Quarterly report pursuant to Section 13 or 15(d)

Note L - Derivatives and Fair Value Measurements

Note L - Derivatives and Fair Value Measurements

3 Months Ended

Jan. 02, 2021

Note L—Derivatives and Fair Value Measurements

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments are made. As of December 2020, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest. Outstanding instruments as of December 2020 are as follows:

		*Notional*
	*Effective Date*	*Amount*	*Fixed LIBOR Rate*	*Maturity Date*
Interest Rate Swap	July 19, 2017	$10.0 million	1.99%	May 10, 2021
Interest Rate Swap	July 25, 2018	$20.0 million	3.18%	July 25, 2023

The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivatives related to our interest swap agreements as of December 2020 and September 2020 (in thousands):

	December 2020			September 2020
Deferred tax assets	$	401		$	442
Accrued expenses		(65)			(108	)
Other non-current liabilities		(1,533	)		(1,656	)
Accumulated other comprehensive loss	$	(1,197	)	$	(1,322	)

From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations. No such cotton contracts were outstanding at December 2020 and September 2020.

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

	○	Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

	○	Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.

	○	Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.

The following financial liabilities are measured at fair value on a recurring basis (in thousands):

	*Fair Value Measurements Using*
				*Quoted Prices in*		*Significant Other*			*Significant*
				*Active Markets for*		*Observable*			*Unobservable*
				*Identical Assets*		*Inputs*			*Inputs*
Period Ended	*Total*			*(Level 1)*		*(Level 2)*			*(Level 3)*
Interest Rate Swaps
December 2020	$	(1,598	)		—	$	(1,598	)		—
September 2020	$	(1,764	)		—	$	(1,764	)		—

Contingent Consideration
December 2020	$	(4,310	)		—		—		$	(4,310	)
September 2020	$	(6,420	)		—		—		$	(6,420	)

The fair value of the interest rate swap agreements was derived from a discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. At December 2020 and September 2020, book value for fixed rate debt approximates fair value based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).

The DTG2Go acquisition purchase price consisted of additional payments contingent on the combined business’s achievement of certain performance targets related to sales and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the period from April 1, 2018, through September 29, 2018, as well as for our fiscal years 2019, 2020, 2021 and 2022. The valuation of the fair value of the contingent consideration is based upon inputs into the Monte Carlo model, including projected results, which then are discounted to a present value to derive the fair value. The fair value of the contingent consideration is sensitive to changes in our projected results and discount rates. As of December 2020, we estimate the fair value of contingent consideration to be $4.3 million, a $2.1 million decrease from September 2020 due to the payment made during the December 2020 quarter for the fiscal 2020 period.