2023. In this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”) in Internal Control – Integrated Framework. The scope of our efforts to comply with the internal requirements of Section 404 of the Sarbanes-Oxley Act of 2002 with respect to fiscal year 2023 included all of our operations. Based on our evaluation, our management has concluded that, as of September 2023, our internal control over financial reporting is effective.

 

29

The effectiveness of our internal control over financial reporting as of September 2023, has been audited by Ernst & Young, LLP (“EY”), our independent registered public accounting firm, who also audited our Consolidated Financial Statements. EY’s attestation report on our internal controls over financial reporting is included herein.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting during the fourth quarter of 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries

 

Opinion on Internal Control over Financial Reporting

 

We have audited Delta Apparel, Inc. and Subsidiaries’ internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Delta Apparel, Inc. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2023, and October 1, 2022, and the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the two years in the period ended September 30, 2023, and the related notes and our report dated December 28, 2023 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Ernst & Young LLP

 

Atlanta, Georgia

December 28, 2023

 

31

 

Item 9B. Other Information

 

Thirteenth Amendment to the Fifth Amended and Restated Credit Agreement

 

On December 28, 2023, Delta Apparel, Inc. and its subsidiaries, M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood Clothing Company), Salt Life, LLC, and DTG2Go, LLC (f/k/a Art Gun, LLC) (collectively, the “Borrowers”) entered into a Thirteenth Amendment to the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Thirteenth Amendment”). The Fifth Amended and Restated Credit Agreement (the “Amended Credit Agreement”), dated as of May 10, 2016, was filed as Exhibit 10.1 to Delta Apparel’s Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016.

 

The First Amendment to the Amended Credit Agreement was filed as Exhibit 10.2.5 to Delta Apparel’s Annual Report on Form 10-K filed with the SEC on November 28, 2017. The Consent and Second Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on March 13, 2018. The Consent and Third Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on October 9, 2018. The Consent and Fourth Amendment to the Amended Credit Agreement was filed as Exhibit 10.2.8 to Delta Apparel's Annual Report on Form 10-K filed with the SEC on November 21, 2019. The Fifth Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Quarterly Report on Form 10-Q filed with the SEC on April 30, 2020. The Sixth Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on August 31, 2020. The Seventh Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on June 3, 2022. The Eighth Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Quarterly Report on Form 10-Q filed with the SEC on February 7, 2023. The Ninth Amendment to the Amended Credit Agreement was filed as Exhibit 10.2 to Delta Apparel’s Quarterly Report on Form 10-Q filed with the SEC on February 7, 2023. The Tenth Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on March 29, 2023. The Eleventh Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on October 11, 2023. The Twelfth Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on December 8, 2023.

 

The Thirteenth Amendment (i) modifies the Availability Block such that (a) on and after the Ninth Amendment Date through and including April 1, 2023, it shall be $7,500,000, (b) on and after April 2, 2023 through and including June 4, 2023, it shall be $9,000,000, (c) on and after June 5, 2023 through and including December 4, 2023, it shall be $10,000,000, (d) on and after December 5, 2023 through and including January 18, 2024, it shall be $7,000,000, (d) on and after January 19, 2024 through and including and February 15, 2024, it shall be $8,500,000, and (e) on and after February 16, 2024 and at all times thereafter, it shall be $10,000,000; (ii) requires that, commencing with the fiscal month ending June 29, 2024, the Company must maintain a Fixed Charge Coverage Ratio for the immediately preceding 12 consecutive fiscal months of not less than 1.00 to 1.00 if (a) Availability is less than $17,500,000 or (b) a Default or Event of Default exists; and (iii) requires that Borrowers maintain specified minimum EBITDA levels measured on a cumulative month-to-date basis through the end of the fiscal month ending March 2, 2024, and for trailing three-month periods starting March 30, 2024.  The Thirteenth Amendment also, among other things, removes the requirement that certain real estate transactions be consummated and also removes the occurrence of an Event of Default in the event such transactions are not consummated by certain dates.

 

We expect the Thirteenth Amendment to enhance our borrowing base and allow us to access more of our availability under the Amended Credit Agreement while easing the financial covenant restrictions for the remainder of fiscal year 2024.

 

The foregoing summary of the Thirteenth Amendment and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the text of the Thirteenth Amendment, which is filed herewith as Exhibit 10.2.14 to this Annual Report on Form 10-K and which is incorporated herein by reference.

 

Separate from the relationship related to the Amended Credit Agreement, as amended, certain lenders thereunder have engaged in, or may in the future engage in, transactions with, and perform services for, Delta Apparel, Inc. and/or its subsidiaries in the ordinary course of business.

 

Termination of Real Estate Purchase and Sale Contract with RH Dunn LLC

 

On December 27, 2023, RH Dunn LLC (the "Buyer") exercised its discretionary right to terminate the Real Estate and Sale Contract entered into between Delta Apparel, Inc. (the "Company") and Buyer dated November 22, 2023, for the sale and long-term leaseback of the Company's approximately 35-acre campus in Fayetteville, North Carolina (the "Agreement"). The purchase price for the Fayetteville campus contained in the agreement was $25 million and the Agreement contained customary representations, warranties and covenants made by the Company. The obligations of the Buyer under the Agreement were subject to inspection, due diligence and other customary closing conditions. The Agreement contained a transaction closing condition requiring the Company or its wholly-owned subsidiary to enter into a long-term lease agreement with the Buyer or its affiliate, with such lease agreement having an initial term of 10 years, with two five-year renewal options.

 

32

The Company is not aware of any material relationship that it or its affiliates have with the Buyer other than in respect of the Agreement. The Company did not incur any early termination penalties in connection with the termination of the Agreement.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

Not applicable.

 

33

 

Part III

 

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2023 fiscal year under the headings “Proposal No. 1: Election of Directors,” “Corporate Governance,” and “Executive Officers.”

 

All of our employees, including our Chief Executive Officer, and principal accounting officer, are required to abide by our business conduct policies so that our business is conducted in a consistently legal and ethical manner. We have adopted a code of business conduct and ethics known as our Ethics Policy Statement. The Ethics Policy Statement is available without charge on our website. In the event that we amend or waive any of the provisions of the Ethics Policy Statement applicable to our Chief Executive Officer, or principal accounting officer, we intend to disclose the same on our website at www.deltaapparelinc.com.

 

 

Item 11. Executive Compensation

 

The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2023 fiscal year under the headings “Executive Compensation,” “Compensation Tables,” and “Director Compensation.”

 

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information relating to security ownership by certain beneficial owners and management is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2023 fiscal year under the headings “Equity Compensation Plan Information” and “Stock Ownership of Management and Principal Shareholders.”

 

On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan (“2020 Stock Plan”) to replace the 2010 Stock Plan, which was previously re-approved by our shareholders on February 4, 2015, and was scheduled to expire by its terms on September 14, 2020. The 2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted and the size and type of each award and manner in which such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards. If a participant dies or becomes disabled (as defined in the 2020 Stock Plan) while employed by the Company or serving as a director, all unvested awards become fully vested. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2020 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other determinations that it deems necessary. The aggregate number of shares of common stock that may be delivered under the 2020 Stock Plan is 449,714 plus any shares of common stock subject to outstanding awards under the 2010 Stock Plan that are subsequently forfeited or terminated for any reason before being exercised. Similar to the 2010 Stock Plan, the 2020 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. The 2010 Stock Plan terminated and the 2020 Stock Plan became effective on February 6, 2020, the date of shareholders’ approval. On August 2, 2023, the 2020 Stock Plan was amended to require all equity awards granted after August 2, 2023, to contain a “double-trigger” vesting provision such that vesting will require both a change-in-control and an additional event such as a termination or other adverse employment action.

 

34

Set forth in the table below is certain information about securities issuable under our equity compensation plans as of September 2023:

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights (1)

   

Weighted-average exercise price of outstanding options, warrants and rights (2)

   

Number of securities remaining available for future issuance under equity compensation plans (excluding those currently outstanding)

 

Equity compensation plans approved by security holders

    121,813     $       121,813  

Equity compensation plans not approved by security holders

                 

Total

    121,813     $       121,813  

 

(1) Includes all outstanding restricted stock units that have a performance-based vesting condition that would vest in equity shares and assumes 100% vesting of performance-based targets.

(2) Not applicable, as there are no outstanding stock options at period end.

 

For additional information on our stock-based compensation plans, see Note 12 - Stock-Based Compensation to the Consolidated Financial Statements.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2023 fiscal year under the heading “Corporate Governance.

 

Item 14. Principal Accountant Fees and Services

 

The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2023 fiscal year under the heading “Proposal No. 3: Ratification of Appointment of Independent Registered Public Accounting Firm.”

 

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedules

Financial Statements:

Report of Independent Registered Public Accounting Firms.

Consolidated Balance Sheets as of September 2023, and September 2022.

Consolidated Statements of Operations for the years ended September 2023, and September 2022.

Consolidated Statements of Comprehensive Income for the years ended September 2023, and September 2022.

Consolidated Statements of Shareholders’ Equity for the years ended September 2023, and September 2022.

Consolidated Statements of Cash Flows for the years ended September 2023, and September 2022.

Notes to Consolidated Financial Statements.

 

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted from schedules filed have been omitted because the information is not applicable.

 

35

(a)(3) Listing of Exhibits*

 

2.1

Asset Purchase Agreement dated as of August 27, 2013, among To The Game, LLC, Salt Life Holdings, LLC, Roger L. Combs, Sr., Donald R. Combs, Richard Thompson, and Michael T. Hutto (excluding schedules and exhibits): Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 29, 2013.

3.1.1

Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-12B filed on December 30, 1999.

3.1.2

Amendment to Articles of Incorporation of the Company dated September 18, 2003: Incorporated by reference to Exhibit 3.1.2 to the Company’s Form 10-Q filed on November 5, 2003.

3.1.3

Amendment to Articles of Incorporation of the Company dated April 28, 2005: Incorporated by reference to Exhibit 3.1.3 to the Company’s Form 8-K filed on April 29, 2005.

3.1.4

Amendment to Articles of Incorporation of the Company dated November 8, 2007: Incorporated by reference to Exhibit 3.1.4 to the Company’s Form 10-K filed on August 28, 2009.

3.2.1

Bylaws of the Company: Incorporated by reference to Exhibit 3.2.1 to the Company’s Form 10-K filed on August 28, 2009.

3.2.2

Amendment to Bylaws of the Company adopted January 20, 2000: Incorporated by reference to Exhibit 3.2.2 to the Company’s Form 10-K filed on August 28, 2009.

3.2.3

Amendment to Bylaws of the Company adopted February 17, 2000: Incorporated by reference to Exhibit 3.2.3 to the Company’s Form 10-K filed on August 28, 2009.

3.2.4

Amendment to Bylaws of the Company adopted June 6, 2000: Incorporated by reference to Exhibit 3.2.4 to the Company’s Form 10-K filed on August 28, 2009.

3.2.5

Amendment to Bylaws of the Company dated August 17, 2006: Incorporated by reference to Exhibit 3.2.5 to the Company’s Form 10-K filed on August 28, 2009.

3.2.6

Amendment to Bylaws of the Company dated August 12, 2009: Incorporated by reference to Exhibit 3.2.6 to the Company’s Form 10-K filed on August 28, 2009.

4.1

See Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5, and 3.2.6.

4.2

Specimen certificate for common stock, par value $0.01 per share, of the Company: Incorporated by reference to Exhibit 4.2 to the Company’s Form 10-12 B/A filed on May 3, 2000.

4.3 Description of Securities: Incorporated by reference to Exhibit 4.3 to the Company's Form 10-K filed on November 21, 2019.

10.1

See Exhibit 2.1.

10.2.14

Fifth Amended and Restated Credit Agreement, dated May 10, 2016, among Delta Apparel, Inc., M.J. Soffe, LLC, Junkfood Clothing Company, Salt Life, LLC (f/k/a To The Game, LLC), and Art Gun, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 12, 2016.

10.2.1

First Amendment to Fifth Amended and Restated Credit Agreement, dated November 27, 2017, among Delta Apparel, Inc., M.J. Soffe, LLC, Junkfood Clothing Company, Salt Life, LLC, and Art Gun, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.2.5 to the Company’s Annual Report on Form 10-K filed on November 28, 2017.

10.2.3

Consent and Second Amendment to Fifth Amended and Restated Credit Agreement, dated March 9, 2018, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and Art Gun, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 13, 2018.

 

36

10.2.4

Consent and Third Amendment to Fifth Amended and Restated Credit Agreement, dated October 8, 2018, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 9, 2018.

10.2.5 Fourth Amendment to Fifth Amended and Restated Credit Agreement, dated November 19, 2019, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association, as agent for Lenders. Incorporated by reference to Exhibit 10.2.8 to the Company's Annual Report on Form 10-K filed on November 23, 2019.
10.2.6 Fifth Amendment to Fifth Amended and Restated Credit Agreement dated April 27, 2020, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on April 30, 2020.
10.2.7 Sixth Amendment to Fifth Amended and Restated Credit Agreement dated August 28, 2020, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 31, 2020.
10.2.8 Seventh Amendment to Fifth Amended and Restated Credit Agreement dated June 2, 2022, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 3, 2022.
10.2.9 Eighth Amendment to Fifth Amended and Restated Credit Agreement dated January 3, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on February 7, 2023.
10.2.10 Ninth Amendment to Fifth Amended and Restated Credit Agreement dated February 3, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on February 7, 2023.
10.2.11 Tenth Amendment to Fifth Amended and Restated Credit Agreement dated March 23, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 29, 2023.
10.2.12 Eleventh Amendment to Fifth Amended and Restated Credit Agreement dated October 6, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 11, 2023.
10.2.13 Twelfth Amendment to Fifth Amended and Restated Credit Agreement dated December 5, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 8, 2023.
10.2.14 Thirteenth Amendment to Fifth Amended and Restated Credit Agreement dated December 28, 2023, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders.

10.3

Delta Apparel, Inc. 2000 Stock Option Plan, Effective as of February 15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-12B/A filed on March 31, 2000.***

10.4

Delta Apparel, Inc. Incentive Stock Award Plan, Effective February 15, 2000, Amended & Restated March 15, 2000: Incorporated by reference to Exhibit 10.5 to the Company’s Form 10-12B/A filed on March 31, 2000.***

10.5

Delta Apparel, Inc. 2010 Stock Plan: Incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K filed on November 4, 2010, and Exhibit 1 to the Company's Proxy Statement filed on December 19, 2014.***

10.5.1 Delta Apparel, Inc. 2020 Stock Plan: Incorporated by reference to Exhibit 1 to the Company's Proxy Statement filed on December 17, 2019.***

10.6

Yarn Supply Agreement dated as of January 5, 2005, between Delta Apparel, Inc. and Parkdale Mills, LLC and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6 to the Companys Form 10-K filed on November 22, 2021+

10.6.1

First Amendment to Yarn Supply Agreement dated as of June 26, 2009 between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.1 to the Companys Form 10-K filed on November 22, 2021.+

10.6.2

Second Amendment to Yarn Supply Agreement dated as of October 21, 2011 between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.2 to the Companys Form 10-K filed on November 22, 2021.+

10.6.3

Third Amendment to Yarn Supply Agreement dated as of March 11, 2013, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.3 to the Companys Form 10-K filed on November 22, 2021.+

10.6.4

Fourth Amendment to Yarn Supply Agreement dated as of December 11, 2015, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.4 to the Companys Form 10-K filed on November 22, 2021.+

10.6.5 Fifth Amendment to Yarn Supply Agreement dated as of December 27, 2018, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.5 to the Company’s Quarterly Report on Form 10-Q filed on February 8, 2022.+
10.6.6
 
Sixth Amendment to Yarn Supply Agreement dated as of December 27, 2021, between Delta Apparel, Inc. and Parkdale Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 3, 2022.+
 

10.7

Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated January 1, 2019: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***

10.8

Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated June 10, 2009: Incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on August 28, 2009.***

 

37

10.8.1

First Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated August 17, 2011: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19, 2011.***

10.8.2

Second Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated June 6, 2012: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012.***

10.8.3

Third Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated December 5, 2014: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 8, 2014.***

10.8.4

Fourth Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated April 27, 2017: Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017.***

10.8.5 Fifth Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated May 11, 2020: Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 12, 2020.***
10.8.6 Sixth Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated January 13, 2022: Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on January 18, 2022.***
10.9 Employment Agreement between Delta Apparel, Inc. and Simone Walsh dated November 30, 2021: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 30, 2021.***
10.10 Employment Agreement between Delta Apparel, Inc. and Justin M. Grow dated September 6, 2022.***
10.11 Employment Agreement between Delta Apparel, Inc. and Matthew J. Miller dated April 4, 2022: Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 3, 2022.***
10.12 Employment Agreement between Delta Apparel, Inc. and Jeffery N. Stillwell dated January 1, 2022: Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on August 4, 2022.***
10.13 Employment Agreement between Delta Apparel, Inc. and Jeffery N. Stillwell dated January 1, 2019: Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***
10.14

Employment Agreement between Delta Apparel, Inc. and Nancy P. Bubanich dated January 1, 2022: Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 1, 2022.***

10.14.1 First Amendment to Employment Agreement between Delta Apparel, Inc. and Nancy P. Bubanich dated December 1, 2022: Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on December 1, 2022.***
10.15 Agreement dated December 7, 2022: Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report of Form 10-K filed on February 7, 2023***

10.16

Delta Apparel, Inc. Short-Term Incentive Compensation Plan, Effective June 1, 2000, Amended and Restated Effective November 19, 2019: Incorporated by reference to Exhibit A to the Company's Proxy Statement filed on September 28, 2011, and Exhibit 1 to the Company's Proxy Statement filed on December 29, 2015.***

10.17

Agreement between Delta Apparel, Inc. and IMG Worldwide, Inc. dated December 6, 2013: Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 6, 2013.

10.18

Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on February 9, 2016.***

10.19

Form of Restricted Stock Unit Award Agreement: Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on February 9, 2016.***

10.20

Form of Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 8, 2017.***

10.21

Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on November 28, 2017.***

10.22

Form of Restricted Stock Unit Award Agreement: Incorporated by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q filed on May 7, 2018.***

10.23 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K filed on November 21.2019.***
10.24 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K filed on November 21, 2022.***
10.25 Form of Restricted Stock Unit Award Agreement: Incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on November 22, 2022.***
10.26 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on May 4, 2023.***
10.27 Delta Apparel, Inc. Clawback Policy, effective November 14, 2023.

10.28

 

Cooperation Agreement dated as of December 14, 2023, by and among Forager Fund, LP, Forager Capital Management, LLC. Robert MacArthur, Edward Kissel and Timothy Brog and Delta Apparel, Inc. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 19, 2023.

21

Subsidiaries of the Company.

23.1

Consent of Independent Registered Public Accounting Firm.

31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

38

 

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).

 

*

All reports previously filed by the Company with the Commission pursuant to the Securities Exchange Act, and the rules and regulations promulgated thereunder, exhibits of which are incorporated to this Report by reference thereto, were filed under Commission File Number 1-15583.

+ Portions of this exhibit (indicated therein by asterisk) have been omitted for confidential treatment.

***

This is a management contract or compensatory plan or arrangement.

 

The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or exhibit to any of the above filed exhibits upon request of the Commission.

 

(b) Exhibits

 

See Item 15(a)(3) above.

 

Item 16. Form 10-K Summary

None.

39

 

Signatures

 

Pursuant to the requirements of Section 13 or 15(d) 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)

 

 

 

 

 
12/28/23

 

/s/Nancy P. Bubanich

 

Date

 

Nancy P. Bubanich

 

 

 

Chief Accounting Officer

 

 

 

(principal financial and accounting officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the dates indicated.

 

 

 

/s/Anita D. Britt

12/28/23

 

/s/Robert W. Humphreys 12/28/23

Anita D. Britt

Date

 

Robert W. Humphreys

Date

Director

 

 

Chairman and Chief Executive Officer

 

 

 

 

(principal executive officer)

 

         

/s/Timothy Brog

12/28/23

 

/s/Sonya E. Medina

12/28/23

Timothy Brog

Date

 

Sonya E. Medina

Date

Director

 

 

Director

 

 

 

 

 

 

/s/J. Bradley Campbell

12/28/23

 

/s/A. Alexander Taylor, II 12/28/23
J. Bradley Campbell

Date

 

A. Alexander Taylor, II

Date

Director

 

 

Director

 

 

 

 

 

 

/s/Dr. Bill C. Hardgrave

12/28/23   /s/David G. Whalen 12/28/23

Dr. Bill C. Hardgrave

Date

 

David G. Whalen

Date

Director

    Director  
         

/s/Glenda E. Hood

12/28/23      
Glenda E. Hood Date      
Director        
         

 

40

     

 
 

 

 

Delta Apparel, Inc. and Subsidiaries

 

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm (PCAOB ID: 42)

F-2

 

 

Consolidated Balance Sheets as of September 2023, and September 2022

F-4

 

 

Consolidated Statements of Operations for the years ended September 2023, and September 2022

F-5

 

 

Consolidated Statements of Comprehensive (Loss) Income for the years ended September 2023, and September 2022

F-6

 

 

Consolidated Statements of Shareholders’ Equity for the years ended September 2023, and September 2022

F-7

 

 

Consolidated Statements of Cash Flows for the years ended September 2023, and September 2022

F-8

 

 

Notes to Consolidated Financial Statements

 

F-9

     Note 1—The Company

F-9
  

     Note 2—Critical Accounting Estimates

F-9
  

     Note 3—Revenue Recognition

F-14
  

     Note 4—Inventories

F-15
  

     Note 5—Property, Plant and Equipment

F-15
  

     Note 6—Goodwill and Intangible Assets

F-15
  

     Note 7—Accrued Expenses

F-16
  

     Note 8—Long-Term Debt

F-16
  

     Note 9—Income Taxes

F-19
  

     Note 10—Leases

F-21
  

     Note 11—Employee Benefit Plans

F-22
  

     Note 12—Stock-Based Compensation

F-22
  

     Note 13—Business Segments

F-24
  

     Note 14—Repurchase of Common Stock

F-27
  

     Note 15—Commitments and Contingencies

F-27
  
     Note 16—Subsequent EventsF-29

 

 

F-1

 

Report of Independent Registered Public Accounting Firm

 

   To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and Subsidiaries (the Company) as of September 30, 2023 and October 1, 2022, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the two years in the period ended September 30, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2023 and October 1, 2022, and the results of its operations and its cash flows for each of the two years in the period ended September 30, 2023, in conformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 28, 2023 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

 

Inventory Reserve Valuation

  

Description of the Matter

As described in Note 4 to the Company’s consolidated financial statements, the Company’s inventories, net totaled approximately $212.4 million as of September 30, 2023, net of approximately $15.8 million of inventory reserves. As discussed in Note 2 to the consolidated financial statements, the Company states inventories at the lower of cost or net realizable value. In connection with this policy, the Company periodically reviews inventory quantities on hand and records reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value. The Company’s evaluation of inventory valuation includes consideration of the life cycle of the individual products and historical sales and margin information based on such life cycles.

 

Auditing management’s estimate of certain inventory reserves was complex and required significant judgment due to estimation uncertainty in the assumptions about the life cycle of the individual products and expected selling price when considering expected future demand and inventory quantities on hand.  Changes in these assumptions can lead to a material effect on the amount of recorded inventory reserves.

F-2

 

How We Addressed the

Matter in Our Audit

We obtained an understanding, evaluated design, and tested the operating effectiveness of controls over the Company’s process to determine the valuation of the Company’s inventory reserves. This included internal controls over the Company’s review of significant assumptions underlying the inventory reserve estimate.

 

To test the adequacy of the Company’s inventory reserve, our substantive audit procedures included, among others, assessing methodologies and assumptions used, testing the accuracy and completeness of the underlying data used in management’s estimation calculations, including aging of inventory and historical margins, and performing sensitivity analyses on the significant assumptions used.

 

 

 Goodwill Valuation Related to the DTG2Go Reporting Unit
  

   Description of the Matter

 

As of September 30, 2023, the Company’s goodwill balance for the DTG2Go reporting unit was approximately $8.8 million. As discussed in Note 2 of the consolidated financial statements, goodwill is tested by the Company for impairment on an annual basis at the reporting unit level. The Company’s annual testing date is the first day of the third fiscal quarter. Further, when events or changes in circumstances indicate the carrying value may not be recoverable the Company tests for impairment as of an interim date. As disclosed in Notes 2 and 6 to the consolidated financial statements, as a result of the impact of market conditions on profitability and future cash flow, as well as the decline in share price, the Company performed an interim impairment analysis at September 30, 2023 on the DTG2Go reporting unit’s goodwill, which resulted in an impairment charge recorded in the fourth quarter in the amount of approximately $9.2 million. The Company estimated the fair value of the DTG2Go reporting unit using the discounted cash flow method, a form of the income approach.

 

Auditing the Company’s interim impairment test for DTG2Go goodwill was complex and highly judgmental and required the involvement of a valuation specialist due to the significant judgment in estimating the fair value of the reporting unit. In particular, the fair value estimate of the DTG2Go reporting unit is sensitive to assumptions such as revenue, EBITDA margin, terminal period growth and discount rate. These assumptions are sensitive to, and affected by, expected future market or economic conditions, as well as industry and company-specific qualitative factors.

 

How We Addressed the

Matter in Our Audit

 

We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s DTG2Go interim goodwill impairment testing process, including controls over management’s review of the significant assumptions described above and the valuation model used to develop such estimates. 

 

To test the estimated fair value of the Company’s DTG2Go reporting unit and the measurement of the impairment charge recognized in the fourth quarter, we performed audit procedures that included, among others, testing the significant assumptions discussed above, testing the underlying data used by the Company in its analyses by comparing to historical and other industry data, as well as validating certain assertions with data internal to the Company and from other sources. We compared the significant assumptions used by management to current industry and economic trends while also considering changes to the Company’s business model, customer base and product mix. We involved our valuation specialists to assist in our evaluation of the Company's model, valuation methodology and certain assumptions utilized in the discounted cash flow model. We also involved our valuation specialists to independently compute a range of reasonableness for the discount rate. We performed sensitivity analyses to evaluate the impact that changes in the significant assumptions would have on the fair value of the reporting unit. In addition, we tested the reconciliation of the fair value of the reporting units to the market capitalization of the Company.

 

 

 /s/ Ernst & Young, LLP

 

We have served as the Company’s auditor since 2016.

 

Atlanta, Georgia

 

December 28, 2023

 

 

F-3

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 

  

September 2023

  

September 2022

 

Assets

        

Cash and cash equivalents

 $187  $300 

Accounts receivable, less allowances of $119 and $109, respectively

  45,130   68,215 

Other receivables

  1,350   1,402 

Income tax receivable

  1,388   1,969 

Inventories, net

  

212,365

   248,538 

Prepaid expenses and other current assets

  2,542   2,755 

Total current assets

  262,962   323,179 
         

Property, plant and equipment, net

  65,611   74,109 

Goodwill

  28,697   37,897 

Intangible assets, net

  21,694   24,026 

Deferred income taxes

  7,822   1,342 

Operating lease assets

  55,464   50,275 

Equity method investment

  10,082   9,886 

Other assets

  

2,906

   2,967 

Total assets

 $

455,238

  $523,681 
         

Liabilities and Equity

        

Liabilities:

        

Accounts payable

 $62,085  $83,553 

Accrued expenses

  

18,236

   27,414 

Income taxes payable

  710   379 

Current portion of finance leases

  8,442   8,163 

Current portion of operating leases

  9,124   8,876 

Current portion of long-term debt

  16,567   9,176 

Total current liabilities

  

115,164

   137,561 
         

Long-term income taxes payable

  2,131   2,841 

Long-term finance leases, less current maturities

  14,029   16,776 

Long-term operating leases, less current maturities

  47,254   42,721 

Long-term debt, less current maturities

  126,465   136,750 

Deferred income taxes

     4,310 

Total liabilities

 $305,043  $340,959 

Shareholders’ 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 shares authorized, 9,646,972 shares issued, and 7,001,020 and 6,915,663 shares outstanding as of September 2023, and September 2022, respectively

  96   96 

Additional paid-in capital

  61,315   61,961 

Retained earnings

  133,387   166,600 

Accumulated other comprehensive gain

     141 

Treasury stock —2,645,952 and 2,731,309 shares as of September 2023, and September 2022, respectively

  (43,896)  (45,420)

Equity attributable to Delta Apparel, Inc.

  150,902   183,378 

Equity attributable to non–controlling interest

  (707)  (656)

Total equity

  150,195   182,722 

Total liabilities and equity

 $455,238  $523,681 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

F-4

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Operations

(Amounts in thousands, except per share data)

 

  

Year Ended

 
  

September 2023

  

September 2022

 

Net sales

 $415,351  $484,859 

Cost of goods sold

  361,338   376,016 

Gross profit

  54,013   108,843 
         

Selling, general and administrative expenses

  73,749   79,455 

Goodwill impairment charge

  9,200    

Other loss (income), net

  506   (2,393)

Operating (loss) income

  (29,442)  31,781 
         

Interest expense

  14,194   7,732 

(Loss) earnings before (benefit from) provision for income taxes

  (43,636)  24,049 

(Benefit from) provision for income taxes

  (10,372)  4,307 

Consolidated (loss) earnings, net

 $(33,264) $19,742 

Net (loss) income attributable to non-controlling interest

  (51)  2 

Net (loss) earnings attributable to shareholders

 $(33,213) $19,740 
         

Basic (loss) earnings per share

 $(4.75) $2.84 

Diluted (loss) earnings per share

 $(4.75) $2.80 
         

Weighted average number of shares outstanding

  6,989   6,953 

Dilutive effect of stock options and awards

     94 

Weighted average number of shares assuming dilution

  6,989   7,047 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

F-5

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(Amounts in thousands)

 

  

Year Ended

 
  

September 2023

  

September 2022

 

Net (loss) earnings attributable to shareholders

 $(33,213) $19,740 

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

  (141)  927 

Consolidated comprehensive (loss) income

 $(33,354) $20,667 

 

See accompanying Notes to Consolidated Financial Statements

 

 

 

F-6

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

 

                  

Accumulated

                 
          

Additional

      

Other

          

Non-

     
  

Common Stock

  

Paid-In

  

Retained

  

Comprehensive

  

Treasury Stock

  

Controlling

     
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amount

  

Interest

  

Total

 

Balance at September 2021

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

Net earnings

           19,740               19,740 

Other comprehensive income

              927            927 

Net income attributable to non-controlling interest

                       2   2 

Stock buyback

                 136,181   (3,957)     (3,957)

Vested stock awards

        (1,783)        (77,184)  686