dla20220124_10q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 1, 2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-15583

DELTA APPAREL, INC.

(Exact name of registrant as specified in its charter)

Georgia		58-2508794
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

2750 Premier Parkway, Suite 100
Duluth, Georgia		30097
(Address of principal executive offices)		(Zip Code)

(678) 775-6900

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, par value $0.01		DLA		NYSE American

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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of January 27, 2022, there were outstanding 6,948,873 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.

Table of Contents

TABLE OF CONTENTS

		Page
PART I.	Financial Information

Item 1.	Financial Statements (unaudited):

	Condensed Consolidated Balance Sheets — December 2021 and September 2021	3

	Condensed Consolidated Statements of Operations — Three months ended December 2021 and December 2020	4

	Condensed Consolidated Statements of Comprehensive Income — Three months ended December 2021 and December 2020	5

	Condensed Consolidated Statements of Shareholders' Equity — Three months ended December 2021 and December 2020	6

	Condensed Consolidated Statements of Cash Flows — Three months ended December 2021 and December 2020	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8
	Note A—Basis of Presentation and Description of Business	8
	Note B—Accounting Policies	8
	Note C—New Accounting Standards	8
	Note D—Revenue Recognition	9
	Note E—Inventories	9
	Note F—Debt	10
	Note G—Selling, General and Administrative Expense	10
	Note H—Stock-Based Compensation	10
	Note I—Purchase Contracts	10
	Note J—Business Segments	11
	Note K—Income Taxes	11
	Note L—Derivatives and Fair Value Measurements	12
	Note M—Legal Proceedings	12
	Note N—Repurchase of Common Stock	13
	Note O—Goodwill and Intangible Assets	13
	Note P—Subsequent Events	13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 4.	Controls and Procedures	15

PART II.	Other Information

Item 1.	Legal Proceedings	15

Item 1A.	Risk Factors	15

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15

Item 5.	Other Information	15

Item 6.	Exhibits	15

Signatures		16

Exhibits
EX-10.6.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Table of Contents

PART 1.

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)

	*December 2021*			*September 2021*
Assets
Cash and cash equivalents	$	6,379		$	9,376
Accounts receivable, less allowances of $183 and $251, respectively		65,060			66,973
Other receivables		681			761
Income tax receivable		439			356
Inventories, net		183,058			161,703
Prepaid expenses and other current assets		5,162			3,794
Total current assets		260,779			242,963

Property, plant and equipment, net of accumulated depreciation of $102,014 and $99,225, respectively		66,350			67,564
Goodwill		37,897			37,897
Intangibles, net		25,766			26,291
Deferred income taxes		1,030			1,854
Operating lease assets		43,423			45,279
Equity method investment		10,202			10,433
Other assets		1,929			2,007
Total assets	$	447,376		$	434,288

Liabilities and Equity
Liabilities:
Accounts payable	$	60,498		$	52,936
Accrued expenses		22,823			29,949
Income taxes payable		356			379
Current portion of finance leases		6,581			6,621
Current portion of operating leases		8,197			8,509
Current portion of long-term debt		7,265			7,067
Current portion of contingent consideration		1,897			-
Total current liabilities		107,617			105,461

Long-term income taxes payable		3,186			3,220
Long-term finance leases		13,946			15,669
Long-term operating leases		37,208			38,546
Long-term debt		118,149			101,680
Long-term contingent consideration		-			1,897
Other non-current liabilities		2,289			3,621
Total liabilities	$	282,395		$	270,094

Shareholder's equity:
Preferred stock - $0.01 par value, 2,000,000 shares authorized, none issued and outstanding		-			-
Common stock - $0.01 par value, 15,000,000 authorized, 9,646,972 shares issued, and 6,976,888 and 6,974,660 shares outstanding as of December 2021 and September 2021, respectively		96			96
Additional paid-in capital		59,205			60,831
Retained earnings		150,505			146,860
Accumulated other comprehensive loss		(574	)		(786	)
Treasury stock - 2,670,084 and 2,672,312 shares as of December 2021 and September 2021, respectively		(43,618	)		(42,149	)
Equity attributable to Delta Apparel, Inc.		165,614			164,852
Equity attributable to non-controlling interest		(633	)		(658	)
Total equity		164,981			164,194
Total liabilities and equity	$	447,376		$	434,288

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended
	December 2021			December 2020

Net sales	$	110,746		$	94,723
Cost of goods sold		87,743			74,434
Gross profit		23,003			20,289

Selling, general and administrative expenses		17,482			16,030
Other (income) loss, net		(395	)		1,190
Operating income		5,916			3,069

Interest expense, net		1,598			1,654
Earnings before provision for income taxes		4,318			1,415
Provision for income taxes		648			572
Consolidated net earnings		3,670			843
Net (income) loss attributable to non-controlling interest		(25	)		40
Net earnings attributable to shareholders	$	3,645		$	883

Basic earnings per share	$	0.52		$	0.13
Diluted earnings per share	$	0.51		$	0.13

Weighted average number of shares outstanding		6,999			6,920
Dilutive effect of stock awards		86			80
Weighted average number of shares assuming dilution		7,085			7,000

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Amounts in thousands)

(Unaudited)

	Three Months Ended
	December 2021		December 2020

Net earnings attributable to shareholders	$	3,645	$	883
Other comprehensive income related to unrealized gain on derivatives, net of income tax		212		125
Consolidated comprehensive income	$	3,857	$	1,008

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Amounts in thousands, except share amounts)

(Unaudited)

										*Accumulated*
					*Additional*					*Other*									*Non-*
	*Common Stock*				*Paid-In*			*Retained*		*Comprehensive*			*Treasury Stock*						*Controlling*
	*Shares*		*Amount*		*Capital*			*Earnings*		*Loss*			*Shares*			*Amount*			*Interest*			*Total*
Balance as of September 2020		9,646,972	$	96	$	61,005		$	126,564	$	(1,322	)		2,756,854		$	(43,133	)	$	(524	)	$	142,686

Net earnings		-		-		-			883		-			-			-			-			883
Other comprehensive income		-		-		-			-		125			-			-			-			125
Net loss attributable to non-controlling interest		-		-		-			-		-			-			-			(40	)		(40	)
Vested stock awards		-		-		(2,117	)		-		-			(84,542	)		984			-			(1,133	)
Stock based compensation		-		-		676			-		-			-			-			-			676
Balance as of December 2020		9,646,972	$	96	$	59,564		$	127,447	$	(1,197	)		2,672,312		$	(42,149	)	$	(564	)	$	143,197

										*Accumulated*
					*Additional*					*Other*									*Non-*
	*Common Stock*				*Paid-In*			*Retained*		*Comprehensive*			*Treasury Stock*						*Controlling*
	*Shares*		*Amount*		*Capital*			*Earnings*		*Loss*			*Shares*			*Amount*			*Interest*			*Total*
Balance as of September 2021		9,646,972	$	96	$	60,831		$	146,860	$	(786	)		2,672,312		$	(42,149	)	$	(658	)	$	164,194

Net earnings		-		-		-			3,645		-			-			-			-			3,645
Other comprehensive income		-		-		-			-		212			-			-			-			212
Net income attributable to non-controlling interest		-		-		-			-		-			-			-			25			25
Purchase of common stock		-		-		-			-		-			74,232			(2,143	)		-			(2,143	)
Vested stock awards		-		-		(1,766	)		-		-			(76,460	)		674			-			(1,092	)
Stock based compensation		-		-		140			-		-			-			-			-			140
Balance as of December 2021		9,646,972	$	96	$	59,205		$	150,505	$	(574	)		2,670,084		$	(43,618	)	$	(633	)	$	164,981

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

(Unaudited)

	*Three Months Ended*
	*December 2021*			*December 2020*
Operating activities:
Consolidated net earnings	$	3,670		$	843
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization		3,629			3,368
Amortization of deferred financing fees		81			81
Provision for inventory market reserves		851			(405	)
Provision for deferred income taxes		754			740
Non-cash stock compensation		140			676
Gain on disposal of equipment		2			30
Other, net		(390	)		(200	)
Changes in operating assets and liabilities:
Accounts receivable, net		1,993			(2,598	)
Inventories, net		(22,206	)		(2,601	)
Prepaid expenses and other current assets		(1,449	)		(797	)
Other non-current assets		699			394
Accounts payable		7,584			387
Accrued expenses		(7,572	)		(2,044	)
Net operating lease liabilities		206			279
Income taxes		(140	)		(193	)
Other liabilities		(1,050	)		(447	)
Net cash used in operating activities		(13,198	)		(2,487	)
Investing activities:
Purchases of property and equipment		(1,822	)		(408	)
Proceeds from equipment purchased under finance leases		-			196
Proceeds from sale of equipment		-			2,312
Cash paid for intangible asset		(51	)		-
Cash paid for business		(583	)		(838	)
Net cash (used in) provided by investing activities		(2,456	)		1,262
Financing activities:
Proceeds from long-term debt		138,543			112,506
Repayment of long-term debt		(121,293	)		(112,557	)
Repayment of finance lease obligations		(1,783	)		(1,684	)
Payment of contingent consideration		-			(2,110	)
Repurchase of common stock		(1,718	)		-
Payment of withholding taxes on stock awards		(1,092	)		(1,133	)
Net cash provided by (used in) financing activities		12,657			(4,978	)
Net decrease in cash and cash equivalents		(2,997	)		(6,203	)
Cash and cash equivalents at beginning of period		9,376			16,458
Cash and cash equivalents at end of period	$	6,379		$	10,255

Supplemental cash flow information
Finance lease assets exchanged for finance lease liabilities	$	20		$	3,976
Operating lease assets exchanged for operating lease liabilities	$	1,401		$	-

See accompanying Notes to Condensed Consolidated Financial Statements.

Delta Apparel, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note A— Description of Business and Basis of Presentation

Delta Apparel, Inc. (collectively with DTG2Go, LLC, Salt Life, LLC, M.J. Soffe, LLC, and other subsidiaries, "Delta Apparel," "we," "us," "our," or the "Company") is a vertically-integrated, international apparel company. With approximately 8,700 employees worldwide, we design, manufacture, source, and market a diverse portfolio of core activewear and lifestyle apparel products under our primary brands of Salt Life®, Soffe®, and Delta. We are a market leader in the on-demand, digital print and fulfillment industry, bringing DTG2Go's proprietary technology and innovation to the supply chain of our customers. We specialize in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military, and through our business-to-business digital platform. Our products are also made available direct-to-consumer on our ecommerce sites and in our branded retail stores. Our diversified distribution model allows us to capitalize on our strengths to provide our activewear and lifestyle apparel products to a broad and evolving customer base whose shopping preferences may span multiple retail channels.

We design and internally manufacture the majority of our products. More than 90% of the apparel units that we sell are sewn in our owned or leased facilities. This allows us to offer a high degree of consistency and quality, leverage scale efficiencies, and react quickly to changes in trends within the marketplace. We have manufacturing operations located in the United States, El Salvador, Honduras, and Mexico, and we use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers. We were incorporated in Georgia in 1999, and our headquarters is located in Duluth, Georgia. Our common stock trades on the NYSE American under the symbol “DLA."

We operate on a 52-53 week fiscal year ending on the Saturday closest to September 30. Our 2022 fiscal year is a 52-week year and will end on October 1, 2022 ("fiscal 2022"). Accordingly, this Form 10-Q presents our first quarter of fiscal 2022. Our 2021 fiscal year was a 52-week year and ended on October 2, 2021 ("fiscal 2021").

For presentation purposes herein, all references to period ended relate to the following fiscal years and dates:

Period Ended	Fiscal Year	Date Ended
December 2020	Fiscal 2021	January 3, 2021
March 2021	Fiscal 2021	April 3, 2021
June 2021	Fiscal 2021	July 3, 2021
September 2021	Fiscal 2021	October 2, 2021
December 2021	Fiscal 2022	January 1, 2022

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 ("U.S. GAAP") for complete financial statements. We believe these Condensed Consolidated Financial Statements include all normal recurring adjustments considered necessary for a fair presentation. Operating results for the three-month period ended December 2021 are not necessarily indicative of the results that may be expected for our fiscal 2022. Although our various product lines are sold on a year-round basis, the demand for specific products or styles reflects some seasonality, with sales in our June quarter generally being the highest and sales in our December quarter generally being the lowest. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and footnotes included in our Annual Report on Form 10-K for our fiscal 2021, filed with the United States Securities and Exchange Commission (“SEC”).

Our Condensed Consolidated Financial Statements include the accounts of Delta Apparel and its wholly-owned and majority-owned domestic and foreign subsidiaries. We apply the equity method of accounting for our investment in 31% of the outstanding capital stock of a Honduran company. During the three-months ended December 2021 and December 2020, we received dividends from the investment of $0.6 million and $0.3 million, respectively. Our Ceiba Textiles manufacturing facility is leased under an operating lease arrangement, with this Honduran company. During the three-months ended December 2021, we paid approximately $0.4 million under this arrangement. Payments of approximately $0.8 million were made during the three-months ended December 2020 which included payment of rent deferrals related to the June 2020 quarter as a result of the COVID pandemic.

We make available copies of materials we file with, or furnish to, the SEC free of charge at https://ir.deltaapparelinc.com. The information found on our website is not part of this, or any other, report that we file with, or furnish to, the SEC. In addition, we will provide upon request, at no cost, paper or electronic copies of our reports and other filings made with the SEC. Requests should be directed to: Investor Relations Department, Delta Apparel, Inc., 2750 Premiere Parkway, Suite 100, Duluth, Georgia 30097. Requests can also be made by telephone to 864-232-5200, or via email at investor.relations@deltaapparel.com.

Note B—Accounting Policies

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Annual Report on Form 10-K for our fiscal 2021, filed with the SEC. See Note C for consideration of recently issued accounting standards.

Note C—New Accounting Standards

Recently Adopted Standards

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within Accounting Standards Codification ("ASC") 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective as of the beginning of our fiscal year 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The impact of the adoption of provision of ASU 2019-12 did not have a material impact to our financial condition, results of operations, cash flows, and disclosures.

Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on the entity's estimate of expected credit losses. Since the issuance of ASU 2016-13, the FASB released several amendments to improve and clarify the implementation guidance. These standards have been collectively codified within ASC Topic 326, Credit Losses (“ASC 326”). As a smaller reporting company as defined by the SEC, the provisions of ASC 326 are effective as of the beginning of our fiscal year 2024. We are currently evaluating the impacts of the provisions of ASC 326 on our financial condition, results of operations, cash flows, and disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting and financial reporting impacts of reference rate reform, including the expected transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This new guidance includes temporary optional practical expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met. These transactions include contract modifications, hedging relationships and the sale or transfer of debt securities classified as held-to-maturity. Entities may apply the provisions of the new standard at the beginning of the reporting period when the election is made. This guidance may be applied through December 31, 2022. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures and has yet to elect an adoption date.

Note D—Revenue Recognition

Our Condensed Consolidated Statements of Operations include revenue streams from retail sales at our branded retail stores; direct-to-consumer ecommerce sales on our consumer-facing web sites; and sales from wholesale channels, which includes our business-to-business ecommerce and DTG2Go sales. The table below identifies the amount and percentage of net sales by distribution channel (in thousands):

	*Three Months Ended*
	*December 2021*				*December 2020*
Retail	$	2,903	3	%	$	2,438	3	%
Direct-to-consumer ecommerce		1,345	1	%		1,809	2	%
Wholesale		106,498	96	%		90,476	95	%
Net sales	$	110,746	100	%	$	94,723	100	%

The table below provides net sales by reportable segment and the percentage of net sales by distribution channel for each reportable segment (in thousands):

	*December 2021 Quarter*
	*Net Sales*		*Retail*			*Direct-to-consumer ecommerce*			*Wholesale*
Delta Group	$	101,921		0.2	%		0.3	%		99.5	%
Salt Life Group		8,825		30.4	%		12.0	%		57.6	%
Total	$	110,746

	*December 2020 Quarter*
	*Net Sales*		*Retail*			*Direct-to-consumer ecommerce*			*Wholesale*
Delta Group	$	87,624		0.2	%		0.4	%		99.4	%
Salt Life Group		7,099		31.4	%		21.1	%		47.5	%
Total	$	94,723

Note E—Inventories

Inventories, net of reserves of $16.7 million and $15.9 million as of December 2021 and September 2021, respectively, consisted of the following (in thousands):

	*December 2021*		*September 2021*
Raw materials	$	23,760	$	17,204
Work in process		23,418		20,954
Finished goods		135,880		123,545
	$	183,058	$	161,703

Raw materials include finished yarn and direct materials for the Delta Group, undecorated garments for the DTG2Go business, and direct embellishment materials for the Salt Life Group.

Note F—Debt

Credit Facility

On May 10, 2016, we entered into a Fifth Amended and Restated Credit Agreement (as further amended, the “Amended Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as Administrative Agent, the Sole Lead Arranger and the Sole Book Runner, and the financial institutions named therein as Lenders, which are Wells Fargo, PNC Bank, and Regions Bank. Our subsidiaries M.J. Soffe, LLC, Culver City Clothing Company, Salt Life, LLC, and DTG2Go, LLC (collectively, the "Borrowers"), are co-borrowers under the Amended Credit Agreement. The Borrowers entered into amendments to the Amended Credit Agreement with Wells Fargo and the other lenders on November 27, 2017, March 9, 2018, October 8, 2018, November 19, 2019, April 27, 2020, and August 28, 2020.

The Amended Credit Agreement allows us to borrow up to $170 million (subject to borrowing base limitations), including a maximum of $25 million in letters of credit. Provided that no event of default exists, we have the option to increase the maximum credit to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions. The Amended Credit Agreement contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in ASC 470, Debt ("ASC 470")) whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. We classify borrowings under the Amended Credit Agreement as long-term debt with consideration of current maturities.

As of December 2021, we had $116.0 million outstanding under our U.S. revolving credit facility at an average interest rate of 3.2%. Our cash on hand combined with the availability under the U.S. credit facility totaled $33.0 million. At December 2021 and September 2021 there was $18.6 million and $19.0 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

Promissory Note

On October 8, 2018, we acquired substantially all of the assets of Silk Screen Ink, Ltd. d/b/a SSI Digital Print Services. In conjunction with the acquisition, we issued a promissory note in the principal amount of $7.0 million. The promissory note bears interest at 6% with quarterly installments which began January 2, 2019, with the final installment due October 1, 2021. The final payment, in accordance with the promissory note agreement, was made during the three-months ended December 2021.

Honduran Debt

Since March 2011, we have entered into term loans and a revolving credit facility with Banco Ficohsa, a Honduran bank, to finance both the operations and capital expansion of our Honduran facilities. In December 2020, we entered into a new term loan and revolving credit facility with Banco Ficohsa, both with five-year terms, and simultaneously settled the prior term loans and revolving credit facility with outstanding balances at the time of settlement of $1.1 million and $9.5 million, respectively. Each of these new loans is secured by a first-priority lien on the assets of our Honduran operations and is not guaranteed by our U.S. entities. These loans are denominated in U.S. dollars, and the carrying value of the debt approximates its fair value. As the revolving credit facility permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to re-borrow funds, subject to those covenants, the amounts have been classified as long-term debt. Additional information about these loans and the outstanding balances as of December 2021 is as follows (in thousands):

	*December 2021*
Revolving credit facility established December 2020, interest at 7.25%, due August 2025	$	984
Term loan established December 2020, interest at 7.5%, quarterly installments beginning September 2021 through December 2025		8,114

Note G—Selling, General and Administrative Expense

We include in selling, general and administrative ("SG&A") expenses the costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking, packing, and shipping goods for delivery to our customers. Distribution costs included in SG&A expenses totaled $5.5 million and $5.2 million for the December 2021 and 2020 quarters, respectively. In addition, SG&A expenses include costs related to sales associates, administrative personnel, advertising and marketing expenses and other general and administrative expenses.

Note H—Stock-Based Compensation

On February 6, 2020, our shareholders approved the Delta Apparel, Inc. 2020 Stock Plan ("2020 Stock Plan") to replace the 2010 Stock Plan, which was previously re-approved by our shareholders on February 4, 2015 and was scheduled to expire by its terms on September 14, 2020. The 2020 Stock Plan is substantially similar in both form and substance to the 2010 Stock Plan. The purpose of the 2020 Stock Plan is to continue to give our Board of Directors and its Compensation Committee the ability to offer a variety of compensatory awards designed to enhance the Company’s long-term success by encouraging stock ownership among its executives, key employees and directors. Under the 2020 Stock Plan, the Compensation Committee of our Board of Directors has the authority to determine the employees and directors to whom awards may be granted, and the size and type of each award and manner in which such awards will vest. The awards available under the plan consist of stock options, stock appreciation rights, restricted stock, restricted stock units, performance stock, stock performance units, and other stock and cash awards. Unvested awards, while employed by the Company or servings as a director, become fully vested under certain circumstances as defined in the 2020 Stock Plan. Such circumstances include, but are not limited to, the participant’s death or becoming disabled. The Compensation Committee is authorized to establish the terms and conditions of awards granted under the 2020 Stock Plan, to establish, amend and rescind any rules and regulations relating to the 2020 Stock Plan, and to make any other determinations that it deems necessary. Similar to the 2010 Stock Plan, the 2020 Stock Plan limits the number of shares that may be covered by awards to any participant in a given calendar year and also limits the aggregate awards of restricted stock, restricted stock units and performance stock granted in a given calendar year. Shares are generally issued from treasury stock upon the vesting of the restricted stock units, performance units or other awards under the 2020 Stock Plan.

Compensation expense is recorded within SG&A in our Condensed Consolidated Statements of Operations over the vesting periods. During the December 2021 and 2020 quarters, we recognized $0.4 million and $0.9 million in stock-based compensation expense, respectively. Associated with the compensation cost are income tax benefits recognized of $0.1 million and $0.3 million for each of the three-month periods ended December 2021 and December 2020, respectively.

During the December 2021 quarter, performance stock units and restricted stock units representing 47,700 and 95,000 shares of our common stock, respectively, vested with the filing of our Annual Report on Form 10-K for fiscal 2021, and were issued in accordance with their respective agreements. Of these vested awards, 96,350 were payable in common stock and 46,350 were payable in cash.

During the December 2021 quarter, restrictive stock units representing 5,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2022 and are payable in common stock.

During the December 2021 quarter, performance stock units and restrictive stock units representing 59,625 and 59,625 shares of our common stock, respectively, were granted and are eligible to vest upon the filing of our Annual Report for fiscal 2023. Of these shares, 64,625 are payable in common stock and 54,625 are payable in cash.

During the December 2021 quarter, restrictive stock units representing 13,000 shares of our common stock were granted and are eligible to vest upon the filing of our Annual Report on Form 10-K for fiscal 2024 and are payable in common stock.

As of December 2021, there was $4.2 million of total unrecognized compensation cost related to unvested awards granted under the 2020 Stock Plan. This cost is expected to be recognized over a period of 2.9 years.

Note I—Purchase Contracts

We have entered into agreements, and have fixed prices, to purchase yarn, finished fabric, and finished apparel and headwear products. At December 2021, minimum payments under these contracts were as follows (in thousands):

Yarn	$	28,071
Finished fabric		7,808
Finished products		18,929
	$	54,808

Note J—Business Segments

Our operations are managed and reported in two segments, Delta Group and Salt Life Group, which reflect the manner in which the business is managed and results are reviewed by the Chief Executive Officer, who is our chief operating decision maker.

The Delta Group is comprised of our business units primarily focused on core activewear styles, and includes our DTG2Go and Delta Activewear business units. We are a market leader in the on-demand, direct-to-garment digital print and fulfillment industry, bringing technology and innovation to the supply chain of our many customers. We use highly-automated factory processes and our proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of our customers. Our Activewear business is organized around key customer channels and how they source their various apparel needs. Delta Activewear is a preferred supplier of activewear apparel to regional and global brands, direct to retail and through wholesale markets. We offer a broad portfolio of apparel and accessories under the Delta, Delta Platinum, Soffe, and sourced-branded products that we distribute utilizing our network of fulfillment centers. Delta Direct services key channels, such as the screen print, promotional, and eRetailer channels as well as the retail licensing channel, whose customers sell through to many mid-tier and mass market retailers. In our Global Brands & Retail Direct business we serve our customers as their supply chain partner, from product development to shipment of their branded products, with the majority of products being sold with value-added services including embellishment, hangtags, and ticketing. We also serve retailers by providing our portfolio of products directly to their retail stores and through their ecommerce channels. We sell our products to a diversified audience, including sporting goods and outdoor retailers, specialty and resort shops, farm and fleet stores, department stores, and mid-tier retailers. We also service custom apparel to major branded sportswear companies, trendy regional brands, and all branches of the United States armed forces. We also offer our Soffe products direct to consumers at www.soffe.com.

The Salt Life Group is comprised of our lifestyle brands focused on a broad range of apparel garments, headwear and related accessories to meet consumer preferences and fashion trends, and includes our Salt Life business unit. These products are sold through specialty and boutique shops, traditional department stores, and outdoor retailers, as well as direct-to-consumer through branded ecommerce sites and branded retail stores. Products in this segment are marketed under our lifestyle brands of Salt Life® as well as other labels.

Our Chief Operating Decision Maker and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges ("segment operating earnings"). Our segment operating earnings 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 2 in our Annual Report on Form 10-K for fiscal 2021, filed with the SEC. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table (in thousands).

	*Three Months Ended*
	*December 2021*		*December 2020*
Segment net sales:
Delta Group	$	101,921	$	87,624
Salt Life Group		8,825		7,099
Total net sales	$	110,746	$	94,723

Segment operating earnings:
Delta Group ⁽¹⁾	$	8,438	$	6,276
Salt Life Group		156		(136	)
Total segment operating earnings	$	8,594	$	6,140

⁽¹⁾In fiscal 2021, the Delta Group operating earnings included $1.3 million of expense, reported within "Other loss (income), net", related to two catastrophic hurricanes that disrupted operations during the December 2020 quarter.

The following table reconciles the segment operating earnings to the consolidated earnings before provision for income taxes (in thousands):

	*Three Months Ended*
	*December 2021*		*December 2020*
Segment operating earnings	$	8,594	$	6,140
Unallocated corporate expenses		2,678		3,071
Unallocated interest expense		1,598		1,654
Consolidated earnings before provision for income taxes	$	4,318	$	1,415

Note K—Income Taxes

The Tax Cuts and Jobs Act of 2017 (the “New Tax Legislation”) was enacted on December 22, 2017, which significantly revised the U.S. corporate income tax code by, among other things, lowering federal corporate income tax rates, implementing a modified territorial tax system and imposing a repatriation tax ("transition tax") on deemed repatriated cumulative earnings of foreign subsidiaries which will be paid over eight years. In addition, new taxes were imposed related to foreign income, including a tax on global intangible low-taxed income (“GILTI”) as well as a limitation on the deduction for business interest expense (“Section 163(j)"). GILTI is the excess of the shareholder’s net controlled foreign corporations ("CFC") net tested income over the net deemed tangible income. GILTI income is eligible for a deduction of up to 50% of the income inclusion, but the deduction is limited to the amount of U.S. adjusted taxable income. The Section 163(j) limitation does not allow the amount of deductible interest to exceed the sum of the taxpayer's business interest income and 30% of the taxpayer’s adjusted taxable income. We have included in our calculation of our effective tax rate the estimated impact of GILTI and Section 163(j). We have elected to account for the tax on GILTI as a period cost and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries.

Our effective income tax rate on operations for the three-months ended December 2021 was 15.1% compared to a rate of 39.3% in the same period of the prior year, and an effective rate of 21.9% for fiscal 2021. We generally benefit from having income in foreign jurisdictions that are either exempt from income taxes or have tax rates that are lower than those in the United States. As such, changes in the mix of U.S. taxable income compared to profits in tax-free or lower-tax jurisdictions can have a significant impact on our overall effective tax rate.

Note L—Derivatives and Fair Value Measurements

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. We have designated our interest rate swap contracts as cash flow hedges of our future interest payments. As a result, the gains and losses on the swap contracts are reported as a component of other comprehensive income and are reclassified into interest expense as the related interest payments are made. As of December 2021, all of our other comprehensive income was attributable to shareholders; none related to the non-controlling interest. Outstanding instruments as of December 2021 are as follows:

		*Notional*
	*Effective Date*	*Amount*	*Fixed LIBOR Rate*	*Maturity Date*
Interest Rate Swap	July 25, 2018	$20.0 million	3.18%	July 25, 2023

The following table summarizes the fair value and presentation in the Condensed Consolidated Balance Sheets for derivatives related to our interest swap agreements as of June 2021 and September 2020 (in thousands):

	December 2021			September 2021
Deferred tax assets	$	195		$	266
Other non-current liabilities		(769	)		(1,052	)
Accumulated other comprehensive loss	$	(574	)	$	(786	)

From time to time, we may purchase cotton option contracts to economically hedge the risk related to market fluctuations in the cost of cotton used in our operations. We do not receive hedge accounting treatment for these derivatives. As such, the realized and unrealized gains and losses associated with them are recorded within cost of goods sold on the Condensed Consolidated Statement of Operations. No such cotton contracts were outstanding at December 2021 and September 2021.

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:

	○	Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

	○	Level 2 – Inputs other than quoted prices that are observable for assets and liabilities, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are less active.

	○	Level 3 – Unobservable inputs that are supported by little or no market activity for assets or liabilities and includes certain pricing models, discounted cash flow methodologies and similar techniques.

The following financial liabilities are measured at fair value on a recurring basis (in thousands):

Fair Value Measurements Using

Quoted Prices in

Significant Other

Significant

Active Markets for

Observable

Unobservable

SEC Form 10-Q filed by Delta Apparel Inc.