D E L T A
SOFFE
THE GAME
C O T T O N E X C H A N G E
JUNK FOOD
2011 Annual Report
Letter to Shareholders
Delta Apparel, Inc. has marked its eleventh year as a publicly
traded company. Despite less than ideal economic conditions,
the Company recorded its eighth consecutive year of record sales,
driven by organic sales growth, the acquisition of The Cotton
Exchange and new license agreements. Sales totaled $475.2
million, up 12% from fiscal 2010. Strong sales growth combined
with improved margins resulted in diluted earnings per share of
$1.98, an increase of 40% from the prior year. These financial
achievements resulted in a 24% growth in Delta Apparel, Inc.
stock price during fiscal year 2011, yielding a stock appreciation of
approximately 650% during our tenure as a public company.
Branded Segment
The Company’s branded segment continued its growth in fiscal
2011 through a rise in To The Game sales driven primarily by the
addition of broader licensing rights to include both hats and
apparel product for Realtree Outfitters for the entire year and Salt
Life late in the fiscal year. The branded segment also benefited
from a solid increase in the Soffe business and the acquisition of
The Cotton Exchange.
During the past year we expanded our relationships with existing
customers by adding retail doors as well as expanding departments
and merchandise displays with existing retailers who support our
brands. We were able to broaden current channels of distribution
through The Cotton Exchange, add new channels of distribution
via the Salt Life exclusive apparel and accessory license agreement
and open up the Junk Food brands’ international presence through
deeper territory rights with our licensing partners.
The Soffe and Junk Food websites continued a three-year trend
of record sales. Both brands continue to bond with their target
consumers through social media and on the websites, connecting
these customers with their favorite products. During this year we
continued making the necessary infrastructure investments in
these sites as well as pursuing e-commerce marketing and sales
strategies that promote our brands and increases sales in this
important channel of distribution, particularly for teen and young
adult customers seeking out Junk Food and Soffe. Fiscal year 2011
also marked the launch of the exciting new Salt Life website which
sells apparel and lifestyle accessories for water sport enthusiasts
of all ages.
Basics Segment
Record sales and operating profits were achieved in our basics
segment in fiscal year 2011. The major initiatives we started in
fiscal 2007 to modernize our textile operations and expand our
basic T-shirt business with the acquisition of FunTees continues to
improve results in this segment. We made additional investments
in equipment during fiscal 2011 to further expand our textile
and sewing capacities. This new equipment allows our Company
to meet expanding customer needs and further leverage our
fixed cost in manufacturing. We believe our updated marketing,
merchandising and customer service strategies are servicing us
well and will be a key ingredient in our future growth plans.
Outlook
In January 2010, we introduced our goals for the next several
years. We believed the opportunity existed to grow our
business to revenues of $500 million and achieve gross margins
of 30%, resulting in earnings of $3.00 per diluted share. While
the unprecedented rise in cotton and other raw material
costs have provided unanticipated challenges, we have made
significant progress towards these goals in fiscal 2011. If the
U.S. economic recovery continues and we properly execute our
business strategies, we believe we will be on pace with these
milestones in fiscal year 2013.
We have been fortunate to build revenues through organic
growth and strategic acquisitions over the past eleven years.
In fact, we have achieved a compounded growth rate of 15%
during this time period. Our Company has many opportunities
available to us to drive growth and reach our revenue goals.
We continue to focus on the specific strategies developed
within our Company to improve our gross margins. These
include increasing the capacity of our manufacturing facilities,
improving material utilization and providing additional value-
added services such as screen printing and retail packaging.
The Delta Apparel, Inc. marketing teams continue to work to
improve merchandising efforts, develop new and appealing
products, and increase sales of our branded and licensed
products. This growth should allow us to leverage our fixed
selling and administrative costs while providing positive cash
flow to reduce debt, resulting in earnings of approximately
$3.00 per diluted share.
While there is much work ahead of us to reach our goals, we
are encouraged with our progress to date and our Company
will remain focused on achieving these targets as a part of our
continued commitment to build value for our shareholders.
Thank you for your continued support of Delta Apparel, Inc. and
the management team. We hope you will join us at our Annual
Meeting of shareholders which will be held in our Duluth,
Georgia office on November 10, 2011 at 10:00 a.m. We will
present our final review of fiscal 2011 results, review the items
put to shareholder vote, and provide an update on our outlook
for fiscal 2012.
Robert W. Humphreys
Chairman and Chief Executive Officer
DELTA APPAREL, INC.
Annual Report
Fiscal Year 2011
FOR THE YEAR
Net Sales
Gross Profit
Operating Income
Net Income
PER COMMON SHARE
Net Income
Net Income, Diluted
Book Value
Financial Highlights
July 2,
2011
July 3,
2010
June 27,
2009
June 28,
2008
June 30,
2007
$ 475,236
116,235
25,296
17,327
$ 424,411
100,783
20,162
12,187
$ 355,197
76,439
12,147
6,456
$ 322,034
64,715
4,887
(508)
$312,438
73,073
12,299
6,343
$ 2.04
1.98
16.73
$ 1.43
1.40
14.76
$ 0.76
0.76
13.19
$ (0.06)
(0.06)
12.35
$ 0.75
0.73
12.34
KEY PERFORMANCE RATIOS
Net Sales Growth %
Return on Beginning Equity
Debt to Equity
Operating Income as a Percent of Net Sales
12.0%
13.8%
61.1%
5.3%
19.5%
10.9%
54.1%
4.8%
10.3%
6.2%
81.7%
3.4%
3.1%
(0.5%)
97.5%
1.5%
15.7%
6.3%
70.8%
3.9%
NET SALES
(in millions)
OPERATING INCOME/MARGINS
(in millions)
SELECTED YEAR END BALANCES
Accounts Receivable, Net
Inventories, Net
Total Assets
Debt
Total Liabilities
Total Equity
July 2,
2011
$ 76,210
159,209
311,865
86,773
169,900
141,965
July 3,
2010
$ 59,916
116,599
251,333
68,073
125,619
125,714
June 27,
2009
$ 55,855
125,887
256,993
91,654
144,848
112,145
June 28,
2008
$ 61,048
124,746
261,623
102,322
156,730
104,893
June 30,
2007
$ 45,326
124,604
232,790
73,418
129,121
103,669
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For The Fiscal Year Ended July 2, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File No. 1-15583
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DELTA APPAREL, INC.
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(Exact name of registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
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58-2508794
(I.R.S. Employer Identification No.)
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322 South Main Street
Greenville, SC 29601
(Address of principal executive offices) (zip code)
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Registrant’s telephone number, including area code: (864) 232-5200
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
Common Stock, par value $0.01
Name of Each Exchange on Which Registered
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NYSE Amex
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Securities registered pursuant to Section 12(g) of the Act:
None
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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 !.
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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 "
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted 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 and post such files). Yes ! No ".
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
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contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. !
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large accelerated filer "
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Accelerated filer !
Non-accelerated filer "
Smaller reporting company "
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes " No !.
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As of January 1, 2011, the aggregate market share of the registrant’s voting stock held by non-affiliates of the registrant (based on the last sale
price for such shares as quoted by the NYSE Amex) was approximately $96.0 million.
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The number of outstanding shares of the registrant’s Common Stock as of August 22, 2011 was 8,388,413.
DOCUMENTS INCORPORATED BY REFERENCE:
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Certain information required in Part III of this Form 10-K shall be incorporated from the registrant’s definitive Proxy Statement to be filed
pursuant to Regulation 14A for the registrant’s 2011 Annual Meeting of Shareholders currently scheduled to be held on November 10, 2011.
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Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
PART I
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PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15
Exhibits and Financial Statement Schedules
Signatures
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Page No.
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7
12
13
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25
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26
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Cautionary Note Regarding Forward Looking Statements
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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 Securities and Exchange Commission (the “SEC”), in our press
releases, in oral statements, 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 “estimate”, “project”, “forecast”, “anticipate”, “expect”, “intend”, “believe” and similar
expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
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The forward-looking statements in this Annual Report are based on our 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 also subject to a number of business risks and uncertainties, any of which could cause actual
results to differ materially from those set forth in or implied by the forward-looking statements. The risks and uncertainties
include, among others:
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the volatility and uncertainty of cotton, other raw materials, transportation and energy prices;
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the general U.S. and international economic conditions;
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changes in consumer confidence, discretionary consumer spending and demand for apparel products;
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the financial difficulties encountered by our customers and credit risk exposure;
the competitive conditions in the apparel and textile industries;
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changes in environmental, tax, trade, employment and other laws and regulations;
any significant litigation in either domestic or international jurisdictions;
changes in the economic, political and social stability at our offshore locations;
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the relative strength of the United States dollar as against other currencies;
any restrictions to our ability to borrow capital or obtain financing;
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the ability to grow, achieve synergies and realize the expected profitability of recent acquisitions;
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the impairment of acquired intangible assets;
changes in our information systems related to our business operations;
any significant interruptions with our distribution network;
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the ability of our brands and products to meet consumer preferences within the prevailing retail environment;
the ability to obtain and renew our significant license agreements;
implementation of cost reduction strategies;
any negative publicity regarding domestic or international business practices; and
the illiquidity of our shares and volatility of the stock market.
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A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our
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expectations is described in Part 1 under the heading of “Risk Factors.” Accordingly, any forward-looking statements do not
purport to be predictions of future events or circumstances and may not be realized. We do not undertake publicly to update or
revise the forward-looking statements even if it becomes clear that any projected results will not be realized.
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ITEM 1. BUSINESS
PART I
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“Delta Apparel”, the “Company”, “we”, “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with
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our domestic wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Junkfood Clothing Company (“Junkfood”),
TCX, LLC ("TCX"), To The Game, LLC (“To The Game”), Art Gun, LLC (“Art Gun”), and other international subsidiaries, as
appropriate to the context.
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We were incorporated in Georgia in 1999 and our headquarters is located at 322 South Main Street, Greenville, South Carolina
29601 (telephone number: 864-232-5200). Our common stock trades on the NYSE Amex under the symbol “DLA”.
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We operate on a 52-53 week fiscal year ending on the Saturday closest to June 30. The 2011 fiscal year was a 52-week year and
ended on July 2, 2011. The 2010 fiscal year was a 53-week year and ended on July 3, 2010. The 2009 fiscal year was a 52-week
year and ended on June 27, 2009.
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Overview
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Delta Apparel, Inc. is an international design, marketing, manufacturing and sourcing company that features a diverse portfolio
of lifestyle branded activewear apparel and headwear and high-quality private label programs. We specialize in selling casual
and athletic products through a variety of distribution channels. Our products are sold across distribution tiers and in most store
types, including specialty stores, boutiques, department stores, mid-tier and mass channels. From a niche distribution
standpoint, we also have strong distribution at college bookstores and the U.S. military. Our products are made available
direct-to-consumer
and
www.deltaapparel.com. Additional products can be viewed at www.2thegame.com and www.thecottonexchange.com. We
believe this diversified distribution allows us to capitalize on our strengths to provide casual activewear and headwear to
consumers purchasing from most types of retailers.
at www.soffe.com, www.junkfoodclothing.com, www.saltlife.com
our websites
on
We design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and
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quality controls as well as leverage scale efficiencies. One of our strengths is the speed in which we can reach the market from
design to delivery. We have manufacturing operations located in the United States, El Salvador, Honduras and Mexico, and
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 for retailers.
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Acquisitions
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We have become a diversified branded apparel company through the seven acquisitions we have completed since October 2003.
These acquisitions have added well-recognized brands and licensed properties to our portfolio, expanded our product offerings
and broadened our distribution channels and customer base.
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Business
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The Cotton Exchange
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Art Gun
To The Game
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FunTees
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Intensity Athletics
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Junkfood Clothing
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M.J. Soffe
The Cotton Exchange Acquisition
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Date of Acquisition
July 5, 2010
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December 28, 2009
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March 29, 2009
October 2, 2006
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October 3, 2005
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August 22, 2005
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October 3, 2003
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Business Segment
Branded
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Branded
Branded
Basics
Branded
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Branded
Branded
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The Cotton Exchange designs and markets decorated casual apparel to college bookstores, the U.S. military and other retail
accounts. On June 11, 2010, we formed a new North Carolina limited liability company, TCX, LLC, as a wholly-owned
subsidiary of M.J. Soffe, LLC. Pursuant to an Asset Purchase Agreement dated July 5, 2010, on July 12, 2010, TCX acquired
substantially all of the net assets of HPM Apparel, Inc. d/b/a The Cotton Exchange, including accounts receivable, inventory,
and fixed assets, and assumed certain liabilities. The total purchase price, which included a post-closing working capital
adjustment, was $9.9 million. We finalized the valuation for the assets acquired and liabilities assumed and have determined
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the final allocation of the purchase price. No goodwill or other intangible assets were recorded in conjunction with the
acquisition of The Cotton Exchange.
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The Cotton Exchange has a strong reputation selling USA made collegiate apparel to college bookstores under “The Cotton
Exchange” brand. The Cotton Exchange was formed in 1984 and is recognized in the industry for the quality of its garments,
graphic designs, and most importantly its service to customers. The Cotton Exchange is headquartered in Wendell, North
Carolina and is operated as the bookstore division of Soffe within our branded segment.
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Business Segments
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We operate our business in two distinct segments: branded and basics. Although the two segments are similar in their
production processes and regulatory environment, they are distinct in their economic characteristics, products and distribution
methods.
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The branded segment is comprised of our business units focused on specialized apparel garments and headwear to meet
consumer preferences and fashion trends, and includes Soffe (which includes The Cotton Exchange as the bookstore division of
Soffe), Junkfood, To The Game and Art Gun. These branded embellished and unembellished products are sold through
specialty and boutique shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, college
bookstores and the U.S. military. Products in this segment are marketed under our primary brands of Soffe®, Intensity
Athletics®, The Cotton Exchange®, Junk Food®, The Game®, Salt Life® and Realtree Outfitters® as well as other labels. The
results of The Cotton Exchange, Art Gun and To The Game have been included in the branded segment since their acquisition
on July 12, 2010, December 28, 2009 and March 29, 2009, respectively.
The basics segment is comprised of our business units primarily focused on garment styles that are characterized by low fashion
risk, and includes our Delta Catalog and FunTees businesses. Within the Delta Catalog business, we market, distribute and
manufacture unembellished knit apparel under the brands of Delta Pro Weight®, Delta Magnum Weight®, Quail Hollow®,
Healthknit® and FunTees®. These products are primarily sold to screen printing and advertising specialty companies. We also
manufacture private label products for major branded sportswear companies, retailers, corporate industry programs, and sports
licensed apparel marketers. Typically these products are sold with value-added services such as hangtags, ticketing, hangers,
and embellishment so that they are fully ready for retail. The majority of the private label products are sold through the
FunTees business.
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See Note 13 of the Notes to Consolidated Financial Statements for financial information regarding segment reporting, which
information is incorporated herein by reference.
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Products
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We specialize in the design, merchandising, sales, and marketing of a variety of casual and athletic products for men, women,
juniors, youth and children at a wide range of price points through most distribution channels.
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We market more specialized fashion apparel garments and headwear under our primary brands of Soffe®, The Cotton
Exchange®, Intensity Athletics®, Junk Food®, and The Game® as well as other labels.
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Soffe designs and markets shorts, t-shirts, performance and fleece apparel in a wide variety of colors and sizes for men, women,
juniors and children. The Soffe heritage of serving the United States Military with certified physical training apparel has
inspired the introduction of a new men's performance line marketed under the collection name of XT46 - Extreme Training
since 1946. Our Soffe® shorts continue to enjoy a very loyal following among teenage girls, many of whom are involved in
cheerleading and dance teams. Collegiate products are designed and marketed under Soffe® and The Cotton Exchange®,
which has a strong reputation selling USA made collegiate apparel to college bookstores. We also provide sports team uniforms
under Intensity Athletics® and performance products to support team dealers and sporting goods stores.
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Junk Food is an original vintage t-shirt company and a celebrity favorite, with global distribution and rights to over 800
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licensed properties. Known for its soft fabrics and amazing fits, Junk Food® has two primary product lines, its "Classics" line
and a more premium "Originals" brand, along with a long standing designer collaboration with Gap Inc.
To The Game includes product offerings of innovatively designed headwear marketed primarily under The Game®, and
licensed apparel under the Realtree Outfitters® and Realtree Girl® brands. To The Game is also the exclusive licensee of Salt
Life® apparel, headwear, decals, bags and other accessories, selling these lifestyle brands to the outdoors and sporting goods
retail markets.
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Delta offers more basic, high quality apparel garments for the entire family under the Delta Pro Weight®, Delta Magnum
Weight®, Quail Hollow®, Healthknit® and FunTees® brand names. Delta products are offered in a wide range of colors
available in 6-month infant to adult sizes up to 4X. The Pro Weight line represents a diverse selection of mid-weight, 100%
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cotton silhouettes in a large color palette, including our new heathered color offerings. The Magnum Weight line is designed to
give our customers a variety of silhouettes in a heavier-weight, 100% cotton fabric.
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FunTees designs, markets and manufactures label custom knit t-shirts primarily to major branded sportswear companies,
including Nike, Quiksilver, adidas and Columbia Sportswear. The majority of the merchandise is embellished, and we offer our
customers a wide variety of packaging services so the products can be shipped store-ready.
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A key to our business success is our ability anticipate and quickly respond to changing consumer preferences. We maintain a
California-based design lab that provides trend reports, concepts and color trends to keep our products and designs in style.
This information is used by our in-house designers and merchandisers, along with our sales and marketing personnel, who
review market trends, sales results and the popularity of our latest products to design new merchandise to meet the expected
future demands of our consumers.
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Trademarks and License Agreements
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We own several well-recognized trademarks that are important to our business. Soffe® has stood for quality and value in the
athletic and activewear market for more than sixty years and Junk Food® has been known as a leading vintage t-shirt company
since 1999. The Game® and Kudzu® have been registered trademarks since 1989 and 1995, respectively. Associated with
The Game®, we also have registered trademarks for the Three-Bar-Design and the Circle Design, which are recognized
collegiate designs. The Cotton Exchange® is also a well recognized brand in the college market. Other registered trademarks
include Sweet and Sour®, Junk Mail®, Delta®, Quail Hollow®, and Intensity Athletics®. Our trademarks are valuable assets
that differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights
against infringement.
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We have distribution rights to other trademarks through license agreements. The Soffe and To The Game business units are
official licensees for most major colleges and universities. Junkfood has the right to distribute trademarked apparel across
athletics (including NFL), entertainment, foods, and other pop culture categories. We also have license agreements for
motorsports properties (including NASCAR), Churchill Downs, golf and other various resort properties. Our license
agreements are typically non-exclusive in nature and have terms that range from one to three years. In addition, in fiscal year
2010 we became the exclusive licensee for most apparel categories within the Realtree Outfitters® and Realtree Girl® outdoor
lifestyle apparel brands. We expanded our lifestyle brand apparel line in fiscal year 2011 by becoming the exclusive licensee for
Salt Life® apparel, headwear, decals, bags and other accessories. While historically we have been able to renew our license
agreements, the loss of certain license agreements could have a material adverse effect on our results of operations. Although
we are not dependent on any single license, our license agreements collectively are of significant value to our branded segment.
Marketing
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Our sales and marketing consists of both employed and independent sales representatives located throughout the country. In the
branded segment, sales teams service specialty and boutique, upscale and traditional department stores, sporting goods, outdoor,
military, and college bookstore customer bases. We also have a growing international presence with our Junk Food® products
in Canada, Europe, Asia and Australia. In the basics segment, our sales personnel sell our knit apparel products primarily direct
to large and small screen printers and into the promotional products markets. Our private label products are sold primarily to
major branded sportswear companies.
During fiscal year 2011, we shipped to approximately 15,000 customers, many of whom have numerous retail doors. No single
customer accounted for more than 10% of sales in fiscal years 2011, 2010 or 2009, and our strategy is to not become dependent
on any single customer. Revenues attributable to foreign countries represented approximately 1% of our total consolidated net
sales in each of fiscal years 2011, 2010 and 2009.
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The majority of our apparel products are produced based on forecasts to permit quick shipments to our customers. Private label
programs are generally made only to order or based on a customer's forecast. Our headwear products are primarily sourced
based on customer orders; however, we carry certain styles in inventory to support quick-turn shipments. We aggressively
explore new ways to leverage our strengths and efficiencies to meet the quick turn needs of our customers.
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We have 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. In order to better serve customers, we allow products to be
ordered by the piece, dozen, or full case quantities. Because a significant portion of our business consists of at-once EDI and
direct catalog orders, we believe that backlog order levels do not give a general indication of future sales.
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Competition
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We have numerous competitors with respect to the sale of apparel and headwear products in domestic and international markets,
with many having greater financial resources than we do.
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We believe that competition within our branded segment is based primarily upon design, brand recognition, and consumer
preference. We focus on sustaining the strong reputation of our brands by adapting our product offerings to changes in fashion
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trends and consumer preferences. We keep our merchandise fresh with unique artwork and new designs, and support the
integrated lifestyle statement through effective consumer marketing. We believe that our favorable competitive position
includes strong consumer recognition and brand loyalty, the high quality of our products, and our flexibility and process control,
which help lead to product consistency. 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.
Competition in our undecorated basics business is generally based upon price, service, delivery time and quality, with the
relative importance of each factor depending upon the needs of the particular customers and the specific product offering. As
this business is highly price competitive, competitor actions can greatly influence pricing and demand for our products. While
price is still important in the private label market, quality and service are more important factors for customer choice. Our
ability to consistently service the needs of our private label customers greatly impacts the future business with these customers.
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Seasonality
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Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some
seasonality, with sales in our fourth fiscal quarter generally being the highest and sales in our second fiscal quarter generally
being the lowest. The percentage of net sales by quarter for the year ended July 2, 2011 was 23%, 22%, 26% and 29% for the
first, second, third, and fourth fiscal quarters, respectively. Consumer demand for apparel is largely influenced by the overall
U.S. economy and consumer spending in general. Therefore, the distribution of sales by quarter in fiscal year 2011 may not be
indicative of the distribution in future years.
Manufacturing
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We have a vertically integrated manufacturing platform that supports both our branded and basics segment. Our manufacturing
operations begin with the purchase of yarn and other raw materials from third-party suppliers. We manufacture fabrics in either
our company-owned domestic textile facility located in Maiden, North Carolina or in Ceiba Textiles, our leased textile facility
located near San Pedro Sula, Honduras. In addition, we may purchase fabric from third party contractors to supplement our
internal production. The manufacturing process continues at one of our seven apparel manufacturing facilities where the
products are ultimately sewn into finished garments. These facilities are either company-owned and operated, or leased and
operated by us. These facilities are located domestically (two in North Carolina) and internationally (two in Honduras, one in
El Salvador and two in Mexico). Our garments may also be embellished and prepared for retail (with any combination of
services, including ticketing, hang tags, and hangers). In fiscal years 2011, 2010 and 2009 approximately 69%, 74% and 76%,
respectively, of our manufactured products were sewn in company-operated locations. The remaining products were sewn by
outside contractors located primarily in the Caribbean basin.
At the 2011, 2010 and 2009 fiscal year-ends, our long-lived assets in Honduras, El Salvador and Mexico collectively comprised
approximately 45%, 49% and 51%, respectively, of our total net property, plant and equipment, with our long-lived assets in
Honduras comprising 37%, 43% and 45%, respectively. For a description of risks associated with our operations located
outside the United States, see Item 1A. Risk Factors.
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Along with our internal manufacturing, we purchase fabric, undecorated products and full-package products from independent
sources throughout the world. In fiscal years 2011, 2010 and 2009, we sourced approximately 23%, 25% and 11%,
respectively, of our products from third parties. We expanded our product line into headwear in the fourth quarter of fiscal year
2009 with the acquisition of To The Game. Because our headwear merchandise is all sourced from third parties, the addition of
this product line drove the increase in sourced products in fiscal year 2010.
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Raw Materials
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We have a supply agreement with Parkdale America, LLC (“Parkdale”) to supply our yarn requirements until December 31,
2011. Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing
operations, 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 plus a fixed conversion cost. We are currently in negotiations to
secure a new agreement to supply our yarn requirements. We do not believe we will lose any competitive position we currently
have with a new agreement. If Parkdale’s operations are disrupted and it is not able to provide us with our yarn requirements,
we may need to obtain yarn from alternative sources. Although alternative sources are presently available, we may not be able
to enter into short-term arrangements with substitute suppliers on terms as favorable as our current terms with Parkdale.
Because there can be no assurance that we would be able to pass along our higher cost of yarn to our customers, this could have
a material adverse effect on our results of operations.
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We also 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
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when certain yarns become limited in quantity, causing some fabrics to be difficult to source. This can result in higher prices or
our inability to provide products to our customers which could negatively impact our results of operations. Our dyes and
chemicals are also purchased from several suppliers. While historically we have not had difficulty obtaining sufficient
quantities of dyes and chemicals for our manufacturing, the availability of products can change, which could require us to adjust
dye and chemical formulations. In certain instances, these adjustments can increase our manufacturing costs, negatively
impacting our results of operations.
Employees and Social Responsibility
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As of July 2, 2011, we employed approximately 7,200 full time employees, of whom approximately 1,800 were employed in the
United States. There are approximately 1,000 employees in Honduras that are covered by a collective bargaining agreement.
We have never had a strike or legal work stoppage, and believe that our relations with our employees are good. We have
invested significant time and resources in ensuring that the working conditions in all of our facilities meet or exceed the
standards imposed by the governing laws. We have obtained WRAP (Worldwide Responsible Accredited Production)
certification for all of our manufacturing facilities that we operate in the United States, Honduras, El Salvador and Mexico.
Soffe and To The Game are affiliates of FLA (Fair Labor Association) as college licensees. In 2011, Delta Apparel, Inc.
applied for and was approved by the FLA board as a provisional participating company. This level of affiliation with FLA will
further enhance human rights compliance monitoring for Delta Apparel plants and our third party contractors. In addition, we
have proactive programs to promote workplace safety, personal health, and employee wellness. We also support educational
institutions in the communities where we operate.
Environmental and Regulatory Matters
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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. Our plants generate very small quantities of
hazardous waste, which are either recycled or disposed of off-site. Most of our plants are required to possess one or more
permits, and we believe that we are currently in compliance with the requirements of these permits.
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The environmental rules applicable to our business are becoming increasingly stringent. We incur capital and other
expenditures annually to achieve compliance with environmental standards, and currently do not expect the amount of
expenditures required to comply with the environmental laws 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 are not currently aware of any violations, 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 or liquidity.
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Available Information
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Our corporate internet address is www.deltaapparelinc.com. We make available free of charge on our website our SEC reports,
including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16
filings and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. The information found on our website is not part of this, or any other, report that we file with or furnish to
the SEC.
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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., 322 South Main Street, Greenville,
South Carolina 29601. Requests can also be made by telephone to 864-232-5200 extension 6621, or via email at
investor.relations@deltaapparel.com.
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ITEM 1A. RISK FACTORS
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We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties,
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including, but not limited to, the risks identified below. The following factors, as well as factors described elsewhere in this
report or in our other filings with the SEC, which could materially affect our business, financial condition or operating results,
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 our Company. Additional risks not presently known to us or that
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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.
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The price 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. The price of cotton fluctuates and is affected by weather,
consumer demand, speculation on the commodities market, and other factors that are generally unpredictable and beyond our
control. As described under the heading “Raw Materials”, the price of yarn purchased from Parkdale 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. For example, we
estimate that a change of $0.01 per pound in cotton prices would affect our annual raw material costs by approximately
$6.9 million at current levels of production. The ultimate effect of this change on our earnings cannot be quantified, as the
effect of movements in cotton prices on industry selling prices are uncertain. Cotton prices surged upward during 2010 and
early 2011, but have recently declined significantly from the high. The ultimate impact on selling prices from the decline is not
yet known, but may require us to reduce selling prices in response to competitive pricing pressure, which could adversely
impact our results of operations in the short-term. We will be bringing in yarn with the highest cotton cost in our first quarter
of fiscal year 2012, and expect the cotton cost to decline over the remaining quarters. As this yarn flows through our
manufacturing process and the finished goods are sold, we expect the highest cost inventory will be in our cost of sales during
our second and third quarters of fiscal year 2012, impacting gross margins most significantly in these quarters. In addition, if
Parkdale’s operations are disrupted and it 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.
Current economic conditions may adversely impact demand for our products. The apparel industry is cyclical and
dependent upon the overall level of discretionary consumer spending which changes 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. Overall, consumer purchases of discretionary items tend to decline during recessionary periods when disposable
income is lower. As such, further deterioration in general economic conditions that creates uncertainty or alters discretionary
consumer spending habits could reduce our sales. Because we match our manufacturing production to demand, weakening sales
may require us to reduce output, thereby increasing per unit costs and lowering our gross margins, causing a material adverse
effect on our results of operations.
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Deterioration of the financial condition of our customers 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
our credit risk exposure by periodically obtaining credit reports and updated financial statements on our customers. Further
deterioration in the economy, continued decline in consumer purchases of apparel, or further disruption in the ability 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 restructurings, bankruptcies and
liquidations. The inability of these retailers and other customers to overcome these difficulties may increase due to the current
worldwide economic conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current
conditions, our historical trends and other available information. However, 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.
The apparel industry is highly competitive, and we face significant competitive threats to our business. The market for
athletic and activewear apparel and headwear is highly competitive and includes new competitors as well as increased
competition from established companies, some of which are larger, more diversified, and may have greater financial resources
than we do. Many of our competitors have competitive advantages, including larger sales forces, better brand recognition
among consumers, larger advertising budgets, and greater economies of scale. If we are unable to compete successfully with our
competitors, our business and results of operations will be adversely affected.
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We currently pay income taxes at lower than statutory rates. We are subject to income tax in the United States and in
foreign jurisdictions in which we generate net operating profits. We benefit from a lower overall effective income tax rate due
to the majority of our manufacturing operations being located in foreign tax-free locations. 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. We have concluded that
the profits earned in the tax-free locations will be considered permanently reinvested. Thus, no U.S. deferred tax liability is
recorded on these profits, causing our effective tax rate to be significantly below U.S. statutory rates. Our effective tax rate
could be adversely affected by changes in the mix of earnings between the U.S. and tax-free foreign jurisdictions. In addition,
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changes to U.S. tax laws impacting how U.S. multinational corporations are taxed on foreign earnings, a need or requirement
for us to remit tax-free earnings back to the U.S., could also have a material adverse effect on our tax expense and cash flow.
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We may be restricted in our ability to borrow under our revolving credit facility. Significant operating losses or significant
uses of cash in our operations could cause us to default on our asset-based revolving credit facility. Our ability to borrow under
the credit facility depends on our accounts receivable and inventory levels. A significant deterioration in our accounts receivable
or inventory levels could restrict our ability to borrow funds. In addition, our credit facility includes a financial covenant that if
the amount of availability falls below an amount equal to 12.5% of the lesser of the borrowing base or $145 million, our Fixed
Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement) for the preceding 12 month period must not be less than
1.1 to 1.0. In addition, the credit facility includes customary conditions to funding, representations and warranties, covenants,
and events of default. The covenants include, among other things, limitations on asset sales, consolidations, mergers, liens,
indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates. An
event of default under the credit facility could result in an acceleration of our obligations under the agreement, in the foreclosure
on any assets subject to liens in favor of the credit facility’s lenders, and in our inability to borrow additional amounts under the
credit facility. Although our availability at July 2, 2011, was $59.1 million and our FCCR for the preceding twelve months was
3.8x, a significant decline in our profitability could cause our FCCR to fall below 1.1x, thereby requiring us to maintain a
minimum availability as defined in our credit agreement. This could restrict our ability to borrow funds and adversely affect our
financial position and results of operations.
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We may need to raise additional capital to grow our business through acquisitions. While our existing credit facility
should be adequate to support our existing business in the foreseeable future, the rate of our growth, especially through
acquisitions, will depend 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.
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We have expanded our business through acquisitions that could result in diversion of resources, an inability to integrate
acquired operations and extra expenses. Our growth strategy involves acquiring businesses that complement of our existing
business. The negotiation of potential acquisitions and integration of acquired businesses could divert our management’s
attention from our existing businesses which could negatively impact the results of operations. In addition, if the integration of
an acquired business is not successful or takes significantly longer than expected, or if we are unable to realize the expected
benefits from an acquired business, it could adversely affect our financial condition and results of operations.
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The price of energy and fuel 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 the United States and
our offshore facilities, along with transportation expenses to ship products to our customers. The cost of energy and fuel
fluctuate due to a number of factors outside our control, including government policy and regulation and weather conditions.
We continue to focus on manufacturing methods that will reduce the amount of energy used in the production of our products to
mitigate risks of fluctuations in the cost of energy. In addition, we enter into forward contracts to fix a portion of our expected
natural gas requirements for delivery in the future in order to mitigate potential increases in costs. However, significant
increases in energy and fuel prices may make us less competitive compared to others in the industry, which may have a material
adverse effect on our results of operations.
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Our business operations rely on our information systems and any material disruption or slowdown of our systems could
cause operational delays. We depend on information systems to manage our inventory, process transactions, respond to
customer inquiries, purchase, sell and ship goods on a timely basis and maintain cost-effective operations. We have invested
significant capital and expect future capital expenditures associated with the integration of our information technology systems
across our businesses. This process involves the replacement and consolidation of technology platforms so our businesses are
served by fewer platforms, resulting in operational efficiencies and reduced costs. Our inability to effectively convert our
operations to the new systems could cause delays in product fulfillment and reduced efficiency in our operations. In addition,
we may experience operational problems with our information systems as a result of system failures, viruses, security breaches,
disasters or other causes. Any material disruption or slowdown of our information systems could cause operational delays that
could have a material adverse effect on our results of operations.
Our business could be harmed if we are unable to deliver our products to the market due to problems with our
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distribution network. We have company-owned and leased distribution facilities located throughout the United States. Any
significant interruption in the operation of any of these facilities, whether within or outside of our control, may delay shipment
of merchandise to our customers, potentially damaging our reputation and causing a loss of revenue. In addition, if we are
unable to successfully coordinate the planning of inventory across these facilities and the distribution activities, it could have a
material adverse effect on our financial condition and results of operations.
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Failure of our operations to comply with environmental regulation could have a material adverse effect on our financial
position and results of operations. Our operations must meet extensive federal, state and local regulatory standards in the
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areas of safety, health and environmental pollution controls. There can be no assurance that interpretations of existing
regulations, future changes in existing laws, or the enactment of new laws and regulations will not require substantial additional
expenditures. Although we believe that we are in compliance in all material respects with existing regulatory requirements, the
extent of our liability, if any, for the discovery of currently unknown problems or conditions, or 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
financial position and results of operations.
We are subject to periodic litigation in both domestic and international jurisdictions that may adversely affect our
financial position and results of operations. From time to time we may be involved in legal actions regarding product
liability, employment practices, trademark infringement, bankruptcies and other litigation. Due to the inherent uncertainties of
litigation in both domestic and foreign jurisdictions, we cannot accurately predict the ultimate outcome of any such proceedings.
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 against these claims, which could adversely affect our financial position and results of operations. For
a description of current legal proceedings, see Part I, Item 3, Legal Proceedings.
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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 headwear. We believe that our brands are recognized by consumers across many demographics. The
popularity, supply and demand for particular products can change significantly from year to year based on prevailing fashion
trends and other factors and therefore our ability to adapt to fashion trends in designing our products is important to the success
of our brands. If we are unable to quickly adapt to changes in consumer preferences in the design of our products, our results of
operations could be adversely affected.
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We rely on the strength of our trademarks and could incur significant costs to protect these trademarks. Our trademarks,
including Soffe®, Junk Food®, The Game®, and The Cotton Exchange® among others, are important to our marketing efforts
and have substantial value. In addition, we have trademarked the Three-Bar-Design and the Circle Design, which are
recognized collegiate designs. We aggressively protect these trademarks and have incurred legal costs in the past to establish
and protect these trademarks, but these costs have not been significant. We may in the future be required to expend additional
resources to protect these trademarks. The loss or limitation of the exclusive right to use our trademarks could adversely affect
our sales and results of operations.
A significant portion of our business relies upon license agreements. We rely on licensed products for a significant part of
our sales. Although we are not dependent on any single license, we believe that our license agreements in the aggregate are of
significant value to our business. The loss of or failure to obtain license agreements could adversely affect our sales and results
of operations.
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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 and other intangible assets is determined by the excess of the purchase price over the net
identifiable assets acquired. At July 2, 2011 and July 3, 2010, our goodwill and other intangible assets were approximately
$24.2 million and $25.4 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. Based upon the operating results and projections for Art Gun, during our
second fiscal quarter we concluded that the goodwill and contingent consideration associated with the Art Gun acquisition were
impaired. The change in contingent consideration (a $1.5 million favorable adjustment) and full impairment of the Art Gun
goodwill (a $0.6 million impairment charge) resulted in a net favorable adjustment of $0.9 million, which was recorded in our
second fiscal quarter and is included in the branded segment (See Note 2(m) to our Consolidated Financial Statements). We
completed our annual impairment test of goodwill on the first day of our third fiscal quarter using actual results through the last
day of the second fiscal quarter. Based on the valuation, there does not appear to be impairment on the goodwill associated with
Junkfood, the only remaining 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.
Changes in the regulations and laws regarding e-commerce could reduce the growth and lower the profitability of our
internet sales. The e-commerce industry has undergone, and continues to undergo, rapid development and change. There have
been continuing efforts to increase the legal and regulatory obligations and restrictions on companies conducting commerce
through the internet, primarily in the areas of taxation, consumer privacy and protection of consumer personal information.
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These laws and regulations could increase the costs and liabilities associated with our e-commerce activities, thereby negatively
impacting our results of operations.
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Our basics segment is subject to significant pricing pressures which may decrease our gross profit margins if we are
unable to implement our cost reduction strategies. We operate our basics segment in a highly competitive, price sensitive
industry. Our strategy in this market environment is to be a low-cost producer and to differentiate ourselves by providing quality
products and value-added services to our customers. To help achieve this goal, we began production in Ceiba Textiles, our
Honduran textile facility, in fiscal year 2008. In the fourth quarter of fiscal year 2009, we closed our Soffe textile manufacturing
facility in Fayetteville, North Carolina and moved this production to our Maiden, North Carolina and Ceiba Textiles plants. In
fiscal year 2010, we began the expansion of Ceiba Textiles to increase internal manufacturing capacity and further leverage the
fixed cost of the facility, and continued the expansion during fiscal year 2011. These initiatives, along with continual
improvements in our production and delivery of products, are expected to lower our product costs and improve our results of
operations. Failure to achieve the cost savings expected from these initiatives could have a material adverse effect on our results
of operations.
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Our operations are subject to political, social, economic, and climate risks in Mexico, Honduras and El Salvador. The
majority of our products are manufactured in Honduras, El Salvador and Mexico, with a concentration in Honduras. These
countries have experienced political, social and economic instability in the past, and we cannot be certain of their future
stability. Instability in a country can lead to protests, riots and labor unrest. New government leaders can change employment
laws, thereby increasing our costs to operate in that country. In addition, fire or natural disasters, such as hurricanes,
earthquakes, or floods can occur in these countries. Any of these political, social, economic or climatic events or conditions
could disrupt our supply chain or increase our costs, adversely affecting our financial position and results of operations.
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 North American Free Trade Agreement (“NAFTA”) and the Central America
Free Trade Agreement (“CAFTA”). Our claims for duty free or reduced duty treatment under CAFTA, NAFTA 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. Subsequent repeal or modification of NAFTA or
CAFTA, or the inadequacy or unavailability of supporting records, could materially adversely affect our results of operations. In
addition, our products are subject to foreign competition, which in the past has been faced with significant U.S. government
import restrictions. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain,
subject to political considerations. The elimination of import protections for domestic apparel producers could significantly
increase global competition, which could adversely affect our business. In addition, any failure to comply with international
trade regulations could cause us to become subject to investigation resulting in significant penalties or claims or our inability to
conduct our business, adversely affecting our results of operations.
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Changes in domestic or foreign employment regulations or changes in our relationship with our employees could
adversely affect our results of operations. We employ approximately 7,200 employees worldwide, with approximately 5,400
of these employees being in Honduras, El Salvador or Mexico. Changes in domestic and foreign laws governing our
relationships with our employees, including wage and human resources laws and regulations, fair labor standards, overtime pay,
unemployment tax rates, workers' compensation rates and payroll taxes, would likely have a direct impact on our operating
costs. A significant increase in wage rates in the countries in which we operate could have a material impact on our operating
results. Our employees are currently not party to any collective bargaining agreements, with the exception of approximately
1,000 employees in Honduras, which are party to a three year collective bargaining agreement. We have historically operated
our facilities in a productive manner without significant labor disruptions, such as strikes or work stoppages. However, if labor
relations were to change, it could adversely affect the productivity and ultimate cost of our manufacturing operations.
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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.
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The value of our brands and sales of our products could be diminished by negative publicity resulting from violations in
labor laws or unethical business practices. We are committed to ensuring that all of our manufacturing facilities comply with
our strict internal Code of Conduct, local and internal laws, and the codes and principles to which we subscribe, including those
of Worldwide Responsible Accredited Production (WRAP) and Fair Labor Association (FLA). 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, labor laws or other
laws by our suppliers or independent contractors could interrupt or otherwise disrupt our operations. Negative publicity
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regarding the production methods of any of our suppliers or independent contractors could adversely affect our reputation and
sales, which could adversely affect our business.
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The market price of Delta Apparel shares is affected by illiquidity of our shares, which could lead to our shares trading
at prices that are significantly lower than expected. Various investment banking firms have informed us that public
companies with relatively small market capitalizations have difficulty generating institutional interest, research coverage or
trading volume. This illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value.
We believe that the market perceives us to have a relatively small market capitalization. This could lead to our shares trading at
prices that are significantly lower than our estimate of their inherent value.
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As of August 22, 2011, we had 8,388,413 shares of common stock outstanding. We believe that approximately 51% of our
stock is beneficially owned by those who own more than 5% of the outstanding shares of our common stock. Included in the
51% are institutional investors that beneficially own more than 5% of the outstanding shares. These institutional investors own
approximately 43% 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.
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The market price of Delta Apparel shares is likely to be highly volatile as the stock market in general can be highly
volatile. Fluctuations in Delta Apparel stock price may be influenced by, among other things, the 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 increased 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.
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Our success depends upon the talents and continued contributions of our key management. 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. Our continued success is
dependent on our ability to retain existing, and attract additional, qualified personnel to execute our business strategy.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
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None.
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ITEM 2. PROPERTIES
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Our principal executive office is located in a leased facility in Greenville, South Carolina. We own and lease properties
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supporting our administrative, manufacturing, distribution and direct outlet activities. Our products are manufactured through a
combination of facilities that we either own, or lease and operate. As of July 2, 2011, we owned or leased twelve manufacturing
facilities (located in the United States, Honduras, El Salvador and Mexico) and ten distribution facilities (all within the United
States). In addition, we operated six leased factory-direct stores and maintained three leased showrooms.
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Our primary manufacturing and distribution facilities are as follows:
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Location
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Maiden Plant, Maiden, NC
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Ceiba Textiles, Honduras*
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Honduras Plant, San Pedro Sula, Honduras*
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Cortes Plant, San Pedro Sula, Honduras*
Mexico Plant, Campeche, Mexico*
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Textiles LaPaz, La Paz, El Salvador*
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Campeche Sportswear, Campeche, Mexico*
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Fayetteville Plant, Fayetteville, NC
!
Rowland Plant, Rowland, NC
!
Cotton Exchange, Wendell, NC*
!
Art Gun Office, Miami, FL*
!
Downing Drive, Phenix City, AL*
!
Warehouse, Louisville, KY*
!
Distribution Center, Clinton, TN
!
Distribution Center, Santa Fe Springs, CA*
!
Distribution Center, Miami, FL*
!
Distribution Center, Cranbury, NJ*
!
DC Annex, Fayetteville, NC*
!
Distribution Center, Lansing, MI*
!
Distribution Center, Wendell, NC*
!
!
!
!
!
!
!
!
!
Utilization
Segment
!
!
!
Knit/dye/finish/cut
!
Knit/dye/finish/cut
!
!
Sew
!
Sew
!
!
Cut/sew
!
!
Sew/decoration
!
!
Sew/decoration
!
Sew/decoration
!
Sew
!
Decoration
!
!
Decoration/distribution
!
Decoration/distribution
!
Distribution
!
Distribution
!
Distribution
!
!
Distribution
!
!
!
!
!
!
Distribution
!
Distribution
!
Distribution
!
Distribution
!
!
Basics and branded
!
!
Basics and branded
!
Basics and branded
!
Basics and branded
!
Basics and branded
!
Basics and branded
!
Basics and branded
!
Branded
!
Branded
!
Branded
!
Branded
!
Branded
!
Branded
!
Basics
!
!
Basics and branded
!
Basics and branded
!
!
!
!
!
!
!
!
!
!
!
!
!
Basics and branded
!
!
Branded
Branded
!
Branded
!
!
!
!
!
!
!
!
!
Denotes leased location
*
!
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 ran our manufacturing facilities near full capacity during fiscal year 2011 and currently expect our
facilities to run near full capacity during fiscal year 2012. Substantially all of our assets are subject to liens in favor of our
lenders under our U.S. asset-based secured credit facility and our Honduran loan.
!
!
ITEM 3. LEGAL PROCEEDINGS
!
At times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance
!
arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a
material effect on our operations, financial condition, or liquidity.
!
!
!
!
13
!
!
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
!
PART II
Market Information for Common Stock: The common stock of Delta Apparel, Inc. is listed and traded on the NYSE Amex
!
under the symbol “DLA”. As of August 22, 2011, there were approximately 1,007 record holders of our Common Stock.
!
The following table sets forth, for each of the periods indicated below, the high and low sales prices per share of our Common
Stock as reported on the NYSE Amex.
!
Fiscal Year 2011
Fiscal Year 2010
!
First Quarter
!
Second Quarter
!
High
Low
!
$
$
!
15.56
!
15.59
!
!
$
12.56
!
12.00
High
Low
!
$
!
6.59
!
7.52
9.23
!
11.85
!! !
!! !
!! !
!
!
!
!
!
!! !
12.00
18.72
14.78
Fourth Quarter
!
!
Third Quarter
!!
!!
!!
Dividends: Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2011 and 2010. Subject to
!!
the provisions of any outstanding blank check preferred stock (none of which is currently outstanding), the holders of our
common stock are entitled to receive whatever dividends, if any, may be declared from time to time by our Board of Directors
in its discretion from funds legally available for that purpose. Under the terms of our credit agreement, we are allowed to make
cash dividends if (i) as of the date of the payment and after giving effect to the payment, we have availability on that date of not
less than $15 million and average availability for the 30 day period immediately preceding that date of not less than $15 million;
and (ii) the aggregate amount of dividends and stock repurchases after May 27, 2011 does not exceed $19 million plus 50% of
our cumulative net income (as defined in the credit agreement) from the first day of fiscal year 2012 to the date of
determination. At July 2, 2011 and July 3, 2010, there was $18.7 million and $14.7 million, respectively, of retained earnings
free of restrictions to make cash dividends.
13.89
13.89
17.51
15.93
10.20
!! !
!! !
!! !
!! !
!! !
!! !
!! !
!! !
!
We would expect that our Board of Directors would consider the advisability of instituting a dividend program in the future.
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 and Note 8 - 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.
!
Comparison of Total Return Among Delta Apparel, Inc., NYSE Amex US Market Index, and NYSE Amex Wholesale &
Retail Trade Index: Our common stock began trading on the NYSE Amex on June 30, 2000, the last trading day of our fiscal
year 2000. Prior to that date, no securities of Delta Apparel were publicly traded. Set forth below is a line graph comparing the
yearly change in the cumulative total stockholder return, assuming dividend reinvestment, of our common stock with (1) the
NYSE Amex US Market Index (the “NYSE Amex US Market Index”) and (2) the NYSE Amex Wholesale and Retail Trade
Index (the “NYSE Amex Wholesale and Retail Trade Index”), which is comprised of all NYSE Amex companies with SIC
codes from 5000 through 5999. This Performance Graph assumes that $100 was invested in the common stock of our Company
and comparison groups on July 1, 2006 and that all dividends have been reinvested.
!
14
!
!
!
Comparison of Total Return
!
!
Delta Apparel, Inc.
!
2006
!
100.00
!
$
2007
2008
2009
2010
2011
!
$
!
107.06
!
$
!
22.12
!
$
!
40.95
!
$
!
83.34
!
$
!
103.25
!
NYSE Amex US Market Index
!
!
$
100.00
!! !
!
$
118.78
!! !
!
$
106.68
!! !
!
$
77.95
!! !
!
$
90.51
!! !
!
$
114.30
NYSE Amex Wholesale & Retail Trade Index
!
$
!
100.00
!! !
$
!
105.65
!! !
$
!
91.49
!! !
$
!
86.34
!! !
$
!
131.29
!! !
$
!
144.83
!
!
!! !
!
!! !
!
!! !
!
!! !
!
!! !
!
!!
!!
!!
!
ITEM 6. SELECTED FINANCIAL DATA
!
See information regarding our acquisitions within “Item 1. Business” under the heading “Acquisitions”. The selected financial
!
data includes the financial position and results of operations of acquired businesses beginning on the date of acquisition. The
consolidated statements of income for the years ended June 30, 2007 and June 28, 2008, and the consolidated balance sheet data
as of June 30, 2007, June 28, 2008 and June 27, 2009 are derived from, and are qualified by reference to, our audited
consolidated financial statements not included in this document. The consolidated statement of operations data for the years
ended June 27, 2009, July 3, 2010 and July 2, 2011 and the consolidated balance sheet data as of July 3, 2010 and July 2, 2011
are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this
document. We operate on a 52-53 week fiscal year ending on the Saturday closest to June 30. All fiscal years shown were 52-
week years with the exception of fiscal year 2010 which was a 53-week year. Historical results are not necessarily indicative of
results to be expected in the future. The selected financial data should be read in conjunction with the Consolidated Financial
Statements and the related notes as indexed on page F-1 and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in Item 7.
!
15
!
!
!
!
!
!
Statement of Operations Data:
!
Net sales
Cost of goods sold
!
!
Selling, general and administrative expenses
!
Valuation adjustment, net
Other (expense) income, net
!
Restructuring costs *
Operating income
!
!
!
Interest expense, net
!
Income (loss) before income taxes
!
Provision (benefit) for income taxes
!
Extraordinary gain, net of taxes
Net income (loss)
!
!
Basic earnings (loss) per common share:
!
Income (loss) before extraordinary gain
!
Extraordinary gain, net of income taxes
Net income (loss)
!
!
Diluted earnings (loss) per common share:
!
Income (loss) before extraordinary gain
!
Extraordinary gain, net of income taxes
Net income (loss)
!
!
Dividends declared per common share
!
!
!
!
Balance Sheet Data (at year end):
!
Working capital
Total assets
!
!
!
Total long-term debt, less current maturities
!
Shareholders’ equity
!
July 2,
2011
!
!
!
July 3,
2010
Fiscal Year Ended
June 27,
2009
(In thousands, except per share amounts)
!
June 28,
2008
!
!
!
!
!
!
!
June 30,
2007
!
!
!
!
$
!
!
475,236
$
!
!
424,411
$
!
!
355,197
$
!
!
322,034
$
!
!
(359,001
(91,512
!
)
!! !
)
!
!!
(323,628
(80,695
!
)
!! !
)
!
!!
(278,758
(64,388
!
)
!! !
)
!
!!
(257,319
(59,898
!
)
!! !
)
!
!!
312,438
(239,365
(59,187
)
!!
)
!
!
918
(345
—
25,296
(2,616
22,680
5,353
—
17,327
!!
!
)
!! !
!
!!
!! !
)
!! !
!
!!
!! !
!! !
!! !
—
74
—
20,162
(3,509
16,653
4,466
—
$
12,187
—
96
—
12,147
(4,718
7,429
973
—
$
6,456
!
!!
!! !
!! !
!! !
)
!! !
!
!!
!! !
!! !
!! !
$
!
!!
!! !
!! !
!! !
)
!! !
!
!!
!! !
!! !
!! !
!! !
!
!! !
!
!! !
!
2.04
—
2.04
1.98
—
1.98
—
160,646
! !
$
!
!
!! !
!! !
$
!! !
! !
$
!
!
!! !
!! !
$
!! !
$
! !
!! !
! !
$
!
!
311,865
!! !
83,974
141,965
!! !
!! !
!
!
!
!
!
!
1.43
—
1.43
1.40
—
1.40
—
125,163
! !
$
!
!
!! !
!! !
$
!! !
! !
$
!
!
!! !
!! !
$
!! !
$
! !
!! !
! !
$
!
!
251,333
!! !
62,355
125,714
!! !
!! !
!
!
!
!
!
!
0.76
—
0.76
0.76
—
0.76
—
135,369
! !
$
!
!
!! !
!! !
$
!! !
! !
$
!
!
!! !
!! !
$
!! !
$
! !
!! !
! !
$
!
!
256,993
!! !
85,936
112,145
!! !
!! !
!
!
!
!
!
!
$
!
$
!
$
!
$
!
$
$
!
!
$
!
!
!
!
!
!
!
!
—
132
(62
!
!!
!! !
)
!! !
4,887
(6,042
(1,155
(647
!!
!
)
!! !
)
!
)
!
!!
!!
—
(508
$
!!
!
)
!! !
!
!!
(0.06
)
! !
$
!
!
—
(0.06
!!
!
)
!! !
$
!
(0.06
)
!!
! !
$
!
!
—
(0.06
0.05
133,917
!!
!
)
!! !
$
!
!!
! !
!! !
! !
$
!
!
261,623
!! !
95,542
104,893
!! !
!! !
!
!
!
!
!
!
!
!
!
!
—
(89
(1,498
12,299
(5,157
!
)
!!
)
!
!
)
!!
7,142
!
!
1,471
672
6,343
!!
!!
!!
!!
0.67
0.08
!!
0.75
!!
!!
0.65
0.08
!!
0.73
!!
!!
0.20
!!
120,645
232,790
!!
70,491
!!
103,669
!!
!!
* On July 18, 2007, we announced plans to restructure our textile manufacturing operations. The restructuring plan included the closing of
our manufacturing facility in Fayette, Alabama, the expensing of excess costs associated with the integration of FunTees and the start-up
expenses related to the opening of our Honduran textile facility, Ceiba Textiles.
!! !
!! !
!! !
!! !
!
The restructuring plan began in the fourth quarter of fiscal year 2007 and was completed in the third quarter of fiscal year 2008. In total, we
incurred $11.8 million, or approximately $0.90 earnings per diluted share, in charges associated with the restructuring. During fiscal year
2007, we incurred a total of $6.9 million, or $0.51 per diluted share, of which $5.4 million was recorded in cost of sales and $1.5 million on
the restructuring cost line item of the financial statements. During fiscal year 2008, we incurred $4.9 million, or $0.39 per diluted share, in
charges associated with the restructuring plan, of which $4.8 million was included in cost of sales with the remaining $0.1 million on the
restructuring cost line item of the financial statements. All charges associated with the restructuring plan were recorded in our basics
segment.
!
!
!
!
16
!
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
!
Business Outlook
While we are encouraged with the results we achieved in fiscal year 2011 and with our long term prospects, the continued
weakness in the global economy and extreme volatility in input costs are presenting unique obstacles. In fiscal year 2012 we
will need to manage through the higher cost cotton rolling through cost of sales, impacting our second and third fiscal quarters
most significantly.
!
Over the last several years we have continued to improve the performance of our manufacturing operations, which we believe
has improved our competitive position. Our continuous improvement and six sigma programs continued to lower product cost
by improving yields, reducing waste and minimizing off quality production. In fiscal year 2011 we expanded the output in most
of our manufacturing facilities, which leverages our fixed costs and provides additional volume to sell. We ran our
manufacturing at capacity during fiscal year 2011 and currently expect to continue this into fiscal year 2012, taking advantage
of the capacity expansions we completed over the past twelve months.
Our customer base for private label and decorated products is expanding and should add revenue in our basics segment for the
upcoming year. Market demand for our private label programs remains strong, driven by consumer demand for our customers'
products and the high service levels required in this marketplace. Demand for undecorated tees has recently weakened causing
additional challenges in the catalog tee business.
!
!
We expect our branded segment to continue its growth trends in the upcoming year with improved operating margins. Our
Soffe business continues to gain new doors, particularly with the sporting goods distribution channel. During fiscal year 2011
we completed most of the integration work on The Cotton Exchange and expect to see the benefits of this in fiscal year 2012.
We are seeing positive trends in our Junkfood business and expect sales growth in fiscal year 2012, driven by solid business
with The Gap, along with improved results with boutiques and upper tier retailers. Junkfood has been focused on brand
building, resulting in strong press coverage over the past six months.
We expect strong sales at To The Game in fiscal year 2012 driven from sales of Salt Life(R) products and Under Armor licensed
headwear. Salt Life(R) product offerings should be available in a growing number of doors over an expanded geographic area as
fiscal year 2012 unfolds. In December we expect to open a flagship Salt Life(R) store, design lab and showroom in Jacksonville
Beach, Florida, giving us an exciting venue to display new products, meet with customers, and get consumer feedback in a real
Salt Life environment. We expect to operate our digital printing operation at Art Gun at full print capacity during the holiday
season and we are working on strategies to build volume throughout the rest of the year. Art Gun continues to attract new
customers across different different business platforms. We will soon be launching an improved Delta Catalog website and are
developing a marketing strategy to allow this customer base to utilize our custom design and decorating capabilities.
!
In January 2010 we provided the investment community with three year targets, which included reaching sales of $500 million,
gross margins of thirty percent and earnings of $3.00 per share. We are ahead of our sales goals and believe we are building an
operating platform and portfolio of brands and licensed properties which should allow us to reach our gross margin and earnings
targets as raw material prices return to more traditional levels. We do, however, remain concerned about the retail climate for
apparel and the United States economy in general. Raw material prices remain volatile which adds uncertainty to our pricing
and production strategies. We have evaluated these heightened risk factors in setting our expectations for the upcoming year,
but it is impossible to predict the full impact these conditions may have on our business.
!
!
!
17
!
!
Earnings Guidance
!
For the fiscal year ending June 30, 2012, we expect net sales to be in the range of $500 to $520 million, an increase of 5% to 9%
from fiscal year 2011, all of which is expected to be organic growth. Earnings are expected to be in the range of $2.00 to $2.15
per diluted share in fiscal year 2012.
!
Our fiscal year 2012 guidance is based on the following assumptions:
!
1) Organic sales growth of 5% to 9% driven primarily by higher average prices. We expect to achieve sales growth in both
our branded and basics segments;
!
2) Decline in gross margins of approximately 150 to 200 basis points for the year driven primarily from higher cotton and
other raw material costs, partially offset by improved manufacturing costs as we gain efficiencies and further leverage our
fixed expenses. We will be bringing in yarn with the highest cotton cost in our first quarter of fiscal year 2012, and expect
the cotton cost to decline over the remaining quarters. As this yarn flows through our manufacturing process and the
finished goods are sold, we expect the highest cost inventory will be in our cost of sales during our second and third
quarters of fiscal year 2012, impacting gross margins most significantly in these quarters.
!
3) Selling, general and administration costs are expected to decrease as a percentage of sales, as well as in gross dollars, from
fiscal year 2011 due primarily to fiscal year 2011 including some one-time expenses that are not expected to repeat in
fiscal year 2012.
!
4) The effective tax rate for fiscal year 2012 is expected to be approximately 24%.
!
5) Capital expenditures are expected to be approximately $10 million for fiscal year 2012, which includes about $4 to
$5 million to increase our textile and sewing capacity in order to meet expected sales growth. Depreciation and
amortization, including non-cash compensation, is expected to also be approximately $10 million.
!
6) Fiscal year 2012 free cash flows are expected to be approximately $20 million and are expected to be used to reduce debt
obligations and for other corporate purposes.
!
In fiscal year 2012, we will face challenging market conditions resulting from the volatile cotton market, inflationary pressures
and general economic conditions, which continue to impact discretionary spending. Although we believe we have taken these
risks, as well as other factors, into consideration as we determined our guidance for fiscal year 2012, the significance of the
challenges, many of which our outside of our control, creates heightened risk to the volatility of our earnings in the upcoming
fiscal year. In addition, although we believe that the assumptions described above are reasonable, if any of the assumptions
proves to be incorrect, our results will differ from our expectations.
!
Results of Operations
!
Overview
!
Fiscal year 2011 marked another year of growth for Delta Apparel, Inc. and our eighth consecutive year of record revenue.
Higher selling prices, coupled with continued marketing initiatives to gain new customers and expand business relationships
with existing customers, drove organic sales growth of 7.1% during fiscal year 2011 on top of the 14% organic growth achieved
in fiscal year 2010. The organic sales growth, coupled with the inclusion of revenue from the acquisition of The Cotton
Exchange, resulted in record sales of $475.2 million, an increase of $50.8 million, or 12.0%, from the prior year.
Our operating profit increased $5.1 million to $25.3 million, or 5.3% of sales, in fiscal year 2011, resulting in net income of
$17.3 million, or $1.98 per diluted share. Our effective tax rate was 23.6% in fiscal year 2011 compared to 26.8% in the prior
year as we further developed our tax planning strategies.
!
In addition to growing our top line and expanding our profits, we also continued to focus on managing the capital in the
business. The rise of cotton prices during the year and resulting increases in selling prices significantly increased our net
working capital requirements. Even with the increased investment in working capital, we generated positive cash flows from
operations during fiscal year 2011. We continued to invest in the growth of our business through the acquisition of The Cotton
Exchange in July 2011, and with capital expenditures to further expand our manufacturing capacity, lower our costs and
improve our information technology platforms.
!
Overall, we believe we have many opportunities to continue our sales growth and further improve our profitability in the
upcoming years. In fiscal year 2012, we will face challenging market conditions resulting from the volatile cotton market,
inflationary pressures and general economic conditions which continue to impact discretionary spending. We believe our broad
channels of distribution and diversified product offerings, along with our prudent capital management, should serve us well
during these more challenging times.
!
!
18
!
!
Quarterly Financial Data!
!
For information regarding quarterly financial data, refer to Note 16 - Quarterly Financial Information (Unaudited) to the
Consolidated Financial Statements, which information is incorporated herein by reference.
Fiscal Year 2011 versus Fiscal Year 2010!
!
Net sales for fiscal year 2011 were $475.2 million, a $50.8 million increase from the prior year sales of $424.4 million. The
12.0% sales increase resulted from organic sales growth of 7.1% and the additional revenue from the acquisition of The Cotton
Exchange. Both segments contributed to the increase with an 11.9% increase in our basics segment and a 12.1% increase in our
branded segment. Sales in the branded segment were $221.7 million, or approximately 47% of total sales. Revenue from The
Cotton Exchange, which we acquired in July 2011, drove a 10.5% increase in the branded segment revenue from the prior year.
Soffe® apparel, coupled with the new Salt Life® collection, also contributed to the growth, being partially offset by lower sales
of Junk Food® merchandise. Sales within the basics segment increased to $253.5 million, or 53% of our total revenue. The
11.9% organic growth in the basics segment was driven by a 15.3% increase in average selling prices, partially offset by a
decline in units sold.
!
Gross margins improved 80 basis points to 24.5% of net sales in fiscal year 2011 from 23.7% of net sales in the prior year. The
increase in gross profit as a percentage of sales was driven primarily from higher average selling prices within our basics
segment combined with efficiencies gained from our vertical manufacturing platform. During fiscal year 2011, we increased
capacity and operated our manufacturing facilities full throughout the entire year. We gained efficiencies, improved quality and
lowered costs in manufacturing through our continuous improvement initiatives and leveraging of fixed costs with the
additional production capacity added during the year. The improved gross margins in our basics segment were partially offset
by a decline in our branded segment margins due to lower sales of our vintage licensed products and higher operational
expenses associated with Salt Life® and the digital printing business. Our gross margins may not be comparable to other
companies, since some companies include costs related to their distribution network in cost of goods sold and we exclude them
from gross margin and include them in selling, general and administrative expenses.
Fiscal year 2011 selling, general and administrative expenses were $91.5 million, or 19.3% of sales, compared to $80.7 million,
or 19.0% of sales, in the prior year. Selling expenses increased as a percentage of sales primarily because we made investments
in consumer brand-marketing campaigns to promote future growth of our branded products. General and administrative
expenses also increased as a percentage of sales with costs associated with the acquisition of The Cotton Exchange, expenses
related to Art Gun and higher performance-based compensation expense associated with our improved operating results and
stock price.
!
!
Our operating profit was $25.3 million, or 5.3% of sales, in fiscal year 2011, compared to $20.2 million, or 4.8% of sales, in
fiscal year 2010 resulting from the factors described above. Operating income in the branded and basics segments were $8.4
million and $16.9 million, respectively. The branded segment operating income included a non-cash net favorable adjustment
of $0.9 million related to the valuation of the Art Gun contingent consideration and goodwill.
Net interest expense for fiscal year 2011 was $2.6 million, a reduction of $0.9 million, or 25.4%, from $3.5 million for fiscal
year 2010. The decrease in net interest expense was primarily due to lower average interest rates in fiscal year 2011 resulting
from the expiration of interest rate swap and collar agreements in March 2010.
!
Our fiscal year 2011 effective income tax rate was 23.6% compared to an effective tax rate of 26.8% in fiscal year 2010. The
decrease is due to having a higher percentage of pre-tax earnings in foreign tax-free locations compared to earnings in the
United states and foreign taxable locations. During fiscal year 2011, we further developed our tax planning strategies, allowing
us to keep more profits in Honduras, a tax-free zone, reducing our overall effective tax rate.
!
Net income for fiscal year 2011 was $17.3 million, a $5.1 million increase from net income of $12.2 million in fiscal year 2010.
!
Fiscal Year 2010 versus Fiscal Year 2009!
!
Net sales during fiscal year 2010 increased by $69.2 million to $424.4 million, a 19.5% increase from fiscal year 2009. The
sales improvement resulted from organic growth of approximately 14%, along with having the full year of sales from To The
Game, which was acquired in the fourth quarter of fiscal year 2009. In addition, fiscal year 2010 included 53 weeks of
operations compared to 52 weeks of operations in fiscal year 2009. Each of our business units contributed to the 14% organic
sales growth, which was on top of an 8% organic sales growth in fiscal year 2009. Basics sales increased 13.8% to
$226.6 million in fiscal year 2010 driven primarily from higher volumes and an increase in average selling prices during the
second half of fiscal year 2010. Sales in the branded segment increased to $197.8 million in fiscal year 2010, a 26.7% increase
from the prior year driven from strong sales growth from our Junk Food® products and a full year of sales from To The Game,
which we acquired in the fourth quarter of fiscal year 2009.
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19
!
!
!
Gross profit improved 220 basis points to 23.7% of net sales in fiscal year 2010 from 21.5% in the prior year. In fiscal year
2010 we benefited from a full year of lower cost production from our Honduran textile operations, improving our results over
!
the prior year by approximately $2 million, adding 50 basis points to our gross margins. Driven primarily from increased
demand for our products, we operated our manufacturing facilities near capacity in the second half of the year, reducing our
shutdown costs compared to the prior year by approximately $1.5 million, or 40 basis points. The remaining improvement in
gross margins resulted from effective merchandising strategies and operational improvements. Our gross margins may not be
comparable to other companies, since some companies include costs related to their distribution network in cost of goods sold
and we exclude them from gross margin and include them in selling, general and administrative expenses.
Fiscal year 2010 selling, general and administrative expenses were $80.7 million, or 19.0% of sales, an increase from 18.1% of
sales in the prior year. The increase was primarily driven from the higher selling costs associated with branded products, which
includes the royalty expense associated with the sale of licensed products. The increase in selling, general and administrative
costs was also due to higher performance-based compensation expense from the improved financial performance and increased
stock price during fiscal year 2010 compared to fiscal year 2009.
!
Our operating profit was $20.2 million, or 4.8% of sales, in fiscal year 2010, compared to $12.1 million, or 3.4% of sales, in
!
fiscal year 2009 resulting from the factors described above. The branded segment contributed $17.8 million in operating income
and the basics segment had operating income of $2.4 million.
Other income for fiscal years 2010 and 2009 was $0.1 million, primarily related to our investment in the joint venture of the
industrial park where Ceiba Textiles is located.
!
Net interest expense for fiscal year 2010 was $3.5 million, a decrease of $1.2 million, or 25.6%, from $4.7 million for fiscal
year 2009. The decrease in interest expense was primarily due to lower debt levels and lower average interest rates compared to
the prior year. During fiscal year 2010, our average interest rate was 1.5% compared to 3.7% in fiscal year 2009.
!
Our fiscal year 2010 effective income tax rate was 26.8%, compared to 13.1% in fiscal year 2009. The primary driver for the
increase in fiscal year 2010 was due to having a higher percentage of pre-tax earnings in the United States and foreign taxable
locations compared to earnings in foreign tax-free locations. Profits that are permanently reinvested in the tax-free zone of
Honduras are relatively fixed since this amount is based on a cost-plus determination based on our production output. Therefore,
our effective tax rate increased during fiscal year 2010 because our U.S. profits increased while our Honduran tax-free profits
remained relatively constant. The higher effective tax rate compared to the prior fiscal year negatively impacted our earnings by
approximately $0.25 per diluted share.
!
Net income for fiscal year 2010 was $12.2 million, a $5.7 million increase from fiscal year 2009 net income of $6.5 million.
!
Liquidity and Capital Resources
!
Credit Facility and Other Financial Obligations!
!
On May 27, 2011, Delta Apparel, Soffe, Junkfood, To The Game, Art Gun and TCX entered into a Fourth Amended and
Restated Loan and Security Agreement (the “Amended Loan Agreement”) with the financial institutions named in the Amended
Loan Agreement as Lenders, Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger, and Wells Fargo Capital Finance, LLC and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners. In connection with the Amended Loan Agreement,
Israel Discount Bank of New York was removed from the syndicate of lenders under the credit facility, and Bank of America,
N.A. was added to the syndicate of lenders.
Pursuant to the Amended Loan Agreement, the maturity of the loans under the previously existing credit facility was extended
to May 26, 2016 and the line of credit was increased to $145 million (subject to borrowing base limitations), which represents
an increase of $35 million in the amount that was previously available under the credit facility. Under the Amended Loan
Agreement, provided that no event of default exists, we have the option to increase the maximum credit available under the
facility to $200 million (subject to borrowing base limitations), conditioned upon the Agent's ability to secure additional
commitments and customary closing conditions. At July 2, 2011, we had $75.9 million outstanding under our credit facility at
an average interest rate of 1.8%, and had the ability to borrow an additional $59.1 million.
!
For further information regarding our U.S. asset-based secured credit facility, refer to Note 9 - Long-Term Debt to the
!
Consolidated Financial Statements, which information is incorporated herein by reference.
In the third quarter of fiscal year 2011, we renegotiated our loan agreement with Banco Ficohsa, a Honduran bank. Proceeds
from the new loan agreement were used to extinguish the existing loan indebtedness and resulted in no gain or loss being
recorded upon extinguishment. As of July 2, 2011, we had a total of $10.8 million outstanding on this loan. For further
!
!
20
!
!
information regarding our Honduran credit facility, refer to Note 9 - Long-Term Debt to the Consolidated Financial Statements,
which information is incorporated herein by reference.
!
Our primary cash needs are for working capital and capital expenditures, as well as to fund share repurchases under our Stock
Repurchase Program. In addition, in the future we may use cash to pay dividends.
!
Derivative Instruments!
!
We use derivative instruments to manage our exposure to interest rates. We do not enter into derivative financial instruments for
purposes of trading or speculation. When we enter into a derivative instrument, we determine whether hedge accounting can be
applied. Where hedge accounting can be applied, a hedge relationship is designated as either a fair value hedge or cash flow
hedge. The hedge is documented at inception, detailing the particular risk objective and strategy considered for undertaking the
hedge. The documentation identifies the specific asset or liability being hedged, the risk being hedged, the type of derivative
used and how effectiveness of the hedge will be assessed.
On April 1, 2009, we entered into an interest rate swap agreement which effectively converted $15.0 million of floating rate
debt under our credit facility to a fixed obligation with a LIBOR rate of 1.57%. This agreement terminated on April 1, 2011.
On March 1, 2010, we entered into an interest rate swap agreement which effectively converted $15.0 million of floating rate
debt under our credit facility to a fixed obligation with a LIBOR rate of 1.11%. This agreement will terminate on September 1,
2011. We assessed these agreements and concluded that the swap agreements match the exact terms of the underlying debt to
which it is related and therefore is considered a highly-effective hedge.
!
Changes in the derivatives’ fair values are deferred and are recorded as a component of accumulated other comprehensive
income (“AOCI”), net of income taxes, until the underlying transaction is recorded. When the hedged item affects income, gains
or losses are reclassified from AOCI to the Consolidated Statements of Operations as interest income/expense. Any
ineffectiveness in our hedging relationships is recognized immediately in the Consolidated Statement of Operations. The
changes in fair value of the interest rate swap agreements resulted in an AOCI gain, net of taxes, of $0.1 million and
$0.5 million for the years ended July 2, 2011 and July 3, 2010, respectively.
!
Operating Cash Flows!
!
Operating activities for fiscal year 2011 provided $2.9 million in cash compared to $32.3 million in cash provided by operating
activities for fiscal year 2010. The decrease in operating cash flow during fiscal year 2011 compared to the prior year resulted
primarily from higher working capital needs driven from higher raw material costs in inventory and increased sales. This
increase was partially offset by higher accounts payable and accrued expensed caused primarily from the higher raw material
costs. The cash flow provided by operating activities in fiscal year 2010 resulted from net income combined with lower
inventory levels as we increased our inventory turns through improved processing and new business operating systems.
Investing Cash Flows!
!
Cash used in investing activities in fiscal year 2011 was $17.9 million compared to $8.7 million for fiscal year 2010. In fiscal
year 2011, we used $8.0 million in cash for the purchase of property and equipment and acquired The Cotton Exchange for $9.9
million in cash. See Note 3 - Acquisitions to the Consolidated Financial Statements for additional information regarding the
acquisition of The Cotton Exchange. In fiscal year 2010, we used $7.0 million for the purchase of property and equipment. In
addition, we made the final payment of $0.7 million associated with the acquisition of To The Game, LLC and completed the
acquisition of Art Gun for $1.0 million.
Capital expenditures for the purchase of property and equipment for fiscal year 2011 were $8.0 million. These expenditures
were primarily to improve our information technology in both our branded and basics segments and to increase capacity and
lower costs in our manufacturing facilities which support both our branded and basics segments. We spent $7.0 million in fiscal
year 2010 on capital expenditures primarily to improve our manufacturing platform and business operating systems.
!
We expect to spend approximately $10 million in capital expenditures in fiscal year 2012, which includes approximately $4 to
$5 million to increase textile and sewing capacity to meet the expected future sales growth. In addition, we will continue to
invest to consolidate and improve our information systems and on maintenance capital in our manufacturing and distribution
facilities.
!
Financing Activities!
!
Cash provided by financing activities for fiscal year 2011 was $14.9 million compared to cash used by financing activities of
$23.6 million in fiscal year 2010. The cash provided by financing activities during fiscal year 2011 was used to fund the
acquisition of The Cotton Exchange, for capital expenditures and for the purchase of our common stock. During fiscal year
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21
!
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2010 we used our cash from operating activities, net of our investing activities, to reduce our debt outstanding under our
revolving credit facility and to make principal payments on our loan with Banco Ficohsa.
!
Future Liquidity and Capital Resources
!
Based on our expectations, we believe that our credit facility should be sufficient to satisfy our foreseeable working capital
needs, and that the cash flow generated by our operations and funds available under our credit line should be sufficient to
service our debt payment requirements, to satisfy our day-to-day working capital needs and to fund our planned capital
expenditures. Any material deterioration in our results of operations, however, may result in our losing the ability to borrow
under our revolving credit facility and to issue letters of credit to suppliers or may cause the borrowing availability under our
facility to be insufficient for our needs.
!
The following table summarizes our contractual cash obligations, as of July 2, 2011, by future period.
!
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Contractual Obligations:
!
Long-term debt (a)
!
Operating leases
Capital leases
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Letters of credit
!
Minimum royalty payments
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Purchase obligations
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Total (b)
______________________
(a)
!
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Total
Payments Due by Period (in thousands)
1 - 3
Less than
years
1 year
!
!
!
!
86,773
!
!
$
!
37,216
!! !
!
$
!
!
!
2,799
!
!
$
!
8,591
!! !
!
!
12,058
!
!
$
!
13,982
!! !
!
!
3 – 5
years
!
!
71,187
!
!
$
!
14,643
!! !
!
2,065
3,765
7,781
96,374
$
233,974
!! !
!! !
!! !
!! !
!! !
569
3,765
2,122
96,374
$
114,220
!! !
!! !
!! !
!! !
!! !
944
—
3,525
—
$
30,509
!! !
!! !
!! !
!! !
!! !
552
—
2,134
—
$
88,516
!! !
!! !
!! !
!! !
!! !
After 5
years
!
!
729
—
—
—
—
—
!!
!!
!!
!!
!!
!!
$
729
!!
!! !
We exclude interest payments from these amounts because the cash outlay for the interest is unknown and can not be reliably estimated because the
majority of the debt is under a revolving credit facility. Interest payments will be determined based upon the daily outstanding balance of the
revolving credit facility and the prevailing interest rate during that time.
!! !
!! !
!! !
!
!
!
!
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(b)
We excluded deferred income tax liabilities of $5.0 million from the contractual cash obligations table because we believe inclusion would not be
meaningful. Refer to Note 9 - Income Taxes to our Consolidated Financial Statements for more information on our deferred income tax liabilities.
Deferred income tax liabilities are calculated based on temporary differences between tax bases of assets and liabilities and their respective book
bases, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of
these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods and therefore would not relate to
liquidity needs. As a result, including deferred income tax liabilities as payments due by period in the schedule could be misleading.
!
!
!Off-Balance Sheet Arrangements
As of July 2, 2011, we do not have any off-balance sheet arrangements that are 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 the letters of credit,
operating leases, and purchase obligations described above. We have entered into derivative interest rate contracts as described
and included below in “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this report.
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Dividends and Purchases of our Own Shares
!
Under our credit agreement, 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 million
and average availability for the 30 day period immediately preceding that date of not less than $15 million; and (ii) the
aggregate amount of dividends and stock repurchases after May 27, 2011 does not exceed $19 million plus 50% of our
cumulative net income (as defined in the Amended Loan Agreement) from the first day of fiscal year 2012 to the date of
determination. At July 2, 2011 and July 3, 2010, there was $18.7 million and $14.7 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 fiscal years 2011 and 2010.We would expect that
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our Board of Directors would consider the advisability of instituting a dividend program in the future. Any future cash dividend
payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other
relevant factors.
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22
!
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As of July 2, 2011, our Board of Directors had authorized management to use up to $15.0 million to repurchase Delta Apparel
stock in open market transactions under our Stock Repurchase Program. During fiscal year 2011, we purchased 176,756 shares
!
of our common stock for a total cost of $2.5 million. No purchases of our common stock were made during fiscal years 2010
and 2009. As of July 2, 2011, we have purchased 1,201,527 shares of common stock for an aggregate of $11.6 million since the
inception of the Stock Repurchase Program. All purchases were made at the discretion of management. As of July 2, 2011,
$3.4 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration
date. On August 17, 2011, our Board of Directors approved a $5 million increase in our Stock Repurchase Program, bringing
the total amount authorized to $20.0 million.
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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. generally accepted accounting principles (“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. Our most critical accounting estimates, discussed below, pertain to
revenue recognition, accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill,
stock-based compensation and the accounting for income taxes.
Note 2 to our Consolidated Financial Statements includes a summary of the significant accounting policies or methods used in
!
the preparation of our Consolidated Financial Statements.
Revenue Recognition!
!
Revenues from product sales are recognized when ownership is transfered to the customer, which includes not only the passage
of title, but also the transfer of the risk of loss related to the product. At this point, the sales price is fixed and determinable, and
we are reasonably assured of the collectibility of the sale. The majority of our sales are shipped FOB shipping point and
revenue is therefore recognized when the goods are shipped to the customer. For sales that are shipped FOB destination point,
we do not recognize the revenue until the goods are received by the customer. Shipping and handling charges billed to our
customers are included in net revenue and the related costs are included in cost of goods sold. Revenues are reported on net
sales basis, which is computed by deducting product returns, discounts and estimated returns and allowances. We estimate
returns and allowances on an ongoing basis by considering historical and current trends.
Accounts Receivable and Related Reserves!
!
In the normal course of business, we extend credit to our customers based upon defined credit criteria. Accounts receivable, as
shown on our Consolidated Balance Sheet, are net of related reserves. We estimate the net collectibility 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, a specific reserve for bad
debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be
collected. For all other customers, 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. In addition, reserves are established for other concessions that have been extended to customers, including
advertising, markdowns and other accommodations, net of historical recoveries. These reserves are determined based upon
historical deduction trends and evaluation of current market conditions. Significant changes in customer concentration or
payment terms, deterioration of customer credit-worthiness or further weakening in economic trends could have a significant
impact on the collectibility of receivables and our operating results.
Inventories and Related Reserves!
!
We state inventories at the lower of cost or market 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. If actual market conditions are less favorable than those
projected, or if sell-through of the inventory is more difficult than anticipated, additional inventory reserves may be required.
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23
!
!
Goodwill and Contingent Consideration!
!
!
Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Junkfood Clothing Company and
Art Gun. We did not record any indefinite-lived intangibles associated with either 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 of
businesses acquired. 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 is required to be written down when impaired. The
goodwill impairment testing process involves the use of significant assumptions, estimates and judgments with respect to a
variety of factors, including sales, gross margins, selling, general and administrative expenses, capital expenditures, cash flows
and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. When we
perform goodwill impairment testing, our assumptions are based on annual business plans and other forecasted results. We
select a discount rate, which is used to reflect market-based estimates of the risks associated with the projected cash flows,
based on the best information available as of the date of the impairment assessment.
See Note 2(m) - Significant Accounting Policies to the Consolidated Financial Statements for further information regarding our
remeasurement of contingent consideration and testing for goodwill impairment, which information is herein incorporated by
reference.
!
!
Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can
be no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the
future. If our assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be
triggered and goodwill may be determined to be impaired.
Stock-Based Compensation!
!
Stock-based compensation cost is accounted for under the provisions of FASB Codification No. 718, Compensation – Stock
Compensation (“ASC 718”), the Securities and Exchange Commission Staff Accounting bulletin No. 107 ("SAB 107"), and the
Securities and Exchange Commission Staff Accounting Bulletin No. 110 ("SAB 110"). ASC 718 requires all stock-based
payments to employees, including grants of employee stock options, to be recognized as expense over the vesting period using a
fair value method. We estimate the fair value of stock-based compensation using the Black-Scholes options pricing model. This
model requires that we estimate a risk-free interest rate, the volatility of the price of our common stock, the dividend yield, and
the expected life of the awards. The use of a different estimate for any one of these components could have a material impact
on the amount of calculated compensation expense. Refer to Note 2(s) and Note 12 to the Consolidated Financial Statements
for a further discussion on stock-based compensation.
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, and operating loss 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. We established a valuation allowance related to certain of our state operating loss carryforward amounts in
accordance with the provisions of FASB Codification No. 740, Income Taxes (“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.
We had net operating loss carryforwards (“NOLs”) in fiscal years 2011 and 2010 of approximately $10.9 million and
$18.8 million, respectively, for state tax purposes with a related valuation allowance against the NOLs of approximately $0.1
million as of both July 2, 2011 and July 3, 2010. These net loss carryforwards expire at various intervals through 2030.
As of July 2, 2011, we had $0.9 million of charitable contribution carryforwards for federal income tax purposes, of which $0.8
million expires in fiscal year 2013 and $0.1 million expires in fiscal year 2014. The future charitable deduction in limited to
10% of taxable income for each year. Based on our forecasts, we expect that we will have sufficient taxable income to use all
of the charitable contributions before they expire. Therefore, we determined that no valuation allowance against the deferred tax
asset associated with the charitable carryforward is required. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary differences become deductible.
!
Recent Accounting Standards
!
For information regarding recently issued accounting standards, refer to Note 2(aa) and Note 2(ab) to our Consolidated
Financial Statements.
!
!
!
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24
!
!
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
!
Commodity Risk Sensitivity
!
We have a supply agreement with Parkdale America, LLC (“Parkdale”) to supply our yarn requirements until December 31,
2011. Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing
operations, 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 plus a fixed conversion cost. Thus, we are subject to the commodity
risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. We fix the cotton prices
as a component of the purchase price of yarn, pursuant to the supply agreement, 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 elect
to fix specific cotton prices.
!
!
!
Yarn with respect to which we have fixed cotton prices at July 2, 2011 was valued at $63.5 million, and is scheduled for
delivery between July 2011 and December 2011. At July 2, 2011, a 10% decline in the market price of the cotton covered by
our fixed price yarn would have had a negative impact of approximately $5.1 million on the value of the yarn. This compares to
what would have been a negative impact of $2.4 million at the 2010 fiscal year end based on the yarn with fixed cotton prices at
July 3, 2010. The impact of a 10% decline in the market price of the cotton covered by our fixed price yarn would have been
greater at July 2, 2011 than at July 3, 2010 due to increased commitments and higher cotton prices at July 2, 2011 compared to
July 3, 2010.
!
We may use derivatives, including cotton option contracts, to manage our exposure to movements in commodity prices. We do
not designate our options as hedge instruments upon inception. Accordingly, we mark to market changes in the fair market
value of the options in cost of sales in the statements of income. We did not own any cotton options contracts on July 2, 2011 or
July 3, 2010.
!
We are currently in negotiations to secure a new agreement to supply our yarn requirements. We do not believe we will lose
any competitive position we currently have with a new agreement. If Parkdale’s operations are disrupted and it is not able to
provide us with our yarn requirements, we may need to obtain yarn from alternative sources. Although alternative sources are
presently available, we may not be able to enter into short-term arrangements with substitute suppliers on terms as favorable as
our current terms with Parkdale. In addition, the cotton futures we have fixed with Parkdale may not be transferable to
alternative yarn suppliers. Because there can be no assurance that we would be able to pass along our higher cost of yarn to our
customers, this could have a material adverse effect on our results of operations.
Interest Rate Sensitivity
!
!
Our U.S. revolving credit facility provides that the outstanding amounts owed shall bear interest at variable rates. If the amount
of outstanding indebtedness at July 2, 2011 under the U.S. revolving credit facility had been outstanding during the entire year
and the interest rate on this outstanding indebtedness was increased by 100 basis points, our expense would have increased by
approximately $0.7 million, or 29.0%, for the fiscal year. This compares to an increase of $0.6 million, or 17.4%, for the 2010
fiscal year based on the outstanding indebtedness at July 3, 2010. The effect of a 100 basis point increase in interest rates would
have had a higher dollar impact for the year ended July 2, 2011 compared to the year ended July 3, 2010 due to the higher debt
levels outstanding on July 2, 2011. The percentage increase is more significant for fiscal year 2011 than for fiscal year 2010
because our total interest expense for fiscal year 2011 was lower than our total interest expense for fiscal year 2010. The actual
increase in interest expense resulting from a change in interest rates would depend on the magnitude of the increase in rates and
the average principal balance outstanding.
Derivatives!
!
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. See Note 2(y) and Note 15(d) to the Consolidated Financial Statements for more
information on our derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
!
!
Our Consolidated Financial Statements for each of the fiscal years in the three-year period ended July 2, 2011, together with the
!
Report of Independent Registered Public Accounting Firm thereon, are included in this report commencing on page F-1 and are
listed under Part IV, Item 15 in this report.
!
!
!
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25
!
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
!
DISCLOSURE
!
Not applicable.
!
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 July 2, 2011 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 Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting as of July 2, 2011 based on the framework in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The scope of our efforts to comply with the internal requirements of Section 404 of the Sarbanes-Oxely Act of 2002 with
respect to fiscal year 2011 included all of our operations. Based on our evaluation, our management has concluded that, as of
July 2, 2011, our internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of July 2, 2011 has been audited by Ernst & Young LLP,
our independent registered public accounting firm, who also audited our consolidated financial statements. Ernst & Young’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 fiscal year 2011 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
!
!
!
26
!
Report of Independent Registered Public Accounting Firm
!
The Board of Directors and Shareholders of Delta Apparel, Inc. and subsidiaries
!
We have audited Delta Apparel, Inc. and subsidiaries' internal control over financial reporting as of July 2, 2011, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Delta Apparel, Inc. and subsidiaries' 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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.
!
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.
!
In our opinion, Delta Apparel, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of July 2, 2011, based on the COSO criteria.
!
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Delta Apparel, Inc. and subsidiaries as of July 2, 2011 and July 3, 2010 and the related
consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the three
years in the period ended July 2, 2011 of Delta Apparel, Inc. and subsidiaries, and our report dated September 1, 2011 expressed
an unqualified opinion thereon.
!
!
Atlanta, Georgia
September 1, 2011
!
!
!
/s/ Ernst & Young LLP
!
!
27
!
ITEM 9B. OTHER INFORMATION
!
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 on or prior to 120 days following the end of our fiscal year under the
headings “Election of Directors”, “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
!
All of our employees, including our Chief Executive Officer and Chief Financial Officer (who is also our principal accounting
officer), are required to abide by our business conduct policies to ensure that our business is conducted in a consistently legal
and ethical manner. We adopted a code of business conduct and ethics known as our Ethics Policy Statement. The Ethics Policy
Statement is available on our website. In the event that we amend or waive any of the provisions of the Ethics Policy Statement
applicable to our Chief Executive Officer or Chief Financial Officer, we intend to disclose the same on our website at
www.deltaapparelinc.com.
!
!
EXECUTIVE COMPENSATION
ITEM 11.
!
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 on or prior to 120 days following the end of our fiscal year under the
headings “Compensation Discussion and Analysis”, “Compensation Tables,” “Compensation Committee Interlocks and Insider
Participation” and “Compensation Committee Report.”
!
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 on or
prior to 120 days following the end of our fiscal year under the heading “Stock Ownership of Principal Shareholders and
Management.”
!
!
On November 11, 2010, the Delta Apparel, Inc. shareholders approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock
Plan"). We will not be granting additional awards under either the Delta Apparel Stock Option Plan ("Option Plan") or the Delta
Apparel Incentive Stock Award Plan ("Award Plan"); instead, all future stock awards will be granted under the 2010 Stock Plan.
The awards available consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance
stock, performance units, and cash awards. The aggregate number of shares of common stock that may be delivered under the
2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the Option Plan or Award
Plan that are subsequently forfeited or terminated for any reason before being exercised. The 2010 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 any given calendar year.
Set forth in the table below is certain information about securities issuable under our equity compensation plans as of July 2,
2011.
!
!
!
28
!
Number of
securities
remaining available
for
future issuance
under equity
compensation plans
(excluding
securities reflected
in column (a))
(c)
!
!
486,333
—
486,333
!
!
!
!
!
!
!
Plan Category
Equity compensation plans approved by security holders
!
Equity compensation plans not approved by security holders
!
!
Total
!
Number of
securities to
be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
!
!
!
!
50,000
!
1,002,847
1,052,847
!!
!
!! !
!! !
$
$
$
!
!
13.47
!
10.32
10.47
!!
!
!! !
!! !
For additional information on our Stock-Based Compensation Plans, see Note 12 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 on or prior to 120 days following the end of our fiscal year under the
headings “Related Party Transactions” and “Election of Directors.”
!
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 on or prior to 120 days following the end of our fiscal year under the
headings “Ratification of Appointment of Independent Registered Public Accounting Firm” and “Election of Directors.”
!
!
PART IV
!
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) and (2) Financial Statements and Financial Statement Schedules:
!
• Report of Independent Registered Public Accounting Firm.
!
!
!
• Consolidated Balance Sheets as of July 2, 2011 and July 3, 2010.
• Consolidated Statements of Operations for the years ended July 2, 2011, July 3, 2010 and June 27, 2009.
• Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended July 2, 2011, July 3,
2010 and June 27, 2009.
!
!
• Consolidated Statements of Cash Flows for the years ended July 2, 2011, July 3, 2010 and June 27, 2009.
• Notes to Consolidated Financial Statements.
!
!
!
!
The following consolidated financial statement schedule of Delta Apparel, Inc. and subsidiaries is included in Item 15(c):
!
•
Schedule II — Consolidated Valuation and Qualifying Accounts
!
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.
!
(a)(3) Listing of Exhibits*
!
!
!
29
!
2.1
!
2.1.1
2.2
2.3
Amended and Restated Stock Purchase Agreement dated as of October 3, 2003 among Delta Apparel, Inc., MJS
Acquisition Company, M. J. Soffe Co., James F. Soffe, John D. Soffe, and Anthony M. Cimaglia (excluding schedules
and exhibits): Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K/A filed on October 17, 2003.
First Amendment to Amended and Restated Stock Purchase Agreement dated as of November 10, 2004 among Delta
Apparel, Inc., M. J. Soffe Co., James F. Soffe, John D. Soffe, and Anthony M. Cimaglia: Incorporated by reference to
Exhibit 2.2.1 to the Company’s Form 10-Q filed on February 9, 2005.
!
Asset Purchase Agreement dated as of August 22, 2005 among Delta Apparel, Inc., Junkfood Clothing Company,
Liquid Blaino Designs, Inc. d/b/a Junkfood Clothing, Natalie Grof, and Blaine Halvorson (excluding schedules and
exhibits): Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 26, 2005.
!
Asset Purchase Agreement dated as of August 17, 2006 among Delta Apparel, Inc., Fun-Tees, Inc., Henry T. Howe,
James C. Poag, Jr., Beverly H. Poag, Lewis G. Reid, Jr., Kurt R. Rawald, Larry L. Martin, Jr., Julius D. Cline and
Marcus F. Weibel: Incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 21, 2006.
!
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,
!
!
!
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000: Incorporated by reference to Exhibit 3.2.2 to the
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000: Incorporated by reference to Exhibit 3.2.3 to the
3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000: Incorporated by reference to Exhibit 3.2.4 to the
3.2.5 Amendment to Bylaws dated August 17, 2006: Incorporated by reference to Exhibit 3.2.5 to the Company’s Form 10-
3.2.6 Amendment to Bylaws dated August 12, 2009: Incorporated by reference to Exhibit 3.2.6 to the Company’s Form 10-
2009.
!
Company’s Form 10-K filed on August 28, 2009.
Company’s Form 10-K filed on August 28, 2009.
Company’s Form 10-K filed on August 28, 2009.
!
!
!
K filed on August 28, 2009.
K filed on August 28, 2009.
!
!
4.1
4.2
10.2
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.
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.
!
10.1
See Exhibits 2.1, 2.1.1, 2.2, and 2.3.
!
Fourth Amended and Restated Loan and Security Agreement, dated May 27, 2011, among Delta Apparel, Inc., M.J.
Soffe, LLC, Junkfood Clothing Company, To The Game, LLC, Art Gun, LLC, and TCX, LLC, the financial
institutions named therein as Lenders, Wells Fargo Bank, National Association, as Administrative Agent, Bank of
America, N.A., as Syndication Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger, and Wells Fargo
Capital Finance, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners: Incorporated by
reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 3, 2011.
!
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.***
!
!
30
!
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 10.29 to the Company’s Form 10-Q filed on February 9,
!
2005.**
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 10.7.1 to the Company’s Form 10-K
filed on August 28, 2009.**
!
10.7
10.8
10.9
Employment Agreement between Delta Apparel, Inc. and Kenneth D. Spires dated December 31, 2009: Incorporated
by reference to Exhibit 10.3 to the Company’s Form 8-K filed on January 4, 2010.***
!
Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated December 31, 2009: Incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 4, 2010.***
!
Employment Agreement between Delta Apparel, Inc. and Martha M. Watson dated December 31, 2009: Incorporated
by reference to Exhibit 10.4 to the Company’s Form 8-K filed on January 4, 2010.***
!
10.10 Employment Agreement between Delta Apparel, Inc. and Steven Edward Cochran dated October 25, 2010.***
10.11 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 Form 10-K filed on August 28, 2009.***
10.11.1 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 Form 8-K filed on August 19, 2011.***
!
!
21
Subsidiaries of the Company.
!
!
23.1
31.1
31.2
32.1
32.2
!
**
!
***
!
!
!
!
Consent of Independent Registered Public Accounting Firm.
!
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.
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.
!
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.
!
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.
!
______________________
*
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 have been omitted pursuant to a request for confidential treatment and have been filed separately with the
Securities and Exchange Commission.
!
This is a management contract or compensatory plan or arrangement.
!
The registrant agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule or
exhibit to any of the above filed exhibits upon request of the Commission.
!
See Item 15(a)(3) above.
(b) Exhibits
!
(c) Schedules
!
!
See information under (a)(1) and (2) of Item 15.
!
!
!
31
!
!
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.
!
SIGNATURES
!
!
September 1, 2011
!
Date
!
!
!
!
!
!
!
!
DELTA APPAREL, INC.
!
(Registrant)
!
!
By: /s/ Deborah H. Merrill
!
Deborah H. Merrill
Vice President, Chief Financial
!
Officer and Treasurer
(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/ James A. Cochran
!
James A. Cochran
Director
!
!
!
/s/ Sam P. Cortez
!
Sam P. Cortez
Director
!
!
!
/s/ William F. Garrett
!
William F. Garrett
Director
!
!
!
!
/s/ Elizabeth J. Gatewood
!
Elizabeth J. Gatewood
Director
!
!
!
/s/ G. Jay Gogue
!
G. Jay Gogue
Director
!
!
!
/s/ Robert W. Humphreys
!
Robert W. Humphreys
Chairman and Chief Executive Officer
!
!
!
!
!
!
8/21/2011
Date
8/29/2011
Date
9/1/2011
Date
!
8/30/2011
Date
8/29/2011
Date
8/29/2011
Date
8/25/2011
Date
8/26/2011
Date
8/28/2011
Date
8/26/2011
Date
9/1/2011
Date
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
/s/ A. Max Lennon
! !
A. Max Lennon
!
!
Director
!
!
!
/s/ E. Erwin Maddrey, II
!!
E. Erwin Maddrey, II
!
Director
!
!
!
/s/ Deborah H. Merrill
!
!
Deborah H. Merrill
!
!
Vice President, Chief Financial Officer and
!
Treasurer (principal financial and accounting officer)
!
!
!
/s/ David Peterson
! !
David Peterson
!
!
Director
!
!
!
/s/ Robert E. Staton, Sr
!
!
Robert E. Staton, Sr.
!!
Director
!!
!
! !
!
!!
!
!!
!!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
32
!
F-2
F-3
!
F-4
!
!
F-5
F-6
F-7
!
!
!
!
!
!
!
!
Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
!
Report of Independent Registered Public Accounting Firm
!
Consolidated Balance Sheets as of July 2, 2011 and July 3, 2010
!
Consolidated Statements of Operations for the years ended July 2, 2011, July 3, 2010 and June 27, 2009
!
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended July 2, 2011,
!
July 3, 2010 and June 27, 2009
!
!
!
Consolidated Statements of Cash Flows for the years ended July 2, 2011, July 3, 2010 and June 27, 2009
!
Notes to Consolidated Financial Statements
!
!
!
!
F-1
!
!
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Delta Apparel, Inc. and subsidiaries
!
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and subsidiaries as of July 2, 2011 and
July 3, 2010, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash
!
flows for each of the three years in the period ended July 2, 2011. 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 conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
!
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
!
!
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Delta Apparel, Inc. and subsidiaries at July 2, 2011 and July 3, 2010, and the consolidated results of its operations
!
and its cash flows for each of the three years in the period ended July 2, 2011, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Delta Apparel, Inc.'s internal control over financial reporting as of July 2, 2011, based on criteria established in Internal
!
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated September 1, 2011 expressed an unqualified opinion thereon.
!
!
Atlanta, Georgia
September 1, 2011
!
!
/s/ Ernst & Young LLP
!
F-2
!
!
ASSETS
!
Delta Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
!
!
!
Cash and cash equivalents
!
Accounts receivable, net
!
Other receivables
Inventories, net
!
!
Prepaid expenses and other current assets
!
Deferred income taxes
Total current assets
!
!
Property, plant and equipment, net
!
!
Goodwill
Intangibles, net
!
Other assets
!
!
!
!
LIABILITIES AND SHAREHOLDER’S EQUITY
!
Liabilities:
!
Accounts payable
!
Accrued expenses
!
Income tax payable
!
Current portion of long-term debt
!
Total current liabilities
!
Long-term debt, less current maturities
!
!
!
Deferred income taxes
Other liabilities
!
Contingent consideration
!
Total liabilities
!
Commitments and contingencies
!
!
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
!
8,421,863 and 8,516,293 shares outstanding as of July 2, 2011 and July 3, 2010, respectively
Additional paid-in capital
!
Retained earnings
!
Accumulated other comprehensive loss
!
Treasury stock —1,225,109 and 1,130,679 shares as of July 2, 2011 and July 3, 2010, respectively
!
Total shareholders’ equity
!
!
See accompanying notes to consolidated financial statements.
!
F-3
!
July 2, 2011
July 3, 2010
!
656
!
!
$
!
76,210
!! !
!
611
159,209
4,059
2,931
243,676
!! !
!! !
!! !
!! !
!! !
!! !
39,756
16,812
7,405
4,216
311,865
! !
!! !
!! !
!! !
!! !
$
!! !
!
! !
!
!
!
$
!
55,554
23,708
!! !
!
969
2,799
83,030
83,974
2,877
19
—
169,900
!! !
!! !
!! !
!! !
! !
!! !
!! !
!! !
!! !
$
!! !
!
! !
!
!
! !
!
!
—
96
!! !
59,750
!! !
93,277
(14
(11,144
141,965
311,865
!! !
)
!! !
)
!
!!
!
!!
!! !
$
!
687
59,916
1,075
116,599
3,475
3,162
184,914
37,694
17,424
8,018
!!
!!
!!
!!
!!
!!
!!
!!
!!
3,283
!!
251,333
!!
!!
34,048
19,273
712
5,718
59,751
62,355
1,826
157
!!
!!
!!
!!
!!
!!
!!
1,530
!!
125,619
!!
!!
—
96
!!
59,111
75,950
(105
(9,338
!!
!!
)
!!
)
!
125,714
!
251,333
!!
!
!
!! !
!
!!
$
!
!
!
$
!
!
$
!
!
!
!
!
$
!
!
!
!
!
$
!
!
Net sales
!
Cost of goods sold
!
Gross profit
!
!
Selling, general and administrative expenses
!
Change in fair value of contingent consideration
!
Goodwill impairment charge
Other expense (income), net
!
Operating income
!
Interest expense, net
!
!
Income before provision for income taxes
!
!
!
Provision for income taxes
!
Net income
!
!
Basic earnings per share
!
Diluted earnings per share
!
!
Weighted average number of shares outstanding
!
Dilutive effect of stock options
!
Weighted average number of shares assuming dilution
!
See accompanying notes to consolidated financial statements.
!
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
!
!
!
July 2, 2011
July 3, 2010
June 27, 2009
475,236
!
359,001
$
!
!! !
116,235
91,512
(1,530
612
345
25,296
!! !
!! !
! !
)
!! !
!
!!
!! !
!! !
!! !
2,616
! !
22,680
!! !
!! !
5,353
17,327
! !
$
!! !
!! !
2.04
1.98
$
! !
$
!! !
!! !
8,486
! !
261
8,747
!! !
!! !
!! !
!
!
!
!
424,411
!
323,628
$
!
!! !
100,783
!! !
!! !
80,695
! !
—
—
(74
20,162
!! !
!! !
)
!! !
!
!!
!! !
3,509
! !
16,653
!! !
!! !
4,466
12,187
! !
$
!! !
!! !
1.43
1.40
$
! !
$
!! !
!! !
8,514
! !
219
8,733
!! !
!! !
!! !
!
!
!
!
355,197
!
278,758
!!
76,439
64,388
—
—
(96
!!
!!
!!
!!
)
!!
12,147
!
!
4,718
7,429
!!
!!
!!
973
6,456
!!
0.76
0.76
!!
!!
!!
8,502
—
8,502
!!
!!
!!
$
!
!
!
!
$
$
!
$
!
!
!
!
!
F-4
!
!
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
(Amounts in thousands, except share amounts)
!
!
!
Additional
Accumulated
Other
!
!
!
Balance at June 28, 2008
!
!
!
!
! !
Common Stock
! !
Shares
Amount
!
9,646,972
!
$
!
!
!! !
Retained
Comprehensive
Earnings
Income (Loss)
!
!
! !
! !
!! !
$
!
57,307
!
!
(441
! !!
!!
! !
)
! !
!!
!
Treasury Stock
Shares
1,150,223
!
$
!
!
!! !
Amount
!
(9,500
!
)
!
!
!
!
!
Comprehensive income:
Net income
!
Unrealized loss on derivatives, net
!
Total comprehensive income
Stock grant
!
Employee stock based compensation
!
Balance at June 27, 2009
!
!
!
Comprehensive income:
Net income
!
Unrealized gain on derivatives, net
!
Total comprehensive income
!
!
Stock grant
Stock options exercised
!
Employee stock based compensation
!
!
Comprehensive income:
Net income
!
Unrealized gain on derivatives, net
!
Total comprehensive income
!
!
Stock grant
!
!
Stock options exercised
!
Excess tax benefits from option
exercises
Purchase of common stock
!
!
Employee stock based compensation
!
Balance at July 2, 2011
!
!
!
!
—
—
—
—
9,646,972
!
!
!
!
—
—
—
—
—
! !
!
!
!! !
!! !
!
!
! !
!! !
!! !
!! !
! !
!
!
!! !
!! !
!
!
! !
!! !
!! !
!! !
!! !
!
!
!
!
—
—
! !
!
!
!! !
!! !
!
!
! !
!! !
—
—
—
!! !
—
!! !
Balance at July 3, 2010
!
9,646,972
! !
! !
!
!
!!
$
! !
!
!
!
—
—
50
—
(9,450
—
—
64
48
—
(9,338
!! !
!! !
!
! !
!! !
)
!! !
!
!!
! !
!
!
!! !
!! !
!
! !
!! !
!! !
)
!! !
!
!!
—
—
! !
!
!
!! !
!! !
!
! !
58
643
!! !
—
!! !
Total
!
104,893
!
!!
6,456
(124
6,332
)
!!
!
!
43
877
112,145
12,187
460
12,647
67
50
805
125,714
17,327
91
17,418
98
102
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
!!
84
!!
—
(124
! !
!
!
)
!! !
!
!!
—
—
! !
!
!
!! !
!! !
!
!
! !
—
(5,950
)
!
!
! !
(565
!! !
)
!!
!
!!
—
1,144,273
!
!!
!! !
!! !
—
460
—
—
—
(105
! !
!
!
!! !
!! !
!
!
! !
—
—
! !
!
!
!! !
!! !
(7,750
)
!
!
! !
!! !
!! !
)
!! !
!
!!
(5,844
—
1,130,679
)
!
!!
!
!!
!! !
!! !
! !
!
!
!! !
!! !
!
!
! !
—
—
! !
!
!
!! !
!! !
(7,000
)
!
!
! !
!! !
(75,326
)
!
!!
—
91
—
—
—
!! !
—
!
!!
! !
!
!
!
!! !
$
!
! !
!
!
!! !
!! !
!
!
! !
!! !
!! !
!! !
! !
!
!
!! !
!! !
!
!
! !
!! !
!! !
!! !
!! !
! !
!
!
!! !
!! !
96
!
—
—
—
—
96
—
—
—
—
—
96
—
—
!
!
! !
!! !
—
—
—
!! !
—
!! !
Paid-In
Capital
!
57,431
!
—
—
! !
! ! !
!
$
!
!! !
! !
!
!
!! !
!! !
!
!
! !
(7
)
877
58,301
—
—
3
2
805
59,111
!
!!
!! !
!! !
! !
!
!
!! !
!! !
!
!
! !
!! !
!! !
!! !
!! !
—
—
! !
!
!
!! !
!! !
!
!
! !
40
(541
)
!! !
84
!
!!
—
!! !
6,456
! !
!
!
—
!! !
!! !
—
—
63,763
12,187
!
!
! !
!! !
!! !
!! !
! !
!
!
—
!! !
!! !
—
—
—
75,950
!
!
! !
!! !
!! !
!! !
!! !
17,327
! !
!
!
—
!! !
!! !
!
!
! !
!! !
—
—
—
!! !
—
!! !
!
F-5
!
See accompanying notes to consolidated financial statements.
!! !
!
!
—
!
9,646,972
!! !
!! !
$
—
96
1,056
$
59,750
!
—
$
93,277
!
!! !
!! !
!! !
$
!
!! !
!! !
!! !
!! !
!! !
!! !
—
!! !
176,756
!! !
(2,507
)
!! !
(2,507
)
!!
—
(14
!! !
)
!! !
!
!!
—
1,225,109
—
$
(11,144
!
!!
!
)
!! !
!
!!
!! !
!! !
!! !
1,056
$
141,965
!
!
!
!!
!!
!
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
!
!
!
!
Operating activities:
!
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
!
!
!
Depreciation
Amortization of intangibles
!
Amortization of deferred financing fees
Excess tax benefits from exercise of stock options
Provision (benefit from) deferred income taxes
Benefit from allowances on accounts receivable, net
Non-cash stock compensation
Change in the fair value of contingent consideration
Goodwill impairment charge
Loss (gain) on disposal of property and equipment
Changes in operating assets and liabilities, net of effect of acquisitions:
!
!
!
!
!
!
!
!
Accounts receivable
Inventories
!
Prepaid expenses and other current assets
!
Other non-current assets
Accounts payable
Accrued expenses
!
Income taxes
!
Other liabilities
!
!
Net cash provided by operating activities
!
!
Investing activities:
!
Purchases of property and equipment, net
Cash paid for businesses, net of cash acquired
!
Net cash used in investing activities
!
!
!
!
Financing activities:
!
!
Proceeds from long-term debt
Repayment of long-term debt
!
Payment of financing fees
!
Repurchase of common stock
Proceeds from stock options
!
Payment of withholding taxes on exercise of stock options
!
Excess tax benefits from exercise of stock options
!
!
!
!
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
!
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
!
Supplemental cash flow information:
!
Cash paid during the year for interest
!
Cash paid during the year for income taxes, net of refunds received
Non-cash financing activity—issuance of common stock
!
!
See accompanying notes to consolidated financial statements.
!
F-6
!
!
!
!
!
!
!
!
$
$
!
$
$
!
!
!
!
July 2, 2011
June 27, 2009
Year Ended
July 3, 2010
17,327
12,187
$
!
!
!
!
$
!
!
!
!
! !
!
!! !
!
!! !
!! !
)
!! !
!!
!
)
!! !
!
!!
)
!! !
!!
!
!! !
!! !
)
!
)
!
!!
)
!!
!
!
!!
!! !
!! !
!! !
)
!! !
!!
!
6,644
613
313
(84
1,282
(354
1,056
(1,530
612
111
(11,673
(36,441
(411
125
20,897
4,109
341
(47
2,890
!! !
!
! !
!
!!
!!
)
)
!
)
!
!
!
!!
! !
!
)
!! !
)
!
!!
)
!
!!
!!
!
)
!! !
!
!!
!! !
)
!! !
!
!!
!! !
(7,966
(9,884
(17,850
511,358
(492,658
(1,450
(2,507
263
(161
84
14,929
(31
687
656
$
$
!
$
$
!
!
!
!
2,229
3,922
98
!! !
!
!! !
!! !
!! !
!
! !
!
!! !
!
!! !
!! !
!! !
!! !
)
!! !
!
!!
!! !
!! !
!! !
!! !
)
!
!!
!
)
!! !
)
!!
!
!
!!
!! !
!! !
!! !
!! !
6,203
585
279
—
916
(903
948
—
—
170
(2,198
9,324
(88
(17
251
1,684
2,467
461
32,269
$
!
!
!
!
!
!
!! !
! !
!
!!
!!
)
)
!
)
!
!
!!
! !
!
)
!! !
!
!!
!! !
!! !
!! !
!! !
)
!! !
!
!!
!! !
!! !
(6,955
(1,700
(8,655
409,680
(433,261
—
—
—
—
—
(23,581
33
654
687
$
$
!
$
$
!
!
!
!
3,643
1,375
118
!! !
!
!! !
!! !
!! !
!
6,456
6,589
489
145
—
(288
(384
981
—
—
(9
8,980
2,152
(40
113
(1,912
658
(748
(826
22,356
(3,018
(7,977
(10,995
362,297
(372,965
(625
—
—
—
—
(11,293
!!
!!
!!
!!
)
!!
)
!
!
!!
!!
)
!!
!
!!
)
!!
!
)
!!
!
)
!!
)
!
!
!!
!
!
!
!
!
!
!
)
)
!
)
!
!
!
!
!
!
!
)
!!
)
!
!
!!
!!
!!
)
!!
!
!
68
586
!!
654
!!
4,867
1,887
43
!!
!!
!!
!!
!
NOTE 1—THE COMPANY
Delta Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
!
!
!
Delta Apparel, Inc. is an international design, marketing, manufacturing and sourcing company that features a diverse portfolio
of lifestyle branded activewear apparel and headwear and high-quality private label programs. We specialize in selling casual
and athletic products through a variety of distribution channels. Our products are sold across distribution tiers and in most store
types, including specialty stores, boutiques, department stores, mid-tier and mass channels. From a niche distribution
standpoint, we also have strong distribution at college bookstores and the U.S. military. Our products are made available
direct-to-consumer
and
www.deltaapparel.com. Additional products can be viewed at www.2thegame.com and www.thecottonexchange.com. We
design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and
quality controls as well as leverage scale efficiencies. We have manufacturing operations located in the United States, El
Salvador, Honduras and Mexico, and 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 for retailers.
at www.soffe.com, www.junkfoodclothing.com, www.saltlife.com
our websites
on
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
!
(a) Basis of Presentation: Our consolidated financial statements include the accounts of Delta Apparel and its wholly owned
domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. We apply the equity method of accounting for investments in companies where we have less than a 50%
ownership interest and over which we exert significant influence. We do not exercise control over these companies and do not
have substantive participating rights. As such, these are not considered variable interest entities.
We manage our business in two distinct segments: branded and basics. Although the two segments are similar in their
production processes and regulatory environment, they are distinct in their economic characteristics, products and distribution
methods.
!
(b) Fiscal Year: We operate on a 52-53 week fiscal year ending on the Saturday closest to June 30. The 2011 fiscal year was a
52-week year and ended on July 2, 2011. The 2010 fiscal year was a 53-week year and ended on July 3, 2010. The 2009 fiscal
year was a 52-week year and ended on June 27, 2009.
!
(c) Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires management to make certain estimates and assumptions that affect the reported amounts and disclosures of assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in
our financial statements, for example: allowance for doubtful trade receivables, sales returns and allowances, inventory
obsolescence, the carrying value of goodwill, stock-based compensation and income tax assets and related valuation allowance.
Our actual results may differ from our estimates.
!
(d) Revenue Recognition: Revenues from product sales are recognized when ownership is transfered to the customer, which
includes not only the passage of title, but also the transfer of the risk of loss related to the product. At this point, the sales price
is fixed and determinable, and we are reasonably assured of the collectibility of the sale. The majority of our sales are shipped
FOB shipping point and revenue is therefore recognized when the goods are shipped to the customer. For sales that are shipped
FOB destination point, we do not recognize the revenue until the goods are received by the customer. Shipping and handling
charges billed to our customers are included in net revenue and the related costs are included in cost of goods sold. Revenues
are reported on net sales basis, which is computed by deducting product returns, discounts and estimated returns and
allowances. We estimate returns and allowances on an ongoing basis by considering historical and current trends.
!
(e) Sales Tax: Sales tax collected from customers and remitted to various government agencies are presented on a net basis
(excluded from revenues) in the consolidated statements of operations.
!
(f) Cash and Cash Equivalents: Cash and cash equivalents consists of cash and temporary investments with original maturities
of three months or less.
!
(g) Accounts Receivable: Accounts receivable consists primarily of receivables from our customers and we generally do not
require collateral. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. At
July 2, 2011, our net accounts receivable was $76.2 million, consisting of $78.0 million in accounts receivable and $1.8 million
in reserves. At July 3, 2010, our net accounts receivable was $59.9 million, consisting of $62.0 million in accounts receivable
and $2.1 million in reserves.
!
!
F-7
!
(h) Inventories: We state inventories at the lower of cost or market 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. See Note 2(x) for further information regarding yarn
procurements.
!
(i) Property, Plant and Equipment: Property, plant and equipment are stated at cost. We depreciate and amortize our assets on
a straight-line method over the estimated useful lives of the assets, which range from three to twenty years. Leasehold
improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Assets that we
acquire under non-cancelable leases that meet the criteria of capital leases are capitalized in property, plant and equipment and
amortized over the useful lives of the related assets. When we retire or dispose of assets, the costs and accumulated depreciation
or amortization are removed from the respective accounts and we recognize any related gain or loss. Repairs and maintenance
costs are charged to expense when incurred. Major replacements that substantially extend the useful life of an asset are
capitalized and depreciated.
(j) Internally Developed Software Costs. We account for internally developed software in accordance with FASB
Codification No. 350-40, Intangibles-Goodwill and Other, Internal-Use Software. After technical feasibility has been
established, we capitalize the cost of our software development process, including payroll and payroll benefits, by tracking the
software development hours invested in the software projects. We amortize our software development costs in accordance with
the estimated economic life of the software, which is generally three to ten years.
!
(k) Impairment of Long-Lived Assets (Including Amortizable Intangible Assets): In accordance with FASB Codification
No. 360, Property, Plant, and Equipment, our long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. When evaluating assets for potential
impairment, we compare the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by
the asset. If impairment is indicated, the asset is permanently written down to its estimated fair market value (based upon future
discounted cash flows) and an impairment loss is recognized. During fiscal year 2009, we closed the Soffe textile production in
our Fayetteville, North Carolina facility and moved this production into our existing Maiden and Ceiba Textiles facilities. No
impairment losses were required to be recorded in connection with the closing of the Fayetteville, North Carolina textile
operations.
!
!
(l) Goodwill and Intangibles: We recorded goodwill and intangibles with definite lives, including trade names and trademarks,
customer relationships, technology, and non-compete agreements, in conjunction with the acquisitions of Junkfood Clothing
Company and Art Gun. Intangible assets are amortized based on their estimated economic lives, ranging from four to twenty
years. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets
and liabilities acquired, and is not amortized. The total amount of goodwill is expected to be deductible for tax purposes. See
Note 6 — Goodwill and Intangible Assets for further details.
!
(m) Impairment of Goodwill: We evaluate the carrying value of goodwill annually or more frequently if events or
circumstances indicate that an impairment loss may have occurred. Such circumstances could include, but are not limited to, a
significant adverse change in business climate, increased competition or other economic conditions. Under FASB Codification
No. 350, Intangibles — Goodwill and Other ("ASC 350"), goodwill is tested at a reporting unit level. As of the beginning of
fiscal year 2011, Junkfood and Art Gun were the only reporting units with recorded goodwill. The impairment test involves a
two-step process. The first step involves comparing the fair value of the reporting unit to which the goodwill is assigned to its
carrying amount. If this comparison indicates that a reporting unit’s estimated fair value is less than its carrying value, a second
step is required. If applicable, the second step requires us to allocate the estimated fair value of the reporting unit to the
estimated fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets
representing the implied fair value of goodwill for that reporting unit. If the carrying value of the goodwill exceeds its implied
fair value, the carrying value is written down by an amount equal to such excess.
The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments with respect to a
variety of factors, including sales, gross margins, selling, general and administrative expenses, capital expenditures, cash flows
and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. When we
perform goodwill impairment testing, our assumptions are based on annual business plans and other forecasted results. We
select a discount rate, which is used to reflect market-based estimates of the risks associated with the projected cash flows,
based on the best information available as of the date of the impairment assessment.
!
At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration related to the Art
Gun acquisition in accordance with FASB Codification No. 805, Business Combinations (“ASC 805”). Based on the operating
results and projections for Art Gun, we analyzed and concluded that the fair value of the contingent consideration was de
minimis, resulting in a $1.5 million favorable adjustment recorded in the fiscal quarter ended January 1, 2011. The change in
fair value of the contingent consideration created an indicator of impairment for the goodwill associated with Art Gun. In
!
F-8
!
accordance with ASC 350, we performed an interim impairment test of goodwill as of the end of the second quarter of fiscal
year 2011. Under the first step of the impairment analysis for Art Gun, we considered both the income approach, which
!
estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value
based on comparable market prices, both of which fall in level 3 of the fair value hierarchy. The results of step one of the
impairment test indicated that the carrying value of the Art Gun reporting unit exceeded its fair value. The second step of the
impairment test required us to allocate the estimated fair value of Art Gun to the estimated fair value of Art Gun's net assets,
with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill. The result
indicated that the goodwill at Art Gun was fully impaired, resulting in a $0.6 million impairment charge recorded in the fiscal
quarter ended January 1, 2011. The change in contingent consideration and goodwill impairment charge resulted in a net
favorable adjustment of $0.9 million, which is included in the branded segment. At July 2, 2011, the fair value of the
contingent consideration was remeasured based on Art Gun's current operating results and projections and remained de minimis.
We completed our annual impairment test of goodwill on the first day of our third fiscal quarter using actual results through the
!
last day of the second fiscal quarter. Based on the valuation, there does not appear to be impairment on the goodwill associated
with Junkfood, the only remaining goodwill recorded on our financial statements.
Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can
be no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the
future. If our assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be
triggered and goodwill may be determined to be impaired.
!
(n) Self-Insurance Reserves: Our medical, prescription and dental care benefits are primarily self-insured. Our self-insurance
accruals are based on claims filed and estimates of claims incurred but not reported. We develop estimates of claims incurred
but not reported based upon the historical time it takes for a claim to be reported and historical claim amounts. We had self-
insurance reserves of approximately $0.6 million and $0.8 million at July 2, 2011 and July 3, 2010, respectively.
!
(o) 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, and operating loss 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
!
(p) Cost of Goods Sold: We include in cost of goods sold all manufacturing and sourcing costs incurred prior to the receipt of
finished goods at our distribution facilities. The cost of goods sold principally includes product cost, purchasing costs, inbound
freight charges, insurance, and inventory write-downs. Our gross margins may not be comparable to other companies, since
some entities include costs related to their distribution network in cost of goods sold and we exclude them from gross margin,
including them instead in selling, general and administrative expenses.
!
(q) Selling, General and Administrative Expense: We include in selling, general and administrative expenses, costs incurred
subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and
packing, and shipping goods for delivery to our customers. Distribution costs included in selling, general and administrative
expenses totaled $14.3 million, $14.0 million and $13.6 million in fiscal years 2011, 2010 and 2009, respectively. In addition,
selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising
and marketing expenses, royalty payments on licensed products, and other general and administrative expenses.
!
(r) Advertising Costs: All costs associated with advertising and promoting our products are expensed during the year in which
they are incurred and are included in selling, general and administrative expenses in the consolidated statements of operations.
We participate in cooperative advertising programs with our customers. Depending on the customer, our defined cooperative
programs allow the customer to use from 1% to 5% of its net purchases from us towards advertisements of our products.
Because our products are being specifically advertised, we are receiving an identifiable benefit resulting from the consideration
for cooperative advertising. Therefore, pursuant to FASB Codification No. 605-50, Revenue Recognition, Customers Payments
and Incentives, we record cooperative advertising costs as a selling expense and the related cooperative advertising reserve as
an accrued liability. Advertising costs totaled $6.7 million, $5.3 million and $4.4 million in fiscal years 2011, 2010 and 2009,
respectively. Included in these costs were $1.9 million, $2.2 million and $1.9 million in fiscal years 2011, 2010 and 2009,
respectively, related to our cooperative advertising programs.
!
(s) Stock-Based Compensation: Stock-based compensation cost is accounted for under the provisions of FASB Codification
No. 718, Compensation – Stock Compensation (“ASC 718”), the Securities and Exchange Commission Staff Accounting
bulletin No. 107 ("SAB 107"), and the Securities and Exchange Commission Staff Accounting Bulletin No. 110 ("SAB 110").
ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized as
expense over the vesting period using a fair value method. We estimate the fair value of stock-based compensation using the
Black-Scholes options pricing model. We recognize this fair value, net of estimated forfeitures, as a component of cost of sales
and selling, general and administrative expense in the consolidated statements of operations over the vesting period.
!
F-9
!
!
(t) Earnings per Share: We compute basic earnings per share by dividing net income by the weighted average number of
common shares outstanding during the year pursuant to FASB Codification No 260, Earnings Per Share (“ASC 260”). Diluted
!
earnings per share is calculated, as set forth in ASC 260, by dividing net income by the weighted average number of common
shares outstanding adjusted for the issuance of potentially dilutive shares. Potential dilutive shares consist of common stock
issuable under the assumed exercise of outstanding stock options and awards using the treasury stock method. This method, as
required by FASB Codification No 718, Compensation — Stock Compensation, assumes that the potential common shares are
issued and the proceeds from the exercise, along with the amount of compensation expense attributable to future services, are
used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the
number of shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted
earnings per share. Outstanding stock options and awards that result in lower potential shares issued than shares purchased
under the treasury stock method are not included in the computation of diluted earnings per share since their inclusion would
have an anti-dilutive effect on earnings per share.
(u) Foreign Currency Translation: Our functional currency for our foreign operated manufacturing facilities is the United
States dollar. We remeasure those assets and liabilities denominated in foreign currencies using exchange rates in effect at each
balance sheet date. Fixed assets and the related accumulated depreciation or amortization are recorded at the exchange rates in
effect on the date we acquired the assets. Revenues and expenses denominated in foreign currencies are remeasured using
average exchange rates for all periods presented. We recognize the resulting foreign exchange gains and losses as a component
of other income and expense in the consolidated statements of operations. These gains and losses are immaterial for all periods
presented.
!
!
(v) Fair Value of Financial Instruments: We use financial instruments in the normal course of our business. The carrying
values approximate fair values for financial instruments that are short-term in nature, such as cash, accounts receivable and
accounts payable. We estimate that the carrying value of our long-term debt approximates fair value based on the current rates
offered to us for debt of the same remaining maturities.
(w) Other Comprehensive Income (Loss): Other Comprehensive Income consists of net income and unrealized gains (losses)
from cash flow hedges, net of tax, and is presented in the Consolidated Statements of Shareholders’ Equity. Accumulated other
comprehensive loss contained in the shareholders’ equity section of the Consolidated Balance Sheets in fiscal years 2011 and
2010 consisted of $14 thousand and $0.1 million, respectively, for one interest rate swap agreement in fiscal year 2011 and two
interest rate swap agreements in fiscal year 2010.
!
!
(x) Yarn and Cotton Procurements: We have a supply agreement with Parkdale America, LLC (“Parkdale”) to supply our
yarn requirements until December 31, 2011. Under the supply agreement, we purchase from Parkdale all of our yarn
requirements for use in our manufacturing operations, 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 plus a fixed
conversion cost. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result
in unfavorable yarn pricing for us. We fix the cotton prices as a component of the purchase price of yarn, pursuant to the supply
agreement, 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 elect to fix specific cotton prices. We are currently in negotiations to secure
a new agreement to supply our yarn requirements. We do not believe we will lose any competitive position we currently have
with a new agreement.
(y) Derivatives: From time to time, we enter into forward contracts, option agreements or other instruments to limit our
exposure to fluctuations in interest rates and raw material prices with respect to long-term debt and cotton purchases,
respectively. We determine at inception whether the derivative instruments will be accounted for as hedges.
!
We account for derivatives and hedging activities in accordance with FASB Codification No 815, Derivatives and Hedging
(“ASC 815”), as amended. ASC 815 establishes accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative
instruments as either assets or liabilities in the consolidated balance sheets and measurement of those instruments at fair value.
The accounting treatment of changes in fair value depends upon whether or not a derivative instrument is designated as a hedge
and, if so, the type of hedge. We include all derivative instruments at fair value in our Consolidated Balance Sheets. For
derivative financial instruments related to the production of our products that are not designated as a hedge, we recognize the
changes in fair value in cost of sales. For derivatives designated as cash flow hedges, to the extent effective, we recognize the
changes in fair value in accumulated other comprehensive income (loss) until the hedged item is recognized in income. Any
ineffectiveness in the hedge is recognized immediately in income in the line item that is consistent with the nature of the hedged
risk. We formally document all relationships between hedging instruments and hedged items, as well as risk management
objectives and strategies for undertaking various hedge transactions, at the inception of the transactions.
!
We are exposed to counterparty credit risks on all derivatives. Because these amounts are recorded at fair value, the full amount
of our exposure is the carrying value of these instruments. We only enter into derivative transactions with well established
institutions and therefore we believe the counterparty credit risk is minimal.
!
F-10
!
!
No raw material option agreements were purchased during fiscal year 2011, 2010 or 2009. On April 1, 2009, we entered into
an interest rate swap agreement which effectively converted $15.0 million of floating rate debt under our credit facility to a
!
fixed obligation with a LIBOR rate of 1.57%. This agreement terminated on April 1, 2011. On March 1, 2010, we entered into
an interest rate swap agreement which effectively converted $15.0 million of floating rate debt under our credit facility to a
fixed obligation with a LIBOR rate of 1.11%. This agreement will terminate on September 1, 2011. We assessed these
agreements and concluded that the swap agreements match the exact terms of the underlying debt to which it is related and
therefore is considered a highly-effective hedge. The changes in fair value of the interest rate swap agreements resulted in an
AOCI gain, net of taxes, of $0.1 million and $0.5 million for the years ended July 2, 2011 and July 3, 2010, respectively. See
Note 15(d) - Derivatives for further details.
(z) Reclassifications: We have made certain reclassifications to the presentation of the prior year results in order to conform to
the current year presentation. In our July 3, 2010 Consolidated Balance Sheet, we have increased our current accrued expenses
by $0.4 million with a corresponding decrease in accounts payable by $0.4 million in order to consistently classify the liabilities
between accounts payable and accrued expenses. Also, in our 2009 Consolidated Statement of Cash Flows, we reclassified, to
show gross, our financing activities related to deferred financing fees. These reclassifications had no impact on our results of
operations or financial position.
!
!
(aa) Recently Adopted Accounting Pronouncements: In June 2009, the FASB issued Codification No. 810-10, Consolidation
of Variable Interest Entities (“ASC 810-10”), and issued Accounting Standards Update (“ASU”) No. 2009-17, Consolidations:
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”), to improve
financial reporting by enterprises involved with variable interest entities. They require an entity to qualitatively assess the
determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to
direct the activities of the VIE that most significantly impact the entity's economic performance and (2) has the obligation to
absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. They
also require an ongoing reconsideration of the primary beneficiary, and amend the events that trigger a reassessment of whether
an entity is a VIE. Enhanced disclosures are also required to provide information about an entity's involvement in a VIE. ASC
810-10 and ASU 2009-17 are effective for annual reporting beginning after November 15, 2009. We adopted ASC 810-10 and
ASU 2009-17 as of July 4, 2010, and the adoption had no impact on our financial statements..
(ab) Recently Issued Accounting Pronouncements Not Yet Adopted: In December 2010, the FASB issued ASU 2010-28,
Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units
with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely
than not that a goodwill impairment exists, an entity must consider whether there are any adverse qualitative factors indicating
an impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2010. ASU 2010-28 is therefore effective for our fiscal year ending June 30, 2012. Based on the current
carrying amount of our reporting units, we do not believe the adoption of ASU 2010-28 will have an impact on our financial
statements.
!
!
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805) - Disclosure of Supplementary Pro
Forma Information for Business Combinations (“ASU 2010-29”). This standard update clarifies that, when presenting
comparative financial statements, Securities and Exchange Commission registrants should disclose revenue and earnings of the
combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior
annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in
the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or
aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption
permitted. ASU 2010-29 is therefore effective for acquisitions made after the beginning of our fiscal year ending June 30, 2012.
We expect that ASU 2010-29 may impact our disclosures for any future business combinations, but the effect will depend on
acquisitions that may be made in the future.
!
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). The new guidance results in
a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between
accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards
(IFRS). Additional disclosure requirements in ASU 2011-04 include: (a) for Level 3 fair value measurements, quantitative
information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the
sensitivity of the measurements to changes in the unobservable inputs; (b) for the use of a nonfinancial asset that is different
from the asset’s highest and best use, the reason for the difference; (c) for financial instruments not measured at fair value but
for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were
determined; and (d) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 is
F-11
!
effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and applied on a
prospective basis. ASU 2011-04 is therefore effective for our fiscal year ending June 29, 2013 and we are currently evaluating
!
the impact on our financial statements.
!
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income
("ASU 2011-05"). This standard update requires that all non-owner changes in stockholders’ equity be presented either in a
single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement
approach, the first statement should present total net income and its components followed consecutively by a second statement
that should present total other comprehensive income, the components of other comprehensive income, and the total of
comprehensive income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011 and applied on a retrospective basis. ASU 2011-05 is therefore effective for our fiscal year ending June 29,
2013 and we do not expect the adoption to have a material effect on our financial position.
NOTE 3—ACQUISITIONS
!
!
We accounted for the acquisitions of The Cotton Exchange and Art Gun pursuant to FASB Codification No. 805, Business
Combinations, with the purchase price, including contingent consideration as applicable, being allocated based upon fair values.
We determined fair values using one or more of the following valuation techniques, all of which are considered level two inputs
based on the fair value hierarchy: (a) market approach using prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities; or (b) cost approach using amounts that would be required to
replace the service capacity of an asset. We financed the acquisitions completed in fiscal years 2011, 2010 and 2009 using our
U.S. asset-based secured credit facility. The acquisitions are included in the consolidated financial statements in our branded
segment since the acquisition date.
!
The Cotton Exchange Acquisition
On June 11, 2010, we formed a new North Carolina limited liability company, TCX, LLC, as a wholly-owned subsidiary of
M.J. Soffe, LLC. Pursuant to an Asset Purchase Agreement dated July 5, 2010, on July 12, 2010, TCX acquired substantially
all of the net assets of HPM Apparel, Inc. d/b/a The Cotton Exchange, including accounts receivable, inventory, and fixed
assets, and assumed certain liabilities. The total purchase price, which included a post-closing working capital adjustment, was
$9.9 million. We finalized the valuation for the assets acquired and liabilities assumed and have determined the final allocation
of the purchase price. No goodwill or other intangible assets were recorded in conjunction with the acquisition of The Cotton
Exchange.
!
Art Gun Acquisition
!
On December 28, 2009, through our wholly-owned subsidiary, Art Gun, LLC, we acquired substantially all of the net assets of
Art Gun Technologies, LLC. Through its innovative technology, Art Gun provides shoppers the ability to choose a basic
garment and design a unique graphic to create a one-of-a-kind customized product. We purchased the associated accounts
receivable, inventory, fixed assets and intangibles of the business, and assumed certain liabilities. The aggregate consideration
for the acquisition of Art Gun included $1.0 million paid in cash at closing. Additional amounts are due to the Art Gun sellers if
performance targets are met by Art Gun during each of the fiscal years beginning on July 4, 2010 and ending on July 1, 2017.
!
We identified and recorded certain intangible assets with definite lives, including technology and non-compete agreements, and
goodwill in conjunction with the acquisition of Art Gun. See Note 6 - Goodwill and Intangible Assets for details and Note 2(m)
- Impairment of Goodwill for further discussion.
!
To The Game Acquisition
Effective on March 29, 2009, we acquired substantially all of the assets of Gekko Brands, a premier supplier of licensed and
decorated headwear sold under the brands of The Game® and Kudzu®. The total purchase price was $5.7 million, with $5.0
million paid at closing and $0.7 million due 120 days after closing, which was paid in the first quarter of fiscal year 2010. We
allocated the purchase price (including direct acquisition costs) to the assets acquired and liabilities assumed based on their fair
values. No goodwill or intangibles were recorded in conjunction with the acquisition of To The Game.
!
!
NOTE 4—INVENTORIES
!
Inventories, net of reserves of $3.7 million and $3.8 million in fiscal years 2011 and 2010, respectively, consist of the following
(in thousands):
!
!
Raw materials
!
Work in process
!
Finished goods
!
!
!
!
$
$
!
!
F-12
!
July 2,
2011
!
20,970
34,599
!
$
!
!
!! !
103,640
159,209
!! !
!! !
$
!! !
!
July 3,
2010
!
10,604
!
21,277
84,718
!
!
!
!
116,599
!
!
!
!
Raw materials include finished yarn and direct materials for the basics segment and include direct embellishment materials and
undecorated garments and headwear for the branded segment.
!
NOTE 5—PROPERTY, PLANT AND EQUIPMENT
!
Property, plant and equipment consist of the following (in thousands):
!
!
Land and land improvements
!
Buildings
!
Machinery and equipment
!
Computers and software
Furniture and fixtures
!
Leasehold improvements
!
Automobiles
Construction in progress
!
!
!
!
Less accumulated depreciation and amortization
!
!
!
!
Estimated
Useful Life
!
!
N/A
10-20 years
!
5-15 years
3-10 years
7 years
3-10 years
!
5 years
!
!
!
!
N/A
!
!
!
!
!
$
!
$
!
!
!
!
!
!
!
!
!
!
!
!
!
July 2,
2011
July 3,
2010
993
!
7,385
$
!
!! !
62,400
16,320
4,760
1,869
633
3,589
97,949
(58,193
39,756
!! !
!! !
!! !
!! !
!! !
!! !
!! !
)
!! !
!
!!
$
!
993
!
7,292
!!
58,620
14,973
4,465
1,986
486
3,148
!!
!!
!!
!!
!!
!!
(54,269
91,963
!!
)
!!
37,694
!
!
!! !
!
!!
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
!
Components of intangible assets consist of the following (in thousands):
!
!
!
Goodwill
!
!
Intangibles:
!
Tradename/trademarks
!
Customer relationships
!
Technology
!
Non-compete agreements
!
Total intangibles
!
!
$
!
!
!
July 2, 2011
Accumulated
Amortization
!
Net Value
!
!
Cost
Cost
July 3,
2010
Accumulated
Amortization
!
Net Value
17,424
!
$
!
(612
)
!
$
!
16,812
!
!
$
! !
17,424
!
$
!
—
!
$
!
17,424
!
!!
!
!
!
!
!
!
1,530
7,220
1,220
517
10,487
!!
!!
!!
!!
!
!
(450
)
(2,124
(185
(323
(3,082
)
!
)
!
)
!
)
!
!
!
!
!
!! !
!
! !
!
!
!! !
!! !
!! !
!! !
1,080
5,096
1,035
194
7,405
!!
!
!!
!
1,530
7,220
1,220
517
10,487
!
!
!!
!!
!!
!!
!
!
(375
)
(1,762
(63
(269
(2,469
)
!
)
!
)
!
)
!
!
!
!
!
! !
!
! !
!! !
Economic Life
N/A
!
!
! !
!
!! !
!! !
!! !
!! !
1,155
5,458
1,157
248
8,018
20 yrs
!
20 yrs
10 yrs
!
!
4 – 8.5 yrs
!
!
!
Amortization expense for intangible assets was $0.6 million for each of the years ended July 2, 2011 and July 3, 2010 and
$0.5 million for the year ended June 27, 2009. Amortization expense is estimated to be approximately $0.6 million each for
fiscal years 2012, 2013, 2014, 2015 and 2016.
!
!
!
!
!
!! !
!! !
!!
!!
!
!
F-13
!
NOTE 7—ACCRUED EXPENSES
!
Accrued expenses consist of the following (in thousands):
!
Accrued employee compensation and benefits
!
Taxes accrued and withheld
!
!
Accrued insurance
Accrued advertising
!
Accrued royalties
!
Accrued commissions
!
Derivative liability
!
!
Other
!
!
NOTE 8—LONG-TERM DEBT
!
Long-term debt consists of the following (in thousands):
!
!
!
!
Revolving credit facility, interest at base rate or adjusted LIBOR rate plus an applicable
margin (interest at 1.8% on July 2, 2011) due May 2016
July 2,
2011
July 3,
2010
$
!
$
!
15,492
!
1,204
$
!
!! !
!
804
741
2,213
1,163
22
2,069
23,708
!! !
!! !
!! !
!! !
!! !
!! !
!! !
$
!! !
!
10,016
!
1,298
!!
1,068
904
1,946
916
105
!!
!!
!!
!!
!!
3,020
!!
19,273
!!
!!
July 2,
2011
July 3,
2010
!
!
!
$
75,936
$
61,152
Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 7% due March
2019 (denominated in U.S. dollars)
Term loan with Banco Ficohsa, a Honduran bank, interest at 7%, interest only payments thru
March 2012, principal payments begin April 2012, payable monthly with a seven-year term
(denominated in U.S. dollars)
Capital expansion loan with Banco Ficohsa, a Honduran bank, interest at 6% until June 2010,
6.5% for the remainder of the term beginning in July 2010, payable monthly with a five-year
term (denominated in U. S. dollars)
!
!
!
!
!! !
5,000
!
5,837
!! !
!! !
—
—
!!
!!
!!
—
6,921
!
!
Less current installments
!
Long-term debt, excluding current installments
!!
)
!!
62,355
!
!
On May 27, 2011, Delta Apparel, Soffe, Junkfood, To The Game, Art Gun and TCX entered into a Fourth Amended and
!!
Restated Loan and Security Agreement (the “Amended Loan Agreement”) with the financial institutions named in the Amended
Loan Agreement as Lenders, Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger, and Wells Fargo Capital Finance, LLC and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners. In connection with the Amended Loan Agreement,
Israel Discount Bank of New York was removed from the syndicate of lenders under the credit facility, and Bank of America,
N.A. was added to the syndicate of lenders.
83,974
(2,799
(5,718
!! !
!! !
)
!! !
$
$
!
!
!!
!
!
86,773
68,073
Pursuant to the Amended Loan Agreement, the maturity of the loans under the previously existing credit facility was extended
to May 26, 2016 and the line of credit was increased to $145 million (subject to borrowing base limitations), which represents
an increase of $35 million in the amount that was previously available under the credit facility. Under the Amended Loan
Agreement, provided that no event of default exists, we have the option to increase the maximum credit available under the
facility to $200 million (subject to borrowing base limitations), conditioned upon the Agent's ability to secure additional
commitments and customary closing conditions. We paid $1.4 million in financing costs in conjunction with the Amended
Loan Agreement.
!
!
The credit facility is secured by a first-priority lien on substantially all of the real and personal property of Delta Apparel,
Junkfood, Soffe, To The Game, Art Gun, and TCX. All loans bear interest at rates, at the Company's option, based on either (a)
an adjusted LIBOR rate plus an applicable margin or (b) a base rate plus an applicable margin, with the base rate equal to the
greatest of (i) the federal funds rate plus 0.5%, (ii) the LIBOR rate plus 1.0%, or (iii) the prime rate announced by Wells Fargo,
National Association. The facility requires monthly installment payments of approximately $0.2 million in connection with
fixed asset amortizations, and these amounts reduce the amount of availability under the facility. Annual facility fees are 0.25%
F-14
!
or 0.375% (subject to average excess availability) of the amount by which $145 million exceeds the average daily principal
balance of the outstanding loans and letters of credit accommodations. The annual facility fees are charged monthly based on
!
the principal balances during the immediately preceding month.
At July 2, 2011, we had $75.9 million outstanding under our credit facility at an average interest rate of 1.8%, and had the
!
ability to borrow an additional $59.1 million. Our credit facility includes the financial covenant that if the amount of
availability falls below an amount equal to 12.5% of the lesser of the borrowing base or $145 million, our Fixed Charge
Coverage Ratio (“FCCR”) (as defined in the Amended Loan Agreement) for the preceding 12 month period must not be less
than 1.1 to 1.0. In addition, the credit facility includes customary conditions to funding, representations and warranties,
covenants, and events of default. The covenants include, among other things, limitations on asset sales, consolidations,
mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with
affiliates.
!
Proceeds of the loans may be used for permitted acquisitions (as defined in the Amended Loan Agreement), general operating,
working capital, other corporate purposes, and to finance credit facility fees and expenses. Under our credit agreement, 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 million and average availability for the 30
day period immediately preceding that date of not less than $15 million; and (ii) the aggregate amount of dividends and stock
repurchases after May 27, 2011 does not exceed $19 million plus 50% of our cumulative net income (as defined in the
Amended Loan Agreement) from the first day of fiscal year 2012 to the date of determination. At July 2, 2011 and July 3,
2010, there was $18.7 million and $14.7 million, respectively, of retained earnings free of restrictions to make cash dividends or
stock repurchases.
The credit facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in ASC 470),
whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt
until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the facility
as long-term debt.
!
!
In March 2011, we extinguished our existing debt with Banco Ficohsa, a Honduran bank, and entered into a new credit facility
with them. Proceeds from the new loan agreement were used to extinguish the existing loan indebtedness and resulted in no
gain or loss being recorded upon extinguishment. The debt facility is secured by a first-priority lien on the assets of our
Honduran operations and the loan is not guaranteed by the U.S. entity. The installment loan portion of the agreement carries a
fixed interest rate of 7% for a term of seven years and is denominated in U.S. dollars. During the first 12 months of the term, the
loan requires only monthly interest payments with no principal payments. Beginning in April 2012, ratable monthly principal
and interest payments are due through the end of the term. As of July 2, 2011, we had $5.8 million outstanding on this loan. The
revolving credit facility has a 7% fixed interest rate with an ongoing 18-month term and is denominated in U.S. dollars. The
revolving credit facility requires minimum payments of $1.7 million during each 6 month period of the 18-month term;
however, the agreement permits additional drawdowns to the extent payments are made, if certain objective covenants are met.
The new revolving Honduran debt, by its nature, is not long-term as it requires scheduled payments each six months. However,
as the agreement permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to
re-borrow funds, subject to the objective criteria, the amounts have been classified as long-term debt. As of July 2, 2011, we
had $5.0 million outstanding on this loan.
The aggregate maturities of debt at July 2, 2011 are as follows (in thousands):
!
Fiscal Year
!
2012
!
2013
!
2014
!
2015
!
2016
!
Thereafter
!
!
!
!
Amount
2,799
!
8,529
!!
3,529
3,529
66,685
!!
!!
!!
1,702
!!
86,773
!!
!!
$
!
$
!
F-15
!
NOTE 9—INCOME TAXES
!
The provision for income taxes consists of the following (in thousands):
!
!
Current:
!
Federal
!
State
!
Foreign
!
Total current
!
Deferred:
Federal
!
!
State
!
Total deferred
!
Provision for income taxes
!
!
July 2,
2011
$
!
$
$
!
!
!
!
$
!
3,936
!
!
$
!
315
!! !
167
4,418
!! !
!! !
$
!! !
562
$
!
!
373
!! !
935
5,353
!! !
!! !
$
!
!
!
Year ended
July 3,
2010
!
!
!
3,317
!
!
$
!
!
!
!
288
!! !
148
3,753
!! !
!! !
$
!! !
115
$
!
!
598
!! !
713
4,466
!! !
!! !
$
June 27,
2009
!
!
954
262
!!
154
!!
1,370
!!
!!
33
(397
(430
)
!!
)
!
973
!
!
!
A reconciliation between actual provision for income taxes and the provision for income taxes computed using the federal
statutory income tax rate of 34% is as follows (in thousands):
!! !
!
!! !
!
!!
!
!
Income tax expense at the statutory rate
!
State income tax expense, net of federal income tax effect
!
Rate difference and nondeductible items in foreign jurisdictions
!
Impact of foreign earnings in tax-free zone
Valuation allowance adjustments
!
!
Nondeductible amortization and other permanent differences
!
Amended return and charitable contribution adjustments
!
Other
Provision for income taxes
!
!
!
$
!
July 2,
2011
7,712
!
!
$
Year ended
July 3,
2010
!
!
5,662
!
June 27,
2009
!
2,525
!
!
$
561
(20
!! !
)
!! !
)
!
!!
(3,223
!
358
(12
!! !
)
!! !
)
!
!!
(1,765
—
243
—
80
$
5,353
!
!!
!! !
!! !
!! !
!! !
84
95
(20
64
$
4,466
!
!!
!! !
)
!! !
!
!!
!! !
$
!
112
25
(1,441
(374
59
24
!!
!!
)
!!
)
!
!
!!
!
!
43
!!
973
!!
!
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and amounts used for income tax purposes. We have not provided deferred taxes on the $24.9
million of undistributed earnings of our foreign subsidiaries where the earnings are considered to be permanently reinvested.
The undistributed earnings would become taxable in the United States if we decided to repatriate earnings for business, tax or
foreign exchange reasons. If we made that decision, U.S. income taxes would be provided for net of foreign taxes already paid.
The determination of the unrecognized deferred tax liability associated with these unremitted earnings is not practical at this
time. Significant components of our deferred tax assets and liabilities are as follows (in thousands):
!! !
!
!! !
!
!!
!
!
!
F-16
!
!
Deferred tax assets:
!
State net operating loss carryforward
!
Charitable donation carryforward
!
Derivative — interest rate contract
!
Currently nondeductible accruals
Gross deferred tax assets
!
!
Less valuation allowance — state net operating loss
!
Net deferred tax assets
!
Deferred tax liabilities:
!
Depreciation
!
Goodwill and intangibles
!
Other
!
Gross deferred tax liabilities
!
Net deferred tax asset
!
Less: non-current net deferred tax liabilities
!
Current deferred tax asset
!
!
$
!
!
!
!
$
!
$
July 2,
2011
July 3,
2010
!
446
!
!
352
!! !
9
!! !
$
!
!
4,363
5,170
(108
5,062
!! !
!! !
)
!! !
!
!!
!! !
(2,032
)
! !
!
!
(2,876
(100
(5,008
)
!
)
!
)
!
!!
!!
!!
54
!!
!
)
!! !
$
!
(2,877
!
792
757
66
3,665
5,280
(108
5,172
!!
!!
!!
!!
)
!!
!
!
!!
(1,738
)
!
!
!
!
(2,081
(3,836
(17
)
!
)
!
)
!
1,336
!
)
!!
(1,826
2,931
$
!
!!
3,162
!
!
!
As of July 2, 2011, we had $0.9 million of charitable contribution carryforwards for federal income tax purposes, of which $0.8
million expires in fiscal year 2013 and $0.1 million expires in fiscal year 2014. The future charitable deduction in limited to
10% of taxable income for each year. Based on our forecasts, we expect that we will have sufficient taxable income to use all
of the charitable contributions before they expire. Therefore, we determined that no valuation allowance against the deferred tax
asset associated with the charitable carryforward is required. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those temporary differences become deductible.
!
!! !
!
!!
As of July 2, 2011, and July 3, 2010, we had operating loss carryforwards of approximately $10.9 million and $18.8 million,
respectively, for state purposes. These carryforwards expire at various intervals through 2030. Our deferred tax asset related to
state net operating loss carryforwards is reduced by a valuation allowance to result in deferred tax assets we consider more
likely than not to be realized. There was no net change in the total valuation allowance for the year ended July 2, 2011. The
ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which
those temporary differences become deductible.
!
!
FASB Codification No. 740, Income Taxes (“ASC 740”) requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The tax years 2007 to 2010,
according to statute, remain open to examination by the major taxing jurisdictions to which we are subject. Upon adoption of
ASC 740, we did not have any material unrecognized tax benefits, nor did we have any material unrecognized tax benefits as of
July 2, 2011. We recognize accrued interest and penalties related to unrecognized tax benefits as components of our income tax
provision. We did not have any interest and penalties accrued related to unrecognized tax benefits as of July 2, 2011.
!
!
F-17
!
Amount
!
8,591
!
7,539
6,443
4,653
6,178
!
!
!
!
!
!
!
!
!
!
37,216
!
!
!
!
3,812
NOTE 10—LEASES
!
We have several non-cancelable operating leases primarily related to buildings, office equipment and computer systems. Certain
land and building leases have renewal options generally for periods ranging from 5 to 10 years.
!
Future minimum lease payments under non-cancelable operating leases as of July 2, 2011 were as follows (in thousands):
Fiscal Year
!
!
2012
2013
2014
2015
!
!
!
2016
!
Thereafter
!
!
$
!
$
!
Rent expense for all operating leases was approximately $9.7 million, $9.1 million and $6.5 million for fiscal years 2011, 2010,
and 2009, respectively.
!
!
NOTE 11—EMPLOYEE BENEFIT PLANS
!
We sponsor and maintain a 401(k) retirement savings plan (the “401(k) Plan”) for our employees who meet certain service and
age requirements. The 401(k) Plan permits participants to make pre-tax contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The 401(k) Plan provides for us to make a guaranteed match of the employee’s
contributions. We contributed approximately $1.2 million, $1.1 million and $1.0 million to the 401(k) Plan during fiscal years
2011, 2010, and 2009, respectively.
!
We provide postretirement life insurance benefits for certain retired employees. The plan is noncontributory and is unfunded,
and therefore, benefits and expenses are paid from our general assets as they are incurred. All of the employees in the plan are
fully vested and the plan was closed to new employees in 1990. The discount rate used in determining the liability was 6.0% for
fiscal years 2011 and 2010. The following table presents the benefit obligation for these benefits, which is included in accrued
expenses in the accompanying balance sheets (in thousands).
!
!
Change in benefit obligations:
!
Balance at beginning of year
!
!
Interest expense
Benefits paid
!
Actuarial adjustment
!
Balance at end of year
!
!
July 2,
2011
!
626
!
!
6
!! !
)
!! !
(53
$
!
!
1
580
!
!!
!! !
$
!! !
!
$
!
$
!
!
July 3,
2010
!
!
716
6
(79
!!
)
!!
)
!
626
!
(17
!
!
!!
NOTE 12—STOCK-BASED COMPENSATION
!
On November 11, 2010, the Delta Apparel, Inc. shareholders approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock
Plan"). We will not be granting additional awards under either the Delta Apparel Stock Option Plan ("Option Plan") or the Delta
Apparel Incentive Stock Award Plan ("Award Plan"); instead, all future stock awards will be granted under the 2010 Stock Plan.
We account for these plans pursuant to ASC 718, SAB 107 and SAB 110.
!
!
2010 Stock Plan
Under the 2010 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 consist of stock options, stock appreciation rights, restricted stock, restricted stock units,
performance stock, performance units, and cash awards. The aggregate number of shares of common stock that may be
delivered under the 2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the
Option Plan or Award Plan that are subsequently forfeited or terminated for any reason before being exercised. The 2010 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 any given calendar year. If a
!
F-18
!
participant dies or becomes disabled (as defined in the 2010 Stock Plan) while employed by 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 2010 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2010 Stock
Plan, and to make any other determinations that it deems necessary.
During fiscal year 2011, non-qualified stock options were granted for 50,000 shares of our common stock. Compensation
expense is recorded on the cost of sales and selling, general and administrative expense line items in our statements of
operations on a straight-line basis over the vesting periods. In fiscal year 2011 we expensed $0.2 million in conjunction with our
2010 Stock Plan.
!
The following table summarizes the weighted average grant date fair values and assumptions that were used to estimate the
grant date fair values using the Black-Scholes option-pricing model of the options granted during the fiscal year ended 2011:
!
2011
Risk-free interest rate
!
Expected life
!
Expected volatility
!
Expected dividend yield
!
Weighted-average per share fair value of options granted
!
!
!
!
!
!
! !
! !
! !
! !
! !
!
!
!
!
!
$
!
2
%
!
4.0 yrs
!
%
63
—
%
!
6.25
!
!
!
!
!
The risk-free interest rate for the periods within the expected life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Due to minimal exercising of stock options historically, in 2011 we have estimated the expected life
of options granted to be the midpoint between the average vesting term and the contractual term as permitted under SAB 107
and SAB 110. The expected volatility for the periods of the expected life of the option is determined using historical volatilities
based on historical stock prices. The expected dividend yield is based on our expected annual dividend in relation to our
historical average stock price.
! !
!!
!
!
!
!
A summary of our stock option activity for the fiscal year ended July 2, 2011 under the 2010 Stock Plan is as follows:
!
Outstanding at July 3, 2010
!
Granted
!
Exercised
!
Forfeited
!
Expired
!
Outstanding at July 2, 2011
!
Exercisable at July 2, 2011
!
Shares
—
!
50,000
—
—
—
50,000
25,000
$
$
$
$
$
$
$
!
!
!
!
!
!
!
!! !
!! !
!! !
!! !
!! !
!! !
Weighted
Average
Exercise Price
!
—
!
!
13.47
—
—
—
13.47
13.47
!
!
!
!
!
!
!! !
!! !
!! !
!! !
!! !
!! !
!
Aggregate
Intrinsic Value
(thousands)
!
!
!
Weighted
Average
Remaining
!
Contractual
!
Term
!
!
!
!
!
!
!
!
!
!
!
!
!
!
6.6 yrs
6.6 yrs
!!
—
—
!
!
!
!
!
The weighted-average per share grant date fair value of options granted during the fiscal year 2011 was $6.25 per option. Shares
are generally issued from treasury stock upon exercise of the options. ASC 718 requires that cash flows from tax benefits
attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified
as financing cash flows. During fiscal year 2011 no options under the 2010 Stock Plan were exercised.
!! !
!! !
!!
!
A summary of the status of our non-vested stock options as of July 2, 2011, and changes during the fiscal year ended July 2,
2011, is presented below:
!
!
Nonvested at July 3, 2010
!
Granted
!
Vested
!
Forfeited
!
Expired
!
Nonvested at July 2, 2011
!
!
F-19
!
Shares
—
!
50,000
(25,000
—
—
25,000
$
$
$
$
$
$
!
!
!
!
!
!
!
!! !
)
!! !
!
!!
!! !
!! !
!! !
Weighted-
Average
Grant-Date
!
Fair Value
!
—
!
!
6.25
6.25
—
—
6.25
!
!
!
!
!
!
!
!
!
!
!
!
As of July 2, 2011, there was $0.2 million of total unrecognized compensation cost related to non-vested stock options under the
2010 Stock Plan. This cost is expected to be recognized over a period of 1 year.
!
Option Plan
Prior to expiration of the Option Plan, the Compensation Committee of our Board of Directors had the discretion to grant
options for up to 2,000,000 shares of common stock to officers and key and middle level executives for the purchase of our
stock at prices not less than fifty percent of the fair market value of the shares on the dates of grant, with an exercise term (as
determined by the Compensation Committee) not to exceed 10 years. The Compensation Committee determined the vesting
period for the stock options, which generally became exercisable over three to four years. Certain option awards in the Option
Plan provided for accelerated vesting upon meeting specific retirement, death or disability criteria. No options were granted
under the Option Plan during fiscal year 2011. During fiscal years 2010 and 2009, we granted non-qualified options for 28,000
and 10,000 shares, respectively, of our common stock.
!
!
Compensation expense is recorded on the cost of sales and selling, general and administrative expense line items in our
statements of operations on a straight-line basis over the vesting periods. In fiscal years 2011, 2010 and 2009, we expensed
$0.2 million, $0.1 million and $0.9 million, respectively, in conjunction with our Option Plan. Associated with the
compensation cost for the Option Plan are recognized tax benefits of $0.1 million, $0.3 million, and $0.3 million for each of
fiscal years 2011, 2010 and 2009, respectively.
!
The following table summarizes the weighted average grant date fair values and assumptions that were used to estimate the
grant date fair values using the Black-Scholes option-pricing model of the options granted during the fiscal years ended 2010
and 2009:
!
!
Risk-free interest rate
!
Expected life
!
Expected volatility
!
Expected dividend yield
!
Weighted-average per share fair value of options granted
!
2011
N/A
!
N/A
N/A
N/A
N/A
!
!
!
!
!
!
!
!
!
2010
2009
3
%
!
!
6.0 yrs
!!
!
%
51
!!
%
2
!
6.1 yrs
!
!
%
50
!
—
%
!
!!
3.53
!
!!
$
—
%
!
!
2.00
!
!
$
The risk-free interest rate for the periods within the expected life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. Due to minimal exercising of stock options historically, in 2010 and 2009, we have estimated the
expected life of options granted to be the midpoint between the average vesting term and the contractual term as permitted
under SAB 107 and SAB 110. The expected volatility for the periods of the expected life of the option is determined using
historical volatilities based on historical stock prices. The expected dividend yield is based on our annual dividend in relation to
our historical average stock price.
!!
!!
!
!
!
!
!
!
A summary of our stock option activity for the fiscal year ended July 2, 2011 under the Option Plan is as follows:
!
Outstanding at July 3, 2010
!
Granted
!
Exercised
!
Forfeited
!
Expired
!
Outstanding at July 2, 2011
!
Exercisable at July 2, 2011
!
Shares
1,024,500
!
—
(118,667
(54,666
—
851,167
777,162
$
$
$
$
$
$
$
!
!
!
!
!
!
!
!! !
)
!! !
)
!
!!
!
!!
!! !
!! !
Weighted
Average
Exercise Price
!
11.89
!
!
—
11.64
8.16
—
12.16
12.55
!
!
!
!
!
!
!! !
!! !
!! !
!! !
!! !
!! !
Weighted
Average
Remaining
!
Contractual
!
Term
!
!
!
4.6 yrs
5.1 yrs
!
Aggregate
Intrinsic Value
(thousands)
!
!
!
—
—
!!
!
!
!
!
!
!
!
!
!
!
!
!!
!
The weighted-average per share grant date fair value of options granted during the fiscal years 2010 and 2009 was $3.53 and
$2.00, respectively, per option. Shares are generally issued from treasury stock upon exercise of the options. ASC 718 requires
that cash flows from tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options
(excess tax benefits) be classified as financing cash flows. During fiscal year 2011, exercised options under the Option Plan
resulted in excess tax benefits of $84 thousand. No options were exercised during fiscal years 2010 and 2009.
!! !
!! !
!!
!!
!
!
F-20
!
A summary of the status of our non-vested stock options as of July 2, 2011, and changes during the fiscal year ended July 2,
!
2011, is presented below:
!
Nonvested at July 3, 2010
!
Granted
!
Vested
!
Forfeited
!
Expired
!
Nonvested at July 2, 2011
!
Weighted
Average
Grant-Date
!
Fair Value
!
2.96
!
!
—
!!
2.93
3.01
—
2.95
!!
!!
!!
!!
Shares
202,661
!
—
(73,990
(54,666
—
74,005
!
!! !
)
!! !
)
!
!!
!
!!
!! !
$
$
$
$
$
$
!
!
!
!
!
As of July 2, 2011, there was $0.2 million of total unrecognized compensation cost related to non-vested stock options under the
Option Plan. This cost is expected to be recognized over a period of 1 year.
!! !
!
!!
!
Award Plan
Under the Award Plan, the Compensation Committee of our Board of Directors had the discretion to grant awards for up to an
aggregate maximum of 800,000 shares of our common stock. The Award Plan authorized the Compensation Committee to grant
to our officers and key and middle level executives rights to acquire shares at a cash purchase price of $0.01 per share. The
Award Plan contains provisions for cash payments equal to the taxes due when the shares vest. Therefore, pursuant to ASC 718,
the underlying stock grant is accounted for as an equity award and the associated cash payment as a liability award.
!
!
In fiscal year 2011, prior to the adoption of the 2010 Stock Plan, awards for up to 7,000 shares of our common stock were
granted. The award was comprised of 4,200 shares which are service based and will vest upon the filing on our Annual Report
of Form 10-K for the fiscal year ended July 2, 2011. The remaining 2,800 shares are performance awards and are based on the
achievement of performance criteria for the two year period ending July 2, 2011 and will vest upon the filing of our Annual
Report of Form 10-K for the fiscal year ended July 2, 2011, subject to the performance criteria.
!
In fiscal year 2010, awards for up to 186,000 shares of our common stock were granted. The outstanding awards are comprised
of 135,600 shares which are service based and 50,400 shares which are performance based. Within the service awards, 30,000
shares vested upon the filing of our Annual Report on Form 10-K for fiscal year ended July 3, 2010. The remaining 105,600
service based shares will vest upon the filing of our Annual Report on Form 10-K for the fiscal year ended July 2, 2011. The
performance awards representing 50,400 shares are based on the achievement of performance criteria for the two year period
ending July 2, 2011, and will vest upon the filing of our Annual Report for the year ended July 2, 2011, subject to the
performance criteria. No awards were granted in fiscal year 2009. Awards provide for accelerated vesting upon meeting
specific retirement, death or disability criteria.
!
Compensation expense recorded under the Award Plan was $1.8 million, $1.6 million and $0.1 million in fiscal years 2011,
2010 and 2009, respectively. Compensation expense is recorded on the cost of sales and selling, general and administrative
expense line items of our statements of income as incurred.
!
A summary of the status of our nonvested awards as of July 2, 2011, and changes during the year ended July 2, 2011, is
presented below:
!
!
Nonvested at July 3, 2010
!
Granted
!
Vested
!
Forfeited
!
Performance adjustment
!
Nonvested at July 2, 2011
!
Weighted
Average
Exercise
!
Price
!
0.01
!
!
0.01
0.01
0.01
0.01
0.01
!!
!!
!!
!!
!!
Shares
185,000
!
7,000
(30,000
(15,000
4,680
151,680
!
!! !
)
!! !
)
!
!!
!
!!
!! !
$
$
$
$
$
$
!
!
!
!
!
As of July 1, 2011, there was $0.1 million of total unrecognized compensation cost related to non-vested awards under the
Award Plan. This cost is expected to be recognized over a period of 0.2 years.
!! !
!
!!
!
!
!
F-21
!
NOTE 13—BUSINESS SEGMENTS
!
We operate our business in two distinct segments: branded and basics. Prior to the second quarter of fiscal year 2011, these
segments were named retail-ready and activewear. When the names were changed, there was no change in terms of how the
reporting units operate or are reviewed by Robert W. Humphreys, our chief operating decision maker ("CODM"). Although the
two segments are similar in their production processes and regulatory environment, they are distinct in their economic
characteristics, products and distribution methods.
!
The branded segment is comprised of our business units focused on specialized apparel garments and headwear to meet
consumer preferences and fashion trends, and includes Soffe (which includes The Cotton Exchange as the bookstore division of
Soffe), Junkfood, To The Game and Art Gun. These branded embellished and unembellished products are sold through
specialty and boutique shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, college
bookstores and the U.S. military. Products in this segment are marketed under our primary brands of Soffe®, Intensity
Athletics®, The Cotton Exchange®, Junk Food®, The Game®, Salt Life® and Realtree Outfitters® as well as other labels. The
results of The Cotton Exchange, Art Gun and To The Game have been included in the branded segment since their acquisition
on July 12, 2010, December 28, 2009 and March 29, 2009, respectively.
!
The basics segment is comprised of our business units primarily focused on garment styles that are characterized by low fashion
risk, and includes our Delta Catalog and FunTees businesses. Within the Delta Catalog business, we market, distribute and
manufacture unembellished knit apparel under the brands of Delta Pro Weight®, Delta Magnum Weight®, Quail Hollow®,
Healthknit® and FunTees®. These products are primarily sold to screen printing and advertising specialty companies. We also
manufacture private label products for major branded sportswear companies, retailers, corporate industry programs, and sports
licensed apparel marketers. Typically these products are sold with value-added services such as hangtags, ticketing, hangers,
and embellishment so that they are fully ready for retail. The majority of the private label products are sold through the
FunTees business.
!
!
Our CODM and management evaluate performance and allocates resources based on profit or loss from operations before
interest, income taxes and special charges (“Segment Operating Income (Loss)”). Our Segment Operating Income (Loss) may
not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are
the same as those described in Note 2. Intercompany transfers between operating segments are transacted at cost and have been
eliminated within the segment amounts shown in the following table (in thousands).
!
F-22
!
!
Fiscal Year 2011:
!
Net sales
!
Gain on contingent consideration, net of impairment charge *
!
Segment operating income
Segment assets **
!
!
Equity investment in joint venture
!
Purchases of property and equipment
!
Depreciation and amortization
!
Fiscal Year 2010:
!
Net sales
!
!
Gain on contingent consideration, net of impairment charges *
!
Segment operating income
Segment assets **
!
!
Equity investment in joint venture
!
Purchases of property and equipment
!
Depreciation and amortization
!
Fiscal Year 2009:
!
Net sales
!
!
Gain on contingent consideration, net of impairment charges *
!
Segment operating (loss) income
!
Segment assets **
!
Equity investment in joint venture
!
Purchases of property and equipment
!
Depreciation and amortization
______________________
!
*
$
!
!
!
$
!
!
!
$
!
!
Basics
Branded
Consolidated
!
253,494
!
!
$
!
—
!! !
!
16,889
162,932
2,664
4,165
4,913
!! !
!! !
!! !
!! !
!! !
!! !
! !
$
!
!
226,590
!
221,742
!
!
$
!
918
!! !
!
8,407
148,933
—
3,802
2,346
197,821
!! !
!! !
!! !
!! !
!! !
!! !
! !
$
!
!
—
!! !
!
—
!! !
!
2,360
131,012
2,682
4,486
5,060
!! !
!! !
!! !
!! !
!! !
!! !
! !
$
!
!
!
!! !
)
!! !
199,027
—
(5,444
141,013
2,574
1,248
5,354
!
!!
!! !
!! !
!! !
17,802
120,321
—
2,479
1,728
156,170
!! !
!! !
!! !
!! !
!! !
!! !
! !
$
!
!
—
!! !
!
17,591
115,980
—
1,810
1,724
!! !
!! !
!! !
!! !
!! !
!
475,236
918
25,296
311,865
2,664
7,967
7,259
!!
!!
!!
!!
!!
!!
!!
424,411
—
20,162
251,333
2,682
6,965
6,788
!!
!!
!!
!!
!!
!!
!!
355,197
—
12,147
256,993
2,574
3,058
7,078
!!
!!
!!
!!
!!
!!
!
!
!!
See Note 2(m) for further information regarding the remeasurement of contingent consideration and impairment testing
of goodwill and intangibles.
!
All goodwill and intangibles on our balance sheet is included in the branded segment.
!! !
!! !
!
!
**
!
!
!
The following reconciles the Segment Operating Income to the consolidated income before income taxes (in thousands):
Year Ended
July 2,
2011
!
25,296
!
2,616
!
$
!! !
22,680
!! !
!! !
$
!
!
July 3,
2010
!
!
20,162
!
3,509
!
$
!! !
16,653
!! !
!! !
$
!
!
!
June 27,
2009
!
12,147
!
4,718
!!
7,429
!!
!!
!
Segment operating income
!
Unallocated interest expense
!
Consolidated income before taxes
!
!
!
$
$
!
!
F-23
!
Our revenues include sales to domestic and foreign customers. Foreign customers are composed of companies whose
!
headquarters are located outside of the United States. Supplemental information regarding our revenues by geographic area
based on the location of the customer is as follows (in thousands):
!
!
United States
!
Foreign
!
Total net sales
!
!
!
$
$
!
!
July 2,
2011
Year Ended
July 3,
2010
!
!
412,938
!
!
$
!
$
$
!
!
11,473
!! !
424,411
!! !
$
!! !
!
!
!
470,909
!
4,327
!! !
475,236
!! !
!! !
June 27,
2009
!
347,140
!
8,057
!!
355,197
!!
!!
Our long-lived assets, excluding goodwill and intangible assets, consist of property, plant and equipment for all locations. We
!
attribute our property, plant and equipment to a particular country based on the location of the long-lived assets. Summarized
financial information by geographic area is as follows (in thousands):
July 2, 2011
July 3, 2010
!
United States
!
!
Honduras
!
El Salvador
!
Mexico
!
All foreign countries
!
Total long-lived assets, excluding goodwill and intangibles
!
!
!
$
!
!
$
!
!
21,834
!
$
!
14,635
2,066
!! !
! !
!! !
1,221
17,922
!! !
!! !
39,756
!! !
$
! !
!! !
!
19,124
!
16,075
!
!
!
1,246
1,249
18,570
!
!
!
!
!
!
!
!
37,694
!
!
NOTE 14—REPURCHASE OF COMMON STOCK
!
As of July 2, 2011, our Board of Directors had authorized management to use up to $15.0 million to repurchase Delta Apparel
stock in open market transactions under our Stock Repurchase Program. See Note 17 - Subsequent Events for information
regarding an increase in authorization pursuant to our Stock Repurchase Program.
!
During fiscal year 2011, we purchased 176,756 shares of our common stock for a total cost of $2.5 million. No purchases of
our common stock were made during fiscal years 2010 and 2009. As of July 2, 2011, we have purchased 1,201,527 shares of
common stock for an aggregate of $11.6 million since the inception of the Stock Repurchase Program. All purchases were
made at the discretion of management. As of July 2, 2011, $3.4 million remained available for future purchases under our
Stock Repurchase Program, which does not have an expiration date.
!
The following table summarizes the purchases of our common stock for the quarter ended July 2, 2011:
!
!
Period
Total Number of Shares
Purchased
Average Price Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans
Dollar Value of Shares
that May Yet Be
Purchased Under the
Plans *
!
April 3 to May 7, 2011
May 8 to June 4, 2011
!
June 5 to July 2, 2011
Total
!
!
* As of July 2, 2011
!
!
!
!
!
!
!
!
35,753
4,010
13,769
!
53,532
!
!
!
!
!
! !
! !
! !
! !
$14.46
!
$16.28
$16.18
$15.04
!
!
!
!
!
!
!
!
!
35,753
!
!
4,010
13,769
!
53,532
!
!
!
! !
! !
! !
! !
F-24
!
$3.7 million
$3.6 million
!
!
$3.4 million
!
$3.4 million
!
!
NOTE 15—COMMITMENTS AND CONTINGENCIES
!
(a) Litigation
!
At times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance
arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a
material effect on our operations, financial condition, or liquidity.
!
(b) Purchase Contracts
!
We have entered into agreements, and have fixed prices, to purchase yarn, natural gas, finished fabric and finished apparel and
headwear products for use in our operations. At July 2, 2011, minimum payments under these contracts were as follows (in
thousands):
!
Yarn
!
Natural Gas
!
Finished fabric
!
Finished products
!
!
!
(c) Letters of Credit
$
$
!
!
63,539
1,303
1,500
30,032
!
!
!
!
!
!
96,374
!
!
!
!
As of July 2, 2011, we had outstanding standby letters of credit totaling $0.4 million and outstanding commercial letters of
credit totaling $3.8 million.
!
(d) Derivatives
!
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. We do not use these financial instruments for trading or speculative purposes. On April
1, 2011, our $15 million interest rate swap agreement at 1.57% matured. The outstanding financial instruments as of July 2,
2011 are as follows:
!
!
Interest Rate Swap
!
!
Effective Date
March 1, 2010
!
!
!
!
Notational
Amount
!
$15 million
!
!
!
!
LIBOR Rate
Maturity Date
1.11
%
!
!
September 1, 2011
!
!
!!
!
FASB Codification No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at
fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities.
These levels are:
!
!
!
!
!
!
!
!
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly.
These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in market that are less active.
!
Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes
certain pricing models, discounted cash flow methodologies and similar techniques.
!
!
F-25
!
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
!
Fair Value Measurements Using
!
Period Ended
Interest Rate Swap
July 2, 2011
July 3, 2010
!
!
!
!
Contingent Consideration
!
July 2, 2011
!
July 3, 2010
!
Significant
Unobservable
Inputs
(Level 3)
!
!
!
!
!
!
!
!
22
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
!
Total
!
Significant Other
Observable Inputs
(Level 2)
!
!
$
!
$
!
$
!
$
!
!
!
!
22
171
!
!
!
!! !
!! !
! !
! !
—
1,530
!! !
!
!
!
!! !
!! !
$
!
$
!
!
!
!
—
—
! !
! !
!! !
—
—
171
!! !
!! !
! !
$
! !
$
!! !
!
—
—
!
—
—
!!
!!
—
1,530
!!
The fair value of the interest rate swap agreement was derived from discounted cash flow analysis based on the terms of the
contract and the forward interest rate curve adjusted for our credit risk, which fall in level 2 of the fair value hierarchy.
!! !
!! !
!! !
!!
!
!
!
The following table summarizes the fair value and presentation in the consolidated balance sheets for derivatives as of July 2,
2011 and July 3, 2010.
!
Accrued expenses
!
Deferred tax liabilities
!
Other liabilities
!
Accumulated other comprehensive loss
!
July 2,
2011
!
!
$
!
$
!
July 3,
2010
!
22
!
$
(8
)
!! !
—
14
!
!!
!! !
!
$
!
105
(66
)
!!
!
66
!
105
!!
!!
!
We adopted the provisions of the fair value measurement accounting and disclosure guidance related to nonfinancial assets and
liabilities recognized at fair value on a nonrecurring basis for the acquisitions of The Cotton Exchange on July 12, 2010 and Art
Gun on December 28, 2009. The assets and liabilities were measured at fair value upon acquisition and will be evaluated as
needed as part of our impairment assessments and as circumstances require. The fair value measurement was made using the
income approach and falls in level 3 of the fair value hierarchy. We used the projected cash flows, discounted as necessary, to
estimate the fair value of the contingent consideration for Art Gun. Accordingly, the fair value measurement for contingent
consideration falls in level 3 of the fair value hierarchy. The contingent consideration for Art Gun is remeasured at the end of
each reporting period. Additionally, we remeasured the Art Gun goodwill to fair value in the period ended January 1, 2011.
See Note 2(m) - Impairment of Goodwill for further discussion.
!
!! !
!
(e) License Agreements
!
We have entered into license agreements that provide for royalty payments of net sales of licensed products as set forth in the
agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in selling,
general and administrative expenses) of approximately $12.4 million, $11.6 million and $7.6 million, during fiscal years 2011,
2010, and 2009, respectively.
!
Based on minimum sales requirements, future minimum royalty payments required under these license agreements are (in
thousands):
!
!
Fiscal Year
2012
2013
2014
2015
2016
!
!
!
!
!
!
!
$
!
$
!
F-26
!
Amount
1,507
2,122
!
1,786
!
!
1,739
!
!
!
!
!
!
!
!
!
!
7,781
627
NOTE 16—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
!
Presented below is a summary of our unaudited consolidated quarterly financial information for the fiscal years ended July 2,
2011 and July 3, 2010 (in thousands):
!
!
!
!
!
!
!
!
!
Net sales
!
Gross profit
!
Operating income
!
Net income
!
Basic EPS
!
Diluted EPS
!
!
$
! !
$
!
!
!
!
2011 Quarter Ended
October 2
!
January 1
$
!
107,916
!
25,909
!
!! !
$
!
104,722
!
21,878
!
!! !
$
!
April 2
!
124,954
!
30,862
!
!! !
$
!
2,956
1,648
!! !
!! !
!! !
0.19
0.19
$
! !
$
!! !
!! !
!
!
2,625
1,416
!! !
!! !
!! !
0.17
0.16
$
! !
$
!! !
!! !
!
!
8,127
5,725
!! !
!! !
!! !
0.67
0.65
$
! !
$
!! !
!! !
!
!
2010 Quarter Ended
July 2
September 26
December 26
March 27
July 3
137,644
!
37,586
!
!
!! !
$
!
11,588
8,538
!! !
!! !
!! !
1.01
0.97
$
! !
$
!! !
!! !
!
!
99,122
$
91,160
$
23,645
!!
!! !
4,492
2,583
!! !
!! !
!! !
0.30
0.30
$
! !
$
!! !
!! !
!
!
!
21,776
! !
!! !
2,243
979
!! !
!! !
!! !
0.11
0.11
$
! !
$
!! !
!! !
!
!
!
!
107,942
!
25,203
!
!! !
$
!
4,914
2,958
!! !
!! !
!! !
0.35
0.34
$
! !
$
!! !
!! !
!
!
126,187
!
30,159
!!
8,513
!!
5,667
!!
!!
0.67
0.64
!!
!!
NOTE 17—SUBSEQUENT EVENTS
!
On August 17, 2011, our Board of Directors approved a $5 million increase in our Stock Repurchase Program, bringing the total
amount authorized to $20.0 million.
!
!
F-27
!
!
SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
DELTA APPAREL, INC. AND SUBSIDIARIES
(In thousands)
!
ACCOUNTS RECEIVABLES RESERVES
2011
!
2010
2009
!
!
!
!
MARKET AND OBSOLESCENCE RESERVE
2011
!
2010
2009
!
!
!
SELF INSURANCE RESERVE
!
2011
!
2010
2009
!
!
!
$
!
$
!
$
!
!
DEFERRED TAX ASSET VALUATION ALLOWANCE
2011
!
2010
!
$
!
!
2009
______________________
*
!
!
Beginning
Balance
$
2,136
!
!
3,039
!
!! !
2,813
!! !
!! !
Beginning
Balance
$
3,782
!
!
4,074
!
!! !
2,215
!! !
!! !
Beginning
Balance
!
!
!
$
777
!
!
636
!
!! !
595
!! !
!! !
Acquisition
Accounting *
—
!
—
! !
!! !
963
!! !
!! !
Acquisition
Accounting *
—
!
—
! !
!! !
1,486
!! !
!! !
Acquisition
Accounting *
39
!
—
! !
!! !
—
!! !
!! !
Beginning
Balance
!
Acquisition
Accounting *
—
!
—
108
!
!
378
$
!
!
!! !
1,289
!! !
—
!! !
! !
!! !
!! !
!! !
$
!
$
!
$
!
$
!
!
Expense
$
8,813
!
5,516
!
!! !
4,871
!! !
!! !
Write-Offs/
Credits Issued
(9,167
!
(6,419
)
! !
)
!!
!
)
(5,608
!
!!
!
$
!
!
!!
Expense **
Deductions **
)
(65
!
(292
)
!
373
!
$
!
!
!!
!!
!! !
$
!
—
—
—
! !
!! !
!! !
!! !
Expense **
Deductions **
$
!
!
!!
)
(227
!
141
!
41
!! !
!! !
$
!
—
—
—
! !
!! !
!! !
!! !
Expense **
Deductions **
—
!
(270
(911
$
!
!
)
!! !
)
!
!!
!
!!
$
!
—
—
—
! !
!! !
!! !
!! !
Ending
Balance
1,782
!
!
2,136
!
!
3,039
!
!
!
!
Ending
Balance
3,717
!
!
3,782
!!
4,074
!!
!!
Ending
Balance
589
!
!
777
!!
636
!!
!!
Ending
Balance
108
!
!
108
!!
378
!!
!!
Represents the reserves provided for as a result of the acquisitions of Art Gun and To The Game.
**
!
!
!
Net change in the reserves and allowance are shown in the expense column.
!
!
!
!
!
!
!
!
!
F-28
!
!
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
!
!
EXHIBIT 31.1
I, Robert W. Humphreys, certify that:
!
1.
I have reviewed this annual report on Form 10-K of Delta Apparel, Inc.;
!
!
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
!
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
!
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
!
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
!
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
!
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
!
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
!
5.
!
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
!
!
September 1, 2011
!
!
!
Date:
!
!
!
!
!
/s/ Robert W. Humphreys
Chairman and Chief Executive Officer
!
!
!
!
!
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
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EXHIBIT 31.2
I, Deborah H. Merrill, certify that:
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1.
I have reviewed this annual report on Form 10-K of Delta Apparel, Inc.;
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2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
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3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
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all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
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b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
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c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
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d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
and
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5.
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The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
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/s/ Deborah H. Merrill
Vice President, Chief Financial Officer and Treasurer
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September 1, 2011
Date:
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EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
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PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
ADOPTED
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Robert W.
Humphreys, the Chief Executive Officer of Delta Apparel, Inc. (the “Company”), hereby certifies that to the best of his
knowledge:
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The Annual Report on Form 10-K for the fiscal year ended July 2, 2011 of the Company, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
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September 1, 2011
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A signed original of this written statement required by Section 906 has been provided to Delta Apparel, Inc. and will be retained
by Delta Apparel, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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/s/ Robert W. Humphreys
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Robert W. Humphreys
Chairman and Chief Executive Officer
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1.
2.
Date:
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EXHIBIT 32.2
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
!
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Robert W.
Humphreys, the Chief Executive Officer of Delta Apparel, Inc. (the “Company”), hereby certifies that to the best of his
knowledge:
!
!
!
The Annual Report on Form 10-K for the fiscal year ended July 2, 2011 of the Company, as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
!
September 1, 2011
!
!
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A signed original of this written statement required by Section 906 has been provided to Delta Apparel, Inc. and will be retained
by Delta Apparel, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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/s/ Deborah H. Merrill
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Deborah H. Merrill
Vice President, Chief Financial Officer and Treasurer
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1.
2.
Date:
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EXHIBIT 21
SUBSIDIARIES OF DELTA APPAREL, INC.
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Listed below are the subsidiaries of Delta Apparel, Inc.:
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Art Gun, LLC, a Georgia limited liability company.
Junkfood Clothing Company, a Georgia corporation.
To The Game, LLC, a Georgia limited liability company.
M. J. Soffe, LLC, a North Carolina limited liability company.
(1)
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(2)
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(3)
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(4)
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(5)
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(6)
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(7) Delta Campeche, S.A. de C.V., a Mexican sociedad anónima de capital variable.
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(8) Delta Cortes, S.A., a Honduran sociedad anónima.
Delta Apparel Honduras, S.A., a Honduran sociedad anónima.
TCX, LLC, a North Carolina limited liability company.
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(9) Campeche Sportswear, S de RL de CV, a Mexican sociedad de responsabilidad de capital variable.
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(10) Textiles La Paz, LLC, a North Carolina limited liability company.
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(11) Ceiba Textiles, S de RL, a Honduran sociedad de responsabilidad limitada.
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(12) Atled Holding Company Honduras, S de RL, a Honduran sociedad de responsabilidad limitada.
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(13) LaPaz Honduras, S de RL, a Honduran sociedad de responsabilidad limitada.
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EXECUTIVE OFFICERS
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Vice President, Chief Financial Officer and Treasurer
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Vice President and Secretary
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President
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Chairman and Chief Executive Officer
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Statements and other information in this press release that are not reported financial results or other historical information are forward-looking
statements. These are based on our 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 also subject to a number of business
risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking
statements. The risks and uncertainties include, among others, the general U.S and international economic conditions; the ability to grow,
achieve synergies and realize the expected profitability of recent acquisitions; the volatility and uncertainty of raw material, transportation and
energy prices and the availability of these products and services; changes in consumer confidence, consumer spending, and demand for apparel
products; the ability of our brands and products to meet consumer preferences within the prevailing retail environment; significant
interruptions in our distribution network or information systems; the financial difficulties encountered by our customers and higher credit risk
exposure; the competitive conditions in the apparel and textile industries; changes in environmental, tax, trade, employment and other laws and
regulations; changes in the economic, political and social stability of our offshore locations; significant litigation in either domestic or
international jurisdictions, the relative strength of the United States dollar as against other currencies; and other risks described from time to
time in our reports filed with the Securities and Exchange Commission. Accordingly, any forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized. We do not undertake publicly to update or revise the forward-looking
statements even if it becomes clear that any projected results will not be realized.
Corporate Information
Transfer Agent and Registrar
American Stock Transfer & Trust Company
Attn: Operations Center
6201 15th Avenue
Brooklyn, New York 11219
1-800-937-5449
Stock Information
Our common shares are listed on the NYSE Amex under
the symbol of ‘DLA’.
Independent Registered Public Accounting Firm
Ernst & Young LLP
55 Ivan Allen Jr. Boulevard - Suite 1000
Atlanta, GA 30308
Marketing Groups
Corporate and Shareholder Information
Corporate and shareholder information may be obtained
free of charge by contacting Investor Relations at Delta
Apparel, Inc., 322 S. Main Street, Greenville, SC 29601. You
can also visit our internet website at www.deltaapparelinc.
com.
Annual Meeting of Shareholders
Our Annual Meeting of shareholders will be held on
Thursday, November 10, 2011 at 10:00 a.m. at our Duluth,
Georgia office located at 2750 Premiere Parkway - Suite
100, Duluth, Georgia.
Delta Catalog
2750 Premiere Parkway
Suite 100
Duluth, GA 30097
www.deltaapparel.com
M. J. Soffe
One Soffe Drive
Suite 501
Fayetteville, NC 28312
www.soffe.com
Junkfood Clothing
5770 W. Jefferson Blvd.
Los Angeles, CA 90016
www.junkfoodclothing.com
To The Game
16 Downing Drive
Phenix City, AL 36869
www.2thegame.com
FunTees
4735 Corporate Drive NW
Suite 100
Concord, NC 28027
www.funtees.com
The Cotton Exchange
115 E. Third
Wendell, NC 27591
www.thecottonexchange.com
Intensity Athletics
One Soffe Drive
Suite 501
Fayetteville, NC 28312
www.intensity.com
Art Gun
16085 NW 52nd Ave
Miami Gardens, FL 33014
Company Profile
Delta Apparel, Inc. is an international design, marketing, manufacturing and sourcing company that features a diverse portfolio
of lifestyle branded activewear apparel and headwear, and high quality private label programs. Our primary brands include
Soffe®, Junk Food®, The Game® and The Cotton Exchange® and we have licensing agreements with the major colleges and
universities, as well as hundreds of other licensed properties. One of our key strengths is our broad distribution and diverse
customer base. Our casual and athletic apparel and headwear products are sold to specialty and boutique stores, upscale and
traditional department stores, mid-tier retailers, sporting goods stores, screen printers, college bookstores, the U.S. military
and private label to major national brands. Delta Apparel, Inc. trades on the NYSE Amex under the symbol “DLA”.
Additional information is available at www.deltaapparelinc.com.
XT46
R E A L T R E E
O U T F I T T E R S
SALT LIFE
INTENSITY
J U N K F O O D
Delta Apparel, Inc.
322 S. Main Street
Greenville, SC 29601
(864) 232-5200
(864) 232-5199 (fax)
www.deltaapparelinc.com