1
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 October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-5256
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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
Suite D
Greenville, SC 29615
(Address of principal executive offices)
(864) 987-5200
(Registrant's telephone number, including area code)
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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 6, 1998, there were outstanding 8,360,683 shares of Common Stock
and 8,692,315 shares of Class B Common Stock.
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GERBER CHILDRENSWEAR, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of October 3, 1998
and December 31, 1997................................................................ 1
Condensed Consolidated Statements of Operations for the quarters ended
October 3, 1998 and September 27, 1997 and for the nine months ended
October 3, 1998 and September 27, 1997............................................... 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended October 3, 1998 and September 27, 1997............................. 3
Notes to Condensed Consolidated Financial Statements................................. 4-6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 7-12
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K..................................................... 13
Signatures.................................................................................... 13
Exhibit - Financial Data Schedule............................................................. 14
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GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (NOTE)
OCTOBER 3, DECEMBER 31,
1998 1997
----------- ------------
(In thousands)
ASSETS
Current Assets
Cash and cash equivalents ........................................ $ 1,701 $ 536
Accounts receivable, net ......................................... 42,322 34,506
Inventories ...................................................... 99,984 71,041
Income tax receivable ............................................ 0 4,635
Other ............................................................ 3,624 1,672
-------- --------
Total current assets ....................................... 147,631 112,390
-------- --------
Property, Plant and Equipment ........................................ 31,721 27,867
Less accumulated depreciation .................................... 6,643 3,219
-------- --------
25,078 24,648
-------- --------
Other Assets
Excess of cost over fair value of net assets acquired, net ....... 21,378 22,257
Other ............................................................ 6,392 4,596
-------- --------
Total other assets ......................................... 27,770 26,853
-------- --------
$200,479 $163,891
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ................................................. $ 18,249 $ 14,759
Accrued expenses ................................................. 18,131 24,099
Revolving credit loan payable .................................... 24,500 250
Current portion of long-term debt ................................ 3,368 7,286
Other ............................................................ 2,280 119
-------- --------
Total current liabilities .................................. 66,528 46,513
-------- --------
Non-Current Liabilities
Long-term debt ................................................... 22,734 69,474
Other non-current liabilities .................................... 16,340 13,875
-------- --------
Total non-current liabilities .............................. 39,074 83,349
-------- --------
Redeemable preferred stock, including accrued dividends of $2,965 .... 0 14,610
-------- --------
Shareholders' Equity ................................................. 94,877 19,419
-------- --------
$200,479 $163,891
======== ========
Note: The amounts were derived from the audited financial statements at that
date.
See accompanying notes
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GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------ -------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales ........................................ $ 73,879 $ 60,323 $ 202,405 $ 145,835
Cost of sales .................................... 56,068 43,486 149,788 104,180
--------- --------- --------- ---------
Gross margin ................................. 17,811 16,837 52,617 41,655
Expenses:
Selling, general and administrative expenses.. 10,442 7,327 29,674 21,299
Other ........................................ 0 16 0 530
--------- --------- --------- ---------
10,442 7,343 29,674 21,829
--------- --------- --------- ---------
Income before interest and income taxes .......... 7,369 9,494 22,943 19,826
Interest expense, net of interest income ......... 1,111 1,569 5,157 4,313
--------- --------- --------- ---------
Income before income taxes ....................... 6,258 7,925 17,786 15,513
Income tax expense ............................... 1,996 3,091 6,221 6,051
--------- --------- --------- ---------
Income before extraordinary item ................. 4,262 4,834 11,565 9,462
Extraordinary item, net .......................... 0 0 (266) 0
--------- --------- --------- ---------
Net income ....................................... 4,262 4,834 11,299 9,462
Foreign currency translation ................. 1,513 0 1,159 0
--------- --------- --------- ---------
Comprehensive income ............................. $ 5,775 $ 4,834 $ 12,458 $ 9,462
========= ========= ========= =========
Earnings per common share:
Income before extraordinary item, net ......... $ .26 $ .40 $ .81 $ .74
Extraordinary item, net ....................... 0 0 (.02) 0
--------- --------- --------- ---------
Net income .................................... $ .26 $ .40 $ .79 $ .74
========= ========= ========= =========
Earnings per common share - diluted:
Income before extraordinary item, net ......... $ .21 $ .30 $ .64 $ .56
Extraordinary item, net ....................... 0 0 (.02) 0
--------- --------- --------- ---------
Net income .................................... $ .21 $ .30 $ .62 $ .56
========= ========= ========= =========
Numerator
Income before extraordinary item, net ............ $ 4,262 $ 4,834 $ 11,565 $ 9,462
Preferred stock dividends ........................ 0 (420) (774) (1,199)
--------- --------- --------- ---------
Income available to common shareholders ......... 4,262 4,414 10,791 8,263
Extraordinary item, net .......................... 0 0 (266) 0
--------- --------- --------- ---------
Net income available to common shareholders ...... $ 4,262 $ 4,414 $ 10,525 $ 8,263
========= ========= ========= =========
Denominator
Weighted average shares - basic .................. 16,477 11,023 13,320 11,099
Effect of dilutive securities:
Warrants ....................................... 2,958 2,958 2,958 2,958
Nonvested stock/stock options .................. 527 552 577 634
--------- --------- --------- ---------
Adjusted weighted average shares - diluted ....... 19,962 14,533 16,855 14,691
========= ========= ========= =========
See accompanying notes
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GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
------------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
(in thousands)
OPERATING ACTIVITIES
Net income ........................................................... $ 11,299 $ 9,462
Adjustments to reconcile net income to net cash used in operating
Activities:
Depreciation and amortization ...................................... 4,468 1,681
Other .............................................................. (3,647) 16
Changes in assets and liabilities
Accounts receivable, net ....................................... (7,810) (15,085)
Inventories .................................................... (28,762) (17,096)
Accounts payable ............................................... 4,608 (33)
Other assets and liabilities, net .............................. 3,356 4,258
-------- --------
(16,488) (16,797)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment ........................... (3,528) (3,055)
Proceeds from sale of property, plant and equipment .................. 37 445
-------- --------
(3,491) (2,610)
-------- --------
FINANCING ACTIVITIES
Borrowings under revolving credit agreement .......................... 68,240 59,636
Repayments under revolving credit agreement .......................... (43,990) (56,909)
Proceeds from long-term borrowing .................................... 0 1,600
Principal payments on long-term borrowings ........................... (51,539) (2,125)
Proceeds from initial public offering, net of expenses ............... 48,659 0
Other ................................................................ (301) (198)
-------- --------
21,069 2,004
-------- --------
Effect of exchange rate changes on cash .............................. 75 0
-------- --------
Net increase (decrease) in cash and cash equivalents ..................... 1,165 (17,403)
Cash and cash equivalents at beginning of period ......................... 536 17,592
-------- --------
Cash and cash equivalents at end of period ............................... $ 1,701 $ 189
======== ========
See accompanying notes
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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 generally accepted accounting principles 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 financial
statements for the year ended December 31, 1997, which were included as part of
the Company's Registration Statement on Form S-1 (Registration No. 333-47327)
(the "Registration Statement"), as declared effective by the Securities and
Exchange Commission (the "SEC") on June 10, 1998.
2. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Auburn Holdings, Inc., a
wholly owned subsidiary of the Company, acquired Auburn Hosiery Mills, Inc. and
Sport Socks Co. (Ireland) Limited on December 17, 1997. Sport Socks Co.
(Ireland) Limited has been translated into U.S. dollars based upon the weighted
average exchange rate of U.S. dollars/Irish punts for the statement of income
and the end of the period rate of U.S. dollars/Irish punts for the balance
sheet. 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 the Company's operations.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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
7
5. INVENTORIES
A summary of inventories, by major classification, at October 3, 1998
and December 31, 1997 is as follows (in thousands):
October 3, 1998 December 31, 1997
--------------- -----------------
Raw materials $13,843 $14,192
Work in process 17,287 12,507
Finished goods 68,854 44,342
------- -------
$99,984 $71,041
======= =======
6. INCOME TAXES
The Company's effective income tax rate of 31.9% and 35.0% for the
quarter and the nine months ended October 3, 1998, respectively, was lower than
the statutory rates due to the impact in 1998 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. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of SFAS 130 had no impact on the
Company's net income or shareholders' equity. SFAS 130 requires the Company's
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standard No. 131 ("SFAS 131")
"Disclosures about Segments of an Enterprise and Related Information" was issued
in June 1997. This statement is effective for the Company's calendar year ending
December 31, 1998. This statement changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports. Adoption of SFAS 131 is not expected to have a material
effect on the Company's financial statement disclosures.
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9. INITIAL PUBLIC OFFERING
During June 1998, the Company consummated its Initial Public Offering
("IPO") with 4,140,000 shares (including the exercise of the underwriters'
over-allotment option) of its Common Stock being sold at a price of $13.00 per
share. The net proceeds from the IPO were $48.7 million and were used to: (a)
repay $22.5 million of a senior subordinated note; (b) repay $11.0 million of a
junior subordinated note; (c) repay $14.8 million of other indebtedness of the
Company; and (d) redeem 2,828.4 shares of the Company's redeemable preferred
stock in the aggregate amount of approximately $0.4 million held by certain of
its officers.
10. EXTRAORDINARY ITEM
In June 1998, the Company repaid senior and junior subordinated notes
in the principal amount of $22.5 million and $11.0 million, respectively. The
write-off of unamortized discount and loan costs totaling $266,000 (net of an
income tax benefit of $163,000) is included as an extraordinary item in the
accompanying statements of income for the nine months ended October 3, 1998.
11. CASUALTY - HURRICANE GEORGES
In late September 1998, the Company's three plants in the Dominican
Republic sustained property damage and began to experience business interruption
losses associated with Hurricane Georges. The Company has maintained property
and business interruption insurance and is currently working with its insurance
providers in determining the estimated proceeds for the loss. Based on current
estimates, the Company believes there will be no material gain or loss
associated with the property damage and thus no amounts have been recorded in
the accompanying statements of income for the quarter and nine months ended
October 3, 1998.
The Company's loss of production and current inefficiencies (business
interruption) in the Dominican Republic plants are ongoing and are not expected
to be fully recovered until year-end. The three plants loss was only one day's
production due to the hurricane through October 3, 1998 and, accordingly, no
business interruption amounts have been recorded in the accompanying statements
of income for the quarter and nine months ended October 3, 1998. The Company
will record the estimated insurance proceeds over the actual lost production
period.
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9
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 and regional economic conditions, 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.
INITIAL PUBLIC OFFERING
During June 1998, the Company consummated its Initial Public Offering
("IPO") with 4,140,000 shares (including the exercise of the underwriters'
over-allotment option) of its Common Stock being sold at a price of $13.00 per
share. The net proceeds from the IPO were $48.7 million and were used to: (a)
repay $22.5 million of a senior subordinated note; (b) repay $11.0 million of a
junior subordinated note; (c) repay $14.8 million of other indebtedness of the
Company; and (d) redeem 2,828.4 shares of the Company's redeemable preferred
stock in the aggregate amount of approximately $0.4 million held by certain of
its officers.
YEAR 2000 COMPLIANCE
During 1997, the Company began to develop plans to make key operational
and financial systems compliant and to ensure uninterrupted functionality
through the Year 2000. A formal Year 2000 compliance project was established
which identified three phases: 1) investigation of affected systems, 2)
assessment and 3) remediation and testing. As of October 3, 1998, the Company
has completed the investigation and assessment phases with significant progress
in the remediation and testing phase. The Year 2000 initiative is currently
anticipated to be complete by the end of 1998. The Company does not expect the
costs associated with ensuring Year 2000 compliance to have a material impact on
the Company's business, operations or financial condition. All costs associated
with Year 2000 compliance are being funded either by cash flow generated by
operations or from funds borrowed under the Company's credit agreement and are
being expensed as incurred. As part of the Year 2000 initiative, the Company
believes that all systems necessary to manage the business effectively will be
replaced, modified or upgraded before the Year 2000.
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10
The Company has contacted key customers, shipping companies and banks
to assess Year 2000 compliance in key potentially impacted business
relationships. The Company is currently relying upon manual and hard copy
interfaces to minimize potential disruptions with suppliers and manufacturing
contractors worldwide. The Company does not have control over these third
parties and, as a result, the Company cannot currently determine to what extent
future operating results may be adversely affected by the failure of these third
parties to successfully address their Year 2000 issues. Based on the results of
the Year 2000 status information regarding third parties, the Company is
currently in the process of developing contingency plans to minimize identified
exposures.
Based on the Company's efforts to date, Management believes that it is
unlikely that the Year 2000 problem will have a material adverse effect on the
Company's results of operations in the future.
CASUALTY - HURRICANE GEORGES
In late September 1998, the Company's three plants in the Dominican
Republic sustained property damage and began to experience business interruption
losses associated with Hurricane Georges. The Company has maintained property
and business interruption insurance and is currently working with its insurance
providers in determining the estimated proceeds for the loss. Based on current
estimates, the Company believes there will be no material gain or loss
associated with the property damage and thus no amounts have been recorded in
the accompanying statements of income for the quarter and nine months ended
October 3, 1998.
The Company's loss of production and current inefficiencies (business
interruption) in the Dominican Republic plants are ongoing and are not expected
to be fully recovered until year-end. The three plants loss was only one day's
production due to the hurricane through October 3, 1998 and, accordingly, no
business interruption amounts have been recorded in the accompanying statements
of income for the quarter and nine months ended October 3, 1998. The Company
will record the estimated insurance proceeds over the actual lost production
period.
RESULTS OF OPERATIONS
The Company operates two business segments: apparel and hosiery. The
apparel segment consists of the production and sale of infant and toddler's
sleepwear, playwear, underwear, bedding, bath, cloth diapers and other products
under the Gerber and Baby Looney Tunes trademarks and private labels. The
hosiery segment which was acquired on December 17, 1997 consists of the
production and sale of sport socks under the Wilson, Coca Cola and Dunlop names
to major retailers in the United States and Europe. The Company's first three
quarters always end on the Saturday closest to the calendar quarter end. The
fourth quarter ends on December 31 of the applicable year. The Company believes
that these cutoffs have no significant impact on the Company's financial
results.
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11
The following table sets forth certain unaudited results of operations
and other financial information of the Company by business segments and
geographic areas (in thousands).
BUSINESS SEGMENTS FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
---------------------------------- ------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
Net sales and revenue:
Apparel ................................ $ 58,560 $ 60,323 $154,233 $145,835
Hosiery ................................ 15,319 0 48,172 0
-------- -------- -------- --------
Total net sales and revenue ............ $ 73,879 $ 60,323 $202,405 $145,835
======== ======== ======== ========
Income before interest and taxes:
Apparel ................................ $ 6,345 $ 9,494 $ 19,443 $ 19,826
Hosiery ................................ 1,024 0 3,500 0
-------- -------- -------- --------
Total operating income ................. $ 7,369 $ 9,494 $ 22,943 $ 19,826
======== ======== ======== ========
Depreciation and amortization:
Apparel ................................ $ 709 $ 497 $ 2,111 $ 1,681
Hosiery ................................ 726 0 2,357 0
-------- -------- -------- --------
Total depreciation and amortization .... $ 1,435 $ 497 $ 4,468 $ 1,681
======== ======== ======== ========
Capital additions:
Apparel ................................ $ 1,202 $ 1,787 $ 2,508 $ 3,055
Hosiery ................................ 346 0 1,020 0
-------- -------- -------- --------
Total capital additions ................ $ 1,548 $ 1,787 $ 3,528 $ 3,055
======== ======== ======== ========
OCTOBER 3, DECEMBER 31, SEPTEMBER 27,
1998 1997 1997
---------- ------------ -------------
Identifiable assets:
Apparel ................................ $149,307 $113,202 $120,481
Hosiery ................................ 51,172 50,689 0
-------- -------- --------
Total assets ........................... $200,479 $163,891 $120,481
======== ======== ========
GEOGRAPHIC AREAS FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
---------------------------------- ------------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
Net sales and revenue:
United States .......................... $ 69,327 $ 59,963 $187,292 $145,475
All other .............................. 4,552 360 15,113 360
-------- -------- -------- --------
Total net sales and revenue ............ $ 73,879 $ 60,323 $202,405 $145,835
======== ======== ======== ========
Income before interest and taxes:
United States .......................... $ 6,053 $ 9,445 $ 20,064 $ 19,777
All other .............................. 1,316 49 2,879 49
-------- -------- -------- --------
Total operating income ................. $ 7,369 $ 9,494 $ 22,943 $ 19,826
======== ======== ======== ========
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OCTOBER 3, DECEMBER 31, SEPTEMBER 27,
1998 1997 1997
---------- ------------ -------------
Identifiable assets:
United States .......................... $176,340 $153,944 $119,874
All other .............................. 24,139 9,947 607
-------- -------- --------
Total assets ........................... $200,479 $163,891 $120,481
======== ======== =========
THIRD QUARTER ENDED OCTOBER 3, 1998 COMPARED TO THIRD QUARTER ENDED SEPTEMBER
27, 1997
Net sales. Apparel net sales were $58.6 million for the third quarter
ended October 3, 1998, a decrease of $1.7 million or 2.8% below net sales of
$60.3 million for the third quarter of 1997 due to lower than anticipated
shipments of its weather-related blanket sleeper and thermal product lines due
to the unseasonably warm weather during the quarter. Hosiery net sales were
$15.3 million in the third quarter of 1998.
Gross margin. Gross margin as a percentage of net sales declined from
27.9% in 1997 to 24.1% in 1998. The decrease in gross margin was due to the
effect of Hosiery sales, which typically have lower gross margins than Apparel
sales.
Selling general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased to 14.1% in the
third quarter of 1998, from 12.2% in 1997. The increase is due to higher than
expected distribution costs at the Apparel segment.
Other. Other represents the cost incurred during the quarter from the
closing and realignment of facilities in 1997.
Income before interest and income taxes. Apparel income before interest
and income taxes as a percentage of Apparel sales was 10.8% in the third quarter
of 1998 versus 15.7% in the third quarter of 1997. Hosiery income before
interest and taxes was 6.7% of Hosiery sales in the third quarter of 1998.
Interest expense, net. Interest expense was $1.1 million in the third
quarter of 1998 versus $1.6 million in the third quarter of 1997. The decrease
in interest expense reflects the lower debt levels resulting from the use of
proceeds from the Company's initial public offering on June 11, 1998 partially
offset by higher Apparel inventories.
Provision for income taxes. Provision for income taxes was $2.0 million
in the third quarter of 1998, compared to $3.1 million in the third quarter of
1997. The effective tax rate was 31.9% for 1998 as compared to 39.0% for 1997.
The Company's effective income tax rate differed from the prior period effective
rate 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, third quarter net income was
$4.26 million in 1998, a 11.8% decrease over the $4.83 million in 1997.
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NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 27,
1997
Net sales. Apparel net sales were $154.2 million for the first nine
months ended October 3, 1998, an increase of $8.4 million or 5.8% over net sales
of $145.8 million for the first nine months of 1997 due to increased unit volume
sales. Hosiery net sales were $48.2 million in the first nine months of 1998.
Gross margin. Gross margin as a percentage of net sales declined from
28.6% in 1997 to 26.0% in 1998. The decrease in gross margin was due to the
effect of Hosiery sales, which typically have lower gross margins than Apparel
sales.
Selling general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased to 14.7% in the
first nine months of 1998, from 14.6% in the first nine months of 1997. The
increase is primarily due to higher than expected distribution costs at the
Apparel segment.
Other. Other represents the cost of closing and realignment of
facilities aggregating $0.5 million in 1997.
Income before interest and income taxes. Apparel income before interest
and income taxes as a percentage of apparel sales was 12.6% in the first nine
months of 1998 versus 13.6% in 1997. Hosiery income before interest and taxes
was 7.3% of Hosiery sales in the first nine months of 1998.
Interest expense, net. Interest expense was $5.2 million in the first
nine months of 1998 versus $4.3 million in the first nine months of 1997. The
higher interest expense reflects the higher debt levels maintained most of the
year associated with the acquisition of the Hosiery operations and higher
Apparel inventories, partially offset by the initial offering proceeds used to
repay debt on June 11, 1998.
Provision for income taxes. Provision for income taxes was $6.2 million
in the first nine months of 1998, compared to $6.1 million in the first nine
months of 1997. The effective tax rate was 35.0% for 1998 compared to 39.0% for
1997. The Company's effective income tax rate differed from the prior period
effective rate 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.
Extraordinary item, net. The Company repaid senior and junior
subordinated notes in June 1998 resulting in the write-off of unamortized
discount and loan costs of approximately $.3 million (net of an income tax
benefit of $.2 million).
Net income. As a result of the above, net income for the first nine
months was $11.3 million in 1998, a 19.4% increase over the $9.5 million in
1997.
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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 under the
Company's credit agreement.
Net cash used in operating activities for the nine months ended October
3, 1998 and September 27, 1997 was $16.5 million and $16.8 million,
respectively. The primary components of cash used in operating activities for
the first nine months of 1998 and 1997 were increases in accounts receivable
($7.8 million and $15.1 million, respectively) and inventories ($28.8 million
and $17.1 million, respectively). The increase in the accounts receivable and
inventory balances for both periods reflects the seasonality of the Apparel
business. To support the third and fourth quarter sales volumes of certain
seasonal products (such as blanket sleepers), the Company builds inventory in
the first six months of each year. The Hosiery business is less seasonal, and as
such, while working capital tends to increase slightly during the second half of
the year, the variation is small. During the third quarter of 1998, the Company
was impacted by lower than anticipated shipments of its weather-related blanket
sleeper and thermal product lines due to the unseasonably warm weather during
the quarter. The lower than anticipated sales resulted in a lower accounts
receivable balance offset by higher than expected inventory balance at October
3, 1998.
Capital expenditures were $3.5 million and $3.1 million for the first
nine months of 1998 and 1997, respectively. These expenditures consisted
primarily of normal replacement of manufacturing equipment, purchases of office
equipment and upgrades of information systems. In addition, during the nine
months ended September 27, 1997 the Company sold its Maine facility for
approximately $0.4 million. The Company believes its budget of $5.7 million for
capital expenditures for 1998 ($3.9 million for the Apparel segment and $1.8
million for the Hosiery segment) should be sufficient for the anticipated
capital expenditure needs of the Company for 1998.
Net cash provided by financing activities for the nine months ended
October 3, 1998 was $21.1 million compared to $2.0 million for the nine months
ended September 27, 1997. The increase in cash provided by financing activities
for the first nine months in 1998 and 1997 consisted of borrowings under the
Company's revolving credit agreement to fund the seasonably increased working
capital needs as well as higher inventory levels maintained in 1998. In
addition, for the nine months ended October 3, 1998, the Company used the net
proceeds of $48.7 million from its IPO and the exercise of the over-allotment
option to: (a) repay all of a senior subordinated note in the aggregate
principal amount of $22.5 million; (b) repay all of a junior subordinated note
in the aggregate principal amount of $11.0 million; (c) repay certain other
indebtedness of the Company in the aggregate principal amount of $14.8 million;
and (d) redeem 2,828.4 shares of the Company's redeemable preferred stock in the
aggregate amount of approximately $0.4 million held by certain of its officers.
The Company believes that cash generated from operations, together with
amounts available under its credit agreement and the Irish subsidiary's loan
facility with the National Irish Bank, will be adequate to meet its working
capital, capital expenditures and debt service requirements for the next twelve
months.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (for SEC use only).
(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 10, 1998 By: /s/ Edward Kittredge
------------------------
Edward Kittredge
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
DATE: November 10, 1998 By: /s/ Richard L. Solar
------------------------
Richard L. Solar
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
DATE: November 10, 1998 By: /s/ David E. Uren
---------------------
David E. Uren
Vice President of Finance, Secretary
and Treasurer
(Principal Accounting Officer)
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