10-Q: Delta Apparel Reports Q2 2024 Results, Grapples with Debt Covenant Breach and Going Concern Uncertainty

Sentiment:

Quarterly Report 9 May 2024 5:06 PM

Delta Apparel's Q2 2024 results reveal a significant net loss and a breach of debt covenants, raising substantial doubt about the company's ability to continue as a going concern.

Capital raiseThe company's liquidity position raises substantial doubt as to its ability to continue as a going concern over the next 12 months and it believes it will need to raise capital or obtain other liquidity in the near future in order to have sufficient resources to fund its operations and meet the obligations specified in its Amended Credit Agreement for the next 12 months.To date, the company has been unable to raise the necessary capital or otherwise obtain the necessary liquidity to have sufficient resources to fund its operations and meet the obligations specified in its Amended Credit Agreement for the next 12 months.Moreover, there can be no assurance that the company will be successful in raising the necessary capital or otherwise obtaining the necessary liquidity, that any such capital or liquidity will be available to it on terms acceptable to it, or at all, or that it will be successful in any of its other endeavors to become financially viable and continue as a going concern.

Worse than expectedThe company reported a significantly larger net loss compared to the prior year.Gross margins decreased substantially due to lower production volumes and production curtailment costs.The company is not in compliance with financial covenants in its U.S. revolving credit facility.The company's liquidity position raises substantial doubt about its ability to continue as a going concern.

Summary

Delta Apparel reported net sales of $78.9 million for the second quarter of fiscal 2024, a decrease from $110.3 million in the prior year.
The company experienced a net loss attributable to shareholders of $36.3 million, or ($5.15) per share, compared to a net loss of $7.0 million, or ($1.00) per share, in the prior year period.
Gross margins decreased to 4.3% from 14.7% in the prior year, impacted by lower production volumes and production curtailment costs.
The company recorded a goodwill impairment charge of $8.8 million associated with the DTG2Go reporting unit.
Delta Apparel is not in compliance with certain financial covenants in its U.S. revolving credit facility, constituting a breach of the agreement and an event of default.
The company's liquidity position raises substantial doubt about its ability to continue as a going concern within one year.
Delta Apparel is exploring strategic options, including the potential sale of its Salt Life business and a sale-leaseback of its Fayetteville, North Carolina campus.
The company's debt and inventory levels were down more than 35% year-over-year.
The company has decided to refocus its Delta Activewear business on its Delta Direct and Retail Direct channels and will no longer emphasize the Global Brands channel.
The company is currently exploring the sale of its El Salvador manufacturing operations servicing the Global Brands channel.

Sentiment

Score: 2

Explanation: The document presents a highly negative outlook due to significant financial losses, debt covenant breaches, and uncertainty about the company's ability to continue as a going concern. While there are some positive aspects, such as debt and inventory reduction, they are overshadowed by the overall financial distress.

Positives

Debt and inventory levels were both down favorably more than 35% year-over-year.
The wind-down of manufacturing operations in Mexico concluded as planned.
The company is taking steps to improve its cost structure and manage working capital.
Days sales outstanding (DSO) as of March 2024 were 39 days compared to 46 days at September 2023.

Negatives

The company experienced a significant decrease in net sales and gross margins.
A substantial net loss was reported for the quarter.
The company recorded a goodwill impairment charge of $8.8 million.
Delta Apparel is not in compliance with financial covenants in its U.S. revolving credit facility, constituting a breach of the agreement and an event of default.
The company's liquidity position raises substantial doubt about its ability to continue as a going concern.
The largest customer on DTG2Go's digital first model no longer intends to source production from this platform.

Risks

The company's ability to continue as a going concern is uncertain.
Continued operating losses and restrictions on the ability to borrow capital or service indebtedness pose a significant risk.
Economic conditions may adversely impact demand for the company's products.
The availability of key raw materials or raw material price volatility may interrupt supply chains.
The company may be subject to the impairment of acquired intangible assets.
The market price of the company's shares may be highly volatile.
The company's future success depends in part on its ability to successfully implement its strategic plans and achieve its business strategies.
The company's liquidity position continued to prevent it from purchasing all of the yarn, dyes, chemicals and other production inputs required to supply its manufacturing facilities and allow them to run at the levels required to meet its business plans.

Future Outlook

The company anticipates a reduction in capital expenditures for fiscal 2024 and is keenly focused on managing working capital and costs. Delta Apparel is exploring strategic options, including the potential sale of its Salt Life business and a sale-leaseback of its Fayetteville, North Carolina campus.

Management Comments

We saw signs of improving demand for activewear during our second quarter, but the prolonged industry slump beginning over 18 months ago continued to impact our operations and production levels.
Managing liquidity and maintaining access to capital remain our highest priorities and our team has continued to execute well on initiatives to improve our balance sheet during the quarter.

Industry Context

The apparel industry is cyclical and dependent upon the overall level of demand for soft goods, which may or may not coincide with the overall level of discretionary consumer spending. Recent distress in global credit markets, rising interest rates, foreign exchange rate fluctuations, significant geopolitical conflicts, volatility in energy prices, constraints on the global supply chain, high inventory levels among retailers and their supply chains, and other factors continue to affect the global economy and the apparel industry and adversely impact demand for Delta Apparel's products.

Comparison to Industry Standards

It is difficult to compare Delta Apparel's results directly to industry standards without specific competitor data.
However, the company's struggles with profitability and debt covenants are indicative of challenges faced by other apparel companies in the current economic environment.
Companies like Hanesbrands and Gildan Activewear, which operate in similar segments, have also faced challenges related to inventory management and consumer demand.
Delta Apparel's focus on digital printing through DTG2Go is a differentiator, but the goodwill impairment suggests that this segment has not performed as expected.
The potential sale of the Salt Life business suggests a strategic shift to focus on core operations, similar to actions taken by other apparel companies to streamline their portfolios.

Management Changes

Role	Previous Person	New Person	Effective Date	Reason
Board of Directors	Dr. Bill C. Hardgrave		2024-05-06	Resignation
Executive Vice President and Chief Administrative Officer	Justin M. Grow		2024-07-02	Resignation

Legal Proceedings

The company is party to various legal claims, actions and complaints, but believes such actions should not have a material adverse effect on its operations, financial condition, or liquidity.

Related Party Transactions

During the six months ended March 2024 and March 2023, the company received dividends from its equity method investment of $0.6 million and $1.2 million, respectively.
During the six months ended March 2024 and March 2023, the company paid approximately $0.9 million in rent under an operating lease arrangement with the Honduran company.

Stakeholder Impact

Shareholders face significant risk due to the company's financial distress and potential inability to continue as a going concern.
Employees may be affected by potential restructuring activities and the sale of business units.
Customers may experience disruptions in supply and service due to the company's financial challenges.
Suppliers may face increased risk of non-payment or changes in contract terms.
Creditors face increased risk of default and potential loss of investment.

Next Steps

The company will continue to explore strategic options, including the potential sale of its Salt Life business and a sale-leaseback of its Fayetteville, North Carolina campus.
The company is evaluating the potential impact of the loss of a major DTG2Go customer on forecasts of current and future years business performance.
The company is in communication with its lenders about its non-compliance and potential options to address concerns related to meeting the covenant requirements in its U.S. revolving credit facility over the next 12 months.

Key Dates

Date	Description
2016-05-10	Entered into a Fifth Amended and Restated Credit Agreement.
2019-11-19	Entered into a Consent and Fourth Amendment to the Fifth Amended and Restated Credit Agreement, increasing borrowing capacity to $170 million and extending the maturity date to November 19, 2024.
2020-04-27	Entered into a Fifth Amendment to the Fifth Amended and Restated Credit Agreement, amending financial covenant provisions.
2020-08-28	Entered into a Sixth Amendment to the Fifth Amended and Restated Credit Agreement, maintaining lower minimum availability thresholds.
2022-06-02	Entered into a Seventh Amendment to the Fifth Amended and Restated Credit Agreement, removing LIBOR based borrowing and utilizing SOFR.
2023-01-03	Entered into an Eighth Amendment to the Fifth Amended and Restated Credit Agreement, clarifying provisions regarding in transit inventory.
2023-02-03	Entered into a Ninth Amendment to the Fifth Amended and Restated Credit Agreement, adding an Accommodation Period.
2023-03-23	Entered into a Tenth Amendment to the Fifth Amended and Restated Credit Agreement to account for specified costs and expenses in calculating EBITDA.
2023-10-06	Entered into an Eleventh Amendment to the Fifth Amended and Restated Credit Agreement, extending the Accommodation Period.
2023-12-05	Entered into a Twelfth Amendment to the Agreement, modifying the Applicable Margin and Availability Block.
2023-12-27	Entered into a Thirteenth Amendment to the Agreement, modifying the Availability Block and minimum EBITDA levels.
2023-12-28	Completed a sale-leaseback agreement for the Knoxville, Tennessee property.
2024-01	Suppliers notified Delta Apparel they would no longer allow extended credit.
2024-03-30	End of the quarterly period.
2024-05	Company received notice that the largest customer on DTG2Go's digital first model no longer intends to source production from this platform.
2024-05-06	Dr. Bill C. Hardgrave resigned from service on the Company's Board of Directors.
2024-05-07	As of this date, there were outstanding 7,051,153 shares of the registrant's common stock.
2024-07-02	Justin M. Grow's resignation from his position as Executive Vice President and Chief Administrative Officer will be effective as of this date.
2024-09-28	Fiscal 2024 year end.

Keywords

Delta Apparel, financial results, Q2 2024, going concern, debt covenant, net loss, gross margin, DTG2Go, Salt Life, liquidity, strategic options, apparel industry, manufacturing, activewear

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