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DLA > SEC Filings for DLA > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for DELTA APPAREL, INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Note Regarding 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 SEC, in our press releases, and in other reports to our shareholders. All statements, other than statements of historical fact, which address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. The words "estimate", "project", "forecast", "anticipate", "expect", "intend", "believe" and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.
The forward-looking statements in this 10-Q 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 volatility and uncertainty of cotton and other raw material prices;

the general U.S. and international economic conditions;

the financial difficulties encountered by our customers and suppliers and credit risk exposure;

the competitive conditions in the apparel and textile industries;

our ability to predict or react to changing consumer preferences or trends;

pricing pressures and the implementation of cost reduction strategies;

changes in the economic, political and social stability at our offshore locations;

our ability to retain key management;

the effect of unseasonable weather conditions on purchases of our products;

significant changes in our effective tax rate;

any restrictions to our ability to borrow capital or obtain financing;

the ability to raise additional capital;

the ability to grow, achieve synergies and realize the expected profitability of recent acquisitions;

the volatility and uncertainty of energy and fuel prices;


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any material disruptions in our information systems related to our business operations;

any data security or privacy breaches;

any significant interruptions with our distribution network;

changes in or our ability to comply with safety, health and environmental regulations;

any significant litigation in either domestic or international jurisdictions;

the ability to protect our trademarks;

the ability to obtain and renew our significant license agreements;

the impairment of acquired intangible assets;

changes in e-commerce laws and regulations;

changes to international trade regulations;

changes in employment regulations;

foreign currency exchange rate fluctuations;

any negative publicity regarding domestic or international business practices;

the illiquidity of our shares and volatility of the stock market;

price volatility in our shares and the general volatility of the stock market; and

the costs required to comply with the regulatory landscape regarding public company governance and disclosure.

A detailed discussion of significant risk factors that have the potential to cause actual results to differ materially from our expectations is described under the subheading "Risk Factors" in our Form 10-K for our fiscal year ending June 30, 2012, filed with the SEC. Any forward-looking statements in this Form 10-Q do not purport to be predictions of future events or circumstances and may not be realized. Any forward-looking statements are made only as of the date of this Form 10-Q and 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.
The risks described in our Form 10-K for our fiscal year ended June 30, 2012, and in this Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition, and/or operating results.

Business Outlook
We achieved record first quarter net sales of $130.1 million, which represented a 5.3% increase over fiscal 2012 first quarter net sales of $123.5 million. Our first quarter performance was primarily driven by the strong growth and improved margins in the basics segment as well as in the branded segment's Art Gun business. The higher revenues were offset somewhat by lower average selling prices that resulted from cotton price declines and product mix changes. Fiscal year 2013 first quarter net sales for the basics segment rose 26.5% compared to the prior year period. The FunTees private label business led the basics segment growth with a 48% increase in unit volume and 41.5% net sales growth during the quarter. Delta Catalog experienced a 35% increase in unit volume and 20% net sales growth. The higher unit volumes leveraged against fixed manufacturing costs, coupled with lower cotton costs in inventory, enabled Delta Apparel to reduce pricing while maintaining acceptable margins in the basics segment. The market for undecorated t-shirts was stable during the first fiscal quarter, with overall market demand keeping pace with inventories. The branded segment sales for the fiscal 2013 first quarter declined 10% from the comparable 2012 quarter. Soffe's revenue declined due to weak department store business with low replenishment orders. However, Soffe did experience solid growth in the military and sporting goods channels. The decline in Junkfood sales was primarily driven by mix changes and early shipping of fall merchandise pulling sales into our fourth quarter of fiscal year 2012. The Junk Food business did achieve growth with its core Junk Food brand in boutiques, specialty chains and high-end department stores, and maintained strong margins during the quarter. Slower collegiate product sales lowered The Game sales during the quarter, but solid growth is anticipated from the Salt Life and motorsports lines for the remainder of the fiscal year. Art Gun continued the strength it has shown over the past several quarters with a net sales increase of nearly 230 percent over last year's first quarter.
In the branded segment, all of the businesses had strengthening margins with the exception of Soffe, which is still being affected by cautious retailer purchasing patterns. We are currently evaluating several strategies to better leverage the Soffe brand assets to accelerate growth. In addition, a strong business-to-business platform aimed at gaining market position in the sporting goods channel was recently added. We continue to focus on information technology initiatives that should streamline our business operations and enhance our service levels to our customers.
Our Salt Life retail store in Jacksonville, Florida had a good first quarter, with sales meeting our expectations. Looking ahead, we see the Salt Life store as a model that retailers can successfully emulate in their own locations for the marketing and promotion of Salt Life products. We believe we can drive Salt Life's geographic growth in California with solid grass roots marketing campaigns that are planned during the year.
We expensed a one-time charge of $1.2 million in the fiscal 2013 first quarter, lowering our earnings by $0.10 per share. The charge covered legal and professional fees related to the Audit Committee internal investigation that was completed during the quarter. As


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previously disclosed, that investigation revealed no evidence to support the allegations made by a former employee regarding the year-end financial closing processes at the Company's Activewear division. The Audit Committee continues to have full confidence in the Company's financial processes and controls and no future expenses are expected related to this issue.
Capital spending during the quarter was $1.7 million and is expected to be approximately $7.0 million during the fiscal year. Capital improvements will mostly focus on screen print modernization and expansion in both our international and U.S. facilities, and branding and point-of-sale displays for our branded products.
We believe our fiscal 2013 first quarter is an indication of things to come. We managed our business through the very difficult cotton price spike of last year and have emerged with an increase in overall market share, improved manufacturing operations, lower inventories and solid margins to build upon as the year progresses. While there is a lot yet to be accomplished, we believe we are well positioned for further revenue growth and improved earnings. We also expect to achieve a tenth year of record revenue growth and continued margin improvement.

EARNINGS GUIDANCE
We remain optimistic in our outlook for fiscal year 2013, while recognizing there are many unknowns that are outside of our control that could influence our results. For the fiscal year ending June 29, 2013, we believe we will again achieve record revenues in the range of $500 to $510 million, which would be an increase of 2% to 4% from fiscal year 2012 and all of which is expected to be organic growth. Earnings are expected to be in the range of $1.65 to $1.80 per diluted share in fiscal year 2013, even with the inclusion of the $0.10 per share one-time charge taken in the first quarter.

Results of Operations
Net sales for the quarter ended September 29, 2012, were $130.1 million, compared to the quarter ended October 1, 2011, with net sales of $123.5 million. Sales within the branded segment were $63.5 million for the first quarter of fiscal year 2013 compared to $70.9 million for the same period of the prior year. This decline resulted from lower net sales in the Soffe, Junkfood and The Game business units, which were slightly offset by sales growth at Art Gun. The basics segment had sales of $66.6 million in the first quarter of fiscal 2013. The revenue growth resulted from a 37.6% increase in unit volume offset by an 8% decline in average selling prices.
Gross margins improved 190 basis points during the first quarter of fiscal year 2013 compared to the same period of the prior year. All of our branded businesses had strengthening margins. In the basics segment, higher unit volumes leveraged against fixed manufacturing costs, coupled with lower cotton costs in inventory, allowed us to maintain acceptable margins with lower average selling prices. Our gross margins may not be comparable to other companies because 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.
For the quarter ended September 29, 2012, selling, general and administrative expenses were $25.9 million, or 19.9% of sales, compared to $24.6 million, or 19.9% of sales, for the quarter ended October 1, 2011. The one-time charge of $1.2 million related to the previously disclosed Audit Committee internal investigation completed during the quarter increased selling, general and administrative expenses. Excluding the one-time charge, selling, general and administrative expenses would have been 18.9% of sales, a 100 basis point decline from the prior year first quarter driven from the stronger sales mix of basics products.
Operating income for the first quarter of fiscal year 2013 was $5.8 million compared to $6.7 million the first quarter of the prior year.
Net interest expense for the first quarter of fiscal year 2013 was $1.1 million, an increase of $0.2 million compared to the first quarter of fiscal year 2012. The increase in net interest expense was primarily from increased credit facility borrowings as well as a slight increase in the average interest rate. Our effective income tax rate for the three months ended September 29, 2012, was 25.1%, compared to an effective tax rate of 24.0% for the same period in the prior year and an effective tax rate of 76.4% for the fiscal year ended June 30, 2012. The effective tax rate for the fiscal year ended June 30, 2012, was impacted by the operating losses driven by the inventory markdown during the fiscal year, lowering our U.S. taxable income while maintaining profits in the offshore taxable and tax-free jurisdictions. We expect our fiscal year 2013 effective tax rate to be approximately 25%.
Accounts receivable as of September 29, 2012, were $69.3 million, a decrease of $4.6 million from June 30, 2012. The decrease in accounts receivable resulted from lower sales during the first quarter of fiscal year 2013 compared to the fourth quarter of fiscal year 2012 due to seasonality in our business and improved days sales outstanding.
Inventories stayed consistent at $161.8 million as of September 29, 2012, compared to $161.6 million as of June 30, 2012. Our inventory turns improved from the prior year and we remain focused on balancing our inventory levels to demand in order to appropriately service our customers while managing the working capital in the business. Based on sales in our first quarter, we were able to increase our manufacturing levels in the first quarter and are evaluating a stronger running schedule for the second half of the year.


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Capital expenditures for the first three months of fiscal year 2013 were $1.7 million compared to $1.3 million in expenditures for the first three months of fiscal year 2012. Expenditures during the fiscal year 2013 first quarter primarily related to modernizing and expanding our screen print operations along with costs associated with our business-to-business website development. Total capital expenditures are expected to be approximately $7.0 million in fiscal year 2013. Our investments will be focused on modernization and expansion of our screen and digital printing capabilities as well as branding and point-of-sale displays for our branded products.

Liquidity and Capital Resources
Our primary cash needs are for working capital and capital expenditures, as well as to fund share repurchases under our Stock Repurchase Program. In addition, we may use cash in the future to pay dividends. Operating Cash Flows
Operating activities provided $16.0 million in cash for the first three months of fiscal year 2013 compared to $16.6 million in cash used by operating activities in the first three months of fiscal year 2012. The increase in operating cash flow during the fiscal year 2013 first quarter compared to the prior year period resulted primarily from lower working capital requirements in the business. Higher capital was required in the first quarter fiscal year 2012 primarily due to higher priced cotton. In addition, during the first quarter of fiscal year 2012, payments for employee incentive compensation associated with fiscal year 2011 Company performance were made. Investing Cash Flows
Capital expenditures for the first three months of fiscal year 2013 were $1.7 million compared to $1.3 million for the first three months of the prior year. Such capital expenditures were primarily related to the modernization and expansion of our screen print operations, along with costs associated with our business-to-business website development. Financing Activities
For the first three months of fiscal year 2013, cash used by financing activities was $12.9 million compared to $17.6 million provided for the first three months of fiscal year 2011. The cash used by our financing activities during the 2013 first quarter reduced our total debt to $102.6 million, which is a decrease of $11.9 million from our fiscal 2012 year end. The cash provided by financing activities during the first three months of fiscal year 2012 funded the higher working capital needs and the repurchase of our common stock. We believe that the cash flow generated by our operations and funds available under our credit facilities should be sufficient to service our debt payment requirements, satisfy our foreseeable working capital needs, and fund our planned capital expenditures and share repurchases. Any material deterioration in our results of operations, however, may result in our inability to borrow and to issue letters of credit to suppliers under our revolving credit facility, or may cause the borrowing availability under our facility to be insufficient for our needs.

Purchases By Delta Apparel Of Its Own Shares Our Board of Directors has authorized management to use up to $20.0 million to repurchase Delta Apparel stock in open market transactions under our Stock Repurchase Program. As of September 29, 2012, $4.7 million remained available for future purchases (See Note N-Repurchase of Common Stock).

Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to revenue recognition, accounts receivable and related reserves, inventory and related reserves, the carrying value of goodwill, and the accounting for income taxes.
A detailed discussion of critical accounting policies is contained in the Significant Accounting Policies 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 30, 2012, and there have been no changes in those policies since the filing of that Form 10-K with the SEC.

Environmental and Regulatory Matters


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We are subject to various federal, state and local environmental laws and regulations concerning, among other things, wastewater discharges, storm water flows, air emissions and solid waste disposal. Our plants generate very small quantities of hazardous waste, which are either recycled or disposed of off-site. Most of our plants are required to possess one or more environmental permits, and we believe that we are currently in compliance with the requirements of those permits.
The environmental rules applicable to our business are becoming increasingly stringent and we incur capital and other expenditures annually to achieve compliance with environmental standards. We currently do not expect that the amount of expenditures required to comply with environmental laws will have a material adverse affect on our operations, financial condition or liquidity. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, while we believe that we are currently in compliance with all applicable environmental requirements, the extent of our liability, if any, for past failures to comply with laws, regulations or permits applicable to our operations cannot be determined and could have a material adverse effect on our operations, financial condition and liquidity.

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