UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File number 1-15583
DELTA APPAREL, INC.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-2508794
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097
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(Address of principal executive offices) (Zip Code)
(678) 775-6900
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(Registrant's telephone number, including area code)
(Not Applicable)
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(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 [X] No [ ].
As of October 25, 2000, there were outstanding 2,411,643 shares of the
registrant's common stock, par value of $0.01, which is the only class of the
outstanding common or voting stock of the registrant.
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INDEX
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PART I. Financial Information: Page
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Item 1. Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets--
September 30, 2000 and July 1, 2000 3
Condensed Consolidated Statements of Operations--
Three months ended September 30, 2000 and October 2,1999 4
Condensed Consolidated Statements of Cash Flows--
Three months ended September 30, 2000 and October 2,1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 8
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
(Unaudited)
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September 30, July 1,
2000 2000
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Assets
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Current assets:
Cash $ 3,899 415
Accounts receivable, net 18,599 22,115
Inventories 32,016 28,207
Prepaid expenses and other current assets 1,278 1,186
Deferred income taxes 672 -
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Total current assets 56,464 51,923
Property, plant and equipment, net 25,634 26,871
Noncurrent deferred income taxes 28 -
Other assets 280 313
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Total assets $ 82,406 79,107
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Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 13,688 15,116
Income taxes payable 1,426 -
Current portion of long-term debt 2,000 2,000
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Total current liabilities 17,114 17,116
Long-term debt 7,167 7,667
Other liabilities 696 522
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Total liabilities 24,977 25,305
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Stockholders' equity:
Preferred stock, 2,000,000 shares authorized;
none issued and outstanding - -
Common stock, par value $0.01 a share, 7,500,000
shares authorized, 2,411,643 and 2,399,803 issued and
outstanding at September 30, 2000 and July 1, 2000, repectively. 24 24
Additional paid-in capital 53,887 53,778
Retained earnings 3,518 -
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Total stockholders' equity 57,429 53,802
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Total liabilities and stockholders' equity $ 82,406 79,107
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See accompanying notes to condensed consolidated financial statements.
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DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands, except shares and per share amounts)
(Unaudited)
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Three Months Ended
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September 30, October 2,
2000 1999
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Net sales $ 30,649 28,659
Cost of goods sold 23,408 24,966
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Gross profit 7,241 3,693
Selling, general and administrative expenses 2,444 1,881
Provision for bad debts 216 24
Other (income)/expense (6) 11
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Operating income 4,587 1,777
Interest expense, net 295 2,213
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Income (loss) before income taxes 4,292 (436)
Provision for income taxes 774 23
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Net income (loss) $ 3,518 (459)
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Weighted average shares outstanding (1999 Proforma):
Basic 2,407,937 2,379,900
Diluted 2,417,142 2,379,900
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Net income (loss) per common share (1999 Proforma):
Basic $ 1.46 $ (0.19)
Diluted $ 1.46 $ (0.19)
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See accompanying notes to condensed consolidated financial statements.
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DELTA APPAREL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
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Three Months Ended
September 30, October 2,
2000 1999
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Cash flows from operating activities:
Net income (loss) $ 3,518 (459)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,649 1,639
Deferred income taxes (700) 24
Loss (gain) on sale of property and equipment 1 (1)
Changes in operating assets and liabilities:
Accounts receivable 3,516 8,031
Inventories (3,809) 1,318
Prepaid expenses and other current assets (92) (76)
Other noncurrent assets 32 22
Accounts payable and accrued expenses (1,318) 2,585
Other liabilities 174 16
Income taxes payable 1,426 -
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Net cash provided by operating activities 4,397 13,099
Cash flows used in investing activities:
Purchases of property, plant and equipment (413) (80)
Proceeds from sale of property, plant and equipment - 3
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Net cash used in investing activities (413) (77)
Cash flows used in financing activities:
Repayment of long-term financing (500) (60)
Change in due to related parties, net - (13,262)
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Net cash used in financing activities (500) (13,322)
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Net increase (decrease) in cash 3,484 (300)
Cash balance at beginning of period 415 402
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Cash balance at end of period $ 3,899 102
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Supplemental cash flow information:
Cash paid during the period for interest $ 286 6
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Cash paid during the period for income taxes $ 48 -
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Noncash financing activity--issuance of common stock $ 110 -
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See accompanying notes to condensed consolidated financial statements.
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DELTA APPAREL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A--Basis of Presentation
Prior to June 30, 2000, Delta Apparel, Inc. (together with its predecessors, the
"Company") was a wholly owned subsidiary of Delta Woodside Industries, Inc.
("Delta Woodside" or the "Parent"). In connection with a plan to separate its
two apparel businesses, Delta Woodside transferred to the Company the assets,
liabilities, and operations of its apparel business previously conducted by the
following divisions or subsidiaries of Delta Woodside: Delta Apparel Company and
the Edgefield yarn plant. Effective June 30, 2000, Delta Woodside distributed
all the common stock of the Company to the Delta Woodside stockholders (the
"Distribution"). In connection with the Distribution, Delta Woodside
contributed, as contributions to capital, all net debt amounts owed to it by the
Company, with certain exceptions. Borrowings related to the Company under Delta
Woodside's credit agreement were repaid with the proceeds from borrowings under
the Company's new credit agreement.
The interim condensed consolidated financial statements for the three months
ended September 30, 2000 and October 2, 1999, included herein, have been
prepared 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2001. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended July 1, 2000, filed with the Securities
and Exchange Commission.
Note B--Inventories
Inventories consist of the following:
September 30, July 1,
2000 2000
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Raw materials $ 2,576 2,785
Work in process 11,438 11,903
Finished goods 18,002 13,519
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$ 32,016 28,207
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Note C--Income Taxes
The effective income tax rate on pretax income for the three months ended
September 30, 2000 was 18.0%, compared to 1.3% for the fiscal year ended July 1,
2000. Based on results to date and projections for the remainder of fiscal year
2001, the Company expects to use its remaining net operating loss carryforwards
and be subject to income taxes on a portion of its income. Based on these
projections, management estimates that the valuation allowances on the tax
benefit resulting from net operating loss carryforwards will be reduced or
eliminated, resulting in an annualized forecasted effective income tax rate of
18.0%.
Note D--Cotton Procurements
The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At September 30, 2000, minimum
payments under these contracts with non-cancelable contract terms were $9,825.
Note E--Computation of Basic and Diluted Net Earnings per Share (EPS) and
Proforma EPS
Basic net earnings per share is calculated by dividing the net earnings by the
weighted average common shares outstanding of Delta Apparel, Inc. For the
purposes of earnings per share, the diluted weighted average common shares
outstanding includes the shares covered by options or awards granted under the
Company's Stock Option Plan and the Company's Incentive Stock Award Plan.
Proforma net earnings per share is calculated by dividing the net earnings by
the weighted average common shares outstanding of Delta Woodside Industries,
Inc., adjusted for the distribution ratio assuming that shares distributed in
the Distribution were outstanding for the three months ended October 2, 1999.
The weighted average shares do not include securities that would be
anti-dilutive for each of the periods presented.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains various "forward-looking statements". All
statements, other than statements of historical fact, that address activities,
events or developments that the Company expects or anticipates will or may occur
in the future are forward-looking statements. Examples are statements that
concern future revenues, future costs, 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 the
Company's expectations and are necessarily dependent upon assumptions, estimates
and data that the Company believes 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. Accordingly, any forward-looking statements do not
purport to be predictions of future events or circumstances and may not be
realized.
The Company does not undertake publicly to update or revise the forward-looking
statements even if it becomes clear that any projected results will not be
realized.
RESULTS OF OPERATIONS
Net sales in the first quarter of fiscal year 2001 were $30.6 million, an
increase of $2.0 million, or 6.9%, from net sales of $28.7 million in the first
quarter of the prior fiscal year. The increase in net sales was the result of
increased unit sales (up 8.5%, accounting for $2.4 million) offset by lower unit
prices (down 1.4%, accounting for $0.4 million). The pricing declines were due
to an average 8.0-10.0% decline in same style pricing, partially offset by an
increase in sales of higher priced products. For fiscal year 2001, the Company
projects a sales growth at an annualized rate approaching 10% and operating
earnings growth at a multiple of the sales growth rate. The Company's sales
expectations for the balance of fiscal year 2001 are dependent on no additional
significant declines in same style pricing.
Gross profit increased to $7.2 million, or 23.6% of sales, in the first three
months of fiscal 2001 from $3.7 million, or 12.9% of sales, in the same period
of fiscal 2000. The increased gross profit resulted from the sale of higher
margin products.
During the three months ended September 30, 2000, selling, general and
administrative expenses were $2.7 million, as compared to $1.9 million during
the three months ended October 2, 1999, an increase of $0.8 million or 39.6%.
For the first quarter of fiscal 2001, expenses in this category were 8.7% of net
sales as compared to 6.6% of net sales for the first quarter of fiscal 2000. The
increase in selling, general and administrative expenses was driven by an
increase of $0.6 million in administrative costs and an increase of bad debt
expense of $0.2 million. The higher administrative costs resulted from the move
of the corporate headquarters, higher commission expense resulting from the
sales of higher margin products, public reporting expenses and an increase in
distribution expense. Bad debt expense in this quarter was 0.7% of sales and is
consistent with our expectations. The increase from the same quarter of fiscal
year 2000 was due to bad debt expense being unusually low in that quarter.
The Company's operating income was $4.6 million for the first quarter of fiscal
2001, compared to $1.8 million in fiscal 2000, an increase of $2.8 million or
158.1%. Delta Apparel's improved gross profit contributed to the improvement in
operating income in the first quarter of fiscal year 2001 due to the factors
described above. The Company's operating income as a percentage of net sales
increased to 15.0% for the first quarter of fiscal 2001 compared to 6.2% for the
first quarter of fiscal 2000.
For the three months ended September 30, 2000, net interest expense was $0.3
million, as compared to $2.2 million for the three months ended October 2, 1999.
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This reduction was a result of the contribution to equity of the intercompany
debt in connection with the spin-off from Delta Woodside Industries, Inc. on
June 30, 2000.
The effective income tax rate on pretax income for the three months ended
September 30, 2000 was 18.0%, compared to 1.3% for the fiscal year ended July 1,
2000. Based on results to date and projections for the remainder of fiscal year
2001, the Company expects to use its remaining net operating loss carryforwards
and be subject to income taxes on a portion of its income. Based on these
projections, management estimates that the valuation allowances on the tax
benefit resulting from net operating loss carryforwards will be reduced or
eliminated, resulting in an annualized forecasted effective income tax rate of
18.0%.
Net income for the first quarter of fiscal year 2001 was $3.5 million, as
compared to a net loss of $0.5 million for the first quarter of fiscal year
2000, due to the factors described above.
Delta Apparel's order backlog at September 30, 2000 was $13.0 million, a $7.2
million decrease from the $20.2 million order backlog at October 2, 1999. The
decrease in backlog is due to the reduction of forward purchase commitments
given by distributors and the increase in short notice orders from catalog
customers. This is due to the decrease in sales to distributors from
approximately 38% of sales in the first quarter of fiscal 2000 to 25% of sales
in the first quarter of fiscal 2001. As a growing percentage of the Company's
business is sold on an immediate shipment basis, Delta Apparel believes that
backlog order levels may no longer give a general indication of future sales.
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Inventories at September 30, 2000 totaled $32.0 million, compared to $28.2
million at July 1, 2000. The increase in inventories is due to an increase in
manufacturing capacity which will allow the Company to meet its projected sales
growth. The Company will continue to build its inventory levels as it prepares
for its sales growth for the balance of the fiscal year.
Capital expenditures in the three months ended September 30, 2000 were $0.4
million as compared to $0.1 million in the three months ended October 2, 1999.
These investments were primarily related to E-commerce and the Company's
expansion into Mexico.
LIQUIDITY AND CAPITAL RESOURCES
Delta Apparel's operating activities provided cash of $4.4 million and $13.1
million in the first quarter of fiscal year 2001 and the first quarter of fiscal
year 2000, respectively. The cash provided in the first quarter of fiscal year
2001 was primarily due to net income and a reduction in accounts receivable,
offset by an increase in inventory. The cash provided in the first quarter of
fiscal year 2000 was primarily due to a reduction in accounts receivable and an
increase in accounts payable and accrued expenses.
In mid-May 2000, Delta Apparel entered into a credit agreement with a lending
institution, under which the lender provided Delta Apparel with a $10 million
term loan and a 3-year $25 million revolving credit facility. All loans under
the credit agreement bear interest at rates based on an adjusted LIBOR rate plus
an applicable margin or a bank's prime rate plus an applicable margin. Delta
Apparel granted the lender a first mortgage lien on or security interest in
substantially all of its assets. Delta Apparel has the option to increase the
revolving credit facility from $25 million to $30 million, provided that no
event of default exists under the facility.
Delta Apparel expects that its peak borrowing needs will be in its third and
fourth fiscal quarters and that during those quarters it may need to draw or set
aside for letters of credit approximately $7.0 million under its revolving
credit facility for working capital purposes and letters of credit. The interest
rate on the term loan at September 30, 2000 was 8.63%.
Based on these expectations, Delta Apparel believes that its $25 million
revolving credit facility should be sufficient to satisfy its foreseeable
working capital needs, and that the cash flow generated by its operations and
funds available under its revolving credit line should be sufficient to service
its debt payment requirements, to satisfy its day-to-day working capital needs
and to fund its planned capital expenditures. Any material deterioration in
Delta Apparel's results of operations, however, may result in Delta Apparel
losing its ability to borrow under its revolving credit facility and to issue
letters of credit to suppliers or may cause the borrowing availability under
that facility to be insufficient for Delta Apparel's needs.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
COMMODITY RISK SENSITIVITY
The Company purchases cotton from approximately seven established merchants with
whom it has long standing relationships. The majority of the Company's purchases
are executed using "on-call" contracts. These on-call arrangements are used to
insure that an adequate supply of cotton is available for the Company's
requirements. Under on-call contracts, the Company agrees to purchase specific
quantities for delivery on specific dates, with pricing to be determined at a
later time. Prices are set according to prevailing prices, as reported by the
New York Cotton Exchange, at the time of the Company's election to fix specific
contracts.
Cotton on-call with a fixed price at September 30, 2000 was valued at $9.8
million, and is scheduled for delivery between October, 2000 and March, 2001. At
September 30, 2000, the Company had unpriced contracts for deliveries between
January, 2001 and September, 2001. Based on the prevailing price at September
30, 2000, the value of these commitments is approximately $8.2 million. Daily
price fluctuations are minimal, yet long-term trends in price movement can
result in unfavorable pricing of cotton for Delta Apparel. Delta Apparel does
not use financial instruments to hedge commodity price risk. At September 30,
2000, a 10% decline in the market price of the cotton covered by Delta Apparel's
fixed price contracts would have had a negative impact of approximately $1.0
million on the value of the contracts.
INTEREST RATE SENSITIVITY
Delta Apparel's credit agreement provides that the interest rate on outstanding
amounts owed shall bear interest at variable rates. If the amount of outstanding
indebtedness at September 30, 2000 under the term loan had been the amount
outstanding during the entire three months ended September 30, 2000 and the
interest rate on this outstanding indebtedness had been increased by 1%, Delta
Apparel's expense would have been approximately $0.1 million higher during the
quarter. The actual increase 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.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Pursuant to the Company's incentive stock award plan, on July 31, 2000 the
Company issued an aggregate of 11,780 shares of the Company's common stock to
officers and key and middle management employees of the Company in exchange for
$117.80 aggregate consideration ($0.01 per share, as provided by the incentive
stock award plan). Issuance of these shares to such officers and key and middle
management employees was exempt from registration under the Securities Act of
1933, as amended, by reason of Section 4(2) of that Act.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K were filed by the Company during the fiscal quarter
ended September 30, 2000.
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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.
Delta Apparel, Inc.
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(Registrant)
October 26, 2000 /s/ Herbert M. Mueller
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Herbert M. Mueller
Vice President, Chief Financial Officer
And Treasurer
