Broder Bros., Co., a major distributor of promotional t-shirts and sportswear, said it is considering increasing the size of its $175 million revolving credit facility to accommodate both continued cotton apparel price increases and continued unit growth.

 
“Our major suppliers have implemented four price increases since July 2010. As a result, the average unit cost of products we buy from our major suppliers have increased approximately 24%. Suppliers have publicly stated that these apparel prices incorporate cotton prices in the range of $1.15 to $1.30 per pound of cotton. With spot cotton prices at roughly $2.11 and December 2011 futures prices at roughly $1.24, it seems likely that we will experience further price increases from virtually all suppliers in 2011. Price reductions in 2011 appear unlikely. At the same time, demand for our products has grown unabated by higher prices. In fact, demand for Broder's products has increased as demonstrated by strong market growth and our continued market share gains. We believe that considering increasing the size of our revolving credit facility is prudent to finance both higher replacement costs and higher market share,” noted Tom Myers, the company's CEO.
The company reported unaudited fourth quarter 2010 net sales were $215.7 million compared to $182.8 million for the fourth quarter 2009. Gross profit for the fourth quarter 2010 was $40.9 million compared to gross profit of $30.9 million for the fourth quarter 2009. Fiscal 2010 net sales were $791.3 million compared to $705.2 million for fiscal 2009. Gross profit for fiscal 2010 was $147.1 million compared to gross profit of $117.1 million for fiscal 2009.
For the fourth quarter 2010, the company's gross profit less warehousing, selling and administrative expenses, excluding depreciation and amortization, less charges (Adjusted EBITDA), was $15.8 million compared to $5.5 million for the fourth quarter 2009. Adjusted EBITDA for Fiscal 2010 was $46.1 million compared to $17.1 million for Fiscal 2009.
 
For Fiscal 2011, the company expects full year Adjusted EBITDA to be approximately $57.5 million.
 
Three cost increases were announced by the company's major suppliers during 2010, and a fourth price increase was announced by major suppliers during January 2011. The company increased its selling prices in response to each of these announcements and achieved higher gross margins during the third and fourth quarters 2010 relative to the third and fourth quarters 2009 as the company sold through inventory with pre-price increase costs.
 
The company estimates that of the $30.0 million increase in gross profit over fiscal 2009, approximately $13 million was due to the benefit resulting from cotton prices increases. During the fourth quarter 2010, the company increased its inventory reserves by $6.5 million due to the anticipated reduction in selling prices for some of its private label products that were discontinued as of December 2010 and in prior years. The selling price reductions will permit the company to increase its rate of sales on these slower-moving, discontinued styles during 2011. The remainder of the increase in gross profit is attributed to the company's focus on improved pricing and purchasing activities.

Relation between cotton and apparel costs
 

Cotton apparel prices are not as volatile as cotton prices. Although cotton prices have risen more than threefold from April 2009, following the global economic crisis, to the present, cotton apparel prices have risen only 24%. A typical promotional cotton T-shirt requires about 0.58 pounds of cotton. A 10 cent increase in the price of a pound of cotton increases the cost of the cotton in this promotional T-shirt by about 6 cents -approximately 3.4% of the price of a white T-shirt or 2.4% of the price of a color T-shirt. The impact of cotton prices increases on more expensive cotton shirts such as knit sport shirts and on cotton-polyester blend shirts such as sweatshirts is significantly less.

 
Although cotton prices are at $2.11 per pound today, up from 60 cents per pound in April 2009, manufacturers' costs in products currently manufactured is roughly $1.15 to $1.30 per pound since they purchase cotton in advance to ensure more stable costs and adequate supply. If cotton prices were to stay at current high levels, the cost of cotton in a promotional T-shirt would rise about 46 cents, or 27% of the price of a white T-shirt or 19% of the price of a color T-shirt.
 
During the fourth quarter 2010 and the full year 2010, S.T.A.R.S. reported that the market grew 7% and 6%, respectively, compared to fourth quarter 2009 and full year 2009 declines of 9% and 14%, respectively. During the fourth quarter 2010 and the full year 2010, the company's units sold grew by 14% and 12%, respectively, compared to fourth quarter 2009 and full year 2009 declines of 15% and 24%, respectively.
 
The company's inventory and accounts receivable balances at December 2010 increased by $5.2 million and $12.6 million, respectively, over December 2009 levels. These increases were driven by improved sales as the company gained market share and due to the inflation in apparel prices. The sales growth and price increases 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.
Borrowings and revolving credit facility

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 $115.3 million at December 2010 compared to $100.8 million at December 2009. The increase in revolver debt was mainly due to higher levels of working capital at December 2010. Borrowing base availability at December 2010 and December 2009 was $40.0 million and $31.5 million, respectively.
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 payments, and provide funds for working capital, capital expenditures and other needs of the business for fiscal 2011. The company's revolving credit facility provides for a $175.0 million revolving credit facility which may be used for working capital and other lawful corporate purposes of the company.
 
Management believes it has sufficient liquidity during 2011 to meet the requirements under the revolving credit facility to pay $7.1 million in each semi-annual cash interest payments under the Senior Notes due October 2013. The company expects to remain in compliance with the fixed charge coverage ratio covenant included in its revolving credit facility, as amended in October 2010, during fiscal 2011.
 
Highlighted Charges
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Highlighted charges recorded during the fourth quarter 2009 consisted of $300,000 in executive bonus expense related to a bonus award program for certain key executives which recognized the executives' commitment to and success in restructuring of company's finances in 2009.
Highlighted charges recorded during the twelve months ended December 2010 consisted of severance. Highlighted charges recorded during the twelve months ended December 2009 consisted of $900,000 in executive bonus expense related to the program described above, $500,000 in consulting and professional fees related to the exchange offer and $300,000 in inventory management consulting charges.