FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 28, 2009
OR
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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)
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| GEORGIA
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58-2508794 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.) |
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| 322 South Main Street |
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| Greenville, SC
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29601 |
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| (Address of principal executive offices)
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(Zip Code) |
(864) 232-5200
(Registrant’s 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
o 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 definition of “large accelerated
filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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| Large accelerated filer o |
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Accelerated filer þ |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2 of the Exchange Act).
Yes o No þ.
As of April 30, 2009, there were outstanding 8,502,699 shares of the registrant’s common stock, par
value of $0.01 per share, which is the only class of outstanding common or voting stock of the
registrant.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
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March 28, |
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June 28, |
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2009 |
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2008 |
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Assets |
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Current assets: |
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Cash |
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$ |
1,162 |
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$ |
586 |
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Accounts receivable, net |
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49,702 |
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62,012 |
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Income taxes receivable |
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2,440 |
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1,007 |
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Inventories, net |
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136,469 |
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124,746 |
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Prepaid expenses and other current assets |
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3,014 |
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2,916 |
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Deferred income taxes |
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3,402 |
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2,542 |
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Total current assets |
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196,189 |
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193,809 |
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Property, plant and equipment, net |
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37,650 |
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40,042 |
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Goodwill |
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16,814 |
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16,814 |
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Intangibles, net |
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7,235 |
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7,603 |
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Other assets |
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3,330 |
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3,355 |
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Total assets |
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$ |
261,218 |
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$ |
261,623 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
37,560 |
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$ |
35,423 |
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Accrued expenses |
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14,479 |
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17,689 |
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Current portion of long-term debt |
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5,718 |
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6,780 |
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Total current liabilities |
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57,757 |
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59,892 |
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Long-term debt, less current maturities |
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93,650 |
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95,542 |
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Deferred income taxes |
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985 |
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578 |
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Other liabilities |
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1,070 |
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718 |
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Total liabilities |
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153,462 |
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156,730 |
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Stockholders’ equity: |
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Preferred stock—2,000,000 shares authorized; none issued
and outstanding |
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— |
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— |
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Common stock—$0.01 par value, 15,000,000 shares authorized,
9,646,972 shares issued, and 8,502,699 and 8,496,749
shares outstanding as of March 28, 2009 and June 28, 2008,
respectively |
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96 |
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96 |
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Additional paid-in capital |
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58,029 |
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57,431 |
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Retained earnings |
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59,739 |
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57,307 |
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Accumulated other comprehensive loss |
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(658 |
) |
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(441 |
) |
Treasury stock—1,144,273 and 1,150,223 shares as of March 28,
2009 and June 28, 2008, respectively |
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(9,450 |
) |
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(9,500 |
) |
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Total stockholders’ equity |
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107,756 |
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104,893 |
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Total liabilities and stockholders’ equity |
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$ |
261,218 |
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$ |
261,623 |
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See accompanying notes to condensed consolidated financial statements.
3
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts in thousands, except share amounts and per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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March 28, |
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March 29, |
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March 28, |
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March 29, |
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2009 |
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2008 |
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2009 |
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2008 |
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Net sales |
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$ |
85,685 |
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$ |
75,364 |
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$ |
250,458 |
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$ |
216,706 |
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Cost of goods sold |
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68,915 |
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59,654 |
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198,327 |
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177,184 |
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Gross profit |
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16,770 |
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15,710 |
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52,131 |
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39,522 |
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Selling, general and administrative expenses |
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14,450 |
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14,645 |
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45,850 |
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42,232 |
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Other (expense) income, net |
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(34 |
) |
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9 |
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(49 |
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57 |
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Restructuring costs |
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— |
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— |
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— |
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62 |
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Operating income (loss) |
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2,286 |
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1,074 |
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6,232 |
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(2,715 |
) |
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Interest expense, net |
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1,028 |
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1,648 |
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3,669 |
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4,703 |
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Income (loss) before provision
(benefit) for income taxes |
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1,258 |
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(574 |
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2,563 |
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(7,418 |
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Provision (benefit) for income taxes |
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95 |
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(189 |
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131 |
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(2,651 |
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Net income (loss) |
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$ |
1,163 |
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$ |
(385 |
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$ |
2,432 |
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$ |
(4,767 |
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Basic earnings (loss) per share |
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$ |
0.14 |
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$ |
(0.05 |
) |
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$ |
0.29 |
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$ |
(0.56 |
) |
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Diluted earnings (loss) per share |
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$ |
0.14 |
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$ |
(0.05 |
) |
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$ |
0.29 |
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$ |
(0.56 |
) |
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Weighted average number of shares outstanding |
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8,503 |
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8,497 |
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8,501 |
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8,474 |
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Dilutive effect of stock options |
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2 |
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— |
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1 |
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— |
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Weighted average number of shares assuming dilution |
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8,505 |
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8,497 |
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8,502 |
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8,474 |
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Cash dividends declared per common share |
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— |
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— |
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— |
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$ |
0.05 |
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See accompanying notes to condensed consolidated financial statements.
4
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
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Nine Months Ended |
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March 28, |
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March 29, |
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2009 |
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2008 |
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Operating activities: |
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Net income (loss) |
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$ |
2,432 |
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$ |
(4,767 |
) |
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |
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Depreciation and amortization |
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5,375 |
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4,462 |
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Deferred income taxes |
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(453 |
) |
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(1,194 |
) |
Loss on disposal of property, plant and equipment |
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55 |
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26 |
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Non-cash stock compensation |
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648 |
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966 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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12,310 |
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2,115 |
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Inventories |
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(11,723 |
) |
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(11,588 |
) |
Prepaid expenses and other current assets |
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(98 |
) |
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(769 |
) |
Other non-current assets |
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25 |
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(174 |
) |
Accounts payable and accrued expenses |
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1,519 |
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(89 |
) |
Income taxes |
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(1,433 |
) |
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(504 |
) |
Other liabilities |
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135 |
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386 |
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Net cash provided by (used in) operating activities |
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8,792 |
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(11,130 |
) |
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Investing activities: |
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Purchases of property, plant and equipment |
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(2,681 |
) |
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(12,699 |
) |
Proceeds from sale of property, plant and equipment |
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11 |
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50 |
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Cash paid for business |
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(2,592 |
) |
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— |
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Net cash used in investing activities |
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(5,262 |
) |
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(12,649 |
) |
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Financing activities: |
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Proceeds from long-term debt |
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263,165 |
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260,880 |
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Repayment of long-term debt |
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(266,119 |
) |
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(236,866 |
) |
Dividends paid |
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— |
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(420 |
) |
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Net cash (used in) provided by financing activities |
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(2,954 |
) |
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23,594 |
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Net increase (decrease) in cash |
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576 |
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(185 |
) |
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Cash at beginning of period |
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586 |
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792 |
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Cash at end of period |
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$ |
1,162 |
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$ |
607 |
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Supplemental cash flow information: |
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Cash paid for interest |
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$ |
3,781 |
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$ |
4,109 |
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Cash paid (refunded) for income taxes |
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$ |
1,837 |
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$ |
(1,564 |
) |
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Non-cash financing activity—issuance of common stock |
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$ |
41 |
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$ |
1,704 |
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|
See accompanying notes to condensed consolidated financial statements.
5
DELTA APPAREL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands, unless otherwise noted and excluding share and per share amounts)
Note A—Basis 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 and nine months ended March 28, 2009 are not
necessarily indicative of the results that may be expected for our fiscal year ending June 27,
2009. 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 June 28, 2008, 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 wholly-owned subsidiaries, M.J. Soffe, LLC (“Soffe”), Junkfood
Clothing Company (“Junkfood”), and our other subsidiaries, as appropriate to the context.
Note B—Accounting Policies
Our accounting policies are consistent with those described in our Summary of Significant
Accounting Policies in our Form 10-K for our fiscal year ended June 28, 2008, filed with the
Securities and Exchange Commission.
Note C—New Accounting Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157,
Fair Value Measurements (“SFAS 157”), which is effective for fiscal years beginning after November
15, 2007, and for interim periods within those fiscal years. We adopted SFAS 157 on June 29, 2008
and the adoption had no material impact on our financial position and results of operations. SFAS
157 is a principles-based standard intended to provide a framework for measuring fair value in
generally accepted accounting principles (“GAAP”), clarify the definition of fair value within that
framework, and expand disclosures about the use of fair value measurements. SFAS 157 does not
address which items are to be measured at fair value or when this measurement should be used in
accounting. Our only asset or liability that is measured at fair value on a recurring basis is the
liability for our interest rate swap and collar agreements. As of March 28, 2009, the fair value
of the liability for the interest rate swap and collar agreements was $1.1 million. The fair value
hierarchy has three levels based on the reliability of the inputs used to determine fair value.
The fair value of the interest rate swap and collar agreements was derived from a discounted cash
flow analysis based on the terms of the contract and the forward interest rate curve adjusted for
our credit risk, which is considered a level two input based on the fair value hierarchy.
In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (“FSP 157-4”). FSP 157-4 provides guidelines for
making fair value measurements more consistent with the principles presented in SFAS 157 in
determining fair values when there is no active market or where the price inputs being used
represent distressed sales. Specifically it reaffirms the need to use judgment to ascertain if a
formerly active market has become inactive and in determining fair values when markets have become
inactive. FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. We are
currently evaluating the effect that the adoption of FSP 157-4 will have on our financial position
and results of operations and do not expect the adoption of FSP 157-4 will have a material impact
on our financial statements.
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which permits companies to choose to measure certain
financial instruments and certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on
June 29, 2008 and did not elect to record any other financial instruments or other items at fair
value. As such, the adoption of SFAS 159 had no impact on our financial position and results of
operations.
In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements (“SFAS 160”), which requires all entities to report non-controlling (minority)
interests in subsidiaries as equity in the consolidated financial statements. SFAS 160 is
effective for fiscal years beginning after December 15, 2008. We are currently evaluating the
effect that the adoption of SFAS 160 will have on our financial position and results of operations
and do not expect the adoption of this statement will have a material impact on our financial
statements.
6
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”)
to improve the relevance, representational faithfulness, and comparability of the information that
a reporting entity provides in its financial statements about a business combination and its
effects. SFAS 141R applies to all transactions or other events in which an entity obtains control
of one or more businesses, and combinations achieved without the transfer of consideration. SFAS
141R is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141R is
prospective and will impact the financial position and results of operations for acquisitions
recorded after the date of adoption.
In February 2009, the FASB issued FASB Staff Position No. 141(R)-1, Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(R)-1”).
This standard requires an asset or liability arising from a contingency in a business combination
to be recognized at fair value if fair value can be reasonably determined. If it cannot be
reasonably determined, then the asset or liability will need to be recognized in accordance with
FASB Statement No. 5, Accounting for Contingencies, and FASB Interpretation No. 14, Reasonable
Estimation of the Amount of the Loss. FSP 141(R)-1 is effective for fiscal years beginning after
December 15, 2008. The adoption of FSP 141(R)-1 is prospective and will impact the financial
position and results of operations for acquisitions recorded after the date of adoption.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (“SFAS 161”), an amendment to SFAS 133, which is effective for fiscal years and interim
periods beginning after November 15, 2008. SFAS 161 changes the disclosure requirements for
derivative instruments and hedging activities, requiring entities to disclose (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related hedge items are
accounted for under SFAS 133 and its related interpretations and (c) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance and cash flows.
We adopted SFAS 161 on December 28, 2008. The additional disclosure requirements are presented in
Note O—Derivatives.
In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that must be considered in
developing renewal or extension assumptions used to determine the useful life over which to
amortize the cost of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible
Assets. FSP 142-3 is effective for financial statements for fiscal years beginning after December
15, 2008. We are currently evaluating the effect that the adoption of FSP 142-3 will have on our
financial position and results of operations and do not expect the adoption of this statement will
have a material impact on our financial statements.
In November 2008, the Emerging Issues Task Force, issued EITF Issue No. 08-6, Equity Method
Investment Accounting Considerations (“EITF 08-6”). EITF 08-6 clarifies accounting for certain
transactions and impairment considerations involving the equity method, including initial
measurement, decrease in investment value and change in level of ownership or degree of influence.
EITF 08-6 is effective on a prospective basis for fiscal years beginning on or after December 15,
2008. We are currently evaluating the effect that the adoption of EITF 08-6 will have on our
financials position and results of operations and do not expect the adoption of EITF 08-6 will have
a material impact on our financial statements.
Note D—Inventories
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
March 28, |
|
|
June 28, |
|
| |
|
2009 |
|
|
2008 |
|
Raw materials |
|
$ |
10,059 |
|
|
$ |
10,881 |
|
Work in process |
|
|
27,709 |
|
|
|
23,198 |
|
Finished goods |
|
|
98,701 |
|
|
|
90,667 |
|
|
|
|
|
|
|
|
|
|
$ |
136,469 |
|
|
$ |
124,746 |
|
|
|
|
|
|
|
|
Raw materials include finished yarn and direct materials for the activewear segment and include
finished yarn, direct materials and blank t-shirts for the retail-ready segment.
7
Note E—Goodwill and Intangible Assets
Components of intangible assets are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
March 28, |
|
|
Economic |
|
| |
|
2009 |
|
|
Life |
|
Goodwill |
|
$ |
16,814 |
|
|
|
N/A |
|
| |
Intangibles: |
|
|
|
|
|
|
|
|
Tradename/trademarks |
|
|
1,530 |
|
|
20 yrs |
Customer relationships |
|
|
7,220 |
|
|
20 yrs |
Non-compete agreements |
|
|
250 |
|
|
5 yrs |
|
|
|
|
|
|
|
|
Total intangibles |
|
|
9,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangibles |
|
|
25,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(1,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was $0.1 million and $0.4 million for the three and nine
months ended March 28, 2009, respectively. We estimate amortization expense will be approximately
$0.1 million for the remainder of fiscal year 2009, approximately $0.5 million for fiscal year
2010, and approximately $0.4 million in succeeding fiscal years.
Note F—Debt
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 Wachovia Bank, National
Association, as Agent, and the financial institutions named in the Amended Loan Agreement as
Lenders.
Pursuant to the Amended Loan Agreement, the maturity of the loans under the previously existing
credit facility was extended to September 21, 2012, and the line of credit available was increased
to $100 million (subject to borrowing base limitations based on the value and type of collateral
provided), which represents an increase of $10 million in the amount that was previously available
under the credit facility.
The credit facility is secured by a first-priority lien on substantially all of the real and
personal property of Delta Apparel, Junkfood, Soffe, and To The Game, LLC. All loans under the
Amended Loan Agreement bear interest at rates based on either an adjusted LIBOR rate plus an
applicable margin or the bank’s prime rate plus an applicable margin. The facility requires
installment payments of approximately $0.2 million per month in connection with fixed asset
amortizations, and these amounts reduce the amount of availability under the facility. Annual
facility fees are .25% of the amount by which $100 million exceeds the average daily principal
balance of the outstanding loans and letters of credit accommodations 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 (as defined in the Amended Loan Agreement) for the
preceding 12 month period must not be less than 1.10 to 1.0 and otherwise includes customary
conditions to funding, covenants, and events of default. During the quarter ended March 28, 2009
our Fixed Charge Coverage Ratio exceeded the 1.10 to 1.0 requirement allowing access to, if needed,
the total amount of availability provided for under the Amended Loan Agreement. As of March 28,
2009, our Fixed Charge Coverage Ratio was 2.50 for the preceding 12 months and we expect to
continue to meet the Fixed Charge Coverage Ratio for fiscal year 2009. At March 28, 2009, we had
the ability to borrow an additional $9.9 million under the credit facility. In addition, we had
$5.7 million of suppressed availability, where our borrowing ability on our assets exceeded our
$100 million credit limit.
Proceeds of the loans 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 March
28, 2009, there was $10.7 million of retained earnings free of restrictions for the payment of
dividends.
At March 28, 2009, we had $88.2 million outstanding under our credit facility with Wachovia Bank,
National Association, at an average interest rate of 2.57%.
The credit facility contains a subjective acceleration clause and a “springing” lockbox arrangement
(as defined in EITF 95-22),
8
whereby remittances from customers are forwarded to our general bank
account and do not reduce the outstanding debt until and unless a specified event or an event of
default occurs. Pursuant to EITF 95-22, we classify borrowings under the facility as non-current
debt.
On March 30, 2009 we invoked the “accordion” feature in our loan agreement, amending the credit
facility to increase 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 amendment did not otherwise materially change the terms or provisions of the
facility.
During the quarter ended September 27, 2008, we made the final debt payment of $1.3 million to the
former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of August 22, 2005.
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
increases to 6.5% for the remainder of the term. The loan is payable monthly, has a five-year term
and is denominated in U.S. dollars. At March 28, 2009, we had $11.2 million outstanding on this
loan.
Note G—Selling, General and Administrative Expense
We include in selling, general and administrative 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. In addition, selling, general and
administrative expenses include costs related to sales associates, administrative personnel cost,
advertising and marketing expenses and general and administrative expenses. For the third quarter
of each of fiscal years 2009 and 2008, distribution costs included in selling, general and
administrative expenses totaled $3.4 million. Distribution costs included in selling, general and
administrative expenses were $10.3 million in each of the first nine months of fiscal years 2009
and 2008.
Note H—Stock 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 2008 Annual Report to Shareholders. Effective
July 3, 2005, we adopted the fair-value recognition provisions of FASB Statement No. 123(R),
Share-Based Payment, and the Securities and Exchange Commission Staff Accounting Bulletin No. 107
(“SAB 107”).
Delta Apparel Stock Option Plan (“Option Plan”)
During the quarter ended March 28, 2009, we granted options for the purchase of up to 10,000 shares
of common stock as authorized under the Option Plan. For the third quarter of each of fiscal years
2009 and 2008, we expensed $0.1 million and $0.3 million, respectively, in connection with our
Option Plan. During the first nine months of each of fiscal years 2009 and 2008, we expensed $0.6
million and $0.7 million, respectively, in connection with our Option Plan. As of March 28, 2009,
there was $0.8 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 3.25 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.
Delta Apparel Incentive Stock Award Plan (“Award Plan”)
During the quarter ended March 28, 2009, we did not grant any shares under the Award Plan, and
compensation expense recorded under the Award Plan was $20 thousand. Compensation expense of $0.1
million was recorded under the Award Plan during the third quarter of fiscal year 2008. For the
first nine months of fiscal years 2009 and 2008, respectively, $26 thousand and $0.3 million in
compensation expense was recorded under the Award Plan. Stock compensation expense is included in
the cost of sales and selling, general and administrative expense line items of our statements of
operations over the vesting periods.
The Award Plan contains certain provisions that require it to be accounted for as a liability under
Statement No. 123(R). The outstanding awards will vest upon the filing of our Annual Report on Form
10-K for fiscal year 2009 and based on the achievement of performance criteria for the two-year
period ended June 27, 2009. Based upon the expected results of the performance criteria of these
awards and the stock price at March 28, 2009, there was $11 thousand of total unrecognized
compensation cost related to non-vested awards that would be expected to be recognized over a
period of 5 months. Because the performance criteria and our stock price at the time of vesting
are unknown, the actual amount of unrecognized compensation cost, if any, is not known.
9
Note I—Purchase Contracts
We have entered into agreements, and have fixed prices, to purchase natural gas, yarn, finished
fabric and finished apparel products for use in our manufacturing operations. At March 28, 2009,
minimum payments under these non-cancelable contracts were as follows:
| |
|
|
|
|
Natural gas |
|
$ |
141 |
|
Yarn |
|
|
21,643 |
|
Finished fabric |
|
|
2,735 |
|
Finished apparel products |
|
|
2,246 |
|
|
|
|
|
|
|
$ |
26,765 |
|
|
|
|
|
Note J—Stockholders’ Equity
Stock Repurchase Program
Our Board of Directors has authorized the Company’s management to use up to $15 million to
repurchase stock in open market transactions under our Stock Repurchase Program. We did not
purchase any shares of our common stock during the nine months ended March 28, 2009. Since the
inception of the Stock Repurchase Program, we have purchased 1,024,771 shares of our common stock
pursuant to the program for an aggregate of $9.1 million. As of March 28, 2009, $5.9 million
remained available for future purchases under our Stock Repurchase Program.
Note K—Segment Reporting
We operate our business in two distinct segments: activewear and retail-ready. 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 activewear segment consists of our Delta catalog and FunTees private label business units
primarily focused on garment styles that are characterized by low fashion risk. We manufacture,
market, and distribute unembellished knit apparel under the brands of “Delta Pro Weight®”, “Delta
Magnum Weight™”, and “Quail Hollow™.” The products are primarily sold to screen printing
companies. In addition, we manufacture products under private labels for retailers, branded
sportswear companies, corporate industry programs and sports licensed apparel marketers. These
products are also available through our website at www.deltaapparel.com.
The retail-ready segment consists of our business units primarily focused on more specialized
apparel garments to meet consumer preferences and fashion trends. We sell these embellished and
unembellished products through specialty and boutique stores, upscale and traditional department
stores, mid-tier retailers and sporting goods stores. In addition to these retail channels, we
also supply college bookstores and produce products for the U.S. military. Our Soffe and Junkfood
products are also available direct to consumers at their respective websites at www.soffe.com and
www.junkfoodclothing.com. Our products in this segment are marketed under the brands of “Soffe®”,
“Intensity Athletics®”, “Junk Food®”, “Junk Mail®”, and “Sweet and Sour®”.
Our chief operating decision maker 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. The accounting policies of our reportable segments are the same as those
described in Note B. Intercompany transfers between operating segments are transacted at cost and
have been eliminated within the segment amounts shown in the following table.
Information about our operations as of and for the three months ended March 28, 2009 and March 29,
2008, by operating segment, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Activewear |
|
Retail-Ready |
|
Consolidated |
Three months ended March 28,
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
53,313 |
|
|
$ |
32,372 |
|
|
$ |
85,685 |
|
Segment operating (loss) income |
|
|
(543 |
) |
|
|
2,829 |
|
|
|
2,286 |
|
Segment assets |
|
|
148,363 |
|
|
|
112,855 |
|
|
|
261,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 29,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
40,345 |
|
|
$ |
35,019 |
|
|
$ |
75,364 |
|
Segment operating (loss) income |
|
|
(3,649 |
) |
|
|
4,723 |
|
|
|
1,074 |
|
Segment assets |
|
|
140,672 |
|
|
|
112,515 |
|
|
|
253,187 |
|
10
Information about our operations as of and for the nine months ended March 28, 2009 and March 29,
2008, by operating segment, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Activewear |
|
Retail-Ready |
|
Consolidated |
Nine months ended March 28, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
144,271 |
|
|
$ |
106,187 |
|
|
$ |
250,458 |
|
Segment operating (loss) income |
|
|
(4,919 |
) |
|
|
11,151 |
|
|
|
6,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 29, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
123,670 |
|
|
$ |
93,036 |
|
|
$ |
216,706 |
|
Segment operating (loss) income |
|
|
(12,215 |
) |
|
|
9,500 |
|
|
|
(2,715 |
) |
The following table reconciles the segment operating income (loss) to the consolidated income
(loss) before income taxes for the three months and nine months ended March 28, 2009 and March 29,
2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Nine months Ended |
|
| |
|
March 28, |
|
|
March 29, |
|
|
March 28, |
|
|
March 29, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Segment operating income (loss) |
|
$ |
2,286 |
|
|
$ |
1,074 |
|
|
$ |
6,232 |
|
|
$ |
(2,715 |
) |
Unallocated interest expense |
|
|
1,028 |
|
|
|
1,648 |
|
|
|
3,669 |
|
|
|
4,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income (loss) before taxes |
|
$ |
1,258 |
|
|
$ |
(574 |
) |
|
$ |
2,563 |
|
|
$ |
(7,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note L—Income Taxes
Our effective income tax rate for the nine months ended March 28, 2009 was 5.1%, compared to an
effective tax rate of 56.0% for the fiscal year ended June 28, 2008. On December 31, 2008, we
completed a change in the legal entity structure of M.J. Soffe from a corporation to a limited
liability company. The change in legal structure allows us to use Delta Apparel’s state net
operating loss carryforwards, and therefore, we reversed a portion of our deferred income tax asset
valuation allowance, resulting in a tax benefit of $0.4 million, which was recognized during the
quarter ended December 27, 2008. Excluding the $0.4 million adjustment to our valuation allowance,
our effective tax rate for the nine months ended March 28, 2009 was 20.0%. In fiscal year 2008, we
donated our Fayette, Alabama facility to a charitable organization and recognized a $0.2 million
tax benefit. Our effective tax rate is subject to significant changes based on the jurisdiction and
the percentage of earnings and losses in domestic and foreign taxable and tax-free locations
relative to the total pre-tax income (loss) in a given period.
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 2003. 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 M—Factored Receivables
We assign a portion of our trade accounts receivable relating to our Junkfood business under a
factoring agreement. We account for our factoring agreement as a sale in accordance with FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, a replacement of FASB Statement 125. The assignment of these receivables is
without recourse, provided that the customer orders are approved by the factor prior to shipment of
the goods, up to a maximum for each individual account. The agreement does not include provisions
for advances from the factor against the assigned receivables. The factor funds the accounts
receivable upon collection, or, exclusive of disputed claims, upon 90 days after the due date. The
amount due from the factor is included in our accounts receivable on our balance sheet and changes
in the amount due from factor are included in our cash flow from operations. At March 28, 2009,
our accounts receivable less allowances was $49.7 million, comprised of $49.7 million in unfactored
accounts receivable, $2.5 million due from factor, and $2.5 million in allowances. At June 28,
2008, our accounts receivable less allowances was $62.0 million, comprised of $61.4 million in
unfactored accounts receivable, $3.4 million due from factor, and $2.8 million in allowances.
Note N—Restructuring Plan
On July 18, 2007, we announced an overall restructuring plan which included the closing of our
Fayette, Alabama manufacturing facility, the expensing of excess manufacturing costs associated
with the FunTees manufacturing integration, and the expensing of
11
start-up costs stemming from the
opening of our Honduran textile facility. The restructuring plan began in the fourth quarter of
fiscal year 2007, and was completed in the third quarter of fiscal year 2008. Expenses associated
with the restructuring plan impacted our
financials as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
FY 07 Qtr 4 |
|
|
FY 08 Qtr 1 |
|
|
FY 08 Qtr 2 |
|
|
FY 08 Qtr 3 |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales |
|
$5.4 million |
|
$1.9 million |
|
$2.0 million |
|
$0.9 million |
|
$10.2 million |
Restructuring Charges |
|
1.5 million |
|
0.1 million |
|
|
— |
|
|
|
— |
|
|
1.6 million |
| |
|
|
Total |
|
$6.9 million |
|
$2.0 million |
|
$2.0 million |
|
$0.9 million |
|
$11.8 million |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Impact |
|
$0.51 |
|
$0.16 |
|
$0.15 |
|
$0.07 |
|
$0.90 |
| |
|
|
In the first nine months of fiscal year 2008, we incurred $4.9 million associated with the
restructuring plan, of which $0.1 million related to severance paid to the employees of the
Fayette, Alabama facility and is included on the income statement line item “Restructuring costs.”
The remaining $4.8 million related to the excess manufacturing costs associated with the
integration of the FunTees business into our existing Maiden, North Carolina facility and the
start-up expenses associated with Ceiba Textiles, which is included in cost of sales. There were no
expenses recorded in the first nine months of fiscal year 2009 associated with the restructuring
plan, because the restructuring plan concluded in the third quarter of fiscal year 2008.
Note O—Derivatives
We use interest rate swap and collar agreements 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. On April 2, 2007, we entered into an interest rate swap agreement and an
interest rate collar agreement. Both agreements mature (or expire) on April 1, 2010. By entering
into the interest rate swap agreement, we effectively converted $15.0 million of floating rate debt
under our credit facility to a fixed obligation with a LIBOR rate of 5.06%. By entering into the
interest rate collar agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR
rates on $15.0 million of floating rate debt under our credit facility. We have assessed these
agreements and concluded each swap and collar agreement matches the exact terms of the underlying
debt to which it is related, allowing for perfectly-effective hedges. As such, changes in the
derivatives’ fair values are deferred and recorded as a component of accumulated other
comprehensive income (“AOCI”). The changes in fair value of the interest rate swap and collar
agreements resulted in an accumulated other comprehensive loss, net of taxes, of $0.7 million as of
March 28, 2009.
The following table summarizes the fair value and presentation in the consolidated balance sheets
for derivatives as of March 28, 2009 and June 28, 2008.
| |
|
|
|
|
|
|
|
|
| |
|
March 28, |
|
|
June 28, |
|
| |
|
2009 |
|
|
2008 |
|
Deferred income tax liability |
|
$ |
(412 |
) |
|
$ |
(275 |
) |
Other liabilities |
|
|
1,070 |
|
|
|
716 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
658 |
|
|
$ |
441 |
|
|
|
|
|
|
|
|
The change in fair value recognized in accumulated other comprehensive loss represented a gain of
$0.1 million and a loss of $0.2 million for the three and nine months ended March 28, 2009,
respectively. For the three and nine months ended March 29, 2008, the change in fair value
recognized in accumulated other comprehensive loss was a loss of $0.4 million and $1.0 million,
respectively.
On April 1, 2009, we entered into an interest rate swap agreement which effectively converted $15.0
million of floating rate debt under our credit facility to a fixed obligation with a LIBOR rate of
1.57%. This agreement will mature (or expire) on April 1, 2011. We have assessed this agreement and
concluded that the swap matches the exact terms of the underlying debt to which it is related and
therefore is considered a perfectly-effective hedge.
Note P—Subsequent Event
Effective on March 29, 2009, we acquired substantially all of the assets of Gekko Brands, a premier
supplier of licensed and decorated headwear sold under the brands of The Game® and Kudzu®. Under
our new wholly-owned subsidiary, To The Game, LLC will continue the business of providing
innovatively designed, high quality headwear. The Game® and Kudzu® have extensive license
agreements including most major colleges and universities, motorsports properties, Churchill Downs,
and various resort properties.
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We purchased associated inventory, accounts receivables, and fixed assets of the business, and
assumed certain liabilities. No goodwill or intangibles will be recorded in connection with the
acquisition. The acquisition was financed through our asset-based secured revolving credit
facility. In conjunction with the acquisition, we exercised our $10 million accordion feature under
our existing credit facility, bringing the total line of credit to $110 million, subject to
borrowing base restrictions.
Item 2. Management’s 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 and in 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. Examples are statements that concern future revenues, future costs, future earnings,
future capital expenditures, business strategy, competitive strengths, competitive weaknesses,
goals, plans, references to future success or difficulties, and other similar information. 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;
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
competitive conditions in the apparel and textile industries; changes in environmental, tax, trade,
employment and other laws and regulations; the uncertainty of raw material and energy prices; the
relative strength of the United States dollar as against other currencies and other risks and
uncertainties as described under the subheading “Risk Factors” in our Form 10-K for our fiscal year
ended June 28, 2008 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
Net sales for our third quarter of fiscal year 2009 were a record $85.7 million, an increase of
$10.3 million from the third quarter of the prior year. The sales growth was driven by a 32% sales
increase in the activewear segment with sales in our retail-ready segment reflecting a 7.6% decline
compared to the prior year quarter. Earnings were $0.14 per diluted share compared to a net loss
($0.05) per share in the prior year third quarter, inclusive of ($0.07) per share of restructuring
related expenses. We are pleased with the overall sales growth during the third quarter of this
fiscal year given the current economic environment. We believe the strength of our brands,
expanding license agreements, creative graphic talent, unique manufacturing and distribution
capabilities, combined with our diverse channels of distribution, are allowing us to build market
share in a difficult apparel marketplace. We continue to look at new business strategies in each
of our operations to fuel organic growth in the future.
Our manufacturing group continued to improve performance in the third quarter through our process
improvement methodology and cost reduction programs. We have made further developments in
productivity in our textile, sewing and printing facilities, our material utilization has improved,
and we are creating less off-quality production. The move of the Soffe textile production into our
Maiden and Ceiba Textile facilities started during the third quarter and is expected to be complete
by the end of fiscal year 2009. In addition to expecting an annual savings of approximately $1
million by combining this production, it should also create a more efficient supply chain allowing
lower inventories in our Soffe business unit. We currently project that these savings will start
flowing through as a reduction to our cost of sales in the fourth quarter of fiscal year 2010.
The overall environment for apparel remains difficult. We believe current capacity in the
undecorated tee market exceeds current demand. Despite this, our Delta catalog business achieved a
13% increase in unit volume during the quarter. Our FunTees business performed well during the
third quarter and the demand for our decorated, full-package production capabilities remains
healthy. Our retail customers remain cautious about consumer demand and are keeping their
inventories lean. While we believe demand for our Soffe and Junkfood products is good, we do
expect our fourth quarter revenue in these businesses to be down from the prior year when we had
very strong results. The initial build of Junkfood product to The Gap and our primary shipment of
the Navy PT uniform by Soffe positively impacted the fourth quarter of the prior year and will not
be repeated this year. However, the retail-ready segment continues to acquire new license
agreements and to add new customer relationships, building the foundation for further growth in the
future.
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We were pleased to complete the acquisition of The Game® and Kudzu® brands during the first week of
our fourth quarter. Under our new subsidiary, To The Game, LLC, we will continue this headwear
business, allowing us to increase sales of branded and licensed products and become a more
important partner with many of our key license holders. We believe there are marketing
opportunities
with many of the distribution channels we currently serve and that by utilizing our vertical
apparel manufacturing platform, The Game®, best known for headwear, could become an important
apparel brand for us.
The overall retail climate is difficult and we continue to remain cautious about our short-term
business prospects due to heightened risk in the apparel marketplace and the economy in general.
We are focusing on continued improvements in the day to day execution of our business operations
and have completed several important strategic initiatives that should ultimately build value for
our shareholders.
EARNINGS GUIDANCE
For the fiscal year ending June 27, 2009, we have narrowed our expectation for net sales to be in
the range of $350 to $360 million and earnings to be in the range of $0.70 to $0.80 per diluted
share. This compares to our fiscal year 2008 sales of $322 million and a loss of ($0.06) per
diluted share, inclusive of ($0.39) of costs associated with the textile restructuring plan.
In determining our expectations for fiscal year 2009, we believe we have taken into consideration
the heightened risk factors relating to the general slowdown of the U.S. economy and slowing
consumer demand for apparel. However, significant further deterioration in the economy may
negatively impact our ability to achieve our expectations.
RESULTS OF OPERATIONS
Net sales for the third quarter of fiscal year 2009 increased 13.7% to $85.7 million compared to
$75.4 million for the third quarter of the prior year. The activewear segment, which is comprised
of the Delta and FunTees businesses, reported sales of $53.3 million for the three months ended
March 28, 2009, an increase of 32.1% over the prior year third quarter sales of $40.3 million.
Sales in the FunTees business increased 70.7% as it received more programs and a higher percentage
of full-package products from its customers as a result of improved quality and performance over
the last several quarters. Sales in our retail-ready segment, which is comprised of Soffe and
Junkfood, were $32.4 million, a 7.6% decrease from the prior year third quarter. The Junkfood and
Soffe businesses both experienced reduced sales as retailers reduced orders to lower their
inventory investment after the weak holiday season and with continued expectation of reduced
consumer spending in the future. The Soffe business also declined in its military business, as the
prior year included sales from the introduction of the new Navy PT uniform, which resulted in a
spike in military sales in the third and fourth fiscal quarters of 2008.
Sales for the first nine months of fiscal year 2009 increased 15.6% to $250.5 million, an increase
of $33.8 million over the same period of fiscal year 2008. The sales increase was driven by organic
growth in each of our four business units.
Gross profit as a percentage of net sales was 19.6% in the third quarter of fiscal year 2009
compared to 20.8% in the third quarter of the prior year primarily due to a higher percentage of
activewear sales during the quarter compared to the prior year, lowering gross margins by
approximately 260 basis points. This decline from the mix of sales was partially offset by improved
margins in the activewear segment driven by higher prices in the private label business and overall
improved manufacturing results. In addition, the prior year third quarter included $0.9 million in
restructuring related expenses, lowering the gross margin by approximately 115 basis points. Gross
profit for the first nine months of fiscal year 2009 was 20.8%, a 250 basis points increase over
the first nine months of fiscal 2008. During the first nine months of fiscal 2008, we expensed $4.9
million in restructuring related expenses which resulted in a 220 basis point reduction in gross
profit as a percent of sales for that period. 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 third
quarter of fiscal year 2009 were $14.5 million, or 16.9% of sales, compared to $14.6 million, or
19.4% of sales, for the same period in the prior year. The decrease in selling, general and
administrative expenses as a percent of sales was due to a lower mix of branded products, which
have higher selling and marketing costs associated with them. For the first nine months of fiscal
year 2009, our selling, general and administrative expenses were $45.9 million, or 18.3% of sales,
compared to $42.2 million, or 19.5% of sales, for the same period last year. The leveraging of our
fixed costs over an increased sales base resulted in a reduction in selling, general and
administrative expenses as a percentage of sales compared to the first nine months of fiscal year
2008.
Operating income for the third quarter of fiscal year 2009 was $2.3 million, an increase of $1.2
million over the third quarter of the prior year, which included $0.9 million of restructuring
related expenses. The first nine months of fiscal year 2009 generated $6.2 million in operating
income, an increase of $8.9 million over the same period for fiscal year 2008. The operating loss
for the first nine months of fiscal year 2008 included restructuring related expenses of $4.9
million.
Net interest expense for the third quarter of fiscal year 2009 was $1.0 million, a reduction of
$0.6 million in comparison to the third
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quarter of fiscal year 2008. Through the first nine months
of fiscal 2009, we incurred $3.7 million in net interest expense, a $1.0 million reduction from the
first nine months of fiscal year 2008. Although our average debt level for the third quarter and
first nine months of fiscal year 2009 was higher than for the same periods last year, reduced
interest rates on our variable rate debt resulted in lower interest expense.
Our effective income tax rate for the nine months ended March 28, 2009 was 5.1%, compared to an
effective tax rate of 56.0% for the fiscal year ended June 28, 2008. On December 31, 2008, we
completed a change in the legal entity structure of M.J. Soffe from a corporation to a limited
liability company. The change in legal structure allows us to use Delta Apparel’s state net
operating loss carryforwards and therefore we reversed a portion of our tax valuation allowance,
resulting in a tax benefit of $0.4 million, which was recognized during the quarter ended December
27, 2008. Excluding the $0.4 million adjustment to our tax valuation allowance, our effective tax
rate for the nine months ended March 28, 2009 was 20.0%. In fiscal year 2008, we donated our
Fayette, Alabama facility to a charitable organization and recognized a $0.2 million tax benefit.
Our effective tax rate is subject to significant changes based on the jurisdiction and the
percentage of earnings and losses in domestic and foreign taxable and tax-free locations relative
to the total pre-tax income (loss) in a given period.
Accounts receivable decreased $12.3 million from June 28, 2008 to $49.7 million on March 28, 2009.
The decrease in accounts receivable was primarily the result of lower sales during the third
quarter of fiscal year 2009 in comparison to the fourth quarter of fiscal year 2008 combined with a
reduction in the number of days sales outstanding from 50 days as of June 28, 2008 to 47 days as of
March 28, 2009.
Inventories increased $11.8 million from June 28, 2008 to $136.5 million on March 28, 2009 due to
the normal build in inventory associated with the seasonality of our business. We expect inventory
levels to begin declining during the fourth quarter to levels consistent with June 28, 2008 as we
continue to match production levels with our sales projections and are further prepared to reduce
manufacturing levels in our fourth fiscal quarter as required in order to avoid building
unnecessary inventory.
Capital expenditures in the third quarter of fiscal year 2009 were $0.7 million compared to $2.9
million in the third quarter of the prior year. Expenditures for the third quarter of fiscal year
2009 were primarily for continued improvements in our information technology in our retail-ready
and activewear segments and capital expenditures intended to lower costs in our manufacturing
facilities in our activewear segment. Total capital expenditures for the first nine months of
fiscal year 2009 were $2.7 million compared to $12.7 million over the same period last year.
Capital expenditures in the third quarter and first nine months of fiscal year 2008 primarily
related to purchasing new equipment for our Honduran textile facility. Total capital expenditures
are expected to be between $3 million and $4 million for fiscal year 2009.
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.
On September 21, 2007, we entered into a Third Amended Loan and Security Agreement (the “Amended
Loan Agreement”) with Wachovia Bank, National Association, as Agent, and the financial institutions
named in the Amended Loan Agreement as Lenders. The amended agreement increased our credit
facility by $10 million to $100 million (subject to borrowing base limitations based on the value
and type of collateral provided) and extended the maturity of the loans to September 21, 2012.
Proceeds of the loans may be used for general operating, working capital, and other corporate
purposes, and to finance fees and expenses under the facility. The credit facility is secured by a
first priority lien on substantially all of the real and personal property of Delta Apparel,
Junkfood, Soffe, and To The Game, LLC. All loans under the Amended Loan Agreement bear interest at
rates based on either an adjusted LIBOR rate plus an applicable margin or the bank’s prime rate
plus an applicable margin. The facility requires installment payments of approximately $0.2
million per month in connection with fixed asset amortizations, and these amounts reduce the amount
of availability 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 March 28, 2009 and June 28, 2008, there was $10.7 million
and $10.1 million, respectively, of retained earnings free of restrictions for the payment of
dividends
Our credit facility includes the financial covenant that if the amount of availability falls below
$10 million, our Fixed Charge Coverage Ratio (as defined in the Amended Loan Agreement) for the
preceding 12 month period must not be less than 1.10 to 1.0 and otherwise includes customary
conditions to funding, covenants, and events of default. During the quarter ended March 28, 2009,
our Fixed Charge Coverage Ratio exceeded the 1.10 to 1.0 requirement allowing access to, if needed,
the total amount of availability provided for under the Amended Loan Agreement. As of March 28,
2009, our Fixed Charge Coverage Ratio was 2.50 for the preceding 12 months and we expect to
continue to meet the Fixed Charge Coverage Ratio for fiscal year 2009. At March 28, 2009, we had
the ability to borrow an additional $9.9 million under the credit facility. In addition, we had
$5.7 million of suppressed availability, where our borrowing ability on our assets exceeded our
$100 million credit limit.
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The credit facility contains a subjective acceleration clause and a “springing” lockbox arrangement
(as defined in EITF 95-22), whereby remittances from customers are forwarded to our general bank
account and do not reduce the outstanding debt until and unless a specified event or an event of
default occurs. Pursuant to EITF 95-22, we classify borrowings under the facility as non-current
debt.
At March 28, 2009, we had $88.2 million outstanding under our credit facility with Wachovia Bank,
National Association, at an average interest rate of 2.57%.
On March 30, 2009 we invoked the “accordion” feature in our loan agreement, amending the credit
facility to increase 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 amendment did not otherwise materially change the terms or provisions of the
facility.
In addition to our credit facility with Wachovia Bank, National Association, we had a seller note
payable to the former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of
August 22, 2005. During the quarter ended September 27, 2008, we made the third and final debt
payment to the former Junkfood shareholders.
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% until June 2010, at which time the interest rate
increases to 6.5% for the remainder of the term. The loan is payable monthly, has a five-year term
and is denominated in U.S. dollars. At March 28, 2009, we had $11.2 million outstanding on this
loan.
As part of the consideration to be paid in connection with the acquisition of Junkfood, additional
amounts are payable to the Junkfood sellers during each of fiscal years 2007, 2008, 2009, and 2010
if financial performance targets are met by Junkfood during the period beginning on August 22, 2005
and ending on July 1, 2006 and during each of the three fiscal years thereafter (ending on June 27,
2009). During the quarter ended September 27, 2008, an earnout payment in the amount of $2.6
million was paid to the Junkfood sellers based on the performance of Junkfood for the fiscal year
ended June 28, 2008. Based on our current projections, we do not anticipate paying an earnout
payment for fiscal year 2009. Any contingent consideration that may be earned related to the
earnout period ending June 27, 2009 will be accrued on June 27, 2009, when the contingency has been
resolved.
Derivative Instruments
We use derivative instruments to manage our exposure to interest rate changes. We do not enter
into derivative financial instruments for purposes of trading or speculation. When we enter into a
derivative instrument, we determine whether hedge accounting can be applied. Where hedge
accounting can be applied, a hedge relationship is designated as either a fair value hedge or cash
flow hedge. The hedge is documented at inception, detailing the particular risk objective and
strategy considered for undertaking the hedge. The documentation identifies the specific asset or
liability being hedged, the risk being hedged, the type of derivative used and how effectiveness of
the hedge will be assessed.
On April 2, 2007, we entered into an interest rate swap agreement and an interest rate collar
agreement to manage our interest rate exposure and effectively reduce the impact of future interest
rate changes. Both agreements mature (or expire) on April 1, 2010. By entering into the interest
rate swap agreement, we effectively converted $15.0 million of floating rate debt under our credit
facility to a fixed obligation with a LIBOR rate at 5.06%. By entering into the interest rate
collar agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR rates on
$15.0 million of floating rate debt under our credit facility. We have assessed these agreements
and concluded each swap and collar agreement matches the exact terms of the underlying debt to
which it is related, allowing for perfectly-effective hedges.
Changes in the derivatives’ fair values are deferred and are recorded as a component of accumulated
other comprehensive income (“AOCI”), net of income taxes, until the underlying transaction is
recorded. When the hedged item affects income, gains or losses are reclassified from AOCI to the
Consolidated Statements of Operations interest income/expense. The changes in fair value of the
interest rate swap and collar agreements resulted in AOCI, net of taxes, of a loss of $0.7 million
as of March 28, 2009.
On April 1, 2009, we entered into an interest rate swap agreement which effectively converted $15.0
million of floating rate debt under our credit facility to a fixed obligation with a LIBOR rate of
1.57%. This agreement will mature (or expire) on April 1, 2011. We have assessed this agreement and
concluded that the swap matches the exact terms of the underlying debt to which it is related and
therefore is considered a perfectly-effective hedge.
Operating Cash Flows
Net cash provided by operating activities was $8.8 million for the first nine months of fiscal year
2009, compared to cash used in operating activities of $11.1 million in the first nine months of
fiscal year 2008. Our cash flows from operating activities are primarily our net income plus
depreciation and amortization and non-cash compensation costs and changes in working capital. We
monitor changes in working capital by analyzing our investment in accounts receivable and
inventories and by managing our accounts
16
payable. During the first nine months of fiscal year
2009, our net cash provided by operating activities was primarily from our net income plus
depreciation and amortization and decreases in accounts receivable, partially offset by an increase
in inventories. The cash used in operating activities during the first nine months of fiscal year
2008 was primarily from our net loss less depreciation and amortization and increased inventory
levels, partially offset by lower accounts receivable.
Investing Cash Flows
Capital expenditures for the first nine months of fiscal year 2009 were $2.7 million compared to
$12.7 million for the first nine months of the prior year. Expenditures for the first nine months
of fiscal year 2009 were primarily due to continued improvements in our information technology in
our retail-ready and activewear segments and capital expenditures intended to lower costs in our
manufacturing facilities in our activewear segment. In addition, during the first quarter of fiscal
year 2009, we paid an earnout payment of $2.6 million to the former Junkfood shareholders based on
the performance of Junkfood for the fiscal year ended June 28, 2008. Capital expenditures in the
first nine months of fiscal year 2008 primarily related to purchasing new equipment for our
Honduran textile facility.
Financing Activities
For the first nine months of fiscal year 2009, cash used by financing activities was $3.0 million,
primarily related to payments under our revolving credit facility with Wachovia Bank, National
Association. During the nine months ended March 29, 2008, cash provided by financing activities was
$23.6 million, primarily related to proceeds from our revolving credit facility and proceeds from
our secured loan in Honduras with Banco Ficohsa.
On March 30, 2009 we invoked the “accordion” feature in our loan agreement, amending the credit
facility to increase 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 amendment did not otherwise materially change the terms or provisions of the
facility.
Based on our expectations, we believe that our $110 million 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 facility 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 credit facility and to issue letters of credit to suppliers,
or may cause the borrowing availability under the facility to be insufficient for our needs.
Purchases by Delta Apparel of its Own Shares
Our Board of Directors has authorized the Company’s management to use up to $15 million to
repurchase Company stock in open market transactions under our Stock Repurchase Program. We did not
purchase any shares of our common stock during the nine months ended March 28, 2009. Since the
inception of the Stock Repurchase Program, we have purchased 1,024,771 shares of our common stock
pursuant to the program for an aggregate of $9.1 million. As of March 28, 2009, $5.9 million
remained available for future purchases under our Stock Repurchase Program.
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 the adequacy of receivable and inventory reserves,
self-insurance accruals, accounting for share-based compensation, and the accounting for income
taxes.
The detailed Summary of Significant Accounting Policies is included in Note 2 to the Audited
Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year
ended June 28, 2008 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.
17
On September 29, 2008 and December 16, 2008, the North Carolina Department of Environment and
Natural Resources, Division of Water Quality (“DWQ”) issued Notices of Violation regarding
exceedances of effluent limitations in the National Pollutant Discharge Elimination System
(“NPDES”) permit for our Maiden, North Carolina textile plant. These notices were based on
self-monitoring reports submitted by us to the DWQ. The exceedances related to the permit limit of
average monthly gallons of water discharged for April, May and August 2008. The notice states that
remedial actions, if not already implemented, should be taken to correct any
problems. We have already taken actions to reduce the amount of water used in the facility and are
working with DWQ on additional actions. Although the DWQ could pursue penalties for these
violations and any additional violations, we do not believe that any penalties resulting from these
violations would be material to our results of operations or cash flows.
We incur capital and other expenditures annually to achieve compliance with environmental
standards. Generally, the environmental rules applicable to our business are becoming increasingly
stringent; however, we do not expect the amount of these expenditures 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, the extent of our liability, if any, for past
failures to comply with laws, regulations and permits applicable to our operations cannot be
determined though we are not aware of any such past violations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
COMMODITY RISK SENSITIVITY
On January 5, 2005, in conjunction with the sale of our yarn spinning facility in Edgefield, South
Carolina, we entered into a five-year agreement with Parkdale America, LLC (“Parkdale”) to supply
our yarn requirements. During this five-year period, we will purchase from Parkdale all yarn
required by Delta Apparel and our wholly-owned subsidiaries for use in our manufacturing operations
(excluding yarns that Parkdale did not manufacture as of the date of the agreement in the ordinary
course of its business or due to temporary Parkdale capacity restraints). 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 March 28, 2009 was valued at $21.6
million, and was scheduled for delivery between April 2009 and September 2009. At March 28, 2009,
a 10% decline in the market price of the cotton covered by our fixed price yarn would have had a
negative impact of approximately $1.6 million on the value of the yarn. At June 28, 2008, a 10%
decline in the market price of the cotton covered by our fixed price yarn would have had a negative
impact of approximately $1.0 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 March 28,
2009 than at June 28, 2008 due primarily to our increased commitments at March 28, 2009 as compared
to June 28, 2008.
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 as other
income or expense in the statements of income. We did not own any cotton option contracts on March
28, 2009.
INTEREST RATE SENSITIVITY
Our credit agreement provides that outstanding amounts bear interest at variable rates. If the
amount of outstanding indebtedness at March 28, 2009, under the revolving credit facility, had been
outstanding during the entire three months ended March 28, 2009 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 21.6% of actual interest expense, during the quarter.
This compares to what would have been an increase of $0.9 million, or 14.6% of actual interest
expense, for fiscal year 2008, or an average of $0.2 million per quarter, based on the outstanding
indebtedness at June 28, 2008. 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
On April 2, 2007, we entered into an interest rate swap agreement and an interest rate collar
agreement to manage our interest rate exposure and reduce the impact of future interest rate
changes. Both agreements mature (or expire) on April 1, 2010. By entering into the interest rate
swap agreement, we effectively converted $15.0 million of floating rate debt under our credit
facility to a fixed obligation with a LIBOR rate of 5.06%. By entering into the interest rate
collar agreement, we effectively provided a cap of 5.5% and a floor of 4.33% on LIBOR rates on
$15.0 million of floating rate debt under our credit facility. We have assessed these agreements
and concluded that each met the requirements to account for each as a hedge.
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Changes in the derivatives’ fair values are deferred and recorded as a component of accumulated
other comprehensive income (“AOCI”) until the underlying transaction is recorded. When the hedged
item affects income, gains or losses are reclassified from AOCI to the Consolidated Statements of
Income as interest income/expense. The changes in fair value of the interest rate swap and collar
agreements resulted in an accumulated other comprehensive loss, net of taxes, of $0.7 million as of
March 28, 2009.
On April 1, 2009, we entered into an interest rate swap agreement which effectively converted $15.0
million of floating rate debt under our credit facility to a fixed obligation with a LIBOR rate of
1.57%. This agreement will mature (or expire) on April 1, 2011.
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 Commission’s rules and
forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information that we are required to disclose in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
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 March 28, 2009 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 third quarter of fiscal year 2009. Based on that evaluation, we have concluded that there has
been no change in our internal control over financial reporting during the third quarter of fiscal
year 2009 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 6. Exhibits
Exhibits
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31.1
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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. |
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31.2
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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. |
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32.1
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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. |
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32.2
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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. |
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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.
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DELTA APPAREL, INC. |
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(Registrant) |
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May 1, 2009
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By:
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/s/ Deborah H. Merrill
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Date
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Deborah H. Merrill |
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Vice President, Chief Financial Officer and Treasurer |
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