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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 2, 1999
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 11, 1999, there were outstanding 8,306,544 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 2, 1999,
October 3, 1998 and December 31, 1998...............................1
Condensed Consolidated Statements of Income and Comprehensive
Income for the quarters ended October 2, 1999 and October 3, 1998
and for the nine months ended October 2, 1999 and October 3,1998....2
Condensed Consolidated Statements of Cash Flows for the nine
months ended October 2, 1999 and October 3, 1998....................3
Notes to Condensed Consolidated Financial Statements..............4-7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................8-13
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
Exhibit - Financial Data Schedule.............................................16
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Gerber Childrenswear, Inc.
Condensed Consolidated Balance Sheets
(Unaudited) (Unaudited) (Note)
October 2, October 3, December 31,
1999 1998 1998
----------- ----------- -----------
(In thousands)
Assets
Current Assets
Cash and cash equivalents........... $ 4,824 $ 1,701 $ 1,780
Accounts receivable, net............ 48,642 42,322 36,621
Inventories......................... 85,030 99,984 87,020
Deferred income taxes............... 4,858 2,511 4,806
Other............................... 1,543 1,113 2,534
----------- ----------- -----------
Total current assets.......... 144,897 147,631 132,761
----------- ----------- -----------
Property, plant and equipment........... 36,764 31,721 32,935
Less accumulated depreciation....... 11,128 6,643 7,711
----------- ----------- -----------
25,636 25,078 25,224
----------- ----------- -----------
Other Assets
Excess of cost over fair value of
net assets acquired, net.......... 19,108 21,378 20,607
Other............................... 8,138 6,392 7,146
----------- ----------- -----------
Total other assets............ 27,246 27,770 27,753
----------- ----------- -----------
$197,779 $200,479 $185,738
=========== =========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable.................... $ 15,339 $ 18,249 $ 11,815
Accrued expenses.................... 18,460 18,131 12,387
Revolving credit loan payable....... 8,800 24,500 15,300
Current portion of long-term debt
and capital leases................ 6,605 3,368 4,847
Income tax payable.................. 6,004 2,280 5,666
----------- ----------- -----------
Total current liabilities..... 55,208 66,528 50,015
----------- ----------- -----------
Non-Current Liabilities
Long-term debt...................... 14,593 22,734 19,631
Other non-current liabilities....... 19,222 16,340 17,166
----------- ----------- -----------
Total non-current liabilities. 33,815 39,074 36,797
----------- ----------- -----------
Shareholders' Equity.................... 108,756 94,877 98,926
----------- ----------- -----------
$197,779 $200,479 $185,738
=========== =========== ===========
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 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share data)
Net sales..................... $ 80,159 $ 73,879 $205,212 $202,405
Cost of sales................ 60,900 56,068 153,315 149,788
---------- ---------- ---------- ----------
Gross margin.............. 19,259 17,811 51,897 52,617
Selling, general and
administrative expenses..... 11,423 10,442 32,065 29,674
---------- ---------- ---------- ----------
Income before interest and
income taxes................ 7,836 7,369 19,832 22,943
Interest expense, net of
interest income ............ 1,141 1,111 2,339 5,157
---------- ---------- ---------- ----------
Income before income taxes.... 6,695 6,258 17,493 17,786
Provision for income taxes.... 2,340 1,996 6,154 6,221
---------- ---------- ---------- ----------
Income before extraordinary
item........................ 4,355 4,262 11,339 11,565
Extraordinary item, net....... - - - (266)
---------- ---------- ---------- ----------
Net income.................... 4,355 4,262 11,339 11,299
Foreign currency translation 749 1,513 (1,497) 1,159
---------- ---------- ---------- ----------
Comprehensive income.......... $ 5,104 $ 5,775 $ 9,842 $ 12,458
========== ========== ========== ==========
Per share amount:
Earnings per common share:
Income before
extraordinary item, net. $ .26 $ .26 $ .68 $ .81
Extraordinary item, net... - - - (.02)
---------- ---------- ---------- ----------
Net income.................... $ .26 $ .26 $ .68 $ .79
========== ========== ========== ==========
Earnings per common share - diluted:
Income before
extraordinary item, net. $ .22 $ .21 $ .57 $ .64
Extraordinary item, net... - - - (.02)
---------- ---------- ---------- ----------
Net income.................... $ .22 $ .21 $ .57 $ .62
========== ========== ========== ==========
Numerator
Income before extraordinary
item, net................... $ 4,355 $ 4,262 $ 11,339 $ 11,565
Preferred stock dividends..... - - - (774)
---------- ---------- ---------- ----------
Income available to common
shareholders................ 4,355 4,262 11,339 10,791
Extraordinary item, net....... - - - (266)
---------- ---------- ---------- ----------
Net income available to common
shareholders................ $ 4,355 $ 4,262 $ 11,339 $ 10,525
========== ========== ========== ==========
Denominator
Weighted average shares - basic 16,665 16,477 16,621 13,320
Effect of dilutive securities:
Warrants.................... 2,958 2,958 2,958 2,958
Nonvested stock/stock options 288 527 345 577
--------- ---------- ---------- ----------
Adjusted weighted average
shares - diluted............ 19,911 19,962 19,924 16,855
========= ========== ========== ==========
See accompanying notes
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Gerber Childrenswear, Inc.
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
For the nine months ended
---------------------------
October 2, October 3,
1999 1998
------------ ------------
(In thousands)
Operating Activities
Net income...................................... $ 11,339 $ 11,299
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Depreciation and amortization................. 4,595 4,468
Other......................................... (1,554) (3,647)
Changes in assets and liabilities
Accounts receivable, net.................. (12,276) (7,810)
Inventories............................... 1,799 (28,762)
Accounts payable.......................... 3,571 4,608
Other assets and liabilities, net......... 9,986 3,356
------------ ------------
17,460 (16,488)
------------ ------------
Investing Activities
Purchases of property, plant and equipment...... (4,486) (3,528)
Proceeds from sale of property, plant
and equipment................................. 142 37
------------ ------------
(4,344) (3,491)
------------ ------------
Financing Activities
Borrowings under revolving credit agreement..... 57,600 68,240
Repayments under revolving credit agreement..... (64,100) (43,990)
Principal payments on long-term borrowings and
capital leases................................ (3,254) (51,539)
Proceeds from initial public offering, net
of expenses................................... - 48,659
Other........................................... (104) (301)
------------ ------------
(9,858) 21,069
------------ ------------
Effect of exchange rate changes on cash......... (214) 75
------------ ------------
Net increase in cash and cash equivalents........... 3,044 1,165
Cash and cash equivalents at beginning of period.... 1,780 536
------------ ------------
Cash and cash equivalents at end of period.......... $ 4,824 $ 1,701
============ ============
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 and notes
thereto included in the Company's 1998 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 U.S. 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 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.
In conjunction with the Company's accounting for a royalty contract, the
Company previously lowered the estimate of its future liability to be paid
related to certain products. This change in estimate is not material to the nine
months ended October 2, 1999.
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Gerber Childrenswear, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
5. INVENTORIES
A summary of inventories, by major classification, at October 2, 1999,
October 3, 1998 and December 31, 1998 is as follows (in thousands):
October 2, 1999 October 3, 1998 December 31, 1998
----------------- ----------------- -----------------
Raw materials $11,885 $13,843 $11,863
Work in process 11,938 17,287 13,515
Finished goods 61,207 68,854 61,642
-------- -------- --------
$85,030 $99,984 $87,020
======== ======== ========
6. INCOME TAXES
The Company's effective income tax rate of 35.0% and 35.2% for the quarter
and the nine months ended October 2, 1999, respectively, was lower than the
statutory rates due to the impact in 1999 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. RECENTLY ISSUED ACCOUNTING STANDARDS
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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Adoption of FAS 133 is not anticipated to have a material impact on the
Company's financial statements.
8. 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 condensed consolidated statements of income for the nine months
ended October 3, 1998.
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Gerber Childrenswear, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
9. 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's
sleepwear, playwear, underwear, bedding, bath, cloth diapers and other products
to volume retailers, mid-tier department stores and specialty retailers in the
United States under the Gerber, Baby Looney Tunes and Curity brand names, the
Onesies trademark 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 Converse brand names in the United States and Europe and
under the Dunlop brand name in Europe. The Company's first three quarters always
end on the Saturday closest to the calendar quarter end. The fourth quarter ends
on December 31st of the applicable year.
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 segments
and geographic areas (in thousands).
Business Segments
For the quarter ended For the nine months ended
-------------------------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales:
Apparel................... $ 62,214 $ 58,560 $152,001 $154,233
Hosiery................... 17,945 15,319 53,211 48,172
---------- ---------- ---------- ----------
Total net sales............... $ 80,159 $ 73,879 $205,212 $202,405
========== ========== ========== ==========
Income before interest and income taxes:
Apparel................... $ 6,013 $ 6,345 $ 14,724 $ 19,443
Hosiery................... 1,823 1,024 5,108 3,500
---------- ---------- ---------- ----------
Total income before interest
and income taxes............ $ 7,836 $ 7,369 $ 19,832 $ 22,943
========== ========== ========== ==========
Depreciation and amortization:
Apparel................... $ 784 $ 709 $ 2,246 $ 2,111
Hosiery................... 781 726 2,349 2,357
---------- ---------- ---------- ----------
Total depreciation and
amortization................ $ 1,565 $ 1,435 $ 4,595 $ 4,468
========== ========== ========== ==========
Capital additions:
Apparel................... $ 988 $ 1,202 $ 3,557 $ 2,508
Hosiery................... 450 346 929 1,020
---------- ---------- ---------- ----------
Total capital additions....... $ 1,438 $ 1,548 $ 4,486 $ 3,528
========== ========== ========== ==========
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Gerber Childrenswear, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
October 2, October 3, December 31,
1999 1998 1998
---------- ---------- ----------
Assets:
Apparel................... $147,935 $149,307 $136,246
Hosiery................... 49,844 51,172 49,492
---------- ---------- ----------
Total assets.................. $197,779 $200,479 $185,738
========== ========== ==========
Inventories (included in assets):
Apparel................... $ 76,972 $ 91,151 $ 79,748
Hosiery................... 8,058 8,833 7,272
---------- ---------- ----------
Total inventories (included
in assets).................. $ 85,030 $ 99,984 $ 87,020
========== ========== ==========
Geographic Areas For the quarter ended For the nine months ended
-------------------------------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Net sales:
United States............. $ 75,157 $ 69,327 $188,521 $187,292
All other................. 5,002 4,552 16,691 15,113
---------- ---------- ---------- ----------
Total net sales............... $ 80,159 $ 73,879 $205,212 $202,405
========== ========== ========== ==========
Income before interest and income taxes:
United States............. $ 7,313 $ 6,053 $ 17,999 $ 20,064
All other................. 523 1,316 1,833 2,879
---------- ---------- ---------- ----------
Total income before interest
and income taxes............ $ 7,836 $ 7,369 $ 19,832 $ 22,943
========== ========== ========== ==========
October 2, October 3, December 31,
1999 1998 1998
---------- ---------- ----------
Assets:
United States............. $172,735 $176,340 $161,175
All other................. 25,044 24,139 24,563
---------- ---------- ----------
Total assets.................. $197,779 $200,479 $185,738
========== ========== ==========
10. SUBSEQUENT EVENT - REGARDING INSURED CASUALTY LOSS
In 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 maintained property damage and
business interruption insurance and settled a majority of the claim with its
insurance providers in November 1999. The final outcome/settlement of this claim
is expected to be recorded as a gain in the statement of income in the fourth
quarter of 1999.
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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 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, financial difficulties
encountered by customers and Year 2000 compliance by the Company and third
parties. 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.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") problem is a result of computer programs having been
written using two rather than four digits to identify an applicable year. Any
equipment that has time sensitive embedded chips may recognize a date using "00"
as the year 1900 rather than the year 2000. If not corrected, many computer
programs/embedded chips could cause systems to fail or other errors, leading to
possible disruptions in operations or creation of erroneous results. The
Company, in an enterprise-wide effort, is taking steps to ensure that its
internal systems are secure from such failure and that its current products will
perform. The Company created a Y2K Compliance Project that focused on three
primary areas of concern: the Company's Information Technology ("IT plan"),
other Non-IT equipment ("Non-IT plan") and third party suppliers and customers
("TP plan").
The IT plan was begun in 1997 and consisted of three phases: 1)
investigation of the Company's affected systems; 2) assessment and design of a
remediation plan; and 3) remediation and testing. As of April 3, 1999, the
Company had completed all phases of the IT plan. The Company believes that all
internal IT systems necessary to manage the business effectively have been
replaced, modified or upgraded. The Company does not currently believe that it
faces material adverse issues related to its IT equipment.
The Non-IT plan was begun in 1998 and consists of two phases: 1)
identification and assessment of the Company's Non-IT equipment; and 2)
remediation and/or development of contingency plans. As of October 2, 1999 the
Company has identified all critical Non-IT equipment and has contacted the
equipment vendors (via Y2K questionnaires) to determine the status of their Y2K
readiness. Based on their responses, the Company has either replaced, modified
or upgraded the respective equipment or has developed contingency plans to
minimize identified exposures. Contingency plans include, but are not limited
to, using alternate vendors,
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using manual interfaces, and hard copies. The Company does not currently believe
that it faces material adverse issues related to its Non-IT equipment.
Like every other business, the Company is at risk from potential Y2K
failures on the part of its major business partners, including, but not limited
to, suppliers, vendors, financial institutions, benefit providers, payroll
services, customers, and clients, as well as potential failures in public and
private infrastructure services, including electricity, water, transportation,
and communications. The Company in 1998 began its TP plan by initiating
communications (via Y2K questionnaires) with significant third party businesses.
Completion of the TP plan is ongoing, as several of these TP businesses have
fourth quarter 1999 target compliance dates for their Year 2000 programs. The
Company is reviewing all questionnaires as received and is in the process of
assessing its vulnerability related to any critical non-remediated third party
Y2K compliance. Contingency plans are being developed and include, but are not
limited to, using alternate vendors, using manual interfaces, and hard copies.
The Company has not established a timetable for completing these contingency
plans since it is still in the process of receiving third party Y2K
questionnaires. There can be no guarantee that the systems of third parties will
be remediated on a timely basis, or that such parties' failure to remediate Y2K
issues would not have a material adverse effect on the Company.
The total cost of adapting the Company's systems to the Y2K problem is now
estimated at approximately $350,000. Expenses incurred up to and including
October 2, 1999 totaled approximately $340,000. The remaining Y2K budget
established by the Company is expected to be adequate to cover costs still to be
incurred. Provisions have not been made for expenses that may arise from
problems occurring from third party non-compliance.
The Y2K problem is unique in that it has never previously occurred; thus,
it is not possible to completely foresee or quantify the overall or any specific
financial or operational impacts to the Company or to third parties which
provide significant services to the Company. Factors which could affect the
Company's ability to be Y2K compliant by the end of 1999 include the failure of
customers, suppliers, governmental entities and others to achieve compliance and
the inaccuracy of certifications received from them. Major business risks
associated with the Y2K problem include, but are not limited to, infrastructure
failures, disruptions to the economy in general, excessive cash withdrawal
activity, closure of government offices, foreign banks, and clearing houses, and
a general slow down in the economy. The Company believes its reasonably likely
worst case scenario related to Y2K issues is the inability to service customer
orders on a timely basis due to production/sourcing interruptions offshore which
account for a significant portion of the Company's products produced. However,
the risks indicated above, along with the risk of the Company failing to
adequately complete the remaining parts of its Y2K Compliance Project and the
resulting possible inability to properly process core business transactions and
meet contractual obligations, could expose the Company to loss of revenues,
litigation and fluctuations in the price of the Company's common stock, any of
which could be material.
CASUALTY EVENT
For information regarding the Company's insured casualty loss, reference is
made to the information presented in Note 10 "Subsequent Event - Regarding
Insured Casualty Loss" to the condensed consolidated financial statements.
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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 9 "Business Segments and Geographic Areas" to the condensed
consolidated financial statements.
Third Quarter Ended October 2, 1999 Compared to Third Quarter Ended
October 3, 1998
Net sales. Apparel net sales were $62.2 million for the third quarter of
1999, an increase of $3.7 million or 6.2% above net sales of $58.6 million for
the third quarter of 1998. The Apparel sales increase was due to an increase in
seasonal products shipped in 1999, partially as a result of earlier deliveries
of blanket sleepers than a year ago. Hosiery net sales were $17.9 million in the
third quarter of 1999, an increase of $2.6 million or 17.1% above net sales of
$15.3 million for the third quarter of 1998 due to strong sales at retail.
Gross margin. Gross margin as a percentage of net sales was 24.0% in 1999
and 24.1% in 1998.
Selling, general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased to 14.3% in the
third quarter of 1999, from 14.1% in 1998. The percentage increase was due to
the Apparel segment's higher costs for warehousing and startup of the new
Mexican production facility.
Income before interest and income taxes. Apparel income before interest and
income taxes ("EBIT") was $6.0 million in the third quarter of 1999 compared to
$6.3 million in the third quarter of 1998. The drop in Apparel EBIT was the
result of higher operating cost as discussed above. Hosiery EBIT was $1.8
million in the third quarter of 1999 compared with $1.0 million in the third
quarter of 1998. The increase in Hosiery EBIT was the result of improved margins
due to lower material cost and a more favorable volume mix of products.
Interest expense, net of interest income. Interest expense was $1.1 million
in the third quarter of 1999 and 1998. Interest expense for 1999 includes a $0.6
million provision for possible interest charges in connection with resolving
principally timing differences between the Company and the Internal Revenue
Service ("IRS") on the amount of current income taxes due for 1996 and 1997. The
differences arise from ongoing examinations by the IRS.
Provision for income taxes. Provision for income taxes was $2.3 million in
the third quarter of 1999 compared to $2.0 million in the third quarter of 1998.
The effective tax rate was 35.0% for 1999 compared to 31.9% for 1998. The
Company's effective income tax rate reflects 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
$4.4 million in 1999 and $4.3 million in 1998.
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Nine Months Ended October 2, 1999 Compared to Nine Months Ended October 3, 1998
Net sales. Apparel net sales were $152.0 million for the first nine months
of 1999, a decrease of $2.2 million or 1.4% below net sales of $154.2 million
for the first nine months of 1998. The Apparel sales decline was due to a
reduction in non-seasonal normal margin products sold in 1999 to key accounts,
offset in part by an increase in closeout sales in 1999. Hosiery net sales were
$53.2 million in the first nine months of 1999, an increase of $5.0 million or
10.5% above net sales of $48.2 million for the first nine months of 1998 due to
customer pipe line stocking early in the year and strong sales at retail.
Gross margin. Gross margin as a percentage of net sales declined from 26.0%
in 1998 to 25.3% in 1999. The decrease in gross margin was due to the Apparel
segment, which had an increase in closeout sales, a reduction in non-seasonal
normal margin sales and higher manufacturing cost in the second and third
quarter due to slower than planned build up of production levels in the new
Mexican facility.
Selling, general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased to 15.6% in the
first nine months of 1999, from 14.7% in 1998. The percentage increase was due
to the Apparel segment's lower sales and higher costs for warehousing and
startup of the new Mexican production facility.
Income before interest and income taxes. Apparel EBIT was $14.7 million in
the first nine months of 1999 compared to $19.4 million in the first nine months
of 1998. The drop in Apparel EBIT was the result of a reduction in non-seasonal
normal margin sales combined with an increase in closeout sales and higher
operating cost as discussed above. Hosiery EBIT was $5.1 million in the first
nine months of 1999 compared with $3.5 million in the first nine months of 1998.
The increase in Hosiery EBIT was the result of improved margins due to lower
material cost and a more favorable volume mix of products.
Interest expense, net of interest income. Interest expense was $2.3 million
in the first nine months of 1999 versus $5.2 million in the first nine months of
1998. 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 and a $0.6 million
provision in the third quarter of 1999 for possible interest charges in
connection with resolving principally timing differences between the Company and
the IRS on the amount of current income taxes due for 1996 and 1997. The tax
differences arise from ongoing examinations by the IRS.
Provision for income taxes. Provision for income taxes was $6.2 million in
the first nine months of 1999 and 1998. The effective tax rate was 35.2% for
1999 compared to 35.0% for 1998. The Company's effective income tax rates
reflect foreign earnings generally 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 1999 and in 1998.
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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.
For the Apparel segment, working capital requirements vary throughout the
year. Working capital requirements generally increase during the first half of
the year as inventory, primarily blanket sleepers, 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 (used in) operating activities for the nine months
ended October 2, 1999 and October 3, 1998 was $17.5 million and $(16.5) million,
respectively. The change was primarily due to variations in accounts receivable
and inventories. Accounts receivable for both years changed due to the timing of
sales and collections and due to an increase in seasonal products shipped in the
third quarter of 1999, partially as a result of earlier deliveries of blanket
sleepers than a year ago. 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 in 1998 along with inefficiencies
in the Company's production planning system and inefficiencies still occurring
at the Company's new distribution center resulted in a higher than expected
inventory balance at October 3, 1998. Inventories decreased in 1999 due to
higher seasonal sales in the third quarter of 1999 compared to a year ago.
Capital expenditures were $4.5 million and $3.5 million for the first nine
months of 1999 and 1998, respectively. These expenditures consisted primarily of
building/leasehold improvements, normal replacement of manufacturing equipment,
purchases of office equipment and upgrades of information systems. Capital
expenditures for the remainder of 1999 are expected to be approximately $2.3
million.
Net cash (used in) provided by financing activities was $(9.9) million and
$21.1 million for the first nine months of 1999 and 1998, respectively. Based on
the cash provided by operating activities in 1999, the Company was able to make
repayments on the Company's revolving credit agreement and other long-term
borrowing arrangements. Cash provided by financing activities in 1998 consisted
principally of borrowings under the Company's revolving credit agreement to fund
the increased working capital needs. In addition, the Company used the net
proceeds received from its initial public offering in June 1998 to repay certain
long-term indebtedness of the Company and to redeem shares of the Company's
redeemable preferred stock held by certain of its officers.
The Company believes that cash generated from operations, together with
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.
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CHANGE IN ESTIMATE
In conjunction with the Company's accounting for a royalty contract, the
Company previously lowered the estimate of its future liability to be paid
related to certain products. This change in estimate was not material to the
nine months ended October 2, 1999. The Company is uncertain whether this change
in estimate will have a material impact on statements of income for future
periods; however, the Company does not believe this change in estimate will have
a material impact on the Company's financial position in future periods,
although there can be no assurance that this will be the case.
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.
RECENT ACCOUNTING STANDARDS
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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Adoption of FAS 133 is not anticipated to have a material impact on the
Company's financial statements.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continues to have no holdings of derivative financial or
commodity-based instruments at October 2, 1999. A review of the Company's other
financial instruments and risk exposures at that date revealed that the Company
had exposure to interest rate and foreign currency exchange rate risks. The
Company performed sensitivity analysis at December 31, 1998 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 1999 and
thus believes that the Company's year-end assessment is still appropriate at
October 2, 1999.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule.
(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 16, 1999 By: /s/ Edward Kittredge
-------------------------
Edward Kittredge
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
DATE: November 16, 1999 By: /s/ Richard L. Solar
-------------------------
Richard L. Solar
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
DATE: November 16, 1999 By: /s/ David E. Uren
-------------------------
David E. Uren
Vice President of Finance,
Secretary and Treasurer
(Principal Accounting Officer)
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