UNITED
STATES SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
ANNUAL
REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
|
|
FOR
THE FISCAL YEAR ENDED JANUARY 3,
2009
|
OR
|
o
|
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 incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
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)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
TITLE
OF EACH CLASS
|
NAME
OF EACH EXCHANGE ON
|
|
Carter’s,
Inc.’s common stock
|
WHICH
REGISTERED:
|
|
par
value $0.01 per share
|
New
York Stock Exchange
|
SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes x No o
Indicate by check mark if the
Registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes o No x
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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form
10-K. o
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 definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer x Accelerated
Filer o Non-Accelerated
Filer o Smaller
Reporting Company o
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
approximate aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 28, 2008 (the last business day of our most recently
completed second quarter) was $776,016,341.
There
were 56,352,111 shares of Carter’s, Inc.’s common stock with a par value of
$0.01 per share outstanding as of the close of business on February 27,
2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A relating to the
Annual Meeting of Stockholders of Carter’s, Inc., to be held on May 14, 2009,
will be incorporated by reference in Part III of this Form
10-K. Carter’s, Inc. intends to file such proxy statement with the
Securities and Exchange Commission not later than 120 days after its fiscal year
ended January 3, 2009.
CARTER’S,
INC.
|
INDEX
TO ANNUAL REPORT ON FORM 10-K
|
|||||
|
FOR
THE FISCAL YEAR ENDED JANUARY 3, 2009
|
|||||
|
Page
|
|||||
| 1 | |||||
| 7 | |||||
| 12 | |||||
| 12 | |||||
| 12 | |||||
| 13 | |||||
| 14 | |||||
| 16 | |||||
| 19 | |||||
| 33 | |||||
| 34 | |||||
| 68 | |||||
| 68 | |||||
| 68 | |||||
| 69 | |||||
| 69 | |||||
| 69 | |||||
| 69 | |||||
| 69 | |||||
| 70 | |||||
| 72 | |||||
|
CERTIFICATIONS
|
|||||
Our market share data is based on
information provided by the NPD Group, Inc. Unless otherwise
indicated, references to market share in this Annual Report on Form 10-K are
expressed as a percentage of total retail sales of a market. NPD has
restated historical data, therefore, the market data reported prior to 2008 is
not directly comparable to the data reported in this Annual Report on Form
10-K. The baby and young children’s apparel market includes apparel
products from sizes newborn to seven.
Unless the context indicates otherwise,
in this filing on Form 10-K, “Carter’s,” the “Company,” “we,” “us,” “its,” and
“our” refers to Carter’s, Inc. and its wholly owned subsidiaries.
We are the largest branded marketer in
the United States of apparel exclusively for babies and young
children. We own two of the most highly recognized and most trusted
brand names in the children’s apparel industry, Carter’s and OshKosh. Established
in 1865, our Carter’s
brand is recognized and trusted by consumers for high-quality apparel for
children sizes newborn to seven. In fiscal 2005, we acquired OshKosh
B’Gosh, Inc. Established in 1895, OshKosh is recognized as a well-known brand
that is trusted by consumers for its line of apparel for children sizes newborn
to 12. We have extensive experience in the young children’s apparel
market and focus on delivering products that satisfy our consumers’
needs. We market high-quality, essential core products at prices that
deliver an attractive value proposition for consumers.
We have developed a business model that
we believe has multiple platforms for growth and is focused on high volume and
productivity. Our Carter’s, OshKosh, and
related sub-brands are sold to national department stores, chain and specialty
stores, discount retailers, and, as of January 3, 2009, through 253 Carter’s and
165 OshKosh outlet and brand retail stores. We believe each of our
brands has its own unique positioning in the marketplace. Our brands
compete in the $24 billion children’s apparel market, for children sizes newborn
to seven, with our Carter’s brand achieving the
#1 branded position with a 10.9% market share. Our OshKosh brand has a 3.2%
market share. We offer multiple product categories, including baby,
sleepwear, playclothes, and other accessories. Our distribution
strategy enables us to reach a broad range of consumers through channel, price
point, and region.
Since fiscal 2004, including OshKosh,
we have increased consolidated net sales at a compound annual growth rate of
16.0%. Since fiscal 2006, our first full year of sales from OshKosh,
we have increased consolidated net sales at a compounded annual growth rate of
5.3%. Our pre-tax results have ranged from income of $82.5 million in
fiscal 2004 to $117.4 million in fiscal 2008, with the exception of fiscal 2007
in which we had a pre-tax loss of $29.1 million. In fiscal 2007, our
pre-tax results were impacted by OshKosh related intangible asset impairment
charges of $154.9 million and distribution facility closure costs of $7.4
million related to further integrating OshKosh. In fiscal 2008, our
pre-tax results were decreased by executive retirement charges of $5.3 million
and a write-down of $2.6 million on our OshKosh distribution facility, which is
held for sale.
The Company’s principal executive
offices are located at The Proscenium, 1170 Peachtree Street NE, Suite 900,
Atlanta, Georgia 30309, and our telephone number is (404) 745-2700.
OUR
BRANDS, PRODUCTS, AND DISTRIBUTION CHANNELS
CARTER’S
BRANDS
Under our Carter’s brand, we design,
source, and market a broad array of products, primarily for sizes newborn to
seven. Our Carter’s brand is sold in
department stores, national chains, specialty stores, off-price sales channels,
and through our Carter’s retail stores. Additionally, we sell our
Just One Year and Child of Mine brands through
the mass channel at Target and Wal-Mart, respectively. In fiscal
2008, we sold over 223 million units of Carter’s, Child of Mine, and Just One Year products to
our wholesale customers, mass channel customers, and through our Carter’s retail
stores, an increase of approximately 9% from fiscal 2007. Under our
Carter’s, Child of Mine, and Just One Year brands, sales
growth has been driven by our focus on essential, high-volume, core apparel
products for babies and young children. Such products include
bodysuits, pajamas, blanket sleepers, gowns, bibs, towels, washcloths, and
receiving blankets. Our top ten baby and sleepwear core products
accounted for approximately 67% of our baby and sleepwear net sales in fiscal
2008, including the mass channel. We believe these core products are
essential consumer staples, insulated from changes in fashion trends, and
supported by a strong birth rate and other favorable demographic
trends.
1
We have four cross-functional product
teams focused on the development of our Carter’s baby, sleepwear, playclothes,
and mass channel products. These teams are skilled in identifying and
developing high-volume, core products. Each team includes members
from merchandising, design, sourcing, product development, forecasting, and
supply chain logistics. These teams follow a disciplined approach to
fabric usage, color rationalization, and productivity and are supported by a
dedicated art department and state-of-the-art design systems. We also
license our brand names to other companies to create a complete collection of
lifestyle products, including bedding, hosiery, underwear, shoes, room décor,
furniture, and toys. The licensing team directs the use of our
designs, art, and selling strategies to all licensees.
We believe this disciplined approach to
core product design reduces our susceptibility to fashion risk and supports
efficient operations. We conduct consumer research as part of our
product development process and engage in product testing in our own
stores. We analyze quantitative measurements such as pre-season
bookings, weekly over-the-counter selling results, and daily re-order rates in
order to assess productivity.
CARTER’S
BRAND POSITIONING
Our strategy is to drive our brand
image as the leader in baby and young children’s apparel and to consistently
provide high-quality products at a great value to consumers. We
employ a disciplined marketing strategy that identifies and focuses on core
products. We believe that we have strengthened our brand image with
the consumer by differentiating our core products through fabric improvements,
new artistic applications, and new packaging and presentation
strategies. We also attempt to differentiate our products through
store-in-store shops and advertising with our wholesale and mass channel
customers. We have invested in display units for our major wholesale
customers that clearly present our core products on their floors to enhance
brand and product presentation. We also strive to provide our
wholesale and mass channel customers with a consistent, high-level of service,
including delivering and replenishing products on time to fulfill customer
needs.
CARTER’S
PRODUCTS
Baby
Carter’s brand baby products
include bodysuits, undershirts, towels, washcloths, receiving blankets, layette
gowns, bibs, caps, and booties. In fiscal 2008, excluding mass
channel sales, we generated $362.7 million in net sales of these products, representing 24.3% of our
consolidated net sales.
Our Carter’s brand is the leading
brand in the baby category. In fiscal 2008, in the department store,
national chain, outlet, specialty store, and off-price sales channels, our
aggregate Carter’s
brand market share was approximately 29.6% for baby, which represents
greater than five times the market share of the next largest
brand. We sell a complete range of baby products for newborns,
primarily made of cotton. We attribute our leading market position to
our brand strength, distinctive print designs, artistic applications, reputation
for quality, and ability to manage our dedicated floor space for our retail
customers. We tier our products through marketing programs targeted
toward gift-givers, experienced mothers, and first-time mothers. Our
Carter's Starters
product line, the largest component of our baby business, provides
mothers with essential core products and accessories, including value-focused
multi-packs. Our Little Collections product
line consists of coordinated baby programs designed for first-time mothers and
gift-givers.
Playclothes
Carter’s brand playclothes
products include knit and woven cotton apparel for everyday use in size three
months to size seven. In fiscal 2008, we generated $324.8 million in
net sales of these products, excluding the mass channel, or 21.8%, of our
consolidated net sales.
We have focused on building our Carter’s brand in the playclothes market by
developing a base of essential, high-volume, core products that utilize original
print designs and innovative artistic applications. Our aggregate
2008 Carter’s brand
playclothes market share was 11.7% in the $10.0 billion department store,
national chain, outlet, specialty store, and off-price sales
channels.
Sleepwear
Carter’s brand sleepwear
products include pajamas, cotton long underwear, and blanket sleepers in size 12
months to size seven. In fiscal 2008, we generated $164.6 million in
net sales of these products, excluding the mass channel, or 11.0%, of our
consolidated net sales.
2
Our Carter’s brand is the leading
brand of sleepwear for babies and young children within the department store,
national chain, outlet, specialty store, and off-price sales channels in the
United States. In fiscal 2008, in these channels, our Carter’s brand market share
was approximately 32.7%, which represents greater than two times the market
share of the next largest brand. As in our baby product line, we
differentiate our sleepwear products by offering high-volume, core products with
creative artwork and soft fabrications.
Mass
Channel Products
Our mass channel product team focuses
on baby, sleepwear, and playclothes products produced specifically for the mass
channel. Such products are differentiated through fabrications,
artwork, and packaging. Our 2008 market share was 7.9% in the $9.8
billion mass channel children’s apparel market. Our Child of Mine product line,
which is sold in substantially all Wal-Mart stores nationwide, includes layette,
sleepwear, and playclothes along with a range of licensed products, such as
hosiery, bedding, toys, and gifts. We also sell our Just One Year brand to
Target, which includes baby, sleepwear, and baby playclothes along with a range
of licensed products, such as hosiery, bedding, toys, and gifts. In
fiscal 2008, we generated $254.4 million in net sales of our Child of Mine and Just One Year products, or
17.1%, of our consolidated net sales.
Other
Products
Our other product offerings include
bedding, outerwear, shoes, socks, diaper bags, gift sets, toys, room décor, and
hair accessories. In fiscal 2008, we generated $60.1 million in net
sales of these other products in our Carter’s retail stores, or 4.0%,
of our consolidated net sales.
Royalty
Income
We currently extend our Carter’s, Child of Mine,
and Just One
Year product offerings by licensing our brands to 17 domestic marketers
in the United States. These licensing partners develop and sell
products through our multiple sales channels while leveraging our brand
strength, customer relationships, and designs. Licensed products
provide our customers and consumers with a range of lifestyle products that
complement and expand upon our core baby and young children’s apparel
offerings. Our license agreements require strict adherence to our
quality and compliance standards and provide for a multi-step product approval
process. We work in conjunction with our licensing partners in the
development of their products and ensure that they fit within our brand vision
of high-quality, core products at attractive values to the
consumer. In addition, we work closely with our wholesale and mass
channel customers and our licensees to gain dedicated floor space for licensed
product categories. In fiscal 2008, our Carter’s brand and mass
channel licensees generated wholesale and mass channel net sales of $188.4
million on which we earned $16.8 million in royalty income.
In fiscal 2008, we extended the Carter’s brand licensing
arrangements internationally with two licensees who currently license the OshKosh brand. In
connection with these arrangements, the Carter’s brand generated
international licensing sales of $3.2 million on which we earned $0.3 million in
royalty income.
CARTER’S
DISTRIBUTION CHANNELS
As described above, we sell our Carter’s brand products to
leading retailers throughout the United States in the wholesale and mass
channels and through our own Carter’s retail outlet and brand
stores. In fiscal 2008, sales of our Carter’s brand products
through the wholesale channel, including off-price sales, accounted for 32.9% of
our consolidated net sales (34.2% in fiscal 2007), sales through our retail
stores accounted for 28.3% of our consolidated net sales (25.9% in fiscal 2007),
and sales through the mass channel accounted for 17.1% of our consolidated net
sales (17.2% in fiscal 2007).
Business segment financial information
for our Carter’s brand
wholesale, Carter’s
brand retail, and Carter’s brand mass channel
segments is contained in ITEM 8 “Financial Statements and Supplementary Data,”
Note 14 -- “Segment Information” to the accompanying audited consolidated
financial statements.
Our Carter’s brand wholesale
customers include major retailers, such as Kohl’s, Toys “R” Us, Costco,
JCPenney, Macy’s, and Sears. Our mass channel customers are Wal-Mart
and Target. Our sales professionals work with their department or
specialty store accounts to establish annual plans for our baby products, which
we refer to as core basics. Once we establish an annual plan with an
account, we place the majority of our accounts on our automatic reorder plan for
core basics. This allows us to plan our sourcing requirements and
benefits both us and our wholesale and mass channel customers by maximizing our
customers’ in-stock positions, thereby improving sales and
profitability. We intend to drive continued growth with our wholesale
and mass channel customers through our focus on managing our key accounts'
business through product mix, fixturing, brand presentation, and
advertising. We believe that we maintain strong account relationships
and drive brand growth through frequent meetings with the senior management of
our major wholesale and mass channel customers.
3
As of January 3, 2009, we operated 253
Carter’s retail stores, of which 170 were outlet stores and 83 were brand
stores. These stores carry a complete assortment of first-quality
baby and young children’s apparel, accessories, and gift items. Our
stores average approximately 4,700 square feet per location and are
distinguished by an easy, consumer-friendly shopping environment. We
believe our brand strength and our assortment of core products has made our
stores a destination location within many outlet and strip
centers. Our outlet stores are generally located within 20 to 30
minutes of densely-populated areas. Our brand stores are generally
located in high-traffic, strip centers located in or near major
cities.
We have established a real estate
selection process whereby we fully assess all new locations based on demographic
factors, retail adjacencies, and population density. We believe that
we are located in many of the premier outlet centers in the United States and we
continue to add new strip center locations to our real estate
portfolio.
OSHKOSH
BRANDS
Under our OshKosh brand, we design,
source, and market a broad array of young children’s apparel, primarily for
children in sizes newborn to 12. Our OshKosh brand is currently
sold in our OshKosh retail stores, department stores, national chains, specialty
stores, and through off-price sales channels. In fiscal 2008, we sold
over 45 million units of OshKosh products through our
retail stores and to our wholesale customers, an increase of approximately 7%
over fiscal 2007. We also have a licensing agreement with Target
through which Target sells products under our Genuine Kids from OshKosh
brand. Given its long history of durability, quality, and style, we
believe our OshKosh
brand continues to be a market leader in the children’s branded apparel industry
and represents a significant long-term growth opportunity for us, especially in
the $17.0 billion young children’s playclothes market. While we have
made significant progress integrating the OshKosh business, our plans to grow
the OshKosh brand in
the wholesale and retail store channels have not met our expectations to
date. We continue to focus on our core product development and
marketing disciplines, improving the productivity of our OshKosh retail stores,
leveraging our relationships with major wholesale accounts, and leveraging our
infrastructure and supply chain.
OSHKOSH
BRAND POSITIONING
We believe our OshKosh brand stands for
high-quality, authentic playclothes products for children sizes newborn to
12. Our core OshKosh brand products
include denim, overalls, t-shirts, fleece, and other playclothes for
children. Our OshKosh brand is generally
positioned towards an older segment (sizes two to seven) and at slightly higher
average prices than our Carter’s brand. We
believe our OshKosh
brand has significant brand name recognition, which consumers associate with
rugged, durable, and active playclothes for young children.
OSHKOSH
PRODUCTS
Playclothes
Our OshKosh brand is best known
for its playclothes products. In fiscal 2008, we generated $228.4
million in net sales of OshKosh brand playclothes
products, which accounted for approximately 15.3% of our consolidated net
sales. OshKosh brand playclothes
products include denim apparel products with multiple wash treatments and
coordinating garments, overalls, woven bottoms, knit tops, and playclothes
products for everyday use in sizes newborn to 12. We plan to grow
this business by continuing to reduce product complexity, expanding our core
product offerings, improving product value, and leveraging our strong customer
relationships and global supply chain expertise.
We believe our OshKosh brand represents a
significant opportunity for us to increase our share as the $17.0 billion young
children’s playclothes market, including the mass channel, is highly
fragmented. In fiscal 2008, this market was more than five times the
size of the baby and sleepwear markets combined.
Our OshKosh brand’s playclothes
market share in the department store, national chain, outlet, specialty store,
and off-price sales channels in fiscal 2008, exclusive of the mass channel, was
approximately 4.8% in the $10.0 billion market in these channels. We
are continuing to develop a base of high-volume, core playclothes products for
our OshKosh
brand.
4
Other
Products
The remainder of our OshKosh brand product
offering includes baby, sleepwear, outerwear, shoes, hosiery, and
accessories. In fiscal 2008, we generated $95.0 million in net sales
of these other products in our OshKosh retail stores, which accounted for 6.4%
of our consolidated net sales.
Royalty
Income
We partner with a number of domestic
and international licensees to extend the reach of our OshKosh brand. We
currently have eight domestic licensees, as well as 23 international licensees
selling apparel and accessories in approximately 36 countries. Our
largest licensing agreement is with Target. All Genuine Kids from OshKosh
products sold by Target are sold pursuant to this licensing
agreement. Our licensed products provide our customers and consumers
with a range of OshKosh
products including outerwear, underwear, swimwear, socks, shoes, bedding, and
accessories. In fiscal 2008, our domestic licensees
generated wholesale and mass channel net sales of approximately $187.7 million
on which we earned approximately $9.5 million in royalty income. In
fiscal 2008, our international licensees generated retail sales of approximately
$112.3 million on which we earned approximately $7.1 million in royalty
income.
OSHKOSH
DISTRIBUTION CHANNELS
In fiscal 2008, sales of our OshKosh brand products
through our OshKosh retail stores accounted for 16.7% of our consolidated net
sales (16.6% in fiscal 2007) and sales through the wholesale channel, including
off-price sales, accounted for 5.0% of our consolidated net sales (6.1% in
fiscal 2007).
Business segment financial information
for our OshKosh brand
wholesale and OshKosh
brand retail segments is contained in ITEM 8 “Financial Statements and
Supplementary Data,” Note 14 -- “Segment Information” to the accompanying
audited consolidated financial statements.
As of January 3, 2009, we operated 165
OshKosh retail stores, of which 156 were outlet stores and nine were brand
stores. These stores carry a wide assortment of young children’s
apparel, accessories, and gift items and average approximately 4,800 square feet
per location.
Our OshKosh brand wholesale
customers include major retailers, such as Kohl’s, Bon Ton, Costco, Fred Meyer,
and JCPenney. We continue to work with our department and specialty
store accounts to establish seasonal plans for playclothes
products. The majority of our OshKosh brand playclothes
products will be planned and ordered seasonally as we introduce new
products.
GLOBAL SOURCING
NETWORK
We have significant experience
in sourcing products from Asia, with expertise that includes the ability to
evaluate vendors, familiarity with foreign supply sources, and experience with
sourcing logistics particular to Asia. We also have relationships
with both leading and certain specialized sourcing agents in Asia.
Our sourcing network consists of
approximately 140 vendors located in approximately 13 countries. We
believe that our sourcing arrangements are sufficient to meet our current
operating requirements and provide capacity for growth.
COMPETITION
The baby and young children's apparel
market is highly competitive. Competition is generally based upon
product quality, brand name recognition, price, selection, service, and
convenience. Both branded and private label manufacturers compete in
the baby and young children's apparel market. Our primary competitors
in the wholesale and mass channels 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. Most retailers, including our customers, have significant
private label product offerings that compete with us. Because of the
highly-fragmented nature of the industry, we also compete with many small
manufacturers and retailers. We believe that the strength of our
Carter’s and OshKosh brand names combined
with our breadth of product offerings and operational expertise position us well
against these competitors.
5
ENVIRONMENTAL
MATTERS
We are subject to various federal,
state, and local laws that govern activities or operations that may have adverse
environmental effects. Noncompliance with these laws and regulations
can result in significant liabilities, penalties, and
costs. Generally, compliance with environmental laws has not had a
material impact on our operations, but there can be no assurance that future
compliance with such laws will not have a material adverse effect on our
operations.
TRADEMARKS,
COPYRIGHTS, AND LICENSES
We own many copyrights and trademarks,
including Carter’s®, Carter’s® Classics, Celebrating Childhood™, Child of Mine®,
Just One Year®, OshKosh®, OshKosh B’Gosh®, At Play Since 1895™, OshKosh Est.
1895®, Genuine Kids®, The Genuine Article®, and The Genuine Deal™ many of which
are registered in the United States and in more than 120 foreign
countries.
We license various Company trademarks,
including Carter’s, Just One
Year, Child of Mine, OshKosh, OshKosh B’Gosh, OshKosh Est. 1895, and Genuine Kids to third
parties to produce and distribute children’s apparel and related products such
as hosiery, outerwear, swimwear, underwear, shoes, boots, slippers, diaper bags,
furniture, room décor, bedding, giftwrap, baby books, party goods, and
toys.
AVAILABLE
INFORMATION
Our Internet address is www.carters.com. We
are not including the information contained on our website as part of, or
incorporating it by reference into, this Annual Report on Form
10-K. There we make available, free of charge, our Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to those reports, proxy statements, director and officer reports on
Forms 3, 4, and 5, and amendments to these reports, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (“SEC”). Our SEC reports can
be accessed through the investor relations section of our
website. The information found on our website is not part of this or
any other report we file with or furnish to the SEC. We also make
available on our website, the Carter’s Code of Business Ethics and
Professional Conduct, our Corporate Governance Principles, and the
charters for the Compensation, Audit, and Nominating and Corporate Governance
Committees of the Board of Directors. Our SEC filings are also
available for reading and copying at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site,
www.sec.gov,
containing reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
EMPLOYEES
As of January 3, 2009, we had 6,548
employees, 2,675 of whom were employed on a full-time basis and 3,873 of whom
were employed on a part-time basis. We have no unionized
employees. We have had no labor-related work stoppages and believe
that our labor relations are good.
6
You should carefully consider each of
the following risk factors as well as the other information contained in this
Annual Report on Form 10-K 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 fiscal 2008, we derived
approximately 42% of our consolidated net sales from our top eight customers,
including mass channel customers. Kohl’s and Wal-Mart each accounted
for approximately 10% of our consolidated net sales in fiscal
2008. We do not enter into long-term sales contracts with our major
customers, relying instead on long-standing relationships 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.
7
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 generate royalty income from the sale of licensed products that bear 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 not offset
by reductions in manufacturing costs, there would be an affect on the Company's
gross margin. Additionally, 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 young children's apparel segment.
Consumers' demand for
young children's apparel, specifically brand name apparel products, is impacted
by the overall level of consumer spending. Discretionary consumer
spending is impacted by employment levels, gasoline and utility costs, business
conditions, availability of consumer credit, tax rates, interest rates, levels
of consumer indebtedness, and overall levels of consumer
confidence. Recent and further reductions in the level of
discretionary spending may have a material adverse affect on the Company’s sales
and results of operations.
We
face risks associated with the current global credit crisis and related economic
downturn.
The continuing volatility in the
financial markets and the related economic downturn in markets throughout the
world could have a material adverse effect on our business. While we
currently generate significant cash flows from our ongoing operations and have
access to credit through amounts available under our revolving credit facility
(the “Revolver”), credit markets have recently experienced significant
disruptions and certain leading financial institutions have either declared
bankruptcy or have shown significant deterioration in their financial
stability. Further deterioration in the financial markets could make
future financing difficult or more expensive. If any of the financial
institutions that are parties to our Revolver were to declare bankruptcy or
become insolvent, they may be unable to perform under their agreements with
us. This could leave us with reduced borrowing
capacity. In addition, tighter credit markets may lead to business
disruptions for certain of our suppliers, contract manufacturers or trade
customers and consequently, could disrupt our business.
8
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,
unfavorable economic conditions, 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 primarily in Asia, coordinated by our Asia
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:
|
|
·
|
financial
instability of one of our major
vendors;
|
|
·
|
political
instability or other international events resulting in the disruption of
trade in foreign countries from which we source our
products;
|
|
|
·
|
increases
in transportation costs as a result of increased fuel
prices;
|
|
|
·
|
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
application of foreign intellectual property
laws;
|
|
·
|
the
ability of our vendors to secure sufficient credit to finance the
manufacturing process including the acquisition of raw materials;
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
source all of our products through a network of vendors. We have
limited control over these vendors and we may experience delays, product recalls
or loss of revenues if our products do not meet our quality standards or
regulatory requirements.
Our vendors, independent
manufacturers and licensees may not continue to provide products that are
consistent with our standards. We have occasionally received, and may in
the future continue to receive, shipments of product that fail to conform to our
quality control standards. A failure in our quality control program
may result in diminished product quality, which may result in increased order
cancellations and returns, decreased consumer demand for our products, or
product recalls, any of which may have a material adverse affect on our results
of operations and financial condition.
In addition, because we do not control our vendors, notwithstanding our strict
quality control procedures, products that fail to meet our standards, or other
unauthorized products, could end up in the marketplace without our knowledge,
which could harm our brand and our reputation in the
marketplace.
Our products are subject to
regulation of and regulatory standards set by various governmental authorities
with respect to quality and safety. Regulations and standards in this area
are currently in place. These regulations and standards may change
from time to time. Our inability to comply on a timely basis with
regulatory requirements could result in significant fines or penalties, which
could adversely affect our reputation and sales. Issues with the quality
and safety of merchandise we sell in our stores, regardless of our culpability,
or customer concerns about such issues, could result in damage to our
reputation, lost sales, uninsured product liability claims or losses,
merchandise recalls, and increased
costs.
9
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 revenue and gross profit.
The Company’s retail success and future growth is dependent upon identifying locations and negotiating appropriate lease terms for retail stores.
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 January 3, 2009, we had total debt
of approximately $338.0 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.
|
In addition, our senior credit facility
contains financial and other restrictive covenants that may limit our ability to
engage in activities that may be in our long-term best interests such as selling
assets, strategic acquisitions, paying dividends, and
borrowing additional funds. Our failure to comply with those
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of all of our debt which could leave us unable
to meet some or all of our obligations.
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.
10
We
may not achieve sales growth plans, cost savings, and other assumptions that
support the carrying value of our intangible assets.
As of January 3, 2009, the
Company had Carter’s cost in excess of fair value of net assets acquired of
$136.6 million, a $220.2 million Carter’s brand tradename asset, and an
$85.5 million OshKosh
brand tradename asset on its consolidated balance sheet. 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.
11
None
|
Location
|
Approximate
floor space in square feet
|
Principal
use
|
Lease
expiration
date
|
Renewal
options
|
||||||
|
Stockbridge,
Georgia
|
505,000 |
Distribution/warehousing
|
April
2010
|
13
years
|
||||||
|
Hogansville,
Georgia
|
258,000 |
Distribution/warehousing
|
Owned
|
-- | ||||||
|
Barnesville,
Georgia
|
149,000 |
Distribution/warehousing
|
Owned
|
-- | ||||||
|
White
House, Tennessee
|
284,000 |
Distribution/warehousing
*
|
Owned
|
-- | ||||||
|
Chino,
California
|
413,000 |
Distribution/warehousing
|
March
2011
|
2
years
|
||||||
|
Griffin,
Georgia
|
219,000 |
Finance/information
technology/benefits administration/rework
|
Owned
|
-- | ||||||
|
Griffin,
Georgia
|
12,500 |
Carter’s
customer service
|
Owned
|
-- | ||||||
|
Griffin,
Georgia
|
11,000 |
Information
technology
|
December
2009
|
1 year
|
||||||
|
Atlanta,
Georgia
|
102,000 |
Executive
offices/Carter’s design and merchandising
|
June
2015
|
5
years
|
||||||
|
Oshkosh,
Wisconsin
|
99,000 |
OshKosh’s
operating offices
|
Owned
|
-- | ||||||
|
Shelton,
Connecticut
|
64,000 |
Finance
and retail store administration office
|
February
2019
|
10
years
|
||||||
|
New
York, New York
|
16,000 |
Sales
office/showroom
|
January
2015
|
-- | ||||||
|
New
York, New York
|
14,000 |
OshKosh’s
design center
|
October
2011
|
-- | ||||||
|
|
*
As of January 3, 2009, this property is classified as an asset held for
sale included in prepaid and other current assets on the accompanying
audited consolidated balance
sheets.
|
As of January 3, 2009, we operated 418
leased retail stores located primarily in outlet and strip centers across the
United States, having an average size of approximately 4,800 square
feet. Generally, the majority of our leases have an average term of
approximately five years with additional five-year renewal options.
Aggregate lease commitments as of
January 3, 2009 for the above leased properties are as
follows: fiscal 2009—$51.8 million; fiscal
2010—$45.8 million; fiscal 2011—$35.4 million; fiscal 2012—$26.4 million;
fiscal 2013—$21.2 million, and $51.7 million for the balance of these
commitments beyond fiscal 2013.
A class action lawsuit was filed on
September 16, 2008 in the United States District Court for the Northern District
of Georgia asserting claims under Sections 10(b) and 20(a) of the federal
securities laws. The complaint alleges that between February 21, 2006
and July 21, 2007, the Company made misrepresentations regarding the successful
integration of OshKosh into the Company's business, and that the share price of
the Company's stock later fell when the market learned that the integration had
not been as successful as
represented. Plaintiff Plymouth County Retirement System
filed an unopposed motion to be appointed lead counsel on November 18, 2008, and
that motion was fully submitted as of December 8, 2008. Plaintiff is
now waiting for a decision from the court. By stipulation of the
parties, no motion to dismiss or other response to the complaint will be due
until 60 days after an amended complaint is filed subsequent to lead plaintiff
appointment. The Company intends to vigorously defend this
claim. Following appointment of lead plaintiff and lead counsel, the
Company intends to file a motion to dismiss for failure to state a claim under
the federal securities laws.
12
A class action lawsuit was filed on
September 29, 2008 in United States District Court for the Northern District of
Illinois against the Company claiming breach of contract arising from certain
advertising and pricing practices with respect to Carter's brand products purchased by consumers
at Carter's retail stores nationally. The complaint seeks damages and
injunctive relief. Plaintiff has since filed an amended complaint,
alleging breach of contract on behalf of a nationwide class and Illinois
Consumer Fraud Act claims on behalf of Illinois consumers. The
Company has moved to dismiss the entire amended complaint. On
February 3, 2009 the same plaintiff's attorney filed a second, nearly identical
action against the Company in the same court but in the name of a different
plaintiff. The parties filed an agreed upon motion to consolidate
this second action with the first case and to stay the need for response in the
second case until after the court has ruled upon the pending motion to
dismiss. The Company intends to vigorously defend these
claims.
The Company is subject to various other
claims and pending or threatened lawsuits in the normal course of our
business. We are not currently party to any other legal proceedings that
we believe would have a material adverse effect on our financial position,
results of operations or cash flows.
Not applicable
13
Our common stock trades on the New York
Stock Exchange under the symbol CRI. The last reported sale price per
share of our common stock on February 13, 2009 was $15.70. On that
date there were approximately 43,548 holders of record of our common
stock.
The following table sets forth for the
periods indicated the high and low sales prices per share of common stock as
reported by the New York Stock Exchange:
|
2008
|
High
|
Low
|
||||||
|
First
quarter
|
$ | 22.39 | $ | 13.48 | ||||
|
Second
quarter
|
$ | 17.14 | $ | 13.12 | ||||
|
Third
quarter
|
$ | 21.82 | $ | 11.94 | ||||
|
Fourth
quarter
|
$ | 22.35 | $ | 13.79 | ||||
|
2007
|
High
|
Low
|
||||||
|
First
quarter
|
$ | 26.90 | $ | 20.53 | ||||
|
Second
quarter
|
$ | 29.00 | $ | 24.62 | ||||
|
Third
quarter
|
$ | 26.93 | $ | 18.92 | ||||
|
Fourth
quarter
|
$ | 23.13 | $ | 18.35 | ||||
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides
information about purchases by the Company during the fourth quarter of fiscal
2008 of equity securities that are registered by the Company pursuant to Section
12 of the Exchange Act:
|
Period
|
Total
number of shares purchased
(1)
|
Average
price paid per share
|
Total
number of shares purchased as part of publicly announced plans or
programs
(2)
|
Approximate
dollar value of shares that may yet be purchased under the plans or
programs
(2)
|
||||||||||||
|
September
28, 2008 through October 25, 2008
|
228,178 | $ | 16.93 | 228,178 | $ | 8,895,948 | ||||||||||
|
October
26, 2008 through November 29, 2008
|
-- | -- | -- | $ | 8,895,948 | |||||||||||
|
November
30, 2008 through January 3, 2009
|
-- | -- | -- | $ | 8,895,948 | |||||||||||
|
Total
|
228,178 | $ | 16.93 | 228,178 | $ | 8,895,948 | ||||||||||
|
(1)
|
Represents
repurchased shares which were
retired.
|
|
(2)
|
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 $8,895,948 as of
January 3, 2009.
|
14
DIVIDENDS
Provisions in our senior credit
facility currently restrict the ability of our operating subsidiary, The William
Carter Company (“TWCC”), from paying cash dividends to our parent company,
Carter’s, Inc., in excess of $15.0 million, which materially restricts Carter’s,
Inc. from paying cash dividends on our common stock. We do not
anticipate paying cash dividends on our common stock in the foreseeable future
but intend to retain future earnings, if any, for reinvestment in the future
operation and expansion of our business and related development
activities. Any future decision to pay cash dividends will be at the
discretion of our Board of Directors and will depend upon our financial
condition, results of operations, terms of financing arrangements, capital
requirements, and any other factors as our Board of Directors deems
relevant.
RECENT
SALES OF UNREGISTERED SECURITIES
Not applicable
15
The following table sets forth selected
financial and other data as of and for the five fiscal years ended January 3,
2009 (fiscal 2008).
On July 14, 2005, Carter’s, Inc.,
through TWCC, acquired all of the outstanding common stock of OshKosh for a
purchase price of $312.1 million, which included payment for vested stock
options (the “Acquisition”). As part of financing the Acquisition,
the Company refinanced its existing debt (the “Refinancing”), comprised of its
former senior credit facility and its outstanding 10.875% Senior Subordinated
Notes due 2011 (the “Notes”) (the Refinancing, together with the Acquisition,
the “Transaction”).
Financing for the Transaction was
provided by a new $500 million Term Loan (the “Term Loan”) and a $125 million
revolving credit facility (including a sub-limit for letters of credit of $80
million, the “Revolver”) entered into by TWCC with Bank of America, N.A., as
administrative agent, and certain other financial institutions (the “Senior
Credit Facility”).
The proceeds from the Refinancing were
used to purchase the outstanding common stock and vested stock options of
OshKosh ($312.1 million), pay Transaction expenses ($6.2 million), refinance the
Company’s former senior credit facility ($36.2 million), repurchase the
Company’s Notes ($113.8 million), pay a redemption premium on the Company’s
Notes ($14.0 million), along with accrued and unpaid interest ($5.1 million),
and pay debt issuance costs ($10.6 million). Other Transaction
expenses paid prior and subsequent to the closing of the Transaction totaled
$1.4 million, including $0.2 million in debt issuance costs.
On June 6, 2006, the Company effected a
two-for-one stock split (the “stock split”) through a stock dividend to
stockholders of record as of May 23, 2006 of one share of our common stock for
each share of common stock outstanding. Earnings per share for all
prior periods presented have been adjusted to reflect the stock
split.
The selected financial data for the
five fiscal years ended January 3, 2009 were derived from our audited
consolidated financial statements. Our fiscal year ends on the
Saturday, in December or January, nearest the last day of
December. Consistent with this policy, fiscal 2008 ended on January
3, 2009, fiscal 2007 ended on December 29, 2007, fiscal 2006 ended on December
30, 2006, fiscal 2005 ended on December 31, 2005, and fiscal 2004 ended on
January 1, 2005. Fiscal 2008 contained 53 weeks of financial
results. Fiscal 2007, fiscal 2006, fiscal 2005, and fiscal 2004 each
contained 52 weeks of financial results.
16
The following table should be read in
conjunction with ITEM 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and ITEM 8 "Financial Statements and
Supplementary Data."
|
Fiscal
Years
|
||||||||||||||||||||
|
(dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
OPERATING
DATA:
|
||||||||||||||||||||
|
Wholesale
sales – Carter’s
|
$ | 489,744 | $ | 482,350 | $ | 464,636 | $ | 427,043 | $ | 385,810 | ||||||||||
|
Wholesale
sales – OshKosh
|
74,270 | 86,555 | 96,351 | 59,707 | -- | |||||||||||||||
|
Retail
sales – Carter’s
|
422,436 | 366,296 | 333,050 | 316,477 | 291,362 | |||||||||||||||
|
Retail
sales – OshKosh
|
249,130 | 233,776 | 229,103 | 140,104 | -- | |||||||||||||||
|
Mass
Channel sales – Carter’s
|
254,436 | 243,269 | 220,327 | 178,027 | 145,949 | |||||||||||||||
|
Total net sales
|
1,490,016 | 1,412,246 | 1,343,467 | 1,121,358 | 823,121 | |||||||||||||||
|
Cost
of goods sold
|
975,999 | 928,996 | 854,970 | 725,086 | 525,082 | |||||||||||||||
|
Gross
profit
|
514,017 | 483,250 | 488,497 | 396,272 | 298,039 | |||||||||||||||
|
Selling,
general, and administrative expenses
|
404,274 | 359,826 | 352,459 | 288,624 | 208,756 | |||||||||||||||
|
Intangible
asset impairment (a)
|
-- | 154,886 | -- | -- | -- | |||||||||||||||
|
Executive
retirement charges (b)
|
5,325 | -- | -- | -- | -- | |||||||||||||||
|
Facility
write-down and closure costs (c)
|
2,609 | 5,285 | 91 | 6,828 | 620 | |||||||||||||||
|
Royalty
income
|
(33,685 | ) | (30,738 | ) | (29,164 | ) | (20,426 | ) | (12,362 | ) | ||||||||||
|
Operating
income (loss)
|
135,494 | (6,009 | ) | 165,111 | 121,246 | 101,025 | ||||||||||||||
|
Interest
income
|
(1,491 | ) | (1,386 | ) | (1,914 | ) | (1,322 | ) | (335 | ) | ||||||||||
|
Loss
on extinguishment of debt (d)
|
-- | -- | -- | 20,137 | -- | |||||||||||||||
|
Interest
expense
|
19,578 | 24,465 | 28,837 | 24,564 | 18,852 | |||||||||||||||
|
Income
(loss) before income taxes
|
117,407 | (29,088 | ) | 138,188 | 77,867 | 82,508 | ||||||||||||||
|
Provision
for income taxes
|
42,349 | 41,530 | 50,968 | 30,665 | 32,850 | |||||||||||||||
|
Net
income (loss)
|
$ | 75,058 | $ | (70,618 | ) | $ | 87,220 | $ | 47,202 | $ | 49,658 | |||||||||
|
PER
COMMON SHARE DATA:
|
||||||||||||||||||||
|
Basic
net income (loss)
|
$ | 1.33 | $ | (1.22 | ) | $ | 1.50 | $ | 0.82 | $ | 0.88 | |||||||||
|
Diluted
net income (loss)
|
$ | 1.29 | $ | (1.22 | ) | $ | 1.42 | $ | 0.78 | $ | 0.83 | |||||||||
|
Basic
weighted-average shares
|
56,309,454 | 57,871,235 | 57,996,241 | 57,280,504 | 56,251,168 | |||||||||||||||
|
Diluted
weighted-average shares
|
58,276,001 | 57,871,235 | 61,247,122 | 60,753,384 | 59,855,914 | |||||||||||||||
|
BALANCE
SHEET DATA (end of period):
|
||||||||||||||||||||
|
Working
capital (e)
|
$ | 372,964 | $ | 326,891 | $ | 265,904 | $ | 242,442 | $ | 185,968 | ||||||||||
|
Total
assets
|
1,051,057 | 974,668 | 1,123,191 | 1,116,727 | 672,965 | |||||||||||||||
|
Total
debt, including current maturities
|
338,026 | 341,529 | 345,032 | 430,032 | 184,502 | |||||||||||||||
|
Stockholders’
equity
|
426,596 | 382,129 | 495,491 | 386,644 | 327,933 | |||||||||||||||
|
CASH
FLOW DATA:
|
||||||||||||||||||||
|
Net
cash provided by operating activities
|
$ | 183,623 | $ | 51,987 | $ | 88,224 | $ | 137,267 | $ | 42,676 | ||||||||||
|
Net
cash used in investing activities
|
(37,529 | ) | (21,819 | ) | (30,500 | ) | (308,403 | ) | (18,577 | ) | ||||||||||
|
Net
cash (used in) provided by financing activities
|
(32,757 | ) | (49,701 | ) | (73,455 | ) | 222,147 | (26,895 | ) | |||||||||||
|
OTHER
DATA:
|
||||||||||||||||||||
|
Gross
margin
|
34.5 | % | 34.2 | % | 36.4 | % | 35.3 | % | 36.2 | % | ||||||||||
|
Depreciation
and amortization
|
$ | 30,158 | $ | 29,919 | $ | 26,489 | $ | 21,912 | $ | 19,536 | ||||||||||
|
Capital
expenditures
|
37,529 | 21,876 | 30,848 | 22,588 | 20,481 | |||||||||||||||
See Notes
to Selected Financial Data.
17
NOTES
TO SELECTED FINANCIAL DATA
(a) Intangible asset impairment charges
of $154.9 million in fiscal 2007 reflect the impairment of the OshKosh cost in
excess of fair value of net assets acquired asset (OshKosh wholesale segment of
$36.0 million and OshKosh retail segment of $106.9 million) and the impairment
of the value ascribed to the OshKosh tradename of $12.0
million.
(b) Executive retirement charges of
$5.3 million consist of $3.1 million related to the present value of severance
and benefit obligations and $2.2 million of which related to the accelerated
vesting of certain stock options.
(c) The $0.6 million in closure costs
in fiscal 2004 relate to costs associated with the closure of our Costa Rican
facilities and our distribution facility in Leola, Pennsylvania. The
$6.8 million and $0.1 million in closure costs in fiscal 2005 and fiscal 2006
relate to the closure of our Mexican sewing facilities. The $5.3
million in closure costs in fiscal 2007 relate to the closure of our OshKosh
distribution facility. The $2.6 million charge in fiscal 2008 relates
to the write-down of the carrying value of our OshKosh distribution facility
held for sale.
(d) Debt extinguishment charges in
fiscal 2005 reflect the payment of a $14.0 million redemption premium on our
Notes, the write-off of $4.5 million in unamortized debt issuance costs related
to the former senior credit facility and Notes, and the write-off of $0.5
million of the related Note discount. Additionally, we expensed
approximately $1.1 million of debt issuance costs associated with our Senior
Credit Facility in accordance with Emerging Issues Task Force (“EITF”) No.
96-19, “Debtor’s Accounting for a Modification or Exchange of Debt
Instruments.”
(e) Represents total current assets
less total current liabilities.
18
The following is a discussion of our
results of operations and current financial condition. You should
read this discussion in conjunction with our consolidated historical financial
statements and notes included elsewhere in this Annual Report on Form
10-K. Our discussion of our results of operations and financial
condition includes various forward-looking statements about our markets, the
demand for our products and services, and our future results. We
based these statements on assumptions that we consider
reasonable. Actual results may differ materially from those suggested
by our forward-looking statements for various reasons including those discussed
in the “Risk Factors” in ITEM 1A of this Annual Report on Form
10-K. Those risk factors expressly qualify all subsequent oral and
written forward-looking statements attributable to us or persons acting on our
behalf. Except for any ongoing obligations to disclose material
information as required by the federal securities laws, we do not have any
intention or obligation to update forward-looking statements after we file this
Annual Report on Form 10-K.
OVERVIEW
For more than 140 years, Carter’s has become one of
the most highly recognized and most trusted brand names in the children’s
apparel industry and with the Acquisition of OshKosh on July 14, 2005, we now
own the highly recognized and trusted OshKosh B’Gosh brand which also
earned the position of a highly trusted and well-known brand for over 110
years.
We sell our products under our Carter’s and OshKosh brands in the
wholesale channel, which includes over 260 department store, national chain, and
specialty store accounts. We also sell our products in the mass
channel under our Child of
Mine brand to over 3,500 Wal-Mart stores nationwide and under our Just One Year brand to over
1,600 Target stores. Additionally, as of January 3, 2009, we operated
253 Carter’s and 165 OshKosh retail stores located
primarily in outlet and strip centers throughout the United
States. We also extend our brand reach by licensing our Carter’s, Child of Mine, Just One
Year, OshKosh,
and related brand names through domestic licensing arrangements, including
licensing of our Genuine Kids
from OshKosh brand to Target stores nationwide. Our OshKosh B’Gosh brand name is
also licensed through international licensing arrangements. During
fiscal 2008, we earned approximately $33.7 million in royalty income from these
arrangements, including $16.6 million from our OshKosh and Genuine Kids from OshKosh
brands.
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. During the second quarter of fiscal 2007, as a
result of the continued 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. Based
on this assessment, charges of approximately $36.0 million for the OshKosh
wholesale segment and $106.9 million for the OshKosh retail segment were
recorded for the impairment of the cost in excess of fair value of net assets
acquired asset. In addition, an impairment charge of $12.0 million
was recorded to reflect the impairment of the value ascribed to the OshKosh
tradename. The carrying value of the OshKosh tradename asset 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. Estimated future cash flows used in such impairment
reviews could be negatively impacted if we do not achieve our sales plans and
other assumptions that support the carrying value of these intangible assets,
which could result in potential impairment of such assets.
We have also acquired certain
definite-lived intangible assets in connection with the Acquisition of OshKosh
comprised of licensing agreements and leasehold interests which resulted in
annual amortization expense of $4.7 million in fiscal 2006; $4.5 million in
fiscal 2007; and $4.1 million in fiscal 2008. Amortization expense
related to these intangible assets will be $3.7 million in fiscal 2009 and $1.8
million in fiscal 2010.
During fiscal 2007, the 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 fiscal 2008, the Company repurchased
and retired 2,126,361 shares, or approximately $33.6 million, of its common
stock at an average price of $15.82 per share. Since inception of the
program and through fiscal 2008, the Company repurchased and retired 4,599,580
shares, or approximately $91.1 million, of its common stock at an average price
of $19.81 per share.
19
Our fiscal year ends on the Saturday,
in December or January, nearest the last day of December. Consistent
with this policy, fiscal 2008 ended on January 3, 2009, fiscal 2007 ended on
December 29, 2007, and fiscal 2006 ended on December 30, 2006. Fiscal
2008 contained 53 weeks of financial results while fiscal 2007 and 2006 each
contained 52 weeks.
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:
|
Fiscal
Years
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Wholesale
sales:
|
||||||||||||
|
Carter’s
|
32.9 | % | 34.2 | % | 34.6 | % | ||||||
|
OshKosh
|
5.0 | 6.1 | 7.2 | |||||||||
|
Total
wholesale sales
|
37.9 | 40.3 | 41.8 | |||||||||
|
Retail
store sales:
|
||||||||||||
|
Carter’s
|
28.3 | 25.9 | 24.8 | |||||||||
|
OshKosh
|
16.7 | 16.6 | 17.0 | |||||||||
|
Total
retail store sales
|
45.0 | 42.5 | 41.8 | |||||||||
|
Mass
channel sales
|
17.1 | 17.2 | 16.4 | |||||||||
|
Consolidated
net sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of goods sold
|
65.5 | 65.8 | 63.6 | |||||||||
|
Gross
profit
|
34.5 | 34.2 | 36.4 | |||||||||
|
Selling,
general, and administrative expenses
|
27.1 | 25.5 | 26.2 | |||||||||
|
Intangible
asset impairment
|
-- | 11.0 | -- | |||||||||
|
Executive
retirement charges
|
0.4 | -- | -- | |||||||||
|
Facility
write-down and closure costs
|
0.2 | 0.3 | -- | |||||||||
|
Royalty
income
|
(2.3 | ) | (2.2 | ) | (2.1 | ) | ||||||
|
Operating
income (loss)
|
9.1 | (0.4 | ) | 12.3 | ||||||||
|
Interest
expense, net
|
1.2 | 1.7 | 2.0 | |||||||||
|
Income
(loss) before income taxes
|
7.9 | (2.1 | ) | 10.3 | ||||||||
|
Provision
for income taxes
|
2.9 | 2.9 | 3.8 | |||||||||
|
Net
income (loss)
|
5.0 | % | (5.0 | )% | 6.5 | % | ||||||
|
Number
of retail stores at end of period:
|
||||||||||||
|
Carter’s
|
253 | 228 | 219 | |||||||||
|
OshKosh
|
165 | 163 | 157 | |||||||||
|
Total
|
418 | 391 | 376 | |||||||||
20
FISCAL
YEAR ENDED JANUARY 3, 2009 COMPARED WITH FISCAL YEAR ENDED DECEMBER 29,
2007
CONSOLIDATED
NET SALES
Consolidated net sales for fiscal 2008
were $1.5 billion, an increase of $77.8 million, or 5.5%, compared to $1.4
billion in fiscal 2007. This increase reflects growth in all three of
our Carter’s brand
segments and our OshKosh brand retail store
segment.
|
For
the fiscal years ended
|
||||||||||||||||
|
(dollars
in thousands)
|
January
3,
2009
|
%
of
Total
|
December
29,
2007
|
%
of
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Wholesale-Carter’s
|
$ | 489,744 | 32.9 | % | $ | 482,350 | 34.2 | % | ||||||||
|
Wholesale-OshKosh
|
74,270 | 5.0 | % | 86,555 | 6.1 | % | ||||||||||
|
Retail-Carter’s
|
422,436 | 28.3 | % | 366,296 | 25.9 | % | ||||||||||
|
Retail-OshKosh
|
249,130 | 16.7 | % | 233,776 | 16.6 | % | ||||||||||
|
Mass
Channel-Carter’s
|
254,436 | 17.1 | % | 243,269 | 17.2 | % | ||||||||||
|
Total
net sales
|
$ | 1,490,016 | 100.0 | % | $ | 1,412,246 | 100.0 | % | ||||||||
CARTER’S
WHOLESALE SALES
Carter’s brand wholesale
sales increased $7.4 million, or 1.5%, in fiscal 2008, to $489.7
million. The increase in Carter’s brand wholesale
sales was driven by a 6% increase in units shipped, partially offset by a 4%
decrease in average price per unit, as compared to fiscal 2007. The
growth in units shipped was driven primarily by growth in all product categories
due to increased demand and higher levels of off-price units
shipped. The decrease in average price per unit was due to more
competitive pricing in certain product categories, particularly to our off-price
customers.
OSHKOSH
WHOLESALE SALES
OshKosh brand wholesale sales
decreased $12.3 million, or 14.2%, in fiscal 2008 to $74.3
million. The decrease in OshKosh brand wholesale sales
reflects a 16% decline in average price per unit, partially offset by a 2%
increase in units shipped, as compared to fiscal 2007. The decrease
in average prices reflects a change in strategy to reposition the OshKosh brand to appeal to a
broader consumer population. We believe our new product offerings and
price repositioning drove the increase in units shipped.
CARTER’S RETAIL STORES
Carter’s retail stores sales increased
$56.1 million, or 15.3%, in fiscal 2008 to $422.4 million. The
increase was driven by a comparable store sales increase of $38.5 million, or
9.0% (based on 225 locations), incremental sales of $18.5 million generated by
new store openings, partially offset by the impact of store closures of $0.9
million. During fiscal 2008, on a comparable store basis,
transactions increased 4.0%, units per transaction increased 3.5%, and average
prices increased 1.3% as compared to fiscal 2007. The increases in
transactions and units per transaction were driven by strong product performance
in all product categories, improved in-store product presentation, and a focus
on merchandising and marketing efforts. The increase in average
prices was driven by our baby, sleepwear, and other product categories,
partially offset by decreased playwear product category pricing.
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 253 Carter’s
retail stores open as of January 3, 2009. During fiscal 2008, we
opened 25 stores. We plan to open approximately 20 and close five
Carter’s retail stores during fiscal 2009.
21
OSHKOSH
RETAIL STORES
OshKosh retail store sales increased
$15.4 million, or 6.6%, in fiscal 2008 to $249.1 million. The
increase was due to incremental sales of $7.1 million generated by new store
openings, and a comparable store sales increase of $10.3 million, or 3.2% (based
on 160 locations), partially offset by the impact of store closings of $2.0
million. On a comparable store basis, transactions increased 2.0%,
units per transaction increased 4.3%, and average prices decreased
3.0%. The increases in transactions and units per transaction and
decrease in average prices were driven by heavy promotional pricing on excess
products during the first half of fiscal 2008.
There were a total of 165 OshKosh
retail stores open as of January 3, 2009. During fiscal 2008, we
opened three stores and closed one store. We plan to close three
OshKosh retail stores during fiscal 2009.
MASS
CHANNEL SALES
Mass channel sales increased $11.2
million, or 4.6%, in fiscal 2008 to $254.4 million. The increase was
driven by sales of $14.9 million, or 15.5%, of our Just One Year brand to
Target partially
offset by a $3.7 million, or 2.5%, decrease in sales of our Child of Mine brand to
Wal-Mart. The increase in Just One Year sales was
driven primarily from new door growth and new floor space, particularly in
playwear and baby. The decrease in Child of Mine sales was due
to product performance in certain categories, particularly certain Spring 2008
products and certain fall hanging products. We anticipate our mass
channel sales could decline approximately 15% in fiscal 2009 as compared to
fiscal 2008.
GROSS
PROFIT
Our gross profit increased $30.8
million, or 6.4%, to $514.0 million in fiscal 2008. Gross profit as a
percentage of net sales was 34.5% in fiscal 2008 as compared to 34.2% in fiscal
2007.
The increase in gross profit as a
percentage of net sales reflects a higher relative percentage of sales from our
Carter’s and OshKosh retail store segments, which generate higher gross profit
margins than our other business segments. In fiscal 2008, our retail
segments sales increased $71.5 million, or 11.9%.
Partially offsetting these increases
were:
|
(i)
|
higher
provisions for excess inventory of approximately $6.0 million in fiscal
2008 as compared to fiscal 2007 due to declining market
conditions;
|
|
(ii)
|
lower
margins on 2008 Child of
Mine products due to disappointing over-the-counter performance;
and
|
|
(iii)
|
a
decline in Carter’s
and OshKosh
brand wholesale margins due to price
reductions.
|
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 fiscal 2008 increased $44.4 million, or 12.4%, to $404.3
million. As a percentage of net sales, selling, general, and
administrative expenses in fiscal 2008 were 27.1% as compared to 25.5% in fiscal
2007.
The increase in selling, general, and
administrative expenses as a percentage of net sales reflects:
|
(i)
|
increase
in our consolidated retail expenses from 30.7% of retail store sales in
fiscal 2007 to 31.6% in fiscal 2008, related primarily to new store
openings and investments in our retail management team;
and
|
|
(ii)
|
a
provision for incentive compensation of $6.3 million in fiscal 2008 as
compared to no provision in fiscal
2007.
|
22
Partially offsetting these increases
were:
|
(i)
|
a
decline in distribution costs as a percentage of sales from 4.1% in fiscal
2007 to 3.7% in fiscal 2008 resulting from supply chain efficiencies;
and
|
|
(ii)
|
accelerated
depreciation of $2.1 million recorded in fiscal 2007 related to the
closure of our OshKosh distribution
facility.
|
The
Company is currently in the process of evaluating its overall cost structure in
order to identify areas where costs can be reduced and operations can be run
more efficiently. While the timing of and charges associated with
any restructuring have not yet been determined, it is likely that some level of
restructuring charges will be incurred during the first quarter and balance of
fiscal 2009.
INTANGIBLE
ASSET IMPAIRMENT
During the second quarter
of fiscal 2007, as a result of negative trends in sales and profitability of the
OshKosh wholesale and retail segments and revised projections for such segments,
the Company conducted an interim impairment assessment of the value of the
intangible assets that the Company recorded in connection with the Acquisition of OshKosh. This assessment was
performed in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Intangible Assets.” Based on this
assessment, charges of approximately $36.0 million and $106.9 million were
recorded for the impairment of the cost in excess of fair value of net assets
acquired for the 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.
EXECUTIVE
RETIREMENT CHARGES
On June 11, 2008, the
Company announced the retirement of an
executive officer. In connection with this retirement, the Company
recorded charges of $5.3 million, $3.1 million of which related to the present
value of severance and benefit obligations, and $2.2 million of which related to
the accelerated vesting of stock options.
FACILITY
WRITE-DOWN AND CLOSURE COSTS
On February 15, 2007, the Board of
Directors approved management’s plan to close the Company’s OshKosh distribution
facility, which was utilized to distribute the Company’s OshKosh brand
products. In connection with this closure we recorded costs of $7.4
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, $2.1 million of accelerated depreciation (included in
selling, general, and administrative expenses), and $0.9 million in other
closure costs during fiscal 2007.
In the third quarter of fiscal 2008,
the Company wrote down the carrying value of the OshKosh distribution facility
by $2.6 million to reflect a reduction of the anticipated selling price of the
property as a result of the deterioration in the commercial real estate
market.
ROYALTY
INCOME
Our royalty income increased $2.9
million, or 9.6%, to $33.7 million in fiscal 2008.
We license the use of our Carter’s, Just One Year, and
Child of Mine
brands. Royalty income from these brands was approximately
$16.8 million, an increase of 9.1%, or $1.4 million, as compared to fiscal 2007
due to increased sales by our Carter’s brand and Child of Mine brand
licensees. In addition, in fiscal 2008, the Company began to license
the Carter’s brand
internationally generating $0.3 million in royalty income.
We also license the use of our OshKosh B’Gosh, OshKosh,
and Genuine Kids from
OshKosh brand names. Royalty income from these brands
increased approximately $1.3 million, or 8.2%, to $16.6 million in fiscal 2008
and includes $7.1 million of international royalties. This increase
was driven by increased sales by our OshKosh brand domestic and
international licensees.
OPERATING
INCOME (LOSS)
Our operating income was $135.5 million
in fiscal 2008 as compared to an operating loss of $6.0 million in fiscal
2007. This change in our operating results is due largely to the
charges in fiscal 2007 related to the impairment of OshKosh’s intangible assets
and the closure of our OshKosh distribution facility in addition to the other
factors described above.
23
INTEREST
EXPENSE, NET
Interest expense, net, in fiscal 2008
decreased $5.0 million, or 21.6%, to $18.1 million. This decrease is
attributable to a lower effective interest rate on lower weighted-average
borrowings. In fiscal 2008, weighted-average borrowings were $340.1
million at an effective interest rate of 5.76% as compared to weighted-average
borrowings of $349.2 million at an effective interest rate of 7.01% in fiscal
2007. In fiscal 2008, we recorded $1.1 million in interest expense
related to our interest rate swap agreement and $1.2 million in interest expense
related to our interest rate collar agreement. In fiscal 2007, we
recorded interest income of approximately $1.6 million related to our interest
rate swap agreement, which effectively reduced our interest expense under the
term loan.
INCOME
TAXES
Our effective tax rate was
approximately 36.1% in fiscal 2008 as compared to approximately (142.8%) in
fiscal 2007. This change is a result of the impairment of our OshKosh
cost in excess of fair value of net assets acquired asset in fiscal 2007, which
was not deductible for income tax purposes. See Note 8 to the
accompanying audited consolidated financial statements for a reconciliation of
the statutory rate to our effective tax rate.
NET
INCOME (LOSS)
As a result of the factors above, we
recorded net income of $75.1 million in fiscal 2008 as compared to a net loss of
$70.6 million in fiscal 2007.
FISCAL
YEAR ENDED DECEMBER 29, 2007 COMPARED WITH FISCAL YEAR ENDED DECEMBER 30,
2006
CONSOLIDATED
NET SALES
Consolidated net sales for fiscal 2007
were $1.4 billion, an increase of $68.8 million, or 5.1%, compared to $1.3
billion in fiscal 2006. This increase reflects growth in all three of
our Carter’s brand
distribution channels and our OshKosh brand retail store
segment.
|
For
the fiscal years ended
|
||||||||||||||||
|
(dollars
in thousands)
|
December
29,
2007
|
%
of
Total
|
December
30,
2006
|
%
of
Total
|
||||||||||||
|
Net
sales:
|
||||||||||||||||
|
Wholesale-Carter’s
|
$ | 482,350 | 34.2 | % | $ | 464,636 | 34.6 | % | ||||||||
|
Wholesale-OshKosh
|
86,555 | 6.1 | % | 96,351 | 7.2 | % | ||||||||||
|
Retail-Carter’s
|
366,296 | 25.9 | % | 333,050 | 24.8 | % | ||||||||||
|
Retail-OshKosh
|
233,776 | 16.6 | % | 229,103 | 17.0 | % | ||||||||||
|
Mass
Channel-Carter’s
|
243,269 | 17.2 | % | 220,327 | 16.4 | % | ||||||||||
|
Total
net sales
|
$ | 1,412,246 | 100.0 | % | $ | 1,343,467 | 100.0 | % | ||||||||
CARTER’S
WHOLESALE SALES
Carter’s brand wholesale
sales increased $17.7 million, or 3.8%, in fiscal 2007, to $482.4
million. The increase in Carter’s brand wholesale
sales was driven by a 4% increase in units shipped. Average price per
unit was comparable to fiscal 2006.
The growth in units shipped was driven
primarily by our baby and playwear product categories, which accounted for
approximately 47% and 33% of total Carter’s brand wholesale
sales, respectively, partially offset by a decrease in sleepwear units
shipped. The growth in baby and playwear units shipped was driven by
increased demand.
OSHKOSH
WHOLESALE SALES
OshKosh brand wholesale sales
decreased $9.8 million, or 10.2%, in fiscal 2007 to $86.6
million. The decrease in OshKosh brand wholesale sales
was impacted by a 19% decrease in average price per unit, partially offset by an
11% increase in units shipped as compared to fiscal 2006. The
decrease in average prices reflects changes in product mix and higher levels of
customer accommodations as compared to the prior year.
24
CARTER’S RETAIL STORES
Carter’s retail stores sales increased
$33.2 million, or 10.0%, in fiscal 2007 to $366.3 million. The
increase was driven by incremental sales of $22.8 million generated by new store
openings and a comparable store sales increase of $13.3 million, or 4.1% (based
on 206 locations), partially offset by the impact of store closures of $2.8
million. During fiscal 2007, units per transaction increased 5.3% and
average prices decreased 3.0% as compared to fiscal 2006. Average
prices decreased due to increased promotional pricing on spring sleepwear and
fall playclothes products. We believe increased promotional pricing
drove the increase in unit volume. Average inventory levels, on a
comparable store basis, were up 10.9% as compared to fiscal 2006. We
believe these higher average inventory levels helped drive our comparable store
sales increases.
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 228 Carter’s
retail stores as of December 29, 2007. During fiscal 2007, we opened
ten stores and closed one store.
OSHKOSH
RETAIL STORES
OshKosh retail store sales increased
$4.7 million, or 2.0%, in fiscal 2007 to $233.8 million. The increase
was due to incremental sales of $15.2 million generated by new store openings,
partially offset by a comparable store sales decrease of $9.8 million, or 4.3%
(based on 146 locations), and the impact of store closings of $0.8
million. Average prices decreased 6.0% and units per transaction
increased 4.4%. Average prices decreased due to increased promotional
activity across all major product categories. Average inventory
levels, on a comparable store basis, were up 22.5% as compared to fiscal
2006.
There were a total of 163 OshKosh
retail stores as of December 29, 2007. During fiscal 2007, we opened
nine stores and closed three stores.
MASS
CHANNEL SALES
Mass channel sales increased $22.9
million, or 10.4%, in fiscal 2007 to $243.3 million. The increase was
driven by increased sales of $11.9 million, or 8.8%, of our Child of Mine brand to
Wal-Mart and increased sales of $11.0 million, or 12.9%, of our Just One Year brand to
Target. The growth in sales of our Child of Mine brand was
driven by gaining additional floor space for fall sleepwear and fall playwear
products. Growth in sales of our Just One Year brand was
driven by new door growth and better product performance.
GROSS
PROFIT
Our gross profit decreased $5.2
million, or 1.1%, to $483.3 million in fiscal 2007. Gross profit as a
percentage of net sales was 34.2% in fiscal 2007 as compared to 36.4% in fiscal
2006.
The decrease in gross profit as a
percentage of net sales reflects:
|
(i)
|
a
decrease in gross profit in our consolidated retail segments, primarily
OshKosh, due to increased promotional pricing (consolidated retail gross
margin decreased from 51.1% in fiscal 2006 to 47.8% in fiscal 2007 despite
an increase in consolidated retail net sales of 6.7% in fiscal
2007);
|
|
(ii)
|
the
impact of OshKosh
brand wholesale product performance, which led to higher levels of
customer accommodations in fiscal 2007;
and
|
|
(iii)
|
the
impact of $4.9 million in higher losses associated with excess
inventory.
|
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.
25
SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative
expenses in fiscal 2007 increased $7.4 million, or 2.1%, to $359.8
million. As a percentage of net sales, selling, general, and
administrative expenses in fiscal 2007 were 25.5% as compared to 26.2% in fiscal
2006.
The decrease in selling, general, and
administrative expenses as a percentage of net sales reflects:
|
(i)
|
a
reduction in incentive compensation expense of $10.2 million as compared
to fiscal 2006;
|
|
(ii)
|
controlling
growth in spending to a rate lower than the growth in net sales for fiscal
2007; and
|
|
(iii)
|
the
reversal in fiscal 2007 of approximately $1.5 million of previously
recorded stock-based compensation expense and the reduction in fiscal 2007
of $1.2 million of stock-based compensation expense on performance-based
stock awards (see Note 6).
|
Partially offsetting these decreases
were:
|
(i)
|
accelerated
depreciation charges of $2.1 million in fiscal 2007 related to the closure
of our OshKosh distribution facility;
and
|
|
(ii)
|
increased
severance, recruiting, and relocation expenses of $1.9 million as compared
to fiscal 2006. The increase was driven primarily by
restructuring our retail store management
team.
|
INTANGIBLE
ASSET IMPAIRMENT
During the second quarter of fiscal
2007, as a result of negative trends in sales and profitability of the OshKosh
wholesale and retail segments and revised projections for such segments, the
Company conducted an interim impairment assessment on the value of the
intangible assets that the Company recorded in connection with the Acquisition
of OshKosh. This assessment was performed in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and
Intangible Assets.” Based on this assessment, charges of
approximately $36.0 million and $106.9 million were recorded for the impairment
of the cost in excess of fair value of net assets acquired for the 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.
CLOSURE
COSTS
On February 15, 2007, the Board of
Directors approved management’s plan to close the Company’s OshKosh distribution
facility, which was utilized to distribute the Company’s OshKosh brand
products. In connection with this closure we recorded costs of $7.4
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, $2.1 million of accelerated depreciation (included in
selling, general, and administrative expenses), and $0.9 million in other
closure costs during fiscal 2007.
In May 2005, we decided to exit two
Carter’s sewing facilities in Mexico. During fiscal 2006, in
connection with these closures, we recorded costs of $91,000, including $74,000
of severance and $17,000 of other exit costs.
ROYALTY
INCOME
Our royalty income increased $1.6
million, or 5.4%, to $30.7 million in fiscal 2007.
We license the use of our Carter’s, Just One Year, and
Child of Mine
brands. Royalty income from these brands was approximately
$15.3 million, an increase of 2.1%, or $0.3 million, as compared to fiscal 2006
due to increased sales by our Carter’s brand and Child of Mine brand
licensees.
We license the use of our OshKosh and Genuine Kids from OshKosh
brand names. Royalty income from these brands increased approximately
$1.3 million, or 8.9%, to $15.4 million in fiscal 2007 and includes $6.5 million
of international royalty. This increase was driven primarily by
increased sales by our OshKosh
brand domestic licensees.
26
OPERATING
(LOSS) INCOME
Our operating loss was $6.0 million in
fiscal 2007 as compared to operating income of $165.1 million in fiscal
2006. The decrease in operating results was due to the factors
described above including the charges incurred in fiscal 2007 related to the
impairment of OshKosh’s intangible assets and the closure of our OshKosh
distribution facility, partially offset by the reversal of stock-based
compensation expense associated with performance stock awards.
INTEREST
EXPENSE, NET
Interest expense in fiscal 2007
decreased $3.8 million, or 14.3%, to $23.1 million. This decrease is
attributable to accelerated debt reduction in fiscal 2006 and a lower effective
interest rate. In fiscal 2007, weighted-average borrowings were
$349.2 million at an effective interest rate of 7.01% as compared to
weighted-average borrowings of $397.9 million at an effective interest rate of
7.25% in fiscal 2006. In fiscal 2007 and 2006, our interest rate swap
agreement reduced our interest expense under the Term Loan by approximately $1.6
million and $1.3 million, respectively.
INCOME
TAXES
Our effective tax rate was
approximately (142.8%) in fiscal 2007 as compared to approximately 36.9% in
fiscal 2006. This change in our effective tax rate is a result of the
impairment of our OshKosh cost in excess of fair value of net assets acquired
asset, which is not deductible for income tax purposes. See Note 8 to
the accompanying audited consolidated financial statements for a reconciliation
of the statutory rate to our effective tax rate.
NET
(LOSS) INCOME
As a result of the factors above, we
recorded a net loss for fiscal 2007 of $70.6 million as compared to net income
of $87.2 million in fiscal 2006.
LIQUIDITY
AND CAPITAL RESOURCES
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, described below.
Net accounts receivable at January 3,
2009 were $106.1 million compared to $119.7 million at December 29,
2007. This decrease reflects lower levels of wholesale revenue in the
latter part of fiscal 2008 as compared to the latter part of fiscal
2007.
Net inventories at January 3, 2009 were
$203.5 million compared to $225.5 million at December 29, 2007. This
decrease was due primarily to improved inventory management across all business
segments.
Net cash provided by operating
activities for fiscal 2008 was $183.6 million compared to $52.0 million in
fiscal 2007. This change is primarily attributable to improved
working capital management. We expect operating cash flow in fiscal
2009 to return to levels more consistent with those achieved in the previous two
years. Net cash provided by our operating activities in fiscal 2006
was approximately $88.2 million.
We invested $37.5 million in capital
expenditures during fiscal 2008 compared to $21.9 million in fiscal
2007. Major investments included retail store openings and
remodelings (including retail store fixtures), a new point of sale system for
our retail stores, fixtures for our wholesale customers, and a new finance and
retail store administration office in Shelton, Connecticut. We plan
to invest approximately $40 million in capital expenditures in fiscal 2009
primarily for retail store openings and remodelings (including retail store
fixtures), fixtures for our wholesale customers, and investments in information
technology.
On February 16, 2007, the 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 fiscal 2008, the Company repurchased
and retired 2,126,361 shares, or approximately $33.6 million, of its common
stock at an average price of $15.82 per share. Since inception of the
program and through fiscal 2008, the Company repurchased and retired 4,599,580
shares, or approximately $91.1 million, of its common stock at an average price
of $19.81 per share.
27
At January 3, 2009, we had
approximately $338.0 million in Term Loan borrowings and no borrowings under our
Revolver, exclusive of $8.6 million of outstanding letters of
credit. At December 29, 2007, we had approximately $341.5 million in
Term Loan borrowings and no borrowings under our Revolver, exclusive of
approximately $16.3 million of outstanding letters of credit. Weighted-average
borrowings for fiscal 2008 were $340.1 million at an effective rate of 5.76% as
compared to weighted-average borrowings of $349.2 million at an effective rate
of 7.01% in fiscal 2007.
The term of the Revolver expires July
14, 2011 and the term of the Term Loan expires July 14,
2012. Principal borrowings under the Term Loan are due and payable in
quarterly installments of $0.9 million from March 31, 2009 through June 30, 2012
with the remaining balance of $325.8 million due on July 14, 2012. In
fiscal 2008 and fiscal 2007, we made scheduled amortization payments of $3.5
million in each year. The Term Loan has an applicable rate of LIBOR +
1.50%, regardless of the Company’s overall leverage level. Interest
is payable at the end of interest rate reset periods, which vary in length, but
in no case exceed 12 months for LIBOR rate loans and quarterly for prime rate
loans. The effective interest rate on Term Loan borrowings as of
January 3, 2009 and December 29, 2007 was 3.3% and 6.4%.
The Senior Credit Facility contains and
defines financial covenants, including a minimum interest coverage ratio,
maximum leverage ratio, and a fixed charge coverage ratio. As of January
3, 2009, the Company is in compliance with all debt covenants. The
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. There
was no excess cash flow payment required for fiscal 2008 or 2007. Our
obligations under the Senior Credit Facility are collateralized by a first
priority lien on substantially all of our assets, including the assets of our
domestic subsidiaries.
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 January 3, 2009, approximately $55.3 million of our
outstanding term loan debt was hedged under this agreement.
On May 25, 2006, we entered into an
interest rate collar agreement with a floor of 4.3% and a ceiling of
5.5%. The interest rate collar agreement 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 interest rate collar
agreement matures on January 31, 2009.
On January 30, 2009, we entered into
two interest rate swap agreements, each covering $50.0 million of our variable
rate Term Loan debt, to receive floating rate interest and pay fixed
interest. These swap agreements are designated as cash flow hedges of
the variable interest payments on a portion of our variable rate Term Loan
debt. These swap agreements mature in January 2010.
Our operating results are subject to
risk from interest rate fluctuations on our Senior Credit Facility, which
carries variable interest
rates. As of January 3, 2009, our outstanding debt aggregated
approximately $338.0 million, of which $182.7 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 $1.8 million, exclusive
of variable rate debt subject to our swap and collar agreements, and could have
an adverse effect on our net income (loss) and cash flow.
The following table summarizes as of
January 3, 2009, the maturity or expiration dates of mandatory contractual
obligations and commitments for the following fiscal years:
|
(dollars
in thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Long-term
debt
|
$ | 3,503 | $ | 3,503 | $ | 3,503 | $ | 327,517 | $ | -- | $ | -- | $ | 338,026 | ||||||||||||||
|
Interest
on debt:
|
||||||||||||||||||||||||||||
|
Variable
rate (a)
|
11,007 | 11,007 | 11,007 | 5,503 | -- | -- | 38,524 | |||||||||||||||||||||
|
Operating
leases (see Note 10 to the Consolidated Financial
Statements)
|
52,888 | 46,278 | 35,502 | 26,407 | 21,240 | 51,692 | 234,007 | |||||||||||||||||||||
|
Total
financial obligations
|
67,398 | 60,788 | 50,012 | 359,427 | 21,240 | 51,692 | 610,557 | |||||||||||||||||||||
|
Letters
of credit
|
8,571 | -- | -- | -- | -- | -- | 8,571 | |||||||||||||||||||||
|
Purchase
obligations (b)
|
210,648 | -- | -- | -- | -- | -- | 210,648 | |||||||||||||||||||||
|
Total
financial obligations and commitments
|
$ | 286,617 | $ | 60,788 | $ | 50,012 | $ | 359,427 | $ | 21,240 | $ | 51,692 | $ | 829,776 | ||||||||||||||
|
(a)
|
Reflects
estimated variable rate interest on obligations outstanding on our Term
Loan as of January 3, 2009 using an interest rate of 3.3% (rate in effect
at January 3, 2009).
|
|
(b)
|
Unconditional
purchase obligations are defined as agreements to purchase goods or
services that are enforceable and legally binding on us and that specify
all significant terms, including fixed or minimum quantities to be
purchased; fixed, minimum, or variable price provisions; and the
approximate timing of the transaction. The purchase obligations
category above relates to commitments for inventory
purchases. Amounts reflected on the accompanying audited
consolidated balance sheets in accounts payable or other current
liabilities are excluded from the table
above.
|
28
In addition to the total contractual
obligations and commitments in the table above, we have post-retirement benefit
obligations and reserves for uncertain tax positions, included in other current
and other long-term liabilities as further described in Note 7 and Note 8,
respectively, to the accompanying audited consolidated financial
statements.
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
debt service requirements, capital expenditures, and working capital needs 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.
The continuing volatility in the
financial markets and the related economic downturn in markets throughout the
world could have a material adverse effect on our business. While we
currently generate significant cash flows from our ongoing operations and have
access to credit through amounts available under our Revolver, credit markets
have recently experienced significant disruptions and certain leading financial
institutions have either declared bankruptcy or have shown significant
deterioration in their financial stability. Further deterioration in
the financial markets could make future financing difficult or more
expensive. If any of the financial institutions that are parties to
our Revolver were to declare bankruptcy or become insolvent, they may be unable
to perform under their agreements with us. This could leave us with
reduced borrowing capacity. In addition, tighter credit markets may
lead to business disruptions for certain of our suppliers, contract
manufacturers or trade customers and consequently, could disrupt our
business.
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. If deflationary price trends
outpace our ability to obtain 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 OshKosh 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 fiscal
year. During these peak periods, we had historically borrowed under
our Revolver. In fiscal 2008, we had no borrowings under our
Revolver. In fiscal 2007, we had $41.6 million in peak borrowings
under our Revolver.
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.
29
Our
significant accounting policies are described in Note 2 to the accompanying
audited consolidated financial statements. 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 or
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 believe 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 EITF 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 $2.1 million in fiscal
2008, $2.5 million in fiscal 2007, and $3.3 million in fiscal 2006 as a
component of selling, general, and administrative expenses on the accompanying
audited consolidated statement 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.
Cost in excess of fair value of net
assets acquired and tradename: As of January 3, 2009, we had
approximately $136.6 million in Carter’s cost in excess of fair value of net
assets acquired and $305.7 million of aggregate value related to the Carter’s and OshKosh tradename
assets. The fair value of the Carter’s tradename was
estimated at the acquisition of Carter’s, Inc. by Berkshire Partners LLC which
was consummated on August 15, 2001, 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 also
estimated at its acquisition date using an identical discounted cash flow
analysis. The tradenames were determined to have indefinite
lives.
The
carrying values of these assets are subject to annual impairment reviews in
accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
and other Intangible Assets,” 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.
Loss
contingencies: We record accruals for various contingencies
including legal exposures as they arise in the normal course of
business. In accordance with SFAS No. 5, “Accounting for
Contingencies,” we determine whether to disclose and accrue for loss
contingencies based on an assessment of whether the risk of loss is remote,
reasonably possible or probable. Our assessment is developed in
consultation with our internal and external counsel and other advisors and is
based on an analysis of possible outcomes under various
strategies. Loss contingency assumptions involve judgments that are
inherently subjective and can involve matters that are in litigation, which, by
its nature is unpredictable. We believe that our assessment of the
probability of loss contingencies is reasonable, but because of the subjectivity
involved and the unpredictable nature of the subject matter at issue, our
assessment may prove ultimately to be incorrect, which could materially impact
our consolidated financial statements.
30
Accounting for income
taxes: As part of the process of preparing the accompanying
audited 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, stock-based compensation
expense, 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.
Employee benefit
plans: We sponsor a defined benefit pension, defined
contribution and other post-retirement plans. Major assumptions used
in the accounting for these employee benefit plans include the discount rate,
expected return on the pension fund assets, and health care cost increase
projections. See Note 7, “Employee Benefits Plans,” to the
accompanying audited consolidated financial statements for further details on
rates and assumptions.
Stock-based compensation
arrangements: The
Company accounts for stock-based compensation in accordance with the fair value
recognition provisions of 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.
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 have plans 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 audited
consolidated statement 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.
31
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial
Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007),
“Business Combinations” (“SFAS 141(R)”), which replaces SFAS 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 have evaluated the impact that SFAS 141(R) will have on
our consolidated financial statements and have determined that it will not have
a material impact on our consolidated financial statements.
In February 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2 (“FSP 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 FSP 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 157-2. We have
evaluated the impact that FSP 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 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 of
fiscal 2009 consolidated financial statements. We will include such
required disclosures beginning with our Quarterly Report on Form 10-Q for the
three-month period ending April 4, 2009.
In April 2008, the FASB issued FSP No.
142-3, “Determination of the Useful Life of Intangible Assets” (“FSP
142-3”). The FSP amends the factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets under SFAS No. 142, “Goodwill and Other
Intangible Assets,” and adds certain disclosures for an entity’s accounting
policy of the treatment of the costs, period of extension, and total costs
incurred. The FSP must be applied prospectively to intangible assets
acquired after January 1, 2009. We have evaluated the impact that FSP
142-3 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 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’
Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), to
provide guidance on an employers’ disclosures about plan assets of a defined
benefit pension or other postretirement plan. This FSP is effective
for fiscal years ending after December 15, 2009. We are
currently evaluating the impact that FSP FAS 132(R)-1 will have on our
consolidated financial statements.
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 2009 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 the heading “Risk
Factors” on page 7. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
32
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 Asia 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 (loss) in future years. In order to manage
this risk, we source products from approximately 140 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 January 3, 2009, our
outstanding debt aggregated approximately $338.0 million, of which $182.7
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
$1.8 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 (loss)
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. As we rely exclusively on our full-package global
sourcing network, we could incur more of these termination charges, which could
increase our cost of goods sold and have a material impact on our
business.
33
CARTER’S,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
34
To the
Board of Directors and Stockholders of Carter's, Inc.:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Carter's,
Inc. and its subsidiaries at January 3, 2009 and December 29, 2007,
and the results of their operations and
their cash flows
for each of the three years in the period ended January 3, 2009 in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of January 3,
2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management
is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial
statements and on the Company's internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Stamford,
Connecticut
February
27, 2009
35
CARTER’S,
INC.
(dollars
in thousands, except for share data)
|
January
3,
2009
|
December
29,
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 162,349 | $ | 49,012 | ||||
|
Accounts
receivable, net of reserve for doubtful accounts of $5,167 in fiscal 2008
and $4,743 in fiscal 2007
|
106,060 | 119,707 | ||||||
|
Finished
goods inventories, net
|
203,486 | 225,494 | ||||||
|
Prepaid
expenses and other current
assets
|
13,214 | 15,202 | ||||||
|
Deferred
income taxes
|
27,982 | 24,234 | ||||||
|
Total
current
assets
|
513,091 | 433,649 | ||||||
|
Property,
plant, and equipment,
net
|
86,229 | 75,053 | ||||||
|
Tradenames
|
305,733 | 308,233 | ||||||
|
Cost
in excess of fair value of net assets
acquired
|
136,570 | 136,570 | ||||||
|
Licensing
agreements, net of accumulated amortization of $13,840 in fiscal 2008 and
$10,185 in fiscal 2007
|
5,260 | 8,915 | ||||||
|
Deferred
debt issuance costs, net
|
3,598 | 4,743 | ||||||
|
Other
assets
|
576 | 7,505 | ||||||
|
Total
assets
|
$ | 1,051,057 | $ | 974,668 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Current
maturities of long-term
debt
|
$ | 3,503 | $ | 3,503 | ||||
|
Accounts
payable
|
79,011 | 56,589 | ||||||
|
Other
current liabilities
|
57,613 | 46,666 | ||||||
|
Total
current liabilities
|
140,127 | 106,758 | ||||||
|
Long-term
debt
|
334,523 | 338,026 | ||||||
|
Deferred
income taxes
|
108,989 | 113,706 | ||||||
|
Other
long-term liabilities
|
40,822 | 34,049 | ||||||
|
Total
liabilities
|
624,461 | 592,539 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock; par value $.01 per share; 100,000 shares authorized; none issued or
outstanding at January 3, 2009 and December 29, 2007
|
-- | -- | ||||||
|
Common
stock, voting; par value $.01 per share; 150,000,000 shares authorized;
56,352,111 and 57,663,315 shares issued and outstanding at January 3, 2009
and December 29, 2007, respectively
|
563 | 576 | ||||||
|
Additional
paid-in capital
|
211,767 | 232,356 | ||||||
|
Accumulated
other comprehensive (loss)
income
|
(7,318 | ) | 2,671 | |||||
|
Retained
earnings
|
221,584 | 146,526 | ||||||
|
Total
stockholders’ equity
|
426,596 | 382,129 | ||||||
|
Total
liabilities and stockholders’
equity
|
$ | 1,051,057 | $ | 974,668 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements
36
CARTER’S,
INC.
(dollars
in thousands, except per share data)
|
For
the fiscal years ended
|
||||||||||||
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
||||||||||
|
Net
sales
|
$ | 1,490,016 | $ | 1,412,246 | $ | 1,343,467 | ||||||
|
Cost
of goods sold
|
975,999 | 928,996 | 854,970 | |||||||||
|
Gross
profit
|
514,017 | 483,250 | 488,497 | |||||||||
|
Selling,
general, and administrative expenses
|
404,274 | 359,826 | 352,459 | |||||||||
|
Intangible
asset impairment (Note 2)
|
-- | 154,886 | -- | |||||||||
|
Executive
retirement charges (Note 16)
|
5,325 | -- | -- | |||||||||
|
Facility
write-down and closure costs (Note 15)
|
2,609 | 5,285 | 91 | |||||||||
|
Royalty
income
|
(33,685 | ) | (30,738 | ) | (29,164 | ) | ||||||
|
Operating
income (loss)
|
135,494 | (6,009 | ) | 165,111 | ||||||||
|
Interest
income
|
(1,491 | ) | (1,386 | ) | (1,914 | ) | ||||||
|
Interest
expense
|
19,578 | 24,465 | 28,837 | |||||||||
|
Income
(loss) before income taxes
|
117,407 | (29,088 | ) | 138,188 | ||||||||
|
Provision
for income taxes
|
42,349 | 41,530 | 50,968 | |||||||||
|
Net
income (loss)
|
$ | 75,058 | $ | (70,618 | ) | $ | 87,220 | |||||
|
Basic
net income (loss) per common share
|
$ | 1.33 | $ | (1.22 | ) | $ | 1.50 | |||||
|
Diluted
net income (loss) per common share
|
$ | 1.29 | $ | (1.22 | ) | $ | 1.42 | |||||
|
Basic
weighted-average number of shares outstanding
|
56,309,454 | 57,871,235 | 57,996,241 | |||||||||
|
Diluted
weighted-average number of shares outstanding
|
58,276,001 | 57,871,235 | 61,247,122 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements
37
CARTER’S,
INC.
(dollars
in thousands)
|
For
the fiscal years ended
|
||||||||||||
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | 75,058 | $ | (70,618 | ) | $ | 87,220 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation and
amortization
|
30,158 | 29,919 | 26,489 | |||||||||
|
Non-cash intangible asset
impairment charges
|
-- | 154,886 | -- | |||||||||
|
Amortization of debt issuance
costs
|
1,145 | 1,160 | 2,354 | |||||||||
|
Non-cash stock-based
compensation expense
|
8,652 | 3,601 | 5,942 | |||||||||
|
Non-cash facility write-down
and closure costs
|
2,609 | 2,450 | -- | |||||||||
|
Loss on disposal/sale of
property, plant, and equipment
|
323 | 690 | 118 | |||||||||
|
Income tax benefit from
exercised stock options
|
(3,531 | ) | (8,230 | ) | (9,155 | ) | ||||||
|
Deferred income
taxes
|
(1,979 | ) | (9,630 | ) | 502 | |||||||
|
Effect of changes in operating
assets and liabilities:
|
||||||||||||
|
Accounts
receivable
|
13,647 | (9,092 | ) | (14,471 | ) | |||||||
|
Inventories
|
22,008 | (31,906 | ) | (5,134 | ) | |||||||
|
Prepaid
expenses and other assets
|
(2,043 | ) | (1,404 | ) | (886 | ) | ||||||
|
Accounts
payable
|
22,422 | (13,721 | ) | 7,181 | ||||||||
|
Other
liabilities
|
15,154 | 3,882 | (11,936 | ) | ||||||||
|
Net cash provided by operating
activities
|
183,623 | 51,987 | 88,224 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(37,529 | ) | (21,876 | ) | (30,848 | ) | ||||||
|
Proceeds
from sale of property, plant, and equipment
|
-- | 57 | 348 | |||||||||
|
Net cash used in investing
activities
|
(37,529 | ) | (21,819 | ) | (30,500 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Payments
on term loan
|
(3,503 | ) | (3,503 | ) | (85,000 | ) | ||||||
|
Proceeds
from revolving loan facility
|
-- | 121,400 | 5,000 | |||||||||
|
Payments
on revolving loan facility
|
-- | (121,400 | ) | (5,000 | ) | |||||||
|
Share
repurchase
|
(33,637 | ) | (57,467 | ) | -- | |||||||
|
Income
tax benefit from exercised stock options
|
3,531 | 8,230 | 9,155 | |||||||||
|
Proceeds
from exercise of stock options
|
852 | 3,039 | 2,390 | |||||||||
|
Net cash used in financing
activities
|
(32,757 | ) | (49,701 | ) | (73,455 | ) | ||||||
|
Net
increase (decrease) in cash and cash equivalents
|
113,337 | (19,533 | ) | (15,731 | ) | |||||||
|
Cash
and cash equivalents at beginning of period
|
49,012 | 68,545 | 84,276 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 162,349 | $ | 49,012 | $ | 68,545 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements
38
CARTER’S,
INC.
(dollars
in thousands, except for share data)
|
Common
stock
|
Additional
paid-in
capital
|
Deferred
compensation
|
Accumulated
other comprehensive
income
(loss)
|
Retained
earnings
|
Total
stockholders’
equity
|
|||||||||||||||||||
|
Balance
at December 31,
2005
|
$ | 289 | $ | 260,414 | $ | (2,749 | ) | $ | 1,354 | $ | 127,336 | $ | 386,644 | |||||||||||
|
Income
tax benefit from exercised stock options
|
9,417 | 9,417 | ||||||||||||||||||||||
|
Exercise
of stock options (994,250 shares)
|
9 | 2,381 | 2,390 | |||||||||||||||||||||
|
Stock-based
compensation expense
|
5,333 | 5,333 | ||||||||||||||||||||||
|
Issuance
of common stock (17,172 shares)
|
540 | 540 | ||||||||||||||||||||||
|
Reversal
of deferred compensation (Note 6)
|
(2,749 | ) | 2,749 | -- | ||||||||||||||||||||
|
Two-for-one
common stock split (Note 5)
|
291 | (291 | ) | -- | ||||||||||||||||||||
|
SFAS
158 transition adjustment, net of tax of $2,329 (Note 2)
|
3,836 | 3,836 | ||||||||||||||||||||||
|
Comprehensive
income:
|
||||||||||||||||||||||||
|
Net
income
|
87,220 | 87,220 | ||||||||||||||||||||||
|
Unrealized
gain on interest rate swap, net of tax of $194
|
370 | 370 | ||||||||||||||||||||||
|
Unrealized
loss on interest rate collar, net of tax
of $148
|
(259 | ) | (259 | ) | ||||||||||||||||||||
|
Total
comprehensive income
|
-- | -- | -- | 111 | 87,220 | 87,331 | ||||||||||||||||||
|
Balance
at December 30,
2006
|
589 | 275,045 | -- | 5,301 | 214,556 | 495,491 | ||||||||||||||||||
|
Income
tax benefit from exercised stock options
|
8,230 | 8,230 | ||||||||||||||||||||||
|
Exercise
of stock options (999,389 shares)
|
10 | 3,029 | 3,039 | |||||||||||||||||||||
|
Stock-based
compensation expense
|
2,911 | 2,911 | ||||||||||||||||||||||
|
Issuance
of common stock (23,482 shares)
|
1 | 584 | 585 | |||||||||||||||||||||
|
FIN
48 cumulative effect of adoption (Note 8)
|
2,588 | 2,588 | ||||||||||||||||||||||
|
Share
repurchase (2,473,219 shares)
|
(24 | ) | (57,443 | ) | (57,467 | ) | ||||||||||||||||||
|
Comprehensive
loss:
|
||||||||||||||||||||||||
|
Net
loss
|
(70,618 | ) | (70,618 | ) | ||||||||||||||||||||
|
Settlement
of pension asset, net of tax of $75
|
(132 | ) | (132 | ) | ||||||||||||||||||||
|
Defined
benefit pension adjustment, net of tax of $125
|
(207 | ) | (207 | ) | ||||||||||||||||||||
|
Unrealized
loss on interest rate swap, net of tax of $1,121
|
(1,955 | ) | (1,955 | ) | ||||||||||||||||||||
|
Unrealized
loss on interest rate collar, net of tax of $192
|
(336 | ) | (336 | ) | ||||||||||||||||||||
|
Total
comprehensive loss
|
-- | -- | -- | (2,630 | ) | (70,618 | ) | (73,248 | ) | |||||||||||||||
|
Balance
at December 29,
2007
|
576 | 232,356 | -- | 2,671 | 146,526 | 382,129 | ||||||||||||||||||
|
Income
tax benefit from exercised stock options
|
3,531 | 3,531 | ||||||||||||||||||||||
|
Exercise
of stock options (624,415 shares)
|
6 | 846 | 852 | |||||||||||||||||||||
|
Stock-based
compensation expense
|
8,022 | 8,022 | ||||||||||||||||||||||
|
Issuance
of common stock (43,386 shares)
|
1 | 629 | 630 | |||||||||||||||||||||
|
Share
repurchase (2,126,361 shares)
|
(20 | ) | (33,617 | ) | (33,637 | ) | ||||||||||||||||||
|
Comprehensive
(loss) income:
|
||||||||||||||||||||||||
|
Net
income
|
75,058 | 75,058 | ||||||||||||||||||||||
|
Unrealized
loss on OshKosh defined benefit plan, net of tax benefit of
$5,850
|
(9,996 | ) | (9,996 | ) | ||||||||||||||||||||
|
Unrealized
gain on Carter’s post-retirement benefit obligation, net of tax of
$494
|
844 | 844 | ||||||||||||||||||||||
|
Unrealized
loss on interest rate swap, net of tax benefit
of $582
|
(1,026 | ) | (1,026 | ) | ||||||||||||||||||||
|
Unrealized
gain on interest rate collar, net of tax of $122
|
189 | 189 | ||||||||||||||||||||||
|
Total
comprehensive (loss) income
|
-- | -- | -- | (9,989 | ) | 75,058 | 65,069 | |||||||||||||||||
|
Balance
at January 3, 2009
|
$ | 563 | $ | 211,767 | $ | -- | $ | (7,318 | ) | $ | 221,584 | $ | 426,596 | |||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements
39
CARTER’S,
INC.
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 for our 253 Carter’s and 165 OshKosh
retail stores that market our brand name merchandise and other licensed products
manufactured by other companies.
NOTE 2—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
PRINCIPLES
OF CONSOLIDATION:
The accompanying audited consolidated
financial statements include the accounts of Carter’s, Inc. and its wholly owned
subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation.
RECLASSIFICATIONS:
Certain prior year amounts have been
reclassified for comparative purposes.
FISCAL
YEAR:
Our fiscal year ends on the Saturday,
in December or January, nearest the last day of December. The
accompanying audited consolidated financial statements reflect our financial
position as of January 3, 2009 and December 29, 2007 and results of operations
for the fiscal years ended January 3, 2009, December 29, 2007, and December 30,
2006. The fiscal year ended January 3, 2009 (fiscal 2008) contain 53
weeks. The fiscal years ended December 29, 2007 (fiscal 2007) and
December 30, 2006 (fiscal 2006), each contain 52 weeks.
USE
OF ESTIMATES IN THE PREPARATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS:
The preparation of these consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires our management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
CASH
AND CASH EQUIVALENTS:
We consider all highly liquid
investments that have original maturities of three months or less to be cash
equivalents. Our cash and cash equivalents consist of deposit
accounts, cash management funds invested in U.S. Treasury securities, and
municipal obligations that provide income exempt from federal income
taxes.
ACCOUNTS
RECEIVABLE:
Approximately 88.6% of our gross
accounts receivable at January 3, 2009 and 81.5% at December 29, 2007 were from
our ten largest wholesale and mass channel customers. Of these
customers, two had individual receivable balances in excess of 10% of our gross
accounts receivable (but not more than 21%) at January 3, 2009. At
December 29, 2007, two customers had individual receivable balances in excess of
10% of our gross accounts receivable (but not more than 20%). Sales
to these customers represent comparable percentages to total wholesale and mass
channel net sales. In fiscal 2008 and fiscal 2007, two customers each
accounted for more than 10% of our consolidated net sales.
40
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES: (Continued)
Components of accounts receivable as of
January 3, 2009 and December 29, 2007 are as follows:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Trade
receivables, net
|
$ | 93,772 | $ | 109,280 | ||||
|
Royalties
receivable
|
8,203 | 7,666 | ||||||
|
Tenant
allowances and other receivables
|
4,085 | 2,761 | ||||||
|
Total
|
$ | 106,060 | $ | 119,707 | ||||
INVENTORIES:
Inventories are stated at the lower of
cost (first-in, first-out basis for wholesale and mass channel inventory and
average cost for retail inventories) or market. 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.
PROPERTY,
PLANT, AND EQUIPMENT:
Property, plant, and equipment are
stated at cost, less accumulated depreciation and amortization. When
fixed assets are sold or otherwise disposed of, the accounts are relieved of the
original cost of the assets, and the related accumulated depreciation and any
resulting profit or loss is credited or charged to income. For
financial reporting purposes, depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets as
follows: buildings from 15 to 26 years and retail store fixtures,
equipment, and computers from 3 to 10 years. Leasehold improvements
and fixed assets purchased under capital leases are amortized over the lesser of
the asset life or related lease term. We capitalize the cost of our
fixtures designed and purchased for use at major wholesale and mass channel
accounts. The cost of these fixtures is amortized over a three-year
period.
COST
IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBILE
ASSETS:
Cost in excess of fair value of net
assets acquired as of January 3, 2009, 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. Our Carter’s tradename and cost
in excess of fair value of net assets acquired are deemed to have indefinite
lives and are not being amortized.
In connection with the Acquisition of
OshKosh 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. 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 Statement of Financial Accounting Standards
(“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 on 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.
41
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES: (Continued)
During the fiscal year ended December
29, 2007, we adjusted the OshKosh tradename by $2.0
million due to the settlement of pre-Acquisition tax contingencies in accordance
with Emerging Issues Task Force (“EITF”) No. 93-7, “Uncertainties Related to
Income Taxes in a Purchase Business Combination” (“EITF 93-7”).
During the fiscal year ended January 3,
2009, approximately $1.5 million of tax contingencies recorded in connection
with the Acquisition were reversed due to settlement with taxing authorities and
closure of applicable statute of limitations. This reversal resulted
in a corresponding reduction to the OshKosh tradename asset of
$2.5 million and a reduction in the related deferred tax liability of $1.0
million in accordance with EITF 93-7.
The Company’s intangible assets were as
follows:
|
Fiscal
2008
|
Fiscal
2007
|
||||||||||||||||||||||||
|
(dollars
in thousands)
|
Weighted-average
useful life
|
Gross
amount
|
Accumulated
amortization
|
Net
amount
|
Gross
amount
|
Accumulated
amortization
|
Net
amount
|
||||||||||||||||||
|
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
|
$ | 85,500 | $ | -- | $ | 85,500 | $ | 88,000 | $ | -- | $ | 88,000 | ||||||||||||
|
OshKosh
licensing agreements
|
4.7
years
|
$ | 19,100 | $ | 13,840 | $ | 5,260 | $ | 19,100 | $ | 10,185 | $ | 8,915 | ||||||||||||
|
Leasehold
interests
|
4.1
years
|
$ | 1,833 | $ | 1,599 | $ | 234 | $ | 1,833 | $ | 1,149 | $ | 684 | ||||||||||||
Amortization expense for intangible
assets subject to amortization was approximately $4.1 million for the fiscal
year ended January 3, 2009, $4.5 million for the fiscal year ended December 29,
2007, and $4.7 million for the fiscal year ended December 30,
2006. Annual amortization expenses for the OshKosh licensing
agreements and leasehold interests are expected to be as follows:
|
Estimated
|
||||
|
(dollars
in thousands)
|
amortization | |||
|
Fiscal
Year
|
expense
|
|||
|
2009
|
$ | 3,717 | ||
|
2010
|
1,777 | |||
|
Total
|
$ | 5,494 | ||
We measure our cost in excess of fair
value of net assets acquired and tradename for impairment (by comparing the fair
values of our reporting units to their respective carrying values, including
allocated cost in excess of fair value of net assets acquired) on at least an
annual basis or if events or changes in circumstances so
dictate. Based upon our most recent assessment performed as of
January 3, 2009, we found there to be no further impairment of our cost in
excess of fair value of net assets acquired or tradename assets.
IMPAIRMENT
OF OTHER LONG-LIVED ASSETS:
We review other long-lived assets,
including property, plant, and equipment, and licensing agreements, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such an asset may not be recoverable. Management
will determine whether there has been a permanent impairment on such assets held
for use in the business by comparing anticipated undiscounted future cash flows
from the use and eventual disposition of the asset or asset group to the
carrying value of the asset. The amount of any resulting impairment
will be calculated by comparing the carrying value to fair value, which may be
estimated using the present value of the same cash flows. Long-lived
assets that meet the definition of held for sale are valued at the lower of
carrying amount or fair value, less costs to sell.
42
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2—SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES: (Continued)
DEFERRED
DEBT ISSUANCE COSTS:
Debt issuance costs are deferred and
amortized to interest expense using the straight-line method, which approximates
the effective interest method, over the life of the related
debt. Amortization approximated $1.1 million for the fiscal year
ended January
3, 2009, $1.2 million for the fiscal year ended December 29, 2007, and $2.4
million for the fiscal year ended December 30, 2006.
CASH
FLOW HEDGES:
The Senior Credit Facility requires us
to hedge at least 25% of our variable rate Term Loan debt. On
September 22, 2005, we entered into an interest rate swap agreement (“swap
agreement”) to receive floating interest and pay fixed interest. This
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 swap
agreement matures on July 30, 2010. The unrealized losses related to
the swap agreement, net of tax benefits, were approximately $1.0 million for the
fiscal year ended January 3, 2009 and $2.0 million for the fiscal year ended
December 29, 2007. These unrealized losses, net of tax benefits, are
included within accumulated other comprehensive (loss) income on the
accompanying audited consolidated balance sheets. In fiscal 2008, we
recorded $1.1 million in interest expense related to the swap
agreement. In fiscal 2007, we recorded interest income of
approximately $1.6 million related to the swap agreement.
On May 25, 2006, we entered into an
interest rate collar agreement (the “collar”) with a LIBOR 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. The unrealized gain, net of taxes, related to the collar was
approximately $0.2 million for the fiscal year ended January 3,
2009. For the fiscal year ended December 29, 2007, we had unrealized
losses, net of tax benefit, of $0.3 million. These unrealized gains
and losses related to the collar, net of tax, are included within accumulated
other comprehensive (loss) income on the accompanying audited consolidated
balance sheets. In fiscal 2008, we recorded $1.2 million in interest
expense related to the collar.
ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME:
Accumulated other comprehensive (loss)
income, shown as a component of stockholders’ equity on the accompanying audited
consolidated balance sheets, reflects unrealized gains or losses on the
Company’s interest rate swap and collar agreements, net of taxes, which are not
included in the determination of net income (loss). These unrealized
gains and losses are recorded directly into accumulated other comprehensive
(loss) income and are referred to as comprehensive (loss) income
items. Accumulated other comprehensive (loss) income also reflects
adjustments to the Company’s SFAS No. 158, “Employers’ Accounting for Defined
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87,
88, 106, and 132(R)” (“SFAS 158”) assets and liabilities as of the end of the
year, and the gains and losses and prior service costs or credits, net of tax,
that arise during the period but that are not recognized as components of net
periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for
Pensions,” (“SFAS 87”) or SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other than Pensions” (“SFAS 106”).
REVENUE
RECOGNITION:
Revenues consist of sales to customers,
net of returns, accommodations, allowances, deductions, and cooperative
(“co-op”) advertising. We consider revenue realized or realizable and
earned when the product has been shipped, 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. We provide accommodations and
allowances to our major 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 on 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.
43
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
We contract with a third-party service
to provide us with the fair value of co-op 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 EITF 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 $2.1 million in fiscal 2008, $2.5 million in fiscal 2007, and $3.3
million in fiscal 2006 as a component of selling, general, and administrative
expenses on the accompanying audited consolidated statement 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.
ACCOUNTING
FOR SHIPPING AND HANDLING FEES AND COSTS:
Shipping and handling costs include
related labor costs, third-party shipping costs, shipping supplies, and certain
distribution overhead. Such costs are generally absorbed by us and
are included in selling, general, and administrative expenses. These
costs amounted to approximately $36,727,000 for fiscal 2008, $39,173,000 for
fiscal 2007, and $38,059,000 for fiscal 2006.
With respect to the freight component
of our shipping and handling costs, certain customers arrange for shipping and
pay the related freight costs directly to third parties. However, in
the event that we arrange and pay the freight for these customers and bill them
for this service, such amounts billed would be included in revenue and the
related cost would be charged to cost of goods sold. For fiscal years
2008, 2007, and 2006, the Company billed customers approximately $185,000,
$170,000, and $54,000, respectively.
ROYALTIES
AND LICENSE FEES:
We license the Carter’s, Just One Year, Child of
Mine, OshKosh, and Genuine Kids from OshKosh trademarks to
other companies for use on baby and young children’s products, including
bedding, outerwear, sleepwear, shoes, underwear, socks, room décor, toys,
stationery, strollers, hair accessories, and related products. These
royalties are recorded as earned, based upon the sales of licensed products by
our licensees.
STOCK-BASED
COMPENSATION ARRANGEMENTS:
In accordance with the fair value
recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”), the Company recognizes compensation expense for its share-based
payments based on the fair value of the awards at the grant date.
We determine the fair value of stock
options under SFAS 123R using the Black-Scholes option pricing model, which is
consistent with our valuation techniques previously utilized for stock options
in pro forma footnote disclosure required under SFAS No. 123, “Accounting for
Stock-Based Compensation,” and require 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 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 option. An increase in the risk-free interest
rate will increase compensation expense.
Expected term – This is the
period of time over which the 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.
44
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
Dividend yield – The Company
does not have plans 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 audited
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.
The fair value of restricted stock is
determined based on the quoted closing price of our common stock on the date of
grant.
INCOME
TAXES:
The accompanying audited consolidated
financial statements reflect current and deferred tax provisions. The
deferred tax provision is determined under the liability
method. Deferred tax assets and liabilities are recognized based on
differences between the book and tax bases of assets and liabilities using
presently enacted tax rates. Valuation allowances are established
when it is “more likely than not” that a deferred tax asset will not be
recovered. The provision for income taxes is generally the sum of the
amount of income taxes paid or payable for the year as determined by applying
the provisions of enacted tax laws to the taxable income for that year, the net
change during the year in our deferred tax assets and liabilities, and the net
change during the year in any valuation allowances.
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 consolidated financial
statements. Where applicable, associated interest is also
recognized.
We adopted the provisions of Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes,” (“FIN 48”) on December 31, 2006. As a
result of this adoption, we recorded a cumulative effect of adoption, reducing
our reserves for unrecognized tax benefits by approximately $2.6 million as of
December 31, 2006 and increasing retained earnings by $2.6
million. Additionally, we reclassified, as of December 31, 2006,
approximately $6.9 million of reserves for unrecognized tax benefits from other
current liabilities to long-term liabilities on the accompanying audited
consolidated balance sheet. 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.
SUPPLEMENTAL
CASH FLOW INFORMATION:
Interest paid in cash approximated
$19,074,000 for the fiscal year ended January 3, 2009, $24,893,000 for the
fiscal year ended December 29, 2007, and $27,815,000 for the fiscal year ended
December 30, 2006. Income taxes paid in cash approximated $44,157,000
for the fiscal year ended January 3, 2009, $32,393,000 for the fiscal year ended
December 29, 2007, and $40,277,000 for the fiscal year ended December 30,
2006.
45
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
EARNINGS
PER SHARE:
In accordance with SFAS No. 128,
“Earnings Per Share,” basic net income (loss) per share is calculated by
dividing net income (loss) for the period by the weighted-average common shares
outstanding for the period. Diluted net income (loss) per share
includes the effect of dilutive instruments, such as stock options and
restricted stock, and uses the average share price for the period in determining
the number of shares that are to be added to the weighted-average number of
shares outstanding.
For the fiscal years ended January 3,
2009 and December 30, 2006, antidilutive shares of 1,539,650 and 361,250, and
performance-based stock options of 220,000 and 620,000 were excluded from the
computations of diluted earnings per share. For the fiscal year ended
December 29, 2007, diluted net loss per common share is the same as basic net
loss per common share, as the Company had a net loss.
The following is a reconciliation of
basic common shares outstanding to diluted common and common equivalent shares
outstanding:
|
For
the fiscal years ended
|
||||||||||||
|
January 3,
2009
|
December 29, 2007
|
December 30, 2006
|
||||||||||
|
Net
income (loss)
|
$ | 75,058,000 | $ | (70,618,000 | ) | $ | 87,220,000 | |||||
|
Weighted-average
number of common and common equivalent shares outstanding:
|
||||||||||||
|
Basic
number of common shares outstanding
|
56,309,454 | 57,871,235 | 57,996,241 | |||||||||
|
Dilutive
effect of unvested restricted stock
|
76,843 | -- | 71,626 | |||||||||
|
Dilutive
effect of stock options
|
1,889,704 | -- | 3,179,255 | |||||||||
|
Diluted
number of common and common equivalent shares outstanding
|
58,276,001 | 57,871,235 | 61,247,122 | |||||||||
|
Basic
net income (loss) per common share
|
$ | 1.33 | $ | (1.22 | ) | $ | 1.50 | |||||
|
Diluted
net income (loss) per common share
|
$ | 1.29 | $ | (1.22 | ) | $ | 1.42 | |||||
EMPLOYEE
BENEFIT PLANS:
Effective December 30, 2006, we adopted
SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)” and recorded a transition adjustment of approximately $3.8 million, net
of tax of $2.3 million to accumulated other comprehensive
income. SFAS 158 requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other than a
multi-employer plan) as an asset or liability on its balance
sheet. SFAS 158 also requires an employer to recognize as a component
of other comprehensive income, net of tax, the gains or losses and prior service
costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost pursuant to SFAS 87, “Employers’
Accounting for Pensions,” or SFAS 106, “Employers’ Accounting for Postretirement
Benefits Other Than Pensions.” These costs are then subsequently
recognized as components of net periodic benefit cost in the consolidated
statement of operations pursuant to the recognition and amortization provisions
of SFAS 87 and SFAS 106.
During fiscal 2008 and fiscal 2007, we
adjusted our SFAS 158 liability and accumulated other comprehensive (loss)
income related to the Company’s post-retirement benefit obligations by
approximately $1.3 million, or $0.8 million, net of tax, and $0.4 million, or
$0.3 million, net of tax, to reflect changes in underlying assumptions including
projected claims and population. In addition, the Company recorded an
adjustment of $15.8 million, or $10.0 million, net of tax, during fiscal 2008
and an adjustment of $0.8 million, or $0.5 million, net of tax, during fiscal
2007 to the OshKosh pension plan asset and accumulated other comprehensive
(loss) income to reflect the decrease in the funded status of this plan due to a
lower than anticipated return on plan assets.
46
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (Continued)
RECENT
ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS
No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which replaces
SFAS 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 have evaluated the impact that SFAS 141(R) will have on
our consolidated financial statements and have determined that it will not have
a material impact on our consolidated financial statements.
In February 2008, the FASB issued FASB
Staff Position (“FSP”) No. FAS 157-2 (“FSP 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 FSP 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 157-2. We have
evaluated the impact that FSP 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 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 of
fiscal 2009. We will include such required disclosures beginning with
our Quarterly Report on Form 10-Q for the three-month period ending April 4,
2009.
In April 2008, the FASB issued FSP No.
142-3, “Determination of the Useful Life of Intangible Assets” (“FSP
142-3”). This FSP amends the factors an entity should consider in
developing renewal or extension assumptions used in determining the useful life
of recognized intangible assets under SFAS No. 142, “Goodwill and Other
Intangible Assets,” and adds certain disclosures for an entity’s accounting
policy of the treatment of the costs, period of extension, and total costs
incurred. The FSP must be applied prospectively to intangible assets
acquired after January 1, 2009. We have evaluated the impact that FSP
142-3 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 2008, the FASB issued
FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan
Assets” (“FSP FAS 132(R)-1”), to provide guidance on an employers’ disclosures
about plan assets of a defined benefit pension or other postretirement
plan. This FSP is effective for fiscal years ending after
December 15, 2009. We are currently evaluating the impact that
FSP FAS 132(R)-1 will have on our consolidated financial
statements.
47
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
3—PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment
consisted of the following:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Retail
store fixtures, equipment, and computers
|
$ | 119,194 | $ | 95,200 | ||||
|
Land,
buildings, and improvements
|
58,939 | 51,579 | ||||||
|
Marketing
fixtures
|
8,777 | 11,135 | ||||||
|
Construction
in progress
|
3,867 | 3,605 | ||||||
| 190,777 | 161,519 | |||||||
|
Accumulated
depreciation and amortization
|
(104,548 | ) | (86,466 | ) | ||||
|
Total
|
$ | 86,229 | $ | 75,053 | ||||
Depreciation and amortization expense
was approximately $26,053,000 for the fiscal year ended January 3, 2009,
$25,471,000 for the fiscal year ended December 29, 2007, and $21,767,000 for the
fiscal year ended December 30, 2006.
NOTE
4—LONG-TERM DEBT:
Long-term debt consisted of the
following:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Term
Loan
|
$ | 338,026 | $ | 341,529 | ||||
|
Current
maturities
|
(3,503 | ) | (3,503 | ) | ||||
|
Total
long-term debt
|
$ | 334,523 | $ | 338,026 | ||||
The Company’s Senior Credit Facility is
comprised of a $500 million Term Loan and a $125 million revolving credit
facility (the “Revolver”) (including a sub-limit for letters of credit of $80
million). The Revolver expires on July 14, 2011 and the Term Loan
expires July 14, 2012. Principal borrowings under our Term Loan are
due and payable in quarterly installments of $0.9 million from March 31, 2009
through June 30, 2012 with the remaining balance of $325.8 million due on July
14, 2012.
Amounts borrowed under the Term Loan
have an applicable rate of LIBOR + 1.50%, regardless of the Company’s overall
leverage level. Interest is payable at the end of interest rate reset
periods, which vary in length but in no case exceed 12 months for LIBOR rate
loans and quarterly for prime rate loans. The effective interest
rates on Term Loan borrowings as of January 3, 2009 and December 29, 2007 were
3.3% and 6.4%.
Amounts borrowed under the Revolver
accrue interest at a prime rate or, at our option, a LIBOR rate plus 1.00% which
is based upon a leverage-based pricing grid ranging from Prime or LIBOR plus
1.00% to Prime plus 1.00% or LIBOR plus 2.00%. There were no
borrowings outstanding under the Revolver at January 3, 2009 and December 29,
2007.
The Senior Credit Facility contains and
defines financial covenants, including a minimum interest coverage ratio,
maximum leverage ratio, and a fixed charge coverage ratio. As of
January 3, 2009, the Company is in compliance with all debt
covenants. The 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. There was no excess cash flow payment required for
fiscal 2008 or 2007. Our obligations under the Senior Credit Facility are
collateralized by a first priority lien on substantially all of our assets,
including the assets of our domestic subsidiaries.
48
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
4—LONG-TERM DEBT: (Continued)
The
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 a
interest rate swap agreement to receive floating interest and pay fixed
interest. This swap agreement is designated as a cash flow hedge of
the variable interest payments on a portion of our variable rate Term Loan debt
as of January 3, 2009. The swap agreement matures July 30,
2010. During fiscal 2008, we recorded approximately $1.1 million in
interest expense related to our swap agreement. During fiscal 2007,
we recorded interest income of approximately $1.6 million related to our swap
agreement.
On May 25, 2006, we entered into an
interest rate collar agreement 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. During
fiscal 2008, we recorded approximately $1.2 million in interest expense related
to our interest rate collar agreement.
NOTE
5—COMMON STOCK:
On May 12, 2006, the Company amended
its certificate of incorporation to increase the number of authorized shares of
the Company’s common stock from 40,000,000 to 150,000,000.
On June 6, 2006, the Company effected a
two-for-one stock split (the “stock split”) through a stock dividend to
stockholders of record as of May 23, 2006 of one share of our common stock for
each share of common stock outstanding. Earnings per share for all
prior periods presented have been adjusted to reflect the stock
split.
As of January 3, 2009, the total amount
of Carter’s, Inc.’s authorized capital stock consisted of 150,000,000 shares of
common stock, $0.01 par value per share, and 100,000 shares of preferred stock,
$0.01 par value per share. As of January 3, 2009, 56,352,111 shares
of common stock and no shares of preferred stock were outstanding.
During fiscal 2008, we issued 43,386
shares of common stock at a fair market value of $14.52 to its non-management
board members. Accordingly, we recognized $630,000 in stock-based
compensation expense in fiscal 2008. We received no proceeds from the
issuance of these shares.
During fiscal 2007, we issued 21,420
and 2,062 shares of our common stock at a fair market value of $25.21 and
$21.82, respectively, to our non-management board
members. Accordingly, we recognized approximately $585,000 in
compensation expense in fiscal 2007. We received no proceeds from the
issuance of these shares.
During fiscal 2006, we issued 17,172
shares of common stock to our non-management board members. The fair
market value of our common stock at the time of issuance was
$31.45. Accordingly, we recognized $540,000 in compensation expense
in fiscal 2006. We received no proceeds from the issuance of these
shares.
Pursuant to the Company’s share
repurchase program, the Company repurchased and retired 2,126,361 shares of its
common stock at an average price of $15.82 per share during fiscal
2008. Since inception of the program and through fiscal 2008, the
Company repurchased and retired 4,599,580 shares of its common stock at an
average price of $19.81 per share.
The
issued and outstanding shares of common stock are validly issued, fully paid,
and nonassessable. Holders of our common stock are entitled to share
equally, share for share, if dividends are declared on our common stock, whether
payable in cash, property, or our securities. The shares of common
stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon
liquidation, dissolution, or winding up of our Company, the holders of common
stock are entitled to share equally, share for share, in our assets which are
legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of any series of
preferred stock then outstanding. Each outstanding share of common
stock is entitled to one vote on all matters submitted to a vote of
stockholders. There is no cumulative voting. Except as
otherwise required by law or the certificate of incorporation, the holders of
common stock vote together as a single class on all matters submitted to a vote
of stockholders.
49
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
5—COMMON STOCK: (Continued)
Our Board
of Directors may issue preferred stock from time to time. Subject to
the provisions of our certificate of incorporation and limitations prescribed by
law, the Board of Directors is expressly authorized to adopt resolutions to
issue the shares, to fix the number of shares, and to change the number of
shares constituting any series and to provide for or change the voting powers,
designations, preferences and relative participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights, and liquidation preferences of the shares constituting any series of the
preferred stock, in each case without any further action or vote by the
shareholders.
NOTE
6—STOCK-BASED COMPENSATION:
Under our Amended and Restated 2003
Equity Incentive Plan (the “Plan”), the compensation committee of our Board of
Directors may award incentive stock options (ISOs and non-ISOs), stock
appreciation rights (SARs), restricted stock, unrestricted stock, stock
deliverable on a deferred basis, performance-based stock awards, and cash
payments intended to help defray the cost of awards. All share and
per share amounts have been adjusted to reflect the stock split discussed in
Note 5 above.
The Plan allows 11,488,392 shares to be
delivered, with no more than 1,260,000 of such additional shares able to be used
for awards other than stock options. Under the Plan, the maximum
number of shares for which stock options may be granted to any individual or
which can be subject to SARs granted to any individual in any calendar year is
2,000,000. As of January 3, 2009, there are 1,440,827 shares
available for grant under the Plan. The Plan makes provision for the
treatment of awards upon termination of service or in the case of a merger or
similar corporate transaction. Participation in the Plan is limited
to Directors and those key employees selected by the compensation
committee. The limit on shares available under the Plan, the
individual limits, and other award terms are subject to adjustment to reflect
stock splits or stock dividends, combinations, and certain other
events. All stock options issued under the Plan subsequent to the
2001 Acquisition expire no later than ten years from the date of
grant. The Company believes that the current level of authorized
shares is sufficient to satisfy future option exercises.
There are currently three types of
stock options outstanding under the Plan: basic, performance, and
retained options. Basic options issued prior to May 12, 2005 vest in
equal annual installments over a five-year period. Basic options
granted on and subsequent to May 12, 2005 vest in equal annual installments over
a four-year period. Performance options vest upon the achievement of
pre-determined performance criteria. Retained stock options are
options that were outstanding prior to the Company’s 2001 Acquisition by
Berkshire Partners LLC and became fully vested in connection with the 2001
Acquisition.
In connection with the adoption and
provisions of SFAS 123R, the Company reversed its deferred compensation balance
of $2,749,000 on January 1, 2006 related to restricted stock
awards.
In accordance with SFAS 123R, the
Company has recorded stock-based compensation expense (as a component of
selling, general, and administrative expenses) in the amount of approximately
$8.7 million (including $2.2 million of accelerated performance-based stock
option expense, see Note 16), $3.6 million (including the reversal of $2.7
million performance-based stock compensation expense), and $5.9 million related
to stock awards for the fiscal year ended January 3, 2009, December 29, 2007,
and December 30, 2006, respectively.
50
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
6—STOCK-BASED COMPENSATION: (Continued)
A summary
of stock option activity under the Plan (in number of shares that may be
purchased) is as follows for the fiscal year ended January 3, 2009:
|
Basic Stock
Options
|
||||||||||||
|
Basic stock
options
|
Weighted-
average exercise price per share
|
Weighted-average
grant-date fair value
|
||||||||||
|
Outstanding,
December 29, 2007
|
4,315,689 | $ | 8.56 | $ | 3.73 | |||||||
|
Granted
|
540,250 | $ | 15.44 | $ | 5.92 | |||||||
|
Exercised
|
(76,059 | ) | $ | 5.80 | $ | 3.36 | ||||||
|
Forfeited
|
(21,150 | ) | $ | 23.94 | $ | 10.31 | ||||||
|
Expired
|
(25,650 | ) | $ | 13.55 | $ | 4.83 | ||||||
|
Outstanding,
January 3, 2009
|
4,733,080 | $ | 9.29 | $ | 3.94 | |||||||
|
Exercisable,
January 3, 2009
|
3,643,500 | $ | 6.37 | $ | 2.78 | |||||||
During fiscal 2008, the Company granted
540,250 basic stock options. In connection with these grants of basic
stock options, the Company recognized approximately $422,000 in stock-based
compensation expense during the fiscal year ended January 3, 2009.
A summary of basic stock options
outstanding and exercisable at January 3, 2009 is as follows:
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||||||||||||||
|
Range
of exercise
prices
|
Number
|
Weighted-
average remaining contractual life
|
Weighted-average
exercise price
|
Weighted-average
grant-date fair value
|
Number
|
Weighted-
average remaining contractual life
|
Weighted-average
exercise price
|
Weighted-average
grant-date fair value
|
||||||||||||||||||||||||||
| $ | 3 – $ 5 | 2,812,992 | 2.63 | $ | 3.09 | $ | 1.28 | 2,812,992 | 2.63 | $ | 3.09 | $ | 1.28 | |||||||||||||||||||||
| $ | 6 – $ 7 | 113,458 | 4.71 | $ | 6.98 | $ | 4.88 | 113,458 | 4.71 | $ | 6.98 | $ | 4.88 | |||||||||||||||||||||
| $ | 13 – $19 | 1,057,980 | 7.36 | $ | 14.99 | $ | 6.23 | 422,500 | 5.29 | $ | 14.78 | $ | 6.61 | |||||||||||||||||||||
| $ | 20 – $30 | 602,650 | 8.13 | $ | 22.85 | $ | 9.47 | 219,050 | 7.53 | $ | 22.70 | $ | 9.30 | |||||||||||||||||||||
| $ | 31 – $35 | 146,000 | 7.15 | $ | 33.37 | $ | 15.06 | 75,500 | 7.13 | $ | 33.31 | $ | 14.98 | |||||||||||||||||||||
| 4,733,080 | 4.58 | $ | 9.29 | $ | 3.94 | 3,643,500 | 3.39 | $ | 6.37 | $ | 2.78 | |||||||||||||||||||||||
51
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
6—STOCK-BASED COMPENSATION: (Continued)
At January 3, 2009, the aggregate
intrinsic value of all outstanding basic stock options was approximately $51.3
million and the aggregate intrinsic value of currently exercisable basic stock
options was approximately $48.7 million. The intrinsic value of basic
stock options exercised during the fiscal year ended January 3, 2009 was
approximately $1.0 million. At January 3, 2009, the total estimated
compensation cost related to non-vested basic stock options not yet recognized
was approximately $6.2 million with a weighted-average expense recognition
period of 2.63 years.
|
Performance Stock
Options
|
||||||||||||
|
Performance
stock options
|
Weighted-
average exercise price per share
|
Weighted-average
grant-date fair value
|
||||||||||
|
Outstanding,
December 29, 2007
|
620,000 | $ | 25.04 | $ | 9.46 | |||||||
|
Granted
|
-- | $ | -- | $ | -- | |||||||
|
Exercised
|
-- | $ | -- | $ | -- | |||||||
|
Forfeited
|
400,000 | $ | 22.01 | $ | 7.76 | |||||||
|
Expired
|
-- | $ | -- | $ | -- | |||||||
|
Outstanding,
January 3, 2009
|
220,000 | $ | 30.54 | $ | 12.55 | |||||||
|
Exercisable,
January 3, 2009
|
-- | $ | -- | $ | -- | |||||||
A summary of performance stock options
outstanding and exercisable at January 3, 2009 is as follows:
|
Outstanding
|
Exercisable
|
|||||||||||||||||||||||||||||||||
|
Range
of exercise prices
|
Number
|
Weighted-average
remaining contractual life
|
Weighted-average
exercise price
|
Weighted-average
grant-date fair value
|
Number
|
Weighted-average
remaining contractual life
|
Weighted-average
exercise price
|
Weighted-average
grant-date fair value
|
||||||||||||||||||||||||||
| $ | 22-$32 | 220,000 | 6.93 | $ | 30.54 | $ | 12.55 | -- | -- | $ | -- | $ | -- | |||||||||||||||||||||
At January 3, 2009, no performance
options were exercisable and the Company does not expect these performance
options to vest as the performance criteria are not expected to be
met.
As a result of the retirement of an
executive officer during the second quarter of fiscal 2008, the Company
recognized approximately $2.2 million of stock-based compensation expense
relating to the accelerated vesting of 400,000 performance-based stock options
(see Note 16, “Executive Retirement Charges”).
The weighted-average contractual life
for basic and performance stock options in aggregate as of January 3, 2009 was
approximately 4.58 years.
|
Retained Stock
Options
|
Retained
stock options
|
Weighted-
average exercise price
per
share
|
||||||
|
Outstanding,
December 29, 2007
|
661,870 | $ | 0.75 | |||||
|
Granted
|
-- | $ | -- | |||||
|
Exercised
|
548,356 | $ | 0.75 | |||||
|
Forfeited
|
-- | $ | -- | |||||
|
Expired
|
-- | $ | -- | |||||
|
Outstanding,
January 3, 2009
|
113,514 | $ | 0.75 | |||||
|
Exercisable,
January 3, 2009
|
113,514 | $ | 0.75 | |||||
52
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
6—STOCK-BASED COMPENSATION: (Continued)
At January 3, 2009, the aggregate
intrinsic value of all outstanding retained options, which are all currently
exercisable, was approximately $1.8 million. The intrinsic value of
retained options exercised during the fiscal year ended January 3, 2009 was
approximately $9.3 million.
The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing method
with the following weighted-average assumptions used for grants
issued:
|
For
the fiscal years ended
|
||||||||||||
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
||||||||||
|
Volatility
|
34.16 | % | 36.20 | % | 38.95 | % | ||||||
|
Risk-free
interest rate
|
3.48 | % | 4.03 | % | 4.69 | % | ||||||
|
Expected
term (years)
|
5.6 | 6.0 | 6.0 | |||||||||
|
Dividend
yield
|
-- | -- | -- | |||||||||
Restricted
Stock
Restricted stock awards issued under
the Plan vest based upon continued service. Restricted stock awards
vest in equal annual installments over a four-year period or cliff vest after a
three- or four-year period. As noted above, the fair value of
restricted stock is determined based on the quoted closing price of our common
stock on the date of grant.
The following table summarizes our
restricted stock award activity during the fiscal year ended January 3,
2009:
|
Restricted
stock
|
Weighted-average
grant date
fair
value
|
|||||||
|
Outstanding,
December 29, 2007
|
372,283 | $ | 24.29 | |||||
|
Granted
|
199,992 | $ | 16.23 | |||||
|
Vested
|
(118,436 | ) | $ | 21.54 | ||||
|
Forfeited
|
(9,250 | ) | $ | 22.75 | ||||
|
Outstanding,
January 3, 2009
|
444,589 | $ | 21.43 | |||||
During the fiscal year ended January 3,
2009, the Company granted 199,992 shares of restricted stock to employees and
Directors. Stock-based compensation expense recorded during the
fiscal year ended January 3, 2009 for all restricted stock awards totaled
approximately $2.5 million. The total amount of estimated
compensation expense related to unvested restricted stock awards is
approximately $4.8 million as of January 3, 2009.
During the fiscal year ended January 3,
2009, the Company granted our Chief Executive Officer 75,000 shares of
restricted stock at a fair market value of $17.92. Vesting of these
restricted shares is contingent upon meeting specific performance targets
through fiscal 2010 as well as continued employment through fiscal
2012. Currently, the Company believes that these targets will
be achieved and, accordingly, we will continue to record compensation expense
until the restricted shares vest or the Company’s assessment of achievement of
the performance criteria changes.
53
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
6—STOCK-BASED COMPENSATION: (Continued)
Unrecognized
stock-based compensation expense related to outstanding unvested stock options
and unvested restricted stock awards are expected to be recorded as
follows:
|
(dollars
in thousands)
|
Basic
options
|
Restricted
stock
|
Total
|
|||||||||
|
2009
|
$ | 2,694 | $ | 2,153 | $ | 4,847 | ||||||
|
2010
|
1,926 | 1,519 | 3,445 | |||||||||
|
2011
|
1,299 | 985 | 2,284 | |||||||||
|
2012
|
286 | 130 | 416 | |||||||||
|
Total
|
$ | 6,205 | $ | 4,787 | $ | 10,992 | ||||||
NOTE
7—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.
The following is a reconciliation of
the Accumulated Post-Retirement Benefit Obligation (“APBO”) under this
plan:
|
For
the fiscal years ended
|
||||||||
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Benefit
Obligation (APBO) at beginning of period
|
$ | 9,851 | $ | 10,278 | ||||
|
Service
cost
|
88 | 104 | ||||||
|
Interest
cost
|
454 | 521 | ||||||
|
Actuarial
gain
|
(1,300 | ) | (471 | ) | ||||
|
Benefits
paid
|
(570 | ) | (581 | ) | ||||
|
APBO
at end of period
|
$ | 8,523 | $ | 9,851 | ||||
Our contribution for these
post-retirement benefit obligations was $570,231 in fiscal 2008, $581,196 in
fiscal 2007, and $561,678 in fiscal 2006. We expect that our
contribution for post-retirement benefit obligations each year from fiscal 2009
through fiscal 2015 will be approximately $600,000. We do not
pre-fund this plan and as a result there are no plan assets. The
measurement date used to determine the post-retirement benefit obligations is as
of the end of the fiscal year.
Post-retirement benefit obligations
under the plan are measured on a discounted basis at an assumed discount
rate. At each measurement date, the discount rate was determined with
consideration given to Moody’s Aa Corporate Bond rate. We believe
Moody’s Aa Corporate Bond index, which is typically comprised of bonds with
longer maturities (typically 20 to 30 year maturities) is comparable to the
timing of expected payments under the plan. The discount rates used
in determining the APBO were as follows:
|
January
3,
2009
|
December
29,
2007
|
|||||||
|
Discount
rates
|
5.5 | % | 5.5 | % | ||||
54
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
7—EMPLOYEE BENEFIT PLANS: (Continued)
The components of post-retirement
benefit expense charged to operations are as follows:
|
For
the fiscal years ended
|
||||||||||||
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
|||||||||
|
Service
cost – benefits attributed to service during the period
|
$ | 88 | $ | 104 | $ | 106 | ||||||
|
Interest
cost on accumulated post-retirement benefit obligation
|
454 | 521 | 542 | |||||||||
|
Amortization
of net actuarial
loss
|
(7 | ) | -- | -- | ||||||||
|
Total
net periodic post-retirement benefit cost
|
$ | 535 | $ | 625 | $ | 648 | ||||||
The discount rates used in determining
the net periodic post-retirement benefit costs were as follows:
|
For
the fiscal years ended
|
||||||||||||
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
||||||||||
|
Discount
rates
|
5.5 | % | 5.5 | % | 5.5 | % | ||||||
The effects on our plan of all future
increases in health care costs are borne primarily by employees; accordingly,
increasing medical costs are not expected to have any material effect on our
future financial results.
We have an obligation under a defined
benefit plan covering certain former officers and their spouses. At
January 3, 2009 and December 29, 2007, the present value of the estimated
remaining payments under this plan was approximately $0.9 million and $1.0
million and is included in other current and long-term liabilities in the
accompanying audited consolidated balance sheets.
The retirement benefits under the
OshKosh B’Gosh pension plan and OshKosh B’Gosh Collective Bargaining Pension
Plan 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, 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 this 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 OshKosh B’Gosh pension plan assets
are invested in group annuity contracts based on the Company’s overall strategic
investment direction as follows:
|
Target
allocation percentage
|
||||
|
Equity
investments
|
50 | % | ||
|
Intermediate
term debt investments
|
42 | % | ||
|
Real
estate investments
|
8 | % | ||
|
Total
|
100 | % | ||
55
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
7—EMPLOYEE BENEFIT PLANS: (Continued)
The
defined benefit pension plan assets were invested as follows as of the end of
the year:
|
2008
|
2007
|
|||||||
|
Equity
investments
|
44 | % | 51 | % | ||||
|
Intermediate
term debt investments
|
47 | % | 41 | % | ||||
|
Real
estate investments
|
9 | % | 8 | % | ||||
|
Total
|
100 | % | 100 | % | ||||
Due to
volatility in the financial markets in latter part of fiscal 2008, the pension
plan asset mix was slightly different than our targets as of the end of fiscal
2008. A rebalancing of plan assets was completed in early January to
return the asset mix to the targeted investment mix. Pension
liabilities are measured on a discounted basis at an assumed discount
rate. The discount rate used at January 3, 2009 and December 29, 2007
was determined with consideration given to Moody’s Aa Corporate Bond index,
adjusted for the timing of expected plan distributions. The expected
long-term rate of return assumption considers historic returns adjusted for
changes in overall economic conditions that may affect future returns and a
weighting of each investment class. The actuarial computations
utilized the following assumptions, using year-end measurement
dates:
|
Benefit
obligation
|
2008
|
2007
|
||||||||||
|
Discount
rate
|
5.5 | % | 5.5 | % | ||||||||
|
Net periodic pension
cost
|
2008
|
2007
|
2006
|
|||||||||
|
Discount
rate
|
5.5 | % | 5.5 | % | 5.5 | % | ||||||
|
Expected
long-term rate of return on assets
|
8.0 | % | 8.0 | % | 8.0 | % | ||||||
The net periodic pension benefit
included in the statement of operations was comprised of:
|
For
the fiscal years ended
|
||||||||||||
|
(dollars
in thousands)
|
January
3, 2009
|
December
29, 2007
|
December
30, 2006
|
|||||||||
|
Interest
cost
|
$ | 2,248 | $ | 2,206 | $ | 2,601 | ||||||
|
Expected
return on plan assets
|
(3,774 | ) | (4,131 | ) | (4,139 | ) | ||||||
|
Recognized
actuarial gain
|
(76 | ) | (410 | ) | -- | |||||||
|
Net periodic pension
benefit
|
$ | (1,602 | ) | $ | (2,335 | ) | $ | (1,538 | ) | |||
56
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
7—EMPLOYEE BENEFIT PLANS: (Continued)
A reconciliation of
changes in the projected pension benefit obligation and plan assets is as
follows:
|
For
the fiscal years ended
|
||||||||
|
(dollars
in thousands)
|
January
3,
2009
|
December
29, 2007
|
||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Projected benefit
obligation at beginning of year
|
$ | 41,514 | $ | 49,440 | ||||
|
Interest
cost
|
2,248 | 2,206 | ||||||
|
Actuarial
gain
|
(613 | ) | (172 | ) | ||||
|
Benefits
paid
|
(1,314 | ) | (9,960 | ) | ||||
|
Projected
benefit obligation at end of year
|
$ | 41,835 | $ | 41,514 | ||||
|
Change
in plan assets:
|
||||||||
|
Fair value of plan
assets at beginning of year
|
$ | 47,813 | $ | 56,602 | ||||
|
Actual return on
plan assets
|
(12,608 | ) | 3,404 | |||||
|
Transfer to defined
contribution plan
|
-- | (2,233 | ) | |||||
|
Benefits
paid
|
(1,314 | ) | (9,960 | ) | ||||
|
Fair
value of plan assets at end of year
|
$ | 33,891 | $ | 47,813 | ||||
|
(Unfunded)
funded status:
|
||||||||
|
(Accrued) prepaid
benefit cost
|
$ | (7,944 | ) | $ | 6,299 | |||
A pension liability of
approximately $7.9 million is included in other long-term liabilities in the
accompanying audited consolidated balance sheet for fiscal
2008. Prepaid benefit costs of approximately $6.3 million are
included in other assets on the accompanying audited consolidated balance sheet
for fiscal 2007. Despite the substantial overall decline in the fair
market value of plan assets during the year, we do not expect to make any
contributions to the OshKosh defined benefit plan during fiscal 2009 as the
plan's funding exceeds the minimum funding requirements.
The Company currently expects benefit
payments for its defined benefit pension plans as follows for the next ten
fiscal years.
| (dollars in thousands) | ||||
| Fiscal Year | ||||
|
2009
|
$ | 1,120 | ||
|
2010
|
$ | 970 | ||
|
2011
|
$ | 1,240 | ||
|
2012
|
$ | 1,170 | ||
|
2013
|
$ | 1,430 | ||
|
2014-2018
|
$ | 10,510 | ||
We also sponsor a defined contribution
plan within the United States. This plan covers employees who are at
least 21 years of age and have completed three months of service, during which
at least 250 hours were served. The plan provides for the option for
employee contributions up to statutory limits, of which we match up to 4% of the
employee contributions, at a rate of 100% on the first 3% and 50% on the next
2%. Our expense for the defined contribution plan totaled
approximately $3.0 million for the fiscal year ended January 3, 2009, $2.8
million for the fiscal year ended December 29, 2007, and $3.1 million for the
fiscal year ended December 30, 2006.
57
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
8 – INCOME TAXES:
Effective December 31, 2006 (the first
day of our fiscal year 2007), we adopted the provisions of FIN
48. FIN 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain
tax positions that the company has taken or expects to take on a tax
return. FIN 48 states that a tax benefit from an uncertain position
may be recognized only if it is “more likely than not” that the position is
sustainable, based on its technical merits. The tax benefit of a
qualifying position is the largest amount of tax benefit that is greater than
fifty percent likely of being realized upon ultimate settlement with a taxing
authority having full knowledge of all relevant information.
The provision (benefit) for income
taxes consisted of the following:
|
For
the fiscal years ended
|
||||||||||||
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
|||||||||
|
Current tax provision
(benefit):
|
||||||||||||
|
Federal
|
$ | 38,813 | $ | 45,997 | $ | 44,277 | ||||||
|
State
|
4,908 | 4,585 | 5,736 | |||||||||
|
Foreign
|
607 | 578 | 453 | |||||||||
|
Total current
provision
|
44,328 | 51,160 | 50,466 | |||||||||
|
Deferred tax (benefit)
provision:
|
||||||||||||
|
Federal
|
(2,505 | ) | (10,120 | ) | 1,349 | |||||||
|
State
|
526 | 490 | (847 | ) | ||||||||
|
Total deferred (benefit)
provision
|
(1,979 | ) | (9,630 | ) | 502 | |||||||
|
Total
provision
|
$ | 42,349 | $ | 41,530 | $ | 50,968 | ||||||
The
foreign portion of the current tax position relates primarily to foreign tax
withholdings related to our foreign royalty income.
The
Company’s effective tax rate for fiscal 2007 was impacted by the impairment of
the cost in excess of fair value of net assets acquired of $142.9 million, as
such charge is not deductible for tax purposes but impacts income (loss) before
income taxes. The difference between our effective income tax rate
and the federal statutory tax rate is reconciled below:
|
For
the fiscal years ended
|
||||||||||||
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
||||||||||
|
Statutory
federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Impairment
of OshKosh cost in excess of fair value of net assets
acquired
|
-- | (171.9 | ) | -- | ||||||||
|
State
income taxes, net of federal income tax benefit
|
3.0 | (11.3 | ) | 2.3 | ||||||||
|
Settlement
of uncertain tax positions
|
(1.5 | ) | 1.7 | -- | ||||||||
|
Federal
tax-exempt income
|
(0.4 | ) | 1.7 | (0.5 | ) | |||||||
|
Other
|
-- | 2.0 | 0.1 | |||||||||
|
Total
|
36.1 | % | (142.8 | %) | 36.9 | % | ||||||
The portion of income before income
taxes attributable to foreign income was approximately $235,000 for the fiscal
year ended December 30, 2006. There was no income or (loss) before
taxes attributable to foreign income for the fiscal years ended January 3, 2009
and December 29, 2007.
The Company and its subsidiaries file
income tax returns in the United States and in various states and local
jurisdictions. During fiscal 2008, the Internal Revenue Service
completed an income tax examination for fiscal 2004 and 2005, and has recently
begun its audit of fiscal 2006. In most cases, the Company is no
longer subject to state and local tax authority examinations for years prior to
fiscal 2004.
58
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
8—INCOME TAXES: (Continued)
In
connection with the adoption of FIN 48, we recorded a cumulative effect of
adoption, reducing our reserves for unrecognized tax benefits by approximately
$2.6 million as of December 31, 2006 and increasing retained earnings by $2.6
million. Additionally, we reclassified, as of December 31, 2006,
approximately $6.9 million of reserves for unrecognized tax benefits from
current liabilities to long-term liabilities on the accompanying audited
consolidated balance sheet. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:
|
(dollars
in thousands)
|
||||
|
Balance
at December 30,
2006
|
$ | 8,098 | ||
|
Additions
based on tax positions related to fiscal 2007
|
1,950 | |||
|
Additions
for prior year tax positions
|
1,816 | |||
|
Reductions
for lapse of statute of limitations
|
(1,259 | ) | ||
|
Reductions
for prior year tax settlements
|
(961 | ) | ||
|
Balance
at December 29,
2007
|
9,644 | |||
|
Additions
based on tax positions related to fiscal 2008
|
1,900 | |||
|
Reductions
for prior year tax positions
|
(150 | ) | ||
|
Reductions
for lapse of statute of limitations
|
(949 | ) | ||
|
Reductions
for prior year tax settlements
|
(3,171 | ) | ||
|
Balance
at January 3,
2009
|
$ | 7,274 | ||
During fiscal 2007, we recognized
approximately $0.6 million in tax benefits previously reserved for which the
statute of limitations expired in September 2007. In addition, we
recognized approximately $2.0 million of pre-Acquisition obligations previously
reserved for consisting of $1.0 million that was settled during fiscal 2007 with
taxing authorities, $0.7 million for which the statute of limitations expired in
September 2007, and $0.3 million of interest related to these tax
obligations. These pre-Acquisition uncertainties have been reflected
as an adjustment to the OshKosh tradename asset in
accordance with EITF 93-7.
During 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 and approximately $0.3 million in
tax benefits due to various statute closures, primarily state and local
jurisdictions. In addition, we recognized approximately $1.5 million
of pre-Acquisition uncertainties previously reserved for consisting of
approximately $0.9 million related to the completion of the Internal Revenue
Service audit and $0.6 million related to the closure of applicable statute of
limitations. These pre-Acquisition uncertainties have been reflected
as a reduction in the OshKosh tradename asset in
accordance with EITF 93-7.
Substantially all of the Company’s
reserve for unrecognized tax benefits as of January 3, 2009, if ultimately
recognized, will impact the Company’s effective tax rate in the period
settled. The Company has recorded 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 did not impact the annual
effective tax rate.
Included in the reserves for
unrecognized tax benefits are approximately $0.5 million of reserves for which
the statute of limitations is expected to expire in the third quarter of fiscal
2009. If these tax benefits are ultimately recognized, such
recognition may impact our annual effective tax rate for fiscal 2009 and the
effective tax rate in the quarter in which the benefits are
recognized. While the Internal Revenue Service has begun its audit of
the Company’s income tax returns for 2006, the audit has not proceeded to a
point where the Company can reasonably determine the completion
date.
59
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
8—INCOME TAXES: (Continued)
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. During the fiscal year ended January 3, 2009, the Company
recognized a net reduction in interest expense of approximately $0.7 million,
primarily related to the successful resolution of the Internal Revenue Service
audit for 2004 and 2005 in addition to the settlement of tax positions due to
the expiration of the applicable statute of limitations. For the year
ended December 29, 2007, the Company recognized approximately $0.1 million in
interest expense. The Company had approximately $0.6 million and $1.3
million of interest accrued as of January 3, 2009 and December 29,
2007.
Components
of deferred tax assets and liabilities were as follows:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Current deferred taxes:
|
Assets
(Liabilities)
|
|||||||
|
Accounts
receivable allowance
|
$ | 6,987 | $ | 6,651 | ||||
|
Inventory
|
8,859 | 8,710 | ||||||
|
Accrued
liabilities
|
7,073 | 6,797 | ||||||
|
Deferred
employee
benefits
|
5,214 | 3,059 | ||||||
|
Other
|
(151 | ) | (983 | ) | ||||
|
Total current
deferred
taxes
|
$ | 27,982 | $ | 24,234 | ||||
|
Non-current deferred taxes:
|
||||||||
|
Depreciation
|
$ | (8,277 | ) | $ | (5,990 | ) | ||
|
Tradename
and licensing
agreements
|
(114,388 | ) | (115,840 | ) | ||||
|
Deferred
employee
benefits
|
7,072 | 2,503 | ||||||
|
Other
|
6,604 | 5,621 | ||||||
|
Total non-current
deferred taxes
|
$ | (108,989 | ) | $ | (113,706 | ) | ||
NOTE
9 – 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 January 3, 2009,
as required by SFAS 157:
|
(dollars
in millions)
|
Level
1
|
Level
2
|
Level
3
|
|||||||||
|
Assets
|
||||||||||||
|
Investments
|
$ | -- | $ | 130.0 | $ | -- | ||||||
|
Liabilities
|
||||||||||||
|
Interest
rate swap
|
$ | -- | $ | 2.0 | $ | -- | ||||||
|
Interest
rate collar
|
$ | -- | $ | 0.2 | $ | -- | ||||||
At January 3, 2009, we had
approximately $130.0 million of cash invested in two Dreyfus Cash Management
Funds. These funds consisted of the Dreyfus Treasury Prime Cash
Management fund ($87.9 million) which invests only in U.S. Treasury Bills or
U.S. Treasury Notes and the Dreyfus Tax Exempt Cash Management fund ($42.1
million) which invests in short-term, high quality municipal obligations that
provide income exempt from federal taxes.
60
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
9 – FAIR VALUE MEASUREMENTS: (Continued)
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 January 3, 2009, approximately $55.3 million of our
outstanding term loan debt was hedged under this agreement.
On May 25, 2006, we entered into an
interest rate collar agreement with a floor of 4.3% and a ceiling of
5.5%. The interest rate collar agreement 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 interest rate collar
agreement matures on January 31, 2009.
Both our interest rate swap and collar
agreements are traded in the over-the-counter market. Fair values are
based on quoted market prices for similar assets or 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.
NOTE
10—LEASE COMMITMENTS:
Rent expense under operating leases was
approximately $57,914,000 for the fiscal year ended January 3, 2009, $50,824,000
for the fiscal year ended December 29, 2007, and $46,907,000 for the fiscal year
ended December 30, 2006.
Minimum annual rental commitments under
current noncancellable operating leases as of January 3, 2009 were as
follows:
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Fiscal
Year
|
Buildings
(primarily
retail
stores)
|
Distribution
center
equipment
|
Data
processing
equipment
|
Transportation
equipment
|
Total
noncancellable
leases
|
|||||||||||||||
|
2009
|
$ | 51,765 | $ | 392 | $ | 696 | $ | 35 | $ | 52,888 | ||||||||||
|
2010
|
45,814 | 44 | 401 | 19 | 46,278 | |||||||||||||||
|
2011
|
35,380 | 17 | 89 | 16 | 35,502 | |||||||||||||||
|
2012
|
26,388 | 6 | 13 | -- | 26,407 | |||||||||||||||
|
2013
|
21,238 | 2 | -- | -- | 21,240 | |||||||||||||||
|
Thereafter
|
51,692 | -- | -- | -- | 51,692 | |||||||||||||||
|
Total
|
$ | 232,277 | $ | 461 | $ | 1,199 | $ | 70 | $ | 234,007 | ||||||||||
We currently operate 418 leased retail
stores located primarily in outlet and strip centers across the United States,
having an average size of approximately 4,800 square feet. Generally,
the majority of our leases have an average term of approximately five years with
additional five-year renewal options.
In accordance with SFAS No. 13,
"Accounting for Leases," we review all of our leases to determine whether they
qualify as operating or capital leases. As of January 3, 2009, all of
our leases are classified as operating. Leasehold improvements are
amortized over the lesser of the useful life of the asset or current lease
term. We account for free rent periods and scheduled rent increases
on a straight-line basis over the lease term. Landlord allowances and
incentives are recorded as deferred rent and are amortized as a reduction to
rent expense over the lease term.
61
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
11—COMMITMENTS AND CONTINGENCIES:
We are subject to various federal,
state, and local laws that govern activities or operations that may have adverse
environmental effects. Noncompliance with these laws and regulations
can result in significant liabilities, penalties, and costs. From
time to time, our operations have resulted or may result in noncompliance with
or liability pursuant to environmental laws. Generally, compliance
with environmental laws has not had a material impact on our operations, but
there can be no assurance that future compliance with such laws will not have a
material adverse effect on our operations.
We also have other commitments and
contingent liabilities related to legal proceedings, self-insurance programs,
and matters arising out of the normal course of business. We accrue
contingencies based upon a range of possible outcomes. If no amount
within this range is a better estimate than any other, then we accrue the
minimum amount. Management does not anticipate that in the aggregate such
losses would have a material adverse effect on the Company’s consolidated
financial position or liquidity; however, it is possible that the final outcomes
could have a significant impact on the Company’s reported results of operations
in any given period.
As of January 3, 2009, we have entered
into various purchase order commitments with full-package suppliers for
merchandise for resale that approximates $210.6 million. 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.
NOTE
12—OTHER CURRENT LIABILITIES:
Other current liabilities consisted of
the following:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
||||||
|
Accrued
workers’
compensation
|
$ | 9,452 | $ | 9,700 | ||||
|
Accrued
income taxes (Note
8)
|
8,912 | 11,719 | ||||||
|
Accrued
incentive
compensation
|
7,325 | 327 | ||||||
|
Accrued
severance and
relocation
|
4,110 | 2,224 | ||||||
|
Accrued
salaries and
wages
|
3,839 | 1,252 | ||||||
|
Accrued
sales and use
taxes
|
3,203 | 3,227 | ||||||
|
Accrued
gift
certificates
|
2,497 | 2,239 | ||||||
|
Accrued
legal fees and
reserves
|
2,258 | 885 | ||||||
|
Accrued
interest
|
1,686 | 2,845 | ||||||
|
Other
current liabilities
|
14,331 | 12,248 | ||||||
|
Total
|
$ | 57,613 | $ | 46,666 | ||||
NOTE
13—VALUATION AND QUALIFYING ACCOUNTS:
Information regarding accounts
receivable and inventory reserves is as follows:
|
(dollars
in thousands)
|
Accounts
receivable reserves
|
Sales returns
reserves
|
Excess
and obsolete inventory reserves
|
|||||||||
|
Balance,
December 31,
2005
|
$ | 3,947 | $ | 150 | $ | 8,300 | ||||||
|
Additions,
charged to expense
|
4,468 | 732 | 6,535 | |||||||||
|
Charges
to reserve
|
(5,099 | ) | (732 | ) | (8,935 | ) | ||||||
|
Balance,
December 30, 2006
|
3,316 | 150 | 5,900 | |||||||||
|
Additions,
charged to expense
|
6,288 | 556 | 15,193 | |||||||||
|
Charges
to reserve
|
(4,861 | ) | (556 | ) | (10,952 | ) | ||||||
|
Balance,
December 29, 2007
|
4,743 | 150 | 10,141 | |||||||||
|
Additions,
charged to expense
|
9,169 | 1,267 | 18,626 | |||||||||
|
Charges
to reserve
|
(8,745 | ) | (1,267 | ) | (17,331 | ) | ||||||
|
Balance,
January 3, 2009
|
$ | 5,167 | $ | 150 | $ | 11,436 | ||||||
62
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
14—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.
Segment results include the direct
costs of each segment and all other costs are allocated based upon detailed
estimates and analysis of actual time and expenses incurred to support the
operations of each segment or units produced or sourced to support each
segment’s revenue. Certain costs, including incentive compensation
for certain employees, facility closure costs, and various other general
corporate costs that are not specifically allocable to our segments, are
included in other reconciling items below. Intersegment sales and
transfers are recorded at cost and are treated as a transfer of
inventory. The accounting policies of the segments are the same as
those described in Note 2 to the consolidated financial statements.
63
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
14—SEGMENT INFORMATION:
The table
below presents certain segment information for the periods
indicated:
|
(dollars
in thousands)
|
For
the fiscal years ended
|
|||||||||||||||||||||||
|
January
3,
2009
|
%
of
Total
|
December
29,
2007
|
%
of
Total
|
December
30,
2006
|
%
of
Total
|
|||||||||||||||||||
|
Net sales:
|
||||||||||||||||||||||||
|
Wholesale-Carter’s
|
$ | 489,744 | 32.9 | % | $ | 482,350 | 34.2 | % | $ | 464,636 | 34.6 | % | ||||||||||||
|
Retail-Carter’s
|
422,436 | 28.3 | % | 366,296 | 25.9 | % | 333,050 | 24.8 | % | |||||||||||||||
|
Mass
Channel-Carter’s
|
254,436 | 17.1 | % | 243,269 | 17.2 | % | 220,327 | 16.4 | % | |||||||||||||||
|
Carter’s
total net sales
|
1,166,616 | 78.3 | % | 1,091,915 | 77.3 | % | 1,018,013 | 75.8 | % | |||||||||||||||
|
Wholesale-OshKosh
|
74,270 | 5.0 | % | 86,555 | 6.1 | % | 96,351 | 7.2 | % | |||||||||||||||
|
Retail-OshKosh
|
249,130 | 16.7 | % | 233,776 | 16.6 | % | 229,103 | 17.0 | % | |||||||||||||||
|
OshKosh
total net sales
|
323,400 | 21.7 | % | 320,331 | 22.7 | % | 325,454 | 24.2 | % | |||||||||||||||
|
Total
net sales
|
$ | 1,490,016 | 100.0 | % | $ | 1,412,246 | 100.0 | % | $ | 1,343,467 | 100.0 | % | ||||||||||||
|
Operating income (loss):
|
%
of
segment
net
sales
|
%
of
segment
net
sales
|
%
of segment
net
sales
|
|||||||||||||||||||||
|
Wholesale-Carter’s
|
$ | 81,935 | 16.7 | % | $ | 92,934 | 19.3 | % | $ | 87,335 | 18.8 | % | ||||||||||||
|
Retail-Carter’s
|
67,013 | 15.9 | % | 57,032 | 15.6 | % | 56,415 | 16.9 | % | |||||||||||||||
|
Mass
Channel-Carter’s
|
33,424 | 13.1 | % | 37,395 | 15.4 | % | 33,517 | 15.2 | % | |||||||||||||||
|
Carter’s
operating income
|
182,372 | 15.6 | % | 187,361 | 17.2 | % | 177,267 | 17.4 | % | |||||||||||||||
|
Wholesale-OshKosh
|
(4,420 | ) | (6.0 | %) | (1,220 | ) | (1.4 | %) | 11,204 | 11.6 | % | |||||||||||||
|
OshKosh
cost in excess of fair value of net assets
acquired-impairment
|
-- | -- | (35,995 | ) | (41.6 | %) | -- | -- | ||||||||||||||||
|
Net
Wholesale-OshKosh
|
(4,420 | ) | (6.0 | %) | (37,215 | ) | (43.0 | %) | 11,204 | 11.6 | % | |||||||||||||
|
Retail-OshKosh
|
9,111 | 3.7 | % | 6,474 | 2.8 | % | 18,809 | 8.2 | % | |||||||||||||||
|
OshKosh
cost in excess of fair value of net assets
acquired-impairment
|
-- | -- | (106,891 | ) | (45.8 | %) | -- | -- | ||||||||||||||||
|
Net
Retail-OshKosh
|
9,111 | 3.7 | % | (100,417 | ) | (43.0 | %) | 18,809 | 8.2 | % | ||||||||||||||
|
Mass
Channel-OshKosh (a)
|
3,187 | -- | 2,685 | -- | 2,428 | -- | ||||||||||||||||||
|
OshKosh
operating income
|
7,878 | 2.4 | % | (134,947 | ) | (42.1 | %) | 32,441 | 10.0 | % | ||||||||||||||
|
Segment
operating income
|
190,250 | 12.8 | % | 52,414 | 3.7 | % | 209,708 | 15.6 | % | |||||||||||||||
|
Other
reconciling items (b)
|
(54,756 | ) (c) | (3.7 | %) | (46,423 | ) (d) | (3.3 | %) | (44,597 | ) | (3.3 | %) | ||||||||||||
|
OshKosh tradename
impairment
|
-- | -- | (12,000 | ) | (0.8 | %) | -- | -- | ||||||||||||||||
|
Net
other reconciling items
|
(54,756 | ) | (3.7 | %) | (58,423 | ) | (4.1 | %) | (44,597 | ) | (3.3 | %) | ||||||||||||
|
Total
operating income (loss)
|
$ | 135,494 | 9.1 | % | $ | (6,009 | ) | (0.4 | %) | $ | 165,111 | 12.3 | % | |||||||||||
|
(a)
|
OshKosh
mass channel consists of a licensing agreement with Target
Stores. Operating income consists of royalty income, net of
related expenses.
|
|
(b)
|
Other
reconciling items generally include expenses related to severance and
relocation, executive management, finance, stock-based compensation,
building occupancy, information technology, certain legal fees, incentive
compensation, consulting, and audit
fees.
|
|
(c)
|
Includes
$5.3 million related to executive retirement charges (see Note 16) and
$2.6 million related to the write-down of the carrying value of the
OshKosh distribution facility (see Note
15).
|
|
(d)
|
Includes
$7.4 million in facility closure costs related to the closure of the
OshKosh distribution facility (see Note 15) and the benefit from reversing
$2.7 million in stock-based compensation expenses on certain
performance-based equity
awards.
|
64
CARTER’S, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
14—SEGMENT INFORMATION: (Continued)
The table
below represents inventory, net, by segment:
|
(dollars
in thousands)
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
|||||||||
|
Wholesale-Carter’s
|
$ | 86,221 | $ | 91,191 | $ | 74,737 | ||||||
|
Wholesale-OshKosh
|
31,442 | 32,594 | 32,163 | |||||||||
|
Retail-Carter’s
|
30,629 | 32,969 | 23,612 | |||||||||
|
Retail-OshKosh
|
18,862 | 23,462 | 18,422 | |||||||||
|
Mass
Channel-Carter’s
|
36,332 | 45,278 | 44,654 | |||||||||
|
Total
|
$ | 203,486 | $ | 225,494 | $ | 193,588 | ||||||
Wholesale inventories include inventory
produced and warehoused for the retail segment.
All of our property, plant, and
equipment, net, for the past three fiscal years have been located within the
United States.
The following represents cost in excess
of fair value of net assets acquired by segment:
|
(dollars
in thousands)
|
Wholesale
– Carter’s
|
Wholesale
– OshKosh
|
Retail
– Carter’s
|
Retail
–OshKosh
|
Mass
Channel
– Carter’s
|
Total
|
||||||||||||||||||
|
Balance
at December 30, 2006
|
$ | 51,814 | $ | 36,071 | $ | 82,025 | $ | 107,115 | $ | 2,731 | $ | 279,756 | ||||||||||||
|
Intangible
asset impairment
|
-- | (35,995 | ) | -- | (106,891 | ) | -- | (142,886 | ) | |||||||||||||||
|
Adjustments
|
-- | (76 | ) | -- | (224 | ) | -- | (300 | ) | |||||||||||||||
|
Balance
at December 29, 2007
|
51,814 | -- | 82,025 | -- | 2,731 | 136,570 | ||||||||||||||||||
|
Adjustments
|
-- | -- | -- | -- | -- | -- | ||||||||||||||||||
|
Balance
at January 3, 2009
|
$ | 51,814 | $ | -- | $ | 82,025 | $ | -- | $ | 2,731 | $ | 136,570 | ||||||||||||
NOTE
15—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 could 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 OshKosh 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. Over the past year, the Company has been actively trying to
sell this facility for its appraised value. However, due to recent
declines in the commercial real estate market, the Company lowered the selling
price of the facility during the third quarter of fiscal 2008 and has written
down the carrying value of the facility to $3.5 million (classified as an asset
held for sale within prepaid expenses and other current assets on the
accompanying audited consolidated balance sheets) to reflect the new anticipated
selling price.
65
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
15—FACILITY CLOSURE AND RESTRUCTURING COSTS: (Continued)
For a majority of the affected
employees, severance benefits were communicated on February 20,
2007. Approximately 215 employees were terminated.
During fiscal 2007, we recorded costs
of $7.4 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, $2.1 million of accelerated depreciation (included in
selling, general, and administrative expenses), and $0.9 million of other
closure costs.
As discussed above, during fiscal 2008,
we recorded costs of $2.6 million to write-down the carrying value of the
OshKosh distribution facility in response to market conditions.
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 activity related to the Acquisition in fiscal 2008 and fiscal 2007
and are included in other current liabilities on the accompanying audited
consolidated balance sheets:
|
(dollars
in thousands)
|
Severance
|
Other
exit
costs
|
Lease
termination costs
|
Contract
termination costs
|
Total
|
|||||||||||||||
|
Balance
at December 30, 2006
|
$ | 2,135 | $ | 719 | $ | 1,733 | $ | 200 | $ | 4,787 | ||||||||||
|
Payments
|
(1,624 | ) | (641 | ) | (1,059 | ) | -- | (3,324 | ) | |||||||||||
|
Adjustments
to cost in excess of fair value of net assets acquired
|
(100 | ) | -- | -- | (200 | ) | (300 | ) | ||||||||||||
|
Balance
at December 29, 2007
|
411 | 78 | 674 | -- | 1,163 | |||||||||||||||
|
Payments
|
(411 | ) | (78 | ) | (674 | ) | -- | (1,163 | ) | |||||||||||
|
Balance
at January 3, 2009
|
$ | -- | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||||
NOTE
16—EXECUTIVE RETIREMENT CHARGES:
On June 11, 2008, the Company announced
the retirement of an executive officer. In connection with this
retirement, the Company recorded charges during the second quarter of fiscal
2008 of $5.3 million, $3.1 million of which related to the present value of
severance and benefit obligations, and $2.2 million of which related to the
accelerated vesting of stock options.
66
CARTER’S,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE
17—UNAUDITED QUARTERLY FINANCIAL DATA:
Unaudited summarized financial data by
quarter for the fiscal years ended January 3, 2009 and December 29, 2007 is
presented in the table below:
|
(dollars
in thousands, except per share data)
|
Quarter
1
|
Quarter
2
|
Quarter
3
|
Quarter
4
|
||||||||||||
|
2008:
|
||||||||||||||||
|
Net
sales
|
$ | 329,972 | $ | 301,675 | $ | 436,419 | $ | 421,950 | ||||||||
|
Gross
profit
|
104,915 | 99,581 | 154,667 | 154,854 | ||||||||||||
|
Selling,
general, and administrative expenses
|
92,276 | 92,207 | 104,536 | 115,255 | ||||||||||||
|
Royalty
income
|
7,914 | 7,203 | 9,576 | 8,992 | ||||||||||||
|
Operating
income
|
20,553 | 9,252 | 57,098 | 48,591 | ||||||||||||
|
Net
income
|
11,559 | 2,779 | 33,375 | 27,345 | ||||||||||||
|
Basic
net income per common share
|
0.20 | 0.05 | 0.60 | 0.49 | ||||||||||||
|
Diluted
net income per common share
|
0.19 | 0.05 | 0.58 | 0.47 | ||||||||||||
|
2007:
|
||||||||||||||||
|
Net
sales
|
$ | 320,128 | $ | 287,775 | $ | 410,949 | $ | 393,394 | ||||||||
|
Gross
profit
|
106,380 | 95,418 | 145,856 | 135,596 | ||||||||||||
|
Selling,
general, and administrative expenses
|
88,246 | 84,635 | 94,241 | 92,704 | ||||||||||||
|
Royalty
income
|
7,545 | 6,700 | 8,649 | 7,844 | ||||||||||||
|
Operating
income (loss)
|
21,172 | (137,873 | ) | 60,008 | 50,684 | |||||||||||
|
Net
income (loss)
|
9,611 | (143,449 | ) | 34,618 | 28,602 | |||||||||||
|
Basic
net income (loss) per common share
|
0.16 | (2.48 | ) | 0.60 | 0.50 | |||||||||||
|
Diluted
net income (loss) per common share
|
0.16 | (2.48 | ) | 0.58 | 0.48 | |||||||||||
67
Not applicable
Our Chief Executive Officer and Chief
Financial Officer 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 have
concluded that our disclosure controls and procedures are
effective.
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted evaluations of the
effectiveness of our internal control over financial reporting based on the
framework in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on our
evaluations under the framework in Internal Control-Integrated
Framework issued by the COSO, our management concluded
that our internal control over financial reporting was effective as of January
3, 2009.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
The effectiveness of Carter’s, Inc. and
its subsidiaries’ internal control over financial reporting as of January 3,
2009 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
None
68
The
information called for by ITEM 10 is incorporated herein by reference to the
definitive proxy statement relating to the Annual Meeting of Stockholders of
Carter’s, Inc. to be held on May 14, 2009. Carter’s, Inc. intends to
file such definitive proxy statement with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K.
The
information called for by ITEM 11 is incorporated herein by reference to the
definitive proxy statement referenced above in ITEM 10.
EQUITY
COMPENSATION PLAN INFORMATION
The following table provides
information about our equity compensation plan as of our last fiscal
year:
|
Equity
Compensation Plan Information
|
||||||||||||
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants,
and rights
|
Weighted-average
exercise price of outstanding options, warrants, and
rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in first
column)
|
|||||||||
|
Equity
compensation plans approved by security holders (1)
|
5,066,594 | $ | 10.03 | 1,440,827 | ||||||||
|
Equity
compensation plans not approved by security holders
|
-- | -- | -- | |||||||||
|
Total
|
5,066,594 | $ | 10.03 | 1,440,827 | ||||||||
|
(1)
|
Represents
stock options that are outstanding or that are available for future
issuance pursuant to the Carter’s, Inc.’s Amended and Restated 2003 Equity
Incentive Plan.
|
Additional
information called for by ITEM 12 is incorporated herein by reference to the
definitive proxy statement referenced above in ITEM 10.
The
information called for by ITEM 13 is incorporated herein by reference to the
definitive proxy statement referenced above in ITEM 10.
The
information called for by ITEM 14 is incorporated herein by reference to the
definitive proxy statement referenced above in ITEM 10.
69
|
Page
|
|||||||||
|
(A)
|
1. | 34 | |||||||
| 35 | |||||||||
| 36 | |||||||||
| 37 | |||||||||
| 38 | |||||||||
| 39 | |||||||||
| 40 | |||||||||
| 2. |
Financial
Statement Schedules: None
|
||||||||
|
(B)
|
Exhibits:
|
||||||||
|
Exhibit Number
|
Description of
Exhibits
|
||
| 3.1 |
Certificate
of Incorporation of Carter’s, Inc., as amended on May 12,
2006.*********
|
||
| 3.2 |
By-laws
of Carter’s, Inc.***
|
||
| 4.1 |
Specimen
Certificate of Common Stock. ****
|
||
| 10.1 |
Amended
and Restated Employment Agreement between Carter’s, Inc., The William
Carter Company, and Frederick J. Rowan, II, dated as of August 29, 2005.
****
|
||
| 10.2 |
Amended
and Restated Employment Agreement between The William Carter Company and
Joseph Pacifico, dated as of August 15, 2001. *
|
||
| 10.3 |
Amended
and Restated Employment Agreement between The William Carter Company and
Charles E. Whetzel, Jr., dated as of August 15, 2001. *
|
||
| 10.4 |
Amended
and Restated Employment Agreement between The William Carter Company and
David A. Brown, dated as of August 15, 2001. *
|
||
| 10.5 |
Amended
and Restated Employment Agreement between The William Carter Company and
Michael D. Casey, dated as of August 15, 2001. *
|
||
| 10.6 |
Employment
arrangement between The William Carter Company and Richard F.
Westenberger, dated as of January 19, 2009.
|
||
| 10.7 |
Amended
and Restated 2003 Equity Incentive Plan. ****
|
||
| 10.8 |
Credit
Agreement dated as of July 14, 2005 among The William Carter Company, as
Borrower, and Bank of America, N.A., as Administrative Agent, Swing Line
Lender, L/C Issuer and Collateral Agent, Credit Suisse as syndication
Agent, The Other Lenders Party Hereto and Banc of America Securities LLC
and Credit Suisse as Joint Lead Arrangers and Joint Bookrunning Managers,
and JP Morgan Chase Bank, N.A., U.S. Bank National Association and
Wachovia Bank, National Association, as Co-Documentation
Agent.******
|
||
70
|
10.9
|
Amendment
No. 1 among the Company, each leader from time to time party thereto, Bank
of America, N.A., as Administrative Agent, and the Required Lenders, the
Term Lenders and the Additional Term 1 Lenders, in each case listed on the
signature pages thereto, to the Credit Agreement, dated as of July 14,
2005.********
|
||
| 10.10 |
Lease
Agreement dated February 16, 2001 between The William Carter Company and
Proscenium, L.L.C.*
|
||
| 10.11 |
Amended
and Restated Stockholders Agreement dated as of August 15, 2001 among
Carter's, Inc. and the stockholders of Carter's, Inc., as amended.
****
|
||
| 10.12 |
Lease
Agreement dated January 27, 2003 between The William Carter Company
and Eagle Trade Center, L.L.C.***
|
||
| 10.13 |
Amended
and Restated Supplemental Executive Retirement Agreement dated as of
November 1, 1993, by and between Frederick J. Rowan, II and
The William Carter Company. **
|
||
| 10.14 |
First
Amendment to Amended and Restated Supplemental Executive Retirement
Agreement dated as of October 30, 1996, by and between
Frederick J. Rowan, II and The William Carter Company.
**
|
||
| 10.15 |
Trust
Agreement for The Frederick J. Rowan Retirement Trust dated as of
August 1, 1994, by and between The William Carter Company and
Wachovia Bank of Georgia, N.A. and its successor or successors or assigns
in the Trust, as trustee. **
|
||
| 10.16 |
First
Amendment to Trust Agreement for The Frederick J. Rowan Retirement
Trust dated as of October 30, 1996. **
|
||
| 10.17 |
Split
Dollar Agreement dated as of September 21, 1992, by and between The
William Carter Company and Frederick J. Rowan, II.
**
|
||
| 10.18 |
Amended
and Restated Annual Incentive Compensation Plan. ****
|
||
| 10.19 |
Fourth
Amendment dated December 21, 2004 to the Lease Agreement dated February
16, 2001, as amended by that certain First Lease Amendment dated as of May
31, 2001, by that certain Second Amendment dated as of July 26, 2001, and
by that certain Third Amendment dated December 3, 2001, between The
William Carter Company and The Manufacturers Life Insurance Company (USA).
*****
|
||
| 10.20 |
The
William Carter Company Severance plan, Administrative Provisions, and
Claims Procedure, dated as of February 15,
2007.*********
|
||
| 21 |
Subsidiaries
of Carter’s, Inc. *******
|
||
| 23 |
Consent
of Independent Registered Public Accounting Firm
|
||
| 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
|
|
*
|
Incorporated
by reference to The William Carter Company’s Registration Statement filed
on Form S-4 (No. 333-72790) on November 5, 2001.
|
|
**
|
Incorporated
by reference to Carter’s, Inc.’s Registration Statement on Form S-1 (No.
333-98679) filed on August 25, 2003.
|
|
***
|
Incorporated
by reference to Carter’s, Inc.’s Registration Statement on Form S-1 (No.
333-98679) filed on October 1, 2003.
|
|
****
|
Incorporated
by reference to Carter’s, Inc.’s Registration Statement on Form S-1 (No.
333-98679) filed on October 10, 2003.
|
|
*****
|
Incorporated
by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March
16, 2005.
|
|
******
|
Incorporated
by reference to Carter’s, Inc.’s Form 8-K filed on July 14,
2005.
|
|
*******
|
Incorporated
by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on March
15, 2006.
|
|
********
|
Incorporated
by reference to Carter’s, Inc.’s Form 8-K filed on April 28,
2006.
|
|
*********
|
Incorporated
by reference to Carter’s, Inc.’s Annual Report on Form 10-K filed on
February 28, 2007.
|
71
Pursuant to the requirements of Section
13 or 15(a) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on their behalf by the undersigned, thereunto
duly authorized, in Atlanta, Georgia on February 27, 2009.
| CARTER’S, INC. | |||
|
Date: February
27, 2009
|
By: |
/s/ MICHAEL
D. CASEY
|
|
|
Michael
D. Casey
|
|||
|
Chief
Executive Officer
|
|||
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities
indicated.
|
Name
|
Title
|
|
/s/
MICHAEL D. CASEY
|
Director and Chief Executive Officer
|
|
Michael
D. Casey
|
(Principal Executive Officer)
|
|
/s/
RICHARD F. WESTENBERGER
|
Executive Vice President and Chief Financial Officer
|
|
Richard
F. Westenberger
|
(Principal Financial and Accounting Officer)
|
|
/s/
BRADLEY M. BLOOM
|
Director
|
|
Bradley
M. Bloom
|
|
|
/s/
A. BRUCE CLEVERLY
|
Director
|
|
A.
Bruce Cleverly
|
|
|
/s/
PAUL FULTON
|
Director
|
|
Paul
Fulton
|
|
|
/s/
WILLIAM MONTGORIS
|
Director
|
|
William
Montgoris
|
|
|
/s/
DAVID PULVER
|
Director
|
|
David
Pulver
|
|
|
/s/
JOHN R. WELCH
|
Director
|
|
John
R. Welch
|
|
|
/s/
THOMAS WHIDDON
|
Director
|
|
Thomas
Whiddon
|
|
72
Exhibit
10.6
[CARTER’S
LETTERHEAD]
January
19, 2009
|
Mr.
Richard F. Westenberger
|
224 East
Sheridan Road
Lake
Bluff, Illinois 60044
Re: Severance
Terms
Dear
Richard,
This
letter agreement (this “Agreement”) confirms
the understanding between The William Carter Company (the
“Company”) and
you with respect to your severance compensation from the Company, notably
that:
|
1.
|
Position.
|
|
|
(a)
|
You
will continue to be an At Will employee, serving as the Executive Vice
President and Chief Financial Officer for Carter's, and have the normal
duties, responsibilities, and authority of such position, subject to the
Company’s ability to expand, limit, or otherwise change these duties,
responsibilities, and authorities.
|
|
|
(b)
|
Your
base salary will be a minimum of $400,000 per year and your current target
annual cash incentive award (“Target Bonus”)
under the Company’s Amended and Restated Annual Incentive Plan (“Plan”) will be
a minimum of seventy-five percent (75%) of your base salary as in effect
during the calendar year for which the award is made, each subject to
upward adjustments based on your performance.
|
|
|
2.
|
Severance
Compensation.
|
|
|
(a)
|
If
the Company terminates your employment for any reason other than because
of your conviction of a felony, your commission of fraud (or other act
involving dishonesty) or misconduct that is injurious to the Company, or
your willful refusal to perform your job responsibilities, then you shall
be entitled to receive (i) your base salary as in effect during the
calendar year during which such termination occurs (“Termination
Year”) for a period of twelve (12) months following your
termination (“Severance
Period”); and (ii) the Target Bonus you would have earned under the
Plan for the Termination Year, provided that
the calculation of any such Target Bonus shall take into account whether
the Company’s performance goals established pursuant to the Plan were
achieved, and provided, further, that
any such Target Bonus payment shall be pro-rated for the amount of time
you were employed by the Company during the Termination Year (the
compensation referenced in subclauses (i) and (ii) above are collectively
referred to as the (“Severance
Compensation”). Except to the extent modification is
required to comply with the requirements of Section 409A of the Internal
Revenue Code of 1986, as amended (“Section 409A”), as described in Section
4 below, the portion of your Severance Compensation described in subclause
(i) shall be paid in accordance with the Company’s normal pay cycles and
the portion described in subclause (ii) shall be paid in accordance with
the terms of the Plan.
|
|
|
(b)
|
In
addition to the Severance Compensation described above, during the
Severance Period, you can continue to receive coverage under the
Company-sponsored medical, dental, vision, or group life insurance plans
for you (and any eligible dependents who are enrolled in those plans at
the time of your termination of employment) at the same cost for such
coverage as is paid by active employees. In order to receive
the Company’s subsidy for these benefits, you (and any dependents) must
qualify for continued coverage under the terms and conditions of the plans
or by law; must elect to continue the coverage in accordance with the
terms of each plan; and must pay the cost of your coverage through
deduction from the salary continuation payments under subclause (i) of
Section 2(a) above. The Company’s subsidy for these benefits
will expire with the end of the Severance Period.
|
|
|
(c)
|
The
amount of your Severance Compensation will be reduced by the amount of any
severance compensation you are otherwise entitled to pursuant to any
Company Severance Plan.
|
|
|
3.
|
Other
Benefits. Your eligibility for all Company-subsidized
benefits will cease on the last day of the Severance Period or, if later,
on the date provided by the plan documents for such
benefits. Coverage for medical, dental and vision insurance may
be continued under COBRA. Group life insurance may be continued
pursuant to the terms and conditions of that plan.
|
|
|
4.
|
Section
409A Compliance.
|
|
|
(a) It
is intended that the payment of benefits described in this Agreement will
comply with Section 409A and all guidance and regulations
thereunder. This Agreement will at all times be construed
in a manner to comply with Section 409A and should any provision be
found not in compliance with Section 409A, you
hereby agree to any changes to the terms of
this Agreement reasonably deemed necessary and required by the
Company to achieve compliance with Section 409A, including any
applicable exemptions. In no event will any
payment pursuant to this Agreement that is considered “deferred
compensation” within the meaning of Section 409A, and that does not
satisfy any of the applicable exemptions under Section 409A, be
accelerated or delayed in violation of Section 409A. If you are a
“specified employee,” as defined in Section 409A and Section 4(c) below,
at the time that payments to you under this Agreement are to commence, no
payment under this Agreement that is considered to be “deferred
compensation” within the meaning of Section 409A that does not satisfy any
of the applicable exemptions under Section 409A may be made before the
date that is six (6) months after your separation from service (or death,
if earlier). To the extent that payments to you under this
Agreement are subject to the six-month delay rule, all payments that would
have been made to you during the six (6) months following your separation
from service will be accumulated and paid to you during the seventh
(7th)
month following your separation from service, and any remaining payments
due will be made in their ordinary course according to the terms of this
Agreement. The Company will notify you if you are subject to
the six (6) month delay rule. In no event shall amounts be paid
to you pursuant to Section 2(a) unless you incur a separation from service
within the meaning of Section 409A(a)(2)(A)(i) and the Treasury
Regulations promulgated thereunder.
|
||
|
(b) Notwithstanding
the provisions of Section 4(a), so much of the Severance Compensation
payable pursuant to Section 2(a) as does not exceed the "exempt amount" as
hereinafter defined shall be paid in accordance with the Company’s normal
pay cycles or the terms of the Plan, which is applicable; provided,
that in no event shall such amounts be paid later than by December 31
of the second calendar year following the calendar year in which your
involuntary separation from service occurs. For purposes of the
immediately preceding sentence, the "exempt amount" means the lesser of
(i) your total Severance Compensation, if any, or (ii) the lesser of (A)
two times the applicable limit under Section 401(a)(17) of the Internal
Revenue Code for the year in which your involuntary separation from
service occurs, or (B) two times the annualized compensation determined
under applicable Treasury Regulations by reference to the annual rate of
pay for the calendar year preceding the calendar year in which your
involuntary separation from service occurs. For purposes of the
Treasury Regulations under Section 409A, each payment described in this
Section shall be treated as a separate payment.
|
||
|
(c) For
purposes of this Section, the term "specified employee" means an
individual who is determined by the Company to be a specified employee as
defined in subsection (a)(2)(B)(i) of Section 409A. The Company
may, but need not, elect in writing, subject to the applicable limitations
under Section 409A, any of the special elective rules prescribed in
Section 1.409A-1(i) of the Treasury Regulations for purposes of
determining "specified employee" status. Any such written
election shall be deemed part of this Agreement.
|
||
|
5.
|
Release
and Compliance. Your right to receive Severance
Compensation is expressly conditional upon (a) your execution (and
non-revocation) of a general release of liability of the Company and its
Affiliates in form and substance satisfactory to the Company, and (b) your
compliance with each of the terms of this Agreement.
|
|
|
6.
|
Non-Competition/Non-Solicitation. During
the Severance Period, you will not: work or provide services in a similar
capacity for any company a material component of whose business is
competitive with the Company; solicit, induce, or hire (or attempt to do
any of the same) any Company employee for employment with another company;
induce or attempt to induce any customer of the Company to, in any way,
diminish their relationship with the Company; or otherwise interfere with
any relationship between the Company and any employee or
customer.
|
|
|
7.
|
Confidential
Information. The information you obtain while working
for the Company (whether written, oral, or any other form) relating to the
business or operations of the Company that is not generally known by the
public is proprietary to the Company. You agree not to use any
of such confidential information outside of your performance of your job
responsibilities for the Company, and you agree to return or destroy any
physical copies that may contain such confidential
information. You agree not to discuss or disclose the terms or
existence of this letter agreement. The obligations of this
paragraph survive the termination of your employment with the
Company.
|
|
|
8.
|
Miscellaneous. This
letter sets forth the entire understanding between the Company and you
with respect to your severance compensation. The interpretation
of any of these provisions will be governed by the laws of the State of
New York. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid,
illegal or unenforceable in any respect under any applicable law or rule
in any jurisdiction, such invalidity, illegality or unenforceability will
not affect any other provision or any other jurisdiction, but this
Agreement will be reformed, construed and enforced in such jurisdiction as
if such invalid, illegal or unenforceable provision had never been
contained herein.
|
|
Please
acknowledge your acceptance of these terms by counter-signing
below.
Sincerely,
|
/s/ BRENDAN
M. GIBBONS
|
|
Brendan
M. Gibbons
|
|
Vice
President, General Counsel, and
Corporate
Secretary
|
AGREED
AND ACCEPTED
|
/s/ RICHARD
F. WESTENBERGER
|
|
Richard
F. Westenberger
|
Exhibit
31.1
CERTIFICATION
I,
Michael D. Casey certify that:
|
|
1.
|
I
have reviewed this annual report on Form 10-K of Carter’s,
Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
|
Date: February
27, 2009
|
/s/ MICHAEL
D. CASEY
|
||
|
Michael
D. Casey
|
|||
|
Chief
Executive Officer
|
|||
Exhibit
31.2
CERTIFICATION
I,
Richard F. Westenberger certify that:
|
|
1.
|
I
have reviewed this annual report on Form 10-K of Carter’s,
Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
|
|
5.
|
The
registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent
functions):
|
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
|
Date: February
27, 2009
|
/s/ RICHARD
F. WESTENBERGER
|
||
|
Richard
F. Westenberger
|
|||
|
Chief
Financial Officer
|
|||
Exhibit
32
CERTIFICATION
Each of the undersigned in the capacity
indicated hereby certifies that, to his knowledge, this Annual Report on Form
10-K for the fiscal year ended January 3, 2009 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and the information contained in this Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Carter’s, Inc.
|
Date: February
27, 2009
|
/s/ MICHAEL
D. CASEY
|
||
|
Michael
D. Casey
|
|||
|
Chief
Executive Officer
|
|||
|
Date: February
27, 2009
|
/s/ RICHARD
F. WESTENBERGER
|
||
|
Richard
F. Westenberger
|
|||
|
Chief
Financial Officer
|
|||
The foregoing certifications are being
furnished solely pursuant to 18 U.S.C. § 1350 and are not
being filed as part of the Annual Report on Form 10-K or as a separate
disclosure document.