dla20220913_10k.htm
Delta Apparel, Inc.
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SEC Document
SEC Filing
0001101396 DELTA APPAREL, INC false --10-01 FY 2022 109 251 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 6,915,663 6,974,660 2,731,309 2,672,312 2 1 3 25 3 10 4 20 0 1 20 30 20 10 15 30 4 8.5 2.3 2.3 2.2 5.3 5.3 June 30, 2027 June 30, 2027 7.25 7.7 August 31, 2025 August 31, 2025 7.5 7.5 December 31, 2025 December 31, 2025 7.5 May 31, 2027 8.6 August 31, 2027 6.0 October 31, 2021 4.0 4.0 5 5 5 5 21.0 0 0 2018 2019 2020 2021 1.8 0.9 6.0 21.04 30.07 27.94 30.07 30.15 1 20 0 In 2020, the Salt Life Group operating income included approximately $0.3 million of increased accounts receivable and inventory reserves related to the heightened risks in the market as the U.S. continues its recovery from the COVID-19 pandemic, as well as $0.5 million of other expenses. These costs are included within net sales ($0.1 million), SG&A expenses ($0.6 million), and other loss (income), net ($0.1 million). Unsecured liability associated with the purchase of intangible technology, of which the final quarterly installment of $500 was paid in the first quarter of fiscal 2023. In 2020, the Delta Group operating income included $23.7 million of expenses related to the COVID-19 pandemic. These costs primarily related to the curtailment of manufacturing operations ($11.9 million), incremental costs to right size production to new forecasted demand ($2.6 million), increased accounts receivable and inventory reserves related to the heightened risks in the market as the U.S. continues its recovery ($6.3 million), and other expenses ($2.9 million). 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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 1, 2022

 

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 $29.94 as quoted by the NYSE American on April 2, 2022, 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 $191.0 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 6,915,663 as of November 14, 2022.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant's Annual Meeting of Shareholders is currently scheduled for February 9, 2023. 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 1, 2022.



 

 

TABLE OF CONTENTS

 

Part I

   

Item 1.

Business

2

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

18

Item 2.

Properties

18

Item 3.

Legal Proceedings

19

Item 4.

Mine Safety Disclosures

19

Part II

   

Item 5.

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

20

Item 6.

[Reserved]

20

Item 7.

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

20

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 8.

Financial Statements and Supplementary Data

25

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

25

Item 9A.

Controls and Procedures

26

Item 9B.

Other Information

28
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 28

Part III

   

Item 10.

Directors, Executive Officers and Corporate Governance

28

Item 11.

Executive Compensation

28

Item 12.

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

28

Item 13.

Certain Relationships and Related Transactions, and Director Independence

29

Item 14.

Principal Accountant Fees and Services

29

Part IV

   

Item 15.

Exhibits and Financial Statement Schedules

29
Item 16. Form 10-K Summary 33

Signatures

  34

EX-10.10

   
EX-10.22    
EX-10.23    
EX-21    

EX-23.1

   

EX-31.1

   

EX-31.2

   

EX-32.1

   

EX-32.2

   

 

 

 

Cautionary Note Regarding Forward-Looking Statements

 

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

 

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

 

  the general U.S. and international economic conditions;
 

the impact of the COVID-19 pandemic on our operations, financial condition, liquidity, and capital investments, including recent labor shortages, inventory constraints, and supply chain disruptions;

  significant interruptions or disruptions within our manufacturing, distribution or other operations;
  deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our customers and suppliers;
  the volatility and uncertainty of cotton and other raw material prices and availability;
  the competitive conditions in the apparel industry;
  our ability to predict or react to changing consumer preferences or trends;
  our ability to successfully open and operate new retail stores in a timely and cost-effective manner;
  the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
  changes in economic, political or social stability at our offshore locations 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, our relationship with employees; or our ability to attract and retain employees;
  negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors;
  the inability of suppliers or other third-parties, including those providing properly functioning key equipment, transportation, and other services, to perform their obligations or fulfill the terms of their contracts with us;
  restrictions on our ability to borrow capital or service our indebtedness;
  interest rate fluctuations increasing our obligations under our variable rate indebtedness;
  the ability to raise additional capital;
  the impairment of acquired intangible assets;
  foreign currency exchange rate fluctuations;
  the illiquidity of our shares; and
  price volatility in our shares and the general volatility of the stock market.

 

A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is set forth in Part 1 under the subheading "Risk Factors." Any forward-looking statements in this Annual Report on Form 10-K do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements are made only as of the date of this Annual Report on Form 10-K, and we do not undertake to publicly update or revise the forward-looking statements, except as required by the federal securities laws.

 

 
1

 

Part I

Item 1. Business

 

Overview

 

Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company with approximately 8,600 employees worldwide. We design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and fulfillment industry, bringing DTG2Go's proprietary technology and innovation to our customers' supply chain. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants, eRetailers, the U.S. military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce sites and in our branded retail stores. Our diversified go-to-market strategy allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

 

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

 

We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American under the symbol “DLA." We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. All references to "2022" refer to the 52-week fiscal year ended October 1, 2022. All references to "2021" relate to the 52-week fiscal year ended October 2, 2021. We are filing as a smaller reporting company for 2022 as our public float was less than the applicable $250 million threshold on the last day of our second quarter.

 

We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not part of this, or any other, report that we file with or furnish to the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097. Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.

 

Segments, Products, Brands, and Customers

 

Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which the business is managed, and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker.

 

Delta Group

 

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

 

DTG2Go
We are a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chains of our many customers.  Our ‘On-Demand DC’ digital solution provides retailers and brands with immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate digital fulfillment within the customer's own distribution facilities. We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Via our eight fulfillment facilities throughout the United States, DTG2Go offers a robust digital supply chain, shipping custom graphic products within 24 to 48 hours to consumers in the United States and to over 100 countries worldwide. DTG2Go has made significant investments in its “digital-first” retail model, providing digital graphic prints that meet the high-quality standards required for brands, retailers and intellectual property holders. Throughout fiscal 2022, we continued to invest in our proprietary software, new digital print equipment, and in research and development initiatives related to the setups, formulas and processes needed to serve our customers. Through integration with Delta Activewear, DTG2Go also services the eRetailer, ad-specialty, promotional and screen print marketplaces, among others.

 

Delta Activewear

Delta Activewear is a preferred supplier of activewear apparel to regional and global brands as well as direct to retail and wholesale markets. The Activewear business is organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their go-to-market strategies and how their respective customer bases source their various apparel needs. Our Delta Direct channel services the screen print, promotional, and eRetailer markets as well as retail licensing customers that sell through to many mid-tier and mass market retailers. Delta Direct products include a broad portfolio of apparel and accessories under the Delta, Delta Platinum, and Soffe brands as well as sourced items from select third party brands. Our fashion basics line includes our Platinum Collection, which offers fresh, fashionable silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel products, including the Delta Dri line of performance shirts built with moisture-wicking material to keep athletes dry and comfortable; ringspun garments with superior comfort, style and durability; and Delta Soft, a collection with an incredible feel and price. We also offer our heritage, mid- and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.

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The iconic Soffe brand offers activewear for spirit makers and record breakers and is widely known for the original "cheer short" with the signature roll-down waistband.  Soffe carries a wide range of activewear for the entire family.  Soffe's heritage is anchored in the military, and we continue to be a proud supplier to both active duty and veteran United States military personnel worldwide.  The Soffe men's assortment features the tagline "anchored in the military, grounded in training" and offers everything 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.  Our Soffe products are also available direct to consumers at www.soffe.com.

 

Our Global Brands channel serves as a key supply chain partner to large multi-national brands, major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces, providing services ranging from custom product development to shipment of branded products with  “retail-ready” value-added services including embellishment, hangtags, and ticketing.

 

Our Retail Direct channel serves brick and mortar and online retailers by providing our portfolio of Delta, Delta Platinum, and Soffe products directly to the retail locations and ecommerce fulfillment centers of a diversified customer base including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. 

 

As a key element of the integrated Delta Group segment, each of Activewear’s primary channels offers a seamless solution for small-run decoration needs with on-demand digital print services, powered by DTG2Go.  

 

Salt Life Group

 

Salt Life

Salt Life is an authentic, aspirational lifestyle brand that represents a passion for the ocean, the salt air, and, more importantly, a way of life and all it offers, from surfing, fishing, and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines function and fashion with a tailored fit for the active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life has continued to provide the cotton graphic tees and logo decals that originally drove awareness for the brand, and expanded into performance apparel, swimwear, board shorts, sunglasses, bags, and accessories. In fiscal 2022, Salt Life grew its retail footprint to include twenty-one stores across the U.S. coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware. Consumers can also seamlessly experience the Salt Life brand through one of our retail partners which include surf shops, specialty stores, department stores, and outdoor merchants or by accessing our Salt Life ecommerce site at www.saltlife.com.

 

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

 

Manufacturing, Sourcing, and Distribution

 

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

 

Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We have operated with a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively "Parkdale") to supply our yarn requirements since 2005, with our existing agreement running through December 31, 2024. Under 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. 

 

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 2022 and 2021, 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 2022 and 2021, 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 2022 and 2021, we sourced less than 10% of our total products from third parties.

3

 

Many of the garments we produce will be decorated using screen printing or digital printing technology, and will be retail-packaged, including ticketing, hang tags, and hangers.  These services can be performed domestically for quick-turn service or internationally in our facilities in El Salvador and Mexico. We offer digital fulfillment services, powered by DTG2Go, at eight 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 95% of all U.S. consumers with two-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 orders, we believe that backlog order levels do not provide a general indication of future sales.
 
See Item 2. Properties for more information about each of our primary manufacturing and distribution facilities.

 

Sales & Marketing

 

Our sales and marketing functions consist of both employed and independent sales representatives and agencies located throughout the country. Our sales teams service specialty and resort shops; department, mid-tier and mass retailers; sporting goods stores; eRetailers and the U.S. military. 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 2022, we shipped our products to approximately 7,300 customers, many of whom have numerous retail doors.  No single customer accounted for more than 10% of our sales in 2022 or 2021, 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 2022 and 2021.

 

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 logo trademark. Our trademarks are valuable assets that differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against infringement. While our strategy is to own the intellectual property we use within our business, we are an official intellectual property licensee for branches of the United States military which 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 investors, and we strive to implement policies and practices that continuously improve the transparency and sustainability of our supply chain. The Environmental, Sustainability, and Governance (“ESG”) disclosures within this Annual Report and our definitive Proxy Statement align with the standards issued by the Sustainability Accounting Standards Board (“SASB”) for the Apparel, Accessories, and Footwear industry and with regulations and guidance issued by the Securities and Exchange Commission. The indicators in the Annual Report and definitive Proxy Statement have been carefully selected to show the most relevant aspects of our performance in the areas of environmental impact, health and safety, responsible raw material sourcing, safe chemical management, and responsible corporate governance.

 

Conserving the Environment

 

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

4

 

Reducing our Environmental Impact

 

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

 

The focus on reducing our overall energy intensity is driven by our goal to establish an energy efficient operation and reduce greenhouse gas emissions, which will contribute to lowering our operating costs as well as reducing our carbon footprint. The operations at our Ceiba Textiles facility account for a significant portion of the fuel and electricity used in our manufacturing network and, as such, are our largest contributors of carbon dioxide (CO2) emissions. In May 2022 Ceiba Textiles began receiving 100 percent clean, renewable energy from a 14.7-megawatt solar power array installed by the industrial park in which the facility is located. Not only is solar energy sustainable, it does not emit greenhouse gases, air, or water pollution when producing electricity, contributing to our goal to establish an energy efficient operation and reduce greenhouse gas emissions.

 

When comparing 2022 to our 2018 baseline year, we have reduced our total greenhouse gas emissions by 3.5 percent and reduced our emissions intensity by 12 percent in 2022. These reductions avoid the equivalent of 1,637 metric tons of CO2 emissions, which is comparable to the energy used by approximately 206 homes for one year or the carbon sequestered by 1,937 acres of U.S. forests in one year.

 

In recent years we implemented several energy efficiency projects such as installing 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. We also continue to replace compact florescent light bulbs with LED lighting, which is known to emit less heat and use less energy than conventional bulbs, decrease the temperature on factory floors, and thus potentially raise productivity, particularly on hot days. In the sewing area, we improved the performance of our sewing machines by installing new motors that use significantly less energy due to advanced technology. In the knitting operations area, we modified the cooling system to turn off automatically when the outside temperature and humidity reaches the optimum environment inside.

 

In February 2022, we removed 27 older model circular knitting machines and installed 18 large capacity knitting machines. Each new machine is much more energy efficient in addition to being more productive; with each new machine capable of knitting one and one-half times more greige fabric in less time than one of the older knitting machines. The new knitting machines were directly responsible for reducing our electricity usage by approximately 393,000 kilowatt hours in 2022. Additional energy saving initiatives at Ceiba Textiles included the purchase of a new steam textile dryer that replaced two existing thermal oil dryers. The steam dryer is capable of drying 66 percent more pounds of fabric per week than the thermal dryers and uses 25 percent less energy. Over a four-month service period in 2022, the new steam dryer was responsible for reducing our electricity usage by approximately 250,000 kilowatt hours and we anticipate its energy savings to double next year. Together, these two energy-saving initiatives reduced our total electricity usage by 641,875 kilowatt hours and avoided 455 metric tons of carbon dioxide (CO2) emissions, which is comparable to the carbon sequestered by 538 acres of forest in one full year. In addition, compared to our 2018 baseline year, we produced 9.7 percent more finished fabric in 2022 while using 7.5 percent less fuel and 8.6 percent less electricity. Overall, this has improved our fuel intensity by approximately 16 percent and electricity intensity by approximately 17 percent compared to the 2018 baseline 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 five 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, we implemented a system in 2018 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. Compared to our 2018 baseline, these initiatives reduced our water intensity by 9.1 percent in 2021 and 7.3 percent in 2022.

 

Wastewater from Ceiba Textiles is transferred to the Green Valley water treatment facility, which operates on an environmental license issued by the Honduras Ministry of Energy, Natural Resources, Environment, and Mines. Over 87 percent of our 2022 water consumption at Ceiba Textiles was recycled. The Green Valley wastewater treatment facility uses the industry standard primary, secondary, and tertiary water treatment methods based on the types of effluents being discharged as well as regulatory and environmental standards. Treatment procedures are also in place to neutralize and remove additional substances that may potentially be harmful, but are not necessarily regulated. The following information describes the primary, secondary, and tertiary water treatment methods.

5

 

 

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 sleeve and bottom hems to eliminate trimming. This initiative not only reduces textile waste but also lowers fabric production needs, which saves water, electricity, and fuel. 

 

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

 

 

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

 

 

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

 

 

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

 

Using Safe Chemistry

 

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

 

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

 

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

6

 

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 percent 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 percent 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 that regularly experience water stress, and we do not source conflict minerals in the production of our products.

 

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

 

The vast majority of the yarn we use in our textile operations is sourced from Parkdale Mills, whose products are independently certified to Standard 100 established by the International Oeko-Tex Association ("OEKO-TEX"), which is one of our industry's most well-known and trusted certifications for product safety. 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 Textiles facility has been using this tool for several years, and our 2021 self-assessment resulted in a total score in the upper quartile as compared to our industry competitors. Our most recent self-assessment was completed in April 2022 and the results will be available in April 2023. We retain the services of an external consultant to verify our assessments for a sample of facilities and to provide guidance for any areas of improvement.

 

Social Responsibility and Human Capital Management

 

Our employees are our most important and valuable asset. Our diverse and talented workforce helps drive our culture of high performance, close teamwork, and deep caring for each other across geographies and functions. We have an impact on the lives of over 8,600 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.

 

Our People

 

The table below provides an overview of the approximate number of our employees by geographic location as well as the tenure of that employee base as of September 2022:

 

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

El Salvador

  3,245   62%   20%   19%
Honduras   3,229   53%   27%   21%
Mexico   986   59%   15%   27%
United States   1,163   74%   9%   18%
Total   8,623   60%   20%   20%

 

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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 percent 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 our employees by gender and region as of September 2022:

 

Region   Male   Female
Offshore   49%   51%
United States   35%   65%
Total   47%   53%

 

Diversity and Inclusion

 

We are committed to fostering an inclusive culture where every employee is treated with dignity and respect, regardless of their gender, age, race, abilities, sexual orientation, or other legally protected characteristic. 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 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 2022, we provided more than 230,400 hours of professional development and safety training for our employees, which is a 6 percent 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.

 

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 2022 incident rate for total recordable cases dropped to 0.19 percent compared to the apparel industry average incident rate of 1.7 percent.

 

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.

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At the onset of the 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 COVID-19 safety measures are still in place at our offshore facilities, including maintaining plexiglass partitions to separate cafeteria seating areas 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.

 

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 2022 resulted in no priority non-conformance findings, which are defined as severe violations of code of conduct in the areas of labor or environmental health and safety. For minor violations identified, we put corrective action plans in place to remediate the findings.

 

Community Outreach

 

Delta Apparel is committed to giving back to the communities where our employees live and work through volunteer service and community outreach. In 2022, our employees were involved in programs to promote environmental responsibility and improve the way of life for nearby communities. For example, Salt Life sponsored a number of national organizations, in addition to offering a variety of t-shirts for which donations were collected for various relief efforts. In addition, our US employees were directly involved with the community through both the donation of merchandise to fundraisers and sponsorship of individual volunteer efforts with nearby organizations. Additionally, our offshore employees in Mexico, Honduras, and El Salvador were involved in numerous activities throughout the year including the following:

 

 

Our facilities in Mexico and Honduras continue to support COVID-19 campaigns in local communities by donating personal protection items such as sanitizing gel and face masks. Schools in Mexico that received donations were the 21 de Agosto Primary School in the town of Villa Madero, which is south of Seybaplaya, Campeche, and the Lazaro Cardenas Primary School in Seybaplaya where some of our employees’ children attend. Our Mexico facilities employ 210 people who live in these communities. In Honduras, donations of items such as bleach, sanitizing gel, alcohol, and face masks were made to the San Raphael Orphanage located in Villanueva, Cortes, and Dos Caminos Health Care Center located in Dos Caminos, Cortes. The Delta Honduras and Delta Cortes facilities employ 203 people who live in Dos Caminos.
     
 

 For the second year, Mexico employees joined with the “Together We Will Win” civil association and the Una Caricia Humana, IAP organization to collect and donate thousands of plastic bottle caps that are sold to companies that grind and reuse the plastic to make new products. The proceeds from the sale of the caps are used to help cover the cost of comprehensive treatment for children with cancer. Una Caricia Humana provides free support to families of children with cancer such as food, lodging, medicines, treatment supplies, and transportation.
     
  For the second year, Delta Campeche employees participated in the Campeche Turtle Project to help save the critically endangered Hawksbill sea turtle by cleaning the plastic waste from beaches in Seybaplaya 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 percent 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.
     
  Delta Cortes employees installed trash cans and environmental signs, and cleaned litter in an area of the Mico Quemado mountain range, which is an ecological reserve located in the department of Yoro. More than 280 square kilometers of this mountain chain are protected by the Central Government of Honduras due to its ecological importance to surrounding communities. Not only are the forests and valleys filled with rare plants and exotic animals, this area contains rivers and natural springs that are the primary water source for over 450,000 people in the cities of Santa Rita and El Negrito.
     
  Employees at Ceiba Textiles donated a gas-powered trimmer to the Quimistán Municipal Environmental Unit to support the maintenance of the area reforested as a result of the annual “United for a Greener Honduras” campaign in which Ceiba Textiles employees previously participated. Reforestation in this area of western Honduras was a critical factor in increasing the region’s water retention capacity as it reduced the impact to nearby communities when rivers would overflow during the rain and hurricane seasons.
     
  In the town of Santiago Nonualco in the department of La Paz, Textiles La Paz employees painted the entrance of the Caserio Ojo de Agua school and installed four fans in two classrooms. Out of the approximately 270 children who attend this school, 50 of those are the children of employees at the Textiles La Paz facility.

 

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Competition

 

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

 

Competition in our Delta Group segment is generally based upon price, service, delivery time, and quality, with the relative importance of each factor dependent upon the needs of the particular customer and the specific product offering. Our Delta Direct products generally are highly price competitive, and competitor actions can greatly influence pricing and demand for our products. While price is still important in our Global Brands and Retail Direct channels, quality and service are generally more important factors for customer choice. Our ability to consistently service the needs of our Global Brand and Retail Direct customers greatly impacts future business in these channels. We believe our U.S. market-adjacent manufacturing platform enables us to compete 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.

 

Seasonality

 

Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality. By diversifying our product lines and go-to-market strategies over the years, we have reduced the overall seasonality of our business. Consumer demand for apparel is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and international economic conditions change. Therefore, the distribution of sales by quarter in 2022 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.

 

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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.  By way of example, the price of cotton increased to almost 50% in a five-month period and reached a high of over $1.50 in our fiscal 2022.  In some instances, we were unable to pass through these higher costs to our customers, with the gross margins in our Activewear and other businesses negatively impacted as a result.  In addition, sudden decreases in the price of cotton and other raw materials may result in the cost of inventory exceeding the cost of new production, which may result in downward selling price pressures, negatively impacting the gross margins in our Activewear and other businesses by significant amounts.

 

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. Recent distress in global credit markets, rising interest rates, foreign exchange rate fluctuations, significant geopolitical conflicts, volatility in energy prices, constraints on the global supply chain and other factors continue to affect the global economy and adversely impact demand for our products. In 2022, the U.S. experienced significantly heightened inflationary pressures which we expect to continue into 2023. We may not be able to fully mitigate the impact of inflation through price increases, productivity initiatives and cost savings, which could have a material adverse effect on our financial results. In addition, if the U.S. economy enters a recession, we may experience sales declines and may have to decrease prices, all of which could have a material adverse impact on our financial results.  Historically, during recessionary periods, the demand for casual and activewear apparel has been strong and our business has performed well. However, there can be no assurances that this correlation will continue in future recessions. Sometimes, the timing of increases or decreases in consumer purchases of soft goods can differ from the timing of increases or decreases in the overall level of economic activity. Weakening sales may require us to reduce manufacturing operations to match our output to demand or expected demand.  Reductions in our manufacturing operations may increase unit costs and lower our gross margins, causing a material adverse effect on our results of operations.

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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 also 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. As we expand into new geographic areas, we need to successfully identify and satisfy the consumer preferences in these areas. In addition, we need to address competitive, merchandising, marketing, distribution and other challenges encountered in connection with any expansion. Finally, we cannot ensure that any newly-opened stores will be received as well as, or achieve net sales or profitability levels comparable to those of, our existing stores in our estimated time periods, or at all. If our stores fail to achieve, or are unable to sustain, acceptable net sales and profitability levels, our business overall may be materially harmed and we may incur significant costs associated with closing or relocating stores.

 

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, financial condition, liquidity, and capital investments. The virus has impacted all regions around the world, resulting in restrictions and shutdowns implemented by national, state, and local authorities.  During fiscal 2020, these requirements resulted in temporary closures of all of our branded retail locations and, our manufacturing facilities in El Salvador, Honduras Mexico, and North Carolina. Throughout fiscal years 2022 and 2021, the vast majority of our branded retail locations and manufacturing facilities have continued to operate.

 

Many of our customers and suppliers also face these and other challenges, which has resulted in ongoing supply chain and logistic constraints, closure of certain third-party manufacturers and increased freight cost at various stages of the pandemic.  Any further material temporary or long-term disruption in our supply chain could lead to reduced demand for our products and services and could impair our customers' ability to pay all or portion of the amounts owed to us.  We rely on suppliers and third-parties to deliver raw materials and transport our finished goods.  Prolonged inventory shortages may result in significant lost business or delay in shipments which could have a material adverse effect on our results of operations and financial condition.

 

The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including the ultimate duration, severity and sustained geographic resurgence of the virus, the emergence of new variants and strains of the virus, and the success of actions to contain the virus and its variants, 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.

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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 years 2021 and 2022, our operations in and around San Pedro Sula, Honduras, were partially disrupted by the protests and strikes related to increasing fuel costs and the impact related to higher ticket prices on public transportation. These disruptions temporarily restricted the ability of our employees and suppliers to access our manufacturing facilities as well as our ability to ship products from our facilities, and negatively impacted our operations from a cost standpoint.  

 

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.

 

We rely on third parties to provide us with certain key equipment and services for our business. If any of these third parties fails to perform their obligations to us or declines to provide properly functioning equipment or services to us in the future, we may suffer a disruption to our business. We rely on certain key equipment and services provided by various third parties, including logistics partners and equipment suppliers.  For example, we rely on third parties to provide certain inbound and outbound transportation and delivery services and other third parties to provide us with key equipment to support our manufacturing and fulfillment platforms, including our DTG2Go digital platform. If any of these or other third parties fails to perform their obligations to us or declines to provide properly functioning equipment or services to us in the future, we may suffer a disruption to our business or increased costs. Furthermore, we may be unable to implement substitute arrangements on a timely and cost-effective basis on terms favorable to us.

 

Energy, fuel and related costs are prone to significant fluctuations and volatility, which could adversely affect our results of operations. Our manufacturing operations require high inputs of energy, and 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. Many of these factors impacted such cost in fiscal year 2022 and are expected to have an impact in the near term. 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, 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.

13

 

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

 

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

 

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

 

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

14

 

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 Act (“CARES Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including some provisions which were previously enacted under the 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 the 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 condition and results of operations. From time to time, we may be involved in legal or regulatory actions regarding product liability, employment practices, intellectual property infringement, bankruptcies and other litigation or enforcement matters. Due to the inherent uncertainties of litigation in both domestic and foreign jurisdictions, we cannot accurately predict the ultimate outcome of any such proceedings. These proceedings could cause us to incur costs and may require us to devote resources to defend against these claims and could ultimately result in a loss or other remedies such as product recalls, which could adversely affect our financial condition and results of operations. For a description of current material legal proceedings, see Part I, Item 3, Legal Proceedings.


Product liability issues could lead to recalls, claims and negative publicity, and adversely affect our results of operations. Our operations are subject to certain product liability risks common to most brands and manufacturers and our ability to maintain consumer confidence in the safety and quality of our products is vital to our success. We have implemented product safety and quality programs and standards that we follow and we expect our supplier partners to strictly adhere to applicable requirements and best practices. In addition to selling apparel and accessory products, we 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.

 

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.

15

 

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 reduction or elimination of import protections for domestic apparel producers could significantly increase global competition, which could adversely affect our business and results of operations.

 

Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and negative publicity. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys' general in the United States. Any failure to comply with such regulations could cause us to become subject to investigation and enforcement actions resulting in significant penalties or claims or in our inability to conduct business, adversely affecting our results of operations.

 

Our international operations are also subject to compliance with the 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, changes in our relationship with our employees, and changes in our ability to attract and retain employees could adversely affect our results of operations. As of October 1, 2022, we employed approximately 8,600 employees worldwide, with approximately 7,500 of these employees located in Honduras, El Salvador and Mexico. Changes in domestic and foreign laws and regulations governing our relationships with our employees, including wage and human resources laws and regulations, labor standards, overtime pay, unemployment tax rates, workers' compensation rates, and payroll taxes could impact our relationship with our employees and adversely impact the productivity and ultimate cost of our manufacturing operations. A total of approximately 2,600 employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We have historically conducted our operations without significant labor disruptions and believe that our relations with our employees are generally good. However, a change in labor relations could adversely affect the productivity and ultimate cost of our manufacturing operations.

 

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

 

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

16

 

Risks Related to Financial Matters

 

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 $34.6 million at October 1, 2022, well above the minimum thresholds specified in our credit agreement.  In addition, we were above our credit facility's 1.0 fixed charge coverage ratio ("FCCR") threshold 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 in our credit facility include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates. If an event of default under our credit facility occurred or became imminent, we may request our credit agreement lenders to provide a waiver.  If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility and may not be available.  If we were unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to make acquisitions, fund share repurchases or pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance would have a material adverse effect on our financial position and results of operations.

 

Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our customers or suppliers could adversely affect our financial position and results of operations. We extend credit to our customers, generally without requiring collateral. The extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history. We monitor credit risk exposure by periodically obtaining credit reports and updated financial statements on our customers. Deterioration in the economy, declines in consumer purchases of apparel, disruption in the apparel retail environment, or the inability of our customers to access liquidity could have an adverse effect on the financial condition of our customers. During the past several years, various retailers and other customers have experienced significant difficulties, including consolidations, restructurings, bankruptcies and liquidations as well as retail shutdowns as a result of the COVID-19 pandemic. The inability of retailers and other customers to overcome these difficulties may continue or even increase due to the current economic and retail market conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current conditions, historical trends, estimates and other available information, which involves judgments and uncertainties. During fiscal year 2022, customers generally paid on the credit extended to them, and we ended fiscal year 2022 with days sales outstanding at 51.7 days, up from 47.4 days at September 2021.  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.

 

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

 

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

 

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

17

 

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 2022 and September 2021, our goodwill and other intangible assets were approximately $61.9 million and $64.2 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 2022, we concluded based on the assessment performed 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, and trading volume. This illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the market perceives us to have a relatively small market capitalization. This has led and could continue to lead to our shares trading at prices that are significantly lower than our estimate of their inherent value.

 

As of November 14, 2022, we had 6,915,663 shares of common stock outstanding. We believe that approximately 37% of our stock is beneficially owned by entities and individuals who each own more than 5% of the outstanding shares of our common stock. Institutional investors that each beneficially own more than 5% of the outstanding shares collectively own approximately 25% 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.

 

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 2022:  

 

   

Owned

   

Leased

   

Other

   

Total

 

Manufacturing

  2     6         8  

Distribution

  2     1     1     4  

Decoration/distribution

  1     6     1     8  

Retail stores/showroom

  1     23         24  

Offices

      5         5  

Total

  6     41     2     49  

 

 

18

 

Our primary manufacturing locations as of September 2022, 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 2022 and 2021, our long-lived assets in Honduras, El Salvador and Mexico collectively encompassed approximately 27% and 25%, respectively, of our consolidated net property, plant and equipment, of which 18% was in Honduras.  See Item 1A. Risk Factors for a description of risks associated with our operations located outside of the United States.

 

Our primary distribution centers, including those integrated with decoration operations, as of September 2022, 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

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, our Honduran credit facility, and our Salvadoran credit facility.

 

ITEM 3. Legal Proceedings

 

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

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

19

 

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 14, 2022, there were approximately 782 record holders of our common stock.

 

Dividends: Our Board of Directors did not declare, nor were any dividends paid, during 2022 or 2021. Subject to certain restrictions, our credit facility allows stock repurchases and cash dividends from two sources:  (1) legally available funds other than cash from certain sale/leaseback transactions, (2) legally available funds solely from certain recent sale/leaseback transactions.  In each case, at least 15% of the maximum revolver amount and borrowing base must be available both for 30 days before the transaction and after giving effect to it.  There is also a restriction on the total amount of such payments from April 3, 2016 to the date of determination.  For payments from funds other than sale/lease backs, the amount is $10,000,000 plus 50% of net income since April 3, 2016.  For payments solely from sale/leasebacks, the amount is limited to $10,000,000 since April 3, 2016.  Also, payments from sale/leasebacks must be in excess of the subject real property’s contribution to the borrowing base.  Subsidiaries of the Borrowers (as defined in the credit facility) are not subject to these restrictions on dividends to the Borrowers.  At September 2022, and September 2021, there was $24.9 million and $19.0 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.

 

Business Outlook

 

Fiscal year 2022 marked another year of strong organic growth for Delta Apparel and highlighted the collective reach of our multiple go-to-market strategies. The combination of our vertically integrated manufacturing and service platforms with our diversified distribution allowed us to successfully navigate what was a dynamic business and economic environment throughout the year.  All five of our market channels – Delta Direct, Global Brands, Retail Direct, DTG2Go, and Salt Life  – delivered year-over-year sales increases and drove overall sales growth of 11%.  For the year, we achieved a 6.6% operating margin on $484.7 million in net sales, and earnings of $2.80 per diluted share.

 

Our Delta Group segment’s fully integrated Activewear and DTG2Go businesses continue to offer solutions to a broadening spectrum of customers across the apparel industry. Our Activewear business is organized around three key customer channels – Delta Direct, Global Brands, and Retail Direct – that are distinct in their market approaches and customer bases. Our Delta Direct channel offers the screen print, promotional, eRetailer and retail licensing markets a broad portfolio of apparel and accessories under the Delta, Delta Platinum, and Soffe brands, including basic, performance, fashion basic and other elevated product offerings, as well as sourced items from select third party brands.

 

Our Global Brands channel serves as a key supply chain partner to large multi-national brands, providing services ranging from custom product development to value-added “retail-ready” enhancements, and our Retail Direct channel provides our portfolio of Delta, Delta Platinum, and Soffe products with value-added “retail-ready” enhancements directly to the brick and mortar retail locations and ecommerce fulfillment centers of a customer base ranging from sporting goods and outdoor retailers, specialty and resort shops, and farm and fleet stores to department stores and mid-tier retailers.  Our onshore and nearshore manufacturing and fulfillment platforms, coupled with a distribution network spanning the United States, continue to become more integral to brand and retailer sourcing strategies and generate new interest from customers looking to reach the United States market more efficiently and manage supply chain risks associated with international trade policy, ESG priorities, inflationary pressures, and supply chain disruptions. 

 

Our DTG2Go business and its leadership position in digital print and fulfillment give us the unique ability to offer customers across all of our channels a seamless make-on-demand solution. DTG2Go continues to grow through its “digital first” strategy, achieving strong double-digit sales growth in fiscal year 2022, including increased units and revenue. More and more customers across the apparel industry see the compelling economics of DTG2Go’s digital make-on-demand model as a desirable alternative to traditional make-to-forecast models, particularly when integrated with our Delta Direct channel’s vertical supply of blank garments.

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Profitability at DTG2Go was impacted during the year by additional costs for equipment to further its “digital first” model and the tight domestic labor market, but we expect operating margins to improve materially over time. We see more exciting growth potential at DTG2Go going forward as the apparel industry migrates more towards the DTG2Go model, selling prices continue to grow, and we increase our output to meet elevating demand.

 

Our Delta Group segment achieved significant overall growth for the year even as demand between its various market channels shifted, with strong order flow in our Global Brands and DTG2Go channels helping to offset slowness in our Delta Direct channel to end the year. Our Delta Direct channel was heavily impacted by strong inflationary pressures on both input and labor costs that resulted in some downward pressure on gross margins in the second half of year. We expect this market fluidity and inflationary cost environment to continue in fiscal year 2023, and we will continue to leverage the flexibility of our vertical platform and adjust production levels to manage inventory, mitigate higher input costs, and stay aligned with customer demand.

 

Our Salt Life Group segment continued to excel in fiscal year 2022, producing record revenues of $60.3 million and a strong double-digit sales increase of 21% percent over the prior year. Growing consumer awareness and engagement with the Salt Life lifestyle brand, together with the Salt Life team’s ability to manage supply chain issues and shipping delays, culminated in organic growth across all three Salt Life omnichannel markets – wholesale, retail, and ecommerce – in the fourth quarter of fiscal year 2022.  We look for that growth trend to continue in fiscal year 2023.

 

With the milestone achievement of eight new store openings in fiscal year 2022, there are now 21 Salt Life branded retail doors open for business across the United States coastline from Southern California to Key West and up the eastern seaboard to Rehoboth Beach, Delaware. We expect to continue to expand Salt Life’s retail footprint with six to eight planned store openings in 2023, including a new location in Long Branch, New Jersey in the coming months to further Salt Life’s geographic reach in the northeast.

 

We continue to invest in marketing initiatives designed to elevate the Salt Life brand and drive increased engagement.  Salt Life’s YouTube channel reached 7.1 million views in fiscal 2022, a 36% increase over the prior year.  Beyond YouTube, Salt Life’s social media channel net audience spanning Facebook, Instagram, Twitter, LinkedIn and Pinterest grew nearly 85% on the year. Salt Life also continues to interact with consumers through its online content portal, The Daily Salt, and its Salt Life-branded podcast, Above and Below.

 

Overall fiscal 2022 was another excellent year for Delta Apparel. Our performance highlights the strong foundation across our business segments and the benefits of our broad channels of distribution, the demand for our unique product and service offerings, the efficiencies of our vertically integrated operations, and the emotional connection our lifestyle brand, Salt Life, has with a broad range of consumers.  Although we move into fiscal year 2023 with some unsettled economic conditions, we believe that we continue to be well-positioned to take advantage of opportunities as they arise and win additional market share. 

 

Results of Operations

 

Net sales for 2022 were $484.9 million, up 11.0% from $436.8 million in the prior year.  Our growth was broad-based with sales increasing year-over year in both the Delta Group and Salt Life Group segments.  

 

Delta Group segment net sales increased 10% to $424.8 million in 2022 compared to prior year net sales of $387.0 million. Within the Activewear business, our Global Brand and Retail Direct channels both achieved double-digit year over year growth, and our Delta Direct channel achieved single-digit year over year growth. Our DTG2Go business achieved both unit and sales dollar growth, resulting in sales growth of 17% over the prior year.

 

Salt Life Group segment net sales were $60.1 million in 2022, increasing 21% from $49.7 million in the prior year. During fiscal 2022, the segment saw both wholesale and direct-to-consumer retail channel growth over the prior year. Salt Life also opened eight new branded retail doors, bringing our total retail store locations to 21.

 

Overall gross profit increased by 7% to $108.8 million from $101.9 million in the prior year. Gross margins were 22.4% of sales, a decline of 90 basis points from prior year gross margins of 23.3% of sales. The decline from the prior year is a result of increased input costs in the Delta Group, offset by favorable sales mix in the Salt Life group.  

 

Delta Group segment gross margins were 18.3% compared to 20.2% in the prior year. Margins were negatively impacted by increasing input costs and labor costs. 

 

Salt Life Group segment gross margins improved by 370 basis points to 51.6% compared to 47.9% in 2021. Margins were favorably impacted by a stronger mix of direct-to-consumer sales and favorable mix of higher profit products.

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Selling, general and administrative (“SG&A”) expenses in 2022 were $79.5 million, or 16.4% of sales, compared to $70.7 million, or 16.2% of sales, in 2021. Expenses increased in 2022 due to higher selling costs associated with the expansion of Salt Life’s retail footprint and higher distribution labor costs.

 

Other income of $2.4 million in 2022 included $0.9 million in profits related to our equity investment in Green Valley Industrial Park, S.A. de C.V., the Honduran entity that owns and operates the industrial park in Naco, Quimistan, Santa Barbara Honduras, where our Ceiba Textiles facility is located ("Honduran Equity Method Investment"), as well as $1.9 million in income from the net reduction in contingent consideration liabilities, offset by a loss on the disposal of fixed assets of $0.4 million. In the prior year, other income of $1.6 million 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. 

 

Operating income for 2022 was $31.8 million.  This compares to an operating income of $32.7 million in the prior year. 

 

Delta Group segment operating income for 2022 was $38.0 million, or 9.0% of sales, compared to $40.0 million, or 10.3% of sales, in 2021.  The decline in operating income is attributable to gross margin decline from increasing input costs. 

 

Salt Life Group segment operating income was $8.2 million for 2022 compared to prior year operating income of $5.8 million. Operating income improved due to higher sales volume coupled with favorable product mix.

 

Interest expense for 2022 was $7.7 million compared to $6.8 million in 2021. The increase is primarily due to higher average debt levels.

 

Our 2022 effective income tax rate is 17.9% compared to 21.9% in the prior year. See Note 9—Income Taxes for more information.

 

Net income attributable to shareholders in 2022 was $19.7 million, or $2.80 per diluted share. Our prior year net income was $20.3 million, or $2.86 per diluted share.

 

Liquidity and Capital Resources

 

Operating Cash Flows

 

Cash used by operating activities in 2022 was $20.1 million, compared to cash provided by operating activities of $25.5 million in 2021. The lower operating cash flows in 2022 primarily relate to increasing input costs and higher ending inventory levels at year-end.

 

Investing Cash Flows

 

Cash used in investing activities in 2022 and 2021 was $13.0 million. Capital expenditures during 2022 and 2021 were $19.9 and $15.8 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 $10.4 million in expenditures financed under capital lease arrangements and $1.0 million in unpaid expenditures as of September 2022. 

 

We currently expect to spend less on capital expenditures in 2023 as compared to 2022.  These projects would be focused on digital print equipment, information technology, manufacturing efficiency, and direct-to-consumer investments, including new Salt Life retail store openings. 

 

Financing Activities

 

Cash provided by financing activities was $24.1 million in 2022 compared to cash used of $19.5 million in 2021. In 2022, we increased the amount outstanding on our U.S credit facility and utilized cash proceeds to fund operating activities and certain capital investments, as well as the required payments on our capital lease financing. Additionally, in the current year we entered into a new Honduran term loan with a principal of $3.7 million and a new term loan related to our El Salvador facility for $3.0 million, both with five-year terms. We repurchased $4.0 million shares of our common stock during 2022 compared to no share repurchases in 2021. 

 

Future Liquidity and Capital Resources

 

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

 

Our asset-based U.S. revolving credit facility, as amended on June 2, 2022, 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.

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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 1.0. Our availability at September 2022, was above the minimum thresholds specified in our credit agreement, and we were above the 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 2022.

 

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 2022, all of other comprehensive income was attributable to shareholders and; none related to the non-controlling interest. The changes in fair value of the interest rate swap agreements resulted in other comprehensive gain, net of taxes, of $0.9 million for the year ended September 2022, and other comprehensive gain, net of taxes, of $0.5 million for the year ended September 2021.

 

Off-Balance Sheet Arrangements

 

As of September 2022, 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 2022, and September 2021, there was $24.9 million and $19.0 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

 

Our Board of Directors did not declare, nor were any dividends paid, during 2022 and 2021.  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 2022, our Board of Directors had authorized management to use up to $60.0 million to repurchase stock in open market transactions under our Stock Repurchase Program. During 2022, we purchased 136,181 shares of our common stock for a total cost of $4.0 million. There were no repurchases of our common stock in 2021. As of September 2022, we had purchased 3,735,114 shares of common stock for an aggregate of $56.4 million since the inception of the Stock Repurchase Program.  All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18.  As of September 2022, $3.6 million remained authorized by our Board of Directors for future purchases under our Stock Repurchase Program, which does not have an expiration date.

 

Critical Accounting Policies

 

The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We have no reason to believe that our past estimates have not been appropriate. Our most critical accounting estimates, discussed below, pertain to revenue recognition, accounts receivable and related reserves, inventories and related reserves, the carrying value of goodwill, and the accounting for income taxes.

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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 2022, and September 2021, there was $1.1 million and $1.0 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 2022 and 2021.

 

Inventories and Related Reserves

 

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

 

Goodwill

 

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

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

 

Income Taxes

 

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

 

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 2022, we had state NOLs of approximately $41.6 million, with deferred tax assets of $2.0 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 2027 through 2040.

 

Recent Accounting Standards

 

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

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

 

Item 8. Financial Statements and Supplementary Data

 

Our Consolidated Financial Statements for each of our periods ended September 2022, and September 2021, 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.

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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 2022, 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 2022. 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 2022 included all of our operations. Based on our evaluation, our management has concluded that, as of September 2022, our internal control over financial reporting is effective.

 

The effectiveness of our internal control over financial reporting as of September 2022, 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 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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 1, 2022, 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 1, 2022, 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 1, 2022, and October 2, 2021, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the two years in the period ended October 1, 2022, and the related notes and our report dated November 21, 2022 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 21, 2022

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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 2022 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 2022 fiscal year under the headings “Executive Compensation,” “Compensation Tables,” and "Director Compensation."

 

 

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

 

The information relating to security ownership by certain beneficial owners and management is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2022 fiscal year under the headings “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.

28

 

Set forth in the table below is certain information about securities issuable under our equity compensation plans as of September 2022.

 

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

    274,625     $       276,464  

Equity compensation plans not approved by security holders

                 

Total

    274,625     $       276,464  

 

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

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

 

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

 

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

 

The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2022 fiscal year under the heading "Corporate Governance".

 

Item 14. Principal Accountant Fees and Services

 

The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days following the end of our 2022 fiscal year under the heading “Proposal No. 3: Ratification of Appointment of Independent Registered Public Accounting Firm”.

 

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedules

Financial Statements:

Report of Independent Registered Public Accounting Firms.

Consolidated Balance Sheets as of September 2022, and September 2021.

Consolidated Statements of Operations for the years ended September 2022, and September 2021.

Consolidated Statements of Comprehensive Income for the years ended September 2022, and September 2021.

Consolidated Statements of Shareholders’ Equity for the years ended September 2022, and September 2021.

Consolidated Statements of Cash Flows for the years ended September 2022, and September 2021.

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.

 

29

(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.

 

30

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.
10.2.11 Seventh Amendment to Fifth Amended and Restated Credit Agreement dated June 2, 2022, among Delta Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named therein as Lenders, and Wells Fargo Bank, National Association as agent for Lenders. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 3, 2022.

10.3

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

10.4

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

10.5

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

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

10.6

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

10.6.1

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

10.6.2

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

10.6.3

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

10.6.4

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

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

10.7

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

10.8

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

 

31

10.8.1

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

10.8.2

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

10.8.3

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

10.8.4

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

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

10.14

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.***

10.15

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.

10.16

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

10.17

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.***

10.18

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.***

10.19

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.***

10.20

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.***

10.21 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K filed on November 21.2019.***
10.22 Form of Restricted Stock Unit and Performance Unit Award Agreement.***
10.23 Form of Restricted Stock Unit Award Agreement.***

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.

 

32

 

101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

*

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

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

***

This is a management contract or compensatory plan or arrangement.

 

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

 

(b) Exhibits

 

See Item 15(a)(3) above.

 

Item 16. Form 10-K Summary

None.

33

 

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)

 

 

 

 

 
11/21/22

 

/s/Simone Walsh

 

Date

 

Simone Walsh

 

 

 

Chief Financial Officer

 

 

 

(principal financial and accounting officer)

 

 

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

 

 

 

/s/Anita D. Britt

11/21/22

 

/s/Sonya E. Medina 11/21/22

Anita D. Britt

Date

 

Sonya E. Medina

Date

Director

 

 

Director

 

 

 

 

 

 

/s/J. Bradley Campbell

11/21/22

 

/s/A. Alexander Taylor, II

11/21/22

J. Bradley Campbell

Date

 

A. Alexander Taylor, II

Date

Director

 

 

Director

 

 

 

 

 

 

/s/G. Jay Gogue

11/21/22

 

/s/Simone Walsh 11/21/22
G. Jay Gogue

Date

 

Simone Walsh

Date

Director

 

 

Chief Financial Officer 

 

      (principal financial and accounting officer)  

 

 

 

 

 

/s/Glenda E. Hood

11/21/22   /s/David G. Whalen 11/21/22

Glenda E. Hood

Date

 

David G. Whalen

Date

Director

    Director  
         

/s/Robert W. Humphreys

11/21/22      
Robert W. Humphreys

Date

 

 

 

Chairman and Chief Executive Officer

       
(principal executive officer)        

 

34

 

 

 

Delta Apparel, Inc. and Subsidiaries

 

Index to Consolidated Financial Statements

 

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

F-2

 

 

Consolidated Balance Sheets as of September 2022, and September 2021

F-4

 

 

Consolidated Statements of Operations for the years ended September 2022, and September 2021

F-5

 

 

Consolidated Statements of Comprehensive Income for the years ended September 2022, and September 2021

F-6

 

 

Consolidated Statements of Shareholders’ Equity for the years ended September 2022, and September 2021

F-7

 

 

Consolidated Statements of Cash Flows for the years ended September 2022, and September 2021

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-24
  

     Note 14—Repurchase of Common Stock

F-26
  

     Note 15—Commitments and Contingencies

F-26
  
     Note 16—Subsequent EventsF-28

 

 

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 1, 2022 and October 2, 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the two years in the period ended October 1, 2022, 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 1, 2022 and October 2, 2021, and the results of its operations and its cash flows for each of the two years in the period ended October 1, 2022, 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 1, 2022, 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 21, 2022 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 $248.5 million as of October 1, 2022, net of approximately $17.7 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.

 

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 21, 2022

 

 

F - 3

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Balance Sheets

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

 

  

September 2022

  

September 2021

 

Assets

        

Cash and cash equivalents

 $300  $9,376 

Accounts receivable, less allowances of $109 and $251, respectively

  68,215   66,973 

Other receivables

  1,402   761 

Income tax receivable

  1,969   356 

Inventories, net

  248,538   161,703 

Prepaid expenses and other current assets

  2,755   3,794 

Total current assets

  323,179   242,963 
         

Property, plant and equipment, net

  74,109   67,564 

Goodwill

  37,897   37,897 

Intangible assets, net

  24,026   26,291 

Deferred income taxes

  1,342   1,854 

Operating lease assets

  50,275   45,279 

Equity method investment

  9,886   10,433 

Other assets

  2,967   2,007 

Total assets

 $523,681  $434,288 
         

Liabilities and Equity

        

Liabilities:

        

Accounts payable

 $83,553  $52,936 

Accrued expenses

  27,414   29,949 

Income taxes payable

  379   379 

Current portion of finance leases

  8,163   6,621 

Current portion of operating leases

  8,876   8,509 

Current portion of long-term debt

  9,176   7,067 

Total current liabilities

  137,561   105,461 
         

Long-term income taxes payable

  2,841   3,220 

Long-term finance leases, less current maturities

  16,776   15,669 

Long-term operating leases, less current maturities

  42,721   38,546 

Long-term debt, less current maturities

  136,750   101,680 

Long-term contingent consideration

     1,897 

Deferred income taxes

  4,310   1,520 

Other liabilities

     2,101 

Total liabilities

 $340,959  $270,094 

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 6,915,663 and 6,974,660 shares outstanding as of September 2022, and September 2021, respectively

  96   96 

Additional paid-in capital

  61,961   60,831 

Retained earnings

  166,600   146,860 

Accumulated other comprehensive gain (loss)

  141   (786)

Treasury stock —2,731,309 and 2,672,312 shares as of September 2022, and September 2021, respectively

  (45,420)  (42,149)

Equity attributable to Delta Apparel, Inc.

  183,378   164,852 

Equity attributable to non–controlling interest

  (656)  (658)

Total equity

  182,722   164,194 

Total liabilities and equity

 $523,681  $434,288 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

F - 4

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Operations

(Amounts in thousands, except per share data)

 

   

Year Ended

 
   

September 2022

   

September 2021

 

Net sales

  $ 484,859     $ 436,750  

Cost of goods sold

    376,016       334,870  

Gross profit

    108,843       101,880  
                 

Selling, general and administrative expenses

    79,455       70,743  

Other income, net

    (2,393 )     (1,574 )

Operating income

    31,781       32,711  
                 

Interest expense

    7,732       6,844  

Earnings before provision for income taxes

    24,049       25,867  

Provision for income taxes

    4,307       5,705  

Consolidated earnings, net

  $ 19,742     $ 20,162  

Net income (loss) attributable to non-controlling interest

    2       (134 )

Net earnings attributable to shareholders

    19,740       20,296  
                 

Basic earnings per share

  $ 2.84     $ 2.92  

Diluted earnings per share

  $ 2.80     $ 2.86  
                 

Weighted average number of shares outstanding

    6,953       6,961  

Dilutive effect of stock options and awards

    94       132  

Weighted average number of shares assuming dilution

    7,047       7,093  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

F - 5

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Amounts in thousands)

 

   

Year Ended

 
   

September 2022

   

September 2021

 

Net earnings attributable to shareholders

  $ 19,740     $ 20,296  

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

    927       536  

Consolidated comprehensive income

  $ 20,667     $ 20,832  

 

See accompanying Notes to Consolidated Financial Statements

 

 

 

 

F - 6

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

 

                                   

Accumulated

                                 
                   

Additional

           

Other

                   

Non-

         
   

Common Stock

   

Paid-In

   

Retained

   

Comprehensive

   

Treasury Stock

   

Controlling

         
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Shares

   

Amount

   

Interest

   

Total

 

Balance at September 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  

Net loss attributable to non-controlling interest

                                              (134 )     (134 )

Vested stock awards

                (2,117 )                 (84,542 )     984             (1,133 )

Stock based compensation

                1,943                                     1,943  

Balance at September 2021

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

Net earnings

                      19,740                               19,740  

Other comprehensive income

                            927                         927  

Net income attributable to non-controlling interest

                                              2       2  

Stock buyback

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

Vested stock awards

                (1,783 )                 (77,184 )     686             (1,097 )

Stock based compensation

                2,913                                     2,913  

Balance at September 2022

    9,646,972     $ 96     $ 61,961     $ 166,600     $ 141       2,731,309     $ (45,420 )   $ (656 )   $ 182,722  

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

F - 7

 

Delta Apparel, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

   

Year Ended

 
   

September 2022

   

September 2021

 

Operating activities:

               

Consolidated net earnings

  $ 19,742     $ 20,162  

Adjustments to consolidated net earnings attributable to net cash (used in) provided by operating activities:

               

Depreciation

    12,636       11,913  

Amortization of intangibles

    2,396       1,841  

Amortization of deferred financing fees

    336       325  

Provision for deferred income taxes

    2,988       3,542  

Provision for market reserves

    1,804       898  

Non-cash stock compensation

    2,913       1,943  

Loss (gain) on disposal of equipment

    354       (54 )

Contingent consideration earn out adjustment

    (1,897 )     (2,413 )

Other, net

    (848 )     (615 )

Changes in operating assets and liabilities, net of effect of acquisitions:

               

Accounts receivable, net

    (1,438 )     (6,734 )

Inventories, net

    (88,639 )     (17,086 )

Prepaid expenses and other current assets

    1,593       (1,307 )

Other non-current assets

    624       1,368  

Accounts payable

    30,435       3,030  

Accrued expenses

    (415 )     8,039  

Change in net operating lease liabilities

    342       493  

Income taxes

    (1,992 )     248  

Other liabilities

    (1,049 )     (126 )

Net cash (used in) provided by operating activities

    (20,115 )     25,467  
                 

Investing activities:

               

Purchases of property and equipment

    (12,378 )     (5,586 )

Proceeds from sale of property and equipment