10-Q 1 g69101e10-q.txt GERBER CHILDRENSWEAR INC 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 March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-14189 --------------------------------------------------------------------------- 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) --------------------------------------------------------------------------- 7005 Pelham Road Greenville, SC 29615 (Address of principal executive offices) (864) 987-5200 (Registrant's telephone number, including area code) ---------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] YES [ ] NO As of May 9, 2001, there were outstanding 8,209,866 shares of Common Stock and 8,692,315 shares of Class B Common Stock. 2 GERBER CHILDRENSWEAR, INC. INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2001, April 1, 2000 and December 31, 2000 ...................................... 1 Condensed Consolidated Statements of Income and Comprehensive Income for the quarters ended March 31, 2001 and April 1, 2000............ 2 Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2001 and April 1, 2000.......................................... 3 Notes to Condensed Consolidated Financial Statements...................... 4-7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results Of Operations............................................................. 8-11 Item 3 - Quantitative and Qualitative Disclosures about Market Risk................ 11 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K.......................................... 11 Signatures......................................................................... 12

3 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS GERBER CHILDRENSWEAR, INC. CONDENSED CONSOLIDATED BALANCE SHEETS

Note: The amounts were derived from the audited financial statements at that date. See accompanying notes 1 4 GERBER CHILDRENSWEAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

See accompanying notes 2 5 GERBER CHILDRENSWEAR, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See accompanying notes 3 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 consolidated financial statements and notes thereto included in the Company's 2000 Annual Report on Form 10-K. 2. CONSOLIDATED FINANCIAL STATEMENTS The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The financial statements of all foreign subsidiaries were prepared in their respective local currencies and translated into United States dollars based on the current exchange rate at the end of the period for the balance sheet and a weighted average rate for the periods on the statements of income. All significant intercompany balances have been eliminated in consolidation. 3. SEASONALITY OF BUSINESS The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year, due to the seasonal nature of some of the Company's products and retailer initiated promotions. 4. USE OF ESTIMATES The preparation of financial statements in conformity with 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 GERBER CHILDRENSWEAR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. INVENTORIES Inventories consist of the following (in thousands): March 31, 2001 April 1, 2000 December 31, 2000 -------------- ------------- ----------------- Raw materials $ 8,521 $10,589 $ 9,514 Work in process 8,224 16,447 9,956 Finished goods 36,882 41,709 37,467 ------- ------- ------- $53,627 $68,745 $56,937 ======= ======= ======= 6. INCOME TAXES The Company's effective income tax rate was 33.6% and 34.7% for the quarters ended March 31, 2001 and April 1, 2000, respectively. The rates were lower than the statutory rates in 2001 and 2000 due to the impact of foreign earnings, certain of which are taxed at lower rates than in the United States, partially offset by goodwill amortization, most of which is not deductible for federal and state income tax purposes. 7. 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. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company adopted the standard effective January 1, 2001, and the adoption did not have a material impact on the condensed consolidated financial statements. 8. RECLASSIFICATIONS Certain amounts in 2000 have been reclassified to conform to current presentations. 5 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 sleepwear, playwear, underwear, bedding, bath, cloth diapers and other products to mass merchandise outlets in the U.S. under the Gerber brand and other 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, Converse and Dunlop names to major retailers in the United States and/or Europe. Net sales, income before interest and income taxes, depreciation and amortization, and capital additions are reported based on the operations of each business segment or geographic region. Assets are those used exclusively in the operations of each business segment or geographic region, or which are allocated when used jointly. The following table sets forth certain unaudited results of operations and other financial information of the Company by business segment and geographic region (in thousands):

6 9 GERBER CHILDRENSWEAR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 9. BUSINESS SEGMENTS AND GEOGRAPHIC AREAS (CONTINUED)

10. CURTAILMENT GAIN ON POSTRETIREMENT PLAN Effective January 1, 2001, the Company amended the postretirement plan by increasing eligibility requirements which resulted in a gain on curtailment of postretirement benefit costs of approximately $1.8 million. 7 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, regional and foreign economic conditions (including foreign exchange rates), the overall level of consumer spending, the performance of the Company's products within the prevailing retail environment, customer acceptance of both new designs and newly-introduced product lines, competition and financial difficulties encountered by customers. All statements other than statements of historical facts included in this quarterly report, including, without limitation, the statements under Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statement are reasonable, it can give no assurance that such expectations will prove to have been correct and actual results, performance or events could differ materially from those expressed in such statements. RESULTS OF OPERATIONS BUSINESS SEGMENT DATA For information regarding net sales, income before interest and income taxes and assets by industry segment, reference is made to the information presented in Note 9 "Business Segments and Geographic Areas" to the condensed consolidated financial statements. FIRST QUARTER ENDED MARCH 31, 2001 COMPARED TO FIRST QUARTER ENDED APRIL 1, 2000 Net sales. Apparel net sales were $38.4 million for the first quarter of 2001, a decrease of $5.8 million or 13.1% below net sales of $44.2 million for the first quarter of 2000. The Apparel sales decline was due to unit declines in both basic products and fashion/seasonal products. The Company placed less emphasis on developing fashion/seasonal products for 2001 with sales of $1.5 million versus $4.3 million in 2000. Sales of Apparel basic products were 7.0% below last year's sales, reflecting increased promotional activity by competition as well as retailers seeking to lower inventory levels to reflect a general softening of sales in the marketplace. Hosiery net sales were $15.9 million in the first quarter of 2001, a decrease of $.7 million or 4.3% below net sales of $16.6 million for the first quarter of 2000, due to a drop in the average exchange rate between the Irish Punt and the U.S. Dollar in the translation of the Irish operations. Gross margin. Gross margin as a percentage of net sales decreased from 26.6% in 2000 to 26.2% in 2001. The decrease in gross margin in 2001 was due to lower margins on Hosiery as a result of domestic cost increases and promotional pricing in European markets, offset in part by Apparel cost decreases due to more efficient operations and reduced domestic manufacturing. Selling, general & administrative expenses. Selling, general and administrative expenses ("SG&A") decreased in absolute dollars but increased as a percentage of net sales to 17.0% in the 8 11 first quarter of 2001, from 16.5% in 2000. The percentage increase was due to the 8.0% reduction in expenses in absolute dollars falling short of the 13.1% sales decline. Other. Represents a gain on curtailment of postretirement benefit costs associated with the Company's decision to change eligibility requirements of the postretirement benefit plan. These changes resulted in a gain on curtailment of postretirement benefit costs of approximately $1.8 million in the first quarter of 2001. Income before interest and income taxes. Apparel income before interest and income taxes ("EBIT") was $6.1 million in the first quarter of 2001 compared to $4.0 million in the first quarter of 2000. The increase in Apparel EBIT in 2001 was the result of improved gross margin percentage and the $1.8 million gain reported in Other. Hosiery EBIT was $.7 million in the first quarter of 2001 compared with $2.1 million in the first quarter of 2000. The decrease in Hosiery EBIT was the result of lower gross margins due to domestic cost increases and promotional pricing in European markets. Interest expense, net of interest income. Interest expense, net was ($0.3) million in the first quarter of 2001 compared to $.1 million in the first quarter of 2000. The decrease in interest expense, net is due to reduced debt and higher cash balances maintained in 2001, partially arising from the Company's lower overall inventory levels. Provision for income taxes. Provision for income taxes was $2.4 million in the first quarter of 2001 compared to $2.1 million in the first quarter of 2000. The effective tax rate was 33.6% for 2001 compared to 34.7% for 2000. The Company's effective income tax rate reflects the impact of foreign earnings, certain of which are taxed at lower rates than in the United States, partially offset by goodwill amortization, most of which is not deductible for federal and state income tax purposes. Net income. As a result of the above, net income for the first quarter was $4.7 million in 2001 and $3.9 million in 2000. LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash needs are for working capital, capital expenditures and debt service. The Company has financed its cash needs primarily through internally generated cash flow, in addition to funds borrowed, if necessary, under the Company's credit agreement. For the Apparel segment, working capital requirements vary throughout the year. Working capital requirements have historically increased during the first half of the year as inventory builds to support peak shipping periods. The Hosiery segment is less seasonal and, while working capital requirements tend to increase slightly during the second half of the year, the variation is small. Net cash provided by operating activities for the quarter ended March 31, 2001 and April 1, 2000 was $9.5 million and $10.4 million, respectively. The decrease in cash provided by operating activities in the first quarter of 2001 compared to 2000 was primarily due to changes in the Company's working capital accounts. Historically, the Apparel segment builds inventory in the first six months of the year to support third and fourth quarter sales volumes of certain fashion/seasonal products. In 2001, the Company placed less emphasis on developing 9 12 fashion/seasonal products and continued to reduce excess inventories through improvements in production planning and procurement practices. In addition, Apparel sales were soft in the first quarter of 2001 due to increased promotional activity by competitors as well as retailers seeking to lower overall inventory levels due to the general softening of sales in the marketplace. These sales reductions primarily resulted in the lower accounts receivable balance at the end of the first quarter as compared to the prior year. Accounts payable decreased in 2001 due to less purchases in the first quarter related to fashion/seasonal products and due to the timing of purchases and payments. Capital expenditures were $1.7 million and $1.3 million for the first quarter of 2001 and 2000, respectively. These expenditures consisted primarily of building/leasehold improvements, manufacturing equipment, purchases of office equipment and upgrades of information systems. Net cash used in financing activities was $3.9 million and $1.8 million for the first quarter of 2001 and 2000, respectively. Based on the cash provided by operating activities in the first quarter of 2001 and 2000, the Company made repayments on the Company's credit agreement and/or other long-term borrowing arrangements. In addition, in 2001 the Company made an excess cash flow payment as required under the credit agreement for approximately $2.1 million. In May 2001, the Company lowered the revolving committed amount under the Credit Agreement from $60.0 million to $20.0 million due to the increased amount of cash on hand. The Company believes that cash on hand, combined with cash generated from operations and amounts available under its credit facilities, will be adequate to meet its working capital, capital expenditures and debt service requirements for the next twelve months. LICENSE AGREEMENT The Company renewed its Baby Looney Tunes license with Warner Bros. in April 2001. The renewed license agreement contains essentially the same terms and conditions as the agreement that expired on December 31, 2000. The term of the new agreement is from January 1, 2001 to December 31, 2003. 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. 10 13 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. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value will be either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company adopted the standard effective January 1, 2001, and the adoption did not have a material impact on the consolidated financial statements. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not utilize derivative financial or commodity based instruments for trading or for speculative purposes but does utilize them in the regular course of business. A review of the Company's financial instruments and risk exposures at March 31, 2001 revealed that the Company had exposure to interest rate and foreign currency exchange rate risks. The Company performed sensitivity analysis at December 31, 2000 to assess the potential effect of a change in the interest rate and a change to the foreign currency exchange rates and concluded that near-term changes in either should not materially affect the Company's financial position, results of operations or cash flows. The Company has experienced no significant changes in these financial instruments or risk exposures during the first quarter of 2001 and thus believes that the Company's year-end assessment is still appropriate at March 31, 2001. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.29 License Agreement by and between Warner Bros., a division of Time Warner Entertainment Company, L.P., and GCI dated as of April 25, 2001. (b) Reports on Form 8-K - None 11 14 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: May 11, 2001 By: /s/ Edward Kittredge ------------------------- Edward Kittredge Chairman, Chief Executive Officer and President (Principal Executive Officer) DATE: May 11, 2001 By: /s/ Richard L. Solar --------------------------------- Richard L. Solar Senior Vice President and Chief Financial Officer (Principal Financial Officer) DATE: May 11, 2001 By: /s/ David E. Uren ------------------------------ David E. Uren Vice President of Finance, Secretary and Treasurer (Principal Accounting Officer) 12

GERBER CHILDRENSWEAR INC 10-Q