UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~January 1,~~April 2, 2011


o		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)		~~(I.R.S. Employer~~ Identification No.)


322 South Main Street
Greenville, SC		29601

(Address of principal executive offices)		(Zip Code)

(864) 232-5200

(Registrant’s telephone number, including area code)

(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.

Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yesþ Noo

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


Large accelerated filero		Accelerated filero		Non-accelerated filerþ (Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

As of ~~January 31,~~April 29, 2011, there were outstanding ~~8,496,736~~8,420,983 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.

PART I. FINANCIAL INFORMATION


~~Item 1.~~		~~Financial Statements~~

Item 1. Financial Statements

Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share amounts and per share data)
(Unaudited)


	January 1,			July 3,			April 2,			July 3,
	2011			2010			2011			2010
Assets
Current assets:
Cash and cash equivalents	$	270		$	687		$	632		$	687
Accounts receivable, net		53,179			60,991			72,877			60,991
Income tax receivable		1,362			—
Inventories, net		144,373			116,599			152,340			116,599
Prepaid expenses and other current assets		4,733			3,475			4,530			3,475
Deferred income taxes		2,959			3,162			3,247			3,162

Total current assets		206,876			184,914			233,626			184,914

Property, plant and equipment, net		39,021			37,694			39,516			37,694
Goodwill		16,814			17,426			16,814			17,426
Intangibles, net		7,706			8,016			7,555			8,016
Other assets		3,142			3,283			3,015			3,283

Total assets	$	273,559		$	251,333		$	300,526		$	251,333


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	41,767		$	34,459		$	48,059		$	34,459
Accrued expenses		16,414			18,862			19,631			18,862
Income tax payable		—			712			517			712
Current portion of long-term debt		5,718			5,718			2,333			5,718

Total current liabilities		63,899			59,751			70,540			59,751

Long-term debt, less current maturities		78,675			62,355			93,426			62,355
Deferred income taxes		2,417			1,826			2,504			1,826
Other liabilities		48			157			29			157
Contingent consideration		—			1,530			—			1,530

Total liabilities		145,039			125,619			166,499			125,619

Commitments and contingencies

Shareholders’ 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 shares authorized, 9,646,972 shares issued, and 8,504,836 and 8,516,293 shares outstanding as of January 1, 2011 and July 3, 2010, respectively		96			96
Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares issued, and 8,456,736 and 8,516,293 shares outstanding as of April 2, 2011 and July 3, 2010, respectively								96			96
Additional paid-in capital		59,348			59,111			59,726			59,111
Retained earnings		79,016			75,950			84,742			75,950
Accumulated other comprehensive loss		(76	)		(105	)		(31	)		(105	)
Treasury stock —1,142,136 and 1,130,679 shares as of January 1, 2011 and July 3, 2010, respectively		(9,864	)		(9,338	)
Treasury stock —1,190,236 and 1,130,679 shares as of April 2, 2011 and July 3, 2010, respectively								(10,506	)		(9,338	)

Total shareholders’ equity		128,520			125,714			134,027			125,714

Total liabilities and shareholders’ equity	$	273,559		$	251,333		$	300,526		$	251,333

Delta Apparel, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share data)
(Unaudited)


	Three Months Ended						Six Months Ended
	January 1,			December 26,			January 1,			December 26,			Three Months Ended					Nine Months Ended
	2011			2009			2011			2009			April 2,		March 27,			April 2,			March 27,
													2011		2010			2011			2010
Net sales	$	104,722		$	91,160		$	212,639		$	190,282		$	124,954	$	107,942		$	337,592		$	298,224
Cost of goods sold		82,844			69,384			164,851			144,861			94,092		82,739			258,943			227,600

Gross profit		21,878			21,776			47,788			45,421			30,862		25,203			78,649			70,624

Selling, general and administrative expenses		20,076			19,561			42,971			38,819			22,706		20,345			65,676			59,164
Change in fair value of contingent consideration		(1,530	)		—			(1,530	)		—			—		—			(1,530	)		—
Goodwill impairment charge		612			—			612			—			—		—			612			—
Other expense (income), net		95			(28	)		152			(133	)		29		(56	)		180			(189	)

Operating income		2,625			2,243			5,583			6,735			8,127		4,914			13,711			11,649

Interest expense, net		601			903			1,202			1,857			627		948			1,828			2,805

Income before provision for income taxes		2,024			1,340			4,381			4,878			7,500		3,966			11,883			8,844

Provision for income taxes		608			361			1,315			1,316			1,775		1,008			3,089			2,324

Net income	$	1,416		$	979		$	3,066		$	3,562		$	5,725	$	2,958		$	8,794		$	6,520


Basic earnings per share	$	0.17		$	0.11		$	0.36		$	0.42		$	0.67	$	0.35		$	1.03		$	0.77


Diluted earnings per share	$	0.16		$	0.11		$	0.35		$	0.42		$	0.65	$	0.34		$	1.00		$	0.76


Weighted average number of shares outstanding		8,500			8,516			8,512			8,512			8,490		8,516			8,505			8,513
Dilutive effect of stock options		256			51			257			37			249		215			247			65

Weighted average number of shares assuming dilution		8,756			8,567			8,769			8,549			8,739		8,731			8,752			8,578

Delta Apparel, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)


	Six Months Ended						Nine Months Ended
	January 1,			December 26,			April 2,			March 27,
	2011			2009			2011			2010
Operating activities:
Net income	$	3,066		$	3,562		$	8,794		$	6,520
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization		3,573			3,357			5,411			5,172
Provision for deferred income taxes		794			433			593			326
Loss on disposal of property and equipment		65			56			56			56
Non-cash stock compensation		456			534			736			759
Change in the fair value of contingent consideration		(1,530	)		—			(1,530	)		—
Goodwill impairment charge		612			—			612			—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		11,615			11,964			(8,083	)		(4,368	)
Inventories		(21,605	)		(4,123	)		(29,572	)		52
Prepaid expenses and other current assets		(1,164	)		(189	)		(960	)		(87	)
Income taxes receivable		(2,074	)		868
Income taxes								(196	)		1,966
Other non-current assets		141			166			267			233
Accounts payable		6,699			(3,538	)		12,991			797
Accrued expenses		(2,774	)		876			441			3,842
Other liabilities		(80	)		390			(54	)		(927	)

Net cash (used in) provided by operating activities		(2,206	)		14,356			(10,494	)		14,341


Investing activities:
Purchases of property and equipment, net		(3,804	)		(2,180	)		(5,978	)		(3,849	)
Cash paid for business, net of cash acquired		(9,884	)		(700	)		(9,884	)		(1,700	)

Net cash used in investing activities		(13,688	)		(2,880	)		(15,862	)		(5,549	)


Financing activities:
Proceeds from long-term debt		246,401			197,247			379,260			296,161
Repayment of long-term debt		(230,081	)		(208,954	)		(351,574	)		(305,052	)
Repurchase of common stock		(1,060	)		—			(1,702	)		—
Proceeds from stock options		217			—			217			—
Excess tax benefits from exercise of stock options								100			—

Net cash provided by (used in) financing activities		15,477			(11,707	)		26,301			(8,891	)


Net decrease in cash and cash equivalents		(417	)		(231	)		(55	)		(99	)

Cash and cash equivalents at beginning of period		687			654			687			654

Cash and cash equivalents at end of period	$	270		$	423		$	632		$	555


Supplemental cash flow information:
Cash paid for interest	$	1,017		$	1,709		$	1,598		$	2,571


Cash paid for income taxes	$	2,611		$	209		$	2,773		$	301


Non-cash financing activity—issuance of common stock	$	98		$	118		$	98		$	118

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A—Basis of Presentation

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 for complete financial statements. We believe these condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation. Operating results for the three and ~~six~~nine months ended ~~January 1,~~April 2, 2011 are not necessarily indicative of the results that may be expected for our fiscal year ending July 2, 2011. 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 fourth fiscal quarter generally being the highest and sales in our second fiscal quarter generally being the lowest. For more information regarding our results of operations and financial position, refer to the consolidated financial statements and footnotes included in our Form 10-K for our fiscal year ended July 3, 2010, filed with the Securities and Exchange Commission (“SEC”).

“Delta Apparel”, the “Company”, and “we”, “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our domestic wholly-owned subsidiaries, ~~including~~ M.J. Soffe, LLC (“Soffe”), Junkfood Clothing Company (“Junkfood”), To The Game, LLC (“To The Game”), Art Gun, LLC (“Art Gun”), TCX, LLC (“The Cotton Exchange”) and our international subsidiaries, as appropriate to the context.

Certain reclassification entries have been made for fiscal year 2010 to conform to our fiscal year 2011 presentation. These reclassifications had no impact on our results of operations or financial position.

Note B—Accounting Policies

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Form 10-K for our fiscal year ended July 3, 2010, filed with the Securities and Exchange Commission.

Note C—New Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Codification No. 810-10,Consolidation of Variable Interest Entities(“ASC 810-10”), and issued Accounting Standards Update (“ASU”) No. 2009-17,Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities(“ASU 2009-17”), to improve financial reporting by enterprises involved with variable interest entities. They require an entity to qualitatively assess the determination of the primary beneficiary of a variable interest entity (“VIE”) based on whether the entity (1) has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. They also require an ongoing reconsideration of the primary beneficiary, and amend the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an entity’s involvement in a VIE. ASC 810-10 and ASU 2009-17 are effective for annual reporting beginning after November 15, 2009. We adopted ASC 810-10 and ASU 2009-17 as of July 4, 2010, and the adoption had no impact on our financial position and results of operations.

In December 2010, the FASB issued ASU 2010-28,Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts(“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity must consider whether there are any adverse qualitative factors indicating an impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. ASU 2010-28 is therefore effective for our fiscal year ending June 30, 2012 and we are currently evaluating the impact on our financial position, results of operations and cash flows.

In December 2010, the FASB issued ASU No. 2010-29,Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations(“ASU 2010-29”). This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)

years and is denominated in U.S. dollars. During the first 12 months of ~~fiscal year 2009,~~the term, the loan requires only monthly interest payments with no principal payments. Beginning in April 2012, ratable monthly principal payments and interest payments are due through the end of the term. As of April 2, 2011, we had $5.8 million outstanding on this loan which was ~~amended to~~classified as noncurrent. The revolving credit facility has a 7% fixed interest rate ~~of 6% through June 2010, at which time the interest rate increased to 6.5% for the remainder of the term beginning in July 2010. The loan is payable monthly, has a five-year~~with an ongoing 18-month term and is denominated in U.S. dollars. ~~At January 1,~~The revolving credit facility requires minimum payments of $1.7 million during each 6 month period of the 18-month term; however, the agreement permits additional drawdowns to the extent payments are made and the Honduran operations remain in good financial condition. As of April 2, 2011, we had ~~$5.2~~$5.0 million outstanding on this ~~loan.~~loan which was also classified as noncurrent.

Note F—Selling, General and Administrative Expense

We include in selling, general and administrative expenses, costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and packing, and shipping goods for delivery to our customers. Distribution costs included in selling, general and administrative expenses totaled ~~$3.4 million and $3.1~~$3.5 million for both the ~~second~~third quarter of fiscal years 2011 and ~~2010, respectively.~~2010. Distribution costs included in selling, general and administrative expenses totaled ~~$7.0~~$10.4 million and ~~$6.5~~$10.0 million for the first ~~six~~nine months of fiscal years 2011 and 2010, respectively. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising and marketing expenses, royalty payments on licensed products and other general and administrative expenses.

Note G—Stock Options and Incentive Stock Awards

On November 11, 2010, the shareholders of the Company approved the Delta Apparel, Inc. 2010 Stock Plan (“2010 Stock Plan”). We will not be granting additional awards under either the Delta Apparel Stock Option Plan or the Delta Apparel Incentive Stock Award Plan. Instead, all future stock awards will be granted under the 2010 Stock Plan. The aggregate number of shares of common stock that may be delivered under the 2010 Stock Plan is 500,000 plus any shares of common stock subject to outstanding awards under the prior plans that are subsequently forfeited or terminated for any reason before being exercised. We account for these plans pursuant to FASB Codification No. 718,Compensation — Stock Compensation (“(“ASC 718”), Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”), and the Securities and Exchange Commission Staff Accounting Bulletin No. 110 (“SAB 110”).

Delta Apparel, Inc. 2010 Stock ~~Option~~ Plan (“~~Option~~2010 Stock Plan”)

~~We expensed $59 thousand and $51 thousand during~~
During the ~~second~~ quarter ended April 2, 2011, we granted options for the purchase of ~~fiscal years~~up to 50,000 shares of common stock as authorized under the 2010 Stock Plan. These options vest 50% on July 2, 2011 and ~~2010, respectively,~~50% on June 30, 2012.

For the three months ending April 2, 2011, we expensed $64 thousand in connection with our ~~Option Plan. During the first six months of fiscal years 2011 and~~ 2010 ~~we expensed~~Stock Plan, $0.1 ~~million during each period. As of January 1, 2011, there was $0.4~~ million of total unrecognized compensation cost related to non-vested stock options ~~under the Option Plan. This cost~~as of April 2, 2011 which is expected to be recognized over a period of ~~1.5~~1.25 years. Stock compensation expense is included in the cost of sales and selling, general and administrative expense line items of our statements of operations on a straight-line basis over the vesting periods of each grant.

During the quarter ended January 1, 2011, vested options representing 20,000 shares of our common stock were exercised, and the shares issued, in accordance with their respective agreements. No new stock options were granted under the Option Plan during the quarter ended January 1, 2011.

~~Delta Apparel Incentive Stock Award Plan (“Award Plan”)~~

For the second quarter of fiscal years 2011 and 2010, we expensed $0.2 million and $0.3 million, respectively, in connection with our Award Plan. During the first six months of fiscal years 2011 and 2010, we expensed $0.7 million and $0.6 million, respectively. The compensation expense includes the cost associated with the tax-assistance component of the awards, which is included in accrued liabilities until the vesting of the awards.

Stock compensation expense is included in the cost of sales and selling, general and administrative expense line items of our consolidated statements of operations over the vesting periods.

Delta Apparel Stock Option Plan (“Option Plan”)
We expensed $43 thousand and $0.1 million during the third quarter of fiscal years 2011 and 2010, respectively, in connection with our Option Plan. During the first nine months of fiscal years 2011 and 2010, we expensed $0.1 million and $0.2 million, respectively. As of April 2, 2011, there was $0.2 million of total unrecognized compensation cost related to non-vested stock options under the Option Plan, which is expected to be recognized over a period of 1.25 years. Stock compensation expense is included in the cost of sales and selling, general and administrative expense line items of our consolidated statements of operations on a straight-line basis over the vesting periods of each grant. During the quarter ended January 1, 2011, we granted awards for up to 7,000 shares of common stock as authorized under the Award Plan. The issued awards are comprised of 4,200 shares which are service-based and 2,800 shares which are performance-based. The service-based shares will vest upon the filing of our Annual Report on Form 10-K for the fiscal year ending July 2, 2011. The performance-based awards are based on the achievement of performance criteria for the period ending JulyApril 2, 2011, ~~and will vest upon the filing of our Annual Report for the year ending July 2, 2011.~~no vested options were exercised.

Delta Apparel ~~Inc.~~Incentive Stock Award Plan (“Award Plan”)
For the third quarter of fiscal years 2011 and 2010, we expensed $0.5 million and $0.6 million, respectively, in connection with our Award Plan. In each of the periods during the first nine months of fiscal years 2011 and 2010, we expensed $1.2 million. The compensation expense includes the cost associated with the tax-assistance component of the awards, which is included in accrued liabilities until the vesting of the awards. Stock ~~Plan (“Stock Plan”)~~

~~During~~compensation expense is included in the ~~quarter ended January 1, 2011, no stock awards were granted under~~cost of sales and selling, general and administrative expense line items of our consolidated statements of operations over the ~~Stock Plan.~~vesting periods.

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)

grouped in three levels. The levels prioritize the inputs based on reliability 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 market that are less active.

	•		Level 3 — Unobservable inputs for assets or liabilities reflecting the reporting entity’s own assumptions.

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


	Fair Value Measurements Using								Fair Value Measurements Using
			Quoted Prices in				Significant				Quoted Prices in				Significant
			Active Markets for		Significant Other		Unobservable				Active Markets for		Significant Other		Unobservable
			Identical Assets		Observable Inputs		Inputs				Identical Assets		Observable Inputs		Inputs
Period Ended	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Interest rate swaps
January 1, 2011	$	124		—	$	124		—
July 3, 2010	$	171		—	$	171		—

Goodwill
January 1, 2011	$	16,814		—		—	$	16,814
Interest rate swap
April 2, 2011									$	50		—	$	50		—
July 3, 2010	$	17,426		—		—	$	17,426	$	171		—	$	171		—

Contingent consideration
January 1, 2011	$	—		—		—	$	—
April 2, 2011									$	—		—		—	$	—
July 3, 2010	$	1,530		—		—	$	1,530	$	1,530		—		—	$	1,530

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)

Note L—Legal Proceedings

At times we are party to various legal claims, actions and complaints. We believe that, as a result of legal defenses, insurance arrangements, and indemnification provisions with parties believed to be financially capable, such actions should not have a material effect on our operations, financial condition, or liquidity.

Note M—The Cotton Exchange Acquisition

On June 11, 2010, we formed a new North Carolina limited liability company, TCX, LLC (“~~TCX”~~The Cotton Exchange”), as a wholly-owned subsidiary of M.J. Soffe, LLC. Pursuant to an Asset Purchase Agreement dated July 5, 2010, on July 12, 2010, ~~TCX~~The Cotton Exchange acquired substantially all of the net assets of HPM Apparel, Inc. d/b/a The Cotton Exchange, including accounts receivable, inventory, and fixed assets, and assumed certain liabilities. The results of The Cotton Exchange’s operations have been included in the consolidated financial statements since the acquisition date. The total purchase price, which included a post-closing working capital adjustment, was $9.9 million. We financed the cash purchase price under our existing revolving credit facility.

We accounted for the acquisition of The Cotton Exchange pursuant to ASC 805,Business Combinations, with the purchase price allocated based upon fair value. No goodwill ~~is expected to be~~was recorded on our financial statements in connection with this acquisition. We ~~are currently in~~have finalized the ~~process of finalizing the valuations of~~valuation for the assets acquired and liabilities assumed and ~~thus~~have determined the ~~initial~~final allocation of the purchase ~~price is subject to change until the allocation is finalized upon refinement of certain preliminary estimates as of the acquisition date.~~price.

Note N—Repurchase of Common Stock

Our Board of Directors has authorized our management to use up to $15.0 million to repurchase Delta Apparel stock in open market transactions under our Stock Repurchase Program. During the three months ended ~~January 1,~~April 2, 2011, we purchased ~~23,484~~48,100 shares of our common stock for a total cost of ~~$0.3~~$0.6 million. During the ~~six~~nine months ended ~~January 1,~~April 2, 2011, we purchased ~~75,124~~123,224 shares of our common stock for a total cost of ~~$1.1~~$1.7 million. Since the inception of the Stock Repurchase Program, we have purchased ~~1,099,895~~1,147,995 shares of our common stock for an aggregate of ~~$10.1~~$10.8 million. All purchases were made at the discretion of our management. As of ~~January 1,~~April 2, 2011, ~~$4.9~~$4.2 million remained available for future purchases under our Stock Repurchase ~~Program. Our Stock Repurchase~~ Program, which does not have an expiration date.

The following table summarizes the purchases of our common stock for the quarter ended ~~January 1,~~April 2, 2011:

Total Total Number of Dollar Value of
Number Average Shares Purchased Shares that May
of Shares Price Paid as Part of Publicly Yet Be Purchased
Period Purchased per Share Announced Plans Under the Plans

October 3 to November 6, 2010 11,300 $ 15.21 11,300 $5.0 million
November 7 to December 2, 2010 12,184 $ 12.52 12,184 $4.9 million
December 3 to January 1, 2011 — — — $4.9 million

Total 23,484 $ 13.81 23,484 $4.9 million


	Total				Total Number of		Dollar Value of
	Number		Average		Shares Purchased		Shares that May
	of Shares		Price Paid		as Part of Publicly		Yet Be Purchased
Period	Purchased		per Share		Announced Plans		Under the Plans

January 2 to February 5, 2011		11,528	$	12.75		11,528	$4.7 million
February 6 to March 5, 2011		9,352	$	13.03		9,352	$4.6 million
March 6 to April 2, 2011		27,220	$	13.71		27,220	$4.2 million

Total		48,100	$	13.35		48,100	$4.2 million

Note O—License Agreements

We have entered into license agreements that provide for royalty payments on net sales of licensed products as set forth in the agreements. These license agreements are within our branded segment. We have incurred royalty expense (included in selling, general and administrative expenses) of approximately ~~$3.2 million and $3.7~~$2.2 million for the ~~second~~third quarter of fiscal years 2011 and ~~2010, respectively.~~2010. Royalty expense for the first ~~six~~nine months of fiscal years 2011 and 2010 was approximately ~~$7.2~~$9.4 million ~~and $7.3 million, respectively.~~for both years.

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)

Note P—Goodwill and Contingent Consideration

~~The change in our goodwill and~~At the end of each reporting period, we are required to remeasure the fair value of the contingent consideration ~~consisted of~~related to the ~~following:~~

Art Gun

October 3, January 1,
Goodwill 2010 Additions Impairment 2011
Goodwill $ 612 $ — $ (612 ) $ —

Total 612 — (612 ) —

October 3, Change in January 1,
Contingent Consideration 2010 Additions Fair Value 2011
Contingent Consideration $ 1,530 $ — $ (1,530 ) $ —

Total 1,530 — (1,530 ) —

In acquisition in accordance with FASB Codification No. 805,Business Combinations (“ASC 805”)~~, we were required to record a contingent consideration liability at the acquisition date for the estimated fair value of potential future earnout payments that would be made based~~. Based on the future performance of the Art Gun business. The recording of this liability resulted in goodwill being recorded on the acquisition of Art Gun. Under ASC 805, we remeasure the contingent consideration liability associated with the Art Gun acquisition to fair value at the end of each reporting period. A change in fair value of the contingent consideration can result from changes in assumed discount periods and rates, changes in the assumed timing of when milestones will be achieved and changes in the estimated future revenue and expenses of the business. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Based on currentoperating results and projections, the fair value of the contingent consideration was analyzed and considered to be de minimis, resulting in a $1.5 million favorable adjustment recorded in the fiscal quarter ended January 1, 2011.

The change in fair value of the contingent consideration created an indicator of impairment of the goodwill associated with Art Gun. In accordance with FASB Codification No. 350,Intangibles — Goodwill and Other, we performed an interim impairment test of goodwill as of the end of the second quarter of fiscal year 2011. Under the first step of the impairment analysis for Art Gun, we considered both the income approach, which estimates the fair value based on the future discounted cash flows, and the market approach, which estimates the fair value based on comparable market prices. The results of step one indicated that the carrying value of the Art Gun reporting unit exceeded its fair value. The second step required us to allocate the estimated fair value of the reporting unit to the estimated fair value of the reporting unit’s net assets, with any fair value in excess of amounts allocated to such net assets representing the implied fair value of goodwill for that reporting unit. If the carrying value of the goodwill exceeds its fair value, the carrying value is written down by an amount equal to such excess. The results of step two indicated that the goodwill at Art Gun was fully impaired, resulting in a $0.6 million impairment charge recorded in the fiscal quarter ended January 1, 2011, which is included in our branded segment. The change in contingent consideration and goodwill impairment charge resulted in a net favorable adjustment of $0.9 ~~million, or $0.07 per diluted share.~~million. During the third quarter ended April 2, 2011, the fair value of the contingent consideration was remeasured and still considered to be de minimis based on Art Gun’s current operating results and projections.

We ~~began~~completed our annual test of goodwill on the first day of our third fiscal quarter using our actual results through the last day of our second fiscal quarter. Based ~~on preliminary analysis,~~our valuation, it does not appear that there is any impairment in the goodwill of Junkfood, the only remaining goodwill recorded on our financial statements.

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

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 Securities and Exchange Commission (the “SEC”), in our press releases, in oral statements, 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 Quarterly Report 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 uncertainty of raw material, transportation and energy prices;

	•		the general U.S. and international economic conditions, including market conditions;

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

	•		changes in consumer confidence, consumer spending, and demand for apparel products;

	•		the ability of our brands and products to meet consumer preferences within the prevailing retail environment;

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

	•		the ability to obtain and renew our significant license agreements;

	•		the competitive conditions in the apparel and textile industries;

	•		changes in environmental, tax, trade, employment and other laws and regulations;

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

	•		changes in our information systems related to our business operations;

	•		any significant interruptions with our distribution network;

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

	•		the relative strength of the United States dollar as against other currencies.

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 ended July 3, 2010 filed with the SEC and are beyond our control. Accordingly, any forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.

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.

BUSINESS OUTLOOK

We continued to experience strong demand for our products ~~as we progressed through~~in a difficult retail environment and expect fiscal year 2011 will be our ~~second quarter~~ninth consecutive year of record revenues. Revenues during the first nine months of fiscal year 2011 ~~in what remains a difficult retail environment. Our revenues during the first half of our fiscal year~~ increased nearly ~~12%~~13% as a result of our acquisition of The Cotton Exchange and organic sales growth of ~~4.8%~~7.6%. ~~Sales of~~This organic sales growth was attributed to both our basics and branded business segments.

Our basics business performed well during the third quarter as the market demand continues to be strong for our undecorated products and our private label programs. Average selling prices have increased in the marketplace driven by higher cotton costs, energy costs and wage inflation. We expect the demand to remain high for our basics products in the retail market continue to be strong and we are in a good order position going into the second half of our fiscal year. We believe that all of our operating units have the opportunity to achieve organic growth over the second half of the year.

~~Our branded segment product demand remains strong~~fourth quarter as we will ship additional placements of our Soffe products in the second half of this year. Sales of our Junkfood branded product were below the prior year level in the first half of our fiscal year as we expected. This was primarily due to the large initial roll out of certain Gap programs in the first half of the prior fiscal year. Sales on our various e-commerce sites continued to increase as expected. In addition to our existing Soffe, Junkfood and Delta Catalog direct to consumer e-commerce sites, we launched our new Ranger Boats sites for apparel and accessories in November 2010. In the spring, we will introduce our new Salt Life e-commerce site and will then follow up with a new e-commerce website for Delta Catalog.

Demand in our basics segment continues to remain strong. The service level we provide for our catalog and private label products remains high, which we believe will allow us to gain additional business. We also believe that pricing in these markets is increasing but is not at the level to support replacement cotton costs. Inventory levels in our catalog business remain below traditional levels but we believe we are well positioned to service our ~~customer needs~~customers’ needs. Based on the higher average selling prices and improved manufacturing performance, profitability has improved significantly in the basics business compared to the prior fiscal year.

During the third quarter, demand for our branded products remained strong led by organic growth across all distribution channels in our ~~typically~~Soffe business. We made considerable progress in our integration of The Cotton Exchange and expect to benefit from the cost savings from our vertical manufacturing platform and administrative synergies starting this fall. The new Salt Life collection has strong ~~spring shipping season.~~brand recognition in Florida and is receiving interest from retailers outside Florida as well. In March we launched a new Salt Life e-commerce website,www.saltlife.com, which we expect will continue to grow the brand recognition with consumers. Sales of our Junkfood branded product have been below our expectations. We ~~intend~~have focused on building the brand and developing new sales programs, including being the official t-shirt supplier for Coca-Cola’s anniversary edition, gaining additional order placements with The Gap and negotiating new license agreements, all of which should help continue to ~~focus on service and inventory management and~~build the Junkfood branded business in the future.

We continued to ~~closely monitor selling and production levels so that we do not rebuild inventories to traditional levels until we have more long-term visibility on cotton cost.~~

~~We operated~~operate our manufacturing facilities at ~~full running schedules~~capacity during the ~~second~~third quarter. ~~We continued~~Our fabric production continues to increase ~~our fabric production~~ at our Ceiba ~~Textile~~textiles facility with the new equipment we added during the first quarter. We are also currently installing additional dye equipment which should increase production by our fiscal year end. The additional fabric production at Ceiba Textiles, combined with additional production at our Maiden Textile facility, has allowed us to increase our sewing plant output. We continue to make productivity gains and improve our material utilization in our manufacturing operations which should lower our overall cost to manufacture garments. We have ordered additional equipment for our textile facilities which, combined with efficiency improvements,capacity should allow us to leverage our fixed costs and capitalize on productivity gains, while also giving us the opportunity to increase sales between $15-$18 million on an annual basis. In addition, we are also evaluating current alternatives to further ~~increase fabric~~expand production ~~by 100,000 pounds over~~capacity in our Ceiba textile facility in order to meet future anticipated demand.

As we begin our fourth quarter of fiscal year 2011, we believe the ~~next six months.~~

~~In general, the~~overall demand for our ~~branded~~ products remains strong and we continue to gain momentum for the second half of our fiscal year. Demand for our Delta Catalog and FunTees private label products also remains solid. We believe we are servicing these markets well and believe our high service levels are attracting new customers. We completed the acquisition of The Cotton Exchange in our first quarter and have just entered into an exclusive apparel license agreement for the Salt Life brand to help grow our outdoor and active lifestyle retail channel. Over time, we believe both of these initiatives will be important to our future growth.

strong. While the unprecedented appreciation in cotton costs ~~adds~~continues to add risk to our business, we ~~believe this could create opportunities~~have been successful in passing some of these costs along through price increases. We are also experiencing higher energy and wage costs, which will need to be considered as we plan our business for the upcoming year. We are strategically planning to minimize our inventories and expect to end the year with lower inventory units than in fiscal year 2010 in order to reduce our exposure to the current higher cotton costs. Our management teams will remain focused on these risk factors to help maintain our competitive edge in the market.

Based on the strong operating results for the third quarter, we have raised our earnings expectations for fiscal year 2011. We are now developing our plans for fiscal year 2012 and anticipate continued sales growth ~~as well.~~for both our basics and branded segments, driven primarily from higher average selling prices rather than volume growth. We ~~believe~~expect the higher cotton and other input costs in 2012 may lower our gross margins by approximately 200 basis points but we believe we can partially offset these higher costs with further leveraging of our general and ~~longer lead times out~~administrative costs. In January of ~~Asia should give~~2010, we introduced our ~~vertical manufacturing platform~~three-year goals of $500 million in revenue and earnings of $3.00 per share by fiscal year 2013 and based ~~in Central America a competitive advantage. In addition to this competitive edge,~~on our current outlook we expect to ~~benefit from shorter lead times~~continue to ~~market and lower working capital commitments while providing a superior service model within the apparel marketplace. Our vertical manufacturing platform has been a key to our success for many years.~~make progress toward these goals in fiscal year 2012. We believe we are ~~now evolving~~well positioned for the future and look forward to ~~a supply chain environment where~~the further growth of our ~~manufacturing investments will be a strategic advantage to our brands.~~Company.

EARNINGS GUIDANCE

~~We reiterate~~Based on the strong third quarter results and solid outlook for the fourth quarter, we raised our full year sales and earnings guidance for fiscal year ~~2011 outlook for sales and earnings. For the year ending July 2, 2011, we continue to~~2011. We now expect ~~net sales to be in the range of $455 to $465 million and~~ earnings to be in the range of $1.85 to $1.95 per diluted share from our previous guidance of $1.55 to $1.70 per diluted share. This would be an increase of between 32% and 39% over earnings of $1.40 per diluted share in fiscal 2010. Full year 2011 sales are now expected to be $465 to $475 million, up $10 million from our previous guidance range and sales growth of 10% to 12% from the prior year. The ~~sales outlook~~2010 fiscal year was a 53-week year while fiscal year 2011 is a 52-week year. We further developed our tax planning during the quarter and now expect our effective tax rate to be 26% for fiscal ~~2011 includes anticipated organic growth of approximately 3% to 6% after adjusting for one less week of operations in fiscal~~year 2011 compared to ~~the prior year, and approximately $25 million in additional revenues from The Cotton Exchange. We expect~~ our ~~branded segment to grow approximately 15% with sales in the range~~previous expectation of ~~$225 to $230 million. The basics segment sales grew 14% in fiscal 2010, and we expect to achieve sales of $230 to $235 million in this segment in fiscal 2011.~~30%.

We remain concerned about the challenging economic conditions which, coupled with the higher prices driven from the volatile cotton market, could continue to impact consumer demand for apparel. In determining our expectations for ~~the upcoming~~fiscal year 2011, we believe we have taken into consideration these heightened risk factors.

RESULTS OF OPERATIONS

Net sales for the ~~second~~quarter ended April 2, 2011 were $125.0 million, an increase of 15.8% compared to the quarter ended March 27, 2010. Both segments contributed to the increase with a 14.5% increase in our basics segment and a 17.5% increase in our branded segment. Branded segment sales improved to $54.3 million for the third quarter of fiscal year 2011 ~~increased by $13.6~~compared to $46.2 million ~~to $104.7 million, an increase of 14.9% from~~for the ~~second quarter~~same period of the prior ~~year. Basics segment sales were $56.2 million for the second quarter~~year due to organic growth of fiscal year 2011, an increase of 23.9% compared to $45.4 million in sales in the second quarter of fiscal year 2010, driven by sales growth in both catalog and private label products. These sales increases resulted9.9% as well as revenue from an increase of approximately 7% in average selling prices combined with a 16% increase in unit sales. Branded segment sales were $48.5 million for the three months ended January 1, 2011, an increase of 5.9% over the prior year second quarter sales of $45.8 million. The sales growth resulted from revenue in The Cotton Exchange, which we acquired on July 12, ~~2010,~~2010. Higher sales of Soffe^® apparel and The Game^® headwear, coupled with the new Salt Life^® collection, drove the organic sales growth during the quarter. Sales within the basics segment increased to $70.6 million for the quarter ended April 2, 2011 compared to $61.7 million in the same period in the prior year, driven from an increase in average selling prices of 19.6% partially offset by ~~lower sales of vintage licensed tees.~~a slight decline in units sold.

Our net sales for the first ~~six~~nine months of fiscal year 2011 grew ~~11.8%~~13.2% to ~~$212.6~~$337.6 million, an increase of ~~$22.4~~$39.4 million over the same period of fiscal year 2010. Both the basics and branded segments contributed to the growth with sales increases of ~~$13.3~~$22.2 million and ~~$9.1~~$17.2 million, respectively. The revenue growth in the basics segment was all organic, while the branded segment had organic sales growth ~~in our branded segment includes~~along with the addition of The Cotton Exchange which we acquired during the first quarter of fiscal year 2011.

Gross ~~profit as a percentage of net sales was 20.9% in~~margins improved 130 basis points during the ~~second~~third quarter of fiscal year 2011 compared to ~~23.9% in~~ the ~~second quarter~~same period of the prior year. The increase in gross profit as a percentage of sales was driven primarily from higher average selling prices within our basics segment combined with efficiencies gained from our manufacturing platform. This was partially offset by a decline in ~~gross~~our branded segment margins ~~was~~ due to alower sales of our vintage licensed products and higher ~~percentage of basics products which carry lower gross margins than our branded products. Additionally, we were not fully leveraging our fixed costs in our~~operational expenses associated with Salt Life^® and the digital printing ~~operations and within The Cotton Exchange. We expect margins to improve over the next six months as these businesses become more fully integrated.~~business. Gross margins for the first ~~six~~nine months of fiscal year 2011 were ~~22.5%, a 140 basis point decrease over the first six months of fiscal year 2010. The decline in gross margins is due primarily to a higher mix of basics sales~~23.3% compared to 23.7% in the ~~first six months of fiscal year 2010.~~same period in the prior year. Our gross margins may not be comparable to other companies, since 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.

~~Selling,~~For the quarter ended April 2, 2011, selling, general and administrative expenses, including the provision for bad debts, ~~for the second quarter of fiscal year 2011~~ were ~~$20.1~~$22.7 million or ~~19.2%~~18.2% of sales compared to ~~$19.6~~$20.3 million or ~~21.5%~~18.8% of sales for the ~~same period in the prior year.~~quarter ended March 27, 2010. Selling, general and administrative expenses as a percent of sales decreased as ~~a percentage of sales due to our ability to leverage~~we leveraged our fixed costs on ~~overall~~ higher ~~revenue combined with a decline in licensed product sales which reduced royalty expense. These reductions were partially offset by costs~~

~~associated with the acquisition of The Cotton Exchange, expenses related to the start-up of Art Gun, and new brand-marketing campaigns.~~revenue. For the first ~~six~~nine months of fiscal year 2011 our selling, general and administrative expenses were ~~$43.0~~$65.7 million, or ~~20.2%~~19.5% of sales, compared to ~~$38.8~~$59.2 million, or ~~20.4%~~19.8% of sales, for the first ~~six~~nine months of fiscal year 2010.

Operating income for the ~~second~~third quarter of fiscal year 2011 was ~~$2.6~~$8.1 million, an increase of ~~$0.4~~$3.2 million from the ~~second~~third quarter of the prior year. ~~This~~For the first nine months of fiscal year 2011, operating income was $13.7 million, a $2.1 million increase compared to the same period of the prior year. Fiscal year 2011 included a non-cash net favorable adjustment of $0.9 million related to the valuation of the Art Gun contingent consideration and goodwill, resulting in a positive impact of $0.07 per diluted share. For the first six months of fiscal year 2011, operating income was $5.6 million, a $1.1 million decrease compared to the first six months of fiscal year 2010 of $6.7 million.goodwill.

Net interest expense for the ~~second~~third quarter of fiscal year 2011 was $0.6 million, a reduction of $0.3 million compared to the ~~second~~third quarter of fiscal year 2010. The decrease in net interest expense was primarily due to the lower average interest rates in fiscal year 2011 driven from the expiration of ~~our $15.0 million~~ interest rate swap ~~at 5.06%~~ and ~~$15.0 million~~ collar ~~agreement at 4.33%, partially offset by the new $15.0 million interest rate swap at 1.11% added~~agreements in ~~March~~fiscal year 2010. For the first ~~six~~nine months of fiscal year 2011, net interest expense declined by ~~$0.7~~$1.0 million to ~~$1.2~~$1.8 million compared to ~~$1.9~~$2.8 million for the first ~~six~~nine months of fiscal year 2010.

Our effective income tax rate for the three months ended ~~January 1,~~April 2, 2011 was ~~30.0%~~23.7%, compared to an effective tax rate of ~~27.0%~~25.4% for the same ~~quarter~~period in the prior year. The ~~primary driver for the increase in fiscal year 2011~~decrease is due to having a higher percentage of pre-tax earnings in foreign tax-free locations compared to earnings in the United States and foreign taxable ~~locations~~locations. During the current quarter, we further developed our tax planning strategies, allowing us to keep more profits in Honduras, a tax-free zone, reducing our overall effective tax rate. Our effective income tax rate for the nine months ended April 2, 2011 was 26.0%, compared to earnings in foreign tax-free locations. Profits that are permanently reinvested in the tax-free zone of Honduras are relatively fixed since this amount is based on a cost-plus determination based on our production output. Therefore, ouran effective tax rate ~~has increased because~~of 26.3% for the same period in the prior year. We now expect our ~~expected U.S. profits have increased while our Honduran tax-free profits have remained relatively constant.~~fiscal year 2011effective tax rate to be 26.0%.

Accounts receivable as of ~~January 1,~~April 2, 2011 was ~~$53.2~~$72.9 million, ~~a decrease~~an increase of ~~$7.8~~$11.9 million from July 3, 2010. The ~~decrease~~increase in accounts receivable was primarily ~~the result of lower~~due to higher sales during the ~~second~~third quarter of fiscal year 2011 ~~due to the seasonality of~~slightly offset by an improvement in our ~~business.~~days sales outstanding.

Inventories increased ~~$27.8~~$35.7 million from July 3, 2010 to ~~$144.4~~$152.3 million on ~~January 1,~~April 2, 2011 due to the normal build up of inventory associated with the seasonality of our ~~business. We expect~~business and the additional inventory ~~units to continue to increase during the third quarter of fiscal year 2011 in preparation for the spring selling season.~~associated with our recent acquisitions and licensed brands. In addition, ~~the cost of our inventory will continue to increase as we carry~~ higher raw material costs have also increased our investment in ~~our inventory.~~inventory in fiscal year 2011. We anticipate ~~we could add an additional $15 million in working capital solely due to higher price cotton in~~ our inventory ~~as of our~~units will be lower at fiscal 2011 year end ~~July 2, 2011.~~compared to the prior year; however, the higher cotton costs will increase our investment in the inventory by approximately $20 million.

Capital expenditures for the first ~~six~~nine months of fiscal year 2011 were ~~$3.8~~$6.0 million compared to ~~$2.2~~$3.9 million in expenditures for the first ~~six~~nine months of fiscal year 2010. Expenditures ~~for the second quarter of~~during fiscal year 2011 were primarily to increase capacity and lower costs in our textile ~~facilities.~~facilities and adding new digital printing machines associated with the start-up of Art Gun. Total capital expenditures are expected to be approximately $8.0 million in fiscal year 2011.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are for working capital and capital expenditures. In addition, ~~in the future~~ we may continue to use cash to fund share repurchases under our Stock Repurchase Program or to pay dividends. Refer to Note E—Debt and Note K—Derivatives for additional discussion regarding our external liquidity resources.

Operating Cash Flows

Operating activities used ~~$2.2~~$10.5 million in cash for the first ~~six~~nine months of fiscal year 2011 compared to ~~$14.4~~$14.3 million in cash provided by operating activities in the first ~~six~~nine months of fiscal year 2010. The decrease in operating cash flow ~~in the second quarter of~~during fiscal year 2011 compared to the prior year resulted primarily from higher working capital ~~requirements as we replenished our~~driven from higher raw material costs in inventory ~~in preparation for the spring selling season after ending fiscal year 2010 with lower than normal inventory levels.~~and increased sales. This increase was partially offset by higher accounts payable due to improved cash management and higher raw material costs.

Investing Cash Flows

Capital expenditures for the first ~~six~~nine months of fiscal year 2011 were ~~$3.8~~$6.0 million compared to ~~$2.2~~$3.8 million for the first ~~six~~nine months of the prior year. Expenditures for the first ~~six~~nine months of fiscal year 2011 were primarily from adding new digital printing machines associated with the start-up of Art Gun and ~~to continue~~from continuing to increase capacity and lower costs in our textile facilities. During the first quarter of fiscal year 2011, we acquired The Cotton Exchange for $9.9 million (See Note M—The Cotton Exchange Acquisition). During the first ~~quarter~~nine months of ~~the prior~~fiscal year 2010, we made the final payment of $0.7 million associated with the acquisition of To The Game, ~~LLC.~~LLC and completed the acquisition of Art Gun for $1.0 million.

Financing Activities

For the first ~~six~~nine months of fiscal year 2011, cash provided by financing activities was ~~$15.5~~$26.3 million compared to ~~$11.7~~$8.9 million of cash used by financing activities during the first ~~six~~nine months of fiscal year 2010. During the first ~~six~~nine months of fiscal year 2011, the cash provided by our financing activities was used to fund the acquisition of The Cotton Exchange and higher working capital needs. During the first ~~six~~nine months of fiscal year 2010, we used the cash from our operating activities, net of our investing activities, to reduce

our debt outstanding under our revolving credit facility and to make principal payments on our loan with Banco Ficohsa.

~~Based on our expectations, we~~We believe that our credit facility should be sufficient to satisfy our foreseeable working capital needs, and that the cash flow generated by our operations and funds available under our credit line should be sufficient to service our debt payment requirements, to satisfy our day-to-day working capital needs and to fund our planned capital expenditures. Any material deterioration in our results of operations, however, may result in our losing the ability to borrow under our revolving credit facility and to issue letters of credit to suppliers or may cause the borrowing availability under our facility to be insufficient for our needs. We have started negotiations for a new U.S. revolving credit facility which we expect to complete before the end of the fiscal year. We expect the new credit facility will give us additional flexibility to continue our growth strategies into the future.

PURCHASES BY DELTA APPAREL OF ITS OWN SHARES

Our Board of Directors has authorized our management to use up to $15.0 million to repurchase Delta Apparel stock in open market transactions under our Stock Repurchase Program. As of ~~January 1,~~April 2, 2011, ~~$4.9~~$4.2 million remained available for future ~~purchases under our Stock Repurchase Program.~~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. generally accepted accounting principles (“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, stock-based compensation and the accounting for income taxes.

The detailed Significant Accounting Policies are included in Note 2 to the Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 3, 2010, and there have been no changes in those policies since the filing of that Annual Report.

ENVIRONMENTAL AND REGULATORY MATTERS

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 are not currently aware of any violations, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

COMMODITY RISK SENSITIVITY

We have a supply agreement with Parkdale America, LLC (“Parkdale”) to supply our yarn requirements until December 31, 2011. Under the supply agreement, we purchase from Parkdale all of our yarn requirements for use in our manufacturing operations, excluding yarns that Parkdale does not manufacture or cannot manufacture due to temporary capacity constraints. The purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost. Thus, we are subject to the commodity risk of cotton prices and cotton price movements, which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of the purchase price of yarn with Parkdale, pursuant to the supply agreement, in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.

Yarn with respect to which we had fixed cotton prices at ~~January 1,~~April 2, 2011 was valued at ~~$26.8~~$34.3 million, and was scheduled for delivery between ~~January~~April 2011 and ~~June~~December 2011. At ~~January 1,~~April 2, 2011, a 10% decline in our underlying fixed cotton price in yarn would have had

a negative impact of approximately ~~$2.2~~$2.8 million on the value of the yarn. At July 3, 2010, a 10% decline in our underlying fixed cotton price in yarn would have had a negative impact of approximately $2.4 million on the value of the yarn. The impact of a 10% decline in the market price of the cotton covered by our fixed price yarn would have been greater at ~~July 3, 2010 than at January 1,~~April 2, 2011 ~~due primarily to our decreased commitments at January 1, 2011 as~~ compared to July 3, ~~2010.~~2010 due primarily to the higher fixed cotton prices partially offset by significantly lower commitments.

We may use derivatives, including cotton option contracts, to manage our exposure to movements in commodity prices. We do not designate our cotton option contracts as hedge instruments upon inception. Accordingly, we mark to market changes in the fair market value of the options in cost of sales in the statements of operations. We did not own any cotton option contracts on ~~January 1,~~April 2, 2011.

If Parkdale’s operations are disrupted and it is not able to provide us with our yarn requirements, we may need to obtain yarn from alternative sources. Although alternative sources are presently available, we may not be able to enter into arrangements with substitute suppliers on terms as favorable as our current terms with Parkdale. In addition, the cotton futures we have fixed with Parkdale may not be transferable to alternative yarn suppliers. Because there can be no assurance that we would be able to pass along our higher cost of yarn to our customers, this could have a material adverse effect on our results of operations.

INTEREST RATE SENSITIVITY

Our credit agreement provides that outstanding amounts bear interest at variable rates. If the amount of outstanding indebtedness at ~~January 1,~~April 2, 2011 under the revolving credit facility had been outstanding during the entire three months ended ~~January 1,~~April 2, 2011 and the interest rate on this outstanding indebtedness were increased by 100 basis points, our interest expense would have increased by approximately $0.2 million, or ~~32.9%~~33.9% of actual interest expense, during the quarter. This compares to what would have been an increase of $0.6 million, or 17.4% of actual interest expense, for fiscal year 2010, or an average of $0.2 million per quarter, based on the outstanding indebtedness at July 3, 2010. Although the dollar amount of the increase is consistent between the ~~second~~third quarter of 2011 and the quarterly average during fiscal year 2010, the higher percentage increase in the ~~second~~third quarter of fiscal year 2011 is due to the actual interest expense in the quarter being lower than the quarterly average interest expense in fiscal year 2010. The actual change in interest expense resulting from a change in interest rates would depend on the magnitude of the increase in rates and the average principal balance outstanding.

Derivatives

WeFrom 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 as described in Note K—Derivatives.

Changes in the derivatives’ fair values are deferred and recorded as a component of accumulated other comprehensive loss (“AOCL”) until the underlying transaction is recorded. When the hedged item affects income, gains or losses are reclassified from AOCL to the Consolidated Statements of Operations as interest income/expense. Any ineffectiveness in our hedging relationships, of which there currently is none, would be recognized immediately in the Consolidated Statement of Operations. As of January 1, 2011, the fair value of the interest rate swap agreements resulted in an accumulated other comprehensive loss, net of taxes, of $0.1 million.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of ~~January 1,~~April 2, 2011 and, based on the evaluation of these controls and procedures, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the evaluation date.

Changes in Internal Control Over Financial Reporting

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting occurred during the ~~second~~third quarter of fiscal year 2011. Based on that evaluation, we have concluded that there has been no change in our internal control over financial reporting during the ~~second~~third quarter of fiscal year 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We are currently evaluating the internal control over financial reporting at TCX, LLC and are taking action to strengthen the internal control over financial reporting at TCX, LLC during the current fiscal year.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note L—Legal Proceedings in Item 1, which is incorporated herein by reference.

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

See Note N—Repurchase of Common Stock and Note E—Debt, in Item 1, which is incorporated herein by reference.

Item 6. Exhibits

Exhibits

	10.2.2		Exhibits and Schedules to the Third Amended and Restated Loan and Security Agreement dated as of September 21, 2007 among Delta Apparel, Inc., Junkfood Clothing Company, M. J. Soffe, LLC, Wells Fargo Bank, National Association, successor by merger to Wachovia Bank, National Association, as Agent, and the financial institutions named therein as Lenders.

	31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

1918


	January 1,		July 3,		April 2,		July 3,
	2011		2010		2011		2010
Raw materials	$	17,190	$	10,604	$	18,296	$	10,604
Work in process		22,714		21,277		25,301		21,277
Finished goods		104,469		84,718		108,743		84,718

	$	144,373	$	116,599	$	152,340	$	116,599


Yarn	$	26,792	$	34,343
Natural gas		810		342
Finished fabric		1,816		2,658
Finished products		18,764		20,395

	$	48,182	$	57,738


	Basics			Branded		Consolidated		Basics		Branded		Consolidated
Three months ended January 1, 2011:
Three months ended April 2, 2011:
Net sales	$	56,228		$	48,494	$	104,722	$	70,632	$	54,322	$	124,954
Segment operating income		1,370			1,255		2,625		6,593		1,534		8,127
Segment assets		138,121			135,438		273,559		149,086		151,440		300,526
Purchases of property and equipment		1,436			832		2,268		1,106		1,067		2,173

Three months ended December 26, 2009:
Three months ended March 27, 2010:
Net sales	$	45,379		$	45,781	$	91,160	$	61,685	$	46,257	$	107,942
Segment operating (loss) income		(638	)		2,881		2,243
Segment operating income									1,368		3,546		4,914
Segment assets		136,759			109,899		246,658		140,291		120,431		260,722
Purchases of property and equipment		533			374		907		1,092		577		1,669


	Basics			Branded		Consolidated
Six months ended January 1, 2011:
Net sales	$	105,769		$	106,870	$	212,639
Segment operating income		1,521			4,062		5,583
Purchases of property and equipment		2,239			1,566		3,805

Six months ended December 26, 2009:
Net sales	$	92,524		$	97,758	$	190,282
Segment operating (loss) income		(1,723	)		8,458		6,735
Purchases of property and equipment		1,411			775		2,186


	Basics			Branded		Consolidated
Nine months ended April 2, 2011:
Net sales	$	176,400		$	161,192	$	337,592
Segment operating income		8,116			5,595		13,711
Purchases of property and equipment		3,345			2,633		5,978

Nine months ended March 27, 2010:
Net sales	$	154,209		$	144,015	$	298,224
Segment operating (loss) income		(355	)		12,004		11,649
Purchases of property and equipment		2,503			1,352		3,855


		Page
PART I.	Financial Information

Item 1.	Condensed Consolidated Financial Statements:

	Condensed Consolidated Balance Sheets — ~~January 1,~~April 2, 2011 and July 3, 2010 (unaudited)		3

	Condensed Consolidated Statements of Operations — Three and ~~six~~nine months ended ~~January 1,~~April 2, 2011 and ~~December 26, 2009~~March 27, 2010 (unaudited)		4

	Condensed Consolidated Statements of Cash Flows — ~~Six~~Nine months ended ~~January 1,~~April 2, 2011 and ~~December 26, 2009~~March 27, 2010 (unaudited)		5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		1413

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		17

Item 4.	Controls and Procedures		18

PART II.	Other Information

Item 1.	Legal Proceedings		1918

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		1918

Item 6.	Exhibits		1918

Signatures			2019

Exhibits			2120
EX-10.2.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2


Fiscal Year
2011	$	1,403	$	558
2012		2,239		2,178
2013		1,516		1,763
2014		1,776		1,795
2015		1,603		1,615
2016		625		638

	$	9,162	$	8,547


	October 3,							January 1,
Goodwill	2010		Additions		Impairment			2011
Goodwill	$	612	$	—	$	(612	)	$	—

Total		612		—		(612	)		—


	October 3,				Change in			January 1,
Contingent Consideration	2010		Additions		Fair Value			2011
Contingent Consideration	$	1,530	$	—	$	(1,530	)	$	—

Total		1,530		—		(1,530	)		—


	DELTA APPAREL, INC. (Registrant)
~~February 4,~~Date May 5, 2011	By:	/s/ Deborah H. Merrill
~~Date~~		Deborah H. Merrill
		Vice President, Chief Financial Officer and Treasurer