Delta Apparel, Inc
2020 Annual Report
Shareholder Letter nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
The annual process of developing thoughts for a letter to our shareholders has always been a comforting experience for me. Having gone through this journey for more than two
decades, I’ve come to believe this experience probably does more for me than the readers of my letter. In our busy work lives, we benefit from the process of looking back on what we
have accomplished as a Company, but more importantly to gauge the opportunities for the future. In my wildest imagination, I never dreamed that I would be thinking back over a year
where our Company, and the world, would be suddenly impacted by an event as destructive as the COVID-19 pandemic.
We began fiscal year 2020 well positioned to continue the growth we experienced in the prior year, building on our sales and earnings momentum, while continuing to execute our
long-term strategic initiatives. Our first quarter sales were somewhat impacted by the shortened holiday calendar, but we reported solid profits, and revenue was rapidly building as
we progressed into the March 2020 quarter. This all changed in mid-March when much of the U.S. economy was closed to combat the pandemic. Because we had a strong start to our
second quarter, we still had solid sales and earnings for the March quarter despite the interruption to our business.
As the closures in the United States were announced, we took immediate action to safeguard the health of our employees and the assets of our Company. We benefited from our broad
sales channels, being considered an essential service provider to the military and direct to consumers, as well as being a supplier to other essential businesses. This allowed us to
continue to operate most of our U.S.-based facilities, although at greatly reduced schedules. We also immediately began production of face masks in our North Carolina facilities, and
began limited production of masks in Central America and Mexico, to support the U.S. government’s need for this protective equipment. By late March, our manufacturing facilities in
El Salvador and Honduras had ceased production of all non-essential products due to government mandates, with certain curtailments in our Mexico facilities as well.
Maintaining adequate liquidity to operate our Company during this crisis was our highest priority after the health and safety of our employees. We immediately stopped all non-essential
spending to preserve liquidity through this shock to our economic system. We communicated regularly with our U.S. and Honduran bank groups, and we were able to obtain additional
funding in Honduras and negotiate two amendments to our U.S. loan agreement over the course of several months that significantly improved our liquidity position. In addition, we
spent considerable time evaluating additional sources of liquidity that were available to us, but because of our effective management of cash and liquidity, we were able to manage
through this crisis without taking on an additional tranche of debt, which would have significantly increased our cost of debt for years to come. Our financial flexibility should serve us
well as we continue to navigate potential choppy business conditions and prepare for a rebound to long-term growth in the future.
Our revenue fell dramatically in April and improved sequentially through our third fiscal quarter, with June rebounding to 90% of the prior June sales. We quickly realized that our
diversified channels of distribution, developed over many years, combined with our focus on ecommerce and the on-demand apparel supply chain, were valuable assets which
distinguished us from much of our competition. As a result, our consumer ecommerce sites and our technology-driven, digital print business, DTG2Go, experienced tremendous growth
that started early in the third quarter and continued throughout the remainder of the fiscal year. Of course, a key component of our ability to take advantage of this out-sized spike in
our direct-to-consumer businesses was our decentralized direct-to-garment print facilities strategically located across the United States to supply custom printed garments quickly to
consumers, while minimizing shipping time and cost. Our distribution centers for our consumer sites, Soffe.com and Saltlife.com were also able to quickly react to changing business
conditions and provide outstanding service to our customers despite the dramatic increase in demand.
As we began our fourth fiscal quarter, demand for our products had rebounded to a level that would ultimately drive revenue growth over the prior year and produce record profits
for our fourth quarter. Clearly there are certain channels of distribution that are still feeling the impact of the economic shutdown that is affecting many parts of the world economy. I
believe the flexibility of our organization with our diversification of product mix, manufacturing, and distribution locations, has been and should continue to be, key to our success during
this economic upheaval.
Despite our overall decline in sales for the year, we were able to mitigate much of the cost of the pandemic through strong cost controls and spending reductions. The exception to this
was the cost associated with the closure of our manufacturing facilities in Central America. In addition to the fixed cost within the facilities themselves, we continued to make payments
to our employee base in accordance with local laws and union agreements, along with humanitarian payments in areas where we could help employees to bridge the gap back to
employment in our facilities once they restarted.
All of our facilities in the United States, Central America and Mexico are now operating efficiently. Our production output is about 90% of our pre-pandemic levels, and our overall
employment base is down about 1,000 associates from the approximately 8,700 working with our Company prior to COVID-19. If economic conditions remain stable, we would expect
to continue to increase our manufacturing production to record levels and grow our employment base as we progress through the second quarter of fiscal year 2021.
By fiscal 2020 year-end, our balance sheet and debt structure had weathered the initial storm of the world-wide pandemic. We ended the year with reduced inventory levels and lower
net debt, as well as improved liquidity. In fact, loan availability improved as we progressed through the year, and we ended September with more availability than a year ago. While we
postponed and permanently cancelled some capital expenditures, we did continue to invest in projects that will further drive revenue growth in the future – our new distribution and
digital print facility in Phoenix, Arizona, additional digital print equipment for established facilities, and new Salt Life retail doors.
We are looking forward to fiscal year 2021 with much anticipation. We ended fiscal year 2020 on a strong note and gained market share in nearly every sales channel in which we
participated. Our direct-to-garment digital print business, DTG2Go, should expand its leadership position in digital print with its ‘On Demand DC’ model to service retailers and brands
with a virtual inventory supply chain. We will continue to invest in our proprietary technology with enhancements for unique service capabilities as the business model evolves in this
rapidly expanding marketplace. Our vertical distribution model continues to drive additional revenue in the Activewear business, expanding margins through a stronger mix of fashion
and performance products. Our Soffe brand, now integrated within Activewear, is benefiting from our combined sales force and a lower cost and more efficient operating model. The
authentic Soffe brand also gives us a branded presence in numerous retail channels. Salt Life recorded tremendous growth over the past year in our ecommerce business and branded
retail stores. We expect to see growth continue in our direct-to-consumer initiatives and plan to open three new Salt Life retail stores in 2021. Additionally, we expect to see a rebound
in our Salt Life wholesale business as this channel recovers from lost revenue due to store closures as a result of COVID-19.
The past year was challenging to our Company, our leadership team, and our many employees spread across four countries. The hard work, creativity, and commitment by our
employees to our Company objectives is crucial to our ability to meet our business goals and be successful. We take great pride in the jobs, benefits, and advancement opportunities
we provide our employees and are grateful for their loyalty and dedication to Delta Apparel. Our diversified Board of Directors, who vary in age, gender and leadership experiences,
provided valuable support and constant input as we navigated this unprecedented environment.
We appreciate your continued support of Delta Apparel. We hope you will join us for our Annual Meeting of Shareholders, which will be held in Greenville, South Carolina on February
11, 2021 at 8:30 a.m. local time. At the meeting we will present a final review of our fiscal year 2020 results, address the items put to shareholder vote, and provide an update on our
outlook for fiscal year 2021.
Robert W. Humphreys
Chairman and Chief Executive Officer
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Delta Apparel, Inc.
Annual Report
Fiscal Year 2020
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 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”, “outlook”, “anticipate”, “expect”,
“intend”, “remain”, “seek”, “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current expectations and are necessarily dependent
upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a
number of business risks and inherent uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements.
Therefore, you should not rely on any of these forward-looking statements. Important risk factors that could cause our actual results and financial condition to differ materially
from those indicated in forward-looking statements are discussed in Part I, Item 1A. “Risk Factors” and Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” When considering these forward-looking statements, you should keep in mind the cautionary statements in this document and in our other
SEC filings. Any forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements
contained in this Annual Report 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.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended October 3, 2020
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-15583
DELTA APPAREL, INC.
(Exact name of registrant as specified in its charter)
Georgia
(State or other jurisdiction of incorporation or organization)
58-2508794
(I.R.S. Employer Identification No.)
322 South Main Street
Greenville, SC 29601
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (864) 232-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, par value $0.01
Trading Symbol
DLA
Name of Each Exchange on Which Registered
NYSE American
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned filer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-
T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer ☑
Non-accelerated filer ☐
Smaller reporting company ☑ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑.
Based on the closing price of the registrant's common stock of $11.21 as quoted by the NYSE American on March 27, 2020, which is the last business day of the
registrant's most recently completed second quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately
$70.1 million. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been
excluded because such persons may be deemed to be affiliates.
The number of outstanding shares of the registrant’s common stock was 6,890,118 as of November 18, 2020.
The registrant's Annual Meeting of Shareholders is currently scheduled for February 11, 2021. Portions of the registrant's Proxy Statement for its annual meeting are
incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange
Commission ("SEC") within 120 days of the registrant's fiscal year ended October 3, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Offices and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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18
18
19
19
20
20
20
27
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27
30
30
30
30
31
31
31
32
33
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Part IV
Item 15.
Item 16.
Signatures
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
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Cautionary Note Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of
the Company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained
in this report and other filings with the SEC, in our press releases, and in other reports to our shareholders. All statements, other than
statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the
future are forward-looking statements. The words “plan”, “estimate”, “project”, “forecast”, "outlook", “anticipate”, “expect”,
“intend”, "remain", “seek", “believe”, “may”, “should” and similar expressions, and discussions of strategy or intentions, are intended
to identify forward-looking statements.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current
expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but
may be incorrect, incomplete or imprecise. Forward-looking statements are subject to a number of business risks and inherent
uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking
statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual
results and financial condition to differ materially from those indicated in forward-looking statements include, among others, the
following:
● the general U.S. and international economic conditions;
● the impact of the COVID-19 pandemic on our operations, financial condition, liquidity, and capital investments;
● significant interruptions or disruptions within our manufacturing, distribution or other operations;
● deterioration in the financial condition of our customers and suppliers and changes in the operations and strategies of
our customers and suppliers;
● the volatility and uncertainty of cotton and other raw material prices and availability;
● the competitive conditions in the apparel industry;
● our ability to predict or react to changing consumer preferences or trends;
● our ability to successfully open and operate new retail stores in a timely and cost-effective manner;
● the ability to grow, achieve synergies and realize the expected profitability of acquisitions;
● changes in economic, political or social stability at our offshore locations;
● our ability to attract and retain key management;
● the volatility and uncertainty of energy, fuel and related costs;
● material disruptions in our information systems related to our business operations;
● compromises of our data security;
● significant changes in our effective tax rate;
● significant litigation in either domestic or international jurisdictions;
● recalls, claims and negative publicity associated with product liability issues;
● the ability to protect our trademarks and other intellectual property;
● changes in international trade regulations;
● our ability to comply with trade regulations;
● changes in employment laws or regulations or our relationship with employees;
● negative publicity resulting from violations of manufacturing standards or labor laws or unethical business practices
by our suppliers and independent contractors;
● restrictions on our ability to borrow capital or service our indebtedness;
● interest rate fluctuations increasing our obligations under our variable rate indebtedness;
● the ability to raise additional capital;
● the impairment of acquired intangible assets;
● foreign currency exchange rate fluctuations;
● the illiquidity of our shares; and
● price volatility in our shares and the general volatility of the stock market.
A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations
is set forth in Part 1 under the subheading "Risk Factors." Any forward-looking statements in this Annual Report on Form 10-K do
not purport to be predictions of future events or circumstances and may not be realized. Further, any forward-looking statements are
made only as of the date of this Annual Report on Form 10-K, and we do not undertake to publicly update or revise the forward-
looking statements, except as required by the federal securities laws.
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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 7,900 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 on-demand, digital print and fulfillment
industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling
casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers,
independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military,
and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce
sites and in our branded retail stores. Our diversified distribution model allows us to capitalize on our strengths to provide our
activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail
channels.
We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in our
owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react
quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador,
Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities
are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products
and weekly replenishments to retailers.
We were incorporated in Georgia in 1999, and our headquarters is located in Greenville, South Carolina. Our common stock trades
on the NYSE American under the symbol “DLA." We operate on a 52-53 week fiscal year ending on the Saturday closest to
September 30. All references to "2020" refer to the 53-week fiscal year ended October 3, 2020. All references to "2019" relate to the
52-week fiscal year ended on September 28, 2019. We are filing as a smaller reporting company for our 2020 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: DTG2Go, Delta
Activewear, and Soffe.
DTG2Go
We are a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation
to the supply chain of our many customers. We use highly-automated factory processes and our proprietary software to deliver on-
demand, digitally printed apparel direct to consumers on behalf of our customers. Utilizing its nine fulfillment facilities throughout
the United States, DTG2Go offers a robust digital supply chain to ship custom graphic products within 24 to 48 hours to consumers
in the United States and to over 100 countries worldwide. Our ‘On-Demand DC’ digital solution provides retailers and brands with
immediate access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate
digital fulfillment within the customer's own distribution facility. DTG2Go 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.
Delta Activewear
Delta Activewear is a preferred supplier of activewear apparel to the wholesale and private label markets. We offer a broad range of
apparel and accessories through our catalog business under the Delta and Soffe brands, as well as other brands that we distribute
utilizing our digital platform and network of fulfillment centers. Our fashion basics line includes our Platinum Collection, which
offers fresh, fashionable silhouettes with a luxurious look and feel, as well as versatile fleece offerings. We offer innovative apparel
products, including the Delta Dri line with performance shirts built with moisture-wicking material to keep athletes dry and
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comfortable; Ringspun garments with superior comfort, style and durability; and Delta Soft, a collection with an incredible feel and
price. We also continue to offer our heritage, mid- and heavier-weight Delta Pro Weight® and Magnum Weight® tee shirts.
Complementing Delta brand apparel, we provide our customers with a broad range of product categories with nationally recognized
branded products including polos, outerwear, headwear, bags and other accessories. As an integrated Delta Group segment, we offer
a seamless solution for small-run decoration needs with our on-demand digital print services, powered by DTG2Go. Service is a key
component of Delta Activewear. We provide superior service to our customers by shipping the same day of order receipt down to a
piece level, allowing customers to purchase exactly what they need when they need it. In addition to our catalog 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 the
technology and tools to help them manage and grow their business. We sell our catalog and private label products to a diversified
audience, including sporting goods retailers, large licensed screen printers, specialty and resort stores, e-retailers, and ad-specialty
and promotional products businesses. We also service major branded sportswear companies, trendy regional brands, mass retailers,
and others.
Soffe
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. 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 DTG2Go-powered 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, e-retailers, 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. Our direct-to-consumer Salt Life ecommerce
site at www.saltlife.com provides our customers with a seamless, omni-channel experience with the Salt Life brand.
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,
as well as upscale specialty and resort stores.
See Note 13 to the Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operation" for additional information regarding reportable segments.
Manufacturing, Sourcing, and Distribution
The vast majority of our products are manufactured or sewn in facilities that we own or lease and operate to support both the Delta
Group and Salt Life Group. To a lesser extent, we also use third-party contractors and suppliers to supplement our requirements. Our
vertically integrated manufacturing operations include a textile facility and 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
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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 2020 and 2019, we manufactured approximately 80% of fabrics used in our internally-produced garments. The
manufacturing process continues at one of our six apparel manufacturing facilities where fabric is cut and sewn into finished
garments. These owned or leased facilities are located domestically (two in North Carolina) and internationally (two in Honduras,
one in El Salvador and one in Mexico). In fiscal years 2020 and 2019, approximately 95% or more of our manufactured products
were sewn in our owned or leased manufacturing facilities. The remaining products were sewn by third-party contractors located
primarily in the Caribbean Basin. To supplement our internal manufacturing platform, we purchase products from third-party global
suppliers. In fiscal years 2020 and 2019, we sourced less than 10% of our total products from third parties.
Many of the garments will be decorated using screen printing or digital 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 nine domestic facilities, including five such
facilities that are integrated with Delta Group distribution centers. These facilities support our strategy of establishing integrated
fulfillment locations that combine our DTG2Go state-of-the-art digital platform with our Delta Activewear and Soffe business' supply
of fashion and core basic garments. Furthermore, these facilities create a seamless nationwide footprint allowing us to reach
approximately 60% of all U.S. consumers with one-day shipping.
At fiscal 2020 year end, we operated eight distribution facilities strategically located throughout the United States that carry in-stock
inventory for shipment to customers, with most shipments made via third-party carriers. To better serve customers, we allow products
to be ordered by the piece, dozen, or full case quantity, and we aggressively leverage our strengths and efficiencies to meet the quick-
turn needs of our customers. Because a significant portion of our business consists of at-once replenishment, we believe that backlog
order levels do not provide a general indication of future sales.
See Item 2. Properties for more information about each of our primary manufacturing and distribution facilities.
Sales & Marketing
Our sales and marketing functions consist of both employed and independent sales representatives and agencies located throughout
the country. Our sales teams service specialty and resort shops, department, mid-tier and mass retailers, sporting goods stores, e-
retailers and the U.S. military. Our brands leverage both in-house and outsourced marketing communication professionals to amplify
their lifestyle statements.
The majority of our apparel products are produced based on forecasts to permit quick shipments to our customers; however, our
private label programs are generally made only to order. During fiscal year 2020, we shipped our products to approximately 8,000
customers, many of whom have numerous retail "doors." No single customer accounted for more than 10% of our sales in fiscal
years 2020 or 2019, and our strategy is to not become dependent on any single customer. Revenues attributable to sales of our
products in foreign countries represented approximately 1% of consolidated net sales in both fiscal years 2020 and 2019.
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 official licensee for
branches of the United States military. We believe these license agreements are important given the military heritage of Soffe.
Environmental, Sustainability, and Governance
We aim to disclose and communicate transparently any material risks that could affect our stakeholders, and we strive to implement
policies and practices that continuously improve the transparency and sustainability of our supply chain. The Environmental,
Sustainability, and Governance (“ESG”) disclosures within this Annual Report and our definitive Proxy Statement align with the
standards issued by the Sustainability Accounting Standards Board (“SASB”) for the Apparel, Accessories, and Footwear industry
and with regulations and guidance issued by the Securities and Exchange Commission. The indicators in the Annual Report and
definitive Proxy Statement have been carefully selected to show the most relevant aspects of our performance in the areas of
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environmental impact, health and safety, responsible raw material sourcing, safe chemical management, and responsible corporate
governance.
Conserving the Environment
We believe that efficiently and sustainably managing natural resources is a smart business move and a responsible decision for the
planet. By effectively and safely managing the materials used to manufacture our apparel products, we also protect the health and
safety of our customers and employees. Our commitment to environmental sustainability includes compliance with safe chemistry
practices and implementing technology and processes that reduce energy and water consumption, reuse and effectively treat
wastewater, and reduce and recycle waste. In addition, we are committed to full compliance with local, regional, and national
environmental laws and regulations.
Focusing on Energy Efficiency
The operations at our Ceiba Textiles facility in Honduras account for a significant portion of the fuel and electricity used in our
global, vertically integrated manufacturing network. Our Ceiba Textiles facility is located within the Green Valley Industrial Park
(“Green Valley”) near San Pedro Sula, Honduras. Green Valley is certified under the International Organization for Standardization
ISO-14001 Environmental Management System, which is widely considered the world’s “gold standard” for environmental
management.
We are committed to continuously identifying ways to reduce our overall energy intensity by reducing our consumption and
harnessing waste energy often lost in manufacturing processes. Our work has focused on innovations in equipment and process
technologies as well as responsible climate management within our facility to increase our energy efficiency while reducing our fuel
and electricity consumption. Since fiscal year 2018, we have reduced our fuel and electricity consumption at Ceiba Textiles by
approximately 17% and 18%, respectively, on an annualized basis.
We installed a heat exchanger system at Ceiba Textiles during the fiscal year 2020 fourth quarter that plays an essential role in
reducing the environmental impact of our manufacturing processes by recovering and reusing energy. This system recovers the heat
from our already hot wastewater and uses the energy to heat the freshwater needed in dyeing operations. On an annual basis, this
installation is projected to save an additional approximately 500 thousand gallons or 2,000 cubic meters of fuel.
Ceiba Textiles operations are located in Honduras with tropical climates that require a cooling system for the protection and comfort
of our employees and the integrity of our yarn and fabrics. In fiscal year 2020, we identified and implemented strategies to reduce
our annual electricity usage in certain operating areas by approximately 25% while continuing to maintain the required temperature
and humidity levels for our people and for the quality of our textile production.
Additionally, in fiscal year 2019 we replaced conventional light bulbs at Ceiba Textiles with light-emitting diode (“LED”) bulbs.
LED lighting, which emits less heat and uses less energy than conventional bulbs and decreases the temperature on factory floors,
raises productivity, particularly on hotter days. LED lights contain no toxic materials, and the bulbs are 100 percent recyclable,
whereas most conventional light bulbs contain materials that are hazardous for the environment.
Managing Water
Water is one of the world’s most precious and vital resources. Access to water is essential to Delta Apparel’s manufacturing
operations, and we are committed to managing our water use in an efficient and responsible manner.
During manufacturing, the most significant amount of water consumption occurs during the fabric washing, dyeing, and rinsing
processes. To reduce our water consumption at Ceiba Textiles, in fiscal year 2018 we implemented a system that reuses the leftover
dye water for use in future batches of similar-colored fabric. This system saves approximately 4 million gallons or 15,000 cubic
meters of water per year while maintaining the quality of our dyed fabrics. Also, in fiscal year 2019, we changed our dye processes
to further reduce water consumption and reduce the amount of contaminates remaining in the wastewater. Since fiscal year 2018, we
have reduced our water consumption at Ceiba Textiles by approximately 27% on an annualized basis.
Treating textile wastewater is necessary not only to protect the local ecosystems but also to make the recycled water available to
reuse in manufacturing processes or irrigation. To properly treat problematic substances before the water is discharged, our vertically-
integrated manufacturing facilities, as well as our third-party fabric suppliers, comply with wastewater discharge requirements
through currently active licenses and permits issued by local governments. In each of the last three years, none of these wastewater
treatment facilities have received a compliance citation or violation.
Wastewater from Ceiba Textiles is transferred to the Green Valley water treatment facility, which operates on an environmental
license issued by the Honduras Ministry of Energy, Natural Resources, Environment, and Mines. Over 90% of our water consumption
at Ceiba Textiles in fiscal year 2020 was safely and effectively treated and recycled. The Green Valley wastewater treatment facility
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uses the industry standard primary, secondary, and tertiary water treatment methods based on the types of effluents being discharged
as well as regulatory and environmental standards. Treatment procedures are also in place to neutralize and remove additional
substances that may potentially be harmful, but are not necessarily regulated. The following information describes the primary,
secondary, and tertiary water treatment methods.
● Primary – Primary treatment methods include screening, sedimentation, homogenization, pH neutralization, and
mechanical and chemical flocculation, which is a chemical added to the water that binds suspended solids into heavier
particles that are easier to remove. Nano and cross-flow nano filtration techniques are also used to reduce the vast
majority of sodium chloride and dyes.
● Secondary – Secondary treatment is designed to substantially degrade the biological content of the wastewater by using
a combination of physical and aerobic biological processes. Secondary treatment methods include various types of
filtration along with an activated sludge process, which stabilizes and converts potentially toxic contaminates into less
harmful forms such as carbon dioxide and water, which are safe for the environment.
● Tertiary – Tertiary treatment is the final cleaning process that purifies wastewater before it is reused, recycled, or
discharged into the environment. Treatment methods include a combination of physical and chemical techniques to
decontaminate and purify the water.
Reducing Waste
Our waste management strategy is to reduce, reuse, and recycle, which increases the likelihood that the waste materials we generate
during the manufacturing process never reach landfills, lakes, rivers, streams, or municipal water systems. We are committed to full
compliance with local, regional, and national environmental laws and regulations in the countries in which we operate as it relates to
responsible recycling and disposal of hazardous and non-hazardous waste. Since fiscal year 2018, we have reduced total waste,
measured in metric tons, generated at our offshore manufacturing facilities by approximately 4%, on an annualized basis. In fiscal
year 2020, less than 5% of the waste generated is considered hazardous waste material.
Pre-consumer textile waste is created during the cutting and sewing processes and includes small pieces of fabric trimmed away and
other fabric scraps. During fiscal years 2020 and 2019, we modified sewing patterns to significantly reduce fabric waste during
cutting. We also invested in sewing machines capable of folding excess fabric inside the bottom and sleeve hems to eliminate
trimming. This initiative not only reduces textile waste but also lowers fabric production needs, which saves water, electricity, and
fuel usage.
We have multiple reuse and recycle programs that help limit the waste that would otherwise be disposed in landfills:
● We partner with several companies that collect our fabric waste and sell it to manufacturers in the automotive industry,
among others, that can mix the fabric with other materials to create alternate applications for the fabric, such as for
automotive seats and windshield wipers.
● Our screen-printing facilities recycle colors of inks that remain at the end of a production project for use in future
production. In one year, this recycling program can recover as much as 75% of the plastisol ink and 50% of the water-
based ink that otherwise would have been discarded.
● All of our manufacturing, sewing, and distribution facilities participate in cardboard recycling programs. Each facility
flattens and places all cardboard in an outside container for recycling companies to then collect the cardboard on a
regular schedule.
In fiscal year 2020, we recycled approximately 70% of the waste generated from our offshore manufacturing operations.
Using Safe Chemistry
Textile operations use various chemicals, cleaners, dyes, and inks throughout the manufacturing, finishing, and decorating processes.
We strive to use non-hazardous, bio-eliminable ingredients in our apparel products and throughout our manufacturing processes to
protect the safety of our customers and employees as well as reduce negative impacts on the environment. For example, our DTG2Go
digital printing facilities use water-based biodegradable inks that are 100 percent non-hazardous and adhere to the strictest human
health and environmental standards.
We have a robust, hazard-based chemicals management system throughout our manufacturing processes. Our commitment to safe
chemistry begins in the design and development stage of our products, which are conceived from the latest fashion trends and are
fully compliant with statutory, industry, and customer-specific safety requirements. We are proud that the chemicals we use comply
with the restricted substance list (“RSL”) published by the American Apparel & Footwear Association (“AAFA”). AAFA is the
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industry’s leading resource for maintaining and publishing banned and restricted substances lists for finished apparel products around
the world. We continuously monitor our RSL, which includes additional substances that may be harmful, but are not necessarily
regulated. We also control against the procurement of restricted substances through our purchase approval processes and
arrangements with dye and chemical vendors.
The dyes and chemicals used in our manufacturing facilities are tested annually by a third-party laboratory that uses a scoring system
to determine the level of compliance. Since 2017, we have maintained a “Green” status, which is the highest level of compliance.
Annual tests are also conducted by a third-party laboratory to ensure our compliance with The Consumer Product Safety Improvement
Act (“CPSIA”) of 2008, The Safe Drinking Water and Toxic Enforcement Act of 1986 (“Proposition 65 of California State Law”),
and we adhere to any customer-supplied RSL. Our manufacturing employees are provided training on compliance with our RSL as
well as training on how to safely handle potentially hazardous substances throughout the manufacturing process. It is also important
to us that all our significant third-party yarn and fabric suppliers share our high compliance standards and operate in a legal and
responsible manner. We require these suppliers to provide, at least annually, certification or self-declaration documents that
demonstrate compliance with industry standard parameters for safe chemistry. We take immediate corrective actions in instances
where non-compliance may be identified.
Responsible Sourcing
As a vertically integrated apparel company, we believe it is important to have a high degree of oversight into all aspects of sourcing,
manufacturing, and distribution. To that end, the lifecycle of a Delta Apparel garment begins with high quality, sustainable cotton,
which is the primary ingredient for the majority of apparel products across our brand portfolio. Over 90% of our garments are created
with U.S. cotton, which is known for both the quality of its fibers as well as the sustainability practices of the cotton farmers who
harvest it. Cotton is not considered a water-intensive crop and more than 60% of the cotton grown in the U.S. is produced without
irrigation. Cotton is also highly tolerant of soil and water salinity levels, so it can be grown with water and soil resources unsuitable
for most other crops. We do not source cotton from regions with water stress, and we do not source conflict minerals in the production
of our products.
During fiscal year 2020, we joined the Cotton LEADS program, which is committed to sustainable and traceable cotton production.
This partnership enables us to broaden our support of the cotton farmers who supply our Company with high-quality cotton, allowing
us to continue transforming sustainably-sourced cotton into high quality, responsible apparel products for our customers. We serve
as a supply chain partner for many customers who expect high quality raw materials and require the ability to trace those raw materials
back to the source. With cotton traceability, we are now able to trace the fiber used in our garments all the way back to harvest.
The vast majority of the yarn we use in our textile operations is sourced from Parkdale, whose products are independently certified
to Standard 100 by OEKO-TEX. Our significant external fabric suppliers are also certified to Standard 100 by OEKO-TEX.
Monitoring Progress
We use the Sustainable Apparel Coalition’s Higg Index to measure the environmental impact of all our offshore manufacturing
facilities and the facilities of our key external fabric suppliers. The Higg Index tool provides transparency of our efforts to reduce
our environmental impact, and it identifies areas for continued improvement. Our Ceiba Textile facility has been using this tool for
several years, and our 2019 self-assessment resulted in a total score in the upper quartile as compared to our industry competitors.
Our most recent self-assessment was completed in July of 2020 and the results will be available in March 2021. We retain the services
of an external consultant to verify our assessments for a sample of facilities and to provide guidance for any areas of improvement.
Social Responsibility
Our employees are our most important and valuable asset. Our diverse and talented workforce helps drive our culture of high
performance, close teamwork, and deep caring for each other across geographies and functions. We have an impact on the lives of
the approximately 7,900 employees across the globe as well as their families and communities. We support the livelihoods of our
people through competitive wages and benefits, providing them with a safe and healthy workspace, supporting the communities in
which they live, and, most importantly, treating all employees with dignity and respect.
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Our People
The table below provides an overview of the approximate number of employees by geographic location as well as the tenure of that
employee base as of October 3, 2020:
Country
El Salvador
Honduras
Mexico
United States
Total
Number of
Employees
2,436
3,255
940
1,229
7,860
5 Years of Less
6 - 10 Years
10 Years or More
Tenure
64%
67%
62%
71%
65%
13%
23%
17%
10%
18%
23%
10%
21%
19%
17%
Our employee base fluctuates based on seasonal labor requirements within our distribution and fulfillment centers, as well as based
on production levels within our manufacturing facilities. These personnel changes generally trend with the overall demand for our
products and services.
Approximately 2,670 employees at two of our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining
agreements. We have historically conducted our operations without significant labor disruptions and believe that our relations with
our employees are positive.
The table below provides an overview of the approximate percentage of employees by gender and region as of October 3, 2020:
Region
Offshore
United States
Total
Diversity and Inclusion
Male
46%
36%
45%
Female
54%
64%
55%
We are committed to fostering an inclusive culture where every employee is treated with dignity and respect, regardless of their
gender, age, race, abilities, or sexual orientation. We believe that our employees’ contributions are richer because of their diverse
backgrounds and experiences, which strengthens the collaboration of our cross-functional, global teams and leads to improved
performance.
Wages and Benefits
Investing in our people is critical for their personal and professional success, and we believe this investment enhances engagement
and performance levels. Our compensation philosophy is to provide a fair living wage that is also scalable to the performance of the
business. We provide our employees with at least the legal minimum wage or the prevailing industry wage in the countries where we
operate, whichever is higher, complying with all legal wage requirements. We also provide fringe benefits, some of which are
required by law, contract, or as per established collective bargaining agreements, while others are more favorable than required.
In recognition of the importance of raising the standard of living in certain communities in which we operate, we provide additional
benefits, such as free onsite medical care from fully licensed physicians and nurses that encompass clinics and wellness programs.
In these locations, we also provide subsidized meal assistance as well as free transportation to and from our facilities.
We invest in the professional development of our employees through various training programs. In fiscal year 2020, we provided
more than 123,000 hours of professional development and safety training for our employees.
Health and Safety
Our responsibility is to provide our employees with a safe and healthy work environment that meets or exceeds the applicable
environmental and health and safety laws and regulations. All our manufacturing facilities in El Salvador, Honduras, and Mexico are
Worldwide Responsible Accredited Production (“WRAP”) certified. We are a Category C affiliate with the Fair Labor Association
(“FLA”), an organization that supports human rights compliance monitoring for our plants and our third-party contractors.
Because textile manufacturing can contain various hazards and risks to workers, we have proactive programs in place to promote
workplace safety, personal health, and employee wellness. Our culture promotes and rewards safety-first in all aspects of
manufacturing, materials handling, and distribution of our apparel products. Safety training and awareness is embedded in employee
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orientation and onboarding, job performance and evaluation, and ongoing training based on a set safety training calendar by topic.
We standardize and document our manufacturing and distribution safety procedures that require activities to be performed in the
safest manner possible.
Our production and distribution processes have incorporated improvements to ergonomics and material handling equipment to reduce
physical risks, protect employee health, and optimize productivity. In our cut and sew facilities, we have invested in upgrading our
ergonomically-friendly chairs and floor mats in addition to instituting frequent group stretching and movement exercises. In fiscal
year 2020, we invested in new slip sheet material handling equipment in several of our manufacturing and distribution facilities. This
equipment has the dual benefit of reducing the manual labor and potential back strain on employees of loading and unloading finished
cases as well as maximizing the loads of shipping containers.
We are proud that our safety records have been consistently better than OSHA’s benchmarks for the apparel manufacturing sector.
For example, our fiscal year 2020 incident rate for total recordable cases was 1.2% compared to OSHA’s average rate of 3.4%. Our
incident rate in 2020 for cases involving lost time from work was 0.09%.
In response to the health emergency created by the COVID-19 pandemic, we immediately established a series of protocols and safety
measures across all our facilities to protect the health and safety of our employees and contractors. We comply with all local
regulations that continue to evolve in response to the pandemic. For example, our manufacturing facilities in Honduras and El
Salvador were subject to government-mandated closures for approximately 15 weeks beginning in mid-March 2020. Our other
manufacturing, distribution, and retail facilities complied with local regulations for essential businesses.
Upon reopening in June 2020, our manufacturing facilities implemented a comprehensive COVID-19 safety protocol that
incorporates optimal social distancing and sanitation protocols. For example, we created our own COVID-19 safety videos to promote
healthy behaviors at home and in the workplace. These videos were incorporated into training sessions to educate our employees on
safety protocols. Our safety initiatives include checking each person’s temperature prior to entering a facility, installing plexiglass
partitions to separate hand-washing stations, work areas, and cafeteria seating areas, sanitizing the interior of vehicles that are used
to transport employees to and from work, and requiring all employees to observe safe distancing. We also provide all employees with
personal protective equipment, sanitizing products, and COVID-19 informational materials. Our COVID-19 safety protocols have
been recognized by local governments and our customers as best-in-class and serve as a model for other manufacturing operations
in the regions in which we operate.
Monitoring
We conduct annual audits of all our internal manufacturing facilities as well as our significant third-party fabric suppliers to evaluate
compliance with the FLA Workplace Code of Conduct. These audits cover labor topics, such as forced or child labor, compensation
policies, and nondiscrimination, as well as environmental health and safety topics, such as fire safety, processes for safe chemistry,
and environmental permits. These audits are important in identifying and preventing human rights and environmental health and
safety violations.
The annual audits are conducted by Delta Apparel employees in our human resources or compliance departments, and they follow
predefined audit programs and checklists that involve a mix of in-person site visits and walkthroughs of the facility, observations of
processes, interviews with employees, and inspection of records and applicable permits. The audit results are documented with
supporting photographs for any non-conformance findings. The internal auditors then report the findings to management, including
the recommended corrective actions, the manager responsible for taking action, and the date by which the corrective actions must be
complete. The audits performed in fiscal year 2020 resulted in no priority non-conformance findings, defined as severe violations of
code of conduct in the areas of labor or environmental health and safety. For minor violations identified, we put corrective action
plans in place to remediate the findings.
Community Outreach
We believe in the importance in engaging in the communities in which we operate. Employees at several of our facilities are involved
in programs to promote environmental responsibility and improve the way of life for nearby communities:
● Ceiba Textiles facilitates an annual "United for a Greener Honduras" campaign to help restore the forest and
environmental conditions in an area of western Honduras. In this annual reforestation campaign, a group of employees
from Ceiba teams up with representatives from the Quimistán Municipal Environmental Unit to plant over 100 trees.
Reforestation is a critical factor in increasing this region’s water retention capacity as it reduces the impact to nearby
communities when rivers overflow during the region’s rainy season.
● During the initial stages of the COVID-19 pandemic, our cutting and sewing facilities manufactured face masks under
strict safety protocols. With the approval of the Honduran government, employees donated face masks and sanitizing
gel to help area communities that were experiencing higher COVID-19 infection rates. We also supported the local
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Mexican government’s "Stay at Home Campeche” campaign by donating specialty t-shirts, face masks, and face shields
imprinted with the campaign’s logo to support awareness for the program.
●
In June 2020, the communities surrounding our facilities in El Salvador and Mexico were impacted by severe flooding
and property damage due to tropical storms Cristobal and Amanda. Our employees quickly coordinated the distribution
of groceries, emergency supplies, and other employee donations to assist people who were affected by the severe
storms.
● Employees at several of our facilities provide community outreach in the form of supporting local nursing homes or
orphanages through donations and other support.
Competition
As a vertically-integrated apparel company, we have numerous competitors in both domestic and international markets, many of
which are larger and have more brand recognition and greater marketing budgets. Some of these competitors may benefit from lower
production costs that can result from greater operational scale, a differing supply chain footprint, or trade-related agreements and
other macroeconomic factors that may enable them to compete more effectively.
Competition in our Delta Group segment is generally based upon price, service, delivery time, and quality with the relative
importance of each factor dependent upon the needs of the particular customer and the specific product offering. Our catalog products
generally are highly price competitive, and competitor actions can greatly influence pricing and demand for our products. While
price is still important in the 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. However, the impact associated with the COVID-19 pandemic negatively
impacted our sales during the June 2020 quarter, which represented 19% of fiscal year 2020 net sales. Our first fiscal quarter (quarter
ended in December) typically is the lowest and represented 25% of fiscal year 2020 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 2020 may not be indicative of the distribution in future years.
Environmental and Other Regulatory Matters
We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater
discharges, storm water flows, air emissions and solid waste disposal. The labeling, distribution, importation, marketing, and sale of
our products are subject to extensive regulation by various federal agencies, including the Federal Trade Commission, Consumer
Product Safety Commission and state attorneys general in the United States. Our international operations are also subject to
compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti-bribery laws applicable to our operations.
The environmental and other regulations applicable to our business are becoming increasingly stringent, and we incur capital and
other expenditures annually to achieve compliance with these environmental standards and regulations. We currently do not expect
that the amount of expenditures required to comply with these environmental standards or other regulatory matters will have a
material adverse effect on our operations, financial condition or liquidity. There can be no assurance, however, that future changes
in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or
conditions will not require substantial additional expenditures. Similarly, while we believe that we are currently in compliance with
all applicable environmental and other regulatory requirements, the extent of our liability, if any, for past failures to comply with
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laws, regulations and permits applicable to our operations cannot be determined and could have a material adverse effect on our
operations, financial condition and liquidity.
Item 1A. Risk Factors
We operate in a rapidly changing, highly competitive business environment that involves substantial risks and uncertainties,
including, but not limited to, the risks identified below. The following risks, as well as risks described elsewhere in this report or in
our other filings with the SEC, could materially affect our business, financial condition or operating results and the value of Company
securities held by investors and should be carefully considered in evaluating our Company and the forward-looking statements
contained in this report or future reports. The risks described below are not the only risks facing Delta Apparel. Additional risks not
presently known to us or that we currently do not view as material may become material and may impair our business operations.
Any of these risks could cause, or contribute to causing, our actual results to differ materially from expectations.
Risks Related to our Strategy
The price and availability of purchased yarn and other raw materials is prone to significant fluctuations and volatility. Cotton
is the primary raw material used in the manufacture of our apparel products. As is the case with other commodities, the price of
cotton fluctuates and is affected by weather, consumer demand, speculation on the commodities market, and other factors that are
generally unpredictable and beyond our control. As described under the heading “Manufacturing, Sourcing, and Distribution”, the
price of yarn purchased from Parkdale, our key supplier, is based upon the cost of cotton plus a fixed conversion cost. We set future
cotton prices with purchase commitments as a component of the purchase price of yarn in advance of the shipment of finished yarn
from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we enter into
the commitments. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in
unfavorable yarn pricing for us. In the past, the Company, and the apparel industry as a whole, has experienced periods of
increased cotton 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. Levels of demand change as regional, domestic and international economic conditions change, including, but not limited
to, employment levels, energy costs, interest rates, tax rates, inflation, personal debt levels, and uncertainty about the future, with
many of these factors outside of our control. Historically during recessionary periods the demand for casual and activewear apparel
has been strong and our business has performed well. However, there can be no assurances that this correlation will continue in future
recessions. Weakening sales may require us to reduce manufacturing operations to match our output to demand or expected
demand. Reductions in our manufacturing operations may increase unit costs and lower our gross margins, causing a material adverse
effect on our results of operations.
The apparel industry is highly competitive, and we face significant competitive threats to our business. The market for athletic
and activewear apparel and the related accessory and other items we provide is highly competitive and includes many new
competitors as well as increased competition from established companies, some of which are larger or more diversified and may
have greater financial resources. Many of our competitors have larger sales forces, stronger brand recognition among consumers,
bigger advertising budgets, and greater economies of scale. We compete with these companies primarily on the basis of price, quality,
service and brand recognition, all of which are important competitive factors in the apparel industry. Our ability to maintain our
competitive edge depends upon these factors, as well as our ability to deliver new products at the best value for the customer, maintain
positive brand recognition, and obtain sufficient retail floor space and effective product presentation at retail. If we are unable to
compete successfully with our competitors, our business and results of operations will be adversely affected.
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Our success depends, in part, on our ability to predict or effectively react to changing consumer preferences and trends. The
success of our businesses depends on our ability to anticipate and respond quickly to changing consumer demand and preferences in
apparel and other items we provide. We believe that our brands are recognized by consumers across many demographics and
geographies. The popularity for particular products can change significantly from year-to-year based on prevailing fashion trends
(particularly in our lifestyle businesses) and on other factors and, accordingly, our ability to adapt to fashion trends in designing
products is important to the success of our brands. If we are unable to quickly adapt to changes in consumer preferences in the design
of products, our results of operations could be adversely affected. Moreover, because we and our customers project demand for our
products based on estimated sales and fashion trends, the actual demand for our products sometimes falls short of what was
projected. This can lead to higher inventory levels than desired. Excess inventory levels increase our working capital needs, and
sometimes excess inventory must be sold at discounted prices, all of which could have an adverse impact on our business, financial
condition and results of operations.
Our strategy to grow our direct-to-consumer retail business depends upon our ability to successfully open and operate new
stores in a timely and cost-effective manner. Our strategy to grow our “brick and mortar” retail footprint depends on many factors
including, among others, our ability to: identify desirable store locations; negotiate acceptable lease terms; hire, train and retain a
growing workforce of store managers, sales associates and other personnel; successfully integrate new stores into our existing control
structure and operations, including our information technology systems; and coordinate well with our digital platforms and
wholesale customers to minimize the competition within our sales channels.
If we expand into new geographic areas, we will need to successfully identify and satisfy the consumer preferences in these areas. In
addition, we will need to address competitive, merchandising, marketing, distribution and other challenges encountered in connection
with any expansion. Finally, we cannot ensure that any newly-opened stores will be received as well as, or achieve net sales or
profitability levels comparable to those of, our existing stores in our estimated time periods, or at all. If our stores fail to achieve, or
are unable to sustain, acceptable net sales and profitability levels, our business overall may be materially harmed and we may incur
significant costs associated with closing or relocating stores.
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.
Risks Related to our Operations
The COVID-19 pandemic has had, and could continue to have, a material adverse effect our ability to operate, results of
operations, financial condition, liquidity, and capital investments. The World Health Organization has declared the COVID-19
outbreak a pandemic, and the virus continues to spread in areas where we operate and sell our products. The COVID-19 pandemic
and similar pandemics or disruptions in the future have had an adverse effect and could continue to adversely affect our performance
and results of operations and could impact our financial condition, liquidity, and capital investments. Several public health
organizations have recommended, and some local and foreign governments have implemented, certain measures to slow and limit
the transmission of the virus, including shelter in place and social distancing ordinances. Such preventive measures, or others we
may voluntarily put in place, may have a material adverse effect on our business for an indefinite period of time, such as the potential
shutdown of certain locations, decreased employee availability, potential border closures, reduced customer traffic, modified hours
and operations, and others. In mid-March 2020, all of our branded retail locations were temporarily closed in compliance with
guidelines for retail store operations and were re-opened by the end of May 2020. Our manufacturing facilities in El Salvador and
Honduras were temporarily closed in mid-March through late June due to the government-mandated country shutdowns, in addition
to intermittent closures during the June quarter at our manufacturing facilities in Mexico and North Carolina. The disruption of our
manufacturing operations in fiscal year 2020 resulted in lost sales, as inventory was not available to fulfill customer demand.
Uncertainty remains whether our retail stores and manufacturing plants may be required to close again.
Many of our customers and suppliers also face these and other challenges, which could lead to reduced demand for our products and
services and a disruption in our supply chain. These challenges could impair our customers' ability to pay all or a portion of amounts
owed to us per the sales agreements, resulting in reduced cash flows and charges incurred for bad debt. These issues may also
materially affect our future access to our sources of liquidity, particularly our cash flows from operations, financial condition, and
capital investments.
The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the pandemic, a resurgence of the pandemic, new information that may emerge
concerning the severity of COVID-19, and public and private actions to contain COVID-19 or treat its impact. The COVID-19
pandemic has and will likely continue to result in social, economic, and labor instability in the countries in which we, or the third
parties with whom we engage, operate. The long-term economic impact and near-term financial impacts of the COVID-19 pandemic,
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including but not limited to, possible impairment, restructuring, and other charges, as well as overall impact on our business, results
of operations, financial condition, liquidity, or capital resources and investments, cannot be reliably quantified or estimated at this
time due to the uncertainty of future developments.
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 have occurred and can recur 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 or global
pandemics and political disruptions such as those referenced in the immediately-preceding risk section. In addition, if we are unable
to successfully coordinate the planning of inventory across these facilities and the related distribution activities, it could have a
material adverse effect on our business, financial condition and results of operations.
The talents and continued contributions of our key management are important to our success. We believe our future success
depends on our ability to retain and motivate our key management, our ability to attract and integrate new members of management
into our operations, and the ability of all personnel to work together effectively as a team and to execute our business strategy. Our
inability to accomplish any of these goals could have a material adverse effect on our results of operations.
Energy, fuel and related costs are prone to significant fluctuations and volatility, which could adversely affect our results of
operations. Our manufacturing operations require high inputs of energy, and therefore changes in energy prices directly impact our
gross profits. In addition, we incur significant freight costs to transport goods between our offshore facilities and the United States,
along with transportation expenses to ship products to our customers. The cost of energy and fuel fluctuates due to a number of
factors outside of our control, including government policy and regulation 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
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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
customer payment card and check information. There can be no assurance that we will not suffer a data compromise, that unauthorized
parties will not gain access to personal information, or that any such data compromise or access will be discovered in a timely manner.
Further, the systems currently used for transmission and approval of payment card transactions, and the technology utilized in
payment cards themselves, all of which can put payment card data at risk, are determined and controlled by the payment card industry,
not by us. Our computer systems, software and networks may be vulnerable to breaches (including via computer hackings),
unauthorized access, misuse, computer viruses, phishing or other failures or disruptions that could result in disruption to our business
or the loss or theft of confidential information, including customer information. Any failure, interruption, or breach in security of
these systems, could result in the misappropriation of personal information, payment card or check information or confidential
business information of our Company. In addition, there may be non-technical issues, such as our employees, contractors or third
parties with whom we do business or to whom we outsource business operations may attempt to circumvent our security measures
in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information.
The methods used by third parties to obtain unauthorized access change frequently and may not be anticipated or immediately
detected. Thus, despite the security measures we may have in place, an actual or perceived information security breach, whether due
to "cyber-attack," computer viruses or other malicious software code, or human error or malfeasance, could occur. Actual or
anticipated attacks may cause us to incur significant costs to rectify the consequences of the security breach or cyber-attack, including
costs to deploy additional personnel and protection technologies, repair damage to our systems, train employees and engage third-
party experts and consultants. The collection, retention, transmission, and use of personal information is subject to contractual
requirements and is highly regulated by a multitude of state, federal, and foreign laws. Privacy and information security laws are
complex and constantly changing. Compliance with these laws and regulations may result in additional costs due to new systems and
processes, and our non-compliance could lead to legal liability. Any compromise of our customer, employee or company data, failure
to prevent or mitigate the loss of personal or business information, or delay in detecting or providing prompt notice of any such
compromise could attract media attention, damage our customer or other business relationships and reputation, result in lost sales,
fines, liability for stolen assets or information, costs of incentives we may be required to offer to our customers or business partners
to retain their business, significant litigation or other costs and involve the loss of confidential company information, any or all of
which could have a material adverse effect on our business, financial condition and results of operations.
As 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.
Risks Related to Legal and Regulatory Matters
Changes in U.S. or other tax laws or regulations may cause us to incur additional tax liability. We are subject to income tax in
the United States and in certain foreign jurisdictions where we generate net operating profits. We generally benefit from a lower
overall effective income tax rate due to the majority of our manufacturing operations being located in foreign tax-free jurisdictions
or foreign jurisdictions with tax rates that are lower than those in the United States. Our U.S. legal entity contracts with our foreign
subsidiaries to manufacture products on its behalf, with the intercompany prices paid for the manufacturing services and
manufactured products based on an arms-length standard and supported by an economic study.
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
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cumulative earnings of foreign subsidiaries. In addition, new taxes were imposed related to foreign income, including a tax on global
intangible low-taxed income ("GILTI") as well as a limitation on the deduction for business interest expense ("Section 163(j)").
GILTI is the excess of the shareholder's net controlled foreign corporations (“CFCs”) net tested income over the deemed tangible
income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business
interest income, of 30% of the taxpayer's adjusted taxable income. The Coronavirus Aid, Relief, and Economic Security (“CARES
Act”), which was enacted on March 27, 2020, provided temporary changes to income and non-income-based tax laws, including
some provisions which were previously enacted under the New Tax Legislation. The CARES Act revised the U.S. corporate income
tax code on a temporary basis by, among other things, eliminating the 80% of taxable income limitation on net operating loss (“NOL”)
carryforwards, allowing NOL carrybacks, and increasing the Section 163(j) interest limitation deduction from 30% to 50% of adjusted
taxable income.
Our effective tax rate could be adversely affected by changes in the mix of earnings between the U.S. and tax-free or lower-tax
foreign jurisdictions. We may be limited in our ability to deduct 50% of applicable foreign earnings under the GILTI income inclusion
or to deduct U.S. interest expense based on the amount of U.S. taxable income earned in a particular fiscal year. In addition, the
future impact of the CARES Act and New Tax Legislation may differ from historical amounts, possibly materially, due to, among
other things, changes in interpretations and assumptions made regarding the CARES Act and New Tax Legislation, guidance that
may be issued, and actions we may take as a result of the CARES Act and New Tax Legislation.
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.
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.
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. Trade partnerships and treaties can be subjected to negotiations and modifications by domestic and foreign
governments, which could result in new or increased tariffs on goods we import into the United States. Subsequent repeal or further
modification of 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.
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Our failure to comply with trade and other regulations could lead to investigations or actions by government regulators and
negative publicity. The labeling, distribution, importation, marketing, and sale of our products are subject to extensive regulation
by various federal agencies, including the Federal Trade Commission, Consumer Product Safety Commission and state attorneys
general in the United States. Any failure to comply with such regulations could cause us to become subject to investigation and
enforcement actions resulting in significant penalties or claims or in our inability to conduct business, adversely affecting our results
of operations.
Our international operations are also subject to compliance with the U.S. Foreign Corrupt Practices Act (the “FCPA”) and other anti-
bribery laws applicable to our operations. In many foreign countries, particularly in those with developing economies, it may be a
local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other U.S.
and foreign laws and regulations applicable to us. Although we have implemented procedures designed to ensure compliance with
the FCPA and similar laws, some of our agents or other channel partners, as well as those companies to which we outsource certain
of our business operations, could take actions in violation of our policies. Any such violation could have a material and adverse
effect on our business.
Changes in domestic or foreign employment regulations or changes in our relationship with our employees could adversely
affect our results of operations. As of October 3, 2020, we employed approximately 7,900 employees worldwide, with
approximately 6,600 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 operating
costs. Increases in wage rates in the countries in which we operate have occurred, and any further significant increases in wage rates
in those countries could have a material adverse impact on our operating results. A total of approximately 2,670 employees at two of
our facilities in San Pedro Sula, Honduras, are party to multi-year collective bargaining agreements. We have historically conducted
our operations without significant labor disruptions and believe that our relations with our employees are generally good. However,
a change in labor relations could adversely affect the productivity and ultimate cost of our manufacturing operations.
Our business is dependent on attracting and retaining a large number of quality associates with staffing needs especially high during
the holiday season. Competition for personnel during this time of year is highly competitive, and there is no assurance we will be
able to attract and retain a sufficient number of qualified personnel in future periods. Our ability to meet our labor needs is subject
to many factors, such as prevailing wage rates, minimum wage legislation unemployment levels, and actions by our competitors in
compensation levels. In addition, changes in federal, state, or local laws and regulations relating to employee benefits, including, but
not limited to, sick time, paid time off, leave of absence, wage-and-hour, overtime, and meal-and-break time could cause us to incur
additional costs. Competitive and regulatory pressures have already significantly increased our labor costs and further changes that
adversely impact our ability to attract and retain personnel could adversely affect our results of operations in the future.
The value of our brands, sales of our products and our licensing relationships could be impacted by negative publicity
resulting from violations of manufacturing or employee safety standards or labor laws, or unethical business practices, by
our suppliers and independent contractors. We are committed to ensuring that all of our manufacturing facilities comply with our
strict internal code of conduct, applicable laws and regulations, and the codes and principles to which we subscribe. In addition, we
require our suppliers and independent contractors to operate their businesses in compliance with the laws and regulations that apply
to them. However, we do not control these suppliers and independent contractors. A violation of our policies, applicable
manufacturing or employee safety standards and codes of conduct, labor laws or other laws or regulations by our suppliers or
independent contractors could interrupt or otherwise disrupt our operations. Negative publicity regarding the production or operating
methods of any of our suppliers or independent contractors or their failure to comply with our policies, applicable manufacturing or
employee safety standards and codes of conduct, labor laws or other laws or regulations could adversely affect our reputation, brands,
sales and licensing relationships, which could adversely affect our business and results of operations.
Risks Related to Financial Matters
We may be restricted in our ability to borrow under our revolving credit facility or service our indebtedness. Significant
operating losses or significant uses of cash in our operations could cause us to default on our asset-based revolving credit facility.
We rely on our credit facility, as well as on cash generated by our operations, to fund our working capital and capital expenditure
needs, to make acquisitions, to fund repurchases under our share repurchase program and to pay dividends should we choose to do
so in the future. Our working capital needs are generally greater in advance of the spring and summer selling seasons. Availability
under our credit facility is primarily a function of the levels of our accounts receivable and inventory, as well as the uses of cash in
our operations. A significant deterioration in our accounts receivable or inventory levels could restrict our ability to borrow additional
funds or service our indebtedness. Prior to amendments executed on April 27, 2020 and August 28 ,2020 (collectively, the “Bridge
Amendments”), our credit facility included 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. The Bridge Amendments amend the financial covenant provisions from
the amendment dates through July 3, 2021, including effectively lowering the minimum availability thresholds and removing the
requirement that our FCCR for the preceding 12-month period must be not be less than 1.1 to 1.0. Our availability at October 3,
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2020, was above the minimum thresholds specified in our credit agreement, and we were above the 1.1 to 1.0 FCCR for the preceding
12-month period. Following the expiration of the terms of the Bridge Amendments on July 3, 2021, a significant deterioration in our
business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR
specified in our credit agreement, which we may not be able to maintain. The covenants include, among other things, limitations on
asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases,
and transactions with affiliates. If an event of default under our credit facility occurred or became imminent, we may request our
credit agreement lenders to provide a waiver. If we were unsuccessful in that endeavor, we could explore alternative sources of
capital, whether debt or equity, which would likely be more expensive than the costs we incur under our credit facility. If we were
unable to cure an un-waived event of default under our credit facility, we would be unable to borrow additional amounts under the
facility, we could be unable to make acquisitions as well as fund share repurchases and pay dividends, and our lenders thereunder
could accelerate our obligations under the agreement and foreclose on our assets subject to the liens in their favor. This circumstance
would have a material adverse effect on our financial position and results of operations.
Deterioration in the financial condition of our customers or suppliers and changes in the operations and strategies of our
customers or suppliers could adversely affect our financial position and results of operations. We extend credit to our customers,
generally without requiring collateral. The extension of credit involves considerable judgment and is based on an evaluation of each
customer’s financial condition and payment history. We monitor credit risk exposure by periodically obtaining credit reports and
updated financial statements on our customers. Deterioration in the economy, declines in consumer purchases of apparel, disruption
in the apparel retail environment, or the inability of our customers to access liquidity could have an adverse effect on the financial
condition of our customers. During the past several years, various retailers and other customers have experienced significant
difficulties, including consolidations, restructurings, bankruptcies and liquidations as well as retail shutdowns as a result of the
COVID-19 pandemic. The inability of retailers and other customers to overcome these difficulties may continue or even increase
due to the current economic and retail market conditions. We maintain an allowance for doubtful accounts for potential credit losses
based upon current conditions, historical trends, estimates and other available information, which involves judgments and
uncertainties. During fiscal year 2020, we estimated and recorded additional reserves based on the heightened risks in the market as
the U.S. and our customers work to recover from the COVID-19 pandemic. The inability to collect on sales to significant customers
or a group of customers could have a material adverse effect on our financial condition and results of operations. Significant changes
in the financial condition of any of our suppliers or other parties with which we do business could result in disruption to our business
and have a material adverse effect on our financial condition and results of operations.
In addition, significant changes in the retail, merchandising and/or operational strategies employed by our customers may result in
decreased sales of our products to such customers and could have a material adverse effect on our financial condition and results of
operations. Likewise, significant changes in the operations of any of our suppliers or other parties with which we do business could
result in disruption to our business and have a material adverse effect on our financial condition and results of operations.
Our variable rate debt subjects us to interest rate risk that could cause our debt service obligations to increase significantly.
The debt we incur under our asset-based revolving credit facility is at variable rates of interest, which exposes us to interest rate risk.
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 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 October 3, 2020,
and September 28, 2019, our goodwill and other intangible assets were approximately $57.8 million and $59.5 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 2020, 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.
17
We are subject to foreign currency exchange rate fluctuations. We manufacture the majority of our products outside of the United
States, exposing us to currency exchange rate fluctuations. In addition, movements in foreign exchange rates can affect transaction
costs because we source products from various countries. We may seek to mitigate our exposure to currency exchange rate
fluctuations but our efforts may not be successful. Accordingly, changes in the relative strength of the United States dollar against
other currencies could adversely affect our business.
The market price of our shares is affected by the illiquidity of our shares, which could lead to our shares trading at prices
that are significantly lower than expected. Various investment banking firms have informed us that public companies with
relatively small market capitalizations have difficulty generating institutional interest, research coverage or trading volume. This
illiquidity can translate into price discounts as compared to industry peers or to the shares’ inherent value. We believe that the market
perceives us to have a relatively small market capitalization. This has led and could continue to lead to our shares trading at prices
that are significantly lower than our estimate of their inherent value.
As of November 18, 2020, we had 6,890,118 shares of common stock outstanding. We believe that approximately 37% of our stock
is beneficially owned by entities and individuals who each own more than 5% of the outstanding shares of our common stock.
Included in the 37% are institutional investors that beneficially own more than 5% of the outstanding shares. These institutional
investors own approximately 26% 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.
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 October 3, 2020:
Manufacturing
Distribution
Decoration/distribution
Retail stores/showroom (a)
Offices
Total
Owned
2
2
1
—
—
5
Leased
6
3
7
22
5
43
Other
—
1
1
—
—
2
Total
8
6
9
22
5
50
(a) Includes three "pop-up" retail locations temporarily leased through December 2020 by Salt Life.
Our primary manufacturing as of October 3, 2020, are as follows:
Name
Ceiba Textiles
Honduras Plant
Cortes Plant
Campeche Plant
Campeche Sportswear
Textiles LaPaz
Fayetteville Plant
Rowland Plant
Location
Utilization
Segment
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
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 2020 and 2019 fiscal year-ends, our long-lived assets in Honduras, El Salvador and Mexico collectively comprised
approximately 28% and 32%, respectively, of our consolidated net property, plant and equipment. Our long-lived assets in Honduras
18
comprised approximately 21% and 25%, 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 October 3, 2020, are as follows:
Location
Clinton, TN
Fayetteville, NC
Fayetteville, NC (Annex)
Hebron, OH
Opelika, AL
Santa Fe Springs, CA
Clearwater, FL
Cranbury, NJ
Fayetteville, NC
Lewisville, TX
Miami, FL
Nashville, TN
Phoenix, AZ
Sparks, NV
Storm Lake, IA
Utilization
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Decoration/distribution
Segment
Delta Group
Salt Life Group
Delta Group
Delta Group
Delta Group
Delta Group
Delta 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.
Item 3. Legal Proceedings
At times, we are party to various legal claims, actions and complaints. There are currently no material pending legal proceedings to
which we are a party or of which any of our property is subject, and we are not aware of any such proceedings that are contemplated
by any governmental authority.
Item 4. Mine Safety Disclosures
Not applicable.
19
Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock: The common stock of Delta Apparel, Inc. is listed and traded on the NYSE American
under the symbol “DLA.” As of November 18, 2020, there were approximately 809 record holders of our common stock.
Dividends: Our Board of Directors did not declare, nor were any dividends paid, during fiscal years 2020 and 2019. 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 October 3, 2020, and September 28, 2019, there was $8.8 million and $16.1 million, respectively, of retained
earnings free of restrictions to make cash dividends or stock repurchases.
Any future cash dividend payments will depend upon our earnings, financial condition, capital requirements, compliance with loan
covenants and other relevant factors.
Purchases of our Own Shares of Common Stock: See Note 14— Repurchase of Common Stock - Debt, in Item 15, which is
incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans: The information required by Item 201(d) of Regulation S-
K is set forth under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”
of this Annual Report, which information is incorporated herein by reference.
Item 6. 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
Financial measures included herein have been presented on a generally accepted accounting principles ("GAAP") basis and, in
certain limited instances, we have presented our financial results on a GAAP and non-GAAP (“adjusted”) basis, which is further
described and reconciled in the sections entitled “Non-GAAP Financial Measures.”
Business Outlook
We are pleased to have ended the 2020 fiscal year with balanced growth across all our business units in the fourth quarter, delivering
year-over-year sales growth of 8.1% and operating income improvement of over 70%. This strong recovery comes after the
business was impacted by the COVID-19 pandemic that halted retail in the U.S. beginning in mid-March through the first half of
June quarter fiscal year 2020.
Delta Apparel's strategic advantages, including our diversified sales channels, broad geographic footprint, and strong consumer
connections with our lifestyle brands, were validated over the course of fiscal year 2020. As an essential business, we remained open
and operating to serve our customers when they needed us, flexing our manufacturing and distribution operations, as needed, across
our vertically, integrated supply chain anchored in the Western Hemisphere. The restart and expedited ramp up of our offshore
manufacturing operations during the fourth quarter allowed us to continue to service the broad-based demand for casual activewear
apparel in the market. Consumers continued to actively seek Salt Life and Soffe products, particularly through direct-to-consumer
channels. In the second half of fiscal year 2020, sales on both our Salt Life and Soffe ecommerce sites each grew over 80% compared
to the same period in the prior year. As consumer shopping habits evolve, we anticipate continued strength in orders from our
profitable ecommerce channels, both on our branded consumer sites and our retail partners’ sites.
This was a pivotal year for the DTG2Go business as a market leader in the on-demand, direct-to-garment digital print and fulfillment
industry. During the second half of fiscal year 2020, DTG2Go registered sales growth of nearly 30% compared to the same period
in the prior year, driven by additional volume with existing customers as well as from new customers onboarding to our digital
platform. We are the only digital print supplier in the world that can offer a seamless, vertically-integrated solution, utilizing our
proprietary software and internal supply chain to offer a fully-decorated, on-demand product shipped directly to the consumer. This
20
unique model eliminates non-value added costs and reduces the risks involved with third-party supply chains. Customers are seeing
the benefits of the seamless supply chain of Delta Apparel garments within our on-demand model, with DTG2Go’s usage of Delta
Catalog blanks reaching a new record of approximately 40% utilization in the fourth quarter fiscal year 2020 compared to 20% in
the prior year’s fourth quarter. This trend is promising as it creates a more efficient operation, reduces garment costs for our
customers, and lowers working capital needs in the business.
We recently announced an expansion of DTG2Go’s service offerings and print capacity. In collaboration with a leading omni-channel
retailer of pop culture merchandise, we opened our first ‘On-Demand DC,’ a solution for retailers and brands to grow their business
utilizing an integrated, on-demand fulfillment model. The DTG2Go ‘On-Demand DC’ digital solution provides retailers immediate
access to utilize DTG2Go’s broad network of print and fulfillment facilities, while offering the scalability to integrate digital
fulfillment within the retailer’s own distribution facility. DTG2Go provides the full package: the technology, personnel, quality
control, equipment, blank apparel, and the experience and knowledge of this rapidly growing industry. To support the expected
demand coming from our transformation of the on-demand, fulfillment model, we have increased our fleet of digital printers ahead
of the upcoming holiday season, which will expand daily printing capacity by over 25%.
We were pleased to see the steep recovery in our Delta Catalog business with year-over-year sales growth in our September quarter.
We are seeing notable strength in the retail licensing channel as well as our recently launched e-retailer channel. We also returned to
year-over-year growth in our private label business, as we proactively worked with our customers and quickly ramped up production
to fulfill their needs. The diversification of our customer base is serving us well, and we are encouraged by the growth we are seeing
in the direct-to-retail channel. Market trends overall remain positive for our Delta Activewear business as, historically through
recessionary times, decorated t-shirt sales have been strong. This, coupled with more consumers dressing in casual apparel as they
work from home, should drive solid demand in this business in future quarters. Our team is focused on efficiently manufacturing and
replenishing inventory levels to meet the broad-based demand we are currently seeing in the market and in anticipation of the fiscal
year 2021 spring selling season.
We recently initiated strategies to foster sales growth and improve operating efficiencies within the Delta Group. To further leverage
the one-stop shop offering, we have now merged our Delta Catalog and Soffe sales teams to better position Soffe for growth and to
reduce redundant selling costs. Our upcoming print and digital editions of our catalog will not only feature our Delta product lines,
such as our industry-leading, fashion-forward Platinum Collection, but also will include activewear apparel from our own iconic
Soffe brand. Complementing the Delta and Soffe brands, we provide our customers with a broad range of product categories with
nationally recognized branded products including polos, outerwear, headwear, bags and other accessories. We also offer a seamless
solution for small-run decoration needs with our on-demand digital print services, powered by DTG2Go. The recent successful launch
of our newest distribution center in Phoenix, Arizona adds a fifth integrated digital print and distribution facility to our network,
combining DTG2Go’s digital print business with Delta Apparel’s own supply of garments.
Demand for the Salt Life brand was strong through fiscal year 2020, as consumers sought out the lifestyle brand products in various
channels, particularly direct-to-consumer channels. In addition to strong ecommerce sales, we saw consumers flock to our Salt Life
branded retail stores, leading over 50% sales growth in the retail channel in fiscal year 2020 compared to the prior year and driven
by both same store sales growth as well as new retail doors. In the coming year, we continue to see growth opportunities with our
Salt Life consumer ecommerce site, opening additional retail doors in select markets, and continuing to partner with our wholesale
customers to expand the floor space and enhance the Salt Life experience within their doors.
Our fiscal 2020 results included approximately $25.2 million of expenses associated with the impacts from the COVID-19 pandemic,
which resulted in an operating loss for the year of $7.0 million compared to operating income of $15.9 million in the prior year.
These COVID-19 related costs primarily related to the curtailment of our manufacturing operations, incremental costs to right size
production to new forecasted demand, and increased accounts receivable and inventory reserves related to the heightened risks in the
market as the U.S. continues its recovery. Excluding these discrete items, operating income would have been $18.1 million, a $0.7
million or 4% improvement compared to adjusted operating income of $17.4 million in the prior year.
As we enter the next fiscal year, although the environment comprises a level of uncertainty, we are well positioned to capitalize on
multiple market demand opportunities across our businesses. There are many factors outside of our control that can influence how
the upcoming year unfolds, including levels of consumer spending, higher unemployment rates, potential future COVID-19
disruptions, and the overall general economic conditions. We remain confident that our diversified sales channels and uniquely
positioned business model provide the optimal strategy that should allow us to successfully navigate near-term challenges and drive
future profitable growth.
Results of Operations
Net sales for fiscal year 2020 were $381.0 million compared to $431.7 million in the prior year. Net sales in fiscal year 2020 were
impacted by the COVID-19 pandemic, which halted retail in the U.S. beginning in mid-March through the first half of the June
quarter, as well as disrupted our non-U.S. manufacturing operations for most of the June quarter. However, in the September quarter,
21
we returned to year-over-year sales growth, achieving a consolidated 8% increase in sales with growth in both the Delta Group and
Salt Life Group segments.
Our direct-to-consumer and business-to-business ecommerce and branded retail sales continued to represent a larger portion of
consolidated revenue in the current year, constituting 9.9% of total net sales for the 2020 fiscal year compared to 8.1% of net sales
in the prior year.
Delta Group segment net sales were $343.9 million in fiscal year 2020 compared to prior year net sales of $389.1 million. The
COVID-19 pandemic negatively impacted sales performance in the Activewear and Soffe businesses, although Soffe direct-to-
consumer web sales increased approximately 33% compared to the prior year. DTG2Go, our on-demand, digital print business,
experienced mid-single digit sales growth over the prior year, with sales growth of 29% in the second half of the year, as we
onboarded new customers as well as gained additional print volumes from existing customers. All Delta Group segment businesses
returned to year-over-year sales growth in the September quarter.
Salt Life Group segment net sales were $37.1 million in fiscal year 2020 compared to $42.7 million in the prior year. The segment
was impacted by the COVID-19 pandemic with the temporary closure of retail, including our Salt Life branded retail stores, in our
June quarter. However, the sales in the wholesale business, as well as our own retail stores, began to accelerate in late May and
continued that growth through the fourth quarter, which resulted in double-digit sales growth in the September quarter. Our Salt Life
direct-to-consumer web sales increased over 50% compared to the prior year.
Overall gross margin for fiscal year 2020 was 17.9%, down from prior year margin of 19.7%. Adjusting for the $14.7 million impact
of COVID-19 related expenses, gross margins would have been 21.8%. This is a 210 basis point improvement over prior year and
is attributable to favorable product mix, lower raw material prices, and manufacturing efficiencies and process improvements within
the Delta Group segment’s integrated vertical manufacturing platform. The prior year was impacted by costs associated with product
changes in the private label business and the impact of acquisition and integration activities in DTG2Go.
Delta Group segment gross margins of 15.2% were unfavorably impacted by the $14.7 million of COVID-19 related expenses.
Adjusting for these discrete impacts, gross margins would have been 19.4%, an improvement of 260 basis points compared to the
16.8% gross margins in the prior year. Fiscal years 2020 and 2019 were impacted by the items noted above.
Salt Life Group segment gross margins were 43.6% compared to 46.7% in fiscal year 2019. Margins were impacted by increased
product costs from tariffs enacted during the fiscal year as well as higher freight costs. This was partially offset by a higher sales mix
of more profitable direct-to-consumer ecommerce and retail sales.
Fiscal year 2020 selling, general and administrative (“SG&A”) expenses were $68.4 million, or 17.9% of sales, compared to $70.2
million, or 16.3% of sales, in fiscal year 2019. Adjusting for $2.4 million of COVID-19 related expenses, adjusted SG&A for fiscal
year 2020 was $66.0 million, or 17.3% of sales. Expenses decreased due to lower variable selling costs as well as cost controls put
in place, but expenses were higher as a percentage of sales due to fixed costs against lower sales volume.
In fiscal year 2020, we recognized $8.1 million in expenses in other loss (income) caused from the COVID-19 pandemic related to
incremental costs to right size production to new forecasted demand and increased inventory reserves related to the heightened risks
in the market as the U.S. continues its recovery. In fiscal year 2020, we also recognized income from our Honduran equity method
investment as well as $0.2 million in income from net reductions in contingent consideration liabilities. The prior year included
profits related to our Honduran equity method investments, approximately $0.8 million in income from net reductions in contingent
consideration liabilities, a $2.5 million discrete expense incurred from an unfavorable litigation settlement due to the bankruptcy of
a customer in the Delta Group segment, a $1.3 million discrete gain realized from the settlement of a commercial litigation matter in
the Salt Life Group segment, and other less significant items.
Operating profit for fiscal year 2020 was a loss of $7.1 million compared to operating income of $15.9 million in the prior year.
Operating income, adjusted for discrete items, was $18.1 million in the current year compared to $17.4 million in the prior year.
Delta Group segment operating income for fiscal year 2020 was $6.6 million, or 1.9% of sales, compared to $23.8 million, or 6.1%
of sales, in fiscal year 2019. Adjusting for the $23.7 million in COVID-related expenses in the current year, operating income would
have been $30.3 million, or 8.8% of sales. When excluding the $2.5 million of unfavorable litigation settlement in the prior year,
adjusted operating income for fiscal 2019 would have been $26.2 million, or 6.7% of sales. The improvement in operating income is
attributable to gross margin expansion, partially offset by lower sales volumes. Operating income also improved due to strategic cost
reductions associated with integration efficiencies between the Soffe and Activewear businesses.
Salt Life Group segment operating income was $0.5 million for fiscal year 2020 compared to prior operating income
of $5.8 million. Adjusting for the $0.8 million in COVID-related expenses in the current year, operating income would have been
$1.3 million, or 3.4% of net sales. The prior year benefited from the approximately $1.3 million discrete gain in other loss (income)
22
realized from the settlement of a commercial litigation matter. Operating income declined due to lower sales volume, coupled with
higher product costs from the newly-enacted tariffs on imported goods.
Interest expense for fiscal year 2020 decreased by approximately $0.5 million to $7.0 million, compared to $7.6 million in fiscal year
2019. The decrease is due primarily to lower average debt levels.
Our fiscal year 2020 effective income tax rate is 23.6%. This compares to a rate of 5.5% in the prior year. See Note 9—Income Taxes
for more information.
Net loss attributable to shareholders in fiscal year 2020 was $10.6 million, or $1.53 loss per diluted share, and adjusted net income
was $8.6 million, or $1.22 income per diluted share. The prior year net income was $8.2 million, or $1.17 per diluted share, and
adjusted net income was $9.7 million, or $1.38 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 gross
margin, SG&A expenses, operating income, net income and earnings per diluted share as performance measures because management
uses these measures in evaluating the Company's underlying performance on a consistent basis across periods. We also believe these
measures are frequently used by securities analysts, investors and other interested parties in the evaluation of the Company's ongoing
performance. These non-GAAP measures have limitations as analytical tools, and securities analysts, investors and other interested
parties should not consider any of these non-GAAP measures in isolation or as a substitute for analysis of the Company's results as
reported under GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
The tables below reconcile operating income, net income and earnings per diluted share to adjusted operating income, adjusted net
income and adjusted earnings per diluted share (in thousands except per share data):
Operating (loss) income
Adjustments for COVID-19 expenses (1)
Adjustments for litigation settlements (2)
Adjusted operating income
Net (loss) earnings attributable to shareholders
Adjustments for COVID-19 expenses, net of tax (1)
Adjustments for litigation settlements, net of tax (2)
Adjusted net earnings attributable to shareholders
Reported weighted average number of shares assuming dilution
Adjustments impact on dilutive effect of stock awards
Adjusted weighted average number of shares assuming dilution
Reported diluted earnings per share
Adjustments for COVID-19 expenses, net of tax (1)
Adjustments for litigation settlements, net of tax (2)
Adjusted diluted earnings per share (3)
Year Ended
October 3, 2020
(7,075 )
25,200
—
18,125
September 28, 2019
15,895
$
—
1,529
17,424
$
(10,577 )
19,152
—
8,575
$
$
6,921
87
7,008
(1.53 )
2.73
—
1.22
$
$
8,242
—
1,470
9,712
7,064
—
7,064
1.17
—
0.21
1.38
$
$
$
$
$
$
(1) Our fiscal 2020 results included approximately $25.2 million of pre-tax expenses associated with the impacts from the COVID-19
pandemic and primarily related to the curtailment of manufacturing operations ($11.9 million), incremental costs to right size
production to new forecasted demand ($2.6 million), increased accounts receivable and inventory reserves related to the heightened
risks in the market as the U.S. continues its recovery ($6.6 million), and other expenses ($4.1 million). These costs are included
within net sales ($0.5 million), cost of goods sold ($14.2 million), SG&A expenses ($2.4 million), and other loss (income), net ($8.1
million).
(2) Our fiscal 2019 results included approximately $2.5 million of unfavorable litigation settlement due to the bankruptcy of a customer
in the Delta Group segment in the first quarter of fiscal year 2019, partially offset by approximately $1.3 million in other income as
the result of a favorable litigation settlement in the Salt Life Group segment in the third quarter fiscal year 2019.
(3) Totals may not add due to rounding.
23
Liquidity and Capital Resources
Operating Cash Flows
Cash provided by operating activities in fiscal year 2020 was $31.8 million compared to $9.4 million for fiscal year 2019. The
improved operating cash flows in 2020 primarily relate to a decrease in inventory levels as inventory sold was not replaced as quickly
as the prior year because of the COVID-19 manufacturing disruptions from mid-March through June 2020.
Investing Cash Flows
Cash used in investing activities in fiscal years 2020 and 2019 was $12.1 million and $11.5 million, respectively. Capital expenditures
during fiscal years 2020 and 2019 were $13.6 and $16.2 million, respectively. Capital expenditures in both periods primarily related
to investments in our distribution expansion, digital print equipment, information technology, and retail stores. There were $3.8
million in expenditures financed under capital lease arrangements and $2.7 million in unpaid expenditures as of October 3, 2020.
We expect to spend approximately $18 million to $20 million in capital expenditures in fiscal year 2021, primarily on our distribution
expansion, digital print equipment, manufacturing equipment, information technology, and direct-to-consumer investments including
additional Salt Life retail store openings.
Financing Activities
Cash used by financing activities was $3.9 million in fiscal year 2020 compared to cash provided by financing activities of $2.2
million in fiscal year 2019. We utilized the cash proceeds from our credit facility in both fiscal years to fund our operating activities,
certain capital investments, and share repurchases. In fiscal year 2020, we paid $2.5 million in contingent consideration related to
the DTG2Go acquisition compared to $0.6 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.
Our credit facility, as amended on August 28, 2020, as well as cash flows from operations, are intended to fund our day-to-day
working capital needs, along with capital lease financing arrangements, to fund our planned capital expenditures. However, any
material deterioration in our results of operations, such as those that could occur due to the COVID-19 pandemic, may result in the
loss of our ability to borrow under our U.S. revolving credit facility and to issue letters of credit to suppliers, or may cause the
borrowing availability under that facility to be insufficient for our needs. Availability under our credit facility is primarily a function
of the levels of our accounts receivable and inventory. A significant deterioration in our accounts receivable or inventory levels could
restrict our ability to borrow additional funds or service our indebtedness.
Prior to the Fifth Amendment and Sixth Amendment executed on April 27, 2020 and on August 28 ,2020, respectively, (collectively,
the “Bridge Amendments”), our credit facility included 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. The Bridge Amendments amend the financial covenant provisions
from the amendment dates through July 3, 2021, including effectively lowering the minimum availability thresholds and removing
the requirement that our FCCR for the preceding 12-month period must be not be less than 1.1 to 1.0. Our availability at October 3,
2020, was above the minimum thresholds specified in our credit agreement, and we were above the 1.1 to 1.0 FCCR for the preceding
12-month period. Following the expiration of the terms of the Bridge Amendments on July 3, 2021, a significant deterioration in our
business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR
specified in our credit agreement, which we may not be able to maintain.
Derivative Instruments
From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost
of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized gains and
losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There were no
material option agreements that were outstanding at October 3, 2020.
From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact
of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our
interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts
are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments
are made. As of October 3, 2020, all of other comprehensive income was attributable to shareholders; none related to the non-
24
controlling interest. The changes in fair value of the interest rate swap agreements resulted in an other comprehensive loss, net of
taxes, of $0.4 million for fiscal year 2020, and an other comprehensive loss, net of taxes, of $1.1 million for fiscal year 2019.
Off-Balance Sheet Arrangements
As of October 3, 2020, we did not have any off-balance sheet arrangements that were material to our financial condition, results of
operations or cash flows as defined by Item 303(a)(4) of Regulation S-K promulgated by the SEC other than letters of credit, and
purchase obligations. We have disclosed letters of credit and purchase obligations in Note 15—Commitments and Contingencies.
Dividends and Purchases of our Own Shares
Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the
payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than 15% of
the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that date
of not less than 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock
repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the Amended
Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of determination. At October 3, 2020, and
September 28, 2019, there was $8.8 million and $16.1 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 2020 and 2019. Any future cash dividend
payments will depend upon our earnings, financial condition, capital requirements, compliance with loan covenants and other relevant
factors.
As of October 3, 2020, 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 2020 and 2019, we purchased 99,971 shares and
141,501 shares, respectively, of our common stock for a total cost of $2.0 million and $2.7 million, respectively. There were no
repurchases of our common stock for the quarter ended October 3, 2020. As of October 3, 2020, we had purchased 3,598,933 shares
of common stock for an aggregate of $52.5 million since the inception of the Stock Repurchase Program. All purchases were made
at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of October 3, 2020, $7.5 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, inventories and related reserves, the carrying value of goodwill, and the accounting for
income taxes.
Note 2 to our Consolidated Financial Statements includes a summary of the significant accounting policies or methods used in the
preparation of our Consolidated Financial Statements.
Revenue Recognition
Revenue is recognized when performance obligations under the terms of the contracts are satisfied. Our performance obligations
primarily consist of delivering products to our customers. Control is transferred upon providing the products to customers in our
retail stores, upon shipment of our products to the consumers from our ecommerce sites, and upon shipment from our distribution
centers to our customers in our wholesale operations. Once control is transferred to the customer, we have completed our performance
obligation.
In certain areas of our wholesale business, we offer discounts and allowances to support our customers. Some of these arrangements
are written agreements, while others may be implied by customary practices in the industry. Wholesale sales are recorded net of
discounts, allowances, and operational chargebacks. As certain allowances and other deductions are not finalized until the end of a
season, program or other event which may not have occurred, we estimate such discounts, allowances, and returns that we expect to
provide.
25
We record reductions to revenue for estimated customer returns, allowances, markdowns and discounts. We estimate these reductions
based on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns
and allowances that have not yet been received by us. The actual amount of customer returns and allowances, which is inherently
uncertain, may differ from our estimates. If we determine that actual or expected returns or allowances are significantly higher or
lower than the reserves we established, we would record a reduction or increase, as appropriate, to net sales in the period in which
we make such a determination. Reserves for returns, allowances, markdowns and discounts are included within accrued expenses as
refund liabilities, and the value of inventory associated with reserves for sales returns are included within prepaid expenses and other
current assets on the Consolidated Balance Sheets. As of October 3, 2020, and September 28, 2019, there was $1.3 million and $1.0
million, respectively, in refund liabilities for customer returns, allowances, markdowns and discounts included within accrued
expenses.
Accounts Receivable and Related Reserves
Accounts receivable consists primarily of receivables from our customers arising from the sale of our products, and we generally do
not require collateral from our customers. We actively monitor our exposure to credit risk through the use of credit approvals and
credit limits. Accounts receivable is presented net of reserves for doubtful accounts.
We estimate the net collectability of our accounts receivable and establish an allowance for doubtful accounts based upon this
assessment. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case
of a bankruptcy filing, we assess the need for a specific reserve for bad debts. Reserves are determined through analysis of the aging
of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends
and changes in customer payment terms. During fiscal year 2020, we estimated and recorded additional reserves of approximately
$0.4 million based on the heightened risks in the market as the U.S. and our customers continue to recover from the early stages of
the COVID-19 pandemic. Although our historical allowances have been materially accurate, if market conditions change, additional
reserves may be required. Bad debt expense was less than 1% of net sales in each of fiscal years 2020 and 2019.
Inventories and Related Reserves
We state inventories at the lower of cost and net realizable value using the first-in, first-out method. Inventory cost includes materials,
labor and manufacturing overhead on manufactured inventory and all direct and associated costs, including inbound freight, to
acquire sourced products. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities,
irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand
to reduce inventory to its net realizable value. During fiscal year 2020, we estimated and recorded additional reserves of
approximately $5.5 million based on heightened risks in the market as the U.S. and our customers continue their recovery from the
early stages of the COVID-19 pandemic. Although our historical reserves have been materially accurate, if actual selling prices are
less favorable than those projected or if sell-through of the inventory is more difficult than anticipated, additional inventory reserves
may be required.
Goodwill
Goodwill and definite-lived intangibles were recorded in conjunction with our acquisitions of Salt Life, DTG2Go, and SSI, 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. As of March 29, 2020, we
performed our annual goodwill impairment evaluation and concluded that the goodwill for the Salt Life and DTG2Go reporting units
were not impaired. The goodwill impairment testing process involved the use of significant assumptions, estimates and judgments
with respect to a variety of factors, including projected sales, gross margins, selling, general and administrative expenses, capital
expenditures and cash flows and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and
subjectivity. Our assumptions were based on annual business plans and other forecasted results as well as the selection of a discount
rate, all of which we believe represent those of a market participant. We also believe these assumptions are reflective of the current
macro-economic environment, including the impacts of the recent COVID-19 pandemic. Although we are aggressively managing
our response to the pandemic, its impact on the Salt Life and DTG2Go reporting units' future operating results and cash flows is
uncertain. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on retailers as
well as the ability of our customers, supply chain, and distribution to operate with minimal disruption, all of which could negatively
impact the reporting units' financial position, results of operations, cash flows, and outlook. Given the current macro-economic
environment and the uncertainties regarding its potential impact on our business, there can be no assurance that our estimates and
assumptions used in our impairment tests will prove to be accurate predictions of the future. If our assumptions regarding fair value
are not achieved, it is possible that an impairment review may be triggered and goodwill or other intangible assets may be impaired
in a future period.
26
Income Taxes
We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases, as well as operating loss, interest deductions, and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. A valuation allowance is required to reduce the carrying value of deferred tax assets to the amount that is
more-likely-than-not to be realized. In making this final determination, we follow the Accounting Standards Codification 740,
Income Taxes ("ASC 740"), and look to taxable income in prior carryback years, reversals of existing temporary book/tax differences,
tax planning strategies and future taxable income exclusive of reversals of existing temporary differences. By its very nature, future
taxable income requires estimates and judgments about future events that may be predictable, but are far less certain than past events
that can be objectively measured.
We established a valuation allowance related to certain of our state operating loss carryforward amounts in accordance with the
provisions of ASC 740. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax
assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts
in the respective state tax jurisdictions. As of October 3, 2020, we had state NOLs of approximately $52.6 million, with deferred tax
assets of $2.5 million related to these state NOLs, and related valuation allowances against them of approximately $0.6 million.
These state net loss carryforwards expire at various intervals from 2021 through 2040.
Recent Accounting Standards
For information regarding recently issued accounting standards, refer to Note 2(ad) and Note 2(ae) to our Consolidated Financial
Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 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 October 3, 2020, and September 28, 2019, together with
the Reports of Independent Registered Public Accounting Firms thereon, are included in this report commencing on page F-1 and
are listed under Part IV, Item 15 in this report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of our disclosure controls and procedures as of October 3, 2020, and, based on their evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that these controls and procedures were effective at the evaluation date.
Disclosure controls and procedures are controls and other procedures that are designed to reasonably assure that information required
to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information that we are required to disclose in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
Management of Delta Apparel, Inc. is responsible for establishing and maintaining effective internal control over financial reporting
as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to
provide reasonable assurance regarding the preparation and fair presentation of published financial statements. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
27
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 October 3, 2020. 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 2020 included all of our operations. Based
on our evaluation, our management has concluded that, as of October 3, 2020, our internal control over financial reporting is effective.
The effectiveness of our internal control over financial reporting as of October 3, 2020, 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 2020 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
28
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited Delta Apparel, Inc. and Subsidiaries’ internal control over financial reporting as of October 3, 2020, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) (the COSO criteria). In our opinion, Delta Apparel, Inc. and Subsidiaries (the Company) maintained,
in all material respects, effective internal control over financial reporting as of October 3, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of October 3, 2020, and September 28, 2019, and the related
consolidated statements of operations, comprehensive (loss) income, shareholders’ equity and cash flows for each of the two years
in the period ended October 3, 2020, and the related notes and our report dated November 23, 2020 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 23, 2020
29
Item 9B. Other Information
None.
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 2020 fiscal year under the headings
"Proposal No. 1: Election of Directors", “Corporate Governance”, “Executive Officers” and “Delinquent Section 16(a) Reports .”
All of our employees, including our Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer, are required to
abide by our business conduct policies so that our business is conducted in a consistently legal and ethical manner. We have adopted
a code of business conduct and ethics known as our Ethics Policy Statement. The Ethics Policy Statement is available without charge
on our website. In the event that we amend or waive any of the provisions of the Ethics Policy Statement applicable to our Chief
Executive Officer, Chief Financial Officer, or Chief Accounting Officer, we intend to disclose the same on our website at
www.deltaapparelinc.com.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from the portions of the definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days following the end of our 2020 fiscal year under the headings
“Executive Compensation,” “Compensation Tables,” and "Director Compensation."
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information relating to security ownership by certain beneficial owners and management is incorporated herein by reference
from the portion of the definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days
following the end of our 2020 fiscal year under the heading “Equity Compensation Plan Information" and “Stock Ownership of
Management and Principal Shareholder.”
On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010
Stock Plan, which was previously re-approved by our shareholders on February 4, 2015 and was scheduled to expire by its terms on
September 14, 2020. The 2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of
the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of
compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives,
key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the authority
to determine the employees and directors to whom awards may be granted and the size and type of each award and manner in which
such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock,
restricted stock units, performance stock, performance units, and other stock and cash awards. If a participant dies or becomes
disabled (as defined in the 2020 Stock Plan) while employed by the Company or serving as a director, all unvested awards become
fully vested. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2020
Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other
determinations that it deems necessary. The aggregate number of shares of common stock that may be delivered under the 2020
Stock Plan is 449,714 plus any shares of common stock subject to outstanding awards under the 2010 Stock Plan that are subsequently
forfeited or terminated for any reason before being exercised. Similar to the 2010 Stock Plan, the 2020 Stock Plan limits the number
of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted
stock, restricted stock units and performance stock granted in a given calendar year. The 2010 Stock Plan terminated and the 2020
Stock Plan became effective on February 6, 2020, the date of shareholders’ approval.
30
Set forth in the table below is certain information about securities issuable under our equity compensation plans as of October 3,
2020.
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(1)
71,000
—
71,000
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(2)
—
—
—
$
$
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding those
currently outstanding)
351,714
—
351,714
(1) Includes all outstanding restricted stock units that have a performance-based vesting condition that would vest in equity shares,
and assumes 100% vesting performance-based targets.
(2) Not applicable, as no outstanding stock options at period end.
For additional information on our stock-based compensation plans, see Note 12 - Stock-Based Compensation to the Consolidated
Financial Statements.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference from the portion of the definitive Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days following the end of our 2020 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 2020 fiscal year under the heading
“Proposal No. 3: Ratification of Appointment of Independent Registered Public Accounting Firm”.
Item 15. Exhibits and Financial Statement Schedules
Part IV
Financial Statements:
Report of Independent Registered Public Accounting Firms.
Consolidated Balance Sheets as of October 3, 2020, and September 28, 2019.
Consolidated Statements of Operations for the years ended October 3, 2020, and September 28, 2019.
Consolidated Statements of Comprehensive (Loss) Income for the years ended October 3, 2020, and September 28, 2019.
Consolidated Statements of Shareholders’ Equity for the years ended October 3, 2020, and September 28, 2019.
Consolidated Statements of Cash Flows for the years ended October 3, 2020, and September 28, 2019.
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.
(a)(3) The exhibits filed herewith we listed on the Exhibit Index filed as part of this report on Form 10-K.
21
23.1
31.1
31.2
32.1
32.2
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.
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.
31
(b) Exhibits
See Item 15(a)(3) above.
Item 16. Form 10-K Summary
None
32
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 23, 2020
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
11/23/2020
Date
11/23/2020
Date
/s/Robert W. Humphreys
Robert W. Humphreys
Chairman and Chief Executive Officer
(principal executive officer)
11/23/2020
Date
/s/Deborah H. Merrill
Deborah H. Merrill
Chief Financial Officer and President, Delta Group
(principal financial and accounting officer)
11/23/2020
Date
11/23/2020
Date
/s/Robert E. Staton, Sr.
Robert E. Staton, Sr
Director
11/23/2020
Date
/s/A. Alexander Taylor, II
A. Alexander Taylor, II
Director
/s/David G. Whalen
David G. Whalen
Director
11/23/2020
Date
11/23/2020
Date
11/23/2020
Date
33
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Delta Apparel, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of October 3, 2020, and September 28, 2019
Consolidated Statements of Operations for the years ended October 3, 2020, and September 28, 2019
F-2
F-3
F-4
Consolidated Statements of Comprehensive (Loss) Income for the years ended October 3, 2020, and September 28, 2019
F-5
Consolidated Statements of Shareholders’ Equity for the years ended October 3, 2020, and September 28, 2019
Consolidated Statements of Cash Flows for the years ended October 3, 2020, and September 28, 2019
Notes to Consolidated Financial Statements
Note 1—The Company
Note 2—Significant Accounting Policies
Note 3—Revenue Recognition
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-6
F-7
F-8
F-8
F-8
F-13
F-14
F-14
F-14
F-15
F-15
F-17
F-19
F-21
F-21
F-22
F-24
F-25
F-26
F - 1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Delta Apparel, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Delta Apparel, Inc. and Subsidiaries (the Company) as of October
3, 2020 and September 28, 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders’
equity, and cash flows for each of the two years in the period ended October 3, 2020, 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 October 3, 2020 and September 28, 2019, and the results of its operations and
its cash flows for each of the two years in the period ended October 3, 2020, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of October 3, 2020, 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 23, 2020 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 23, 2020
F - 2
Delta Apparel, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
October 3, 2020
September 28, 2019
Assets
Cash and cash equivalents
Accounts receivable, less allowances of $684 and $327, respectively
Other receivables
Inventories, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Operating lease assets
Equity method investment
Other assets
Total assets
Liabilities and Equity
Liabilities:
Accounts payable
Accrued expenses
Income taxes payable
Current portion of finance leases
Current portion of operating leases
Current portion of long-term debt
Current portion of contingent consideration
Total current liabilities
Long-term income taxes payable
Long-term finance leases, less current maturities
Long-term operating leases, less current maturities
Long-term debt, less current maturities
Long-term contingent consideration
Deferred income taxes
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 6,890,118 and 6,921,417 shares outstanding as of October 3,
2020, and September 28, 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock —2,756,854 and 2,725,555 shares as of October 3, 2020, and
September 28, 2019, 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
$
$
$
$
$
16,458
60,146
854
145,515
3,795
226,768
63,950
37,897
19,948
4,052
54,645
10,573
2,398
420,231
49,800
20,174
379
6,956
9,039
7,559
2,120
96,027
3,599
11,328
46,570
112,782
4,300
—
2,939
277,545
$
$
$
$
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
20,412
379
6,434
—
6,540
2,790
88,875
3,977
12,836
—
109,296
6,304
1,519
1,293
224,100
—
—
96
61,005
126,564
(1,322 )
(43,133 )
143,210
(524 )
142,686
420,231
$
96
59,855
136,937
(969 )
(41,750 )
154,169
(281 )
153,888
377,988
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 loss (income), net
Operating (loss) income
Interest expense
(Loss) earnings before (benefit from) provision for income taxes
(Benefit from) provision for income taxes
Consolidated net (loss) earnings
Net loss attributable to non-controlling interest
Net (loss) earnings attributable to shareholders
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted average number of shares outstanding
Dilutive effect of stock options and awards
Weighted average number of shares assuming dilution
See accompanying Notes to Consolidated Financial Statements.
Fiscal Year Ended
$
October 3, 2020
381,035
312,660
68,375
$
September 28, 2019
431,730
346,578
85,152
68,383
7,067
(7,075 )
7,005
(14,080 )
(3,260 )
(10,820 ) $
243
(10,577 )
(1.53 ) $
(1.53 ) $
6,921
—
6,921
$
$
$
70,220
(963 )
15,895
7,550
8,345
477
7,868
374
8,242
1.19
1.17
6,929
135
7,064
F - 4
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)
Net (loss) earnings attributable to shareholders
Other comprehensive loss related to unrealized loss on derivatives, net of
income tax
Consolidated comprehensive (loss) income
See accompanying Notes to Consolidated Financial Statements
Fiscal Year Ended
October 3, 2020
$
$
(10,577 ) $
(353 )
(10,930 ) $
September 28, 2019
8,242
(1,105 )
7,137
F - 5
Delta Apparel, Inc. and Subsidiaries
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share amounts)
Common Stock
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury Stock
Shares
Amount
Non-
Controlling
Interest
Total
Balance at September 29, 2018
Net earnings
Other comprehensive loss
Net loss attributable to non-
controlling interest
Vested stock awards
Purchase of common stock
Stock based compensation
Balance at September 28, 2019
Net loss
Other comprehensive loss
Net loss attributable to non-
controlling interest
Vested stock awards
Purchase of common stock
Stock based compensation
ASU 2016-02 adoption
Balance at October 3, 2020
Shares
9,646,972 $
—
—
—
—
—
—
9,646,972
—
—
—
—
—
—
—
9,646,972 $
96 $
61,979
$
128,695 $
136
2,737,526 $
(40,881 ) $
93 $
150,118
—
—
—
—
—
—
96
—
—
—
—
—
—
—
96 $
—
—
—
(3,980 )
—
1,856
59,855
—
—
—
(1,611 )
—
2,761
—
61,005 $
8,242
—
—
—
—
—
136,937
(10,577 )
—
—
—
—
—
204
126,564 $
—
(1,105 )
—
—
—
—
(969 )
—
(353 )
—
—
—
—
—
—
—
—
(153,472 )
141,501
—
2,725,555
—
—
—
(68,672 )
99,971
—
—
(1,322 )
2,756,854 $
—
—
—
1,867
(2,736 )
—
(41,750 )
—
—
—
646
(2,029 )
—
—
(43,133 ) $
—
—
(374 )
—
—
—
(281 )
—
—
(243 )
—
—
—
—
(524 ) $
8,242
(1,105 )
(374 )
(2,113 )
(2,736 )
1,856
153,888
(10,577 )
(353 )
(243 )
(965 )
(2,029 )
2,761
204
142,686
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 (loss) 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 for deferred income taxes
Provision for market reserves
Non-cash stock compensation
(Gain) 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
Change in net operating lease liabilities
Income taxes
Other liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Proceeds from sale of property and equipment
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 deferred financing costs
Payment of withholding taxes on stock awards
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes, net of refunds received
See accompanying Notes to Consolidated Financial Statements.
Fiscal Year Ended
October 3, 2020
September 28, 2019
$
(10,820 )
$
7,868
11,097
1,659
315
(3,730 )
4,906
2,761
(29 )
(775 )
(113 )
28,686
319
(198 )
(3,345 )
(238 )
964
(632 )
968
31,795
(8,990 )
—
(3,077 )
(12,067 )
438,770
(431,932 )
(4,041 )
(2,500 )
(2,029 )
(1,176 )
(967 )
(3,875 )
15,853
605
16,458
$
9,953
1,811
312
(384 )
(458 )
1,856
289
(2,292 )
(12,824 )
(2,539 )
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
6,510
960
$
$
7,064
890
$
$
$
F - 7
Delta Apparel, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
October 3, 2020
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 7,900 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 on-demand, digital print and fulfillment
industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling
casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers,
independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military,
and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce
sites and in our branded retail stores. Our diversified distribution model allows us to capitalize on our strengths to provide our
activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail
channels.
We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in our
owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react
quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador,
Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities
are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products
and weekly replenishments to retailers.
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 "2020"
and "2019" relate to the 53-week fiscal year ended on October 3, 2020, and the 52-week fiscal year ended on September 28, 2019.
(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 consist 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.
We estimate the net collectability of our accounts receivable and establish an allowance for doubtful accounts based upon this
assessment. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of
a bankruptcy filing, we assess the need for a specific reserve for bad debts. Reserves are determined through analysis of the aging of
F - 8
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 2020 and 2019.
(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(x) 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. Right of use assets
that we acquire under non-cancelable leases that meet the criteria of finance 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 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.
(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 DTG2Go acquisition in March 2018. We remeasure contingent consideration in accordance with ASC
805, Business Combinations based on historical operating results and projections for the future. The DTG2Go contingent
consideration was valued at $6.4 million and $8.9 million at October 3, 2020 and September 28, 2019, respectively.
F - 9
(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 three 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 October 3, 2020, and September 28, 2019, there was $1.3 million
and $1.0 million, respectively, in refund liabilities for customer returns, allowances, markdowns and discounts included 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.
(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 $17.8 million and $17.6 million in fiscal years 2020 and 2019, 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 $4.4 million and $4.7 million in fiscal years 2020 and 2019, respectively. Included in these costs
were $0.8 million in fiscal years 2020 and 2019 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.
F - 10
(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 as well as operating loss, interest deduction limitations, 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.
(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. Potentially 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 in both years of $1.3 million and $1.0 million as
of October 3, 2020, and as of September 28, 2019, respectively.
(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. 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.
F - 11
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.
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 October 3, 2020 or September 28, 2019.
(z) Equity Method Accounting: As of October 3, 2020, 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) Recently Adopted Accounting Pronouncements:
In August 2017, the Financial Accounting Standards Board, ("FASB"), issued Accounting Standards Update, ("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. We adopted ASU 2017-12 as of September 29, 2019. The provisions of ASU 2017-12 did not 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. We early adopted ASU 2017-04 as of September 29,
2019. The provisions of ASU 2017-04 did not have a material effect on our financial condition, results of operations, cash flows or
disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to include most leases on
the balance sheet as lease liabilities with an associated right-of-use ("ROU") asset. Since the issuance of ASU 2016-02, the FASB
released several amendments to improve and clarify the implementation guidance, as well as to change the allowable adoption
methods. These standards have been collectively codified within Accounting Standard Codification, ("ASC ") 842, Leases (“ASC
842”). We adopted ASC 842 using the modified retrospective method and applied the standard to all leases existing as of September
29, 2019. Information for prior years presented has not been restated and continues to reflect the authoritative accounting standards
in effect for those periods. We elected to use the package of practical expedients that allows us to carryforward our historical
assessments of whether existing contracts contain leases, determinations of lease classification, and treatments of initial direct costs.
F - 12
As of September 29, 2019, we recognized total operating lease liabilities of $44.6 million in our Consolidated Balance Sheets, of
which $36.1 million was recorded within Long-term operating leases, less current maturities and $8.5 million was recorded within
Current portion of operating leases. We additionally derecognized $0.8 million of previously recorded net deferred rent balances and
recorded operating lease ROU assets of $43.8 million related to our operating leases, which are reflected within Operating lease
assets in our Consolidated Balance Sheets. We also recognized deferred tax assets of $0.2 million on the Consolidated Balance
Sheets, which resulted in an increase to retained earnings upon adoption. The adoption of the new leasing standard had no significant
impact on covenants or other provisions of our secured credit facility.
(ad) Recently Issued Accounting Pronouncements Not Yet Adopted:
In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement that is a Service Contract (“ASU 2018-15”), which will require customers to apply internal-use software
guidance to determine the implementation costs that are able to be capitalized. Capitalized implementation costs will be required to
be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. ASU
2018-15 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within
those annual periods. ASU 2018-15 will therefore be effective for us as of October 4, 2020 including the interim periods within our
fiscal year 2021 annual period. The standard allows changes to be applied either retrospectively or prospectively. We do not anticipate
that the provisions of ASU 2018-15 will have a material effect on our financial condition, results of operations, cash flows or
disclosures.
Note 3—Revenue Recognition
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):
Fiscal Year Ended
Retail
Direct-to-consumer ecommerce
Wholesale
Net Sales
$
October 3, 2020
$
%
5,626
7,994
367,415
$ 381,035
%
September 28, 2019
$
4,396
2 % $
5,526
2 %
96 % 421,808
100 % $ 431,730
1 %
1 %
98 %
100 %
The table below provides net sales by reportable segment (in thousands) and the percentage of net sales by distribution channel for
each reportable segment:
Delta Group
Salt Life Group
Total
Delta Group
Salt Life Group
Total
Fiscal Year Ended October 3, 2020
Direct-to-
Consumer
ecommerce
Retail
Wholesale
0.2 %
12.9 %
0.5 %
16.9 %
99.3 %
70.2 %
Net Sales
$ 343,891
37,144
$ 381,035
Fiscal Year Ended September 28, 2019
Direct-to-
Consumer
ecommerce
Retail
Wholesale
0.3 %
7.6 %
0.3 %
9.9 %
99.4 %
82.5 %
Net Sales
$ 389,075
42,655
$ 431,730
F - 13
Note 4—Inventories
Inventories, net of reserves of $15.0 million and $10.0 million as of October 3, 2020, and September 28, 2019, respectively, consist
of the following (in thousands):
Raw materials
Work in process
Finished goods
October 3, 2020
September 28, 2019
$
$
13,571
13,984
117,960
145,515
$
$
12,022
17,765
149,320
179,107
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
Total property, plant and equipment, net
Note 6—Goodwill and Intangible Assets
Estimated Useful
Life (in years)
25
20
10
3-10
7-25
3-10
5
N/A
October 3, 2020
569
3,715
106,102
24,362
7,135
6,635
587
6,968
156,073
(92,123 )
63,950
$
$
September 28, 2019
569
3,715
99,962
21,065
3,650
5,790
587
7,873
143,211
(81,807 )
61,404
$
$
Goodwill and components of intangible assets consist of the following (in thousands):
October 3, 2020
Accumulated
Amortization
Cost
Net
Value
Cost
September 28, 2019
Accumulated
Amortization
Net
Value
Economic
Life
Goodwill
$ 37,897
$
—
$ 37,897
$ 37,897
$
—
$ 37,897
N/A
Intangibles:
Tradename/trademarks
Customer relationships
Technology
License agreements
Non-compete agreements
Total intangibles, net
$ 16,090
7,400
1,720
2,100
1,657
$ 28,967
$
$
(3,820 ) $ 12,270
5,667
(1,733 )
340
(1,380 )
1,367
(733 )
(1,353 )
304
(9,019 ) $ 19,948
$ 16,090
7,400
1,720
2,100
1,657
$ 28,967
$
$
(3,278 ) $ 12,812
6,407
(993 )
431
(1,289 )
1,470
(630 )
(1,170 )
487
(7,360 ) $ 21,607
20 - 30 yrs
20 yrs
10 yrs
15 - 30 yrs
4 – 8.5 yrs
Goodwill represents the acquired goodwill net of the cumulative impairment losses recorded in fiscal year 2011 of $0.6 million. As
of October 3, 2020, the Delta Group segment assets include $18.0 million of goodwill, and the Salt Life Group segment assets include
$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 $1.7 million for the year ended October 3, 2020, and $1.8 million for the
year ended September 28, 2019. Amortization expense is estimated to be approximately $1.6 million for each of fiscal years 2021,
2022, approximately $1.5 million for fiscal year 2023, and approximately $1.4 million for fiscal years 2024 and 2025.
F - 14
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
Accrued interest
Other
Note 8—Long-Term Debt
Long-term debt consists of the following (in thousands):
October 3, 2020
13,958
1,565
1,347
720
379
541
2,043
20,553
$
$
September 28, 2019
13,883
1,160
1,047
969
379
563
2,790
20,791
$
$
Revolving U.S. credit facility, interest at base rate or adjusted LIBOR rate plus an
applicable margin (interest at 3.3% on October 3, 2020) due November 2024
Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 7.7% due
August 2025
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments
beginning November 2014 through December 2020
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments
beginning June 2016 through April 2022
Term loan with Banco Ficohsa, a Honduran bank, interest at 6.0%, monthly installments
beginning October 2017 through September 2021
DTG2Go, LLC acquisition promissory note, interest at 6.0%, quarterly payments
beginning January 2019 through October 2021
Salt Life Beverage, LLC promissory note, interest at 4.0%
Less current portion of long-term debt
Long-term debt, excluding current maturities
Credit Facility
October 3,
2020
September 28,
2019
$
106,213 $
101,957
9,529
5,000
200
485
888
2,917
109
120,341
(7,559 )
112,782 $
$
800
776
1,953
5,250
100
115,836
(6,540 )
109,296
On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (as further amended, 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. The Borrowers entered into amendments to the Amended Credit Agreement with Wells Fargo and the
other lenders on November 27, 2017, March 9, 2018, and October 8, 2018.
On November 19, 2019, the Borrowers entered into a Consent and Fourth Amendment to the Fifth Amended and Restated Credit
Agreement with Wells Fargo and the other lenders set forth therein (the "Fourth Amendment"). The Fourth Amendment, among
other things, (i) increased the borrowing capacity under the Amended Credit Agreement from $145 million to $170 million (subject
to borrowing base limitations), (ii) extended the maturity date from May 21, 2021 to November 19, 2024, (iii) reduced pricing on the
revolver and first-in last-out "FILO" borrowing components by 25 basis points, and (iv) added 25% of the fair value of eligible
intellectual property to the borrowing base calculation. In addition, the Fourth Amendment amended 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
their distribution facility located within the Town of Clinton, Anderson County, Tennessee.
On April 27, 2020, the Borrowers entered into a Fifth Amendment to the Fifth Amended and Restated Credit Agreement with Wells
Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Fifth Amendment”). The Fifth Amendment amends the
financial covenant provisions from the amendment date through October 3, 2020, including effectively lowering the minimum
availability thresholds and removing the requirement that our Fixed Charge Coverage Ratio (“FCCR”) for the preceding 12-month
F - 15
period must not be less than 1.1 to 1.0. The Fifth Amendment also, among other things, (i) allows for an additional 30 days of aged
receivables from customers in the borrowing base through August 1, 2020, (ii) ceases amortization of real estate and machinery and
equipment assets in the borrowing base through August 1, 2020, (iii) postpones amortization of trademark assets in the borrowing
base until October 4, 2020; (iv) amends the definition of Fixed Charge Coverage Ratio to reference the monthly amortization of the
borrowing bases that were amended as part of the Fourth Amendment to the Fifth Amended and Restated Credit Agreement on
November 19, 2019, (v) amends the LIBOR rate definition to include a floor rate of 1.0%, and (vi) requires weekly reporting of
accounts receivable to the Agent through October 3, 2020.
On August 28, 2020, the Borrowers entered into a Sixth Amendment to the Fifth Amended and Restated Credit Agreement with
Wells Fargo Bank (the “Agent”) and the other lenders set forth therein (the “Sixth Amendment”). The Sixth Amendment, (i)
maintains lower minimum availability thresholds from the amendment date through July 3, 2021, (ii) allows for an additional 30
days of aged receivables from customers in the borrowing base through April 3, 2021, (iii) increases the advance rate to 70% of real
estate assets in the borrowing base and commences amortization on October 4, 2020, (iv) ceases amortization of machinery and
equipment assets in the borrowing base through April 3, 2021, (v) postpones amortization of trademark assets in the borrowing base
until April 4, 2021, (vi) requires the Applicable Margin to be set at Level III through July 3, 2021 and increases the Applicable
Margin by 50 basis points across all Levels within the Applicable Margin table for the remaining term of the Amended Credit
Agreement, and (vii) requires continued weekly reporting of accounts receivable to the Agent through July 3, 2021.
The Amended Credit Agreement allows us to borrow up to $170 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 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.
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, subject to a floor of 1.0%, 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 1.0%, (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 to $0.3 million
beginning October 4, 2020, in connection with fixed asset and intellectual property 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 $170 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 October 3, 2020, we had $106.2 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.3%.
Our cash on hand combined with the availability under the U.S. credit facility totaled $47.1 million.
Prior to the Fifth Amendment and Sixth Amendment executed on April 27, 2020 and on August 28 ,2020, respectively, (collectively,
the “Bridge Amendments”), our credit facility included 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. The Bridge Amendments amend the financial covenant provisions
from the amendment dates through July 3, 2021, including effectively lowering the minimum availability thresholds and removing
the requirement that our FCCR for the preceding 12-month period must be not be less than 1.1 to 1.0. Our availability at October 3,
2020, was above the minimum thresholds specified in our credit agreement, and we were above the 1.1 to 1.0 FCCR for the preceding
12-month period. Following the expiration of the terms of the Bridge Amendments on July 3, 2021, a significant deterioration in our
business could cause our availability to fall below minimum thresholds, thereby requiring us to maintain the minimum FCCR
specified in our credit agreement, which we may not be able to maintain. In addition, the credit facility includes customary conditions
to funding, representations and warranties, covenants, and events of default. The covenants include, among other things, limitations
on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases,
and transactions with affiliates.
Proceeds of the loans made pursuant to the Amended 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 October
F - 16
3, 2020, and September 28, 2019, there was $8.8 million and $16.1 million, respectively, of retained earnings free of restrictions to
make cash dividends or stock repurchases.
Promissory Notes
On October 8, 2018, we acquired substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. 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 October 3,
2020, there was $2.9 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
Honduran lempiras, 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 October 3, 2020, is listed as part of the long-term
debt schedule above.
Total Debt
The aggregate maturities of debt at October 3, 2020, are as follows (in thousands):
Fiscal Year
2021
2022
2023
2024
2025
Thereafter
Note 9—Income Taxes
$
$
Amount
7,559
4,349
4,155
4,155
100,123
—
120,341
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 or 30% of the taxpayer’s adjusted taxable income. 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.
The Coronavirus Aid, Relief, and Economic Security (“CARES Act”), which was enacted on March 27, 2020, provided temporary
changes to income and non-income-based tax laws, including some provisions which were previously enacted under the New Tax
Legislation. The CARES Act revised the U.S. corporate income tax code on a temporary basis by, among other things, eliminating
the 80% of taxable income limitation on net operating loss (“NOL”) carryforwards, allowing NOL carrybacks, and increasing the
Section 163(j) interest limitation deduction from 30% to 50% of adjusted taxable income. We have included the estimated impact of
these provisions in our effective tax rate calculation.
F - 17
The provision for (benefit from) income taxes consists of the following (in thousands):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
(Benefit from) provision for income taxes
Period ended
October 3, 2020
September 28, 2019
$
$
$
$
300
50
120
470
$
$
(3,200 ) $
(530 )
(3,730 )
(3,260 ) $
732
(3 )
132
861
(304 )
(80 )
(384 )
477
For financial reporting purposes our (loss) 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
October 3, 2020
(22,056 )
8,219
(13,837 )
September 28, 2019
(2,321 )
11,040
8,719
$
$
$
$
Our effective income tax rate on operations for fiscal year 2020 was 23.6% compared to a rate of 5.5% in the prior year. We generally
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. As such, 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. Furthermore, we may be limited in our ability to deduct
50% of applicable foreign earnings under the GILTI income inclusion or to deduct U.S. interest expense based on lower U.S. taxable
income due to the COVID-19 pandemic. In addition, the future impact of the CARES Act and New Tax Legislation may differ from
historical amounts, possibly materially, due to, among other things, changes in interpretations and assumptions made regarding the
CARES Act and New Tax Legislation, guidance that may be issued, and actions we may take as a result of the CARES Act and New
Tax Legislation.
A reconciliation between the actual provision for income taxes and the provision for income taxes computed using the federal
statutory income tax rate of 21.0% for fiscal years 2020 and 2019 is as follows (in thousands):
Income tax expense at the statutory rate of 21.0%
State income tax benefits, net of federal income tax benefit
Impact of foreign earnings in tax-free zone
GILTI inclusion
Other permanent differences
Impact of state rate changes
Other
(Benefit from) provision for income taxes
Period ended
October 3, 2020
(2,906 )
(430 )
(1,604 )
1,596
109
(144 )
119
(3,260 )
$
$
September 28, 2019
1,831
(82 )
(2,186 )
1,040
(140 )
—
14
477
$
$
F - 18
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
State net operating loss carryforwards
Section 163(j) deduction carryforwards
Receivable allowances and reserves
Inventories and reserves
Accrued compensation and benefits
Operating lease liabilities
Other
Gross deferred tax assets
Less valuation allowance — state net operating loss carryforwards
Net deferred t tax assets
Deferred tax liabilities:
Depreciation
Goodwill and intangibles
Operating lease assets
Other
Gross deferred tax liabilities
Net deferred tax assets (liabilities)
October 3, 2020
September 28, 2019
$
$
$
$
$
2,490
1,913
509
4,176
2,213
13,939
517
25,757
(600 )
25,157
$
$
$
(3,540 )
(3,768 )
(13,705 )
(92 )
(21,105 ) $
$
4,052
2,190
627
345
2,960
1,789
—
466
8,377
(516 )
7,861
(4,611 )
(3,183 )
—
(72 )
(7,866 )
(5 )
As of October 3, 2020, we had state net operating losses ("NOLs") of approximately $52.6 million, with deferred tax assets of $2.5
million related to these state NOLs, and related valuation allowances against them of approximately $0.6 million. These state net
loss carryforwards expire at various intervals from 2021 through 2040. 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 October 3, 2020, or September 28, 2019.
As of October 3, 2020, we are indefinitely reinvested in the cumulative undistributed earnings of and original investments in our
foreign subsidiaries. Future remittances could be subject to additional foreign withholding taxes, U.S. state taxes, and certain tax
impacts relating to foreign currency exchange effects. It is not practicable to estimate the amount of any unrecognized tax effects on
these reinvested earnings and original investments in foreign subsidiaries.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years 2016, 2017,
2018, and 2019, according to statute and with few exceptions, remain open to examination by various federal, state, local, and foreign
jurisdictions.
Note 10—Leases
We lease property and equipment under operating lease arrangements, most of which relate to distribution centers and manufacturing
facilities in the U.S., Honduras, El Salvador, and Mexico. We also lease machinery and equipment in the U.S. under finance lease
arrangements. We include both the contractual term as well as any renewal option that we are reasonably certain to exercise in the
determination of our lease terms. For leases with a term of greater than 12 months, we value lease liabilities and the related assets as
the present value of the lease payments over the related term. We apply the short-term lease exception to leases with a term of 12
months or less and exclude such leases from our Condensed Consolidated Balance Sheet. Payments related to these short-term leases
are expensed on a straight-line basis over the lease term and are reflected as a component of lease cost within our Condensed
Consolidated Statements of Operations. Our operating lease agreements for buildings generally include provisions for the payment
of our proportional share of operating costs, property taxes, and other variable payments. These incremental payments are excluded
from our calculation of operating lease liabilities and right of use assets. We have elected to use the practical expedient present in
F - 19
ASC 842 to not separate lease and non-lease components for all significant underlying asset classes and instead account for them
together as a single lease component in the measurement of our lease liabilities.
Generally, the rate implicit in our operating leases is not readily determinable. Therefore, we discount future lease payments using
our estimated incremental borrowing rate at lease commencement. We determine this rate based on a credit-adjusted risk-free rate,
which approximates a secured rate over the lease term. The weighted average discount rate for operating leases as of October 3, 2020,
was 4.1%. We discount our finance lease payments based on the rate implicit and stated in the lease. The weighted average discount
rate for finance leases as of October 3, 2020, was 5.1%.
The following table presents the future undiscounted payments due on our operating and finance lease liabilities as well as a
reconciliation of those payments to our operating and finance lease liabilities, recorded as of October 3, 2020 (in thousands):
2021
2022
2023
2024
2025
Thereafter
Undiscounted fixed lease payments
Discount due to interest
Total lease liabilities
Less current maturities
Lease liabilities, excluding current maturities
Operating
Leases
Finance
Leases
$
$
$
$
12,459 $
10,374
8,408
6,981
7,009
21,079
66,310 $
(10,701 )
55,609 $
(9,039 )
46,570 $
7,687
4,771
4,068
2,588
695
-
19,809
(1,525 )
18,284
(6,956 )
11,328
As of October 3, 2020, we have entered into certain operating leases that have not yet commenced, but the annual fixed lease
payments are not significant.
Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement with a Honduran company, of which we
own 31% of the outstanding capital stock of the lessor at October 3, 2020. During the twelve-months ended October 3, 2020, and
September 28, 2019, we paid approximately $1.3 million and $1.8 million, respectively, in lease payments under this arrangement.
As of October 3, 2020, we had $54.6 million of operating lease ROU assets which were reflected within Operating lease assets in
our Consolidated Balance Sheet, and $23.6 million of finance lease ROU assets, which were reflected within Property, plant, and
equipment, net in our Consolidated Balance Sheet.
The weighted average remaining lease terms for our operating leases and finance leases were approximately 7 years and 3 years,
respectively, as of October 3, 2020.
The components of total lease expense were as follows for the twelve months ended October 3, 2020 (in thousands):
Operating lease fixed expense
Operating lease variable cost expense
Finance lease amortization of ROU assets expense
Finance lease interest expense
Total lease expense
$
$
11,582
1,777
3,380
976
17,715
Total operating lease expense, excluding variable lease costs, recognized during the twelve months ended September 28, 2019, prior
to the adoption of ASC 842, was $10.6 million. In addition, during the twelve months ended September 28, 2019, we incurred
expenses related to finance leases, including interest expense and depreciation expense, related to financed machinery and equipment.
Cash outflows for operating lease payments and for interest payments on finance leases during the twelve months ended October 2,
2020, were $11.0 million and $0.7 million, respectively, and are classified within net cash provided by operating activities on the
Consolidated Statement of Cash Flows. Cash outflows for finance lease payments during the twelve months ended October 3, 2020,
were $4.8 million and are classified within net cash used in financing activities on the Consolidated Statement of Cash Flows.
During the three month period ended June 27, 2020, in response to the COVID-19 pandemic, the Company entered into certain lease
arrangements deferring approximately $1.7 million of operating lease payments and approximately $1.7 million of finance lease
F - 20
payments. The operating lease deferrals will be paid over the next 12 months while finance lease deferrals will be repaid at the end
of each lease.
ROU assets obtained in exchange for operating lease and finance lease liabilities during the twelve months ended October 3, 2020,
were $22.7 million and $5.0 million, respectively. During the twelve-month period ended September 28, 2019, prior to the adoption
of ASC 842, we entered into new finance lease obligations totaling $8.4 million.
We do not have significant leasing transactions in which we are the lessor.
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. We contributed $1.0 million to the 401(k) Plan during fiscal years 2020
and 2019, respectively.
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 2020 and 2019. 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
October 3, 2020
307
2
(20 )
—
289
$
$
$
September 28, 2019
$
313
2
(9 )
1
307
On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010
Stock Plan, which was previously re-approved by our shareholders on February 4, 2015 and was scheduled to expire by its terms on
September 14, 2020. The 2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of
the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of
compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives,
key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the authority
to determine the employees and directors to whom awards may be granted and the size and type of each award and manner in which
such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock,
restricted stock units, performance stock, performance units, and other stock and cash awards. If a participant dies or becomes
disabled (as defined in the 2020 Stock Plan) while employed by the Company or serving as a director, all unvested awards become
fully vested. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2020
Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other
determinations that it deems necessary. The aggregate number of shares of common stock that may be delivered under the 2020
Stock Plan is 449,714 plus any shares of common stock subject to outstanding awards under the 2010 Stock Plan that are subsequently
forfeited or terminated for any reason before being exercised. Similar to the 2010 Stock Plan, the 2020 Stock Plan limits the number
of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted
stock, restricted stock units and performance stock granted in a given calendar year. The 2010 Stock Plan terminated and the 2020
Stock Plan became effective on February 6, 2020, the date of shareholders’ approval.
Shares are generally issued from treasury stock upon the vesting of the restricted stock units, performance units or other awards under
the 2010 Stock Plan and 2020 Stock Plan.
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 2020 and 2019 was $3.0
million and $2.1 million, respectively. Associated with the compensation cost are income tax benefits recognized of $0.9 million for
both fiscal years 2020 and 2019.
F - 21
The following table summarizes the restricted stock unit and performance unit award activity during the periods ended October 3,
2020, and September 28, 2019:
Fiscal Year Ended
October 3, 2020
September 28, 2019
Units outstanding, beginning of fiscal period
Units granted
Units issued
Units forfeited
Units outstanding, end of fiscal period
Number of
Units
Weighted
average grant
date fair value
19.78
20.72
22.13
19.37
20.16
$
283,500
294,000
$
(132,858 ) $
(38,642 ) $
$
406,000
Number of
Units
Weighted
average grant
date fair value
16.12
—
11.88
21.51
19.78
$
532,500
—
(247,000 ) $
(2,000 ) $
$
283,500
During fiscal year 2020, restricted stock units and performance units representing 54,750 and 78,108 shares of our common stock,
respectively, vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended September 28, 2019, and were
issued in accordance with their respective agreements. Of these vested units, 86,589 were paid in common stock and 46,269 were
paid in cash.
During fiscal year 2019, restricted stock units and performance units, each consisting of 60,000 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 ended October 2, 2021. 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 2020, restricted stock units representing 50,000 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 ended October 2, 2021. These restricted stock units are payable
in common stock.
During fiscal year 2020, restricted stock units representing 124,000 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 ended October 1, 2022. These restricted stock units are payable
in common stock.
As of October 3, 2020, there was $3.8 million of total unrecognized compensation cost related to unvested restricted stock units and
performance units under the 2020 Stock Plan. This cost is expected to be recognized over a period of 2.1 years.
The following table summarizes information about the unvested restricted stock units and performance units as of October 3, 2020.
Restricted Stock Units/Performance Units
Fiscal Year 2017 Performance Units
Fiscal Year 2018 Restricted Units
Fiscal Year 2020 Performance Units
Fiscal Year 2020 Restricted Units
Fiscal Year 2020 Restricted Units
Number of
Units
42,000
74,000
58,000
108,000
124,000
406,000
Average Market Price on
Date of Grant
$ 17.97
$ 19.52
$ 23.15
$ 18.15
$ 21.63
Vesting Date*
November 2020
November 2020
November 2021
November 2021
November 2022
* 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.
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.
The Delta Group is comprised of our business units primarily focused on core activewear styles, and includes our DTG2Go, Delta
Activewear, and Soffe business units. We are a market leader in the on-demand, direct-to-garment digital print and fulfillment
industry, bringing DTG2Go technology and innovation to the supply chain of our many customers. We use highly-automated factory
processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers.
DTG2Go services the fast-growing e-retailer channels, as well as the ad-specialty, promotional products and retail marketplaces,
among others. Delta Activewear is a preferred supplier of activewear apparel to the wholesale and private label markets. We offer a
broad range of apparel and accessories through our catalog business under the Delta and Soffe brands as well as other brands that we
F - 22
distribute utilizing our digital platform and network of fulfillment centers. In addition to our catalog 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.
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
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(1)
Salt Life Group(2)
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
October 3, 2020 September 28, 2019
$
$
$
$
$
$
$
$
343,891 $
37,144
381,035 $
389,075
42,655
431,730
6,609 $
460
7,069 $
7,496 $
1,494
—
8,990 $
11,788 $
960
8
12,756 $
23,780
5,786
29,566
4,861
1,202
—
6,063
9,889
1,522
353
11,764
(1)In fiscal year 2020, the Delta Group operating income included $23.7 million of expenses related to the COVID-19 pandemic.
These costs primarily related to the curtailment of manufacturing operations ($11.9 million), incremental costs to right size production
to new forecasted demand ($2.6 million), increased accounts receivable and inventory reserves related to the heightened risks in the
market as the U.S. continues its recovery ($6.3 million), and other expenses ($2.9 million). These costs are included within net sales
($0.4 million), cost of goods sold ($14.2 million), SG&A expenses ($1.1 million), and other loss (income), net ($8.0 million). In the
quarter ended December 29, 2018, the Delta Group operating income included $2.5 million of expense incurred in connection with
the settlement of litigation related to the 2016 bankruptcy filing of a customer.
(2)In fiscal year 2020, the Salt Life Group operating income included approximately $0.3 million of increased accounts receivable
and inventory reserves related to the heightened risks in the market as the U.S. continues its recovery from the COVID-19 pandemic,
as well as $0.5 million of other expenses. These costs are included within net sales ($0.1 million), SG&A expenses ($0.6 million),
and other loss (income), net ($0.1 million). In the quarter ended June 29, 2019, the Salt Life Group operating income included $1.3
million in other loss (income) as the result of a litigation settlement.
F - 23
The following reconciles the segment operating income to the consolidated income before provision for income taxes (in thousands):
Segment operating income
Unallocated corporate expenses
Unallocated interest expense
Consolidated income before provision for income taxes
Fiscal Year Ended
$
October 3, 2020
7,069
14,144
7,005
$
$
(14,080 ) $
September 28, 2019
29,566
13,671
7,550
8,345
Our revenues include sales to domestic and foreign customers. Foreign customers are composed of companies whose headquarters
are located outside of the United States. Sales to foreign customers represented approximately 1% of our consolidated net sales for
both fiscal years 2020 and 2019.
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
October 3,2020
September 28, 2019
$
$
$
$
346,135
65,676
8,420
420,231
$
$
10,573
—
10,573
$
$
315,653
57,574
4,761
377,988
10,388
—
10,388
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):
As of
October 3, 2020
September 28, 2019
United States
Honduras
El Salvador
Mexico
All foreign countries
$
46,251
$
13,445
3,066
1,188
17,699
Total property, plant and equipment, net
$
63,950
$
Note 14—Repurchase of Common Stock
41,620
15,326
3,209
1,249
19,784
61,404
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 2020 and 2019, we purchased 99,971 shares and 141,501 shares, respectively, of
our common stock for a total cost of $2.0 million and $2.7 million, respectively. As of October 3, 2020, we have purchased 3,598,933
shares of common stock for an aggregate of $52.5 million since the inception of the Stock Repurchase Program. All purchases were
made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of October 3, 2020, $7.5
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 October 3, 2020.
F - 24
Note 15—Commitments and Contingencies
(a) Litigation
At times, we are party to various legal claims, actions and complaints. We believe that, as a result of legal defense, insurance
arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material
adverse 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 October 3, 2020, minimum payments under these contracts were as follows (in thousands):
Yarn
Finished fabric
Finished products
(c) Letters of Credit
$
$
21,809
3,163
12,266
37,238
As of October 3, 2020, 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 October 3, 2020:
Interest Rate Swap
Interest Rate Swap
Effective Date
July 19, 2017
July 25, 2018
Notional 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.
No such cotton contracts were outstanding as of October 3, 2020, and September 28, 2019.
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 - 25
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
Period Ended
Interest Rate Swap
October 3, 2020
September 28, 2019
Contingent Consideration
October 3, 2020
September 28, 2019
$
$
$
$
Fair Value Measurements Using
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Total
(1,764 ) $
(1,293 ) $
—
—
$
$
(1,764 ) $
(1,293 ) $
—
—
(6,420 ) $
(9,094 ) $
—
—
$
$
—
—
$
$
(6,420 )
(9,094 )
The fair value of the interest rate swap agreements was derived from a 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. At October
3, 2020 and September 28, 2019, book value for fixed rate debt approximates fair value 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 October 3,
2020, and September 28, 2019.
Deferred tax asset
Deferred tax liability
Accrued expenses
Other liabilities
Accumulated other comprehensive loss
$
October 3, 2020
442
—
(108 )
(1,656 )
(1,322 ) $
September 28, 2019
—
324
—
(1,293 )
(969 )
$
$
The DTG2Go acquisition purchase price consisted of additional payments contingent on the combined businesses' 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. During fiscal year 2020, $2.5 million was paid related to the 2019 period. As of October 3, 2020, we estimated
the fair value of contingent consideration to be $6.4 million which, excluding the $2.5 million payment, is consistent with the accrual
as of September 28, 2019.
In August 2013, we acquired Salt Life, which included contingent consideration as part of the purchase price and which is payable
in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products were met
during the 2019 calendar year. During fiscal year 2020, it was determined that calendar year 2019 performance targets were not
achieved and, as a result, the $0.2 million accrual as of September 28, 2019, was reversed. At October 3, 2020, no amount was
accrued for contingent consideration in related to the acquisition of Salt Life.
Note 16—Subsequent Events
None
F - 26
EXHIBIT 21
SUBSIDIARIES OF DELTA APPAREL, INC.
Listed below are the subsidiaries of Delta Apparel, Inc.:
(1) M. J. Soffe, LLC, a North Carolina limited liability company.
(2) Culver City Clothing Company, a Georgia corporation.
(3) Salt Life, LLC, a Georgia limited liability company.
(4) Salt Life Beverage Management, LLC, a Delaware limited liability company.
(5) Salt Life Beverage, LLC, a Delaware limited liability company
(6) DTG2Go, LLC, a Georgia limited liability company.
(7) Delta Apparel Honduras, S.A., a Honduran sociedad anónima.
(6) Delta Campeche, S.A. de C.V., a Mexican sociedad anónima de capital variable.
(7) Delta Cortes, S.A., a Honduran sociedad anónima.
(8) Campeche Sportswear, S. de R.L. de C.V., a Mexican sociedad de responsabilidad limitada de capital variable.
(9) Textiles La Paz, LLC, a North Carolina limited liability company.
(10) Ceiba Textiles, S. de R.L., a Honduran sociedad de responsabilidad limitada.
(11)
Atled Holding Company Honduras, S. de R.L., a Honduran sociedad de
responsabilidad limitada.
(12) La Paz Honduras, S. de R.L., a Honduran sociedad de responsabilidad limitada.
EXHIBIT
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-61190) pertaining to the Delta Apparel, Inc. 2000 Stock Option Plan and Delta
Apparel, Inc. Incentive Stock Award Plan,
(2) Registration Statement (Form S-8 No. 333-237938) pertaining to the Delta Apparel, Inc. 2020 Stock Plan, and
(3) Registration Statement (Form S-3 No. 333-235578) of Delta Apparel, Inc.;
of our reports dated November 23, 2020, with respect to the consolidated financial statements of Delta Apparel, Inc. and Subsidiaries
and the effectiveness of internal control over financial reporting of Delta Apparel, Inc. and Subsidiaries, included in this Annual
Report (Form 10-K) of Delta Apparel, Inc. and Subsidiaries for the year ended October 3, 2020.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 23, 2020
EXHIBIT
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Robert W. Humphreys, certify that:
1. I have reviewed this Annual Report on Form 10-K of Delta Apparel, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 23, 2020
/s/Robert W. Humphreys
Chairman and Chief Executive Officer
EXHIBIT
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Deborah H. Merrill, certify that:
1. I have reviewed this Annual Report on Form 10-K of Delta Apparel, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: November 23, 2020
/s/Deborah H. Merrill
Chief Financial Officer and President, Delta Group
EXHIBIT
EXHIBIT 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Robert W.
Humphreys, the Chief Executive Officer of Delta Apparel, Inc. (the “Company”), hereby certifies that to the best of his knowledge:
1. The Annual Report on Form 10-K for the fiscal year ended October 3, 2020, of the Company, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 23, 2020
/s/Robert W. Humphreys
Robert W. Humphreys
Chairman and Chief Executive Officer
This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not
being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate
disclosure document. A signed original of this written certification required by Section 906, or other document authenticating,
acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written
certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT
EXHIBIT 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
For purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Deborah H.
Merrill, the Chief Financial Officer of Delta Apparel, Inc. (the “Company”), hereby certifies that to the best of his knowledge:
1. The Annual Report on Form 10-K for the fiscal year ended October 3, 2020, of the Company, as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: November 23, 2020
/s/Deborah H. Merrill
Deborah H. Merrill
Chief Financial Officer and President, Delta Group
This certification is being furnished solely to comply with the provisions of § 906 of the Sarbanes-Oxley Act of 2002 and is not
being filed as part of the accompanying Report, including for purposes of Section 18 of the Exchange Act, or as a separate
disclosure document. A signed original of this written certification required by Section 906, or other document authenticating,
acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written
certification required by Section 906, has been provided to the Company and will be rendered by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT
Company Information nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
Delta Group
Salt Life Group
Delta Apparel
2750 Premiere Parkway - Suite 100
Duluth, GA 30097
Salt Life
1147 Sixth Avenue
Columbus, GA 31901
The Delta Group segment, powered by our industry leading, on-demand
digital print business, DTG2Go, is focused on core activewear styles, such
as the iconic Soffe brand, in our Delta Activewear business.
The Salt Life Group segment is focused on a broad range of apparel
garments, headwear and related accessories to meet consumer
preferences and fashion trends with its authentic lifestyle brands, Salt
Life and Coast.
Executive Officers
Board of Directors
Robert W. Humphreys
Chairman and Chief Executive Officer
Deborah H. Merrill
Chief Financial Officer and President, Delta Group
Jeffrey N. Stillwell
President, Salt Life Group
Carlos E. Encalada Arjona
Vice President of Manufacturing
Corporate and Shareholder Information
Corporate and shareholder information may be obtained free of charge by
contacting Investor Relations at investor.relations@deltaapparel.com.
Corporate Office:
Delta Apparel, Inc.
322 S. Main Street
Greenville, SC 29601
T: (864) 232-5200
F: (864) 232-5199
investor.relations@deltaapparel.com
Stock Transfer Agent:
American Stock Transfer & Trust Company, LLC (AST)
Attention: Operations Center
6201 5th Avenue
Brooklyn, NY 11219
T: (800) 937-5440
investors@amstock.com
www.amstock.com
locations, skills, education, and professional and
leadership
Each of our directors brings extensive management and
experience gained through his or her service to diverse businesses and
institutions. We believe our board of directors brings together broadly diverse
backgrounds and experiences in terms of gender, difference of viewpoints,
geographic
industry
knowledge among other factors. Our directors are committed to effectively
overseeing management’s performance, to act in the long-term best interests
of shareholders, and to maintain a high standard of corporate governance.
We believe that good corporate governance practices not only reflect our
values as a Company but also support strong strategic growth and financial
performance. Refer to the definitive Proxy Statement for discussion of the
professional experience, qualifications, and board committee memberships of
each of the directors listed below:
Anita D. Britt
J. Bradley Campbell
Dr. G. Jay Gogue
Glenda E. Hood
Robert W. Humphreys
Robert E. Staton., Sr.
A. Alexander Taylor, II
David G. Whalen
Annual Meeting of Shareholders
Our Annual Meeting of Shareholders will be held at the Embassy Suites by
Hilton Downtown Greenville on Thursday, February 11, 2021, at 8:30 a.m.
Eastern Time.
Embassy Suites by Hilton Downtown Greenville
250 Riverplace
Greenville, SC 29601
nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
nnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnnn
Delta Apparel, Inc.
322 South Main Street
Greenville, SC 29601
NYSE American: DLA
www.deltaapparelinc.com