A N N U A L
R E P O R T
2019
D e l t a A p p a r e l , I n c .
DLA FY19 Annual Report 12-2-19.indd 1
12/10/19 7:14 PM
L e t t e r t o S h a r e h o l d e r s
Fiscal year 2019 was another year of growth and transformation for our Company. We continued to implement our long-term strategy of building additional channels
of distribution, providing value-adding services to develop closer relationships with our customers, and investing in technologies and expertise to differentiate us from
our competition. Although the changing buying habits of consumers around the globe continue to present challenges for many retailers, we were successful in further
expanding our relationships with both our retail and wholesale partners and also continued to increase our direct-to-consumer business during the year.
We grew sales in all of our channels of distribution for the year, resulting in total sales of $431.7 million, an increase of 9.2% from sales of $395.5 million in the prior
year. We also ended the year on a strong note with sales growth of 16% and a 40% improvement in operating income for our fourth quarter.
The continued development of our digital print platform was a major focus area during fiscal year 2019. We completed the acquisition of SSI Digital Print Services at
the beginning of the year and were able to use this expanded capacity to drive record sales of digitally printed garments in the important holiday season. During the
course of the year we integrated SSI into our DTG2Go platform and made further investments in proprietary technology to enhance our business and provide superior
customer service. We were pleased to be the beta test site for new technology designed to digitally print on 100% polyester garments. Our development work was
successful and enabled us to both be first-to-market with this technology and expand into the athletic wear and uniform marketplace, which is a new channel for us
that we believe will become a larger part of our business in the upcoming year. Also during 2019, we added digital print equipment to our existing Cranbury, New
Jersey distribution center that will allow us to service the important northeastern United States with next day service. We also opened a new distribution center in
Dallas, Texas and equipped this state-of-the-art facility with digital print capability that is
also available for the 2019 holiday season. With our current DTG2Go footprint we can
now service over 50% of the U.S. population with one-day shipping and approximately
99% of the population with two-day shipping. This geographic platform, coupled with
our service capabilities, makes us the clear leader in digital print services on apparel
and we are positioned to be the key digital print and technology supply chain partner for
all channels of distribution for graphic embellished activewear as new customers adopt
on-demand fulfillment.
“With our current DTG2Go
footprint we can now service
over 50% of the U.S. population
with one-day shipping...”
We had another solid year in our Activewear business and took a number of significant steps designed to further grow that business. We continued to expand the
fashion basics product offerings within our catalog business and diversified our customer base in our FunTees private label business, resulting in record units shipped
during the year and overall revenue growth over the prior fiscal year. As I mentioned, we have invested in additional distribution locations and are leveraging our cost
structure and providing further value-adding services by installing DTG2Go print operations within the new facilities. During the year we incorporated the Soffe sales,
merchandising and marketing functions within the Activewear team to leverage our customer relationships and go-to-market strategies. We are also expanding the
output of our textile and sewing facilities to meet current and expected future demand. All of these steps are expected to have a material impact on our revenue and
profitability as we progress through fiscal 2020.
DLA FY19 Annual Report 12-2-19.indd 2
12/10/19 7:14 PM
In conjunction with our fiscal year-end, we successfully completed a major business system installation within our Activewear business to further deepen our
relationships with customers and provide more efficient service. This milestone allows us to begin implementation of our longer-term model involving the
transformation of our Activewear business to become a vertically-integrated distributor marketing not only items that we manufacture, but also additional brands
and products manufactured by selected partners. Over the next several years, this initiative should provide significant growth opportunities with existing and new
customers, as it positions us to target an important new portion of the marketplace that requires a broader mix of apparel and accessories to meet their needs.
In support of our strategy to provide higher service levels to our customers
and build more direct relationships with consumers of our branded products,
we continued to invest in our ecommerce platforms by updating the software
systems that support our two largest ecommerce sites – www.deltaapparel.com
and www.saltlife.com. Our new platforms provide a higher level of service and
support emerging consumer purchasing trends reliant on more sophisticated
product descriptions and merchandising strategies as well as enhanced support
of mobile devices. We expect these trends to drive buying habits for years to
come and for these direct-to-consumer sales channels to grow at a double-digit rate going forward. We take pride in managing our ecommerce sales channels to
produce not only top-line sales growth but also strong operating margins for our businesses, and we achieved another record year of revenue and profitability in
this channel over the past year.
“Our new ecommerce platforms
provide a higher level of service
and support emerging consumer
purchasing trends...”
Our Salt Life business further broadened its revenue base during fiscal 2019 and also enjoyed strong consumer engagement on all of its social media platforms
that translated into higher demand for our products. We have a true omni-channel model supporting the Salt Life brand that is growing sales for our wholesale
customers as well as driving record direct-to-consumer sales through our Salt Life branded retail stores and our Salt Life ecommerce site. We expanded our
Salt Life retail footprint with a new location in the Mall of Florida in Orlando and committed to new
locations in Key West, Florida, Charleston, South Carolina, and Destin, Florida that we expect to open
in the first half of fiscal year 2020. In addition, we expanded our sales of Salt Life Lager by adding
distribution in Georgia, Alabama, Tennessee and South Carolina, and continue to see this branded
beer offering as a natural extension of our lifestyle brand that adds millions of impressions annually to
our target audience. Our Salt Life restaurant licensee also opened an additional flagship location in
“We have a true omni-
channel model supporting
the Salt Life brand...”
Fernandina Beach, Florida, driving another year of record restaurant sales.
Our Coast brand now operates within our Salt Life segment, leveraging the same management team and sales, marketing and distribution strategies. While still
a small brand that we are nurturing, we feel there is a great opportunity to build Coast into a niche lifestyle brand that targets a different demographic segment
than our current offerings. We developed and launched new products and designs for Fall 2019 and are encouraged with the initial response from our targeted
customers.
Our share repurchase program continues to offer us an additional strategy for investing our excess cash flow, and during fiscal year 2019 we spent $2.7 million
to purchase 141,501 of our shares in the open market at an average cost of $19.33 per share. At fiscal year-end we had an additional $9.5 million authorized by
our Board of Directors for share repurchases.
We are excited about the many opportunities for our business as we transition into fiscal year
2020. The investments we have made in compelling products, new technologies, and enhanced
business and customer engagement should drive organic sales growth across our businesses
along with improved operating margins. While we see continued cost pressures from certain
tariffs and increased energy, transportation and labor costs, moderating raw materials costs,
productivity gains and innovative product development should mitigate some of these dynamics.
“We are excited about the
many opportunities for our
business...”
During the past year, we added approximately 1,000 new jobs in our Company spread across the United States, Honduras, El Salvador and Mexico, bringing our
total employment to approximately 8,600 associates. Their hard work and commitment to our Company objectives are key ingredients in our ability to meet our
business objectives and grow successfully. We take great pride in the jobs, benefits and advancement opportunities we provide our associates and are grateful
for their loyalty and dedication to Delta Apparel. Our Board of Directors, and the diverse backgrounds, viewpoints and leadership experiences it brings to the table,
continues to provide support and appropriately challenge our management team while also setting a high standard for transparency and corporate governance.
We appreciate your continued support of Delta Apparel. We hope you will join us for our Annual Meeting of Shareholders, which will be held at our offices in
Duluth, Georgia, on February 6, 2020, at 8:30 a.m. local time. At the meeting we will present a final review of our fiscal year 2019 results, address the items put to
shareholder vote, and provide an update on our outlook for fiscal year 2020.
Robert W. Humphreys
Chairman and Chief Executive Officer
DLA FY19 Annual Report 12-2-19.indd 3
12/10/19 7:14 PM
F i n a n c i a l H i g h l i g h t s
$432m
$17m
$1.38
Net Sales
Operating Income
(Adjusted)*
Diluted EPS
(Adjusted)*
Net Sales
Delta Apparel, Inc. $432m
Delta Group
$389m
9.3%
Net Sales
Sales Growth
Salt Life Group
$43m
8.1%
* Adjusted for discrete gain of $1.3 million or $0.10 per share from the settlement of a commercial litigation matter and a discrete expense of $2.5 million or $0.31 per share associated with the resolution of
litigation stemming from the 2016 bankruptcy of a customer.
DLA FY19 Annual Report 12-2-19.indd 4
12/10/19 7:14 PM
Delta Apparel, Inc.
Annual Report
Fiscal Year 2019
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of Delta Apparel, Inc. (the “Company”). We
may from time to time make written or oral statements that are “forward-looking,” including statements contained in this Annual Report and other filings with the Securities and
Exchange Commission (the “SEC”), in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address
activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”,
“forecast”, “anticipate”, “expect”, “intend”, “seek’, “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify
forward-looking statements. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and
are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking
statements are subject to a number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by
the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. A detailed discussion of important factors that have the potential to
cause our actual results to differ materially from our expectations is contained in Part 1 under the subheading of “Item 1A. Risk Factors” in our Annual Report on Form 10-K
filed with the SEC on November 21, 2019. Any forward-looking statements in this Annual Report 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 to publicly update or revise the forward-looking
statements, except as required by the federal securities laws.
Part I
Part II
Part III
Part IV
TABLE OF CONTENTS
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases
of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Offices 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
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
EX-4.3
EX-10.2.8
EX-10.15
EX-10.22
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
2
6
12
13
14
14
14
15
15
21
21
21
21
24
24
24
24
25
25
25
29
30
[This Page Intentionally Left Blank]
Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on
behalf of the Company. We may from time to time make written or oral statements that are “forward-looking,” including
statements contained in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders.
All statements, other than statements of historical fact, which address activities, events or developments that we expect or
anticipate will or may occur in the future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”,
“anticipate”, “expect”, “intend”, “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or
intentions, are intended to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our
current expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and
accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks
and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the
forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that
could cause our actual results and financial condition to differ materially from those indicated in forward-looking statements
include, among others, the following:
•
•
•
•
•
the volatility and uncertainty of cotton and other raw material prices and availability;
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;
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 and trends;
our ability to successfully open and operate new retail stores in a timely and cost-effective manner;
changes in economic, political, social or climatic stability at our offshore locations;
significant interruptions or disruptions within our manufacturing or distribution facilities or other operations;
our ability to attract and retain key management;
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 acquisitions;
the volatility and uncertainty of energy, fuel and related costs;
•
•
•
•
•
•
•
•
•
•
• material disruptions in our information systems related to our business operations;
•
•
•
•
•
•
•
•
•
•
compromises of our data security;
significant litigation in either domestic or international jurisdictions;
recalls, claims and negative publicity associated with product liability issues;
the ability to protect our trademarks and other intellectual property;
the impairment of acquired intangible assets;
changes in international trade regulations;
our ability to comply with trade regulations;
changes in employment laws or regulations or our relationship with employees;
foreign currency exchange rate fluctuations;
negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices
by our suppliers and independent contractors;
the illiquidity of our shares; and
price volatility in our shares and the general volatility of the stock market.
•
•
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our
expectations is set forth in Part 1 under the subheading "Risk Factors." Any forward-looking statements in this Annual Report on
Form 10-K do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-
looking statements are made only as of the date of this Annual Report on Form 10-K, and we do not undertake to publicly update
or revise the forward-looking statements, except as required by the federal securities laws.
1
Item 1. Business
Overview
Part I
Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel,"
"we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 8,500
employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel
products under our primary brands of Salt Life®, COAST®, Soffe®, and Delta. We are a market leader in the direct-to-garment
digital print and fulfillment industry, bringing DTG2Go technology and innovation to the supply chain of our customers. We
specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting
goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-
retailers, the U.S. military, and through our business-to-business ecommerce sites. Our products are also made available direct-to-
consumer on our websites and in our branded retail stores. This diversified distribution allows us to capitalize on our strengths to
provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span
multiple retail channels.
We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in
our owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and
react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El
Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our
distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping
on our catalog products and weekly replenishments to retailers.
Through several acquisitions, we became a diversified branded apparel company with well-recognized brands in our portfolio,
expanded product offerings, broadened distribution channels and customer reach, and increased leverage of our vertical
manufacturing platform. We continue to monitor and evaluate our portfolio, making strategic acquisitions or exiting markets as
needed to support our long-term growth and profitability goals.
We were incorporated in Georgia in 1999, and our headquarters is located in Greenville, South Carolina. We operate on a 52-53
week fiscal year ending on the Saturday closest to September 30. All references to "2019" and "2018" relate to the 52 week fiscal
years ended on September 28, 2019, and September 29, 2018, respectively. Our common stock trades on the NYSE American
under the symbol “DLA." We are filing as a smaller reporting company for our 2019 fiscal year end as our public float was less
than the $250 million threshold on the last day of our second quarter.
We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The
information found on our website is not part of this, or any other, report that we file with or furnish to the SEC. In addition, we will
provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be
directed to: Investor Relations Department, Delta Apparel, Inc., 322 South Main Street, Greenville, South Carolina 29601.
Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.
Segments, Products, Brands, and Customers
Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which
the business is managed and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker.
Delta Group
The Delta Group is comprised of the following business units primarily focused on core activewear styles: Delta Activewear
(encompassing our core Delta Catalog business and FunTees private label business), DTG2Go, and Soffe.
Delta Activewear
Delta Activewear has been a preferred supplier to the market for core basic tee shirts for many years. Our Delta Pro Weight® and
Magnum Weight® products are a huge part of our heritage. These lines offer a diverse selection of mid-weight and heavier-weight,
100% cotton fabrications. We also provide innovative products like our Delta Soft, Delta Dri performance, Ringspun, and Fleece
lines. After decades of being a key source for casual and sport basics done right, three years ago we decided to expand our
industry-leading brand and raised the bar even higher with the introduction of the Delta Platinum line. Our ‘cut above the rest’
collection provides a fresh, fashionable edge to Delta’s product assortment. More luxurious in look and feel, Platinum
silhouettes take their refined attitude uptown, downtown, to brunch, to the office and anywhere in between. Service is a key
component of Delta Activewear. We provide superior service to our customers by shipping the same day of order receipt down to
a piece level, allowing customers to purchase exactly what they need when they need it. We are also excited to be offering a
seamless solution for small-run decoration needs with our on-demand digital print services, powered by DTG2Go. Through our
2
FunTees business, we serve our customers as their supply chain partner, from product development to shipment of their branded
products, with the majority of products being sold with value-added services including embellishment, hangers, hangtags and
ticketing, so that they are ready for retail sale to the end consumers. We assist our customers in managing their production and
inventory needs and provide technology tools to help them manage and grow their business. We sell our products to a diversified
audience, including sporting goods retailers, large licensed screen printers, specialty and resort stores, and ad-specialty and
promotional products businesses. We also service major branded sportswear companies, trendy regional brands, retailers, and
sports-licensed apparel marketers.
DTG2Go
We are a market leader in the direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the
supply chain of our many customers. We use highly-automated factory processes and our proprietary software to deliver on-
demand, digitally printed
seven
fulfillment facilities throughout the United States, DTG2Go offers a robust digital supply chain to ship custom graphic products
within 24 to 48 hours to consumers in the United States and to over 100 countries worldwide. DTG2Go services the fast-growing
e-retailer channels, as well as the ad-specialty, promotional products, screen print, traditional retail, social media, and licensed
apparel marketplaces, among others.
consumers on behalf of our
customers. Utilizing
apparel direct
its
to
Soffe
Founded in 1946, Soffe is an iconic, heritage brand that designs and produces high quality activewear for spirit makers and record
breakers. Soffe sells a wide range of activewear products for women, men, juniors and children with appealing graphics anchored
in today's trends. Widely known for the original “cheer short” with the signature roll-down waistband, Soffe also offers spirit wear
and team wear that outfits cheerleaders, dancers, and gymnasts around the world. Intensity by Soffe leads the way in female fit,
fashion-forward team uniforms and features the first female-fit fast pitch pant, in addition to practice gear and accessories. Layered
with Soffe's female presentation are styles that seamlessly transition from studio to street-wear for all day comfort. Soffe's heritage
is anchored in the military, and we continue to be a proud supplier to both active duty and veteran United States military personnel
worldwide. The men's assortment features the tagline "anchored in the military, grounded in training" and offers everything from
physical training gear certified by the respective branches of the military, classic base layers that include the favored 3-pack tees,
and the iconic "ranger panty." We apply graphics to Soffe activewear using screen print and digital print technology in our North
Carolina facility. Soffe has diverse distribution channels which include all military branches, as well as big box and independent
sporting goods retailers, department stores, team dealers, school uniform suppliers, and specialty stores. We also offer our Soffe
products direct to consumers at www.soffe.com and at our branded retail stores.
Salt Life Group
The Salt Life Group is comprised of our lifestyle brands focused on a broad range of apparel garments, headwear and related
accessories to meet consumer preferences and fashion trends, and includes our Salt Life and Coast business units.
Salt Life
Salt Life is an authentic, aspirational lifestyle brand that embraces those who love the ocean and all it offers, from surfing, fishing,
and diving to beach fun and sun-soaked relaxation. The Salt Life brand combines function and fashion with a tailored fit for the
active lifestyles of those that “live the Salt Life.” With increased worldwide appeal, Salt Life continues to expand its product
assortment outside of apparel, now offering swimwear, sunglasses, bags, and accessories as well as its own craft beer, Salt Life
Lager. From its first merchandise offerings in 2006, Salt Life has grown distribution to include surf shops, specialty stores,
department stores, and outdoor retailers to complement our own network of branded retail stores. In 2019, we upgraded the Salt
Life ecommerce site at www.saltlife.com to a new technology platform, providing our customers a seamless, omni-channel
experience with the Salt Life brand.
Coast
Offering a full line of premium casual apparel, Coast is as much a testament to good times and carefree afternoons as it is to
superior quality, custom fit, and maximum comfort. The Coast collection is designed to bring the coastal experience of weekends
and summers at the beach to everyday life, keeping those that celebrate the relaxed, yet sophisticated coastal lifestyle fully
connected, year-round. Coast Apparel is available direct to consumer through our branded retail locations and our ecommerce site
at www.coastapparel.com.
See Note 13 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" for additional information regarding reportable segments.
3
Manufacturing, Sourcing, and Distribution
The vast majority of our products are manufactured or sewn in facilities that we own or lease and operate to support both the Delta
Group and Salt Life Group. To a lesser extent, we also use third-party contractors and suppliers to supplement our requirements.
Our vertically integrated manufacturing operations include a textile facility and sew and decoration facilities.
Our manufacturing operations begin with the purchase of yarn and other raw materials from third-party suppliers. We have
operated with a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC (collectively "Parkdale") to supply our
yarn requirements since 2005, with our existing agreement running through December 31, 2021. Under the supply agreement, we
purchase all of our yarn requirements for use in our manufacturing operations from Parkdale, excluding yarns that Parkdale does
not manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of
cotton, as reported by the New York Cotton Exchange, plus a fixed conversion cost. We set future cotton prices with purchase
commitments as a component of the purchase price in advance of the shipment of finished yarn from Parkdale.
We manufacture fabrics in our leased textile facility located near San Pedro Sula, Honduras. 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. In fiscal years 2019 and 2018, we manufactured over 80% of fabrics used in our internally-produced garments. The
manufacturing process continues at one of our six apparel manufacturing facilities where fabric is cut and sewn into finished
garments. These owned or leased facilities are located domestically (two in North Carolina) and internationally (two in Honduras,
one in El Salvador and one in Mexico). In fiscal years 2019 and 2018, approximately 90% or more of our manufactured products
were sewn in our owned or leased manufacturing facilities. The remaining products were sewn by third-party contractors located
primarily in the Caribbean Basin. To supplement our internal manufacturing platform, we purchase products from third-party
global suppliers. In fiscal years 2019 and 2018, we sourced less than 20% of our total products from third parties.
Many of the garments will be decorated using a screen printing or digital printing technology as well as retail-packaged, including
ticketing, hang tags, and hangers. These services can be performed domestically for quick-turn service or internationally in our
facilities in El Salvador and Mexico. We offer digital fulfillment services, powered by DTG2Go, at seven domestic facilities,
including three such facilities that are integrated with Delta Group distribution centers. These facilities support our strategy of
establishing integrated fulfillment locations that combine our DTG2Go state-of-the-art digital platform with our Delta Activewear
business's supply of fashion and core basic garments. Furthermore, these facilities create a seamless nationwide footprint allowing
us to reach over half of all U.S. consumers with one-day shipping.
At fiscal 2019 year end, we operated nine distribution facilities strategically located throughout the United States that carry in-
stock inventory for shipment to customers, with most shipments made via third-party carriers. To better serve customers, we allow
products to be ordered by the piece, dozen, or full case quantity, and we aggressively leverage our strengths and efficiencies to
meet the quick-turn needs of our customers. Because a significant portion of our business consists of at-once replenishment, we
believe that backlog order levels do not provide a general indication of future sales.
See Item 2. Properties for more information about each of our primary manufacturing and distribution facilities.
Sales & Marketing
Our sales and marketing functions consist of both employed and independent sales representatives and agencies located throughout
the country. Our sales teams service specialty and boutique shops, upscale and traditional department stores, mid-tier retailers,
sporting goods stores, e-retailers and the U.S. military. Our brands leverage both in-house and outsourced marketing
communication professionals to amplify their lifestyle statements.
The majority of our apparel products are produced based on forecasts to permit quick shipments to our customers; however, our
private label programs are generally made only to order. During fiscal year 2019, we shipped our products to approximately 9,000
customers, many of whom have numerous retail "doors." No single customer accounted for more than 10% of our sales in fiscal
years 2019 or 2018, and our strategy is to not become dependent on any single customer. Revenues attributable to sales of our
products in foreign countries, as a percentage of our consolidated net sales, represented approximately 1% in both fiscal years
2019 and 2018.
Trademarks and License Agreements
We own several well-recognized trademarks that are important to our business. Salt Life® is an authentic, aspirational lifestyle
brand that embraces those who love the ocean and everything associated with living the "Salt Life". Soffe® has stood for quality
and value in the athletic and activewear market for more than sixty years. Our other registered trademarks include COAST®,
Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design. Our trademarks are valuable assets that
differentiate the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against
infringement. While our strategy is to own the intellectual property we use within our business, the Soffe business unit is an
4
official licensee for branches of the United States military. We believe these license agreements are important given the military
heritage of Soffe.
Competition
As a vertically-integrated apparel company, we have numerous competitors with respect to the manufacturing and sale of apparel
products in both domestic and international markets, many of which are larger and have more brand recognition and greater
marketing budgets. Some of these competitors may benefit from lower production costs that can result from greater operational
scale, a differing supply chain footprint, or trade-related agreements and other macroeconomic factors that may enable them to
compete more effectively.
Competition in our Delta Group segment is generally based upon price, service, delivery time, and quality with the relative
importance of each factor dependent upon the needs of the particular customer and the specific product offering. These businesses
are highly price competitive 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 generally 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. We believe our
Western Hemisphere-centered manufacturing platform enables us to compete with our competitors by providing an outlet for
customers to diversify their sourcing footprints and reduce time to market. Furthermore, as an integrated entity with design,
manufacturing, sourcing, and marketing capabilities, we believe the interdependencies within our portfolio provide cost, quality,
and speed to market advantages that enable us to be more competitive.
We believe that competition within our Salt Life Group segment is based primarily upon brand recognition, design, and consumer
preference. We focus on sustaining the strong reputation of our lifestyle brands by adapting our product offerings to changes in
fashion trends and consumer preferences. We aim to keep our merchandise offerings fresh with unique artwork and new designs
and support the integrated lifestyle statement of our products through effective consumer marketing. We believe that our favorable
competitive position stems from strong consumer recognition and brand loyalty, the high quality of our products, and our
flexibility and process control, which drive product consistency. We believe that our ability to remain competitive in the areas of
quality, price, design, marketing, product development, manufacturing, technology and distribution will, in large part, determine
our future success.
Seasonality
Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some
seasonality. By diversifying our product lines over the years, we have reduced the overall seasonality of our business. Sales in our
third fiscal quarter (quarter ended in June) are typically the highest and represented 27% of fiscal year 2019 net sales. Our first
fiscal quarter (quarter ended in December) typically is the lowest and represented 24% of fiscal year 2019 net sales. Consumer
demand for apparel is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with
the overall level of discretionary consumer spending. These levels of demand change as regional, domestic and international
economic conditions change. Therefore, the distribution of sales by quarter in fiscal year 2019 may not be indicative of the
distribution in future years.
Employees and Social Responsibility
As of September 28, 2019, we employed approximately 8,500 full time employees, of whom approximately 1,150 were employed
in the United States. A total of approximately 3,150 employees at two of our facilities in San Pedro Sula, Honduras, are party to
multi-year collective bargaining agreements. We have historically conducted our operations without significant labor disruptions
and believe that our relations with our employees are good. We have invested significant time and resources to have the working
conditions in all of our facilities meet or exceed the standards imposed by governing laws and regulations. All of our
manufacturing facilities in Honduras, El Salvador and Mexico are Worldwide Responsible Accredited Production (WRAP)
certified. We are a Category C affiliate with the Fair Labor Association (FLA), which 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/or charitable organizations in 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 very small quantities of hazardous
waste, which are either recycled or disposed of off-site.
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
5
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.
Item 1A. Risk Factors
We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties,
including, but not limited to, the risks identified below. The following risks, as well as risks described elsewhere in this report or in
our other filings with the SEC, could materially affect our business, financial condition or operating results and the value of
Company securities held by investors and should be carefully considered in evaluating our Company and the forward-looking
statements contained in this report or future reports. The risks described below are not the only risks facing Delta Apparel.
Additional risks not presently known to us or that we currently do not view as material may become material and may impair our
business operations. Any of these risks could cause, or contribute to causing, our actual results to differ materially from
expectations.
The price and availability of purchased yarn and other raw materials is prone to significant fluctuations and volatility.
Cotton is the primary raw material used in the manufacture of our apparel products. As is the case with other commodities, the
price of cotton fluctuates and is affected by weather, consumer demand, speculation on the commodities market, and other factors
that are generally unpredictable and beyond our control. As described under the heading “Business–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. In the past, the Company, and the apparel industry as a whole, has experienced increases in cotton
prices and price volatility that we were unable to pass through to our customers, with the higher cost of cotton negatively
impacting the gross margins in our Activewear and other businesses by significant amounts.
In addition, if Parkdale’s operations are disrupted and Parkdale is not able to provide us with our yarn requirements, we may need
to obtain yarn from alternative sources. We may not be able to enter into short-term arrangements with substitute suppliers on
terms as favorable as our current terms with Parkdale, which could negatively affect our business.
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, the availability of products can change, which could require us to adjust dye and chemical
formulations. In certain instances, these adjustments can increase manufacturing costs, negatively impacting our business and
results of operations.
Economic conditions may adversely impact demand for our products. The apparel industry is cyclical and dependent upon the
overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer
spending. These levels of demand change as regional, domestic and international economic conditions change. These economic
conditions include, but are not limited to, employment levels, energy costs, interest rates, tax rates, inflation, personal debt levels,
and uncertainty about the future, with many of these factors outside of our control. 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 the related accessory and other items we provide is highly competitive and includes many new
competitors as well as increased competition from established companies, some of which are larger or more diversified and may
have greater financial resources. Many of our competitors have larger sales forces, stronger brand recognition among consumers,
bigger advertising budgets, and greater economies of scale. We compete with these companies primarily on the basis of price,
quality, service and brand recognition, all of which are important competitive factors in the apparel industry. Our ability to
maintain our competitive edge depends upon these factors, as well as our ability to deliver new products at the best value for the
6
customer, maintain positive brand recognition, and obtain sufficient retail floor space and effective product presentation at
retail. If we are unable to compete successfully with our competitors, our business and results of operations will be adversely
affected.
We may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness. Significant
operating losses or significant uses of cash in our operations could cause us to default on our asset-based revolving credit facility.
We rely on our credit facility, as well as on cash generated by our operations, to fund our working capital and capital expenditure
needs, to make acquisitions, to fund repurchases under our share repurchase program and to pay dividends should we choose to do
so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability
under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in
our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow
additional funds or service our indebtedness. 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 28, 2019, 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. 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 have a material
adverse effect on our financial position and results of operations.
Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our
customers or suppliers could adversely affect our financial position and results of operations. We extend credit to our
customers, generally without requiring collateral. The extension of credit involves considerable judgment and is based on an
evaluation of each customer’s financial condition and payment history. We monitor credit risk exposure by periodically obtaining
credit reports and updated financial statements on our customers. Deterioration in the economy, declines in consumer purchases of
apparel, disruption in the apparel retail environment, or the inability of our customers to access liquidity could have an adverse
effect on the financial condition of our customers. During the past several years, various retailers and other customers have
experienced significant difficulties, including consolidations, restructurings, bankruptcies and liquidations. The inability of
retailers and other customers to overcome these difficulties may continue or even increase due to the current economic and retail
market conditions. We maintain an allowance for doubtful accounts for potential credit losses based upon current conditions,
historical trends, estimates and other available information, which involves judgments and uncertainties, 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, merchandising and/or operational strategies employed by our customers may result in
decreased sales of our products to such customers and could have a material adverse effect on our financial condition and results of
operations. Likewise, significant changes in the operations of any of our suppliers or other parties with which we do business
could result in disruption to our business and have a material adverse effect on our financial condition and results of operations.
Our 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 the related accessory and other items we provide. We believe that our brands are recognized by
consumers across many demographics and geographies. The popularity, supply and demand for particular products can change
significantly from year-to-year based on prevailing fashion trends (particularly in our lifestyle businesses) and on other factors and,
accordingly, our ability to adapt to fashion trends in designing products is important to the success of our brands. If we are unable
to quickly adapt to changes in consumer preferences in the design of products, our results of operations could be adversely
affected. Moreover, because we and our customers project demand for our products based on estimated sales and fashion trends,
the actual demand for our products sometimes falls short of what was projected. This can lead to higher inventory levels than
desired. Excess inventory levels increase our working capital needs, and sometimes excess inventory must be sold at discounted
prices, all of which could have an adverse impact on our business, financial condition and results of operations.
Our strategy to grow our direct-to-consumer business depends upon our ability to successfully open and operate new stores
in a timely and cost-effective manner. Our strategy to grow our “brick and mortar” retail footprint depends on many factors
7
including, among others, our ability to: identify desirable store locations; negotiate acceptable lease terms; hire, train and retain a
growing workforce of store managers, sales associates and other personnel; successfully integrate new stores into our existing
control structure and operations, including our information technology systems; and coordinate well with our ecommerce
platforms and wholesale customers to minimize the competition within our sales channels.
If we expand into new geographic areas, we will need to successfully identify and satisfy the consumer preferences in these areas.
In addition, we will need to address competitive, merchandising, marketing, distribution and other challenges encountered in
connection with any expansion. Finally, we cannot ensure that any newly-opened stores will be received as well as, or achieve net
sales or profitability levels comparable to those of, our existing stores in our estimated time periods, or at all. If our stores fail to
achieve, or are unable to sustain, acceptable net sales and profitability levels, our business overall may be materially harmed and
we may incur significant costs associated with closing or relocating stores.
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 concentrations in Honduras and El
Salvador. These countries from time to time experience political, social and economic instability, and we cannot be certain of their
future stability. Instability in a country can lead to protests, riots and labor unrest. Governments have changed, and may continue
to change, and employment, wage and other laws and regulations may change, thereby increasing our costs to operate in those
countries. 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. For example, in fiscal year 2018, our operations in and around San Pedro Sula,
Honduras, were partially disrupted by the protests, unrest and government action associated with the November 2017 presidential
elections in Honduras. These disruptions temporarily restricted the ability of our employees and suppliers to access our
manufacturing facilities as well as our ability to ship products from our facilities, and negatively impacted our operations from a
cost standpoint. In fiscal year 2019, our Honduran operations experienced disruptions of a similar nature that were smaller in
scope than those occurring in fiscal year 2018.
If we experience disruptions or interruptions within any of our facilities, operations, or distribution networks, we may be
unable to deliver our products to the market and may lose sales and customers. We own or lease manufacturing facilities in
the United States, Honduras, Mexico and El Salvador. We also own or lease distribution facilities located throughout the United
States and maintain inventory at certain third-party locations. Any casualty or other circumstance that damages or destroys any of
these material facilities or significantly limits their ability to function could have a material adverse effect on our
business. Similarly, any significant interruption in the operation of any of these facilities or our related sourcing and transportation
logistics functions, whether within or outside of our control, may delay shipment of merchandise to our customers, potentially
damaging our reputation and customer relationships and causing a loss of revenue. Moreover, in the event of a regional disruption
where we manufacture our products, we may not be able to shift our operations to a different geographic region, and we may have
to cease or curtail our operations in a selected area. This may cause us to lose sales and customers. The types of disruptions that
may occur include foreign trade disruptions, import restrictions, labor disruptions, embargoes, government intervention, natural
disasters, regional pandemics and political disruptions such as those referenced in the immediately-preceding risk section. In
addition, if we are unable to successfully coordinate the planning of inventory across these facilities and the related distribution
activities, it could have a material adverse effect on our business, financial condition and results of operations.
The talents and continued contributions of our key management are important to our success. We believe our future success
depends on our ability to retain and motivate our key management, our ability to attract and integrate new members of
management into our operations, and the ability of all personnel to work together effectively as a team and to execute our business
strategy. Our inability to accomplish any of these goals could have a material adverse effect on our results of operations.
Changes in U.S. or other tax laws or regulations may cause us to incur additional tax liability. We are subject to income tax
in the United States and in certain foreign jurisdictions where we generate net operating profits. We benefit from a lower overall
effective income tax rate due to the majority of our manufacturing operations being located in foreign tax-free jurisdictions or
foreign jurisdictions with tax rates that are lower than those in the United States. Our U.S. legal entity contracts with our foreign
subsidiaries to manufacture products on its behalf, with the intercompany prices paid for the manufacturing services and
manufactured products based on an arms-length standard and supported by an economic study. We have concluded that the profits
earned in the tax-free locations are considered permanently reinvested. Our effective tax rate could be adversely affected by
changes in the mix of earnings between the U.S. and tax-free or lower-tax foreign jurisdictions.
In addition, further changes to U.S. tax laws impacting how U.S. multinational corporations are taxed on foreign earnings could
also have a material adverse effect on our tax expense and cash flow. The December 22, 2017 Tax Cuts and Jobs Act of 2017 (the
“New Tax Legislation”) significantly revised the U.S. corporate income tax code by, among other things, lowering federal
corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on
deemed repatriated cumulative earnings of foreign subsidiaries. In addition, new taxes were imposed related to foreign income,
including a tax on global intangible low-taxed income ("GILTI") as well as a limitation on the deduction for business interest
expense ("Section 163(j)"). GILTI is the excess of the shareholder's net controlled foreign corporations (“CFCs”) net tested income
8
over the deemed tangible income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum
of the taxpayer's business interest income, 30% of the taxpayer's adjusted taxable income, and the taxpayer's floor plan financing
interest expense for the year. The future impact of the New Tax Legislation may differ from historical amounts, possibly
materially, due to, among other things, changes in interpretations and assumptions made regarding the New Tax Legislation,
guidance that may be issued, and actions we may take as a result of the New Tax Legislation.
Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase
significantly. The debt we incur under our asset-based revolving credit facility is at variable rates of interest, which exposes us to
interest rate risk. If interest rates increase, our obligations on this variable rate indebtedness would increase even though the
amount borrowed remained the same, and there would be a corresponding decrease in our net income and cash flows, including
cash available for servicing our debt. In addition, certain of the variable rate indebtedness extended to us uses the London
Interbank Offered Rate (LIBOR) as a benchmark for establishing the interest rate. Recent regulatory reform efforts may cause
LIBOR to cease to exist, new methods of calculating LIBOR to be established, or the use of an alternative reference rate(s). These
consequences are not entirely predictable and could have an adverse impact on our financing costs, returns on investments,
valuation of derivative contracts and our financial results.
We may need to raise additional capital to grow our business. The rate of our growth, especially through acquisitions, depends,
in part, on the availability of debt and equity capital. We may not be able to raise capital on terms acceptable to us or at all. If new
sources of financing are required, but are insufficient or unavailable, we may be required to modify our growth and operating plans
based on available funding, which could adversely affect our ability to grow the business.
We 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 has involved 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.
Energy, fuel and related costs are prone to significant fluctuations and volatility, which could adversely affect our results of
operations. Our manufacturing operations require high inputs of energy, and therefore changes in energy prices directly impact
our gross profits. In addition, we incur significant freight costs to transport goods between our offshore facilities and the United
States, along with transportation expenses to ship products to our customers. The cost of energy and fuel fluctuates due to a
number of factors outside of our control, including government policy and regulation and weather conditions. We continue to
focus on methods that will reduce the amount of energy used in the manufacture of products to mitigate risks of fluctuations in the
cost of energy. However, significant increases in energy and fuel prices 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, reputational harm, or loss of revenue. We depend on information systems to, among other things,
manage our inventory, process transactions, operate our websites, respond to customer inquiries, purchase, sell and ship goods on a
timely basis, and maintain cost-effective operations. Management uses information systems to support decision-making and to
monitor business performance. If we experience any disruptions or slowdowns with our information systems, we may fail to
generate accurate and complete financial and operational reports essential for making decisions at various levels of management,
which could lead to decisions being made that have adverse results. We have invested significant capital and expect future capital
expenditures associated with the implementation and integration of our information technology systems across our businesses.
This process involves the replacement and consolidation of technology platforms so that our businesses are served by fewer
platforms, resulting in operational efficiencies and reduced costs. Our inability to effectively implement or convert our operations
to the new systems could cause delays in product fulfillment and reduced efficiency in our operations. Further, if changes in
technology cause our information systems to become obsolete, or if our information systems are inadequate to handle our growth,
we could lose customers. We are also subject to risks and uncertainties associated with the internet, including changes in required
technology interfaces, website downtime and other technical failures. Our failure to successfully respond to these risks and
uncertainties could reduce sales, increase costs and damage the reputation of our brands. In addition, we interact with many of our
customers through our websites. Customers increasingly utilize our online platforms to purchase our merchandise. If we are unable
to continue to provide consumers a user-friendly experience and evolve our platforms to satisfy consumer preferences, the growth
of our ecommerce and other businesses and our sales may be negatively impacted. If our websites contain errors or other
vulnerabilities which impede or halt service, it could result in damage to our brands’ images and a loss of revenue. In addition, we
may experience operational problems with our information systems as a result of system failures, "cyber-attacks," computer
viruses, security breaches, disasters or other causes. Any material disruption or slowdown of our information systems could cause
operational delays and increased costs that could have a material adverse effect on our business and results of operations.
Compromises of our data security could lead to liability and reputational damage. In the ordinary course of our business, we
often collect, retain, transmit, and use sensitive and confidential information regarding customers and employees and we process
9
customer payment card and check information. There can be no assurance that we will not suffer a data compromise, that
unauthorized parties will not gain access to personal information, or that any such data compromise or access will be discovered in
a timely manner. Further, the systems currently used for transmission and approval of payment card transactions, and the
technology utilized in payment cards themselves, all of which can put payment card data at risk, are determined and controlled by
the payment card industry, not by us. Our computer systems, software and networks may be vulnerable to breaches (including via
computer hackings), unauthorized access, misuse, computer viruses or other failures or disruptions that could result in disruption to
our business or the loss or theft of confidential information, including customer information. Any failure, interruption, or breach in
security of these systems, could result in the misappropriation of personal information, payment card or check information or
confidential business information of our company. In addition, there may be non-technical issues, such as our employees,
contractors or third parties with whom we do business or to whom we outsource business operations may attempt to circumvent
our security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving
such information.
The methods used by third parties to obtain unauthorized access change frequently and may not be anticipated or immediately
detected. Thus, despite the security measures we may have in place, an actual or perceived information security breach, whether
due to "cyber-attack," computer viruses or other malicious software code, or human error or malfeasance, could occur. Actual or
anticipated attacks may cause us to incur significant costs to rectify the consequences of the security breach or cyber-attack,
including costs to deploy additional personnel and protection technologies, repair damage to our systems, train employees and
engage third-party experts and consultants. The collection, retention, transmission, and use of personal information is subject to
contractual requirements and is highly regulated by a multitude of state, federal, and foreign laws. Privacy and information
security laws are complex and constantly changing. Compliance with these laws and regulations may result in additional costs due
to new systems and processes, and our non-compliance could lead to legal liability. Any compromise of our customer, employee or
company data, failure to prevent or mitigate the loss of personal or business information, or delay in detecting or providing prompt
notice of any such compromise could attract media attention, damage our customer or other business relationships and reputation,
result in lost sales, fines, liability for stolen assets or information, costs of incentives we may be required to offer to our customers
or business partners to retain their business, significant litigation or other costs and involve the loss of confidential company
information, any or all of which could have a material adverse effect on our business, financial condition and results of operations.
As disclosed in our Quarterly Report on Form 10-Q filed May 6, 2019, we previously confirmed that unauthorized malware
intrusions of our system may have exposed customer payment information as it was being entered to make a purchase at one of our
consumer ecommerce websites. We removed the malware associated with the intrusions from our system and took actions to
secure our website by working with recognized data security experts to conduct a thorough investigation of the incident and
implement additional measures designed to build stronger protections against future incidents of this nature. This, or any
compromise of security or cyber-attack, could deter consumers from entering into transactions that require them to provide
confidential information to us in the future. In addition, if confidential customer information was misappropriated from our
computer systems, we could be sued by those who assert that we did not take adequate precautions to safeguard our systems and
confidential data belonging to our customers or business partners, which could subject us to liability and result in significant legal
fees and expenses in defending these claims. While we do not currently believe that we experienced any material losses related to
this incident, there can be no assurance that this or any other incident will not have a material adverse effect on our business,
prospects, financial condition and results of operations.
We are subject to periodic litigation in both domestic and international jurisdictions that may adversely affect our
financial position and results of operations. From time to time we may be involved in legal or regulatory actions regarding
product liability, employment practices, intellectual property infringement, bankruptcies and other litigation or enforcement
matters. Due to the inherent uncertainties of litigation in both domestic and foreign jurisdictions, we cannot accurately predict the
ultimate outcome of any such proceedings. These proceedings could cause us to incur costs and may require us to devote resources
to defend against these claims and could ultimately result in a loss or other remedies such as product recalls, which could adversely
affect our financial position and results of operations. For a description of current material legal proceedings, see Part I, Item 3,
Legal Proceedings.
Product liability issues could lead to recalls, claims and negative publicity, and adversely affect our results of operations.
Our operations are subject to certain product liability risks common to most brands and manufacturers and our ability to maintain
consumer confidence in the safety and quality of our products is vital to our success. We have implemented product safety and
quality programs and standards that we follow and we expect our supplier partners to strictly adhere to applicable requirements
and best practices. In addition to selling apparel and accessory products, we participate in a joint venture involving the sale of a
branded alcoholic beverage, and we also license one of our brands for use in connection with restaurant, food and beverage
services. Selling products intended for human consumption carries inherent risks and uncertainties. If we or our supplier or license
partners fail to comply with applicable product safety and quality standards and our products or those otherwise associated with
our brands are, or become, unsafe, non-compliant, contaminated or adulterated, we may be required to recall our products and
encounter product liability claims and negative publicity. Any of these events could adversely affect our reputation, business or
results of operations.
10
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®, Coast®, Intensity Athletics®, Kudzu®, Pro Weight®,
Magnum Weight®, and the Delta Design, among others, are important to our marketing efforts and have substantial value. We
aggressively protect these trademarks and have incurred legal costs in the past to establish and protect these trademarks. We may
in the future be required to expend significant additional resources to protect these trademarks and our other intellectual property.
Intellectual property litigation may be costly and may divert management's attention from the operation of our business. Adverse
determinations in any litigation may result in the loss of our proprietary rights, subject us to significant liabilities or require us to
seek licenses from third parties, which may not be available on commercially reasonable terms, if at all. Any of these outcomes
may have a material adverse effect on our financial condition, results of operations or cash flows.
We may be subject to the impairment of acquired intangible assets. When we acquire a business, a portion of the purchase
price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price that
is allocated to goodwill is determined by the excess of the purchase price over the net identifiable assets acquired. At September
28, 2019, and September 29, 2018, our goodwill and other intangible assets were approximately $59.5 million and $53.7 million,
respectively. We conduct an annual review, and more frequent reviews if events or circumstances dictate, to determine whether
goodwill is impaired. We also determine whether impairment indicators are present related to our identifiable intangible assets. If
we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We
complete our annual impairment test of goodwill on the first day of our third fiscal quarter. For fiscal year 2019, we concluded
based on the valuation estimates that there was no indication of impairment on the goodwill recorded on our financial statements.
We also concluded that there are no additional indicators of impairment related to our intangible assets. There can, however, be no
assurance that we will not be required to take an impairment charge in the future, which could have a material adverse effect on
our results of operations.
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 its anticipated successor
agreement, the U.S.-Mexico-Canada Agreement (“USMCA”), as well as the Central America Free Trade Agreement (“CAFTA”).
Our claims for duty free or reduced duty treatment under CAFTA, NAFTA/USMCA and other available programs are largely
conditioned on our ability to produce or obtain accurate records (some of which are provided to us by third parties) about
production processes and sources of raw materials. Fairly recent changes in the United States federal government have caused
uncertainty about the future of trade partnerships and treaties, as the current administration has expressed its desire to specifically
modify existing trade agreements and has imposed increased tariffs on goods imported into the United States and raised the
possibility of imposing further increases to such tariffs. These tariffs have increased our costs to source certain products imported
from other countries. Subsequent repeal or further modification of NAFTA/USMCA or CAFTA, further increases to tariffs on
goods imported into the United States, or the inadequacy or unavailability of supporting records, could have a material adverse
effect on our results of operations.
In addition, our products are subject to foreign competition, which in the past has been faced with significant U.S. government
import restrictions. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain,
subject to political considerations. The elimination of import protections for domestic apparel producers could significantly
increase global competition, which could adversely affect our business and results of operations.
Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators
and negative publicity. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive
regulation by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state
attorneys general in the United States. Any failure to comply with such regulations could cause us to become subject to
investigation and enforcement actions resulting in significant penalties or claims or in our inability to conduct business, adversely
affecting our results of operations.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other
anti-bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may
be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other
U.S. and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance
with the FCPA and similar laws, some of our agents or other channel partners, as well as those companies to which we outsource
certain of our business operations, could take actions in violation of our policies. Any such violation could have a material and
adverse effect on our business.
Changes in domestic or foreign employment regulations or changes in our relationship with our employees could adversely
affect our results of operations. As of September 28, 2019, we employed approximately 8,500 employees worldwide, with
approximately 7,350 of these employees located in Honduras, El Salvador and Mexico. Changes in domestic and foreign laws
governing our relationships with our employees, including wage and human resources laws and regulations, labor standards,
overtime pay, unemployment tax rates, workers' compensation rates and payroll taxes, would likely have a direct impact on our
11
operating costs. Increases in wage rates in the countries in which we operate have occurred, and any further significant increases in
wage rates in those countries could have a material adverse impact on our operating results. A total of approximately
3,150 employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We
have historically conducted our operations without significant labor disruptions and believe that our relations with our employees
are generally good. However, a change in labor relations could adversely affect the productivity and ultimate cost of our
manufacturing operations.
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, applicable laws and regulations, and the codes and principles to which we subscribe. In
addition, we require our suppliers and independent contractors to operate their businesses in compliance with the laws and
regulations that apply to them. However, we do not control these suppliers and independent contractors. A violation of our
policies, applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations by
our suppliers or independent contractors could interrupt or otherwise disrupt our operations. Negative publicity regarding the
production or operating methods of any of our suppliers or independent contractors or their failure to comply with our policies,
applicable manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations could
adversely affect our reputation, brands, sales and licensing relationships, which could adversely affect our business and results of
operations.
The market price of our shares is affected by the illiquidity of our shares, which could lead to our shares trading at prices
that are significantly lower than expected. Various investment banking firms have informed us that public companies with
relatively small market capitalizations have difficulty generating institutional interest, research coverage or trading volume. This
illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the
market perceives us to have a relatively small market capitalization. This has led and could continue to lead to our shares trading at
prices that are significantly lower than our estimate of their inherent value.
As of November 14, 2019, we had 6,921,417 shares of common stock outstanding. We believe that approximately 48% 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 48% are institutional investors that beneficially own more than 5% of the outstanding shares. These
institutional investors own approximately 33% 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.
Item 1B. Unresolved Staff Comment
None.
12
Item 2. Properties
Our principal executive office is located in a leased facility in Greenville, South Carolina. We own and lease properties supporting
our manufacturing, distribution, direct retail, and administrative activities. The majority of our products are manufactured through
a combination of facilities that we either own or lease and operate. The following listing summarizes the significant categories as
of September 28, 2019:
Manufacturing
Distribution
1
2
Decoration/distribution
Retail stores/showroom
Administrative
Total
Owned
2
2
1
—
—
5
Leased
6
3
4
12
5
30
Other
—
2
—
—
—
2
Total
8
7
5
12
5
37
1 At September 28, 2019, we operated within a third party logistics distribution center in Dallas, TX. In October 2019, operations were moved to a company-leased
facility in the surrounding area. In addition, we began operations in a new company-leased facility in October 2019 in Columbus, OH.
2 In our first quarter of fiscal year 2020, we began operations in two additional digital decoration and distribution facilities in Cranberry, NJ and Lewisville, TX.
This results in three DTG2Go facilities that are integrated with Delta Activewear distribution centers.
Our primary manufacturing as of September 28, 2019, are as follows:
Name
Ceiba Textiles
Honduras Plant
Cortes Plant
Campeche Plant
Campeche Sportswear
Textiles LaPaz
Fayetteville Plant
Rowland Plant
Location
Naco, Quimistan, Santa
Barbara Honduras
San Pedro Sula, Honduras
San Pedro Sula, Honduras
Seybaplaya, Campeche Mexico
Campeche, Mexico
La Paz, El Salvador
Fayetteville, North Carolina
Rowland, North Carolina
Utilization
Segment
Knit/dye/finish/cut
Delta Group
Sew
Sew
Cut/sew
Decoration
Cut/sew/decoration
Cut/sew/decoration
Sew
Delta Group
Delta Group
Delta Group/Salt Life Group
Delta Group/Salt Life Group
Delta Group
Delta Group/Salt Life Group
Delta Group
At our 2019 and 2018 fiscal year-ends, our long-lived assets in Honduras, El Salvador and Mexico collectively comprised
approximately 32% and 41%, respectively, of our consolidated net property, plant and equipment. Our long-lived assets in
Honduras comprised approximately 25% and 32%, respectively, of consolidated net property, plant and equipment. See Item 1A.
Risk Factors for a description of risks associated with our operations located outside of the United States.
Our primary distribution centers, including those integrated with decoration operations, as of September 28, 2019, are as follows:
Location
Clinton, TN
Cranbury, NJ
Dallas, TX
Fayetteville, NC
Fayetteville, NC, Annex
Opelika, AL
Santa Fe Springs, CA
Clearwater, FL
Sparks, NV
Storm Lake, IA
Fayetteville, NC
Miami, FL
Utilization
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Segment
Delta Group
Delta Group
Delta Group
Salt Life Group
Delta Group
Delta Group
Delta Group
Delta Group
Delta Group
Delta Group
Delta Group
Delta Group
We believe that all of our facilities are suitable for the purposes for which they are designed and are generally adequate to allow us
to remain competitive. We continue to maintain a sharp focus on improving our supply chain, lowering our product costs and
reducing the operating capital required in our business. We will continue to take the necessary actions to balance capacities with
demand as needed. Substantially all of our assets are subject to liens in favor of our lenders under our U.S. asset-based secured
credit facility and our Honduran credit facility.
13
ITEM 3. Legal Proceedings
At times, we are party to various legal claims, actions and complaints. There are currently no material pending legal
proceedings to which we are a party or of which any of our property is subject, and we are not aware of any such proceedings that
are contemplated by any governmental authority.
Item 4. Mine Safety Disclosures
Not applicable.
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock: The common stock of Delta Apparel, Inc. is listed and traded on the NYSE American
under the symbol “DLA.” As of November 14, 2019, there were approximately 807 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 American.
Fiscal Year 2019:
September Quarter
June Quarter
March Quarter
December Quarter
Fiscal Year 2018:
September Quarter
June Quarter
March Quarter
December Quarter
High
Low
Sale Price Sale Price
$24.30
$24.47
$24.99
$19.98
$19.49
$20.30
$22.10
$22.00
$18.48
$21.00
$17.06
$16.11
$16.30
$16.90
$17.04
$19.60
Dividends: Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2019 and 2018. Subject to the
provisions of any outstanding blank check preferred stock (none of which is currently outstanding), the holders of our common
stock are entitled to receive whatever dividends, if any, that may be declared from time to time by our Board of Directors in its
discretion from funds legally available for that purpose. Pursuant to the terms of our credit facility, we are allowed to make cash
dividends and stock repurchases if (i) as of the date of the payment or repurchase and after giving effect to the payment or
repurchase, we have availability on that date of not less than 15% of the lesser of the borrowing base or the commitment, and
average availability for the 30-day period immediately preceding that date of not less than 15% of the lesser of the borrowing base
or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 10, 2016, does not exceed $10
million plus 50% of our cumulative net income (as defined in the Amended Credit Agreement) from the first day of the third
quarter of fiscal year 2016 to the date of determination. At September 28, 2019, and September 29, 2018, there was $16.1 million
and $14.7 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan
covenants and other relevant factors.
Purchases of our Own Shares of Common Stock: See Note 14— Repurchase of Common Stock - Debt, in Item 15, which is
incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans: The information required by Item 201(d) of
Regulation S-K is set forth under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters” of this Annual Report, which information is incorporated herein by reference.
14
Item 6. Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to
provide the information under this item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Outlook
We are pleased to deliver strong sales growth for the year, including growth in both our Delta Group and Salt Life Group
segments. Our gross margins expanded sequentially through the year, and we leveraged our growth to deliver solid profitability for
our shareholders. Our investments in new manufacturing technologies, speed-to-market distribution strategies, and additional sales
channels continue to generate growth opportunities across our businesses and differentiate us from competitors. We see a variety
of strategic growth opportunities across our business, and our team remains focused on the initiatives we have in place to take
advantage of them. In addition to the accelerating momentum in our DTG2Go and Salt Life businesses, we will launch a full-
service, vertical distributor model in our Activewear business in 2020. This will include a broad offering of nationally recognized
branded products comprised of polos, outerwear, headwear and accessories. We believe this additional go-to-market strategy can
become a game-changer for us and for our shareholders as it grows over time.
Through meaningful investments in manufacturing capacity, proprietary fulfillment systems, and new facilities, along with two
strategic acquisitions, DTG2Go has risen as the industry leader in the digital print space. DTG2Go is the only digital print supplier
in the world providing customers a seamless fulfillment solution integrated with a vertical manufacturing platform offering a
reliable supply of high quality fashion and core basic garments. We continued to expand our unique positioning with the addition
of two new facilities, strategically integrating DTG2Go’s state-of-the-art digital print and fulfillment platform with Delta
Apparel’s blank garment distribution network. This model has significantly improved our speed-to-market and elevated our
customer service levels with one-day shipping to over half of all U.S. consumers, including the key New York City and Dallas
metropolitan markets. These facilities are now operating and accepting orders in time for the important holiday selling season.
With six fewer days of holiday selling between Thanksgiving and Christmas, DTG2Go’s key tenet of speed combined with our
multi-facility distribution strategy should further differentiate our positioning in the marketplace. We are happy with the new
polyester printing technology and see a tremendous opportunity to capitalize on demand for personalized decorated polyester
garments, adding another layer of growth for our fully integrated direct-to-garment apparel printing solution. Entering fiscal year
2020 with strong business momentum, coupled with the significant increase in our capacity and value added positioning, we see a
clear path to reach our goals of 20% compounded sales growth with healthy double-digit operating margins in our DTG2Go
business.
Market conditions in our core Activewear business are solid, with demand for our higher-margin fashion basics products and with
our Western Hemisphere manufacturing platform continuing to accelerate. We have experienced rapid expansion of our fashion
basics line, particularly Delta Platinum, over the last several years with growth expected to continue in 2020 across multiple sales
channels. We remain focused on building internal manufacturing capacity to satisfy the Activewear demand and better service
customers with speed of delivery. The vast majority of our new product development continues to be focused on fashion basics,
adding product diversification and expanding offerings across color and silhouettes. In January 2020, we will launch a full-service,
vertical distributor model in our Activewear business, which will provide our customers with a broader range of product offerings
of nationally recognized branded products. Our diversified sales channels coupled with cross-selling opportunities involving the
DTG2Go and Soffe decoration platforms, should continue to drive new business along with valuable customer diversification. Our
FunTees business recently began shipping to several new direct-to-retail customers and expects that business to continue to grow.
We have been growing and diversifying our customer base at FunTees with brands and retailers who are interested in full-service
supply chain management and technology, along with our manufacturing platform, which is compliant, flexible in the products and
retail-ready services it can provide and, importantly, close to the United States market with nationwide distribution coverage.
Overall, we anticipate more growth at Activewear as we further leverage our internal manufacturing capacity and broad
distribution network.
We were pleased to see two consecutive quarters of year-over-year top and bottom-line improvement from our Soffe brand. We
have continuously refined the core Soffe product line to meet customer demand, while strategically developing new products such
as channel-specific graphic tee programs. Soffe’s business-to-business ("B2B") and business-to-consumer ("B2C") ecommerce
performance has been strong with double-digit net sales growth. This, coupled with the increased integration with our Activewear
sales platform, has created momentum in this business to grow in the future.
Across our national and regional customer footprint, Salt Life has enjoyed strong growth in fiscal year 2019, and we enter the new
fiscal year with solid momentum as Salt Life grows geographically with our larger accounts. Following the conversion of our
www.saltlife.com ecommerce site to a new platform in the third quarter of fiscal year 2019, we have experienced strong site traffic
and conversion with notable strength in mobile. We are very pleased with the site enhancements ahead of the holiday selling
season, which includes improved speed, site navigation and frictionless check out, all features we expect will drive continued
15
strong performance. Additional product categories remain an important pillar of growth for Salt Life for our wholesale partners, as
well as our branded direct-to-consumer channels. The higher priced performance line continues to be well received across
channels. The expansion of additional product lines, such as women shoes and accessories, are facilitating more opportunities to
drive incremental floor space including point-of-sale displays and shop-in-shops. This product expansion, as well as the success of
brand extensions with the ladies' swim line and Salt Life Lager, continue to broaden the brand’s audience and lifestyle positioning.
15
We remain uniquely positioned to compete and grow profitably in today’s dynamic retail environment. We are continuously
focused on building our foundational capabilities and expertise to best serve our existing customers, while also attracting new
customers. The diversification of our customer base and expansion of our sales channels, including the launch of our full service,
vertically-integrated distributor model, remain key pillars of our success and fuels the growth we see ahead for our DTG2Go and
Activewear businesses. We also enter the next fiscal year with strong momentum in our Salt Life lifestyle and brand with refreshed
ecommerce and direct-to-consumer platforms.
Results of Operations
Our financial results have been presented on a generally accepted accounting principles ("GAAP") basis and, in certain limited
instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further described and
reconciled in the sections entitled “Non-GAAP Financial Measures.”
Net sales for fiscal year 2019 were $431.7 million, up 9.2% from $395.5 million in the prior year. Net sales growth was achieved
in both the Delta Group and Salt Life Group segments. Our direct-to-consumer and business-to-business ecommerce and retail
sales continued to represent a larger portion of consolidated revenue, constituting 8.1% of total net sales for the 2019 fiscal year
compared to 7.6% of net sales in the prior year.
Delta Group segment net sales of $389.1 million in fiscal year 2019 increased 9.3% over prior year results of $356.0 million.
This sales growth was primarily driven by organic sales growth in our DTG2Go digital print and fulfillment business in addition
to its acquisition of Silk Screen Ink, Ltd. d/b/a Digital Print Service ("SSI") in October 2018. The segment also experienced
sales growth in Delta Activewear due to continued product expansions offered to catalog customers as well as growth in new
sales channels, such as direct-to-retail customers.
Salt Life Group segment net sales of $42.7 million in fiscal year 2019 increased 8.1% over prior year results of $39.4 million in
the prior year. This sales growth was attributable to growth across multiple sales channels, including wholesale, national
retailers, direct-to-consumer channels, and Salt Life Lager beer sales.
Overall gross margin for fiscal year 2019 was 19.7%, down from prior year margin of 20.7%, driven by the impact in the first half
of the year of higher raw material prices and other inflationary cost increases, costs associated with product changes in the
FunTees business, and the impact of acquisition and integration activities. These headwinds were partially offset by improved
selling prices and favorable product mix. Note that our gross margins may not be comparable to those of other companies because
some companies include costs related to their distribution network in cost of goods sold, and we exclude these costs from gross
profit and instead include them in selling, general and administrative expenses.
Delta Group segment gross margins were 16.8% compared to the 17.9% in the prior year and were impacted by the items noted
above in the first half of fiscal year 2019. During the second half of fiscal year 2019, Delta Group gross margins improved to
18.4%.
Salt Life Group segment gross margins remained relatively flat at 46.7% in fiscal year 2019 as the result of higher margins
associated with the growth in direct-to-consumer sales channels, offset by lower margins associated with the growth of Salt Life
Lager.
Fiscal year 2019 selling, general and administrative expenses were $70.2 million, or 16.3% of sales, compared to $67.0 million, or
16.9% of sales, in fiscal year 2018. The 60 basis point decrease in selling, general and administrative expenses is due to leveraging
fixed costs with higher sales volumes, partially offset by higher distribution costs related to investments to expand facilities and
improve service to our customers.
Other income includes profits related to our Honduran equity method investment, valuation changes in our contingent
consideration related to the previously acquired Salt Life and DTG2Go businesses, and other matters such as litigation-related
settlements. In fiscal year 2019, we recognized a discrete gain of $1.3 million from the settlement of a commercial litigation
matter. This matter related to a claim Salt Life previously filed with BP Deepwater Horizon claims fund administration that was
established in connection with the 2010 oil spill off the Gulf Coast seeking damages for the impacts of the spill on the Salt Life
business. In fiscal year 2019, we also recognized a discrete expense of $2.5 million associated with the resolution of litigation
stemming from The Sports Authority's March 2016 bankruptcy (see Note 15 - Commitments and Contingencies in the
Consolidated Financial Statements for additional information concerning this matter). In fiscal year 2019, we recorded other
16
income of $0.8 million due to a net reduction in the estimate of the contingent consideration liabilities. In fiscal 2018, we recorded
other expense of $0.2 million due to a net increase in the estimate of the contingent consideration liabilities. The remainder of
other income in fiscal years 2019 and 2018 is principally related to profits from our Honduran equity method investment.
Operating income was $15.9 million compared to $17.4 million in the prior year. Operating income decreased by $4.6 million in
the first half of fiscal year 2019, primarily due to acquisition integration expenses, costs associated with product changes in the
FunTees business, and investments in new and expanded distribution facilities. We experienced operating income expansion of
$3.1 million in the second half of the year due to net sales growth and gross margin expansion with increased sales volume and
improved selling price and mix.
Delta Group operating income decreased in fiscal year 2019 by $2.3 million to $23.8 million, or 6.1% of net sales, compared to
$26.1 million, or 7.3% of net sales in the prior year primarily due to acquisition integration costs, FunTees product cost changes,
and distribution facility investments.
Salt Life Group operating income improved by $1.5 million in fiscal year 2019 to $6.2 million from the prior year operating
income of $4.7 million, primarily due to growth across multiple sales channels, including the higher margin direct-to-consumer
channels.
Interest expense for fiscal year 2019 increased approximately $1.9 million to $7.6 million, compared to $5.7 million in fiscal year
2018. The increase is due primarily to higher average debt levels due to recent acquisitions coupled with higher interest rates in
fiscal year 2019 compared to the prior year.
Our fiscal year 2019 effective income tax rate is a 5.5% compared to a rate of 89.5% in the prior year. Excluding the additional
$10.7 million of expense related to the New Tax Legislation, the adjusted effective tax rate is a benefit of 1.7% in fiscal year 2018.
See Note 9—Income Taxes for more information. We benefit from having income in foreign jurisdictions that are either exempt
from income taxes or have tax rates that are lower than those in the United States.
Net earnings attributable to shareholders in fiscal year 2019 was $8.2 million, or $1.17 per diluted share, compared with net
earnings in the prior year of $1.3 million, or $0.18 per diluted share. Adjusting for the $2.2 million expense, net of tax, in fiscal
year 2019 associated with the resolution of The Sports Authority bankruptcy litigation as well as $0.7 million of income, net of
tax, associated with a favorable settlement of a commercial litigation matter, our adjusted net earnings for fiscal year 2019 were
approximately $9.7 million and $1.38 per diluted share. In fiscal year 2018, after adjusting for the $10.7 million expense due to the
New Tax Legislation, our adjusted net earnings were approximately $12.0 million and $1.62 per diluted share.
Non-GAAP Financial Measures
We provide all information required in accordance with GAAP, but we believe that evaluating our ongoing operating results may
be difficult if limited to reviewing only GAAP financial measures. In an effort to provide investors with additional information
regarding the Company's results, we also provide non-GAAP information that management believes is useful to investors. We
discuss adjusted net earnings attributable to shareholders and earning per share as performance measures because management
uses these measures in evaluating the Company's underlying performance on a consistent basis across periods. We also believe
these measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Company's
ongoing performance. These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other
interested parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the
Company's results as reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures used
by other companies. The tables below reconcile net income and earnings per diluted share to adjusted net income and adjusted
earnings per diluted share, (in thousands except per share data):
Year Ended
Net earnings attributable to shareholders
Adjustment for tax legislation impact
Adjustment for commercial litigation settlement, net of tax
Adjustment for The Sports Authority litigation settlement, net of tax
Adjusted earnings attributable to shareholders
September 28, 2019
8,242
$
—
(698 )
2,168
9,712
$
Reported diluted earnings per share
Adjustment for tax legislation impact
Adjustment for commercial litigation settlement, net of tax
Adjustment for The Sports Authority litigation settlement, net of tax
Adjusted diluted earnings per share
$
$
1.17
—
(0.10 )
0.31
1.38
$
$
$
$
September 29, 2018
1,337
10,664
—
—
12,001
0.18
1.44
—
—
1.62
17
Liquidity and Capital Resources
Operating Cash Flows
Cash provided by operating activities in fiscal year 2019 was $9.4 million compared to $21.2 million for fiscal year 2018. The
decrease from the prior year is due to an increase in accounts receivable from the sales growth and timing of those sales occurring
during the fourth quarter of fiscal year 2019 as well as increasing our inventory positions in order to better service our customers
with a broad offering of products.
Investing Cash Flows
Cash used in investing activities in fiscal year 2019 and 2018 was $11.5 million and $14.9 million, respectively. Cash outflows for
capital expenditures during fiscal year 2019 and 2018 were $6.1 and $5.8 million, respectively. Capital expenditures in both
periods primarily related machinery and equipment, including investments in our digital print business. There were $8.4 million in
expenditures financed under capital lease arrangements and $3.1 million in unpaid expenditures as of September 28, 2019. In
addition, property, plant, and equipment of $3.4 million was acquired as part of the SSI acquisition during fiscal year 2019.
Investing activities for fiscal year 2018 included $5.8 million of proceeds from the sale of fixed assets. Equipment of $5.0 million
was acquired as part of the DTG2Go acquisition. Subsequently, a capital lease arrangement was entered into to finance the
purchase of the equipment. During fiscal year 2018, investing cash flows included $1.9 million in proceeds received from the sale
of a business.
We expect to spend approximately $25 million to $28 million in capital expenditures in fiscal year 2020, primarily on distribution
expansion, manufacturing equipment, information technology, and direct-to-consumer investments including additional Salt Life
retail store openings. We anticipate that approximately $12 million of planned fiscal year 2020 capital expenditures will be
invested in the expansion of our Clinton, Tennessee distribution center to support the growth within the Delta Group segment
business.
Financing Activities
Cash provided by financing activities was $2.2 million in fiscal year 2019 compared to cash used by financing activities of
$6.4 million in fiscal year 2018. We utilized the cash proceeds from our credit facility in both fiscal years to fund our investments
in property, plant, and equipment as well as our operations. In fiscal year 2019, we repurchased $2.7 million of our common stock
compared to $9.0 million in the prior year.
Future Liquidity and Capital Resources
See Note 8 – Long-Term Debt to the Consolidated Financial Statements for discussion of our various financing arrangements,
including the terms of our revolving U.S. credit facility.
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 loss of 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 28, 2019, 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 28, 2019, our FCCR was above the
minimum threshold specified in our credit agreement.
Derivative Instruments
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the
cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized
gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There
were no material option agreements that were outstanding at September 28, 2019.
18
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. There were no raw material option agreements outstanding at
September 28, 2019 or September 29, 2018.
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 AOCI loss, net of taxes, of $1.1 million for fiscal year 2019, and an AOCI gain, net of
taxes, of $0.2 million for fiscal year 2018.
Off-Balance Sheet Arrangements
As of September 28, 2019, 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. We have disclosed operating lease commitments in Note 10—Leases, and
letters of credit and purchase obligations in Note 15—Commitments and Contingencies.
Dividends and Purchases of our Own Shares
Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the
payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than 15%
of the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that
date of not less than 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and
stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the
Amended Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of determination. At September
28, 2019, and September 29, 2018, there was $16.1 million and $14.7 million, respectively, of retained earnings free of restrictions
to make cash dividends or stock repurchases.
Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2019 and 2018. Any future cash dividend
payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other
relevant factors.
As of September 28, 2019, our Board of Directors had authorized management to use up to $60.0 million to repurchase stock in
open market transactions under our Stock Repurchase Program. During fiscal years 2019 and 2018, we purchased 141,501 shares
and 463,974 shares, respectively, of our common stock for a total cost of $2.7 million and $9.0 million, respectively. As of
September 28, 2019, we have purchased 3,498,562 shares of common stock for an aggregate of $50.5 million since the inception
of the Stock Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor
provisions of SEC Rule 10b-18. As of September 28, 2019, $9.5 million remained available for future purchases under our Stock
Repurchase Program, which does not have an expiration date.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial
Statements, which were prepared in accordance with U.S. GAAP. The preparation of our Consolidated Financial Statements
requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have no reason to believe that our past estimates have not been appropriate. Our most critical accounting estimates, discussed
below, pertain to revenue recognition, accounts receivable and related reserves, 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.
19
Revenue Recognition
Revenue is recognized when performance obligations under the terms of the contracts are satisfied. Our performance obligation
primarily consists of delivering products to our customers. Control is transferred upon providing the products to customers in our
retail stores, upon shipment of our products to the consumers from our ecommerce sites, and upon shipment from our distribution
centers to our customers in our wholesale operations. Once control is transferred to the customer, we have completed our
performance obligation.
In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these
arrangements are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are
recorded net of discounts, allowances, and operational chargebacks. As certain allowances and other deductions are not finalized
until the end of a season, program or other event which may not have occurred, we estimate such discounts, allowances, and
returns that we expect to provide.
We record reductions to revenue for estimated customer returns, allowances, markdowns and discounts. We estimate these
reductions based on historical rates of customer returns and allowances as well as the specific identification of outstanding returns,
markdowns and allowances that have not yet been received by us. The actual amount of customer returns and allowances, which is
inherently uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly
higher or lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period
in which we make such a determination. Reserves for returns, allowances, markdowns and discounts are included within accrued
expenses as refund liabilities, and the value of inventory associated with reserves for sales returns are included within prepaid
expenses and other current assets on the Consolidated Balance Sheet. As of September 28, 2019, there was $1.0 million in refund
liabilities for customer returns, allowances, markdowns and discounts included within accrued expenses.
Accounts Receivable and Related Reserves
Accounts receivable consists primarily of receivables from our customers arising from the sale of our products, and we generally
do not require collateral from our customers. We actively monitor our exposure to credit risk through the use of credit approvals
and credit limits. Accounts receivable is presented net of reserves for doubtful accounts.
We estimate the net 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, we assess the need for a specific reserve for bad debts. Reserves are determined through analysis of the
aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in customer payment terms. Bad debt expense was less than 1% of net sales in each of fiscal years 2019 and
2018.
Inventories and Related Reserves
We state inventories at the lower of cost and net realizable value using the first-in, first-out method. Inventory cost includes
materials, labor and manufacturing overhead on manufactured inventory and all direct and associated costs, including inbound
freight, to acquire sourced products. See Note 2(y) for further information regarding yarn procurements. 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.
Goodwill
Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Salt Life, DTG2Go, and SSI, and an
insignificant amount of definite-lived intangibles were recorded with our acquisition of Coast. We did not record any separately
identifiable indefinite-lived intangibles associated with any of these acquisitions. Goodwill represents the excess of the purchase
price and related costs over the value assigned to net tangible and identifiable intangible assets acquired and liabilities
assumed. Goodwill must be tested for impairment at least annually or more frequently if events or changes in circumstances
indicate that the carrying amount may be impaired, and goodwill is required to be written down when impaired. The goodwill
impairment testing process involves the use of significant assumptions, estimates and judgments with respect to a variety of
factors, including projected sales, gross margins, selling, general and administrative expenses, capital expenditures and cash flows
and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. 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.
20
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 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. A valuation allowance is required to reduce the carrying value of deferred tax assets to the amount that is
more-likely-than-not to be realized. In making this final determination, we follow the Accounting Standards Codification 740,
Income Taxes ("ASC 740"), and look to taxable income in prior carryback years, reversals of existing temporary book/tax
differences, tax planning strategies and future taxable income exclusive of reversals of existing temporary differences. By its very
nature, future taxable income requires estimates and judgments about future events that may be predictable, but are far less certain
than past events that can be objectively measured.
We established a valuation allowance related to certain of our state operating loss carryforward amounts in accordance with the
provisions of ASC 740. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax
assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings
forecasts in the respective state tax jurisdictions. As of September 28, 2019, we had state NOLs of approximately $46.6 million,
with deferred tax assets of $2.2 million related to these state NOLs, and related valuation allowances against them of
approximately $0.5 million. These state net loss carryforwards expire at various intervals from 2020 through 2037.
Recent Accounting Standards
For information regarding recently issued accounting standards, refer to Note 2(ad) and Note 2(ae) to our Consolidated Financial
Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to
provide the information under this item.
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements for each of our fiscal years ended September 28, 2019, and September 29, 2018, 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 28, 2019, 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.
21
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 28, 2019.
In this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 Framework) ("COSO") in Internal Control – Integrated Framework. The scope of our efforts to comply with
the internal requirements of Section 404 of the Sarbanes-Oxley Act of 2002 with respect to fiscal year 2019 included all of our
operations. Based on our evaluation, our management has concluded that, as of September 28, 2019, our internal control over
financial reporting is effective.
The effectiveness of our internal control over financial reporting as of September 28, 2019, has been audited by Ernst & Young,
LLP ("EY"), our independent registered public accounting firm, who also audited our Consolidated Financial Statements. EY’s
attestation report on our internal controls over financial reporting is included herein.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the fourth quarter of fiscal year 2019 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
22
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Delta Apparel, Inc. and Subsidiaries’ internal control over financial reporting as of September 28, 2019, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Delta Apparel, Inc. and Subsidiaries (the Company)
maintained, in all material respects, effective internal control over financial reporting as of September 28, 2019, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of September 28, 2019, and September 29, 2018, and the related
consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the two years in the
period ended September 28, 2019, and the related notes and our report dated November 21, 2019, expressed an unqualified opinion
thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 21, 2019
23
Item 9B. Other Information
Fourth Amendment to Fifth Amended and Restated Credit Agreement
On November 19, 2019, Delta Apparel, and its Subsidiaries M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC,
and DTG2Go, LLC (collectively, the “Borrowers”) entered into a Fourth Amendment to Fifth Amended and Restated Credit
Agreement with Wells Fargo Bank, National Association (“Wells Fargo”) and the other lenders set forth therein (the “Fourth
Amendment”).
The Fifth Amended and Restated Credit Agreement, dated as of May 10, 2016 (the “Amended Credit Agreement”), was filed as
Exhibit 10.1 to Delta Apparel’s Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016. The First Amendment to the
Amended Credit Agreement was filed as Exhibit 10.2.5 to Delta Apparel’s Annual Report on Form 10-K filed with the SEC on
November 28, 2017. The Consent and Second Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta
Apparel’s Form 8-K filed with the SEC on March 13, 2018. The Consent and Third Amendment to the Amended Credit
Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed with the SEC on October 9, 2018.
The Fourth Amendment increases the borrowing capacity from $145.0 million to $170.0 million (subject to borrowing base
limitations), extends the maturity date from May 10, 2021 to November 19, 2024, reduces pricing on the revolver and first-in last-
out “FILO” borrowing components, adds 25% of the fair market value of eligible intellectual property into the borrowing base, and
makes certain other structural changes. In addition, the Fourth Amendment amends the definition of Fixed Charge Coverage Ratio
to exclude up to $10 million of capital expenditures incurred by the Borrowers in connection with the expansion of the distribution
facility located within the Town of Clinton, Anderson County, Tennessee.
The foregoing summary of the Fourth Amendment and the transactions contemplated thereby does not purport to be complete and
is qualified in its entirety by reference to the text of the Fourth Amendment, which is filed herewith as Exhibit 10.2.8 to this
Annual Report on Form 10-K and which is incorporated herein by reference.
Separate from the relationship related to the Amended Credit Agreement, as amended, certain lenders thereunder have engaged in,
or may in the future engage in, transactions with, and perform services for, Delta Apparel and/or its subsidiaries in the ordinary
course of business.
Item 10. Directors, Executive Officers and Corporate Governance
Part III
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 2019 fiscal year under the headings
"Proposal No. 1: Election of Directors", “Corporate Governance”, “Executive Officers” and “Delinquent Section 16(a) Reports .”
All of our employees, including our Chief Executive Officer 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 2019 fiscal year under the headings
“Executive Compensation” and “Compensation Tables.”
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 2019 fiscal year under the heading “Equity Compensation Plan Information."
On February 4, 2015, our shareholders re-approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock Plan") that was
originally approved by our shareholders on November 11, 2010. The re-approval of the 2010 Stock Plan, including the material
terms of the performance goals included in the 2010 Stock Plan, enabled us to continue to grant equity incentive compensation
24
awards structured in a manner intended to qualify as tax deductible, performance-based compensation under Section 162(m) of the
Internal Revenue Code of 1986, as applicable. Since November 2010, 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 been 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
28, 2019.
Plan Category
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-
average exercise
price of
outstanding
options, warrants
and rights
(b)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
(c)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
283,500 $
— $
283,500 $
19.78
—
19.78
538,464
—
538,464
For additional information on our stock-based compensation plans, see Note 12 - Stock-Based Compensation to the Consolidated
Financial Statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days following the end of our 2019 fiscal year under the heading
"Corporate Governance".
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days following the end of our 2019 fiscal year under the heading
“Proposal No. 4: Ratification of Appointment of Independent Registered Public Accounting Firm”.
Part IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements:
Report of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of September 28, 2019, and September 29, 2018.
Consolidated Statements of Operations for the years ended September 28, 2019, and September 29, 2018.
Consolidated Statements of Comprehensive Income for the years ended September 28, 2019, and September 29, 2018.
Consolidated Statements of Shareholders’ Equity for the years ended September 28, 2019, and September 29, 2018.
Consolidated Statements of Cash Flows for the years ended September 28, 2019, and September 29, 2018.
Notes to Consolidated Financial Statements.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Columns omitted
from schedules filed have been omitted because the information is not applicable.
25
(a)(3) Listing of Exhibits*
2.1
Asset Purchase Agreement dated as of August 27, 2013, among To The Game, LLC, Salt Life Holdings, LLC, Roger L.
Combs, Sr., Donald R. Combs, Richard Thompson, and Michael T. Hutto (excluding schedules and exhibits): Incorporated
by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 29, 2013.
3.1.1 Articles of Incorporation of the Company: Incorporated by reference to Exhibit 3.1 to the Company’s Form 10-12B filed on
December 30, 1999.
3.1.2 Amendment to Articles of Incorporation of the Company dated September 18, 2003: Incorporated by reference to Exhibit
3.1.2 to the Company’s Form 10-Q filed on November 5, 2003.
3.1.3 Amendment to Articles of Incorporation of the Company dated April 28, 2005: Incorporated by reference to Exhibit 3.1.3
to the Company’s Form 8-K filed on April 29, 2005.
3.1.4 Amendment to Articles of Incorporation of the Company dated November 8, 2007: Incorporated by reference to Exhibit
3.1.4 to the Company’s Form 10-K filed on August 28, 2009.
3.2.1
Bylaws of the Company: Incorporated by reference to Exhibit 3.2.1 to the Company’s Form 10-K filed on August 28, 2009.
3.2.2 Amendment to Bylaws of the Company adopted January 20, 2000: Incorporated by reference to Exhibit 3.2.2 to the
Company’s Form 10-K filed on August 28, 2009.
3.2.3 Amendment to Bylaws of the Company adopted February 17, 2000: Incorporated by reference to Exhibit 3.2.3 to the
Company’s Form 10-K filed on August 28, 2009.
3.2.4 Amendment to Bylaws of the Company adopted June 6, 2000: Incorporated by reference to Exhibit 3.2.4 to the Company’s
Form 10-K filed on August 28, 2009.
3.2.5 Amendment to Bylaws of the Company dated August 17, 2006: Incorporated by reference to Exhibit 3.2.5 to the
Company’s Form 10-K filed on August 28, 2009.
3.2.6 Amendment to Bylaws of the Company dated August 12, 2009: Incorporated by reference to Exhibit 3.2.6 to the
4.1
4.2
4.3
10.1
10.2
Company’s Form 10-K filed on August 28, 2009.
See Exhibits 3.1.1, 3.1.2, 3.1.3, 3.1.4, 3.2.1, 3.2.2, 3.2.3, 3.2.4, 3.2.5, and 3.2.6.
Specimen certificate for common stock, par value $0.01 per share, of the Company: Incorporated by reference to Exhibit
4.2 to the Company’s Form 10-12 B/A filed on May 3, 2000.
Description of Securities
See Exhibit 2.1.
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.
10.2.3 Fourth Amendment to Fourth Amended and Restated Loan and Security Agreement, dated February 27, 2015, 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 March 4, 2015.
26
10.2.4 Fifth Amended and Restated Credit Agreement, dated May 10, 2016, among Delta Apparel, Inc., M.J. Soffe, LLC,
Junkfood Clothing Company, Salt Life, LLC (f/k/a To The Game, LLC), and Art Gun, LLC, the financial institutions
named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and
Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on
May 12, 2016.
10.2.5 First Amendment to Fifth Amended and Restated Credit Agreement, dated November 27, 2017, among Delta Apparel, Inc.,
M.J. Soffe, LLC, Junkfood Clothing Company, Salt Life, LLC, and Art Gun, LLC, the financial institutions named therein
as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead Arranger, and Sole Book
Runner: Incorporated by reference to Exhibit 10.2.5 to the Company’s Annual Report on Form 10-K filed on November 28,
2017.
10.2.6 Consent and Second Amendment to Fifth Amended and Restated Credit Agreement, dated March 9, 2018, among Delta
Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and Art Gun, LLC, the financial
institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead
Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on March 13, 2018.
10.2.7 Consent and Third Amendment to Fifth Amended and Restated Credit Agreement, dated October 8, 2018, among Delta
Apparel, Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial
institutions named therein as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent, Sole Lead
Arranger, and Sole Book Runner: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on October 9, 2018.
10.2.8 Fourth Amendment to Fifth Amended and Restated Credit Agreement, dated November 19, 2019, among Delta Apparel,
Inc., M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC, the financial institutions named
therein as Lenders, and Wells Fargo Bank, National Association, as agent for Lenders.
10.3
10.4
10.5
10.6
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.***
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.***
Delta Apparel, Inc. 2010 Stock Plan: Incorporated by reference to Exhibit 99.2 to the Company’s Form 8-K filed on
November 4, 2010, and Exhibit 1 to the Company's Proxy Statement filed on December 19, 2014.***
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 Quarterly Report on 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 Annual Report on 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 Current Report on
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 Current Report on Form 8-
K filed on March 14, 2013.**
10.6.4 Fourth Amendment to Yarn Supply Agreement dated as of December 11, 2015, between Delta Apparel, Inc. and Parkdale
Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.6.4 to the Company’s Annual Report on
Form 10-K filed on December 15, 2015.**
10.6.5 Fifth Amendment to Yarn Supply Agreement dated as of December 27, 2018, between Delta Apparel, Inc. and Parkdale
Mills, LLC, and Parkdale America, LLC: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on December 28, 2018.**
10.7
10.8
10.9
Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated December 31, 2015: Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 7, 2016.***
Employment Agreement between Delta Apparel, Inc. and Deborah H. Merrill dated January 1, 2019: Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***
Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated June 10, 2009: Incorporated by
reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K filed on August 28, 2009.***
27
10.9.1 First Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated August 17,
2011: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19,
2011.***
10.9.2 Second Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated June 6,
2012: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012.***
10.9.3 Third Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated December 5,
2014: Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 8,
2014.***
10.9.4 Fourth Amendment to Employment Agreement between Delta Apparel, Inc. and Robert W. Humphreys dated April 27,
2017: Incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on April 28, 2017.***
10.10 Employment Agreement between Delta Apparel, Inc. and Justin M. Grow dated December 31, 2015: Incorporated by
reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K filed on November 29, 2016.***
10.11 Employment Agreement between Delta Apparel, Inc. and Justin M. Grow dated January 1, 2019: Incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***
10.12 Employment Agreement between Delta Apparel, Inc. and Jeffery N. Stillwell dated December 31, 2015: Incorporated by
reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K filed on November 19, 2018.***
10.13 Employment Agreement between Delta Apparel, Inc. and Jeffery N. Stillwell dated January 1, 2019: Incorporated by
reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 2, 2019.***
10.14 Employment Agreement between Delta Apparel, Inc. and John T. Tester dated October 28, 2019: Incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on October 28, 2019.***
10.15 Delta Apparel, Inc. Short-Term Incentive Compensation Plan, Effective June 1, 2000, Amended and Restated Effective
November 19, 2019: Incorporated by reference to Exhibit A to the Company's Proxy Statement filed on September 28,
2011, and Exhibit 1 to the Company's Proxy Statement filed on December 29, 2015.***
10.16 Agreement between Delta Apparel, Inc. and IMG Worldwide, Inc. dated December 6, 2013: Incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 6, 2013.
10.17
10.18
10.19
10.20
10.21
Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed on February 9, 2016.***
Form of Restricted Stock Unit Award Agreement: Incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q filed on February 9, 2016.***
Form of Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed on May 8, 2017.***
Form of Restricted Stock Unit and Performance Unit Award Agreement: Incorporated by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K filed on November 28, 2017.***
Form of Restricted Stock Unit Award Agreement: Incorporated by reference to Exhibit 10.23 to the Company's Quarterly
Report on Form 10-Q filed on May 7, 2018.***
10.22
Form of Restricted Stock Unit and Performance Unit Award Agreement.***
16.1
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.
16.2 March 8, 2016, Correspondence from KPMG LLP to SEC: Incorporated by reference to Exhibit 16.1 to the Company's
21
23.1
31.1
31.2
32.1
Form 8-K filed on March 9, 2016.
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
28
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.
XBRL Instance Document
101.INS
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
*
**
***
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.
Item 16. Form 10-K Summary
None
29
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
November 21, 2019
Date
DELTA APPAREL, INC.
(Registrant)
By: Deborah H. Merrill
Deborah H. Merrill
Chief Financial Officer and
President, Delta Group
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and as of the dates indicated.
/s/ Anita D. Britt
Anita D. Britt
Director
/s/ J. Bradley Campbell
J. Bradley Campbell
Director
/s/ G. Jay Gogue
G. Jay Gogue
Director
/s/ Glenda E. Hood
Glenda E. Hood
Director
11/21/2019
Date
/s/ Robert W. Humphreys
Robert W. Humphreys
Chairman and Chief Executive Officer
11/21/2019
/s/ Deborah H. Merrill
Date Deborah H. Merrill
11/21/2019
Date
11/21/2019
Date
Chief Financial Officer and President, Delta Group
(principal financial and accounting officer)
11/21/2019
Date
/s/ Robert E. Staton, Sr.
Robert E. Staton, Sr.
Director
11/21/2019
/s/ A. Alexander Taylor, II
Date A. Alexander Taylor, II
Director
/s/ David G. Whalen
David G. Whalen
Director
11/21/2019
Date
11/21/2019
Date
11/21/2019
Date
30
Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 28, 2019, and September 29, 2018
Consolidated Statements of Operations for the two years ended September 28, 2019, and September 29, 2018
Consolidated Statements of Comprehensive Income for the two years ended September 28, 2019, and September 29, 2018
Consolidated Statements of Shareholders’ Equity for the two years ended September 28, 2019, and September 29, 2018
Consolidated Statements of Cash Flows for the two years ended September 28 2019, and September 29, 2018
Notes to Consolidated Financial Statements
Note 1—The Company
Note 2—Significant Accounting Policies
Note 3—Acquisitions
Note 4—Inventories
Note 5—Property, Plant and Equipment
Note 6—Goodwill and Intangible Assets
Note 7—Accrued Expenses
Note 8—Long-Term Debt
Note 9—Income Taxes
Note 10—Leases
Note 11—Employee Benefit Plans
Note 12—Stock-Based Compensation
Note 13—Business Segments
Note 14—Repurchase of Common Stock
Note 15—Commitments and Contingencies
Note 16—Subsequent Events
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-8
F-8
F-15
F-16
F-16
F-16
F-17
F-17
F-20
F-22
F-22
F-22
F-24
F-26
F-26
F-29
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and Subsidiaries (the Company) as of
September 28, 2019 and September 29, 2018, the related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the two years in the period ended September 28, 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of September 28, 2019 and September 29, 2018, and the
results of its operations and its cash flows for each of the two years in the period ended September 28, 2019, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of September 28, 2019, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated November 21, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Atlanta, Georgia
November 21, 2019
F-2
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, less allowances of $327 and $1,475, respectively
Other receivables
Inventories, net
Note receivable
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Equity method investment
Other assets
Total assets
Liabilities and Equity
Liabilities:
Accounts payable
Accrued expenses
Current portion of contingent consideration
Current portion of capital lease financing
Current portion of long-term debt
Total current liabilities
Long-term income taxes payable
Long-term capital lease financing, less current maturities
Long-term debt, less current maturities
Deferred income taxes
Long-term contingent consideration
Other liabilities
Total liabilities
Shareholders’ equity:
Preferred stock—$0.01 par value, 2,000,000 shares authorized, none issued and
outstanding
Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares
issued, and 6,921,417 and 6,909,446 shares outstanding as of September 28, 2019, and
September 29, 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock —2,725,555 and 2,737,526 shares as of September 28, 2019, and
September 29, 2018, respectively
Equity attributable to Delta Apparel, Inc.
Equity attributable to non–controlling interest
Total equity
Total liabilities and equity
See accompanying Notes to Consolidated Financial Statements.
F-3
Fiscal Year Ended
September 28,
2019
September 29,
2018
$
$
$
$
$
605 $
59,337
1,550
179,107
—
2,999
243,598
61,404
37,897
21,607
1,514
10,388
1,580
377,988 $
52,320 $
20,791
2,790
6,434
6,540
88,875
3,977
12,836
109,296
1,519
6,304
1,293
224,100 $
460
45,605
1,274
174,983
100
3,000
225,422
52,114
33,217
20,498
1,374
8,980
2,004
343,609
48,008
16,742
638
3,846
6,577
75,811
4,259
9,302
92,083
2,132
9,904
—
193,491
—
—
96
59,855
136,937
(969 )
(41,750 )
154,169
(281 )
153,888
377,988 $
96
61,979
128,695
136
(40,881 )
150,025
93
150,118
343,609
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
Other income, net
Operating income
Interest expense
Earnings before provision for income taxes
Provision for income taxes
Consolidated net earnings
Net loss attributable to non-controlling interest
Net earnings attributable to shareholders
Basic earnings per share
Diluted 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
September 28,
2019
September 29,
2018
$
$
$
$
431,730 $
346,578
85,152
70,220
(963 )
15,895
7,550
8,345
477
7,868 $
(374 )
8,242
1.19 $
1.17 $
6,929
135
7,064
395,450
313,429
82,021
66,969
(2,351 )
17,403
5,713
11,690
10,460
1,230
(107 )
1,337
0.19
0.18
7,149
276
7,425
F-4
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Net earnings attributable to shareholders
Other comprehensive (loss) income related to unrealized (loss) gain on derivatives, net of
income tax
Consolidated comprehensive income
$
$
8,242 $
(1,105 )
7,137 $
1,337
171
1,508
See accompanying Notes to Consolidated Financial Statements
Fiscal Year Ended
September 28,
2019
September 29,
2018
F-5
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share amounts)
Common Stock
Shares
Amount Capital
Additional
Paid-In Retained Comprehensive Treasury Stock
Earnings Income (Loss) Shares
Non-
Controlling
Amount Interest
Total
Accumulated
Other
Balance at September 30, 2017
9,646,972 $
96 $ 61,065 $ 127,358 $
(35 ) 2,346,675 $ (32,597 )
— $ 155,887
Net earnings
— —
—
1,337
—
—
—
—
1,337
Other comprehensive loss
Net loss attributable to
non-controlling interest
— —
—
—
171
—
—
—
171
— —
—
—
—
—
—
(107 )
(107 )
Vested stock awards
— —
(1,661 )
—
—
(73,123 )
716
—
(945 )
Purchase of common stock
— —
—
—
— 463,974 (9,000 )
—
(9,000 )
Stock based compensation
Capital contributions by
non-controlling interest
— —
2,575
—
—
—
—
—
2,575
— —
—
—
—
—
—
200
200
Balance at September 29, 2018
9,646,972
96 61,979 128,695
136 2,737,526 (40,881 )
93 150,118
Net earnings
— —
—
8,242
—
—
—
—
8,242
Other comprehensive loss
Net loss attributable to non-
controlling interest
— —
—
—
(1,105 )
—
—
—
(1,105 )
— —
—
—
—
—
—
(374 )
(374 )
Vested stock awards
— —
(3,980 )
—
— (153,472 ) 1,867
—
(2,113 )
Purchase of common stock
— —
—
—
— 141,501 (2,736 )
—
(2,736 )
Stock based compensation
— —
1,856
—
—
—
—
—
1,856
Balance at September 28, 2019
9,646,972 $
96 $ 59,855 $ 136,937 $
(969 ) 2,725,555 $ (41,750 ) $
(281 ) $ 153,888
See accompanying Notes to Consolidated Financial Statements.
F-6
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
Operating activities:
Consolidated net earnings
Adjustments to consolidated net earnings attributable to net cash provided by
operating activities:
Depreciation
Amortization of intangibles
Amortization of deferred financing fees
(Benefit from) provision for deferred income taxes
Non-cash stock compensation
Loss on disposal of equipment
Other, net
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accrued expenses
Income taxes
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
Proceeds from sale of business
Investment in capital stock
Investment by non-controlling member
Cash paid for business
Net cash used in investing activities
Financing activities:
Proceeds from long-term debt
Repayment of long-term debt
Payment of capital financing
Payment of contingent consideration
Repurchase of common stock
Payment of withholding taxes on stock awards
Net cash provided by (used in) financing activities
Net increase (decrease) 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 during the period for income taxes, net of refunds received
Non-cash financing activity—seller financing
Non-cash financing activity—capital lease agreements
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
$
F-7
Fiscal Year Ended
September 28,
2019
September 29,
2018
$
7,868 $
1,230
9,953
1,811
312
(384 )
1,856
289
(2,292 )
(12,824 )
(2,997 )
878
(71 )
1,951
3,670
(594 )
2
9,428
(6,063 )
30
—
—
—
(5,424 )
(11,457 )
452,055
(440,130 )
(4,338 )
(564 )
(2,736 )
(2,113 )
2,174
145
460
605 $
8,736
1,253
306
5,760
2,575
130
(2,398 )
1,466
715
(208 )
53
(1,904 )
(994 )
4,573
(55 )
21,238
(5,769 )
5,779
1,946
(500 )
200
(16,602 )
(14,946 )
459,385
(453,579 )
(2,325 )
—
(8,940 )
(945 )
(6,404 )
(112 )
572
460
7,064 $
890 $
— $
11,406 $
5,052
260
5,000
6,840
Delta Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 28, 2019
Note 1—The Company
Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel,"
"we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 8,500
employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel
products under our primary brands of Salt Life®, COAST®, Soffe®, and Delta. We are a market leader in the direct-to-garment
digital print and fulfillment industry, bringing DTG2Go technology and innovation to the supply chain of our customers. We
specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting
goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-
retailers, the U.S. military, and through our business-to-business ecommerce sites. Our products are also made available direct-to-
consumer on our websites and in our branded retail stores. This diversified distribution allows us to capitalize on our strengths to
provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span
multiple retail channels.
We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in
our owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and
react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El
Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our
distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping
on our catalog products and weekly replenishments to retailers.
Note 2—Significant Accounting Policies
(a) Basis of Presentation: Our consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America ("GAAP") and include the accounts of Delta Apparel and its wholly-owned domestic and
foreign subsidiaries, as well as its majority-owned subsidiary, Salt Life Beverage, LLC ("Salt Life Beverage"). In January 2018,
Delta Apparel, Inc. established Salt Life Beverage, of which Delta Apparel, through its subsidiary, holds a 60% ownership
interest. Salt Life Beverage was formed to manufacture, market and sell Salt Life-branded alcoholic beverage products. We have
concluded we have a controlling financial interest in Salt Life Beverage and have consolidated its results in accordance with
Accounting Standards Codification ("ASC") ASC-810, Consolidations, and Accounting Standards Update ("ASU") No. 2015-02,
Consolidation (Topic 810); Amendments to Consolidations. The non–controlling interest represents the 40% proportionate share
of the results of Salt Life Beverage. All significant intercompany accounts and transactions have been eliminated in consolidation.
We operate our business in two distinct segments: Delta Group and Salt Life Group. 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.
(b) Fiscal Year: We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. All references to "2019"
and "2018" relate to the 52 week fiscal years ended on September 28, 2019, and September 29, 2018, respectively.
(c) Use of Estimates: The preparation of financial statements in conformity with GAAP 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, such
as allowance for doubtful accounts receivable, refund liabilities, inventory obsolescence, the carrying value of goodwill, and
income tax assets and related valuation allowance. Our actual results may differ from our estimates.
(d) Cash and Cash Equivalents: Cash and cash equivalents consists of cash and temporary investments with original maturities
of three months or less.
(e) 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. Accounts receivable is presented net of reserves for doubtful accounts.
F-8
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, we assess the need for a specific reserve for bad debts. Reserves are determined through analysis of the
aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic
trends and changes in customer payment terms. Bad debt expense was less than 1% of net sales in each of fiscal years 2019 and
2018.
(f) Inventories: We state inventories at the lower of cost or net realizable value using the first-in, first-out method. Inventory cost
includes materials, labor and manufacturing overhead on manufactured inventory, and all direct and associated costs, including
inbound freight, to acquire sourced products. See Note 2(y) for further information regarding yarn procurements. 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.
(g) 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.
(h) Internally Developed Software Costs: We account for internally developed software in accordance with ASC 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.
(i) Impairment of Long-Lived Assets (Including Amortizable Intangible Assets): In accordance with ASC 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 value and an impairment loss is recognized.
(j) Goodwill and Intangible Assets: We recorded goodwill and intangible assets with definite lives, including trade names and
trademarks, customer relationships, technology, and non-compete agreements, as a result of several acquisitions. 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 acquired and liabilities assumed, and is not
amortized. The total amount of goodwill is expected to be deductible for tax purposes. See Note 6 — Goodwill and Intangible
Assets for further details.
(k) 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.
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 methodology 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,
including projected sales, gross margins, selling, general and administrative expenses, and capital expenditures, 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
annual impairment analysis, there is not an impairment on the goodwill recorded in our financial statements.
Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be
no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the future. If
our assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be triggered and
goodwill may be impaired.
F-9
(l) Contingent Consideration: 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 DTG2Go acquisitions in August 2013 and March 2018, respectively. We remeasure
contingent consideration in accordance with ASC 805, Business Combinations based on historical operating results and projections
for the future. The estimated fair value of the contingent consideration for Salt Life was $0.2 million and $1.3 million at September
28, 2019, and September 29, 2018, respectively. The DTG2Go contingent consideration was valued at $8.9 million and $9.2
million at September 28, 2019 and September 29, 2018, respectively.
(m) Revenue Recognition: Revenue is recognized when performance obligations under the terms of the contracts are satisfied.
Our performance obligation primarily consists of delivering products to our customers. Control is transferred upon providing the
products to customers in our retail stores, upon shipment of our products to the consumers from our ecommerce sites, and upon
shipment from our distribution centers to our customers in our wholesale operations. Once control is transferred to the customer,
we have completed our performance obligation.
Our receivables resulting from wholesale customers are generally collected within two months, in accordance with our established
credit terms. Our direct-to-consumer ecommerce and retail store receivables are collected within a few days. Our revenue,
including freight income, is recognized net of applicable taxes in our Consolidated Statements of Operations.
In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these
arrangements are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are
recorded net of discounts, allowances, and operational chargebacks. As certain allowances and other deductions are not finalized
until the end of a season, program or other event which may not have occurred, we estimate such discounts, allowances, and
returns that we expect to provide.
We only recognize revenue to the extent that it is probable that we will not recognize a significant reversal of revenue when the
uncertainties related to the variability are ultimately resolved. In determining our estimates for discounts, allowances, chargebacks,
and returns, we consider historical and current trends, agreements with our customers and retailer performance. We record these
discounts, returns and allowances as a reduction to net sales in our Consolidated Statements of Operations and as a refund liability
in our accrued expenses in our Consolidated Balance Sheets, with the estimated value of inventory expected to be returned in
prepaid and other current assets in our Consolidated Balance Sheets. As of September 28, 2019, there was $1.0 million in refund
liabilities for customer returns, allowances, markdowns and discounts within accrued expenses.
We record shipping and handling charges incurred by us before and after the customer obtains control as a fulfillment cost rather
than an additional promised service. Our customers' terms are less than one year from the transfer of goods, and we do not adjust
receivable amounts for the impact of the time value of money. We do not capitalize costs of obtaining a contract which we expect
to recover, such as commissions, as the amortization period of the asset recognized would be one year or less.
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 licensee's royalty report in accordance with the terms
of the executed license agreement and when all other revenue recognition criteria have been met.
Our revenue streams consist of wholesale, direct-to-consumer ecommerce and retail stores which are included in our Consolidated
Statements of Operations. The table below identifies the amount and percentage of net sales by distribution channel (in thousands):
Retail
Direct-to-consumer ecommerce
Wholesale
Net Sales
Fiscal Year Ended
September 28, 2019
September 29, 2018
$
%
$
%
$
$
4,396
5,526
421,808
431,730
1 % $
1 %
98 %
100 % $
3,560
5,339
386,551
395,450
1 %
1 %
98 %
100 %
F-10
The table below provides net sales by reportable segment (in thousands) and the percentage of net sales by distribution channel for
each reportable segment:
Fiscal Year Ended September 28, 2019
Delta Group
Salt Life Group
Total
Delta Group
Salt Life Group
Total
Direct-to-
Consumer
ecommerce Wholesale
0.3 %
7.6 %
0.3 %
9.9 %
99.4 %
82.5 %
Net Sales Retail
$
389,075
42,655
431,730
$
Fiscal Year Ended September 29, 2018
Retail
Direct-to-
Consumer
ecommerce Wholesale
0.3 %
6.2 %
0.4 %
10.3 %
99.3 %
83.5 %
Net Sales
$
356,009
39,441
395,450
$
(n) 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.
(o) Cost of Goods Sold: We include all manufacturing and sourcing costs incurred prior to the receipt of finished goods at our
distribution facilities in cost of goods sold. The cost of goods sold principally includes product costs, purchasing costs, inbound
freight charges, insurance, inventory write-downs, and depreciation and amortization expense associated with our manufacturing
and sourcing operations. Our gross margins may not be comparable to other companies, since some entities may include costs
related to their distribution network in cost of goods sold, and we include them in selling, general and administrative expenses.
(p) 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 $17.6 million and $16.9 million in fiscal years 2019 and 2018, respectively. In addition, selling, general and
administrative expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses,
royalty payments on licensed products, and other general and administrative expenses.
(q) Advertising Costs: All costs associated with advertising and promoting our products are expensed during the period 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 some of our customers. Depending on the customer, our defined
cooperative programs allow the customer to use from 2% 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. We record cooperative advertising costs as a selling expense and the related cooperative
advertising reserve as an accrued liability. Advertising costs totaled $4.7 million and $4.0 million in fiscal years 2019 and 2018,
respectively. Included in these costs were $0.8 million and $0.7 million in fiscal years 2019 and 2018, respectively, related to our
cooperative advertising programs.
(r) Stock-Based Compensation: Stock-based compensation is accounted for under the provisions of ASC 718, Compensation –
Stock Compensation, which 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. 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 selling, general and administrative expense in the Consolidated Statements of Operations over the vesting period.
(s) Income Taxes: We account for income taxes pursuant to ASC 740, 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.
F-11
(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 ASC 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 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. Property, plant and equipment 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 during the period transacted. We recognize the resulting foreign exchange gains and losses as a component
of other income, net 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 fixed rate debt approximates fair value based on the current rates
offered to us for debt of the same remaining maturities.
(w) Other Comprehensive Income: Other Comprehensive Income consists of net earnings and unrealized gains from cash flow
hedges, net of tax. Accumulated other comprehensive (loss) income ("AOCI") contained in the shareholders’ equity section of the
Consolidated Balance Sheets related to interest rate swap agreements and was a loss of $1.0 million as of September 28, 2019, and
income of $0.1 million as of September 29, 2018.
(x) Yarn and Cotton Procurements: We have a supply agreement with Parkdale Mills, Inc. and Parkdale America, LLC,
(collectively "Parkdale"), to supply our yarn requirements that has been in place since 2005, with our existing agreement running
through December 31, 2021. 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.
(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 ASC 815, Derivatives and Hedging, as amended. ASC 815
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in
other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the
Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair
value depends upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. We include all
derivative instruments at fair value in our Consolidated Balance Sheets. For derivative financial instruments related to the
production of our products that are not designated as a hedge, we recognize the changes in fair value in cost of sales. For
derivatives designated as cash flow hedges, to the extent effective, we recognize the changes in fair value in accumulated other
comprehensive income (loss) until the hedged item is recognized in income. Any ineffectiveness in the hedge is recognized
immediately in income in the line item that is consistent with the nature of the hedged risk. We formally document all relationships
between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various
hedge transactions, at the inception of the transactions.
We are exposed to counterparty credit risks on all derivatives. Because these amounts are recorded at fair value, the full amount of
our exposure is the carrying value of these instruments. We only enter into derivative transactions with well-established
institutions and therefore we believe the counterparty credit risk is minimal.
F-12
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the
cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized
gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There
were no raw material option agreements outstanding at September 28, 2019 or September 29, 2018.
The table below indicates information on our outstanding interest rate swap agreements during fiscal years 2019 and 2018:
Interest Rate Swap
Interest Rate Swap
Effective Date
July 19, 2017
July 25, 2018
Notational Amount
$10 million
$20 million
LIBOR Rate
1.99%
3.18%
Maturity Date
May 10, 2021
July 25, 2023
During fiscal years 2019 and 2018, these 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 AOCI (loss) gain, net of taxes, of ($1.1 million) and $0.2
million for the years ended September 28, 2019, and September 29, 2018, respectively. See Note 15(d) - Fair Value
Measurements for further details.
(z) Equity Method Accounting: As of September 28, 2019, we owned 31% of the outstanding capital stock in our Honduran
equity method investment. We apply the equity method of accounting for our investment, as we have less than a 50% ownership
interest and can exert significant influence. We do not exercise control over this company and do not have substantive participating
rights. As such, this entity is not considered a variable interest entity.
(aa) Net Income Attributable to Non-Controlling Interest: The net income attributable to non-controlling interest represents the
share of net income allocated to members of our consolidated affiliates.
(ab) Business Combinations: Business combinations completed by Delta Apparel have been accounted for under the acquisition
method of accounting. The acquisition method requires the assets acquired and liabilities assumed, including contingencies, to be
recorded at the fair value determined at the acquisition date and changes thereafter recorded in income. We generally obtain
independent third-party valuation studies for certain assets acquired and liabilities assumed to assist us in determining the fair
value. Goodwill represents the purchase price over the fair value of tangible and intangible assets acquired and liabilities assumed.
The results of acquired businesses are included in our results of operations from the date of acquisition.
(ac) Capital Leases: We classify leases as capital or operating leases in accordance with ASC 840, Leases. We account for a lease
that transfers substantially all of the benefits and risks incidental to ownership of property as a capital lease. At the inception of a
capital lease, we record an asset and payment obligation at an amount equal to the lesser of the present value of the minimum lease
payments and the property's fair market value. All other leases are accounted for as operating leases, and the related lease
payments are charged to expenses as incurred.
(ad) Recently Adopted Accounting Pronouncements: In May 2014, the FASB issued ASU 2014-19, Revenue from Contracts
with Customers ("ASU 2014-09"), which replaced the existing revenue recognition guidance in U.S. GAAP. Since the issuance of
ASU 2014-09, the FASB released several amendments to improve and clarify the implementation guidance, as well as to change
the effective date. These standards have been collectively codified within ASC 606, Revenue from Contracts with Customers
("ASC 606"). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers. The standard also requires additional disclosures about the nature, timing, and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in those judgments.
We adopted ASC 606 effective October 1, 2018 using the modified retrospective method. We applied the standard to all contracts
as of the transition date. Information for prior years has not been retrospectively adjusted and continues to reflect the authoritative
accounting standards in effect for those periods.
With the adoption of ASC 606, the timing of revenue recognition for our primary revenue streams remained substantially
unchanged, with no material effect on net sales. See the table below (in thousands) for the effect of the adoption of the standard on
our Consolidated Balance Sheet as of September 28, 2019 due to the change in recording provisions for customer refunds as a
liability instead of netted against trade accounts receivable.
F-13
Accounts receivable, net
Prepaid expenses and other current assets
Total Current Assets
Total assets
Accrued expenses
Total current liabilities
Total liabilities
Total liabilities and equity
As Reported
September 28,
2019
59,337
2,999
243,598
377,988
20,791
88,875
224,100
377,988
Effect of
Standard
(682)
(155)
(837)
(837)
(1,047)
(1,047)
(1,047)
(1,047)
Balances
without
Adoption
58,655
2,844
242,761
377,151
19,744
87,828
223,053
376,941
(ae) Recently Issued Accounting Pronouncements Not Yet Adopted:
In February 2016, the FASB issued ASU No. 2016-02, Leases, ("ASU 2016-02") which is codified in ASC 842, Leases. ASC 842
requires lessees to recognize assets and liabilities for most leases. All leases will be required to be recorded on the balance sheet
with the exception of short-term leases. The standard allows entities to present the effects of the accounting change as either a
cumulative adjustment as of the beginning of the earliest period presented or as of the date of adoption. ASC 842 is effective for
financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods,
with early application permitted. ASC 842 will, therefore, be adopted in our first quarter of the fiscal year beginning September 29,
2019 (fiscal year 2020).
We have an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to
our financial statements. The team is also tasked with identifying appropriate changes to our business processes, systems, and
controls to support recognition and disclosure under the new standard. The implementation team reports its findings and progress
of the project to management on a frequent basis and to the Audit Committee of the Board of Directors on a quarterly basis. We
have identified contracts with potential leasing arrangements, entered leases into a tracking and accounting software, and are
analyzing the results of the impact of adoption. Based on our current lease portfolio, we preliminarily expect ASC 842 to have a
material impact on our consolidated balance sheets primarily related to the recognition of operating lease assets and liabilities.
However, we do not expect the standard to have a material impact on our consolidated statements of operations, comprehensive
income, or cash flows. Further details regarding our undiscounted future lease payments as well as the timing of those payments
are included within Note 10 - Leases.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities, ("ASU 2017-12"). The amendments in ASU 2017-12 apply to any entity that elects to apply hedge
accounting in accordance with U.S. GAAP. ASU 2017-12 permits more flexibility in hedging interest rate risk for both variable
rate and fixed rate financial instruments, and the ability to hedge risk components for nonfinancial hedges. In addition, this ASU
requires an entity to present the earnings effect of hedging the instrument in the same income statement line in which the earnings
effect of the hedge item is reported. In addition, companies no longer need to separately measure and report hedge ineffectiveness
and can use an amortization approach or continue with mark-to-market accounting. ASU 2017-12 is effective for financial
statements issued for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. ASU 2017-
12 will be adopted in the first quarter of our fiscal year beginning September 29, 2019 (fiscal year 2020). The provisions of ASU
2017-12 are not anticipated to have a material effect on our financial condition, results of operations, cash flows or disclosures.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and other (Topic 350), Simplifying the Test for Goodwill
Impairment, ("ASU 2017-04"). To simplify the subsequent measurement of goodwill, ASU 2017-04 eliminates Step 2 from the
goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to
determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities)
following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a
business combination. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment
charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects
from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore,
the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to
each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative
assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for financial
statements issued for annual and interim periods beginning after December 15, 2019. ASU 2017-04 will therefore be effective in
our fiscal year beginning October 4, 2020 (fiscal year 2021). The provisions of ASU 2017-04 are not anticipated to have a material
effect on our financial condition, results of operations, cash flows or disclosures.
F-14
Note 3—Acquisitions
On October 8, 2018, our DTG2Go, LLC subsidiary purchased substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI
Digital Print Services ("SSI"), a premium provider of direct-to-garment digital printed products. The SSI business operated from
locations in Iowa and Colorado serving the western and mid-western parts of the United States. During the fiscal 2019 second
quarter, we ceased production at the operation in Colorado, as the location was not strategic because it served the same geographic
locations as the Iowa and existing DTG2Go Nevada locations.
We have included the financial results of the acquired entity since the date of the acquisition in our Delta Group segment. It is not
practicable to disclose the revenue and income of SSI since the acquisition date, as we have integrated the SSI and DTG2Go
businesses together since acquisition.
The SSI acquisition purchase price consisted of the following (in thousands):
Cash
Promissory note
Capital lease financing
Net working capital adjustment
Total consideration
$
$
2,000
7,000
3,000
729
12,729
During the fiscal 2019 fourth quarter, we completed the accounting for the acquisition. The final allocation of consideration to the
assets and liabilities are noted in the table below, which includes measurement period adjustments recorded in our third quarter of
fiscal year 2019 for additional information obtained on conditions that existed at the acquisition date. The total amount of
goodwill is expected to be deductible for tax purposes.
Accounts receivable
Inventory
Other current assets
Fixed assets
Goodwill
Intangible assets
Accounts payable
Consideration paid
Allocation as of
October 8, 2018
Measurement
Period
Adjustments
Allocation as of
September 28,
2019
$
$
1,184 $
1,127
86
3,400
3,380
4,020
(668 )
12,529 $
— $
—
—
—
1,300
(1,100 )
—
200 $
1,184
1,127
86
3,400
4,680
2,920
(668 )
12,729
We accounted for the SSI acquisition pursuant to ASC 805, Business Combinations, with the purchase price allocated based upon
fair value. The fair value of the fixed assets acquired were estimated using the market approach, based on analysis of sales and
offerings for assets that are considered similar to the acquired assets. The fair value of the acquired customer relationships
intangible assets was estimated using discounted cash flows using the multi-period excess earnings method. The methods used to
determine the fair value assigned to the fixed and intangible assets fall into Level 3 inputs as defined by ASC 820, Fair Value
Measurements and Disclosures.
F-15
Note 4—Inventories
Inventories, net of reserves of $10.0 million and $10.5 million as of September 28, 2019, and September 29, 2018, respectively,
consist of the following (in thousands):
Raw materials
Work in process
Finished goods
September 28,
2019
12,022
17,765
149,320
179,107
$
$
September 29,
2018
9,641
18,327
147,015
174,983
$
$
Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and
direct embellishment materials for the Salt Life Group.
Note 5—Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands, except economic life data):
Land and land improvements
Buildings
Machinery and equipment
Computers and software
Furniture and fixtures
Leasehold improvements
Vehicles and related equipment
Construction in progress
Less accumulated depreciation and amortization
$
Estimated
Useful Life (in
years)
25
20
10
3-10
7
3-10
5
N/A
$
September 28,
2019
September 29,
2018
569 $
3,715
99,962
21,065
3,650
5,790
587
7,873
143,211
(81,807 )
61,404 $
569
3,096
90,565
20,724
3,073
5,702
754
1,649
126,132
(74,018 )
52,114
The acquisition cost of machinery and equipment acquired under capital leases was $28.0 million and $16.6 million as of
September 28, 2019, and September 29, 2018, respectively.
Note 6—Goodwill and Intangible Assets
Goodwill and components of intangible assets consist of the following (in thousands):
September 28, 2019
September 29, 2018
Cost
Accumulated
Amortization
Net
Value Cost
Accumulated
Amortization
Net
Value
Economic
Life
$ 37,897 $
— $ 37,897 $ 33,217 $
— $ 33,217 N/A
Goodwill
Intangibles:
Tradename/trademarks
Customer relationships
Technology
$ 16,090 $
7,400
1,720
(3,278 ) $ 12,812 $ 16,090 $
(993 ) 6,407 4,500
431 1,720
(1,289 )
(2,736 ) $ 13,354
20 - 30
yrs
(253 ) 4,247 20 yrs
615 10 yrs
(1,105 )
License Agreements
2,100
(630 ) 1,470 2,100
(527 ) 1,573
Non-compete agreements
Total intangibles
1,657
$ 28,967 $
(1,170 )
487 1,637
(7,360 ) $ 21,607 $ 26,047 $
(928 )
709
(5,549 ) $ 20,498
15 - 30
yrs
4 – 8.5
yrs
F-16
Goodwill represents the acquired goodwill net of the cumulative impairment losses recorded in fiscal year 2011 of $0.6 million. As
of September 28, 2019, the Delta Group segment includes $18.0 million of goodwill, and the Salt Life Group segment includes
$19.9 million.
Depending on the type of intangible assets, amortization is recorded under cost of goods sold or selling, general and administrative
expenses. Amortization expense for intangible assets was $1.8 million for the year ended September 28, 2019, and $1.3 million for
the year ended September 29, 2018. Amortization expense is estimated to be approximately $1.7 million for fiscal year 2020, $1.6
million for each of fiscal years 2021 and 2022, $1.5 million for fiscal year 2023, and approximately $1.4 million for fiscal year
2024.
Note 7—Accrued Expenses
Accrued expenses consist of the following (in thousands):
Accrued employee compensation and benefits
Taxes accrued and withheld
Refund liabilities
Accrued freight
Income taxes payable
Other
Note 8—Long-Term Debt
Long-term debt consists of the following (in thousands):
September 28,
2019
September 29,
2018
$
$
13,388 $
1,160
1,047
969
379
3,848
20,791 $
11,138
882
—
1,023
—
3,699
16,742
Revolving U.S. credit facility, interest at base rate or adjusted LIBOR rate plus an applicable margin
(interest at 4.2% on September 28, 2019) due May 2021
Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 6.9% due August 2025
(denominated in U.S. dollars)
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments beginning
November 2014 through December 2020 (denominated in U.S. dollars)
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments beginning
June 2016 through April 2022 (denominated in U.S. dollars)
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments beginning
October 2017 through September 2021 (denominated in U.S. dollars)
Salt Life acquisition promissory note, imputed interest at 3.62%, quarterly payments beginning
September 2016 through June 2019
DTG2Go, LLC acquisition promissory note, interest at 6.0%, quarterly payments beginning January
2019 through October 2021
Salt Life Beverage, LLC promissory note, non-interest, lump sum payment due January 2020
Less current portion of long-term debt
Long-term debt, excluding current maturities
Credit Facility
September
28, 2019
September
29, 2018
$ 101,957 $
85,746
5,000
4,958
800
1,400
776
1,067
1,953
3,018
—
2,471
5,250
100
115,836
(6,540 )
$ 109,296 $
—
—
98,660
(6,577 )
92,083
On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with
Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book
Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, National Association and
Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood Clothing Company), Salt Life,
LLC, and DTG2Go, LLC (f/k/a Art Gun, LLC) (collectively, the "Borrowers"), are co-borrowers under the Amended Credit
Agreement.
F-17
On November 27, 2017, the Borrowers entered into a First Amendment to the Fifth Amended and Restated Credit Agreement with
Wells Fargo and the other lenders set forth therein (the “First Amendment”). The First Amendment amended the definition of
Fixed Charge Coverage Ratio within the Amended Credit Agreement to permit up to $10 million of the proceeds received from the
March 31, 2017, sale of certain assets of the Junkfood business to be used towards share repurchases for up to one year from the
date of that transaction. In addition, the definition of Permitted Purchase Money Indebtedness was amended to extend the time
period within which the Borrowers may enter into capital leases and to increase the aggregate principal amount of such leases into
which the Borrowers may enter to up to $15 million. The definition of Permitted Investments was also amended to permit the
Borrowers to make investments in entities that are not a party to the Amended Credit Agreement in an aggregate amount of up to
$2 million. The First Amendment also allowed the change in the name of our Junkfood Clothing Company subsidiary to Culver
City Clothing Company. There were no changes to the Amended Credit Agreement related to interest rate, borrowing capacity, or
maturity.
On March 9, 2018, the Borrowers entered into a Consent and Second Amendment to the Fifth Amended and Restated Credit
Agreement with Wells Fargo and the other lenders set forth therein (the “Second Amendment”). Pursuant to the Second
Amendment, Wells Fargo and the other lenders set forth therein consented to Art Gun, LLC’s acquisition of substantially all of the
assets of TeeShirt Ink Inc. d/b/a DTG2Go. The Second Amendment also: (i) revised certain provisions in the Amended Credit
Agreement relating to our ability to pay cash dividends or distributions to shareholders or to repurchase shares of our common
stock so that the effects of the Tax Cuts and Jobs Act of 2017 did not negatively impact our ability to make such dividends or
distributions or to repurchase shares of our common stock during our 2018 fiscal year; (ii) amended the definition of Permitted
Investments in the Amended Credit Agreement to allow investments in the Honduras partnership (as defined in the Amended
Credit Agreement) in an aggregate original principal amount not to exceed $6 million; (iii) amended the definition of Permitted
Purchase Money Indebtedness in the Amended Credit Agreement to increase the aggregate principal amount of capital leases into
which we may enter to up to $25 million; (iv) permitted the name change of Art Gun, LLC to DTG2Go, LLC; and (v) added new
definitions relating to the DTG2Go acquisition. There were no changes to the Amended Credit Agreement related to interest rate,
borrowing capacity, or maturity.
On October 8, 2018, the Borrowers entered into a Consent and Third Amendment to the Fifth Amended and Restated Credit
Agreement with Wells Fargo and the other lenders set forth therein (the “Third Amendment”). Pursuant to the Third Amendment,
Wells Fargo and the other lenders set forth therein consented to DTG2Go, LLC's acquisition of substantially all of the assets of
Silk Screen Ink Ltd. d/b/a SSI Digital Print Services. The Third amendment also: (i) amended the existing loan agreement,
including various definitions therein, to add a first-in last-out "FILO" borrowing component; and (ii) amended the existing loan
agreement, including various definitions therein, to address the potential unavailability or discontinuance of the use of LIBOR
rates and updates certain provisions regarding compliance with denied party, sanctioned entity, anti-corruption and anti-money
laundering and related laws and regulations and other items.
The Amended Credit Agreement allows us to borrow up to $145 million (subject to borrowing base limitations), including a
maximum of $25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum
credit to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure
additional commitments and customary closing conditions. The credit facility matures on May 10, 2021.
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, Salt Life, and DTG2Go. 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 greater
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 28, 2019, we had $102.0 million outstanding under our U.S. revolving credit facility at an average interest rate of
4.2%, and had the ability to borrow an additional $27.2 million. This credit facility includes the financial covenant that if the
amount of availability falls below the threshold amounts set forth in the Amended Credit Agreement, our Fixed Charge Coverage
Ratio (“FCCR”) (as defined in the Amended Credit Agreement) for the preceding 12-month period must not be less than 1.1 to
1.0. We were not subject to the FCCR covenant as of September 28, 2019, because our availability was above the minimum
required under the Amended Credit Agreement. At September 28, 2019, our FCCR was above the required 1.1 to 1.0 ratio and,
therefore, we would have satisfied our financial covenant had we been subject to it. 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.
F-18
Proceeds of the loans made pursuant to the Amended Credit Agreement may be used for permitted acquisitions (as defined in the
Amended Credit Agreement), general operating expenses, working capital, other corporate purposes, and to finance credit facility
fees and expenses. Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i)
as of the date of the payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date
of not less than 15% of the lesser of the borrowing base or the commitment, and average availability for the 30-day period
immediately preceding that date of not less than 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate
amount of dividends and stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net
income (as defined in the Amended Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of
determination. At September 28, 2019, and September 29, 2018, there was $16.1 million and $14.7 million, respectively, of
retained earnings free of restrictions to make cash dividends or stock repurchases.
The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in
ASC 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.
See Note 16—Subsequent Events for discussion of the Fourth Amendment to the Fifth Amended and Restated Credit Agreement
executed on November 19, 2019.
Promissory Notes
In August 2013, we acquired Salt Life and issued two promissory notes in the aggregate principal amount of $22.0 million, which
included a one-time installment of $9.0 million that was paid as required on September 30, 2014, and quarterly installments
commencing on March 31, 2015, with the final installment due on June 30, 2019. The promissory notes were zero-interest notes
and stated that interest would be imputed as required under Section 1274 of the Internal Revenue Code. We had imputed interest
at 1.92% and 3.62% on the promissory notes that matured on June 30, 2016, and June 30, 2019, respectively. As of September 28,
2019, no amounts remained outstanding on these notes.
On October 8, 2018, we acquired substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. See Note
3—Acquisitions for more information on this transaction. In conjunction with this acquisition, we issued a promissory note in the
principal amount of $7.0 million. The promissory note bears interest of 6% with quarterly payments that began January 2, 2019,
with the final installment due October 1, 2021. As of September 28, 2019, there was $5.3 million outstanding for this note.
Honduran Debt
Since March 2011, we have entered into loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, in order to
finance both the operations and capital expansion of our Honduran facilities. Each of these loans is secured by a first-priority lien
on the assets of our Honduran operations, and is not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars,
and the carrying value of the debt approximates the fair value. The revolving credit facility requires minimum payments during
each six-month period of the 18-month term; however, the loan agreement permits additional drawdowns to the extent payments
are made and certain objective covenants are met. The current revolving Honduran debt, by its nature, is not long-term, as it
requires scheduled payments each six months. However, as the loan permits us to re-borrow funds up to the amount repaid,
subject to certain covenants, and we intend to re-borrow funds, subject to the objective covenants, the amounts have been
classified as long-term debt. Information about these loans and the outstanding balance as of September 28, 2019, is listed as part
of the long-term debt schedule above.
Total Debt
The aggregate maturities of debt at September 28, 2019, are as follows (in thousands):
Fiscal Year
2020
2021
2022
2023
2024
Thereafter
F-19
Amount
6,540
103,518
778
—
—
5,000
115,836
$
$
Note 9—Income Taxes
The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted on December 22, 2017, which significantly revised
the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified
territorial tax system and imposing a repatriation tax, ("transition tax"), on deemed repatriated cumulative earnings of foreign
subsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on
global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section
163(j)"). GILTI is the excess of the shareholder’s net controlled foreign corporations, ("CFC") net tested income over the net
deemed tangible income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the
taxpayer's business interest income, 30% of the taxpayer’s adjusted taxable income, and the taxpayer’s floor plan financing interest
expense for the year. We have included in our calculation of our effective tax rate the estimated impact of GILTI and Section
163(j) which were effective for us beginning fiscal year 2019. We have elected to account for the tax on GILTI as a period cost
and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries.
In the quarter ended December 30, 2017, when the New Tax Legislation was enacted, we made reasonable estimates of the effects
of the expense associated with the one-time transition tax and with remeasuring net deferred tax liabilities at a lower federal
corporate tax rate. We recorded $10.7 million as provisional amounts in fiscal year 2018. Our provisional assessment of the
impacts of the New Tax Legislation were finalized during the first quarter of fiscal year 2019.
The provision for income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
Period ended
September 28,
2019
September 29,
2018
$
$
$
$
732 $
(3 )
132
861 $
(304 ) $
(80 )
(384 )
477 $
4,629
16
121
4,766
5,927
(233 )
5,694
10,460
For financial reporting purposes our income before provision for income taxes includes the following components (in thousands):
United States, net of loss attributable to non-controlling interest
Foreign
Period ended
September 28,
2019
September 29,
2018
$
$
(2,695 ) $
11,040
8,345 $
156
11,534
11,690
Our effective income tax rate on operations for fiscal year 2019 was 5.5% compared to a rate of 89.5% in the prior year. Excluding
the additional $10.7 million of expense related to the New Tax Legislation, the adjusted effective tax rate was a benefit of 1.7% in
fiscal year 2018. The change in the federal statutory rate from 34% to 21% as a result of the New Tax Legislation was effective as
of December 22, 2017, part way through our fiscal year 2018. As such, the blended federal statutory tax rate for fiscal year 2018
was 24.3%.
We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower
than those in the United States. However, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax
jurisdictions can have a significant impact on our overall effective tax rate. In addition, the future impact of the New Tax
Legislation may differ from historical amounts, possibly materially, due to, among other things, changes in interpretations and
assumptions made regarding the New Tax Legislation, guidance that may be issued and actions we may take as a result of the New
Tax Legislation.
F-20
A reconciliation between actual provision for income taxes and the provision for income taxes computed using the federal
statutory income tax rate of 21.0% for fiscal year 2019 and 24.3% for fiscal year 2018 is as follows (in thousands):
Income tax expense at the statutory rate of 21.0% and 24.3%
State income tax (benefits expense, net of federal income tax benefit
New Tax Legislation:
Impact of federal rate change
Federal transition tax
GILTI inclusion
Impact of state rate changes
Impact of foreign earnings in tax-free zone
Nondeductible amortization and other permanent differences
Other
Provision for income taxes
Period ended
September 28,
2019
September 29,
2018
$
$
1,831 $
(82 )
—
109
1,040
—
(2,186 )
(140 )
(95 )
477 $
2,861
16
624
10,039
—
(236 )
(2,676 )
(163 )
(5 )
10,460
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
State net operating loss carryforwards
Alternative minimum tax credit carryforward
Inventories and reserves
Accrued compensation and benefits
Receivable allowances and reserves
Other
Gross deferred tax assets
Less valuation allowance — state net operating loss carryforwards
Net deferred tax assets
Deferred tax liabilities:
Depreciation
Goodwill and intangibles
Other
Gross deferred tax liabilities
Net deferred tax liabilities
September 28,
2019
September 29,
2018
$
$
$
$
$
2,190 $
—
2,960
1,789
345
1,093
8,377 $
(516 )
7,861 $
(4,611 )
(3,183 )
(72 )
(7,866 ) $
(5 ) $
1,870
397
3,277
1,881
371
67
7,863
(493 )
7,370
(5,459 )
(2,529 )
(140 )
(8,128 )
(758 )
As of September 28, 2019, we had state net operating losses ("NOLs") of approximately $46.6 million, with deferred tax assets of
$2.2 million related to these state NOLs, and related valuation allowances against them of approximately $0.5 million. These state
net loss carryforwards expire at various intervals from 2020 through 2037. Our deferred tax asset related to state net operating loss
carryforwards is reduced by a valuation allowance to result in net deferred tax assets we consider more likely than not to be
realized.
For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable
income or tax planning strategies during the periods in which those temporary differences become deductible or when the
carryforwards are available.
ASC 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 50% 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 28, 2019 or September
29, 2018.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years 2015, 2016,
2017 and 2018, according to statute and with few exceptions, remain open to examination by various federal, state, local, and
foreign jurisdictions.
F-21
Note 10—Leases
We have several non-cancelable leases primarily related to buildings, machinery, office equipment and computer systems. Certain
building leases have renewal options generally for periods ranging from 5 to 10 years.
Future minimum lease payments under non-cancelable leases as of September 28, 2019, were as follows (in thousands):
Fiscal Year
2020
2021
2022
2023
2024
Thereafter
Amount
11,197
9,903
8,565
7,732
7,054
19,442
63,893
$
$
Rent expense for all operating leases was $10.6 million and $9.9 million for fiscal years 2019 and 2018, respectively.
Note 11—Employee Benefit Plans
We sponsor and maintain a 401(k) retirement savings plan (the “401(k) Plan”) for our employees who meet certain 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, as well as a Roth Plan that allows for after tax contributions. The 401(k) Plan requires for us to make a guaranteed
match of a defined portion of the employee’s contributions. During fiscal years 2019 and 2018 we contributed $1.0 million and
$0.9 million, respectively, to the 401(k) Plan.
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 2019 and 2018. The following table presents the benefit obligation, which is included in accrued expenses in the
accompanying balance sheets (in thousands).
Balance at beginning of year
Interest expense
Benefits paid
Adjustment
Balance at end of year
Note 12—Stock-Based Compensation
September 28,
2019
September 29,
2018
$
$
313 $
2
(9 )
1
307 $
343
3
(34 )
1
313
On February 4, 2015, our shareholders re-approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock Plan") that was
originally approved by our shareholders on November 11, 2010. The re-approval of the 2010 Stock Plan, including the material
terms of the performance goals included in the 2010 Stock Plan, enabled us to continue to grant equity incentive compensation
awards that are structured in a manner intended to qualify as tax deductible, performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986, as applicable. The New Tax Legislation changed several conclusions under Section
162(m), including that there will no longer be a performance-based compensation exemption, and the Chief Financial Officer
position is now included in the applicable calculation along with the next three highest-paid officers. This reform impacted taxes
related to fiscal years 2019 and 2018.
Since November 2010, 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 been granted
under the 2010 Stock Plan.
F-22
We account for these plans pursuant to ASC 718. Shares are generally issued from treasury stock upon exercise of the options or
the vesting of the restricted stock units and performance units. See Note 2—Significant Accounting Policies (r) Stock-Based
Compensation for further detail.
Compensation expense is recorded on the selling, general and administrative expense line item in our Consolidated Statements of
Operations over the vesting periods. Total employee stock-based compensation expense for fiscal years 2019 and 2018 was $2.1
million and $2.6 million, respectively. Associated with the compensation cost are income tax benefits recognized of $0.1
million for both fiscal years 2019 and 2018.
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.
Stock Options
No stock options were granted during fiscal year 2019. During fiscal year 2018, 10,000 remaining stock options, with an exercise
price of $13.07 per option, expired and were forfeited.
Restricted Stock Units and Performance Units
The following table summarizes the restricted stock unit and performance unit award activity during the periods ended September
28, 2019, and September 29, 2018:
Fiscal Year Ended
September 28, 2019
September 29, 2018
Units outstanding, beginning of fiscal period
Units granted
Units issued
Units forfeited
Units outstanding, end of fiscal period
532,500 $
—
(247,000 ) $
(2,000 ) $
283,500 $
16.12
—
11.88
21.51
19.78
Number of
Units
Weighted
average grant
date fair value
Number of
Units
Weighted
average grant
date fair value
13.09
20.57
12.89
11.88
16.12
512,856 $
205,500 $
(146,781 ) $
(39,075 ) $
532,500 $
During fiscal year 2019, restricted stock units and performance units representing 205,000 and 42,000 shares of our common
stock, respectively, vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 29, 2018, and
were issued in accordance with their respective agreements. All vested awards were paid in common stock.
During fiscal year 2018, restricted stock units and performance units, each consisting of 57,750 shares of our common stock, were
granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019.
One-half of the restricted stock units and one-half of the performance units are payable in common stock and one-half are payable
in cash.
During fiscal year 2018, restricted stock units representing 90,000 shares of our common stock were granted and are eligible to
vest upon the filing of our Annual Report on Form 10-K for the fiscal year ending October 3, 2020. These restricted stock units are
payable in common stock.
F-23
During fiscal year 2018, restricted stock units and performance units representing 54,602 and 92,068 shares of our common stock,
respectively, vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, and were
issued in accordance with their respective agreements. One-half of the restricted stock units were paid in common stock and one-
half in cash. Of the performance units, 72,138 were paid in common stock and 19,930 were paid in cash. In addition, restricted
stock units and performance units representing 2,000 shares of our common stock vested and were issued in accordance with their
agreement. One-half of the restricted stock units and one-half of the performance units were paid in common stock and one-half
were paid in cash.
As of September 28, 2019, there was $1.1 million of total unrecognized compensation cost related to unvested restricted stock
units and performance units under the 2010 Stock Plan. This cost is expected to be recognized over a period of 1.2 years.
The following table summarizes information about the unvested restricted stock units and performance units as of September 28,
2019.
Restricted Stock Units/Performance Units
Fiscal Year 2017 Performance Units
Fiscal Year 2017 Performance Units
Fiscal Year 2018 Restricted Stock Units
Fiscal Year 2018 Performance Units
Fiscal Year 2018 Restricted Stock Units
Fiscal Year 2018 Performance Units
Fiscal Year 2018 Restricted Stock Units
Number of Units
42,000
42,000
52,750
52,750
2,000
2,000
90,000
283,500
Average Market Price on Date
of Grant
$ 17.97
$ 17.97
$ 21.51
$ 21.51
$ 17.97
$ 17.97
$ 19.52
Vesting Date*
November 2019
November 2020
November 2019
November 2019
November 2019
November 2019
November 2020
* These awards are eligible to vest upon the filing of our Annual Report on Form 10-K for the applicable fiscal year, which is
anticipated to be during the month and year indicated in this column.
Option Plan
Prior to expiration of the Option Plan, the Compensation Committee of our Board of Directors had the discretion to grant options
for up to 2,000,000 shares of common stock to officers and key and middle-level executives for the purchase of our stock at prices
not less than fifty percent of the fair market value of the shares on the dates of grant, with an exercise term (as determined by the
Compensation Committee) not to exceed 10 years. The Compensation Committee determined the vesting period for the stock
options, which generally became exercisable over three to four years. Certain option awards in the Option Plan provided for
accelerated vesting upon meeting specific retirement, death or disability criteria.
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.
During fiscal year 2018, 6,000 remaining stock options, with an exercise price of $8.30 per option, expired and were forfeited.
Note 13—Business Segments
Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which
the business is managed and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker.
®
, and Delta Magnum Weight
The Delta Group is comprised of our business units primarily focused on core activewear styles, and includes our Delta
Activewear (encompassing our core Delta Catalog business and FunTees private label business), Soffe, and DTG2Go business
units. We market, distribute and manufacture unembellished knit apparel under the main brands of Soffe®, Delta Platinum, Delta
for sale to a diversified audience ranging from large licensed screen printers to small
Pro Weight
independent businesses. We also manufacture private label products for major branded sportswear companies, trendy regional
brands, retailers, and sports licensed apparel marketers. Typically, our private label products are sold with value-added services
such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. Using digital print equipment and its
proprietary technology, DTG2Go embellishes garments to create private label, custom decorated apparel servicing the fast-
growing e-retailer channels, as well as the ad-specialty, promotional products and retail marketplaces
®
The Salt Life Group is comprised of our lifestyle brands focused on a broad range of apparel garments, headwear and related
accessories to meet consumer preferences and fashion trends, and includes our Salt Life and Coast business units. These products
are sold through specialty and boutique shops, traditional department stores, and outdoor retailers, as well as direct-to-consumer
F-24
through branded ecommerce sites and branded retail stores. Products in this segment are marketed under our lifestyle brands of
Salt Life® and COAST®, as well as other labels.
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 earnings"). Our segment operating earnings 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).
Segment net sales:
Delta Group
Salt Life Group
Total net sales
Segment operating income:
Delta Group
Salt Life Group
Total segment operating income
Purchases of property, plant and equipment:
Delta Group
Salt Life Group
Corporate
Total purchases of property, plant and equipment
Depreciation and amortization:
Delta Group
Salt Life Group
Corporate
Total depreciation and amortization
Fiscal Year Ended
September 28,
2019
September 29,
2018
$
$
$
$
$
$
$
$
389,075 $
42,655
431,730 $
356,009
39,441
395,450
23,780 $
6,160
29,940 $
26,091
4,747
30,838
4,861 $
1,202
—
6,063 $
9,889 $
1,522
353
11,764 $
4,341
917
511
5,769
8,090
1,456
442
9,988
The following reconciles the segment operating income to the consolidated income before provision for income taxes (in
thousands):
Segment operating income
Loss attributable to non-controlling interest
Unallocated corporate expenses
Unallocated interest expense
Consolidated income before provision for income taxes
Fiscal Year Ended
September 28,
2019
September 29,
2018
$
$
29,940 $
374
13,671
7,550
8,345 $
30,838
107
13,328
5,713
11,690
Our revenues include sales to domestic and foreign customers. Foreign customers are composed of companies whose headquarters
are located outside of the United States. Supplemental information regarding our revenues by geographic area based on the
location of the customer is as follows (in thousands):
United States
Foreign
Total net sales
F-25
Fiscal Year Ended
September 28,
2019
September 29,
2018
$
$
431,082 $
648
431,730 $
394,252
1,198
395,450
Our total assets and equity investment by segment are as follows (in thousands):
Total assets by segment:
Delta Group
Salt Life Group
Corporate
Total assets
Equity investment in joint venture:
Delta Group
Salt Life Group
Total equity investment in joint venture
As of
September 28,
2019
September 29,
2018
$
$
$
$
315,653 $
57,574
4,761
377,988 $
283,811
55,032
4,766
343,609
10,388 $
—
10,388 $
8,980
—
8,980
We attribute our property, plant and equipment to a particular country based on the location of these assets. Summarized financial
information by geographic area is as follows (in thousands):
United States
Honduras
El Salvador
Mexico
All foreign countries
As of
September 28,
2019
September 29,
2018
$
41,620 $
30,768
15,326
3,209
1,249
19,784
16,823
3,476
1,047
21,346
Total property, plant and equipment, net
$
61,404 $
52,114
Note 14—Repurchase of Common Stock
Our Board of Directors has authorized management to use up to $60.0 million to repurchase stock in open market transactions
under our Stock Repurchase Program. During fiscal years 2019 and 2018, we purchased 141,501 shares and 463,974 shares,
respectively, of our common stock for a total cost of $2.7 million and $9.0 million, respectively. As of September 28, 2019, we
have purchased 3,498,962 shares of common stock for an aggregate of $50.5 million since the inception of the Stock Repurchase
Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-
18. As of September 28, 2019, $9.5 million remained available for future purchases under our Stock Repurchase Program, which
does not have an expiration date. There were no repurchases of our common stock for the quarter ended September 28, 2019.
Note 15—Commitments and Contingencies
(a) Litigation
The Sports Authority Bankruptcy Litigation
Soffe was previously involved in several related litigation matters stemming from The Sports Authority's ("TSA") March 2, 2016,
filing of a voluntary petition(s) for relief under Chapter 11 of the United States Bankruptcy Code (the "TSA Bankruptcy"). Prior to
such filing, Soffe provided TSA with products to be sold on a consignment basis pursuant to a "pay by scan" agreement and the
litigation matters related to Soffe's interest in the products it provided TSA on a consignment basis (the "Products") and the
proceeds derived from the sale of such products (the "Proceeds").
TSA Stores, Inc. and related entities TSA Ponce, Inc. and TSA Caribe, Inc. filed an action against Soffe on March 16, 2016, in the
United States Bankruptcy Court for the District of Delaware (the "TSA Action") including requests for declaratory judgment on a
variety of matters related to the Products and Proceeds as well as several related claims. TSA lender Wilmington Savings Fund
Society, FSB, as Successor Administrative and Collateral Agent ("WSFS"), intervened in the TSA Action seeking declaratory
judgment on a variety of matters related to the Products and Proceeds and including several related claims. Soffe subsequently
asserted counterclaims against WSFS in the TSA Action seeking declaratory judgment on a variety of matters related to the
Products and Proceeds.
F-26
On November 26, 2018, the court issued an order in favor of WSFS with respect to its claimed interest in the majority of the
Products and Proceeds. Soffe, WSFS, TSA Stores, Inc., TSA Ponce, Inc. and TSA Caribe, Inc. subsequently reached agreement to
settle the above-referenced matters, with Soffe agreeing to pay approximately $2.5 million in exchange for a comprehensive
release of all claims at issue in the matters. These matters have now been finally resolved, with the agreed amounts funded on
December 31, 2018. We recorded the settlement expense in other income, net in our Consolidated Statement of Operations in
fiscal year 2019.
Other
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, finished fabric, and finished apparel and headwear
products. At September 28, 2019, minimum payments under these contracts were as follows (in thousands):
Yarn
Finished fabric
Finished products
(c) Letters of Credit
$
$
19,231
2,973
16,946
39,150
As of September 28, 2019, we had outstanding standby letters of credit totaling $0.4 million.
(d) Fair Value Measurements
From time to time we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact
of future interest rate changes. These financial instruments are not used for trading or speculative purposes. The following
financial instruments were outstanding as of September 28, 2019:
Interest Rate Swap
Interest Rate Swap
Effective Date
July 19, 2017
July 25, 2018
Notational Amount
$10 million
$20 million
LIBOR Rate
1.99
3.18
%
%
Maturity Date
May 10, 2021
July 25, 2023
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the
cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized
and unrealized gains and losses associated with them are recorded within cost of goods sold on the Consolidated Statement of
Operations.
ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three
levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
○
○
○
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly.
These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in market that are less active.
Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes
certain pricing models, discounted cash flow methodologies and similar techniques.
F-27
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
Period Ended
Interest Rate Swap
September 28, 2019
September 29, 2018
Cotton Options
September 28, 2019
September 29, 2018
Contingent Consideration
September 28, 2019
September 29, 2018
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Significant Other
Observable
Total
Assets (Level 1)
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
$
$
$
$
$
$
(1,293 ) $
183 $
— $
— $
(1,293 ) $
183 $
— $
(110 )
— $
(110 ) $
— $
— $
—
—
—
—
(9,094 ) $
(10,542 ) $
— $
— $
— $
— $
(9,094 )
(10,542 )
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 curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. Fair
values for debt are based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the
same remaining maturities (a Level 2 fair value measurement).
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of
September 28, 2019, and September 29, 2018.
Other assets
Deferred tax liabilities
Other liabilities
Accumulated other comprehensive loss
September 28,
2019
September 29,
2018
$
$
- $
324
(1,293 )
(969 ) $
182
(46 )
—
136
The DTG2Go acquisition purchase price consisted of additional payments contingent on the combined business’s achievement of
certain performance targets related to sales and earnings before interest, taxes, depreciation and amortization ("EBITDA") for the
period from April 1, 2018, through September 29, 2018, as well as for our fiscal years 2019, 2020, 2021 and 2022. The valuation
of the fair value of the contingent consideration is based upon inputs into the Monte Carlo model, including projected results,
which then are discounted to a present value to derive the fair value. The fair value of the contingent consideration is sensitive to
changes in our projected results. At September 28, 2019, we estimated the fair value of contingent consideration to be $8.9 million,
a decrease of $0.3 million from the September 29, 2018 balance of $9.2 million. The decrease in the accrual was related to a
payment of $0.6 million for the period ended September 29, 2018 which was partially offset by an increase in the valuation for the
remaining periods as a result of updated performance expectations.
In August 2013, we acquired Salt Life and issued contingent consideration 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. We used a
Monte Carlo model which 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 at acquisition, as well as to remeasure the
contingent consideration related to the acquisition of Salt Life at each reporting period. Accordingly, the fair value measurement
for contingent consideration falls in Level 3 of the fair value hierarchy. At September 28, 2019, we had $0.2 million accrued in
contingent consideration related to the acquisition of Salt Life, a $1.1 million reduction from the accrual at September 29, 2018,
based on actual performance to date in calendar year 2019 compared to prior estimates.
F-28
Note 16—Subsequent Events
Fourth Amendment to Fifth Amended and Restated Credit Agreement
On November 19, 2019, Delta Apparel, Inc. and its subsidiaries, M.J. Soffe, LLC, Culver City Clothing Company (f/k/a Junkfood
Clothing Company), Salt Life, LLC, and DTG2Go, LLC (f/k/a Art Gun, LLC) entered into a Fourth Amendment to Fifth Amended
and Restated Credit Agreement with Wells Fargo Bank and the other lenders set forth therein (the “Fourth Amendment”).
The Fifth Amended and Restated Credit Agreement, dated as of May 10, 2016, was filed as Exhibit 10.1 to Delta Apparel’s
Quarterly Report on Form 10-Q filed with the SEC on May 12, 2016. The First Amendment to the Amended Credit Agreement
was filed as Exhibit 10.2.5 to Delta Apparel’s Annual Report on Form 10-K filed with the SEC on November 28, 2017. The
Consent and Second Amendment to the Amended Credit Agreement was filed as Exhibit 10.1 to Delta Apparel’s Form 8-K filed
with the SEC on March 13, 2018. The Consent and Third Amendment to the Amended Credit Agreement was filed as Exhibit 10.1
to Delta Apparel’s Form 8-K filed with the SEC on October 9, 2018.
The Fourth Amendment, among other things, (i) increases the borrowing capacity under the Amended Credit Agreement from
$145.0 million to $170.0 million (subject to borrowing base limitations), (ii) extends the maturity date from May 10, 2021 to
November 19, 2024, (iii) reduces pricing on the revolver and first-in last-out “FILO” borrowing components by 25 basis points,
and (iv) adds 25% of the fair market value of eligible intellectual property to the borrowing base calculation. In addition, the
Fourth Amendment amends the definition of Fixed Charge Coverage Ratio to exclude up to $10.0 million of capital expenditures
incurred by the Borrowers in connection with the expansion of their distribution facility located within the Town of Clinton,
Anderson County, Tennessee.
F-29
C o m p a n y I n f o r m a t i o n
COMPANY INFORMATION
Date of Incorporation:
Number of Employees:
Stock Transfer Agent:
Stock Exchange Listing:
December 1999
8,600
American Stock Transfer & Trust Company, LLC (AST)
NYSE American under the symbol DLA
Independent Registered Public Accounting Firm:
Ernst & Young LLP
EXECUTIVE OFFICERS
Robert W. Humphreys
Chairman and Chief Executive Officer
Deborah H. Merrill
Jeffery N. Stillwell
Chief Financial Officer and President, Delta Group
President, Salt Life Group
BOARD OF DIRECTORS
Anita D. Britt
Retired. Formerly served as Chief Financial Officer of Perry Ellis International, Inc.
J. Bradley Campbell
President, J.B. Campbell Consulting, LLC
Dr. G. Jay Gogue
Glenda E. Hood
Interim President, Auburn University
President and Chief Executive Officer, Hood Partners, LLC
Robert W. Humphreys
Chairman and Chief Executive Officer
Robert E. Staton, Sr.
President, Presbyterian College
A. Alexander Taylor, II
Retired. Formerly served as Chairman and Chief Executive Officer of FGX International, Inc.
David G. Whalen
Retired. Formerly served as President and Chief Executive Officer of A.T. Cross Company
CORPORATE AND SHAREHOLDER INFORMATION
Corporate and shareholder information may be obtained free of charge by contacting Investor Relations at investor.relations@
deltaapparel.com.
Delta Apparel, Inc.,
322 S. Main Street
Greenville SC 29601
American Stock Transfer & Trust Company, LLC (AST)
Attention: Operations Center
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5440
You can also visit our website at www.deltaapparelinc.com.
ANNUAL MEETING OF SHAREHOLDERS
Our Annual Meeting of Shareholders will be held on Thursday, February 6, 2020, at 8:30 a.m. ET at:
Delta Apparel, Inc.
2750 Premiere Parkway - Suite 100
Duluth, GA 30097
DLA FY19 Annual Report 12-2-19.indd 5
12/10/19 7:14 PM
D e l t a G r o u p
Our Delta Catalog business has been a preferred supplier to the market for
core basic tee shirts for many years. Delta Pro Weight and Magnum Weight
products are a huge part of our heritage, offering a diverse selection of
mid-weight and heavier-weight, 100% cotton fabrication. We also provide
innovative products like our Delta Soft, Delta Dri performance, Ringspun,
and Fleece lines. Our ‘cut above the rest’ Platinum Line collection provides
a fresh, fashionable edge to Delta’s product assortment. More luxurious
in look and feel, our Platinum Line silhouettes take their refined attitude
uptown, downtown, to brunch, to the office and anywhere in between.
Delta Catalog - 2750 Premiere Parkway - Suite 100, Duluth, GA 30097
www.deltaapparel.com
We serve our customers as their supply chain partner from product
development to shipment of branded products, with the majority of
products being sold with value-added services including embellishment,
hangers, hangtags and ticketing, so that they are ready for retail sale to
the end consumers.
FunTees - 4735 Corporate Drive NW - Suite 100, Concord, NC 28027
As a market leader in the direct-to-garment digital print and fulfillment
industry, we bring technology and innovation to the supply chain of our
many customers. We utilize our seven fulfillment facilities throughout
the United States to ship custom graphic products within 24 to 48 hours
throughout the United States and to over 100 countries worldwide.
DTG2Go - 5821 East 10th, Hialeah, FL 33013
www.dtg2go.com
Soffe is an iconic, heritage brand that designs and produces high quality
activewear for spirit makers and record breakers, selling a wide range of
activewear products for women, men, juniors and children with appealing
graphics anchored in today’s trends. Soffe’s heritage is anchored in the
military, and we continue to be a proud supplier to both active duty and
veteran United States military personnel worldwide.
Soffe - One Soffe Drive, Fayetteville, NC 28312
www.soffe.com
DLA FY19 Annual Report 12-2-19.indd 6
12/10/19 7:14 PM
S a l t L i f e G r o u p
As an authentic, aspirational lifestyle brand that embraces those who love the ocean and all it offers, from surfing, fishing, and diving to beach fun
and sun-soaked relaxation, the Salt Life brand combines function and fashion with a tailored fit for the active lifestyles of those that “live the Salt
Life.”
Salt Life 24 12th Street, Columbus, GA 31901
www.saltlife.com
The Coast collection is as much a testament to good times and carefree
afternoons as it is to superior quality, custom fit, and maximum comfort.
Coast Apparel is designed to bring the coastal experience of weekends and
summers at the beach to everyday life, keeping those that celebrate the
relaxed, yet sophisticated coastal lifestyle fully connected, year-round.
Coast Apparel, 324 S. Main Street, Greenville, SC 29601
www.coastapparel.com
DLA FY19 Annual Report 12-2-19.indd 7
12/10/19 7:14 PM
Delta Apparel, Inc.
322 S. Main Street
Greenville, SC 29601
NYSE American: DLA
www.deltaapparelinc.com
DLA FY19 Annual Report 12-2-19.indd 8
12/10/19 7:14 PM