Broder Bros., Co. Announces Third Quarter 2010 Results

TREVOSE, Pa., Nov. 8 /PRNewswire/ -- Broder Bros., Co. (the "Company") today announced results for its third quarter ended September 25, 2010.

Third Quarter 2010 Results Compared to Prior Year

Third quarter 2010 net sales were $210.7 million compared to $193.0 million for the third quarter 2009.  Income from operations for the third quarter 2010 was $12.9 million compared to a loss of $1.7 million for the third quarter 2009.  Net income for the third quarter 2010 was $6.0 million compared to a net loss of ($1.4) million for the third quarter 2009.

For the third quarter 2010, the Company reported earnings before interest, taxes, depreciation and amortization ("EBITDA") of $16.3 million compared to EBITDA of $6.0 million for the third quarter 2009.  A reconciliation of EBITDA to net income (loss) is set forth at the end of this press release.

Results include the impact of certain restructuring and other highlighted charges discussed below.  Excluding these highlighted charges, EBITDA was $16.5 million for the third quarter 2010 compared to EBITDA of $7.0 million for the third quarter 2009.  The improvement in EBITDA was driven by higher gross margins and higher unit volumes.  

Third quarter 2010 gross profit was $41.1 million compared to $31.0 million for the third quarter 2009.  The increase in gross profit was due to higher gross margins which mostly resulted from selling products in the third quarter 2010 that had been acquired in prior quarters when their costs were lower and due to increased unit volumes.  Third quarter 2010 gross margin was 19.5% compared to 16.1% in the third quarter 2009 and was aided by cost increases imposed by major suppliers in July 2010 and September 2010.  In addition, the Company grew unit volumes by 5% during the third quarter 2010 compared to the same period in the prior year.  

The Company regained lost market share during the third quarter 2010.  As reported by STARS, the market grew 3% in units sold.  Approximately half of the increase in the Company's unit volume for the third quarter 2010 was due to the growth in the market. The remainder of the increase in the Company's unit volume was due to the Company's three-part guarantee instituted in July 2009 as well as sales and marketing efforts to grow revenues and gross profit.  The three-part guarantee consists of promises that the Company would be in stock in key styles and colors, that it would fulfill orders accurately and that the Company would not be undersold.

Highlighted Charges

Results for the three and nine months ended September 25, 2010 and September 26, 2009 include certain charges as follows:

Restructuring charges recorded during the third quarter 2010 consisted of interest accretion on restructuring charges for closed facilities. Restructuring charges recorded for during nine months ended September 25, 2010 consisted of interest accretion on restructuring charges for closed facilities net of a reversal of restructuring charges due to the Company entering into a sublease at its former Philadelphia, PA distribution center. Other highlighted charges consisted mainly of severance.

Restructuring charges recorded during the third quarter 2009 consisted of interest accretion on restructuring charges for closed facilities. Restructuring charges recorded during the nine months ended September 26, 2009 consisted of interest accretion on restructuring charges for closed facilities and severance costs due to headcount reductions in March 2009. Other highlighted charges recorded during the third quarter 2009 consisted of $0.6 million in executive bonus expense related to a bonus award program for certain key executives which recognized the executive's value in financial restructuring effort and commitment to stabilize and grow the Company's business, plus $0.3 million in professional fees related to the exchange offer. Other highlighted charges recorded during nine months ended September 26, 2009 consisted of $0.6 million in executive bonus expense, $0.5 million in consulting and professional fees related to exchange offer and $0.3 million in inventory management consulting charges.

Business Outlook

Broder's objective is to be the "ultra-reliable supplier" of imprintable activewear to customers in the U.S. imprintable activewear market.  Management believes that the Company's three-part guarantee demonstrates the Company's commitment and ability to provide the best service in the industry to its customers.  During the third quarter, the Company expanded its in-stock guarantee to include private label products.  Customers have responded to the three-part guarantee since its inception in the third quarter 2009 and have continued to do so.  As noted earlier in this earnings release, half of the improvement in unit volume during the quarter is attributable to the three-part guarantee.  

The Company's unit volume growth was adversely impacted during the third quarter 2010 due to supply chain issues at major suppliers.  Some major suppliers have struggled to fulfill purchase orders due to factors such as the relative scarcity of cotton resulting from the floods in Pakistan and the scarcity of sewing resulting from the earthquake in Haiti. In addition, customer demand was stronger than expected during the second quarter 2010.  The Company's unit volume growth was stronger in the fleece and knit woven shirt categories than in the T-shirt category, where supply chain issues are more prevalent.  Management expects supply chain issues to continue to persist through 2010.

Despite two cost increases announced by major suppliers during the third quarter 2010, demand remained relatively strong.  The strong demand for the products the Company sells has allowed the Company to increase its selling prices generally in line with the supplier cost increases.  A third price increase was announced by major suppliers during October 2010.  The Company again increased its selling prices in response to that announcement and will likely achieve higher gross margins during the fourth quarter 2010 relative to the fourth quarter 2009 as the Company sells through inventory purchased at pre-price increase costs.  The Company continues to be adversely effected by insufficient supply due to the factors described above more than by insufficient demand due to price increases.

Management continues to remain focused on selling activities. The performance of the sales force has improved as measured by internal quantitative and qualitative metrics.  The Company opened a new "Express" location in Denver, CO in October 2010 since the Company could not reach next-day delivery from any of its eight distribution centers.  The Company also recently created a new sales position to engage with customers who have not made the Company their first call.  Management believes these and other actions will enable to the Company to continue to regain lost market share.

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.  Historical borrowing levels have reached peaks during the middle of a given year and low points during the last quarter of the year.  Borrowings under the revolving credit facility were $112.1 million at September 25, 2010 compared to $100.8 million at December 26, 2009 and $122.9 million at September 26, 2009.  The increase in revolver debt from December 2009 was mainly due to increases in inventory and accounts receivable.  Borrowing base availability at September 25, 2010, December 26, 2009 and September 26, 2009 was $36.2 million, $31.5 million and $33.9 million, respectively.  

In October 2010, the Company paid the aggregate principal balance of $11.5 million of its 11 ¼% Senior Notes due October 15, 2010 ("2010 Notes") plus $0.6 million in interest due.  In addition, the Company issued an aggregate principal value of $8.2 million in 12%/15% Senior PIK Toggle Notes due October 2013 ("2013 Notes") in October 2010 in payment of the interest due on the 2013 Notes.  The aggregate outstanding principal balance of 2013 Notes is $117.9 million as of the date hereof.  The Company's future semi-annual interest payment on 2013 Notes will accrue at a rate of 12% per annum and will be payable in $7.1 million in cash.  

Management believes that it has the ability to manage cash flow and working capital levels, particularly inventory and accounts payable, to allow the Company to meet its current and future obligations, pay scheduled principal and interest, and provide funds for working capital, capital expenditures and other needs of the business for at least the remainder of fiscal 2010.  Additional information regarding the Company's liquidity position can be found in the Company's Quarterly Report for the period ended June 26, 2010 and in its 2009 Annual Report which are posted on the Company's corporate website at www.broderbrosco.com.  More information regarding liquidity may be found in the Company's Quarterly Report for the period ended September 25, 2010, which will be posted on the corporate website on November 8, 2010.

Amendment to Revolving Credit Facility

In October 2010, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement").  The Credit Agreement amends and restates in its entirety the Company's Amended and Restated Credit Agreement, dated as of August 31, 2006, which was due to mature on August 31, 2011.  

The Credit Agreement provides for a $175.0 million revolving credit facility (the "Revolver Facility") and a $10.0 million first-in, last-out facility (the "FILO Facility").  The Revolver Facility and the FILO Facility may be used for working capital and other lawful corporate purposes of the Company.  The Credit Agreement reduces cash interest expense, extends the maturity by three years, and relaxes the requirements to be met to allow for payment of cash interest on 2013 Notes, among other items. The FILO Facility matures in January 2011 and gives the Company additional liquidity through January 2011.  A more complete description of the Credit Agreement and the FILO Facility are included in the Company's Quarterly Report for the period ended September 25, 2010, which will be posted on the corporate website on November 8, 2010.  The Credit Agreement can be located in a Current Report dated October 18, 2010 posted on the Company's corporate website at www.broderbrosco.com.

Selected Balance Sheet Information

Debt Restructuring

In May 2009, the Company completed the exchange offer for its outstanding 2010 Notes.  An aggregate of $213.5 million in principal amount of 2010 Notes were exchanged for $94.9 million aggregate principal amount of newly issued 2013 Notes and a pro rata share of 96% of the outstanding newly issued common stock of the Company.  This transaction qualified as a Troubled Debt Restructuring under the authoritative guidance.  As a result of this transaction, the Company recorded a net gain of $10.5 million during the quarter ended June 30, 2009.  This gain was calculated as the difference between the carrying amount of the liabilities settled (reduced for the fair value of the equity issued) and the total future cash payments under the terms of the 2013 Notes.  The authoritative guidance requires that the Company offset any gain by the costs directly attributable to the debt restructuring.  The Company reduced the gain by $5.7 million relating to legal and financing fees incurred in connection with the debt restructuring.  The net gain was recorded as a component of other income on the Company's statement of operations.    

As of September 25, 2010, the 2013 Notes were recorded on the balance sheet at $160.3 million which represented the total future cash payments under the terms of the Notes, including both principal and interest payments, as required under the authoritative guidance.   As a result, the Company does not anticipate recognizing any interest expense on the 2013 Notes through their maturity.  As of September 26, 2009, the 2013 Notes were recorded on the balance sheet at $162.4 million, which included the second consent fee of $2.1 million paid in October 2009.

Conference Call

The Company will conduct a conference call on Monday, November 8, 2010 at 10:00 a.m. Eastern Time to discuss the third quarter 2010 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 (877) 795-3599.  The conference ID is 6841241.  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 November 8, 2010 at 1:00 p.m. Eastern Time until November 17, 2010, at 1:00 p.m. Eastern Time. To access the replay, dial (888) 203-1112. The replay conference ID is 6841241.

About Broder Bros., Co.

Broder Bros., Co. is one of the nation's largest distributors of trade, private label, and retail apparel brands to the imprinting, embroidery and promotional product industries, serving customers since 1919. It currently has eight distribution centers across the U.S. and has the capability to deliver to approximately 80 percent of the U.S. population in one day. Via its three divisions, the Company distributes industryleading brands Anvil, Fruit of the Loom, Gildan, Hanes and Jerzees as well as retail brands Adidas Golf and Champion.

Cautionary Information Regarding ForwardLooking Statements

This press release contains "forward-looking statements" 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 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 are not guarantees of future results and conditions but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements.  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 and have had an adverse effect on its 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 does not have any long term contracts with its customers and the loss of customers could adversely affect its sales and profitability; 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; as a result of the Exchange Offer, board members serve three year terms; the Company's substantial level of indebtedness could adversely affect its financial condition and prevent it from fulfilling its obligations; the Company has ceased filing reports with the SEC; the Company's failure to comply with restrictive covenants contained in its revolving credit facility or the Indenture governing the New 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 income taxes, interest expense, other financing costs, the gain on troubled debt restructuring, depreciation and amortization.  EBITDA is a measure commonly used in the distribution industry and is 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 should not be considered as an alternative to, or more meaningful than, amounts determined in accordance with generally accepted accounting principles.  EBITDA is 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.