Broder Bros.’ Third-Quarter Revenues Jump 9%

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.

Excluding non-recurring charges, EBITDA was $16.5 million for the third quarter 2010 compared to EBITDA of $7.0 million a year ago. 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 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 Sept. 25, 2010 compared to $100.8 million at Dec. 26, 2009 and $122.9 million at Sept. 26, 2009.  The increase in revolver debt from Dec.  2009 was mainly due to increases in inventory and accounts receivable.  Borrowing base availability at Sept. 25, 2010, Dec. 26, 2009 and Sept. 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.

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.