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 December 26, 1998
OR
[ ] 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 1-10095
DELTA WOODSIDE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57- 0535180
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
233 North Main Street, Suite 200
Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
864\232-8301
(Registrant's telephone number, including area code)
(Not Applicable)
(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 [ ] .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value- 24,186,900 shares as of January 27,
1998.
INDEX
DELTA WOODSIDE INDUSTRIES, INC.
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--
December 26, 1998 and June 27, 1998 3-4
Condensed consolidated statements of operations--
Three and six months ended December 26, 1998 and
December 27, 1997 5
Condensed consolidated statements of cash flows
Six months ended December 26, 1998
and December 27, 1997 6
Notes to condensed consolidated financial
statements-December 26, 1998 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 12
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Securities Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 26, June 27,
1998 1998
(Unaudited)
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,215 $ 2,753
Accounts receivable:
Factor 72,324 81,256
Customers 30,820 41,253
103,144 122,509
Less allowances for doubtful
accounts and returns 5,302 3,309
97,842 119,200
Inventories:
Finished goods 61,142 52,219
Work in process 48,704 48,814
Raw materials and supplies 14,849 12,925
124,695 113,958
Current assets of discontinued
operations 7,665 25,797
Deferred income taxes 873 861
Prepaid expenses and other
current assets 4,807 2,962
TOTAL CURRENT ASSETS 239,097 265,531
PROPERTY, PLANT AND EQUIPMENT
Cost 277,684 288,300
Accumulated depreciation 120,010 123,537
157,674 164,763
Noncurrent assets of discontinued
operations 12,523 22,323
Other assets 21,766 21,425
$431,060 $474,042
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET--Continued
December 26, June 27,
1998 1998
(Unaudited)
(In thousands)
LIABILITIES
CURRENT LIABILITIES
Short-term bank debt $ 17,423 $ 11,108
Trade accounts payable 26,708 41,592
Accrued and sundry liabilities 34,235 41,460
Current portion of long-term
debt 623 610
78,989 94,770
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT 161,536 183,535
DEFERRED INCOME TAXES 3,779 3,716
OTHER LIABILITIES AND DEFERRED 9,370 12,454
CREDITS
SHAREHOLDERS' EQUITY
Common Stock, par value $.01-authorized
50,000,000 shares, issued and outstanding
24,190,000 shares at December 26, 1998
and 24,644,000 shares at June 27, 1998 242 246
Additional paid-in capital 163,451 165,221
Retained earnings 13,694 14,100
177,387 179,567
COMMITMENTS AND CONTINGENCIES
$431,060 $474,042
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
December 26, December 27, December 26, December 27
1998 1997 1998 1997
(In thousands, except per share data)
Net Sales $113,760 $124,927 $244,382 $264,069
Cost of goods sold 93,762 103,260 196,033 217,185
Gross profit on sales 19,998 21,667 48,349 46,884
Selling, general and
administrative expense 13,805 13,857 28,181 28,286
administrative expense
Other income (expense) 258 (9) 160
OPERATING PROFIT 5,935 7,819 20,008 18,598
Interest expense (income):
Interest expense 5,310 5,669 10,221 11,975
Interest (income) (95) (118) (148) (202)
5,215 5,551 10,073 11,773
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 720 2,268 9,935 6,825
Income tax expense 91 567 1,257 1,706
INCOME FROM CONTINUING
OPERATIONS 629 1,701 8,678 5,119
(Loss) on disposal of
discontinued operations
less applicable income taxes (3,469) (7,863)
(Loss) from operations of
discontinued operations
less applicable income taxes (2,271) (5,023)
NET INCOME $(2,840) $(570) $815 $96
Basic and diluted earnings
(loss) per share:
Continuing operations $ .03 $ .07 $ .36 $ .21
Discontinued operations $ (.15) $ (.09) $ (.33) $ (.21)
Net earnings $ (.12) $ (.02) $ .03 $ .00
Weighted average shares
outstanding 24,190 24,573 24,423 24,572
See notes to consolidated financial statements.
DELTA WOODSIDE INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
December 26, December 27,
1998 1997
(In thousands)
OPERATING ACTIVITIES
Net Income (loss) $ 815 $ 96
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Discontinued operations 27,204 4,531
Depreciation 10,833 10,830
Amortization 602 1,114
Other 1,983 1,945
Changes in operating assets
and liabilities (15,558) (114)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 25,064 18,402
INVESTING ACTIVITIES
Property, plant and equipment
purchases (9,447) (5,338)
Proceeds of dispositions 2,674 323
Investing activities of
discontinued operations (217) (2,055)
Other 508 (13)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (6,482) (7,083)
FINANCING ACTIVITIES
Proceeds from revolving
lines of credit 222,359 141,000
Repayments on revolving
lines of credit (237,679) (290,500)
Scheduled principal payments of
long-term debt (277) (259)
Proceeds from issuance of
long-term debt 143,935
Purchase and retirement of
common stock (1,880)
Dividends paid (1,221) (1,229)
Other (237) (109)
NET CASH (USED) BY FINANCING
ACTIVITIES (18,935) (7,162)
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 462 4,157
Cash and cash equivalents at
beginning of period 2,753 2,676
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 3,215 $ 6,833
See notes to consolidated financial statements.
DELTA WOODSIDE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 26, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Delta Woodside Industries, Inc. ("the Company")
have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to 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 six months ended December 26, 1998 are
not necessarily indicative of the results that may be expected
for the year ending July 3, 1999. 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 June 27, 1998.
NOTE B--DISCONTINUED OPERATIONS
On March 3, 1998, the Company made the decision to close its
Stevcoknit Fabrics division and sell its Nautilus International
division (fitness equipment). The sale of the Nautilus business
was closed on January 4, 1999, and will be reported in the third
quarter of fiscal year 1999. The Company increased the estimate
of the after-tax cost to close discontinued businesses and
recognized after tax charges of $4.4 million and $3.5 million
during the first and second quarters of fiscal year 1999,
respectively.
The assets of discontinued businesses are as follows (in thousands):
December 26, June 27,
1998 1998
Accounts Receivable $ 3,774 $ 19,450
Inventories 3,023 6,104
Other current assets 138 243
Total current assets 7,665 25,797
Property, plant and equipment net of
accumulated depreciation 10,796 11,535
Other assets 1,727 10,788
Total Assets $ 20,188 $ 48,120
Summarized results of operations for discontinued businesses are as follows (in
thousands):
Three Months Ended Six Months Ended
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
Net Sales $ 4,934 $ 30,889 $ 11,880 $ 62,433
Cost and expenses 8,330 34,083 17,427 69,100
Net costs charged to
reserves (3,396) (5,547)
(Loss) before income taxes 0 (3,194) 0 (6,667)
Income tax (benefit) (923) (1,644)
(Loss) from discontinued
operations $ 0 $ (2,271) $ 0 $ (5,023)
NOTE C-INCOME TAXES
The effective income tax rate on income from continuing
operations for the three months ended December 26, 1998 is 13%,
compared to 25% for the fiscal year ended June 27, 1998. The
Company expects that earnings for fiscal year 1999 will permit it
to reduce the valuation allowance against deferred tax assets,
resulting in a lower effective income tax rate for fiscal year
1999.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Net sales for the second quarter of fiscal year 1999, were $114
million as compared to $125 million in the same quarter of the
prior fiscal year, a decrease of 9%. Sales were down in all
three business segments for both the quarter and year-to-date
periods. For the six months ended December 26, 1998, net sales
were $244 million, a 7% decline from $264 million in the first
six months of the prior fiscal year.
Gross profit declined with the decline in sales, but gross profit
as a percent of sales stayed approximately the same, in the
current quarter compared to the same quarter of the prior fiscal
year. For the first six months of the current fiscal year, gross
profit and gross margin both improved, in spite of a decline in
sales, due primarily to the strong results in the first quarter
of fiscal year 1999.
Operating profits were $5.9 million in the second quarter of
fiscal year 1999, a decline of 24% compared to operating profits
of $7.8 million in the same quarter of the prior fiscal year.
The decline in operating profits is related to the decline in
gross profits described above. While gross profits declined,
selling, general and administrative expenses were approximately
the same in the second quarter of fiscal year 1999 as compared to
the same quarter of the prior fiscal year. Delta Apparel
operating losses decreased, but this improvement was more than
offset by operating losses at Duck Head Apparel. Operating
profit for the six months ended December 26, 1998, totaled $20
million, an increase of 7.5% over the $18.6 million achieved in
the six months ended December 27, 1997. The year-to-date
improvement in operating profit is due primarily to improvements
at Delta Apparel, offset by operating losses at Duck Head
Apparel.
The Company reported income from continuing operations of $.6
million in the second quarter of fiscal year 1999 as compared to
$1.7 million in the same quarter of the prior fiscal year. On a
per share basis, earnings from continuing operations for the
quarter ended December 26, 1998, were $.03 on the 24,190,000
average shares outstanding as compared to $.07 per share on the
24,572,000 average shares outstanding for the quarter ended
December 27, 1997. Average shares outstanding declined during
the second quarter as a result of the Company's stock repurchase
plan described later.
In discontinued operations the Company recognized an additional
pretax charge of $4 million during the latest quarter to reflect
a reduction in anticipated proceeds from the sale of Nautilus
International. The sale was closed on January 4, 1999, in the
third quarter of fiscal year 1999. According to the terms of the
agreement, the Company will receive a total of approximately $16
million in cash, and the purchaser assumed approximately $2.0
million in liabilities. Proceeds have been and will be used to
pay down short-term debt. Discontinued operations for the six
months ended December 26, 1998 include net impairment charges of
$9.0 million. Net impairment charges include approximately $13.5
million for losses at Nautilus based on a reduction in estimated
net proceeds from the sale, and a reduction of estimated losses
at Stevcoknit Fabrics Company of approximately $4.5 million.
Discontinued operation losses in the quarter and year-to-date
periods of the prior fiscal year represent operating losses for
periods prior to the business being categorized as discontinued
operations.
The Company's effective income tax rate on income from continuing
operations for fiscal year 1999 is 13%, compared to 25% in fiscal
year 1998. The current tax rate is lower than in the previous
year because of an expected reduction in the valuation allowance
on deferred tax assets.
Net loss for the latest quarter was $2.8 million or $.12 per
share as compared to a loss of $.6 million or $.02 per share in
the same quarter of the prior fiscal year. Net income for the
six months ended December 26, 1998, was $.8 million or $.03 per
share as compared to net income of $.1 million for the six months
ended December 27, 1997.
Inventories increased nearly $11 million to $125 million at
December 26, 1998 compared to June 27, 1998. The inventory
increases occurred primarily at Delta Apparel, in anticipation of
increased sales in the spring season, and as a result of the
decline in sales in the second quarter of fiscal year 1999, as
compared to the same quarter in the prior fiscal year.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
The order backlog was $112 million at December 26, 1998, a
decrease of 17% as compared to $135 million at December 27, 1997.
While backlogs declined in all three segments, the greatest
percentage declines occurred at Delta Apparel and Duck Head
Apparel.
In Delta Mills Marketing Company, which manufactures and sells
finished and unfinished woven fabrics, sales declined 7% to $79
million in the second quarter of fiscal year 1999, as compared to
the same quarter of the prior fiscal year, primarily due to lower
demand for unfinished and synthetic fabric. Similarly, sales for
the six months ended December 26, 1998 were down 7% to $162
million as compared to the first six months of the prior fiscal
year. Gross margins improved due to lower raw material cost and
improved manufacturing efficiencies. Improvements in gross
margins on declining sales resulted in a gross profit improvement
in the second quarter and six months ended December 26, 1998, as
compared to the same periods of the prior fiscal year. Progress
is being made in shifting production from unfinished greige
fabric to fabrics used in finished products. The improvement in
gross margin permitted the segment to report operating earnings
of $11 million, approximately 1% higher than in the same quarter
of the prior fiscal year. Operating earnings for the six months
ended December 26, 1998 were $25 million, also about 1% ahead of
the same six months of the prior fiscal year.
Delta Apparel, the Company's T-shirt and fleece apparel division,
continued to improve its results over the prior fiscal year. The
improved results came in spite of an 18% decline in sales to $18
million in the second quarter of fiscal year 1999 as compared to
the same quarter of the prior fiscal year. Net sales for the
first six months of fiscal year 1999 were down by 12%. Lower raw
material cost and better manufacturing efficiencies helped offset
lower market prices on the products manufactured by Delta
Apparel. Delta Apparel's improved gross margins and gross profit
on lower sales, along with a reduction in selling and
administrative costs, resulted in a reduction in operating losses
for the quarter and year-to-date as compared to the same periods
of the prior fiscal year. Delta Apparel had an operating loss of
$1.3 million in the second quarter of fiscal year 1999 as
compared to a loss of $3.4 million in the same quarter of the
prior fiscal year. Similarly, for the six months ended December
26, 1998, Delta Apparel had an operating loss of $.8 million
compared to a loss of $6.8 million in the same period of the
prior fiscal year.
Duck Head Apparel Company's sales decreased 5% and 4% in the
second quarter and first six months of fiscal year 1999,
respectively, as compared to the same periods of the prior fiscal
year. Gross margins declined as well, due to an increase in
reserves for unsold finished inventory. While fixed selling and
administrative costs have been reduced at Duck Head, these
savings have been more than offset by higher advertising cost.
Operating losses in the second quarter and first six months of
fiscal year 1999, were $3.4 million and $1.9 million,
respectively; as compared to operating profit of $.1 million and
$1.4 million in the second quarter and first six months of the
prior fiscal year.
As previously reported, the Board of Directors has made the
decision to seek a buyer for Duck Head Apparel Company. The
Company has had discussions with third parties with respect to a
possible sale and other strategic alternatives for Duck Head, but
cannot be reasonably certain that a transaction on satisfactory
terms will be consummated in the near future. For this reason,
the Company has made the decision to continue to report the Duck
Head Apparel business as a part of continuing operations.
On September 15, 1998, the Company announced a plan to
repurchase, from time to time, up to 2.5 million shares of the
Company's outstanding stock at prices and at times in the
discretion of the Company's top management. . Through December
26, 1998, the Company purchased for retirement approximately .5
million shares of its Common Stock at a total cost of about $1.9
million.
The Company's focus on reducing capital investment in under-
performing businesses is improving the overall health of the
Company. Debt has been reduced by $54 million during the year
since December 27, 1997. The recent close on the sale of
Nautilus International has allowed a further reduction of debt in
the third quarter of fiscal 1999.
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS (CONTINUED)
The Company is still cautious about the business environment for
textiles and apparel. Order backlogs are lower than at this time
last year, and there continues to be unrest in the international
business climate. Retail prices for apparel continue to stagnate
and wholesale prices for T-shirts and fleece continue to decline.
These conditions will put pressure on the Company's earnings for
the second half of fiscal 1999.
The Company has a variety of computers and systems that are
subject to Year 2000 issues. The Year 2000 problem arose because
many existing computer programs use only the last two digits to
refer to a year. Therefore, these programs do not properly
recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail,
or cause erroneous results. The Company has considered the
impact of Year 2000 issues on the Company's computer information
systems and other equipment that use embedded technology such as
micro-controllers, and has developed a remediation plan. The
Company's Year 2000 plan includes 1) Identifying year 2000
issues, 2) Assessment and prioritization of issues, 3)
Remediation, and 4) Testing for Year 2000 compliance. Because
the Company has a wide variety of systems and equipment at
various locations affected by the Year 2000 issue, various
aspects of the Company's Year 2000 efforts are at different
stages of progress. Most of the work now being done involves
remediation and testing of Year 2000 solutions. Expenditures in
fiscal 1998 for the Year 2000 project amounted to approximately
$150,000. As a part of its plan to achieve Year 2000 compliance,
the Company has decided to accelerate the schedule for
implementation of certain data collection systems. The cost of
these systems is approximately $1 million. The Company now
expects to spend approximately $1.5 million on software
improvements and remediation work in fiscal year 1999, and an
additional $.4 million in fiscal year 2000, with completion
expected by the first quarter of fiscal year 2000. Key vendors
and customers have documented assurance of current or planned
readiness for the year 2000. The most likely worst-case scenario
is that certain non-critical business systems might fail. The
Company has developed contingency plans for all systems that had
not been remediated as of December 26, 1998. Contingency plans
include the option to disable certain systems or to use alternate
methods of providing the same or similar service. The Company
does not believe that these non-critical systems will have a
material adverse impact on the Company's ability to generate
revenue. In the event that the Company is unable to implement
all or a part of its Year 2000 plan, then some of the Company's
computer systems could fail. Any liability or lost revenue
associated with systems failure cannot be reasonably estimated at
this time.
The Company believes that cash flow generated by its operations
and funds available under its current credit facilities will be
sufficient to service its debt, to satisfy its day-to-day working
capital requirements, to pay dividends and to fund its planned
capital expenditures.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a part of the Company's business of converting fiber to
finished fabric, the Company makes raw cotton purchase
commitments and then fixes prices with cotton merchants who buy
from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement
can result in unfavorable pricing of cotton. Before fixing
prices, the Company looks at supply and demand fundamentals,
recent price trends and other factors that affect cotton prices.
The Company also reviews the backlog of orders from customers as
well as the level of fixed price cotton commitments in the
industry in general. A 10% decline in market price of the
Company's fixed price contracts would have a negative impact of
approximately $5.8 million on the value of the contracts.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings*
Item 2. Changes in Securities and Use of Proceeds
Date of Type of Amount Of Class of Nature of
Transaction Transaction Common Stock Persons Transaction
October 23, 1988 Issued 300 Employee Service Awards
The Company believes that these issuances are exempt from
registration under the Securities Act of 1933 by reason of
Section 4(2) of the Securities Act of 1933 and as not
constituting a "sale".
Item 3. Defaults upon Senior Securities*
Item 4. Submission of Matters to a Vote of Security Holders
The following summarizes the votes at the Annual
Meeting of the Company's shareholders held on
November 24 , 1998:
Election of Broker
Directors For Against Withheld Abstentions Nonvotes
C. C. Guy 21,826,142 N/A 169,633 0 N/A
J. F. Kane 21,819,016 N/A 176,759 0 N/A
M. Lennon 21,805,764 N/A 190,011 0 N/A
E. E. Maddrey, II 21,815,815 N/A 169,960 0 N/A
B. A. Mickel 21,808,135 N/A 187,640 0 N/A
B. C. Rainsford 21,817,517 N/A 168,258 0 N/A
Ratification of
Appointment of
KPMG Peat Marwick
as Independent
Auditors
For Fiscal 1999 21,933,215 51,947 10,613 N/A N/A
Item 5. Other Information*
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
None
(b) The Company filed Form 8-K with date of October 27,
1998.
Item 5. Other Events
*Items 1, 3 and 5 are not applicable
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 Woodside Industries, Inc.
(Registrant)
Date February 4, 1999
/s/ Robert W. Humphreys
Robert W. Humphreys
Vice President-Finance
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTER
ENDED DECEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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