Broder Bros., Co. reported net sales in the fourth quarter slipped to $232.7 million compared to $240.9 million a year ago. Including a non-cash goodwill impairment charge of $87.3 million, the fourth quarter 2007 loss from operations was $85.9 million compared to income from operations of $9.3 million for the fourth quarter 2006.
Fourth quarter 2007 net loss was $97 million compared to net income of $0.3 million for the fourth quarter 2006. Earnings before interest, taxes, depreciation and amortization and the goodwill impairment charge (EBITDA) was $6.5 million for the fourth quarter 2007 compared to EBITDA of $14.1 million for the fourth quarter 2006. 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, consolidation and other highlighted charges discussed below. Excluding these highlighted charges, EBITDA was $11.0 million for the fourth quarter 2007 and $19.1 million for the fourth quarter 2006.
The company has three operating segments. The Broder division generated fourth quarter 2007 net sales of $90.0 million compared to $98.0 million in the fourth quarter 2006. The Alpha division generated fourth quarter 2007 revenue of $113.9 million compared to $112.3 million in the fourth quarter 2006. The NES division generated net sales of $28.8 million in the fourth quarter 2007 compared to $30.6 million in the fourth quarter 2006.
Fourth quarter 2007 gross profit was $46.3 million compared to $49.5 million for the fourth quarter 2006. Gross margin of 19.9% was less than the 20.5% gross margin in the prior period. Gross profit from commodity trade brand products declined due to lower unit volumes sold at lower gross margins. Supply conditions in the market were worse during the fourth quarter 2007 compared to the fourth quarter 2006 due to certain mills which are restructuring their operations to increase their abilities to serve the Company's market. The Company continued to sell fewer low margin white t- shirts. Gross profit from private label brand products was flat to the prior year due to lower unit volumes sold at higher gross margins.
Distribution Center Consolidation
In December 2007, the company completed its distribution center consolidation in which multi-branded distribution centers were created. At year end, the company had eight multi-branded distribution centers and operated ten Express facilities which have product assortments to meet the local needs and preferences of each market and serve as customer pick-up locations. The distribution center consolidation strategy was executed as a significant investment to improve performance and drive growth. The strategy will generate improved inventory availability and enhanced service levels to customers which is expected to result in increased revenue and profitability. A table is attached to this release which lists the company's facilities before consolidation started and after consolidation was completed.
Distribution center consolidation adversely affected financial performance during fiscal 2006 and 2007. In moving the company's operations from one location to a new location, inventory was split between the locations for weeks during the transition, which created short-term availability issues during consolidation. Since inventory availability is critical to the company's competitiveness, the company suffered short-term sales declines as a result of splitting inventory between two locations. Unit volumes declined during fiscal 2007 and average selling prices declined due to a strategy to offer among the lowest selling prices in the industry to retain customer orders.
Non-Cash Goodwill Impairment Charge
In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the company conducted its annual test for goodwill impairment for each of its reporting units as of December 2007. The Alpha and Broder divisions had goodwill balances of $126.3 million and $12.2 million, respectively, prior to Alpha's non-cash goodwill impairment charge. Following the Company's annual test for goodwill impairment, the carrying value of Alpha's net assets exceeded its enterprise value, primarily due to a change in the composition of the Alpha division's tangible and intangible assets, which resulted in a non-cash goodwill impairment charge of $87.3 million during the fourth quarter 2007. The impairment charge will not result in future cash expenditures or effect compliance with covenants under the company's borrowing agreements.
To compute the goodwill impairment charge in accordance with SFAS No. 142, (i) the company identified its tangible and intangible assets for its Alpha division (which, in effect, constitutes a purchase price allocation for the reporting unit as if it were recently acquired), such as vendor relationships, the assembled workforce and trademarks, (ii) determined the valuation of intangible assets with the assistance of an independent appraisal firm, (iii) determined the fair value of Alpha's goodwill based on the residual of Alpha's summed identified tangible and intangible assets and the fair value of the enterprise, then (iv) determined the magnitude of goodwill impairment based on a comparison of the fair value residual goodwill and the carrying value (or book value) of Alpha goodwill.
The magnitude of the goodwill impairment charge was primarily driven by an increase in Alpha's tangible assets to improve performance and drive growth. The table below compares Alpha's summarized purchase price allocation in September 2003 to its enterprise value at December 29, 2007.
(dollars in millions)
(Unaudited)
December 29, September 22, Increase/
2007 2003 (Decrease)
Tangible Assets $114.0 $32.0 $82.0
Intangible Assets $88.0 $88.4 $(0.4)
Goodwill $39.0 $126.3 $(87.3)
Enterprise Value / Purchase Price $241.0 $246.7 $(5.7)
Full Year 2007 Results Compared to Prior Year
For the twelve months ended December 2007, net sales were $929.1 million compared to $959.3 million for the twelve months ended December 2006. Loss from operations for the twelve months ended December 2007 was $(91.5) million compared to income from operations of $26.6 million for the twelve months ended December 2006. Net loss for the twelve months ended December 2007 was $(124.1) million compared to net loss of $(7.7) million for the twelve months ended December 2006. EBITDA for the twelve months ended December 2007 was $15.9 million compared to EBITDA of $46.2 million for the twelve months ended December 2006.
Excluding the highlighted charges denoted herein, EBITDA for the twelve months ended December 2007 was $36.9 million compared to EBITDA of $61.1 million for the twelve months ended December 2006.
Business Outlook
In addition to remaining focused on improving inventory availability to its customers to improve profitability, the company has undertaken three initiatives during 2008 to drive improved performance. First, the company will publish a new price list in the second quarter 2008 to increase the company's competitiveness in the marketplace. Now that the Company's quality of inventory has dramatically improved over fiscal 2007, the Company's goal is to use its inventory and superior economies of scale to gain market share. Second, the company has hired additional sales managers to better manage the company's inside and outside sales forces. Since the Company maintains three separate sales forces, management believes that regional sales managers will help the company gain market share by targeting the sales force to foster growth across customers with major potential and to avoid unproductive, inter- division competition. Third, the Company expects to reduce its operating expenses as distribution center personnel become more efficient in picking orders in the new multi-branded distribution centers, as orders continue to shift from call center calls to web orders following the introduction of three new websites launched during the first quarter 2007, and as fixed operating expenses are reduced by consolidating functions that had not yet been fully consolidated following acquisitions.
Liquidity
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 decreased from $110.4 million at December 30, 2006 to $102.7 million at December 29, 2007. The company's revolving credit facility provides for aggregate borrowings up to $225.0 million, subject to borrowing base availability. As of December 29, 2007, borrowing base availability was $55.5 million.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 29, 2007
AND DECEMBER 30, 2006
(dollars in millions)
(Unaudited)
Three Months Twelve Months
Ended Ended
2007 2006 2007 2006
Net sales $232.7 $240.9 $929.1 $959.3
Cost of sales (exclusive of
depreciation and amortization as
shown below) 186.4 191.4 762.9 778.6
Gross profit 46.3 49.5 166.2 180.7
Warehousing, selling and administrative
expenses 37.5 31.9 136.8 126.7
Restructuring and asset impairment
charges, net 2.2 2.4 13.0 4.1
Goodwill impairment charge 87.3 0.0 87.3 0.0
Management fee 0.0 0.7 0.0 3.2
Stock-based compensation 0.1 0.4 0.5 0.5
Depreciation and amortization 5.1 4.8 20.1 19.6
Operating expenses 132.2 40.2 257.7 154.1
Income (loss) from operations (85.9) 9.3 (91.5) 26.6
Interest expense, net of change in
fair value of interest rate swaps 9.7 9.4 38.4 40.3
Other expenses 9.7 9.4 38.4 40.3
Loss before income taxes (95.6) (0.1) (129.9) (13.7)
Income tax provision (benefit) 1.4 (0.4) (5.8) (6.0)
Net income (loss) $(97.0) $0.3 $(124.1) $(7.7)
Reconciliation to EBITDA
Goodwill impairment charge 87.3 0.0 87.3 0.0
Interest expense, net of change in
fair value of interest rate swaps 9.7 9.4 38.4 40.3
Income tax provision (benefit) 1.4 (0.4) (5.8) (6.0)
Depreciation and amortization 5.1 4.8 20.1 19.6
EBITDA $6.5 $14.1 $15.9 $46.2
