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
29, 2008 OR
|
|
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM
_____ TO
______
|
Commission
file number:
001-31829
CARTER’S,
INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
13-3912933
|
(state
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
incorporation
or organization)
|
|
The
Proscenium
1170
Peachtree Street NE, Suite 900
Atlanta,
Georgia 30309
(Address
of principal executive offices, including zip code)
(404)
745-2700
(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. Yes [X] No
[ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer, large accelerated
filer, and smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one)
Large
Accelerated Filer (X) Accelerated
Filer ( ) Non-Accelerated
Filer ( ) Smaller Reporting Company
( )
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes (
) No (X)
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Common
Stock
|
|
Outstanding
Shares at April 25, 2008
|
Common
stock, par value $0.01 per share
|
|
56,591,085
|
CARTER’S,
INC.
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
16
|
|
|
|
26
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
28
|
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
|
|
32
|
|
|
|
33
|
|
34
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
(dollars
in thousands, except for share data)
(unaudited)
|
|
March
29,
|
|
|
December
29,
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
65,546 |
|
|
$ |
49,012 |
|
Accounts receivable,
net
|
|
|
128,501 |
|
|
|
119,707 |
|
Finished goods inventories,
net
|
|
|
174,232 |
|
|
|
225,494 |
|
Prepaid expenses and other
current
assets
|
|
|
10,285 |
|
|
|
9,093 |
|
Assets held for
sale
|
|
|
6,109 |
|
|
|
6,109 |
|
Deferred income
taxes
|
|
|
25,293 |
|
|
|
24,234 |
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
|
409,966 |
|
|
|
433,649 |
|
Property,
plant, and equipment,
net
|
|
|
71,557 |
|
|
|
75,053 |
|
Tradenames
|
|
|
306,733 |
|
|
|
308,233 |
|
Cost
in excess of fair value of net assets
acquired
|
|
|
136,570 |
|
|
|
136,570 |
|
Deferred
debt issuance costs, net
|
|
|
4,463 |
|
|
|
4,743 |
|
Licensing
agreements,
net
|
|
|
8,001 |
|
|
|
8,915 |
|
Leasehold
interests,
net
|
|
|
568 |
|
|
|
684 |
|
Other
assets
|
|
|
7,193 |
|
|
|
6,821 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
945,051 |
|
|
$ |
974,668 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current maturities of long-term
debt
|
|
$ |
4,379 |
|
|
$ |
3,503 |
|
Accounts
payable
|
|
|
30,097 |
|
|
|
56,589 |
|
Other current
liabilities
|
|
|
45,425 |
|
|
|
46,666 |
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
79,901 |
|
|
|
106,758 |
|
Long-term
debt
|
|
|
337,150 |
|
|
|
338,026 |
|
Deferred
income
taxes
|
|
|
114,177 |
|
|
|
113,706 |
|
Other
long-term
liabilities
|
|
|
30,998 |
|
|
|
34,049 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
562,226 |
|
|
|
592,539 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred stock; par value $.01
per share; 100,000 shares authorized; none issued or outstanding at March
29, 2008 and December 29, 2007
|
|
|
-- |
|
|
|
-- |
|
Common stock, voting; par value
$.01 per share; 150,000,000 shares authorized; 57,008,933 and 57,663,315
shares issued and outstanding at March 29, 2008 and December 29, 2007,
respectively
|
|
|
570 |
|
|
|
576 |
|
Additional paid-in
capital
|
|
|
223,778 |
|
|
|
232,356 |
|
Accumulated other comprehensive
income
|
|
|
392 |
|
|
|
2,671 |
|
Retained
earnings
|
|
|
158,085 |
|
|
|
146,526 |
|
|
|
|
|
|
|
|
|
|
Total stockholders’
equity
|
|
|
382,825 |
|
|
|
382,129 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’
equity
|
|
$ |
945,051 |
|
|
$ |
974,668 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars
in thousands, except per share data)
(unaudited)
|
|
For
the
three-month
periods ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
329,972 |
|
|
$ |
320,128 |
|
Cost
of goods
sold
|
|
|
225,057 |
|
|
|
213,748 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
104,915 |
|
|
|
106,380 |
|
Selling,
general, and administrative expenses
|
|
|
92,276 |
|
|
|
88,246 |
|
Closure
costs
|
|
|
-- |
|
|
|
4,507 |
|
Royalty
income
|
|
|
(7,914 |
) |
|
|
(7,545 |
) |
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
20,553 |
|
|
|
21,172 |
|
Interest
expense,
net
|
|
|
4,520 |
|
|
|
5,728 |
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
16,033 |
|
|
|
15,444 |
|
Provision
for income
taxes
|
|
|
4,474 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,559 |
|
|
$ |
9,611 |
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.20 |
|
|
$ |
0.16 |
|
Diluted
net income per common share
|
|
$ |
0.19 |
|
|
$ |
0.16 |
|
Basic
weighted-average number of shares outstanding
|
|
|
57,215,027 |
|
|
|
58,447,494 |
|
Diluted
weighted-average number of shares outstanding
|
|
|
59,306,222 |
|
|
|
61,210,621 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars
in thousands)
(unaudited)
|
|
For
the
three-month
periods ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,559 |
|
|
$ |
9,611 |
|
Adjustments to reconcile net
income to net cash provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
7,007 |
|
|
|
8,661 |
|
Amortization of debt issuance
costs
|
|
|
280 |
|
|
|
292 |
|
Non-cash stock-based compensation
expense
|
|
|
1,586 |
|
|
|
1,617 |
|
Income tax benefit from exercised
stock
options
|
|
|
(40 |
) |
|
|
(360 |
) |
Loss on sale of property, plant,
and
equipment
|
|
|
-- |
|
|
|
194 |
|
Deferred income
taxes
|
|
|
669 |
|
|
|
(1,401 |
) |
Non-cash closure
costs
|
|
|
-- |
|
|
|
2,414 |
|
Effect of changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(8,794 |
) |
|
|
(6,249 |
) |
Inventories
|
|
|
51,262 |
|
|
|
34,014 |
|
Prepaid
expenses and other
assets
|
|
|
(1,564 |
) |
|
|
(4,917 |
) |
Accounts
payable and other
liabilities
|
|
|
(33,031 |
) |
|
|
(37,199 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by operating
activities
|
|
|
28,934 |
|
|
|
6,677 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(2,485 |
) |
|
|
(3,118 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing
activities
|
|
|
(2,485 |
) |
|
|
(3,118 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments on term
loan
|
|
|
-- |
|
|
|
(876 |
) |
Share repurchase (Note
7)
|
|
|
(10,020 |
) |
|
|
(30,000 |
) |
Income tax benefit from
exercised stock
options
|
|
|
40 |
|
|
|
360 |
|
Proceeds from exercise of stock
options
|
|
|
65 |
|
|
|
162 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in financing
activities
|
|
|
(9,915 |
) |
|
|
(30,354 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
16,534 |
|
|
|
(26,795 |
) |
Cash
and cash equivalents, beginning of
period
|
|
|
49,012 |
|
|
|
68,545 |
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of
period
|
|
$ |
65,546 |
|
|
$ |
41,750 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars
in thousands, except for share data)
(unaudited)
|
|
Common
|
|
|
Additional
paid-in
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Retained
|
|
|
Total
stockholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
576 |
|
|
$ |
232,356 |
|
|
$ |
2,671 |
|
|
$ |
146,526 |
|
|
$ |
382,129 |
|
Income
tax benefit from exercised stock options
|
|
|
-- |
|
|
|
40 |
|
|
|
-- |
|
|
|
-- |
|
|
|
40 |
|
Exercise
of stock options (11,070 shares)
|
|
|
-- |
|
|
|
65 |
|
|
|
-- |
|
|
|
-- |
|
|
|
65 |
|
Stock-based
compensation expense
|
|
|
-- |
|
|
|
1,331 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,331 |
|
Share
repurchase (674,358 shares) (Note 7)
|
|
|
(6 |
) |
|
|
(10,014 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(10,020 |
) |
Comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
11,559 |
|
|
|
11,559 |
|
Unrealized
loss on interest rate swap, net of tax benefit of $847
|
|
|
-- |
|
|
|
-- |
|
|
|
(1,478 |
) |
|
|
-- |
|
|
|
(1,478 |
) |
Unrealized
loss on interest rate collar, net of tax benefit of $459
|
|
|
-- |
|
|
|
-- |
|
|
|
(801 |
) |
|
|
-- |
|
|
|
(801 |
) |
Total
comprehensive income (loss)
|
|
|
-- |
|
|
|
-- |
|
|
|
(2,279 |
) |
|
|
11,559 |
|
|
|
9,280 |
|
Balance
at March 29,
2008
|
|
$ |
570 |
|
|
$ |
223,778 |
|
|
$ |
392 |
|
|
$ |
158,085 |
|
|
$ |
382,825 |
|
See
accompanying notes to the unaudited condensed consolidated financial
statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
1 – THE COMPANY:
Carter’s, Inc. and its wholly owned
subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design,
source, and market branded childrenswear under the Carter’s, Child of Mine, Just One Year, OshKosh, and related
brands. Our products are sourced through contractual arrangements
with manufacturers worldwide for wholesale distribution to major domestic
retailers, including the mass channel, and to our Carter’s and OshKosh retail
stores that market our brand name merchandise and other licensed products
manufactured by other companies.
NOTE
2 – BASIS OF PREPARATION:
The accompanying unaudited condensed
consolidated financial statements comprise the consolidated financial statements
of Carter’s, Inc. and its subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
In our opinion, the Company’s
accompanying unaudited condensed consolidated financial statements contain all
adjustments necessary for a fair statement of our financial position as of March
29, 2008, the results of our operations for the three-month periods ended March
29, 2008 and March 31, 2007, cash flows for the three-month periods ended March
29, 2008 and March 31, 2007 and changes in stockholders’ equity for the
three-month period ended March 29, 2008. Operating results for the
three-month period ended March 29, 2008 are not necessarily indicative of the
results that may be expected for the fiscal year ending January 3,
2009. Our accompanying condensed consolidated balance sheet as of
December 29, 2007 is from our audited consolidated financial statements included
in our most recently filed Annual Report on Form 10-K, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America (“GAAP”).
Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission and the instructions to Form
10-Q. The accounting policies we follow are set forth in our most
recently filed Annual Report on Form 10-K in the notes to our audited
consolidated financial statements for the fiscal year ended December 29,
2007.
Our fiscal year ends on the Saturday,
in December or January, nearest the last day of December. The
accompanying unaudited condensed consolidated financial statements for the first
quarter of fiscal 2008 reflect our financial position as of March 29,
2008. The first quarter of fiscal 2007 ended on March 31,
2007.
Certain prior year amounts have been
reclassified for comparative purposes.
NOTE
3 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS:
Cost in excess of fair value of net
assets acquired represents the excess of the cost of the acquisition of
Carter’s, Inc. by Berkshire Partners LLC which was consummated on August 15,
2001 (the “2001 acquisition”) over the fair value of the net assets
acquired. Our cost in excess of fair value of net assets acquired is
not deductible for tax purposes.
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
NOTE
3 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS: (Continued)
In connection with the
acquisition of OshKosh B’Gosh, Inc. on July 14, 2005, (the “Acquisition”) the
Company recorded cost in excess of fair value of net assets acquired, tradename,
licensing, and leasehold interest assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" ("SFAS 141"). During the second quarter of fiscal
2007, as a result of negative trends in sales and profitability of the Company’s
OshKosh B’Gosh wholesale and retail segments and re-forecasted projections for
such segments for the balance of fiscal 2007, the Company conducted an interim
impairment assessment on the value of the intangible assets that the Company
recorded in connection with the Acquisition. This assessment was
performed in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets." Based on this assessment, impairment charges of
approximately $36.0 million and $106.9 million were recorded to reflect the
impairment of the cost in excess of fair value of net assets acquired for the
OshKosh wholesale and retail segments, respectively. In addition, an
impairment charge of $12.0 million was recorded to reflect the impairment of the
value ascribed to the OshKosh tradename
asset. For cost in excess of fair value of net assets acquired, the
fair value was determined using the expected present value of future cash
flows. For the OshKosh tradename, the fair
value was determined using a discounted cash flow analysis which examined the
hypothetical cost savings that accrue as a result of our ownership of the
tradename.
During the three-month period ended
March 29, 2008, approximately $0.9 million of contingencies recorded in
connection with the Acquisition were reversed due to settlement with taxing
authorities. This reversal resulted in a corresponding reduction to
the OshKosh tradename
asset of $1.5 million and a reduction in the related deferred tax liability of
$0.6 million in accordance with Emerging Issues Task Force (“EITF”) No. 93-7,
“Uncertainties Related to Income Taxes in a Purchase Business Combination”
(“EITF 93-7”).
The Company’s intangible assets were as
follows:
|
|
|
|
|
|
|
|
(dollars
in thousands)
|
Weighted-average
useful life
|
|
|
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s
cost in excess of fair value of net assets acquired
|
Indefinite
|
|
$ |
136,570 |
|
|
$ |
-- |
|
|
$ |
136,570 |
|
|
$ |
136,570 |
|
|
$ |
-- |
|
|
$ |
136,570 |
|
Carter’s
tradename
|
Indefinite
|
|
$ |
220,233 |
|
|
$ |
-- |
|
|
$ |
220,233 |
|
|
$ |
220,233 |
|
|
$ |
-- |
|
|
$ |
220,233 |
|
OshKosh
tradename
|
Indefinite
|
|
$ |
86,500 |
|
|
$ |
-- |
|
|
$ |
86,500 |
|
|
$ |
88,000 |
|
|
$ |
-- |
|
|
$ |
88,000 |
|
OshKosh
licensing agreements
|
4.7
years
|
|
$ |
19,100 |
|
|
$ |
11,099 |
|
|
$ |
8,001 |
|
|
$ |
19,100 |
|
|
$ |
10,185 |
|
|
$ |
8,915 |
|
Leasehold
interests
|
4.1
years
|
|
$ |
1,833 |
|
|
$ |
1,265 |
|
|
$ |
568 |
|
|
$ |
1,833 |
|
|
$ |
1,149 |
|
|
$ |
684 |
|
Amortization expense for intangible
assets was approximately $1.0 million and $1.2 million for the three-month
periods ended March 29, 2008 and March 31, 2007, respectively. Annual
amortization expense for the OshKosh licensing agreements and leasehold
interests is expected to be as follows:
(dollars
in thousands)
|
|
|
|
|
|
Estimated
amortization
|
|
|
|
|
|
2008
(period from March 30 through January 3, 2009)
|
|
$ |
3,075 |
|
2009
|
|
|
3,717 |
|
2010
|
|
|
1,777 |
|
|
|
|
|
|
Total
|
|
$ |
8,569 |
|
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
NOTE
4 - INCOME TAXES:
The Company and its subsidiaries file
income tax returns in the United States and in various states and local
jurisdictions. The Internal Revenue Service has recently completed an
income tax examination for fiscal 2004 and 2005, and has recently notified the
Company that fiscal 2006 will be examined. In most cases, the Company
is no longer subject to state and local tax authority examinations for years
prior to fiscal 2004.
During the first quarter of fiscal
2008, we recognized approximately $1.6 million in tax benefits due to the
completion of an Internal Revenue Service audit for fiscal 2004 and
2005. In addition, we recognized approximately $0.9 million of
pre-Acquisition uncertanties previously reserved for upon completion of these
audits. These pre-Acquisition uncertainties have been reflected as a
reduction in the OshKosh
tradename asset in accordance with EITF 93-7, “Uncertainties Related to
Income Taxes in a Purchase Business Combination.”
As of March 29, 2008, the Company had
gross unrecognized tax benefits of approximately $6.7 million. The
Company’s reserve for unrecognized tax benefits as of March 29, 2008 includes
approximately $4.6 million of reserves which, if ultimately recognized, will
impact the Company’s effective tax rate in the period settled. The
reserve for unrecognized tax benefits also includes $1.9 million of reserves
which, if ultimately recognized, would be reflected as an adjustment to the
Carter’s cost in excess of fair value of net assets acquired or the OshKosh tradename asset, and
$0.2 million for tax positions for which the ultimate deductibility is highly
certain, but for which there is uncertainty about the timing of such
deductions. Because of deferred tax accounting, changes in the timing
of these deductions would not impact the annual effective tax rate, but would
accelerate the payment of cash to the taxing authorities.
Included in the reserves for
unrecognized tax benefits are approximately $0.3 million of reserves for which
the statute of limitations is expected to expire in the third quarter of fiscal
2008. Such exposures relate primarily to state and local income tax
matters. If these tax benefits are ultimately recognized, such
recognition may impact our annual effective tax rate for fiscal 2008 and the tax
rate in the quarter in which the benefits are recognized. In
addition, the reserves for unrecognized tax benefits include approximately $0.6
million of pre-Acquisition reserves for which the statute of limitations is
expected to expire in the third quarter of fiscal 2008. Recognition
of these uncertainties would be reflected as an additional adjustment to the
OshKosh tradename asset
in accordance with EITF 93-7.
We recognize interest related to
unrecognized tax benefits as a component of interest expense and penalties
related to unrecognized tax benefits as a component of income tax
expense. The Company had approximately $1.0 million of interest
accrued as of March 29, 2008.
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(unaudited)
NOTE
5 – FAIR VALUE MEASUREMENTS:
Effective December 30, 2007 (the first
day of our 2008 fiscal year), the Company adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements. The fair value hierarchy for disclosure of fair value
measurements under SFAS 157 is as follows:
Level
1
|
- Quoted
prices in active markets for identical assets or
liabilities
|
|
|
Level
2
|
- Quoted
prices for similar assets and liabilities in active markets or inputs that
are observable
|
|
|
Level
3
|
- Inputs
that are unobservable (for example cash flow modeling inputs based on
assumptions)
|
The following table summarizes assets
and liabilities measured at fair value on a recurring basis at March 29, 2008,
as required by SFAS 157:
(dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Investments
|
|
$ |
-- |
|
|
$ |
-- |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
-- |
|
|
$ |
2.7 |
|
|
$ |
-- |
|
Interest
rate collar
|
|
$ |
-- |
|
|
$ |
1.8 |
|
|
$ |
-- |
|
Our senior credit facility requires us
to hedge at least 25% of our variable rate debt under the term
loan. On September 22, 2005, we entered into an interest rate swap
agreement to receive floating interest and pay fixed interest. This
interest rate swap agreement is designated as a cash flow hedge of the variable
interest payments on a portion of our variable rate term loan
debt. The interest rate swap agreement matures on July 30,
2010. As of March 29, 2008, approximately $146.7 million of our
outstanding term loan debt was hedged under this agreement.
On May 25, 2006, we entered into an
interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling
of 5.5%. The collar covers $100 million of our variable rate term
loan debt and is designated as a cash flow hedge of the variable interest
payments on such debt. The collar matures on January 31,
2009.
Both our interest rate swap agreement
and collar are traded in the over the counter market. Fair values are
based on quoted market prices for similar liabilities or determined using inputs
that use as their basis readily observable market data that are actively quoted
and can be validated through external sources, including third-party pricing
services, brokers, and market transactions.
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
6 – EMPLOYEE BENEFIT PLANS:
Under a defined benefit plan frozen in
1991, we offer a comprehensive post-retirement medical plan to current and
certain future retirees and their spouses until they become eligible for
Medicare or a Medicare supplement plan. We also offer life insurance
to current and certain future retirees. Employee contributions are
required as a condition of participation for both medical benefits and life
insurance and our liabilities are net of these expected employee
contributions. Additionally, we have an obligation under a defined benefit
plan covering certain former officers and their spouses. See Note 7
“Employee Benefit Plans” to our audited consolidated financial statements in our
most recently filed Annual Report on Form 10-K for further
information.
The components of
post-retirement benefit expense charged to operations are as
follows:
|
|
For
the
three-month
periods ended
|
|
(dollars
in thousands)
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Service
cost – benefits attributed to service during the period
|
|
$ |
27 |
|
|
$ |
26 |
|
Interest
cost on accumulated post-retirement benefit obligation
|
|
|
131 |
|
|
|
130 |
|
Total
net periodic post-retirement benefit cost
|
|
$ |
158 |
|
|
$ |
156 |
|
The components of pension expense
charged to operations are as follows:
|
|
For
the
three-month
periods ended
|
|
(dollars
in thousands)
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Interest
cost on accumulated pension benefit obligation
|
|
$ |
13 |
|
|
$ |
15 |
|
The Company acquired two
defined-benefit pension plans in connection with the Acquisition. The
benefits for certain current and former employees of OshKosh under these pension
plans were frozen as of December 31, 2005.
During
the second quarter of fiscal 2007, the Company liquidated the OshKosh B’Gosh
Collective Bargaining Pension Plan (the “Plan”), distributed each participant’s
balance, and the remaining net assets of $2.2 million were contributed to the
Company’s defined contribution plan to offset future employer
contributions. In connection with the liquidation of the Plan, the
Company recorded a pre-tax gain of approximately $0.3 million related to the
Plan settlement during the second quarter of fiscal 2007.
The Company’s net periodic pension
benefit included in the statement of operations was comprised of:
|
|
For
the
three-month
periods ended
|
|
(dollars
in thousands)
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Interest
cost on accumulated pension benefit obligation
|
|
$ |
562 |
|
|
$ |
551 |
|
Expected
return on assets
|
|
|
(943 |
) |
|
|
(912 |
) |
Amortization
of actuarial gain
|
|
|
(19 |
) |
|
|
(35 |
) |
Total
net periodic pension benefit
|
|
$ |
(400 |
) |
|
$ |
(396 |
) |
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
7 – COMMON STOCK:
On February 16, 2007, the Company’s
Board of Directors approved a stock repurchase program, pursuant to which the
Company is authorized to purchase up to $100 million of its outstanding common
shares. Such repurchases may occur from time to time in the open
market, in negotiated transactions, or otherwise. This program has no
time limit. The timing and amount of any repurchases will be
determined by the Company’s management, based on its evaluation of market
conditions, share price, and other factors.
During the three-month period ended
March 29, 2008, the Company repurchased and retired approximately $10.0 million,
or 674,358 shares, of its common stock at an average price of $14.86 per
share. Accordingly, we have reduced common stock by the par value of
such shares and have deducted the remaining excess repurchase price over par
value from additional paid-in capital.
Since inception of the program and
through the three-month period ended March 29, 2008, the Company repurchased and
retired approximately $67.5 million, or 3,147,577 shares, of its common stock at
an average price of $21.44 per share. Accordingly, we have reduced
common stock by the par value of such shares and have deducted the remaining
excess repurchase price over par value from additional paid-in
capital.
During the three-month period ended
March 31, 2007, the Company repurchased and retired approximately $30.0 million,
or 1,252,832 shares, of its common stock at an average price of $23.95 per
share. Accordingly, we have reduced common stock by the par value of
such shares and have deducted the remaining excess repurchase price over par
value from additional paid-in capital.
NOTE
8 – STOCK-BASED COMPENSATION:
We account for stock-based compensation
expense in accordance with SFAS No. 123 (revised 2004), “Share-Based
Payment.” The fair value of time-based or performance-based stock
option grants are estimated on the date of grant using the Black-Scholes option
pricing method with the following weighted-average assumptions used for grants
issued during the three-month period ended March 29, 2008:
|
|
For
the
three-month
period
ended
|
|
|
|
|
|
Volatility
|
|
|
35.42 |
% |
Risk-free
interest rate
|
|
|
3.24 |
% |
Expected
term (years)
|
|
|
6.0 |
|
Dividend
yield
|
|
|
-- |
|
The fair value of restricted stock is
determined based on the quoted closing price of our common stock on the date of
grant.
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
8 – STOCK-BASED COMPENSATION: (Continued)
The following table summarizes our
stock option and restricted stock activity during the three-month period ended
March 29, 2008:
|
|
Time-
based
|
|
|
Performance-based
stock
|
|
|
Retained
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 29, 2007
|
|
|
4,315,689 |
|
|
|
620,000 |
|
|
|
661,870 |
|
|
|
372,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
15,250 |
|
|
|
-- |
|
|
|
-- |
|
|
|
14,106 |
|
Exercised
|
|
|
(11,070 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Vested
restricted stock
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(28,500 |
) |
Forfeited
|
|
|
(19,600 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
(5,200 |
) |
Expired
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
March 29, 2008
|
|
|
4,300,269 |
|
|
|
620,000 |
|
|
|
661,870 |
|
|
|
352,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 29, 2008
|
|
|
3,511,733 |
|
|
|
-- |
|
|
|
661,870 |
|
|
|
-- |
|
During the three-month period ended
March 29, 2008, we granted 15,250 time-based stock options with a Black-Scholes
fair value of $8.25 and an exercise price of $20.60. In connection
with this grant, we recognized approximately $2,867 in stock-based compensation
expense during the three-month period ended March 29, 2008.
During the three-month period ended
March 29, 2008, we granted 7,625 shares of restricted stock to employees with a
fair value on the date of grant of $20.60. In connection with this
grant, we recognized approximately $3,580 in stock-based compensation expense
during the three-month period ended March 29, 2008.
During the three-month period ended
March 29, 2008, we granted 6,481 shares of restricted stock to a director with a
fair value of the date of grant of $15.43. In connection with this
grant, we recognized approximately $2,648 in stock-based compensation expense
during the three-month period ended March 29, 2008.
Unrecognized stock-based compensation
expense related to outstanding stock options and restricted stock awards is
expected to be recorded as follows:
(dollars
in thousands)
|
|
Time-
based
stock
|
|
|
Performance-based
stock
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
(period from March 30 through January 3, 2009)
|
|
$ |
2,131 |
|
|
$ |
251 |
|
|
$ |
1,735 |
|
|
$ |
4,117 |
|
2009
|
|
|
1,788 |
|
|
|
70 |
|
|
|
1,936 |
|
|
|
3,794 |
|
2010
|
|
|
1,090 |
|
|
|
-- |
|
|
|
1,287 |
|
|
|
2,377 |
|
2011
|
|
|
630 |
|
|
|
-- |
|
|
|
753 |
|
|
|
1,383 |
|
2012
|
|
|
4 |
|
|
|
-- |
|
|
|
5 |
|
|
|
9 |
|
Total
|
|
$ |
5,643 |
|
|
$ |
321 |
|
|
$ |
5,716 |
|
|
$ |
11,680 |
|
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
9 – SEGMENT INFORMATION:
We report segment information in
accordance with the provisions of SFAS No. 131, “Disclosure about Segments of an
Enterprise and Related Information,” which requires segment information to be
disclosed based upon a “management approach.” The management approach
refers to the internal reporting that is used by management for making operating
decisions and assessing the performance of our reportable segments.
The table below presents certain
segment information for the periods indicated:
(dollars
in thousands)
|
|
For
the
three-month
period ended
|
|
|
%
of
|
|
|
For
the
three-month
period ended
|
|
|
%
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale-Carter’s
|
|
$ |
117,832 |
|
|
|
35.7 |
% |
|
$ |
112,653 |
|
|
|
35.2 |
% |
Wholesale-OshKosh
|
|
|
18,449 |
|
|
|
5.6 |
% |
|
|
24,993 |
|
|
|
7.8 |
% |
Retail-Carter’s
|
|
|
86,402 |
|
|
|
26.2 |
% |
|
|
74,826 |
|
|
|
23.4 |
% |
Retail-OshKosh
|
|
|
44,365 |
|
|
|
13.4 |
% |
|
|
45,848 |
|
|
|
14.3 |
% |
Mass
Channel-Carter’s
|
|
|
62,924 |
|
|
|
19.1 |
% |
|
|
61,808 |
|
|
|
19.3 |
% |
Total
net sales
|
|
$ |
329,972 |
|
|
|
100.0 |
% |
|
$ |
320,128 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss):
|
|
|
|
|
|
%
of
segment
|
|
|
|
|
|
|
%
of
segment
|
|
Wholesale-Carter’s
|
|
$ |
21,559 |
|
|
|
18.3 |
% |
|
$ |
21,386 |
|
|
|
19.0 |
% |
Wholesale-OshKosh
|
|
|
(2,524 |
) |
|
|
(13.7 |
%) |
|
|
(687 |
) |
|
|
(2.7 |
%) |
Retail-Carter’s
|
|
|
11,442 |
|
|
|
13.2 |
% |
|
|
7,909 |
|
|
|
10.6 |
% |
Retail-OshKosh
|
|
|
(6,733 |
) |
|
|
(15.2 |
%) |
|
|
(1,293 |
) |
|
|
(2.8 |
%) |
Mass
Channel-Carter’s
|
|
|
6,742 |
|
|
|
10.7 |
% |
|
|
8,351 |
|
|
|
13.5 |
% |
Mass
Channel-OshKosh (a)
|
|
|
531 |
|
|
|
-- |
|
|
|
527 |
|
|
|
-- |
|
Segment
operating income
|
|
|
31,017 |
|
|
|
9.4 |
% |
|
|
36,193 |
|
|
|
11.3 |
% |
Other
reconciling items
|
|
|
(10,464 |
) |
|
|
(3.2 |
%) |
|
|
(15,021 |
) |
(b) |
|
(4.7 |
%) |
Total
operating income
|
|
$ |
20,553 |
|
|
|
6.2 |
% |
|
$ |
21,172 |
|
|
|
6.6 |
% |
|
(a)
|
OshKosh
mass channel consists of a licensing agreement with
Target. Operating income consists of
royalty
income, net of related expenses.
|
|
(b)
|
Includes
$6.0 million in closure costs related to the closure of our OshKosh
distribution center including
$1.5
million in accelerated
depreciation.
|
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
10 – FACILITY CLOSURE AND RESTRUCTURING COSTS:
OshKosh
Distribution Facility
The Company continually evaluates
opportunities to reduce its supply chain complexity and lower
costs. In the first quarter of fiscal 2007, the Company determined
that OshKosh brand
products can be effectively distributed through its other distribution
facilities and third-party logistics providers. On February 15, 2007,
the Company’s Board of Directors approved management’s plan to close the
Company’s White House, Tennessee distribution facility, which was utilized to
distribute the Company’s OshKosh brand
products.
In accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” under a held
and used model, it was determined that the distribution facility assets were
impaired as of the end of January 2007, as it became “more likely than not” that
the expected life of the OshKosh distribution facility would be significantly
shortened. Accordingly, we wrote down the assets to their estimated
recoverable fair value as of the end of January 2007. The adjusted
asset values were subject to accelerated depreciation over their remaining
estimated useful life. Distribution operations at the OshKosh
facility ceased as of April 5, 2007 at which point the land, building, and
equipment assets of $6.1 million were reclassified as held for sale on the
accompanying unaudited condensed consolidated balance sheet.
During the first quarter of fiscal
2007, we recorded closure costs of $6.0 million, consisting of asset impairment
charges of $2.4 million related to a write-down of the related land, building,
and equipment, $2.0 million of severance charges, $1.5 million of accelerated
depreciation (included in selling, general, and administrative expenses), and
$0.1 million of other closure costs.
Acquisition
Restructuring
In connection with the Acquisition,
management developed a plan to restructure and integrate the operations of
OshKosh. In accordance with EITF No. 95-3, “Recognition of
Liabilities in Connection with a Purchase Business Combination,” liabilities
were established for OshKosh severance, lease termination costs associated with
the closure of 30 OshKosh retail stores, contract termination costs, and other
exit and facility closure costs.
The following table summarizes
restructuring reserves related to the Acquisition which are included in other
current liabilities on the accompanying unaudited condensed consolidated balance
sheet:
(dollars
in thousands)
|
|
Severance
and
other
exit
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
489 |
|
|
$ |
674 |
|
|
$ |
1,163 |
|
Payments
|
|
|
(458 |
) |
|
|
-- |
|
|
|
(458 |
) |
Adjustments
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Balance
at March 29, 2008
|
|
$ |
31 |
|
|
$ |
674 |
|
|
$ |
705 |
|
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
11 – EARNINGS PER SHARE:
In accordance with SFAS No. 128,
“Earnings Per Share,” basic earnings per share is based on the weighted-average
number of common shares outstanding during the year, whereas diluted earnings
per share also gives effect to all potentially dilutive shares of common stock,
including time-based and retained stock options and unvested restricted stock,
that were outstanding during the period. All such stock options are
reflected in the denominator using the treasury stock method. This
method assumes that shares are issued for stock options that are “in the money,”
but that we use the proceeds of such stock option exercises (generally, cash to
be paid plus future compensation expense to be recognized and the amount of tax
benefits, if any, that will be credited to additional paid-in capital assuming
exercise of the stock options) to repurchase shares at the average market value
of our shares for the respective periods. Unvested shares of
restricted stock are reflected in the denominator using the treasury stock
method with proceeds of the amount, if any, the employees must pay upon vesting,
the amount of compensation cost attributed to future services and not yet
recognized in earnings, and the amount of tax benefits, if any, that would be
credited to additional paid-in capital (i.e., the amount of the tax deduction in
excess of recognized compensation cost) assuming vesting of the shares at the
current market price.
For the three-month period ended March
29, 2008, anti-dilutive shares of 999,885 and performance-based stock options of
620,000, were excluded from the computations of diluted earnings per share and
for the three-month period ended March 31, 2007, anti-dilutive shares of 529,500
and performance-based stock options of 620,000 were excluded from the
computations of diluted earnings per share.
The following is a reconciliation of
basic common shares outstanding to diluted common and common equivalent shares
outstanding:
|
|
For
the
three-month
periods ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,559,000 |
|
|
$ |
9,611,000 |
|
Weighted-average
number of common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
number of common shares outstanding
|
|
|
57,215,027 |
|
|
|
58,447,494 |
|
Dilutive
effect of unvested restricted stock
|
|
|
67,209 |
|
|
|
49,760 |
|
Dilutive
effect of stock options
|
|
|
2,023,986 |
|
|
|
2,713,367 |
|
Diluted
number of common and common equivalent shares outstanding
|
|
|
59,306,222 |
|
|
|
61,210,621 |
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.20 |
|
|
$ |
0.16 |
|
Diluted
net income per common share
|
|
$ |
0.19 |
|
|
$ |
0.16 |
|
CARTER’S,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE
12 – RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2008, the Financial
Accounting Standards Board ("FASB") issued FSP No. FAS 157-2, which delays the
effective date of SFAS 157, "Fair Value Measurements," for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). Nonfinancial assets and nonfinancial liabilities would
include all assets and liabilities other than those meeting the definition of a
financial asset or financial liability as defined in paragraph 6 of SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities." This FASB Staff Position defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of FSP No. FAS
157-2. We have evaluated the impact that FSP No. FAS 157-2 will have
on our consolidated financial statements and have determined that it will not
have a material impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces
SFAS 141, “Business Combinations.” SFAS 141(R) retains the
underlying concepts of SFAS 141 in that all business combinations are still
required to be accounted for at fair value under the acquisition method of
accounting but SFAS 141(R) changed the method of applying the acquisition method
in a number of significant aspects. Acquisition costs will generally
be expensed as incurred; noncontrolling interests will be valued at fair value
at the acquisition date; in-process research and development will be recorded at
fair value as an indefinite-lived intangible asset at the acquisition date;
restructuring costs associated with a business combination will generally be
expensed subsequent to the acquisition date; and changes in deferred tax asset
valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141(R) is effective on
a prospective basis for all business combinations for which the acquisition date
is on or after the beginning of the first annual period subsequent to
December 15, 2008. SFAS 141(R) amends SFAS No. 109, “Accounting
for Income Taxes,” such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS 141(R) would also apply the
provisions of SFAS 141(R). Early adoption is not
permitted. We are currently evaluating the effects, if any, that SFAS
141(R) may have on our consolidated financial statements.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities – an
Amendment of FASB Statement No. 133,” which requires enhanced disclosures on the
effect of derivatives on a Company’s financial statements. These
disclosures will be required for the Company beginning with the first quarter
fiscal 2009 consolidated financial statements.
The following is a discussion of our
results of operations and current financial position. You should read
this discussion in conjunction with our unaudited condensed consolidated
financial statements and the accompanying notes included elsewhere in this
quarterly report.
Our fiscal year ends on the Saturday,
in December or January, nearest the last day of December. The
accompanying unaudited condensed consolidated financial statements for the first
quarter of fiscal 2008 reflect our financial position as of March 29,
2008. The first quarter of fiscal 2007 ended on March 31,
2007.
RESULTS
OF OPERATIONS
The following table sets forth, for the
periods indicated (i) selected statement of operations data expressed as a
percentage of net sales and (ii) the number of retail stores open at the end of
each period:
|
|
Three-month
periods ended
|
|
|
|
March
29,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Wholesale
sales:
|
|
|
|
|
|
|
Carter’s
|
|
|
35.7 |
% |
|
|
35.2 |
% |
OshKosh
|
|
|
5.6 |
|
|
|
7.8 |
|
Total
wholesale sales
|
|
|
41.3 |
|
|
|
43.0 |
|
|
|
|
|
|
|
|
|
|
Retail
store sales:
|
|
|
|
|
|
|
|
|
Carter’s
|
|
|
26.2 |
|
|
|
23.4 |
|
OshKosh
|
|
|
13.4 |
|
|
|
14.3 |
|
Total
retail store
sales
|
|
|
39.6 |
|
|
|
37.7 |
|
|
|
|
|
|
|
|
|
|
Mass
channel
sales
|
|
|
19.1 |
|
|
|
19.3 |
|
|
|
|
|
|
|
|
|
|
Consolidated
net
sales
|
|
|
100.0 |
|
|
|
100.0 |
|
Cost
of goods
sold
|
|
|
68.2 |
|
|
|
66.8 |
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
31.8 |
|
|
|
33.2 |
|
Selling,
general, and administrative expenses
|
|
|
28.0 |
|
|
|
27.6 |
|
Closure
costs
|
|
|
-- |
|
|
|
1.4 |
|
Royalty
income
|
|
|
(2.4 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
6.2 |
|
|
|
6.6 |
|
Interest
expense,
net
|
|
|
1.3 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Income
before income
taxes
|
|
|
4.9 |
|
|
|
4.8 |
|
Provision
for income
taxes
|
|
|
1.4 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
3.5 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
Number
of retail stores at end of period:
|
|
|
|
|
|
|
|
|
Carter’s
|
|
|
229 |
|
|
|
220 |
|
OshKosh
|
|
|
163 |
|
|
|
157 |
|
Total
|
|
|
392 |
|
|
|
377 |
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS: (Continued)
Three-month
period ended March 29, 2008 compared to the three-month period ended March 31,
2007
CONSOLIDATED
NET SALES
In the first quarter of fiscal 2008,
consolidated net sales increased $9.8 million, or 3.1%, to $330.0 million and
reflect growth in all of our Carter’s brand distribution
channels, partially offset by a decrease in our OshKosh brand distribution
channels.
|
|
For
the three-month periods ended
|
|
(dollars
in thousands)
|
|
March
29,
|
|
|
%
of
|
|
|
March
31,
|
|
|
%
of
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale-Carter’s
|
|
$ |
117,832 |
|
|
|
35.7 |
% |
|
$ |
112,653 |
|
|
|
35.2 |
% |
Wholesale-OshKosh
|
|
|
18,449 |
|
|
|
5.6 |
% |
|
|
24,993 |
|
|
|
7.8 |
% |
Retail-Carter’s
|
|
|
86,402 |
|
|
|
26.2 |
% |
|
|
74,826 |
|
|
|
23.4 |
% |
Retail-OshKosh
|
|
|
44,365 |
|
|
|
13.4 |
% |
|
|
45,848 |
|
|
|
14.3 |
% |
Mass
Channel-Carter’s
|
|
|
62,924 |
|
|
|
19.1 |
% |
|
|
61,808 |
|
|
|
19.3 |
% |
Total
net
sales
|
|
$ |
329,972 |
|
|
|
100.0 |
% |
|
$ |
320,128 |
|
|
|
100.0 |
% |
CARTER’S
WHOLESALE SALES
Carter’s brand wholesale
sales increased $5.2 million, or 4.6%, in the first quarter of fiscal 2008 to
$117.8 million. The increase in Carter’s brand wholesale
sales was driven by an 11% increase in units shipped, partially offset by a 6%
decline in average price per unit, as compared to the first quarter of fiscal
2007.
The increase in units shipped during
the first quarter of fiscal 2008 was driven by increased shipments of our baby
and playwear products, due primarily to the timing of demand. The number
of sleepwear units shipped was flat compared to the first quarter of fiscal
2007. The average price per unit decline was due to more competitive
pricing in our baby and playwear product categories, partially offset by an
increase in average price per unit in our sleepwear product category due to the
mix of products sold. Carter’s wholesale sales for the first half of
fiscal 2008 are expected to be relatively flat compared to the first half of
fiscal 2007.
OSHKOSH
WHOLESALE SALES
OshKosh brand wholesale sales
decreased $6.5 million, or 26.2%, in the first quarter of fiscal 2008 to $18.4
million. The decrease in OshKosh brand wholesale sales
reflects a 24% decrease in average price per unit and a 3% decrease in units
shipped as compared to the first quarter of fiscal 2007. The lower
average price per unit reflects a change in strategy to reposition the OshKosh brand to appeal
to a broader audience of mainstream consumers. We believe we have
strengthened the OshKosh brand to be more
competitive in the marketplace and enhance the profitability of our
customers. The benefits from this change in strategy are not expected
to meaningfully improve our OshKosh brand sales and
related profitability until later this year when the cumulative effect of
changes in talent, product benefits, pricing, branding, and sourcing strategies
are reflected in our Spring 2009 product line. Our Spring 2009
product line begins shipping in the latter part of the fourth quarter of fiscal
2008.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
MASS
CHANNEL SALES
Mass channel sales increased $1.1
million, or 1.8%, in the first quarter of fiscal 2008 to $62.9
million. The increase was driven by a $4.8 million, or 21.1%,
increase in sales of our Just
One Year brand to Target, offset by a $3.7 million, or 9.4% decrease in
sales of our Child of
Mine brand to Wal-Mart. The increase in Just One Year sales was
driven primarily from increased productivity and new door growth. The
decrease in Child of
Mine sales was due to disappointing performance of certain Spring 2008
products. We are strengthening the underperforming Child of Mine product
categories for Fall 2008 which is planned up 5% as compared to Fall
2007. Fall 2008 begins shipping in June 2008.
CARTER’S
RETAIL STORES
Carter’s retail store sales increased
$11.6 million, or 15.5%, in the first quarter of fiscal 2008 to $86.4
million. The increase was driven by a comparable store sales increase
of 12.3%, or $9.2 million, and incremental sales of $2.7 million generated by
new store openings, partially offset by the impact of store closures of $0.3
million.
On a comparable store basis, units per
transaction increased 7.5%, and average prices increased 0.6%. The
increase in units per transaction was driven by strong product performance in
all categories, particularly in baby and playwear. In order to better
support demand, inventory per door increased 24% over the first quarter of
fiscal 2007. By comparison, inventory per door at the end of the
first quarter of fiscal 2007 was down 20% compared to the first quarter of
fiscal 2006. Over the two year period, first quarter 2008 inventory
per door was down 1%.
The Company’s comparable store sales
calculations include sales for all stores that were open during the comparable
fiscal period, including remodeled stores and certain relocated
stores. If a store relocates within the same center with no business
interruption or material change in square footage, the sales for such store will
continue to be included in the comparable store calculation. If a
store relocates to another center, or there is a material change in square
footage, such store is treated as a new store. Stores that are closed
during the period are included in the comparable store sales calculation up to
the date of closing.
There were a total of 229 Carter’s
retail stores as of March 29, 2008. During the first quarter of
fiscal 2008, we opened one store. In total, we plan to open 25 and
close five Carter’s retail stores during fiscal 2008.
OSHKOSH
RETAIL STORES
OshKosh retail store sales decreased
$1.5 million, or 3.2%, in the first quarter of fiscal 2008 to $44.4
million. The decrease reflects a comparable store sales decrease of
6.6%, or $3.0 million, and the impact of store closings of $0.4 million,
partially offset by incremental sales of $1.9 million generated by new store
openings. On a comparable store basis, average prices decreased
18.9%, and units per transaction increased 16.3%. The decrease in
average prices and increase in units per transaction were driven by heavy
promotional pricing on excess Fall and Holiday product. Inventory per
door was up 3% at the end of the first quarter of fiscal 2008 as compared to the
first quarter of fiscal 2007.
There were a total of 163 OshKosh
retail stores as of March 29, 2008. In total, we plan to open two and
close three OshKosh retail stores during fiscal 2008.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
GROSS
PROFIT
Our gross profit decreased $1.5
million, or 1.4%, to $104.9 million in the first quarter of fiscal
2008. Gross profit as a percentage of net sales was 31.8% in the
first quarter of fiscal 2008 as compared to 33.2% in the first quarter of fiscal
2007.
The decrease in gross profit as a
percentage of net sales reflects:
(i) Higher
provisions for excess inventory of approximately $4.1 million, particularly
related to our OshKosh retail and mass channel segments;
(ii) A
decline in OshKosh
brand wholesale and retail margins due to price reductions and product
performance; and
(iii) Lower
margins on certain Spring 2008 Child of Mine products due to
disappointing over-the-counter performance.
The Company includes distribution costs
in its selling, general, and administrative expenses. Accordingly,
the Company’s gross profit may not be comparable to other companies that include
such distribution costs in their cost of goods sold.
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative
expenses in the first quarter of fiscal 2008 increased $4.0 million, or 4.5%, to
$92.3 million. As a percentage of net sales, selling, general, and
administrative expenses in the first quarter of fiscal 2008 were 28.0% as
compared to 27.6% in the first quarter of fiscal 2007.
The increase in selling, general, and
administrative expenses as a percentage of net sales was due to increased
expenses in our retail segments related to new stores and investments in our new
retail management team.
Partially offsetting this increase
was:
|
(i)
|
Accelerated
depreciation charges of $1.5 million that the Company recorded in the
first quarter of fiscal 2007 in connection with the closure of our OshKosh
distribution center; and
|
|
(ii)
|
Favorable
freight costs in the first quarter of fiscal 2008 compared to the first
quarter of fiscal 2007 resulting from supply chain
efficiencies.
|
CLOSURE
COSTS
On February 15, 2007, the Company’s
Board of Directors approved management’s plan to close the Company’s White
House, Tennessee distribution facility, which was utilized to distribute the
Company’s OshKosh brand
products. As a result of this closure, during the first quarter of
fiscal 2007, we recorded costs of $6.0 million. These consisted of
$2.4 million of asset impairment charges related to a write-down of the related
land, building, and equipment; $2.0 million of severance charges; $1.5 million
of accelerated depreciation (included in selling, general, and administrative
expenses); and $0.1 million of other closure costs.
ROYALTY
INCOME
We license the use of our Carter’s, Just One Year, Child of Mine, OshKosh, and Genuine Kids from OshKosh
brand names. Royalty income from these brands was approximately $7.9
million (including $1.8 million of international royalty income from our OshKosh brands) in the first
quarter of fiscal 2008, an increase of 4.9%, or $0.4 million, as compared to the
first quarter of fiscal 2007. This increase was driven primarily by
Carter’s and OshKosh brand domestic
licensee sales.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
OPERATING
INCOME
Operating income decreased $0.6
million, or 2.9%, to $20.6 million in the first quarter of fiscal
2008. The decrease in operating income was due to the factors
described above.
INTEREST
EXPENSE, NET
Interest expense in the first quarter
of fiscal 2008 decreased $1.2 million, or 21.1%, to $4.5 million. The
decrease is primarily attributable to lower effective interest
rates. Weighted-average borrowings in the first quarter of fiscal
2008 were $341.5 million at an effective interest rate of 5.8% as compared to
weighted-average borrowings in the first quarter of fiscal 2007 of $344.7
million at an effective interest rate of 7.2%. In the first quarter
of fiscal 2007, we received approximately $0.4 million related to our interest
rate swap agreement, which effectively reduced our interest expense under the
term loan. In the first quarter of fiscal 2008, we paid $0.2 million
in interest expense related to our interest rate swap agreement.
INCOME
TAXES
Our effective tax rate was 27.9% for
the first quarter of fiscal 2008 and 37.8% for the first quarter of fiscal
2007. This decrease in the effective tax rate was due to the reversal
of $1.6 million of reserves for certain tax exposures following the completion
of an Internal Revenue Service examination.
NET
INCOME
Our net income for the first quarter of
fiscal 2008 increased $1.9 million, or 20.3%, to $11.6 million as compared to
$9.6 million in the first quarter of fiscal 2007 as a result of the factors
described above.
FINANCIAL
CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our primary cash needs are working
capital and capital expenditures. Our primary source of liquidity
will continue to be cash flow from operations and borrowings under our revolver,
and we expect that these sources will fund our ongoing requirements for working
capital and capital expenditures. These sources of liquidity may be
impacted by continued demand for our products and our ability to meet debt
covenants under our senior credit facility.
Net accounts receivable at March 29,
2008 were $128.5 million compared to $116.9 million at March 31, 2007 and $119.7
million at December 29, 2007. The increase as compared to March 31,
2007 reflects an increase in Carter’s brand wholesale and
mass channel sales in the latter part of the first quarter of fiscal
2008. Due to the seasonal nature of our operations, the net accounts
receivable balance at March 29, 2008 is not comparable to the net accounts
receivable balance at December 29, 2007.
Net inventories at March 29, 2008 were
$174.2 million compared to $159.6 million at March 31, 2007 and $225.5 million
at December 29, 2007. The increase of $14.7 million, or 9.2%, as
compared to March 31, 2007 is due primarily to higher levels of inventory in our
Carter’s retail stores to better support demand and timing of wholesale
shipments. Due to the seasonal nature of our operations, net
inventories at March 29, 2008 are not comparable to net inventories at December
29, 2007.
Net cash provided by operating
activities for the first quarter of fiscal 2008 was $28.9 million compared to
net cash provided by operating activities of $6.7 million in the first quarter
of fiscal 2007. The increase in operating cash flow reflects changes
in inventory levels.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
We invested $2.5 million in capital
expenditures during the first quarter of fiscal 2008 compared to $3.1 million
during the first quarter of fiscal 2007. We plan to invest
approximately $45 million in capital expenditures during the remainder of fiscal
2008 primarily for retail store openings, a new point of sale system for our
retail stores, and fixtures for our wholesale customers.
On February 16, 2007, the Company’s
Board of Directors approved a stock repurchase program, pursuant to which the
Company is authorized to purchase up to $100 million of its outstanding common
shares. Such repurchases may occur from time to time in the open
market, in negotiated transactions, or otherwise. This program has no
time limit. The timing and amount of any repurchases will be
determined by management, based on its evaluation of market conditions, share
price, and other factors.
During the first quarter of fiscal
2008, the Company repurchased and retired approximately $10.0 million, or
674,358 shares, of its common stock at an average price $14.86 per
share. Since inception of the program and through the three-month
period ended March 29, 2008, the Company repurchased and retired approximately
$67.5 million, or 3,147,577 shares, of its common stock at an average price of
$21.44 per share.
At March 29, 2008, we had approximately
$341.5 million in term loan borrowings and no borrowings outstanding under our
revolver, exclusive of approximately $10.2 million of outstanding letters of
credit. Principal borrowings under our term loan are due and payable
in quarterly installments of $0.9 million through June 30, 2012 with the
remaining balance of $325.8 million due on July 14, 2012.
Our senior credit facility requires us
to hedge at least 25% of our variable rate debt under the term
loan. On September 22, 2005, we entered into an interest rate swap
agreement to receive floating interest and pay fixed interest. This
interest rate swap agreement is designated as a cash flow hedge of the variable
interest payments on a portion of our variable rate term loan
debt. The fair market value of the interest rate swap agreement as of
March 29, 2008 was a liability of $2.7 million and is included in other current
liabilities in the accompanying unaudited condensed consolidated balance
sheet. The interest rate swap agreement matures on July 30,
2010. As of March 29, 2008, approximately $146.7 million of our
outstanding term loan debt was hedged under this agreement.
On May 25, 2006, we entered into an
interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling
of 5.5%. The fair market value of the collar as of March 29, 2008 was
a liability of $1.8 million and is included in other current liabilities in the
accompanying unaudited condensed consolidated balance sheet. The
collar covers $100 million of our variable rate term loan debt and is designated
as a cash flow hedge of the variable interest payments on such
debt. The collar matures on January 31, 2009.
Our senior credit facility also sets
forth mandatory and optional prepayment conditions, including an annual excess
cash flow requirement, as defined, that may result in our use of cash to reduce
our debt obligations. No such prepayment was required for fiscal 2007
or 2006.
Our operating results are subject to
risk from interest rate fluctuations on our Senior Credit Facility, which
carries variable interest rates. As of March 29, 2008, our
outstanding debt aggregated approximately $341.5 million, of which $94.8 million
bore interest at a variable rate. An increase or decrease of 1% in
the applicable rate would increase or decrease our annual interest cost by $0.9
million, exclusive of variable rate debt subject to our swap and collar
agreements, and could have an adverse effect on our earnings and cash
flow.
As a result of the plan to close the
OshKosh distribution facility, we recorded costs in the first quarter of fiscal
2007 of $6.0 million, consisting of asset impairment charges of $2.4 million
related to a write-down of the related land, building, and equipment; $2.0
million of severance charges; $1.5 million of accelerated depreciation (included
in selling, general, and administrative expenses); and $0.1 million of other
closure costs. The estimated value of the OshKosh distribution
facility assets as of March 29, 2008 was $6.1 million. These assets
are classified as assets held for sale.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
In connection with the Acquisition,
management developed an integration plan that includes severance, certain
facility and store closings, and contract termination costs. The
following liabilities, included in other current liabilities in the accompanying
unaudited condensed consolidated balance sheet, were established at the closing
of the Acquisition and will be funded by cash flows from operations and
borrowings under our revolver and are expected to be paid in fiscal
2008:
(dollars
in thousands)
|
|
Severance
and
other
exit
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 29, 2007
|
|
$ |
489 |
|
|
$ |
674 |
|
|
$ |
1,163 |
|
Payments
|
|
|
(458 |
) |
|
|
-- |
|
|
|
(458 |
) |
Adjustments
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Balance
at March 29, 2008
|
|
$ |
31 |
|
|
$ |
674 |
|
|
$ |
705 |
|
Based on our current level of
operations, we believe that cash generated from operations and available cash,
together with amounts available under our revolver, will be adequate to meet our
working capital needs and capital expenditure requirements for the foreseeable
future, although no assurance can be given in this regard. We may,
however, need to refinance all or a portion of the principal amount of amounts
outstanding under our revolver on or before July 14, 2011 and amounts
outstanding under our term loan on or before July 14, 2012.
EFFECTS
OF INFLATION AND DEFLATION
We are affected by inflation and
changing prices primarily through purchasing product from our global suppliers,
increased operating costs and expenses, and fluctuations in interest
rates. The effects of inflation on our net sales and operations have
not been material in recent years. In recent years, there has been
deflationary pressure on selling prices. While we have been
successful in offsetting such deflationary pressures through product
improvements and lower costs with the expansion of our global sourcing network,
if deflationary price trends outpace our ability to obtain further price
reductions from our global suppliers, our profitability may be
affected.
SEASONALITY
We experience seasonal fluctuations in
our sales and profitability, with generally lower sales and gross profit in the
first and second quarters of our fiscal year. Over the past five
fiscal years, excluding the impact of the Acquisition in fiscal 2005,
approximately 57% of our consolidated net sales were generated in the second
half of our fiscal year. Accordingly, our results of operations for
the first and second quarters of any year are not indicative of the results we
expect for the full year.
As a result of this seasonality, our
inventory levels and other working capital requirements generally begin to
increase during the second quarter and into the third quarter of each
year. During these peak periods we have historically borrowed under
our revolving credit facility.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are
described in Note 2 to our audited consolidated financial statements contained
in our most recently filed Annual Report on Form 10-K. The following
discussion addresses our critical accounting policies and estimates, which are
those policies that require management’s most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Revenue recognition: We
recognize wholesale and mass channel revenue after shipment of products to
customers, when title passes, when all risks and rewards of ownership have
transferred, the sales price is fixed or determinable, and collectibility is
reasonably assured. In certain cases, in which we retain the risk of
loss during shipment, revenue recognition does not occur until the goods have
reached the specified customer. In the normal course of business, we
grant certain accommodations and allowances to our wholesale and mass channel
customers in order to assist these customers with inventory clearance and
promotions. Such amounts are reflected as a reduction of net sales
and are recorded based upon historical trends and annual
forecasts. Retail store revenues are recognized at the point of
sale. We reduce revenue for customer returns and
deductions. We also maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make payments
and other actual and estimated deductions. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, an additional allowance could be
required. Past due balances over 90 days are reviewed individually
for collectibility. Our credit and collections department reviews all
other balances regularly. Account balances are charged off against
the allowance when we feel it is probable the receivable will not be
recovered.
We
contract with a third-party service to provide us with the fair value of
cooperative advertising arrangements entered into with certain of our major
wholesale and mass channel customers. Such fair value is determined
based upon, among other factors, comparable market analysis for similar
advertisements. In accordance with Emerging Issues Task Force Issue
No. 01-09, “Accounting for Consideration Given by a Vendor to a
Customer/Reseller,” we have included the fair value of these arrangements of
approximately $0.6 million in each of the first quarters of fiscal 2008 and 2007
as a component of selling, general, and administrative expenses in the
accompanying unaudited condensed consolidated statements of operations rather
than as a reduction of revenue. Amounts determined to be in excess of
the fair value of these arrangements are recorded as a reduction of net
sales.
Inventory: We
provide reserves for slow-moving inventory equal to the difference between the
cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual market conditions are
less favorable than those we project, additional write-downs may be
required.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
Cost in excess of fair value of net
assets acquired and tradename: As of March 29, 2008, we had
approximately $443.3 million in Carter’s cost in excess of fair value of net
assets acquired and Carter’s
and OshKosh
tradename assets. The fair value of the Carter’s tradename was
estimated at the 2001 acquisition to be approximately $220.2 million using a
discounted cash flow analysis, which examined the hypothetical cost savings that
accrue as a result of our ownership of the tradename. The fair value
of the OshKosh
tradename was recently estimated to be approximately $88.0 million, also using a
discounted cash flow analysis. The cash flows, which incorporated
both historical and projected financial performance, were discounted using a
discount rate of 10% for Carter’s and 12% for OshKosh. The tradenames
were determined to have indefinite lives. The carrying values of
these assets are subject to annual impairment reviews as of the last day of each
fiscal year. Factors affecting such impairment reviews include the
continued market acceptance of our offered products and the development of new
products. Impairment reviews may also be triggered by any significant
events or changes in circumstances.
Accrued
expenses: Accrued expenses for workers’ compensation,
incentive compensation, health insurance, and other outstanding obligations are
assessed based on actual commitments, statistical trends, and estimates based on
projections and current expectations, and these estimates are updated
periodically as additional information becomes available.
Accounting for income
taxes: As part of the process of preparing the accompanying
unaudited condensed consolidated financial statements, we are required to
estimate our actual current tax exposure (state, federal, and
foreign). We assess our income tax positions and record tax benefits
for all years subject to examination based upon management’s evaluation of the
facts, circumstances, and information available at the reporting
dates. For those uncertain tax positions where it is “more likely
than not” that a tax benefit will be sustained, we have recorded the largest
amount of tax benefit with a greater than 50% likelihood of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all
relevant information. For those income tax positions where it is not
“more likely than not” that a tax benefit will be sustained, no tax benefit has
been recognized in the financial statements. Where applicable,
associated interest is also recognized. We also assess permanent and
temporary differences resulting from differing bases and treatment of items for
tax and accounting purposes, such as the carrying value of intangibles,
deductibility of expenses, depreciation of property, plant, and equipment, and
valuation of inventories. Temporary differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheets. We must then assess the likelihood that our deferred tax
assets will be recovered from future taxable income. Actual results
could differ from this assessment if sufficient taxable income is not generated
in future periods. To the extent we determine the need to establish a
valuation allowance or increase such allowance in a period, we must include an
expense within the tax provision in the accompanying audited consolidated
statement of operations.
Stock-based compensation
arrangements: The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). The
Company adopted SFAS 123R using the modified prospective application method of
transition. The Company uses the Black-Scholes option pricing model, which
requires the use of subjective assumptions. These assumptions include
the following:
Volatility – This is a
measure of the amount by which a stock price has fluctuated or is expected to
fluctuate. The Company uses actual monthly historical changes in the
market value of our stock since the Company’s initial public offering on October
29, 2003, supplemented by peer company data for periods prior to our initial
public offering covering the expected life of stock options being
valued. An increase in the expected volatility will increase
compensation expense.
Risk-free interest rate –
This is the U.S. Treasury rate as of the grant date having a term equal to the
expected term of the stock option. An increase in the risk-free
interest rate will increase compensation expense.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
Expected term – This is the
period of time over which the stock options granted are expected to remain
outstanding and is based on historical experience and estimated future exercise
behavior. Separate groups of employees that have similar historical
exercise behavior are considered separately for valuation
purposes. An increase in the expected term will increase compensation
expense.
Dividend yield – The Company
does not expect to pay dividends in the foreseeable future. An
increase in the dividend yield will decrease compensation expense.
Forfeitures – The Company
estimates forfeitures of stock-based awards based on historical experience and
expected future activity.
Changes in the subjective assumptions
can materially affect the estimate of fair value of stock-based compensation and
consequently, the related amount recognized in the accompanying unaudited
condensed consolidated statements of operations.
The Company accounts for its
performance-based awards in accordance with SFAS 123R and records stock-based
compensation expense over the vesting term of the awards that are expected to
vest based on whether it is probable that the performance criteria will be
achieved. The Company reassesses the probability of vesting at each
reporting period for awards with performance criteria and adjusts stock-based
compensation expense based on its probability assessment.
RECENT
ACCOUNTING PRONOUNCEMENTS
In February 2008, the Financial
Accounting Standards Board ("FASB") issued FSP No. FAS 157-2, which delays the
effective date of SFAS 157, “Fair Value Measurements,” for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (at least
annually). Nonfinancial assets and nonfinancial liabilities would
include all assets and liabilities other than those meeting the definition of a
financial asset or financial liability as defined in paragraph 6 of SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities." This FASB Staff Position defers the effective date of
Statement 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of FSP No. FAS
157-2. We have evaluated the impact that FSP No. FAS 157-2 will have
on our consolidated financial statements and have determined that it will not
have a significant impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces
SFAS No. 141, “Business Combinations” (“SFAS 141”). SFAS 141(R)
retains the underlying concepts of SFAS 141 in that all business combinations
are still required to be accounted for at fair value under the acquisition
method of accounting but SFAS 141(R) changed the method of applying the
acquisition method in a number of significant aspects. Acquisition
costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and
development will be recorded at fair value as an indefinite-lived intangible
asset at the acquisition date; restructuring costs associated with a business
combination will generally be expensed subsequent to the acquisition date; and
changes in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax
expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the
beginning of the first annual period subsequent to December 15,
2008. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes,”
such that adjustments made to valuation allowances on deferred taxes and
acquired tax contingencies associated with acquisitions that closed prior to the
effective date of SFAS 141(R) would also apply the provisions of SFAS
141(R). Early adoption is not permitted. We are currently
evaluating the effects, if any, that SFAS 141(R) may have on our consolidated
financial statements.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities – an
Amendment of FASB Statement No. 133,” which requires enhanced disclosures on the
effect of derivatives on a Company’s financial statements. These
disclosures will be required for the Company beginning with the first quarter
fiscal 2009 consolidated financial statements.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS: (Continued)
FORWARD-LOOKING
STATEMENTS
Statements contained herein that relate
to our future performance, including, without limitation, statements with
respect to our anticipated results of operations or level of business for fiscal
2008 or any other future period, are forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on current expectations
only and are subject to certain risks, uncertainties, and
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, or
projected. These risks are described herein under Item 1A of Part
II. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
CURRENCY
AND INTEREST RATE RISKS
In the operation of our business, we
have market risk exposures including those related to foreign currency risk and
interest rates. These risks and our strategies to manage our exposure
to them are discussed below.
We contract for production with third
parties primarily in the Far East and South and Central
America. While these contracts are stated in United States dollars,
there can be no assurance that the cost for the future production of our
products will not be affected by exchange rate fluctuations between the United
States dollar and the local currencies of these contractors. Due to
the number of currencies involved, we cannot quantify the potential impact of
future currency fluctuations on net income in future years. In order
to manage this risk, we source products from approximately 130 vendors
worldwide, providing us with flexibility in our production should significant
fluctuations occur between the United States dollar and various local
currencies. To date, such exchange fluctuations have not had a
material impact on our financial condition or results of
operations. We do not hedge foreign currency exchange rate
risk.
Our operating results are subject to
risk from interest rate fluctuations on our senior credit facility, which
carries variable interest rates. As of March 29, 2008, our
outstanding debt aggregated $341.5 million, of which $94.8 million bore interest
at a variable rate. An increase or decrease of 1% in the applicable
rate would increase or decrease our annual interest cost by $0.9 million,
exclusive of variable rate debt subject to our interest rate swap and collar
agreements, and could have an adverse effect on our net income and cash
flow.
OTHER
RISKS
We enter into various purchase order
commitments with full-package suppliers. We can cancel these
arrangements, although in some instances, we may be subject to a termination
charge reflecting a percentage of work performed prior to
cancellation. Historically, such cancellations and related
termination charges have not had a material impact on our
business. However, as we rely nearly exclusively on our full-package
global sourcing network, we expect to incur more of these termination charges,
which could increase our cost of goods sold.
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Our Chief Executive Officer and Chief
Financial Officer of Carter’s, Inc. have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined under
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer of Carter’s, Inc. have concluded that our disclosure
controls and procedures are effective.
|
(b)
|
Changes
in Internal Control over Financial
Reporting
|
There were no changes in the Company’s
internal controls over financial reporting during the period covered by this
report that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
N/A
You should carefully consider each of
the following risk factors as well as the other information contained in this
Quarterly Report on Form 10-Q and other filings with the Securities and Exchange
Commission in evaluating our business. The risks and uncertainties
described below are not the only we face. Additional risks and
uncertainties not presently known to us or that we currently consider immaterial
may also impact our business operations. If any of the following
risks actually occur, our operating results may be affected.
Risks
Relating to Our Business
The
loss of one or more of our major customers could result in a material loss of
revenues.
In the first quarter of fiscal 2008, we
derived approximately 44% of our consolidated net sales from our top eight
customers, including mass channel customers. Wal-Mart accounted for
approximately 11% of our consolidated net sales. We expect that this
customer will continue to represent a significant portion of our sales in the
future. However, we do not enter into long-term sales contracts with
our major customers, relying instead on long-standing relationships with these
customers and on our position in the marketplace. As a result, we
face the risk that one or more of our major customers may significantly decrease
its or their business with us or terminate its or their relationships with
us. Any such decrease or termination of our major customers' business
could result in a material decrease in our sales and operating
results.
The
acceptance of our products in the marketplace is affected by consumers’ tastes
and preferences, along with fashion trends.
We believe that continued success
depends on our ability to provide a unique and compelling value proposition for
our consumers in the Company’s distribution channels. There can be no
assurance that the demand for our products will not decline, or that we will be
able to successfully evaluate and adapt our product to be aware of consumers’
tastes and preferences and fashion trends. If consumers’ tastes and
preferences are not aligned with our product offerings, promotional pricing may
be required to move seasonal merchandise. Increased use of
promotional pricing would have a material adverse affect on our sales, gross
margin, and results of operations.
The
value of our brand, and our sales, could be diminished if we are associated with
negative publicity.
Although our employees, agents, and
third-party compliance auditors periodically visit and monitor the operations of
our vendors, independent manufacturers, and licensees, we do not control these
vendors, independent manufacturers, licensees, or their labor
practices. A violation of our vendor policies, licensee agreements,
labor laws, or other laws by these vendors, independent
manufacturers, or licensees could interrupt or otherwise disrupt our supply
chain or damage our brand image. As a result, negative publicity
regarding our Company, brands, or products, including licensed products, could
adversely affect our reputation and sales.
The
security of the Company’s databases that contain personal information of our
retail customers could be breached, which could subject us to adverse publicity,
litigation, and expenses. In addition, if we are unable to comply
with security standards created by the credit card industry, our operations
could be adversely affected.
Database privacy, network security, and
identity theft are matters of growing public concern. In an attempt
to prevent unauthorized access to our network and databases containing
confidential, third-party information, we have installed privacy protection
systems, devices, and activity monitoring on our
network. Nevertheless, if unauthorized parties gain access to our
networks or databases, they may be able to steal, publish, delete, or modify our
private and sensitive third-party information. In such circumstances,
we could be held liable to our customers or other parties or be subject to
regulatory or other actions for breaching privacy rules. This could
result in costly investigations and litigation, civil or criminal penalties, and
adverse publicity that could adversely affect our financial condition, results
of operations, and reputation. Further, if we are unable to comply
with the security standards, established by banks and the credit card industry,
we may be subject to fines, restrictions, and expulsion from card acceptance
programs, which could adversely affect our retail operations.
The
Company’s royalty income is greatly impacted by the Company’s brand
reputation.
The Company’s brand image, which is
associated with providing a consumer product with outstanding quality and name
recognition, makes it valuable as a royalty source. The Company is
able to license complementary products and obtain royalty income from use of its
Carter’s, Child of Mine, Just One Year, OshKosh, Genuine Kids from OshKosh, and related
trademarks. The Company also generates foreign royalty income as our
OshKosh B’Gosh label
carries an international reputation for quality and American
style. While the Company takes significant steps to ensure the
reputation of its brand is maintained through its license agreements, there can
be no guarantee that the Company’s brand image will not be negatively impacted
through its association with products outside of the Company’s core apparel
products.
There
are deflationary pressures on the selling price of apparel
products.
In part due to the actions of discount
retailers, and in part due to the worldwide supply of low cost garment sourcing,
the average selling price of children’s apparel continues to
decrease. To the extent these deflationary pressures are offset by
reductions in manufacturing costs, there could be an affect on the gross margin
percentage. However, the inability to leverage certain fixed costs of
the Company’s design, sourcing, distribution, and support costs over its gross
sales base could have an adverse impact on the Company’s operating
results.
Our
business is sensitive to overall levels of consumer spending, particularly in
the apparel segment.
The Company believes that spending on
children’s apparel is somewhat discretionary. While certain apparel
purchases are less discretionary due to size changes as children grow, the
amount of clothing consumers desire to purchase, specifically brand name apparel
products, is impacted by the overall level of consumer
spending. Overall economic conditions that affect discretionary
consumer spending include employment levels, gasoline and utility costs,
business conditions, tax rates, interest rates, and levels of consumer
indebtedness. Reductions in the level of discretionary spending or
shifts in consumer spending to other products may have a material adverse affect
on the Company’s sales and results of operations.
We
source substantially all of our products through foreign production
arrangements. Our dependence on foreign supply sources could result
in disruptions to our operations in the event of political instability,
international events, or new foreign regulations and such disruptions may
increase our cost of goods sold and decrease gross profit.
We source substantially all of our
products through a network of vendors in the Far East, coordinated by our Far
East agents. The following could disrupt our foreign supply chain,
increase our cost of goods sold, decrease our gross profit, or impact our
ability to get products to our customers:
|
·
|
political
instability or other international events resulting in the disruption of
trade in foreign countries from which we source our
products;
|
|
·
|
the
imposition of new regulations relating to imports, duties, taxes, and
other charges on imports including the China
safeguards;
|
|
·
|
the
occurrence of a natural disaster, unusual weather conditions, or an
epidemic, the spread of which may impact our ability to obtain products on
a timely basis;
|
|
·
|
changes
in the United States customs procedures concerning the importation of
apparel products;
|
|
·
|
unforeseen
delays in customs clearance of any
goods;
|
|
·
|
disruption
in the global transportation network such as a port strike, world trade
restrictions, or war. The risk of labor-related disruption in
the ports on the West Coast of the United States in 2008 is
considered to be reasonably likely;
|
|
·
|
the
application of foreign intellectual property laws;
and
|
|
·
|
exchange
rate fluctuations between the United States dollar and the local
currencies of foreign contractors.
|
These and other events beyond our
control could interrupt our supply chain and delay receipt of our products into
the United States.
We
operate in a highly-competitive market and the size and resources of some of our
competitors may allow them to compete more effectively than we can, resulting in
a loss of market share and, as a result, a decrease in revenues and gross
profit.
The baby and young children's apparel
market is highly competitive. Both branded and private label
manufacturers compete in the baby and young children's apparel
market. Our primary competitors in our wholesale and mass channel
businesses include Disney, Gerber, and private label product
offerings. Our primary competitors in the retail store channel
include Old Navy, The Gap, The Children’s Place, Gymboree, and
Disney. Because of the fragmented nature of the industry, we also
compete with many other manufacturers and retailers. Some of our
competitors have greater financial resources and larger customer bases than we
have and are less financially leveraged than we are. As a result,
these competitors may be able to:
|
·
|
adapt
to changes in customer requirements more
quickly;
|
|
·
|
take
advantage of acquisition and other opportunities more
readily;
|
|
·
|
devote
greater resources to the marketing and sale of their products;
and
|
|
·
|
adopt
more aggressive pricing strategies than we
can.
|
The
Company’s retail success and future growth is dependent upon identifying
locations and negotiating appropriate lease terms for retail
stores.
The Company’s retail stores are located
in leased retail locations across the country. Successful operation
of a retail store depends, in part, on the overall ability of the retail
location to attract a consumer base sufficient to make store sales volume
profitable. If the Company is unable to identify new retail locations
with consumer traffic sufficient to support a profitable sales level, retail
growth may consequently be limited. Further, if existing outlet and
strip centers do not maintain a sufficient customer base that provides a
reasonable sales volume, there could be a material adverse impact on the
Company’s sales, gross margin, and results of operations.
Our
leverage could adversely affect our financial condition.
On March 29, 2008, we had total debt of
approximately $341.5 million.
Our indebtedness could have negative
consequences. For example, it could:
|
·
|
increase
our vulnerability to interest rate
risk;
|
|
·
|
limit
our ability to obtain additional financing to fund future working capital,
capital expenditures, and other general corporate requirements, or to
carry out other aspects of our business
plan;
|
|
·
|
require
us to dedicate a substantial portion of our cash flow from operations to
pay principal of, and interest on, our indebtedness, thereby reducing the
availability of that cash flow to fund working capital, capital
expenditures, or other general corporate purposes, or to carry out other
aspects of our business plan;
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry; and
|
|
·
|
place
us at a competitive disadvantage compared to our competitors that have
less debt.
|
Profitability
could be negatively impacted if we do not adequately forecast the demand for our
products and, as a result, create significant levels of excess inventory or
insufficient levels of inventory.
If the Company does not adequately
forecast demand for its products and purchases inventory to support an
inaccurate forecast, the Company could experience increased costs due to the
need to dispose of excess inventory or lower profitability due to insufficient
levels of inventory.
We
may not achieve sales growth plans, cost savings, and other assumptions that
support the carrying value of our intangible assets.
In connection with the 2001 acquisition
of the Company, we recorded cost in excess of fair value of net assets acquired
of $136.6 million and a Carter’s brand tradename
asset of $220.2 million. Additionally, in connection with the
acquisition of OshKosh, we recorded cost in excess of fair value of net assets
acquired of $142.9 million and an OshKosh brand tradename asset
of $102.0 million. The carrying value of these assets is subject to
annual impairment reviews as of the last day of each fiscal year or more
frequently, if deemed necessary, due to any significant events or changes in
circumstances. During the second quarter of fiscal 2007, the Company
performed an interim impairment review of the OshKosh intangible assets due to
continued negative trends in sales and profitability of the Company’s OshKosh
wholesale and retail segments. As a result of this review, the
Company wrote off our OshKosh cost in excess of fair value of net assets
acquired asset of $142.9 million and wrote down the OshKosh tradename by $12.0
million.
Estimated future cash
flows used in these impairment reviews could be negatively impacted if we do not
achieve our sales plans, planned cost savings, and other assumptions that
support the carrying value of these intangible assets, which could result in
potential impairment of the remaining asset value.
The
Company’s success is dependent upon retaining key individuals within the
organization to execute the Company’s strategic plan.
The Company’s ability to attract and
retain qualified executive management, marketing, merchandising, design,
sourcing, operations, and support function staffing is key to the Company’s
success. If the Company were unable to attract and retain qualified
individuals in these areas, an adverse impact on the Company’s growth and
results of operations may result.
The
following table provides information about purchases by the Company during the
three-month period ended March 29, 2008, of equity securities that are
registered by the Company pursuant to Section 12 of the Exchange
Act:
|
|
Total
number of shares
|
|
|
Average
price paid per share
|
|
|
Total
number of shares purchased as part of publicly announced plans or
programs
|
|
|
Approximate
dollar value of shares that may yet be purchased under the plans or
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
30, 2007 through January 26, 2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
42,532,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
27, 2008 through February 23, 2008
|
|
|
-- |
|
|
$ |
-- |
|
|
|
-- |
|
|
$ |
42,532,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
24, 2008 through March 29, 2008
|
|
|
674,358 |
(2) |
|
$ |
14.86 |
|
|
|
674,358 |
|
|
$ |
32,512,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
674,358 |
|
|
$ |
14.86 |
|
|
|
674,358 |
|
|
$ |
32,512,669 |
|
(1)
|
On
February 16, 2007, our Board of Directors approved a stock repurchase
program, pursuant to which the Company is authorized to purchase up to
$100 million of its outstanding common shares. Such repurchases may
occur from time to time in the open market, in negotiated transactions, or
otherwise. This program has no time limit. The timing and
amount of any repurchases will be determined by the Company’s management,
based on its evaluation of market conditions, share price, and other
factors. This program was announced in the Company’s report on
Form 8-K, which was filed on February 21, 2007. The total
remaining authorization under the repurchase program was $32,512,669 as of
March 29, 2008.
|
(2)
|
Represents
repurchased shares which were
retired.
|
N/A
N/A
N/A
(a) Exhibits:
|
|
|
|
|
|
10.1
|
|
The
William Carter Company Severance Plan
|
|
|
|
31.1
|
|
Rule
13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f)
Certification
|
|
|
|
31.2
|
|
Rule
13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f)
Certification
|
|
|
|
32
|
|
Section
1350 Certification
|
|
|
|
Pursuant to the requirements of the
Securities and Exchange Act of 1934, the Registrants have duly caused this
report to be signed on their behalf by the undersigned thereunto duly
authorized.
CARTER’S,
INC.
|
|
|
Date: April
25, 2008
|
|
/s/ FREDERICK
J. ROWAN, II
|
|
|
Frederick
J. Rowan, II
|
|
|
Chairman
of the Board of Directors and
|
|
|
Chief
Executive Officer
|
|
|
|
Date: April
25, 2008
|
|
/s/ MICHAEL
D. CASEY
|
|
|
Michael
D. Casey
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|