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The following is an excerpt from a 10-K SEC Filing, filed by GERBER CHILDRENSWEAR INC on 3/31/1999.
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GERBER CHILDRENSWEAR INC - 10-K - 19990331 - RESULTS_OF_OPERATIONS

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, income statement data expressed as a percentage of revenue. Any trends reflected by the following table may not be indicative of future results.

                                                                       Percent of Net Sales
                                                          ------------------------------------------
                                                                                       Period from
                                                                                       January 22,
                                                           Year Ended    Year Ended      1996 to
                                                          December 31,   December 31,   December 31,
                                                              1998          1997          1996
                                                          -----------------------------------------
Net sales ............................................        100.0%        100.0%        100.0%
Cost of sales ........................................         75.2          72.4          74.8
                                                              -----         -----         -----
Gross margin .........................................         24.8          27.6          25.2
Selling, general & administrative expenses ...........         13.8          13.7          12.9
Stock compensation ...................................          0.0           4.7           0.0
Other ................................................          0.0           0.1           0.4
                                                              -----         -----         -----
Income before interest and income taxes ..............         11.0           9.1          11.9
Interest expense, net ................................          2.1           2.9           3.4
                                                              -----         -----         -----
Income before income taxes and extraordinary item, net          8.9           6.2           8.5
Provision for income taxes ...........................          3.1           2.4           3.4
                                                              -----         -----         -----
Income before extraordinary item, net ................          5.8           3.8           5.1
Extraordinary item, net ..............................         (0.1)         (0.3)          0.0
                                                              -----         -----         -----
Net income ...........................................          5.7%          3.5%          5.1%
                                                              =====         =====         =====

BUSINESS SEGMENT DATA

For information regarding net sales, income (loss) before interest and income taxes and assets by industry segment, reference is made to the information presented in Note 18 "Business Segments and Geographic Areas" to the consolidated financial statements.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net sales. Apparel net sales were $212.4 million for 1998, an increase of $11.9 million or 5.9% over net sales of $200.5 million for 1997 due to increased unit volume sales. Hosiery net sales were $66.1 million in 1998 compared to $1.5 million and $69.6 million for the two week period ended December 31, 1997 and pro forma net sales for 1997, respectively.

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Gross margin. Gross margin as a percentage of net sales declined from 27.6% in 1997 to 24.8% in 1998. The decrease in gross margin was due in part to Hosiery sales, which typically have lower gross margins than Apparel sales, and in part to underabsorbed overhead, sales allowances and inventory markdowns for Apparel due to lost production associated with Hurricane Georges and inventory reduction efforts in late 1998.

Selling general & administrative expenses, excluding stock compensation. Selling, general and administrative expenses (excluding stock compensation) as a percentage of net sales increased to 13.8% in 1998, from 13.7% in 1997. The increase is primarily due to higher than expected distribution costs at the Apparel segment.

Stock Compensation. In 1997, stock compensation of $9.5 million was incurred in connection with the sale of stock below its fair market value to certain executives and managers of the Company.

Income before interest and income taxes. Apparel income before interest and income taxes as a percentage of Apparel sales was 12.0% in 1998 compared to 9.1% in 1997. Excluding stock compensation, Apparel income before interest and income taxes as a percentage of Apparel sales was 13.9% in 1997 due to higher gross margins. The Hosiery segment income before interest and taxes was 7.7% of Hosiery sales in 1998 compared to 3.7% for pro forma 1997. The improvement resulted from reduced SG&A expenses in 1998, including a $1.8 million year over year reduction in expense from forward foreign currency exchange contracts.

Interest expense, net. Interest expense was approximately $5.8 million in both 1998 and 1997. Interest expense reflects the higher debt levels maintained most of the year associated with the acquisition of the Hosiery operations and higher Apparel inventories, offset by the Offering proceeds used to repay debt in June 1998.

Provision for income taxes. Provision for income taxes was $8.6 million in 1998, compared to $4.8 million in 1997. The effective tax rate was 35.0% for 1998 compared to 38.2% for 1997. The Company's effective income tax rate differed from the prior period effective rate due to the impact of foreign earnings, certain of which are taxed at lower rates than in the United States, partially offset by goodwill amortization, most of which is not deductible for federal and state income tax purposes.

Extraordinary item, net. The Company repaid senior and junior subordinated notes in June 1998 with the proceeds from the Offering, resulting in the write-off of unamortized discount and loan costs of approximately $.3 million (net of an income tax benefit of $.2 million). In 1997, unamortized loan costs and a prepayment penalty of $.7 million (net of an income tax benefit of $.5 million) were expensed in connection with the replacement of the Company's then existing credit facility with its current Credit Agreement.

Net income. As a result of the above, net income was $15.8 million for 1998, a 124.8% increase over the $7.0 million in 1997.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO PERIOD FROM JANUARY 22, 1996 TO
DECEMBER 31, 1996

Net sales. Net sales were $202.0 million in 1997, an increase of $16.8 million, or 9.1%, from net sales of $185.2 million for the period January 22, 1996 to December 31, 1996. The revenue in 1997 included three weeks of additional results compared to 1996 and also included $1.5 million relating to Hosiery sales following the acquisition of the Hosiery segment on December 17, 1997. Excluding Hosiery results in 1997 and including the Predecessor Company's results for the period January 1, 1996 through January 21, 1996, the increase in net sales was $9.0 million, primarily resulting from increases in unit sales to existing customers in core categories. The growth in unit sales was primarily due to a greater emphasis on developing new product categories and the introduction of new displays offering promotional buying advantages for the consumer.

Gross margin. Gross margin as a percentage of net sales increased to 27.6% in 1997 from 25.2% in 1996. Gross margin is determined after accruing royalty expense under the Gerber license agreement of $3.5 million in 1997 versus $1.9 million in 1996. The principal reasons for the improved gross margin as a percentage of net sales were lower manufacturing costs resulting from improved operating efficiency, increased production in owned facilities and a greater percentage of products made offshore.

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Selling, general & administrative expenses, excluding stock compensation. Selling, general and administrative expenses (excluding stock compensation) as a percentage of net sales were 13.7% in 1997, versus 12.9% in 1996. The increase was principally due to expanding the Company's merchandising and selling efforts to support sales growth, plus the cost in 1997 to relocate central distribution activities into a lower cost facility in another state.

Stock compensation. In 1997, stock compensation of $9.5 million was incurred in connection with the sale of stock below its fair market value to certain executives and managers of the Company.

Income before interest and income taxes. Income before interest and income taxes was $18.3 million in 1997, compared to $22.0 million in 1996. Excluding stock compensation, 1997 income before interest and income taxes would have been $27.7 million, or 13.7% of net sales compared to 11.9% in 1996. The improvement resulted from the increased sales and improved gross margin percentage.

Interest expense, net. Interest expense, net, was $5.8 million for 1997 compared to $6.3 million for 1996. This decrease was primarily due to decreased average debt outstanding and a more favorable rate structure for 1997 as compared to 1996.

Provision for income taxes. Provision for income taxes was $4.8 million in 1997 compared to $6.2 million in 1996. The effective tax rate was 38.2% for 1997 as compared to 39.7% for 1996. The higher effective tax rate in 1996 was primarily due to permanent non-deductible items associated with the acquisition of the Company.

Extraordinary item, net. In connection with the Recent Acquisition, the senior credit facility was replaced. The deferred financing costs associated with this old facility were written off and charged to operations in 1997. This expense, along with the associated prepayment penalties, was approximately $0.7 million (net of a tax benefit of $0.5 million) in 1997.

Net income. As a result of the above, net income was $7.0 million for 1997 and $9.5 million for 1996. Excluding the impact of the stock compensation, net income for 1997 would have been $12.9 million, a 35.8% increase over 1996.

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