UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 1-14189
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GERBER CHILDRENSWEAR, INC.
(Exact name of registrant as specified in its charter)
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Delaware 62-1624764
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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7005 Pelham Road
Greenville, SC 29615
(Address of principal executive offices)
(864) 987-5200
(Registrant's telephone number, including area code)
------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] YES [ ] NO
As of November 7, 2001, there were outstanding 8,437,863 shares of Common Stock
and 11,396,046 shares of Class B Common Stock.
GERBER CHILDRENSWEAR, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 29, 2001,
September 30, 2000 and December 31, 2000........................ 1
Condensed Consolidated Statements of Income and Comprehensive
Income for the quarters ended September 29, 2001 and
September 30, 2000 and for the nine months ended
September 29, 2001 and September 30, 2000....................... 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 29, 2001 and September 30, 2000..... 3
Notes to Condensed Consolidated Financial Statements............ 4-8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9-14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...... 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................ 14
Signatures............................................................... 15
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (UNAUDITED) (NOTE)
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 31,
2001 2000 2000
------------- ------------- ------------
ASSETS (In thousands)
Current Assets
Cash and cash equivalents..................................... $ 38,498 $ 16,307 $ 31,203
Accounts receivable, net...................................... 29,486 39,774 36,921
Inventories................................................... 52,912 71,477 56,937
Deferred income taxes ............................... 4,026 4,038 3,085
Other......................................................... 3,957 1,887 2,562
------------- ------------- ------------
Total current assets.................................... 128,879 133,483 130,708
------------- ------------- ------------
Property, plant and equipment..................................... 54,357 44,599 49,629
Less accumulated depreciation................................. 20,457 15,548 16,867
------------- ------------- ------------
33,900 29,051 32,762
------------- ------------- ------------
Other Assets
Excess of cost over fair value of net assets acquired, net.... 16,039 16,877 16,985
Other......................................................... 7,860 9,147 9,458
------------- ------------- ------------
Total other assets...................................... 23,899 26,024 26,443
------------- ------------- ------------
$186,678 $188,558 $189,913
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.............................................. $ 9,063 $.10,825 $ 10,825
Accrued expenses.............................................. 13,688 15,856 13,423
Current portion of long-term debt and capital leases.......... 5,507 6,392 7,767
Income tax payable............................................ 3,349 5,772 4,862
------------- ------------- ------------
Total current liabilities............................... 31,607 38,845 36,877
------------- ------------- ------------
Non-Current Liabilities
Long-term debt and capital leases, less current portion....... 1,715 7,695 5,621
Other non-current liabilities................................. 15,991 21,139 20,109
------------- ------------- ------------
Total non-current liabilities........................... 17,706 28,834 25,730
------------- ------------- ------------
Shareholders' Equity.............................................. 137,365 120,879 127,306
------------- ------------- ------------
$186,678 $188,558 $189,913
============= ============= ============
Note: The amounts were derived from the audited financial statements at that
date.
See accompanying notes
1
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
-----------------------------------------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(In thousands, except per share data)
Net sales................................................ $ 55,548 $ 70,588 $ 158,949 $ 189,947
Cost of sales........................................... 40,416 54,136 117,943 144,273
------------- ------------- ------------- -------------
Gross margin............................................. 15,132 16,452 41,006 45,674
Selling, general and administrative expenses............. 8,550 8,461 27,318 28,384
Other, net............................................... (971) -- (2,765) --
------------- ------------- ------------- -------------
7,579 8,461 24,553 28,384
------------- ------------- ------------- -------------
Income before interest and income taxes.................. 7,553 7,991 16,453 17,290
Interest expense, net of interest income................. (130) 107 (659) 242
------------- ------------- ------------- -------------
Income before income taxes............................... 7,683 7,884 17,112 17,048
Provision for income taxes............................... 2,913 2,810 6,207 5,712
------------- ------------- ------------- -------------
Net income............................................... 4,770 5,074 10,905 11,336
Foreign currency translation......................... 1,248 (1,397) (579) (2,313)
------------- ------------- ------------- -------------
Comprehensive income..................................... $ 6,018 3,677 $ 10,326 $ 9,023
============= ============= ============= =============
Earnings per common share.............................. $ 24 $ 26 $ 55 $ .57
Earnings per common share - diluted.................... $ 24 $ 25 $ 55 $ .57
Denominator
Weighted average shares - basic.......................... 19,842 19,792 19,849 19,751
Effect of dilutive securities:
Nonvested stock/stock options.......................... 4 108 16 147
------------- ------------- ------------- -------------
Adjusted weighted average shares - diluted............... 19,846 19,900 19,865 19,899
============= ============= ============= =============
See accompanying notes
2
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
--------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------- -------------
(In thousands)
OPERATING ACTIVITIES
Net income.............................................................. $ 10,905 $ 11,336
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................................... 5,072 4,648
Other................................................................. 815 (2,480)
Changes in assets and liabilities
Accounts receivable, net.......................................... 7,330 (4,351)
Inventories....................................................... 3,937 (6,434)
Accounts payable.................................................. (1,754) 1,639
Other assets and liabilities, net................................. (6,662) 6,724
------------- -------------
19,643 11,082
------------- -------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment.............................. (5,851) (6,976)
Proceeds from sale of property, plant and equipment..................... 191 682
------------- -------------
(5,660) (6,294)
------------- -------------
FINANCING ACTIVITIES
Principal payments on long-term borrowings and capital leases........... (6,292) (5,429)
Repurchase of common stock.............................................. (336) (144)
Other................................................................... (9) --
------------- -------------
(6,637) (5,573)
------------- -------------
Effect of exchange rate changes on cash................................. (51) (411)
------------- -------------
Net increase (decrease) in cash and cash equivalents........................ 7,295 (1,196)
Cash and cash equivalents at beginning of period............................ 31,203 17,503
------------- -------------
Cash and cash equivalents at end of period.................................. $ 38,498 $ 16,307
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash items:
Obligations under capital leases....................................... $ 128 --
============= =============
See accompanying notes
3
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have
been prepared by Gerber Childrenswear, Inc. ("the Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations; however,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The interim financial statements are unaudited and, in
the opinion of management, contain all adjustments necessary to present fairly
the Company's financial position and the results of its operations and cash
flows for the interim periods presented. It is suggested that these interim
financial statements be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
2000 Annual Report on Form 10-K.
2. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. The financial
statements of all foreign subsidiaries were prepared in their respective local
currencies and translated into United States dollars based on the current
exchange rate at the end of the period for the balance sheet and a weighted
average rate for the periods on the statements of income. All significant
intercompany balances have been eliminated in consolidation.
3. SEASONALITY OF BUSINESS
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for a full fiscal year, due
to the seasonal nature of some of the Company's products and retailer initiated
promotions.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVENTORIES
Inventories consist of the following (in thousands):
September 29, 2001 September 30, 2000 December 31, 2000
------------------ ------------------ -----------------
Raw materials $ 6,525 $ 7,932 $ 9,514
Work in process 5,268 9,801 9,956
Finished goods 41,119 53,744 37,467
------- ------- -------
$52,912 $71,477 $56,937
======= ======= =======
6. INCOME TAXES
The Company's effective income tax rate was 37.9% and 35.6% for the
quarters ended September 29, 2001 and September 30, 2000, respectively and was
36.3% and 33.5% for the nine months ended September 29, 2001 and September 30,
2000, respectively. The third quarter 2001 rate was higher than the statutory
rates due to goodwill amortization, most of which is not deductible for federal
and state income tax purposes, partially offset by lower foreign earnings for
the quarter, certain of which are taxed at lower rates than in the United
States. The rates for the remaining periods were lower than the statutory rates
due to the impact of foreign earnings, certain of which are taxed at lower rates
than in the United States, partially offset by goodwill amortization, most of
which is not deductible for federal and state income tax purposes.
7. RECLASSIFICATIONS
Certain amounts in 2000 have been reclassified to conform to current
presentations.
8. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS
The Company operates in two business segments: apparel and hosiery. The
apparel segment consists of the production and sale of infant and toddler
sleepwear, playwear, underwear, bedding, bath, cloth diapers and other products
to mass merchandise outlets in the U.S. under the Gerber brand, Baby Looney
Tunes brand and other labels. The hosiery segment consists of the production and
sale of sport socks under the Wilson, Coca-Cola, Converse and Dunlop names to
major retailers in the United States and/or Europe.
5
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)
Net sales, income before interest and income taxes, depreciation and
amortization, and capital additions are reported based on the operations of each
business segment or geographic region. Assets are those used exclusively in the
operations of each business segment or geographic region, or which are allocated
when used jointly. The following table sets forth certain unaudited results of
operations and other financial information of the Company by business segment
and geographic region (in thousands):
BUSINESS SEGMENTS
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales:
Apparel............................................. $ 41,153 $ 56,096 $ 112,445 $ 138,960
Hosiery............................................. 14,395 14,492 46,504 50,987
------------- ------------- ------------- -------------
Total net sales......................................... $ 55,548 $ 70,588 $ 158,949 $ 189,947
============= ============= ============= =============
Income before interest and income taxes:
Apparel............................................. $ 7,085 $ 6,436 $ 14,445 $ 11,156
Hosiery............................................. 468 1,555 2,008 6,134
------------- ------------- ------------- -------------
Total income before interest and income taxes........... $ 7,553 $ 7,991 $ 16,453 $ 17,290
============= ============= ============= =============
Depreciation and amortization:
Apparel............................................. $ 1,084 $ 725 $ 2,530 $ 2,216
Hosiery............................................. 826 812 2,542 2,432
------------- ------------- ------------- -------------
Total depreciation and amortization..................... $ 1,910 $ 1,537 $ 5,072 $ 4,648
============= ============= ============= =============
Capital additions:
Apparel............................................. $ 768 $ 1,687 $ 3,895 $ 4,027
Hosiery............................................. 459 1,080 1,956 2,949
------------- ------------- ------------- -------------
Total capital additions................................. $ 1,227 $ 2,767 $ 5,851 $ 6,976
============= ============= ============= =============
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 31,
2001 2000 2000
------------- ------------- -------------
Assets:
Apparel............................................. $ 137,326 $ 140,123 $ 140,323
Hosiery............................................. 49,352 48,435 49,590
------------- ------------- -------------
Total assets............................................ $ 186,678 $ 188,558 $ 189,913
============= ============= =============
Inventories (included in assets):
Apparel............................................. $ .41,157 $ 61,682 $ 48,047
Hosiery............................................. 11,755 9,795 8,890
------------- ------------- -------------
Total inventories (included in assets).................. $ 52,912 $ 71,477 $ 56,937
============= ============= =============
6
\\
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)
GEOGRAPHIC AREAS
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------ -------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales:
United States....................................... $ 50,109 $ 65,439 $ 143,352 $ 173,905
All other........................................... 5,439 5,149 15,597 16,042
------------- ------------- ------------- -------------
Total net sales......................................... $ 55,548 $ 70,588 $ 158,949 $ 189,947
============= ============= ============= =============
Income before interest and income taxes:
United States....................................... $ 7,556 $ 6,983 $ 15,571 $ 15,053
All other........................................... (3) 1,008 882 2,237
------------- ------------- ------------- -------------
Total income before interest and income taxes........... $ 7,553 $ 7,991 $ 16,453 $ 17,290
============= ============= ============= =============
SEPTEMBER 29, SEPTEMBER 30, DECEMBER 31,
2001 2000 2000
------------- ------------- -------------
Assets:
United States....................................... $ 162,186 $ 165,570 $ 165,032
All other........................................... 24,492 22,988 24,881
------------- ------------- -------------
Total assets............................................ $ 186,678 $ 188,558 $ 189,913
============= ============= =============
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). This statement established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If the derivative is a
hedge, depending on the nature of the hedge, changes in fair value will be
either offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company adopted the standard effective January 1, 2001, and the adoption did not
have a material impact on the condensed consolidated financial statements.
7
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In July 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible
Assets." SFAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant changes made by
SFAS 142 are: (a) goodwill and indefinite lived intangible assets will no longer
be amortized, (b) goodwill will be tested for impairment at least annually, (c)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually and (d) the amortization period of intangible
assets with finite lives will no longer be limited to forty years. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. Currently, amortization of goodwill and acquisition costs
amounts to approximately $260,000 per quarter. The Company is currently in the
process of testing goodwill for impairment and has not determined the effect, if
any, on its consolidated financial position, results of operations and cash
flows.
The Financial Accounting Standards Board also recently issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). SFAS 144 establishes accounting standards for the recognition and
measurement of long-lived assets held for use or held for disposal. This
statement is required to be adopted by the beginning of 2002. The Company is
evaluating the impact of this standard and has not yet determined the effect of
adoption on our consolidated financial position, results of operations and cash
flows.
10. CURTAILMENT GAIN ON POSTRETIREMENT PLAN
The Company decided to change and later discontinue the postretirement
health care plan ("Postretirement Plan") which resulted in a $2.8 million gain
on curtailment of postretirement benefit costs for the nine months ended
September 29, 2001. In January of 2001, the Company decided to change
eligibility requirements of the Postretirement Plan resulting in $1.8 million
gain on curtailment of postretirement benefit costs. In addition, the Company
discontinued the Postretirement Plan, except for employees currently
participating in the Postretirement Plan, effective August 1, 2001. The
discontinuance of the Postretirement Plan resulted in an additional gain on
curtailment of postretirement benefit costs of approximately $1.0 million.
11. WARRANT CONVERSION
During August 2001, the Company issued 2,953,731 shares of stock to
Citicorp Mezzanine Partners, L.P. ("CMP"). These shares were issued in a
cashless exercise of all of CMP's warrants to purchase shares of Class B Common
Stock. Simultaneously, CMP converted 250,000 shares of Class B Common Stock into
an equal number of shares of Common Stock.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE-HARBOR STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This report includes "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, which represent
the Company's expectations or beliefs concerning future events that involve
known and unknown risks and uncertainties, including, without limitation, those
associated with the effect of national, regional and foreign economic conditions
(including foreign exchange rates), the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines,
competition and financial difficulties encountered by customers. All statements
other than statements of historical facts included in this quarterly report,
including, without limitation, the statements under Management's Discussion and
Analysis of Financial Condition and Results of Operations, are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statement are reasonable, it can give no assurance that
such expectations will prove to have been correct and actual results,
performance or events could differ materially from those expressed in such
statements.
RESULTS OF OPERATIONS
BUSINESS SEGMENT DATA
For information regarding net sales, income before interest and income
taxes and assets by industry segment, reference is made to the information
presented in Note 8 "Business Segments and Geographic Areas" to the condensed
consolidated financial statements.
THIRD QUARTER ENDED SEPTEMBER 29, 2001 COMPARED TO THIRD QUARTER ENDED
SEPTEMBER 30, 2000
Net sales. Apparel net sales were $41.2 million for the third quarter
of 2001, a decrease of $14.9 million or 26.6% below net sales of $56.1 million
for the third quarter of 2000. The Apparel sales decline was primarily due to
unit declines in fashion/seasonal products. The Company placed less emphasis on
developing fashion/seasonal products for 2001 with sales of $5.9 million versus
$20.9 million in 2000. Sales of Apparel basic products were flat to last year's
sales, overcoming lost sales to key customers who filed bankruptcy (two of which
ultimately liquidated), increased promotional activity by competition as well as
retailers seeking to lower inventory levels to reflect a general softening of
sales in the marketplace. Hosiery net sales were $14.4 million in the third
quarter of 2001, a decrease of $0.1 million or 0.7% below net sales of $14.5
million for the third quarter of 2000.
Gross margin. Gross margin as a percentage of net sales increased from
23.3% in 2000 to 27.2% in 2001. The increase in gross margin in 2001 was due to
higher margins achieved on Apparel sales as a result of more efficient
operations, reduced domestic manufacturing, and discontinuance of less
profitable product lines, offset in part by lower Hosiery margins due to
9
domestic cost increases arising from lowered production levels and promotional
pricing in European markets.
Selling, general & administrative expenses. Selling, general and
administrative expenses ("SG&A") increased slightly in absolute dollars and
increased as a percentage of net sales to 15.4% in the third quarter of 2001,
from 12.0% in 2000. The percentage increase was primarily due to a 21.3% sales
decline.
Other. Represents a gain on the discontinuance of the Company's
postretirement health care plan ("Postretirement Plan"), except for employees
currently participating in the Postretirement Plan, effective August 1, 2001.
The discontinuance of the Postretirement Plan resulted in a gain on curtailment
of postretirement benefit costs of approximately $1.0 million.
Income before interest and income taxes. Apparel income before interest
and income taxes ("EBIT") was $7.1 million in the third quarter of 2001 compared
to $6.4 million in the third quarter of 2000. The increase in Apparel EBIT in
2001 was the result of the improved gross margin percentage and the $1.0 million
gain reported above in Other. Hosiery EBIT was $0.5 million in the third quarter
of 2001 compared with $1.6 million in the third quarter of 2000. The decrease in
Hosiery EBIT was the result of both lower sales volumes and lower gross margins
due to domestic cost increases and promotional pricing in European markets.
Interest expense, net of interest income. The Company had net interest
income of $130,000 in the third quarter of 2001 compared to net interest expense
of $107,000 in the third quarter of 2000. The change in interest expense is due
to reduced debt and higher cash balances maintained in 2001, partially arising
from the Company's lower overall inventory levels.
Provision for income taxes. Provision for income taxes was $2.9 million
in the third quarter of 2001 compared to $2.8 million in the third quarter of
2000. The effective tax rate was 37.9% for 2001 compared to 35.6% for 2000. The
2001 rate was higher in the third quarter of 2001 due to goodwill amortization,
most of which is not deductible for federal and state income tax purposes, and
reduced foreign earnings that are typically taxed at lower rates than in the
United States. The rate for the third quarter of 2000 was lower than the
statutory rates due to the impact of foreign earnings, certain of which are
taxed at lower rates than in the United States, partially offset by goodwill
amortization, most of which is not deductible for federal and state income tax
purposes.
Net income. As a result of the above, net income for the third quarter
was $4.8 million in 2001 compared to $5.1 million in 2000.
NINE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales. Apparel net sales were $112.4 million for the first nine
months of 2001, a decrease of $26.6 million or 19.1% below net sales of $139.0
million for the first nine months of 2000. The Apparel sales decline was due to
unit declines in both basic products and fashion/seasonal products. The Company
placed less emphasis on developing fashion/seasonal products for 2001 with sales
of $9.9 million versus $29.8 million in 2000. Sales of Apparel basic products
were 6.1% below last year's sales, reflecting lower sales as a result of
customer
10
bankruptcies, increased promotional activity by competition as well as retailers
seeking to lower inventory levels to reflect a general softening of sales in the
marketplace. Hosiery net sales were $46.5 million in the first nine months of
2001, a decrease of $4.5 million or 8.8% below net sales of $51.0 million for
the first nine months of 2000, due to unit declines, increased promotional
pricing reflecting competitive pressures and retailers maintaining lower
inventory levels, plus a drop in the average exchange rate between the Irish
Punt/Euro and the U.S. Dollar in the translation of the Irish operations.
Gross margin. Gross margin as a percentage of net sales increased from
24.0% in 2000 to 25.8% in 2001. The increase in gross margin in 2001 was due to
higher margins achieved on Apparel sales as a result of more efficient
operations, reduced domestic manufacturing, discontinuance of less profitable
product lines, and unexpected losses on imported merchandise in the prior year,
offset in part by lower Hosiery margins due to domestic cost increases and
promotional pricing in European markets.
Selling, general & administrative expenses. Selling, general and
administrative expenses ("SG&A") decreased in absolute dollars but increased as
a percentage of net sales to 17.2% in the first nine months of 2001, from 14.9%
in 2000. The percentage increase was due to the 3.8% reduction in expenses in
absolute dollars falling short of the 16.3% sales decline.
Other. Represents a $2.8 million gain on curtailment of postretirement
benefit costs associated with the Company's decision to change and later
discontinue the Postretirement Plan. In January of 2001, the Company decided to
change eligibility requirements of the Postretirement Plan resulting in $1.8
million gain on curtailment of postretirement benefit costs. In addition, the
Company later discontinued its Postretirement Plan, except for employees
currently participating in the Postretirement Plan, effective August 1, 2001.
The discontinuance of the Postretirement Plan resulted in an additional gain on
curtailment of postretirement benefit costs of approximately $1.0 million.
Income before interest and income taxes. Apparel income before interest
and income taxes ("EBIT") was $14.4 million in the first nine months of 2001
compared to $11.2 million in the first nine months of 2000. The increase in
Apparel EBIT in 2001 was the result of the improved gross margin percentage,
lower SG&A expenses and the $2.8 million gain reported above in Other. Hosiery
EBIT was $2.0 million in the first nine months of 2001 compared with $6.1
million in the first nine months of 2000. The decrease in Hosiery EBIT was the
result of both lower sales volumes and lower gross margins due to domestic cost
increases and promotional pricing in European markets.
Interest expense, net of interest income. The Company had net interest
income of $0.7 million in the first nine months of 2001 compared to net interest
expense of $0.2 million in the first nine months of 2000. The change in interest
expense is due to reduced debt and higher cash balances maintained in 2001,
partially arising from the Company's lower overall inventory levels.
Provision for income taxes. Provision for income taxes was $6.2 million
in the first nine months of 2001 compared to $5.7 million in the first nine
months of 2000. The effective tax rate was 36.3% for 2001 compared to 33.5% for
2000. The Company's effective income tax rate reflects the impact of foreign
earnings, certain of which are taxed at lower rates than in the
11
United States, partially offset by goodwill amortization, most of which is not
deductible for federal and state income tax purposes.
Net income. As a result of the above, net income for the first nine
months was $10.9 million in 2001 compared to $11.3 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for working capital, capital
expenditures and debt service. The Company has financed its cash needs primarily
through internally generated cash flow, in addition to funds borrowed, if
necessary, under the Company's credit agreement. For the Apparel segment,
working capital requirements vary throughout the year. Working capital
requirements have historically increased during the first half of the year as
inventory builds to support peak shipping periods. The Hosiery segment is less
seasonal and, while working capital requirements tend to increase slightly
during the second half of the year, the variation is small.
Net cash provided by operating activities for the nine months ended
September 29, 2001 and September 30, 2000 was $19.6 million and $11.1 million,
respectively. The increase in cash provided by operating activities in the first
nine months of 2001 compared to 2000 was primarily due to changes in the
Company's working capital accounts. Historically, the Apparel segment builds
inventory in the first nine months of the year to support third and fourth
quarter sales volumes of certain fashion/seasonal products. In 2001, inventories
decreased by approximately $3.9 million as the Company placed less emphasis on
developing fashion/seasonal products and continued to reduce inventories through
improvements in production planning and procurement practices. In addition,
Apparel sales declined in the first nine months of 2001 due to increased
promotional activity by competitors as well as retailers seeking to lower
overall inventory levels due to the general softening of sales in the
marketplace. These sales reductions primarily resulted in the lower accounts
receivable balance at the end of the first nine months as compared to the prior
year. Accounts payable decreased in 2001 due to less purchases in the first nine
months related to fashion/seasonal products and due to the timing of purchases
and payments. Other assets and liabilities, net primarily decreased in 2001 due
to the Company changing and later discontinuing its Postretirement Plan and due
to lower accruals needed for group benefits and advertising.
Capital expenditures were $5.9 million and $7.0 million for the first
nine months of 2001 and 2000, respectively. These expenditures consisted
primarily of building/leasehold improvements, manufacturing equipment, purchases
of office equipment and upgrades of information systems.
Net cash used in financing activities was $6.6 million and $5.6 million
for the first nine months of 2001 and 2000, respectively. The cash used in
financing activities primarily consisted of repayments on the Company's credit
agreement and/or other long-term borrowing arrangements. In addition, in March
2001 the Company made an excess cash flow payment as required under the credit
agreement of approximately $2.1 million. In May 2001, the Company lowered the
revolving committed amount under the Credit Agreement from $60.0 million to
$20.0 million due to the increased amount of cash on hand.
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The Company believes that cash on hand, combined with cash generated
from operations and amounts available under its credit facilities, will be
adequate to meet its working capital, capital expenditures and debt service
requirements for the next twelve months.
INFLATION
In general, costs are affected by inflation and the Company may
experience the effects of inflation in future periods. The Company does not
currently consider the impact of inflation to be significant in the businesses
or countries in which the Company operates.
WARRANT CONVERSION
During August 2001, the Company issued 2,953,731 shares of stock to
Citicorp Mezzanine Partners, L.P. ("CMP"). These shares were issued in a
cashless exercise of all of CMP's warrants to purchase shares of Class B Common
Stock. Simultaneously, CMP converted 250,000 shares of Class B Common Stock into
an equal number of shares of Common Stock
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). This statement established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If the derivative is a
hedge, depending on the nature of the hedge, changes in fair value will be
either offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company adopted the standard effective January 1, 2001, and the adoption did not
have a material impact on the condensed consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS
142"). SFAS 142 supersedes Accounting Principles Bulletin No. 17, "Intangible
Assets." SFAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition. The most significant changes made by
SFAS 142 are: (a) goodwill and indefinite lived intangible assets will no longer
be amortized, (b) goodwill will be tested for impairment at least annually, (c)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually and (d) the amortization period of intangible
assets with finite lives will no longer be limited to forty years. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. Currently, amortization of goodwill and acquisition costs
amounts to approximately $260,000 per quarter. The Company is currently in the
process of testing goodwill for impairment and has not determined the effect, if
any, on its consolidated financial position, results of operations and cash
flows.
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The Financial Accounting Standards Board also recently issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"). SFAS 144 establishes accounting standards for the recognition and
measurement of long-lived assets held for use or held for disposal. This
statement is required to be adopted by the beginning of 2002. The Company is
evaluating the impact of this standard and has not yet determined the effect of
adoption on our consolidated financial position, results of operations and cash
flows.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not utilize derivative financial or commodity based
instruments for trading or for speculative purposes but does utilize them in the
regular course of business. A review of the Company's financial instruments and
risk exposures at September 29, 2001 revealed that the Company had exposure to
interest rate and foreign currency exchange rate risks. The Company performed
sensitivity analysis at December 31, 2000 to assess the potential effect of a
change in the interest rate and a change to the foreign currency exchange rates
and concluded that near-term changes in either should not materially affect the
Company's financial position, results of operations or cash flows. The Company
has experienced no significant changes in these financial instruments or risk
exposures during the first nine months of 2001 and thus believes that the
Company's year-end assessment is still appropriate at September 29, 2001.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GERBER CHILDRENSWEAR, INC.
(Registrant)
DATE: November 13, 2001 By: /s/ Edward Kittredge
---------------------------------
Edward Kittredge
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
DATE: November 13, 2001 By: /s/ Richard L. Solar
---------------------------------
Richard L. Solar
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
DATE: November 13, 2001 By: /s/ David E. Uren
---------------------------------
David E. Uren
Vice President of Finance, Secretary
and Treasurer
(Principal Accounting Officer)
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