##### Table of Contents



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 September 30, 2006
 OR
 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.
 
  GEORGIA
    
    58-2508794(State or other jurisdiction of 
Incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 2750 Premiere Parkway, Suite 100
Duluth, Georgia
    
    30097(Address of principal executive offices)
    
    (Zip Code)
 (678) 775-6900
 
  (Not Applicable)
 
  o þ
  Large accelerated
filer   o   Accelerated
filer   þ   Non-accelerated filer   o
 o þ




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INDEX
  
 PagePART I. Financial InformationItem 1. Financial Statements
Condensed Consolidated Financial Statements:Condensed Consolidated Balance Sheets
September 30, 2006 and July 1, 2006
    
    
    3Condensed Consolidated Statements of Income
Three months ended September 30, 2006 and October 1, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 2006 and October 1, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12-17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6. Exhibits and Reports on Form 8-K
    
    
    19Signatures
    
    
    20Exhibits
    
    
    21-24EX-31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICEREX-32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICEREX-32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DELTA APPAREL, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
 (in thousands, except shares and per share amounts)
(Unaudited)
 September 30,
    
    
    July 1,2006
    
    
    2006AssetsCurrent assets:Cash
    
    $
    315
    
    
    $
    642Accounts receivable, net
    
    
    36,232
    
    
    
    47,525Inventories, net
    
    
    105,894
    
    
    
    103,660Prepaid expenses and other current assets
    
    
    2,474
    
    
    
    2,708Deferred income taxes
    
    
    2,792
    
    
    
    2,710Total current assets
    
    
    147,707
    
    
    
    157,245Property, plant and equipment, net
    
    
    21,136
    
    
    
    21,164Goodwill
    
    
    14,223
    
    
    
    13,888Other intangibles, net
    
    
    8,456
    
    
    
    8,579Other assets
    
    
    2,248
    
    
    
    2,247Total assets
    
    $
    193,770
    
    
    $
    203,123Liabilities and Stockholders EquityCurrent liabilities:Accounts payable and accrued expenses
    
    $
    38,658
    
    
    $
    49,366Income taxes payable
    
    
    1,222
    
    
    
    986Current portion of long-term debt
    
    
    3,933
    
    
    
    3,683Total current liabilities
    
    
    43,813
    
    
    
    54,035Long-term debt
    
    
    46,433
    
    
    
    46,967Deferred income taxes
    
    
    909
    
    
    
    1,123Other liabilities
    
    
    9
    
    
    
    10Total liabilities
    
    
    91,164
    
    
    
    102,135Stockholders equity:Preferred stock2,000,000 shares authorized; none issued
and outstanding
    
    
    
    
    
    
    Common stockpar value $.01 a share, 15,000,000 shares authorized,
9,646,972 shares issued, and 8,538,795 and 8,562,821
shares outstanding as of September 30, 2006 and July 1, 2006,
respectively
    
    
    96
    
    
    
    96Additional paid-in capital
    
    
    54,886
    
    
    
    54,672Retained earnings
    
    
    55,289
    
    
    
    53,412Treasury stock1,108,177 and 1,084,151 shares as of September 30,
2006 and July 1, 2006, respectively
    
    
    (7,665
    )
    
    
    (7,192
    )Total stockholders equity
    
    
    102,606
    
    
    
    100,988Total liabilities and stockholders equity
    
    $
    193,770
    
    
    $
    203,123
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DELTA APPAREL, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(Unaudited)
 Three Months EndedSeptember 30, 2006
    
    
    October 1, 2005Net sales
    
    $
    62,680
    
    
    $
    60,573Cost of goods sold
    
    
    45,344
    
    
    
    41,879Gross profit
    
    
    17,336
    
    
    
    18,694Selling, general and administrative expenses
    
    
    13,898
    
    
    
    12,700Operating income
    
    
    3,438
    
    
    
    5,994Other income (expense)
    
    
    51
    
    
    
    (29
    )Interest expense, net
    
    
    947
    
    
    
    685Income before provision for
income taxes and extraordinary
gain
    
    
    2,542
    
    
    
    5,280Provision for income taxes
    
    
    967
    
    
    
    1,903Income before extraordinary gain
    
    
    1,575
    
    
    
    3,377Extraordinary gain, net of income taxes
    
    
    672
    
    
    
    Net income
    
    $
    2,247
    
    
    $
    3,377Basic earnings per shareIncome before extraordinary gain
    
    $
    0.18
    
    
    $
    0.40Extraordinary gain, net of income taxes
    
    
    0.08
    
    
    
    Net income
    
    $
    0.26
    
    
    $
    0.40Diluted earnings per shareIncome before extraordinary gain
    
    $
    0.18
    
    
    $
    0.39Extraordinary gain, net of income taxes
    
    
    0.08
    
    
    
    Net income
    
    $
    0.26
    
    
    $
    0.39Weighted average number of shares outstanding
    
    
    8,546
    
    
    
    8,532Dilutive effect of stock options
    
    
    144
    
    
    
    27Weighted average number of shares assuming dilution
    
    
    8,690
    
    
    
    8,559Cash dividends declared per common share
    
    $
    0.05
    
    
    $
    0.04
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DELTA APPAREL, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Three Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Operating activities:Net income
    
    $
    2,247
    
    
    $
    3,377Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,189
    
    
    
    1,094Deferred income taxes
    
    
    (717
    )
    
    
    (551
    )Gain on sale of property and equipment
    
    
    (17
    )
    
    
    (47
    )Extraordinary gain on earnout payment
    
    
    (672
    )
    
    
    Noncash
stock compensation
    
    
    1,000
    
    
    
    1,031Changes in operating assets and liabilities, net of assets acquired
and liabilities assumed in connection with business acquisitions:Accounts receivable
    
    
    11,293
    
    
    
    5,052Inventories
    
    
    (2,234
    )
    
    
    (2,983
    )Prepaid expenses and other current assets
    
    
    234
    
    
    
    152Other noncurrent assets
    
    
    (1
    )
    
    
    (6
    )Accounts payable and accrued expenses
    
    
    (10,311
    )
    
    
    1,813Income taxes
    
    
    236
    
    
    
    1,379Other liabilities
    
    
    (1
    )
    
    
    53Net cash provided by operating activities
    
    
    2,246
    
    
    
    10,364Investing activities:Purchases of property, plant and equipment
    
    
    (1,042
    )
    
    
    (1,142
    )Proceeds from sale of property, plant and equipment
    
    
    20
    
    
    
    82Acquisition of business
    
    
    (334
    )
    
    
    (27,386
    )Cash invested in joint venture
    
    
    
    
    
    
    (1,037
    )Net cash used in investing activities
    
    
    (1,356
    )
    
    
    (29,483
    )Financing activities:Repayment of Soffe revolving credit facility, net
    
    
    
    
    
    
    (11,781
    )Proceeds from long-term debt
    
    
    48,306
    
    
    
    32,120Repayment of long-term debt
    
    
    (48,590
    )
    
    
    (814
    )Cash paid for common stock
    
    
    (506
    )
    
    
    Dividends paid
    
    
    (427
    )
    
    
    (341
    )Net cash (used in) provided by financing activities
    
    
    (1,217
    )
    
    
    19,184Net (decrease) increase in cash
    
    
    (327
    )
    
    
    65Cash at beginning of period
    
    
    642
    
    
    
    298Cash at end of period
    
    $
    315
    
    
    $
    363Supplemental cash flow information:Cash paid during the period for interest
    
    $
    811
    
    
    $
    642Cash paid during the period for income taxes
    
    $
    1,247
    
    
    $
    1,074Noncash financing activitycommon stock issued under option plan
    
    $
    90
    
    
    $
    1,428
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DELTA APPAREL, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  Note ABasis of Presentation
   Note BAccounting Policies
  Note CNew Accounting Standards
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair Value Measurements
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) Employers Accounting for Pensions Employers Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits Employers Accounting for Postretirement Benefits Other Than Pensions Employers Disclosures about Pensions and Other Postretirement
Benefits
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Note DInventories
  September 30,
    
    
    July 1,2006
    
    
    2006Raw materials
    
    $
    6,699
    
    
    $
    5,537Work in process
    
    
    27,344
    
    
    
    27,534Finished goods
    
    
    71,851
    
    
    
    70,589$
    105,894
    
    
    $
    103,660
 Note EGoodwill and Intangible Assets
  September
30,2006
    
    
    Economic LifeGoodwill
    
    $
    14,223
    
    
    
    N/AIntangibles:Tradename/trademarks
    
    
    1,530
    
    
    20 yrsCustomer relationships
    
    
    7,220
    
    
    20 yrsNon-compete agreements
    
    
    250
    
    
    5 yrsTotal intangibles
    
    
    9,000Total goodwill and intangibles
    
    
    23,223Less accumulated amortization
    
    
    (544
    )$
    22,679
  Goodwill and Other
Intangible Assets
 Note FDebt
   7




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Note GSelling, General and Administrative Expense
  Note HStock Options and Incentive Stock Awards
  Option Plan
  2007
    
    

2006Risk-free interest rate
    
    
    4.99
    %
    
    
    4.00
    %Expected life
    
    6 yrs
    
    7 yrsExpected volatility
    
    
    31.7
    %
    
    
    35.8
    %Expected dividend yield
    
    
    1.10
    %
    
    
    1.30
    %Weighted-average fair value of options granted
    
    $
    6.204
    
    
    $
    5.182
  8




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Three Months EndedSeptember 30, 2006WeightedAverageShares
    
    
    Exercise PriceOutstanding at July 1, 2006
    
    
    818,500
    
    
    $
    12.98Granted
    
    
    48,000
    
    
    $
    17.24Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Outstanding at September 30, 2006
    
    
    866,500
    
    
    $
    13.22Exercisable at September 30, 2006
    
    
    313,000
  Weighted-AverageGrant-DateShares
    
    
    Fair ValueNonvested at July 1, 2006
    
    
    674,000
    
    
    $
    5.18Granted
    
    
    48,000
    
    
    $
    6.20Vested
    
    
    (168,500
    )
    
    $
    5.18Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Nonvested at September 30, 2006
    
    
    553,500
    
    
    $
    5.27
  Award Plan
  9




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WeightedAverageExerciseShares
    
    
    PriceNonvested at July 1, 2006
    
    
    113,000
    
    
    $
    0.01Granted
    
    
    10,200
    
    
    $
    0.01Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    Nonvested at September 30, 2006
    
    
    123,200
    
    
    $
    0.01
  Note IIncome Taxes
  Note JPurchase Contracts
  Natural gas
    
   $
    398Yarn
    
    
    20,076Finished fabric
    
    
    622Finished apparel products
    
    
    2,073$
    23,169
 Note KComputation of Basic and Diluted Net Earnings per Share (EPS)
  Note LStockholders Equity
 Stock Repurchase Program
 Quarterly Dividend Program
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Note MSegment Reporting
  ®
 ® ® ® ®
    CorporateandActivewear Apparel
    
    
    Retail-Ready Apparel
    
    
    Unallocated
    
    
    ConsolidatedFiscal Year 2007:Net sales
    
    $
    30,323
    
    
    $
    32,357
    
    
    $
    
    
    
    $
    62,680Segment operating income
    
    
    216
    
    
    
    2,788
    
    
    
    485
    
    
    
    3,489Segment assets
    
    
    97,234
    
    
    
    96,536
    
    
    
    
    
    
    
    193,770Fiscal Year 2006:Net sales
    
    $
    29,566
    
    
    $
    31,007
    
    
    $
    
    
    
    $
    60,573Segment operating income
    
    
    2,009
    
    
    
    3,896
    
    
    
    60
    
    
    
    5,965Segment assets
    
    
    93,525
    
    
    
    98,901
    
    
    
    
    
    
    
    192,426
  Three Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Segment operating income
    
    $
    3,489
    
    
    $
    5,965Unallocated interest expense
    
    
    947
    
    
    
    685Consolidated income before taxes
    
    $
    2,542
    
    
    $
    5,280
 Note NExtraordinary Gain
  11




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Note OOther Items
  Note PSubsequent Events
    
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD LOOKING STATEMENTS
      12




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Operating Cash Flows
  Investing Cash Flows
   15




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Financing Activities
   Purchases by Delta Apparel of its Own Shares
  Dividend Program
     Revenue Recognition and Accounts Receivable
  16




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Inventories
  Self Insurance
  Share-Based Compensation
 Share-Based Payment
 Income Taxes
 Accounting for Income Taxes
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
   17




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Item 4: Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
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PART II. OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    Dollar Value ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    ProgramsJuly
Period
(July 2, 2006 to August 5, 2006)
    
    
    9,770
    
    
    $
    17.56
    
    
    
    9,770
    
    
    $5.1 millionAugust
Period
(August 6, 2006 to September 2, 2006)
    
    
    19,100
    
    
    $
    17.55
    
    
    
    19,100
    
    
    $4.8 millionSeptember
Period
(September 3, 2006 to September 30,
2006)
    
    
    
    
    
    
    
    
    
    
    
    
    
    $4.8 million
   
 Item 6. Exhibits
 
  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.
 
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SIGNATURES
  DELTA APPAREL, INC.
(Registrant)November 6, 2006
    
    By:
    /s/ Deborah H. MerrillDate
    
    
    Deborah H. MerrillVice President, Chief Financial Officer and Treasurer 20