form10-q.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549

 
 FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2007
 
OR
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO             
 
 
 
Commission file number:
001-31829
 

 
CARTER’S, INC.

 (Exact name of Registrant as specified in its charter)
 
 
 
Delaware
 
13-3912933
(state or other jurisdiction of
 
(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 o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one)
 
Large Accelerated Filer x  Accelerated Filer o  Non-Accelerated Filer o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x
 
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 October 29, 2007
 
 
 
Common stock, par value $0.01 per share
 
57,956,190
 
 
CARTER’S, INC.
INDEX

     
Page
Part I.                                Financial Information
  
       
 
 
  
   
3
       
   
4
       
   
5
       
   
6
       
 
  
7
       
 
19
       
 
31
       
 
31
       
Part II.                              Other Information
  
       
 
32
       
 
32
       
 
37
       
 
37
       
 
37
       
 
37
       
 
37
   
38
   
39


2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
(unaudited)
   
September 29,
2007
    
December 30,
2006
  
             
ASSETS
            
Current assets:
            
Cash and cash equivalents                                                                                                  
   $
9,254
     $
68,545
  
Accounts receivable, net                                                                                                  
    
160,069
      
110,615
  
Finished goods inventories, net                                                                                                  
    
246,529
      
193,588
  
Prepaid expenses and other current assets                                                                                                  
    
13,385
      
7,296
  
Assets held for sale                                                                                                  
    
6,109
      
--
  
Deferred income taxes                                                                                                  
    
20,729
      
22,377
  
                 
Total current assets                                                                                                
    
456,075
      
402,421
  
Property, plant, and equipment, net                                                                                                    
    
72,829
      
87,940
  
Tradenames                                                                                                    
    
308,233
      
322,233
  
Cost in excess of fair value of net assets acquired                                                                                                    
    
136,570
      
279,756
  
Deferred debt issuance costs, net
    
5,031
      
5,903
  
Licensing agreements, net                                                                                                    
    
9,829
      
12,895
  
Leasehold interests, net                                                                                                    
    
801
      
1,151
  
Other assets                                                                                                    
    
8,234
      
10,892
  
                 
       Total assets                                                                                                
   $
997,602
     $
1,123,191
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Current maturities of long-term debt                                                                                                  
   $
2,627
     $
2,627
  
Accounts payable                                                                                                  
    
69,971
      
70,878
  
Other current liabilities                                                                                                  
    
51,454
      
63,012
  
                 
Total current liabilities                                                                                                
    
124,052
      
136,517
  
Long-term debt                                                                                                    
    
361,378
      
342,405
  
Deferred income taxes                                                                                                    
    
114,481
      
125,784
  
Other long-term liabilities                                                                                                    
    
32,443
      
22,994
  
                 
Total liabilities                                                                                                
    
632,354
      
627,700
  
                 
Commitments and contingencies
                
Stockholders’ equity:
                
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at
  September 29, 2007 and December 30, 2006
    
--
      
--
  
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 57,926,790 and
  58,927,280 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively
    
579
      
589
  
Additional paid-in capital                                                                                                  
    
242,780
      
275,045
  
Accumulated other comprehensive income                                                                                                  
    
3,965
      
5,301
  
Retained earnings                                                                                                  
    
117,924
      
214,556
  
                 
Total stockholders’ equity                                                                                                
    
365,248
      
495,491
  
                 
       Total liabilities and stockholders’ equity                                                                                                
   $
997,602
     $
1,123,191
  

See accompanying notes to the unaudited condensed consolidated financial statements

3


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
   
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Net sales                                                                         
   $
410,949
     $
391,977
     $
1,018,852
     $
966,001
  
Cost of goods sold                                                                         
    
265,093
      
244,757
      
671,198
      
613,382
  
                                 
Gross profit                                                                         
    
145,856
      
147,220
      
347,654
      
352,619
  
Selling, general, and administrative expenses
    
94,241
      
93,496
      
267,122
      
258,944
  
Intangible asset impairment (Note 3)            
    
--
      
--
      
154,886
      
--
  
Closure costs                                                                         
    
256
      
--
      
5,233
      
91
  
Royalty income                                                                         
     (8,649 )     (7,782 )     (22,894 )     (21,610 )
                                 
Operating income (loss)                                                                         
    
60,008
      
61,506
       (56,693 )    
115,194
  
Interest expense, net                                                                         
    
6,021
      
6,554
      
17,453
      
20,367
  
                                 
Income (loss) before income taxes
    
53,987
      
54,952
       (74,146 )    
94,827
  
Provision for income taxes                                                                         
    
19,369
      
19,975
      
25,074
      
35,046
  
                                 
Net income (loss)
   $
34,618
     $
34,977
     $ (99,220 )   $
59,781
  
                                 
Basic net income (loss) per common share
   $
0.60
     $
0.60
     $ (1.71 )   $
1.03
  
Diluted net income (loss) per common share
   $
0.58
     $
0.57
     $ (1.71 )   $
0.98
  
Basic weighted-average number of shares outstanding
    
57,745,717
      
57,949,783
      
58,010,633
      
57,845,521
  
Diluted weighted-average number of shares outstanding
    
59,975,130
      
61,094,141
      
58,010,633
      
61,173,247
  

See accompanying notes to the unaudited condensed consolidated financial statements



4

CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
   
For the
nine-month periods ended
  
   
September 29,
2007
    
September 30,
2006
  
Cash flows from operating activities:
            
Net (loss) income                                                                                        
   $ (99,220 )   $
59,781
  
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
                
Depreciation and amortization                                                                                       
    
22,526
      
18,272
  
Amortization of debt issuance costs                                                                                       
    
872
      
1,460
  
    Non-cash intangible asset impairment charges                                                                                         
    
154,886
      
--
  
Non-cash stock-based compensation expense                                                                                       
    
4,653
      
4,349
  
Income tax benefit from exercised stock options                                                                                       
     (7,797 )     (2,472 )
Loss on sale of property, plant, and equipment                                                                                       
    
620
      
197
  
Deferred income taxes                                                                                       
     (8,890 )    
5,666
  
Non-cash closure costs                                                                                       
    
2,450
      
--
  
Effect of changes in operating assets and liabilities:
                
Accounts receivable                                                                                
     (49,454 )     (54,691 )
Inventories                                                                                
     (52,941 )     (11,395 )
Prepaid expenses and other assets                                                                                
     (5,302 )     (3,090 )
Accounts payable and other liabilities                                                                                
     (1,020 )     (23,310 )
                 
Net cash used in operating activities                                                                            
     (38,617 )     (5,233 )
                 
Cash flows from investing activities:
                
Capital expenditures                                                                                        
     (13,228 )     (15,861 )
Proceeds from sale of property, plant, and equipment                                                                                        
    
53
      
348
  
                 
Net cash used in investing activities                                                                            
     (13,175 )     (15,513 )
                 
Cash flows from financing activities:
                
Payments on term loan                                                                                        
     (2,627 )     (37,133 )
Share repurchase                                                                                        
     (47,406 )    
--
  
Borrowings from revolving loan facility                                                                                        
    
117,600
      
5,000
  
Payments on revolving loan facility                                                                                        
     (96,000 )     (5,000 )
Income tax benefit from exercised stock options                                                                                        
    
7,797
      
2,472
  
Proceeds from exercise of stock options                                                                                        
    
2,576
      
1,087
  
Book overdraft                                                                                        
    
10,561
      
--
  
                 
Net cash used in financing activities                                                                            
     (7,499 )     (33,574 )
                 
Net decrease in cash and cash equivalents                                                                                         
     (59,291 )     (54,320 )
Cash and cash equivalents, beginning of period                                                                                         
    
68,545
      
84,276
  
                 
Cash and cash equivalents, end of period                                                                                         
   $
9,254
     $
29,956
  

See accompanying notes to the unaudited condensed consolidated financial statements

5

CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands, except for share data)
(unaudited)

   
Common
stock
    
Additional
paid-in
capital
    
Accumulated
other comprehensive
income
(loss)
    
Retained
earnings
    
Total
stockholders’
equity
  
                               
Balance at December 30, 2006
   $
589
     $
275,045
     $
5,301
     $
214,556
     $
495,491
  
Income tax benefit from exercised stock options
            
7,797
                      
7,797
  
Exercise of stock options (901,464 shares)
    
9
      
2,567
                      
2,576
  
Stock-based compensation expense
            
4,173
                      
4,173
  
Issuance of common stock (23,482 shares)
    
1
      
584
                      
585
  
FIN 48 cumulative effect of adoption  (Note 4)
                            
2,588
      
2,588
  
Share repurchase (1,985,519 shares)
     (20 )     (47,386 )                     (47,406 )
Comprehensive loss:
                                        
Net loss
                             (99,220 )     (99,220 )
Settlement of pension plan, net of tax benefit of $75
                     (132 )             (132 )
Unrealized loss on interest rate swap, net of tax benefit of $606
                     (1,058 )             (1,058 )
Unrealized loss on interest rate collar, net of tax benefit of $84
    
 
      
 
       (146 )    
 
       (146 )
Total comprehensive loss
    
--
      
--
       (1,336 )     (99,220 )     (100,556 )
Balance at September 29, 2007
   $
579
     $
242,780
     $
3,965
     $
117,924
     $
365,248
  

See accompanying notes to the unaudited condensed consolidated financial statements

6

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – THE COMPANY:

 
Carter’s, Inc. and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One Year, OshKosh, and related brands.  Our products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic retailers, including the mass channel, and to our Carter’s and OshKosh retail stores that market our brand name merchandise and other licensed products manufactured by other companies.

NOTE 2 – BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements comprise the consolidated financial statements of Carter’s, Inc. and its subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.

In our opinion, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of our financial position as of September 29, 2007, the results of our operations for the three and nine-month periods ended September 29, 2007 and September 30, 2006, cash flows for the nine-month periods ended September 29, 2007 and September 30, 2006 and changes in stockholders’ equity for the nine-month period ended September 29, 2007.  Operating results for the three and nine-month periods ended September 29, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2007.  Our accompanying condensed consolidated balance sheet as of December 30, 2006 is from our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and the instructions to Form 10-Q.  The accounting policies we follow are set forth in our most recently filed Annual Report on Form 10-K in the notes to our audited consolidated financial statements for the fiscal year ended December 30, 2006.

Our fiscal year ends on the Saturday in December or January nearest to the last day of December.  The accompanying unaudited condensed consolidated financial statements for the third quarter and first nine months of fiscal 2007 reflect our financial position as of September 29, 2007.  The third quarter and first nine months of fiscal 2006 ended on September 30, 2006.

Certain prior year amounts have been reclassified for comparative purposes.

7
 
NOTE 3 – COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS:

In connection with the acquisition of OshKosh B’Gosh, Inc. on July 14, 2005 (the “Acquisition”), the Company recorded the cost in excess of fair value of net assets acquired and other intangible assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”

During the second quarter of fiscal 2007, as a result of negative trends in sales and profitability of the Company’s OshKosh B’Gosh wholesale and retail segments and re-forecasted projections for such segments for the balance of fiscal 2007, the Company conducted an interim impairment assessment on the value of the intangible assets that the Company recorded in connection with the Acquisition.  This assessment was performed in accordance with SFAS No. 142, “Goodwill and Intangible Assets.”  Based on this assessment, charges of approximately $36.0 million and $106.9 million were recorded for the impairment of the cost in excess of fair value of net assets acquired for the OshKosh wholesale and retail segments, respectively.  In addition, an impairment charge of $12.0 million was recorded to reflect the impairment of the value ascribed to the OshKosh tradename asset.  For cost in excess of fair value of net assets acquired, the fair value was determined using the expected present value of future cash flows.  For the OshKosh tradename, the fair value was determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of our ownership of the tradename.

During the three-month period ended September 29, 2007, approximately $1.2 million related to pre-Acquisition tax contingencies were reversed due to settlement with taxing authorities.  The reversal resulted in a corresponding reduction to the OshKosh tradename asset of $2.0 million and a reduction in our deferred tax liability of $0.8 million in accordance with Emerging Issues Task Force No. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination” (“EITF 93-7”).

As of September 29, 2007, the remaining intangible assets resulting from the Acquisition were as follows:

(dollars in thousands)
Weighted-
average
useful
life
  
Gross
amount
    
Accumulated
amortization
  
               
OshKosh tradename                                                       
Indefinite
   $
88,000
     $
--
  
OshKosh licensing agreements    
4.7 years
   $
19,100
     $
9,271
  
Leasehold interests                                                       
4.1 years
   $
1,833
     $
1,032
  

Amortization expense for intangible assets was approximately $1.0 million and $3.4 million for the three and nine-month periods ended September 29, 2007 and $1.2 million and $3.5 million for the three and nine-month periods ended September 30, 2006.  Annual amortization expense for the OshKosh licensing agreements and leasehold interests is expected to be as follows:

   
Estimated
  
(dollars in thousands)
  
amortization
  
Fiscal Year
  
expense
  
       
2007 (period from September 30 through December 29)
   $
1,030
  
2008                                                                          
    
4,106
  
2009                                                                          
    
3,717
  
2010                                                                          
    
1,777
  
         
Total                                                               
   $
10,630
  
 
        As described in Note 2 “Summary of Significant Accounting Policies” to our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K, our Carter’s tradename and cost in excess of fair value of net assets acquired assets have been deemed to have indefinite lives and are not being amortized.

8
 
 
NOTE 4 – INCOME TAXES:

Effective December 31, 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”).  FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  FIN 48 states that a tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

In connection with the adoption of FIN 48, we recorded a cumulative effect of adoption, reducing our reserves for unrecognized tax benefits by approximately $2.6 million as of December 31, 2006 and increasing retained earnings by $2.6 million.  Additionally, we reclassified, as of December 31, 2006, approximately $6.9 million of reserves for unrecognized tax benefits from current liabilities to long-term liabilities on the accompanying unaudited condensed consolidated balance sheet.

The Company and its subsidiaries file income tax returns in the U.S. and in various states and local jurisdictions.  The Internal Revenue Service is currently conducting an examination of the Company’s U.S. income tax returns for fiscal 2004 and fiscal 2005.  In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2003.

As of December 31, 2006, the Company had gross unrecognized tax benefits of approximately $8.1 million, excluding interest and penalties of approximately $1.5 million.  The amount of net unrecognized tax benefits that could result in an adjustment to our effective tax rate in future periods, if recognized, was approximately $3.1 million as of December 31, 2006.

During the three-month period ended September 29, 2007, we recognized approximately $0.6 million in tax benefits previously reserved for which the statue of limitations expired in September 2007.  In addition, we recognized approximately $2.0 million of pre-Acquisition tax obligations previously reserved for which were settled in September 2007 with taxing authorities.  The settlement of these pre-Acquisition uncertainties have been reflected as an adjustment to the OshKosh tradename asset in accordance with EITF 93-7.

Included in the reserves for unrecognized tax benefits are approximately $1.2 million of reserves for which the statute of limitations expires in September 2008.  Such exposures relate primarily to the deductibility of certain operating expenses from various jurisdictions.  If these tax benefits are ultimately recognized, such recognition will not have a material impact on our annual effective tax rate for fiscal 2008, although the effective tax rate for the third quarter of fiscal 2008 may be impacted.  In addition, our unrecognized tax benefits include approximately $0.9 million of pre-Acquisition reserves for which the statute of limitations expires in September 2008.  Recognition of these uncertainties would be reflected as an adjustment to the OshKosh tradename asset in accordance with EITF 93-7.
 
        We recognize interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of income tax expense.  The Company had approximately $1.1 million of interest and penalties accrued as of September 29, 2007.
 
        The Company’s effective tax rate for the first nine months of fiscal 2007 was impacted by the impairment of the cost in excess of fair value of net assets acquired as such charge is not deductible for tax purposes.

9

 
NOTE 5 – 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.  Additionally, we have an obligation under a defined benefit plan covering certain former officers and their spouses.  See Note 8 “Employee Benefit Plans” to our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K for further information.

The components of post-retirement life and medical benefit expense charged to operations are as follows:

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
(dollars in thousands)
  
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Service cost – benefits attributed to service during the period
   $
26
     $
42
     $
82
     $
126
  
Interest cost on accumulated post-retirement benefit obligation
    
131
      
160
      
405
      
477
  
Amortization of prior service cost
    
--
      
23
       (18 )    
69
  
Total net periodic benefit cost
   $
157
     $
225
     $
469
     $
672
  

The components of pension expense charged to operations are as follows:

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
(dollars in thousands)
  
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Interest cost on accumulated pension benefit obligation
   $
13
     $
19
     $
43
     $
57
  
Actuarial gain
     (53 )    
--
       (53 )    
--
  
Total net periodic benefit cost
   $ (40 )   $
19
     $ (10 )   $
57
  

The Company acquired two defined benefit pension plans in connection with the Acquisition.  The benefits for certain current and former employees of OshKosh under these pension plans were frozen as of December 31, 2005.



10

        During the second quarter of fiscal 2007, the Company liquidated the OshKosh B’Gosh Collective Bargaining Pension Plan (the “Plan”), distributed each participant’s balance, and the remaining net assets of $2.2 million were contributed to the Company’s defined contribution plan to offset future employer contributions.  In connection with the liquidation of the Plan, the Company recorded a pre-tax gain of approximately $0.3 million related to the Plan settlement during the second quarter of fiscal 2007.
 
        The Company’s net periodic pension benefit related to these plans is comprised of the following components:

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
(dollars in thousands)
  
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Interest cost on accumulated pension benefit obligation
   $
551
     $
650
     $
1,654
     $
1,951
  
Expected return on assets
     (897 )     (1,035 )     (3,213 )     (3,104 )
Amortization of actuarial gain
     (34 )    
--
       (104 )    
--
  
Gain on settlement
    
--
      
--
       (276 )    
--
  
Total net periodic benefit
   $ (380 )   $ (385 )   $ (1,939 )   $ (1,153 )

NOTE 6 – COMMON STOCK:

On February 16, 2007, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $100 million of its outstanding common shares.  Such repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise.  This program has no time limit.  The timing and amount of any repurchases will be determined by management, based on its evaluation of market conditions, share price, and other factors.

During the third quarter and first nine months of fiscal 2007, the Company repurchased and retired 338,100 and 1,985,519 shares, or approximately $7.4 million and $47.4 million, of its common stock at an average price of $21.87 and $23.88 per share, respectively.  Accordingly, we have reduced common stock by the par value of such shares and have deducted the remaining excess repurchase price over par value from additional paid-in capital.

During the third quarter and first nine months of fiscal 2007, the Company issued 2,062 shares and 23,482 shares of common stock to its non-management board members.

11

NOTE 7 – 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 and 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 nine-month period ended September 29, 2007.

   
For the
nine-month
period ended
September 29, 2007
  
       
Volatility
    
38.16%
  
Risk-free interest rate
    
4.74%
  
Expected term (years)
    
6.0
  
Dividend yield
    
--
  

The fair value of restricted stock is determined based on the quoted closing price of our common stock on the date of grant.

The following table summarizes our stock option and restricted stock activity during the nine-month period ended September 29, 2007:
 
   
Time-based
stock options
    
Performance-based
stock
options
    
Retained
stock options
    
Restricted
Stock
  
                         
Outstanding, December 30, 2006
    
4,666,678
      
620,000
      
1,071,870
      
222,620
  
                                 
Granted
    
189,200
      
--
      
--
      
90,383
  
Exercised
     (491,464 )    
--
       (410,000 )    
--
  
Vested restricted stock
    
--
      
--
      
--
       (28,800 )
Forfeited
     (194,450 )    
--
      
--
       (30,300 )
Expired
    
--
      
--
      
--
      
--
  
                                 
Outstanding, September 29, 2007
    
4,169,964
      
620,000
      
661,870
      
253,903
  
                                 
Exercisable, September 29, 2007
    
3,448,110
      
--
      
661,870
      
--
  

During the three-month period ended September 29, 2007, we granted 6,000 time-based stock options with a weighted-average Black-Scholes fair value of $9.60 and a weighted-average exercise price of $21.40.  In connection with these grants, we recognized approximately $2,000 in stock-based compensation expense.

During the nine-month period ended September 29, 2007, we granted 189,200 time-based stock options with a weighted-average Black-Scholes fair value of $10.52 and a weighted-average exercise price of $23.36.  In connection with these grants, we recognized approximately $231,000 in stock-based compensation expense.

        During the three-month period ended September 29, 2007, we granted 7,583 shares of restricted stock to an employee and a director with a weighted-average fair value on the date of grant of $21.65.  In connection with these grants, we recognized approximately $7,000 in stock-based compensation expense.

12
 
        During the nine-month period ended September 29, 2007, we granted 90,383 shares of restricted stock to employees and a director with a weighted-average fair value on the date of grant of $22.85.  In connection with these grants, we recognized approximately $244,000 in stock-based compensation expense.
 
  Unrecognized stock-based compensation expense related to outstanding stock options and restricted stock awards is expected to be recorded as follows:

(dollars in thousands)
  
Time-based
stock
options
    
Performance -based
stock
options
    
Restricted
stock
    
Total
  
                         
2007 (period from September 30 through December 29)
   $
612
     $
375
     $
421
     $
1,408
  
2008
    
2,427
      
1,519
      
1,765
      
5,711
  
2009
    
1,437
      
721
      
1,296
      
3,454
  
2010
    
567
      
84
      
593
      
1,244
  
2011
    
102
      
--
      
86
      
188
  
Total
   $
5,145
     $
2,699
     $
4,161
     $
12,005
  


13

 
NOTE 8 – SEGMENT INFORMATION:

We report segment information in accordance with the provisions of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which requires segment information to be disclosed based upon a “management approach.”  The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of our reportable segments.

The table below presents certain segment information for the periods indicated:

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
(dollars in thousands)
  
September 29,
2007
    
% of
Total
    
September 30,
2006
    
% of
Total
    
September 29,
2007
    
% of
Total
    
September 30,
2006
    
% of
Total
  
                                                 
Net sales:
                                                
Wholesale-Carter’s
   $
149,918
       36.4 %   $
143,624
       36.6 %   $
355,865
       34.9 %   $
330,080
       34.2 %
Wholesale-OshKosh
    
28,197
       6.9 %    
25,778
       6.6 %    
63,417
       6.2 %    
74,870
       7.8 %
Retail-Carter’s
    
102,429
       24.9 %    
93,493
       23.9 %    
253,530
       24.9 %    
233,956
       24.2 %
Retail-OshKosh
    
62,800
       15.3 %    
62,739
       16.0 %    
157,533
       15.5 %    
155,754
       16.1 %
Mass Channel-Carter’s
    
67,605
       16.5 %    
66,343
       16.9 %    
188,507
       18.5 %    
171,341
       17.7 %
Total net sales
   $
410,949
       100.0 %   $
391,977
       100.0 %   $
1,018,852
       100.0 %   $
966,001
       100.0 %
                                                                 
Operating income (loss):
          
% of
segment
net sales
            
% of
segment
net sales
            
% of
segment
net sales
            
% of
segment
net sales
  
Wholesale-Carter’s
   $
33,740
       22.5 %   $
32,238
       22.4 %   $
71,228
       20.0 %   $
64,974
       19.7 %
Wholesale-OshKosh (a)
    
2,624
       9.3 %    
3,812
       14.8 %     (37,005 )     (58.4 )%    
8,396
       11.2 %
Retail-Carter’s
    
21,602
       21.1 %    
16,989
       18.2 %    
35,238
       13.9 %    
36,940
       15.8 %
Retail-OshKosh (b)
    
2,541
       4.0 %    
7,444
       11.9 %     (107,369 )     (68.2 )%    
10,276
       6.6 %
Mass Channel-Carter’s
    
10,639
       15.7 %    
11,703
       17.6 %    
27,784
       14.7 %    
26,681
       15.6 %
Mass Channel-OshKosh (c)
    
615
      
--
      
604
      
--
      
1,503
      
--
      
1,440
      
--
  
Segment operating income (loss)
    
71,761
       17.5 %    
72,790
       18.6 %     (8,621 )     (0.8 )%    
148,707
       15.4 %
Other reconciling items (d)
     (11,753 )     (2.9 )%     (11,284 )     (2.9 )%     (48,072 )     (4.7 )%     (33,513 )     (3.5 )%
Total operating income (loss)
   $
60,008
       14.6 %   $
61,506
       15.7 %   $ (56,693 )     (5.6 )%   $
115,194
       11.9 %

(a)  
OshKosh wholesale includes a charge of approximately $36.0 million related to the impairment of the OshKosh cost in excess of fair value of net assets acquired related to the wholesale segment for the nine-month period ended September 29, 2007.
(b)  
OshKosh retail includes a charge of approximately $106.9 million related to the impairment of the OshKosh cost in excess of fair value of net assets acquired related to the retail segment for the nine-month period ended September 29, 2007.
(c)  
OshKosh mass channel consists of a licensing agreement with Target.  Operating income consists of royalty income, net of related expenses.
(d)  
Other reconciling items include a charge of $12.0 million related to the impairment of the OshKosh tradename for the nine-month period ended September 29, 2007.

14
 
        The following represents cost in excess of fair value of net assets acquired by segment:

(dollars in thousands)
  
Wholesale – Carter’s
    
Wholesale – OshKosh
    
Retail – Carter’s
    
Retail –OshKosh
    
Mass Channel – Carter’s
    
Total
  
                                     
Balance at December 30, 2006
   $
51,814
     $
36,071
     $
82,025
     $
107,115
     $
2,731
     $
279,756
  
Intangible asset impairment
    
--
       (35,995 )    
--
       (106,891 )    
--
       (142,886 )
Adjustments
    
--
       (76 )    
--
       (224 )    
--
       (300 )
Balance at September 29, 2007
   $
51,814
     $
--
     $
82,025
     $
--
     $
2,731
     $
136,570
  

NOTE 9 – FACILITY CLOSURE AND RESTRUCTURING COSTS:

White House Distribution Facility

The Company continually evaluates opportunities to reduce its supply chain complexity and lower costs.  In the first quarter of fiscal 2007, the Company determined that OshKosh brand products could be effectively distributed through its other distribution facilities and third-party logistics providers.  On February 15, 2007, the Company’s Board of Directors approved management’s plan to close the Company’s White House, Tennessee distribution facility, which was utilized to distribute the Company’s OshKosh brand products.

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” under a held and used model, it was determined that the distribution facility assets were impaired as of the end of January 2007, as it became “more likely than not” that the expected life of the White House distribution facility would be significantly shortened.  Accordingly, we have written down the assets to their estimated recoverable fair value as of the end of January 2007.  The adjusted asset values were subject to accelerated depreciation over their remaining estimated useful life.  Distribution operations at the White House facility ceased as of April 5, 2007, at which point the White House land, building, and equipment assets of $6.1 million were reclassified as held for sale on the accompanying unaudited condensed consolidated balance sheet.

For a majority of the affected employees, severance benefits were communicated on February 20, 2007.  Approximately 215 employees were terminated.  In connection with this closure, we expect to incur approximately $3.6 million in cash expenses.  These cash expenses consist of severance and other costs to exit the facility.  The Company also incurred approximately $4.6 million of non-cash charges relating to accelerated depreciation and asset impairment.

During the first nine months of fiscal 2007, we recorded costs of $7.4 million, consisting of asset impairment charges of $2.4 million related to a write-down of the related land, building, and equipment, $2.0 million of severance charges, $2.1 million of accelerated depreciation (included in selling, general, and administrative expenses), and $0.9 million of other closure costs.

15
 
        The following table summarizes restructuring reserves related to the closure of the White House facility which are included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet:

(dollars in thousands)
  
Severance
    
Other
exit
costs
    
Total
  
                   
Balance at March 31, 2007
   $ 2,040     $ 45     $ 2,085  
Provisions
    
--
      
470
      
470
  
Payments
     (1,234 )     (515 )     (1,749 )
Balance at June 30, 2007
    
806
      
--
      
806
  
Provisions
    
--
      
256
      
256
  
Payments
     (223 )     (256 )     (479 )
Balance at September 29, 2007
   $ 583     $ --     $ 583  

Acquisition Restructuring
 
        In connection with the Acquisition, management developed a plan to restructure and integrate the operations of OshKosh.  In accordance with EITF No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” liabilities were established for OshKosh severance, lease termination costs associated with the closure of 30 OshKosh retail stores, contract termination costs, and other exit costs.  These liabilities also covered costs related to the closure of OshKosh’s Choloma, Honduras sewing facility, the Uman, Mexico sewing facility, and the Liberty, Kentucky distribution center.  The Honduras and Kentucky facilities were closed during the fourth quarter of fiscal 2005.  The Mexico facility was closed during the first quarter of fiscal 2006 and all remaining liabilities have been paid.

The following table summarizes restructuring reserves related to the Acquisition which are included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet:

(dollars in thousands)
  
Severance
    
Other
exit
costs
    
Lease
termination
costs
    
Contract
termination
costs
    
Total
  
                               
Balance at December 30, 2006
   $ 2,135     $ 719     $ 1,733     $ 200     $ 4,787  
Payments                                            
     (626 )     (473 )     (610 )    
--
       (1,709 )
Balance at March 31, 2007
    
1,509
      
246
      
1,123
      
200
      
3,078
  
Payments                                            
     (288 )     (154 )     (469 )    
--
       (911 )
Adjustments to cost in excess of fair value of net assets acquired        
     (100 )    
--
      
--
       (200 )     (300 )
Balance at June 30, 2007
    
1,121
      
92
      
654
      
--
      
1,867
  
Payments                                            
     (391 )     (43 )    
--
      
--
       (434 )
Balance at September 29, 2007
   $ 730     $ 49     $ 654     $ --     $ 1,433  

Sewing Facility Closures

In May 2005, we decided to exit two Carter’s brand sewing facilities in Mexico.  During the first nine months of fiscal 2006, we recorded total charges of $91,000, including $74,000 in severance charges and $17,000 in other exit costs related to these closures.

16

NOTE 10 – EARNINGS PER SHARE:

In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is based on the weighted-average number of common shares outstanding during the year, whereas diluted earnings per share also gives effect to all potentially dilutive shares of common stock, including time-based and retained stock options and unvested restricted stock, that were outstanding during the period.  All such stock options are reflected in the denominator using the treasury stock method.  This method assumes that shares are issued for stock options that are “in the money,” but that we use the proceeds of such stock option exercises (generally, cash to be paid plus future compensation expense to be recognized and the amount of tax benefits, if any, that will be credited to additional paid-in capital assuming exercise of the stock options) to repurchase shares at the average market value of our shares for the respective periods.  Unvested shares of restricted stock are reflected in the denominator using the treasury stock method with proceeds of the amount, if any, the employees must pay upon vesting, the amount of compensation cost attributed to future services and not yet recognized in earnings, and the amount of tax benefits, if any, that would be credited to additional paid-in capital (i.e., the amount of the tax deduction in excess of recognized compensation cost) assuming vesting of the shares at the current market price.

For the three-month period ended September 29, 2007, anti-dilutive shares of 658,100 and performance-based stock options of 620,000 were excluded from the computations of diluted earnings per share.  For the nine-month period ended September 29, 2007, diluted net loss per common share is the same as basic net loss per common share, as the Company has a net loss.  For the three and nine-month periods ended September 30, 2006, anti-dilutive shares of 545,950 and 315,750, respectively, and performance-based stock options of 620,000, were excluded from the computations of diluted earnings per share.

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:

   
For the
three-month periods ended
    
For the
nine-month periods ended
  
(dollars in thousands, except per share data)
  
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Net income (loss)                                                     
   $
34,618
     $
34,977
     $ (99,220 )   $
59,781
  
                                 
Weighted-average number of common and common equivalent shares outstanding:
                                
Basic number of common shares outstanding
    
57,745,717
      
57,949,783
      
58,010,633
      
57,845,521
  
Dilutive effect of unvested restricted stock
    
60,190
      
35,400
      
--
      
65,310
  
Dilutive effect of stock options
    
2,169,223
      
3,108,958
      
--
      
3,262,416
  
                                 
Diluted number of common and common equivalent shares outstanding
    
59,975,130
      
61,094,141
      
58,010,633
      
61,173,247
  
                                 
Basic net income (loss) per common share
   $
0.60
     $
0.60
     $ (1.71 )   $
1.03
  
Diluted net income (loss) per common share
   $
0.58
     $
0.57
     $ (1.71 )   $
0.98
  


17

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2006, the FASB issued 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 provisions of SFAS 157 are effective as of the beginning of our 2008 fiscal year.  We are evaluating the impact that SFAS 157 will have on our consolidated financial statements based on evolving interpretive guidance.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”), which provides entities with an option to report selected financial assets and liabilities at fair value.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007.  We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.

18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

  The following is a discussion of our results of operations and current financial position.  You should read this discussion in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

Our fiscal year ends on the Saturday in December or January nearest to the last day of December.  The accompanying unaudited condensed consolidated financial statements for the third quarter and first nine months of fiscal 2007 reflect our financial position as of September 29, 2007.  The third quarter and first nine months of fiscal 2006 ended on September 30, 2006.

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
    
Nine-month periods ended
  
   
September 29,
2007
    
September 30,
2006
    
September 29,
2007
    
September 30,
2006
  
                         
Wholesale sales:
                        
Carter’s
     36.4 %     36.6 %     34.9 %     34.2 %
OshKosh
    
6.9
      
6.6
      
6.2
      
7.8
  
    Total wholesale sales
    
43.3
      
43.2
      
41.1
      
42.0
  
                                 
Retail store sales:
                                
Carter’s
    
24.9
      
23.9
      
24.9
      
24.2
  
OshKosh
    
15.3
      
16.0
      
15.5
      
16.1
  
    Total retail store sales
    
40.2
      
39.9
      
40.4
      
40.3
  
                                 
Mass channel sales
    
16.5
      
16.9
      
18.5
      
17.7
  
                                 
Consolidated net sales
    
100.0
      
100.0
      
100.0
      
100.0
  
Cost of goods sold
    
64.5
      
62.4
      
65.9
      
63.5