form10_qa.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 4, 2009 OR |
|
|
¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____
TO ______ |
Commission file number:
001-31829
CARTER’S, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
13-3912933 |
(state or other jurisdiction of |
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
The Proscenium
1170 Peachtree Street NE, Suite 900
Atlanta, Georgia 30309
(Address of principal executive offices, including zip code)
(404) 745-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock |
|
Outstanding Shares at April 30, 2009 |
Common stock, par value $0.01 per share |
|
56,690,740 |
CARTER’S, INC.
FORM 10-Q/A
EXPLANATORY NOTE
We are filing this Amended Quarterly Report on Form 10-Q/A (the “Amended Filing” or "Form 10-Q/A") to our Quarterly Report on Form 10-Q for the three months ended April 4, 2009 (the “Original Filing”) to amend and restate our unaudited condensed consolidated financial
statements and related disclosures for the three months ended April 4, 2009 and March 29, 2008, as discussed in Note 3 to the accompanying restated unaudited condensed consolidated financial statements. The Original Filing was filed with the Securities and Exchange Commission (“SEC”) on April 30, 2009.
Background of the Restatement
On November 10, 2009, the Company announced that its Audit Committee, with the assistance of outside counsel, had commenced a review of customer margin support provided by the Company and an investigation into undisclosed margin support commitments and related matters. As a result
of this review, the Company announced that the previously issued consolidated financial statements for the fiscal years 2004 through 2008 included in the Company’s Forms 10-K, and for the fiscal quarters from September 29, 2007 through July 4, 2009 included in the Company's Forms 10-Q, should no longer be relied upon (collectively, the "Affected Periods").
Management initially began a review of margin support arrangements with respect to a single wholesale customer (the "Initial Customer") after becoming aware of a disputed amount of margin support with the Initial Customer. In the normal course of business, the Company provides margin
support and other allowances (collectively, “accommodations”) to its wholesale customers to assist them with the costs related to inventory clearance and sales promotions. The Company’s policy is to reflect the amounts of accommodations as reductions to revenue or, in the case of certain co-op advertising expenses, as additions to selling, general, and administrative expenses. As a result of its review, management identified issues with respect to the timing of recognizing
customer accommodations with respect to the Initial Customer. Following management’s review, the Audit Committee engaged outside counsel to undertake the review and investigation.
The Audit Committee has completed its review and investigation, which was conducted with the assistance of outside counsel and forensic accountants engaged by outside counsel, and has concluded that the Company reported various customer accommodations in incorrect fiscal periods. The
investigation uncovered irregularities involving members of the sales organization intentionally not disclosing accommodations arrangements with customers to the Company’s finance organization and intentionally providing inaccurate documentation and explanations regarding accommodations to the finance organization. Consequently, such arrangements were not communicated to the Company’s independent registered public accounting firm. These accommodations arrangements were made throughout
the Affected Periods by certain members of the Company’s sales organization and involved the deferral of accommodations into later fiscal periods. The deferrals resulted in the overstatement of net sales and net income in certain of the Affected Periods and the understatement of net sales and net income in certain of the Affected Periods. The deferrals related primarily to the Initial Customer and, to a lesser extent, other wholesale customers.
The cumulative, after-tax impact of the adjustments required to fairly state the previously issued financial statements for the Affected Periods is a 3% reduction in retained earnings in the amount of $7.5 million as of July 4, 2009. This amount reflects the sum of adjustments to
net income for fiscal 2004 through the six-month period ended July 4, 2009, which total $4.4 million, and a 2003 cumulative adjustment to retained earnings in the amount of $3.1 million. The adjustments do not impact the Company’s reported cash flow from operations for any of the Affected Periods.
The Company has self-reported information concerning this investigation to the SEC. The Company has also been informed that the United States Attorney’s Office is conducting an inquiry into this matter. The Company will continue to cooperate with these inquiries.
Restatement of Other Financial Statements
With the filing of this Form 10-Q/A, we are concurrently filing amendments to our Annual Report on Form 10-K for fiscal 2008 and our Quarterly Report on Form 10-Q for the quarterly period ended July 4, 2009. The amendment to our Annual Report on Form 10-K is being filed to restate
our consolidated financial statements for the fiscal years ended January 3, 2009, December 29, 2007, and December 30, 2006, and for the fiscal years ended December 31, 2005 and January 1, 2005, as included in Item 6 – “Selected Financial Data,” as well as our selected condensed consolidated financial data (excluding footnotes) for the quarterly periods in fiscal 2007 and fiscal 2008 included in Item 8 – “Financial Statements and Supplementary Data.” The amendment
to our Quarterly Report on Form 10-Q is being filed to restate our unaudited condensed consolidated financial statements and related financial information for the quarterly period ended July 4, 2009 and the comparative fiscal 2008 period for the effects of the restatement. In addition, we are also concurrently filing our Quarterly Report on Form 10-Q for the quarterly period ended October 3, 2009, in which we are restating our financial information for the three and nine-month periods ended September
27, 2008.
We do not intend to file any other amended Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for periods affected by the restatement. The consolidated financial statements and related financial information contained in any of the Company’s filings with the SEC during
the restated periods should no longer be relied upon.
Internal Control Considerations
Through the investigation, management identified: (i) control deficiencies in its internal controls associated with customer accommodations processes that constitute material weaknesses, as discussed in Part I, Item 4 of this Amended Filing, and (ii) the need to restate prior period consolidated
financial statements. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. Management has also determined that the Company’s disclosure controls and procedures were ineffective as of April 4, 2009. For a discussion of management’s consideration of the Company’s
disclosure controls and procedures and material weaknesses identified, see Part I, Item 4 included in this Amended Filing.
If not remediated, these control deficiencies could result in future material misstatements to the Company’s consolidated financial statements. Accordingly, management determined that these control deficiencies represented material weaknesses in internal control over financial
reporting.
For the convenience of the reader, this Amended Filing sets forth the Original Filing in its entirety, as modified and superseded where necessary to reflect the restatement. The following items have been amended principally as a result of, and to reflect, the restatement:
· |
Part I — Item 1. Financial Statements; |
· |
Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations; |
· |
Part I — Item 4. Controls and Procedures; |
· |
Part II — Item 1A. Risk Factors; and |
· |
Part II — Item 6. Exhibits. |
In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.
The remaining Items contained within this Amended Filing consist of all other Items originally contained in the Form 10-Q and are included for the convenience of the reader. The sections of the Form 10-Q which were not amended are unchanged and continue in full force and effect as
originally filed. This Amended Filing speaks as of the date of the Original Filing on the Form 10-Q and has not been updated to reflect events occurring subsequent to the original filing date other than those associated with the investigation and resulting restatement of the Company’s consolidated financial statements.
CARTER’S, INC.
INDEX
CARTER’S, INC.
(dollars in thousands, except for share data)
(unaudited)
|
|
April 4,
2009
|
|
|
January 3,
2009
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
186,834 |
|
|
$ |
162,349 |
|
Accounts receivable, net |
|
|
92,698 |
|
|
|
85,452 |
|
Finished goods inventories, net |
|
|
153,941 |
|
|
|
203,486 |
|
Prepaid expenses and other current assets |
|
|
13,974 |
|
|
|
13,214 |
|
Deferred income taxes |
|
|
36,021 |
|
|
|
35,545 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
483,468 |
|
|
|
500,046 |
|
Property, plant, and equipment, net |
|
|
84,809 |
|
|
|
86,229 |
|
Tradenames |
|
|
305,733 |
|
|
|
305,733 |
|
Cost in excess of fair value of net assets acquired |
|
|
136,570 |
|
|
|
136,570 |
|
Deferred debt issuance costs, net |
|
|
3,314 |
|
|
|
3,598 |
|
Licensing agreements, net |
|
|
4,346 |
|
|
|
5,260 |
|
Other assets |
|
|
469 |
|
|
|
576 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,018,709 |
|
|
$ |
1,038,012 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
3,503 |
|
|
$ |
3,503 |
|
Accounts payable |
|
|
42,915 |
|
|
|
79,011 |
|
Other current liabilities |
|
|
56,211 |
|
|
|
57,613 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
102,629 |
|
|
|
140,127 |
|
Long-term debt |
|
|
333,648 |
|
|
|
334,523 |
|
Deferred income taxes |
|
|
107,928 |
|
|
|
108,989 |
|
Other long-term liabilities |
|
|
41,411 |
|
|
|
40,822 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
585,616 |
|
|
|
624,461 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 4, 2009 and January 3, 2009 |
|
|
-- |
|
|
|
-- |
|
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 56,677,490 and 56,352,111 shares issued and outstanding at April 4, 2009 and January 3, 2009, respectively |
|
|
567 |
|
|
|
563 |
|
Additional paid-in capital |
|
|
214,441 |
|
|
|
211,767 |
|
Accumulated other comprehensive loss |
|
|
(7,058 |
) |
|
|
(7,318 |
) |
Retained earnings |
|
|
225,143 |
|
|
|
208,539 |
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
433,093 |
|
|
|
413,551 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
|
$ |
1,018,709 |
|
|
$ |
1,038,012 |
|
See accompanying notes to the restated unaudited condensed consolidated financial statements
CARTER’S, INC.
(dollars in thousands, except per share data)
(unaudited)
|
|
For the
three-month periods ended |
|
|
|
April 4,
2009
|
|
|
March 29,
2008
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
357,162 |
|
|
$ |
333,885 |
|
Cost of goods sold |
|
|
229,440 |
|
|
|
225,057 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
127,722 |
|
|
|
108,828 |
|
Selling, general, and administrative expenses |
|
|
99,130 |
|
|
|
92,276 |
|
Workforce reduction and facility closure costs (Note 11) |
|
|
8,420 |
|
|
|
-- |
|
Royalty income |
|
|
(8,762 |
) |
|
|
(7,914 |
) |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
28,934 |
|
|
|
24,466 |
|
Interest expense, net |
|
|
3,175 |
|
|
|
4,520 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
25,759 |
|
|
|
19,946 |
|
Provision for income taxes |
|
|
9,155 |
|
|
|
5,915 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,604 |
|
|
$ |
14,031 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share (Note 12) |
|
$ |
0.29 |
|
|
$ |
0.24 |
|
Diluted net income per common share (Note 12) |
|
$ |
0.28 |
|
|
$ |
0.24 |
|
See accompanying notes to the restated unaudited condensed consolidated financial statements
CARTER’S, INC.
(dollars in thousands)
(unaudited)
|
|
For the
three-month periods ended |
|
|
|
April 4,
2009
|
|
|
March 29,
2008
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
|
$ |
16,604 |
|
|
$ |
14,031 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8,395 |
|
|
|
7,007 |
|
Amortization of debt issuance costs |
|
|
284 |
|
|
|
280 |
|
Non-cash stock-based compensation expense |
|
|
1,874 |
|
|
|
1,586 |
|
Income tax benefit from exercised stock options |
|
|
(778 |
) |
|
|
(40 |
) |
Non-cash asset impairment charges (Note 11) |
|
|
2,962 |
|
|
|
-- |
|
Deferred income taxes |
|
|
(1,526 |
) |
|
|
2,110 |
|
Effect of changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(7,246 |
) |
|
|
(12,707 |
) |
Inventories |
|
|
49,545 |
|
|
|
51,262 |
|
Prepaid expenses and other assets |
|
|
(760 |
) |
|
|
(1,564 |
) |
Accounts payable and other liabilities |
|
|
(36,002 |
) |
|
|
(33,031 |
) |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
33,352 |
|
|
|
28,934 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(8,959 |
) |
|
|
(2,485 |
) |
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,959 |
) |
|
|
(2,485 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Payments on term loan |
|
|
(875 |
) |
|
|
-- |
|
Share repurchases |
|
|
-- |
|
|
|
(10,020 |
) |
Income tax benefit from exercised stock options |
|
|
778 |
|
|
|
40 |
|
Proceeds from exercise of stock options |
|
|
189 |
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
92 |
|
|
|
(9,915 |
) |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
24,485 |
|
|
|
16,534 |
|
Cash and cash equivalents, beginning of period |
|
|
162,349 |
|
|
|
49,012 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
186,834 |
|
|
$ |
65,546 |
|
See accompanying notes to the restated unaudited condensed consolidated financial statements
CARTER’S, INC.
(dollars in thousands, except for share data)
(unaudited)
|
|
Common
|
|
|
Additional
paid-in
|
|
|
Accumulated
other comprehensive
(loss)
|
|
|
Retained
|
|
|
Total
stockholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated balance at January 3, 2009 |
|
$ |
563 |
|
|
$ |
211,767 |
|
|
$ |
(7,318 |
) |
|
$ |
208,539 |
|
|
$ |
413,551 |
|
Exercise of stock options (147,154 shares) |
|
|
1 |
|
|
|
188 |
|
|
|
-- |
|
|
|
-- |
|
|
|
189 |
|
Income tax benefit from exercised stock options |
|
|
-- |
|
|
|
778 |
|
|
|
-- |
|
|
|
-- |
|
|
|
778 |
|
Restricted stock grants, net of forfeitures |
|
|
3 |
|
|
|
(3 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
Stock-based compensation expense |
|
|
-- |
|
|
|
1,711 |
|
|
|
-- |
|
|
|
-- |
|
|
|
1,711 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated net income |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
16,604 |
|
|
|
16,604 |
|
Unrealized loss on interest rate swap agreements, net of tax benefit of $87 |
|
|
-- |
|
|
|
-- |
|
|
|
(147 |
) |
|
|
-- |
|
|
|
(147 |
) |
Settlement of interest rate collar agreement, net of tax of $216 |
|
|
-- |
|
|
|
-- |
|
|
|
407 |
|
|
|
-- |
|
|
|
407 |
|
Total comprehensive income |
|
|
-- |
|
|
|
-- |
|
|
|
260 |
|
|
|
16,604 |
|
|
|
16,864 |
|
Restated balance at April 4, 2009 |
|
$ |
567 |
|
|
$ |
214,441 |
|
|
$ |
(7,058 |
) |
|
$ |
225,143 |
|
|
$ |
433,093 |
|
See accompanying notes to the restated unaudited condensed consolidated financial statements.
CARTER’S, INC.
(unaudited)
NOTE 1 – THE COMPANY:
Carter’s, Inc., and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design, source, and market branded childrenswear under the Carter’s,
Child of Mine, Just One Year, OshKosh, and related brands. Our products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic retailers, including the mass channel, and for our 260 Carter’s and 165 OshKosh retail stores that market our branded merchandise
and other licensed products manufactured by other companies.
NOTE 2 – BASIS OF PREPARATION:
The accompanying unaudited condensed consolidated financial statements comprise the consolidated financial statements of Carter’s, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
In our opinion, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair presentation of our financial position as of April 4, 2009, the results of our operations for the three-month periods ended April 4, 2009 and March
29, 2008, cash flows for the three-month periods ended April 4, 2009 and March 29, 2008 and changes in stockholders’ equity for the three-month period ended April 4, 2009. Operating results for the three-month period ended April 4, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 2, 2010. Our accompanying condensed consolidated balance sheet
as of January 3, 2009 is from our restated audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K/A for the fiscal year ended January 3, 2009, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and the instructions to Form 10-Q. The accounting
policies we follow are set forth in our most recently filed Annual Report on Form 10-K/A in the notes to our restated audited consolidated financial statements for the fiscal year ended January 3, 2009.
Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying unaudited condensed consolidated financial statements for the first quarter of fiscal 2009 reflect our financial position as of April 4, 2009. The first quarter
of fiscal 2008 ended on March 29, 2008.
Certain prior year amounts have been reclassified to facilitate comparability with current year presentation.
NOTE 3 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS:
Background of the Restatement
On November 10, 2009, the Company announced that its Audit Committee, with the assistance of outside counsel, had commenced a review of customer margin support provided by the Company and an investigation into undisclosed margin support commitments and related matters. As a result
of this review, the Company announced that the previously issued consolidated financial statements for the fiscal years 2004 through 2008 included in the Company’s Forms 10-K, and for the fiscal quarters from September 29, 2007 through July 4, 2009 included in the Company's Forms 10-Q, should no longer be relied upon (collectively, the "Affected Periods").
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS: (Continued)
Management initially began a review of margin support arrangements with respect to a single wholesale customer (the "Initial Customer") after becoming aware of a disputed amount of margin support with the Initial Customer. In the normal course of business, the Company provides margin
support and other allowances (collectively, “accommodations”) to its wholesale customers to assist them with the costs related to inventory clearance and sales promotions. The Company’s policy is to reflect the amounts of accommodations as reductions to revenue or, in the case of certain co-op advertising expenses, as additions to selling, general, and administrative expenses. As a result of its review, management identified issues with respect to the timing of recognizing
customer accommodations with respect to the Initial Customer. Following management’s review, the Audit Committee engaged outside counsel to undertake the review and investigation.
The Audit Committee has completed its review and investigation, which was conducted with the assistance of outside counsel and forensic accountants engaged by outside counsel, and has concluded that the Company reported various customer accommodations in incorrect fiscal periods. The
investigation uncovered irregularities involving members of the sales organization intentionally not disclosing accommodations arrangements with customers to the Company’s finance organization and intentionally providing inaccurate documentation and explanations regarding accommodations to the finance organization. Consequently, such arrangements were not communicated to the Company’s independent registered public accounting firm. These accommodations arrangements were made throughout
the Affected Periods by certain members of the Company’s sales organization and involved the deferral of accommodations into later fiscal periods. The deferrals resulted in the overstatement of net sales and net income in certain of the Affected Periods and the understatement of net sales and net income in certain of the Affected Periods. The deferrals related primarily to the Initial Customer and, to a lesser extent, other wholesale customers.
The Company has self-reported information concerning this investigation to the SEC. The Company has also been informed that the United States Attorney’s Office is conducting an inquiry into this matter. The Company will continue to cooperate with these inquiries.
Impact of the Restatement
The restatement adjustments detailed below to our previously filed consolidated financial statements reflect adjustments to margin support provided to wholesale customers which impact net income, net sales, and accounts receivable, net, along with the related deferred tax impact.
The effects of the restatement on the unaudited condensed consolidated balance sheets as of April 4, 2009 and January 3, 2009 are summarized in the following table:
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
112,931 |
|
|
$ |
(20,233 |
) |
|
$ |
92,698 |
|
|
$ |
106,060 |
|
|
$ |
(20,608 |
) |
|
$ |
85,452 |
|
Deferred income taxes |
|
|
28,597 |
|
|
|
7,424 |
|
|
|
36,021 |
|
|
|
27,982 |
|
|
|
7,563 |
|
|
|
35,545 |
|
Total current assets |
|
|
496,277 |
|
|
|
(12,809 |
) |
|
|
483,468 |
|
|
|
513,091 |
|
|
|
(13,045 |
) |
|
|
500,046 |
|
Total assets |
|
|
1,031,518 |
|
|
|
(12,809 |
) |
|
|
1,018,709 |
|
|
|
1,051,057 |
|
|
|
(13,045 |
) |
|
|
1,038,012 |
|
Retained earnings |
|
|
237,952 |
|
|
|
(12,809 |
) |
|
|
225,143 |
|
|
|
221,584 |
|
|
|
(13,045 |
) |
|
|
208,539 |
|
Total stockholders’ equity |
|
|
445,902 |
|
|
|
(12,809 |
) |
|
|
433,093 |
|
|
|
426,596 |
|
|
|
(13,045 |
) |
|
|
413,551 |
|
Total liabilities and stockholders’ equity |
|
|
1,031,518 |
|
|
|
(12,809 |
) |
|
|
1,018,709 |
|
|
|
1,051,057 |
|
|
|
(13,045 |
) |
|
|
1,038,012 |
|
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS: (Continued)
The effects of the restatement on the unaudited condensed consolidated statements of operations for the three-month periods ended April 4, 2009 and March 29, 2008 are summarized in the following table:
|
|
For the three-month period ended
April 4, 2009 |
|
|
For the three-month period ended
|
|
(dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
356,787 |
|
|
$ |
375 |
|
|
$ |
357,162 |
|
|
$ |
329,972 |
|
|
$ |
3,913 |
|
|
$ |
333,885 |
|
Gross profit |
|
|
127,347 |
|
|
|
375 |
|
|
|
127,722 |
|
|
|
104,915 |
|
|
|
3,913 |
|
|
|
108,828 |
|
Operating income |
|
|
28,559 |
|
|
|
375 |
|
|
|
28,934 |
|
|
|
20,553 |
|
|
|
3,913 |
|
|
|
24,466 |
|
Income before income taxes |
|
|
25,384 |
|
|
|
375 |
|
|
|
25,759 |
|
|
|
16,033 |
|
|
|
3,913 |
|
|
|
19,946 |
|
Provision for income taxes |
|
|
9,016 |
|
|
|
139 |
|
|
|
9,155 |
|
|
|
4,474 |
|
|
|
1,441 |
|
|
|
5,915 |
|
Net income |
|
|
16,368 |
|
|
|
236 |
|
|
|
16,604 |
|
|
|
11,559 |
|
|
|
2,472 |
|
|
|
14,031 |
|
Basic net income per common share |
|
|
0.29 |
|
|
|
-- |
|
|
|
0.29 |
|
|
|
0.20 |
|
|
|
0.04 |
|
|
|
0.24 |
|
Diluted net income per common share |
|
|
0.28 |
|
|
|
-- |
|
|
|
0.28 |
|
|
|
0.19 |
|
|
|
0.05 |
|
|
|
0.24 |
|
The effects of the restatement on the unaudited condensed consolidated statements of cash flows for the three-month periods ended April 4, 2009 and March 29, 2008 are summarized in the following table:
|
|
For the three-month period ended
|
|
|
For the three-month period ended
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,368 |
|
|
$ |
236 |
|
|
$ |
16,604 |
|
|
$ |
11,559 |
|
|
$ |
2,472 |
|
|
$ |
14,031 |
|
Deferred income taxes |
|
|
(1,665 |
) |
|
|
139 |
|
|
|
(1,526 |
) |
|
|
669 |
|
|
|
1,441 |
|
|
|
2,110 |
|
Increase in accounts receivable |
|
|
(6,871 |
) |
|
|
(375 |
) |
|
|
(7,246 |
) |
|
|
(8,794 |
) |
|
|
(3,913 |
) |
|
|
(12,707 |
) |
Net cash provided by operating activities |
|
|
33,352 |
|
|
|
-- |
|
|
|
33,352 |
|
|
|
28,934 |
|
|
|
-- |
|
|
|
28,934 |
|
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 3 – RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS: (Continued)
The effects of the restatement on the Company’s segment information (see Note 10) for the three-month periods ended April 4, 2009 and March 29, 2008 are summarized in the following table:
|
|
For the three-month period ended
April 4, 2009 |
|
|
For the three-month period ended
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s wholesale net sales |
|
$ |
122,897 |
|
|
$ |
(1,080 |
) |
|
$ |
121,817 |
|
|
$ |
117,832 |
|
|
$ |
390 |
|
|
$ |
118,222 |
|
Carter’s wholesale operating income |
|
|
24,179 |
|
|
|
(1,080 |
) |
|
|
23,099 |
|
|
|
21,559 |
|
|
|
390 |
|
|
|
21,949 |
|
Carter’s mass channel net sales |
|
|
58,745 |
|
|
|
78 |
|
|
|
58,823 |
|
|
|
62,924 |
|
|
|
125 |
|
|
|
63,049 |
|
Carter’s mass channel operating income |
|
|
8,035 |
|
|
|
78 |
|
|
|
8,113 |
|
|
|
6,742 |
|
|
|
125 |
|
|
|
6,867 |
|
Carter’s total net sales |
|
|
283,572 |
|
|
|
(1,002 |
) |
|
|
282,570 |
|
|
|
267,158 |
|
|
|
515 |
|
|
|
267,673 |
|
Carter’s total operating income |
|
|
48,802 |
|
|
|
(1,002 |
) |
|
|
47,800 |
|
|
|
39,743 |
|
|
|
515 |
|
|
|
40,258 |
|
OshKosh wholesale net sales |
|
|
21,387 |
|
|
|
1,377 |
|
|
|
22,764 |
|
|
|
18,449 |
|
|
|
3,398 |
|
|
|
21,847 |
|
OshKosh wholesale operating income (loss) |
|
|
44 |
|
|
|
1,377 |
|
|
|
1,421 |
|
|
|
(2,524 |
) |
|
|
3,398 |
|
|
|
874 |
|
OshKosh total net sales |
|
|
73,215 |
|
|
|
1,377 |
|
|
|
74,592 |
|
|
|
62,814 |
|
|
|
3,398 |
|
|
|
66,212 |
|
OshKosh total operating income (loss) |
|
|
419 |
|
|
|
1,377 |
|
|
|
1,796 |
|
|
|
(8,726 |
) |
|
|
3,398 |
|
|
|
(5,328 |
) |
Total net sales |
|
|
356,787 |
|
|
|
375 |
|
|
|
357,162 |
|
|
|
329,972 |
|
|
|
3,913 |
|
|
|
333,885 |
|
Total operating income |
|
|
28,559 |
|
|
|
375 |
|
|
|
28,934 |
|
|
|
20,553 |
|
|
|
3,913 |
|
|
|
24,466 |
|
NOTE 4 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS:
Cost in excess of fair value of net assets acquired as of April 4, 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 over the fair value of the net assets acquired. The Carter’s cost
in excess of fair value of net assets acquired is not deductible for tax purposes. The Carter’s cost in excess of fair value of net assets acquired and tradename are deemed to have indefinite lives and are not being amortized.
The Company’s intangible assets were as follows:
|
|
|
|
|
|
|
|
(dollars in thousands) |
Weighted-average useful life |
|
|
|
|
Accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s cost in excess of fair value of net assets acquired |
Indefinite |
|
$ |
136,570 |
|
|
$ |
-- |
|
|
$ |
136,570 |
|
|
$ |
136,570 |
|
|
$ |
-- |
|
|
$ |
136,570 |
|
Carter’s tradename |
Indefinite |
|
$ |
220,233 |
|
|
$ |
-- |
|
|
$ |
220,233 |
|
|
$ |
220,233 |
|
|
$ |
-- |
|
|
$ |
220,233 |
|
OshKosh tradename |
Indefinite |
|
$ |
85,500 |
|
|
$ |
-- |
|
|
$ |
85,500 |
|
|
$ |
85,500 |
|
|
$ |
-- |
|
|
$ |
85,500 |
|
OshKosh licensing agreements |
4.7 years |
|
$ |
19,100 |
|
|
$ |
14,754 |
|
|
$ |
4,346 |
|
|
$ |
19,100 |
|
|
$ |
13,840 |
|
|
$ |
5,260 |
|
Leasehold interests |
4.1 years |
|
$ |
1,833 |
|
|
$ |
1,707 |
|
|
$ |
126 |
|
|
$ |
1,833 |
|
|
$ |
1,599 |
|
|
$ |
234 |
|
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 4 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS: (Continued)
Amortization expense for intangible assets was approximately $1.0 million for each of the three-month periods ended April 4, 2009 and March 29, 2008. Annual amortization expense for the OshKosh licensing agreements and leasehold interests is expected to be as follows:
(dollars in thousands) |
|
|
|
|
|
Estimated
amortization
|
|
|
|
|
|
2009 (period from April 5 through January 2, 2010) |
|
$ |
2,695 |
|
2010 |
|
|
1,777 |
|
|
|
|
|
|
Total |
|
$ |
4,472 |
|
NOTE 5 – INCOME TAXES:
The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions. The Internal Revenue Service recently completed an income tax examination for fiscal 2006, and has recently begun an audit of fiscal 2007. In most
cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2005.
During the first quarter of fiscal 2009, we recognized approximately $1.0 million in tax benefits due to the completion of an Internal Revenue Service audit for fiscal 2006. During the first quarter of fiscal 2008, we recognized approximately $1.6 million in tax benefits due to the completion
of an Internal Revenue Service audit for fiscal 2004 and 2005.
As of April 4, 2009, the Company had gross unrecognized tax benefits of approximately $6.9 million. Substantially all of the Company’s reserve for unrecognized tax benefits as of April 4, 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 would not impact the annual effective tax rate, but would accelerate the payment of cash to the taxing authorities.
Included in the reserves for unrecognized tax benefits are approximately $0.5 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 return for 2007, the audit has not proceeded to a point where the Company can reasonably determine the completion date.
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 first quarter of fiscal 2009, the Company recognized a net reduction in interest expense
of approximately $0.1 million, primarily related to the successful resolution of the Internal Revenue Service audit for fiscal 2006. The Company had approximately $0.5 million of interest accrued as of April 4, 2009.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6 – FINANCIAL INSTRUMENTS:
Effective December 30, 2007 (the first day of our 2008 fiscal year), the Company adopted Statements of Financial Accounting Standards (“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 April 4, 2009, as required by SFAS 157:
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
Investments |
|
$ |
-- |
|
|
$ |
130.0 |
|
|
$ |
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
$ |
-- |
|
|
$ |
2.2 |
|
|
$ |
-- |
|
At April 4, 2009, we had approximately $130.0 million invested in two Dreyfus Cash Management Funds, which are included in cash and cash equivalents on the accompanying unaudited condensed consolidated balance sheet. 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.
Our senior credit facility requires us to hedge at least 25% of our variable rate debt under this facility. 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 April 4, 2009, approximately $51.2 million of our outstanding term loan debt was hedged under this interest rate swap agreement.
On May 25, 2006, we entered into an interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling of 5.5%. The collar covered $100 million of our variable rate term loan debt and was designated as a cash flow hedge of the variable interest payments on
such debt. The collar matured on January 31, 2009.
On January 30, 2009, we entered into two interest rate swap agreements in order to limit our exposure to higher interest rates. Each interest rate swap agreement covers $50.0 million of our variable rate term loan debt, to receive floating interest and pay fixed interest. We
continue to be in compliance with the 25% hedging requirement under our senior credit facility. These interest rate swap agreements are designated as cash flow hedges of the variable interest payments on a portion of our variable rate term loan debt. These interest rate swap agreements each mature in January 2010.
Our interest rate swap 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.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 6 – FINANCIAL INSTRUMENTS: (Continued)
The fair value of our derivative instruments in our accompanying unaudited condensed consolidated balance sheet as of April 4, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
Prepaid expenses and other current assets |
|
|
-- |
|
Other current liabilities |
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
The effect of derivative instruments designated as cash flow hedges on our accompanying unaudited condensed consolidated financial statements for the three-month period ended April 4, 2009 was as follows:
(dollars in thousands) |
|
Amount of gain (loss) recognized in accumulated other comprehensive income (loss) on effective hedges (1) |
|
|
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense |
|
|
|
|
|
|
|
|
Interest rate hedge agreements |
|
$ |
(147 |
) |
|
$ |
(873 |
) |
|
|
|
|
|
|
|
|
|
(1) Amount recognized in accumulated other comprehensive income (loss), net of tax benefit of $87. |
|
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. See Note 8 “Employee Benefit Plans” to our restated audited consolidated financial statements in our most recently filed Annual Report on Form 10-K/A for further information.
The components of post-retirement benefit expense charged to operations are as follows:
|
|
For the
three-month periods ended |
|
(dollars in thousands) |
|
April 4,
|
|
|
March 29,
|
|
|
|
|
|
|
|
|
Service cost – benefits attributed to service during the period |
|
$ |
23 |
|
|
$ |
27 |
|
Interest cost on accumulated post-retirement benefit obligation |
|
|
113 |
|
|
|
131 |
|
Amortization of net actuarial gain |
|
|
(7 |
) |
|
|
-- |
|
Total net periodic post-retirement benefit cost |
|
$ |
129 |
|
|
$ |
158 |
|
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 7 – EMPLOYEE BENEFIT PLANS: (Continued)
The component of pension expense charged to operations is as follows:
|
|
For the
three-month periods ended |
|
(dollars in thousands) |
|
April 4,
|
|
|
March 29,
|
|
|
|
|
|
|
|
|
Interest cost on accumulated pension benefit obligation |
|
$ |
13 |
|
|
$ |
13 |
|
Under a defined benefit pension plan frozen as of December 31, 2005, certain current and former employees of OshKosh are eligible to receive benefits. The net periodic pension benefit associated with this pension plan and included in the statement of operations was comprised of:
|
|
For the
three-month periods ended |
|
(dollars in thousands) |
|
April 4,
|
|
|
March 29,
|
|
|
|
|
|
|
|
|
Interest cost on accumulated pension benefit obligation |
|
$ |
567 |
|
|
$ |
562 |
|
Expected return on assets |
|
|
(650 |
) |
|
|
(943 |
) |
Amortization of actuarial loss (gain) |
|
|
103 |
|
|
|
(19 |
) |
Total net periodic pension expense (benefit) |
|
$ |
20 |
|
|
$ |
(400 |
) |
NOTE 8 – COMMON STOCK:
On February 16, 2007, the Company’s Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $100 million of its outstanding common shares. Such repurchases may occur from time to time in the open market, in negotiated
transactions, or otherwise. This program has no time limit. The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, and other factors.
During the three-month period ended April 4, 2009, the Company did not repurchase any shares of its common stock. During the three-month period ended March 29, 2008, the Company repurchased and retired approximately 674,358 shares of its common stock at an average price of $14.86
per share. Since inception of the program and through April 4, 2009, the Company repurchased and retired approximately 4,599,580 shares, or approximately $91.1 million, of its common stock at an average price of $19.81 per share, leaving approximately $8.9 million available for repurchase under the plan. Accordingly, we have reduced common stock by the par value of such shares and have deducted the remaining excess repurchase price over par value from additional paid-in capital.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 9 – STOCK-BASED COMPENSATION:
We account for stock-based compensation expense in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment.” The fair value of time-based or performance-based stock option grants are estimated on the date of grant using the Black-Scholes option pricing method
with the following weighted-average assumptions used for grants issued during the three-month period ended April 4, 2009.
|
|
|
|
|
|
|
|
Volatility |
|
|
35.83 |
% |
Risk-free interest rate |
|
|
2.50 |
% |
Expected term (years) |
|
|
7 |
|
Dividend yield |
|
|
-- |
|
The fair value of restricted stock is determined based on the quoted closing price of our common stock on the date of grant.
The following table summarizes our stock option and restricted stock activity during the three-month period ended April 4, 2009:
|
|
Time-based
|
|
|
Performance-based
stock
|
|
|
Retained
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, January 3, 2009 |
|
|
4,733,080 |
|
|
|
220,000 |
|
|
|
113,514 |
|
|
|
444,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
448,000 |
|
|
|
-- |
|
|
|
-- |
|
|
|
208,500 |
|
Exercised |
|
|
(33,640 |
) |
|
|
-- |
|
|
|
(113,514 |
) |
|
|
-- |
|
Vested restricted stock |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(28,406 |
) |
Forfeited |
|
|
(40,850 |
) |
|
|
(20,000 |
) |
|
|
-- |
|
|
|
(30,275 |
) |
Expired |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 4, 2009 |
|
|
5,106,590 |
|
|
|
200,000 |
|
|
|
-- |
|
|
|
594,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, April 4, 2009 |
|
|
3,752,673 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
During the three-month period ended April 4, 2009, we granted 448,000 time-based stock options with a weighted-average Black-Scholes fair value of $7.61 and a weighted-average exercise price of $18.08. In connection with this grant, we recognized approximately $56,000 in stock-based
compensation expense during the three-month period ended April 4, 2009.
During the three-month period ended April 4, 2009, we granted 208,500 shares of restricted stock to employees with a weighted-average fair value on the date of grant of $18.08. In connection with this grant, we recognized approximately $62,000 in stock-based compensation expense during
the three-month period ended April 4, 2009.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 9 – STOCK-BASED COMPENSATION: (Continued)
Unrecognized stock-based compensation expense related to outstanding unvested stock options and unvested restricted stock awards is expected to be recorded as follows:
(dollars in thousands) |
|
Time-based
stock
|
|
|
Restricted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 (period from April 5 through January 2, 2010) |
|
$ |
2,329 |
|
|
$ |
2,294 |
|
|
$ |
4,623 |
|
2010 |
|
|
2,608 |
|
|
|
2,594 |
|
|
|
5,202 |
|
2011 |
|
|
2,016 |
|
|
|
2,099 |
|
|
|
4,115 |
|
2012 |
|
|
1,084 |
|
|
|
1,211 |
|
|
|
2,295 |
|
Total |
|
$ |
8,037 |
|
|
$ |
8,198 |
|
|
$ |
16,235 |
|
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 10 – SEGMENT INFORMATION (RESTATED):
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. We report our corporate expenses, workforce reduction, and facility closure costs separately as they are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of our reportable segments.
The table below presents certain segment information for the periods indicated:
|
|
For the three-month periods ended |
|
(dollars in thousands) |
|
April 4,
2009
|
|
|
% of
|
|
|
March 29,
2008
|
|
|
% of
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
121,817 |
|
|
|
34.1 |
% |
|
$ |
118,222 |
|
|
|
35.4 |
% |
Retail |
|
|
101,930 |
|
|
|
28.5 |
% |
|
|
86,402 |
|
|
|
25.9 |
% |
Mass Channel |
|
|
58,823 |
|
|
|
16.5 |
% |
|
|
63,049 |
|
|
|
18.9 |
% |
Carter’s total net sales |
|
|
282,570 |
|
|
|
79.1 |
% |
|
|
267,673 |
|
|
|
80.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OshKosh: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail |
|
|
51,828 |
|
|
|
14.5 |
% |
|
|
44,365 |
|
|
|
13.3 |
% |
Wholesale |
|
|
22,764 |
|
|
|
6.4 |
% |
|
|
21,847 |
|
|
|
6.5 |
% |
OshKosh total net sales |
|
|
74,592 |
|
|
|
20.9 |
% |
|
|
66,212 |
|
|
|
19.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
357,162 |
|
|
|
100.0 |
% |
|
$ |
333,885 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
% of
segment
|
|
|
|
|
|
|
% of
segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
$ |
23,099 |
|
|
|
19.0 |
% |
|
$ |
21,949 |
|
|
|
18.6 |
% |
Retail |
|
|
16,588 |
|
|
|
16.3 |
% |
|
|
11,442 |
|
|
|
13.2 |
% |
Mass Channel |
|
|
8,113 |
|
|
|
13.8 |
% |
|
|
6,867 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter’s operating income |
|
|
47,800 |
|
|
|
16.9 |
% |
|
|
40,258 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OshKosh: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale |
|
|
1,421 |
|
|
|
6.2 |
% |
|
|
874 |
|
|
|
4.0 |
% |
Retail |
|
|
(331 |
) |
|
|
(0.6 |
%) |
|
|
(6,733 |
) |
|
|
(15.2 |
%) |
Mass Channel (a) |
|
|
706 |
|
|
|
-- |
|
|
|
531 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OshKosh operating income (loss) |
|
|
1,796 |
|
|
|
2.4 |
% |
|
|
(5,328 |
) |
|
|
(8.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
49,596 |
|
|
|
13.9 |
% |
|
|
34,930 |
|
|
|
10.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses (b) |
|
|
(11,920 |
) |
|
|
(3.3 |
%) |
|
|
(10,464 |
) |
|
|
(3.1 |
%) |
Workforce reduction and facility closure costs (c) |
|
|
(8,742 |
) |
|
|
(2.4 |
%) |
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net corporate expenses |
|
|
(20,662 |
) |
|
|
(5.8 |
%) |
|
|
(10,464 |
) |
|
|
(3.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
28,934 |
|
|
|
8.1 |
% |
|
$ |
24,466 |
|
|
|
7.3 |
% |
(a) |
OshKosh mass channel consists of a licensing agreement with Target Stores. Operating income consists of royalty income, net of related expenses. |
(b) |
Corporate expenses 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 closure costs associated with our Barnesville, Georgia distribution facility of $3.6 million consisting of severance, asset impairment charges, other closure costs, and accelerated depreciation, $1.8 million of asset impairment charges related to our Oshkosh, Wisconsin facility, and $3.3 million of severance related to the corporate workforce
reduction. |
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 11 – CORPORATE WORKFORCE REDUCTION AND FACILITY CLOSURE COSTS:
Corporate Workforce Reduction
The Company recently announced a plan to reduce its corporate workforce (defined as excluding retail district managers, hourly retail store employees, and distribution center employees). Approximately 150 employees will be affected under the plan. The plan was communicated
to affected employees on April 21, 2009. The plan includes consolidating the majority of our operations performed in our Oshkosh, Wisconsin corporate office into other Company locations. This consolidation will likely result in the addition of resources in our other locations.
As a result of this corporate workforce reduction, we recorded charges in the first quarter of fiscal 2009 of $5.1 million consisting of $3.3 million in severance charges related to corporate office positions in connection with our existing plan and approximately $1.8 million in asset impairment
charges related to the closure of our Oshkosh, Wisconsin corporate office. The Company has written down this facility to $0 to reflect the Company’s intention to donate the facility. The Company expects to incur additional severance of approximately $1.4 million in the second quarter of fiscal 2009 for special one-time benefits provided to affected employees. The majority of the severance payments will be paid through the end of the year.
Barnesville Distribution Facility Closure
The Company recently announced a plan to close its Barnesville, Georgia distribution center. Approximately 210 employees will be affected by this closure. The plan was communicated to affected employees on April 2, 2009. Operations at the Barnesville facility
are expected to cease by the end of June 2009.
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 became impaired during March 2009, when it became “more likely than not” that the expected
life of the Barnesville distribution facility would be significantly shortened. Accordingly, we have written down the assets to their estimated recoverable fair value in March 2009. The adjusted asset values will be subject to accelerated depreciation over their remaining estimated useful life.
In conjunction with the plan to close the Barnesville distribution center, the Company recorded charges of approximately $3.6 million, consisting of severance of $1.7 million (included in other current liabilities in the unaudited condensed consolidated balance sheet as of April 4, 2009), asset
impairment charges of $1.1 million related to the write-down of the related land, building, and equipment, $0.3 million of accelerated depreciation (included in selling, general, and administrative expenses), and $0.5 million of other closure costs. The Company expects to incur additional accelerated depreciation charges of approximately $0.6 million in the second quarter of fiscal 2009. The salvage value of this facility is estimated to be $0 to reflect the Company’s intention to
donate the facility.
NOTE 12 – EARNINGS PER SHARE (RESTATED):
Basic net income per share is calculated by dividing net income for the period by the weighted-average common shares outstanding for the period. Diluted net income 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. The table below summarizes the shares from these potentially dilutive securities, calculated using the treasury stock method.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 12 – EARNINGS PER SHARE (RESTATED): (Continued)
Effective January 4, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”) which requires earnings per share to be calculated pursuant to the two-class method for unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) and retrospectively adjusted earnings per share data and included the required disclosures below.
The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
|
|
For the
three-month periods ended |
|
|
|
April 4,
2009
|
|
|
March 29,
2008
|
|
Weighted-average number of common and common equivalent shares outstanding: |
|
|
|
|
|
|
Basic number of common shares outstanding |
|
|
55,958,825 |
|
|
|
57,215,027 |
|
Dilutive effect of unvested restricted stock |
|
|
117,027 |
|
|
|
67,209 |
|
Dilutive effect of stock options |
|
|
1,673,963 |
|
|
|
2,023,986 |
|
Diluted number of common and common equivalent shares outstanding |
|
|
57,749,815 |
|
|
|
59,306,222 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,604,000 |
|
|
$ |
14,031,000 |
|
Income allocated to participating securities |
|
|
(174,518 |
) |
|
|
(85,961 |
) |
Net income available to common shareholders |
|
$ |
16,429,482 |
|
|
$ |
13,945,039 |
|
|
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.29 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,604,000 |
|
|
$ |
14,031,000 |
|
Income allocated to participating securities |
|
|
(169,501 |
) |
|
|
(83,041 |
) |
Net income available to common shareholders |
|
$ |
16,434,499 |
|
|
$ |
13,947,959 |
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share |
|
$ |
0.28 |
|
|
$ |
0.24 |
|
For the three-month period ended April 4, 2009, anti-dilutive shares of 2,038,975 and performance-based stock options of 200,000, were excluded from the computations of diluted earnings per share and for the three-month period ended March 29, 2008, anti-dilutive shares of 999,885 and performance-based
stock options of 620,000 were excluded from the computations of diluted earnings per share.
NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2008, the FASB issued FSP No. FAS 157-2 (“FSP 157-2”), which delays the effective date of SFAS No. 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. The Company has adopted FSP 157-2 effective January 4, 2009.
CARTER’S, INC.
NOTES TO RESTATED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
NOTE 13 – RECENT ACCOUNTING PRONOUNCEMENTS: (Continued)
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. The Company has adopted the provisions of this statement effective April 4, 2009 and has included the required disclosures within Note 6.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities
prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior-period earnings per share data presented shall be adjusted retrospectively. The Company has adopted the provisions of this standard effective January 4, 2009 and has included the required disclosures in Note 12.
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.
In April 2009, the FASB issued FSP FAS 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP will not impact the consolidated
financial results as the requirements are disclosure-only in nature and is effective for interim reporting periods ending after June 15, 2009.
The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our restated unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.
Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying restated unaudited condensed consolidated financial statements for the first quarter of fiscal 2009 reflect our financial position as of April 4, 2009. The first
quarter of fiscal 2008 ended on March 29, 2008.
As discussed in the Explanatory Note to this Amended Filing, the Company is restating its Original Filing of its Quarterly Report on Form 10-Q for the three months ended April 4, 2009, including comparative prior year financial results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated (i) selected statement of operations data expressed as a percentage of net sales and (ii) the number of retail stores open at the end of each period:
|
|
Three-month periods ended |
|
|
|
April 4,
2009
|
|
|
March 29,
|
|
|
|
|
|
|
|
|
Wholesale sales: |
|
|
|
|
|
|
Carter’s |
|
|
34.1 |
% |
|
|
35.4 |
% |
OshKosh |
|
|
6.4 |
|
|
|
6.5 |
|
Total wholesale sales |
|
|
40.5 |
|
|
|
41.9 |
|
|
|
|
|
|
|
|
|
|
Retail store sales: |
|
|
|
|
|
|
|
|
Carter’s |
|
|
28.5 |
|
|
|
25.9 |
|
OshKosh |
|
|
14.5 |
|
|
|
13.3 |
|
Total retail store sales |
|
|
43.0 |
|
|
|
39.2 |
|
|
|
|
|
|
|
|
|
|
Mass channel sales |
|
|
16.5 |
|
|
|
18.9 |
|
|
|
|
|
|
|
|
|
|
Consolidated net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
64.2 |
|
|
|
67.4 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
35.8 |
|
|
|
32.6 |
|
Selling, general, and administrative expenses |
|
|
27.8 |
|
|
|
27.7 |
|
Workforce reduction and facility closure costs |
|
|
2.4 |
|
|
|
-- |
|
Royalty income |
|
|
(2.5 |
) |
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8.1 |
|
|
|
7.3 |
|
Interest expense, net |
|
|
0.9 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7.2 |
|
|
|
6.0 |
|
Provision for income taxes |
|
|
2.6 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.6 |
% |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
Number of retail stores at end of period: |
|
|
|
|
|
|
|
|
Carter’s |
|
|
260 |
|
|
|
229 |
|
OshKosh |
|
|
165 |
|
|
|
163 |
|
Total |
|
|
425 |
|
|
|
392 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
Three-month period ended April 4, 2009 compared to the three-month period ended March 29, 2008
CONSOLIDATED NET SALES
In the first quarter of fiscal 2009, consolidated net sales increased $23.3 million, or 7.0%, to $357.2 million and reflect growth in our Carter’s and OshKosh brand
wholesale and retail store segments.
|
|
For the three-month periods ended |
|
(dollars in thousands) |
|
April 4,
2009
|
|
|
% of
|
|
|
March 29,
2008
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale-Carter’s |
|
$ |
121,817 |
|
|
|
34.1 |
% |
|
$ |
118,222 |
|
|
|
35.4 |
% |
Wholesale-OshKosh |
|
|
22,764 |
|
|
|
6.4 |
% |
|
|
21,847 |
|
|
|
6.5 |
% |
Retail-Carter’s |
|
|
101,930 |
|
|
|
28.5 |
% |
|
|
86,402 |
|
|
|
25.9 |
% |
Retail-OshKosh |
|
|
51,828 |
|
|
|
14.5 |
% |
|
|
44,365 |
|
|
|
13.3 |
% |
Mass Channel-Carter’s |
|
|
58,823 |
|
|
|
16.5 |
% |
|
|
63,049 |
|
|
|
18.9 |
% |
Total net sales |
|
$ |
357,162 |
|
|
|
100.0 |
% |
|
$ |
333,885 |
|
|
|
100.0 |
% |
CARTER’S WHOLESALE SALES
Carter’s brand wholesale sales increased $3.6 million, or 3.0%, in the first quarter of fiscal 2009 to $121.8 million. The increase in Carter’s brand wholesale
sales was driven by a 4% increase in average price per unit, partially offset by a 1% decrease in units shipped, as compared to the first quarter of fiscal 2008. The increase in average price per unit during the first quarter of fiscal 2009 was driven by an increase in average selling prices to off-price customers.
OSHKOSH WHOLESALE SALES
OshKosh brand wholesale sales increased $0.9 million, or 4.2%, in the first quarter of fiscal 2009 to $22.8 million. The increase in OshKosh brand wholesale sales reflects
a 9% increase in units shipped, partially offset by a 4% decrease in average price per unit as compared to the first quarter of fiscal 2008. The increase in units shipped relates primarily to the timing of Spring 2009 shipments. The decrease in average price per unit reflects a net reduction in selling prices due to product changes.
MASS CHANNEL SALES
Mass channel sales decreased $4.2 million, or 6.7%, in the first quarter of fiscal 2009 to $58.8 million. The decrease was due to a $3.0 million, or 8.6%, decrease in sales of our Child of Mine brand to Walmart, and a $1.2 million,
or 4.3%, decrease in sales of our Just One Year brand to Target. These decreases were a result of the timing of shipments. We anticipate our mass channel sales could decline approximately 15% in fiscal 2009 as compared to fiscal 2008, primarily due to lower sales of our Child of Mine brand.
CARTER’S RETAIL STORES
Carter’s retail store sales increased $15.5 million, or 18.0%, in the first quarter of fiscal 2009 to $101.9 million. The increase was driven by incremental sales of $8.3 million generated by
new store openings and a comparable store sales increase of 5.2%, or $7.4 million.
On a comparable store basis, transactions increased 2.3% and average prices increased 3.1% as compared to the first quarter of fiscal 2008. The increase in transactions was driven by strong product performance in all product categories, improved inventory management, improved in-store
product presentation, and improved merchandising and marketing efforts. The increase in average prices was driven primarily by the strong performance of our sleepwear and other product categories.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
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 of 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.
During the first quarter of fiscal 2009, we opened seven Carter’s retail stores. There were a total of 260 Carter’s retail stores as of April 4, 2009. In total, we plan to open 20 and close five Carter’s retail stores during fiscal 2009.
OSHKOSH RETAIL STORES
OshKosh retail store sales increased $7.5 million, or 16.8%, in the first quarter of fiscal 2009 to $51.8 million. The increase reflects a comparable store sales increase of 11.1%, or $6.7 million,
and incremental sales of $0.9 million generated by new store openings, partially offset by the impact of store closings of $0.2 million.
On a comparable store basis, average prices increased 9.5% and transactions increased 5.1%. The increase in average prices and increase in transactions were driven by strong product performance which resulted in lower levels of markdowns, improved inventory management, and in-store
product presentation.
There were a total of 165 OshKosh retail stores as of April 4, 2009. We plan to close three OshKosh retail stores during fiscal 2009.
GROSS PROFIT
Our gross profit increased $18.9 million, or 17.4%, to $127.7 million in the first quarter of fiscal 2009. Gross profit as a percentage of net sales was 35.8% in the first quarter of fiscal 2009 as compared to 32.6% in the first quarter of fiscal 2008.
The increase in gross profit as a percentage of net sales reflects:
· |
a greater mix of consolidated retail sales which, on average, have a higher gross margin than sales in our wholesale and mass channel segments; |
· |
improvement in our Carter’s and OshKosh retail segment gross margin (consolidated retail gross margin increased from 47.1% of consolidated retail store sales in first quarter of fiscal 2008 to 50.9% of consolidated retail store sales in first quarter of fiscal 2009); and |
· |
growth in Carter’s wholesale gross margin due primarily to an increase in average selling prices to off-price customers. |
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses in the first quarter of fiscal 2009 increased $6.9 million, or 7.4%, to $99.1 million. As a percentage of net sales, selling, general, and administrative expenses in the first quarter of fiscal 2009 were 27.8% as compared to 27.7% in the
first quarter of fiscal 2008.
The increase in selling, general, and administrative expenses as a percentage of net sales reflects:
· |
higher provisions for incentive compensation; and |
· |
higher retail store expenses as a percentage of consolidated net sales. |
Partially offsetting these increases were:
· |
lower distribution expenses related to supply chain efficiencies; and |
· |
a focus on reducing discretionary spending. |
WORKFORCE REDUCTION AND FACILITY CLOSURE COSTS
As a result of the corporate workforce reduction plan, we recorded charges in the first quarter of fiscal 2009 of $5.1 million, consisting of $3.3 million severance charges related to corporate office positions in connection with our existing plan and approximately $1.8 million in asset impairment
charges related to our Oshkosh, Wisconsin corporate office. The Company has written down this facility to $0 to reflect the Company’s intention to donate the facility. The Company expects to incur additional severance of approximately $1.4 million in the second quarter of fiscal 2009 for special one-time benefits provided to affected employees that are incremental to the Company’s severance plan. The majority of the severance payments will be paid through the end of
the year.
In conjunction with the plan to close the Barnesville distribution center, the Company recorded charges of approximately $3.6 million, consisting of severance of $1.7 million (included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet as of April
4, 2009); asset impairment charges of $1.1 million related to the write-down of the related land, building, and equipment; $0.3 million of accelerated depreciation (included in selling, general, and administrative expenses); and $0.5 million of other closure costs. The Company expects to incur additional accelerated depreciation charges of approximately $0.6 million in the second quarter of fiscal 2009. The salvage value of this facility is estimated to be $0 to reflect the Company’s
intention to donate the facility.
ROYALTY INCOME
We license the use of our Carter’s, Just One Year, Child of Mine, OshKosh
B’Gosh, OshKosh, and Genuine Kids from OshKosh brand names. Royalty income from these brands in the first quarter of fiscal 2009 was approximately $8.8 million (including $2.1 million of international royalty income), an increase of 10.7%, or $0.8 million, as compared to the first quarter of fiscal 2008. This increase was driven by increased sales by our Carter’s brand
domestic licensees, OshKosh brand international licensees, and our Genuine Kids from OshKosh brand.
OPERATING INCOME
Operating income increased $4.5 million, or 18.3%, to $28.9 million in the first quarter of fiscal 2009. The increase in operating income was due to the factors described above.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
INTEREST EXPENSE, NET
Interest expense in the first quarter of fiscal 2009 decreased $1.3 million, or 29.8%, to $3.2 million. The decrease is primarily attributable to lower effective interest rates. Weighted-average borrowings in the first quarter of fiscal 2009 were $337.7 million at an effective
interest rate of 3.9% as compared to weighted-average borrowings in the first quarter of fiscal 2008 of $341.5 million at an effective interest rate of 5.8%. In the first quarter of fiscal 2009, we recorded $0.4 million in interest expense related to our interest rate swap agreements and $0.5 million in interest expense related to our interest rate collar agreement. In the first quarter of fiscal 2008, we recorded $0.2 million in interest expense related to our interest rate swap agreement.
INCOME TAXES
Our effective tax rate was 35.5% for the first quarter of fiscal 2009 and 29.7% for the first quarter of fiscal 2008. This change was a result of the reversal of $1.6 million of reserves for certain tax exposures following the completion of an Internal Revenue Service examination
for fiscal 2004 and 2005 in the first quarter of fiscal 2008 as compared to the reversal of $1.0 million related to the completion of an Internal Revenue Service examination for fiscal 2006 in the first quarter of fiscal 2009.
NET INCOME
Our net income for the first quarter of fiscal 2009 increased $2.6 million, or 18.3%, to $16.6 million as compared to $14.0 million in the first quarter of fiscal 2008 as a result of the factors described above.
FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our primary cash needs are working capital and capital expenditures. Our primary source of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings under our revolver, and we expect that these sources will fund our ongoing requirements
for working capital and capital expenditures. These sources of liquidity may be impacted by continued demand for our products and our ability to meet debt covenants under our senior credit facility.
Net accounts receivable at April 4, 2009 were $92.7 million compared to $107.3 million at March 29, 2008 and $85.5 million at January 3, 2009. The decrease as compared to March 29, 2008 primarily reflects lower levels of mass channel sales and a decrease in wholesale and mass channel
sales in the latter part of the first quarter of fiscal 2009 compared to the first quarter of fiscal 2008. Due to the seasonal nature of our operations, the net accounts receivable balance at April 4, 2009 is not comparable to the net accounts receivable balance at January 3, 2009.
Net inventories at April 4, 2009 were $153.9 million compared to $174.2 million at March 29, 2008 and $203.5 million at January 3, 2009. The decrease of $20.3 million, or 11.6%, as compared to March 29, 2008 is due to improved inventory management, the timing of shipments, and lower
levels of mass channel inventory. Due to the seasonal nature of our operations, net inventories at April 4, 2009 are not comparable to net inventories at January 3, 2009.
Net cash provided by operating activities for the first quarter of fiscal 2009 was $33.4 million compared to net cash provided by operating activities of $28.9 million in the first quarter of fiscal 2008. The increase in operating cash flow primarily reflects the growth in earnings.
We invested $9.0 million in capital expenditures during the first quarter of fiscal 2009 compared to $2.5 million during the first quarter of fiscal 2008. We plan to invest approximately $30 million in capital expenditures during the remainder of fiscal 2009, primarily for retail
store openings and remodelings (including retail store fixtures), fixtures for our wholesale customers, investments in our supply chain, and investments in information technology.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
On February 16, 2007, the Company’s Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $100 million of its outstanding common shares. During the first quarter of fiscal 2009, the Company did not repurchase any
of its common stock. Since inception of the program and through April 4, 2009, the Company repurchased and retired approximately 4,599,580 shares, or $91.1 million, of its common stock at an average price of $19.81 per share, leaving approximately $8.9 million available for repurchase under the plan. 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.
At April 4, 2009, we had approximately $337.2 million in term loan borrowings and no borrowings outstanding under our revolver, exclusive of approximately $8.6 million of outstanding letters of credit. Principal borrowings under our term loan are due and payable in quarterly installments
of $0.9 million through June 30, 2012 with the remaining balance of $325.8 million due on July 14, 2012. Weighted-average borrowings in the first quarter of fiscal 2009 were $337.7 million at an effective interest rate of 3.9% as compared to weighted-average borrowings in the first quarter of fiscal 2008 of $341.5 million at an effective interest rate of 5.8%.
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 April 4, 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 this facility. 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 April 4, 2009, approximately $51.2 million of our outstanding term loan debt was hedged under this interest rate swap agreement. The fair market value of this interest rate swap agreement as of April 4, 2009 was $1.9 million and is included in other current liabilities in the accompanying unaudited condensed consolidated
balance sheet.
On May 25, 2006, we entered into an interest rate collar agreement (the “collar”) with a floor of 4.3% and a ceiling of 5.5%. The collar covered $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 matured 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 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. The fair market value of these interest rate swap agreements as of April 4, 2009 was $0.3 million and is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet. 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 April 4, 2009, our outstanding debt aggregated approximately $337.2 million, of which $185.9 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 approximately $1.9 million, exclusive of variable rate debt subject to our swap agreements, and could have an adverse effect on our earnings and cash flow.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
As a result of the corporate workforce reduction plan, we recorded charges in the first quarter of fiscal 2009 of $5.1 million, consisting of $3.3 million in severance charges related to corporate office positions in connection with our existing plan and approximately $1.8 million in asset impairment
charges related to our Oshkosh, Wisconsin corporate office. The Company has written down this facility to $0 to reflect the Company’s intention to donate the facility. The Company expects to incur additional severance of approximately $1.4 million in the second quarter of fiscal 2009 for special one-time benefits provided to affected employees that are incremental to the Company’s severance plan. The majority of the severance payments will be paid through the end of
the year.
During the balance of fiscal 2009, as we consolidate the operations currently performed in our Oshkosh, Wisconsin office, we expect to incur approximately $4.0 million in recruiting, relocation, and retention costs throughout the balance of the year. We expect these costs to be mostly
offset by savings from the corporate workforce reduction.
As a result of the plan to close the Company’s Barnesville, Georgia distribution facility, we recorded charges in the first quarter of fiscal 2009 of $3.6 million, consisting of $1.7 million of severance charges; $1.1 million of asset impairment charges; $0.3 million of accelerated depreciation
(included in selling, general, and administrative expenses); and $0.5 million of other closure costs. Severance payments will be paid through the end of the year. The Company expects to incur additional accelerated depreciation charges of approximately $0.6 million in the second quarter of fiscal 2009. The salvage value of this facility is estimated to be $0 to reflect the Company’s intention to donate the facility.
Based on our current level of operations, we believe that cash generated from operations and available cash, together with amounts available under our revolver, will be adequate to meet our working capital needs and capital expenditure requirements for the foreseeable future, although no assurance
can be given in this regard. We may, however, need to refinance all or a portion of the principal amount of amounts outstanding under our revolver on or before July 14, 2011 and amounts outstanding under our term loan on or before July 14, 2012.
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 our acquisition of OshKosh B’Gosh, Inc. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
As a result of this seasonality, our inventory levels and other working capital requirements generally begin to increase during the second quarter and into the third quarter of each year. During these peak periods, we have historically borrowed under our revolving credit facility.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 to our restated audited consolidated financial statements contained in our most recently filed Annual Report on Form 10-K/A filed on January 15, 2010. 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 agreements with customers, 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 Emerging Issues Task Force Issue ("EITF") No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer/Reseller,” we have included the fair value of these arrangements of approximately $0.8 million in the first quarter of fiscal 2009 and $0.6 million in the first quarter of fiscal 2008 as a component of selling, general, and administrative expenses in the accompanying unaudited condensed consolidated statements of operations rather than as a reduction of revenue. Amounts
determined to be in excess of the fair value of these arrangements are recorded as a reduction of net sales.
Inventory: We provide reserves for slow-moving inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than
those we project, additional write-downs may be required.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
Cost in excess of fair value of net assets acquired and tradename: As of April 4, 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 Statements of Financial Accounting Standards (“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.
Accounting for income taxes: As part of the process of preparing the accompanying unaudited condensed consolidated financial statements, we are required to estimate our actual current tax exposure (state, federal, and foreign). We assess our income tax positions
and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting dates. For those uncertain tax positions where it is “more likely than not” that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For
those income tax positions where it is not “more likely than not” that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest is also recognized. We also assess permanent and temporary differences resulting from differing bases and treatment of items for tax and accounting purposes, such as the carrying value of intangibles, deductibility of expenses, depreciation of property, plant, and equipment,
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 unaudited condensed consolidated statement of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
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 8 “Employee Benefit Plans” to our restated audited consolidated financial statements in our most recently filed Annual Report on Form 10-K/A 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 unaudited condensed 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. FAS 157-2 (“FSP 157-2”), which delays the effective date of SFAS No. 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. The Company has adopted FSP 157-2 effective January 4, 2009.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: (Continued)
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. The Company has adopted the provisions of this statement effective April 4, 2009 and has included the required disclosures within Note 6 to the accompanying restated unaudited condensed consolidated financial statements.
In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions
are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method as described in SFAS No. 128, “Earnings per Share.” Under the guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant
to the two-class method. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. All prior-period earnings per share data presented shall be adjusted retrospectively. The Company has adopted the provisions of this standard effective January 4, 2009 and has included the required disclosures in Note 12 to the accompanying restated unaudited condensed 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.
In April 2009, the FASB issued FSP FAS 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This
FSP will not impact the consolidated financial results as the requirements are disclosure-only in nature and is effective for interim reporting periods ending after June 15, 2009.
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 Item 1A of Part II. We undertake no obligation
to publicly update or revise any forward-looking statements or other information, whether as a result of new information, future events, or otherwise.
CURRENCY AND INTEREST RATE RISKS
In the operation of our business, we have market risk exposures including those related to foreign currency risk and interest rates. These risks and our strategies to manage our exposure to them are discussed below.
We contract for production with third parties primarily in 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 currently source products from approximately 100 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 April 4, 2009, our outstanding debt aggregated approximately $337.2 million, of which $185.9 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 approximately $1.9 million, exclusive of variable rate debt subject to our interest rate swap 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.
Restatement of Previously Issued Financial Statements
On November 10, 2009, the Company announced that its Audit Committee, with the assistance of outside counsel, had commenced a review of customer margin support provided by the Company and an investigation into undisclosed margin support commitments and related matters. As a result of this
review, the Company announced that the previously issued consolidated financial statements for the fiscal years 2004 through 2008 included in the Company’s Forms 10-K, and for the fiscal quarters from September 29, 2007 through July 4, 2009 included in the Company's Forms 10-Q, should no longer be relied upon (collectively, the "Affected Periods").
Management initially began a review of margin support arrangements with respect to a single wholesale customer (the "Initial Customer") after becoming aware of a disputed amount of margin support with the Initial Customer. In the normal course of business, the Company provides margin
support and other allowances (collectively, "accommodations") to its wholesale customers to assist them with the costs related to inventory clearance and sales promotions. The Company’s policy is to reflect the amounts of accommodations as reductions to revenue or, in the case of certain co-op advertising expenses, as additions to selling, general, and administrative expenses. As a result of its review, management identified issues with respect to the timing of recognizing
customer accommodations with respect to the Initial Customer. Following management’s review, the Audit Committee engaged outside counsel to undertake the review and investigation described above.
The Audit Committee has completed its review and investigation, which was conducted with the assistance of outside counsel and forensic accountants engaged by outside counsel, and has concluded that the Company reported various customer accommodations in incorrect fiscal periods. The
investigation uncovered irregularities involving members of the sales organization intentionally not disclosing accommodations arrangements with customers to the Company’s finance organization and intentionally providing inaccurate documentation and explanations regarding accommodations to the finance organization. Consequently, such arrangements were not communicated to the Company’s independent registered public accounting firm. These accommodations arrangements were made throughout
the Affected Periods by certain members of the Company’s sales organization and involved the deferral of accommodations into later fiscal periods. The deferrals resulted in the overstatement of net sales and net income in certain of the Affected Periods and the understatement of net sales and net income in certain of the Affected Periods. The deferrals related primarily to the Initial Customer and, to a lesser extent, other wholesale customers.
Evaluation of Disclosure Controls and Procedures
At the time our Quarterly Report on Form 10-Q for the quarterly period ended April 4, 2009 was filed on April 30, 2009, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of April 4, 2009. Subsequent to that
evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, have re-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
were not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements because of the identification of material weaknesses in our internal control over financial reporting described further below.
Specifically, through the investigation discussed above, management identified: (i) control deficiencies in its internal controls associated with customer accommodations processes that constitute material weaknesses, and (ii) the need to restate prior period financial statements. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses in internal control over financial reporting identified are as follows:
(1) Revenue Recognition - The control over the timing of the recording of customer accommodations was improperly designed and was not effective in capturing the accuracy, completeness, and timing of accommodations arrangements. The controls that had been in place focused
primarily on the review of internal Company documentation and the representations of members of the sales organization to ensure deductions taken by customers were valid and authorized; however, the controls were not effective in recording completely and accurately the accommodations arrangements in the appropriate accounting periods.
(2) Control Environment - Sales Organization - Training and oversight of the sales organization were not effective, which resulted in an insufficient understanding by the sales organization regarding the impact of failing to accurately and completely account for customer accommodations
in correct periods on the Company’s reported financial results.
If not remediated, these control deficiencies could result in future material misstatements to the Company’s financial statements. Accordingly, management has determined that these control deficiencies constitute material weaknesses.
Remediation Plan
Management has been actively engaged in developing remediation plans to address the above control deficiencies. The remediation efforts in process or expected to be implemented include the following:
· |
Making personnel changes, including the separation of certain employees from the Company, and a restructuring of the Company’s sales organization; |
· |
Implementing a periodic training program for all sales personnel regarding the appropriate accounting for accommodations and the impact on the Company’s
financial statements of recording such customer accommodations; |
· |
Implementing procedures to improve the capture, review, approval, and recording of all accommodation arrangements in the appropriate accounting period; |
· |
Establishing more comprehensive procedures for authorizing accommodations, including tiered accommodations approval levels that include the Chief Financial
Officer and Chief Executive Officer; |
· |
Establishing a new position in the finance organization with responsibilities to include tracking, monitoring, and reviewing all customer accommodations,
including certain budgetary responsibilities for accommodations; |
· |
Improving the method of educating employees on the Company’s Code of Business Ethics and Professional Conduct; and |
· |
Reemphasizing to all employees the availability of the Company’s Financial Accounting and Reporting Hotline and communicating information to the
Company’s vendors and customers about this Hotline, which is available to both Company employees and its business partners. |
The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remediation efforts and will monitor the implementation. In addition, under the direction of the Audit Committee, management will continue to review and
make necessary changes to the overall design of the Company’s internal control environment, as well as to policies and procedures to improve the overall effectiveness of internal control over financial reporting.
Management believes the foregoing efforts will effectively remediate these material weaknesses. As the Company continues to evaluate and work to improve its internal control over financial reporting, management may determine to take additional measures to address control deficiencies
or determine to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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. The motion was granted, and the parties are now briefing
the Defendants' motion to dismiss the complaint for failure to state a claim under the federal securities laws. The Company intends to vigorously defend this claim.
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. 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 had ruled upon a pending motion to dismiss the first case. On April 15, 2009, the Amended Complaint in the first case was dismissed for failure to state a claim for breach of contract and for failure to adequately allege damages. The Company subsequently filed a motion to dismiss the second case on the same grounds. That
motion is currently pending.
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.
You should carefully consider each of the following risk factors as well as the other information contained in this Quarterly Report on Form 10-Q/A and other filings with the Securities and Exchange Commission in evaluating our business. The risks and uncertainties
described below are not the only we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impact our business operations. If any of the following risks actually occur, our operating results may be affected.
Risks Relating to Our Business
The loss of one or more of our major customers could result in a material loss of revenues.
In the first quarter of fiscal 2009, we derived approximately 42% of our consolidated net sales from our top eight customers, including mass channel customers. 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 or 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.
In addition, 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,