Delta Apparel, Inc.
Annual Report 2014
Letter to Shareholders
expect these costs to ease over the next several months and this should have a positive
impact on our cost of sales in the second half of the year.
We believe our brands are gaining in consumer awareness driven by our branded
retail stores, eCommerce sites, in-store shops, and expanded consumer marketing
initiatives. Likewise we expect sales growth in our basics segment driven by our
unique service and distribution models that are supported by a modern and efficient
manufacturing platform. All of our business units are now taking advantage of our
vertical manufacturing structure to some degree, thereby lowering production cost and
improving our operating efficiencies.
Delta Apparel has many important production and consumer brand assets. Most
importantly, we have a dedicated and experienced employee team well-aligned to drive
further growth in the apparel marketplace and build efficiencies in our production
facilities. We remain focused on the growth of our business units while leveraging our
various brand and operational assets to improve our operating profits.
The initiatives we have implemented over the past months should position us well to
improve our overall profitability and allow us to build market share in a competitive
environment. Our Board of Directors and management team are committed to continue
to take necessary steps to build value for our shareholders.
Thank you for your continued support of Delta Apparel and our management team.
We hope you will join us for our Annual Meeting of Shareholders, which will be held in
Duluth, Georgia on February 4, 2015, at 8:30 a.m. We will present our final review of
fiscal 2014 results, review the items put to shareholder vote, and provide an update on
our outlook for fiscal year 2015.
Robert W. Humphreys
Chairman and Chief Executive Officer
Overall our financial results for fiscal year 2014 were disappointing. After ten
consecutive years of record revenue, our sales declined just over six percent from
the prior twelve months, and we experienced a loss of $0.12 per share for the year.
The overall economy remained challenging for apparel and was further impacted by
an unusually harsh winter that virtually shut down traditional retail sales for several
weeks over many parts of the country.
Despite the poor financial results we reported, we completed a number of key
initiatives during the year that we believe will build shareholder value in the future.
We acquired Salt Life in August 2013 and began operating that business as a brand
owner versus a licensee. This allowed us to further expand the product line and
make long-term investments in point of sale fixtures, marketing initiatives and the
building of social media touch points. Our sales of Salt Life products grew nicely
during the year and we further expanded the geographic footprint of the brand.
Important progress was also made to our manufacturing platform during the
year. We completed the current phase of expansion for Ceiba Textiles, our textile
facility in Honduras. Output from this facility is expected to increase, using this
new expansion capacity, as we progress through fiscal 2015. We also improved our
sewing and screen printing facilities in Honduras and El Salvador, which is allowing
us to increase our internal production of garments in these low-cost plants. Our
domestic screen print operation located in Fayetteville, North Carolina, was also
modernized, which expands its capacity, enhances its capabilities and reduces cost.
Later in the year we reached a milestone in the life of our Junk Food brand with the
opening of the flagship Junk Food branded retail store. We believe its location on
the iconic Abbot Kinney Boulevard in Venice, California will provide a showcase to
further build the brand with consumers and national retailers alike.
As fiscal 2014 progressed, we made the decision to complete a detailed review of
all product lines and manufacturing facilities, as well as our fixed salary cost. As
a result of this analysis, we anticipate exiting some product lines and markets that
are not core to our long-term growth strategies. In addition, we have downsized
certain manufacturing facilities to better match customer needs and take further
advantage of our lower-cost facilities. To speed up decision making and lower our
fixed salary cost, we de-layered our organizational structure through a headcount
reduction initiative that should save over $7 million dollars annually in fixed salary
and benefit costs. In our fiscal 2014 fourth quarter, we took a pre-tax charge of
approximately $4 million as a result of these initiatives.
Branded Segment
Our branded segment recorded revenue growth in the Salt Life, The Game and Art
Gun business units in fiscal 2014 but this growth was offset by sales declines in the
Junkfood and Soffe business units. Art Gun continued its strong double-digit sales
growth in fiscal 2014, and we recently outfitted Art Gun with the latest technology
in digital print equipment to provide capacity to continue its growth in fiscal 2015.
We are reclassifying Art Gun to our basics segment to reflect its current operating
characteristics in the marketplace and this change is being reflected in our fiscal
2014 annual results.
While we continued to gain new customers and grow sales in most channels of
distribution for Junkfood, these improvements were offset by a sales decline with
Junkfood’s largest retail partner. Soffe saw further revenue declines across most of
its markets during the year, but began regaining shelf space with important retailers
as the year progressed. We were able to rebuild the Soffe leadership team with
experienced executives in the apparel industry and are optimistic that Soffe can
start regaining lost revenue and return to profitability as fiscal year 2015 unfolds.
Basic Segment
Through much of fiscal 2014, market demand was weak for undecorated tees,
which led to discounting and price erosion as the year progressed. Also, several
FunTees programs based on licensed business from our customers, ran their course
and did not continue throughout fiscal 2014, which led to a sales decline in our
private label markets as well. We saw strengthening in the undecorated tee market
in the fourth quarter of fiscal 2014 and won a number of new private label programs
as the year progressed. We believe we are poised to achieve revenue growth in
our basics segment for fiscal 2015 and will start taking advantage of our increased
manufacturing capacity in the second half of the year.
Outlook
The markets in which we participate remain challenging as we start fiscal 2015.
Cotton cost and other raw material and energy costs remain volatile. Overall, we
DELTA APPAREL, INC.
Annual Report
Fiscal Year 2014
FOR THE YEAR ENDING
Net Sales
Gross Profit
Operating (Loss) Income
Net (Loss) Income
PER COMMON SHARE
Net Income
Net Income, Diluted
Book Value
Financial Highlights
Sept 27,
2014
June 29,
2013
June 30,
2012
July 2,
2011
452,901
85,741
(1,661)
(960)
490,523
109,509
13,903
9,184
$ 489,923
83,723
(6,222)
(2,447)
$
475,236
116,235
25,296
17,327
July 3,
2010
424,411
100,783
20,162
12,187
(0.12)
(0.12)
17.54
$
$
1.12 $
1.08 $
17.80 $
(0.29)
(0.29)
16.50
$
$
$
2.04
1.98
16.86
$
$
$
1.43
1.40
14.76
$
$
$
$
KEY PERFORMANCE RATIOS
Net Sales Growth %
Return on Beginning Equity
Debt to Equity
Operating Income as a Percent of Net Sales
(7.7%)
(0.7%)
94.0%
(0.4%)
0.1%
6.6%
69.7%
2.8%
3.1%
(1.7%)
82.4%
(1.3%)
12.0%
13.8%
61.1%
5.3%
19.5%
10.9%
54.1%
4.8%
OPERATING INCOME/MARGINS
(in millions)
(cid:7)(cid:3)(cid:8)(cid:5)(cid:6)
(cid:2)(cid:3)(cid:4)(cid:7)(cid:6)(cid:8)(cid:2)(cid:2)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:4)(cid:2)(cid:2)
(cid:12)(cid:3)(cid:4)(cid:5)(cid:6)
(cid:2)(cid:3)(cid:12)(cid:8)(cid:6)(cid:13)(cid:2)(cid:2)
(cid:9)(cid:10)(cid:3)(cid:8)(cid:5)(cid:11)(cid:6)
(cid:2)(cid:3)(cid:9)(cid:10)(cid:6)(cid:4)(cid:11)(cid:2)
(cid:9)(cid:13)(cid:3)(cid:2)(cid:5)(cid:11)(cid:6)
(cid:2)(cid:3)(cid:9)(cid:12)(cid:6)(cid:14)(cid:11)(cid:2)
(cid:9)(cid:5)(cid:4)(cid:5)(cid:7)
(cid:9)(cid:5)(cid:4)(cid:4)(cid:7)
(cid:9)(cid:5)(cid:4)(cid:9)(cid:7)
(cid:9)(cid:5)(cid:4)(cid:10)(cid:7)
(cid:9)(cid:5)(cid:4)(cid:11)(cid:7)
(cid:3)(cid:10)(cid:5)(cid:7)(cid:7)
(cid:3)(cid:9)(cid:8)(cid:7)(cid:7)
(cid:3)(cid:9)(cid:5)(cid:7)(cid:7)
(cid:3)(cid:4)(cid:8)(cid:7)(cid:7)
(cid:3)(cid:4)(cid:5)(cid:7)(cid:7)
(cid:3)(cid:8)(cid:7)(cid:7)
(cid:3)(cid:5)(cid:7)(cid:7)
(cid:2)(cid:3)(cid:8)(cid:6)(cid:7)
(cid:2)(cid:3)(cid:4)(cid:5)(cid:6)(cid:7)
(cid:2)(cid:4)(cid:4)(cid:12)(cid:7)
(cid:2)(cid:4)(cid:12)(cid:12)(cid:7)
(cid:2)(cid:5)(cid:4)(cid:12)(cid:7)
(cid:2)(cid:5)(cid:12)(cid:12)(cid:7)
(cid:2)(cid:3)(cid:4)(cid:12)(cid:7)
(cid:2)(cid:3)(cid:12)(cid:12)(cid:7)
(cid:10)(cid:15)(cid:2)
(cid:7)(cid:15)(cid:2)
(cid:16)(cid:15)(cid:2)
(cid:8)(cid:15)(cid:2)
(cid:4)(cid:15)(cid:2)
(cid:12)(cid:15)(cid:2)
(cid:15)(cid:2)
(cid:9)(cid:12)(cid:15)(cid:11)(cid:2)
(cid:9)(cid:4)(cid:15)(cid:11)(cid:2)
NET SALES
(in millions)
$489.9
$490.5
$475.2
$452.9
$424.4
(cid:6)(cid:12)(cid:7)(cid:12)(cid:7)
(cid:6)(cid:12)(cid:7)(cid:7)(cid:7)
(cid:6)(cid:12)(cid:7)(cid:6)(cid:7)
(cid:6)(cid:12)(cid:7)(cid:3)(cid:7)
(cid:6)(cid:12)(cid:7)(cid:5)(cid:7)
SELECTED YEAR END BALANCES
Accounts Receivable, Net
Inventories, Net
Total Assets
Debt
Total Liabilities
Total Equity
Shares Outstanding
Sept 27,
2014
$ 68,181
162,188
354,578
129,973
216,371
138,207
7,878
June 29,
June 29,
2013
2013
$ 74,415
159,514
311,910
98,292
170,844
141,066
7,923
June 30,
June 30,
2012
2012
$ 73,349
161,633
320,394
114,478
181,427
138,967
8,425
July 2,
July 2,
2011
2011
$ 76,210
159,209
311,865
86,773
169,900
141,965
8,422
July 3,
July 3,
2010
2010
$ 59,916
116,599
251,333
68,073
125,619
125,714
8,516
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended September 27, 2014
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-15583
DELTA APPAREL, INC.
(Exact name of registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
58-2508794
(I.R.S. Employer Identification No.)
322 South Main Street
Greenville, SC 29601
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (864) 232-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01
Name of Each Exchange on Which Registered
NYSE MKT LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned filer, as defined in Rule 405 of the Securities Act. Yes
No
.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically 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
No
that the registrant was required to submit and post such files). Yes
.
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
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):
Large accelerated filer
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
.
As of March 29, 2014, 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 MKT was approximately $118.4 million.
The number of outstanding shares of the registrant’s Common Stock as of November 21, 2014 was 7,878,428.
DOCUMENTS INCORPORATED BY REFERENCE: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 2014 Annual Meeting of
Shareholders currently scheduled to be held on February 4, 2015.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-10.1
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
2
6
12
12
13
14
14
16
17
25
26
26
26
29
29
29
29
30
30
30
34
Cautionary Note Regarding Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the
Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this
report and other filings with the 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.
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:
•
•
•
•
•
•
the volatility and uncertainty of cotton and other raw material prices;
the general U.S. and international economic conditions;
the competitive conditions in the apparel industry;
restrictions on our ability to borrow capital or service our indebtedness;
the inability to successfully implement strategic initiatives;
deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of our
customers and suppliers;
our ability to predict or react to changing consumer preferences or trends;
pricing pressures and the implementation of cost reduction strategies;
changes in economic, political or social stability at our offshore locations;
our ability to attract and retain key management;
the effect of unseasonable weather conditions on purchases of our products;
significant changes in our effective tax rate;
interest rate fluctuations increasing our obligations under our variable rate indebtedness;
the ability to raise additional capital;
the ability to grow, achieve synergies and realize the expected profitability of recent acquisitions;
the volatility and uncertainty of energy and fuel prices;
•
•
•
•
•
•
•
•
•
•
• material disruptions in our information systems related to our business operations;
•
•
•
•
•
•
•
•
•
•
•
•
•
data security or privacy breaches;
significant interruptions within our manufacturing or distribution operations;
changes in or our ability to comply with safety, health and environmental regulations;
significant litigation in either domestic or international jurisdictions:
the ability to protect our trademarks and other intellectual property;
the ability to obtain and renew our significant license agreements;
the impairment of acquired intangible assets;
changes in e-commerce laws and regulations;
changes in international trade regulations;
changes in employment laws or regulations or our relationship with employees;
cost increases and reduction in future profitability due to recent healthcare legislation;
foreign currency exchange rate fluctuations;
violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent
contractors;
the illiquidity of our shares;
price volatility in our shares and the general volatility of the stock market; and
the costs required to comply with the regulatory landscape regarding public company governance and disclosure.
•
•
•
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations
is described in Part 1 under the heading of “Risk Factors.” Any forward-looking statements do not purport to be predictions of future
events or circumstances and may not be realized. Further, any forward-looking statements are made only as of the date of this Annual
Report and we do not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any such
statements or any projected results will not be realized or that any contemplated strategic initiatives will not be implemented.
1
ITEM 1. BUSINESS
PART I
“Delta Apparel”, the “Company”, “we”, “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our domestic
wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Junkfood Clothing Company (“Junkfood”), To The Game, LLC (“To
The Game”), Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to the context.
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 MKT under the symbol “DLA”.
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. On August 26, 2013, our Board of Directors
determined that the Company's fiscal year will begin on the Sunday closest to September 30th of each year and end on the Saturday
closest to September 30th of each year. The change was intended to better align our planning, financial and reporting functions with the
seasonality of our business. The 2014, 2013 and 2012 fiscal years were 52-week years and ended on September 27, 2014, June 29, 2013,
and June 30, 2012, respectively. The transition period was a 13-week quarter and ended on September 28, 2013 to coincide with the
change in our fiscal year end.
OVERVIEW
Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio
of lifestyle basics and branded activewear apparel and headwear. We specialize in selling casual and athletic products through a variety
of distribution channels and distribution tiers, including specialty stores, boutiques, department stores, mid and mass channels, e-retailers,
college bookstores and the U.S. military. Our products are also made available direct-to-consumer on our websites at www.soffe.com,
www.junkfoodclothing.com, www.saltlife.com and www.deltaapparel.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.
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. One of our strengths is the speed with 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 to retailers.
ACQUISITIONS
We became a diversified branded apparel company through eight acquisitions which we have completed since October 2003. These
acquisitions added well-recognized brands and licensed properties to our portfolio, expanded our product offerings and broadened our
distribution channels and customer base.
Business
Salt Life
The Cotton Exchange
Art Gun
To The Game
FunTees
Intensity Athletics
Junkfood Clothing
M.J. Soffe
BUSINESS SEGMENTS
Date of Acquisition
August 27, 2013
July 12, 2010
December 28, 2009
March 29, 2009
October 2, 2006
October 3, 2005
August 22, 2005
October 3, 2003
Business Segment
Branded
Branded
Basics
Branded
Basics
Branded
Branded
Branded
We operate our business in two distinct segments: branded and basics. Although the two segments are similar in their production processes
and regulatory environments, they are distinct in their economic characteristics, products, marketing and distribution methods. During
fiscal year 2014, a review of our operating segments determined that the operations of our Art Gun business more closely align with those
of our basics segment rather than our branded segment. As a result of this determination, our Art Gun business has been reclassified from
the branded to basics segment in all periods presented in Note 13 - Business Segments.
The branded segment is comprised of our business units which are focused on specialized apparel garments and headwear to meet
consumer preferences and fashion trends, and includes Soffe, Junkfood, To The Game and Salt Life. 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 lifestyle brands of
Soffe®, Intensity Athletics®, Junk Food®, The Game®, American Threads™, and Salt Life® as well as other labels.
2
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, FunTees and Art Gun businesses. We market, distribute and manufacture for sale unembellished knit
apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight® for sale to a diversified audience ranging from large
licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear
companies, retailers, corporate industry programs, e-retailers, and sports licensed apparel marketers. Art Gun produces custom private
label garments through digital printing. Typically these products are sold with value-added services such as hangtags, ticketing, hangers,
and embellishment so that they are fully ready for retail.
See Note 13 of the Notes to Consolidated Financial Statements for financial information regarding segment reporting, which information
is incorporated herein by reference.
PRODUCTS
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.
We market fashion apparel garments and headwear under our primary brands of Soffe®, Intensity Athletics®, Junk Food®, Salt Life®,
and The Game®, as well as other labels. We market our basic apparel garments under our Delta brand.
Soffe is positioned in the marketplace as an All-American lifestyle activewear company that designs, produces, and markets products for
men, women, and children. The women's offerings are inspired by Soffe's heritage in cheerleading and include both a performance
segment made for working out that utilizes technical fabrics and a collection of crossover fun, fashion apparel that can be worn to and
from the gym. The Soffe signature fit resonates with our core, junior consumer base. As a supplier to the military since 1946, the men's
offerings are rooted in our military heritage. Our mens collections leverage performance fabrics and channel the military's authenticity
with an emphasis on the soldier, the original elite athlete. We also support the on-the-field female athlete under our Intensity Athletics
brand. Intensity Athletics incorporates fashion on the field and trend-leading fits to create uniforms, practice gear, and accessories.
Junkfood emerged in 1998 as the original vintage t-shirt company. Known for its soft, comfortable fabrics and witty art, Junk Food is
a celebrity favorite carried in the top stores throughout the world, including branded collaborations with Bloomingdales, Nordstrom, Gap
Inc. and other notable brands and retailers. Also a licensing powerhouse, Junkfood has distribution rights to over 800 pop-culture properties
across multiple categories including rock & roll, iconic fictional characters, movies, sports, and foods and beverages. The Junk Food
brand continues to expand beyond its iconic tee shirt collections with new apparel categories, accessories, footwear, and headwear.
Junkfood also recently opened its first flagship retail store on iconic Abbot Kinney in Venice, California. Junkfood's diversified business
model includes both private and branded labels, with a portfolio that includes Junk Food®, Junk Food Art House, Wknd, Paint + Cloth™,
Stray Heart™, The Neighborhood Thieves®, Love + Art™, and True Vintage®.
Salt Life is an authentic, aspirational and lifestyle brand that embraces those who love the ocean and everything associated with living
the "Salt Life". Founded in 2003 by four avid watermen from Jacksonville Beach, Florida, the Salt Life brand has widespread appeal
with ocean enthusiasts worldwide. From fishing, diving and surfing, to beach fun and sun-soaked relaxation, the Salt Life brand says "I
live the Salt Life". Salt Life's distribution includes surf shops, specialty stores, department stores and sporting goods retailers.
The Game is an All-American sportswear and headwear company. Its innovative designs and superior quality products are sold nationally
through sporting goods, college, outdoor, and specialty stores in addition to team dealers. The Game's signature headwear designs include
“The Bar” and “The Circle” which are well recognized by consumers across the country. Worn by college athletes at over 1,000 colleges
and universities, The Game is proud to be the headwear worn by many NCAA baseball and softball champions. The Game products also
include American Threads™, an American-made collegiate apparel and headwear collection.
Delta offers a wide assortment of basic, high-quality apparel garments for the entire family under its primary brand names Delta Pro
Weight® and Delta Magnum Weight®. Delta products are offered in a broad range of colors available in six-month infant to adult sizes
up to 5X. The Pro Weight® line represents a diverse selection of mid-weight, 100% cotton silhouettes in a large color palette. The Magnum
Weight® line is designed to give our customers a variety of silhouettes in a heavier-weight, 100% cotton fabric. We recently launched
a fleece program, which includes a trendy light-weight French terry line and a comfortable heavy-weight fleece. These unisex products
help Delta meet the seasonal demands of our diversified customer base. The upcoming year brings a new 100% polyester fabric to the
popular Delta Dri™ performance t-shirt line. These products wick moisture away from the skin and also include an anti-microbial finish
for odor control. Delta Dri™ products are offered in long and short sleeves for adults and short sleeves for youth. Also new in the
upcoming year is the Delta Soft Collection, its 30 singles soft spun yarn incorporates finer, specialty yarn to create an ultra-soft garment.
We are offering this product line in adult, ladies, youth and juvenile sizes in a variety of colors.
FunTees designs, markets and manufactures private label custom knit t-shirts primarily to major branded sportswear companies, including
Nike, Quiksilver and Columbia Sportswear. The majority of this merchandise is embellished. Additionally, we offer our customers a
wide variety of packaging services so that products can be shipped store-ready.
Art Gun is a leader in direct-to-garment printing, with one of the most highly automated factory processes for delivering on-demand,
direct-to-garment, digitally printed garments of all types. We print single, custom garments and ship products to consumers in over 40
countries worldwide.
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A key to our business success is our ability to anticipate and quickly respond to changing consumer preferences. Our art team reviews
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.
TRADEMARKS AND LICENSE AGREEMENTS
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 brand since 1998. 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, Two-Bar, Split-Bar and Circle Designs, which are recognized collegiate designs. Other registered trademarks
include Salt Life®, Pro Weight®, Magnum Weight®, the Delta Design, American Threads™, The Cotton Exchange®, 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.
We have distribution rights to other trademarks through license agreements. The Soffe and The Game business units are official licensees
for most major colleges and universities. Junkfood has rights to distribute trademarked apparel across athletics (including the NFL and
NBA), music, entertainment, foods and beverages, and numerous 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. Historically we have been able to renew our license
agreements; however, 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.
SALES & MARKETING
Our sales and marketing function consists of both employed and independent sales representatives and agencies located throughout the
country. In our 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 our basics segment, we 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.
Additionally, our brands leverage both in-house and outsourced marketing communications professionals to amplify their lifestyle
statements.
During fiscal year 2014, we shipped our products to approximately 12,000 customers, many of whom have numerous retail "doors". No
single customer accounted for more than 10% of sales in fiscal year 2014, the transition period ended September 28, 2013, or fiscal years
2013, 2012, and our strategy is to not become dependent on any single customer. Revenues attributable to sales of our products in foreign
countries, as a percent of our consolidated net sales, represented approximately 2% in fiscal year 2014, 4% in the transition period ended
September 28, 2013, 2% in fiscal year 2013, and 1% in fiscal year 2012.
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.
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 replenishment and direct catalog orders,
we believe that backlog order levels do not provide a general indication of future sales.
COMPETITION
We have numerous competitors with respect to the sale of apparel and headwear products in domestic and international markets, many
of which have greater financial resources than we do.
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 trends and consumer
preferences. We aim to keep our merchandise offerings fresh with unique artwork and new designs, and support the integrated lifestyle
statement of our products through effective consumer marketing. We believe that our favorable competitive position stems from strong
consumer recognition and brand loyalty, the high quality of our products, and our flexibility and process control, which drive product
consistency. We believe that our ability to remain competitive in the areas of quality, price, design, marketing, product development,
manufacturing, technology and distribution will, in large part, determine our future success.
Competition in our 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. This business is highly price competitive
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and 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 future business with these customers.
SEASONALITY
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 June fiscal quarter typically being the highest and sales in our December fiscal quarter typically being the lowest. As
we continue to expand our product offerings, the seasonality in our business has become less pronounced. The percentage of net sales
by quarter for the year ended September 27, 2014, was 22%, 25%, 28% and 25% for the first, second, third, and fourth fiscal quarters,
respectively. Consumer demand for apparel is cyclical and dependent upon the overall level of demand for soft goods, which may or may
not coincide with the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and
international economic conditions change. Therefore, the distribution of sales by quarter in fiscal year 2014 may not be indicative of the
distribution in future years.
MANUFACTURING
We have a vertically integrated manufacturing platform that supports both our branded and basics segments. Our manufacturing operations
begin with the purchase of yarn and other raw materials from third-party suppliers. We manufacture fabrics in either our owned domestic
textile facility located in Maiden, North Carolina or at Ceiba Textiles, our leased textile facility located near San Pedro Sula, Honduras.
The manufacturing process continues at one of our seven apparel manufacturing facilities where the products are ultimately sewn into
finished garments. We either own these facilities or lease and operate them. 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 sale (with any combination of services, including ticketing, hang tags, and hangers). These facilities are located
domestically (one in Alabama, one in Florida and one in North Carolina) and internationally (one in El Salvador and one in Mexico). In
fiscal year 2014, the transition period ended September 28, 2013 and fiscal years 2013 and 2012, approximately 81%, 85%, 81% and
73%, 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 2014 fiscal year-end, the transition period ended September 28, 2013, and the 2013 and 2012 fiscal year-ends, our long-lived assets
in Honduras, El Salvador and Mexico collectively comprised approximately 44%, 44%, 42%, and 44%, respectively, of our total net
property, plant and equipment, with our long-lived assets in Honduras comprising 35%, 33%, 31%, and 34% , respectively. See Item 1A.
Risk Factors for a description of risks associated with our operations located outside of the United States.
To supplement our internal manufacturing platform, we purchase fabric, undecorated products and full-package products from independent
sources throughout the world. In fiscal year 2014, the transition period ended September 28, 2013 and fiscal years 2013 and 2012, we
sourced approximately 19%, 15%, 19% and 27%, respectively, of our products from third parties.
RAW MATERIALS
We have a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively "Parkdale") to supply our yarn requirements
until December 31, 2015. 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. 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 the higher cost of yarn to our customers, this could have a material adverse
effect on our results of operations. Moreover, our current contract with Parkdale expires on December 31, 2015, and while we expect
to either negotiate an extension agreement with Parkdale or engage an alternative supplier on comparable terms, our inability to do so
could negatively affect our business, financial condition and results of operations.
During calendar year 2011, the apparel industry as a whole experienced unprecedented increases in cotton prices leading to ensuing price
volatility in calendar 2012. These record high cotton prices, coupled with price discounting that occurred in the basic, undecorated t-
shirt market, led to our decision to take a $16.2 million inventory writedown in our basics segment in the December fiscal quarter of
2012, which was the primary factor in the Company's net loss for fiscal year 2012.
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 when certain yarns
become limited in quantity, causing some fabrics to be difficult to source. This can result in higher prices or the inability to provide
products to customers, which could negatively impact our results of operations. Dyes and chemicals are also purchased from several
third party suppliers. While historically we have not had difficulty obtaining sufficient quantities of dyes and chemicals for manufacturing,
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the availability of products can change, which could require us to adjust dye and chemical formulations. In certain instances, these
adjustments can increase manufacturing costs, negatively impacting our results of operations.
EMPLOYEES AND SOCIAL RESPONSIBILITY
As of September 27, 2014, we employed approximately 6,800 full time employees, of whom approximately 1,500 were employed in the
United States. Approximately 1,000 employees at one of our facilities in San Pedro Sula, Honduras are party to a three-year collective
bargaining agreement which was recently extended and approximately 1,200 employees at a separate facility in San Pedro Sula, Honduras
are party to a three-year collective bargaining agreement. We have historically conducted our operations without significant labor
disruptions and believe that our relations with our employees are good. We have invested significant time and resources in attempting
to cause the working conditions in all of our facilities to meet or exceed the standards imposed by the governing laws and regulations.
We have obtained WRAP (Worldwide Responsible Accredited Production) certification for all of our manufacturing facilities that we
operate in Honduras, El Salvador and Mexico and for our Maiden, North Carolina facility in the United States. In 2011, Delta Apparel,
Inc., along with all of its affiliated businesses, became a participating company of the FLA (Fair Labor Association). This affiliation with
FLA further enhances human rights compliance monitoring for our 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 and charitable
organizations in the communities where we operate.
ENVIRONMENTAL AND REGULATORY MATTERS
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater
discharges, storm water flows, air emissions and solid waste disposal. Our plants generate 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 environmental permits, and we believe
that we are currently in compliance with the requirements of these permits.
The environmental regulations applicable to our business are becoming increasingly stringent and we incur capital and other expenditures
annually to achieve compliance with environmental standards. We currently do not expect that the amount of expenditures required to
comply with these environmental standards will have a material adverse effect on our operations, financial condition or liquidity. There
can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the
discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, while we believe
that we are currently in compliance with all applicable environmental requirements, the extent of our liability, if any, for past failures to
comply with laws, regulations and permits applicable to our operations cannot be determined and could have a material adverse effect
on our operations, financial condition and liquidity.
RESEARCH & DEVELOPMENT
Although we continually seek new products and brands to take to market via our diverse distribution network and customer base, there
were no material amounts expended on research and development in the fiscal year ended September 27, 2014.
AVAILABLE INFORMATION
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.
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.
ITEM 1A.
RISK FACTORS
We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties, including,
but not limited to, the risks identified below. The following factors, as well as factors described elsewhere in this report or in our other
filings with the SEC, could materially affect our business, financial condition or operating results and the value of Company securities
held by investors and should be carefully considered in evaluating our Company and the forward-looking statements contained in this
report or future reports. The risks described below are not the only risks facing Delta Apparel. Additional risks not presently known to
us or that we currently do not view as material may become material and may impair our business operations. Any of these risks could
cause, or contribute to causing, our actual results to differ materially from expectations. We expressly disclaim any obligation to publicly
update or revise any risk factors, whether as a result of new information, future events or otherwise, except as required by law.
The price and availability of purchased yarn and other raw materials is prone to significant fluctuations and volatility. Cotton is
the primary raw material used in the manufacture of our apparel products. As is the case with other commodities, the price of cotton
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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, our
key supplier, is based upon the cost of cotton plus a fixed conversion cost. We set future cotton prices with purchase commitments as a
component of the purchase price of yarn in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing
prices, as reported by the New York Cotton Exchange, at the time we enter into the commitments. Thus, we are subject to the commodity
risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. The Company and the apparel
industry as a whole experienced unprecedented increases in cotton prices and price volatility during the fiscal year ended June 30, 2012.
We were unable to pass through to our customers this higher cost of cotton and ultimately decided to take a $16.2 million inventory write-
down in our basics segment in the second quarter of our 2012 fiscal year. This second quarter inventory write-down was the primary
factor in the Company's net loss for fiscal year 2012.
In addition, if Parkdale’s operations are disrupted and Parkdale is not able to provide us with our yarn requirements, we may need to
obtain yarn from alternative sources. We may not be able to enter into short-term arrangements with substitute suppliers on terms as
favorable as our current terms with Parkdale, which could negatively affect our business. Moreover, our current contract with Parkdale
expires on December 31, 2015, and while we expect to either negotiate an extension agreement with Parkdale or engage an alternative
supplier on comparable terms, our inability to do so could negatively affect our business, financial condition and results of operations.
Current economic conditions may adversely impact demand for our products. The apparel industry is cyclical and dependent upon
the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending.
These levels of demand change as regional, domestic and international economic conditions change. These economic conditions include,
but are not limited to, employment levels, energy costs, interest rates, tax rates, inflation, personal debt levels, and uncertainty about the
future, with many of these factors outside of our control. Overall, consumer purchases of discretionary items tend to decline during
recessionary periods when disposable income is lower. As such, deterioration in general economic conditions that creates uncertainty or
alters discretionary consumer spending habits could reduce our sales. Sometimes, however, the timing of increases or decreases in
consumer purchases of soft goods can differ from the timing of increases or decreases in the overall level of economic activity. Weakening
sales may require us to reduce manufacturing operations to match our output to demand or expected demand. Reductions in our
manufacturing operations may increase unit costs and lower our gross margins, causing a material adverse effect on our results of
operations.
The apparel industry is highly competitive, and we face significant competitive threats to our business. The market for athletic and
activewear apparel and headwear is highly competitive and includes many new competitors as well as increased competition from
established companies, some of which are larger or more diversified and may have greater financial resources 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.
We may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness. Significant operating
losses or significant uses of cash in our operations could cause us to default on our asset-based revolving credit facility. We rely on our
credit facility, as well as on cash generated by our operations, to fund our working capital and capital expenditure needs, to make
acquisitions, to fund share repurchases under our Stock Repurchase Program and to pay dividends should we choose to do so in the future.
Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability under our credit facility
is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our operations. A significant
deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds or service our indebtedness.
Moreover, our credit facility includes a financial covenant that if the availability under our credit facility falls below the amounts specified
in our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement) for the preceding 12-month
period must not be less than 1.1 to 1.0. Although our availability at September 27, 2014, was above the minimum thresholds specified
in our credit agreement, a significant deterioration in our business could cause our availability to fall below such thresholds, thereby
requiring us to maintain the minimum FCCR specified in our credit agreement. As of September 27, 2014, our FCCR was below the
minimum threshold specified in our credit agreement. Our credit facility also 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.
If an event of default under our credit facility occurred or became imminent, we may request our credit agreement lenders to provide a
waiver. If we were unsuccessful in that endeavor, we could explore alternative sources of capital, whether debt or equity, which would
likely be more expensive than the costs we incur under our credit facility. If we were unable to cure an un-waived event of default under
our credit facility, we would be unable to borrow additional amounts under the facility, we could be unable to make acquisitions as well
as fund share repurchases and pay dividends, and our lenders thereunder could accelerate our obligations under the agreement and foreclose
on our assets subject to the liens in their favor. This circumstance would materially adversely affect our financial position and results of
operations.
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The inability to successfully implement certain strategic initiatives could adversely affect our financial position and results of
operations. In response to our recent financial performance and results of operations, as well as our near-term view of apparel market
conditions, we initiated a reorganization of our administrative structure at all levels to streamline decision-making and information flow
as well as reduce duplicative and excess fixed costs. In addition, we continue to evaluate other strategic initiatives focused on improving
net profitability. These other initiatives include (i) further restructuring our manufacturing platform to lower product costs and strategically
reduce capacity on certain product lines, and (ii) a comprehensive rationalization of all business units, product lines and sales channels.
The failure or inability to carry out these initiatives, any unexpected increases in the costs to carry out these initiatives, or the failure to
achieve the cost savings or other financial or performance benefits expected from these initiatives could have a material adverse effect
on our financial position or results of operations.
Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our customers
or suppliers could adversely affect our financial position and results of operations. We extend credit to our customers, generally
without requiring collateral. The extension of credit involves considerable judgment and is based on an evaluation of each customer’s
financial condition and payment history. We monitor credit risk exposure by periodically obtaining credit reports and updated financial
statements on our customers. Deterioration in the economy, declines in consumer purchases of apparel, or 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, historical trends,
estimates and other available information. The size of this allowance is the result of our making judgments and determinations in the
context of imperfect information, and in retrospect the allowance may turn out to have been insufficient. The inability to collect on sales
to significant customers or a group of customers could have a material adverse effect on our financial condition and results of operations.
Significant changes in the financial condition of any of our suppliers or other parties with which we do business could result in disruption
to our business and have a material adverse effect on our financial condition and results of operations. In addition, significant changes
in the retail or operational strategies employed by our customers may result in decreased sales of our products to such customers and
could have a material adverse effect on our financial condition and results of operations. Likewise, significant changes in the operations
of any of our suppliers or other parties with which we do business could result in disruption to our business and have a material adverse
effect on our financial condition and results of operations.
Our 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 (particularly in our branded
business) and on other factors and, accordingly, our ability to adapt to fashion trends in designing products is important to the success of
our brands. If we are unable to quickly adapt to changes in consumer preferences in the design of products, our results of operations could
be adversely affected. Moreover, because we and our customers project demand for our products based on estimated sales and fashion
trends, the actual demand for our products sometimes falls short of what was projected. This can lead to higher inventory levels than
desired. Excess inventory levels increase our working capital needs, and sometimes excess inventory must be sold at discounted prices,
all of which could have an adverse impact on our business, financial condition and results of operations.
Our 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 the expansion of manufacturing
operations at that facility has continued in subsequent years. In fiscal year 2012, we moved several functions of our private label business
to our El Salvador facility to better serve customers through an enhanced and efficient product development process. In conjunction with
this, we began a modernization of our decoration equipment to expand capabilities and lower costs. In addition, we announced in 2013
the consolidation of our domestic screen print operations as part of our continued focus on more efficient manufacturing and distribution
strategies. This consolidation resulted in the closing of the Wendell, North Carolina decoration facility operated by our Soffe business
unit and the consolidation of those operations within Soffe's Fayetteville, North Carolina facility. Further, in June 2014, we announced
plans to consolidate some domestic fabric production for our basic, blank t-shirt products into our Ceiba Textiles facility in Honduras.
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. However, any unexpected increases in the costs to carry out these initiatives or the 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 Honduras, El Salvador and Mexico. The majority of
our products are manufactured in Honduras, El Salvador and Mexico, with a concentration in Honduras. These countries from time to
time experience political, social and economic instability, and we cannot be certain of their future stability. Instability in a country can
lead to protests, riots and labor unrest. 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.
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 success is dependent in significant part on our
ability to retain existing, and attract additional, qualified personnel to execute our business strategy.
Our business is influenced by weather patterns. Our business is susceptible to unseasonable weather conditions. For example, extended
periods of unusually warm temperatures during the winter season or cooler weather during the spring and summer seasons could render
portions of our inventory incompatible with weather conditions and influence consumers to alter their apparel purchasing habits. Reduced
sales volumes from extreme or prolonged unseasonable weather conditions could adversely affect our business and results of operations.
We currently pay income taxes at lower than statutory rates and may incur additional tax liability. 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, changes to U.S. tax laws impacting how
U.S. multinational corporations are taxed on foreign earnings or 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.
Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly. The
debt we incur under our asset-based revolving credit facility is at variable rates of interest, which exposes us to interest rate risk. If interest
rates increase, our obligations on this variable rate indebtedness would increase even though the amount borrowed remained the same,
and there would be a corresponding decrease in our net income and cash flows, including cash available for servicing our debt.
We may need to raise additional capital to grow our business. 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.
We have expanded our business through acquisitions that could result in diversion of resources, an inability to integrate acquired
operations and extra expenses. A part of our growth strategy involves acquiring businesses that complement 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 our 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.
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 fluctuates due to a number of factors outside of
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 products to mitigate risks of fluctuations in the cost of energy. In addition,
we enter into forward contracts to fix a portion of the 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 financial position and results of operations.
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
9
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, "cyber attack", computer 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 business and
results of operations.
Data security and privacy breaches could lead to liability and reputational damage. Our business involves the regular collection
and use of sensitive and confidential information regarding customers and employees. These activities are subject to contractual
requirements and are highly regulated. Privacy and information security laws are complex and constantly changing. Compliance with
these laws and regulations may result in additional costs due to new systems and processes, and our non-compliance could lead to legal
liability. Further, the methods used by third parties to obtain unauthorized access change frequently and may not be anticipated or
immediately detected. Thus, despite the security measures we may have in place, an actual or perceived information security breach,
whether due to "cyber attack", computer viruses or human error, could occur. Such a breach of customer, employee or company data
could attract media attention, damage our customer or other business relationships and reputation, result in lost sales, fines, lawsuits or
other costs and involve the loss of confidential company information, any or all of which could have a material adverse effect on our
business, financial condition and results of operations.
Our business could be harmed if we are unable to deliver our products to the market due to casualty or other problems with our
manufacturing operations or distribution network. We own or lease manufacturing facilities in the United States, Honduras, Mexico
and El Salvador. We also own or lease distribution facilities located throughout the United States and maintain inventory at third-party
distribution facilities in the United States. Any casualty or other circumstance that damages or destroys any of these material facilities
or significantly limits their ability to function could materially affect our business in an adverse way. Similarly, any significant interruption
in the operation of any of these facilities or our related sourcing and transportation logistics functions, whether within or outside of our
control, may delay shipment of merchandise to our customers, potentially damaging our reputation and customer relationships and causing
a loss of revenue. In addition, if we are unable to successfully coordinate the planning of inventory across these facilities and the related
distribution activities, it could have a material adverse effect on our business, financial condition and results of operations.
Failure of our operations to comply with safety, health and environmental regulations 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 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 in these areas, 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 or regulatory actions regarding product liability,
employment practices, intellectual property 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. These proceedings
could cause us to incur costs and may require us to devote resources to defend against these claims and could ultimately result in a loss
or other remedies such as product recalls, which could adversely affect our financial position and results of operations. For a description
of current material legal proceedings, see Part I, Item 3, Legal Proceedings.
We rely on the strength of our trademarks and could incur significant costs to protect these trademarks and our other intellectual
property. Our trademarks, including Salt Life®, Soffe®, Junk Food®, and The Game® among others, are important to our marketing efforts
and have substantial value. In addition, we have federal trademark registrations for the Three-Bar, Two-Bar, Split-Bar and Circle Designs,
which are recognized designs in the collegiate and other markets. 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
significant additional resources to protect these trademarks and our other intellectual property. The loss or limitation of the exclusive
right to use our trademarks or other intellectual property 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.
We believe that our license agreements in the aggregate are of significant value to our business. The loss of or failure to obtain, renew
or extend license agreements on favorable terms could adversely affect our sales and have a material adverse effect on our financial
condition and results of operations.
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
10
to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At September 27, 2014, and June
29, 2013, our goodwill and other intangible assets were approximately $60.2 million and $23.0 million, respectively. We conduct an
annual review, and more frequent reviews if events or circumstances dictate, to determine whether goodwill is impaired. We also determine
whether impairment indicators are present related to our identifiable intangible assets. If we determine that goodwill or intangible assets
are impaired, we would be required to write down the value of these assets. We completed our annual impairment test of goodwill on the
first day of our 2014 third fiscal quarter. Based on the valuation, there does not appear to be impairment on the goodwill recorded on our
financial statements. We also concluded that there are no additional indicators of impairment related to our intangible assets. There can,
however, be no assurance that we will not be required to take an impairment charge in the future, which could have a material adverse
effect on our results of operations.
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 of and restrictions on companies conducting commerce through the internet,
primarily in the areas of taxation, consumer privacy and protection of consumer personal information. These laws and regulations could
increase the costs and liabilities associated with our e-commerce activities, thereby negatively impacting our 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 and results of operations.
Any failure to comply with international trade regulations could cause us to become subject to investigation resulting in significant
penalties or claims or in our inability to conduct business, adversely affecting our results of operations. A complaint was filed in March
2012 with the U.S. Department of Labor's Office of Trade & Labor Affairs by the AFL-CIO and various Honduran union federations
alleging that the Honduran government failed to enforce its labor laws in violation of the provisions of CAFTA. The complaint contains
various and sundry allegations of Honduran labor law violations by U.S.-based companies with Honduran operations, including our Ceiba
Textiles operations. We contend that the allegations against Ceiba Textiles have no merit. The U.S. Department of Labor has initiated an
investigation of the allegations in the complaint. We believe that the legal action, if any, that may result from this investigation would be
an action by the U.S. government against Honduras under CAFTA, not a legal action against us related to the specific allegations contained
in the complaint. However, an action against Honduras could result in sanctions or other penalties against Honduras under CAFTA or in
other governmental action that could have a material negative effect on our ability to conduct business there.
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 6,800 employees worldwide, with approximately 5,300 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 adverse impact on our operating results. Approximately 1,000 employees at one of our facilities
in Honduras are party to a three-year collective bargaining agreement which was recently extended and approximately 1,200 employees
at a separate facility in Honduras are party to a three-year collective bargaining agreement. We have historically conducted our operations
without significant labor disruptions and believe that our relations with our employees are good. However, if labor relations were to
change, it could adversely affect the productivity and ultimate cost of our manufacturing operations.
Recent healthcare legislation may increase our costs and reduce our future profitability. To attract and retain employees in our
operations in the United States, we maintain a competitive health insurance program for those employees and their dependents. The
Patient Protection and Affordable Care Act, signed into law in 2010 has increased our annual employee healthcare cost obligations and
is expected to continue to increase our annual employee healthcare cost obligations going forward. We cannot predict the effect that this
legislation, or any future state or federal healthcare legislation or regulation, will ultimately have on our business. However, these rising
healthcare costs and universal healthcare coverage in the United States could result in significant long-term costs to us, which could
adversely affect our future profitability and financial condition. Also, rising healthcare costs could force us to make changes to our
benefits program, which could negatively impact our ability to attract and retain employees.
11
We are subject to foreign currency exchange rate fluctuations. We manufacture the majority of our products outside of the United
States, exposing us to currency exchange rate fluctuations. In addition, movements in foreign exchange rates can affect transaction costs
because we source products from various countries. We may seek to mitigate our exposure to currency exchange rate fluctuations, but
our efforts may not be successful. Accordingly, changes in the relative strength of the United States dollar against other currencies could
adversely affect our business.
The value of our brands, sales of our products and our licensing relationships could be impacted by negative publicity resulting
from violations of manufacturing or employee safety standards or labor laws, or unethical business practices, by our suppliers
and independent contractors. We are committed to ensuring that all of our manufacturing facilities comply with our strict internal code
of conduct, local and internal laws, and the codes and principles to which we subscribe, including those of Worldwide Responsible
Accredited Production (WRAP) and the 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, applicable manufacturing or employee safety standards and codes of conduct,
labor laws or other laws or regulations by our suppliers or independent contractors could interrupt or otherwise disrupt our operations.
Negative publicity regarding the production methods of any of our suppliers or independent contractors or their failure to comply with
our policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations could
adversely affect our reputation, brands, sales and licensing relationships, which could adversely affect our business and results of
operations.
The market price of our shares is affected by the illiquidity of our shares, which could lead to our shares trading at prices that
are significantly lower than expected. Various investment banking firms have informed us that public companies with relatively small
market capitalizations have difficulty generating institutional interest, research coverage or trading volume. This illiquidity can translate
into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the market perceives us to have a
relatively small market capitalization. This could lead to our shares trading at prices that are significantly lower than our estimate of their
inherent value.
As of November 21, 2014, we had 7,878,428 shares of common stock outstanding. We believe that approximately 66% of our stock is
beneficially owned by entities and individuals who each own more than 5% of the outstanding shares of our common stock. Included in
the 66% are institutional investors that beneficially own more than 5% of the outstanding shares. These institutional investors own
approximately 53% 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.
The market price of our shares may be highly volatile, and the stock market in general can be highly volatile. Fluctuations in our
stock price may be influenced by, among other things, general economic and market conditions, conditions or trends in our industry,
changes in the market valuations of other apparel companies, announcements by us or our competitors of significant acquisitions, strategic
partnerships or other strategic initiatives, and trading volumes. Many of these factors are beyond our control, but may cause the market
price of our common stock to decline, regardless of our operating performance.
Efforts to comply with the evolving regulatory landscape regarding public company governance and disclosure could result in
significant additional costs. We are committed to maintaining high standards for internal controls over financial reporting, corporate
governance and public disclosure. However, evolving laws, regulations and standards relating to these issues such as the Dodd-Frank
Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act, and similar regulations have created significant additional
compliance requirements for companies like us. We have devoted and will continue to devote significant resources, and our management
team has devoted and will continue to devote substantial time, to comply with these standards. This may lead to increases in our cost
structure, divert the attention of our management team from revenue generating activities to compliance efforts, and could have a material
adverse effect on our business, financial condition and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive office is located in a leased facility in Greenville, South Carolina. We own and lease properties supporting our
administrative, manufacturing, distribution and direct retail activities. The majority of our products are manufactured through a
combination of facilities that we either own, or lease and operate. As of September 27, 2014, we owned or leased eleven manufacturing
facilities (located in the United States, Honduras, El Salvador and Mexico) and eight distribution facilities (all within the United States).
In the March 2014 quarter, we opened a third party-operated distribution facility in Dallas, Texas to better service a large market for
undecorated tees with shorter shipping times and reduced freight costs. In addition, we operated three leased factory-direct stores, two
flagship retail stores and maintained three leased showrooms.
12
Our primary manufacturing and distribution facilities are as follows:
Location
Maiden Plant, Maiden, NC
Ceiba Textiles, Honduras*
Honduras Plant, San Pedro Sula, Honduras*
Cortes Plant, San Pedro Sula, Honduras*
Mexico Plant, Campeche, Mexico*
Textiles LaPaz, La Paz, El Salvador*
Campeche Sportswear, Campeche, Mexico*
Fayetteville Plant, Fayetteville, NC
Rowland Plant, Rowland, NC
Art Gun, 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*
Distribution Center, Dallas, TX**
DC Annex, Fayetteville, NC*
* Denotes leased location
** Denotes third party-operated distribution facility
Utilization
Knit/dye/finish/cut
Knit/dye/finish/cut
Sew
Sew
Cut/sew
Cut/sew/decoration
Sew/decoration
Sew/decoration
Sew
Decoration/distribution
Decoration/distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Segment
Basics and branded
Basics and branded
Basics and branded
Basics and branded
Basics and branded
Basics and branded
Basics and branded
Branded
Basics and branded
Branded
Branded
Branded
Basics
Basics and branded
Basics and branded
Basics and branded
Basics
Branded
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. During June of our 2014 fiscal year, we consolidated fabric production for our basic, blank tee shirt products from
our North Carolina plant into our lower-cost manufacturing platform in Honduras. The consolidation transfers the production of some
fabric for basic tees currently manufactured at our Maiden, North Carolina plant to Honduras, increasing production at the Ceiba Textiles
facility. This change shifts fabric production for blank tees to our most cost-effective facilities and is expected to shorten the production
cycle by approximately ten days. In addition, we are further reducing U.S. fabric production to better align inventory levels with sales
expectations. We continue to maintain a sharp focus on improving our supply chain, lowering product costs and reducing the operating
capital required in our business. We will also continue to take the necessary actions to balance capacities with demand as needed.
Substantially all of our assets are subject to liens in favor of our lenders under our U.S. asset-based secured credit facility and our Honduran
loan.
ITEM 3. LEGAL PROCEEDINGS
U.S. Consumer Product Safety Commission
We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring
hoodie product sourced, distributed and sold by Junkfood, and its compliance with applicable product safety standards. The Commission
subsequently investigated the matter, including whether Junkfood complied with the reporting requirements of the Consumer Product
Safety Act (“CPSA”), and the garments in question were ultimately recalled. On or about July 25, 2012, Junkfood received notification
from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that the staff will recommend to the
Commission a $900,000 civil penalty. We dispute the Commission's allegations.
On August 27, 2012, Junkfood responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses
and mitigating factors that could result in a much lower penalty, if any, ultimately imposed by a court should the matter proceed to
litigation. The Commission has since requested additional information regarding the matter and issued a subpoena for records and
information. While we will continue to defend against these allegations, we believe a risk of loss is probable. Based upon current
information, including the terms of previously published Commission settlements and related product recall notices, should the
Commission seek enforcement of the recommended civil penalty and ultimately prevail on its claims at trial we believe there is a range
of likely outcomes between $25,000 and an amount exceeding $900,000, along with interest and the Commission's costs and fees. During
the quarter ended June 30, 2012, we recorded a liability for what we believe to be the most likely outcome within this range, and this
liability remains recorded as of September 27, 2014.
13
California Wage and Hour Litigation
We were served with a complaint in the Superior Court of the State of California, County of Los Angeles, on or about March 13, 2013,
by a former employee of our Delta Activewear business unit at our Santa Fe Springs, California distribution facility alleging violations
of California wage and hour laws and unfair business practices with respect to meal and rest periods, compensation and wage statements,
and related claims (the "Complaint"). The Complaint is brought as a class action and seeks to include all of our Delta Activewear business
unit's current and certain former employees within California who are or were non-exempt under applicable wage and hour laws. The
Complaint also names as defendants Junkfood, Soffe, an independent contractor of Soffe, and a former employee, and sought to include
all current and certain former employees of Junkfood, Soffe and the Soffe independent contractor within California who are or were non-
exempt under applicable wage and hour laws. Delta Apparel, Inc. is now the only remaining defendant in this case. The Complaint seeks
injunctive and declaratory relief, monetary damages and compensation, penalties, attorneys' fees and costs, and pre-judgment interest.
The discovery process in this matter is ongoing and the issue of class certification remains pending.
On or about August 22, 2014, we were served with an additional complaint in the Superior Court of the State of California, County of
Los Angeles, by a former employee of Junkfood and two former employees of Soffe at our Santa Fe Springs, California distribution
facility alleging violations of California wage and hour laws and unfair business practices the same or substantially similar to those alleged
in the Complaint and seeking the same or substantially similar relief as sought in the Complaint. This complaint is brought as a class
action and seeks to include all current and certain former employees of Junkfood, Soffe, our Delta Activewear business unit, the Soffe
independent contractor named in the Complaint and an individual employee of such contractor within California who are or were non-
exempt under applicable wage and hour laws. Delta Apparel, Inc. and the contractor employee have since been voluntarily dismissed
from the case and the remaining defendants are Junkfood, Soffe, and the Soffe contractor. The discovery process in this matter is ongoing
and the issue of class certification remains pending.
While we will continue to vigorously defend these actions and believe we have a number of meritorious defenses to the claims alleged,
we believe a risk of loss is probable. Based upon current information, we believe there is a collective range of likely outcomes between
approximately $15,000 and $795,000. During the quarter ended September 28, 2013, we recorded a liability for what we believe to be
the most likely outcome within this range, and this liability remains recorded as of September 27, 2014. Depending upon the scope and
size of any certified class in either action and whether any of the claims alleged ultimately prevail at trial, we could be required to pay
amounts exceeding $795,000.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Market Information for Common Stock: The common stock of Delta Apparel, Inc. is listed and traded on the NYSE MKT under the
symbol “DLA”. As of November 21, 2014, there were approximately 893 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 MKT.
14
Fiscal Year 2014:
September Quarter
June Quarter
March Quarter
December Quarter
Transition Period:
September Quarter
Fiscal Year 2013:
June Quarter
March Quarter
December Quarter
September Quarter
High
Sale Price
Low
Sale Price
$16.62
$17.60
$18.15
$19.23
$8.21
$13.25
$14.37
$15.23
$17.97
$14.07
$16.95
$17.84
$15.78
$14.96
$12.80
$13.50
$13.75
$12.65
Dividends: Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2014, the transition period ended
September 28, 2013, or fiscal year 2013. Subject to the provisions of any outstanding blank check preferred stock (none of which is
currently outstanding), the holders of our common stock are entitled to receive whatever dividends, if any, that may be declared from
time to time by our Board of Directors in its discretion from funds legally available for that purpose. 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 $18.125 million and average availability for the 30-day period immediately preceding
that date of not less than $18.125 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 September 27, 2014, September 28, 2013, and June 29, 2013, there was $8.2 million, $9.9 million
and $11.6 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan
covenants and other relevant factors.
Purchases of our Own Shares of Common Stock: See Note 14 - Repurchase of Common Stock 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., CRSP NYSE MKT Index (US), and CRSP NYSE MKT Wholesale &
Retail Trade Index: Our common stock began trading on the NYSE MKT (previously 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 CRSP NYSE MKT Index (US) and (2) the CRSP NYSE MKT Wholesale and Retail Trade Index, which is comprised of all NYSE
MKT companies with SIC codes from 5000 through 5999. This performance graph assumes that $100 was invested in the common stock
of Delta Apparel and comparison groups on June 27, 2009, and that all dividends have been reinvested.
15
Delta Apparel, Inc.
CRSP NYSE MKT Index (US)
2009
2010
2011
2012
2013
2014
$100.00
$203.50
$252.12
$199.42
$205.84
$128.47
$100.00
$116.11
$146.63
$141.51
$141.57
$182.53
CRSP NYSE MKT Wholesale & Retail Trade Index
$100.00
$144.48
$155.58
$158.77
$210.75
$218.70
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 operations data for the years ended July 3, 2010 and July 2, 2011, and the consolidated balance sheet data as of July 3,
2010, July 2, 2011, and June 30, 2012, 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 30, 2012, June 29, 2013, and
September 27, 2014, and the consolidated balance sheet data as of June 29, 2013, and September 27, 2014, as well as the consolidated
statement of operations data and balance sheet data for the transition period ended September 28, 2013, 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 September 30. All fiscal years shown were 52-week years with the exception of fiscal year 2010
which was a 53-week year and the 13-week transition period ended September 28, 2013. 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.
16
Period Ended
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
July 2,
2011
July 3,
2010
(In thousands, except per share amounts)
Statement of Operations Data:
Net sales
Cost of goods sold
Selling, general and administrative expenses
Valuation adjustment, net
Change in fair value of contingent consideration
Other (expense) income, net
Operating (loss) income
Interest expense, net
Loss (earnings) before income taxes
(Benefit from) provision for income taxes
Net (loss) earnings
Basic (loss) earnings per common share:
Diluted (loss) earnings per common share:
Dividends declared per common share
$
$
$
$
$
452,901
(367,160)
(86,275)
—
(200)
(927)
(1,661)
5,792
(7,453)
(6,493)
(960) $
(0.12) $
(0.12) $
$
122,559
(95,439)
(26,588)
—
$ 490,523
(381,014)
(94,944)
—
$ 489,923
(406,200)
(89,973)
—
$ 475,236
(359,001)
(91,512)
918
—
24
556
1,033
(477)
(1,045)
568
0.07
0.07
$
$
$
—
(662)
13,903
3,997
9,906
722
9,184
1.12
1.08
$
$
$
—
—
(345)
25,296
28
(6,222)
4,132
(10,354)
(7,907)
5,353
(2,447) $ 17,327
22,680
2,616
(0.29) $
(0.29) $
2.04
1.98
$ 424,411
(323,628)
(80,695)
—
—
74
20,162
3,509
16,653
4,466
12,187
1.43
1.40
$
$
$
— $
— $
— $
— $
— $
—
Balance Sheet Data (at year end):
Working capital
Total assets
$
156,695
$
171,681
$ 173,435
$ 187,029
$ 160,646
$ 125,163
355,015
351,762
311,910
320,394
311,865
251,333
Total long-term debt, less current maturities
Shareholders’ equity
114,469
138,207
131,030
138,872
94,763
141,066
110,949
138,967
83,974
62,355
141,965
125,714
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OUTLOOK
While we cannot be pleased with our financial results for fiscal 2014, we are already seeing benefits from the operational accomplishments
completed during the year and the strategic initiatives we have implemented. Delta Apparel is now a leaner, more agile company with
fewer layers of management. We also have reduced our manufacturing costs by consolidating certain domestic fabric production to a
lower-cost platform offshore.
In response to the prolonged sluggishness within the apparel markets and to better position the Company as market conditions improve,
in our fourth fiscal quarter, we initiated certain strategic initiatives to improve net profitability. We have streamlined our administrative
workforce and, with minor exceptions, completed the planned headcount reductions, effectively delayering our management structure
and streamlining decision-making and information flow, as well as reducing duplicative and excess fixed cost. We recorded $2.2 million
of severance-related expenses associated with this initiative in the fourth quarter of fiscal year 2014, and anticipate recognizing almost
$6 million of the expected $7 million in annualized savings in fiscal year 2015.
We also began a comprehensive rationalization analysis of our manufacturing operations, product lines and sales channels intended to
refocus our capital and other resources on the areas we believe are strategic to our business. We continue to maintain a sharp focus on
lowering our product cost and improving our supply chain, while staying aligned with the needs of our customers. We have also made
important improvements to our manufacturing platform, having completed the current phase of expansion for Ceiba Textiles, our textile
facility in Honduras. Output from this facility is expected to increase, using this new expansion capacity, as we progress through fiscal
2015. In addition, we improved our sewing and screen print facilities in Honduras and El Salvador, which is allowing us to increase our
internal production of garments in these low-cost plants. Our domestic screen print operation located in Fayetteville, North Carolina, was
also modernized, which expands its capacity, enhances its capabilities and reduces cost.
17
We have moved certain production into our lower-cost facilities and anticipate further efforts of this nature as we progress through fiscal
year 2015. In addition, we are currently in the process of implementing new information systems that should further streamline our
operations and better support our customer needs. During the fourth quarter fiscal year 2014, we recorded $1.8 million in expense
associated with these operational initiatives.
As fiscal year 2015 progresses, we expect to take further action regarding our rationalization of certain product lines and sales channels.
We believe these actions will provide additional positive impacts on fiscal year 2015 and beyond.
Soffe is being revitalized on several levels. During the past year, we were able to rebuild the Soffe leadership team with experienced
apparel industry executives and we are optimistic that Soffe can begin to regain lost revenue and return to profitability as fiscal year 2015
unfolds. The Soffe team recently kicked off a new marketing program designed to build consumer brand recognition and drive our
targeted customer to retail to purchase Soffe products. Regional and national retailers are supporting the Soffe brand and have increased
the buy-in of Soffe spring merchandise. We have won new military issue programs which will begin shipping in fiscal 2015. We are
also growing in the military exchange retail space, and see growing interest in our unique ability to provide made-in-America products
on our vertical manufacturing platform.
We are very pleased with our new Junkfood store on the iconic Abbot Kinney Boulevard in Venice, California. It is meeting our financial
expectations and has attracted numerous national retailers who are able to witness the most effective ways to merchandise Junkfood
products. Some of these visits are already leading to new retail programs for Junkfood for fiscal year 2015.
Sales of Salt Life products grew nicely during the year and we further expanded the geographic footprint of the brand. Our acquisition
of Salt Life in August 2013 changed our status from a licensee to brand owner. This allowed us to further expand the product line and
make long-term investments in point of sale fixtures, marketing, and the building of social media touch points. Our licensed Salt Life
restaurant in St. Augustine is exceeding expectations by virtue of the high number of consumers who have the opportunity to experience
the Salt Life brand as they patronize the restaurant. While there is a good revenue stream from royalties, we are most pleased that the
restaurants have become an effective marketing tool for Salt Life's exciting lifestyle products.
We have a number of new Salt Life marketing initiatives underway. We have additional brand ambassadors, who are primarily west-
coast based, and have recently engaged a digital media firm to launch a Salt Life You-Tube channel and implement other digital strategies.
We believe our brands are gaining consumer awareness driven by our branded retail shops, e-commerce sites, in-store shops, and expanded
consumer marketing initiatives. Likewise, we expect sales growth in our basics segment driven by our unique service and distribution
models supported by a modern and efficient manufacturing platform. All of our business units are now taking advantage of our vertical
manufacturing structure to some degree, thereby lowering production cost and improving our operating efficiencies. The initiatives we
have implemented over the past months should position us well to improve our overall profitability and allow us to build market share
in a competitive environment.
EARNINGS GUIDANCE
While we will continue to refrain from providing revenue and earnings guidance, we believe that our accomplishments during fiscal 2014
and the benefits from the strategic initiatives should allow Delta Apparel to experience top line growth and to be decisively profitable in
2015.
RESULTS OF OPERATIONS
Overview
While our products performed well at retail this year, continuing sluggishness in the economy and an unusually harsh winter had a negative
impact on the entire apparel industry. The lingering effects of management changes and related issues at several of our large customers
presented additional challenges as well.
Net sales for the fiscal year ended September 27, 2014, were $452.9 million versus $483.0 million in the prior twelve months. Gross
margins declined 280 basis points in fiscal year 2014. This decline was driven from a tougher retail environment with pressures on pricing
as well as higher input costs that were not passed along in higher prices.
In our fiscal fourth quarter, we initiated certain strategic initiatives to improve net profitability. We streamlined our administrative
workforce and, with minor exceptions, completed the planned headcount reductions, effectively delayering our management structure
and streamlining decision-making and information flow, as well as reducing duplicative and excess fixed cost. We also began a
comprehensive rationalization analysis of our manufacturing operations, product lines and sales channels intended to refocus our capital
and other resources on the areas we believe are strategic to our business. We continue to maintain a sharp focus on lowering our product
cost and improving our supply chain, while staying aligned with the needs of our customers. We have moved certain production into our
lower-cost facilities and anticipate further efforts of this nature as we progress through fiscal year 2015. We are currently in the process
of implementing new information systems that should also further streamline our operations and better support our customer needs.
During the fourth quarter of fiscal year 2014, we recorded a total of $4.0 million in expense associated with the strategic initiatives.
18
Net income for the fiscal year 2014, adjusted for the $4.0 million pre-tax impact of strategic initiatives, was $1.5 million, or $0.19 per
diluted share, compared with net income in the prior year of $6.2 million, or $0.74 per diluted share. Without adjustment for the impact
of our strategic initiatives, we experienced a net loss for the year of $1.0 million, or $0.12 per diluted share.
We are reclassifying our Art Gun business from our branded segment to our basics segment to better reflect that business's current operating
characteristics. This change is included within our fiscal 2014 results and corresponding comparisons to prior periods.
Branded Segment
Sales in the branded segment declined 10.0% from the same period last year to $187.0 million in fiscal year 2014. Salt Life continued
its strong sales growth, up nearly 26% for the year, driven from its new product lines and an increase in retail door count. This was offset
by sales declines in the other branded business units. The reduced sales and lower gross margins resulting from the soft retail environment,
coupled with the fixed cost structure of the business and impairment charges taken on certain information technology assets, led to lower
operating margins in fiscal year 2014 compared to the prior period. Operating income for the segment declined to a loss of $5.1 million,
or 2.7% of sales, from a $4.5 million loss, or 2.2% of sales, for the same period last year.
Basics Segment
Net sales in our basics segment were $265.9 million in fiscal year 2014, a 3.4% decrease from $275.2 million in the prior year period.
Gross margins in the basics segment declined by 320 basis points due to static fixed costs weighing against reduced net sales. Operating
income declined to $3.5 million, or 1.3% of sales, compared to $13.1 million, or 4.8% of sales, for the same period last year.
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 2014 Versus Fiscal Year 2013
Net sales for fiscal year 2014 were $452.9 million, a $37.6 million decline from fiscal year 2013 sales of $490.5 million and a $30.1
million, or 6.2%, decrease from the prior twelve-month period's sales of $483.0 million. Our direct-to-consumer and e-commerce sales
represented 2.9% of total revenues, a 0.7% and 0.8% increase over fiscal year 2013 and the prior year period, during which direct-to-
consumer and e-commerce sales were 1.7% and 2.1% of total revenues, respectively.
Gross margins decreased 340 and 280 basis points to 18.9% of net sales in fiscal year 2014 from 22.3 % and 21.7% of net sales from
fiscal year 2013 and the prior twelve-month period, respectively. This decline was driven from a tougher retail environment with pressures
on pricing as well as higher input costs. Additionally, there was $0.9 million in strategic initiatives impacting gross margins. Our gross
margins may not be comparable to other companies because some companies include costs related to their distribution network in cost
of goods sold and we exclude them from gross profit and include them in selling, general and administrative expenses.
Fiscal year 2014 selling, general and administrative expenses were $86.3 million, or 19.0% of sales, compared to $90.0 million and $95.7
million, or 18.3% and 19.8% of sales, in fiscal year 2013 and the prior twelve-month prior period, respectively. The decrease in selling,
general and administrative expenses is primarily due to a decrease in variable selling costs and a decline in performance-based
compensation expense resulting from decreased earnings in fiscal year 2014 compared to the prior fiscal year and the prior twelve-month
period. We recorded $2.2 million of severance related expenses associated with our strategic initiatives during the fourth quarter of fiscal
year 2014. In addition, fiscal year 2013 included $1.2 million of cost associated with a previously disclosed internal investigation
conducted by our Audit Committee related to fiscal year 2012.
Other expense increased to $1.1 million in fiscal year 2014 from $0.7 million and $0.4 million in fiscal year 2013 and the prior twelve
months respectively. This increase was due to impairment charges related to our strategic initiatives and change in contingent consideration.
Fiscal year 2014 operating loss, adjusted for the $4.0 million strategic initiatives, was $2.4 million of operating income, or 0.5% of sales,
compared to $13.9 million and $8.6 million operating income, or 2.8% and 1.8% of sales, in fiscal year 2013 and the prior twelve-month
period, respectively. Without this adjustment, fiscal year operating loss was $1.7 million, or 0.4% of sales, compared to $8.6 million
operating income, or 1.8% of sales, in the prior year period. Operating income of $3.4 million in the basics segment was offset by a $5.1
million loss in the branded segment. The decline in operating income was driven by lower sales in the Junkfood and Soffe business offset
by higher Salt Life sales.
Interest expense for fiscal year 2014 was $5.8 million, an increase of $1.8 million from fiscal year 2013 and prior year twelve-month
period. The increase is due primarily to the increased debt related to the Salt Life Acquisition and the Honduran manufacturing expansion.
Our fiscal year 2014 effective income tax rate was 87.1% compared to an effective tax rate of 7.3% and 32.5% in the prior fiscal year
and the prior twelve months, respectively. We benefit from having income in foreign jurisdictions that are either exempt from income
taxes or have tax rates lower than the United States.
Net income for fiscal year 2014, adjusted for the $4.0 million pre-tax impact of strategic initiatives, was $1.5 million, or $0.19 per diluted
share, compared with net income in the prior fiscal year and prior twelve-month period of $9.2 million and $6.2 million, or $1.12 and
19
$0.74 per diluted share, respectively. Without adjustment for the impact of our strategic initiatives, our net loss for the year was $1.0
million, or $0.12 per diluted share.
The foregoing discussion of our results of operations includes references to certain non-GAAP financial measures, including adjusted
net income and adjusted diluted EPS. Below is a reconciliation of each non-GAAP financial measure for the periods presented in the
foregoing discussion to the most directly comparable GAAP financial measure. Non-GAAP financial measures should not be considered
in isolation or as a substitute for comparable GAAP financial measures. The non-GAAP financial measures we have presented have
limitations in that they do not reflect all of the amounts associated with the results of operations as determined in accordance with GAAP,
and these non-GAAP financial measures should only be used to evaluate the results of operations in conjunction with the corresponding
GAAP financial measures. We believe that the non-GAAP financial measures presented provide meaningful supplemental information
regarding the operating results primarily because they exclude certain non-cash charges or items that we do not believe are reflective of
ongoing operating results. We believe that these non-GAAP financial measures also facilitate the comparison by management and investors
of results between periods and among peer companies. However, those companies may calculate similar non-GAAP financial measures
differently, limiting their usefulness as comparative measures.
The table below reconciles the current period net income and diluted earnings per share to the adjusted net income and adjusted diluted
earnings per share ( in thousands, except per share amounts):
Net (loss) income
Adjustments for:
Costs associated with strategic initiatives
Income tax recovery on strategic initiative-related costs
Adjusted net income
Basic (loss) earnings per share
Diluted (loss) earnings per share
Adjusted diluted earnings per share
Fiscal Year 2013 Versus Fiscal Year 2012
Year Ended
September 27,
2014
September 28,
2013
$
$
$
$
$
(960) $
6,188
4,021
(1,548)
1,513
—
—
$
6,188
(0.12) $
(0.12) $
$
0.19
0.76
0.74
0.74
Net sales for fiscal year 2013 were $490.5 million, a $0.6 million, or 0.1%, increase from the prior year sales of $489.9 million, all of
which was organic sales growth. The basics segment's 14% increase in unit sales was partially offset by lower average selling prices,
resulting in 7.6% sales growth and bringing sales to $278.0 million. Sales in the branded segment declined 8.2% to $212.5 million. Junk
Food and Salt Life had strong sales growth that was offset by lower sales of Soffe merchandise.
Gross margins increased 520 basis points to 22.3% of net sales in fiscal year 2013 from 17.1% of net sales in the prior year. The prior
year gross margins were negatively impacted by the effect that high cotton prices had on our industry. Our gross margins may not be
comparable to other companies because some companies include costs related to their distribution network in cost of goods sold and we
exclude them from gross profit and include them in selling, general and administrative expenses.
Fiscal year 2013 selling, general and administrative expenses were $94.9 million, or 19.4% of sales, compared to $90.0 million, or 18.4%
of sales, in the prior year. The increase in selling, general and administrative expenses was primarily due to an increase in performance-
based compensation expense resulting from the improvement in earnings during fiscal year 2013 compared to the prior year. In addition,
fiscal year 2013 included $1.2 million of cost associated with a previously disclosed internal investigation conducted by our Audit
Committee related to fiscal year 2012.
Fiscal year 2013 operating income was $13.9 million, or 2.8% of sales, compared to a $6.2 million operating loss, or 1.3% of sales, in
fiscal year 2012. Operating income of $15.8 million in the basics segment was partially offset by a $1.9 million loss in the branded
segment resulting from softness in our Soffe business.
Interest expense for fiscal year 2013 was $4.0 million, a decrease of $0.1 million from $4.1 million for fiscal year 2012.
Our fiscal year 2013 effective income tax rate was 7.3% compared to an effective tax rate of 76.4% which resulted in a tax benefit in
fiscal year 2012. We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower
than the United States. The tax benefit in fiscal year 2012 was impacted by the operating losses driven by the inventory markdown during
the year which lowered our U.S. taxable income while maintaining profits in the offshore taxable and tax-free jurisdictions.
In fiscal year 2013 we had net earnings of $9.2 million, an $11.6 million increase from the net loss of $2.4 million in fiscal year 2012.
20
Three-Month Transition Period Ended September 28, 2013, Versus Three Months Ended September 29, 2012
Net sales for the transition period were $122.6 million, a decrease of 6% compared to the prior year quarter net sales of $130.1 million.
Net earnings were $568 thousand, or $0.07 per diluted share, compared with $3.6 million or $0.41 per diluted share, in the prior year
quarter.
Sales within the branded segment were $60.2 million, down 5.2% compared with $63.5 million for the prior year's first quarter. The
primary reason for the decrease was a 28% decline in Soffe sales, which was somewhat offset by strong revenue growth in other brands.
Junkfood, Art Gun, and Salt Life all had double digit sales growth, with Art Gun sales more than doubling. Salt Life revenue growth
exceeded our expectations, with sales up 44% over the prior year September quarter.
Net sales in our basics segment were down 6.4% to $62.3 million, compared with $66.6 million in the prior year period. Sales of undecorated
tees started out strong in July 2013, but weakened in August and September as retail traffic and an earlier than expected build-up of
inventories in the retail sector resulted in price discounting to drive volumes and lower than expected sales of undecorated tees as the
period progressed. Our private label sales also slowed as our customers shifted their callouts to balance inventory from the lower sales
at retail.
SG&A expenses were $26.6 million, or 21.7% of sales, for the transition period, compared to $25.9 million, or 19.9% of sales, for the
prior year September quarter. This increase in SG&A was primarily due to expenses associated with the Salt Life acquisition, higher
than normal bad debt expense and the recording of a contingent liability associated with legal matters in California.
Our effective income tax rate for the three months ended September 28, 2013, was 219.1%, compared to an effective tax benefit of 25.1%
for the prior year September quarter. We have a three-month tax year associated with the transition period. We benefit from having
income in foreign jurisdictions that are either exempt from income taxes or have tax rates lower than the United States. The transition
period benefited as overall operating profits were lower than normal which lowered our U.S. taxable income while maintaining profits
in the offshore taxable and tax-free jurisdictions.
At September 28, 2013, account receivables were $68.7 million, compared to $69.3 million in the prior year September. Days sales
outstanding increased to 53 days as of September 28, 2013, compared to 50 days in the prior year September, resulting from a slight shift
in the receipt of payments at the end of the quarter.
Inventory levels increased $3.4 million to $165.2 million at September 28, 2013, compared to $161.8 million at September 29, 2012.
This increase is due to weakness in retail apparel sales which resulted in lower than expected sales of undecorated tees.
Capital expenditures were $3.0 million during the transition period. These expenditures primarily related to our manufacturing expansion,
which includes new equipment in our textile operations. Depreciation and amortization, including non-cash compensation, was $2.5
million for the transition period.
Total debt at September 28, 2013, was $134.7 million compared to $102.6 million a year ago. The increase is primarily due to the
acquisition of Salt Life.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility and Other Financial Obligations
On May 27, 2011, Delta Apparel, Soffe (successor by merger to TCX, LLC), Junkfood, To The Game and Art Gun 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.
Pursuant to the Amended Loan Agreement, the line of credit under our U.S. revolving credit facility is $145 million (subject to borrowing
base limitations), and matures on May 27, 2017. 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 September 27, 2014, we had $96.2 million outstanding under our U.S.
revolving credit facility at an average interest rate of 2.6%, and had the ability to borrow an additional $38.8 million.
In conjunction with the Salt Life Acquisition, we issued two promissory notes in the aggregate principal of $22.0 million, which included
a one-time installment of $9.0 million that was due on September 30, 2014, and quarterly installments commencing on March 31, 2015,
with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as
required under Section 1274 of the Internal Revenue Code. We have imputed interest at 1.92% and 3.62% on the promissory notes that
mature on June 30, 2016, and June 30, 2019, respectively. At September 27, 2014, the discounted value of the promissory notes was
$21.0 million.
For further information regarding our U.S. asset-based secured credit facility, refer to Note 8 - Long-Term Debt to the Consolidated
Financial Statements, which information is incorporated herein by reference.
21
In the March 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 September 27, 2014, we had a total of $3.4 million outstanding on this loan. For further information regarding our Honduran credit
facility, refer to Note 8 - 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
From time to time we may use derivative instruments to manage our exposure to interest rates. These financial instruments are not used
for trading or speculation purposes. 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.
During fiscal year 2014, the transition period ended September 28, 2013, and fiscal year 2013, the interest rate swap agreements had
minimal ineffectiveness and were considered highly-effective hedges.
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 $0.3 million for the year ended September 27, 2014, an AOCI loss, net of taxes, of
$0.5 million for the transition period ended September 28, 2013, and an AOCI gain, net of taxes, of $47 thousand for the year ended June
29, 2013.
Operating Cash Flows
Cash provided by operating activities in fiscal year 2014 was $14.0 million compared to $32.2 million for fiscal year 2013. The decline
from the prior year is primarily related to decreased earnings in the business. The higher operating cash flow during fiscal year 2013 also
resulted from the tax refund received from the carryback of our 2012 net operating loss.
Investing Cash Flows
Cash used in investing activities in fiscal year 2014 was $8.8 million compared to $7.9 million in fiscal year 2013. In fiscal year 2014,
we used $8.9 million in cash primarily related to the expansion of our textile operations, along with investments in our information
technology systems. In fiscal year 2013, we used $7.9 million for the purchase of property and equipment primarily to improve our
information technology in both our branded and basics segments, to increase our post-production decorating and warehouse capacity,
and to lower costs in our manufacturing facilities, which support both our branded and basics segments.
We expect to spend approximately $5 million to $7.0 million in capital expenditures in fiscal year 2015, primarily on manufacturing
equipment, along with information technology, and a Salt Life retail store.
Financing Activities
Cash used by financing activities was $5.4 million in fiscal year 2014 compared to cash used by financing activities of $24.2 million in
fiscal year 2013. In fiscal year 2014, cash was used primarily to reduce our outstanding debt. In fiscal year 2013, we used cash to reduce
our outstanding debt and for the purchase of our common stock.
Future Liquidity and Capital Resources
Based on our current 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 facility 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. Availability
under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in our
operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional funds
or service our indebtedness. Moreover, our credit facility includes a financial covenant that if the availability under our credit facility
falls below the amounts specified in our credit agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in our credit agreement)
for the preceding 12-month period must not be less than 1.1 to 1.0. Although our availability at September 27, 2014, was above the
minimum thresholds specified in our credit agreement, a significant deterioration in our business could cause our availability to fall below
22
such thresholds, thereby requiring us to maintain the minimum FCCR specified in our credit agreement. As of September 27, 2014, our
FCCR was below the minimum threshold specified in our credit agreement.
The following table summarizes our contractual cash obligations, as of September 27, 2014, by future period.
Contractual Obligations:
Long-term debt (a)
Operating leases
Capital leases
Minimum royalty payments
Purchase obligations
Total (b)
Payments Due by Period (in thousands)
Total
Less than
1 year
1 - 3
years
3 – 5
years
After 5
years
$
133,593
$
16,734
$
103,776
$
12,356
$
25,742
855
4,376
37,827
7,993
171
1,606
37,827
11,761
342
2,766
—
4,805
342
4
—
727
1,183
—
—
—
$
202,393
$
64,331
$
118,645
$
17,507
$
1,910
______________________
(a)
We include interest on our fixed rate debt as a component of our future obligations. However, we exclude interest payments on our floating
rate debt since the majority is under a revolving credit facility and the cash outlay for the interest is unknown and cannot be reliably estimated.
Interest payments will be determined based upon the daily outstanding balance of the revolving credit facility and the prevailing interest rate
during that time.
(b)
We excluded deferred income tax liabilities of $7.7 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 September 27, 2014, we did not have any off-balance sheet arrangements that were material to our financial condition, results of
operations or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the SEC other than 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.
Dividends and Purchases of our Own Shares
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 $18.125 million and average availability for the 30-day
period immediately preceding that date of not less than $18.125 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 September 27, 2014, September 28, 2013, and June 29, 2013, there
was $8.2 million, $9.9 million and $11.6 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 2014, the transition period ended September 28,
2013, or fiscal year 2013. Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements,
compliance with loan covenants and other relevant factors.
As of June 30, 2012, our Board of Directors had authorized management to use up to $20.0 million to repurchase stock in open market
transactions under our Stock Repurchase Program. On January 23, 2013, the Board of Directors authorized an additional $10.0 million
for share repurchases, bringing the aggregate total authorized to $30.0 million. During fiscal years 2014, the transition period ended
September 28, 2013, and fiscal years 2013 and 2012, we purchased 78,674 shares, 129,348 shares, 544,576 shares, and 168,120 shares,
respectively, of our common stock for a total cost of $1.2 million, $2.1 million, $7.8 million, and $2.6 million, respectively. As of September
27, 2014, we have purchased 2,122,246 shares of common stock for an aggregate of $25.3 million since the inception of the Stock
Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule
10b-18. As of September 27, 2014, $4.7 million remained available for future purchases under our Stock Repurchase Program, which
does not have an expiration date.
23
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, 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 transferred 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 Sheets, 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 selling prices are less favorable than those projected, or if sell-through of the inventory is more difficult
than anticipated, additional inventory reserves may be required.
During the December quarter of fiscal year 2012, we recorded a $16.2 million lower of cost or market write-down on the inventory in
the basics segment and its firm purchase commitments for yarn, resulting from historically high cotton prices in inventory costs combined
with declining selling prices. The estimation of the total write-down involved management judgments and assumptions including
assumptions regarding future selling price forecasts, the allocation of raw materials between business units, the estimated costs to complete,
disposal costs and a normal profit margin. The inventory and yarn firm purchase commitments associated with this inventory write-
down were sold during our fiscal year 2012.
Goodwill
Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Salt Life, Junkfood, and Art Gun. We did
not record any separately identifiable indefinite-lived intangibles associated with any of these acquisitions. Goodwill represents the
excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets 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
24
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, which we believe represent those of a market participant. 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.
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.
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. As of September 27, 2014,
we have a federal net operating loss carryforward of $21.2 million, which is classified in deferred tax assets, as there is no carryback
opportunity and the entire loss must be carried forward for utilization against future taxable income. We determined that no valuation
allowance is required to be recorded against the federal net operating loss carryforward under Financial Accounting Standards Board
("FASB") Codification No. 740, Income Taxes ("ASC 740"). These federal net loss carryforwards expire at various intervals from 2033
to 2034.
We established a valuation allowance related to certain of our state operating loss carryforward amounts in accordance with the provisions
of ASC 740. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets if reassessment
indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts in the respective state tax
jurisdictions. We had state net operating loss carryforwards (“NOLs”) as of September 27, 2014, of approximately $52.7 million. We
had deferred tax assets of $2.4 million as of September 27, 2014, related to these state NOLs, with related valuation allowances against
them of approximately $0.2 million. These state net loss carryforwards expire at various intervals from 2019 through 2034.
A valuation allowance is required if there is any evidence that some or all of a deferred tax asset will not be realized. In making this final
determination, the Company follows ASC 740 and looks to taxable income in prior carryback years, reversals of existing temporary book/
tax differences, tax planning strategies and future taxable income exclusive of reversals of existing temporary differences. By its very
nature, future taxable income requires estimates and judgments about future events that may be predictable, but are far less certain than
past events that can be objectively measured. Based on current analysis and assessments, the Company concluded that no valuation
allowance is required on existing deferred tax assets resulting from temporary deductible differences or on federal net operating losses
as these are both expected to be fully utilized with future earnings. However, based upon the analysis of the sources of taxable income,
we did determine a valuation allowance was required on the deferred tax asset resulting from state net operating loss carryforwards. The
amount of the valuation allowance booked was calculated after considering all four sources mentioned above.
RECENT ACCOUNTING STANDARDS
For information regarding recently issued accounting standards, refer to Note 2(z) and Note 2(aa) to our Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk Sensitivity
We have a supply agreement with Parkdale to supply our yarn requirements until December 31, 2015. 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 September 27, 2014 , was valued at $14.4 million, and is scheduled for delivery
between October 2014 and December 2014. At September 27, 2014, a 10% decline in the market price of the cotton covered by our fixed
price yarn would have had a negative impact of approximately $1.1 million on the value of the yarn. This compares to what would have
been a negative impact of $1.1 million at the 2013 fiscal year end based on the yarn with fixed cotton prices at June 29, 2013, and to
what would have been a negative impact of $0.9 million at the transition period end based on the yarn with fixed cotton prices at September
28, 2013.
25
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 Consolidated Statements of Operations. We did not own any significant cotton options contracts on September 27,
2014, September 28, 2013, or June 29, 2013.
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 the higher
cost of yarn to our customers, this could have a material adverse effect on our results of operations. Moreover, our current contract with
Parkdale expires on December 31, 2015, and while we expect to either negotiate an extension agreement with Parkdale or engage an
alternative supplier on comparable terms, our inability to do so could negatively affect our business, financial condition and results of
operations.
During calendar year 2011, the apparel industry as a whole experienced unprecedented increases in cotton prices leading to ensuing price
volatility in calendar 2012. These record high cotton prices, coupled with price discounting that occurred in the basic, undecorated t-
shirt market, led to our decision to take a $16.2 million inventory writedown in our basics segment in the December fiscal quarter of
2012, which was the primary factor in the Company's net loss for fiscal year 2012.
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 floating rate indebtedness at September 27, 2014, 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 $0.4 million, or 6.3%, for the fiscal year. This compares to an increase of $0.1 million, or 6.2%, for the transition period
based on the outstanding floating rate indebtedness at September 28, 2013, and to an increase of $0.6 million, or 14.7%, for the 2013
fiscal year based on the outstanding floating rate indebtedness at June 29, 2013. The effect of a 100 basis point increase in interest rates
would have had a lower dollar impact for the year ended September 27, 2014, compared to the year ended June 29, 2013, from the lower
floating rate debt outstanding and due to a higher level of fixed rate debt under our interest rate swap agreements, on September 27, 2014.
The percentage increase is less significant for fiscal year 2014 than for fiscal year 2013 because our total interest expense for fiscal year
2014 was higher than our total interest expense for fiscal year 2013. 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 and transition period in the period ended September 27, 2014, together
with the Reports of Independent Registered Public Accounting Firms thereon, are included in this report commencing on page F-1 and
are listed under Part IV, Item 15 in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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 September 27, 2014, 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.
26
Management’s Annual Report on Internal Control over Financial Reporting
Management of Delta Apparel, Inc. is responsible for establishing and maintaining effective internal control over financial reporting as
defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide
reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 27, 2014, based on the
framework in Internal Control – Integrated Framework (1992) 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 2014 included all of our operations. Based on our evaluation, our management has concluded that, as of September
27, 2014, our internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of September 27, 2014, has been audited by KPMG LLP, our
independent registered public accounting firm, who also audited our Consolidated Financial Statements. KPMG’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 2014 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
27
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Delta Apparel, Inc.:
We have audited Delta Apparel, Inc.’s internal control over financial reporting as of September 27, 2014, based on criteria established in
Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Delta Apparel Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We 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, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included 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. maintained, in all material respects, effective internal control over financial reporting as of September
27, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
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 September 27, 2014 and September 28, 2013, and the related
consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for the fiscal year ended
September 27, 2014 and the 13-week transition period ended September 28, 2013, and our report dated December 10, 2014 expressed
an unqualified opinion on those consolidated financial statements.
Greenville, South Carolina
December 10, 2014
/s/ KPMG LLP
28
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 within 120 days following the end of our 2014 fiscal year under the headings "Proposal
No. 1: Election of Directors", “Corporate Governance”, “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 so that our business is conducted in a consistently legal and ethical manner. We
have adopted a code of business conduct and ethics known as our Ethics Policy Statement. The Ethics Policy Statement is available
without charge on our website. In the event that we amend or waive any of the provisions of the Ethics Policy Statement applicable to
our Chief Executive Officer or Chief Financial Officer, we intend to disclose the same on our website at www.deltaapparelinc.com.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days following the end of our 2014 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 within 120 days following the
end of our 2014 fiscal year under the heading “Stock Ownership of Management and Principal Shareholders."
On November 11, 2010, the Delta Apparel, Inc. shareholders approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock Plan").
Upon shareholder approval of the 2010 Stock Plan, no additional awards have been or will be granted under either the Delta Apparel
Stock Option Plan ("Option Plan") or the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stock awards have and
will be granted under the 2010 Stock Plan. 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 September 27,
2014.
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
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity
compensation plans
(excluding securities
reflected in column (a))
(a)
(b)
(c)
265,352
502,000
767,352
$
$
$
2.54
12.27
10.29
562,939
—
562,939
For additional information on our stock-based compensation plans, see Note 12 to the Consolidated Financial Statements.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days following the end of our 2014 fiscal year under the headings “Related
Party Transactions” and "Corporate Governance".
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days following the end of our 2014 fiscal year under the heading “Proposal
No. 4: Ratification of Appointment of Independent Registered Public Accounting Firm”.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
PART IV
Reports of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of September 27, 2014, September 28, 2013, and June 29, 2013.
Consolidated Statements of Operations for the year ended September 27, 2014, 13-week transition period ended September
28, 2013, and for the years ended June 29, 2013, and June 30, 2012.
Consolidated Statements of Comprehensive Income (Loss) for the year ended September 27, 2014, 13-week transition period
ended September 28, 2013, and for the years ended June 29, 2013, and June 30, 2012.
Consolidated Statements of Shareholders’ Equity for the year ended September 27, 2014, 13-week transition period ended
September 28, 2013, and for the years ended June 29, 2013, and June 30, 2012.
Consolidated Statements of Cash Flows for the year ended September 27, 2014, 13-week transition period ended September
28, 2013, and for the years ended June 29, 2013, and June 30, 2012.
Notes to Consolidated Financial Statements.
Financial Statements Schedules:
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*
2.1
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.
2.1.1 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.
2.2
2.3
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.
2.4
Asset Purchase Agreement dated as of November 18, 2004, among Delta Apparel, Inc. and Parkdale America LLC: Incorporated
by reference to Exhibit 2.3 to the Company's Form 10-Q filed on February 9, 2005.
30
2.4.1 First Amendment to Asset Purchase Agreement dated as of December 31, 2004, among Delta Apparel, Inc. and Parkdale America
LLC: Incorporated by reference to Exhibit 2.3.1 to the Company's Form 10-Q filed on February 9, 2005.
2.5
Asset Purchase Agreement dated as of August 27, 2013, among To The Game, LLC, Salt Life Holdings, LLC, Roger L. Combs,
Sr., Donald R. Combs, Richard Thompson, and Michael T. Hutto (excluding schedules and exhibits): Incorporated by reference
to Exhibit 2.1 to the Company’s Form 8-K filed on August 29, 2013.
3.1.1 Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-12B filed on
December 30, 1999.
3.1.2 Amendment to Articles of Incorporation of the Company dated September 18, 2003: Incorporated by reference to Exhibit 3.1.2
to the Company’s Form 10-Q filed on November 5, 2003.
3.1.3 Amendment to Articles of Incorporation of the Company dated April 28, 2005: Incorporated by reference to Exhibit 3.1.3 to the
Company’s Form 8-K filed on April 29, 2005.
3.1.4 Amendment to Articles of Incorporation of the Company dated November 8, 2007: Incorporated by reference to Exhibit 3.1.4
to the Company’s Form 10-K filed on August 28, 2009.
3.2.1 Bylaws of the Company: Incorporated by reference to Exhibit 3.2.1 to the Company’s Form 10-K filed on August 28, 2009.
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000: Incorporated by reference to Exhibit 3.2.2 to the Company’s
Form 10-K filed on August 28, 2009.
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000: Incorporated by reference to Exhibit 3.2.3 to the Company’s
Form 10-K filed on August 28, 2009.
3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000: Incorporated by reference to Exhibit 3.2.4 to the Company’s
Form 10-K filed on August 28, 2009.
3.2.5 Amendment to Bylaws dated August 17, 2006: Incorporated by reference to Exhibit 3.2.5 to the Company’s Form 10-K filed
on August 28, 2009.
3.2.6 Amendment to Bylaws dated August 12, 2009: Incorporated by reference to Exhibit 3.2.6 to the Company’s Form 10-K filed
on August 28, 2009.
4.1
See Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5, and 3.2.6.
4.2
Specimen certificate for common stock, par value $0.01 per share, of the Company: Incorporated by reference to Exhibit 4.2 to
the Company’s Form 10-12 B/A filed on May 3, 2000.
10.1
See Exhibits 2.1, 2.1.1, 2.2, 2.3, 2.4, 2.4.1 and 2.5.
10.2
Fourth Amended and Restated Loan and Security Agreement, dated May 27, 2011, among Delta Apparel, Inc., M.J. Soffe, LLC
(successor by merger to TCX, LLC), Junkfood Clothing Company, To The Game, LLC, and Art Gun, 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.
10.2.1 Consent and First Amendment to Fourth Amended and Restated Loan and Security Agreement, dated August 27, 2013, among
Delta Apparel, Inc., M.J. Soffe, LLC (successor by merger to TCX, LLC), Junkfood Clothing Company, To The Game, LLC,
and Art Gun, 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 August 29, 2013.
10.2.2 Third Amendment to Fourth Amended and Restated Loan and Security Agreement, dated September 26, 2014, among Delta
Apparel, Inc., M.J. Soffe, LLC (successor by merger to TCX, LLC), Junkfood Clothing Company, To The Game, LLC, and Art
Gun, 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 October 1, 2014.
31
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.***
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.**
10.6.2 Second Amendment to Yarn Supply Agreement dated as of October 21, 2011 between Delta Apparel, Inc. and Parkdale Mills,
LLC, and Parkdale America, LLC.: Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 25,
2011.**
10.6.3 Third Amendment to Yarn Supply Agreement dated as of March 11, 2013, between Delta Apparel, Inc. and Parkdale Mills, LLC,
and Parkdale America, LLC.: Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 14, 2013.**
10.7
10.8
10.9
Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated December 31, 2012: Incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K filed on January 3, 2013.***
Employment Agreement between Delta Apparel, Inc. and Martha M. Watson dated December 31, 2012: Incorporated by reference
to Exhibit 10.3 to the Company’s Form 8-K filed on January 3, 2013.***
Employment Agreement between Delta Apparel, Inc. and Steven E. Cochran dated December 31, 2012: Incorporated by reference
to Exhibit 10.2 to the Company's Form 8-K filed on January 3, 2013.***
10.9.1 Amendment to Employment Agreement between Delta Apparel, Inc. and Steven E. Cochran dated January 28, 2013: Incorporated
by reference to Exhibit 10.1 to the Company’s Form 8-K filed on January 29, 2013.***
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.***
10.11.2 Second Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated June 6, 2012:
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 8, 2012.***
10.11.3 Third Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated December 5, 2014:
Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 8, 2014:.***
10.12 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q filed on November 3, 2011.***
10.13 Delta Apparel Short-Term Incentive Compensation Plan: Incorporated by reference to Exhibit A to the Company's Proxy
Statement filed on September 28, 2011.***
10.14 Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.14 to the
Company's Form 10-K filed on August 29, 2013.***
10.15 Agreement between Delta Apparel, Inc. and IMG Worldwide, Inc. dated December 6, 2013: Incorporated by reference to Exhibit
10.1 to the Company's Form 8-K filed on December 6, 2013.
10.16 Form of Restricted Stock Unit Award Agreement.***
10.17 Form of Performance Unit Award Agreement.***
16
February 13, 2014, Correspondence from Ernst & Young LLP to SEC: Incorporated by reference to Exhibit 16.1 to the Company's
Form 8-K filed on February 13, 2014.
32
21
Subsidiaries of the Company.
23.1
Consent of Independent Registered Public Accounting Firm.
23.2
Consent of Independent Registered Public Accounting Firm.
31.1
31.2
32.1
32.2
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.
(b) Exhibits
See Item 15(a)(3) above.
(c) Schedules
See information under (a)(1) and (2) of Item 15.
33
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
December 10, 2014
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/ Elizabeth J. Gatewood
Elizabeth J. Gatewood
Director
/s/ G. Jay Gogue
G. Jay Gogue
Director
12/9/2014
/s/ Deborah H. Merrill
Date Deborah H. Merrill
12/10/2014
Date
Vice President, Chief Financial Officer and
Treasurer (principal financial and accounting officer)
12/9/2014
/s/ David Peterson
Date David Peterson
Director
12/9/2014
/s/ Suzanne B. Rudy
Date Suzanne B. Rudy
Director
12/9/2014
/s/ Robert E. Staton, Sr
Date Robert E. Staton, Sr.
Director
12/6/2014
Date
12/9/2014
Date
12/8/2014
Date
/s/ Robert W. Humphreys
Robert W. Humphreys
Chairman and Chief Executive Officer
12/10/2014
Date
34
Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of September 27, 2014, September 28, 2013 and June 29, 2013
Consolidated Statements of Operations for the year ended September 27, 2014, 13-week transition period ended
September 28, 2013, and years ended June 29, 2013 and June 30, 2012
Consolidated Statements of Comprehensive (Loss) Income for the year ended September 27, 2014, 13-week
transition period ended September 28, 2013, and years ended June 29, 2013 and June 30, 2012
Consolidated Statements of Shareholders’ Equity for the year ended September 27, 2014, 13-week transition
period ended September 28, 2013, and years ended June 29, 2013 and June 30, 2012
Consolidated Statements of Cash Flows for the year ended September 27, 2014, 13-week transition period ended
September 28, 2013, and years ended June 29, 2013 and June 30, 2012
Notes to Consolidated Financial Statements
F-2
F-4
F-5
F-6
F-7
F-8
F-9
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Delta Apparel, Inc.:
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and subsidiaries as of September 27,
2014 and September 28, 2013, and the related consolidated statements of operations, comprehensive (loss) income,
shareholders’ equity, and cash flows for the fiscal year ended September 27, 2014 and the 13-week transition period ended
September 28, 2013. In connection with our audits of the consolidated financial statements, we also have audited financial
statement schedule II listed in Item 15 (a) (2). These consolidated financial statements and the financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Delta Apparel, Inc. and subsidiaries as of September 27, 2014 and September 28, 2013, and the results of their
operations and their cash flows for the fiscal year ended September 27, 2014 and the 13-week transition period ended
September 28, 2013, 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 consolidated 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 September 27, 2014, based on criteria established in
Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated December 10, 2014 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Greenville, South Carolina
December 10, 2014
/s/ KPMG LLP
F-2
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 sheet of Delta Apparel, Inc. and subsidiaries as of June 29, 2013, and the related
consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the two years in the period
ended June 29, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule 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 June 29, 2013, and the consolidated results of its operations and its cash flows for each of the two
years in the period ended June 29, 2013, 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.
Atlanta, Georgia
August 29, 2013
/s/ Ernst & Young LLP
F-3
Delta Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
Assets
Cash and cash equivalents
Accounts receivable, net
Other receivables
Income tax receivable
Inventories, net
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, plant and equipment, net
Goodwill
Intangibles, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Total current liabilities
Deferred income taxes
Other liabilities
Contingent Consideration
Total liabilities
Commitments and contingencies
Shareholders’ equity:
September 27, 2014
September 28, 2013
June 29, 2013
$
612
$
829
$
68,181
621
1,360
162,188
4,534
12,152
249,648
41,005
36,729
23,500
3,696
68,028
679
1,232
165,190
3,786
5,981
245,725
40,600
36,729
24,837
3,871
598
74,415
412
2,238
159,514
4,129
4,556
245,862
39,446
16,812
6,190
3,600
354,578
$
351,762
$
311,910
57,719
$
52,877
$
20,167
15,504
93,390
17,463
3,704
74,044
3,399
1,513
3,600
3,610
806
3,400
50,472
18,426
3,529
72,427
94,763
3,571
83
—
$
216,371
$
212,890
$
170,844
$
$
Long-term debt, less current maturities
114,469
131,030
Preferred stock—$0.01 par value, 2,000,000 shares authorized, none
issued and outstanding
Common stock —$0.01 par value, 15,000,000 shares authorized,
9,646,972 shares issued, and 7,877,674 and 7,873,848 and 7,922,784
shares outstanding as of September 27, 2014, September 28, 2013 and
June 29, 2013, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock —1,769,298 and 1,773,124 and 1,724,188 shares as of
September 27, 2014, September 28, 2013 and June 29, 2013,
respectively
Total shareholders’ equity
—
96
59,649
99,622
(269)
(20,891)
138,207
—
96
59,425
100,582
(557)
(20,674)
138,872
Total liabilities and shareholders’ equity
$
354,578
$
351,762
$
—
96
60,598
100,014
(82)
(19,560)
141,066
311,910
See accompanying Notes to Consolidated Financial Statements.
F-4
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Net sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Change in fair value of contingent consideration
Other expense (income), net
Operating (loss) income
Interest expense
(Loss) earnings before (benefit from) provision for income taxes
(Benefit from) provision for income taxes
Net (loss) earnings
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted average number of shares outstanding
Dilutive effect of stock options and awards
Weighted average number of shares assuming dilution
See accompanying Notes to Consolidated Financial Statements.
Fiscal Year
Ended
13-Week
Transition
Period Ended
September 27,
2014
September 28,
2013
Fiscal Year
Ended
Fiscal Year
Ended
June 29, 2013
June 30, 2012
$
452,901
$
122,559
$
490,523
$
489,923
367,160
85,741
86,275
200
927
(1,661)
5,792
(7,453)
(6,493)
(960) $
(0.12) $
(0.12) $
7,901
—
7,901
$
$
$
95,439
27,120
26,588
—
(24)
556
1,033
(477)
(1,045)
568
0.07
0.07
7,848
227
8,075
$
$
$
381,014
109,509
406,200
83,723
94,944
89,973
—
662
—
(28)
13,903
(6,222)
$
$
$
3,997
9,906
722
9,184
1.12
1.08
8,234
252
8,486
4,132
(10,354)
(7,907)
(2,447)
(0.29)
(0.29)
8,453
—
8,453
F-5
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)
Net (loss) earnings
Other comprehensive income (loss) related to unrealized gain (loss)
on derivatives, net of income tax
Comprehensive (loss) income
See accompanying Notes to Consolidated Financial Statements.
Fiscal Year
Ended
13-Week
Transition
Period Ended
September 27,
2014
September 28,
2013
Fiscal Year
Ended
June 29,
2013
Fiscal Year
Ended
June 30,
2012
$
$
(960) $
568
$
9,184
$
(2,447)
288
(672) $
(475)
93
$
47
9,231
$
(115)
(2,562)
F-6
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Retained
Comprehensive
Treasury Stock
Earnings
Income (Loss)
Shares
Amount
Total
Balance at July 2, 2011
9,646,972
$
Net loss and other comprehensive loss
Stock grant
Stock options exercised
Excess tax benefits from option exercises
Purchase of common stock
Employee stock based compensation
—
—
—
—
—
—
Balance at June 30, 2012
9,646,972
Net earnings and other comprehensive
income
Stock grant
Stock options exercised
Excess tax benefits from option exercises
Purchase of common stock
Employee stock based compensation
—
—
—
—
—
—
Balance at June 29, 2013
9,646,972
Net earnings and other comprehensive
loss
Stock grant
Stock options exercised
Excess tax benefits from option exercises
Purchase of common stock
Employee stock based compensation
—
—
—
—
—
—
Balance at September 28, 2013
9,646,972
$
Net loss and other comprehensive income
Stock grant
Stock options exercised
Excess tax benefits from option exercises
Purchase of common stock
Employee stock based compensation
—
—
—
—
—
—
Balance at September 27, 2014
9,646,972
$
96
—
—
—
—
—
—
96
—
—
—
—
—
—
96
—
—
—
—
—
—
96
—
—
—
—
—
—
96
See accompanying Notes to Consolidated Financial Statements.
$ 59,750
$ 93,277
$
(14)
1,225,109
$ (11,144) $ 141,965
—
(83)
(1,559)
529
—
1,730
60,367
—
(115)
(553)
34
—
865
(2,447)
—
—
—
—
—
(115)
—
—
(9,000)
—
83
— (161,966)
1,506
—
—
(2,562)
—
(53)
529
168,120
(2,642)
(2,642)
—
—
1,730
—
—
—
90,830
(129)
1,222,263
(12,197)
138,967
9,184
—
—
—
—
—
47
—
—
—
—
—
—
(11,250)
(31,401)
—
—
115
339
—
9,231
—
(214)
34
544,576
(7,817)
(7,817)
—
—
865
60,598
100,014
(82)
1,724,188
(19,560)
141,066
—
568
(475)
—
(1,501)
(69)
(1)
—
398
—
—
—
—
—
—
—
—
—
—
(77,000)
(3,412)
—
—
898
39
—
93
(603)
(30)
(1)
129,348
(2,051)
(2,051)
—
—
398
$ 59,425
$ 100,582
$
(557)
1,773,124
$ (20,674) $ 138,872
—
—
(32)
27
—
229
(960)
288
—
—
—
—
—
—
—
—
—
—
—
—
(82,500)
—
—
—
963
—
(672)
—
931
27
78,674
(1,180)
(1,180)
—
—
229
$ 59,649
$ 99,622
$
(269)
1,769,298
$ (20,891) $ 138,207
F-7
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Operating activities:
Net (loss) earnings
Adjustments to reconcile net (loss) earnings to net cash provided by
(used in) operating activities:
Depreciation
Amortization of intangibles
Amortization of deferred financing fees
Excess tax benefits from exercise of stock options
(Benefit from) provision for deferred income taxes
Provision for (benefit from) allowances on accounts receivable,
net
Non-cash stock compensation
Change in the fair value of contingent consideration
Loss (gain) on disposal of property and equipment
Fixed asset impairment charge
Inventory write down
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 (used in) operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sale of equipment
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 exercise of stock options
Payment of withholding taxes on exercise of stock options
Excess tax benefits from exercise of stock options
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid during the period for interest
Cash paid (received) during the period for income taxes, net of
refunds received
Non-cash financing activity—issuance of promissory notes in
connection with an acquisition
Non-cash financing activity—capital lease agreement
See accompanying Notes to Consolidated Financial Statements.
F-8
Fiscal Year
Ended
September 27,
2014
13-Week
Transition
Period Ended
September 28,
2013
Fiscal Year
Ended
Fiscal Year
Ended
June 29, 2013
June 30, 2012
$
(960) $
568
$
9,184
$
(2,447)
8,156
1,337
362
(27)
(6,382)
201
229
200
126
913
—
(296)
3,002
(747)
198
4,698
2,503
(101)
561
13,973
(8,894)
71
—
(8,823)
493,360
(498,121)
(384)
(1,180)
931
—
27
(5,367)
(217)
829
612
4,698
255
$
$
$
1,847
223
89
1
(1,386)
1,159
398
—
(15)
—
—
4,961
(5,676)
343
(41)
2,405
(965)
1,006
248
5,165
(2,992)
7
(15,000)
(17,985)
156,751
(140,696)
(319)
(2,051)
—
(633)
(1)
13,051
231
598
829
899
7,407
607
363
(34)
176
(513)
865
—
93
328
—
(458)
2,119
(358)
(90)
4,152
1,819
6,592
(88)
32,164
(7,922)
72
—
(7,850)
486,908
(503,094)
—
(7,817)
23
(237)
34
(24,183)
131
467
598
3,458
$
$
$
$
(956) $
(6,013) $
— $
$
778
20,387
$
— $
— $
— $
6,884
608
361
(529)
(1,107)
530
1,730
—
73
—
16,195
2,435
(18,619)
289
(19)
(9,234)
(7,100)
(9,236)
84
(19,102)
(6,626)
—
—
(6,626)
544,295
(516,590)
—
(2,642)
18
(71)
529
25,539
(189)
656
467
3,532
2,370
—
—
$
$
$
$
$
Delta Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 27, 2014
NOTE 1—THE COMPANY
Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio
of lifestyle basics and branded activewear apparel and headwear. We specialize in selling casual and athletic products through a variety
of distribution channels and distribution tiers, including specialty stores, boutiques, department stores, mid and mass channels, e-retailers,
college bookstores and the U.S. military. Our products are also made available direct-to-consumer on our websites at www.soffe.com,
www.junkfoodclothing.com, www.saltlife.com and www.deltaapparel.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 to retailers.
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
entities are not considered variable interest entities.
We operate our business in two distinct segments: branded and basics. Although the two segments are similar in their production processes
and regulatory environments, they are distinct in their economic characteristics, products, marketing and distribution methods. During
fiscal year 2014, a review of our operating segments determined that the operations of our Art Gun business more closely align with those
of our basics segment rather than our branded segment. As a result of this determination, our Art Gun business has been reclassified from
the branded to basics segment in all periods presented in Note 13 - Business Segments. This change is included within our fiscal 2014
results and corresponding comparisons to prior periods.
(b) Fiscal Year: We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. On August 26, 2013, our Board
of Directors determined that the Company's fiscal year will begin on the Sunday closest to September 30th of each year and end on the
Saturday closest to September 30th of each year. The change was intended to better align our planning, financial and reporting functions
with the seasonality of our business. The 2014, 2013 and 2012 fiscal years were 52-week years and ended on September 27, 2014, June
29, 2013, and June 30, 2012, respectively. The transition period was a 13-week quarter and ended on September 28, 2013 to coincide
with the change in our fiscal year end.
(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,
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 transferred 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.
Royalty revenue is primarily derived from royalties paid to us by licensees of our intellectual property rights, which include, among other
things, trademarks and copyrights. We execute license agreements with our licensees detailing the terms of the licensing arrangement.
Royalties are generally recognized upon receipt of the licensees' royalty report, in accordance with the terms of the executed license
agreement, and when all other revenue recognition criteria have been met.
(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.
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(g) Accounts Receivable: Accounts receivable consists primarily of receivables from our customers arising from the sale of our products,
and we generally do not require collateral from our customers. We actively monitor our exposure to credit risk through the use of credit
approvals and credit limits. At September 27, 2014, our net accounts receivable was $68.2 million, consisting of $71.4 million in accounts
receivable and $3.2 million in reserves. At September 28, 2013, our net accounts receivable was $68.0 million, consisting of $71.0 million
in accounts receivable and $3.0 million in reserves. At June 29, 2013, our net accounts receivable was $74.4 million, consisting of $76.2
million in accounts receivable and $1.8 million in 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. Bad debt expense was less than 1% of net sales in fiscal year 2014, the transition period ended
September 28, 2013 and fiscal years 2013 and 2012.
(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.
During the December quarter of fiscal year 2012, we recorded a $16.2 million lower of cost or market write-down on the inventory in
the basics segment and its firm purchase commitments for yarn, resulting from historically high cotton prices in inventory costs combined
with declining selling prices. The estimation of the total write-down involved management judgments and assumptions including
assumptions regarding future selling price forecasts, the allocation of raw materials between business units, the estimated costs to complete,
disposal costs and a normal profit margin. The inventory and yarn firm purchase commitments associated with this inventory write-
down were sold during our fiscal year 2012.
(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-five 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 the September quarter of fiscal year 2014, we had assets held-for-use that we plan to abandon or dispose of in the December
quarter of fiscal year 2015. As part of our ongoing enhancements to our information technology structure to streamline operations as
well as reduce system complexity, we expect to abandon certain ERP and related systems. In order to meet future capacity requirements
and increase manufacturing efficiency, older model equipment is being replaced with more efficient equipment. Due to the expected
abandonment or disposal, we performed an impairment analysis which resulted in a total of $1.0 million impairment expense recorded
in the other income (expense) line item in our Consolidated Statements of Operations. Of this amount, $0.7 million and $0.3 million
related to our branded and basics segment respectively.
(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 Salt Life, Junkfood, 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.
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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 2014, Junkfood and Salt Life were the
only reporting units with recorded goodwill.
The Company adopted Accounting Standards Update, ("ASU") No. 2011-08, Intangibles - Goodwill and Other (Topic 350), Testing for
Goodwill Impairment ("ASU 2011-08") on July 1, 2012. ASU 2011-08 simplifies how companies are required to test goodwill for
impairment. Companies now have the option to first assess qualitative factors to determine whether it is more likely than not (likelihood
of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If after considering the totality of events and
circumstances a company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,
it will not have to perform the two-step impairment test.
If the company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or it chooses
to not take the simplified approach, the company will have to perform the two-step impairment test. 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 a company 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.
We complete our annual impairment test of goodwill on the first day of our third fiscal quarter. We estimate fair value of the applicable
reporting unit or units using a discounted cash flow methodology. This represents a level 3 fair value measurement as defined under ASC
820, Fair Value Measurements and Disclosures, since the inputs are not readily observable in the marketplace. 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, which we believe represent those of a market participant. 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. Based on the valuation, there is not an impairment on the goodwill
associated with Junkfood and Salt Life, the only goodwill recorded on our financial statements.
At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration related to the Salt Life
and Art Gun acquisitions in accordance with FASB Codification No. 805, Business Combinations (“ASC 805”). Based on the operating
results and projections for Salt Life, we analyzed the fair value of the contingent consideration. At September 27, 2014, the fair value
of the contingent consideration was remeasured based on Salt Life's historical and current operating results and projections, and the
earnout accrual was $3.6 million. At September 27, 2014, the fair value of the contingent consideration was remeasured based on Art
Gun's historical and current operating results and projections, remained de minimis, and no amounts are expected to be paid under the
terms of the arrangements.
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 paid and historical claim amounts. We had self-insurance reserves
of approximately $0.5 million at September 27, 2014, September 28, 2013, and June 29, 2013.
(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, inventory write-downs, and depreciation and amortization expense associated with our manufacturing and sourcing operations.
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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 $16.9 million,
$17.5 million and $16.4 million in fiscal years 2014, 2013 and 2012, respectively, and $4.4 million for the transition period ended
September 28, 2013. 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 $3.6 million, $3.8 million
and $4.3 million in fiscal years 2014, 2013 and 2012, respectively, and $0.8 million for the transition period ended September 28, 2013.
Included in these costs were $1.1 million, $1.5 million and $2.0 million in fiscal years 2014, 2013 and 2012, respectively, and $0.3 million
for the transition period ended September 28, 2013, 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 options using the Black-Scholes options pricing model. The fair value of our restricted
stock awards is the quoted market value of our stock on the grant date. For performance-based stock awards, in the event we determine
it is no longer probable that we will achieve the minimum performance criteria specified in the award, we reverse all of the previously
recognized compensation expense in the period such a determination is made. We recognize the 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.
(t) Earnings per Share: We compute basic earnings per share ("EPS") 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”). Basic EPS includes
no dilution. Diluted EPS 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 ASC
718, 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 EPS. 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 EPS since their inclusion would have an anti-dilutive effect on EPS.
(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 (Loss) consists of net earnings (loss) and unrealized gains
(losses) from cash flow hedges, net of tax. Accumulated other comprehensive loss contained in the shareholders’ equity section of the
Consolidated Balance Sheets was $0.3 million, $0.6 million, and $0.1 million, as of September 27, 2014, September 28, 2013, and June
29, 2013, respectively, related to interest rate swap agreements.
(x) Yarn and Cotton Procurements: We have a supply agreement with Parkdale to supply our yarn requirements until December 31,
2015. 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
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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.
(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.
During fiscal year 2014 we entered into various cotton option contracts to economically hedge the risk related to market fluctuations in
the cost of cotton used in our operations. There were none outstanding as of September 27, 2014. We do not receive hedge accounting
treatment for these derivatives. As such the realized gains and losses associated with them were recorded within cost of goods sold on
the Consolidated Statement of Operations. There were no significant raw material option agreements that were purchased during the
transition period ended September 28, 2013, or fiscal years 2013 or 2012. In September 2013, we entered into four interest rate swap
agreements, as follows:
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Effective Date
9/9/2013
9/9/2013
9/19/2013
9/19/2013
Notational
Amount
$15 million
$15 million
$15 million
$15 million
LIBOR Rate
Maturity Date
1.1700%
1.6480%
1.0030%
1.4490%
9/9/2016
9/11/2017
9/19/2016
9/19/2017
During fiscal year 2014, the transition period ended September 28, 2013, and fiscal year 2013, the interest rate swap agreements had
minimal ineffectiveness and were considered highly-effective hedges.
The changes in fair value of the interest rate swap agreements resulted in an AOCI gain, net of taxes, of $0.3 million for the year ended
September 27, 2014, an AOCI loss, net of taxes, of $0.5 million for the transition period ended September 28, 2013, and an AOCI gain,
net of taxes, of $47 thousand for the year ended June 29, 2013. See Note 15(d) - Derivatives for further details.
(z) Recently Adopted Accounting Pronouncements:
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible
Assets for Impairment. This new guidance adds an optional qualitative assessment for determining whether an indefinite-lived intangible
asset is impaired. Companies have the option to first perform a qualitative assessment to determine whether it is more likely than not
(likelihood of more than 50%) that an indefinite-lived intangible is impaired. If a company determines that it is more likely than not that
the fair value of such an asset exceeds its carrying amount, it would not need to calculate whether the fair value of such an asset exceeds
its carrying amount and it would not need to calculate the fair value of the asset in that year. The company must, however, make a positive
assertion about the conclusion and the circumstances taken into account to reach that conclusion. However, if the company determines
otherwise, it must calculate the fair value of the asset and compare that value with its carrying amount. If the carrying amount of the
company's intangible asset exceeds its fair value, the company must record an impairment charge for the amount of that excess, if any.
ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. ASU
2012-02 was adopted on June 30, 2013, and the adoption had no impact on our financial statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income ("ASU 2013-02"). This guidance requires companies to report information about
reclassifications out of accumulated other comprehensive income in one place. These reclassifications must be presented by component.
If these items are significant and are reclassified in their entirety in the period, companies must report the effect of the reclassifications
on the respective line items in the statement where net income is presented. If the items are not reclassified in their entirety to net income
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in the period, companies must cross-reference in a note. ASU 2013-02 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2012. ASU 2013-02 was adopted on June 30, 2013, and the adoption had no impact on our financial
statements.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815), Inclusion of the Fed Funds Effective Swap Rate
as a Benchmark Interest Rate for Hedge Accounting Purposes ("ASU 2013-10"). This guidance allows an entity to now designate the
Federal Funds Effective Swap Rate (the Overnight Index Swap rate, or OIS rate, in the United States) as a benchmark interest rate for
hedge accounting purposes in addition to the interest rate on direct Treasury obligations of the United States government and the London
Interbank Offered Rate ("LIBOR"). The FASB also eliminated the restriction on designating different benchmark interest rate hedges for
similar hedges. ASU 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after
July 2013. ASU 2013-10 was adopted on July 1, 2013, and the adoption had no impact on our financial statements.
In March 2014, the FASB issued ASU No. 2014-06, Technical Corrections and Improvements Related to Glossary Terms ("ASU 2014-06").
This guidance clarifies the Master Glossary of the Codification, consolidates multiple instances of the same term into a single definition
and makes minor improvements to the Master Glossary. ASU 2014-06 is effective immediately. ASU 2014-06 was adopted on March
29, 2014, and the adoption had no impact on our financial statements.
(aa) Recently Issued Accounting Pronouncements Not Yet Adopted:
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, ("ASU 2013-11"). This new guidance requires
entities to present unrecognized tax benefits as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain
criteria are met. The determination of whether a deferred tax asset is available is based on the unrecognized tax benefit and the deferred
tax asset that exists as of the reporting date and presumes disallowance of the tax position at the reporting date. This amendment is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. ASU 2013-11 is therefore
effective for our fiscal year beginning September 28, 2014. We are evaluating the effect that ASU 2013-11 will have on the Consolidated
Financial Statements and related disclosures
In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, ("ASU 2014-09"). This new guidance
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods for services to
customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09
is effective for annual periods beginning after December 15, 2016, for public business entities and permits the use of either the retrospective
or cumulative effect transition method. Early application is not permitted. ASU 2014-09 is therefore effective for our fiscal year beginning
October 1, 2017. We are evaluating the effect that ASU 2014-09 will have on the Consolidated Financial Statements and related disclosures.
NOTE 3—ACQUISITIONS
On August 27, 2013, To The Game purchased substantially all of the assets of Salt Life Holdings, LLC, including all of its domestic and
international trademark rights in the Salt Life brand (the "Salt Life Acquisition"). The purchase price for the Salt Life Acquisition consisted
of: (i) a cash payment at closing of $12,000,000, (ii) a deposit at closing of $3,000,000 into an escrow account to be held to secure
indemnification obligations of the seller under the asset purchase agreement and to be held for a period of up to fifty-four months following
the closing, and (iii) delivery of two promissory notes in the aggregate principal amount of $22,000,000. An additional amount may be
payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are
met during the 2019 calendar year. At acquisition, we recorded an accrual of $3.4 million for the fair value of the contingent consideration
associated with the Salt Life Acquisition. We financed the cash portion of the purchase price through our Fourth Amended and Restated
Loan and Security Agreement, as amended on August 27, 2013. We expensed all acquisition related costs totaling $0.3 million in
the selling, general and administrative expense line item of our Condensed Consolidated Statements of Operations in the quarter ended
September 28, 2013.
We have made certain revisions to the presentation of the Statement of Cash Flows for the transition period ended September 28, 2013.
The Company originally incorrectly included $20.4 million, the fair value of the two promissory notes entered into in conjunction with
the Salt Life Acquisition, as cash flows used in investing activities and correspondingly as cash flows provided by financing activities.
As this was a non-cash investing and financing transaction, this should have been excluded from cash flows and instead disclosed as a
non-cash investing and financing transactions at the bottom of the Statement of Cash Flows. The Company assessed the materiality of
this error and determined that the error was not material and previously-issued financial statements could continue to be relied upon. The
revisions had no impact on our results of operations or financial position.
On December 6, 2013, we entered into an agreement (the "IMG Agreement") with IMG Worldwide, Inc. ("IMG") that provides for the
termination of the Salt Life brand license agreements entered into between Delta and IMG (as agent on behalf of Salt Life Holdings)
prior to the Salt Life Acquisition as well as the agency agreement entered into between Salt Life Holdings and IMG prior to the Salt Life
Acquisition. In addition, the IMG Agreement provides that Delta and Salt Life Holdings are released from all obligations and liabilities
under those agreements or relating to the Salt Life Acquisition. Pursuant to the IMG Agreement, To The Game and IMG entered into a
separate, multi-year agency agreement, which has since been terminated, whereby IMG represented To The Game with respect to the
licensing of the Salt Life brand in connection with certain product and service categories. To The Game agreed to pay IMG installments
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totaling $3,500,000 to terminate the existing arrangements. As a result, the above-referenced $3,000,000 indemnification asset was
released from escrow during the quarter ended December 28, 2013, and applied towards these payment obligations, along with additional
amounts previously accrued for royalty obligations under the above-referenced Salt Life brand license agreements. In accordance with
the payment terms, To The Game remitted an initial $1.55 million payment and the first $195 thousand installment during the March
2014 quarter. The second and third $195 thousand installments were made during the June and September 2014 quarters as required by
the agreement. As of September 27, 2014, there are 7 quarterly installments of $195 thousand remaining. We have recorded the fair value
of the liability as of September 27, 2014, on our financials with $0.8 million in accrued expenses and $0.4 million in other liabilities.
The Salt Life Acquisition continues our strategy of building lifestyle brands that take advantage of our creative capabilities, vertical
manufacturing platform and international sourcing competencies. Prior to the Salt Life Acquisition, To The Game sold Salt Life-branded
products under exclusive license agreements which began in January 2011. As such, the results of Salt Life sales have been included in
the Condensed Consolidated Financial Statements since that time.
We accounted for the Salt Life Acquisition pursuant to ASC 805, Business Combinations, with the purchase price allocated based upon
fair value. We have identified certain intangible assets associated with Salt Life, including trade name and trademarks, license agreements,
non-compete agreements and goodwill. The total amount of goodwill is expected to be deductible for tax purposes. Components of the
intangible assets recorded at acquisition are as follows (in thousands):
Goodwill
Intangibles:
Tradename/trademarks
License agreements
Non-compete agreements
Total intangibles
$
19,917
N/A
Economic Life
16,000
2,100
770
18,870
30 yrs
15 – 30 yrs
6.6 yrs
Total goodwill and intangibles
$
38,787
NOTE 4—INVENTORIES
Inventories, net of reserves of $7.1 million, $6.9 million, and $6.8 million as of September 27, 2104, September 28, 2013, and June
29, 2013, respectively, consist of the following (in thousands):
Raw materials
Work in process
Finished goods
September 27,
2014
September 28,
2013
June 29,
2013
$
$
9,609
$
11,917
$
15,859
136,720
162,188
$
15,121
138,152
165,190
$
12,443
16,407
130,664
159,514
Raw materials include finished yarn, undecorated garments 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):
F-15
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
September 27,
2014
September 28,
2013
June 29,
2013
25 years
20 years
10 years
3-10 years
7 years
3-10 years
5 years
N/A
$
996
$
993
$
8,769
73,877
20,207
5,342
2,776
932
2,922
7,882
69,570
20,842
5,301
2,335
796
4,590
993
7,882
69,094
20,386
5,290
2,335
797
2,430
115,821
(74,816)
41,005
$
112,309
(71,709)
40,600
$
109,207
(69,761)
$
39,446
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
Components of intangible assets consist of the following (in thousands):
September 27, 2014
September 28, 2013
June 29, 2013
Cost
Accumulated
Amortization
Net
Value
Cost
Accumulated
Amortization
Net
Value
Cost
Accumulated
Amortization
Net
Value
Economic
Life
Goodwill
$ 36,729 $
— $ 36,729
$ 36,729 $
— $ 36,729
$ 16,812 $
— $ 16,812
N/A
Intangibles:
Tradename/trademarks
$ 17,530 $
(1,281) $ 16,249
$ 17,530 $
(672) $ 16,858
$ 1,530 $
(603) $
927
20 - 30 yrs
Customer relationships
Technology
License Agreements
Non-compete agreements
7,220
1,220
2,100
1,287
(3,298)
3,922
(582)
(113)
(583)
638
1,987
704
7,220
1,220
2,100
1,287
(2,937)
4,283
(459)
(10)
(442)
761
2,090
845
7,220
1,220
—
517
(2,847)
4,373
20 yrs
10 yrs
792
(428)
—
(419)
— 15 - 30 yrs
98
4 – 8.5 yrs
Total intangibles
$ 29,357 $
(5,857) $ 23,500
$ 29,357 $
(4,520) $ 24,837
$ 10,487 $
(4,297) $
6,190
The goodwill cost represents the acquired goodwill net of the cumulative impairment losses of $0.6 million. Amortization expense for
intangible assets was $1.3 million for the year ended September 27, 2014, and $0.607 million for the years ended June 29, 2013, and
June 30, 2012. Amortization expense for the transition period ended September 28, 2013, was $0.2 million. Amortization expense is
estimated to be approximately $1.3 million each for fiscal years 2015, 2016, 2017, 2018 and 2019.
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
September 27,
2014
September 28,
2013
June 29,
2013
$
$
10,505
1,173
728
411
2,878
564
—
3,908
20,167
$
$
8,916
742
557
397
3,198
650
100
2,903
17,463
$
$
9,762
1,199
568
363
3,001
677
49
2,807
18,426
F-16
During the fourth quarter of fiscal year 2014, certain strategic initiatives were implemented to improve the Company's results of operations
and financial position. As a result of these initiatives, approximately $4.0 million in expenses were recognized during the fourth quarter
of fiscal year 2014.
These expenses consist of the following (in thousands):
Severance expense
Reduced manufacturing production
Fixed asset impairment
These expenses were reported in our Consolidated Statement of Operations as follows (in thousands):
Cost of goods sold
Selling, general and administrative expenses
Other expense
September 27,
2014
2,169
868
984
4,021
September 27,
2014
868
2,169
984
4,021
$
$
$
$
In fiscal year 2014, we paid $.8 million of these expenses. As of September 27, 2014, $1.8 million of these expenses were accrued
and reported on our Consolidated Balance Sheet.
NOTE 8—LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Revolving U.S. credit facility, interest at base rate or adjusted LIBOR rate plus an
applicable margin (interest at 2.6% on September 27, 2014) due May 2017
$
96,231
$
105,746
$
88,753
September 27,
2014
September 28,
2013
June 29,
2013
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)
Term loan with Banco Ficohsa, a Honduran bank, interest at 7%, payable monthly
with a eighteen-month term (denominated in U.S. dollars)
Term loan with Banco Ficohsa, a Honduran bank, interest at 7%, payable monthly
with a seven-year term (denominated in U.S. dollars)
Salt Life acquisition promissory note, imputed interest at 1.92%, one-time
installment due September 30, 2014, quarterly installments beginning April 2015
through June 2016
Salt Life acquisition promissory note, imputed interest at 3.62%, quarterly
payments beginning September 2016 through June 2019
Less current installments
Long-term debt, excluding current installments
4,984
4,258
5,000
4,297
4,539
3,405
700
3,700
—
—
—
—
—
—
98,292
(3,529)
94,763
13,404
13,150
7,549
129,973
(15,504)
114,469
$
7,283
134,734
(3,704)
131,030
$
$
On May 27, 2011, Delta Apparel, Soffe (successor by merger to TCX, LLC), Junkfood, To The Game and Art Gun 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.
F-17
On August 27, 2013, Delta Apparel, To The Game, Junkfood, Soffe and Art Gun entered into a Consent and First Amendment to the
Amended Loan Agreement with Wells Fargo Bank, National Association and the other lenders set forth therein (the "First Amendment").
Pursuant to the First Amendment, in general and among other things, (1) the lenders and agent parties consented to the Salt Life Acquisition,
(2) the maturity of the loans (other than the below referenced first in last out Tranche B ("FILO Tranche B")) under the Amended Loan
Agreement was extended one year to May 27, 2017, (3) the lenders consented to Delta Apparel's Honduran subsidiaries borrowing up to
an additional $10,000,000 from a certain Honduran bank in connection with the purchase of certain equipment, and (4) the FILO Tranche
B was added to provide Delta Apparel and its affiliate parties to the Amended Loan Agreement an additional 5% borrowing availability
with respect to eligible accounts receivable and eligible inventory. The FILO Tranche B, and only the FILO Tranche B, will terminate
by August 27, 2015 (subject to earlier cancellation by Delta Apparel), has a maximum borrowing availability of $10,000,000, and includes
interest rates between 150 and 200 basis points higher than the rates applicable to the other loans available under the Amended Loan
Agreement.
On September 4, 2013, Delta Apparel, To The Game, Junkfood, Soffe and Art Gun entered into a Second Amendment to the Amended
Loan Agreement with Wells Fargo Bank, National Association and the other lenders set forth therein (the "Second Amendment"). The
Second Amendment revised the time frame for reports due to the lenders to reflect the change in our fiscal year end.
On September 26, 2014, Delta Apparel, To The Game, Junkfood, Soffe and Art Gun entered into a Third Amendment to the Amended
Loan Agreement with Wells Fargo Bank, National Association and the other lenders set forth therein (the "Third Amendment"). The Third
Amendment amends certain definitions within the Amended Loan Agreement and eases borrowing base availability thresholds relating
to the financial testing covenant during the period from September 28, 2014, through October 31, 2015. In addition, the definition of
Fixed Charge Coverage Ratio is amended to adjust for expenses that may be incurred in connection with strategic initiatives, and to
exclude the $9 million payment that was due on September 30, 2014, in connection with the August 27, 2013, purchase of certain assets
and properties of Salt Life Holdings, LLC.
Pursuant to the Amended Loan Agreement, the line of credit under our U.S. revolving credit facility is $145 million (subject to borrowing
base limitations), and matures on May 27, 2017. 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. In fiscal year 2014, we paid $0.4 million in financing costs in conjunction
with the Third Amendment.
Our U.S. revolving 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, and Art Gun. 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% 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 September 27, 2014, we had $96.2 million outstanding under our U.S. revolving credit facility at an average interest rate of 2.6%, and
had the ability to borrow an additional $38.8 million. Our credit facility includes the financial covenant that if the amount of availability
falls below the threshold amounts set forth in the Third Amendment, 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. As availability was above the minimum,
we were not subject to the FCCR covenant at September 27, 2014. As of September 27, 2014, our FCCR was below the minimum
threshold specified in our credit agreement. 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 made pursuant to the Amended Loan Agreement may be used for permitted acquisitions (as defined in the Amended
Loan Agreement), general operating expenses, working capital, other corporate purposes, and to finance credit facility fees and expenses.
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 $18.125 million and average availability for the 30-day
period immediately preceding that date of not less than $18.125 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 September 27, 2014, September 28, 2013, and June 29, 2013, there
was $8.2 million, $9.9 million and $11.6 million, respectively, of retained earnings free of restrictions to make cash dividends or stock
repurchases.
The U.S. revolving credit facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB
Codification No. 470, Debt ("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.
F-18
In conjunction with the Salt Life Acquisition, we issued two promissory notes in the aggregate principal of $22.0 million, which included
a one-time installment of $9.0 million that was due on September 30, 2014, and quarterly installments commencing on March 31, 2015,
with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as
required under Section 1274 of the Internal Revenue Code. We have imputed interest at 1.92% and 3.62% on the promissory notes that
mature on June 30, 2016, and June 30, 2019, respectively. At September 27, 2014, the discounted value of the promissory notes was
$21.0 million.
In March 2011, we extinguished our existing debt with Banco Ficohsa, a Honduran bank, and entered into a new credit facility with it.
The credit 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 portion of the credit facility 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 required 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 September 27, 2014, we had
$3.4 million outstanding on this loan. The revolving credit portion of the loan has a 7% fixed interest rate with an ongoing 18-month
term (expiring March 2019) and is denominated in U.S. dollars. The revolving credit facility requires minimum payments 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 September 27,
2014, we had $5.0 million outstanding on this loan.
In October 2013, we entered into two new term loan agreements with Banco Ficohsa to finance our Honduran expansion project. These
also are not guaranteed by the U.S. entity and are secured by a first-priority lien on the assets of our Honduran operations. The first loan,
an 18-month agreement for $1.8 million with a 7% fixed interest rate, is denominated in U.S. dollars, and has ratable monthly principal
and interest payments due through the end of the term. As of September 27, 2014, we had $0.7 million outstanding on this loan agreement.
The second loan, a seven-year agreement for $4.2 million with a 7% fixed interest rate, is denominated in U.S. dollars and has ratable
monthly principal and interest payments due through the end of the term. As of September 27, 2014, we had $3.7 million outstanding on
this loan agreement. The carrying value of these term loans approximates the fair value.
The aggregate maturities of debt at September 27, 2014, are as follows (in thousands):
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
$
$
Amount
15,504
7,889
95,342
9,070
1,468
700
129,973
F-19
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
(Benefit from) provision for income taxes
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
Period ended
$
$
$
$
— $
— $
79
158
237
$
—
44
44
$
40
35
145
220
$
$
(5,807) $
(933) $
499
$
(923)
(6,730)
(156)
(1,089)
(6,493) $
(1,045) $
3
502
722
$
(6,795)
—
157
(6,638)
(284)
(985)
(1,269)
(7,907)
For financial reporting purposes our (loss) income before (benefit from) provision for income taxes includes the following components
(in thousands):
United States
Foreign
Period ended
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
$
$
(16,832) $
9,379
(7,453) $
(2,827) $
2,350
(477) $
1,468
8,438
9,906
$
$
(21,660)
11,306
(10,354)
A reconciliation between actual (benefit from) provision for income taxes and the provision for income taxes computed using the federal
statutory income tax rate of 34.0% 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 compensation
Nondeductible amortization and other permanent differences
Other
(Benefit from) provision for income taxes
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
Period ended
$
$
(2,533) $
(893)
(55)
(3,098)
4
—
76
(162) $
(147)
(15)
(756)
—
—
25
6
(6,493) $
10
(1,045) $
3,371
(11)
(16)
(2,754)
75
—
100
(43)
722
$
(3,520)
(975)
(47)
(3,683)
14
193
91
20
$
(7,907)
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 $55.6 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.
F-20
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Federal net operating loss carryforwards
State net operating loss carryforwards
Charitable donation carryforward
Derivative — interest rate contracts
Alternative minimum tax credit carryforward
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
September 27,
2014
September 28,
2013
June 29,
2013
$
7,219
$
834
$
2,445
28
168
49
6,747
16,656
(201)
16,455
(2,792)
(4,793)
(117)
(7,702)
8,753
3,399
1,558
66
349
49
6,597
9,453
(197)
9,256
(2,889)
(3,931)
(65)
(6,885)
2,371
3,610
$
12,152
$
5,981
$
—
1,416
50
51
49
6,665
8,231
(197)
8,034
(3,164)
(3,762)
(123)
(7,049)
985
3,571
4,556
As of September 27, 2014, and September 28, 2013, we had federal net operating loss carryforwards of approximately $21.2 million and
$3.4 million, respectively. There was no federal net operating loss carryforward at June 29, 2013. The deferred tax asset resulting from
federal net operating losses for September 27, 2014, and September 28, 2013, were $7.2 million and $0.8 million, respectively. There is
no carryback opportunity for these losses and the carryforwards expire at various intervals from 2033 through 2034. We determined that
no valuation allowance is required as we expect that all such carryforwards more likely than not will be realized within statutory periods
of carryover and utilization.
As of September 27, 2014, September 28, 2013, and June 29, 2013, we had state net operating loss carryforwards of approximately $52.7
million, $36.1 million and $31.1 million, respectively. These carryforwards expire at various intervals from 2019 through 2034. 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 a $4 thousand net increase in the total valuation allowance for the year ended
September 27, 2014.
For both federal and state purposes, 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 or when the carryforwards are available.
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. Accrued interest and penalties related to unrecognized tax benefits would also
be recorded. We did not have any material unrecognized tax benefits as of September 27, 2014, September 28, 2013, or June 29,2013.
We also did not have any interest and penalties accrued related to unrecognized tax benefits as of September 27, 2014.
In the December quarter of fiscal year 2013, the Internal Revenue Service commenced an examination of our U.S. income tax returns
for our fiscal year 2010 (tax year 2009). Upon filing the carryback of our net operating losses from fiscal year 2012 to our fiscal years
2011 and 2010 (tax years 2010 and 2009) and receiving a cash refund of the taxes previously paid, the Internal Revenue Service expanded
the examination to include our U.S. income tax returns for our 2011 and 2012 fiscal years. This examination was concluded in January
2014, and no tax deficiency was found. Based on the conclusion of the audit, these returns are no longer subject to further examination
by the Internal Revenue Service. However, net operating loss carryforwards remain subject to examination to the extent they are carried
forward and impact a year that is open to examination by taxing authorities. The tax years 2010 to 2012 as well as the short tax year
2013, according to statute and with few exceptions, remain open to examination by various state, local and foreign jurisdictions. Tax
years 2012 and the short tax year 2013 remain open for examination for federal purposes.
F-21
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 September 27, 2014, were as follows (in thousands):
Fiscal Year
2015
2016
2017
2018
2019
Thereafter
Amount
7,993
$
6,901
4,860
3,197
1,608
1,183
$
25,742
Rent expense for all operating leases was $9.8 million, $9.8 million and $10 million for fiscal years 2014, 2013, and 2012, respectively.
Rent expense for the transition period ended September 27, 2013 was $2.5 million.
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 $1.3 million to the 401(k) Plan during fiscal year 2014 and approximately $1.3 million to the 401(k) Plan during each of
the fiscal years 2013, and 2012. Contributions to the 401(k) plan during the transition period ended September 28, 2013, were $0.4
million.
We provide post-retirement 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 2014
and 2013. The following table presents the benefit obligation for these benefits, which is included in accrued expenses in the accompanying
balance sheets (in thousands).
Balance at beginning of year
Interest expense
Benefits paid
Actuarial adjustment
Balance at end of year
September 27,
2014
September 28,
2013
June 29,
2013
$
$
465
$
471
$
6
(29)
1
—
(6)
—
443
$
465
$
526
6
(62)
1
471
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").
Upon shareholder approval of the 2010 Stock Plan, no additional awards have been or will be granted under either the Delta Apparel
Stock Option Plan ("Option Plan") or the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stock awards have and
will be granted under the 2010 Stock Plan. We account for these plans pursuant to ASC 718, SAB 107 and SAB 110. Shares are generally
issued from treasury stock upon exercise of the options or the vesting of the restricted stock units and performance units. 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 the 2014 fiscal year, we reduced expense by $90 thousand in connection
with our outstanding awards due to adjustments to the expected vesting of certain performance units granted and known forfeitures of
certain restricted stock units granted. Total stock-based compensation expense was $0.7 million for the transition period ended September
28, 2013. Total stock-based compensation for fiscal years 2013 and 2012 was $1.2 million and $1.6 million, respectively. Tax expense
of $35 thousand, associated with the reduction of expense, was recognized in fiscal year 2014.
Associated with the compensation cost are income tax benefits recognized of $0.3 million, $0.5 million and $0.6 million in the transition
period and fiscal years 2013 and 2012, respectively.
F-22
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 other stock 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 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.
Compensation expense is recorded on the selling, general and administrative expense line item in our Consolidated Statements of
Operations over the vesting periods.
Stock Options
No stock options were granted during fiscal year 2014. All outstanding options granted by us have vested and are exercisable.
A summary of the stock option activity during the periods ending September 27, 2014, September 28, 2013, June 29, 2013, and June 30,
2012 is presented below:
September 27, 2014
September 28, 2013
June 29, 2013
June 30. 2012
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
Shares
Stock options outstanding, beginning of
fiscal year
Stock options granted
Stock options exercised
Stock options forfeited
Stock options outstanding, end of fiscal
year
Stock options outstanding and
exercisable, end of fiscal year
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
50,000 $
13.47
The following table summarizes information about our stock options outstanding, all of which are exercisable as of September 27, 2014:
Date of Option Grant
February 2, 2011
February 2, 2011
Number of Options
Outstanding and
Exercisable
25,000 $
25,000 $
50,000
Exercise Price
Grant-Date Fair Value
Expiration Date
13.86 $
13.07 $
6.15
6.35
February 18, 2018
February 18, 2018
F-23
Restricted Stock Units and Performance Units
The following table summarizes the restricted stock units and performance units award activity during the periods ending September 27,
2014, September 28, 2013, June 29, 2013, and June 30, 2012:
September 27, 2014
September 28, 2013
June 29, 2013
June 30. 2012
Weighted
average
grant date
fair value
Number of
Units
Weighted
average
grant date
fair value
Weighted
average
grant date
fair value
Number of
Units
Number of
Units
Weighted
average
grant date
fair value
Number of
Units
Units outstanding, beginning of fiscal
year
Units granted
Units issued
Units forfeited
348,852 $
14.25
224,870 $
15.37
337,700 $
16.05
— $
—
— $
— $
(133,500) $
— 244,852 $
— (120,870) $
— $
14.16
14.25
10,000 $
13.66
390,900 $
16.04
16.34
— $
— (122,830) $
—
17.10
— $
—
(53,200) $ (16.00)
Units outstanding, end of fiscal year
215,352 $
14.31
348,852 $
14.25
224,870 $
15.37
337,700 $
16.05
During the transition period ended September 28, 2013, restricted stock units representing 122,426 shares of our common stock were
granted. These restricted stock units are service-based and vest upon the filing of our Quarterly Report on Form 10-Q for the period
ending June 27, 2015. Upon the filing of such Quarterly Report on Form 10-Q, one-half are payable in the common stock of Delta Apparel,
Inc. and are therefore accounted for under the equity method pursuant to ASC 718 and one-half are payable in cash and are therefore
accounted for under the liability method pursuant to ASC 718.
During the transition period ended September 28, 2013, performance stock units representing 122,426 shares of our common stock were
granted. The performance units are based on the achievement of certain performance criteria for the two-year period ending June 27,
2015, and vest upon the filing of our Quarterly Report on Form 10-Q for the period ending June 27, 2015, subject to the achievement of
the performance goals. Upon the filing of such Quarterly Report on Form 10-Q, one-half are payable in the common stock of Delta
Apparel, Inc. and are therefore accounted for under the equity method pursuant to ASC 718 and one-half are payable in cash and are
therefore accounted for under the liability method pursuant to ASC 718.
During fiscal years 2013 and 2012, restricted stock units representing 5,000 and 91,450 shares of our common stock, respectively, were
granted. These restricted stock units are service-based and vested upon the filing of our Annual Report on Form 10-K for the fiscal year
ended June 29, 2013. The restricted stock units were payable in the common stock of Delta Apparel, Inc. and were therefore accounted
for under the equity method pursuant to ASC 718.
During fiscal year 2013 and 2012, performance units representing 5,000 and 91,450 shares of our common stock, respectively, were
granted. The performance units were based on the achievement of certain performance criteria for the two-year period ended June 29,
2013, payable in the common stock of Delta Apparel, Inc. and were eligible to vest with the filing of our Annual Report on Form 10-K
for the fiscal year ended June 29, 2013, subject to the achievement of the performance goals. We accounted for these performance units
under the equity method pursuant to ASC 718. During the December quarter of fiscal year 2013, we determined that the ability to achieve
the performance criteria was not probable. As a result, we reversed the $0.4 million of related share-based expense previously recognized.
The performance criteria was not met and the performance units were forfeited on June 29, 2013.
During fiscal year 2012, performance units representing 52,000 shares of our common stock were also granted. These performance units
were based on the achievement of certain performance criteria for the fiscal year ended June 30, 2012, and were eligible to vest upon the
filing of our Annual Report on Form 10-K for fiscal year 2012; however, the performance criteria were not met and the performance
units were forfeited on June 30, 2012.
In addition, during fiscal year 2012, performance units representing 156,000 shares of our common stock were granted. These units were
based on the achievement of one-year performance criteria for each of the fiscal years 2013, 2014 and 2015, with one third of such units
eligible to vest with the filing of our Annual Report on Form 10-K for each of the fiscal years. Upon achievement of the performance
goals, one-half were payable in the common stock of Delta Apparel, Inc. and were therefore accounted for under the equity method
pursuant to ASC 718 and one-half were payable in cash and were therefore accounted for under the liability method pursuant to ASC
718. Based upon the performance achieved during fiscal year 2013, 39,520 units of the 52,000 units granted vested upon the filing of
our Annual Report on Form 10-K for the fiscal year ended June 29, 2013 and 12,480 units were forfeited on June 29, 2013.
As of September 27, 2014, there was $0.6 million of total unrecognized compensation cost related to non-vested restricted stock units
and performance units under the 2010 Stock Plan. This cost is expected to be recognized over a period of 0.9 years.
F-24
The following table summarizes information about the unvested restricted stock units and performance units as of September 27, 2014.
Restricted Stock Units/Performance Units
Fiscal year 2012 Performance Units
Transition period Performance Units
Transition period Restricted Stock Units
Transition period Performance Units
Transition period Restricted Stock Units
Option Plan
Number of Units
Average Market Price
on Date of Grant
52,000
74,176
74,176
7,500
7,500
215,352
$14.25
$14.10
$14.10
$16.61
$16.61
Vesting Date
August 2015
August 2015
August 2015
August 2015
August 2015
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.
Compensation expense was recorded on the selling, general and administrative expense line item in our Consolidated Statements of
Operations on a straight-line basis over the vesting periods.
A summary of our stock option activity during fiscal year 2014, the transition period ended September 28, 2013 and fiscal years 2013
and 2012 is presented below:
Fiscal Year 2014
Transition Period
Fiscal Year 2013
Fiscal Year 2012
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
Shares
Weighted
Average
Exercise
Price
Shares
Stock options outstanding, beginning of
fiscal year
Stock options exercised
Stock options forfeited
Stock options outstanding, end of fiscal
year
Stock options outstanding and
exercisable, end of fiscal year
584,500 $
12.13
(82,500) $
11.28
$
—
600,500 $
(16,000) $
$
12.09
10.83
799,834 $
(139,334) $
— (60,000) $
12.22
11.14
15.91
851,167 $
(25,333) $
(26,000) $
12.16
8.11
14.48
502,000 $
12.27
584,500 $
12.13
600,500 $
12.09
799,834 $
12.22
502,000 $
12.27
584,500 $
12.13
600,500 $
12.09
799,834 $
12.22
Options exercised during fiscal year 2014 had no intrinsic value. The total intrinsic value of options exercised during the transition period
and fiscal years 2013 and 2012 was $1.8 million, $0.7 million and $0.2 million respectively. During fiscal year 2014, the transition period
and fiscal years 2013 and 2012, exercised options resulted in excess tax benefits of $27 thousand, $1 thousand, $34 thousand and $529
thousand, respectively. All outstanding options were vested as of September 27, 2014.
The following table summarizes information about our stock options outstanding, all of which are exercisable as of September 27, 2014:
Date of Option Grant
July 4, 2005
July 27, 2006
February 8, 2008
March 16, 2009
Number of Options
Outstanding and
Exercisable
350,000 $
30,000 $
112,000 $
10,000 $
502,000
Exercise Price
Grant-Date Fair Value
Expiration Date
13.35 $
17.24 $
8.30 $
4.01 $
5.18
6.20
2.95
2.00
July 4, 2015
July 27, 2016
February 8, 2018
February 18, 2018
F-25
NOTE 13—BUSINESS SEGMENTS
We operate our business in two distinct segments: branded and basics. Although the two segments are similar in their production processes
and regulatory environments, they are distinct in their economic characteristics, products, marketing and distribution methods. We are
reclassifying our Art Gun business from our branded segment to our basics segment to better reflect that business's current operating
characteristics. This change is included within our fiscal 2014 results and corresponding comparisons to prior periods.
The branded segment is comprised of our business units which are focused on specialized apparel garments and headwear to meet
consumer preferences and fashion trends, and includes Soffe, Junkfood, To The Game and Salt Life. 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 lifestyle brands of
Soffe®, Intensity Athletics®, Junk Food®, The Game®, American Threads™, and Salt Life® as well as other labels.
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, FunTees and Art Gun businesses. We market, distribute and manufacture for sale unembellished knit
apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight® for sale to a diversified audience ranging from large
licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear
companies, retailers, corporate industry programs, e-retailers, and sports licensed apparel marketers. Art Gun produces custom private
label garments through digital printing. Typically these products are sold with value-added services such as hangtags, ticketing, hangers,
and embellishment so that they are fully ready for retail.
Robert W. Humphreys, our chief operating decision maker, and management evaluate performance and allocate 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). We expensed a one-time charge of $1.2 million
in the fiscal 2013 September quarter for legal and professional fees related to the previously disclosed Audit Committee internal
investigation that was completed during that quarter. This one time charge is included in the basics segment.
F-26
Fiscal Year 2014:
Net sales
Segment operating income (loss)
Segment assets
Equity investment in joint venture
Purchases of property and equipment
Depreciation and amortization
Transition Period:
Net sales
Segment operating income
Segment assets
Equity investment in joint venture
Purchases of property and equipment
Depreciation and amortization
Fiscal Year 2013:
Net sales
Segment operating income (loss)
Segment assets
Equity investment in joint venture
Purchases of property and equipment
Depreciation and amortization
Fiscal Year 2012:
Net sales
Segment operating (loss) income
Segment assets
Equity investment in joint venture
Purchases of property and equipment
Depreciation and amortization
Basics
Branded
Consolidated
$
265,882
$
3,448
174,814
2,879
6,435
6,261
187,019
(5,109)
179,764
—
2,459
3,232
$
452,901
(1,661)
354,578
2,879
8,894
9,493
$
64,996
$
57,563
$
122,559
359
162,505
2,938
2,509
1,451
$
278,020
$
15,831
166,570
2,909
3,978
5,794
258,400
(13,020)
172,646
2,818
3,821
6,135
$
197
189,257
—
483
619
212,503
(1,928)
145,340
—
3,944
2,221
556
351,762
2,938
2,992
2,070
$
490,523
13,903
311,910
2,909
7,922
8,015
$
231,523
$
489,923
6,798
147,748
—
2,805
1,357
(6,222)
320,394
2,818
6,626
7,492
The following reconciles the segment operating income (loss) to the consolidated income (loss) before provision for (benefit from)
income taxes (in thousands):
Segment operating (loss) income
Unallocated interest expense
Consolidated (loss) income before (benefit from) provision for
income taxes
$
$
Period Ended
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
(1,661) $
5,792
556
$
13,903
$
1,033
3,997
(6,222)
4,132
(7,453) $
(477) $
9,906
$
(10,354)
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):
F-27
United States
Foreign
Total net sales
Period Ended
September 27,
2014
September 28,
2013
June 29,
2013
June 30,
2012
$
$
442,062
10,839
452,901
$
$
117,813
4,746
122,559
$
$
480,981
9,542
490,523
$
$
484,419
5,504
489,923
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):
United States
Honduras
El Salvador
Mexico
All foreign countries
As Of
September 27,
2014
September 28,
2013
June 29,
2013
$
22,919
$
22,929
$
23,011
14,234
2,689
1,163
18,086
13,525
3,055
1,091
17,671
12,144
3,163
1,128
16,435
Total long-lived assets, excluding goodwill and intangibles
$
41,005
$
40,600
$
39,446
NOTE 14—REPURCHASE OF COMMON STOCK
As of June 30, 2012, our Board of Directors had authorized management to use up to $20.0 million to repurchase stock in open market
transactions under our Stock Repurchase Program. On January 23, 2013, the Board of Directors authorized an additional $10.0 million
for share repurchases, bringing the aggregate total authorized to $30.0 million.
During fiscal years 2014, the transition period ended September 28, 2013, and fiscal years 2013 and 2012, we purchased 78,674 shares,
129,348 shares, 544,576 shares, and 168,120 shares, respectively, of our common stock for a total cost of $1.2 million, $2.1 million, $7.8
million, and $2.6 million, respectively. As of September 27, 2014, we have purchased 2,122,246 shares of common stock for an aggregate
of $25.3 million since the inception of the Stock Repurchase Program. All purchases were made at the discretion of management and
pursuant to the safe harbor provisions of SEC Rule 10b-18. As of September 27, 2014, $4.7 million remained available for future purchases
under our Stock Repurchase Program, which does not have an expiration date.
There were no purchases of our common stock for the quarter ended September 27, 2014.
NOTE 15—COMMITMENTS AND CONTINGENCIES
(a) Litigation
U.S. Consumer Product Safety Commission
We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring
hoodie product sourced, distributed and sold by Junkfood, and its compliance with applicable product safety standards. The Commission
subsequently investigated the matter, including whether Junkfood complied with the reporting requirements of the Consumer Product
Safety Act (“CPSA”), and the garments in question were ultimately recalled. On or about July 25, 2012, Junkfood received notification
from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that the staff will recommend to the
Commission a $900,000 civil penalty. We dispute the Commission's allegations.
On August 27, 2012, Junkfood responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses
and mitigating factors that could result in a much lower penalty, if any, ultimately imposed by a court should the matter proceed to
litigation. The Commission has since requested additional information regarding the matter and issued a subpoena for records and
information. While we will continue to defend against these allegations, we believe a risk of loss is probable. Based upon current
information, including the terms of previously published Commission settlements and related product recall notices, should the
Commission seek enforcement of the recommended civil penalty and ultimately prevail on its claims at trial we believe there is a range
of likely outcomes between $25,000 and an amount exceeding $900,000, along with interest and the Commission's costs and fees. During
the quarter ended June 30, 2012, we recorded a liability for what we believe to be the most likely outcome within this range, and this
liability remains recorded as of September 27, 2014.
F-28
California Wage and Hour Litigation
We were served with a complaint in the Superior Court of the State of California, County of Los Angeles, on or about March 13, 2013,
by a former employee of our Delta Activewear business unit at our Santa Fe Springs, California distribution facility alleging violations
of California wage and hour laws and unfair business practices with respect to meal and rest periods, compensation and wage statements,
and related claims (the "Complaint"). The Complaint is brought as a class action and seeks to include all of our Delta Activewear business
unit's current and certain former employees within California who are or were non-exempt under applicable wage and hour laws. The
Complaint also names as defendants Junkfood, Soffe, an independent contractor of Soffe, and a former employee, and sought to include
all current and certain former employees of Junkfood, Soffe and the Soffe independent contractor within California who are or were non-
exempt under applicable wage and hour laws. Delta Apparel, Inc. is now the only remaining defendant in this case. The Complaint seeks
injunctive and declaratory relief, monetary damages and compensation, penalties, attorneys' fees and costs, and pre-judgment interest.
The discovery process in this matter is ongoing and the issue of class certification remains pending.
On or about August 22, 2014, we were served with an additional complaint in the Superior Court of the State of California, County of
Los Angeles, by a former employee of Junkfood and two former employees of Soffe at our Santa Fe Springs, California distribution
facility alleging violations of California wage and hour laws and unfair business practices the same or substantially similar to those alleged
in the Complaint and seeking the same or substantially similar relief as sought in the Complaint. This complaint is brought as a class
action and seeks to include all current and certain former employees of Junkfood, Soffe, our Delta Activewear business unit, the Soffe
independent contractor named in the Complaint and an individual employee of such contractor within California who are or were non-
exempt under applicable wage and hour laws. Delta Apparel, Inc. and the contractor employee have since been voluntarily dismissed
from the case and the remaining defendants are Junkfood, Soffe, and the Soffe contractor. The discovery process in this matter is ongoing
and the issue of class certification remains pending.
While we will continue to vigorously defend these actions and believe we have a number of meritorious defenses to the claims alleged,
we believe a risk of loss is probable. Based upon current information, we believe there is a collective range of likely outcomes between
approximately $15,000 and $795,000. During the transition period September 28, 2013, we recorded a liability for what we believe to
be the most likely outcome within this range, and this liability remains recorded as of September 27, 2014. Depending upon the scope
and size of any certified class in either action and whether any of the claims alleged ultimately prevail at trial, we could be required to
pay amounts exceeding $795,000.
In addition, 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. At September 27, 2014, minimum payments under these contracts were as follows (in thousands):
Yarn
Natural Gas
Finished fabric
Finished products
(c) Letters of Credit
$
$
12,555
14
2,880
22,378
37,827
As of September 27, 2014, we had outstanding standby letters of credit totaling $0.4 million.
(d) Derivatives and Contingent Consideration
From time to time we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of
future interest rate changes. These financial instruments are not used for trading or speculative purposes. The following financial
instruments were outstanding as of September 27, 2014:
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Interest Rate Swap
Notational
Amount
$15 million
$15 million
$15 million
$15 million
LIBOR Rate
Maturity Date
1.1700%
1.6480%
1.0030%
1.4490%
9/9/2016
9/11/2017
9/19/2016
9/19/2017
Effective Date
9/9/2013
9/9/2013
9/19/2013
9/19/2013
F-29
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.
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
Period Ended
Interest Rate Swap
September 27, 2014
September 28, 2013
June 29, 2013
June 30, 2012
Contingent Consideration
September 27, 2014
September 28, 2013
Fair Value Measurements Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
$
$
$
$
(438)
(906)
(133)
(209)
(3,600)
(3,400)
— $
— $
— $
— $
—
—
(438)
(906)
(133)
(209)
—
—
—
—
— $
— $
(3,600)
(3,400)
The fair value of the interest rate swap agreements were 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. We used the historical
results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the
contingent consideration for Salt Life. Accordingly, the fair value measurement for contingent consideration falls in level 3 of the fair
value hierarchy. The contingent consideration for Salt Life is remeasured at the end of each reporting period. See Note 2(m) - Impairment
of Goodwill for further discussion.
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of September 27,
2014, September 28, 2013, and June 29, 2013 (in thousands).
Accrued expenses
Deferred tax liabilities
Other liabilities
Accumulated other comprehensive loss
(e) License Agreements
September 27,
2014
September 28,
2013
June 29,
2013
$
$
— $
168
(437)
(269) $
(100) $
349
(806)
(557) $
(49)
51
(84)
(82)
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 $11.1 million, $15.7 million, $15.2 million and $5.1 million during fiscal years 2014, 2013,
2012 and the transition period ended September 27, 2013, respectively.
At September 27, 2014, based on minimum sales requirements, future minimum royalty payments required under these license agreements
were as follows (in thousands):
F-30
Fiscal Year
2015
2016
2017
2018
2019 and thereafter
Amount
1,606
$
2,645
121
4
—
$
4,376
NOTE 16—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of our unaudited consolidated quarterly financial information for the fiscal years ended September 27,
2014, and June 29, 2013 (in thousands, except per share amounts):
2014 Quarter Ended
2013 Quarter Ended
December 28
March 29
June 28
September 27
September 29 December 29 March 30
June 29
$
100,012
$
114,458
$ 123,534
$
114,897
$
130,114
$
106,750
$ 120,092
$ 133,567
Net sales
Gross profit
Operating (loss) income
Net (loss) earnings
19,042
(674)
(1,597)
22,279
834
(763)
22,738
1,592
2,166
21,682
(3,412)
(765)
31,853
5,836
3,564
Basic EPS
Diluted EPS
$
$
(0.20) $
(0.20) $
(0.10) $
(0.10) $
0.27
0.27
$
$
(0.10) $
(0.10) $
0.42
0.41
$
$
NOTE 17—SUBSEQUENT EVENTS
None.
22,755
26,415
28,486
846
46
0.01
0.01
2,564
1,608
$
$
0.20
0.19
$
$
4,657
3,966
0.49
0.48
Section 15 (a)(2) SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
DELTA APPAREL, INC. AND SUBSIDIARIES
(In thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
2014
Transition Period
2013
2012
RETURNS AND ALLOWANCES
2014
Transition Period
2013
2012
TOTAL RESERVES FOR ALLOWANCES
2014
Transition Period
2013
2012
$
$
$
Beginning
Balance
Acquisition
Accounting
Expense
$
851
656
750
658
— $
—
—
—
467
1,082
62
280
Write-Offs/
Credits Issued
$
(271) $
(887)
(156)
(188)
Ending
Balance
1,047
851
656
750
Beginning
Balance
Acquisition
Accounting
Expense
$
2,108
1,143
1,562
1,124
— $
—
—
—
12,425
3,015
8,154
9,864
Write-Offs/
Credits Issued
$
(12,420) $
(2,050)
(8,573)
(9,426)
Ending
Balance
2,113
2,108
1,143
1,562
Beginning
Balance
Acquisition
Accounting
Expense
$
2,959
1,799
2,312
1,782
— $
—
—
—
12,892
4,097
8,216
10,144
Write-Offs/
Credits Issued
$
(12,691) $
(2,937)
(8,729)
(9,614)
Ending
Balance
3,160
2,959
1,799
2,312
F-31
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EXHIBIT 21
SUBSIDIARIES OF DELTA APPAREL, INC.
Listed below are the subsidiaries of Delta Apparel, Inc.:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
M. J. Soffe, LLC, a North Carolina limited liability company.
Junkfood Clothing Company, a Georgia corporation.
To The Game, LLC, a Georgia limited liability company.
Art Gun, LLC, a Georgia limited liability company.
Delta Apparel Honduras, S.A., a Honduran sociedad anónima.
Delta Campeche, S.A. de C.V., a Mexican sociedad anónima de capital variable.
Delta Cortes, S.A., a Honduran sociedad anónima.
Campeche Sportswear, S. de R.L. de C.V., a Mexican sociedad de responsabilidad de capital variable.
Textiles La Paz, LLC, a North Carolina limited liability company.
(10)
Ceiba Textiles, S. de R.L., a Honduran sociedad de responsabilidad limitada.
(11)
Atled Holding Company Honduras, S. de R.L., a Honduran sociedad de responsabilidad limitada.
(12)
La Paz Honduras, S. de R.L., a Honduran sociedad de responsabilidad limitada.
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Delta Apparel, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-61190 and
No. 333-172018) on Form S-8 of Delta Apparel, Inc. of our reports dated December 10, 2014,
with respect to the consolidated balance sheets of Delta Apparel, Inc. and subsidiaries as of
September 27, 2014 and September 28, 2013, and the related consolidated statements of
operations, comprehensive (loss) income, shareholders’ equity, and cash flows for the fiscal year
ended September 27, 2014 and the 13-week transition period ended September 28, 2013, and
related financial statement schedule, and the effectiveness of internal control over financial
reporting as of September 27, 2014, which reports appear in the September 27, 2014 annual
report on Form 10-K of Delta Apparel, Inc..
Greenville, South Carolina
December 10, 2014
/s/ KPMG LLP
EXHIBIT 23.2
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-61190) pertaining to the Delta Apparel, Inc. 2000
Stock Option Plan and Delta Apparel, Inc. Incentive Stock Award Plan, and
(2) Registration Statement (Form S-8 No. 333-172018) pertaining to the Delta Apparel, Inc. 2010
Stock Plan
of our report dated August 29, 2013, with respect to the consolidated financial statements and
schedule of Delta Apparel, Inc. and subsidiaries as of June 29, 2013 and for each of the two years
in the period ended June 29, 2013 included in this Annual Report (Form 10-K) of Delta Apparel,
Inc. and subsidiaries for the year ended September 27, 2014.
/s/ Ernst & Young LLP
Atlanta, Georgia
December 10, 2014
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.
Date: December 10, 2014
/s/ Robert W. Humphreys
Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL 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 31.2
I, Deborah H. Merrill, 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.
Date: December 10, 2014
/s/ Deborah H. Merrill
Vice President, Chief Financial Officer and Treasurer
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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:
1.
2.
The Annual Report on Form 10-K for the fiscal year ended September 27, 2014 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.
Date: December 10, 2014
/s/ Robert W. Humphreys
Robert W. Humphreys
Chairman and Chief Executive Officer
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.
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Deborah H.
Merrill, the Chief Financial Officer of Delta Apparel, Inc. (the “Company”), hereby certifies that to the best of her knowledge:
1.
2.
The Annual Report on Form 10-K for the fiscal year ended September 27, 2014 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.
Date: December 10, 2014
/s/ Deborah H. Merrill
Deborah H. Merrill
Vice President, Chief Financial Officer and Treasurer
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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Delta Apparel, Inc.
EXECUTIVE OFFICERS
BOARD OF DIRECTORS
Robert
W.
Humphreys
Chairman and Chief Executive Officer
Deborah
H.
Merrill
Vice President, Chief Financial Officer and Treasurer
Martha
M.
Watson
Vice President and Chief Human Resources Officer
James
A.
Cochran
Chief Financial Officer
Amendia, Inc. and Vivex Biomedical, Inc.
Sam
P.
Cortez
Principal
KCL Development, LLC
Dr.
Elizabeth
J.
Gatewood
Associate Director
Center for Enterprise Research and Education
Wake Forest University
G.
Jay
Gogue
President
Auburn University
Robert
W.
Humphreys
Chairman and Chief Executive Officer
Delta Apparel, Inc.
David
T.
Peterson
Chairman Emeritus
The North Highland Company
Suzanne
B.
Rudy
Vice President, Compliance Officer and Treasurer
RF Micro Devices, Inc.
Robert
E.
Staton,
Sr.
Consultant
Coleman Lew + Associates
Statements and other information in this Annual Report that are not reported financial results or other historical information are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. 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 or actions to differ materially from those set forth in or implied by the forward-looking statements. The risks and uncertainties include, among
others, the volatility and uncertainty of cotton and other raw material prices; the general U.S. and international economic conditions; the competitive conditions in the apparel
industry; restrictions on our ability to borrow capital or service our indebtedness; inability to successfully implement strategic initiatives; deterioration in the financial condition of
our customers and suppliers and changes in the operations and strategies of our customers and suppliers; our ability to predict or react to changing consumer preferences or trends;
pricing pressures and the implementation of cost reduction strategies; changes in the economic, political and social stability at our offshore locations; our ability to attract and retain
key management; the effect of unseasonable weather conditions on purchases of our products; significant changes in our effective tax rate; interest rate fluctuations increasing our
obligations under our variable rate indebtedness; the ability to raise additional capital; the ability to grow, achieve synergies and realize the expected profitability of recent
acquisitions; the volatility and uncertainty of energy and fuel prices; material disruptions in our information systems related to our business operations; data security or privacy
breaches; significant interruptions within our manufacturing or distribution operations; changes in or our ability to comply with safety, health and environmental regulations;
significant litigation in either domestic or international jurisdictions: the ability to protect our trademarks and other intellectual property; the ability to obtain and renew our
significant license agreements; the impairment of acquired intangible assets; changes in e-commerce laws and regulations; changes in international trade regulations; changes in
employment laws or regulations or our relationship with employees; cost increases and reduction in future profitability due to recent healthcare legislation; foreign currency exchange
rate fluctuations; violations of manufacturing standards or labor laws or unethical business practices by our suppliers and independent contractors; the illiquidity of our shares; price
volatility in our shares and the general volatility of the stock market; and the costs required to comply with the regulatory landscape regarding public company governance and
disclosure; 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. Further, any forward-looking statements are made only as of the date of this Annual Report and we do
not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any such statements or any projected results will not be realized or that any
contemplated strategic initiatives will not be implemented.
Marketing Groups
Delta Catalog
2750 Premiere Parkway - Suite 100
Duluth, GA 30097
www.deltaapparel.com
Soffe
One Soffe Drive - Suite 501
Fayetteville, NC 28312
www.soffe.com
The Game
16 Downing Drive
Phenix City, AL 36869
www.thegameheadwear.com
Junk Food
5770 W. Jefferson
Los Angeles, CA 90016
www.junkfoodclothing.com
FunTees
4735 Corporate Drive NW
Suite 100
Concord, NC 28027
www.funtees.com
Intensity
One Soffe Drive - Suite 501
Fayetteville, NC 28312
www.intensityathletics.com
American Threads
16 Downing Drive
Phenix City, AL 36869
www.thegameheadwear.com/
americanthreads/
Salt Life
240 S. Third
Jacksonville, FL 32250
www.saltlife.com
Art Gun, LLC
16085 NW 52nd Avenue
Miami Gardens, FL 33014
. b i z
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 MKT under the symbol DLA
Independent Registered Public Accounting Firm
KPMG LLP
40 West Broad Street - Ste 260
Greenville, SC 29601
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 Wednesday, February 4, 2015 at 8:30 a.m. in our office at 2750 Premiere Parkway, Duluth, Georgia.
Company Profile
Delta Apparel, Inc. is an international design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle basic and
branded activewear apparel and headwear. Our primary brands include Soffe, Junk Food, The Game, Intensity, American Threads and Salt Life, and we
have licensing agreements with 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 MKT exchange under the symbol “DLA”. Additional information is available at www.deltaapparelinc.ccom.
Delta Apparel, Inc.
322 S. Main Street
Greenville, SC 29601
(864) 232-5200
(864) 232-5199 - fax
www.deltaapparelinc.com