e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2010
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-15583
DELTA APPAREL, INC.
(Exact name of registrant as specified in its charter)
|
|
|
GEORGIA
|
|
58-2508794 |
|
|
|
(State or Other Jurisdiction of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
322 South Main Street
Greenville, SC
|
|
29601 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(864) 232-5200
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of a large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer þ
(Do not check if a smaller reporting company)
|
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of November 3, 2010, there were outstanding 8,497,020 shares of the registrants common stock,
par value of $0.01 per share, which is the only class of outstanding common or voting stock of the
registrant.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
October 2, |
|
|
July 3, |
|
|
|
2010 |
|
|
2010 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
616 |
|
|
$ |
687 |
|
Accounts receivable, net |
|
|
54,522 |
|
|
|
60,991 |
|
Inventories, net |
|
|
136,887 |
|
|
|
116,599 |
|
Prepaid expenses and other current assets |
|
|
3,697 |
|
|
|
3,475 |
|
Deferred income taxes |
|
|
2,981 |
|
|
|
3,162 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
198,703 |
|
|
|
184,914 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
38,482 |
|
|
|
37,694 |
|
Goodwill |
|
|
17,426 |
|
|
|
17,426 |
|
Intangibles, net |
|
|
7,859 |
|
|
|
8,016 |
|
Other assets |
|
|
3,212 |
|
|
|
3,283 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
265,682 |
|
|
$ |
251,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
40,713 |
|
|
$ |
34,459 |
|
Accrued expenses |
|
|
17,592 |
|
|
|
18,862 |
|
Income tax payable |
|
|
179 |
|
|
|
712 |
|
Current portion of long-term debt |
|
|
5,718 |
|
|
|
5,718 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
64,202 |
|
|
|
59,751 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities |
|
|
70,947 |
|
|
|
62,355 |
|
Deferred income taxes |
|
|
1,948 |
|
|
|
1,826 |
|
Other liabilities |
|
|
67 |
|
|
|
157 |
|
Contingent consideration |
|
|
1,530 |
|
|
|
1,530 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
138,694 |
|
|
|
125,619 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock$0.01 par value, 2,000,000 shares authorized, none
issued and outstanding |
|
|
|
|
|
|
|
|
Common stock $0.01 par value, 15,000,000 shares authorized,
9,646,972 shares issued, and 8,508,320 and 8,516,293 shares
outstanding as of October 2, 2010 and July 3, 2010, respectively |
|
|
96 |
|
|
|
96 |
|
Additional paid-in capital |
|
|
59,124 |
|
|
|
59,111 |
|
Retained earnings |
|
|
77,598 |
|
|
|
75,950 |
|
Accumulated other comprehensive loss |
|
|
(118 |
) |
|
|
(105 |
) |
Treasury stock 1,138,652 and 1,130,679 shares as of October 2, 2010
and July 3, 2010, respectively |
|
|
(9,712 |
) |
|
|
(9,338 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
126,988 |
|
|
|
125,714 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
265,682 |
|
|
$ |
251,333 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 2, |
|
|
September 26, |
|
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
107,916 |
|
|
$ |
99,122 |
|
Cost of goods sold |
|
|
82,007 |
|
|
|
75,477 |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
25,909 |
|
|
|
23,645 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
22,896 |
|
|
|
19,258 |
|
Other (expense) income, net |
|
|
(57 |
) |
|
|
105 |
|
|
|
|
|
|
|
|
Operating income |
|
|
2,956 |
|
|
|
4,492 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
601 |
|
|
|
954 |
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
2,355 |
|
|
|
3,538 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
707 |
|
|
|
955 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,648 |
|
|
$ |
2,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.19 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.19 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding |
|
|
8,523 |
|
|
|
8,507 |
|
Dilutive effect of stock options |
|
|
257 |
|
|
|
21 |
|
|
|
|
|
|
|
|
Weighted average number of shares assuming dilution |
|
|
8,780 |
|
|
|
8,528 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 2, |
|
|
September 26, |
|
|
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,648 |
|
|
$ |
2,583 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,767 |
|
|
|
1,680 |
|
Provision for deferred income taxes |
|
|
303 |
|
|
|
491 |
|
Loss on disposal of property and equipment |
|
|
24 |
|
|
|
|
|
Non-cash stock compensation |
|
|
545 |
|
|
|
363 |
|
Changes in operating assets and liabilities,
net of effect of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
10,272 |
|
|
|
2,068 |
|
Inventories |
|
|
(14,119 |
) |
|
|
1,992 |
|
Prepaid expenses and other current assets |
|
|
(128 |
) |
|
|
29 |
|
Income taxes |
|
|
(533 |
) |
|
|
790 |
|
Other non-current assets |
|
|
71 |
|
|
|
103 |
|
Accounts payable |
|
|
5,645 |
|
|
|
1,713 |
|
Accrued expenses |
|
|
(1,951 |
) |
|
|
1,231 |
|
Other liabilities |
|
|
(103 |
) |
|
|
183 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,441 |
|
|
|
13,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,537 |
) |
|
|
(1,279 |
) |
Cash paid for business, net of cash acquired |
|
|
(9,884 |
) |
|
|
(700 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(11,421 |
) |
|
|
(1,979 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
130,035 |
|
|
|
91,400 |
|
Repayment of long-term debt |
|
|
(121,443 |
) |
|
|
(102,712 |
) |
Repurchase of common stock |
|
|
(735 |
) |
|
|
|
|
Proceeds from stock options |
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
7,909 |
|
|
|
(11,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(71 |
) |
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
687 |
|
|
|
654 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
616 |
|
|
$ |
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
536 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (refunded) for income taxes |
|
$ |
928 |
|
|
$ |
(271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activityissuance of common stock |
|
$ |
98 |
|
|
$ |
118 |
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
5
DELTA APPAREL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note ABasis of Presentation
We prepared the accompanying interim condensed consolidated financial statements in accordance with
the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. We believe these condensed consolidated financial statements
reflect all adjustments (consisting of only normal recurring accruals) considered necessary for a
fair presentation. Operating results for the three months ended October 2, 2010 are not
necessarily indicative of the results that may be expected for our fiscal year ending July 2, 2011.
Although our various product lines are sold on a year-round basis, the demand for specific products
or styles reflects some seasonality, with sales in our fourth fiscal quarter generally being the
highest and sales in our second fiscal quarter generally being the lowest. For more information
regarding our results of operations and financial position, refer to the consolidated financial
statements and footnotes included in our Form 10-K for our fiscal year ended July 3, 2010, filed
with the Securities and Exchange Commission.
Delta Apparel, the Company, and we, us and our are used interchangeably to refer to Delta
Apparel, Inc. together with our domestic wholly-owned subsidiaries, including M.J. Soffe, LLC
(Soffe), Junkfood Clothing Company (Junkfood), To The Game, LLC (To The Game), Art Gun, LLC
(Art Gun), TCX, LLC (The Cotton Exchange) and our international subsidiaries, as appropriate to
the context.
Note BAccounting Policies
Our accounting policies are consistent with those described in our Significant Accounting Policies
in our Form 10-K for our fiscal year ended July 3, 2010, filed with the Securities and Exchange
Commission.
Note CNew Accounting Standards
In June 2009, the FASB issued Codification No. 810-10, Consolidation of Variable Interest Entities
(ASC 810-10), and issued Accounting Standards Update No. 2009-17, Consolidations: Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17), to
improve financial reporting by enterprises involved with variable interest entities. They require
an entity to qualitatively assess the determination of the primary beneficiary of a variable
interest entity (VIE) based on whether the entity (1) has the power to direct the activities of
the VIE that most significantly impact the entitys economic performance and (2) has the obligation
to absorb losses of the entity or the right to receive benefits from the entity that could
potentially be significant to the VIE. They also require an ongoing reconsideration of the primary
beneficiary, and amends the events that trigger a reassessment of whether an entity is a VIE.
Enhanced disclosures are also required to provide information about an entitys involvement in a
VIE. ASC 810-10 and ASU 2009-17 are effective for annual reporting beginning after November 15,
2009. We adopted ASC 810-10 and ASU 2009-17 as of July 4, 2010, and the adoption had no impact on
our financial position and results of operations.
Note DInventories
Inventories, net of reserves, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 2, |
|
|
July 3, |
|
|
|
2010 |
|
|
2010 |
|
Raw materials |
|
$ |
16,572 |
|
|
$ |
10,604 |
|
Work in process |
|
|
22,081 |
|
|
|
21,277 |
|
Finished goods |
|
|
98,234 |
|
|
|
84,718 |
|
|
|
|
|
|
|
|
|
|
$ |
136,887 |
|
|
$ |
116,599 |
|
|
|
|
|
|
|
|
Raw materials include finished yarn and direct materials for the Activewear segment and include
direct embellishment materials, undecorated garments and headwear for the Retail-Ready segment.
6
Note EDebt
On September 21, 2007, Delta Apparel, Junkfood and Soffe entered into a Third Amended and Restated
Loan and Security Agreement (the Amended Loan Agreement) with Wells Fargo Bank, National
Association, successor by merger to Wachovia Bank, National Association, as Agent, and the
financial institutions named in the Amended Loan Agreement as Lenders. The Amended Loan Agreement
provided us with a $100 million credit line (subject to borrowing base limitations based on the
value and type of collateral provided) that matures on September 12, 2012. On March 30, 2009, we
invoked the accordion feature in the Amended Loan Agreement, increasing the maximum line of credit
from $100 million to $110 million and adding PNC Bank, National Association to the syndicate of
lenders under the facility with a $10 million commitment.
The credit facility is secured by a first-priority lien on substantially all of the real and
personal property of Delta Apparel, Junkfood, Soffe, To The Game, Art Gun, and TCX. All loans
under the credit agreement bear interest at rates based on either an adjusted LIBOR rate plus an
applicable margin or a banks prime rate plus an applicable margin. 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% of the amount by which $110 million exceeds the average daily principal balance of the
outstanding loans and letters of credit accommodations and are charged monthly based on the
principal balances during the immediately preceding month.
Our credit facility includes the financial covenant that if the amount of availability falls below
$10 million, our Fixed Charge Coverage Ratio (FCCR) (as defined in the Amended Loan Agreement)
for the preceding 12 month period must not be less than 1.1 to 1.0 and otherwise includes customary
conditions to funding, covenants, and events of default. As of October 2, 2010, our FCCR was 3.8x
for the preceding 12 months, thus exceeding the 1.1 to 1.0. This would allow us access, if needed,
to the total amount of availability provided for under the Amended Loan Agreement. We expect to
continue to meet the FCCR for the remainder of fiscal year 2011. At October 2, 2010, we had $70.6
million outstanding under our credit facility at an average interest rate of 1.5% and had the
ability to borrow an additional $28.1 million.
Proceeds of the loans under the Amended Loan Agreement may be used for general operating, working
capital, other corporate purposes, and to finance fees and expenses under the facility. Our credit
facility contains limitations on, or prohibitions of, cash dividends. We are allowed to make cash
dividends in amounts such that the aggregate amount paid to shareholders since May 16, 2000 does
not exceed twenty-five percent (25%) of our cumulative net income calculated from May 16, 2000 to
the date of determination. At October 2, 2010, there was $15.2 million of retained earnings free
of restrictions for the payment of dividends.
The credit facility contains a subjective acceleration clause and a springing lockbox arrangement
(as defined in ASC 470, Debt), 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
non-current debt.
In the fourth quarter of fiscal year 2007, we entered into a loan agreement with Banco Ficohsa, a
Honduran bank, for our capital expansion in Honduras. The loan is secured by a first-priority lien
on the assets of our Honduran operations. During the first quarter of fiscal year 2009, the loan
was amended to a fixed interest rate of 6% through June 2010, at which time the interest rate
increased to 6.5% for the remainder of the term beginning in July 2010. The loan is payable
monthly, has a five-year term and is denominated in U.S. dollars. At October 2, 2010, we had $6.1
million outstanding on this loan.
Note FSelling, 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 $3.6 million and $3.4
million for the first quarter of fiscal years 2011 and 2010, 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.
Note GStock Options and Incentive Stock Awards
We maintain certain stock-based compensation plans that are described in Note 12 to the
Consolidated Financial Statements included in our Form 10-K for our fiscal year ended July 3, 2010,
filed with the Securities and Exchange Commission. We account for these plans pursuant to FASB
Codification No. 718, Compensation Stock Compensation (ASC 718), Securities and Exchange
Commission Staff Accounting Bulletin No. 107 (SAB 107), and the Securities and Exchange
Commission Staff Accounting Bulletin No. 110 (SAB 110).
7
Delta Apparel Stock Option Plan (Option Plan)
We expensed $44 thousand and $0.1 million during the first quarter of fiscal years 2011 and 2010,
respectively, in connection with our Option Plan. As of October 2, 2010, there was $0.3 million of
total unrecognized compensation cost related to non-vested stock options under the Option Plan.
This cost is expected to be recognized over a period of 1.75 years. Stock compensation expense is
included in the cost of sales and selling, general and administrative expense line items of our
statements of operations on a straight-line basis over the vesting periods of each grant.
During the quarter ended October 2, 2010, vested options representing 6,667 shares of our common
stock were exercised, and the shares issued, in accordance with their respective agreements. In
addition, non-vested options representing 29,333 shares of our common stock were forfeited.
Delta Apparel Incentive Stock Award Plan (Award Plan)
For the first quarter of fiscal years 2011 and 2010, we expensed $0.5 million and $0.3 million,
respectively, in connection with our Award Plan. Stock compensation expense is included in the cost
of sales and selling, general and administrative expense line items of our consolidated statements
of operations over the vesting periods. During the first quarter of fiscal year 2011, service
based awards for 30,000 shares of our common stock vested and were issued as of the filing of our
Form 10-K with the Securities and Exchange Commission for the fiscal year ended July 3, 2010. The
remaining 102,600 service based shares will vest upon the filing of our Form 10-K for the fiscal
year ending July 2, 2011. The performance based awards representing 48,400 shares are based on
achievement of performance criteria for the two year period ending July 2, 2011, and will vest upon
the filing of our Annual Report for the year ended July 2, 2011, subject to performance criteria.
Note HPurchase 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 2, 2010, minimum payments under
these contracts were as follows (in thousands):
|
|
|
|
|
Yarn |
|
$ |
25,968 |
|
Natural gas |
|
|
934 |
|
Finished fabric |
|
|
3,034 |
|
Finished products |
|
|
21,209 |
|
|
|
|
|
|
|
$ |
51,145 |
|
|
|
|
|
Note ISegment Reporting
We operate our business in two distinct segments: Retail-Ready and Activewear. Although the two
segments are similar in their production processes and regulatory environment, they are distinct in
their economic characteristics, products and distribution methods.
The Retail-Ready segment is comprised of our business units primarily focused on more specialized
apparel garments and headwear to meet consumer preferences and fashion trends and includes Soffe,
The Cotton Exchange, Junkfood, To The Game and Art Gun. These branded embellished and unembellished
products are sold through specialty and boutique shops, upscale and traditional department stores,
mid-tier retailers, sporting goods stores, college bookstores and to the U.S. military. Products in
this segment are marketed under our primary brands of Soffe®, Intensity
Athletics®, Junk Food®, and The Game® as well as other labels. The
results of The Cotton Exchange, Art Gun and To The Game have been included in the Retail-Ready
segment since acquisition on July 12, 2010, December 28, 2009 and March 29, 2009, respectively.
The Activewear segment is comprised of our business units primarily focused on garment styles that
are characterized by low fashion risk and includes our Delta Catalog and FunTees businesses.
Within the Delta Catalog business, we market, distribute and manufacture unembellished knit apparel
under the brands of Delta Pro Weight®, Delta Magnum Weight®, Quail
Hollow®, Healthknit® and FunTees®. These products are primarily
sold to screen printing and ad specialty companies. We also manufacture products under private
labels for retailers, corporate industry programs, sports licensed apparel marketers and major
branded sportswear companies. Typically these products are sold decorated and ready for the retail
shelf. The majority of the private label goods are sold through the FunTees business.
Our chief operating decision maker (CODM) and management evaluates performance and allocates
resources based on profit or loss from operations before interest, income taxes and special charges
(Segment Operating Income (Loss)). Our Segment Operating Income (Loss) may not be comparable to
similarly titled measures used by other companies. Intercompany transfers between operating
segments are transacted at cost and have been eliminated within the segment amounts shown in the
following table (in thousands).
8
Information about our operations as of and for the three months ended October 2, 2010 and September
26, 2009, by operating segment, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activewear |
|
Retail-Ready |
|
Consolidated |
Three months ended October 2, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
49,539 |
|
|
$ |
58,377 |
|
|
$ |
107,916 |
|
Segment operating income |
|
|
150 |
|
|
|
2,806 |
|
|
|
2,956 |
|
Segment assets |
|
|
130,471 |
|
|
|
135,211 |
|
|
|
265,682 |
|
Purchases of property and equipment |
|
|
803 |
|
|
|
734 |
|
|
|
1,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 26, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
47,145 |
|
|
$ |
51,977 |
|
|
$ |
99,122 |
|
Segment operating (loss) income |
|
|
(1,085 |
) |
|
|
5,577 |
|
|
|
4,492 |
|
Segment assets |
|
|
134,965 |
|
|
|
116,180 |
|
|
|
251,145 |
|
Purchases of property and equipment |
|
|
878 |
|
|
|
401 |
|
|
|
1,279 |
|
The following table reconciles the segment operating income to the consolidated income before
provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
October 2, 2010 |
|
|
September 26, 2009 |
|
Segment operating income |
|
$ |
2,956 |
|
|
$ |
4,492 |
|
Unallocated interest expense |
|
|
601 |
|
|
|
954 |
|
|
|
|
|
|
|
|
Consolidated income before taxes |
|
$ |
2,355 |
|
|
$ |
3,538 |
|
|
|
|
|
|
|
|
Note JIncome Taxes
Our effective income tax rate for the three months ended October 2, 2010 was 30.0%, compared to an
effective tax rate of 27.0% for the same quarter in the prior year. The primary driver for the
increase in effective tax rate from 27.0% to 30.0% is due to having a higher percentage of pre-tax
earnings in the United States and foreign taxable locations compared to earnings in foreign
tax-free locations. Profits that are permanently reinvested in the tax-free zone of Honduras are
relatively fixed since this amount is based on a cost-plus determination based on our production
output. Therefore, our effective tax rate has increased because our expected U.S. profits have
increased while our Honduran tax-free profits have remained relatively constant.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign
jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, local or
non-U.S. income tax examinations by tax authorities for our tax years before 2006. However, net
operating loss carryforwards remain subject to examination to the extent they are carried forward
and impact a year that is open to examination by tax authorities.
Note KDerivatives
We use interest rate swaps to manage our interest rate exposure and reduce the impact of future
interest rate changes. We do not use these financial instruments for trading or speculative
purposes. The following table includes information regarding our interest rate swap agreements as
of October 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Effective Date |
|
Amount |
|
LIBOR Rate |
|
Maturity Date |
Interest Rate Swap |
|
April 1, 2009 |
|
$15 million |
|
1.57% |
|
April 1, 2011 |
Interest Rate Swap |
|
March 1, 2010 |
|
$15 million |
|
1.11% |
|
September 1, 2011 |
We account for derivatives under FASB Codification No. 815, Derivatives and Hedging (ASC 815).
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. We have assessed these
agreements and concluded that the swap agreements match the exact terms of the underlying debt to
which they are related and therefore are considered perfectly effective
9
hedges. Therefore, changes
in the derivatives fair values are deferred and recorded as a component of accumulated other
comprehensive loss. As of October 2, 2010, the fair value of the interest rate swap agreements
resulted in an accumulated other comprehensive loss, net of taxes, of $0.1 million.
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 based on reliability 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 for assets or liabilities reflecting the reporting entitys
own assumptions. |
The following financial liabilities were measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using |
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Inputs |
Period Ended |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2010 |
|
$ |
192,185 |
|
|
|
|
|
|
$ |
192,185 |
|
|
|
|
|
July 3, 2010 |
|
$ |
171,013 |
|
|
|
|
|
|
$ |
171,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2010 |
|
$ |
1,530,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,530,000 |
|
July 3, 2010 |
|
$ |
1,530,000 |
|
|
|
|
|
|
|
|
|
|
$ |
1,530,000 |
|
The fair value of the interest rate swaps were derived from discounted cash flow analyses based on
the terms of the contract and the forward interest rate curve adjusted for our credit risk. The
liability for our interest rate swaps are recorded at fair value. We used the projected cash
flows, discounted as necessary, to estimate the fair value of the contingent consideration for the
acquisition of Art Gun on December 28, 2009. Accordingly, the fair value measurement for the
contingent consideration falls in level 3 of the fair value hierarchy and is remeasured at the end
of each reporting period.
We adopted the provisions of the fair value measurement accounting and disclosure guidance related
to nonfinancial assets and liabilities recognized at fair value on a nonrecurring basis for the
acquisition of The Cotton Exchange on July 12, 2010. These assets and liabilities are measured at
fair value upon acquisition and will be on a nonrecurring and as needed basis as part of our impairment assessments and as circumstances
require. The fair value measurement was made using the income approach and falls in level 3 of the
fair value hierarchy. No intangibles or contingent consideration are expected to be recorded in
connection with the acquisition.
The following table summarizes the fair value and presentation in the consolidated balance sheets
for derivatives as of October 2, 2010 and July 3, 2010 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
October 2, |
|
|
July 3, |
|
|
|
2010 |
|
|
2010 |
|
Accrued expenses |
|
$ |
192 |
|
|
$ |
105 |
|
Deferred tax liabilities |
|
|
(74 |
) |
|
|
(66 |
) |
Other liabilities |
|
|
|
|
|
|
66 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
118 |
|
|
$ |
105 |
|
|
|
|
|
|
|
|
The change in fair value recognized in accumulated other comprehensive loss represented a loss, net
of taxes, of $13 thousand for the three months ended October 2, 2010. For the three months ended
September 26, 2009, the change in fair value recognized in accumulated other comprehensive loss was
a gain, net of taxes, of $0.1 million.
10
Note LLegal Proceedings
At times we are party to various legal claims, actions and complaints. We believe that, as a result
of legal defenses, insurance arrangements, and indemnification provisions with parties believed to
be financially capable, such actions should not have a material effect on our operations, financial
condition, or liquidity.
Note MThe Cotton Exchange Acquisition
On June 11, 2010, we formed a new North Carolina limited liability company, TCX, LLC (TCX), as a
wholly-owned subsidiary of M.J. Soffe, LLC. Pursuant to an Asset Purchase Agreement dated July 5,
2010, on July 12, 2010, TCX acquired substantially all of the net assets of HPM Apparel, Inc. d/b/a
The Cotton Exchange, including accounts receivable, inventory, and fixed assets, and assumed
certain liabilities. The results of The Cotton Exchanges operations have been included in the
consolidated financial statements since the acquisition date. The total purchase price, which
included a post-closing working capital adjustment, was $9.9 million. We financed the cash
purchase price under our existing revolving credit facility.
We accounted for the acquisition of The Cotton Exchange pursuant to ASC 805, Business Combinations,
with the purchase price allocated based upon fair value. No goodwill or intangibles are expected
to be recorded on our financial statements in connection with this acquisition. We are currently in
the process of finalizing the valuations of the assets acquired and liabilities assumed and thus
the initial allocation of the purchase price is subject to change until the allocation is finalized
upon refinement of certain preliminary estimates.
Note NRepurchase of Common Stock
Our Board of Directors has authorized our management to use up to $15.0 million to repurchase Delta
Apparel stock in open market transactions under our Stock Repurchase Program. During the three
months ended October 2, 2010, we purchased 51,640 shares of our common stock for a total cost of
$0.7 million. Since the inception of the Stock Repurchase Program, we have purchased 1,076,411
shares of our common stock for an aggregate of $9.8 million. All purchases were made at the
discretion of our management. As of October 2, 2010, $5.2 million remained available for future
purchases under our Stock Repurchase Program. Our Stock Repurchase Program does not have an
expiration date.
The following table summarizes the purchases of our common stock for the quarter ended October 2,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
Number |
|
Average |
|
Shares Purchased |
|
Shares that May |
|
|
of Shares |
|
Price Paid |
|
as Part of Publicly |
|
Yet Be Purchased |
Period |
|
Purchased |
|
per Share |
|
Announced Plans |
|
Under the Plans |
|
July 4 to August 7, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.9 million |
August 8 to September 4, 2010 |
|
|
11,904 |
|
|
$ |
14.00 |
|
|
|
11,904 |
|
|
$5.7 million |
September 5 to October 2, 2010 |
|
|
39,736 |
|
|
$ |
14.31 |
|
|
|
39,736 |
|
|
$5.2 million |
|
Total |
|
|
51,640 |
|
|
$ |
14.24 |
|
|
|
51,640 |
|
|
$5.2 million |
Note OLicense Agreements
We have entered into license agreements that provide for royalty payments on net sales of licensed
products as set forth in the agreements. These license agreements are within our Retail-Ready
segment. We have incurred royalty expense (included in selling, general and administrative
expenses) of approximately $3.9 million and $3.6 million, for the first quarter of fiscal years
2011 and 2010, respectively.
Based on minimum sales requirements, future minimum royalty payments required under these existing
license agreements are (in thousands):
|
|
|
|
|
Fiscal Year |
|
|
|
|
2011 |
|
$ |
1,045 |
|
2012 |
|
|
1,477 |
|
2013 |
|
|
482 |
|
2014 |
|
|
550 |
|
2015 |
|
|
300 |
|
|
|
|
|
|
|
$ |
3,854 |
|
|
|
|
|
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements made by or on behalf of the Company. We may from time to time make written or oral
statements that are forward-looking, including statements contained in this report and other
filings with the Securities and Exchange Commission (the SEC), in our press releases, in oral
statements, and in other reports to our shareholders. All statements, other than statements of
historical fact, which address activities, events or developments that we expect or anticipate will
or may occur in the future are forward-looking statements. The words estimate, project,
forecast, anticipate, expect, intend, believe and similar expressions, and discussions of
strategy or intentions, are intended to identify forward-looking statements.
The forward-looking statements in this Quarterly Report are based on our expectations and are
necessarily dependent upon assumptions, estimates and data that we believe are reasonable and
accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are also
subject to a number of business risks and uncertainties, any of which could cause actual results to
differ materially from those set forth in or implied by the forward-looking statements. The risks
and uncertainties include, among others:
|
|
|
the general U.S. and international economic conditions, including market
conditions; |
|
|
|
|
the ability to grow, achieve synergies and realize the expected profitability
of recent acquisitions; |
|
|
|
|
changes in consumer confidence, consumer spending, and demand for apparel
products; |
|
|
|
|
the ability of our brands and products to meet consumer preferences within the
prevailing retail environment; |
|
|
|
|
the financial difficulties encountered by our customers and higher credit risk
exposure; |
|
|
|
|
the ability to obtain and renew our significant license agreements; |
|
|
|
|
the competitive conditions in the apparel and textile industries; |
|
|
|
|
changes in environmental, tax, trade, employment and other laws and
regulations; |
|
|
|
|
any restrictions on our ability to borrow capital or obtain financing; |
|
|
|
|
the uncertainty of raw material, transportation and energy prices; |
|
|
|
|
changes in our information systems related to our business operations; |
|
|
|
|
any significant interruptions with our distribution network; |
|
|
|
|
changes in the economic, political and social stability at our offshore
locations; and |
|
|
|
|
the relative strength of the United States dollar as against other currencies. |
A detailed discussion of significant risk factors that have the potential to cause actual results
to differ materially from our expectations is described under the subheading Risk Factors in our
Form 10-K for our fiscal year ended July 3, 2010 filed with the Securities and Exchange Commission
and are beyond our control. Accordingly, any forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized.
We do not undertake publicly to update or revise the forward-looking statements even if it becomes
clear that any projected results will not be realized.
BUSINESS OUTLOOK
We started fiscal year 2011 with further organic sales growth in what remains a difficult retail
environment. Our sales increased 8.9% from the prior year first quarter resulting from the revenue
of The Cotton Exchange, which was acquired on July 12, 2010, and organic sales growth of 2%. This
is our third consecutive September quarter with organic growth, which we accomplished in a period
of overall market contraction.
During the recent quarter, we did experience a slowdown in some channels of distribution. We
believe concern about consumer demand for apparel products, particularly with regard to the
upcoming holiday selling season, has caused retailers to take a more cautious approach to their
near-term inventory commitments. This, coupled with the significant rise in cotton prices and
uncertainty about its long-term impact, has added pressure to an already weak marketplace.
We operated our manufacturing facilities at full running schedules during our first quarter of
fiscal year 2011 and currently anticipate this continuing through the upcoming quarter. Our Ceiba
Textile facility has increased its fabric production with new equipment we added during the
quarter. The additional fabric production has allowed us to increase our sewing plant output. We
continue to make productivity gains and improve our material utilization in our manufacturing
operations which should lower our overall cost to manufacture garments. We are currently
purchasing additional equipment for our textile facilities which, combined with efficiency
improvements, should allow us to further increase fabric production in the upcoming quarters.
In general, the demand for our branded products remains strong and we continue to gain additional
placements at retailers. Demand for our Delta catalog and FunTees private label products also
remains solid. We believe we are servicing these markets well and believe our high service levels
are attracting new customers to us. We have had success with our new apparel programs within our
To
12
The Game business and are working on additional strategies to grow the outdoor and active
lifestyle retail channels. During the first quarter of fiscal 2011, we purchased additional digital printers and increased personnel in our Art
Gun business. We are now printing programs on demand for one retailer, several pro sports leagues
and for internal use and anticipate adding collegiate programs in our third fiscal quarter. We
also remain in discussions with additional national retailers to add our online design studio to
their website.
We are also excited about our most recent acquisition, The Cotton Exchange, which will be
integrated with our Soffe business. We are currently consolidating our Soffe college bookstore
business into The Cotton Exchange operations, to leverage the strong service capabilities that The
Cotton Exchange is known for in the marketplace. In addition, we are consolidating much of The
Cotton Exchanges retail and military business into the Soffe operations where we believe that we
have stronger systems to support the requirements of these programs. Over time, we believe we can
achieve cost savings with these integrations and expect to reduce our product costs by utilizing
our vertical manufacturing platform.
The significant appreciation in cotton costs and uncertainty about future prices adds risk to our
business. We have implemented strategies across our businesses to increase selling prices to
recover the rising costs of raw materials. This, however, may ultimately cause overall decreases
in demand for our cotton products, thereby lowering volumes in these channels. In addition, our
working capital requirements will continue to increase as we carry higher cost products in
inventory. Although these conditions add to the challenging business environment, we remain
encouraged with the many opportunities we see for our business. We believe that we are making the
necessary investments of time and capital in our existing businesses and in new business ventures
to enhance future revenue growth and margin expansion.
EARNINGS GUIDANCE
We reiterate our fiscal year 2011 outlook for sales and earnings. For the year ending July 2,
2011, we still expect net sales to be in the range of $455 to $465 million and earnings to be in
the range of $1.55 to $1.70 per diluted share. The sales outlook for fiscal 2011 includes
anticipated organic growth of approximately 3% to 6% after adjusting for one less week of
operations in fiscal year 2010, and approximately $25 million in additional revenues from The
Cotton Exchange, which we acquired on July 12, 2010.
We remain concerned about the challenging economic conditions which continue to impact consumer
demand for apparel. In addition, volatile cotton prices, global yarn shortages and limited
capacities in cargo freight have created further short-term challenges in the apparel marketplace.
In determining our expectations for fiscal year 2011, we believe we have taken into consideration
these heightened risk factors.
RESULTS OF OPERATIONS
Net sales for the first quarter of fiscal year 2011 increased by $8.8 million to $107.9 million, an
increase of 8.9% from the first quarter of the prior year. Activewear segment sales were $49.5
million for the first quarter of fiscal year 2011, an increase of 5.1% compared to the $47.1
million in sales in the first quarter of fiscal year 2010, driven by sales growth in both catalog
and private label products. These sales increases resulted from an increase of approximately 10%
in average selling prices, partially offset by a 5% decline in unit sales. Retail-Ready segment
sales were $58.4 million for the three months ended October 2, 2010, an increase of 12.3% over the
prior year first quarter sales of $52.0 million. The sales growth resulted from revenue in The
Cotton Exchange, which we acquired on July 12, 2010, partially offset by a 1.1% organic sales
decline. The slight sales decline was driven by lower sales of licensed graphic tees and fleece
products, partially offset by strong sales of our exclusively-licensed outdoor brands, Realtree
Outfitters and Realtree Outfitters by The Game.
Gross profit as a percentage of net sales was 24.0% in the first quarter of fiscal year 2011
compared to 23.9% in the first quarter of the prior year. Activewear segment margins improved 300
basis points to 10.9% in the first quarter of fiscal year 2011 compared to 7.9% in the prior year
first quarter. Gross margins in the Retail-Ready segment were 35.2% in the first quarter of fiscal
year 2011 compared to 38.3% in the prior year first quarter. The decline in gross margins was
driven from a shift in sales mix by distribution channel. Our gross margins may not be comparable
to other companies, since some companies include costs related to their distribution network in
cost of goods sold and we exclude a portion of those costs from gross margin and instead include
them in selling, general and administrative expenses.
Selling, general and administrative expenses, including the provision for bad debts, for the first
quarter of fiscal year 2011 were $22.9 million, or 21.2% of sales, compared to $19.3 million, or
19.4% of sales, for the same period in the prior year. Selling, general and administrative
expenses increased as we made investments in the business to promote future growth for the
business. These expenses included costs associated with the acquisition of The Cotton Exchange,
expenses related to the start-up of Art Gun, and new brand-marketing campaigns.
Operating income for the first quarter of fiscal year 2011 was $3.0 million, a decrease of $1.5
million from the first quarter of the prior year.
Net interest expense for the first quarter of fiscal year 2011 was $0.6 million, a reduction of
$0.4 million compared to the first quarter of fiscal year 2010. The decrease in net interest
expense was due to the expiration of our $15.0 million interest rate swap at 5.06% and
13
$15.0 million collar agreement at 4.33% and also due to lower debt levels for the first quarter of fiscal
2011 compared to the first quarter of fiscal 2010.
Our effective income tax rate for the three months ended October 2, 2010 was 30.0%, compared to an
effective tax rate of 27.0% for the same quarter in the prior year. The primary driver for the
increase in fiscal year 2011 is due to having a higher percentage of pre-tax earnings in the United
States and foreign taxable locations compared to earnings in foreign tax-free locations. Profits
that are permanently reinvested in the tax-free zone of Honduras are relatively fixed since this
amount is based on a cost-plus determination based on our production output. Therefore, our
effective tax rate has increased because our expected U.S. profits have increased while our
Honduran tax-free profits have remained relatively constant.
Accounts receivable as of October 2, 2010 was $54.5 million, a decrease of $6.5 million from July
3, 2010. The decrease in accounts receivable was primarily the result of lower sales during the
first quarter of fiscal year 2011.
Inventories increased $20.3 million from July 3, 2010 to $136.9 million on October 2, 2010. The
increase in inventory levels is primarily due to the inclusion of The Cotton Exchange inventory and
the replenishment of inventory after the strong sales in the fourth quarter of fiscal year 2010
lowered our inventory levels. We expect inventory units to continue to increase during the second
and third quarters of fiscal year 2011 in preparation for the spring shipping season. In addition,
the cost of our inventory will continue to increase as we carry higher raw material costs in our
inventory.
Capital expenditures in the first quarter of fiscal year 2011 were $1.5 million compared to $1.3
million in the first quarter of the prior year. Expenditures for the first quarter of fiscal year
2011 were primarily for adding new digital printing machines associated with the start-up of Art
Gun and to continue to increase capacity and lower costs in our textile facilities. Total capital
expenditures are expected to be approximately $8.0 million in fiscal year 2011.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash needs are for working capital and capital expenditures. In addition, in the future
we may use cash to fund share repurchases under our Stock Repurchase Program or to pay dividends.
Refer to Note EDebt and Note KDerivatives for additional discussion regarding our external
liquidity resources.
Operating Cash Flows
Operating
activities provided $3.4 million in cash for the first three months of fiscal year 2011
compared to $13.2 million in cash provided by operating activities in the first three months of
fiscal year 2010. The decrease in operating cash flow in the first quarter of fiscal year 2011
compared to the prior year resulted primarily from higher working capital requirements as we
replenished our inventory after ending fiscal year 2010 with lower than normal inventory levels.
Investing Cash Flows
Capital expenditures for the first three months of fiscal year 2011 were $1.5 million compared to
$1.3 million for the first three months of the prior year. Expenditures for the first three months
of fiscal year 2011 were primarily from adding new digital printing machines associated with the
start-up of Art Gun and to continue to increase capacity and lower costs in our textile facilities.
During the first quarter of fiscal year 2011, we acquired The Cotton Exchange for $9.9 million (See
Note MThe Cotton Exchange Acquisition). During the first quarter of the prior year, we
made the final payment of $0.7 million associated with the acquisition of To The Game, LLC.
Financing Activities
For the first three months of fiscal year 2011, cash provided by financing activities was $7.9
million compared to $11.3 million of cash used by financing activities during the first three
months of fiscal year 2010. During the first three months of fiscal year 2011 the cash provided by
our financing activities, combined with the cash provided by our operating activities, was used to
fund our investing activities, particularly our acquisition of The Cotton Exchange. During the
first three months of fiscal year 2010, we used the cash from our operating activities, net of our
investing activities, to reduce our debt outstanding under our revolving credit facility and to
make principal payments on our loan with Banco Ficohsa.
Based on our expectations, we believe that our credit facility should be sufficient to satisfy our
foreseeable working capital needs, and that the cash flow generated by our operations and funds
available under our credit line should be sufficient to service our debt payment requirements, to
satisfy our day-to-day working capital needs and to fund our planned capital expenditures. Any
material deterioration in our results of operations, however, may result in our losing the ability
to borrow under our revolving credit facility and to issue letters of credit to suppliers or may
cause the borrowing availability under our facility to be insufficient for our needs.
14
PURCHASES BY DELTA APPAREL OF ITS OWN SHARES
Our Board of Directors has authorized our management to use up to $15.0 million to repurchase Delta
Apparel stock in open market transactions under our Stock Repurchase Program. As of October 2, 2010, $5.2 million remained
available for future purchases under our Stock Repurchase Program. See Note NRepurchase of Common
Stock.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which were prepared in accordance with U.S. generally accepted
accounting principles (GAAP). The preparation of our consolidated financial statements requires
us to make estimates and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We base our estimates and judgments
on historical experience and various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. The most significant
estimates and assumptions relate to revenue recognition, accounts receivable and related reserves,
inventory and related reserves, the carrying value of goodwill, stock-based compensation and the
accounting for income taxes.
The detailed Significant Accounting Policies are included in Note 2 to the Audited Consolidated
Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 3,
2010, and there have been no changes in those policies since the filing of that Annual Report.
ENVIRONMENTAL AND REGULATORY MATTERS
We are subject to various federal, state and local environmental laws and regulations concerning,
among other things, wastewater discharges, storm water flows, air emissions and solid waste
disposal. Our plants generate very small quantities of hazardous waste, which are either recycled
or disposed of off-site. Most of our plants are required to possess one or more environmental
permits, and we believe that we are currently in compliance with the requirements of those permits.
The environmental rules applicable to our business are becoming increasingly stringent and we incur
capital and other expenditures annually to achieve compliance with environmental standards. We
currently do not expect the amount of expenditures required to comply with environmental laws will
have a material adverse affect on our operations, financial condition or liquidity. There can be no
assurance, however, that future changes in federal, state, or local regulations, interpretations of
existing regulations or the discovery of currently unknown problems or conditions will not require
substantial additional expenditures. Similarly, while we are not currently aware of any
violations, the extent of our liability, if any, for past failures to comply with laws, regulations
or permits applicable to our operations cannot be determined and could have a material adverse
effect on our operations, financial condition and liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
COMMODITY RISK SENSITIVITY
We have a supply agreement with Parkdale America, LLC (Parkdale) to supply our yarn requirements
until December 31, 2011. 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 with
Parkdale, 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.
Yarn with respect to which we had fixed cotton prices at October 2, 2010 was valued at $26.0
million, and was scheduled for delivery between October 2010 and March 2011. At October 2, 2010, a
10% decline in the market price of the cotton covered by our fixed price yarn would have had a
negative impact of approximately $2.0 million on the value of the yarn. At July 3, 2010, a 10%
decline in the market price of the cotton covered by our fixed price yarn would have had a negative
impact of approximately $2.4 million on the value of the yarn. The impact of a 10% decline in the
market price of the cotton covered by our fixed price yarn would have been greater at July 3, 2010
than at October 2, 2010 due primarily to our decreased commitments at October 2, 2010 as compared
to July 3, 2010.
We may use derivatives, including cotton option contracts, to manage our exposure to movements in
commodity prices. We do not designate our cotton option contracts as hedge instruments upon
inception. Accordingly, we mark to market changes in the fair market value of the options in cost
of sales in the statements of operations. We did not own any cotton option contracts on October 2,
2010.
15
Additionally, if Parkdales operations are disrupted and it is not able to provide us with our yarn
requirements, we may need to obtain yarn from alternative sources. Although alternative sources are
presently available, we may not be able to enter into arrangements with substitute suppliers on
terms as favorable as our current terms with Parkdale. Because there can be no assurance that we
would be able to pass along our higher cost of yarn to our customers, this could have a material adverse effect
on our results of operations.
INTEREST RATE SENSITIVITY
Our credit agreement provides that outstanding amounts bear interest at variable rates. If the
amount of outstanding indebtedness at October 2, 2010 under the revolving credit facility had been
outstanding during the entire three months ended October 2, 2010 and the interest rate on this
outstanding indebtedness were increased by 100 basis points, our interest expense would have
increased by approximately $0.2 million, or 29.4% of actual interest expense, during the quarter.
This compares to what would have been an increase of $0.6 million, or 17.4% of actual interest
expense, for fiscal year 2010, or an average of $0.2 million per quarter, based on the outstanding
indebtedness at July 3, 2010. Although the dollar amount of the increase is consistent between the
first quarter of 2011 and the quarterly average during fiscal year 2010, the higher percentage
increase in the first quarter of fiscal year 2011 is due to the actual interest expense in the
quarter being lower than the quarterly average interest expense in fiscal year 2010. The actual
change in interest expense resulting from a change in interest rates would depend on the magnitude
of the increase in rates and the average principal balance outstanding.
Derivatives
We use interest rate swaps to manage our interest rate exposure and reduce the impact of future
interest rate changes as described in Note KDerivatives.
Changes in the derivatives fair values are deferred and recorded as a component of accumulated
other comprehensive loss (AOCL) until the underlying transaction is recorded. When the hedged
item affects income, gains or losses are reclassified from AOCL to the Consolidated Statements of
Operations as interest income/expense. Any ineffectiveness in our hedging relationships, of which
there currently is none, would be recognized immediately in the Consolidated Statement of
Operations. As of October 2, 2010, the fair value of the interest
rate swap agreements resulted in an accumulated other
comprehensive loss, net of taxes, of $0.1 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information that we are required to disclose in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated the effectiveness of our disclosure controls and procedures as of October 2, 2010
and, based on the evaluation of these controls and procedures, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures were effective
at the evaluation date.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer,
has evaluated whether any change in our internal control over financial reporting occurred during
the first quarter of fiscal year 2011. Based on that evaluation, we have concluded that there has
been no change in our internal control over financial reporting during the first quarter of fiscal
year 2011 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. We are currently evaluating the internal control over financial
reporting at TCX, LLC and are taking action to strengthen the internal control over financial
reporting at TCX, LLC during the current fiscal year.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note LLegal Proceedings, which is incorporated herein by reference.
16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Repurchases of Common Stock
Our Board of Directors has authorized our management to use up to $15.0 million to repurchase Delta
Apparel stock in open market transactions under our Stock Repurchase Program. During the three
months ended October 2, 2010, we purchased 51,640 shares of our common stock for a total cost of
$0.7 million. Since the inception of the Stock Repurchase Program, we have purchased 1,076,411
shares of our common stock for an aggregate of $9.8 million. All purchases were made at the
discretion of our management. As of October 2, 2010, $5.2 million remained available for future
purchases under our Stock Repurchase Program. Our Stock Repurchase Program does not have an
expiration date.
The following table summarizes the purchases of our common stock for the quarter ended October 2,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
Total Number of |
|
Dollar Value of |
|
|
Number |
|
Average |
|
Shares Purchased |
|
Shares that May |
|
|
of Shares |
|
Price Paid |
|
as Part of Publicly |
|
Yet Be Purchased |
Period |
|
Purchased |
|
per Share |
|
Announced Plans |
|
Under the Plans |
|
July 4 to August 7, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.9 million |
August 8 to September 4, 2010 |
|
|
11,904 |
|
|
$ |
14.00 |
|
|
|
11,904 |
|
|
$5.7 million |
September 5 to October 2, 2010 |
|
|
39,736 |
|
|
$ |
14.31 |
|
|
|
39,736 |
|
|
$5.2 million |
|
Total |
|
|
51,640 |
|
|
$ |
14.24 |
|
|
|
51,640 |
|
|
$5.2 million |
Item 6. Exhibits
Exhibits
|
|
|
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
|
|
|
|
DELTA APPAREL, INC.
(Registrant)
|
|
November 5, 2010 |
|
By: |
/s/ Deborah H. Merrill
|
|
Date |
|
|
Deborah H. Merrill |
|
|
|
|
Vice President, Chief Financial Officer and Treasurer |
|
|
|
18