Broder Bros., Co. Announces Record Second Quarter Earnings and Initiatives to Increase the Liquidity of Common Stock

TREVOSE, Pa., Aug. 5, 2011 /PRNewswire/ -- Broder Bros., Co. (the "Company") today announced record second quarter results for its quarter ended June 25, 2011.  The Company also increased its Fiscal 2011 EBITDA guidance and announced that it has begun a series of initiatives in an effort to increase the liquidity in the Company's common stock, commencing with a registration statement on Form 10 filed with the Securities and Exchange Commission ("SEC") on August 2, 2011.

Second Quarter 2011 Results Compared to Second Quarter 2010 Results

Second quarter 2011 net sales were $227.1 million compared to $211.6 million for the second quarter 2010.  Income from operations for the second quarter 2011 was $23.3 million compared to $9.1 million for the second quarter 2010.  Net income for the second quarter 2011 was $16.0 million, or $1.54 per diluted share, compared to $5.0 million, or $0.50 per diluted share, for the second quarter 2010.

For the second quarter 2011, the Company reported earnings before interest, taxes, depreciation and amortization ("EBITDA") of $25.9 million compared to EBITDA of $12.7 million for the second quarter 2010.  A reconciliation of EBITDA to net income (loss) is set forth at the end of this earnings release.

Results include the impact of certain restructuring and other highlighted charges discussed below.  Excluding these highlighted charges, EBITDA was $23.8 million for the second quarter 2011 compared to $12.4 million for the second quarter 2010.  The improvement in EBITDA was driven by higher gross margins and reduced operating expenses.  

Second quarter 2011 gross profit was $48.4 million compared to $38.3 million for the second quarter 2010.  Second quarter 2011 gross margin was 21.3% compared to 18.1% one year prior.  The increase in gross profit was attributable to management's continued focus on improved pricing and purchasing activities.  

The Company's major suppliers announced price increases in January 2011 and again in late March 2011 or early April 2011 following three price increases announced from July 2010 through December 2010.  Second quarter 2011 gross profit included no benefit resulting from apparel price increases.  The Company increased its selling prices in response to each of the price increases from manufacturers. However, due to competitive factors, the Company did not raise selling prices on a per unit basis more than the Company's costs rose.

According to data provided by CREST, the U.S. imprintable activewear market shrank 9% in units sold during the second quarter 2011.  The Company's units sold shrank by 11% during the period when using the comparable period used by CREST, which was April 1, 2011 through June 30, 2011.  The Company's second quarter 2011 began March 27, 2011 and ended June 25, 2011.

Highlighted Charges

The credit to restructuring charges during the second quarter 2011 was due to a gain of approximately $2.2 million on the purchase of a leased facility in Wadesboro, NC.  The net purchase price of the facility was less than the present value of the remaining lease payments due under the lease, which was set to expire in March 2014.  The Company will reduce its expected future cash outflows related to this facility by more than $2 million.

The reversal of restructuring charges recorded during the second quarter 2010 was the result of the Company executing a new sublease at our former Philadelphia, PA distribution center, net of $0.2 million of interest accretion.

Liquidity Position

The Company relies primarily upon cash flow from operations and borrowings under its revolving credit facility to finance operations, capital expenditures and debt service requirements.  Borrowings and availability under the revolving credit facility fluctuate due to seasonal demands.  Historically, borrowing levels have reached peaks during the middle of a given fiscal year and low points during the last quarter of the fiscal year.  Borrowings under the revolving credit facility were $148.2 million at June 2011 compared to $115.3 million at December 2010 and $129.4 million at June 2010.  The increase in revolver debt was mainly due to higher levels of working capital at June 2011.  Borrowing base availability at June 2011, December 2010 and June 2010 was $44.6 million, $40.0 million and $21.9 million, respectively.

The face value of the 2013 Notes outstanding was $117.9 million at June 2011 and December 2010 and $109.6 million at June 2010.  Guidance provided by the FASB for troubled debt restructuring, however, requires the 2013 Notes to be recorded on the balance sheets as the total future cash payments for the 2013 Notes, including both principal and interest payments.  The 2013 Notes were recorded on the balance sheets at $153.2 million at June 2011 and $160.3 million at December 2010 and June 2010.  As a result of capitalizing the cash interest payments for the 2013 Notes, the Company does not anticipate recognizing any interest expense on the 2013 Notes through their maturity.  The Company paid $7.1 million in semi-annual cash interest in April 2011.

The Company's inventory and accounts receivable balances at June 2011 increased by $70.8 million and $5.6 million, respectively, over June 2010 levels.  These increases were driven by higher cotton apparel prices, anticipated higher unit volumes sold, and timing of fleece receipts.  The price increases and anticipated sales growth have combined to require the Company to maintain a higher inventory level to meet its customers' need for product availability, at an increased price per unit, as well as higher accounts receivable to fund customers' needs for credit.  

Following a successful consent solicitation that ended on March 25, 2011, on March 28, 2011, the Company and the Trustee governing the 2013 Notes executed a supplemental indenture to the Indenture governing the 2013 Notes.  Approximately 100% of holders of 2013 Notes consented to the indenture amendment. Each consenting holder received a consent fee equal to $5.00 for each $1,000 principal amount of 2013 Notes for which consents were validly delivered and not revoked.  The indenture amendment modified the definition in the Indenture limiting Permitted Debt (as defined in the Indenture) to permit the Company to incur up to an additional $40.0 million of Indebtedness (as defined in the Indenture) under subsection 1 of the definition of Permitted Debt.  

On March 28, 2011, the Company increased its revolving credit facility commitment from $175.0 million to $215.0 million under its Second Amended and Restated Credit Agreement, dated as of October 13, 2010.  In connection with this increase, the Company entered into the First Amendment to Second Amended and Restated Credit Agreement, which modified the Credit Agreement by (i) acknowledging an increase from $175.0 million to $215.0 million to the aggregate revolving facility and (ii) amending a component of the borrowing base to provide that it shall not exceed the greater of (A) $215.0 million and (B) the amount of the Indenture Borrowing Base (as defined in the Credit Agreement). The Company increased the size of its revolving credit facility to accommodate both continued cotton apparel price increases and continued unit growth.

In June 2011, the Company entered into the Second Amendment to Second Amended and Restated Credit Agreement.  The amendment reduced the Applicable Fee and the Applicable Margin under the Credit Agreement and is expected to reduce the Company's cash interest in excess of $2 million annually. The Applicable Margin for all tiers in the grid pricing was reduced by 1.50%. The Applicable Fee was reduced by 0.25% if less than 50% of the Revolving Commitments are used and was reduced by 0.125% if greater than or equal to 50% of the Revolving Commitments are used. The revised grid pricing became effective on June 23, 2011.

Fiscal 2011 Guidance Increased

The Company announced today that it is increasing Fiscal 2011 guidance from $57.5 million to $62 million to $65 million in Adjusted EBITDA.  Fiscal 2011 Adjusted EBITDA guidance was provided in a Current Report issued on March 8, 2011 in connection with the Company's consent solicitation to amend the Indenture governing the 2013 Notes. The supplemental indenture was required to enable the Company to exercise the accordion feature of its revolving credit facility and increase the revolving commitments by $40.0 million to $215.0 million.

Stockholder Consent Launched August 5, 2011

By filing a registration statement on Form 10 with the SEC on August 2, 2011, management commenced a process that is expected to culminate in the Company's common stock listing on a national exchange.  Today, the Company announced that it is launching a stockholder consent designed to enable the Company's common stock to become Depository Trust Company- (or "DTC") eligible.  The Company's Board and management believe that the actions being taken are in the stockholders' interest by increasing the liquidity in the Company's common stock.

If adopted by common stockholders owning not less than a majority of the issued and outstanding shares of the common stock by stockholder series, in general, the Restated Certificate of Incorporation will exclude the tag-along rights and drag-along rights set forth in the existing Certificate of Incorporation, which apply prior to an underwritten public offering, and the transfer restrictions set forth in the existing certificate.  Additionally, the Restated Certificate will add certain provisions, including those that become effective upon, and for so long as, the Company's common stock is listed on a national securities exchange, designed to discourage coercive takeover practices or inadequate takeover bids.  Management of the Company is undertaking several actions in an effort to increase the liquidity of the Company's common stock, including the voluntary registration of the Company's common stock.  In addition, management seeks to have trades involving the common stock eligible to be settled through the facilities of the DTC.  In order to do so, any significant transfer restrictions included in the existing certificate need to be eliminated.

The stockholder consent also includes the election of directors. The existing directors were re-nominated, and if re-elected, their terms will expire in the second quarter 2012.

Conference Call

Management of the Company will conduct a conference call today at 10:00 a.m. Eastern Time to discuss the Company's second quarter 2011 results. Thomas Myers, Chief Executive Officer, and Martin Matthews, Chief Financial Officer, will participate in the call.

The domestic dial-in number for the call is (800) 554-8801. The conference ID is 4796947. To help ensure that the conference begins in a timely manner, please dial in ten minutes prior to the start of the call.

For those unable to participate in the conference call, a replay will be available beginning today, August 5, 2011, at 1:00 p.m. Eastern Time until August 15, 2011, at 1:00 p.m. Eastern Time. To access the replay, dial (888) 203-1112. The replay conference ID is 4796947.

About Broder Bros., Co.

Broder Bros., Co. is the nation's leading distributor of imprintable activewear in the country.  It operates the largest distribution network in the industry including eight distribution centers and ten "Express" facilities offering pickup room service. The Company offers next-day delivery to over 92% of the U.S. imprintable activewear customers and second-day service to over 98% of the market.  The Company distributes industry-leading brands Gildan, Jerzees, Hanes, Fruit of the Loom and Anvil as well as retail brands such as Adidas Golf, Alternative Apparel, Ashworth, Bella, Canvas, alo and Champion.

Cautionary Information Regarding Forward-Looking Statements

This earnings release contains "forward-looking statements" and other forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements generally can be identified as such because the context of the statement includes words such as "believe," "expect," "anticipate," "will," "should" or other words of similar import.  These statements and projections also include, but are not limited to, the Company's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the management of Broder Bros., Co. and are subject to significant risks and uncertainties.  

Forward-looking statements and projections are not guarantees of future results and conditions but rather are subject to various factors, risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in these forward-looking statements and projections.  The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: failure to abide by the terms of the Senior Notes or the Company's credit facility would make it difficult for the Company to operate its business in the ordinary course, and may force the Company to seek further financial restructuring; if the Company's cash provided by operating and financing activities is insufficient to fund its cash requirements, the Company may face substantial liquidity problems; slowdowns in general economic activity have detrimentally impacted the Company's customers in the fourth quarter 2008 and during 2009 and have had an adverse effect on the Company's sales and profitability; the Company's ability to access the credit and capital markets may be adversely affected by factors beyond its control, including turmoil in the financial services industry, volatility in financial markets and general economic downturns; the Company's industry is highly competitive and if it is unable to compete successfully it could lose customers and sales may decline; disruption in the Company's distribution centers could adversely affect its results of operations; the Company obtains a significant portion of its products from a limited group of suppliers, and any disruption in their ability to deliver products to the Company or a decrease in demand for their products could have an adverse effect on the Company's results of operations and damage its customer relationships; the Company's relationships with most of its suppliers are terminable at will and the loss of any of these suppliers could have an adverse effect on its sales and profitability; the Company may purchase more inventory than it can sell through in a reasonable period of time causing it to incur increased inventory carrying costs; the loss of customers could adversely affect its sales and profitability; the Company relies on vendor financing, and if vendors do not provide financing or require cash in advance or cash on delivery, the Company may be unable to hold satisfactory inventory levels; the Company must successfully predict customer demand for its private label and retail products to succeed; the Company relies significantly on one shipper to distribute its products to its customers and any service disruption could have an adverse effect on its sales; if any of the Company's distribution facilities were to unionize, the Company would incur increased risk of work stoppages and possibly higher labor costs; loss of key personnel or inability to attract and retain new qualified personnel could hurt the Company's business and inhibit its ability to operate and grow successfully; the Company may incur restructuring or impairment charges that would reduce its earnings; the Company may not successfully identify or complete future acquisitions or establish new distribution facilities, which could adversely affect its business; a change in our Board composition could lead to a loss of talent and insight, which could adversely effect our results of operations; the Company's substantial level of indebtedness could adversely affect its financial condition and prevent it from fulfilling its obligations; the Company's failure to comply with restrictive covenants contained in its revolving credit facility or the Indenture governing the Senior Notes could lead to an event of default under such instruments; despite current anticipated indebtedness levels and restrictive covenants, the Company may incur additional indebtedness in the future; and other factors, risks and uncertainties detailed in its reports posted from time to time on its website pursuant to the terms of the Indenture.  The Company assumes no obligation to update these forward-looking statements.

EBITDA includes the effects of certain charges more fully described in this release.  EBITDA is defined as income before interest expense, income taxes, depreciation and amortization.  Adjusted EBITDA is defined as EBITDA adjusted for certain charges deemed by management to be non-recurring and which are disclosed as "highlighted charges" in the Company's earnings releases.  EBITDA and Adjusted EBITDA are measures commonly used in the distribution industry and are presented to aid in developing an understanding of the ability of the Company's operations to generate cash for debt service and taxes, as well as cash for investments in working capital, capital expenditures and other liquidity needs.  EBITDA and Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, amounts determined in accordance with generally accepted accounting principles.  EBITDA and Adjusted EBITDA are not calculated identically by all companies, and therefore, the presentation herein may not be comparable to similarly titled measures of other companies.

SOURCE Broder Bros., Co.