Delta Apparel(DLA) - 2019 Q4 - Annual Report

Part I Item 1. Business Delta Apparel is a vertically-integrated international apparel company, manufacturing and marketing activewear and lifestyle brands across two segments Overview Delta Apparel is a vertically-integrated international apparel company with 8,500 employees, operating on a 52-53 week fiscal year - Delta Apparel, Inc. is a vertically-integrated, international apparel company with approximately 8,500 employees worldwide, specializing in designing, manufacturing, sourcing, and marketing diverse activewear and lifestyle apparel products[19] - The company manufactures over 90% of its apparel units in owned or leased facilities across the United States, El Salvador, Honduras, and Mexico, allowing for consistency, quality, and quick reaction to market trends[20] - Delta Apparel operates on a 52-53 week fiscal year ending on the Saturday closest to September 30, and its common stock trades on the NYSE American under the symbol 'DLA'[22] Segments, Products, Brands, and Customers The company operates in Delta Group (activewear, digital print) and Salt Life Group (lifestyle brands) segments - The company manages its operations in two segments: Delta Group and Salt Life Group, reflecting how the business is managed and reviewed by the CEO[24] - The Delta Group focuses on core activewear styles, including Delta Activewear (catalog and FunTees private label), DTG2Go (direct-to-garment digital print and fulfillment), and Soffe (heritage activewear and military supplier)[25][26][28][29] - The Salt Life Group comprises lifestyle brands like Salt Life® and Coast, offering apparel, headwear, and accessories for ocean enthusiasts, expanding into swimwear, sunglasses, bags, and craft beer[30][31][32] Manufacturing, Sourcing, and Distribution The company primarily manufactures internally, sources yarn from Parkdale Mills, and uses nine U.S. distribution facilities - The majority of products are manufactured or sewn in company-owned or leased facilities, with over 80% of fabrics and 90% of garments produced internally in fiscal years 2019 and 2018[34][36] - The company has a supply agreement with Parkdale Mills for yarn requirements through December 31, 2021, with yarn prices based on cotton costs plus a fixed conversion cost[35] - Distribution is supported by nine strategically located facilities across the U.S., offering same-day shipping for catalog products and weekly replenishments, with DTG2Go digital fulfillment services integrated into three Delta Group distribution centers[37][38] Sales & Marketing Sales and marketing utilize diverse channels, serving approximately 9,000 customers with no single customer exceeding 10% of sales - Sales and marketing functions utilize both employed and independent representatives, servicing diverse channels including specialty shops, department stores, sporting goods, e-retailers, and the U.S. military[40] - In fiscal year 2019, the company shipped products to approximately 9,000 customers, with no single customer accounting for more than 10% of sales, and foreign sales represented about 1% of consolidated net sales[41] Trademarks and License Agreements The company owns key trademarks like Salt Life® and Soffe®, and Soffe is an official licensee for the U.S. military - The company owns several key trademarks, including Salt Life®, Soffe®, COAST®, Intensity Athletics®, Kudzu®, Pro Weight®, Magnum Weight®, and the Delta Design, which are vital for marketing and are vigorously protected[42] - The Soffe business unit is an official licensee for branches of the United States military, leveraging its military heritage[42] Competition The company faces intense competition from larger rivals, primarily on price, service, and brand recognition - The company faces numerous competitors, many larger with greater brand recognition and marketing budgets, in both domestic and international apparel markets[44] - Competition in the Delta Group segment is primarily based on price, service, delivery time, and quality, while the Salt Life Group competes on brand recognition, design, and consumer preference[45][46] Seasonality Demand for products shows seasonality, with Q3 typically having the highest sales and Q1 the lowest - While product lines are sold year-round, demand for specific products shows seasonality, with the third fiscal quarter (ending June) typically having the highest sales (27% of FY2019 net sales) and the first fiscal quarter (ending December) the lowest (24% of FY2019 net sales)[47] Employees and Social Responsibility The company employs approximately 8,500 worldwide, with manufacturing facilities WRAP certified and FLA affiliated - As of September 28, 2019, the company employed approximately 8,500 full-time employees worldwide, with 1,150 in the U.S. and 3,150 in Honduras covered by collective bargaining agreements[48] - All manufacturing facilities in Honduras, El Salvador, and Mexico are Worldwide Responsible Accredited Production (WRAP) certified, and the company is a Category C affiliate with the Fair Labor Association (FLA)[48] Environmental and Regulatory Matters The company is subject to stringent environmental regulations, incurring compliance costs without material adverse effects expected - The company is subject to increasingly stringent federal, state, and local environmental laws and regulations, incurring annual expenditures for compliance, but does not currently expect a material adverse effect on operations[49][50] Item 1A. Risk Factors The company faces significant risks from raw material volatility, economic conditions, intense competition, operational disruptions, tax law changes, data security, and stock market illiquidity - The price and availability of cotton and other raw materials are subject to significant fluctuations and volatility, which can negatively impact gross margins if higher costs cannot be passed to customers[52][54] - Economic conditions, including employment levels, energy costs, and consumer spending, can adversely impact demand for apparel, leading to reduced sales and potentially increased unit costs if manufacturing operations are scaled back[55] - The apparel industry is highly competitive, with many larger or more diversified competitors, requiring the company to compete on price, quality, service, and brand recognition, and adapt to changing consumer preferences and trends[56][57][61] - The company's ability to borrow under its revolving credit facility or service its indebtedness could be restricted by significant operating losses or cash uses, or deterioration in accounts receivable/inventory levels, potentially leading to default or acceleration of obligations[58] - Operations in Honduras, El Salvador, and Mexico are subject to political, social, economic, and climate risks, which could disrupt the supply chain, increase costs, and adversely affect financial results[64] - Changes in U.S. or other tax laws, such as the Tax Cuts and Jobs Act of 2017, could cause additional tax liability and impact the effective tax rate and cash flow, particularly due to foreign earnings and new taxes like GILTI[67][68] - Compromises of data security, including unauthorized malware intrusions on e-commerce websites, could lead to liability, reputational damage, lost sales, and significant costs[75][76][77] - The market price of the company's shares is affected by illiquidity and general stock market volatility, with substantial sales by large holders potentially adversely impacting the price[89][90][91] Item 1B. Unresolved Staff Comment There are no unresolved staff comments to report - No unresolved staff comments[92] Item 2. Properties The company operates 37 properties, including 5 owned and 30 leased, supporting manufacturing, distribution, retail, and administration, with expansion plans Summary of Properties (as of September 28, 2019) | Category | Owned | Leased | Other | Total | | :---------------------- | :---- | :----- | :---- | :---- | | Manufacturing | 2 | 6 | — | 8 | | Distribution | 2 | 3 | 2 | 7 | | Decoration/distribution | 1 | 4 | — | 5 | | Retail stores/showroom | — | 12 | — | 12 | | Administrative | — | 5 | — | 5 | | Total | 5 | 30 | 2 | 37| - In October 2019, operations moved to a company-leased facility in Dallas, TX, and new operations began in Columbus, OH. In Q1 FY2020, two additional digital decoration and distribution facilities opened in Cranberry, NJ, and Lewisville, TX, integrating DTG2Go with Delta Activewear distribution centers[94][95] - Long-lived assets in Honduras, El Salvador, and Mexico collectively comprised approximately 32% of consolidated net property, plant, and equipment at fiscal year-end 2019, down from 41% in 2018[97] Item 3. Legal Proceedings The company is not currently party to any material pending legal proceedings, nor is it aware of any such proceedings contemplated by governmental authorities - There are no material pending legal proceedings to which the company is a party or of which any property is subject, and no such proceedings are contemplated by any governmental authority[99] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[100] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities DLA common stock trades on NYSE American; no dividends paid in FY2019/2018; $2.7 million stock repurchased in FY2019 - The common stock of Delta Apparel, Inc. is listed and traded on the NYSE American under the symbol 'DLA', with approximately 807 record holders as of November 14, 2019[102] Common Stock High and Low Sales Prices (Fiscal Years 2019 & 2018) | Period | High Sale Price | Low Sale Price | | :---------------- | :-------------- | :------------- | | Fiscal Year 2019: ||| | September Quarter | $24.30 | $18.48 | | June Quarter | $24.47 | $21.00 | | March Quarter | $24.99 | $17.06 | | December Quarter | $19.98 | $16.11 | | Fiscal Year 2018: ||| | September Quarter | $19.49 | $16.30 | | June Quarter | $20.30 | $16.90 | | March Quarter | $22.10 | $17.04 | | December Quarter | $22.00 | $19.60 | - No dividends were declared or paid in fiscal years 2019 and 2018. Future cash dividends depend on earnings, financial condition, capital requirements, and compliance with loan covenants[104][105] Common Stock Repurchases | Fiscal Year | Shares Repurchased | Total Cost (Millions) | | :---------- | :----------------- | :-------------------- | | 2019 | 141,501 | $2.7 | | 2018 | 463,974 | $9.0 | - As of September 28, 2019, $9.5 million remained available for future purchases under the Stock Repurchase Program, which has no expiration date[145] Item 6. Selected Financial Data As a smaller reporting company, the registrant is not required to provide selected financial data - As a smaller reporting company, the registrant is not required to provide selected financial data[107] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved strong FY2019 sales growth and profitability, driven by segment expansion and strategic initiatives, despite gross margin pressures Business Outlook The company projects continued growth for DTG2Go, Activewear, Soffe, and Salt Life brands, with strategic expansions - The company delivered strong sales growth in fiscal year 2019 across both Delta Group and Salt Life Group segments, with expanding gross margins and solid profitability[108] - DTG2Go is positioned as an industry leader in digital print, with expanded capacity and new facilities integrating with Delta Apparel's distribution network, aiming for 20% compounded sales growth and double-digit operating margins in FY2020[109] - The Activewear business plans to launch a full-service, vertical distributor model in January 2020, offering nationally recognized branded products, and expects continued growth in fashion basics and private label (FunTees) businesses[110] - Soffe brand showed two consecutive quarters of year-over-year improvement, with strong double-digit net sales growth in B2B and B2C e-commerce[111] - Salt Life experienced strong growth in FY2019, with a new e-commerce platform driving site traffic and conversion, and plans for continued product category expansion (e.g., women's shoes, accessories, swim line, Salt Life Lager)[112][113] Results of Operations FY2019 net sales increased by 9.2% to $431.7 million, with improved net earnings despite a gross margin decline Key Financial Highlights (Fiscal Years 2019 vs. 2018) | Metric | FY2019 (Millions) | FY2018 (Millions) | Change (%) | | :-------------------------------------- | :---------------- | :---------------- | :--------- | | Net Sales | $431.7 | $395.5 | +9.2% | | Delta Group Net Sales | $389.1 | $356.0 | +9.3% | | Salt Life Group Net Sales | $42.7 | $39.4 | +8.1% | | Overall Gross Margin | 19.7% | 20.7% | -1.0 pp | | Delta Group Gross Margin | 16.8% | 17.9% | -1.1 pp | | Salt Life Group Gross Margin | 46.7% | 46.7% | 0.0 pp | | SG&A Expenses (% of Sales) | 16.3% | 16.9% | -0.6 pp | | Operating Income | $15.9 | $17.4 | -8.6% | | Delta Group Operating Income | $23.8 | $26.1 | -8.8% | | Salt Life Group Operating Income | $6.2 | $4.7 | +31.9% | | Interest Expense | $7.6 | $5.7 | +33.3% | | Effective Income Tax Rate | 5.5% | 89.5% | -84.0 pp | | Net Earnings Attributable to Shareholders | $8.2 | $1.3 | +530.8% | | Diluted EPS | $1.17 | $0.18 | +550.0% | - Direct-to-consumer and business-to-business e-commerce and retail sales increased their share of consolidated revenue to 8.1% in FY2019 from 7.6% in FY2018[115] - Gross margin decline in FY2019 was primarily due to higher raw material prices, inflationary cost increases, product changes in FunTees, and acquisition/integration costs in the first half, partially offset by improved selling prices and favorable product mix[118] - Other income in FY2019 included a $1.3 million gain from a commercial litigation settlement (BP Deepwater Horizon) and a $2.5 million expense from The Sports Authority bankruptcy litigation, along with a net $0.8 million reduction in contingent consideration estimates[122] Non-GAAP Financial Measures The company provides adjusted net earnings and EPS as non-GAAP measures, excluding tax legislation and litigation impacts - The company provides non-GAAP measures, specifically adjusted net earnings and EPS, to offer additional insight into underlying performance, excluding the impact of tax legislation and litigation settlements[130] Adjusted Net Earnings and Diluted EPS (Thousands, except per share data) | Metric | FY2019 | FY2018 | | :------------------------------------------------------------------ | :---------- | :---------- | | Net earnings attributable to shareholders | $8,242 | $1,337 | | Adjustment for tax legislation impact | — | $10,664 | | Adjustment for commercial litigation settlement, net of tax | $(698) | — | | Adjustment for The Sports Authority litigation settlement, net of tax | $2,168 | — | | Adjusted earnings attributable to shareholders | $9,712 | $12,001 | | Reported diluted earnings per share | $1.17 | $0.18 | | Adjustment for tax legislation impact | — | $1.44 | | Adjustment for commercial litigation settlement, net of tax | $(0.10) | — | | Adjustment for The Sports Authority litigation settlement, net of tax | $0.31 | — | | Adjusted diluted earnings per share | $1.38 | $1.62 | Liquidity and Capital Resources Operating cash flows decreased in FY2019, with planned capital expenditures for expansion, supported by a credit facility Cash Flow Summary (Thousands) | Activity | FY2019 | FY2018 | | :------------------------ | :---------- | :---------- | | Operating Cash Flows | $9,428 | $21,238 | | Investing Cash Flows | $(11,457) | $(14,946) | | Financing Activities | $2,174 | $(6,404) |\n| Net Change in Cash | $145 | $(112) | | Cash at End of Period | $605 | $460 | - The decrease in operating cash flows in FY2019 was due to an increase in accounts receivable from sales growth and increased inventory positions to better service customers[132] - Capital expenditures were $6.1 million in FY2019 and $5.8 million in FY2018, primarily for machinery, equipment, and digital print business investments. Approximately $25 million to $28 million is expected for capital expenditures in FY2020, including $12 million for the Clinton, TN distribution center expansion[133][135] - The company's credit facility is expected to be sufficient for working capital, debt payments, and planned capital expenditures, with $16.1 million of retained earnings free of restrictions for cash dividends or stock repurchases as of September 28, 2019[138][143] - The company uses cotton option contracts to economically hedge raw material price fluctuations, with realized gains/losses recorded in cost of goods sold. Interest rate swap agreements are used to manage interest rate exposure, with changes in fair value recognized in accumulated other comprehensive income (AOCI)[139][140][141] Critical Accounting Policies Key accounting estimates include revenue recognition, accounts receivable, inventory, goodwill, and income taxes, with new lease accounting upcoming - Critical accounting estimates include revenue recognition (discounts, allowances, returns), accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and accounting for income taxes[146] - Revenue is recognized when performance obligations are satisfied, typically upon delivery of products to customers in retail stores, shipment from e-commerce sites, or shipment from distribution centers for wholesale operations[148] - Goodwill is tested for impairment annually or more frequently if circumstances indicate impairment, using a discounted cash flow methodology with significant assumptions and estimates[154] - Income taxes are accounted for under the liability method, recognizing deferred tax assets and liabilities for temporary differences and operating loss carryforwards, with a valuation allowance established for state NOLs[156][157] - The company adopted ASC 606 (Revenue from Contracts with Customers) effective October 1, 2018, with no material effect on net sales, but impacting the balance sheet by recording customer refunds as a liability[280][281] - Upcoming accounting pronouncements include ASC 842 (Leases), effective FY2020, which is expected to materially impact consolidated balance sheets by recognizing operating lease assets and liabilities, and ASU 2017-04 (Goodwill Impairment), effective FY2021, which simplifies the impairment test[283][284][286] Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Delta Apparel, Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[159] Item 8. Financial Statements and Supplementary Data This section lists financial statements and supplementary data, including Consolidated Balance Sheets, Statements of Operations, and various exhibits - Consolidated Financial Statements for fiscal years ended September 28, 2019, and September 29, 2018, and the Reports of Independent Registered Public Accounting Firms are included in the report[160] Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure[161] Item 9A. Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of September 28, 2019 - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of September 28, 2019[162] - Management assessed and concluded that the company's internal control over financial reporting was effective as of September 28, 2019, based on the COSO (2013 Framework) criteria[165] - Ernst & Young LLP, the independent registered public accounting firm, audited and issued an unqualified opinion on the effectiveness of the company's internal controls over financial reporting as of September 28, 2019[166][170] - There were no material changes in internal control over financial reporting during the fourth quarter of fiscal year 2019[167] Item 9B. Other Information The company amended its credit agreement, increasing borrowing capacity to $170.0 million and extending maturity to November 2024 - On November 19, 2019, the company entered into a Fourth Amendment to its Fifth Amended and Restated Credit Agreement[178] - The Fourth Amendment increased borrowing capacity from $145.0 million to $170.0 million, extended the maturity date from May 10, 2021, to November 19, 2024, and reduced pricing on revolver and FILO borrowing components by 25 basis points[180] - The amendment also added 25% of the fair market value of eligible intellectual property to the borrowing base and modified the Fixed Charge Coverage Ratio to exclude up to $10 million in capital expenditures for the Clinton, TN distribution facility expansion[180] Part III Item 10. Directors, Executive Offices and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the definitive Proxy Statement - Information on Directors, Executive Officers, and Corporate Governance is incorporated by reference from the definitive Proxy Statement[184] - The company has an Ethics Policy Statement, available on its website, which applies to all employees, including the CEO and CFO, ensuring legal and ethical business conduct[184] Item 11. Executive Compensation Information concerning executive compensation is incorporated by reference from the definitive Proxy Statement - Information on Executive Compensation is incorporated by reference from the definitive Proxy Statement[185] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan details are incorporated by reference, with 283,500 securities issuable under the 2010 Stock Plan - Information on security ownership and equity compensation plans is incorporated by reference from the definitive Proxy Statement[185] - The Delta Apparel, Inc. 2010 Stock Plan, re-approved in 2015, allows for various equity incentive compensation awards and limits the aggregate number of shares that may be delivered to 500,000 plus forfeited shares from prior plans[185][186] Securities Issuable Under Equity Compensation Plans (as of September 28, 2019) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance (c) | | :----------------------------------------------- | :-------------------------------------------------------------------------------- | :-------------------------------------------------------------- | :--------------------------------------------------------------- | | Equity compensation plans approved by security holders | 283,500 | $19.78 | 538,464 | | Equity compensation plans not approved by security holders | — | $— | — | | Total | 283,500 | $19.78 | 538,464 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the definitive Proxy Statement - Information on Certain Relationships and Related Transactions, and Director Independence is incorporated by reference from the definitive Proxy Statement[192] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from the definitive Proxy Statement - Information on Principal Accountant Fees and Services is incorporated by reference from the definitive Proxy Statement[193] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements and supplementary data, including Consolidated Balance Sheets, Statements of Operations, and various exhibits - The section includes the Report of Independent Registered Public Accounting Firms, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows, along with Notes to Consolidated Financial Statements[195] - A detailed listing of exhibits, including various agreements (e.g., Asset Purchase, Credit, Employment, Yarn Supply) and corporate documents (e.g., Articles of Incorporation, Bylaws), is provided, with many incorporated by reference from previous SEC filings[197][198] Item 16. Form 10-K Summary No Form 10-K Summary is provided in this report - No Form 10-K Summary is provided[202] Signatures This section contains the required signatures of the registrant's authorized officers and directors, certifying the filing of the report as of November 21, 2019 - The report is duly signed on behalf of Delta Apparel, Inc. by Deborah H. Merrill, Chief Financial Officer and President, Delta Group, as of November 21, 2019[204] - Signatures of the Chairman and Chief Executive Officer, Robert W. Humphreys, and various directors are also included, all dated November 21, 2019[206] Index to Consolidated Financial Statements This index lists Consolidated Financial Statements and Notes, covering balance sheets, operations, equity, cash flows, and key accounting policies - The index lists the Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets, Statements of Operations, Comprehensive Income, Shareholders' Equity, and Cash Flows[208] - Detailed Notes to Consolidated Financial Statements are provided, covering significant accounting policies, acquisitions, inventories, property, plant and equipment, goodwill and intangible assets, accrued expenses, long-term debt, income taxes, leases, employee benefit plans, stock-based compensation, business segments, repurchase of common stock, commitments and contingencies, and subsequent events[208] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and internal controls for Delta Apparel - Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements of Delta Apparel, Inc. and Subsidiaries for the periods ended September 28, 2019, and September 29, 2018[210] - The audit was conducted in accordance with PCAOB standards, confirming that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[210][213] - Ernst & Young LLP also audited the company's internal control over financial reporting and expressed an unqualified opinion thereon[211] Consolidated Financial Statements Consolidated Balance Sheets Total assets increased to $377.988 million in 2019, with liabilities rising to $224.100 million, and equity reaching $153.888 million Consolidated Balance Sheet Highlights (Amounts in thousands) | Metric | September 28, 2019 | September 29, 2018 | | :-------------------------------------- | :----------------- | :----------------- | | Cash and cash equivalents | $605 | $460 | | Accounts receivable, net | $59,337 | $45,605 | | Inventories, net | $179,107 | $174,983 | | Total current assets | $243,598 | $225,422 | | Property, plant and equipment, net | $61,404 | $52,114 | | Goodwill | $37,897 | $33,217 | | Intangible assets, net | $21,607 | $20,498 | | Total assets | $377,988 | $343,609 | | Accounts payable | $52,320 | $48,008 | | Accrued expenses | $20,791 | $16,742 | | Total current liabilities | $88,875 | $75,811 | | Long-term debt, less current maturities | $109,296 | $92,083 | | Total liabilities | $224,100 | $193,491 | | Total equity | $153,888 | $150,118 | - Total assets increased by $34.379 million (10.0%) from $343.609 million in 2018 to $377.988 million in 2019[218] - Total liabilities increased by $30.609 million (15.8%) from $193.491 million in 2018 to $224.100 million in 2019[218] Consolidated Statements of Operations Net sales increased by 9.2% to $431.730 million in FY2019, with net earnings significantly improving to $8.242 million due to lower taxes Consolidated Statements of Operations Highlights (Amounts in thousands, except per share data) | Metric | FY2019 | FY2018 | | :-------------------------------------- | :---------- | :---------- | | Net sales | $431,730 | $395,450 | | Cost of goods sold | $346,578 | $313,429 | | Gross profit | $85,152 | $82,021 | | Selling, general and administrative expenses | $70,220 | $66,969 | | Other income, net | $(963) | $(2,351) | | Operating income | $15,895 | $17,403 | | Interest expense | $7,550 | $5,713 | | Earnings before provision for income taxes | $8,345 | $11,690 | | Provision for income taxes | $477 | $10,460 | | Consolidated net earnings | $7,868 | $1,230 | | Net earnings attributable to shareholders | $8,242 | $1,337 | | Basic earnings per share | $1.19 | $0.19 | | Diluted earnings per share | $1.17 | $0.18 | - Net sales increased by $36.280 million (9.2%) from $395.450 million in 2018 to $431.730 million in 2019[223] - Net earnings attributable to shareholders increased by $6.905 million (516.4%) from $1.337 million in 2018 to $8.242 million in 2019, primarily due to a significantly lower income tax provision in 2019[223] Consolidated Statements of Comprehensive Income Net earnings were $8.242 million in FY2019, but a $1.105 million loss on derivatives resulted in $7.137 million consolidated comprehensive income Consolidated Statements of Comprehensive Income Highlights (Amounts in thousands) | Metric | FY2019 | FY2018 | | :------------------------------------------------------------------ | :---------- | :---------- | | Net earnings attributable to shareholders | $8,242 | $1,337 | | Other comprehensive (loss) income related to unrealized (loss) gain on derivatives, net of income tax | $(1,105) | $171 | | Consolidated comprehensive income | $7,137 | $1,508 | - Other comprehensive income shifted from a gain of $171 thousand in 2018 to a loss of $1.105 million in 2019, primarily due to unrealized losses on derivatives[225] Consolidated Statements of Shareholders' Equity Total equity increased to $153.888 million in 2019, driven by net earnings and stock-based compensation, despite repurchases Consolidated Statements of Shareholders' Equity Highlights (Amounts in thousands) | Metric | September 28, 2019 | September 29, 2018 | | :-------------------------------------- | :----------------- | :----------------- | | Common Stock | $96 | $96 | | Additional Paid-In Capital | $59,855 | $61,979 | | Retained Earnings | $136,937 | $128,695 | | Accumulated Other Comprehensive (Loss) Income | $(969) | $136 | | Treasury Stock | $(41,750) | $(40,881) | | Equity attributable to non–controlling interest | $(281) | $93 | | Total Equity | $153,888 | $150,118 | - Net earnings contributed $8.242 million to retained earnings in 2019, while treasury stock repurchases amounted to $2.736 million[228] - Accumulated other comprehensive income shifted to a loss of $969 thousand in 2019 from a gain of $136 thousand in 2018[228] Consolidated Statements of Cash Flows Net cash increased by $145 thousand in FY2019, with operating cash flow decreasing to $9.428 million due to receivables and inventory Consolidated Statements of Cash Flows Highlights (Amounts in thousands) | Activity | FY2019 | FY2018 | | :-------------------------------------- | :---------- | :---------- | | Net cash provided by operating activities | $9,428 | $21,238 | | Net cash used in investing activities | $(11,457) | $(14,946) | | Net cash provided by (used in) financing activities | $2,174 | $(6,404) | | Net increase (decrease) in cash and cash equivalents | $145 | $(112) | | Cash and cash equivalents at end of period | $605 | $460 | | Cash paid for interest | $7,064 | $5,052 | | Cash paid for income taxes, net | $890 | $260 | - Operating cash flow decreased significantly in 2019 due to increases in accounts receivable and inventories[230] - Investing activities included $6.063 million in purchases of property and equipment in 2019, and $5.424 million cash paid for business acquisitions[230] - Financing activities in 2019 included $452.055 million in proceeds from long-term debt and $440.130 million in repayments, along with $2.736 million for common stock repurchases[230] Notes to Consolidated Financial Statements Note 1—The Company Delta Apparel is a vertically-integrated international apparel company, a leader in digital print, with manufacturing in the U.S. and Central America - Delta Apparel, Inc. is a vertically-integrated, international apparel company with approximately 8,500 employees, designing, manufacturing, sourcing, and marketing a diverse portfolio of activewear and lifestyle apparel[232] - The company is a market leader in direct-to-garment digital print and fulfillment (DTG2Go) and sells products through various channels, including outdoor/sporting goods retailers, specialty stores, department stores, mass merchants, e-retailers, the U.S. military, and direct-to-consumer websites and stores[232] - The majority of products are internally manufactured in facilities located in the United States, El Salvador, Honduras, and Mexico, with distribution facilities strategically located throughout the U.S. for efficient customer service[233] Note 2—Significant Accounting Policies This note details significant accounting policies, including revenue recognition, goodwill, income taxes, and the upcoming adoption of ASC 842 (Leases) - Consolidated financial statements are prepared in conformity with GAAP and include Delta Apparel and its wholly-owned subsidiaries, as well as majority-owned Salt Life Beverage, LLC, with intercompany accounts eliminated[234] - The company operates in two distinct segments: Delta Group and Salt Life Group, which are similar in production but distinct in economic characteristics, products, marketing, and distribution[235] - Revenue is recognized when performance obligations are satisfied, typically upon delivery or shipment of products, and is recorded net of discounts, allowances, and operational chargebacks[250][252] Net Sales by Distribution Channel (Thousands) | Distribution Channel | FY2019 ($) | FY2019 (%) | FY2018 ($) | FY2018 (%) | | :------------------------ | :--------- | :--------- | :--------- | :--------- | | Retail | $4,396 | 1% | $3,560 | 1% | | Direct-to-consumer ecommerce | $5,526 | 1% | $5,339 | 1% | | Wholesale | $421,808 | 98% | $386,551 | 98% | | Net Sales | $431,730 | 100% | $395,450 | 100% | - The company adopted ASC 606 (Revenue from Contracts with Customers) effective October 1, 2018, using the modified retrospective method, which did not materially affect net sales but changed the recording of customer refunds as a liability[280][281] - ASC 842 (Leases) will be adopted in FY2020 and is expected to materially impact consolidated balance sheets by recognizing operating lease assets and liabilities, while ASU 2017-04 (Goodwill Impairment) will be effective in FY2021[283][284][286] Note 3—Acquisitions DTG2Go, LLC acquired Silk Screen Ink, Ltd. (SSI) for $12.729 million in October 2018, recognizing goodwill and intangible assets - On October 8, 2018, DTG2Go, LLC acquired substantially all assets of Silk Screen Ink, Ltd. (SSI), a direct-to-garment digital print provider[288] SSI Acquisition Purchase Price (Thousands) | Component | Amount ($) | | :------------------------- | :--------- | | Cash | $2,000 | | Promissory note | $7,000 | | Capital lease financing | $3,000 | | Net working capital adjustment | $729 | | Total consideration | $12,729| SSI Acquisition Allocation of Consideration (Thousands) | Asset/Liability | Allocation as of October 8, 2018 | Measurement Period Adjustments | Allocation as of September 28, 2019 | | :----------------------- | :------------------------------- | :----------------------------- | :-------------------------------- | | Accounts receivable | $1,184 | — | $1,184 | | Inventory | $1,127 | — | $1,127 | | Other current assets | $86 | — | $86 | | Fixed assets | $3,400 | — | $3,400 | | Goodwill | $3,380 | $1,300 | $4,680 | | Intangible assets | $4,020 | $(1,100) | $2,920 | | Accounts payable | $(668) | — | $(668) | | Consideration paid | $12,529 | $200 | $12,729 | Note 4—Inventories Total inventories, net of reserves, increased to $179.107 million in 2019, primarily driven by finished goods Inventories, Net (Thousands) | Category | September 28, 2019 | September 29, 2018 | | :---------------- | :----------------- | :----------------- | | Raw materials | $12,022 | $9,641 | | Work in process | $17,765 | $18,327 | | Finished goods | $149,320 | $147,015 | | Total | $179,107 | $174,983 | - Inventories are net of reserves of $10.0 million in 2019 and $10.5 million in 2018[292] Note 5—Property, Plant and Equipment Net property, plant and equipment increased to $61.404 million in FY2019, driven by machinery and construction in progress Property, Plant and Equipment (Thousands) | Category | Estimated Useful Life (in years) | September 28, 2019 | September 29, 2018 | | :--------------------------- | :------------------------------- | :----------------- | :----------------- | | Land and land improvements | 25 | $569 | $569 | | Buildings | 20 | $3,715 | $3,096 | | Machinery and equipment | 10 | $99,962 | $90,565 | | Computers and software | 3-10 | $21,065 | $20,724 | | Furniture and fixtures | 7 | $3,650 | $3,073 | | Leasehold improvements | 3-10 | $5,790 | $5,702 | | Vehicles and related equipment | 5 | $587 | $754 | | Construction in progress | N/A | $7,873 | $1,649 | | Less accumulated depreciation and amortization | | $(81,807) | $(74,018) | | Total, net | | $61,404 | $52,114 | - The acquisition cost of machinery and equipment acquired under capital leases increased to $28.0 million in 2019 from $16.6 million in 2018[293] Note 6—Goodwill and Intangible Assets Goodwill totaled $37.897 million and intangible assets $21.607 million in 2019, with $1.8 million amortization expense Goodwill and Intangible Assets (Thousands) | Category | Cost (2019) | Accumulated Amortization (2019) | Net Value (2019) | Cost (2018) | Accumulated Amortization (2018) | Net Value (2018) | Economic Life (yrs) | | :----------------------- | :---------- | :------------------------------ | :--------------- | :---------- | :------------------------------ | :--------------- | :------------------ | | Goodwill | $37,897 | $— | $37,897 | $33,217 | $— | $33,217 | N/A | | Intangibles: | | | | | | | | | Tradename/trademarks | $16,090 | $(3,278) | $12,812 | $16,090 | $(2,736) | $13,354 | 20 - 30 | | Customer relationships | $7,400 | $(993) | $6,407 | $4,500 | $(253) | $4,247 | 20 | | Technology | $1,720 | $(1,289) | $431 | $1,720 | $(1,105) | $615 | 10 | | License Agreements | $2,100 | $(630) | $1,470 | $2,100 | $(527) | $1,573 | 15 - 30 | | Non-compete agreements | $1,657 | $(1,170) | $487 | $1,637 | $(928) | $709 | 4 – 8.5 | | Total intangibles | $28,967 | $(7,360) | $21,607 | $26,047 | $(5,549) | $20,498 | | - Goodwill increased to $37.897 million in 2019 from $33.217 million in 2018, with the Delta Group segment including $18.0 million and the Salt Life Group segment including $19.9 million[296] - Amortization expense for intangible assets was $1.8 million in 2019 and $1.3 million in 2018. Estimated amortization expense is approximately $1.7 million for FY2020[297] Note 7—Accrued Expenses Accrued expenses increased to $20.791 million in FY2019, driven by employee compensation and refund liabilities Accrued Expenses (Thousands) | Category | September 28, 2019 | September 29, 2018 | | :------------------------------------- | :----------------- | :----------------- | | Accrued employee compensation and benefits | $13,388 | $11,138 | | Taxes accrued and withheld | $1,160 | $882 | | Refund liabilities | $1,047 | $— | | Accrued freight | $969 | $1,023 | | Income taxes payable | $379 | $— | | Other | $3,848 | $3,699 | | Total | $20,791 | $16,742 | - Refund liabilities of $1.047 million were recognized in 2019, reflecting the adoption of ASC 606[298] Note 8—Long-Term Debt Long-term debt increased to $109.296 million in FY2019, with the credit facility amended post-year-end to $170.0 million capacity Long-Term Debt (Thousands) | Debt Type | September 28, 2019 | September 29, 2018 | | :---------------------------------------------------------------------- | :----------------- | :----------------- | | Revolving U.S. credit facility | $101,957 | $85,746 | | Revolving credit facility with Banco Ficohsa (Honduras) | $5,000 | $4,958 | | Term loan with Banco Ficohsa (Honduras) - Nov 2014-Dec 2020 | $800 | $1,400 | | Term loan with Banco Ficohsa (Honduras) - June 2016-Apr 2022 | $776 | $1,067 | | Term loan with Banco Ficohsa (Honduras) - Oct 2017-Sep 2021 | $1,953 | $3,018 | | Salt Life acquisition promissory note | $— | $2,471 | | DTG2Go, LLC acquisition promissory note | $5,250 | $— | | Salt Life Beverage, LLC promissory note | $100 | $— | | Total Debt | $115,836 | $98,660 | | Less current portion of long-term debt | $(6,540) | $(6,577) | | Long-term debt, excluding current maturities | $109,296 | $92,083 | - The U.S. revolving credit facility allows borrowing up to $145 million (subject to borrowing base), maturing on May 10, 2021. As of September 28, 2019, $102.0 million was outstanding at an average interest rate of 4.2%, with $27.2 million additional borrowing capacity[304][306] - Honduran debt, including a revolving credit facility and term loans with Banco Ficohsa, is denominated in U.S. dollars and secured by assets of Honduran operations[312] Aggregate Maturities of Debt (Thousands) | Fiscal Year | Amount ($) | | :---------- | :--------- | | 2020 | $6,540 | | 2021 | $103,518 | | 2022 | $778 | | 2023 | $— | | 2024 | $— | | Thereafter | $5,000 | | Total | $115,836 | - Subsequent to year-end, on November 19, 2019, the credit facility was amended to increase borrowing capacity to $170.0 million and extend the maturity date to November 19, 2024[309][371] Note 9—Income Taxes Income tax provision decreased to $477 thousand in FY2019, with an effective rate of 5.5%, due to New Tax Legislation finalization Provision for Income Taxes (Thousands) | Category | FY2019 ($) | FY2018 ($) | | :------------ | :--------- | :--------- | | Current: | | | | Federal | $732 | $4,629 | | State | $(3) | $16 | | Foreign | $132 | $121 | | Total current | $861 | $4,766 | | Deferred: | | | | Federal | $(304) | $5,927 | | State | $(80) | $(233) | | Total deferred | $(384) | $5,694 | | Total Provision for Income Taxes | $477 | $10,460| - The effective income tax rate was 5.5% in fiscal year 2019, a significant decrease from 89.5% in 2018. Excluding the $10.7 million expense related to the New Tax Legislation, the adjusted effective tax rate in 2018 was a benefit of 1.7%[317] - The New Tax Legislation (Tax Cuts and Jobs Act of 2017) significantly revised the U.S. corporate income tax code, impacting the company's tax rate through a lower federal corporate income tax rate, a transition tax on foreign earnings, and a tax on global intangible low-taxed income (GILTI)[315][316] Deferred Tax Assets and Liabilities (Thousands) | Category | September 28, 2019 | September 29, 2018 | | :---------------------------------------- | :----------------- | :----------------- | | Deferred tax assets: | | | | State net operating loss carryforwards | $2,190 | $1,870 | | Inventories and reserves | $2,960 | $3,277 | | Accrued compensation and benefits | $1,789 | $1,881 | | Gross deferred tax assets | $8,377 | $7,863 | | Less valuation allowance | $(516) | $(493) | | Net deferred tax assets | $7,861 | $7,370 | | Deferred tax liabilities: | | | | Depreciation | $(4,611) | $(5,459) | | Goodwill and intangibles | $(3,183) | $(2,529) | | Gross deferred tax liabilities | $(7,866) | $(8,128) | | Net deferred tax liabilities | $(5) | $(758) | Note 10—Leases Future minimum lease payments totaled $63.893 million as of September 28, 2019, with $11.197 million due in FY2020 Future Minimum Lease Payments (Thousands) | Fiscal Year | Amount ($) | | :---------- | :--------- | | 2020 | $11,197 | | 2021 | $9,903 | | 2022 | $8,565 | | 2023 | $7,732 | | 2024 | $7,054 | | Thereafter | $19,442 | | Total | $63,893| - Rent expense for all operating leases was $10.6 million in fiscal year 2019, up from $9.9 million in 2018[325] Note 11—Employee Benefit Plans The company contributed $1.0 million to its 401(k) plan in 2019 and provides post-retirement life insurance benefits - The company contributed $1.0 million to its 401(k) retirement savings plan in fiscal year 2019, compared to $0.9 million in 2018[326] Post-Retirement Life Insurance Benefit Obligation (Thousands) | Metric | September 28, 2019 | September 29, 2018 | | :------------------------- | :----------------- | :----------------- | | Balance at beginning of year | $313 | $343 | | Interest expense | $2 | $3 | | Benefits paid | $(9) | $(34) | | Adjustment | $1 | $1 | | Balance at end of year | $307 | $313 | Note 12—Stock-Based Compensation Stock-based compensation expense was $2.1 million in FY2019, with 283,500 units outstanding under the 2010 Stock Plan - Total employee stock-based compensation expense was $2.1 million in fiscal year 2019 and $2.6 million in 2018, recognized in selling, general and administrative expenses[333] - The 2010 Stock Plan, re-approved in 2015, allows for various stock awards and is the sole plan for new grants since November 2010[330][334] Restricted Stock Unit and Performance Unit Award Activity | Metric | FY2019 Number of Units | FY2019 Weighted-average grant fair value ($) | FY2018 Number of Units | FY2018 Weighted-average grant fair value ($) | | :-------------------------------------- | :--------------------- | :------------------------------------------- | :--------------------- | :------------------------------------------- | | Units outstanding, beginning of fiscal period | 532,500 | 16.12 | 512,856 | 13.09 | | Units granted | — | — | 205,500 | 20.57 | | Units issued | (247,000) | 11.88 | (146,781) | 12.89 | | Units forfeited | (2,000) | 21.51 | (39,075) | 11.88 | | Units outstanding, end of fiscal period | 283,500 | 19.78 | 532,500 | 16.12 | - As of September 28, 2019, $1.1 million of total unrecognized compensation cost related to unvested restricted stock units and performance units is expected to be recognized over 1.2 years[341] Note 13—Business Segments The company operates in Delta Group and Salt Life Group segments, with FY2019 net sales of $389.075 million and $42.655 million, respectively - The Delta Group includes Delta Activewear, Soffe, and DTG2Go, focusing on unembellished knit apparel and custom decorated apparel for diverse audiences[347] - The Salt Life Group comprises lifestyle brands Salt Life® and COAST®, offering apparel, headwear, and accessories sold through specialty shops, department stores, outdoor retailers, and direct-to-consumer channels[347] Segment Performance Highlights (Thousands) | Metric | FY2019 ($) | FY2018 ($) | | :----------------------------------- | :-------