<PAGE> 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 July 3, 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)
---------------------------------------------------------------------------
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)
----------------------------------------------------------------------------
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 August 11, 1999, there were outstanding 8,337,481 shares of Common Stock
and 8,692,315 shares of Class B Common Stock.
<PAGE> 2
GERBER CHILDRENSWEAR, INC.
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of July 3, 1999 and
December 31, 1998.................................................................................1
Condensed Consolidated Statements of Income and Comprehensive
Income for the quarters ended July 3, 1999 and July 4, 1998 and for the
six months ended July 3, 1999 and July 4, 1998....................................................2
Condensed Consolidated Statements of Cash Flows for the six months
ended July 3, 1999 and July 4, 1998...............................................................3
Notes to Condensed Consolidated Financial Statements.............................................4-7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................................8-14
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
Exhibit - Financial Data Schedule.........................................................................16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE)
JULY 3, DECEMBER 31,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................................ $ 4,328 $ 1,780
Accounts receivable, net ................................. 35,987 36,621
Inventories .............................................. 94,641 87,020
Deferred income taxes .................................... 4,603 4,806
Other .................................................... 2,240 2,534
-------- --------
Total current assets ................................... 141,799 132,761
-------- --------
Property, plant and equipment ................................ 35,228 32,935
Less accumulated depreciation ............................ 9,920 7,711
-------- --------
25,308 25,224
-------- --------
Other Assets
Excess of cost over fair value of net assets acquired, net 19,061 20,607
Other .................................................... 7,964 7,146
-------- --------
Total other assets ................................. 27,025 27,753
-------- --------
$194,132 $185,738
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable ......................................... $ 17,629 $ 11,815
Accrued expenses ......................................... 16,244 12,387
Revolving credit loan payable ............................ 11,150 15,300
Current portion of long-term debt and capital leases ..... 6,544 4,847
Income tax payable ....................................... 5,018 5,666
-------- --------
Total current liabilities .......................... 56,585 50,015
-------- --------
Non-Current Liabilities
Long-term debt ........................................... 16,185 19,631
Other non-current liabilities ............................ 17,667 17,166
-------- --------
Total non-current liabilities ...................... 33,852 36,797
-------- --------
Shareholders' Equity ......................................... 103,695 98,926
-------- --------
$194,132 $185,738
======== ========
</TABLE>
Note: The amounts were derived from the audited financial statements at that
date.
See accompanying notes
1
<PAGE> 4
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
-------------------------- --------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales .................................. $ 58,768 $ 63,879 $ 125,053 $ 128,526
Cost of sales .............................. 44,574 46,508 92,415 93,720
--------- --------- --------- ---------
Gross margin ........................... 14,194 17,371 32,638 34,806
Selling, general and administrative expenses 10,254 9,618 20,642 19,232
--------- --------- --------- ---------
Income before interest and income taxes .... 3,940 7,753 11,996 15,574
Interest expense, net of interest income ... 543 1,784 1,198 4,046
--------- --------- --------- ---------
Income before income taxes ................. 3,397 5,969 10,798 11,528
Provision for income taxes ................. 1,182 2,086 3,814 4,225
--------- --------- --------- ---------
Income before extraordinary item ........... 2,215 3,883 6,984 7,303
Extraordinary item, net .................... -- (266) -- (266)
--------- --------- --------- ---------
Net income ................................. 2,215 3,617 6,984 7,037
Foreign currency translation ........... (827) (166) (2,246) (354)
--------- --------- --------- ---------
Comprehensive income ....................... $ 1,388 $ 3,451 $ 4,738 $ 6,683
========= ========= ========= =========
Per share amount:
Earnings per common share:
Income before extraordinary item, net .. $ .13 $ .28 $ .42 $ .55
Extraordinary item, net ................ -- (.02) -- (.02)
--------- --------- --------- ---------
Net income ................................. $ .13 $ .26 $ .42 $ .53
========= ========= ========= =========
Earnings per common share - diluted:
Income before extraordinary item, net .. $ .11 $ .23 $ .35 $ .43
Extraordinary item, net ................ -- (.02) -- (.02)
--------- --------- --------- ---------
Net income ................................. $ .11 $ .21 $ .35 $ .41
========= ========= ========= =========
Numerator
Income before extraordinary item, net ...... $ 2,215 $ 3,883 $ 6,984 $ 7,303
Preferred stock dividends .................. -- (322) -- (774)
--------- --------- --------- ---------
Income available to common shareholders .... 2,215 3,561 6,984 $ 6,529
Extraordinary item, net .................... -- (266) -- (266)
--------- --------- --------- ---------
Net income available to common shareholders $ 2,215 $ 3,295 $ 6,984 $ 6,263
========= ========= ========= =========
Denominator
Weighted average shares - basic ............ 16,621 12,490 16,599 11,741
Effect of dilutive securities:
Warrants ................................. 2,958 2,958 2,958 2,958
Nonvested stock/stock options ............ 349 605 373 602
--------- --------- --------- ---------
Adjusted weighted average shares - diluted . 19,928 16,053 19,930 15,301
========= ========= ========= =========
</TABLE>
See accompanying notes
2
<PAGE> 5
GERBER CHILDRENSWEAR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------
JULY 3, JULY 4,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................. $ 6,984 $ 7,037
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 3,030 3,033
Other ..................................................... (888) (2,555)
Changes in assets and liabilities
Accounts receivable, net .............................. 241 (5,419)
Inventories ........................................... (7,922) (24,131)
Accounts payable ...................................... 5,876 576
Other assets and liabilities, net ..................... 4,488 1,459
-------- --------
11,809 (20,000)
-------- --------
INVESTING ACTIVITIES
Purchases of property, plant and equipment .................. (3,048) (1,980)
Proceeds from sale of property, plant and equipment ......... 50 29
-------- --------
(2,998) (1,951)
-------- --------
FINANCING ACTIVITIES
Borrowings under revolving credit agreement ................. 37,500 48,540
Repayments under revolving credit agreement ................. (41,650) (22,590)
Principal payments on long-term borrowings and capital leases (1,714) (50,789)
Proceeds from initial public offering, net of expenses ...... -- 49,053
Other ....................................................... (34) (297)
-------- --------
(5,898) 23,917
-------- --------
Effect of exchange rate changes on cash ..................... (365) (4)
-------- --------
Net increase in cash and cash equivalents ....................... 2,548 1,962
Cash and cash equivalents at beginning of period ................ 1,780 536
-------- --------
Cash and cash equivalents at end of period ...................... $ 4,328 $ 2,498
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 6
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 has lowered the estimate of its future liability to be paid related
to certain products. This change in estimate is not material to the quarter
ended July 3, 1999.
4
<PAGE> 7
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. INVENTORIES
A summary of inventories, by major classification, at July 3, 1999 and
December 31, 1998 is as follows (in thousands):
July 3, 1999 December 31, 1998
------------ -----------------
Raw materials $13,694 $11,863
Work in process 15,191 13,515
Finished goods 65,756 61,642
------ ------
$94,641 $87,020
======= =======
6. INCOME TAXES
The Company's effective income tax rate of 34.8% and 35.3% for the
quarter and the six months ended July 3, 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 quarter and six
months ended July 4, 1998.
5
<PAGE> 8
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 mass merchandise outlets 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).
<TABLE>
<CAPTION>
BUSINESS SEGMENTS FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
--------------------------------------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
Apparel ................................. $ 40,349 $ 45,564 $ 89,787 $ 95,673
Hosiery ................................. 18,419 18,315 35,266 32,853
-------- -------- -------- --------
Total net sales ............................. $ 58,768 $ 63,879 $125,053 $128,526
======== ======== ======== ========
Income before interest and income taxes:
Apparel ................................. $ 1,704 $ 6,056 $ 8,711 $ 13,098
Hosiery ................................. 2,236 1,697 3,285 2,476
-------- -------- -------- --------
Total income before interest and income taxes $ 3,940 $ 7,753 $ 11,996 $ 15,574
======== ======== ======== ========
Depreciation and amortization:
Apparel ................................. $ 715 $ 719 $ 1,462 $ 1,402
Hosiery ................................. 776 799 1,568 1,631
-------- -------- -------- --------
Total depreciation and amortization ......... $ 1,491 $ 1,518 $ 3,030 $ 3,033
======== ======== ======== ========
Capital additions:
Apparel ................................. $ 1,750 $ 724 $ 2,569 $ 1,306
Hosiery ................................. 412 534 479 674
-------- -------- -------- --------
Total capital additions ..................... $ 2,162 $ 1,258 $ 3,048 $ 1,980
======== ======== ======== ========
</TABLE>
6
<PAGE> 9
GERBER CHILDRENSWEAR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Assets:
Apparel ................................. $144,203 $136,246
Hosiery ................................. 49,929 49,492
-------- --------
Total assets ................................ $194,132 $185,738
======== ========
Inventories (included in assets):
Apparel ................................. $ 87,828 $ 79,748
Hosiery ................................. 6,813 7,272
-------- --------
Total inventories (included in assets) ...... $ 94,641 $ 87,020
======== ========
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC AREAS FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
--------------------------------------------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
United States ........................... $ 53,359 $ 58,615 $113,364 $117,965
All other ............................... 5,409 5,264 11,689 10,561
-------- -------- -------- --------
Total net sales ............................. $ 58,768 $ 63,879 $125,053 $128,526
======== ======== ======== ========
Income before interest and income taxes:
United States ........................... $ 3,556 $ 6,899 $ 10,686 $ 14,011
All other ............................... 384 854 1,310 1,563
-------- -------- -------- --------
Total income before interest and income taxes $ 3,940 $ 7,753 $ 11,996 $ 15,574
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1999 1998
-------- --------
<S> <C> <C>
Assets:
United States ........................... $170,445 $161,175
All other ............................... 23,687 24,563
-------- --------
Total assets ................................ $194,132 $185,738
======== ========
</TABLE>
7
<PAGE> 10
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 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. The Company's Non-IT
equipment used to conduct business at its business locations consist primarily
of production equipment, fire prevention equipment, security system equipment,
office equipment (besides computers), and communications equipment. The Company
is presently investigating whether time sensitive embedded chips are used in its
Non-IT equipment and if significant, are contacting the equipment vendors (via
Y2K questionnaires) to determine the status of their Y2K readiness. The
Company's goal was to have all significant
8
<PAGE> 11
Non-IT systems compliant by the end of the first half of 1999. As of July 3,
1999, the Company has not received and compiled all of the results from the
Company's Y2K questionnaires. Based on the present responses (as received) from
the Y2K questionnaires, the Company is currently in the process of developing
contingency plans to minimize identified exposures. Contingency plans 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 Y2K
questionnaires. 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, 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 (with Y2K questionnaires) with significant third party
businesses. The Company is reviewing the responses as received and is assessing
the third parties' efforts in addressing Y2K issues and is in the process of
determining the Company's vulnerability if these third parties fail to remediate
their Y2K problems. 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
July 3, 1999 totaled approximately $330,000. 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.
9
<PAGE> 12
CASUALTY EVENT
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
damage insurance and is currently working with its insurance providers in
determining the estimated proceeds for the loss.
The Company fully recovered the production levels of its Dominican
Republic plants during the first quarter of 1999. The Company has maintained
business interruption insurance and is currently working with its insurance
providers in determining the estimated loss value of production/sales. The final
outcome/settlement of this claim can not be presently determined and thus no
amounts have been recorded in the statement of income for the quarter or for the
six months ended July 3, 1999. The final outcome may or may not have a material
impact on the statement of income in the year in which an outcome/settlement is
made; however, the Company does not believe that the final outcome/settlement
will have a material impact on the Company's financial position, although there
can be no assurance that this will be the case.
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.
SECOND QUARTER ENDED JULY 3, 1999 COMPARED TO SECOND QUARTER ENDED JULY 4, 1998
Net sales. Apparel net sales were $40.3 million for the second quarter
of 1999, a decrease of $5.2 million or 11.4% below net sales of $45.6 million
for the second quarter of 1998. The Apparel sales decline was due to a reduction
in normal margin products sold in 1999 to key accounts, offset in part by an
increase in closeout sales in 1999. Hosiery net sales were $18.4 million in the
second quarter of 1999, an increase of $0.1 million or 0.6% above net sales of
$18.3 million for the second quarter of 1998.
Gross margin. Gross margin as a percentage of net sales declined from
27.2% in 1998 to 24.2% in 1999. The decrease in gross margin was due to the
Apparel segment which had an increase in closeout sales, a reduction in normal
margin sales, and higher manufacturing cost 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 17.4% in the
second quarter of 1999, from 15.1% 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. The increased warehousing cost was due
to year-over-year increases in finished goods inventory in the Apparel segment.
10
<PAGE> 13
Income before interest and income taxes. Apparel income before interest
and income taxes ("EBIT") was $1.7 million in the second quarter of 1999
compared to $6.1 million in the second quarter of 1998. The drop in Apparel EBIT
was the result of a reduction in normal margin sales combined with an increase
in closeout sales and higher operating cost as discussed above. Hosiery EBIT was
$2.2 million in the second quarter of 1999 compared with $1.7 million in the
second quarter of 1998. The increase in Hosiery EBIT was the result of improved
margins due to lower material costs and a more favorable volume mix of products.
Interest expense, net of interest income. Interest expense was $.5
million in the second quarter of 1999 versus $1.8 million in the second quarter
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.
Provision for income taxes. Provision for income taxes was $1.2 million
in the second quarter of 1999 compared to $2.1 million in the second quarter of
1998. The effective tax rate was 34.8% for 1999 compared to 34.9% 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.
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 second quarter
was $2.2 million in 1999, a 38.8% drop from $3.6 million for the second quarter
in 1998.
SIX MONTHS ENDED JULY 3, 1999 COMPARED TO SIX MONTHS ENDED JULY 4, 1998
Net sales. Apparel net sales were $89.8 million for the first six
months of 1999, a decrease of $5.9 million or 6.2% below net sales of $95.7
million for the first six months of 1998. The Apparel sales decline was due to a
reduction in normal margin products sold in 1999 to key accounts, offset in part
by an increase in closeout sales in 1999. Hosiery net sales were $35.3 million
in the first six months of 1999, an increase of $2.4 million or 7.3% above net
sales of $32.9 million for the first six 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
27.1% in 1998 to 26.1% in 1999. The decrease in gross margin was due to the
Apparel segment which had an increase in closeout sales, a reduction in normal
margin sales, and higher manufacturing costs in the second quarter due to slower
than planned build up of production levels in the new Mexican facility.
11
<PAGE> 14
Selling, general & administrative expenses. Selling, general and
administrative expenses as a percentage of net sales increased to 16.5% in the
first six months of 1999, from 15.0% 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. The increased warehousing cost was due
to year-over-year increases in finished goods inventory in the Apparel segment.
Income before interest and income taxes. Apparel income before interest
and income taxes ("EBIT") was $8.7 million in the first six months of 1999
compared to $13.1 million in the first six months of 1998. The drop in Apparel
EBIT was the result of a reduction in normal margin sales combined with an
increase in closeout sales and higher operating costs as discussed above.
Hosiery EBIT was $3.3 million in the first six months of 1999 compared with $2.5
million in the first six 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 $1.2
million in the first six months of 1999 versus $4.0 million in the first six
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.
Provision for income taxes. Provision for income taxes was $3.8 million
in the first six months of 1999 compared to $4.2 million in the first six months
of 1998. The effective tax rate was 35.3% for 1999 compared to 36.6% for 1998.
The Company's effective income tax rate differed from the prior period effective
rate due to a greater 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 six
months was $7.0 million in 1999 and in 1998.
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.
12
<PAGE> 15
Net cash provided by (used in) operating activities for the six months
ended July 3, 1999 and July 4, 1998 was $11.8 million and $(20.0) million,
respectively. The variation was primarily due to changes in accounts receivable
and inventories. Accounts receivable for 1999 and 1998 changed due to the timing
of sales and collections and also in 1999 due to lower sales. Inventories
increased in the first six months of 1999 due to lower sales in the period along
with the seasonality of the Apparel segment's business. To support third and
fourth quarter sales volumes of certain seasonal products (such as blanket
sleepers), the Apparel segment builds inventory in the first six months of each
year. Inventory increased in the first six months of 1998 due to both the
seasonality of the Apparel segment's business and an increase in build of
year-round inventory in anticipation of customer orders.
Capital expenditures were $3.0 million and $2.0 million for the first
six 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 $5.0 million.
Net cash (used in) provided by financing activities was $(5.9) million
and $23.9 million for the first six months of 1999 and 1998, respectively. The
decrease in cash provided by financing activities for 1999 consisted of
repayments under the Company's revolving credit agreement and other long-term
borrowings, which was funded by its cash from operating activities. 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.
CHANGE IN ESTIMATE
In conjunction with the Company's accounting for a royalty contract,
the Company has lowered the estimate of its future liability to be paid related
to certain products. This change in estimate was not material to the quarter
ended July 3, 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 doesn't 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.
13
<PAGE> 16
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company continues to have no holdings of derivative financial or
commodity-based instruments at July 3, 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 six months of 1999 and
thus believes that the Company's year-end assessment is still appropriate at
July 3, 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
14
<PAGE> 17
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: August 17, 1999 By: /s/ Edward Kittredge
-------------------------
Edward Kittredge
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
DATE: August 17, 1999 By: /s/ Richard L. Solar
---------------------------------
Richard L. Solar
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
DATE: August 17, 1999 By: /s/ David E. Uren
------------------------------
David E. Uren
Vice President of Finance, Secretary
and Treasurer
(Principal Accounting Officer)
15
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUL-03-1999
<CASH> 4,328,000
<SECURITIES> 0
<RECEIVABLES> 37,395,000
<ALLOWANCES> 1,408,000
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<CURRENT-ASSETS> 141,799,000
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<CURRENT-LIABILITIES> 56,585,000
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<COMMON> 171,000
<OTHER-SE> 103,524,000
<TOTAL-LIABILITY-AND-EQUITY> 194,132,000
<SALES> 125,053,000
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