UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended January 1, 2005

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.

2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097

(678) 775-6900

(Not Applicable)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No x.

As of January 31, 2005, there were outstanding 4,150,181 shares of the registrant’s common stock, par value of $0.01, which is the only class of the outstanding common or voting stock of the registrant.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

     See accompanying notes to condensed consolidated financial statements.

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DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

See accompanying notes to condensed consolidated financial statements.

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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 months ended January 1, 2005 are not necessarily indicative of the results that may be expected for the year ending July 2, 2005. 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 the year ended July 3, 2004, filed with the Securities and Exchange Commission.

“Delta Apparel,” the “Company,” and “we,” “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our wholly-owned subsidiary, M. J. Soffe Co. (“M. J. Soffe”, or “Soffe”), and our other subsidiaries, as appropriate to the context.

Note B—Accounting Policies

Our accounting policies are consistent with those described in our Summary of Significant Accounting Policies in our Form 10-K for the year ended July 3, 2004 filed with the Securities and Exchange Commission.

Note C—New Accounting Standards

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statements of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R) must be adopted for annual periods beginning after June 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt Statement 123(R) on July 3, 2005. We are currently evaluating the effect that the adoption of Statement 123(R) will have on our financial position and results of operations.

Note D—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. For the second quarter of fiscal years 2005 and 2004, distribution costs included in selling, general and administrative expenses totaled $1.9 million and $2.1 million, respectively. For the first six months of fiscal years 2005 and 2004, distribution costs included in selling, general and administrative expenses totaled $3.8 million and $3.2 million, respectively. The Soffe segment was included in our results beginning October 3, 2004. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising and marketing expenses and general and administrative expenses.

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Note E—Inventories

Inventories consist of the following:

Raw materials at July 3, 2004 included raw cotton for the Delta segment and finished yarn for the Soffe segment. In addition, it included direct materials for both segments. On December 27, 2004, we sold our entire inventory located at our yarn manufacturing facility in Edgefield, South Carolina to Parkdale (see Note M). Prior to the sale, raw cotton was the primary raw material in the Delta segment. Subsequent to the sale, finished yarn becomes our primary raw material in both the Delta and Soffe segments. Therefore, raw materials at January 1, 2005 included finished yarn and direct materials for both the Delta and Soffe segments.

Note F—Debt

The Soffe Facility contains both a subjective acceleration clause and a lockbox arrangement, whereby remittances from the customers reduce the current outstanding borrowings. Pursuant to Emerging Issues Task Force (“EITF”) 95-22, we are classifying borrowings under the Soffe Facility as current debt. Borrowings under the Soffe Facility classified as current debt at January 1, 2005 and July 3, 2004 were $13.2 million and $17.2 million, respectively.

The Delta Facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in EITF 95-22), whereby remittances from customers are forwarded to our general bank account and do not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to EITF 95-22, we are classifying borrowings under the Delta Facility as noncurrent debt.

On November 8, 2004, we amended the Delta Facility to increase our line of credit by an additional $2.75 million to $42.75 million.

In conjunction with the sale of the yarn manufacturing plant, on January 6, 2005, we amended our Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million to $5.0 million.

Note G—Income Taxes

Our effective income tax rate for the six months ended January 1, 2005 was 39.7%, compared to 32.4% for the fiscal year ended July 3, 2004. During the fiscal year ended June 30, 2001, we recorded a tax liability in the amount of approximately $0.9 million with respect to our tax sharing agreement between Delta Woodside Industries, Inc. (our former parent company) and the Company. During the fiscal year ended July 3, 2004, we determined that it was no longer probable that a tax liability might occur as a result of this tax sharing agreement. Therefore, we reversed the $0.9 million tax liability that had been created, resulting in the lower effective tax rate during fiscal year 2004.

Note H—Stock Options and Incentive Stock Awards

We have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations in accounting for our employee stock options because the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), requires use of option valuation models that were not developed for use in valuing employee stock options.

Pro forma information regarding net income and earnings per share is required by SFAS 123 to be determined as if we had accounted for our employee stock options under the fair value method of that Statement. For purposes of pro forma disclosures, the estimated fair value of the options under the Option Plan and the Award Plan are amortized to expense over the options’ vesting period. Our pro forma information follows (in thousands, except per share amounts):

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Note I—Purchase Contracts

We have entered into agreements, and have fixed prices, to purchase yarn and finished apparel products for use in our manufacturing operations. At January 1, 2005, minimum payments under these contracts to purchase yarn and finished apparel products with non-cancelable contract terms were $16.3 million and $1.0 million, respectively.

Note J—Computation of Basic and Diluted Net Earnings per Share (EPS)

We compute basic net earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of stock options and non-vested stock awards granted under our Stock Option Plan and our Incentive Stock Award Plan.

The weighted average shares do not include securities that would be anti-dilutive for each of the periods presented.

Note K—Stockholders’ Equity

Stock Repurchase Program
We have authorization from our Board of Directors to spend up to an aggregate of $6.0 million for share repurchases under the Stock Repurchase Program. All purchases are made at the discretion of our management. We did not purchase shares of our common stock during the three months ended January 1, 2005. Since the inception of the Stock Repurchase Program, we’ve purchased 368,057 shares of our common stock pursuant to the program for an aggregate of $4.2 million.

Quarterly Dividend Program
On October 28, 2004, our Board of Directors declared a cash dividend of seven cents per share of common stock pursuant to our quarterly dividend program. We paid the dividend on November 29, 2004 to shareholders of record as of the close of business on November 17, 2004. On January 20, 2005, our Board declared a cash dividend of seven cents per share of common stock payable on February 28, 2005 to shareholders of record as of the close of business on February 16, 2005. Although the Board may terminate or amend the program at any time, we currently expect to continue the quarterly dividend program.

Note L—Segment Reporting

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

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The Delta segment manufactures, markets and distributes unembellished knit apparel under the brands of “Delta Pro Weight®”, “Delta Magnum Weight™” and “Quail Hollow™.” The products are primarily sold to screen printing companies. In addition, products are manufactured under private labels for retailers, corporate industry programs and sports licensed apparel marketers.

The Soffe segment manufactures, markets and distributes embellished and unembellished knit apparel under the “Soffe®” label. The products are sold through specialty sporting goods stores and department stores. In addition to these retail channels, Soffe also supplies college bookstores and produces activewear products for the U.S. Military.

Corporate and Unallocated is a reconciling category for reporting purposes and includes intercompany eliminations and other costs that are not allocated to the operating segments.

Our management evaluates performance and allocates 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. The accounting policies of our reportable segments are the same as those described in Note A. Intercompany transfers between operating segments are transacted at cost and eliminated in consolidation.

Information about our operations as of and for the three months ended January 1, 2005 and December 27, 2003, by operating segment, is as follows (in thousands):

Information about our operations as of and for the six months ended January 1, 2005 and December 27, 2003, by operating segment, is as follows (in thousands):

The following reconciles the Segment Operating Income to the consolidated income before income taxes for the three and six months ended January 1, 2005 and December 27, 2003.

Note M—Assets Held for Sale

On November 18, 2004 we signed an agreement with Parkdale America, LLC (“Parkdale”) to sell our yarn manufacturing plant in Edgefield, South Carolina. The sale of all inventory was completed on December 27,2004. The sale of all real and personal property (excluding

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inventory), including supply parts, was completed on January 5, 2005. We reclassified the assets to be sold to assets held for sale, which includes $6.1 million of property, plant and equipment and $0.2 million of supply parts.

Note N—Subsequent Event

On January 5, 2005, we completed the sale of our yarn manufacturing plant in Edgefield, South Carolina to Parkdale America, LLC for $10 million in cash. In conjunction with the sale transaction, we entered into a five-year agreement with Parkdale to supply our yarn requirements. During this five-year period, we will purchase exclusively from Parkdale all yarn required by Delta Apparel and our wholly owned subsidiary, M. J. Soffe Co., for use in our manufacturing operations (excluding yarns that Parkdale does not manufacture as of the date of the agreement in the ordinary course of its business). The purchase price of yarn will be based upon the cost of cotton plus a fixed conversion cost.

The sale of the Edgefield Plant resulted in a pre-tax financial gain of $3.6 million, or estimated after-tax gain of $0.51 per diluted share. This gain will be recorded in the fiscal quarter ending April 2, 2005.

In conjunction with the sale of the yarn manufacturing plant, on January 6, 2005, we amended our Delta Facility to lower the Fixed Asset Loan Limit Amount from $10.0 million to $5.0 million.

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

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The following discussion contains various “forward-looking statements”. All statements, other than statements of historical fact, that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. Examples are statements that concern future revenues, future costs, future capital expenditures, business strategy, competitive strengths, competitive weaknesses, goals, plans, references to future success or difficulties and other similar information. 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, changes in the retail demand for apparel products, the cost of raw materials, competitive conditions in the apparel and textile industries, the relative strength of the United States dollar as against other currencies, changes in United States trade regulations and the discovery of unknown conditions (such as with respect to environmental matters and similar items) and other risks described from time to time in our reports filed with the Securities and Exchange Commission. 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

Our sales for the second quarter of fiscal year 2005 increased over the prior quarter by 7.8% to record revenue of $49.2 million. The increase was primarily due to organic growth in the core Delta business. While the apparel business remains competitive, overall demand for our products appears strong. Revenue in the Delta business grew 19.1% compared to the prior year’s quarter, resulting from increased unit sales and higher average selling prices. We continued to grow the customer base in the Delta segment during the quarter, shipping to approximately 18% more accounts year to date than in the prior year, now servicing over 3,400 accounts. Our average selling price was $18.30 per dozen versus $18.08 per dozen in the first quarter and up $1.64, or 9.8% from the second quarter of the prior year. The percentage of basic white tee shirts decreased in the second quarter to 27% of total sales compared to 42% in the same quarter of the last year and our first quarter level of 31%. We have adjusted our manufacturing mix in an effort to maintain this lower percentage level of white shirts. We continue to have success selling higher-margin, higher quality goods in the Delta business. In the Soffe business, our revenue decreased 8% to $15.7 million for the second quarter of fiscal year 2005 compared to the prior year. Our sales were impacted by a conservative inventory position in fashion fleece. We recently introduced our expanded product offerings for spring and fall of 2005. Our core products and additional ladies styles in our Soffe business are booking well and we expect sales growth during the second half of fiscal year 2005.

In response to increased demand for our products, we are increasing the output of our manufacturing locations to support the demand. We are going into the spring selling season with lean tee shirt inventories and expect to run our Delta facilities at high levels of capacity utilization into next fall as we service our customer demand and rebuild inventories for next year. We have recently started producing tee shirt fabric in the Soffe textile facility to supplement our needs. We expect that this will allow us to continue to grow our business vertically without

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significant capital investment and will drive down costs at Soffe with improved fixed overhead absorption. In addition, we plan to reduce our domestic sewing operations in the Soffe segment and are currently evaluating the extent of these reductions. We believe we must stay focused on our low-cost global manufacturing and sourcing strategy in order to be competitive in the marketplace.

We continue our focus on our distribution capabilities in anticipation of our growth. During the second quarter, we closed on the purchase of our new distribution center in Clinton, Tennessee to replace the Knoxville, Tennessee distribution facility. This new facility will allow us to continue to expand our pick and pack operations, and lower our maintenance and labor cost. We are almost complete with our renovations and will be moving into this building in February. We expect to have our New Jersey distribution center ready to service the Northeast starting with our spring selling season. We believe this new distribution center will help us continue to expand our customer base in that region, driving additional sales for our Company. This will also allow us to consolidate distribution operations with Soffe, which will lead to efficiencies in the Northeast. We also added the Soffe product line in our Florida DC to allow for a higher service level in the Florida region.

During the first week in January, we completed the sale of our yarn manufacturing assets in Edgefield, South Carolina to Parkdale America, LLC. In connection with the sale, we entered into a yarn supply agreement with Parkdale. We are looking forward to our relationship with Parkdale as our supplier of yarn. As a result of these transactions, we will be assured of an adequate supply of high quality yarn at competitive cost while eliminating the prospect of a major capital investment in yarn manufacturing equipment. We will continue our strategy with our capital investments of equipment to ensure we have the flexibility to move production as necessary to lower cost manufacturing regions. In the near term we will continue to invest in marketing and distribution as a key strategy to grow our overall business.

We believe business conditions will remain positive for the remainder of our 2005 fiscal year. Increased output in our manufacturing facilities for the remainder of the year should improve our absorption of fixed cost. We also anticipate that lower raw material cost and cost reduction efforts will improve margins in the upcoming quarters if pricing on tee shirts remains consistent with current levels.

RESULTS OF OPERATIONS

Net sales for the second quarter of fiscal year 2005 increased 7.8% to $49.2 million compared to $45.6 million for the second quarter of the prior year. The sales increase primarily resulted from a 19.1% increase in the Delta business, resulting from increased unit sales and higher average selling prices. Although pricing is still competitive in the marketplace, pricing on most styles was higher than in the prior year quarter reflecting increased raw material cost. In addition, increased sales of dyed tee shirts and specialty products drove an improved product mix, which also contributed to higher average selling prices. The Soffe business contributed $15.7 million in sales, an 8.0% decrease from sales in the prior year’s quarter. Sales in the Soffe business were impacted by a conservative inventory position in fashion fleece. For the six months ended January 1, 2005, net sales increased 35.4% to $103.5 million compared to $76.4 million in the prior year. The increase in sales was primarily the result of the Soffe sales in the first quarter of fiscal 2005, which accounted for $22.0 million, as the acquisition of Soffe was completed on October 3, 2003.

Gross profit as a percentage of net sales increased to 22.0% in the second quarter of fiscal year 2005 from 19.5% in the second quarter of the prior year. Gross margins in both business segments improved as compared to the prior year. The 250 basis point improvement in gross margin was primarily driven by increased sales of higher margin products, including our Quail Hollow line and our magnum weight styles. Lower textile and sewing manufacturing costs also contributed to the improved gross margins in the second quarter of fiscal year 2005 compared to the prior year. These improvements were partially offset by unfavorable absorption of fixed costs from reduced production levels, and higher raw material costs. Gross profit as a percentage of net sales increased to 21.6% in the first six months of fiscal year 2005 from 17.0% in the same period of the prior year, resulting primarily from the higher gross profits associated with M. J. Soffe Co., which were included for three months in the first six months of fiscal year 2004. Gross margins as a percentage of sales are higher in the So