Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A—Basis of Presentation and Description of Business
We prepared the accompanying interim condensed consolidated financial statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the six months ended
April 2, 2016
, are not necessarily indicative of the results that may be expected for our fiscal year ending October 1, 2016. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. For more information regarding our results of operations and financial position, refer to the Consolidated Financial Statements and footnotes included in our Form 10-K for our fiscal year ended October 3, 2015, filed with the United States Securities and Exchange Commission (“SEC”).
“Delta Apparel”, the “Company”, and “we”, “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our domestic wholly-owned subsidiaries, including M.J. Soffe, LLC (“Soffe”), Junkfood Clothing Company (“Junkfood”), Salt Life, LLC ("Salt Life"), Art Gun, LLC (“Art Gun”), and other international subsidiaries, as appropriate to the context.
Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle basics and branded activewear apparel and headwear. We specialize in selling casual and athletic products through a variety of distribution channels and distribution tiers, including specialty stores, boutiques, department stores, mid and mass channels, e-retailers, and the U.S. military. Our products are also made available direct-to-consumer on our websites and in our retail stores. We believe this diversified distribution allows us to capitalize on our strengths to provide casual activewear to consumers purchasing from most types of retailers.
We design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and quality controls as well as leverage scale efficiencies. One of our strengths is the speed with which we can reach the market from design to delivery.
We have manufacturing operations located in the United States, El Salvador, Honduras and Mexico, and use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers.
We were incorporated in Georgia in 1999 and our headquarters is located at 322 South Main Street, Greenville, South Carolina 29601 (telephone number: 864-232-5200). Our common stock trades on the
NYSE MKT
under the symbol “DLA”. We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our 2016 fiscal year is a 52-week year and will end on October 1, 2016. Our 2015 fiscal year was a 53-week year and ended on October 3, 2015.
Reclassifications
Certain amounts have been corrected in the October 3, 2015, balance sheet to conform to the classification of those balances as of April 2, 2016. These include the reclassification of deposits from Prepaid expenses and other current assets to Other assets in the amount of
$1.2 million
and the reclassification of the current portion of interest rate swaps from Other liabilities to Accrued liabilities in the amount of
$0.3 million
.
Note B—Accounting Policies
Our accounting policies are consistent with those described in our Significant Accounting Policies in our Form 10-K for the fiscal year ended
October 3, 2015
, filed with the SEC.
Note C—New Accounting Standards
Recently Adopted Standards
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
, ("ASU 2015-17"). This new guidance requires businesses to classify deferred tax liabilities and assets on their balance sheets as noncurrent. Under existing accounting standards, a business must separate deferred income tax liabilities and assets into current and noncurrent. ASU 2015-17 was issued as a way to simplify the way businesses classify deferred tax liabilities and assets on their balance sheets. Public companies must apply ASU 2015-17 to fiscal years beginning after December 15, 2016. Companies must follow the requirements for interim periods within those fiscal years, but early adoption at the beginning of an interim or annual period is allowed for all entities. ASU 2015-17 was adopted in our fiscal year beginning October 4, 2015. The implementation of ASU 2015-17 was applied retroactively to the October 3, 2015, Condensed Consolidated Balance Sheet included in this Form 10-Q. As a result of this retroactive application, current deferred income tax assets of
$7.3 million
have been netted with noncurrent deferred income tax liabilities of
$7 thousand
and reclassified to noncurrent deferred income tax assets.
Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, ("ASU 2014-09"). This new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 is effective for annual periods beginning after December 15, 2017, for public business entities and permits the use of either the retrospective or cumulative effect transition method. Early application is permitted only for annual reporting periods beginning after December 15, 2016. ASU 2014-09 will therefore be effective in our fiscal year beginning September 30, 2018. We are evaluating the effect that ASU 2014-09 will have on our Consolidated Financial Statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
, ("ASU 2015-11"). This new guidance requires an entity to measure inventory at the lower of cost and net realizable value. Currently, entities measure inventory at the lower of cost or market. ASU 2015-11 replaces market with net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured under last-in, first-out or the retail inventory method. ASU 2015-11 requires prospective adoption for inventory measurements for fiscal years beginning after December 15, 2016, and interim periods within those years for public business entities. Early application is permitted. ASU 2015-11 will therefore be effective in our fiscal year beginning October 1, 2017. We are evaluating the effect that ASU 2015-11 will have on our Consolidated Financial Statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases,
(ASU 2016-02). ASU 2016-02 requires lessees to recognize assets and liabilities for most leases. All leases will be required to be recorded on the balance sheet with the exception of short-term leases. Early application is permitted. The guidance must be adopted using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. ASU 2016-02 will therefore be effective in our fiscal year beginning September 29, 2019. We are evaluating the effect that ASU 2016-02 will have on our Consolidated Financial Statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting,
(ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. ASU 2016-09 will therefore be effective in our fiscal year beginning October 1, 2017. We are evaluating the effect that ASU 2016-09 will have on our Consolidated Financial Statements and related disclosures.
Note D—Sale of
The Game
On March 2, 2015, we completed the sale of our
The Game
branded collegiate headwear and apparel business to David Peyser Sportswear, Inc., owner of MV Sport, Inc. for
$14.9 million
. The business sold consisted of
The Game
branded products sold nationally in college bookstores and through team dealers. This transaction further strengthened our balance sheet and enables us to focus on areas of our business that are more strategic to our long-term goals. Our Salt Life business and corporate business, Kudzu, previously operated within To The Game, LLC (now Salt Life, LLC) were not included in the sale of the collegiate part of the business.
The sale included finished goods inventory of
$6.0 million
,
$0.4 million
in fixed assets, and
$0.1 million
in other assets, along with the requirement that we indemnify up to
$0.3 million
of legal costs associated with a particular litigation matter which was subsequently settled. The transaction did not include accounts receivable which we subsequently collected in the normal course of business and certain undecorated apparel inventory. We incurred
$0.4 million
in direct selling expenses associated with the transaction. In addition, we incurred certain indirect costs associated with the transaction, including a
$0.8 million
devaluation of the inventory not included in the sale and
$1.4 million
in indirect incentive-based expenses.
The pre-tax gain on the sale of
The Game
assets, inclusive of the direct and indirect expenses, was
$5.6 million
. The transaction and associated indirect expenses were recorded in our
Condensed Consolidated Statements of Operations
in our 2015 second quarter as follows: (i) proceeds of
$14.9 million
less costs of assets sold and direct selling costs resulting in a gain of
$7.7 million
recorded as a gain on sale of business; (ii)
$1.4 million
in indirect expenses recorded in our selling, general and administrative expenses; and (iii)
$0.8 million
of indirect expenses recorded in our cost of goods sold. For income tax purposes, this gain and associated indirect expenses were treated as a discrete item and resulted in
$2.2 million
in income tax expense being recorded in our 2015 second quarter.
Note E—Salt Life Acquisition
On August 27, 2013, Salt Life purchased substantially all of the assets of Salt Life Holdings, LLC ("Salt Life Holdings"), including all of its domestic and international trademark rights in the Salt Life brand (the "Salt Life Acquisition").
The purchase price for the Salt Life Acquisition consisted of: (i) a cash payment at closing of $12,000,000, (ii) a deposit at closing of $3,000,000 into an escrow account to be held to secure indemnification obligations of the seller under the asset purchase agreement and to be held for a period of up to fifty-four months following the closing, and (iii) delivery of two promissory notes in the aggregate principal amount of $22,000,000. An
additional amount may be payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are met during the 2019 calendar year.
At acquisition, we recorded an accrual of
$3.4 million
for the fair value of the contingent consideration associated with the Salt Life Acquisition. We financed the cash portion of the purchase price through our Fourth Amended and Restated Loan and Security Agreement, as amended on August 27, 2013. We expensed all acquisition-related costs, totaling
$0.3 million
, in the selling, general and administrative expense line item of our
Condensed Consolidated Statements of Operations
in the quarter ended September 28, 2013.
On December 6, 2013, we entered into an agreement (the "IMG Agreement") with IMG Worldwide, Inc. ("IMG") that provides for the termination of the Salt Life brand license agreements entered into between Delta Apparel and IMG (as agent on behalf of Salt Life Holdings) prior to the Salt Life Acquisition as well as the agency agreement entered into between Salt Life Holdings and IMG prior to the Salt Life Acquisition. In addition, the IMG Agreement provides that Delta Apparel and Salt Life Holdings are released from all obligations and liabilities under those agreements or relating to the Salt Life Acquisition. Pursuant to the IMG Agreement, Salt Life and IMG entered into a separate, multi-year agency agreement, which has since been terminated, whereby IMG represented Salt Life with respect to the licensing of the Salt Life brand in connection with certain product and service categories. Salt Life agreed to pay IMG installments totaling
$3,500,000
to terminate these contractual arrangements. As a result, the above-referenced
$3,000,000
indemnification asset was released from escrow during the quarter ended December 28, 2013, and applied towards these payment obligations, along with additional amounts previously accrued for royalty obligations under the above-referenced Salt Life brand license agreements. During the years ended October 3, 2015, and September 27, 2014, we made payments of
$0.8 million
and
$2.1 million
, respectively, in accordance with the terms of the agreement. As of April 2, 2016, there was
one
quarterly installment of
$0.2 million remaining
. We have recorded the fair value of the liability as of April 2, 2016, on our financials with
$0.2 million
in accrued expenses.
The Salt Life Acquisition continues our strategy of building lifestyle brands that take advantage of our creative capabilities, vertical manufacturing platform and international sourcing competencies.
Prior to the Salt Life Acquisition, Salt Life, LLC sold Salt Life-branded products under exclusive license agreements which began in January 2011. As such, the results of Salt Life sales have been included in our Condensed Consolidated Financial Statements since that time.
We accounted for the Salt Life Acquisition pursuant to ASC 805,
Business Combinations,
with the purchase price allocated based upon fair value. We have identified certain intangible assets associated with Salt Life, including tradenames and trademarks, license agreements, non-compete agreements and goodwill. The total amount of goodwill has been accounted for as deductible for tax purposes. Components of the intangible assets recorded at acquisition are as follows (in thousands, except economic life data):
|
|
|
|
|
|
|
|
|
|
Economic Life
|
Goodwill
|
|
$
|
19,917
|
|
N/A
|
|
|
|
|
Intangibles:
|
|
|
|
Tradename/trademarks
|
|
16,000
|
|
30 years
|
License agreements
|
|
2,100
|
|
15 – 30 years
|
Non-compete agreements
|
|
770
|
|
6.6 years
|
Total intangibles
|
|
18,870
|
|
|
|
|
|
|
Total goodwill and intangibles
|
|
$
|
38,787
|
|
|
Note F—Inventories
Inventories, net of reserves of
$8.7 million
and
$8.4 million
as of
April 2, 2016
, and
October 3, 2015
, respectively, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
April 2,
2016
|
|
October 3,
2015
|
Raw materials
|
$
|
12,436
|
|
|
$
|
11,412
|
|
Work in process
|
18,183
|
|
|
19,071
|
|
Finished goods
|
133,040
|
|
|
117,889
|
|
|
$
|
163,659
|
|
|
$
|
148,372
|
|
As of April 2, 2016, finished goods inventory included
$2.2 million
in consignment inventory located at one of our large retail customers that had filed for bankruptcy.
Note G—Debt
Delta Apparel, Soffe, Junkfood, Salt Life, and Art Gun were previously borrowers under the May 27, 2011, Fourth Amended and Restated Loan and Security Agreement, with the financial institutions named therein, Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger, and Wells Fargo Capital Finance, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners. The May 27, 2011, Fourth Amended and Restated Loan Agreement (as subsequently amended, the "Amended Loan Agreement") was subsequently amended on each of August 27, 2013, September 4, 2013, September 26, 2014, and February 27, 2015.
Pursuant to the Amended Loan Agreement, the maximum line of credit under our U.S. revolving credit facility is $145 million (subject to borrowing base limitations), and matures on May 27, 2017. Provided that no event of default exists, we have the option to increase the maximum credit available under the facility to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. In fiscal year 2014, we paid $0.4 million in financing costs in conjunction with the September 26, 2014, amendment.
No financing costs were paid in conjunction with the February 27, 2015, amendment.
As of April 2, 2016, there was $94.7 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.25%, and additional borrowing availability of $22.2 million.
This credit facility includes a financial covenant requiring that if the amount of availability falls below the threshold amounts set forth in the Amended Loan Agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in the Amended Loan Agreement) for the preceding
12
-month period must not be less than
1.1
to
1.0
. We were not subject to the FCCR covenant at
April 2, 2016
, because our availability was above the minimum required under the Amended Loan Agreement. At April 2, 2016, our FCCR was above the required 1.1 to 1.0 ratio and therefore we would have satisfied our financial covenant had we been subject to it.
At April 2, 2016, and October 3, 2015, there was $7.6 million and $7.3 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
The Amended Loan Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB Codification No. 470,
Debt
("ASC 470")), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the Amended Loan Agreement as long-term debt.
In conjunction with the Salt Life Acquisition, we issued
two
promissory notes in the aggregate principal of
$22.0 million
, which included a one-time installment of
$9.0 million
that was due and paid as required on September 30, 2014, and quarterly installments commencing on March 31, 2015, with the final installment due on June 30, 2019. The promissory notes are zero-interest notes and state that interest will be imputed as required under Section 1274 of the Internal Revenue Code. We have imputed interest at
1.92%
and
3.62%
on the promissory notes that mature on June 30, 2016, and June 30, 2019, respectively. At
April 2, 2016
, the discounted value of the promissory notes was
$8.7 million
.
In March, 2011, we entered into a credit facility with Banco Ficohsa, a Honduran bank. This credit facility is secured by a first-priority lien on the assets of our Honduran operations and the loan is not guaranteed by our U.S. entities. The installment portion of the credit facility carries a fixed interest rate of
7%
for a term of
seven
years and is denominated in U.S. dollars. As of
April 2, 2016
, there was
$2.0 million
outstanding on the installment portion of this loan. The revolving credit portion of the loan has an average interest rate of
8.0%
with an ongoing
18
-month term (expiring March 2019) and is denominated in U.S. dollars. The revolving credit portion of the loan requires minimum payments during each
6
-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 agreement permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to re-borrow funds, subject to the objective covenants, the amounts have been classified as long-term debt. As of
April 2, 2016
, there was
$5.0 million
outstanding under the revolving portion of the credit facility.
In October, 2013, we entered into
two
new term loan agreements with Banco Ficohsa to finance our Honduran manufacturing expansion project. These loans are also not guaranteed by our U.S. entities and are secured by a first-priority lien on the assets of our Honduran operations. The first loan, an
18
-month agreement for
$1.8 million
, with a
7%
fixed interest rate, is denominated in U.S. dollars, and has ratable monthly principal and interest payments due through the end of the term. As of April 2, 2016, this loan had been extinguished. The second loan, a
seven
-year agreement for
$4.2 million
with a
7%
fixed interest rate, was denominated in U.S. dollars and had ratable monthly principal and interest payments due through the end of the term. In November 2014, this loan was re-financed to a
six
-year agreement for
$3.6 million
with a
7.5%
fixed interest rate. As of
April 2, 2016
, there was
$2.9 million
outstanding under this loan agreement. In April 2015, we entered into another term loan agreement with Banco Ficohsa to finance further capital expansion at our Honduran facilities. This loan is not guaranteed by our U.S. entities and is secured by a first-priority lien on the assets of our Honduran operations. The loan is a
seven
-year agreement for
$2.0 million
with an
8%
fixed interest rate, is denominated in U.S. dollars, and has ratable monthly principal and interest payments due through the end of the term. The first payment was due in June 2015. As of
April 2, 2016
, there was
$1.8 million
outstanding under this loan agreement. The carrying value of debt approximates the fair value.
Note H—Selling, General and Administrative Expense
We include in selling, general and administrative ("SG&A") expenses costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled
$3.9 million
and
$4.1 million
for the three months ended April 2, 2016, and March 28, 2015, respectively, and totaled
$7.6 million
and
$7.8 million
for the six months ended April 2, 2016, and March 28, 2015, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses, royalty payments on licensed products and other general and administrative expenses.
During the fourth quarter of fiscal year 2014, certain strategic initiatives were implemented to improve net profitability. This effort included streamlining our administrative workforce, delayering our management structure and streamlining decision-making and information flow, as well as reducing duplicative and excess fixed cost. During the fourth quarter of fiscal year 2014, we recorded a total of
$4.0 million
in SG&A expense associated with these strategic initiatives. As of October 3, 2015, approximately
$0.5 million
of these expenses were accrued and reported on our
Condensed Consolidated Balance Sheets
. During the first six months of fiscal year 2016,
no
additional expense was incurred in association with these strategic initiatives and
$67 thousand
was disbursed, leaving approximately
$0.5 million
remaining accrued on our April 2, 2016,
Condensed Consolidated Balance Sheets
.
Note I—Stock-Based Compensation
On February 4, 2015, our shareholders re-approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock Plan") that was originally approved by our shareholders on November 11, 2010. The re-approval of the 2010 Stock Plan, including the material terms of the performance goals included in the 2010 Stock Plan, enables us to continue to grant equity incentive compensation awards that are structured in a manner intended to qualify as tax deductible, performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986.
Since November 2010, no additional awards have been or will be granted under either the Delta Apparel Stock Option Plan ("Option Plan") or the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stock awards have been and will continue to be granted under the 2010 Stock Plan.
Compensation expense is recorded on the SG&A expense line item in our
Condensed Consolidated Statements of Operations
over the vesting periods. During the three and six months ended
April 2, 2016
, we recognized
$0.7 million
and
$1.1 million
, respectively, in stock-based compensation expense. During the three and six months ended March 28, 2015, we recognized
$0.7 million
and
$0.5 million
, respectively, in stock-based compensation expense.
2010 Stock Plan
Under the 2010 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted and the size and type of each award and manner in which such awards will vest. The awards available consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards.
The aggregate number of shares of common stock that may be delivered under the 2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the Option Plan or Award Plan that are subsequently forfeited or terminated for any reason before being exercised. The 2010 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in any given calendar year.
If a participant dies or becomes disabled (as defined in the 2010 Stock Plan) while employed by 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 2010 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2010 Stock Plan, and to make any other determinations that it deems necessary.
During the quarter ended April 2, 2016, restricted stock units representing
83,788
shares of our common stock were granted. These restricted stock units are service-based and
8,438
units are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ending October 1, 2016. The remaining
75,350
units are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ending September 30, 2017. Upon vesting,
one
-half of these awards are payable in the common stock of Delta Apparel, Inc. and are accounted for under the equity method pursuant to ASC 718 and
one
-half are payable in cash and are accounted for under the liability method pursuant to ASC 718.
During the quarter ended April 2, 2016, performance stock units representing
75,350
shares of our common stock were granted. These performance stock units are based on the achievement of certain performance criteria for the fiscal years ending October 1, 2016, and September 30, 2017, and are eligible to vest upon the filing of our Annual Report on Form 10-K for the year ending September 30, 2017. Upon vesting,
one
-half of these awards are payable in the common stock of Delta Apparel, Inc. and are accounted for under the equity method pursuant to ASC 718 and
one
-half are payable in cash and are accounted for under the liability method pursuant to ASC 718.
During the three months ended January 2, 2016, performance stock units representing
59,800
shares of our common stock vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended October 2, 2015. Of these performance units, one-half were payable in common stock and one-half were payable in cash and were issued in accordance with their respective agreements.
No
awards vested under the 2010 Stock Plan during the quarter ended April 2, 2016.
As of
April 2, 2016
, there was
$4.8 million
of total unrecognized compensation cost related to non-vested awards granted under the 2010 Stock Plan. This cost is expected to be recognized over a period of
2.7 years
.
Option Plan
All options granted under the Option Plan vested prior to October 3, 2015. As such,
no
expense was recognized during the three or six months ended April 2, 2016, or for the three or six months ended March 28, 2015.
No
options were exercised during the six months ended April 2, 2016. During the six months ended March 28, 2015, vested options representing
14,000
shares of our common stock were exercised, and the shares issued, in accordance with their respective agreements.
Award Plan
All awards granted under the Award Plan have vested and been exercised, and no awards remain outstanding.
Note J—Purchase Contracts
We have entered into agreements, and have fixed prices, to purchase yarn, natural gas, finished fabric, and finished apparel products. At
April 2, 2016
, minimum payments under these contracts were as follows (in thousands):
|
|
|
|
|
Yarn
|
$
|
37,295
|
|
Natural gas
|
83
|
|
Finished fabric
|
2,752
|
|
Finished products
|
21,512
|
|
|
$
|
61,642
|
|
Note K—Business Segments
We operate our business in two distinct segments: branded and basics.
Although the two segments are similar in their production processes and regulatory environments, they are distinct in their economic characteristics, products, marketing, and distribution methods.
In the second quarter of 2016, in connection with the ongoing evaluation of our current and future strategic initiatives, the Chief Operating Decision Maker began reviewing the performance of the branded and basics segments excluding general corporate expenses. Therefore, we will report our financial performance on the two reportable segments, branded and basics, with corporate activities stated separately. Our financial statements reflect this new reporting with prior periods adjusted accordingly.
The branded segment is comprised of our business units focused on specialized apparel garments and headwear to meet consumer preferences and fashion trends, and includes the Salt Life, Junkfood, and Soffe business units, as well as
The Game
business unit prior to its disposition on March 2, 2015. These branded embellished and unembellished products are sold through specialty and boutique shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, e-retailers, and the U.S. military. Products in this segment are marketed under our lifestyle brands of Salt Life®, Junk Food®, and Soffe®, as well as other labels.
The basics segment is comprised of our business units primarily focused on garment styles characterized by low fashion risk, and includes our Delta Activewear (which includes Delta Catalog and FunTees) and Art Gun business units. We market, distribute and manufacture knit apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight® for sale to a diversified audience ranging from large licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear companies, retailers, corporate industry programs, e-retailers, and sports licensed apparel marketers. Typically our private label products are sold with value-added services such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. Using digital print equipment and its proprietary technology, Art Gun embellishes garments to create private label, custom decorated apparel servicing the fast-growing e-retailer channels.
Robert W. Humphreys, our chief operating decision maker, and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges (“segment operating earnings (loss)”). Our segment operating earnings (loss) may not be comparable to similarly titled measures used by other companies. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table.
Information about our operations as of and for the
three
months ended
April 2, 2016
, and
March 28, 2015
, by operating segment, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basics
|
|
Branded
|
|
Corporate
|
|
Consolidated
|
Three months ended April 2, 2016
|
|
|
|
|
|
|
|
Net sales
|
$
|
69,840
|
|
|
$
|
39,320
|
|
|
$
|
—
|
|
|
$
|
109,160
|
|
Segment operating income (loss)
|
6,939
|
|
|
2,466
|
|
|
(3,474
|
)
|
|
5,931
|
|
Segment assets
|
173,025
|
|
|
157,870
|
|
|
9,783
|
|
|
340,678
|
|
|
|
|
|
|
|
|
|
Three months ended March 28, 2015
|
|
|
|
|
|
|
|
Net sales
|
$
|
71,388
|
|
|
$
|
43,654
|
|
|
$
|
—
|
|
|
$
|
115,042
|
|
Segment operating income (loss) *
|
1,707
|
|
|
8,089
|
|
|
(2,468
|
)
|
|
7,328
|
|
Segment assets
|
175,581
|
|
|
160,078
|
|
|
13,995
|
|
|
349,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basics
|
|
Branded
|
|
Corporate
|
|
Consolidated
|
Six months ended April 2, 2016
|
|
|
|
|
|
|
|
Net sales
|
$
|
131,356
|
|
|
$
|
67,975
|
|
|
$
|
—
|
|
|
$
|
199,331
|
|
Segment operating income (loss)
|
12,976
|
|
|
1,513
|
|
|
(6,333
|
)
|
|
8,156
|
|
|
|
|
|
|
|
|
|
Six months ended March 28, 2015
|
|
|
|
|
|
|
|
Net sales
|
$
|
129,068
|
|
|
$
|
79,354
|
|
|
$
|
—
|
|
|
$
|
208,422
|
|
Segment operating income (loss) *
|
1,362
|
|
|
7,313
|
|
|
(4,565
|
)
|
|
4,110
|
|
*The net gain from the sale of
The Game
that is included in the branded segment operating income is
$5.6 million
. Excluding the gain the branded the segment's operating income was
$2.5 million
and
$1.7 million
for the three and six months ended March 28, 2015, respectively.
The following table reconciles the segment operating earnings to the Company's consolidated income before provision from income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
April 2,
2016
|
|
March 28,
2015
|
|
April 2,
2016
|
|
March 28,
2015
|
Segment operating income
|
$
|
5,931
|
|
|
$
|
7,328
|
|
|
$
|
8,156
|
|
|
$
|
4,110
|
|
Unallocated interest expense
|
1,396
|
|
|
1,491
|
|
|
2,671
|
|
|
3,019
|
|
Consolidated income before provision for income taxes
|
$
|
4,535
|
|
|
$
|
5,837
|
|
|
$
|
5,485
|
|
|
$
|
1,091
|
|
Note L—Income Taxes
Our effective income tax provision for the six months ended April 2, 2016, was
25.0%
, compared to an effective income tax provision of
151.8%
for the same period in the prior year, and an effective tax provision of
19.9%
for the fiscal year ended October 3, 2015.
We benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than the United States. Based on our current projected pre-tax income and the anticipated amount of U.S. taxable income compared to profits in the offshore taxable and tax-free jurisdictions in which we operate, our estimated annual income tax rate for the fiscal year ending October 1, 2016, is expected to be approximately
25%
. However, changes in the mix of U.S. taxable income compared to profits in tax-free jurisdictions can have a significant impact on our overall effective tax rate.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Tax years 2012 through 2013, according to statute and with few exceptions, remain open to examination by various federal, state, local and foreign jurisdictions.
Note M—Derivatives and 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. Outstanding instruments as of
April 2, 2016
, are noted below:
|
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notational
Amount
|
|
Fixed LIBOR Rate
|
|
Maturity Date
|
Interest Rate Swap
|
September 9, 2013
|
|
$15 million
|
|
1.1700
|
%
|
|
September 9, 2016
|
Interest Rate Swap
|
September 9, 2013
|
|
$15 million
|
|
1.6480
|
%
|
|
September 11, 2017
|
Interest Rate Swap
|
September 19, 2013
|
|
$15 million
|
|
1.0030
|
%
|
|
September 19, 2016
|
Interest Rate Swap
|
September 19, 2013
|
|
$15 million
|
|
1.4490
|
%
|
|
September 19, 2017
|
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 Condensed Consolidated Statement of Operations.
FASB Codification No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
|
|
◦
|
Level 1
– Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
◦
|
Level 2
– Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.
|
|
|
◦
|
Level 3
– Unobservable inputs that are supported by little or
no
market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
|
The following financial assets (liabilities) are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
Period Ended
|
Total
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Interest Rate Swaps
|
|
|
|
|
|
|
|
April 2, 2016
|
$
|
(383
|
)
|
|
—
|
|
|
$
|
(383
|
)
|
|
—
|
|
October 3, 2015
|
$
|
(697
|
)
|
|
—
|
|
|
$
|
(697
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Cotton Options
|
|
|
|
|
|
|
|
April 2, 2016
|
$
|
21
|
|
|
$
|
21
|
|
|
—
|
|
|
—
|
|
October 3, 2015
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
|
|
|
|
|
|
April 2, 2016
|
$
|
(2,800
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(2,800
|
)
|
October 3, 2015
|
$
|
(3,100
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(3,100
|
)
|
The fair value of the interest rate swap agreements were derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in Level 2 of the fair value hierarchy. Fair values for debt are based on quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities (a Level 2 fair value measurement).
The following table summarizes the fair value and presentation in the
Condensed Consolidated Balance Sheets
for derivatives related to our interest swap agreements as of
April 2, 2016
, and
October 3, 2015
:
|
|
|
|
|
|
|
|
|
|
April 2,
2016
|
|
October 3,
2015
|
Deferred tax assets
|
148
|
|
|
—
|
|
Accrued Expenses
|
(302
|
)
|
|
(519
|
)
|
Deferred tax liabilities
|
—
|
|
|
269
|
|
Other liabilities
|
(81
|
)
|
|
(179
|
)
|
Accumulated other comprehensive loss
|
$
|
(235
|
)
|
|
$
|
(429
|
)
|
The fair value of the cotton option contracts were established based on the daily mark for identical assets on the open market as of the close of business on April 1, 2016, the last business day prior to our quarter ended April 2, 2016, which fall in Level 1 of the fair value hierarchy. The fair value of the cotton option contracts is included in the prepaid and other current assets line item on our Condensed Consolidated Balance Sheets.
The Salt Life Acquisition includes contingent consideration payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are met during the 2019 calendar year. We used a Monte Carlo model which used the historical results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the contingent consideration for Salt Life at acquisition, as well as to remeasure the contingent consideration related to the acquisition of Salt Life at each reporting period. Accordingly, the fair value measurement for contingent consideration falls in Level 3 of the fair value hierarchy.
At
April 2, 2016
, we had
$2.8 million
accrued in contingent consideration related to the Salt Life Acquisition, a
$0.3 million
reduction from the accrual at October 3, 2015. The reduction in the fair value of contingent consideration principally resulted from the reduced remaining time in the measurement period using a Monte Carlo model. We still expect sales in calendar year 2019 to approximate the expectations for calendar 2019 sales used in the valuation of contingent consideration at acquisition. No contingent consideration is expected to be paid under the terms of the Art Gun arrangement.
Assets Measured at Fair Value on a Non-Recurring Basis
Intangible assets acquired in connection with the Salt Life Acquisition are identified by type in Note E—Salt Life Acquisition. These valuations included significant unobservable inputs (Level 3).
Note N—Legal Proceedings
California Wage and Hour Litigation
We were served with a complaint in the Superior Court of the State of California, County of Los Angeles, on or about March 13, 2013, by a former employee of our Delta Activewear business unit at our Santa Fe Springs, California distribution facility alleging violations of California wage and hour laws and unfair business practices with respect to meal and rest periods, compensation and wage statements, and related claims (the "Complaint"). The Complaint is brought as a class action and seeks to include all of our Delta Activewear business unit's current and certain former employees within California who are or were non-exempt under applicable wage and hour laws. The Complaint also names as defendants Junkfood, Soffe, an independent contractor of Soffe, and a former employee, and sought to include all current and certain former employees of Junkfood, Soffe and the Soffe independent contractor within California who are or were non-exempt under applicable wage and hour laws. Delta Apparel, Inc. is now the only remaining defendant in this case. The Complaint seeks injunctive and declaratory relief, monetary damages and compensation, penalties, attorneys' fees and costs, and pre-judgment interest.
On or about August 22, 2014, we were served with an additional complaint in the Superior Court of the State of California, County of Los Angeles, by a former employee of Junkfood and two former employees of Soffe at our Santa Fe Springs, California distribution facility alleging violations of California wage and hour laws and unfair business practices the same or substantially similar to those alleged in the Complaint and seeking the same or substantially similar relief as sought in the Complaint. This complaint is brought as a class action and seeks to include all current and certain former employees of Junkfood, Soffe, our Delta Activewear business unit, the Soffe independent contractor named in the Complaint and an individual employee of such contractor within California who are or were non-exempt under applicable wage and hour laws. Delta Apparel, Inc. and the contractor employee have since been voluntarily dismissed from the case and the remaining defendants are Junkfood, Soffe, and the Soffe contractor.
On September 17, 2015, an agreement in principle was reached between all parties to settle the above-referenced wage and hour matters. Pursuant to that agreement, the defendants in the matters have agreed to pay an aggregate amount of
$300,000
in exchange for a comprehensive release of all claims at issue in the matters. Delta Apparel, Inc., Soffe and Junkfood have collectively agreed to contribute
$200,000
towards the aggregate settlement amount, which remains in our accrued expenses as of April 2, 2016. The settlement agreement requires the approval of the applicable court before it can be finalized and the parties are currently seeking the necessary approvals.
Other
In addition, at times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material effect on our operations, financial condition, or liquidity.
Note O—Repurchase of Common Stock
As of April 2, 2016, our Board of Directors authorized management to use up to $40.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.
During the March quarter of fiscal year 2016, we purchased 45,460 shares of our common stock for a total cost of $0.7 million. We did not purchase any shares of our common stock during the March quarter of fiscal year 2015. Through April 2, 2016, we have purchased 2,376,372 shares of our common stock for an aggregate of $29.2 million since the inception of our 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 April 2, 2016, $10.8 million remained available for future purchases under our Stock Repurchase Program, which does not have an expiration date.
The following table summarizes the purchases of our common stock for the quarter ended April 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of Shares Purchased
|
|
Average Price Paid per Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans
|
|
Dollar Value of Shares that May Yet Be Purchased Under the Plans
|
January 3, 2016 to February 6, 2016
|
|
17,078
|
|
|
$
|
13.16
|
|
|
17,078
|
|
|
|
$11.3
|
million
|
February 7, 2016 to March 5, 2016
|
|
15,539
|
|
|
$
|
15.83
|
|
|
15,539
|
|
|
|
$11.0
|
million
|
March 6, 2016 to April 2, 2016
|
|
12,843
|
|
|
$
|
17.93
|
|
|
12,843
|
|
|
|
$10.8
|
million
|
Total
|
|
45,460
|
|
|
$
|
15.42
|
|
|
45,460
|
|
|
|
$10.8
|
million
|
Note P—License Agreements
We have entered into license agreements that provide for royalty payments on net sales of licensed products as set forth in the agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in SG&A expenses) of approximately
$1.5 million
and
$2.2 million
in the March quarter of fiscal years 2016 and 2015, respectively. Royalty expense for the six months ended April 2, 2016 and March 28, 2015, were approximately
$3.4 million
and
$4.4 million
, respectively. The decline in royalty expense for the six months ended April 2, 2016, compared to the prior year is due to the sale of
The Game
branded collegiate headwear and apparel business, in March, 2015. See Note D—Sale of The Game, for further information on this transaction.
At
April 2, 2016
, based on minimum sales requirements, future minimum royalty payments required under these license agreements were as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amount
|
2016
|
$
|
257
|
|
2017
|
286
|
|
2018
|
5
|
|
2019
|
—
|
|
|
$
|
548
|
|
Note Q—Goodwill and Intangible Assets
Components of intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 2, 2016
|
|
October 3, 2015
|
|
|
|
Cost
|
Accumulated Amortization
|
Net Value
|
|
Cost
|
Accumulated Amortization
|
Net Value
|
|
Economic Life
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
36,729
|
|
$
|
—
|
|
$
|
36,729
|
|
|
$
|
36,729
|
|
$
|
—
|
|
$
|
36,729
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Intangibles:
|
|
|
|
|
|
|
|
|
|
Tradename/trademarks
|
$
|
17,530
|
|
$
|
(2,205
|
)
|
$
|
15,325
|
|
|
$
|
17,530
|
|
$
|
(1,896
|
)
|
$
|
15,634
|
|
|
20 – 30 yrs
|
Customer relationships
|
7,220
|
|
(3,840
|
)
|
3,380
|
|
|
7,220
|
|
(3,664
|
)
|
3,556
|
|
|
20 yrs
|
Technology
|
1,220
|
|
(764
|
)
|
456
|
|
|
1,220
|
|
(703
|
)
|
517
|
|
|
10 yrs
|
License agreements
|
2,100
|
|
(268
|
)
|
1,832
|
|
|
2,100
|
|
(216
|
)
|
1,884
|
|
|
15 – 30 yrs
|
Non-compete agreements
|
1,287
|
|
(783
|
)
|
504
|
|
|
1,287
|
|
(716
|
)
|
571
|
|
|
4 – 8.5 yrs
|
Total intangibles
|
$
|
29,357
|
|
$
|
(7,860
|
)
|
$
|
21,497
|
|
|
$
|
29,357
|
|
$
|
(7,195
|
)
|
$
|
22,162
|
|
|
|
Amortization expense for intangible assets was
$0.3 million
for the three months ended
April 2, 2016
, and
$0.4 million
for the three months ended
March 28, 2015
, and
$0.7 million
for each of the six months ended
April 2, 2016
, and
March 28, 2015
. Amortization expense is estimated to be approximately
$1.3 million
for fiscal years 2016, 2017, 2018, and 2019,
$1.2 million
for fiscal year 2020 and
$1.1 million
for fiscal year 2021.
Note R—Subsequent Events
Maiden Facility Closure
On May 10, 2016, we announced the closure of our textile manufacturing operations located at 100 West Pine Street, Maiden, North Carolina 28650 (the “Maiden Facility”), and the expansion of production at our Ceiba Textiles facility in Honduras in connection with our ongoing strategic manufacturing initiatives. The closure of the Maiden Facility is expected to be completed in the fourth quarter of the 2016 fiscal year. This continues the migration of our internal production to our lower-cost offshore facilities and the expansion and modernization of those facilities to allow us to take advantage of larger scale operations and efficiencies gained from operating those facilities at or nearer to capacity. Once the Maiden Facility closure is complete, we expect to sell the remaining assets, including the land, building, and any equipment we will not use at other facilities. We expect to incur costs of approximately
$3 million
relating to this manufacturing alignment. This initiative had no impact on our financial results for the quarter ended April 2, 2016.
Fifth Amended and Restated Credit Agreement
On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, National Association and Regions Bank. Our subsidiaries, M.J. Soffe, LLC, Junkfood Clothing Company, Salt Life, LLC, and Art Gun, LLC (together with the Company, the “Companies”), are co-borrowers under the Amended Credit Agreement.
The Amended Credit Agreement amends and restates the existing Fourth Amended and Restated Loan and Security Agreement dated May 27, 2011, which was previously amended by four amendments and had a maturity date of May 27, 2017. Bank of America, N.A. is departing from the syndicate of Lenders, and Regions Bank is joining the syndicate of Lenders. Bank of America, N.A. is also ceasing to serve as the syndication agent for the facility, and Merrill Lynch, Pierce, Fenner & Smith Incorporated will no longer be a joint book runner with Wells Fargo.
The Amended Credit Agreement allows us to borrow up to
$145 million
(subject to borrowing base limitations), including a maximum of
$25 million
in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit available to
$200 million
(subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. The credit facility matures on May 10, 2021. See Part II, Item 5 Other Information for additional detail regarding the Amended Credit Agreement.