Notes to Consolidated Financial Statements
October 1, 2016
NOTE 1—THE COMPANY
Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle basics and branded activewear apparel, and headwear and accessories. 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 design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and quality controls as well as leverage scale efficiencies.
We have manufacturing operations located in the United States, El Salvador, Honduras and Mexico, and use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of Delta Apparel and its wholly-owned domestic and foreign subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. We apply the equity method of accounting for investments in companies where we have
less than a 50%
ownership interest and over which we exert significant influence. We do not exercise control over these companies and do not have substantive participating rights. As such, these entities are not considered variable interest entities.
We operate our business in two distinct segments: basics and branded
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.
Revisions
Certain amounts have been corrected in the October 3, 2015, balance sheet and related footnotes to conform to the classification of those balances as of October 1, 2016. These include the revision of deposits from Prepaid expenses and other current assets to Other assets in the amount of
$1.3 million
and the revision of the current portion of interest rate swaps from Other liabilities to Accrued liabilities in the amount of
$0.3 million
.
(b) Fiscal Year:
We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. The 2016 and 2014 fiscal years were 52-week years that ended on October 1, 2016, and September 27, 2014, respectively. The 2015 fiscal year was a 53-week year that ended on October 3, 2015.
(c) Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are adjusted to reflect actual experience when necessary. Significant estimates and assumptions affect many items in our financial statements, for example: allowance for doubtful trade receivables, sales returns and allowances, inventory obsolescence, the carrying value of goodwill, and income tax assets and related valuation allowance. Our actual results may differ from our estimates.
(d) Cash and Cash Equivalents:
Cash and cash equivalents consists of cash and temporary investments with original maturities of three months or less.
(e) Accounts Receivable:
Accounts receivable consists primarily of receivables from our customers arising from the sale of our products, and we generally do not require collateral from our customers. We actively monitor our exposure to credit risk through the use of credit approvals and credit limits. Accounts receivable is presented net of reserves for allowances which include allowance for doubtful accounts, returns and allowances. The reserves for allowances were
$2.0 million
and
$3.0 million
, as of October 1, 2016, and October 3, 2015, respectively.
We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment. In situations where we are aware of a specific customer’s inability to meet its financial obligation, such as in the case of a bankruptcy filing, a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other customers, reserves are determined through analysis of the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. In addition, reserves are established for other concessions that have been extended to customers, including advertising, markdowns and other accommodations, net of historical recoveries. These reserves are determined based upon historical deduction trends and evaluation of current market conditions. Bad debt expense was less than
1%
of net sales in fiscal years 2016, 2015, and 2014.
(f) Inventories:
We state inventories at the lower of cost or market using the first-in, first-out method. Inventory cost includes materials, labor and manufacturing overhead on manufactured inventory, and all direct and associated costs, including inbound freight, to acquire sourced products. See Note 2(y) for further information regarding yarn procurements. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value.
(g) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. We depreciate and amortize our assets on a straight-line method over the estimated useful lives of the assets, which range from three to twenty-five years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Assets that we acquire under non-cancelable leases that meet the criteria of capital leases are capitalized in property, plant and equipment and amortized over the useful lives of the related assets. When we retire or dispose of assets, the costs and accumulated depreciation or amortization are removed from the respective accounts and we recognize any related gain or loss. Repairs and maintenance costs are charged to expense when incurred. Major replacements that substantially extend the useful life of an asset are capitalized and depreciated.
(h) Internally Developed Software Costs.
We account for internally developed software in accordance with FASB Codification No. 350-40,
Intangibles-Goodwill and Other, Internal-Use Software
. After technical feasibility has been established, we capitalize the cost of our software development process, including payroll and payroll benefits, by tracking the software development hours invested in the software projects. We amortize our software development costs in accordance with the estimated economic life of the software, which is generally three to ten years.
(i) Impairment of Long-Lived Assets (Including Amortizable Intangible Assets):
In accordance with FASB Codification No. 360,
Property, Plant, and Equipment
, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When evaluating assets for potential impairment, we compare the carrying amount of the asset to the undiscounted future net cash flows expected to be generated by the asset. If impairment is indicated, the asset is permanently written down to its estimated fair market value (based upon future discounted cash flows) and an impairment loss is recognized.
(j) Goodwill and Intangible Assets:
We recorded goodwill and intangible assets with definite lives, including trade names and trademarks, customer relationships, technology, and non-compete agreements, in conjunction with the acquisitions of Salt Life, Junkfood, and Art Gun. Intangible assets are amortized based on their estimated economic lives, ranging from four to twenty years. Goodwill represents the excess of the purchase price over the fair value of net identified tangible and intangible assets and liabilities acquired, and is not amortized. The total amount of goodwill is expected to be deductible for tax purposes. See Note 7 — Goodwill and Intangible Assets for further details.
(k) Impairment of Goodwill:
We evaluate the carrying value of goodwill annually or more frequently if events or circumstances indicate that an impairment loss may have occurred. Such circumstances could include, but are not limited to, a significant adverse change in business climate, increased competition or other economic conditions.
We complete our annual impairment test of goodwill on the first day of our third fiscal quarter. We estimate fair value of the applicable reporting unit or units using a discounted cash flow methodology. This represents a level 3 fair value measurement as defined under ASC 820,
Fair Value Measurements and Disclosures
, since the inputs are not readily observable in the marketplace.
The goodwill impairment testing process involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including sales, gross margins, selling, general and administrative expenses, capital expenditures, cash flows and the selection of an appropriate discount rate, all of which are subject to inherent uncertainties and subjectivity. When we perform goodwill impairment testing, our assumptions are based on annual business plans and other forecasted results, which we believe represent those of a market participant. We select a discount rate, which is used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment assessment.
Based on the annual impairment analysis, there is not an impairment on the goodwill associated with Junkfood and Salt Life, the only goodwill recorded on our financial statements.
Given the current macro-economic environment and the uncertainties regarding its potential impact on our business, there can be no assurance that our estimates and assumptions used in our impairment tests will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, it is possible that an impairment review may be triggered and goodwill may be impaired.
(l) Contingent Consideration:
At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration related to the Salt Life and Art Gun acquisitions in accordance with FASB Codification No. 805,
Business Combinations
(“ASC 805”). Based on the operating results and projections, we analyzed the fair value of the contingent consideration for both Salt Life and Art Gun as of October 1, 2016. The estimated fair value of the contingent consideration for Salt Life was
$2.5 million
and
$3.1 million
at October 1, 2016, and October 3, 2015, respectively. No contingent consideration is expected to be paid under the terms of the Art Gun arrangement.
(m) Self-Insurance Reserves:
Prior to January 1, 2015, our medical, prescription and dental care benefits were primarily self-insured. Effective January 1, 2015, our medical and prescription benefits became fully insured, but our dental insurance remained self-insured. Our prior self-insurance accruals were based on claims filed and estimates of claims incurred but not reported. We developed estimates
of claims incurred but not reported based upon the historical time it takes for a claim to be reported and paid, and historical claim amounts. Self-insurance reserves were less than
$0.1 million
as of October 1, 2016, and
October 3, 2015
.
(n) Revenue Recognition:
Revenues from product sales are recognized when ownership is transferred to the customer, which includes not only the passage of title, but also the transfer of the risk of loss related to the product. At this point, the sales price is fixed and determinable, and we are reasonably assured of the collectibility of the sale. The majority of our sales are shipped FOB shipping point and revenue is therefore recognized when the goods are shipped to the customer. For sales that are shipped FOB destination point, we do not recognize the revenue until the goods are received by the customer. Shipping and handling charges billed to our customers are included in net revenue and the related costs are included in cost of goods sold. Revenues are reported on net sales basis, which is computed by deducting product returns, discounts and estimated returns and allowances. We estimate returns and allowances on an ongoing basis by considering historical and current trends.
Royalty revenue is primarily derived from royalties paid to us by licensees of our intellectual property rights, which include, among other things, trademarks and copyrights. We execute license agreements with our licensees detailing the terms of the licensing arrangement. Royalties are generally recognized upon receipt of the licensees' royalty report, in accordance with the terms of the executed license agreement, and when all other revenue recognition criteria have been met.
(o) Sales Tax:
Sales tax collected from customers and remitted to various government agencies are presented on a net basis (excluded from revenues) in the Consolidated Statements of Operations.
(p) Cost of Goods Sold:
We include in cost of goods sold all manufacturing and sourcing costs incurred prior to the receipt of finished goods at our distribution facilities. The cost of goods sold principally includes product cost, purchasing costs, inbound freight charges, insurance, inventory write-downs, and depreciation and amortization expense associated with our manufacturing and sourcing operations. Our gross margins may not be comparable to other companies, since some entities include costs related to their distribution network in cost of goods sold and we exclude them from gross margin, including them instead in selling, general and administrative expenses.
(q) Selling, General and Administrative Expense:
We include in selling, general and administrative expenses costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and packing, and shipping goods for delivery to our customers. Distribution costs included in selling, general and administrative expenses totaled
$15.1 million
,
$16.8 million
and
$16.9 million
in fiscal years 2016, 2015 and 2014, respectively. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising and marketing expenses, royalty payments on licensed products, and other general and administrative expenses.
(r) Advertising Costs:
All costs associated with advertising and promoting our products are expensed during the year in which they are incurred and are included in selling, general and administrative expenses in the Consolidated Statements of Operations. We participate in cooperative advertising programs with our customers. Depending on the customer, our defined cooperative programs allow the customer to use from
2%
to
5%
of its net purchases from us towards advertisements of our products. Because our products are being specifically advertised, we are receiving an identifiable benefit resulting from the consideration for cooperative advertising. Therefore, pursuant to FASB Codification No. 605-50,
Revenue Recognition, Customers Payments and Incentives
, we record cooperative advertising costs as a selling expense and the related cooperative advertising reserve as an accrued liability. Advertising costs totaled
$4.4 million
,
$4.7 million
and
$3.6 million
in fiscal years 2016, 2015 and 2014, respectively. Included in these costs were
$1.1 million
in fiscal years 2016, 2015 and 2014 related to our cooperative advertising programs.
(s) Stock-Based Compensation:
Stock-based compensation cost is accounted for under the provisions of FASB Codification No. 718,
Compensation – Stock Compensation
(“ASC 718”), the Securities and Exchange Commission Staff Accounting Bulletin No. 107 ("SAB 107"), and the Securities and Exchange Commission Staff Accounting Bulletin No. 110 ("SAB 110"). ASC 718 requires all stock-based payments to employees, including grants of employee stock options, to be recognized as expense over the vesting period using a fair value method. We estimate the fair value of stock options using the Black-Scholes options pricing model. The fair value of our restricted stock awards is the quoted market value of our stock on the grant date. For performance-based stock awards, in the event we determine it is no longer probable that we will achieve the minimum performance criteria specified in the award, we reverse all of the previously recognized compensation expense in the period such a determination is made. We recognize the fair value, net of estimated forfeitures, as a component of selling, general and administrative expense in the Consolidated Statements of Operations over the vesting period.
(t) Income Taxes:
We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(u) Earnings per Share:
We compute basic earnings per share ("EPS") by dividing net income by the weighted average number of common shares outstanding during the year pursuant to FASB Codification No. 260,
Earnings Per Share
(“ASC 260”). Basic EPS includes no dilution. Diluted EPS is calculated, as set forth in ASC 260, by dividing net income by the weighted average number of common shares outstanding adjusted for the issuance of potentially dilutive shares. Potential dilutive shares consist of common stock issuable under the assumed exercise of outstanding stock options and awards using the treasury stock method. This method, as required by ASC
718, assumes that the potential common shares are issued and the proceeds from the exercise, along with the amount of compensation expense attributable to future services, are used to purchase common stock at the exercise date. The difference between the number of potential shares issued and the number of shares purchased is added as incremental shares to the actual number of shares outstanding to compute diluted EPS. Outstanding stock options and awards that result in lower potential shares issued than shares purchased under the treasury stock method are not included in the computation of diluted EPS since their inclusion would have an anti-dilutive effect on EPS.
(v) Foreign Currency Translation:
Our functional currency for our foreign operated manufacturing facilities is the United States dollar. We remeasure those assets and liabilities denominated in foreign currencies using exchange rates in effect at each balance sheet date. Property, plant and equipment and the related accumulated depreciation or amortization are recorded at the exchange rates in effect on the date we acquired the assets. Revenues and expenses denominated in foreign currencies are remeasured using average exchange rates for all periods presented. We recognize the resulting foreign exchange gains and losses as a component of other income and expense in the Consolidated Statements of Operations. These gains and losses are immaterial for all periods presented.
(w) Fair Value of Financial Instruments:
We use financial instruments in the normal course of our business. The carrying values approximate fair values for financial instruments that are short-term in nature, such as cash, accounts receivable and accounts payable. We estimate that the carrying value of our long-term debt approximates fair value based on the current rates offered to us for debt of the same remaining maturities.
(x) Other Comprehensive Income (Loss):
Other Comprehensive Income (Loss) consists of net earnings (loss) and unrealized gains (losses) from cash flow hedges, net of tax. Accumulated other comprehensive loss contained in the shareholders’ equity section of the Consolidated Balance Sheets was
$0.1 million
and
$0.4 million
as of October 1, 2016, and October 3, 2015, respectively, and was related to interest rate swap agreements.
(y) Yarn and Cotton Procurements:
We have a supply agreement with Parkdale to supply our yarn requirements until December 31, 2018. Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing operations, excluding yarns that Parkdale does not manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost.
Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of the purchase price of yarn, pursuant to the supply agreement, in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.
(z) Derivatives:
From time to time we enter into forward contracts, option agreements or other instruments to limit our exposure to fluctuations in interest rates and raw material prices with respect to long-term debt and cotton purchases, respectively. We determine at inception whether the derivative instruments will be accounted for as hedges.
We account for derivatives and hedging activities in accordance with FASB Codification No. 815,
Derivatives and Hedging
(“ASC 815”), as amended. ASC 815 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires the recognition of all derivative instruments as either assets or liabilities in the Consolidated Balance Sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair value depends upon whether or not a derivative instrument is designated as a hedge and, if so, the type of hedge. We include all derivative instruments at fair value in our Consolidated Balance Sheets. For derivative financial instruments related to the production of our products that are not designated as a hedge, we recognize the changes in fair value in cost of sales. For derivatives designated as cash flow hedges, to the extent effective, we recognize the changes in fair value in accumulated other comprehensive income (loss) until the hedged item is recognized in income. Any ineffectiveness in the hedge is recognized immediately in income in the line item that is consistent with the nature of the hedged risk. We formally document all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions, at the inception of the transactions.
We are exposed to counterparty credit risks on all derivatives. Because these amounts are recorded at fair value, the full amount of our exposure is the carrying value of these instruments. We only enter into derivative transactions with well established institutions and therefore we believe the counterparty credit risk is minimal.
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. During fiscal year 2016 we entered into various cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such the realized gains and losses associated with them were recorded within cost of goods sold on the Consolidated Statement of Operations. There were
no
significant raw material option agreements that were purchased during fiscal years 2016, 2015 or 2014.
In September 2013, we entered into
four
interest rate swap agreements, as follows:
|
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notational
Amount
|
|
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
|
During fiscal years 2016, 2015, and 2014, the interest rate swap agreements had minimal ineffectiveness and were considered highly-effective hedges.
The changes in fair value of the interest rate swap agreements resulted in an AOCI gain, net of taxes, of $0.3 million for the year ended October 1, 2016, an AOCI loss, net of taxes, of $0.2 million for the year ended October 3, 2015, an AOCI gain, net of taxes of $0.3 million for the year ended September 27, 2014.
See Note 16(d) - Derivatives for further details.
(aa) Recently Adopted Accounting Pronouncements:
In November 2015, the FASB issued 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, Consolidated Balance Sheet included in this Form 10-K. 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 in the October 3, 2015, Consolidated Balance Sheet.
(ab) Recently Issued Accounting Pronouncements 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 3—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 enabled 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 Consolidated Statements of Operations in the year ended October 3, 2015, 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 expense; and (iii)
$0.8 million
of indirect expenses recorded in our cost of goods sold.
NOTE 4—RESTRUCTURING PLAN
On May 10, 2016, in connection with our ongoing strategic manufacturing initiatives, we announced plans to restructure our manufacturing operations with the closing of our textile manufacturing facility in Maiden, North Carolina, the consolidation of sew facilities in Mexico, and the expansion of production at our lower-cost Ceiba Textiles facility in Honduras. In September, 2016, we sold the real estate and certain machinery, equipment and supply parts used in the Maiden facility for approximately
$1.7 million
. As part of the closing of the Maiden facility and the expansion of operations at our offshore facilities, we incurred the following costs (in thousands):
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|
|
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|
|
Fiscal Year Ended
|
|
|
October 1, 2016
|
Excess manufacturing costs related to the shutdown and start-up operations
|
|
$
|
1,096
|
|
Total expenses included in cost of goods sold
|
|
1,096
|
|
|
|
|
Employee termination costs
|
|
597
|
|
Fixed asset impairment
|
|
607
|
|
Inventory and supply part impairment
|
|
144
|
|
Other costs to exit facility
|
|
393
|
|
Total restructuring costs
|
|
1,741
|
|
Total manufacturing realignment expenses
|
|
$
|
2,837
|
|
All of these expenses were recorded in our basics segment. We do not expect to incur any significant additional costs related to the manufacturing initiative in fiscal year 2017. At the end of 2016, we had paid
$0.4 million
in employee termination benefits and had
$0.2 million
accrued.
NOTE 5—INVENTORIES
Inventories, net of reserves of
$8.8 million
and
$8.4 million
as of October 1, 2016, and October 3, 2015, respectively, consist of the following (in thousands):
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October 1,
2016
|
|
October 3,
2015
|
Raw materials
|
$
|
11,442
|
|
|
$
|
11,412
|
|
Work in process
|
18,158
|
|
|
19,071
|
|
Finished goods
|
134,647
|
|
|
117,889
|
|
|
$
|
164,247
|
|
|
$
|
148,372
|
|
Raw materials include finished yarn and direct materials for the basics segment, undecorated garments for the Art Gun and Junkfood businesses and direct embellishment materials for the branded segment.
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands, except economic life data):
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Estimated
Useful Life
|
|
October 1,
2016
|
|
October 3,
2015
|
Land and land improvements
|
25 years
|
|
$
|
572
|
|
|
$
|
996
|
|
Buildings
|
20 years
|
|
3,369
|
|
|
8,706
|
|
Machinery and equipment
|
10 years
|
|
72,068
|
|
|
80,843
|
|
Computers and software
|
3-10 years
|
|
20,889
|
|
|
20,635
|
|
Furniture and fixtures
|
7 years
|
|
1,977
|
|
|
3,126
|
|
Leasehold improvements
|
3-10 years
|
|
3,686
|
|
|
2,645
|
|
Vehicles and related equipment
|
5 years
|
|
808
|
|
|
821
|
|
Construction in progress
|
N/A
|
|
3,719
|
|
|
3,256
|
|
|
|
|
107,088
|
|
|
121,028
|
|
Less accumulated depreciation and amortization
|
|
|
(63,585
|
)
|
|
(81,375
|
)
|
|
|
|
$
|
43,503
|
|
|
$
|
39,653
|
|
NOTE 7—GOODWILL AND INTANGIBLE ASSETS
Goodwill and components of intangible assets consist of the following (in thousands, except economic life data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 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
|
$
|
17,620
|
|
$
|
(2,514
|
)
|
$
|
15,106
|
|
|
$
|
17,530
|
|
$
|
(1,896
|
)
|
$
|
15,634
|
|
|
20 - 30 yrs
|
Customer relationships
|
7,220
|
|
(4,016
|
)
|
3,204
|
|
|
7,220
|
|
(3,664
|
)
|
3,556
|
|
|
20 yrs
|
Technology
|
1,220
|
|
(826
|
)
|
394
|
|
|
1,220
|
|
(703
|
)
|
517
|
|
|
10 yrs
|
License Agreements
|
2,100
|
|
(320
|
)
|
1,780
|
|
|
2,100
|
|
(216
|
)
|
1,884
|
|
|
15 - 30 yrs
|
Non-compete agreements
|
1,287
|
|
(849
|
)
|
438
|
|
|
1,287
|
|
(716
|
)
|
571
|
|
|
4 – 8.5 yrs
|
Total intangibles
|
$
|
29,447
|
|
$
|
(8,525
|
)
|
$
|
20,922
|
|
|
$
|
29,357
|
|
$
|
(7,195
|
)
|
$
|
22,162
|
|
|
|
Goodwill represents the acquired goodwill net of the cumulative impairment losses of
$0.6 million
. In August 2016, we acquired Coast Apparel for
$313 thousand
, which resulted in additional intangible assets of
$90 thousand
. Amortization expense for intangible assets was
$1.3 million
for the years ended
October 1, 2016
,
October 3, 2015
, and
September 27, 2014
. Amortization expense is estimated to be approximately
$1.3 million
for fiscal years 2017, 2018 and 2019, approximately
$1.2 million
for fiscal year 2020, and approximately
$1.1 million
for fiscal year 2021.
NOTE 8—ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Accrued employee compensation and benefits
|
$
|
12,899
|
|
|
$
|
10,704
|
|
Taxes accrued and withheld
|
1,003
|
|
|
1,455
|
|
Accrued insurance
|
263
|
|
|
349
|
|
Accrued advertising
|
256
|
|
|
363
|
|
Accrued royalties
|
1,653
|
|
|
2,173
|
|
Accrued commissions
|
460
|
|
|
512
|
|
Accrued freight
|
1,105
|
|
|
1,501
|
|
Other
|
4,067
|
|
|
3,939
|
|
|
$
|
21,706
|
|
|
$
|
20,996
|
|
During the fourth quarter of fiscal year 2014, we implemented certain initiatives to improve our results of operations and financial position. As a result of these initiatives, approximately
$4.0 million
in expenses were recognized during the fourth quarter of fiscal year 2014, consisting of
$2.2 million
in severance expense,
$0.9 million
in expense related to reduced manufacturing production, and
$1.0 million
in fixed asset impairments.
These expenses were reported in our Consolidated Statement of Operations as follows (in thousands):
|
|
|
|
|
|
September 27,
2014
|
Cost of goods sold
|
$
|
868
|
|
Selling, general and administrative expenses
|
2,169
|
|
Other expense
|
984
|
|
|
$
|
4,021
|
|
During fiscal years 2016 and 2015, no additional expenses were incurred in association with these 2014 strategic initiatives. As of October 3, 2015,
$0.5 million
of these expenses were accrued and reported on our Consolidated Balance Sheet.
No
expenses remained accrued as of October 1, 2016.
NOTE 9—LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Revolving U.S. credit facility, interest at base rate or adjusted LIBOR rate plus an applicable margin (interest at 2.7% on October 1, 2016) due May 2021
|
$
|
92,137
|
|
|
$
|
—
|
|
Revolving credit facility, interest at base rate or adjusted LIBOR rate plus an applicable margin (interest at 2.7% on October 3, 2015) due May 2017
|
—
|
|
|
79,550
|
|
Revolving credit facility with Banco Ficohsa, a Honduran bank, interest at 8% due March 2019 (denominated in U.S. dollars)
|
5,000
|
|
|
4,390
|
|
Term loan with Banco Ficohsa, a Honduran bank, interest at 7%, monthly installments beginning March, 2011 through March 2018 (denominated in U.S. dollars)
|
1,459
|
|
|
2,432
|
|
Term loan with Banco Ficohsa, a Honduran bank, interest at 7.5%, monthly installments beginning November 2014 through December 2020 (denominated in U.S. dollars)
|
2,600
|
|
|
3,150
|
|
Term loan with Banco Ficohsa, a Honduran bank, interest at 8%, monthly installments beginning June 2016 through April 2022 (denominated in U.S. dollars)
|
1,650
|
|
|
1,881
|
|
Term loan with Banco Ficohsa, a Honduran bank, interest at 8%, monthly installments beginning June 2016 through July 2017 (denominated in U.S. dollars)
|
4,833
|
|
|
—
|
|
Salt Life acquisition promissory note, imputed interest at 1.92%, one-time installment due September 30, 2014, quarterly installments beginning April 2015 through June 2016
|
—
|
|
|
2,979
|
|
Salt Life acquisition promissory note, imputed interest at 3.62%, quarterly payments beginning September 2016 through June 2019
|
8,116
|
|
|
7,830
|
|
|
115,795
|
|
|
102,212
|
|
Less current installments
|
(9,192
|
)
|
|
(8,340
|
)
|
Long-term debt, excluding current installments
|
$
|
106,603
|
|
|
$
|
93,872
|
|
On May 10, 2016, we amended our U.S. revolving credit facility and 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 our Fourth Amended and Restated Loan and Security Agreement dated May 27, 2011, which was amended on four occasions and had a maturity date of May 27, 2017. Bank of America, N.A. departed the syndicate of Lenders and Regions Bank joined the syndicate of Lenders for the Amended Credit Agreement. Bank of America, N.A. also ceased to serve as the syndication agent for the facility, and Merrill Lynch, Pierce, Fenner and Smith Incorporated is no longer 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 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. We paid $1.0 million in financing costs associated with the Amended Credit Agreement.
Our U.S. revolving credit facility is secured by a first-priority lien on substantially all of the real and personal property of Delta Apparel, Junkfood, Soffe, Salt Life, and Art Gun. All loans bear interest at rates, at the Company's option, based on either (a) an adjusted LIBOR rate plus an applicable margin or (b) a base rate plus an applicable margin, with the base rate equal to the greatest of (i) the
federal funds
rate plus
0.5%
, (ii) the
LIBOR
rate plus
1.0%
, or (iii) the
prime rate
announced by Wells Fargo, National Association. The facility requires monthly installment payments of approximately
$0.2 million
in connection with fixed asset amortizations, and these amounts reduce the amount of availability under the facility. Annual facility fees are
0.25%
or
0.375%
(subject to average excess availability) of the amount by which
$145 million
exceeds the average daily principal balance of the outstanding loans and letters of credit accommodations. The annual facility fees are charged monthly based on the principal balances during the immediately preceding month.
At October 1, 2016, we had $92.1 million outstanding under our U.S. revolving credit facility at an average interest rate of 2.7%, and had the ability to borrow an additional $32.8 million.
This credit facility includes the financial covenant that if the amount of availability falls below the threshold amounts set forth in the Amended Credit Agreement, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in the Amended Credit Agreement) for the preceding
12
-month period must not be less than
1.1 to 1.0.
We were not subject to the FCCR covenant as of
October 1, 2016
, because our availability was above the minimum required under the Amended Credit Agreement. At October 1, 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. In addition, the credit facility includes customary conditions to funding, representations and warranties, covenants, and events of default. The covenants include, among other things, limitations on asset sales, consolidations, mergers, liens, indebtedness, loans, investments, guaranties, acquisitions, dividends, stock repurchases, and transactions with affiliates.
Proceeds of the loans made pursuant to the Amended Credit Agreement may be used for permitted acquisitions (as defined in the Amended Credit Agreement), general operating expenses, working capital, other corporate purposes, and to finance credit facility fees and expenses.
Pursuant to the terms of our credit facility, we are allowed to make cash dividends and stock repurchases if (i) as of the date of the payment or repurchase and after giving effect to the payment or repurchase, we have availability on that date of not less than 15% of the lesser of the borrowing base or the commitment, and average availability for the 30-day period immediately preceding that date of not less than 15% of the lesser of the borrowing base or the commitment; and (ii) the aggregate amount of dividends and stock repurchases after May 10, 2016, does not exceed $10 million plus 50% of our cumulative net income (as defined in the Amended Credit Agreement) from the first day of the third quarter of fiscal year 2016 to the date of determination.
At October 1, 2016, and October 3, 2015, there was $10.7 million and $7.3 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.
The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB Codification No. 470,
Debt
("ASC 470")), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the facility as long-term debt.
In August 2013, we acquired Salt Life and issued two promissory notes in the aggregate principal amount of $22.0 million, which included a one-time installment of $9.0 million that was 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 October 1, 2016, the discounted value of the promissory note was $8.1 million.
On December 6, 2013, we entered into an agreement (the "IMG Agreement") with IMG Worldwide, Inc. ("IMG") that provided for the termination of the Salt Life brand license agreements entered into between Delta and IMG (as agent on behalf of Salt Life Holdings) prior to the acquisition of Salt Life as well as the agency agreement entered into between Salt Life Holdings and IMG prior to the acquisition of Salt Life. In addition, the IMG Agreement provides that Delta and Salt Life Holdings are released from all obligations and liabilities under those agreements or relating to the acquisition of Salt Life. 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 the existing arrangements. There was a
$3,000,000
indemnification asset that was recorded as part of the purchase of Salt Life that 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 year ended October 3, 2015, we made payments of
$0.8 million
in accordance with the terms of the agreement. As of October 3, 2015 there were 3 quarterly installments of
$195 thousand
remaining, and we had recorded the fair value of the liability as of October 3, 2015, in our financials with
$0.6 million
in accrued expenses. During the year ended October 1, 2016, we made the final payments of
$0.6 million
in accordance with the terms of the agreement and no amounts remain accrued in our financials as of October 1, 2016.
Since March, 2011, we have entered into loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, in order to finance both the operations and capital expansion of our Honduran facilities. Each of these loans are secured by a first-priority lien on the assets of our Honduran operations, and are not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars and the carrying value of the debt approximates the fair value. The revolving credit facility requires minimum payments during each
six
-month period of the
18
-month term; however the loan agreement permits additional drawdowns to the extent payments are made and certain objective covenants are met. The current revolving Honduran debt, by its nature, is not long-term, as it requires scheduled payments each
six
months. However, as the loan permits us to re-borrow funds up to the amount repaid, subject to certain covenants, and we intend to re-borrow funds, subject to the objective covenants, the amounts have been classified as long-term debt. Information about these loans and the outstanding balance as of October 1, 2016, is listed as part of the long-term debt schedule above.
The aggregate maturities of debt at
October 1, 2016
, are as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2017
|
$
|
9,192
|
|
2018
|
7,955
|
|
2019
|
10,835
|
|
2020
|
4,469
|
|
2021
|
83,149
|
|
Thereafter
|
195
|
|
|
$
|
115,795
|
|
NOTE 10—INCOME TAXES
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
78
|
|
|
60
|
|
|
79
|
|
Foreign
|
179
|
|
|
186
|
|
|
158
|
|
Total current
|
$
|
293
|
|
|
$
|
246
|
|
|
$
|
237
|
|
Deferred:
|
|
|
|
|
|
Federal
|
$
|
1,462
|
|
|
$
|
1,320
|
|
|
$
|
(5,807
|
)
|
State
|
326
|
|
|
439
|
|
|
(923
|
)
|
Total deferred
|
1,788
|
|
|
1,759
|
|
|
(6,730
|
)
|
Provision for (benefit from) income taxes
|
$
|
2,081
|
|
|
$
|
2,005
|
|
|
$
|
(6,493
|
)
|
For financial reporting purposes our income (loss) before provision for (benefit from) income taxes includes the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
United States
|
$
|
3,966
|
|
|
$
|
3,434
|
|
|
$
|
(16,832
|
)
|
Foreign
|
7,079
|
|
|
6,664
|
|
|
9,379
|
|
|
$
|
11,045
|
|
|
$
|
10,098
|
|
|
$
|
(7,453
|
)
|
A reconciliation between actual provision for (benefit from) income taxes and the provision for income taxes computed using the federal statutory income tax rate of
34.0%
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
Income tax expense at the statutory rate
|
$
|
3,755
|
|
|
$
|
3,433
|
|
|
$
|
(2,533
|
)
|
State income tax expense, net of federal income tax effect
|
447
|
|
|
374
|
|
|
(893
|
)
|
Impact of state rate changes
|
116
|
|
|
—
|
|
|
—
|
|
Rate difference and nondeductible items in foreign jurisdictions
|
54
|
|
|
(30
|
)
|
|
(55
|
)
|
Impact of foreign earnings in tax-free zone
|
(2,319
|
)
|
|
(2,168
|
)
|
|
(3,098
|
)
|
Valuation allowance adjustments
|
(71
|
)
|
|
—
|
|
|
4
|
|
Nondeductible compensation
|
—
|
|
|
335
|
|
|
—
|
|
Nondeductible amortization and other permanent differences
|
96
|
|
|
81
|
|
|
76
|
|
Other
|
3
|
|
|
(20
|
)
|
|
6
|
|
Provision for (benefit from) income taxes
|
$
|
2,081
|
|
|
$
|
2,005
|
|
|
$
|
(6,493
|
)
|
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. We have not provided deferred taxes on the
$66.3 million
of undistributed earnings of our foreign subsidiaries where the earnings are considered to be permanently reinvested. The undistributed earnings would become taxable in the United States if we decided to repatriate earnings for business, tax or foreign exchange reasons. If we made that decision, U.S. income taxes would be provided for net of foreign taxes already paid. The determination of the unrecognized deferred tax liability associated with these unremitted earnings is not practical at this time.
Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
Deferred tax assets:
|
|
|
|
|
Federal net operating loss carryforwards
|
$
|
6,256
|
|
|
$
|
7,842
|
|
|
State net operating loss carryforwards
|
1,784
|
|
|
2,362
|
|
|
Charitable donation carryforward
|
—
|
|
|
28
|
|
|
Derivative — interest rate contracts
|
70
|
|
|
268
|
|
|
Alternative minimum tax credit carryforward
|
135
|
|
|
99
|
|
|
Currently nondeductible accruals
|
7,613
|
|
|
6,029
|
|
|
Gross deferred tax assets
|
15,858
|
|
|
16,628
|
|
|
Less valuation allowance — state net operating loss
|
(131
|
)
|
|
(202
|
)
|
|
Net deferred tax assets
|
15,727
|
|
|
16,426
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation
|
(2,868
|
)
|
|
(2,941
|
)
|
|
Goodwill and intangibles
|
(7,463
|
)
|
|
(6,024
|
)
|
|
Other
|
(150
|
)
|
|
(167
|
)
|
|
Gross deferred tax liabilities
|
(10,481
|
)
|
|
(9,132
|
)
|
|
Net deferred tax asset
|
5,246
|
|
|
7,294
|
|
|
As of October 1, 2016, and October 3, 2015, we had federal net operating loss carryforwards of approximately
$18.3 million
and
$23.1 million
, respectively. The deferred tax asset resulting from federal net operating losses for October 1, 2016, and October 3, 2015, were
$6.3 million
and
$7.8 million
, respectively. There is no carryback opportunity for these losses and the carryforwards expire at various intervals from 2033 to 2035. We determined that no valuation allowance is required, as we expect that all such carryforwards more likely than not will be realized within statutory periods of carryover and utilization.
As of October 1, 2016, and October 3, 2015, we had state net operating loss carryforwards of approximately
$45.4 million
and
$58.5 million
, respectively. These carryforwards expire at various intervals from 2019 through 2036. Our deferred tax asset related to state net operating loss carryforwards is reduced by a valuation allowance to result in deferred tax assets we consider more likely than not to be realized.
For both federal and state purposes, the ultimate realization of deferred tax assets depends upon the generation of future taxable income or tax planning strategies during the periods in which those temporary differences become deductible or when the carryforwards are available.
FASB Codification No. 740,
Income Taxes
(“ASC 740”) requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than
fifty percent
likely of being realized upon ultimate settlement. Accrued interest and penalties related to unrecognized tax benefits would also be recorded. We did not have any material unrecognized tax benefits as of
October 1, 2016
, or October 3, 2015.
The tax years 2012 to 2014 according to statute and with few exceptions, remain open to examination by various federal, state, local and foreign jurisdictions.
NOTE 11—LEASES
We have several non-cancelable operating leases primarily related to buildings, office equipment and computer systems. Certain land and building leases have renewal options generally for periods ranging from
5
to
10
years.
Future minimum lease payments under non-cancelable operating leases as of
October 1, 2016
, were as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2017
|
$
|
7,177
|
|
2018
|
6,595
|
|
2019
|
6,237
|
|
2020
|
5,897
|
|
2021
|
3,633
|
|
Thereafter
|
10,396
|
|
|
$
|
39,935
|
|
Rent expense for all operating leases was
$9.3 million
,
$9.4 million
and
$9.8 million
for fiscal years 2016, 2015, and 2014, respectively.
NOTE 12—EMPLOYEE BENEFIT PLANS
We sponsor and maintain a 401(k) retirement savings plan (the “401(k) Plan”) for our employees who meet certain requirements. The 401(k) Plan permits participants to make pre-tax contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code, as well as a Roth Plan that allows for after tax contributions. The 401(k) Plan provides for us to make a guaranteed match of a defined portion of the employee’s contributions. During fiscal years 2016, 2015, and 2014 we contributed approximately
$1.1 million
,
$1.1 million
, and
$1.3 million
, respectively, to the 401(k) Plan.
We provide post-retirement life insurance benefits for certain retired employees. The plan is noncontributory and is unfunded, and therefore, benefits and expenses are paid from our general assets as they are incurred. All of the employees in the plan are fully vested and the plan was closed to new employees in 1990. The discount rate used in determining the liability was
6.0%
for fiscal years 2016 and 2015. The following table presents the benefit obligation for these benefits, which is included in accrued expenses in the accompanying balance sheets (in thousands).
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
Balance at beginning of year
|
$
|
412
|
|
|
$
|
443
|
|
Interest expense
|
6
|
|
|
1
|
|
Benefits paid
|
(81
|
)
|
|
(32
|
)
|
Adjustment
|
7
|
|
|
—
|
|
Balance at end of year
|
$
|
344
|
|
|
$
|
412
|
|
NOTE 13—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.
We account for these plans pursuant to ASC 718, SAB 107 and SAB 110. Shares are generally issued from treasury stock upon exercise of the options or the vesting of the restricted stock units and performance units. ASC 718 requires that cash flows from tax benefits attributable to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) be classified as financing cash flows. Compensation expense is recorded on the selling, general and administrative expense line item in our Consolidated Statements of Operations over the vesting periods. Total employee stock-based compensation expense for fiscal years 2016 and 2015 was
$2.0 million
and
$1.9 million
, respectively. During the 2014 fiscal year, we reduced this expense by
$90 thousand
in connection with our outstanding awards due to adjustments to the expected vesting of certain performance units granted and known forfeitures of certain restricted stock units granted.
Associated with the compensation cost are income tax benefits recognized of
$0.8 million
and
$0.7 million
in fiscal years 2016 and 2015, respectively. Tax expense of
$35 thousand
, associated with the reduction of expense, was recognized in fiscal year 2014.
2010 Stock Plan
Under the 2010 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted and the size and type of each award and manner in which such awards will vest. The awards available consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, performance units, and other stock and cash awards.
The aggregate number of shares of common stock that may be delivered under the 2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the Option Plan or Award Plan that are subsequently forfeited or terminated for any reason before being exercised. The 2010 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in any given calendar year.
If a participant dies or becomes disabled (as defined in the 2010 Stock Plan) while employed by or serving as a director, all unvested awards become fully vested. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2010 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2010 Stock Plan, and to make any other determinations that it deems necessary.
Stock Options
No stock options were granted during fiscal year 2016. All outstanding options granted by the Company have vested and are exercisable.
A summary of the stock option activity during the periods ended October 1, 2016, October 3, 2015, and September 27, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
|
Shares
|
Weighted Average Exercise Price
|
|
Shares
|
Weighted Average Exercise Price
|
|
Shares
|
Weighted Average Exercise Price
|
Stock options outstanding, beginning of period
|
10,000
|
|
$
|
13.07
|
|
|
50,000
|
|
$
|
13.47
|
|
|
50,000
|
|
$
|
13.47
|
|
Stock options granted
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Stock options exercised
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Stock options forfeited
|
—
|
|
—
|
|
|
(40,000
|
)
|
13.56
|
|
|
—
|
|
—
|
|
Stock options outstanding, end of period
|
10,000
|
|
$
|
13.07
|
|
|
10,000
|
|
$
|
13.07
|
|
|
50,000
|
|
$
|
13.47
|
|
Stock options outstanding and exercisable, end of period
|
10,000
|
|
$
|
13.07
|
|
|
10,000
|
|
$
|
13.07
|
|
|
50,000
|
|
$
|
13.47
|
|
The following table summarizes information about our stock options outstanding, all of which are vested and exercisable as of October 1, 2016:
|
|
|
|
|
|
|
|
|
|
|
Date of Option Grant
|
Number of Options Outstanding and Exercisable
|
Exercise Price
|
Grant-Date Fair Value
|
Expiration Date
|
February 2, 2011
|
10,000
|
|
$
|
13.07
|
|
$
|
6.35
|
|
February 18, 2018
|
|
10,000
|
|
|
|
|
Restricted Stock Units and Performance Units
The following table summarizes the restricted stock unit and performance unit award activity during the periods ending October 1, 2016, October 3, 2015, and September 27, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
|
Number of Units
|
Weighted average grant date fair value
|
|
Number of Units
|
Weighted average grant date fair value
|
|
Number of Units
|
Weighted average grant date fair value
|
Units outstanding, beginning of fiscal period
|
518,800
|
|
$
|
10.80
|
|
|
215,352
|
|
$
|
14.31
|
|
|
348,852
|
|
$
|
14.25
|
|
Units granted
|
159,138
|
|
$
|
14.03
|
|
|
524,000
|
|
$
|
10.81
|
|
|
—
|
|
$
|
—
|
|
Units issued
|
(49,529
|
)
|
$
|
12.32
|
|
|
(69,657
|
)
|
$
|
14.31
|
|
|
—
|
|
$
|
—
|
|
Units forfeited
|
(42,771
|
)
|
$
|
10.87
|
|
|
(150,895
|
)
|
$
|
14.26
|
|
|
(133,500
|
)
|
$
|
14.16
|
|
Units outstanding, end of fiscal period
|
585,638
|
|
$
|
11.54
|
|
|
518,800
|
|
$
|
10.80
|
|
|
215,352
|
|
$
|
14.31
|
|
During fiscal year 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 ended 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 fiscal year 2016, performance units representing
75,350
shares of our common stock were granted. These performance units are based on the achievement of certain performance criteria for the fiscal years ended October 1, 2016, and ending 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 fiscal year 2016, previously issued performance units representing
49,529
shares of our common stock vested upon the filing of our Annual Report on Form 10-K for the fiscal year ended October 3, 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 agreement.
During fiscal year 2015, restricted stock units representing
355,000
shares of our common stock were granted. These restricted stock units are serviced-based and vest upon the filing of our Annual Report on Form 10-K for the period ending September 29, 2018. Upon the filing of such Annual Report on Form 10-K, these units are payable in the common stock of Delta Apparel, Inc. and are therefore accounted for under the equity method pursuant to ASC 718.
During fiscal year 2015, performance units representing
169,000
shares of our common stock were granted. Of these performance units,
65,000
were based on the achievement of certain performance criteria for the fiscal year ended October 3, 2015, and were eligible to vest upon the filing of our Annual Report on Form 10-K. Of these units, one-half were payable in the common stock of Delta Apparel, Inc. and were therefore accounted for under the equity method pursuant to ASC 718 and one-half were payable in cash and were therefore accounted for under the liability method pursuant to ASC 718. Of the remaining units,
52,000
were based on the achievement of certain performance criteria for the fiscal year ended October 1, 2016, and
52,000
units are based on the achievement of certain performance criteria for the fiscal year ending September 30, 2017. These units vest upon the filing of our Annual Report on Form 10-K for the periods ended October 1, 2016, and ending September 30, 2017, respectively. Upon the filing of each Annual Report on Form 10-K, these units are payable in the common stock of Delta Apparel, Inc. and are therefore accounted for under the equity method pursuant to ASC 718. Based upon the performance achieved for fiscal year 2015,
49,529
units were issued upon the filing our Annual Report on Form 10-K for fiscal year 2015 and
5,200
units were forfeited on October 3, 2015.
During fiscal year 2015, previously issued restricted stock units representing
69,657
shares of our common stock vested upon the filing of our Quarterly Report on Form 10-Q for the period ended June 27, 2015, and were issued in accordance with their agreement, either in shares of common stock or cash. The total fair value of vested restricted stock units was
$1.0 million
in fiscal year 2015. No restricted stock units vested during fiscal years 2014 or 2013. In addition, during fiscal year 2015, previously issued restricted stock units representing
12,019
shares of our common stock were forfeited. During fiscal year 2015, previously issued performance shares representing
133,676
shares of our common stock were forfeited due to the failure to achieve the performance criteria specified in the award agreement.
As of
October 1, 2016
, there was
$2.9 million
of total unrecognized compensation cost related to non-vested restricted stock units and performance units under the 2010 Stock Plan. This cost is expected to be recognized over a period of
2.2 years
.
The following table summarizes information about the unvested restricted stock units and performance units as of
October 1, 2016
.
|
|
|
|
|
|
|
Restricted Stock Units/Performance Units
|
Number of Units
|
Average Market Price on Date of Grant
|
Vesting Date
|
Fiscal year 2015 Restricted Stock Units
|
95,000
|
|
|
$10.52
|
December 2018
|
Fiscal year 2015 Restricted Stock Units
|
230,000
|
|
|
$10.73
|
December 2018
|
Fiscal year 2015 Performance Units
|
52,000
|
|
|
$10.52
|
December 2016
|
Fiscal year 2015 Performance Units
|
52,000
|
|
|
$10.52
|
December 2017
|
Fiscal year 2016 Restricted Stock Units
|
8,438
|
|
|
$14.04
|
December 2016
|
Fiscal year 2016 Restricted Stock Units
|
74,100
|
|
|
$14.03
|
December 2017
|
Fiscal year 2016 Performance Units
|
74,100
|
|
|
$14.03
|
December 2017
|
|
585,638
|
|
|
|
|
Option Plan
Prior to expiration of the Option Plan, the Compensation Committee of our Board of Directors had the discretion to grant options for up to
2,000,000
shares of common stock to officers and key and middle-level executives for the purchase of our stock at prices not less than fifty percent of the fair market value of the shares on the dates of grant, with an exercise term (as determined by the Compensation Committee) not to exceed
10 years
. The Compensation Committee determined the vesting period for the stock options, which generally became exercisable over
three
to
four
years. Certain option awards in the Option Plan provided for accelerated vesting upon meeting specific retirement, death or disability criteria.
Compensation expense was recorded on the selling, general and administrative expense line item in our Consolidated Statements of Operations on a straight-line basis over the vesting periods.
A summary of our stock option activity during the periods ended October 1, 2016, October 3, 2015, and September 27, 2014, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
|
Shares
|
Weighted Average Exercise Price
|
|
Shares
|
Weighted Average Exercise Price
|
|
Shares
|
Weighted Average Exercise Price
|
Stock options outstanding, beginning of period
|
86,000
|
|
$
|
8.30
|
|
|
502,000
|
|
$
|
12.27
|
|
|
584,500
|
|
$
|
12.13
|
|
Stock options exercised
|
—
|
|
$
|
—
|
|
|
(350,000
|
)
|
$
|
13.12
|
|
|
(82,500
|
)
|
$
|
11.28
|
|
Stock options forfeited
|
—
|
|
$
|
—
|
|
|
(66,000
|
)
|
$
|
12.94
|
|
|
—
|
|
$
|
—
|
|
Stock options outstanding, end of period
|
86,000
|
|
$
|
8.30
|
|
|
86,000
|
|
$
|
8.30
|
|
|
502,000
|
|
$
|
12.27
|
|
Stock options outstanding and exercisable, end of period
|
86,000
|
|
$
|
8.30
|
|
|
86,000
|
|
$
|
8.30
|
|
|
502,000
|
|
$
|
12.27
|
|
No stock options were exercised during fiscal year 2016. The total intrinsic value of options exercised during fiscal year 2015 and 2014 was
$0.3 million
and
$0
, respectively. During fiscal year 2015, stock option exercises resulted in a reduction of deferred excess tax benefits by
$0.7 million
. During fiscal year 2014, stock option exercises resulted in an excess tax benefit of
$27 thousand
.
The following table summarizes information about our stock options outstanding, all of which are vested and exercisable as of October 3, 2015:
|
|
|
|
|
|
|
|
|
|
|
Date of Option Grant
|
Number of Options Outstanding and Exercisable
|
Exercise Price
|
Grant-Date Fair Value
|
Expiration Date
|
February 8, 2008
|
86,000
|
|
$
|
8.30
|
|
$
|
2.95
|
|
February 8, 2018
|
|
86,000
|
|
|
|
|
NOTE 14—BUSINESS SEGMENTS
We operate our business in two distinct segments: basics and branded
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, Robert W. Humphreys, our Chief Operating Decision Maker, began reviewing the performance of the basics and branded segments excluding general
corporate expenses. Therefore, we report our financial performance on the two reportable segments, basics and branded, with corporate activities stated separately. Our financial statements reflect this reporting with prior periods adjusted accordingly.
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 unembellished knit apparel under the main brands of Delta Pro Weight
®
and Delta Magnum Weight
®
for sale to a diversified audience ranging from large licensed screen printers to small independent businesses. We also manufacture private label products for major branded sportswear companies, trendy regional brands, retailers, and sports licensed apparel marketers. Typically our private label products are sold with value-added services such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. Using digital print equipment and its proprietary technology, Art Gun embellishes garments to create private label, custom decorated apparel servicing the fast-growing e-retailer channels.
The branded segment is comprised of our business units which are focused on specialized apparel garments and headwear to meet consumer preferences and fashion trends, and includes our Salt Life, Junkfood, Soffe, and Coast 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®, Soffe®, and COAST®, as well as other labels. The results of the Coast business have been included in the branded segment since acquisition on August 30, 2016.
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. The accounting policies of our reportable segments are the same as those described in Note 2. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
Segment net sales:
|
|
|
|
|
|
Basics
|
$
|
277,146
|
|
|
$
|
282,467
|
|
|
$
|
265,882
|
|
Branded
|
148,103
|
|
|
166,675
|
|
|
187,019
|
|
Total net sales
|
425,249
|
|
|
449,142
|
|
|
452,901
|
|
|
|
|
|
|
|
Segment operating income:
|
|
|
|
|
|
Basics
|
22,307
|
|
|
13,060
|
|
|
6,785
|
|
Branded
|
6,950
|
|
|
12,379
|
|
|
3,070
|
|
Total segment operating income
|
29,257
|
|
|
25,439
|
|
|
9,855
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment:
|
|
|
|
|
|
Basics
|
10,734
|
|
|
6,037
|
|
|
6,436
|
|
Branded
|
1,501
|
|
|
689
|
|
|
1,458
|
|
Corporate
|
80
|
|
|
1,047
|
|
|
1,000
|
|
Total purchases of property, plant and equipment
|
12,315
|
|
|
7,773
|
|
|
8,894
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
Basics
|
6,437
|
|
|
6,208
|
|
|
6,096
|
|
Branded
|
2,772
|
|
|
2,902
|
|
|
2,948
|
|
Corporate
|
416
|
|
|
432
|
|
|
449
|
|
Total depreciation and amortization
|
9,625
|
|
|
9,542
|
|
|
9,493
|
|
The following reconciles the segment operating income to the consolidated income (loss) before provision for (benefit from) income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
Segment operating income
|
$
|
29,257
|
|
|
$
|
25,439
|
|
|
$
|
9,855
|
|
Unallocated corporate expenses
|
12,925
|
|
|
9,320
|
|
|
11,516
|
|
Unallocated interest expense
|
5,287
|
|
|
6,021
|
|
|
5,792
|
|
Consolidated income (loss) before provision for (benefit from) income taxes
|
$
|
11,045
|
|
|
$
|
10,098
|
|
|
$
|
(7,453
|
)
|
Our revenues include sales to domestic and foreign customers. Foreign customers are composed of companies whose headquarters are located outside of the United States. Supplemental information regarding our revenues by geographic area based on the location of the customer is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
October 1, 2016
|
|
October 3, 2015
|
|
September 27, 2014
|
United States
|
$
|
418,627
|
|
|
$
|
442,207
|
|
|
$
|
442,062
|
|
Foreign
|
6,622
|
|
|
6,935
|
|
|
10,839
|
|
Total net sales
|
$
|
425,249
|
|
|
$
|
449,142
|
|
|
$
|
452,901
|
|
Our total assets and equity investment by segment are as follows (in thousands):
|
|
|
|
|
|
|
|
As of
|
|
October 1, 2016
|
|
October 3, 2015
|
Total assets by segment:
|
|
|
|
Basics
|
178,347
|
|
|
160,902
|
|
Branded
|
156,119
|
|
|
152,210
|
|
Corporate
|
10,186
|
|
|
11,791
|
|
Total assets
|
344,652
|
|
|
324,903
|
|
|
|
|
|
Equity investment in joint venture:
|
|
|
|
Basics
|
3,593
|
|
|
3,195
|
|
Branded
|
—
|
|
|
—
|
|
Total equity investment in joint venture
|
3,593
|
|
|
3,195
|
|
Our long-lived assets, excluding goodwill and intangible assets, consist of property, plant and equipment for all locations. We attribute our property, plant and equipment to a particular country based on the location of the long-lived assets. Summarized financial information by geographic area is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
October 1, 2016
|
|
October 3, 2015
|
|
|
|
|
United States
|
$
|
18,523
|
|
|
$
|
22,302
|
|
|
|
|
|
Honduras
|
19,650
|
|
|
13,072
|
|
El Salvador
|
4,215
|
|
|
3,276
|
|
Mexico
|
1,115
|
|
|
1,003
|
|
All foreign countries
|
24,980
|
|
|
17,351
|
|
|
|
|
|
Total long-lived assets, excluding goodwill and intangibles
|
$
|
43,503
|
|
|
$
|
39,653
|
|
NOTE 15—REPURCHASE OF COMMON STOCK
As of October 1, 2016, our Board of Directors had authorized management to use up to $40.0 million to repurchase stock in open market transactions under our Stock Repurchase Program.
During fiscal years 2016, 2015 and 2014, we purchased 217,568 shares, 140,336 shares, 78,674 shares, respectively, of our common stock for a total cost of $3.5 million, $2.1 million, $1.2 million, respectively. As of October 1, 2016, we have purchased 2,480,150 shares of common stock for an aggregate of $30.9 million since the inception of the Stock Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of October 1, 2016, $9.1 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 October 1, 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
|
July 3 to August 6, 2016
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
|
$10.8
|
million
|
August 7 to September 3, 2016
|
|
16,093
|
|
|
$
|
18.43
|
|
|
16,093
|
|
|
|
$10.5
|
million
|
September 4 to October 1, 2016
|
|
87,685
|
|
|
$
|
16.30
|
|
|
87,685
|
|
|
|
$9.1
|
million
|
Total
|
|
103,778
|
|
|
$
|
16.63
|
|
|
103,778
|
|
|
|
$9.1
|
million
|
NOTE 16—COMMITMENTS AND CONTINGENCIES
(a) Litigation
U.S. Consumer Product Safety Commission
We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring hoodie product sourced, distributed and sold by Junkfood, and its compliance with applicable product safety standards. The Commission subsequently investigated the matter, including whether Junkfood complied with the reporting requirements of the Consumer Product Safety Act (“CPSA”), and the garments in question were ultimately recalled. Junkfood subsequently received notification from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that the staff will recommend to the Commission a
$900,000
civil penalty. We disputed the Commission's allegations and subsequently responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses and mitigating factors that could have resulted in a much lower penalty, if any, ultimately imposed by a court had the matter proceeded to litigation.
We believe that any claims brought by the Commission seeking enforcement of the recommended penalty would be time-barred under any reasonable interpretation of the applicable civil statute of limitations. Accordingly, we consider this matter to be resolved and during the quarter ended October 1, 2016, we reversed the liability previously recorded in connection with this matter.
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 was brought as a class action and sought 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 named 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. The Complaint sought 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 was brought as a class action and sought 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.
On September 17, 2015, an agreement in principle was reached between all parties to settle the above-referenced wage and hour matters, with the defendants in the matters agreeing 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 collectively agreed to contribute
$200,000
towards the aggregate settlement
amount, and we have this amount included in our accrued expenses as of October 1, 2016, and October 3, 2015. The settlement agreement has been approved by the applicable court and these matters have been finally resolved, with the agreed amounts funded subsequent to the 2016 fiscal year-end.
The Sports Authority Bankruptcy Litigation
Soffe is involved in several related litigation matters stemming from The Sports Authority's ("TSA") March 2, 2016, filing of a voluntary petition(s) for relief under Chapter 11 of the United States Bankruptcy Code (the "TSA Bankruptcy"). Prior to such filing, Soffe provided TSA with products to be sold on a consignment basis pursuant to a "pay by scan" agreement and the litigation matters relate to Soffe's interest in the products it provided TSA on a consignment basis (the "Products") and the proceeds derived from the sale of such products (the "Proceeds").
TSA Stores, Inc. and related entities TSA Ponce, Inc. and TSA Caribe, Inc. filed an action against Soffe on March 16, 2016, in the United States Bankruptcy Court for the District of Delaware (the "TSA Action") essentially seeking a declaratory judgment that: (i) Soffe does not own the Products but rather has a security interest that is not perfected or senior and is avoidable; (ii) Soffe only has an unsecured claim against TSA; (iii) TSA and TSA's secured creditors have valid, unavoidable and senior rights in the Products and the Products are the property of TSA’s estate; (iv) Soffe does not have a perfected purchase money security interest in the Products; (v) Soffe is not entitled to a return of the Products; and (vi) TSA can continue to sell the Products and Soffe is not entitled to any proceeds from such sales other than as an unsecured creditor. The TSA Action also contains claims seeking to avoid Soffe's filing of a financing statement related to the Products as a preference and recover the value of that transfer as well as to disallow Soffe's claims until it has returned preferential transfers or their associated value. TSA also brings a claim for a permanent injunction barring Soffe from taking certain actions. We believe that many of the claims in the TSA Action, including TSA’s claim for injunction, are now moot as a result of Soffe’s agreement to permit TSA to continue selling the Products in TSA’s going-out-of-business sale.
On May 16, 2016, TSA lender Wilmington Savings Fund Society, FSB, as Successor Administrative and Collateral Agent ("WSFS"), intervened in the TSA Action seeking a declaratory judgment that: (i) WSFS has a perfected interest in the Products and Proceeds that is senior to Soffe's interest; and (ii) the Proceeds paid to Soffe must be disgorged pursuant to an order previously issued by the court. WSFS's intervening complaint also contains a separate claim seeking the disgorgement of all Proceeds paid to Soffe along with accrued and unpaid interest.
Soffe has asserted counterclaims against WSFS in the TSA Action essentially seeking a declaratory judgment that: (i) WSFS is not perfected in the Products; and (ii) WSFS's interest in the Products is subordinate to Soffe's interest.
On May 24, 2016, Soffe joined an appeal filed by a number of TSA consignment vendors in the United States District Court for the District of Delaware challenging an order issued in the TSA Bankruptcy that, should WSFS or TSA succeed in the TSA Action, granted TSA and/or WSFS a lien on all Proceeds received by Soffe and requiring the automatic disgorgement of such Proceeds. As of November 14, 2016, Soffe and another entity are the remaining consignment vendors pursuing this appeal.
Although we will continue to vigorously defend against the TSA Action and pursue the above-referenced counterclaims and appeal, should TSA and/or WSFS ultimately prevail on their claims, we could be forced to disgorge all Proceeds received and forfeit our ownership rights in any Products that remain in TSA's possession. We believe the range of possible loss in this matter is currently
$0
to
$3.3 million
; however, it is too early to determine the probable outcome and, therefore, no amount has been accrued related to this matter.
In addition, at times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material effect on our operations, financial condition, or liquidity.
(b) Purchase Contracts
We have entered into agreements, and have fixed prices, to purchase yarn, natural gas, finished fabric, and finished apparel and headwear products. At
October 1, 2016
, minimum payments under these contracts were as follows (in thousands):
|
|
|
|
|
Yarn
|
$
|
13,823
|
|
Finished fabric
|
6,952
|
|
Finished products
|
22,130
|
|
|
$
|
42,905
|
|
(c) Letters of Credit
As of
October 1, 2016
, we had outstanding standby letters of credit totaling
$0.4 million
.
(d) Derivatives and Contingent Consideration
From time to time we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. The following financial instruments were outstanding as of
October 1, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notational
Amount
|
|
LIBOR Rate
|
|
Maturity Date
|
Interest Rate Swap
|
September 9, 2013
|
|
$15 million
|
|
1.6480
|
%
|
|
September 11, 2017
|
Interest Rate Swap
|
September 19, 2013
|
|
$15 million
|
|
1.4490
|
%
|
|
September 19, 2017
|
FASB Codification No. 820,
Fair Value Measurements and Disclosures
(“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:
|
|
◦
|
Level 1
– Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
◦
|
Level 2
– Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in market that are less active.
|
|
|
◦
|
Level 3
– Unobservable inputs that are supported by little or
no
market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.
|
The following financial liabilities are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Swap
|
|
|
|
|
|
|
|
October 1, 2016
|
$
|
(182
|
)
|
|
—
|
|
|
$
|
(182
|
)
|
|
—
|
|
October 3, 2015
|
$
|
(697
|
)
|
|
—
|
|
|
$
|
(697
|
)
|
|
—
|
|
September 27, 2014
|
$
|
(438
|
)
|
|
—
|
|
|
$
|
(438
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
|
|
|
|
|
|
October 1, 2016
|
$
|
(2,500
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(2,500
|
)
|
October 3, 2015
|
$
|
(3,100
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(3,100
|
)
|
September 27, 2014
|
$
|
(3,600
|
)
|
|
—
|
|
|
—
|
|
|
$
|
(3,600
|
)
|
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).
In August 2013, we acquired Salt Life and issued contingent consideration payable in cash after the end of calendar year 2019 if financial performance targets involving the sale of Salt Life-branded products are met during the 2019 calendar year. We used a Monte Carlo model which used the historical results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the contingent consideration for Salt Life at acquisition, as well as to remeasure the contingent consideration related to the acquisition of Salt Life at each reporting period. Accordingly, the fair value measurement for contingent consideration falls in Level 3 of the fair value hierarchy.
At October 1, 2016, we had
$2.5 million
accrued in contingent consideration related to the Salt Life Acquisition, a
$0.6 million
reduction from the accrual at October 3, 2015. The reduction in the fair value of contingent consideration is based on the inputs into the Monte Carlo model, including the time remaining in the measurement period. 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 our acquisition of the Art Gun business.
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of
October 1, 2016
, and October 3, 2015.
|
|
|
|
|
|
|
|
|
|
|
October 1,
2016
|
|
October 3,
2015
|
|
Accrued expenses
|
$
|
(182
|
)
|
|
$
|
(519
|
)
|
|
Deferred tax liabilities
|
70
|
|
|
269
|
|
|
Other liabilities
|
—
|
|
|
(179
|
)
|
|
Accumulated other comprehensive loss
|
$
|
(112
|
)
|
|
$
|
(429
|
)
|
|
(e) License Agreements
We have entered into license agreements that provide for royalty payments of net sales of licensed products as set forth in the agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in selling, general and administrative expenses) of approximately
$8.2 million
,
$10.1 million
and
$11.1 million
during fiscal years 2016, 2015, and 2014, respectively.
At
October 1, 2016
, based on minimum sales requirements, future minimum royalty payments required under these license agreements were as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
Amount
|
|
2017
|
$
|
1,132
|
|
2018
|
178
|
|
2019
|
—
|
|
2020
|
—
|
|
2021 and thereafter
|
—
|
|
|
$
|
1,310
|
|
NOTE 17—QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Presented below is a summary of our unaudited consolidated quarterly financial information for the fiscal years ended
October 1, 2016
, and
October 3, 2015
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
2015 Quarter Ended
|
|
January 2,
2016
|
|
April 2,
2016
|
|
July 2,
2016
|
|
October 1,
2016
|
|
December 27,
2014
|
|
March 28,
2015
|
|
June 27,
2015
|
|
October 3,
2015
|
Net sales
|
$
|
90,171
|
|
|
$
|
109,160
|
|
|
$
|
111,552
|
|
|
$
|
114,366
|
|
|
$
|
93,381
|
|
|
$
|
115,042
|
|
|
$
|
120,525
|
|
|
$
|
120,194
|
|
Gross profit
|
18,879
|
|
|
25,726
|
|
|
24,986
|
|
|
23,908
|
|
|
15,326
|
|
|
21,235
|
|
|
25,484
|
|
|
26,274
|
|
Operating income (loss)
|
2,227
|
|
|
5,931
|
|
|
4,227
|
|
|
3,947
|
|
|
(3,217
|
)
|
|
7,328
|
|
|
6,897
|
|
|
5,111
|
|
Net earnings (loss)
|
681
|
|
|
3,436
|
|
|
2,542
|
|
|
2,305
|
|
|
(4,211
|
)
|
|
3,646
|
|
|
4,418
|
|
|
4,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
$
|
0.09
|
|
|
$
|
0.44
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
$
|
(0.53
|
)
|
|
$
|
0.46
|
|
|
$
|
0.56
|
|
|
$
|
0.54
|
|
Diluted EPS
|
$
|
0.09
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
0.29
|
|
|
$
|
(0.53
|
)
|
|
$
|
0.46
|
|
|
$
|
0.55
|
|
|
$
|
0.53
|
|
As discussed in Note 4, gross profit and operating income in the quarters ended July 2, 2016, and October 1, 2016, included restructuring expenses related to the manufacturing realignment, and as discussed in Note 3, operating income for the quarter ended March 28, 2015, included a gain from the sale of
The Game.