Document and Entity Information

3 Months Ended

Sep. 29, 2012

Oct. 26, 2012

Document and Entity Information [Abstract]

Entity Registrant Name

DELTA APPAREL, INC

Entity Central Index Key

0001101396

Current Fiscal Year End Date

--06-29

Entity Filer Category

Accelerated Filer

Document Type

10-Q

Document Period End Date

Sep. 29, 2012

Document Fiscal Year Focus

2013

Document Fiscal Period Focus

Q1

Amendment Flag

false

Entity Common Stock, Shares Outstanding

8,319,352

Condensed Consolidated Balance Sheets (USD $)

In Thousands, unless otherwise specified

Sep. 29, 2012

Jun. 30, 2012

Current assets:

Cash and cash equivalents

$ 1,840

$ 467

Accounts receivable, less allowances of $1,782 and $2,136, respectively

69,297

73,856

Income tax receivable

7,270

8,796

Inventories, net

161,814

161,633

Prepaid expenses and other current assets

3,938

3,770

Deferred income taxes

3,890

4,964

Total current assets

248,049

253,486

Property, plant and equipment, net

39,272

39,425

Goodwill

16,812

Intangibles, net

6,645

6,797

Other assets

3,780

3,874

Total assets

314,558 ¹

320,394

Current liabilities:

Accounts payable

44,898

46,320

Accrued expenses

21,395

16,608

Current portion of long-term debt

3,529

Total current liabilities

69,822

66,457

Long-term debt, less current maturities

99,049

110,949

Deferred income taxes

3,531

3,803

Other liabilities

224

218

Total liabilities

172,626

181,427

Commitments and contingencies

Shareholders’ equity:

Preferred stock—$0.01 par value, 2,000,000 shares authorized, none issued and outstanding

0

Common stock —$0.01 par value, 15,000,000 shares authorized, 9,646,972 shares issued, and 8,363,105 and 8,424,709 shares outstanding as of September 29, 2012 and June 30, 2012, respectively

96

Additional paid-in capital

60,709

60,367

Retained earnings

94,392

90,830

Accumulated other comprehensive loss

(158)

(129)

Treasury stock — 1,283,867 and 1,222,263 shares as of September 29, 2012 and June 30, 2012, respectively

(13,107)

(12,197)

Total shareholders’ equity

141,932

138,967

Total liabilities and shareholders' equity

$ 314,558

$ 320,394

[1] * All goodwill and intangibles on our balance sheet are included in the branded segment.

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)

In Thousands, except Share data, unless otherwise specified

Sep. 29, 2012

Jun. 30, 2012

Statement of Financial Position [Abstract]

Allowances for accounts receivable

$ 1,782

$ 2,136

Shareholders' equity:

Common stock, par value

$ 0.01

Common stock, shares authorized

15,000,000

Common stock, shares issued

9,646,972

Common stock, shares outstanding

8,363,105

8,424,709

Preferred stock, par value

$ 0.01

Preferred stock, shares authorized

2,000,000

Preferred stock, shares issued

0

Preferred stock, shares outstanding

0

Treasury stock, shares

1,283,867

1,222,263

Consolidated Statements of Operations (USD $)

In Thousands, except Per Share data, unless otherwise specified

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Income Statement [Abstract]

Net sales

$ 130,114

$ 123,523

Cost of goods sold

98,261

92,270

Gross profit

31,853

31,253

Selling, general and administrative expenses

25,861

24,562

Other expense (income), net

156

(7)

Operating income

5,836

6,698

Interest expense, net

1,076

893

Income before provision for income taxes

4,760

5,805

Provision for income taxes

1,196

1,393

Net income

$ 3,564

$ 4,412

Basic earnings per share (usd per share)

$ 0.42

$ 0.52

Diluted earnings per share (usd per share)

$ 0.41

$ 0.50

Weighted average number of shares outstanding (shares)

8,398

8,450

Dilutive effect of stock options (shares)

254

310

Weighted average number of shares assuming dilution (shares)

8,652

8,760

Consolidated Statements of Comprehensive Income (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Comprehensive income (loss):

Net income

$ 3,564

$ 4,412

Other comprehensive loss

(29)

(120)

Comprehensive income

$ 3,535

$ 4,292

Consolidated Statements of Cash Flows (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Operating activities:

Net income

$ 3,564

$ 4,412

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization

1,945

1,795

Amortization of deferred financing fees

90

Excess tax benefits from exercise of stock options

0

(475)

Povision for deferred income taxes

802

523

Non-cash stock compensation

456

672

Loss on disposal of property and equipment

49

33

Changes in operating assets and liabilities:

Accounts receivable

4,559

10,044

Inventories

(181)

(27,118)

Prepaid expenses and other current assets

(168)

(334)

Other non-current assets

4

132

Accounts payable

(1,423)

(2,393)

Accrued expenses

4,786

(3,648)

Income taxes

1,526

(439)

Other liabilities

(23)

96

Net cash provided by (used in) operating activities

15,986

(16,610)

Investing activities:

Purchases of property and equipment, net

(1,687)

(1,319)

Net cash used in investing activities

(1,687)

(1,319)

Financing activities:

Proceeds from long-term debt

124,913

164,581

Repayment of long-term debt

(136,814)

(146,021)

Repurchase of common stock

(1,025)

(1,459)

Proceeds from stock options

0

20

Excess tax benefits from exercise of stock options

0

475

Net cash (used in) provided by financing activities

(12,926)

17,596

Net increase (decrease) in cash and cash equivalents

1,373

(333)

Cash and cash equivalents at beginning of year

467

656

Cash and cash equivalents at end of year

1,840

323

Supplemental cash flow information:

Cash paid during the year for interest

1,009

696

Cash paid during the year for income taxes, net of refunds received

$ (1,150)

$ 1,235

Basis of Presentation

Basis of Presentation and Description of Business

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 ("US GAAP") 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 months ended September 29, 2012, are not necessarily indicative of the results that may be expected for our fiscal year ending June 29, 2013. 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 June 30, 2012, filed with the United States 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”) and other international subsidiaries, as appropriate to the context.

Delta Apparel, Inc. is an international apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle branded activewear and headwear, and produces high-quality private label programs. We specialize in selling casual and athletic products through a variety of distribution channels. Our products are sold across distribution tiers and in most store types, including specialty stores, boutiques, department stores, and mid and mass channels. We also have niche distribution at college bookstores and the U.S. military. Our products are made available direct-to-consumer on our websites at www.soffe.com, www.junkfoodclothing.com, www.saltlife.com and www.deltaapparel.com. Additional products can be viewed at www.2thegame.com and www.thecottonexchange.com. We design and internally manufacture the majority of our products, which allows us to offer a high degree of consistency and quality control as well as leverage scale efficiencies. We have manufacturing operations located in the United States, El Salvador, Honduras and Mexico, and use domestic and foreign contractors as additional sources of production. Our distribution facilities are strategically located throughout the United States to better serve our customers with same-day shipping on our catalog products and weekly replenishments to retailers.

We were incorporated in Georgia in 1999 and our headquarters is located at 322 South Main Street, Greenville, South Carolina 29601 (telephone number: 864-232-5200). Our common stock trades on the NYSE MKT under the symbol “DLA”. We operate on a 52-53 week fiscal year ending on the Saturday closest to June 30.

Accounting Policies

Our accounting policies are consistent with those described in our Significant Accounting Policies in our Form 10-K for the fiscal year ended June 30, 2012, filed with the United States Securities and Exchange Commission.

New Accounting Standards

Accounting Standards

Recently Adopted Standards

In June 2011, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU") No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income ("ASU 2011-05"). This new guidance gives companies two choices on how to present items of net income, items of other comprehensive income and total comprehensive income: companies can create one continuous statement of comprehensive income or two separate consecutive statements. Other comprehensive income is no longer allowed to be presented solely in the statement of stockholders' equity. Earnings per share continues to be based on net income. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and applied on a retrospective basis. ASU 2011-05 was adopted on July 1, 2012, and the Condensed Consolidated Statements of Comprehensive Income herein comply with this guidance.

In December 2011, the FASB issued No. ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 ("ASU 2011-12"). ASU 2011-12 indefinitely defers the new provisions under ASU 2011-05, which required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 is effective for the years beginning after December 15, 2011. ASU 2011-12 was adopted on July 1, 2012, and the Condensed Consolidated Statements of Comprehensive Income comply with this guidance.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for Impairment ("ASU 2011-08"). FASB decided to simplify how companies are required to test goodwill for impairment. Companies now have the option to first assess qualitative factors to determine whether it is more likely than not (likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If after considering the totality of events and circumstances a company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it will not have to perform the two-step impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. ASU 2011-08 was adopted on July 1, 2012, and the adoption had no impact on our financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards. Additional disclosure requirements in ASU 2011-04 include: (a) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (b) for the use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (c) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (d) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 is effective for interim periods beginning after December 15, 2011, and applied on a prospective basis. ASU 2011-04 was adopted on January 1, 2012, and did not have a material effect on our financial statements.

Standards Not Yet Adopted

In July 2012, FASB issued ASU No. 2011-02, Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment, ("ASU 2011-02"). This new guidance adds an optional qualitative assessment for determining whether an indefinite-lived intangible asset is impaired. Companies have the option to first perform a qualitative assessment to determine whether it is more likely than not (likelihood of more than 50%) that an indefinite-lived intangible is impaired. If a company determines that it is more likely than not that the fair value of such an asset exceeds its carrying amount, it would not need to calculate whether the fair value of such an asset exceeds its carrying amount and it would not need to calculate the fair value of the asset in that year. However, if the Company determines otherwise, it must calculate the fair value of the asset, compare that value with its carrying amount and record an impairment charge, if any. ASU 2011-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. ASU 2011-02 is therefore effective for our fiscal year ending June 28, 2014.

Inventories

Inventories, net of reserves, consist of the following (in thousands):



	September 29, 2012		June 30, 2012
Raw materials	$	13,737	$	11,759
Work in process	17,011		18,986
Finished goods	131,066		130,888
	$	161,814	$	161,633

Raw materials include finished yarn and direct materials for the basics segment and include direct embellishment materials for the branded segment as well as undecorated garments and headwear for the Junkfood and To The Game business units. We regularly review inventory quantities on hand and record reserves for obsolescence, excess quantities, irregulars and slow-moving inventory based on historical selling prices, current market conditions, and forecasted product demand to reduce inventory to its net realizable value.

Debt

On May 27, 2011, Delta Apparel, Soffe, Junkfood, To The Game and Art Gun entered into a Fourth Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with the financial institutions named in the Amended Loan Agreement as Lenders, Wells Fargo Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, Wells Fargo Capital Finance, LLC, as Sole Lead Arranger, and Wells Fargo Capital Finance, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Joint Bookrunners.

Pursuant to the Amended Loan Agreement, the line of credit is $145 million (subject to borrowing base limitations), and matures on May 26, 2016. Provided that no event of default exists, we have the option to increase the maximum credit available under the facility to $200 million (subject to borrowing base limitations), conditioned upon the Administrative Agent's ability to secure additional commitments and customary closing conditions.

At September 29, 2012, we had $95.3 million outstanding under our U.S. credit facility at an average interest rate of 2.5%, and had the ability to borrow an additional $37.2 million. Our credit facility includes a financial covenant requiring that if the amount of availability falls below an amount equal to 12.5% of the lesser of the borrowing base or $145 million, our Fixed Charge Coverage Ratio (“FCCR”) (as defined in the Amended Loan Agreement) for the preceding 12 month period must not be less than 1.1 to 1.0. As availability was above the minimum, we were not subject to the FCCR covenant at September 29, 2012. At September 29, 2012 and June 30, 2012, there was $15.6 million and $14.8 million, respectively, of retained earnings free of restrictions to make cash dividends or stock repurchases.

The credit facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in FASB Codification No. 470, Debt ("ASC 470")), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to ASC 470, we classify borrowings under the facility as long-term debt.

In March 2011, we extinguished our existing debt with Banco Ficohsa, a Honduran bank, and entered into a new credit facility with them. As of September 29, 2012, we had $5.3 million outstanding on the installment portion of this loan and $2.0 million outstanding under the revolving portion of the agreement. The new revolving Honduran debt, by its nature, is not long-term, as it requires scheduled payments each six months. However, as the agreement permits us to re-borrow funds up to the amount repaid, subject to certain objective covenants, and we intend to re-borrow funds, subject to the objective criteria, the amounts have been classified as long-term debt.

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 $4.4 million and $3.8 million for the first quarter of fiscal years 2013 and 2012, 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. We expensed a one-time charge of $1.2 million in the fiscal 2013 first quarter for legal and professional fees related to the Audit Committee internal investigation that was completed during the quarter.

Stock-based Compensation (Notes)

Stock-Based Compensation

On November 11, 2010, the Delta Apparel, Inc. shareholders approved the Delta Apparel, Inc. 2010 Stock Plan ("2010 Stock Plan"). Upon shareholder approval of the 2010 Stock Plan, no additional awards have been or will be granted under either the Delta Apparel Stock Option Plan ("Option Plan") or the Delta Apparel Incentive Stock Award Plan ("Award Plan"); instead, all stock awards have and 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 Option Plan or Award Plan that are subsequently forfeited or terminated for any reason before being exercised. We expense stock compensation costs in the cost of sales and selling, general and administrative expense line items of our Condensed Consolidated Statements of Earnings over the vesting periods of each grant.

2010 Stock Plan

During the first quarter of fiscal year 2013, we granted restricted stock units for 5,000 of our shares. These units will vest upon the filing of our Form 10-K with the SEC for the fiscal year ending June 29, 2013. In addition, performance units for 5,000 shares were granted. These units will vest upon the filing of our Form 10-K with the SEC for the fiscal year ending June 29, 2013, subject to the achievement of the performance goals.

During the first quarter of fiscal years 2013 and 2012, we expensed $0.4 million and $0.5 million, respectively, in connection with outstanding awards made under the 2010 Stock Plan. As of September 29, 2012, there was $2.0 million of total unrecognized compensation cost related to non-vested awards granted under the 2010 Stock Plan. This cost is expected to be recognized over a period of 2.9 years.

Option Plan

All options granted under the Option Plan have vested. As such, no expense was recognized during the first quarter of fiscal year 2013. During the first quarter of fiscal year 2012, we expensed $43 thousand in connection with the Option Plan.

Award Plan

All awards granted under the Award Plan have vested and been exercised, and no awards remain outstanding. As such, no expense was recognized during the first quarter of fiscal year 2013. During the first quarter of fiscal year 2012, we expensed $0.1 million in connection with the Award Plan.

Purchase Contracts

We have entered into agreements, and have fixed prices, to purchase yarn, natural gas, finished fabric, and finished apparel and headwear products. At September 29, 2012, minimum payments under these contracts were as follows (in thousands):



Yarn	$	4,437
Natural Gas	1,005
Finished fabric	1,832
Finished products	23,193
	$	30,467

Business Segments

We operate our business in two distinct segments: branded and basics. Although the two segments are similar in their production processes and regulatory environments, they are distinct in their economic characteristics, products and distribution methods.

The branded segment is comprised of our business units focused on specialized apparel garments and headwear to meet consumer preferences and fashion trends, and includes Soffe (which includes The Cotton Exchange as the bookstore division of Soffe), Junkfood, To The Game and Art Gun. These branded embellished and unembellished products are sold through specialty and boutique shops, upscale and traditional department stores, mid-tier retailers, sporting goods stores, college bookstores and the U.S. military. Products in this segment are marketed under our lifestyle brands of Soffe®, Intensity Athletics®, The Cotton Exchange®, Junk Food®, and The Game®, licensed brands of Salt Life® and Realtree Outfitters®, as well as other labels.

The basics segment is comprised of our business units primarily focused on garment styles that are characterized by low fashion risk, and includes our Delta Catalog and FunTees businesses. Within the Delta Catalog business, we market, distribute and manufacture unembellished knit apparel under the main brands of Delta Pro Weight® and Delta Magnum Weight®. Delta Catalog products are sold to a diversified audience ranging from large licensed screen printers all the way to small independent businesses. We also manufacture private label products for major branded sportswear companies, retailers, corporate industry programs, and sports licensed apparel marketers. Typically these products are sold with value-added services such as hangtags, ticketing, hangers, and embellishment so that they are fully ready for retail. The majority of the private label products are sold through the FunTees business.

Robert W. Humphreys, our chief operating decision maker, and management evaluate performance and allocate resources based on profit or loss from operations before interest, income taxes and special charges (“Segment Operating Income”). Our Segment Operating Income may not be comparable to similarly titled measures used by other companies. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown in the following table. We expensed a one-time charge of $1.2 million in the fiscal 2013 first quarter for legal and professional fees related to the Audit Committee internal investigation that was completed during the quarter. This one-time charge is included in the basics segment.

Information about our operations as of and for the three months ended September 29, 2012, and October 1, 2011, by operating segment, is as follows (in thousands):



	Basics		Branded		Consolidated
Three months ended September 29, 2012
Net sales	$	66,581	$	63,533	$	130,114
Segment operating income	3,165		2,671		5,836
Segment assets *	165,102		149,456		314,558

Three months ended October 1, 2011
Net sales	$	52,598	$	70,925	$	123,523
Segment operating income	1,584		5,114		6,698
Segment assets *	174,688		153,423		328,111



*		All goodwill and intangibles on our balance sheet are included in the branded segment.

The following reconciles the segment operating income to the Company's consolidated income before income taxes (in thousands):



	Three Months Ended
	September 29, 2012		October 1, 2011
Segment operating income	$	5,836	$	6,698
Unallocated interest expense	1,076		893
Consolidated income before taxes	$	4,760	$	5,805

Income Taxes

We had an effective income tax rate of 25.1% for the three months ended September 29, 2012, compared to an effective rate of 24.0% for the same period in the prior year and an effective rate of 76.4% for the fiscal year ended June 30, 2012. The effective tax rate for the fiscal year ended June 30, 2012, was impacted by the operating losses driven by the inventory markdown during the fiscal year, lowering our U.S. taxable income while maintaining profits in the offshore taxable and tax-free jurisdictions.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for our tax years before 2008. However, net operating loss carryforwards remain subject to examination to the extent they are carried forward and impact a year that is open to examination by authorities.

Derivatives and Fair Value Measurements

From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes.



	Effective Date	Notational Amount	Fixed LIBOR Rate		Maturity Date
Interest Rate Swap	September 1, 2011	$10 million	0.7650	%	September 1, 2013
Interest Rate Swap	September 1, 2011	$10 million	0.9025	%	March 1, 2014
Interest Rate Swap	September 1, 2011	$10 million	1.0700	%	September 1, 2014

FASB Codification No. 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Assets and liabilities measured at fair value are grouped in three levels. The levels prioritize the inputs used to measure the fair value of the assets or liabilities. These levels are:


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


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


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

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



	Fair Value Measurements Using
Period Ended	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Interest Rate Swaps
September 29, 2012	$	257	—	$	257	—
June 30, 2012	$	209	—	$	209	—

The fair value of the interest rate swap agreements were derived from discounted cash flow analysis based on the terms of the contract and the forward interest rate curves adjusted for our credit risk, which fall in level 2 of the fair value hierarchy. We used the historical results and projected cash flows based on the contractually defined terms, discounted as necessary, to estimate the fair value of the contingent consideration for Art Gun. Accordingly, the fair value measurement for contingent consideration falls in level 3 of the fair value hierarchy. The contingent consideration for Art Gun is remeasured at the end of each reporting period.

The following table summarizes the fair value and presentation in the consolidated balance sheets for derivatives as of September 29, 2012, and June 30, 2012.



	September 29, 2012			June 30, 2012
Accrued expenses	$	40		$	—
Deferred tax liabilities	(99		)	(80		)
Other liabilities	217			209
Accumulated other comprehensive loss	$	158		$	129

Legal Proceedings

We previously received an inquiry from the U.S. Consumer Product Safety Commission (“Commission”) regarding a children's drawstring hoodie product sourced, distributed and sold by our Junkfood division and its compliance with applicable product safety standards. The Commission subsequently investigated the matter, including whether we complied with the reporting requirements of the Consumer Product Safety Act (“CPSA”), and the garments in question were ultimately recalled. On or about July 25, 2012, Junkfood received notification from the Commission staff alleging that Junkfood knowingly violated CPSA Section 15(b) and that it will recommend to the Commission a $900,000 civil penalty. We contend that the Commission's allegations are without merit.

On August 27, 2012, Junkfood responded to the Commission staff regarding its recommended penalty, setting forth a number of defenses and mitigating factors that could result in a much lower penalty, if any, ultimately imposed by a court should the matter proceed to litigation. While we will continue to defend against these allegations, we believe it is probable that a liability has been incurred. Based upon the terms of previously published CPSC settlements and related product recall notices, we believe if we settle the matter the minimum settlement amount would be $25,000. Should the Commission seek enforcement of the recommended civil penalty and ultimately prevail on its claims at trial, we could be required to pay amounts exceeding $900,000, along with interest and the Commission's costs and fees. During the quarter ended June 30, 2012, we recorded a liability for the most likely outcome within this range, and this liability remains recorded as of September 29, 2012.

In addition, 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.

The Cotton Exchange Acquisition

On June 11, 2010, we formed a new North Carolina limited liability company, TCX, LLC, 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 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 total purchase price, which included a post-closing working capital adjustment, was $9.9 million. We finalized the valuation for the assets acquired and liabilities assumed and have determined the final allocation of the purchase price. No goodwill or other intangible assets were recorded in conjunction with the acquisition of The Cotton Exchange. Effective January 1, 2012, TCX was merged into its parent entity, M.J. Soffe, LLC, for reasons of corporate simplification and as such, TCX no longer exists as a separate entity. The Cotton Exchange continues to operate as the bookstore division of Soffe.

Repurchase of Common Stock

As of June 30, 2012, our Board of Directors had authorized management to use up to $20.0 million to repurchase Delta Apparel stock in open market transactions under our Stock Repurchase Program.

During the first three months of fiscal year 2013 and 2012, we purchased 72,854 shares and 92,756 shares, respectively, of our common stock for a total cost of $1.0 million and $1.5 million, respectively. As of September 29, 2012, we have purchased 1,442,501 shares of common stock for an aggregate of $15.3 million since the inception of the Stock Repurchase Program. All purchases were made at the discretion of management and pursuant to the safe harbor provisions of SEC Rule 10b-18. As of September 29, 2012, $4.7 million remained available for future purchases under 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 September 29, 2012:



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Dollar Value of Shares that May Yet Be Purchased Under the Plans *
July 1 to August 4, 2012	28,772	$13.80	28,772		$5.4	million
August 5 to September 1, 2012	300	$14.05	300		$5.4	million
September 2 to September 29, 2012	43,782	$14.25	43,782		$4.7	million
Total	72,854	$14.07	72,854		$4.7	million

License Agreements

We have entered into license agreements that provide for royalty payments of 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 $5.2 million and $5.5 million for the first quarter of fiscal years 2013 and 2012, respectively.

At September 29, 2012, based on minimum sales requirements, future minimum royalty payments required under these license agreements were as follows (in thousands):



Fiscal Year	Amount
2013	$	1,998
2014	4,261
2015	2,345
2016	770
2017	—
	$	9,374

Goodwill and Intangible Assets

Components of intangible assets consist of the following (in thousands):



	September 29, 2012							June 30, 2012
	Cost		Accumulated Amortization			Net Value		Cost		Accumulated Amortization			Net Value		Economic Life

Goodwill	$	16,812	$	—		$	16,812	$	16,812	$	—		$	16,812	N/A

Intangibles:
Tradename/trademarks	$	1,530	$	(545	)	$	985	$	1,530	$	(526	)	$	1,004	20 yrs
Customer relationships	7,220		(2,576		)	4,644		7,220		(2,486		)	4,734		20 yrs
Technology	1,220		(338		)	882		1,220		(307		)	913		10 yrs
Non-compete agreements	517		(383		)	134		517		(371		)	146		4 – 8.5 yrs
Total intangibles	$	10,487	$	(3,842	)	$	6,645	$	10,487	$	(3,690	)	$	6,797

Amortization expense for intangible assets was $0.2 million for the three months ended September 29, 2012, and $0.6 million for the fiscal year ended June 30, 2012. Amortization expense is estimated to be approximately $0.6 million each for fiscal years 2013, 2014, 2015, 2016 and 2017.

Selling, General and Administrative Expense (Policies)

Selling, General and Administrative Expenses

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.

Inventories (Tables)

Schedule of Inventories, Net of Reserves

Inventories, net of reserves, consist of the following (in thousands):



	September 29, 2012		June 30, 2012
Raw materials	$	13,737	$	11,759
Work in process	17,011		18,986
Finished goods	131,066		130,888
	$	161,814	$	161,633

Purchase Contracts (Tables)

Purchase contracts minimum payments

At September 29, 2012, minimum payments under these contracts were as follows (in thousands):



Yarn	$	4,437
Natural Gas	1,005
Finished fabric	1,832
Finished products	23,193
	$	30,467

Business Segments (Tables)

Segment reporting information by segment

Information about our operations as of and for the three months ended September 29, 2012, and October 1, 2011, by operating segment, is as follows (in thousands):



	Basics		Branded		Consolidated
Three months ended September 29, 2012
Net sales	$	66,581	$	63,533	$	130,114
Segment operating income	3,165		2,671		5,836
Segment assets *	165,102		149,456		314,558

Three months ended October 1, 2011
Net sales	$	52,598	$	70,925	$	123,523
Segment operating income	1,584		5,114		6,698
Segment assets *	174,688		153,423		328,111



*		All goodwill and intangibles on our balance sheet are included in the branded segment.

Reconciliation of segment operating income to consolidated income before income taxes

The following reconciles the segment operating income to the Company's consolidated income before income taxes (in thousands):



	Three Months Ended
	September 29, 2012		October 1, 2011
Segment operating income	$	5,836	$	6,698
Unallocated interest expense	1,076		893
Consolidated income before taxes	$	4,760	$	5,805

Derivatives and Fair Value Measurements (Tables)

Outstanding financial instruments

These financial instruments are not used for trading or speculative purposes.



	Effective Date	Notational Amount	Fixed LIBOR Rate		Maturity Date
Interest Rate Swap	September 1, 2011	$10 million	0.7650	%	September 1, 2013
Interest Rate Swap	September 1, 2011	$10 million	0.9025	%	March 1, 2014
Interest Rate Swap	September 1, 2011	$10 million	1.0700	%	September 1, 2014

Financial liabilities measure at fair value on a recurring basis

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



	Fair Value Measurements Using
Period Ended	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Interest Rate Swaps
September 29, 2012	$	257	—	$	257	—
June 30, 2012	$	209	—	$	209	—

Summary of fair value and presentation in the consolidated balance sheets for derivatives

The following table summarizes the fair value and presentation in the consolidated balance sheets for derivatives as of September 29, 2012, and June 30, 2012.



	September 29, 2012			June 30, 2012
Accrued expenses	$	40		$	—
Deferred tax liabilities	(99		)	(80		)
Other liabilities	217			209
Accumulated other comprehensive loss	$	158		$	129

Repurchase of Common Stock (Tables)

Schedule of Repurchase of Common Stock

The following table summarizes the purchases of our common stock for the quarter ended September 29, 2012:



Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans	Dollar Value of Shares that May Yet Be Purchased Under the Plans *
July 1 to August 4, 2012	28,772	$13.80	28,772		$5.4	million
August 5 to September 1, 2012	300	$14.05	300		$5.4	million
September 2 to September 29, 2012	43,782	$14.25	43,782		$4.7	million
Total	72,854	$14.07	72,854		$4.7	million

License Agreements (Tables)

Schedule of future minimum royalty payments

At September 29, 2012, based on minimum sales requirements, future minimum royalty payments required under these license agreements were as follows (in thousands):



Fiscal Year	Amount
2013	$	1,998
2014	4,261
2015	2,345
2016	770
2017	—
	$	9,374

Goodwill and Intangible Assets (Tables)

Components of Intangible Assets

Components of intangible assets consist of the following (in thousands):



	September 29, 2012							June 30, 2012
	Cost		Accumulated Amortization			Net Value		Cost		Accumulated Amortization			Net Value		Economic Life

Goodwill	$	16,812	$	—		$	16,812	$	16,812	$	—		$	16,812	N/A

Intangibles:
Tradename/trademarks	$	1,530	$	(545	)	$	985	$	1,530	$	(526	)	$	1,004	20 yrs
Customer relationships	7,220		(2,576		)	4,644		7,220		(2,486		)	4,734		20 yrs
Technology	1,220		(338		)	882		1,220		(307		)	913		10 yrs
Non-compete agreements	517		(383		)	134		517		(371		)	146		4 – 8.5 yrs
Total intangibles	$	10,487	$	(3,842	)	$	6,645	$	10,487	$	(3,690	)	$	6,797

Basis of Presentation Basis of Presentation (Details)

3 Months Ended

Sep. 29, 2012

Basis of Presentation [Abstract]

Weeks in fiscal year, minimum

P52W

Weeks in fiscal year, maximum

P53W

Inventories (Details) (USD $)

In Thousands, unless otherwise specified

Sep. 29, 2012

Jun. 30, 2012

Inventories, net of reserves:

Raw materials

$ 13,737

$ 11,759

Work in process

17,011

18,986

Finished goods

131,066

130,888

Inventories, net

$ 161,814

$ 161,633

Debt (Narrative) (Details) (USD $)

In Millions, unless otherwise specified

3 Months Ended

Sep. 29, 2012

Jun. 30, 2012

May 27, 2011

Sep. 29, 2012

Revolving Credit Facility, due May 2016 [Member]

Revolving Credit Facility [Member]

Sep. 29, 2012

Term Loan [Member]

Revolving Credit Facility [Member]

Sep. 29, 2012

Term Loan [Member]

Loans Payable [Member]

Sep. 29, 2012

Minimum [Member]

Revolving Credit Facility, due May 2016 [Member]

Revolving Credit Facility [Member]

Debt Instrument [Line Items]

Line of credit after increase pursuant to amended loan agreement

$ 145

Potential maximum credit available under the facility

200

Outstanding under credit facility

95.3

Average interest rate under outstanding credit facility (percentage)

2.50%

Unused borrowing capacity

37.2

Debt covenant, percent of borrowing base, benchmark

12.50%

Debt covenant, maximum borrowing base

145

Fixed charge coverage ratio, term

12 months

Fixed charge coverage ratio

1.1

Retained earnings free of restrictions

15.6

14.8

Long-term debt

$ 2.0

$ 5.3

Selling, General and Administrative Expense (Details) (USD $)

In Millions, unless otherwise specified

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Selling, General and Administratie Expense [Abstract]

Distribution costs

$ 4.4

$ 3.8

Stock-based Compensation (Narrative) (Details) (USD $)

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

2010 Stock Plan [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Aggregate number of shares that may be delivered (shares)

500,000

Allocated share-based compensation expense

$ 400,000

$ 500,000

Total compensation cost not yet recognized

2,000,000

Period for recognition

2 years 10 months 24 days

2010 Stock Plan [Member] |
Restricted Stock Units (RSUs) [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Shares granted during the period (shares)

5,000

2010 Stock Plan [Member] |
Performance Stock Units [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Shares granted during the period (shares)

5,000

Option Plan [Member] |
Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Allocated share-based compensation expense

0

43,000

Award Plan [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Allocated share-based compensation expense

$ 0

$ 100,000

Purchase Contracts (Details) (USD $)

In Thousands, unless otherwise specified

Sep. 29, 2012

Long-term Purchase Commitment [Line Items]

Oustanding minimum payments

$ 30,467

Yarn [Member]

Long-term Purchase Commitment [Line Items]

Oustanding minimum payments

4,437

Natural Gas [Member]

Long-term Purchase Commitment [Line Items]

Oustanding minimum payments

1,005

Finished Fabric [Member]

Long-term Purchase Commitment [Line Items]

Oustanding minimum payments

1,832

Finished Products [Member]

Long-term Purchase Commitment [Line Items]

Oustanding minimum payments

$ 23,193

Business Segments (Details) (USD $)

In Thousands, unless otherwise specified

3 Months Ended

Sep. 29, 2012

segment

Oct. 1, 2011

Jun. 30, 2012

Segment Reporting Information [Line Items]

Number of business segments

2

Net sales

$ 130,114

$ 123,523

Segment operating income

5,836

6,698

Segment assets

314,558 ¹

328,111 ¹

320,394

Reconciliation of Operating Profit (Loss) from Segments to Consolidated [Abstract]

Segment operating income

5,836

6,698

Unallocated interest expense

1,076

893

Income before provision for income taxes

4,760

5,805

Basics [Member]

Segment Reporting Information [Line Items]

Net sales

66,581

52,598

Segment operating income

3,165

1,584

Segment assets

165,102 ¹

174,688 ¹

Reconciliation of Operating Profit (Loss) from Segments to Consolidated [Abstract]

Segment operating income

3,165

1,584

Branded [Member]

Segment Reporting Information [Line Items]

Net sales

63,533

70,925

Segment operating income

2,671

5,114

Segment assets

149,456 ¹

153,423 ¹

Reconciliation of Operating Profit (Loss) from Segments to Consolidated [Abstract]

Segment operating income

2,671

5,114

Operating segments [Member]

Segment Reporting Information [Line Items]

Segment operating income

5,836

6,698

Reconciliation of Operating Profit (Loss) from Segments to Consolidated [Abstract]

Segment operating income

5,836

6,698

Unallocated amount to segment [Member]

Reconciliation of Operating Profit (Loss) from Segments to Consolidated [Abstract]

Unallocated interest expense

$ 1,076

$ 893

[1] * All goodwill and intangibles on our balance sheet are included in the branded segment.

Income Taxes (Details)

3 Months Ended

12 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Jun. 30, 2012

Income Tax Disclosure [Abstract]

Effective income tax rate

25.10%

24.00%

76.40%

Derivatives and Fair Value Measurements (Details) (USD $)

Jun. 30, 2012

Accrued Expenses [Member]

Jul. 2, 2011

Accrued Expenses [Member]

Jun. 30, 2012

Deferred Tax Liabilities [Member]

Jul. 2, 2011

Deferred Tax Liabilities [Member]

Jun. 30, 2012

Other Liabilities [Member]

Jul. 2, 2011

Other Liabilities [Member]

Jun. 30, 2012

Accumulated Other Comprehensive Loss [Member]

Jul. 2, 2011

Accumulated Other Comprehensive Loss [Member]

Sep. 29, 2012

Total [Member]

Jun. 30, 2012

Total [Member]

Sep. 29, 2012

Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]

Jun. 30, 2012

Quoted Prices in Active Markets for Identical Assets (Level 1) [Member]

Sep. 29, 2012

Significant Other Observable Inputs (Level 2) [Member]

Jun. 30, 2012

Significant Other Observable Inputs (Level 2) [Member]

Sep. 29, 2012

Significant Unobservable Inputs (Level 3) [Member]

Jun. 30, 2012

Significant Unobservable Inputs (Level 3) [Member]

Jun. 30, 2012

Maturity Date 9/1/2013 [Member]

Jun. 30, 2012

Maturity Date 3/1/2014 [Member]

Jun. 30, 2012

Maturity Date 9/1/2014 [Member]

Interest Rate Derivatives [Abstract]

Notional amount

$ 10,000,000

Fixed LIBOR Rate

0.765%

0.9025%

1.07%

Fair Value, Assets and Liabilities Measured on Recurring Basis [Abstract]

Interest Rate Swap

257,000

209,000

0

257,000

209,000

0

Derivative liabilities, fair value

$ 40,000

$ 0

$ (99,000)

$ (80,000)

$ 217,000

$ 209,000

$ 158,000

$ 129,000

Legal Proceedings (Details) (Pending Litigation [Member], USD $)

In Thousands, unless otherwise specified

Sep. 29, 2012

Pending Litigation [Member]

Loss Contingencies [Line Items]

Recommended civil penalty

$ 900

Minimum possible loss

$ 25

The Cotton Exchange Acquisition (Details) (USD $)

In Millions, unless otherwise specified

Jul. 12, 2010

Business Combinations [Abstract]

Purchase price

$ 9.9

Repurchase of Common Stock (Details) (USD $)

In Millions, except Share data, unless otherwise specified

1 Months Ended

3 Months Ended

12 Months Ended

Sep. 29, 2012

Sep. 1, 2012

Aug. 4, 2012

Sep. 29, 2012

Oct. 1, 2011

Jun. 30, 2012

Equity [Abstract]

Authorized amount

$ 20.0

Shares repurchased (shares)

75,854

92,756

Aggregated number of shares repurchased (shares)

1,442,501

Shares repurchased, value

1.0

1.5

Aggregated shares repurchased, value

15.3

Remaining authorized amount

4.7

5.4

4.7

Purchases of Common Stock [Abstract]

Shares of common stock purchased (shares)

43,782

300

28,772

72,854

Average price paid per share (usd per share)

$ 14.25

$ 14.05

$ 13.80

$ 14.07

Total number of shares purchased as part of publicly announced plans (shares)

43,782

300

28,772

72,854

Dollar value of shares that may yet be purchased under the plans

$ 4.7

$ 5.4

$ 4.7

License Agreements (Details) (USD $)

3 Months Ended

Sep. 29, 2012

Oct. 1, 2011

Commitments and Contingencies [Abstract]

Royalty expense

$ 5,200,000

$ 5,500,000

License Agreements, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]

2013

1,998,000

2014

4,261,000

2015

2,345,000

2016

770,000

2017

0

Total due

$ 9,374,000

Goodwill and Intangible Assets (Details) (USD $)

3 Months Ended

12 Months Ended

Sep. 29, 2012

Jun. 30, 2012

Goodwill and Finite-Lived Intangible Assets [Line Items]

Goodwill, Cost

$ 16,812,000

Goodwill, Accumulated Amortization

0

Goodwill, Net Value

16,812,000

Intangibles, Cost

10,487,000

Intangibles, Accumulated Amortization

(3,842,000)

(3,690,000)

Intangibles, Net Value

6,645,000

6,797,000

Amortization of intangible assets

200,000

600,000

Finite-Lived Intangible Assets, Net, Amortization Expense, Fiscal Year Maturity [Abstract]

Amortization expense estimate for 2013

600,000

Amortization expense estimate for 2014

600,000

Amortization expense estimate for 2015

600,000

Amortization expense estimate for 2016

600,000

Amortization expense estimate for 2017

600,000

Tradename/Trademarks [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, Cost

1,530,000

Intangibles, Accumulated Amortization

(545,000)

(526,000)

Intangibles, Net Value

985,000

1,004,000

Intangibles, economic life

20 years

Customer Relationships [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, Cost

7,220,000

Intangibles, Accumulated Amortization

(2,576,000)

(2,486,000)

Intangibles, Net Value

4,644,000

4,734,000

Intangibles, economic life

20 years

Technology [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, Cost

1,220,000

Intangibles, Accumulated Amortization

(338,000)

(307,000)

Intangibles, Net Value

882,000

913,000

Intangibles, economic life

10 years

Non-compete Agreements [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, Cost

517,000

Intangibles, Accumulated Amortization

(383,000)

(371,000)

Intangibles, Net Value

$ 134,000

$ 146,000

Non-compete Agreements [Member] |
Minimum [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, economic life

4 years

Non-compete Agreements [Member] |
Maximum [Member]

Goodwill and Finite-Lived Intangible Assets [Line Items]

Intangibles, economic life

8 years 6 months