Delta Apparel, Inc.
10-K on 11/22/2021   Download
SEC Document
SEC Filing
0001101396 DELTA APPAREL, INC false --10-02 FY 2021 251 684 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 6,974,660 6,890,118 2,672,312 2,756,854 2 3 25 3 10 4 20 0 1 20 30 20 10 15 30 4 8.5 1.4 1.4 3 3.1 November 30, 2024 7.25 7.7 August 31, 2025 August 31, 2025 7.5 December 31, 2025 6.0 December 31, 2020 6.0 December 31, 2020 6.0 December 31, 2020 6.0 6.0 October 31, 2021 October 31, 2021 4.0 4.0 5 5 0 0 2017 2018 2019 2020 7 3 11.0 6.0 23.06 17.42 20.70 30.80 2 1 0 20 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 purchase of intangible technology, payable in three quarterly installments of $500,000 each beginning March 31, 2022. The previous year remaining balance settled under new term loan agreement in December 2020. 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). 00011013962020-10-042021-10-02 iso4217:USD 00011013962021-04-01 xbrli:shares 00011013962021-11-17 thunderdome:item 00011013962021-10-02 00011013962020-10-03 iso4217:USDxbrli:shares 00011013962019-09-292020-10-03 0001101396us-gaap:CommonStockMember2019-09-28 0001101396us-gaap:AdditionalPaidInCapitalMember2019-09-28 0001101396us-gaap:RetainedEarningsMember2019-09-28 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-28 0001101396us-gaap:TreasuryStockMember2019-09-28 0001101396us-gaap:NoncontrollingInterestMember2019-09-28 00011013962019-09-28 0001101396us-gaap:CommonStockMember2019-09-292020-10-03 0001101396us-gaap:AdditionalPaidInCapitalMember2019-09-292020-10-03 0001101396us-gaap:RetainedEarningsMember2019-09-292020-10-03 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2019-09-292020-10-03 0001101396us-gaap:TreasuryStockMember2019-09-292020-10-03 0001101396us-gaap:NoncontrollingInterestMember2019-09-292020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:CommonStockMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:AdditionalPaidInCapitalMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:RetainedEarningsMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:AccumulatedOtherComprehensiveIncomeMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:TreasuryStockMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMemberus-gaap:NoncontrollingInterestMember2020-10-03 0001101396us-gaap:AccountingStandardsUpdate201602Membersrt:CumulativeEffectPeriodOfAdoptionAdjustmentMember2020-10-03 0001101396us-gaap:CommonStockMember2020-10-03 0001101396us-gaap:AdditionalPaidInCapitalMember2020-10-03 0001101396us-gaap:RetainedEarningsMember2020-10-03 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-10-03 0001101396us-gaap:TreasuryStockMember2020-10-03 0001101396us-gaap:NoncontrollingInterestMember2020-10-03 0001101396us-gaap:CommonStockMember2020-10-042021-10-02 0001101396us-gaap:AdditionalPaidInCapitalMember2020-10-042021-10-02 0001101396us-gaap:RetainedEarningsMember2020-10-042021-10-02 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2020-10-042021-10-02 0001101396us-gaap:TreasuryStockMember2020-10-042021-10-02 0001101396us-gaap:NoncontrollingInterestMember2020-10-042021-10-02 0001101396us-gaap:CommonStockMember2021-10-02 0001101396us-gaap:AdditionalPaidInCapitalMember2021-10-02 0001101396us-gaap:RetainedEarningsMember2021-10-02 0001101396us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-10-02 0001101396us-gaap:TreasuryStockMember2021-10-02 0001101396us-gaap:NoncontrollingInterestMember2021-10-02 xbrli:pure utr:Y 0001101396srt:MinimumMember2020-10-042021-10-02 0001101396srt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:ComputerSoftwareIntangibleAssetMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:ComputerSoftwareIntangibleAssetMembersrt:MaximumMember2020-10-042021-10-02 0001101396dla:DTG2GoMember2021-10-02 0001101396dla:DTG2GoMember2020-10-03 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMember2019-09-292020-10-03 0001101396srt:MinimumMember2021-10-02 0001101396srt:MaximumMember2021-10-02 0001101396dla:CooperativeAdvertisingProgramMember2020-10-042021-10-02 0001101396dla:CooperativeAdvertisingProgramMember2019-09-292020-10-03 0001101396dla:HonduranEquityMethodInvestmentMember2021-10-02 0001101396dla:SaltLifeBeverageMember2021-10-02 0001101396us-gaap:RetailMember2020-10-042021-10-02 0001101396us-gaap:RetailMember2019-09-292020-10-03 0001101396dla:EcommerceMember2020-10-042021-10-02 0001101396dla:EcommerceMember2019-09-292020-10-03 0001101396dla:WholesaleMember2020-10-042021-10-02 0001101396dla:WholesaleMember2019-09-292020-10-03 0001101396dla:DeltaGroupMember2020-10-042021-10-02 0001101396us-gaap:RetailMemberdla:DeltaGroupMember2020-10-042021-10-02 0001101396dla:EcommerceMemberdla:DeltaGroupMember2020-10-042021-10-02 0001101396dla:WholesaleMemberdla:DeltaGroupMember2020-10-042021-10-02 0001101396dla:SaltLifeGroupMember2020-10-042021-10-02 0001101396us-gaap:RetailMemberdla:SaltLifeGroupMember2020-10-042021-10-02 0001101396dla:EcommerceMemberdla:SaltLifeGroupMember2020-10-042021-10-02 0001101396dla:WholesaleMemberdla:SaltLifeGroupMember2020-10-042021-10-02 0001101396dla:DeltaGroupMember2019-09-292020-10-03 0001101396us-gaap:RetailMemberdla:DeltaGroupMember2019-09-292020-10-03 0001101396dla:EcommerceMemberdla:DeltaGroupMember2019-09-292020-10-03 0001101396dla:WholesaleMemberdla:DeltaGroupMember2019-09-292020-10-03 0001101396dla:SaltLifeGroupMember2019-09-292020-10-03 0001101396us-gaap:RetailMemberdla:SaltLifeGroupMember2019-09-292020-10-03 0001101396dla:EcommerceMemberdla:SaltLifeGroupMember2019-09-292020-10-03 0001101396dla:WholesaleMemberdla:SaltLifeGroupMember2019-09-292020-10-03 0001101396us-gaap:LandAndLandImprovementsMember2020-10-042021-10-02 0001101396us-gaap:LandAndLandImprovementsMember2021-10-02 0001101396us-gaap:LandAndLandImprovementsMember2020-10-03 0001101396us-gaap:BuildingMember2020-10-042021-10-02 0001101396us-gaap:BuildingMember2021-10-02 0001101396us-gaap:BuildingMember2020-10-03 0001101396us-gaap:MachineryAndEquipmentMember2020-10-042021-10-02 0001101396us-gaap:MachineryAndEquipmentMember2021-10-02 0001101396us-gaap:MachineryAndEquipmentMember2020-10-03 0001101396us-gaap:ComputerEquipmentMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:ComputerEquipmentMembersrt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:ComputerEquipmentMember2021-10-02 0001101396us-gaap:ComputerEquipmentMember2020-10-03 0001101396us-gaap:FurnitureAndFixturesMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:FurnitureAndFixturesMembersrt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:FurnitureAndFixturesMember2021-10-02 0001101396us-gaap:FurnitureAndFixturesMember2020-10-03 0001101396us-gaap:LeaseholdImprovementsMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:LeaseholdImprovementsMembersrt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:LeaseholdImprovementsMember2021-10-02 0001101396us-gaap:LeaseholdImprovementsMember2020-10-03 0001101396us-gaap:VehiclesMember2020-10-042021-10-02 0001101396us-gaap:VehiclesMember2021-10-02 0001101396us-gaap:VehiclesMember2020-10-03 0001101396us-gaap:ConstructionInProgressMember2021-10-02 0001101396us-gaap:ConstructionInProgressMember2020-10-03 0001101396us-gaap:TrademarksAndTradeNamesMember2021-10-02 0001101396us-gaap:TrademarksAndTradeNamesMember2020-10-03 0001101396us-gaap:TrademarksAndTradeNamesMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:TrademarksAndTradeNamesMembersrt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:CustomerRelationshipsMember2021-10-02 0001101396us-gaap:CustomerRelationshipsMember2020-10-03 0001101396us-gaap:CustomerRelationshipsMember2020-10-042021-10-02 0001101396us-gaap:TechnologyBasedIntangibleAssetsMember2021-10-02 0001101396us-gaap:TechnologyBasedIntangibleAssetsMember2020-10-03 0001101396us-gaap:TechnologyBasedIntangibleAssetsMember2020-10-042021-10-02 0001101396us-gaap:LicensingAgreementsMember2021-10-02 0001101396us-gaap:LicensingAgreementsMember2020-10-03 0001101396us-gaap:LicensingAgreementsMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:LicensingAgreementsMembersrt:MaximumMember2020-10-042021-10-02 0001101396us-gaap:NoncompeteAgreementsMember2021-10-02 0001101396us-gaap:NoncompeteAgreementsMember2020-10-03 0001101396us-gaap:NoncompeteAgreementsMembersrt:MinimumMember2020-10-042021-10-02 0001101396us-gaap:NoncompeteAgreementsMembersrt:MaximumMember2020-10-042021-10-02 0001101396dla:DeltaGroupMember2021-07-03 0001101396dla:SaltLifeGroupMember2021-07-03 0001101396srt:ScenarioForecastMember2022-03-31 0001101396us-gaap:RevolvingCreditFacilityMemberdla:WellsFargoMemberus-gaap:LineOfCreditMember2021-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:WellsFargoMemberus-gaap:LineOfCreditMember2020-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2021-09-30 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2020-09-30 0001101396dla:TermLoanEstablishedDecember2020Member2021-09-30 0001101396dla:TermLoanEstablishedDecember2020Member2020-09-30 0001101396dla:TermLoanEstablishedNovember2014Member2020-09-30 0001101396dla:TermLoanEstablishedNovember2014Member2021-09-30 0001101396dla:TermLoanEstablishedJune2016Member2020-09-30 0001101396dla:TermLoanEstablishedJune2016Member2021-09-30 0001101396dla:TermLoanEstablishedOctober2017Member2020-09-30 0001101396dla:TermLoanEstablishedOctober2017Member2021-09-30 0001101396dla:PromissoryNoteMaturityDateOctober2021Member2021-09-30 0001101396dla:PromissoryNoteMaturityDateOctober2021Member2020-09-30 0001101396dla:PromissoryNoteMaturityDateJanuary2020Member2021-09-30 0001101396dla:PromissoryNoteMaturityDateJanuary2020Member2020-09-30 00011013962021-09-30 00011013962020-09-30 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:AmendedCreditAgreementMember2020-08-28 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMembersrt:MinimumMember2020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:FederalFundsEffectiveSwapRateMember2020-08-282020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMemberus-gaap:LondonInterbankOfferedRateLIBORMember2020-08-282020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMembersrt:MinimumMember2020-08-282020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMembersrt:MaximumMember2020-08-282020-08-28 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2021-10-02 0001101396us-gaap:RevolvingCreditFacilityMemberdla:AmendedCreditAgreementMember2020-10-042021-10-02 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2018-09-302019-09-28 utr:Rate 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2019-09-28 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2018-10-082018-10-08 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2021-10-02 0001101396us-gaap:LetterOfCreditMemberdla:AmendedCreditAgreementMember2020-10-03 0001101396dla:PromissoryNoteMember2018-10-08 0001101396dla:PromissoryNoteMember2019-01-02 0001101396dla:PromissoryNoteMember2021-10-02 0001101396dla:BancoFicohsaMemberdla:TermLoanEstablishedDecember2020Member2020-12-012020-12-31 0001101396us-gaap:RevolvingCreditFacilityMemberdla:BancoFicohsaMemberus-gaap:LineOfCreditMember2020-12-012020-12-31 00011013962018-09-302019-09-28 00011013962021-01-012021-09-30 00011013962020-01-012020-09-30 0001101396us-gaap:StateAndLocalJurisdictionMember2021-10-02 0001101396dla:CeibaTextilesManufacturingFacilityLeasedWithHonduranCompanyMember2020-10-042021-10-02 0001101396dla:CeibaTextilesManufacturingFacilityLeasedWithHonduranCompanyMember2019-09-292020-10-03 0001101396dla:PropertyPlantAndEquipmentNetMember2021-10-02 0001101396dla:PropertyPlantAndEquipmentNetMember2020-10-03 0001101396dla:COVID19Member2020-06-27 00011013962020-10-042021-11-02 00011013962021-11-02 0001101396dla:The2020StockPlanMember2020-02-06 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMember2020-10-042021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2020Member2020-10-042021-10-02 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2020Member2020-10-042021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2019Member2019-09-292020-10-03 0001101396us-gaap:PerformanceSharesMemberdla:UponFilingOfAnnualReportIn2019Member2019-09-292020-10-03 0001101396dla:RestrictedStockUnitsAndPerformanceUnitsMemberdla:UponFilingOfAnnualReportIn2019PaidInCashMember2019-09-292020-10-03 0001101396dla:RestrictedStockUnitsAndPerformanceUnitsMemberdla:UponFilingOfAnnualReportIn2019PaidInStockMember2019-09-292020-10-03 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2022Member2020-10-042021-11-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2021Member2019-09-292020-10-03 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:UponFilingOfAnnualReportIn2022Member2019-09-292020-10-03 0001101396dla:The2020StockPlanMember2021-10-02 0001101396dla:The2020StockPlanMember2020-10-042021-10-02 0001101396us-gaap:PerformanceSharesMemberdla:The2010StockPlanMemberdla:VestingOnNovember2020Member2021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2010StockPlanMemberdla:VestingOnNovember2020Member2021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2020StockPlanMemberdla:VestingOnNovember2021Member2021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:VestingOnNovember2021Memberdla:VestingOnNovember2021Member2021-10-02 0001101396us-gaap:RestrictedStockUnitsRSUMemberdla:The2020StockPlanMemberdla:VestingOnNovember2022Member2021-10-02 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2020-10-042021-10-02 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2019-09-292020-10-03 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2020-10-042021-10-02 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2019-09-292020-10-03 0001101396us-gaap:OperatingSegmentsMember2020-10-042021-10-02 0001101396us-gaap:OperatingSegmentsMember2019-09-292020-10-03 0001101396us-gaap:CorporateNonSegmentMember2020-10-042021-10-02 0001101396us-gaap:CorporateNonSegmentMember2019-09-292020-10-03 0001101396dla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:CurtailmentOfManufacturingOperationsMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:IncrementalCostsToRightSizeProductionMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:IncreasedAccountsReceivableAndInventoryReservesRelatedToTheHeightenedMarketRisksMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:OtherExpensesMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:SalesMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:CostOfSalesMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:OtherOperatingIncomeExpenseMemberdla:DeltaGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:IncreasedAccountsReceivableAndInventoryReservesRelatedToTheHeightenedMarketRisksMemberdla:SaltLifeGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396dla:OtherExpensesMemberdla:SaltLifeGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:SalesMemberdla:SaltLifeGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:SellingGeneralAndAdministrativeExpensesMemberdla:SaltLifeGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:OtherOperatingIncomeExpenseMemberdla:SaltLifeGroupMemberdla:COVID19Member2019-09-292020-10-03 0001101396us-gaap:NonUsMember2020-10-042021-10-02 0001101396us-gaap:NonUsMember2019-09-292020-10-03 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2021-10-02 0001101396us-gaap:OperatingSegmentsMemberdla:DeltaGroupMember2020-10-03 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2021-10-02 0001101396us-gaap:OperatingSegmentsMemberdla:SaltLifeGroupMember2020-10-03 0001101396us-gaap:CorporateNonSegmentMember2021-10-02 0001101396us-gaap:CorporateNonSegmentMember2020-10-03 0001101396country:US2021-10-02 0001101396country:US2020-10-03 0001101396country:HN2021-10-02 0001101396country:HN2020-10-03 0001101396country:SV2021-10-02 0001101396country:SV2020-10-03 0001101396country:MX2021-10-02 0001101396country:MX2020-10-03 0001101396us-gaap:NonUsMember2021-10-02 0001101396us-gaap:NonUsMember2020-10-03 00011013962000-01-012021-10-02 0001101396dla:YarnMember2021-10-02 0001101396dla:FinishedFabricMember2021-10-02 0001101396dla:FinishedProductsMember2021-10-02 0001101396us-gaap:StandbyLettersOfCreditMember2021-10-02 0001101396dla:InterestRateSwapMaturingJuly252023Member2021-10-02 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396us-gaap:InterestRateSwapMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396dla:CottonOptionsMemberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2021-10-02 0001101396dla:CottonOptionsMemberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel1Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396dla:CottonOptionsMemberus-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-10-03 0001101396dla:DeferredTaxAssetsMember2021-10-02 0001101396dla:DeferredTaxAssetsMember2020-10-04 0001101396us-gaap:AccountsPayableAndAccruedLiabilitiesMember2021-10-02 0001101396us-gaap:AccountsPayableAndAccruedLiabilitiesMember2020-10-04 0001101396us-gaap:OtherNoncurrentLiabilitiesMember2021-10-02 0001101396us-gaap:OtherNoncurrentLiabilitiesMember2020-10-04 0001101396dla:AccumulatedOtherComprehensiveIncomeLossMember2021-10-02 0001101396dla:AccumulatedOtherComprehensiveIncomeLossMember2020-10-04 0001101396dla:DTG2GoMember2020-10-042021-10-02 0001101396dla:SaltLifeGroupMember2019-09-28 0001101396dla:SaltLifeGroupMember2020-10-03
 

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 October 2, 2021

 

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. ☑

 

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 $28.28 as quoted by the NYSE American on April 1, 2021, 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$178.4 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 6,974,660 as of November 17, 2021.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant's Annual Meeting of Shareholders is currently scheduled for February 10, 2022. 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 October 2, 2021.



 

 

 

 

 

 

 

 

TABLE OF CONTENTS

 

Part I

   

Item 1.

Business

2

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

20

Item 2.

Properties

20

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

21

Part II

   

Item 5.

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

22

Item 6.

[Reserved]

22

Item 7.

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

22

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

31
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 31

Part III

   

Item 10.

Directors, Executive Offices and Corporate Governance

31

Item 11.

Executive Compensation

31

Item 12.

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

31

Item 13.

Certain Relationships and Related Transactions, and Director Independence

32

Item 14.

Principal Accountant Fees and Services

32

Part IV

   

Item 15.

Exhibits and Financial Statement Schedules

32
Item 16. Form 10-K Summary 35

Signatures

  36

EX-10.6

   
EX-10.6.1    
EX-10.6.2    
EX-10.6.3    
EX-10.6.4    
EX-21    

EX-23.1

   

EX-31.1

   

EX-31.2

   

EX-32.1

   

EX-32.2

   

 

 

 

 

Table of Contents

 

 

Cautionary Note Regarding Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, "outlook", “anticipate”, “expect”, “intend”, "remain", “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.

 

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the following:

 

  the general U.S. and international economic conditions;
 

the impact of the COVID-19 pandemic and government/social actions taken to contain its spread on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions;

  significant interruptions or disruptions within our manufacturing, distribution or other operations;
  deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers;
  the volatility and uncertainty of cotton and other raw material prices and availability;
  the competitive conditions in the apparel industry;
  our ability to predict or react to changing consumer preferences or trends;
  our ability to successfully open and operate new retail stores in a timely and cost-effective manner;
  the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
  changes in economic, political or social stability at our offshore locations in areas in which we, or our suppliers or vendors, operate;
  our ability to attract and retain key management;
  the volatility and uncertainty of energy, fuel and related costs;
  material disruptions in our information systems related to our business operations;
  compromises of our data security;
  significant changes in our effective tax rate;
  significant litigation in either domestic or international jurisdictions;
  recalls, claims and negative publicity associated with product liability issues;
  the ability to protect our trademarks and other intellectual property;
  changes in international trade regulations;
  our ability to comply with trade regulations;
  changes in employment laws or regulations or our relationship with employees;
  negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors;
  the inability of suppliers or other third-parties, including those related to transportation, to 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

Table of Contents

 

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 8,500 employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and fulfillment industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants, 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 distribution model allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

 

We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in our owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers.

 

We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American under the symbol “DLA." We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. All references to "2021" refer to the 52-week fiscal year ended October 2, 2021. All references to "2020" relate to the 53-week fiscal year ended on October 3, 2020. We are filing as a smaller reporting company for 2021 as our public float was less than the $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 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 chain of our many customers.  We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Utilizing its nine fulfillment facilities throughout the United States, DTG2Go offers a robust digital supply chain to ship custom graphic products within 24 to 48 hours to consumers in the United States and to over 100 countries worldwide. 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 facility. DTG2Go has made significant investments in its “digital-first” retail model, ensuring digital graphic prints meet the high-quality standards required for brands, retailers and intellectual property holders.  DTG2Go is most excited to bring this initiative to market in fiscal year 2022, having invested during fiscal 2021 in proprietary software, in new digital print equipment, and in R&D related to the setups, formulas, and processes needed to meet the unique aspects of servicing this sales channel. DTG2Go also services the e-retailer, ad-specialty, and promotional market and screen print marketplaces, among others.

 

 

2

Table of Contents

 

Delta Activewear

Our Activewear business is organized around key customer channels and how they source their various apparel needs. Delta Activewear is a preferred supplier of activewear apparel to regional and global brands, direct to retail and through wholesale markets. We offer a broad portfolio of apparel and accessories through our Delta Direct business under the Delta, Delta Platinum, Soffe, and sourced-branded products that we distribute utilizing our network of fulfillment centers. 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 with 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. Soffe is our iconic brand that offers activewear for spirit makers and record breakers.  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 the Delta and Soffe brand apparel, we provide our customers with a broad range of product categories with nationally recognized branded products including polos, outerwear, headwear, bags and other accessories.

 

Delta Direct services key channels, such as the screen print, promotional, and eRetailer channels as well as the retail licensing channel, whose customers sell through to many mid-tier and mass market retailers.  In our Global Brands & Retail Direct business we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products being sold with value-added services including embellishment, hangtags, and ticketing.  We also serve retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to their retail stores and through their ecommerce channels.  We sell our products to a diversified audience, including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. We service custom apparel to major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces. We also offer our Soffe products direct to consumers at www.soffe.com. As an integrated Delta Group segment, we offer a seamless solution for small-run decoration needs with our on-demand digital print services, powered by DTG2Go. Service is a key component of Delta Activewear. We provide superior service to our customers by shipping the same day of order receipt down to a piece level, allowing customers to purchase exactly what they need when they need it.

 

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. 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 continues to expand its product assortment outside of the cotton graphic tees and logo decals it is known for into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories including its own craft beer, Salt Life Lager. From its first merchandise offerings in 2006, Salt Life has grown distribution to include surf shops, specialty stores, department stores, and outdoor retailers to complement our own growing network of branded retail stores. Our direct-to-consumer Salt Life ecommerce site at www.saltlife.com provides our customers with a seamless, omni-channel experience with the Salt Life brand.

 

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, 2021. Under the 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. While we expect to negotiate an extension to the supply agreement with Parkdale, the terms of the new agreement may not be as favorable as the current agreement. 

 

3

Table of Contents

 

We manufacture fabrics in our leased textile facility located near San Pedro Sula, Honduras. We also purchase fabric sourced in Mexico for use in our Campeche, Mexico sew facility, purchase specialized fabrics that we currently do not have the capacity or capability to produce, and may purchase other fabrics when it is cost-effective to do so.  In 2021 and 2020, we manufactured approximately 80% of fabrics used in our internally-produced garments. The manufacturing process continues at one of our six 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, one in El Salvador and one in Mexico). In  2021 and 2020, 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 2021 and 2020, we sourced less than 10% of our total products from third parties.

 

Many of the garments 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 facilities in El Salvador and Mexico. We offer digital fulfillment services, powered by DTG2Go, at nine 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 approximately 65% of all U.S. consumers with one-day shipping.

 

We operate  eight 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, 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, e-retailers and the U.S. military. 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 2021, we shipped our products to approximately 8,800 customers, many of whom have numerous retail doors.  No single customer accounted for more than 10% of our sales in 2021 or 2020, 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 2021 and 2020.

 

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 sixty years. Our other registered trademarks include Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design. 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 licensee for branches of the United States military which is used within the Soffe brand. 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 stakeholders, 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

Table of Contents

 

Conserving the Environment

 

We believe that efficiently and sustainably managing natural resources is a smart business move 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. In addition, 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 and 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.

 

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 our carbon footprint. In 2020 we installed a heat exchanger at our Ceiba Textiles facility in Honduras that plays an essential role in reducing the environmental impact of manufacturing processes by recovering and reusing energy. Modifications have also been made to the cooling systems in our textile plant which further reduce energy consumption.  We also implemented several energy efficiency projects in recent years such as replacing compact florescent light bulbs with LED lighting, which emits less heat and uses less energy than conventional bulbs, decreases the temperature on factory floors, and thus raises productivity, particularly on hot days. We also improved the performance of our sewing machines by installing new motors that use much less energy due to advanced technology.

 

In 2021 alone, these specific energy saving initiatives reduced our electricity usage by 875,800 kilowatt hours across all our manufacturing locations and avoided approximately 621 metric tons of carbon dioxide (CO2) emissions, which is comparable to the carbon sequestered by 760 acres of forest in one full year. In addition, compared to our 2018 baseline year, we produced 7.1% more finished fabric in 2021 while using 14% less fuel and 7% less electricity. Overall, this has improved our fuel intensity by approximately 20% and electricity intensity by approximately 13% compared to the 2018 baseline year.

 

The operations at our Ceiba Textiles facility 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. Compared to the 2018 baseline year we have reduced our total greenhouse gas emissions by 7.5% and reduced our emissions intensity by approximately 14% in 2021. These reductions avoid the equivalent of 3,600 metric tons of CO2 emissions, which is comparable to the energy used by approximately 434 homes for one year or the carbon sequestered by 4,411 acres of U.S. forests in one year.

 

We recently redesigned our shipping carton dimensions to maximize the storage space available inside shipping containers. This initiative increased our container utilization from 84% in 2019 to 93% in 2021 and resulted in using 153 fewer shipping containers this year. This reduction in shipping container usage avoids 223 metric tons of CO2 emissions, which is comparable to the carbon sequestered by 273 acres of forest in one full year.

 

Energy saving initiatives at Ceiba Textiles in 2022 include the purchase of a new steam textile dryer that will replace two existing thermal oil dryers. The steam dryer is capable of drying 66% more pounds of fabric per week than the thermal dryers and the installation is expected to reduce fuel consumption by approximately 19% per 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, comply with wastewater discharge requirements through currently active licenses and permits issued by local governments. In each of the last four years, none of these 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, in 2018 we implemented a system that reuses the leftover dye water for use in future batches of similar-colored fabric. This system saves approximately 4 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. During 2021, our water intensity was reduced by approximately 9% as compared to our 2018 baseline.

 

5

Table of Contents

 

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 86% of our water consumption at Ceiba Textiles in 2021 was safely and effectively treated and 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 as it relates 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 bottom and sleeve hems to eliminate trimming. This initiative not only reduces textile waste but also lowers fabric production needs, which saves water, electricity, and fuel usage. We are committed to full compliance with local, regional, and national environmental laws and regulations in the countries in which we operate as it relates to responsible recycling and disposal of hazardous and non-hazardous waste.

 

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 screen-printing facilities recycle colors of inks 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 plastisol ink and 50% of the 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 the cardboard 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, bio-eliminable 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 percent non-hazardous and adhere to the strictest human health and environmental standards.

 

6

Table of Contents

 

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.

 

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, The Safe Drinking Water and Toxic Enforcement Act of 1986 (“Proposition 65 of California State Law”), and we adhere 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 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, 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.

 

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 Textile facility has been using this tool for several years, and our 2020 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 July of 2021 and the results will be available in March 2022. 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 the approximately 8,500 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

Table of Contents

 

Our People

 

The table below provides an overview of the approximate number of employees by geographic location as well as the tenure of that employee base as of September 2021:

 

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

El Salvador

  2,901   62%   17%   21%
Honduras   3,508   61%   20%   19%
Mexico   1,002   62%   13%   25%
United States   1,058   71%   9%   20%
Total   8,469   63%   16%   21%

 

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 80% 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 2021:

 

Region   Male   Female
Offshore   48%   52%
United States   36%   64%
Total   46%   54%

 

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 2021, we provided more than 217,000 hours of professional development and safety training for our employees, which is a 76% increase from the previous year.

Health and Safety

Our responsibility is to provide our employees with a safe and healthy work environment that meets or exceeds the applicable environmental and health and safety laws and regulations. All 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

Table of Contents

 

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 2021 incident rate for total recordable cases dropped to 0.3% compared to OSHA’s average incident rate of 3.4%. In addition, Delta Apparel had no cases involving lost time from work in 2021.

 

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.

 

At the onset of the 2020 COVID-19 pandemic, we quickly implemented a comprehensive series of protocols and safety measures across all our facilities to protect the health and safety of our employees and contractors. We also created our own COVID-19 safety videos to promote healthy behaviors at home and in the workplace. Today, these safety measures are still in place such as checking each person’s temperature prior to entering a facility, maintaining plexiglass partitions to separate hand-washing stations, work areas, and cafeteria seating areas, sanitizing the interior of vehicles that are used to transport employees to and from work, and requiring all employees to observe safe distancing. We also continue to provide all employees with personal protective equipment, sanitizing products, and COVID-19 informational materials. Our COVID-19 safety protocols have been recognized by local governments and our customers as best-in-class and serve as a model for other manufacturing operations in the regions in which we operate.

Monitoring

We conduct annual audits of all 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 2021 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. During 2021, employees were involved in programs to promote environmental responsibility and improve the way of life for nearby communities.

 

 

Between November 3 and November 17, 2020, two category five hurricanes, Eta and Iota, made landfall within a 15-mile area of northern Honduras bringing persistent rains and heavy winds that resulted in flooding and dozens of catastrophic landslides and mudflows. Delta Apparel worked quickly to purchase and deliver construction materials that helped rebuild the homes of its affected employees. Employees at other locations activated an internal emergency relief fund that raised $20,000, which Delta Apparel matched 100% resulting in a total of $40,000 in aid for those employees most affected. This effort provided desperately needed items such as groceries, personal hygiene items, and 1,800 Coleman inflatable mattresses and airbeds.

 

 

Employees in our Textiles La Paz facility reforested a recreational area at Holy Spirit School located in San Jose Obrajuelo, El Salvador.

 

9

Table of Contents

 

 

In Mexico, Delta Campeche and Campeche Sportswear employees were active in the following community outreach activities:

 

-  Employees participated in the Campeche Turtle Project to help save the critically endangered Hawksbill sea turtle by cleaning the plastic waste from beaches in Sebaplaya where the turtles come to lay their eggs for six months per year. On average, a sea turtle lays around 100 eggs; however, only 1% of the hatchlings actually makes its way out into the ocean and survives, making it critical to remove any obstacles that would prevent the hatchling from reaching the water. The beach cleanup resulted in one full trash bag for approximately every five yards of beach.

 

-  Employees joined with the “Together We Will Win” civil association to collect and donate thousands of plastic bottle caps that were recycled to provide financial assistance to families of children with cancer.

 

-  In celebration of Mexico’s 2021 National Children’s Day, employees collected and donated toys for approximately 450 children living in an orphanage and in surrounding communities.

 

-  To help surrounding communities in the fight against Covid-19, employees in Mexico provided face masks and sanitizing gel to surrounding communities.

 

Employees from the Honduras sewing facilities participated in several important community projects:

 

-  Employees cleaned up plastic waste and other floating debris across a four-kilometer beach in Omoa, Cortes, Honduras, which is a coastal municipality just west of Puerto Cortes and adjacent to the Guatemala border. Removing the large volume of debris along the beaches surrounding Omoa is important to the survival of nesting sea turtles and other ocean wildlife.

 

-  Employees restored El Plan Park, a family-oriented park in Brisas del Plan, which is a community in Villanueva, Cortes where approximately 6% of our employees live.

 

-  Employees helped to reforest approximately 400 square meters of land in La Mina, which is an environmentally protected area in Villanueva, Cortes.

 

-  To help surrounding communities in the fight against Covid-19, employees donated face masks and sanitizing gel to the Red Cross of Trinidad.

 

-  Employees at Ceiba Textiles participated once again in the annual “United for a Greener Honduras” campaign in conjunction with representatives from the Quimistán Municipal Environmental Unit to help restore the forest and environmental conditions in an important rain water collection area of western Honduras. Reforestation is a critical factor in increasing this region’s water retention capacity as it reduces the impact to nearby communities when rivers overflow during the region’s rain and hurricane season.

 

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 the custom market, quality and service are generally more important factors for customer choice. Our ability to consistently service the needs of our Global Brand customers greatly impacts future business with these customers. We believe our Western Hemisphere-centered manufacturing platform enables us to compete with our competitors 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.

 

10

Table of Contents

 

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 over the years, we have reduced the overall seasonality of our business. Sales in our third fiscal quarter (quarter ended in June) are typically the highest and represented 27% of 2021 net sales. Our first fiscal quarter (quarter ended in December) typically is the lowest and represented 22% of 2021 net sales. 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 2021 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.

Risks Related to our Strategy

The price and availability of purchased yarn and other raw materials is prone to significant fluctuations and volatility. 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 that we were unable to pass through to customers, with the higher costs negatively impacting the gross margins in our Activewear and other businesses by significant amounts.  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.

11

Table of Contents

 

In addition, 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.

 

We also source fabric in Mexico for use in our Campeche, Mexico sew facility, purchase specialized fabrics that we currently do not have the capacity or capability to produce and may purchase other fabrics when it is cost-effective to do so. While these fabrics typically are available from various suppliers, there are times when certain yarns become limited in quantity, causing some fabrics to be difficult to source. This can result in higher prices or the inability to provide products to customers, which could negatively impact our results of operations.

 

Dyes and chemicals are also purchased 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.

 

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. 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.  Reductions in our manufacturing operations may increase unit costs and lower our gross margins, causing a material adverse effect on our results of operations.

The apparel industry is highly competitive, and we face significant competitive threats to our business. The market for athletic and activewear apparel and the related accessory and other items we provide is highly competitive and includes many new competitors 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 have larger sales forces, stronger brand recognition among consumers, bigger advertising budgets, and 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.

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 for 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 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.

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.

If we expand into new geographic areas, we will need to successfully identify and satisfy the consumer preferences in these areas. In addition, we will 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.

 

12

Table of Contents

 

Risks Related to our Operations

 

The COVID-19 pandemic has had, and could continue to have, a material adverse effect our ability to operate, results of operations, financial condition, liquidity, and capital investments. The COVID-19 pandemic has had an adverse effect and could continue to adversely affect our performance, results of operations, our financial condition, liquidity, and capital investments. Several public health organizations have recommended, and numerous local and foreign governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period of time, such as the potential shutdown of certain locations, decreased employee availability, potential border closures, reduced customer traffic, modified hours and operations, and others. In mid-March 2020, all of our branded retail locations were temporarily closed in compliance with guidelines for retail store operations and were re-opened by the end of May 2020. Our manufacturing facilities in El Salvador and Honduras were also temporarily closed in mid-March 2020 through late June 2020 due to the government-mandated country shutdowns and we experienced intermittent closures during the June 2020 quarter at our manufacturing facilities in Mexico and North Carolina. If our retail stores and manufacturing plants are closed in the future, it could adversely affect our results of operations and financial condition.

 

Many of our customers and suppliers also face these and other challenges, which could lead to reduced demand for our products and services, could impair our customers' ability to pay all or portion of the amounts owed to us, and could cause disruptions in our supply chain.  We rely on suppliers and third-parties to deliver raw materials and transport our finished goods.  The 2020 temporary closures of our manufacturing facilities, as well as recent disruptions and delays in the global and national supply chain, have resulted in our finished goods inventory being lower than optimal for our business. This resulted in lost business during fiscal year 2021, and we were unable to fulfill orders for our customers.  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 COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, a resurgence of the pandemic, new information that may emerge concerning the severity of COVID-19, and public and private actions to contain COVID-19 or treat its impact. The COVID-19 pandemic has and will likely continue to 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 the COVID-19 pandemic, 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, or capital resources and investments, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

 

The OSHA vaccine mandate for employers with more than 100 employees could have a material adverse impact on our business, financial condition, and results of operations.  On September 9, 2021, President Biden announced plans for the federal Occupational Safety and Health Administration (“OSHA”) to issue an Emergency Temporary Standard (“ETS”) mandating that all employers with more than 100 employees ensure their workers are either fully vaccinated against COVID-19 or produce, on a weekly basis, a negative COVID test (the “vaccine mandate”). On November 4, 2021, OSHA issued the ETS, which will require covered employers to comply with the vaccine mandate beginning January 4, 2022 or face substantial penalties for non-compliance. Currently, the implementation of the vaccine mandate has been blocked by a federal appeals court, subject to the resolution of ongoing litigation challenging the constitutionality of the rules. In addition to the vaccine mandate, it is possible that additional mandates may be announced by foreign or local jurisdictions that could impact our workforce and operations. Such mandates could result in increased labor attrition and disruption, as well as difficulty securing future labor needs, and could adversely impact our results of operations.
 

Although we cannot predict with certainty the impact that the potential vaccine mandate and any other related measures may have on our workforce and operations, these requirements and any future requirements may require significant managerial time and attention to implement, increase our operating costs, reduce manufacturing productivity levels, result in attrition, including attrition of key employees, and impede our ability to recruit and retain our workforce. These measures also may further disrupt the national supply chain, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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, El Salvador and Mexico, with concentrations in Honduras and El Salvador. 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 year 2018, our operations in and around San Pedro Sula, Honduras, were partially disrupted by the protests, unrest and government action associated with the November 2017 presidential elections in Honduras.  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 a cost standpoint.  In fiscal year 2019, our Honduran operations experienced disruptions of a similar nature that were smaller in scope than those occurring in fiscal year 2018.

 

13

Table of Contents

 

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, Mexico and El Salvador.  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 risk 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 are important to our success. We believe our future success depends on our ability to retain and motivate our key management, 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 goals could have a material adverse effect on our results of operations.

 

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 therefore 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. We continue to focus on methods that will reduce the amount of energy used in the manufacture of products to mitigate risks of fluctuations in the cost of energy. However, significant increases in energy and fuel prices, which 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 the 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.

 

14

Table of Contents

 

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.

 

As previously disclosed in our 2019 unauthorized malware intrusions of our system may have exposed customer payment information as it was being entered to make a purchase at one of our consumer ecommerce websites. We removed the malware associated with the intrusions from our system and took actions to secure our website by working with recognized data security experts to conduct a thorough investigation of the incident and implement additional measures designed to build stronger protections against future incidents of this nature. This, or any compromise of security or cyber-attack, could deter consumers from entering into transactions that require them to provide confidential information to us in the future. In addition, if confidential customer information was misappropriated from our computer systems, we could be sued by those who assert that we did not take adequate precautions to safeguard our systems and confidential data belonging to our customers or business partners, which could subject us to liability and result in significant legal fees and expenses in defending these claims. While we do not currently believe that we experienced any material losses related to this incident, there can be no assurance that this or any other incident will not have a material adverse effect on our business, prospects, 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, 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 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 the 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.

 

15

Table of Contents

 

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.

 

The December 22, 2017 Tax Cuts and Jobs Act of 2017 (the “New 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") as well as a limitation on the deduction for business interest expense ("Section 163(j)"). GILTI is the excess of the shareholder's net controlled foreign corporations (“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, of 30% of the taxpayer's adjusted taxable income. The Coronavirus Aid, Relief, and Economic Security (“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 New Tax Legislation. The CARES Act 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 New 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 New Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and New Tax Legislation.

 

Further changes to U.S. tax laws impacting how U.S. multinational corporations are taxed on U.S. and foreign earnings, including any potential increase in U.S. corporate income tax rate, the doubling of the rate of tax on certain earnings of foreign subsidiaries, and a 15% 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 position 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 position 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 participate in a joint venture involving the sale of a branded alcoholic beverage, and we also license one of our brands for use in connection with restaurant, food and beverage services. 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.

 

16

Table of Contents

 

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, El Salvador and Mexico. We therefore benefit from current free trade agreements and other duty preference programs, including the U.S.-Mexico-Canada Agreement (“USMCA”), and the Central America Free Trade Agreement (“CAFTA”). Our claims for duty free or reduced duty treatment under CAFTA, USMCA 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 USMCA or 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.

 

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 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 U.S. Foreign Corrupt Practices Act (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 or changes in our relationship with our employees could adversely affect our results of operations. As of October 2, 2021, we employed approximately 8,500 employees worldwide, with approximately 7,400 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, payroll taxes, and the potential vaccine mandate would likely have a direct impact on our operating costs. Increases in wage rates in the countries in which we operate have occurred, and any further significant increases in wage rates in those countries could have a material adverse impact on our operating results. A total of approximately 2,900 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 associates with staffing needs especially high during the holiday season. Competition for personnel during this time of year 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 in compensation levels. 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.

 

17

Table of Contents

 

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.

 

Risks Related to Financial Matters

 

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 $45.3 million at October 2, 2021, well above the minimum thresholds specified in our credit agreement.  In addition, we were above the 1.1 to 1.0 FCCR for the preceding 12-month period. A significant deterioration in our business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement, which we may not be able to maintain. The covenants include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates. 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.  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 make acquisitions as well as fund share repurchases and 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 2020, we estimated and recorded additional reserves based on the heightened risks in the market as the U.S. and our customers continue to recover from the early stages of the COVID-19 pandemic. During fiscal year 2021, customers paid on the credit extended to them, and we ended fiscal year 2021 with days sales outstanding at 47.4 days, down from 51.2 days at September 2020 and 47.5 days at September 2019.  As such, we reversed the additional credit risk reserves recorded during fiscal year 2020, but maintain our normal allowance for doubtful accounts for potential credit losses.  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.

 

18

Table of Contents

 

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. If interest rates increase, our obligations on this variable rate indebtedness would increase even though the amount borrowed remained the same, and there would be a corresponding decrease in our net income and cash flows, including cash available for servicing our debt. In addition, certain of the variable rate indebtedness extended to us uses the London Interbank Offered Rate (LIBOR) as a benchmark for establishing the interest rate. While we believe we will continue to use LIBOR through fiscal 2022 and into fiscal 2023, recent regulatory reform efforts may cause LIBOR to cease to exist, new methods of calculating LIBOR 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 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 2021 and 2020, our goodwill and other intangible assets were approximately $64.2 million and $57.8 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 complete our annual impairment test of goodwill on the first day of our third fiscal quarter. For fiscal year 2021, we concluded based on the valuation estimates that there was no indication of impairment on the goodwill 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 or 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 17, 2021, we had 6,974,660 shares of common stock outstanding. We believe that approximately 36% 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 beneficially own more than 5% of the outstanding shares own approximately 24% 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.

 

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.

 

19

Table of Contents

 

Item 1B. Unresolved Staff Comment

 

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 2021:  

 

   

Owned

   

Leased

   

Other

   

Total

 

Manufacturing

  2     6         8  

Distribution

  2     1     1     4  

Decoration/distribution

  1     7     1     9  

Retail stores/showroom

  1     17         18  

Offices

      5         5  

Total

  6     36     2     44  

 

 

 

Our primary manufacturing as of September 2021, 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

Fayetteville Plant

 

Fayetteville, North Carolina

 

Cut/sew/decoration

 

Delta Group/Salt Life Group

Rowland Plant

 

Rowland, North Carolina

 

Sew

 

Delta Group

 

As of September 2021 and 2020, our long-lived assets in Honduras, El Salvador and Mexico collectively encompassed approximately 25% and 28%, respectively, of our consolidated net property, plant and equipment, of which 18% and 21%, respectively, were 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 2021, 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

Clearwater, FL

 

Decoration/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

Sparks, NV

 

Decoration/distribution

 

Delta Group

Storm Lake, IA

 

Decoration/distribution

 

Delta 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 the 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 and our Honduran credit facility.

 

20

Table of Contents

 

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.

 

 

21

Table of Contents

 

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 November 17, 2021, there were approximately 785 record holders of our common stock.

 

Dividends: Our Board of Directors did not declare, nor were any dividends paid, during 2021 or 2020. Subject to the provisions of any outstanding blank check preferred stock (none of which is currently outstanding), the holders of our common stock are entitled to receive whatever dividends, if any, that may be declared from time to time by our Board of Directors in its discretion from funds legally available for that purpose. 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 fiscal year 2016 to the date of determination.  At September 2021, and September 2020, there was $19.0 million and $8.8 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. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

Financial measures included herein have been presented on a generally accepted accounting principles ("GAAP") basis and, in certain limited instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further described and reconciled in the sections entitled “Non-GAAP Financial Measures.”

 

Business Outlook

 

Our fourth quarter and full year results for fiscal 2021 outpaced our expectations. We believe this shows the strength of our unique business model to service diversified sales channels and demonstrated the successful streamlining of our organization.  We delivered record full year results, with a 7.5% operating margin on $437 million in net sales, resulting in $2.86 earnings per diluted share.

 

In our Activewear business, the streamlining of our organization has allowed us to remain nimble as we fluidly adapt to the needs of our diversified customer base. Our executive leadership, planning, sales force and customer service teams are all aligned to service the distinctive Delta Direct, Retail Direct and Global Brands sales channels, which is a win-win for Delta Apparel and our customers. Customers seeking our portfolio of Delta, Delta Platinum, Soffe, and sourced-branded products can purchase them directly from our Delta Direct business, formerly referred to as Delta Catalog. Delta Direct services key channels, such as the screen print, promotional, and eRetailer channels as well as the retail licensing channel, whose customers sell through to many mid-tier and mass market retailers. In our Global Brands & Retail Direct business, we are a supply chain partner to global brands, from product development of custom garments to shipment of their branded products, with the majority of products being sold with value-added services. We also serve retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to their retail stores and through their ecommerce channels. In fiscal 2021 we achieved record sales of $127 million in our Global Brands & Retail Direct business. 

 

On-shore and near-shore strategies have become an integral component of brands’ and retailers’ sourcing plans driven by many factors, including changes in trade policies, speed to market, social, environmental and sustainability efforts, inflationary pressures and supply chain disruptions. We have seen an increased desire from existing and new customers who want to use Delta Activewear as their supply chain partner. Our western hemisphere manufacturing platform, with its broad product capabilities, coupled with our unparalleled service levels, provides customers the diversification and confidence they desire within their supply chain. This past year has been a challenging manufacturing environment with limited availability of raw materials. Our teams have tackled these industry challenges proactively and despite the headwinds, have successfully grown our manufacturing output to record levels. The higher production in the first half of fiscal 2022 should allow us to be in a stronger inventory position to service the spring 2022 business. We also expect to bring further capacity on line in the second half of fiscal 2022, providing additional flexibility of product capabilities for our customers. 

 

22

Table of Contents

 

DTG2Go, our digital print business, remains committed to serving retailers, intellectual property holders, and brands with on-demand products, and remains focused on achieving the highest quality and service in the business. DTG2Go made significant investments this year on research and development to achieve a “digital-first” model utilizing the full decoration platform of digital, hybrid and screen print, making digital indistinguishable from traditional products. We believe the unlocking of this market channel to digital print will result in significant growth opportunities for DTG2Go in fiscal 2022 and beyond. We continue to see customers realizing the benefits of our integrated model with Activewear, and in fiscal 2021 Delta blanks were used for over 51% of the garments digitally printed. This is up significantly from the 32% utilization in fiscal year 2020. This trend is promising as it creates a more efficient operation, reduces garment cost for our customers, and lowers working capital needs in the business.  

 

Within our Salt Life Group, we have divested the Coast brand and ceased operations of the two Coast retail stores in the 2021 fiscal fourth quarter as the leases expired. The brand has been purchased by a regional retailer who is excited to be offering the brand in their stores. During the year we also completed a license agreement for the Salt Life beer. This puts Salt Life Lager in the hands of beer professionals, and we are already receiving royalty payments on the revenue they have generated. These actions will allow our Salt Life team to focus on the many initiatives which should continue to drive growth for the brand.

 

Our Salt Life lifestyle brand awareness and consumer engagement is at an all-time high. Salt Life has the strongest order bookings in its history for spring 2022 and summer 2022. While Salt Life has always been known for its cotton graphic tees, Salt Life’s performance wear and ladies’ categories are gaining great momentum with consumers. During fiscal 2021, Salt Life reached a milestone with 32% of its sales direct to consumers. Of this, over $10 million was from consumers visiting our thirteen branded retail doors, with sales for those stores open a year ago growing 19% during the fourth quarter. We plan to open seven new stores in fiscal 2022 across Florida, South Carolina, Alabama and Texas, with continuing plans to open six to eight new Salt Life stores annually for the next several years. 

 

We believe the opportunities Delta Apparel, Inc. has to grow its top line and further expand profitability are the most robust we have seen in our history. We remain optimistic about the broad-based growth opportunities and are poised for further manufacturing expansion to support the demand we anticipate in fiscal 2022 and beyond. Overall, we expect top-line growth and operating profit expansion in fiscal 2022, resulting in all-time record revenue and earnings per share in fiscal 2022.

 

Results of Operations

 

Net sales for 2021 were $436.8 million, up 14.6% from $381.0 million in the prior year.  Our growth was broad-based reaching all time record sales in our Global Brands & Retail Direct sales channel in our Delta Group Segment and in our branded retail stores in our Salt Life segment.   Net sales in 2020 were impacted by the COVID-19 pandemic, which halted retail in the U.S. beginning in mid-March through the first half of the June quarter, and disrupted our non-U.S. manufacturing operations for most of the June quarter in 2020.  Our direct-to-consumer and business-to-business ecommerce and branded retail sales represented a larger portion of consolidated revenue in the current year, constituting 10.4% of total net sales for 2021 compared to 9.9% of net sales in the prior year.

 

Delta Group segment net sales increased 13% to $387.0 million in 2021 compared to prior year net sales of $343.9 million. While the COVID-19 pandemic negatively impacted sales performance in the prior year, fiscal year 2021 was a record year for our Global Brands & Retail Direct business reaching $127 million in sales, as brands and retailers used Delta Activewear as their supply chain partner.

 

Salt Life Group segment net sales were $49.7 million in 2021, a 34% increase from $37.1 million in the prior year. Wholesale sales grew 30% in fiscal 2021 and our branded retail stores accelerated throughout the year reaching $10 million in sales for the year. In the prior year, this segment was impacted by the COVID-19 pandemic with the temporary closure of retail, including our Salt Life branded retail stores, in the prior year June quarter. 

 

Overall gross profit increased 49% to $101.8 million from $68.4 million in the prior period. Gross margins improved 540 basis points to 23.3% of sales from prior year margin of 17.9% of sales. Adjusting for the $14.7 million impact of COVID-19 related expenses in 2020, gross margins would have been 21.8%. The improvement over prior year is attributable to favorable product mix and process improvements within the Delta Group segment’s integrated vertical manufacturing platform. 

 

23

Table of Contents

 

Delta Group segment gross margins improved 500 basis points to 20.2% compared to 15.2% in the prior year. The prior year was unfavorably impacted by $14.7 million of COVID-19 related expenses. Adjusting for these discrete impacts, gross margins would have been 19.4% in 2020. 

 

Salt Life Group segment gross margins were 47.9% compared to 43.6% in 2020, a 430 basis point improvement. Margins were favorably impacted by a stronger mix of direct-to-consumer sales and favorable mix of higher profitability products.

 

Selling, general and administrative (“SG&A”) expenses in 2021 were $70.7 million, or 16.2% of sales, compared to $68.4 million, or 17.9% of sales, in 2020. Adjusting for $2.4 million of COVID-19 related expenses, adjusted SG&A for 2020 was $66.0 million, or 17.3% of sales. Expenses increased in 2021 due to increased labor costs and higher variable selling costs as well as incentive-based compensation, but expenses were lower as a percentage of sales due to leveraging fixed costs against higher sales volume.

 

Other income of $1.6 million in 2021 included $0.5 million of profits related to our Honduran equity method investment as well as $2.4 million income from the net reduction in contingent consideration liabilities, partially offset by $1.3 million of expenses related to the impact of the two hurricanes that disrupted our Honduran manufacturing facilities in the December quarter.  In 2020, we recognized $8.1 million in expenses caused from the COVID-19 pandemic related to incremental costs to right size production to new forecasted demand and increased inventory reserves related to the heightened risks in the market as the U.S. continued its recovery. In addition, in 2020 we recognized income from our Honduran equity method investment as well as $0.2 million in income from net reductions in contingent consideration liabilities. 

 

Operating profit for 2021 was $32.8 million, an all time record operating profit for the Company.  This compares to an operating loss of $7.1 million in the prior year. Operating income, adjusted for discrete items, was $18.1 million in fiscal year 2020.

 

Delta Group segment operating income for 2021 was $40.0 million, or 10.3% of sales, compared to $6.6 million, or 1.9% of sales, in 2020.  Adjusting for the $23.7 million in COVID-related expenses in the prior year, operating income would have been $30.3 million, or 8.8% of sales.   The improvement in operating income is attributable to increased sales volumes and gross margin expansion. Operating income also improved due to strategic cost reductions associated with integration efficiencies between the Soffe and Activewear businesses.

 

Salt Life Group segment operating income was $5.8 million for 2021 compared to prior year operating income of $0.5 million.  Adjusting for the $0.8 million in COVID-related expenses in the prior year, operating income would have been $1.3 million, or 3.4% of net sales. Operating income improved due to higher sales volume coupled with favorable product mix.

 

Interest expense for 2021 was $6.8 million compared to $7.0 million in 2020. The decrease is primarily due to lower average debt levels.

 

Our 2021 effective income tax rate is 21.9% compared to 23.6% in the prior year. See Note 9—Income Taxes for more information.

 

Net income attributable to shareholders in 2021 was $20.3 million, or $2.86 per diluted share. The prior year net loss was $10.6 million, or a loss of $1.53 per diluted share, and adjusted net income in 2020 was $8.6 million, or $1.22 income per diluted share.

 

24

Table of Contents

 

Non-GAAP Financial Measures

 

We provide all information required in accordance with GAAP, but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. In an effort to provide investors with additional information regarding the Company's results, we also provide non-GAAP information that management believes is useful to investors.  We discuss gross margin, SG&A expenses, operating income, net income and earnings per diluted share as performance measures because management uses these measures in evaluating the Company's 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 the Company's 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 of the Company's results as reported under GAAP.  These non-GAAP measures may not be comparable to similarly titled measures used by other companies. The tables below reconcile operating income, net income and earnings per diluted share to adjusted operating income, adjusted net income and adjusted earnings per diluted share (in thousands except per share data):

 

 

   

Year Ended

 
   

September 2021

   

September 2020

 

Operating income (loss)

  $ 32,711     $ (7,075 )

Adjustments for COVID-19 expenses (1)

          25,200  

Adjusted operating income

  $ 32,711     $ 18,125  
                 

Net earnings (loss) attributable to shareholders

  $ 20,296     $ (10,577 )

Adjustments for COVID-19 expenses, net of tax (1)

          19,152  

Adjusted net earnings attributable to shareholders

  $ 20,296     $ 8,575  
                 

Reported weighted average number of shares assuming dilution

    7,093       6,921  

Adjustments impact on dilutive effect of stock awards

          87  

Adjusted weighted average number of shares assuming dilution

    7,093       7,008  
                 

Reported diluted earnings per share

  $ 2.86     $ (1.53 )

Adjustments for COVID-19 expenses, net of tax (1)

          2.73  

Adjusted diluted earnings per share (2)

  $ 2.86     $ 1.22  

 

 

(1)   Our 2020 results included approximately $25.2 million of pre-tax expenses associated with the impacts from the COVID-19 pandemic and 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 ($6.6 million), and other expenses ($4.1 million). These costs are included within net sales ($0.5 million), cost of goods sold ($14.2 million), SG&A expenses ($2.4 million), and other loss (income), net ($8.1 million).

 

(2)   Totals may not add due to rounding.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

Cash provided by operating activities in 2021 was $25.5 million compared to $31.8 million for 2020.  The lower operating cash flows in 2021 primarily relate to an increase in inventory levels to support demand from customers.

 

Investing Cash Flows

 

Cash used in investing activities in 2021 and 2020 was $13.1 million and $12.1 million, respectively. Capital expenditures during 2021 and 2020 were $15.8 and $13.6 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 $12.3 million in expenditures financed under capital lease arrangements and $2.9 million in unpaid expenditures as of September 2021. 

 

We expect to spend approximately $20 million in capital expenditures in 2022, primarily on our manufacturing expansion, digital print equipment, information technology, and direct-to-consumer investments, including seven new Salt Life retail store openings. 

 

25

Table of Contents

 

Financing Activities

 

Cash used by financing activities was $19.5 million in 2021 compared $3.9 million in 2020. In 2021, we lowered the outstanding on our U.S credit facility and made the required payments on our capital lease financing, while in 2020 we utilized the cash proceeds from our U.S. credit facility to pay the required payments on our capital financing and to fund our operating activities and certain capital investments. In 2021, we paid $2.1 million in contingent consideration related to the DTG2Go acquisition compared to $2.5 million paid in the prior year. We did not purchase any shares of our common stock during 2021 compared to $2.0 million in repurchases in the prior year.

 

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 credit facility, as amended on August 28, 2020, as well as cash flows from operations, are intended to fund our day-to-day working capital needs, 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 credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified in our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement) for the preceding 12-month period must not be less than 1.1 to 1.0. Our availability at September 2021, was above the minimum thresholds specified in our credit agreement, and we were above the 1.1 to 1.0 FCCR for the preceding 12-month period. A significant deterioration in our business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement, which we may not be able to maintain.

 

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. There were no material option agreements that were outstanding at September 2021.

 

 

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 2021, all of other comprehensive income was attributable to shareholders; none related to the non-controlling interest. The changes in fair value of the interest rate swap agreements resulted in other comprehensive gain, net of taxes, of $0.5 million for the year ended September 2021, and other comprehensive loss, net of taxes, of $0.4 million for the year ended September 2020.

 

Off-Balance Sheet Arrangements

 

As of September 2021, 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.  At September 2021, and September 2020, there was $19.0 million and $8.8 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

 

26

Table of Contents

 

Our Board of Directors did not declare, nor were any dividends paid, during 2021 and 2020.  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 2021, 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. There were no repurchases of our common stock in 2021. During 2020, we purchased 99,971 shares of our common stock for a total cost of $2.0 million. As of September 2021, we had purchased 3,598,933 shares of common stock for an aggregate of $52.5 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 2021, $7.5 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 the 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 2021, and September 2020, there was $1.0 million and $1.3 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.

 

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 2021 and 2020.

 

27

Table of Contents

 

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.  During fiscal year 2020, we estimated and recorded additional reserves of approximately $5.5 million based on heightened risks in the market as the U.S. and our customers continue their recovery from the early stages of the COVID-19 pandemic. 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.

 

Goodwill

 

Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Salt Life, DTG2Go, and 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.  As of April 4, 2021, we performed our annual goodwill impairment evaluation and concluded that the goodwill for the Salt Life and DTG2Go reporting units were not impaired. The goodwill impairment testing process involved the use of significant assumptions, estimates and judgments with respect to a variety of factors, including projected sales, gross margins, selling, general and administrative expenses, capital expenditures and cash flows and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. Our assumptions were based on annual business plans and other forecasted results as well as the selection of a discount rate, all of which we believe represent those of a market participant. We also believe these assumptions are reflective of the current macro-economic environment, including the impacts of the COVID-19 pandemic. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on retailers as well as the ability of our customers, supply chain, and distribution to operate with minimal disruption, all of which could negatively impact the reporting units' financial position, results of operations, cash flows, and outlook. Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the future. If our assumptions regarding fair value are not achieved, it is possible that an impairment review may be triggered and goodwill or other intangible assets may be impaired 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.

 

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 2021, we had state NOLs of approximately $46.3 million, with deferred tax assets of $2.2 million related to these state NOLs, and related valuation allowances against them of approximately $0.6 million. These state net loss carryforwards expire at various intervals from 2026 through 2040.

 

 

28

Table of Contents

 

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 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 2021, and September 2020, 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 Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 2021, and, based on their evaluation, our Chief Executive Officer and Chief Financial 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 Chief Financial 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 Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 2021. 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 2021 included all of our operations. Based on our evaluation, our management has concluded that, as of September 2021, our internal control over financial reporting is effective.

 

The effectiveness of our internal control over financial reporting as of September 2021, 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 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

29

Table of Contents

 

 

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 October 2, 2021, 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 October 2, 2021, 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 October 2, 2021, and October 3, 2020, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for each of the two years in the period ended October 2, 2021, and the related notes and our report dated November 22, 2021 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

November 22, 2021

 

 

30

Table of Contents

 

Item 9B. Other Information

 

None.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

 

Not applicable.

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 2021 fiscal year under the headings "Proposal No. 1: Election of Directors", “Corporate Governance”, “Executive Officers” and “Delinquent Section 16(a) Reports.”

 

All of our employees, including our Chief Executive Officer, Chief Financial Officer, and Chief 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, Chief Financial Officer, or Chief 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 2021 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 2021 “Equity Compensation Plan Information" and “Stock Ownership of Management and Principal Shareholder.”

 

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.

 

31

Table of Contents

 

Set forth in the table below is certain information about securities issuable under our equity compensation plans as of September 2021.

 

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

    215,000     $       415,922  

Equity compensation plans not approved by security holders

                 

Total

    215,000     $       415,922  

 

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

(2) Not applicable, as 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 2021under 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 2021 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 2021, and September 2020.

Consolidated Statements of Operations for the years ended September 2021, and September 2020.

Consolidated Statements of Comprehensive (Loss) Income for the years ended September 2021, and September 2020.

Consolidated Statements of Shareholders’ Equity for the years ended September 2021, and September 2020.

Consolidated Statements of Cash Flows for the years ended September 2021, and September 2020.

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.

 

 

32

Table of Contents

 

(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.

10.2.4

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.

10.2.5

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.

10.2.6

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.

10.2.7

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.

10.2.8 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.
10.2.9 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.
10.2.10 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.

 

33

Table of Contents

 

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 1to 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+

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+

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+

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+

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+

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 10.1 to the Company’s Current Report on Form 8-K filed on December 28, 2018.**

10.7

Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated December 31, 2015: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 7, 2016.***

10.8

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.***

10.9

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.***

10.9.1

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.***

10.9.2

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.***

10.9.3

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.***

10.9.4

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.***

10.9.5 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.***
10.11 Employment Agreement between Delta Apparel, Inc. and Justin M. Grow dated January 1, 2019: Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***

10.12

Employment Agreement between Delta Apparel, Inc. and Jeffery N. Stillwell dated December 31, 2015: Incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on November 19, 2018.***

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 John T. Tester dated October 28, 2019: Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on October 28, 2019.***

10.15

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.***

10.16

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.

10.17

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.***

34

Table of Contents

 

10.18

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.***

10.19

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.***

10.20

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.***

10.21

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.***

10.22 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.***

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.

 

 

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.

**

Portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.

***

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

 

 

35

Table of Contents

 

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)

 

 

 

 

 

November 22, 2021

 

By: Deborah H. Merrill

 

Date

 

Deborah H. Merrill

 

 

 

Chief Financial Officer and

President, Delta Group

 

 

 

(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

11/22/2021

 

/s/Robert W. Humphreys

11/22/2021

Anita D. Britt

Date

 

Robert W. Humphreys

Date

Director

 

 

Chairman and Chief Executive Officer

 

      (principal executive officer)  

 

 

 

 

 

/s/J. Bradley Campbell

11/22/2021

 

/s/Deborah H. Merrill

11/22/2021

J. Bradley Campbell

Date

 

Deborah H. Merrill

Date

Director

 

 

Chief Financial Officer and President, Delta Group

 

 

 

 

(principal financial and accounting officer)

 

 

 

 

 

/s/G. Jay Gogue

11/22/2021

 

/s/A. Alexander Taylor, II

11/22/2021

G. Jay Gogue

Date

 

A. Alexander Taylor, II

Date

Director

 

 

Director

 

 

 

 

 

 

/s/Glenda E. Hood

11/22/2021

 

/s/David G. Whalen

11/22/2021

Glenda E. Hood

Date

 

David G. Whalen

Date

Director

    Director  

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 

 

36

Table of Contents

 

Delta Apparel, Inc. and Subsidiaries

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

F-2

 

 

Consolidated Balance Sheets as of September 2021, and September 2020

F-4

 

 

Consolidated Statements of Operations for the years ended September 2021, and September 2020

F-5

 

 

Consolidated Statements of Comprehensive Income (Loss) for the years ended September 2021, and September 2020

F-6

 

 

Consolidated Statements of Shareholders’ Equity for the years ended September 2021, and September 2020

F-7

 

 

Consolidated Statements of Cash Flows for the years ended September 2021, and September 2020

F-8

 

 

Notes to Consolidated Financial Statements

 

F-9

     Note 1—The Company

F-9
   

     Note 2—Significant Accounting Policies

F-9
   

     Note 3—Revenue Recognition

F-14
   

     Note 4—Inventories

F-14
   

     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-18
   

     Note 10—Leases

F-20
   

     Note 11—Employee Benefit Plans

F-22
   

     Note 12—Stock-Based Compensation

F-22
   

     Note 13—Business Segments

F-23
   

     Note 14—Repurchase of Common Stock

F-26
   

     Note 15—Commitments and Contingencies

F-26
   
     Note 16—Subsequent Events F-28

 

 

F-1

Table of Contents

 

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 October 2, 2021 and October 3, 2020, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the two years in the period ended October 2, 2021, 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 October 2, 2021 and October 3, 2020, and the results of its operations and its cash flows for each of the two years in the period ended October 2, 2021, 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 October 2, 2021, 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 November 22, 2021 expressed an unqualified opinion thereon.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

 

 

Inventory Reserve Valuation

   

   Description of the Matter

As described in Note 4 to the Company’s consolidated financial statements, the Company’s inventories totaled approximately $161.7 million as of October 2, 2021, net of approximately $15.9 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.  Changes in these assumptions can lead to a material effect of the amount of recorded inventory reserves.

F-2

Table of Contents

 

 

   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 analysis on the significant assumptions used.

 

 

   /s/ Ernst & Young, LLP

 

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

 

Atlanta, Georgia

   November 22, 2021

 

 

F-3

Table of Contents

 

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 

  

September 2021

  

September 2020

 

Assets

        

Cash and cash equivalents

 $9,376  $16,458 

Accounts receivable, less allowances of $251 and $684, respectively

  66,973   60,146 

Other receivables

  761   854 

Income tax receivable

  356    

Inventories, net

  161,703   145,515 

Prepaid expenses and other current assets

  3,794   3,795 

Total current assets

  242,963   226,768 
         

Property, plant and equipment, net

  67,564   63,950 

Goodwill

  37,897   37,897 

Intangible assets, net

  26,291   19,948 

Deferred income taxes

  1,854   4,052 

Operating lease assets

  45,279   54,645 

Equity method investment

  10,433   10,573 

Other assets

  2,007   2,398 

Total assets

 $434,288  $420,231 
         

Liabilities and Equity

        

Liabilities:

        

Accounts payable

 $52,936  $49,800 

Accrued expenses

  29,949   20,174 

Income taxes payable

  379   379 

Current portion of finance leases

  6,621   6,956 

Current portion of operating leases

  8,509   9,039 

Current portion of long-term debt

  7,067   7,559 

Current portion of contingent consideration

     2,120 

Total current liabilities

  105,461   96,027 
         

Long-term income taxes payable

  3,220   3,599 

Long-term finance leases, less current maturities

  15,669   11,328 

Long-term operating leases, less current maturities

  38,546   46,570 

Long-term debt, less current maturities

  101,680   112,782 

Long-term contingent consideration

  1,897   4,300 

Deferred income taxes

  1,520    

Other liabilities

  2,101   2,939 

Total liabilities

 $270,094  $277,545 

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 6,974,660 and 6,890,118 shares outstanding as of September 2021, and September 2020, respectively

  96   96 

Additional paid-in capital

  60,831   61,005 

Retained earnings

  146,860   126,564 

Accumulated other comprehensive loss

  (786)  (1,322)

Treasury stock —2,672,312 and 2,756,854 shares as of September 2021, and September 2020, respectively

  (42,149)  (43,133)

Equity attributable to Delta Apparel, Inc.

  164,852   143,210 

Equity attributable to non–controlling interest

  (658)  (524)

Total equity

  164,194   142,686 

Total liabilities and equity

 $434,288  $420,231 

 

See accompanying Notes to Consolidated Financial Statements.

 

F-4

Table of Contents

 

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Operations

(Amounts in thousands, except per share data)

 

  

Year Ended

 
  

September 2021

  

September 2020

 

Net sales

 $436,750  $381,035 

Cost of goods sold

  334,870   312,660 

Gross profit

  101,880   68,375 
         

Selling, general and administrative expenses

  70,743   68,383 

Other (income) loss, net

  (1,574)  7,067 

Operating income (loss)

  32,711   (7,075)
         

Interest expense

  6,844   7,005 

Earnings (loss) before provision for (benefit from) income taxes

  25,867   (14,080)

Provision for (benefit from) income taxes

  5,705   (3,260)

Consolidated earnings (loss), net

 $20,162  $(10,820)

Net loss attributable to non-controlling interest

  134   243 

Net earnings (loss) attributable to shareholders

  20,296   (10,577)
         

Basic earnings (loss) per share

 $2.92  $(1.53)

Diluted earnings (loss) per share

 $2.86  $(1.53)
         

Weighted average number of shares outstanding

  6,961   6,921 

Dilutive effect of stock options and awards

  132    

Weighted average number of shares assuming dilution

  7,093   6,921 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

F-5

Table of Contents

 

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

 

   

Year Ended

 
   

September 2021

   

September 2020

 

Net earnings (loss) attributable to shareholders

  $ 20,296     $ (10,577 )

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

    536       (353 )

Consolidated comprehensive income (loss)

  $ 20,832     $ (10,930 )

 

See accompanying Notes to Consolidated Financial Statements

 

 

 

F-6

Table of Contents

 

 

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 2019

    9,646,972     $ 96     $ 59,855     $ 136,937     $ (969 )     2,725,555     $ (41,750 )   $ (281 )   $ 153,888  
                                                                         

Net loss

                      (10,577 )                             (10,577 )

Other comprehensive loss

                            (353 )                       (353 )

Net loss attributable to non-controlling interest

                                              (243 )     (243 )

Vested stock awards

                (1,611 )                 (68,672 )     646             (965 )

Purchase of common stock

                                  99,971       (2,029 )           (2,029 )

Stock based compensation

                2,761                                     2,761  

ASU 2016-02 adoption

                      204                               204  

Balance at September 2020

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

Net earnings

                      20,296                               20,296  

Other comprehensive income

                            536                         536