UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

 

FORM 10-K

 

ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2012

 

Commission File Number  1-6720

 

A. T. CROSS COMPANY
(Exact name of registrant as specified in its charter)

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INDEX

 

 

 

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PART I

 

 

 

The A.T. Cross Company (the “Company”) has two reportable segments: Cross Accessory Division (“CAD”) and Cross Optical Group (“COG”).  For certain financial information with respect to these segments, see Note K to the Company's consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

 

Cross Accessory Division

 

We manufacture and market fine quality writing instruments under the Cross^® brand consisting of ballpoint pens, fountain pens, Selectip^® rolling ball pens and mechanical pencils.  We also manufacture and market a variety of refills for most of our product types.  In addition to Cross-branded writing instruments, CAD manufactures and markets a FranklinCovey line of entry level price point refillable writing instruments.  The Company is an original equipment manufacturer (“OEM”) of writing instruments.  In addition to writing instruments, we also design and market a variety of personal and business accessories including leather goods, reading glasses, desk sets and stationery.  The Company has license agreements with a third party to develop and sell Cross^® watches and cufflinks.  The Company launches new pen products and other personal accessories on a bi-annual basis.

Our writing instruments are offered in a variety of styles and materials at various price points.  They are packaged and sold as individual units or in matching sets.  The majority of writing instrument sales occur at suggested retail price points between approximately $22 and $50.  We believe we are a market leader in the United States at these price points.  Products in this price range include: Classic Century^®, Calais, Aventura^®, Stratford, Cross Contour, Cross Edge, Cross Click, Bailey, Beverly, and selected ATX^® writing instruments.  The Cross Townsend^®, Sauvage, Cross Sentiment, C-Series, Apogee^®, Cross Affinity, Masquerade, Century II, Tech3 and Tech4 lines as well as selected Classic Century and ATX writing instruments provide the Company a presence in the $55 to $300 price range.  Certain Classic Century, Cross Townsend and Special Edition writing instruments are priced over $300.  The Sable, Nile, Revere, Sage and Parasol writing instrument product lines are sold to the Company's self-serve channels of distribution including the office superstore customers.  The FranklinCovey brand provides the Company a presence in the under $10 suggested retail price range for a ballpoint pen.

Cross^® leather goods range in price from $40 to $145, reading glasses are priced at $30, watch prices range between $100 and $330, desk sets are priced at $225, cufflinks from $50 to $80 and stationery from $20 to $25.

The Company emphasizes styling, innovation, craftsmanship and quality in the design and production of all of its products.  All Cross-branded writing instruments carry a full warranty of unlimited duration against mechanical failure.  Our watches are sold with a limited two-year warranty, and leather goods are sold with a limited one-year warranty.

Globally, Cross Accessory Division products are sold at over 10,000 points of distribution in over 80 countries by our direct sales force and manufacturers' agents or representatives.  They are sold in the United States in over 5,500 retailers, directly to consumers via the Company's website, www.cross.com, and at the Cross^® retail store.  Sales outside the United States are made to foreign distributors and retailers worldwide by the Company and its wholly-owned subsidiaries.  Retail accounts include: gift stores, department stores, jewelers, stationery, office supply and pen specialty stores, and United States military post exchanges.  Wholesale accounts distribute products to retail outlets in those countries where the Company does not maintain a direct sales force or to those that purchase in small quantities.  Advertising specialty representatives market products to business accounts that are typically engraved or display a name or emblem and are used for gifts, sales promotions, incentives or advertising. 

 

Cross Optical Group

 

The Company's COG segment consists of its wholly-owned subsidiary, Cross Optical Group, Inc., which was formed on January 2, 2010 and is the legal entity of our two sunglass brands: Costa^® and Native^®.  Costa was acquired in 2003 and Native was purchased in 2008.  This business designs, manufactures and markets premium, high-quality, high-performance polarized sunglasses under these brand names.  Combined, our brands offer sunglasses in more than 88 styles and 25 lens options, most at suggested retail price points between approximately $89 and $279.  Costa expanded its offerings in 2011 to include prescription sunglasses at suggested retail price points between approximately $300 and $750.  The COG segment also sells apparel and accessory products such as hats, t-shirts, cords, cases and backpacks.

Our sunglass products are sold by employee representatives and manufacturers' agents to approximately 7,600 retail accounts throughout the United States.  Retail accounts include optical and sunglass specialty shops, department stores and sporting goods retailers. 

Costa and Native sunglasses are sold with a lifetime warranty against manufacturer’s defects in materials and workmanship.

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Raw Materials

 

The Company's CAD segment obtains raw materials for use in writing instruments from both domestic and foreign suppliers.  Metal and plastic pen parts are obtained from the United States (“U.S.”), China, Germany, Japan, India, Malaysia, and Switzerland.  Coated parts are procured from the U.S. and China.  Ink is procured from the U.S., Germany, China and Japan.

The majority of component materials for the COG segment are imported from highly specialized manufacturers located in Europe and Asia.

To maintain the highest level of product quality, the Company relies on a limited number of domestic and foreign suppliers for certain raw materials and manufacturing technologies.  The Company may be adversely affected in the event that these suppliers cease operations or if pricing terms become less favorable.  The Company believes, but cannot be assured, that the raw materials currently supplied by these vendors could be obtained from other sources and that the manufacturing technologies could either be developed internally or that suitably similar technologies could be located.

 

Patents, Licenses and Trademarks

 

The Company, directly or through its subsidiaries, has certain writing instrument, timepiece, accessory and optical trademark registrations and/or pending trademark applications in the United States and many foreign countries, including but not limited to its principal trademark “CROSS,” and the “FRUSTO-CONICAL DESIGN” on the top of its writing instruments, and the trademarks “COSTA DEL MAR” and “NATIVE.”  The principal trademark “CROSS” is of fundamental importance to the CAD segment and the trademarks “COSTA DEL MAR”, “COSTA” and “NATIVE” are of fundamental importance to the COG segment.  The Company, directly or through its subsidiaries, holds certain United States and foreign writing instrument patents and/or has filed United States and foreign patent applications covering products including, but not limited to, Cross Townsend, Edge, Tech4 and the Company's ball-point pen mechanism.  While the Company pursues a practice of seeking patent protection for novel inventions or designs, the business is not dependent upon obtaining and maintaining patents.

 

Seasonal Business

 

The CAD segment has historically generated its highest sales in the second half of the year, approximately one-third in the fourth quarter.  The COG segment has historically generated its highest sales in the first half of the year, approximately one-third in the second quarter.

 

Working Capital Requirements

 

Writing instrument and sunglass inventory balances tend to be highest in anticipation of new product launches and before peak selling seasons.  The Company offers, and may offer in the future, extended payment terms, primarily to domestic retail writing instrument customers, at certain points during the year.

 

Customers

 

The Company is not dependent upon any single customer for more than 5% of its consolidated revenues.

 

Backlog of Orders

 

The backlog of orders is not a significant factor in the Company's business.

 

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Competition

 

The global non-disposable writing instrument market is estimated to be approximately $2 billion at retail.  It is competitive, in particular with respect to product quality, brand recognition and price.  There are numerous manufacturers of ballpoint, rolling ball and fountain pens, and mechanical pencils in the U.S. and abroad.  Many of these manufacturers produce lower-priced writing instruments than those produced by the Company.  Although the Company is a major producer of ballpoint, rolling ball and fountain pens, and mechanical pencils in the $22 to $50 price range, other writing instrument companies have significantly higher sales volumes from a broader product line across a wider range of prices or have greater resources as divisions of larger corporations.  The Company emphasizes styling, innovation, craftsmanship and quality in the design and production of all of its products.

The plano sunglass market in the U.S. is estimated to be $3.5 billion at retail.  The Company's COG segment under the brand names Costa and Native compete in the premium-priced ($50+ retail) sunglass market segment, which is estimated to be $2.4 billion at retail.  The prescription sunglass market segment is estimated to be approximately $5.0 billion at retail.  Many other sunglass companies also compete in these segments.

See also the “Risk Factors” in Item 1A of this Annual Report on Form 10-K.

 

Research and Development

 

The Company had expenditures for research and development of new products and improvement of existing products of approximately $2.7 million, $2.7 million and $2.8 million in 2012, 2011 and 2010, respectively.  For additional discussion, see “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.

 

Environment

 

The Company believes it is in compliance with all Federal, state and local environmental laws and regulations.  The Company believes that future capital expenditures for environmental control facilities will not be material.  See Item 3 “Legal Proceedings” and Note L to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

Employees

 

The Company had approximately 1,030 employees worldwide at December 29, 2012, none of which were subject to collective bargaining agreements.

 

International Operations and Export Sales

 

Approximately 38% of the Company's sales in 2012 were in foreign markets.  The primary foreign markets are in Europe and Asia.  Sales of the Company's products to foreign distributors are subject to import duties in many countries.  The operations of the Company's foreign subsidiaries and branches are subject to the effects of currency fluctuations, the availability of U.S. dollar exchange, exchange control and other restrictive regulations.  Undistributed earnings of our foreign subsidiaries generally are not subject to current U.S. Federal and state income taxes, as such earnings are considered permanently reinvested in the growth of business outside the U.S.  The Company manufactures almost all of its core writing instruments in China.  See Note J and Note K to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.  For the effect of foreign sales on the Company's results of operations, see “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.

 

Availability of Securities and Exchange Commission Filings

 

The Company's website address is www.cross.com.  The Company makes available free of charge, through the Investor Relations section of its website, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials have been electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).  Information on the Company's website is not incorporated into this Annual Report.

 

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Executive Officers of the Company

 

The following are the executive officers of the Company (each of whom serves until his or her successor is elected and has qualified), their respective ages as of December 29, 2012 and their principal positions:

 

 

 

 

The following section describes certain of the more prominent risks and uncertainties inherent in our operations.  The risks and uncertainties below are those that we currently consider material; however, this section does not intend to discuss all possible risks and uncertainties that a company like Cross with broad international operations could experience.  We are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and the performance of our customers.  Similarly, the price of our securities is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community, and other factors beyond our control.  Further, there could be other risks and uncertainties that are not presently known to us or that may become more significant to us.  These Risk Factors should be read in conjunction with the factors discussed elsewhere in this and other of our filings with the SEC and in materials incorporated by reference in these filings.  We undertake no obligation to correct or update any forward-looking statements or statements of risk related thereto for any reason.

 

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We depend on the success of new products.  Our ability to sustain profitability and growth in sales depends largely on consumer acceptance of numerous new products recently introduced and planned for introduction.  Further, consumer preferences are continuously changing.  The markets in which we sell are highly competitive, and there is no assurance that consumer acceptance will be realized to the degree necessary to generate continued growth in our sales and earnings.

 

Our global manufacturing, sales and distribution operations make us susceptible to the risks of overseas operations.  We have sales offices and certain operations in  ten  countries and we have distributors worldwide.  In 2012, approximately 38% of our revenue came from sales to locations outside the United States.  We may be adversely affected in the event that global economic uncertainty erodes consumer confidence and purchasing.  Most of our products are manufactured overseas.  Operating internationally exposes us to changes in export controls and other laws or regulations, as well as the general political and economic conditions, security risks, natural disasters, health conditions and possible disruptions in transportation networks, of the various countries in which we operate, which could result in an adverse effect on our business and results of operations in such countries.

 

Incorrect forecasts of consumer demand could adversely affect our results of operations.  The Company manufactures product based on forecasts of consumer demand.  These forecasts are based on multiple assumptions.  If we inaccurately forecast consumer demand we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.  Goodwill and other indefinite-lived intangible assets impairment analyses rely on forecasted cash flows resulting from our expectations of consumer demand.  Failure to meet these forecasts could result in an impairment of goodwill or other indefinite-lived intangible assets, which would impact results of operations.

 

Our success depends on our ability to retain and recruit a sufficient number of qualified employees in a competitive environment.  Our success depends, in part, on our retention and recruitment of skilled personnel, including technical, distribution, sourcing, marketing, sales, management and staff personnel.  There can be no assurance that we will be able to successfully retain and recruit the key personnel that we need.

 

Our dependence on certain suppliers may leave us temporarily without adequate access to raw materials or products.    To maintain the highest level of product quality, we rely on a limited number of domestic and foreign suppliers for certain raw materials, manufacturing technologies and certain finished products.  We may be adversely affected in the event that these suppliers cease operations or if pricing terms become less favorable.  We believe, but cannot guarantee, that we could obtain the raw materials currently supplied by these vendors from other sources and that we could either develop the manufacturing technologies internally or locate suitably similar technologies.  If we are unable to replace a key supplier we may face delays in delivering finished products according to our customers' demands, which could have an adverse effect on our financial performance.

 

Overseas manufacturing makes us dependent upon the performance of our overseas partners.  As a result of our manufacturing initiative, we manufacture most of our finished products in China.  Our manufacturing operations in China are supported by a local partner from whom Cross leases the building housing Cross' physical plant.

 

Unfavorable resolution of pending or future litigation matters could prove costly to us.  In 2002, the Company received a so-called notice letter under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") from the Federal Environmental Protection Agency (“EPA”) alleging that the Company is a Potentially Responsible Party (“PRP”) in one Superfund case.  The Company has reached settlement of the case and paid a settlement amount of approximately $0.2 million in 2010.  The EPA is expected to select a remedy for the Site in 2013.  At that time, the EPA will initiate an administrative process (the "Special Notice Process") pursuant to CERCLA whereby the EPA will request that those entities that the EPA contends arranged for the disposal of hazardous materials at the Site (the PRPs), undertake the selected remedy at the Site.  The EPA contends that the Company is a PRP at the Site.  During the Special Notice Process, the Company and the other PRPs will engage in negotiations with the EPA regarding the remedy, and among themselves regarding the contribution of each PRP to overall remediation costs.  Neither the cost of the remedy nor the identity of all PRPs is known at this time.  Therefore it is not possible to assess the outcome of the Special Notice Process as it may relate to the Company's contribution to remediation costs.    If we were required to fully fund the remediation of a site, the statutory framework would allow us to pursue rights to contribution from other PRPs.

We are involved from time to time in litigation matters.  An unfavorable resolution of pending litigation could have a material adverse effect on our financial condition.  Litigation may result in substantial costs and expenses and significantly divert the attention of our management regardless of the outcome.  There can be no assurance that we will be able to achieve a favorable settlement of pending litigation or obtain a favorable resolution of litigation if it is not settled.  In addition, current and future litigation, governmental proceedings or environmental matters could lead to increased costs or interruptions of our normal business operations.

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Not applicable.

 

 

 

The Company leases its Lincoln, Rhode Island corporate headquarters, housing corporate offices and CAD segment administrative and retail facilities.  Our leased facility in Dong Guan City, China houses the CAD segment's manufacturing operations and the segment also leases administrative and/or warehouse facilities for its operations in the United Kingdom, France, Japan, Hong Kong, Taiwan, Singapore and China.  In addition, the CAD segment leases a  retail facility in the United Kingdom.

The Company's COG segment leases administrative and/or warehouse facilities in Florida and Colorado.

 

 

 

The Company was named as one of approximately ninety defendants in a contribution suit brought by CCL/Unilever relating to the J.M. Mills Landfill Site (the “Site”), which is part of the Peterson/Puritan Superfund Site in Cumberland, Rhode Island.  These complaints alleged that the Company was liable under CERCLA for contribution for Site investigation costs.  The Company has reached settlement of the case and paid a settlement amount of approximately $0.2 million in 2010.

The EPA is expected to select a remedy for the Site in 2013.   At that time, the EPA will initiate an administrative process (the "Special Notice Process") pursuant to CERCLA whereby the EPA will request that those entities that the EPA contends arranged for the disposal of hazardous materials at the Site (the PRPs), undertake the selected remedy at the Site.  The EPA contends that the Company is a PRP at the Site.  During the Special Notice Process, the Company and the other PRPs will engage in negotiations with the EPA regarding the remedy, and among themselves regarding the contribution of each PRP to overall remediation costs.  Neither the cost of the remedy nor the identity of all PRPs is known at this time.  Therefore it is not possible to assess the outcome of the Special Notice Process as it may relate to the Company's contribution to remediation costs. 

The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business.  To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

 

 

 

Not applicable.

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PART II

 

 

 

 

Market Information

 

The Company's Class A common stock is traded on NASDAQ (symbol: ATX).  There is no established trading market for the Company's Class B common stock.  At December 29, 2012, there were approximately 1,000 shareholders of record of the Company's Class A common stock and two shareholders of record of the Company's Class B common stock.  The weighted average numbers of total shares outstanding was 12,334,775 and 12,194,712 during 2012 and 2011, respectively.

 

Market Price of and Dividends on the Registrant's Common Equity and Related Shareholder Matters

 

High and low sales prices of Class A common stock for the last two years were:

 

The Company intends to retain earnings to finance the growth of the Company.

 

Performance Graph

 

The following graph compares the performance of the Company's Class A common stock to the Russell 2000 Index (as the Company's peer group index), the NYSE MKT Composite and the NASDAQ Composite over the Company's last five years.  The graph assumes that the value of the investment in the Company's Class A common stock and each index was $100 at December 31, 2007 and that all dividends were reinvested.

 

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
among the A.T. Cross Company, the Russell 2000 Index
the NYSE Amex Composite and the NASDAQ Composite

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The Company has chosen the Russell Group 2000 as a meaningful peer group against which to compare its performance.  The Russell Group 2000 represents a broad based group of small capitalization stocks and is generally believed to be indicative of market performance for small capitalization companies.

 

Issuer Purchases of Equity Securities

 

 

In 2008, the Company's Board of Directors authorized a plan to purchase up to 1.0 million shares of Cross Class A common stock, depending on market conditions.  On February 22, 2012, the Company’s Board of Directors authorized a 0.7 million share increase to the 2008 program.  Cumulatively, through December 29, 2012, the Company purchased approximately  1.1 million shares of stock under this plan for approximately $7.6 million at an average price per share of $6.71.  In 2012, the Company purchased a total of approximately 0.4  million shares under this plan for approximately $4.0 million at an average price per share of $10.04.

 

 

 

 

 

 

* Included in 2008 is a $3.9 million charge to operating income and net income for an impairment of goodwill.

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Results of Operations

 

Overview

 

A.T. Cross Company (“the Company”) is a designer and marketer of branded personal accessories including writing instruments, reading glasses, personal and business accessories and sunglasses.

The Company operates in competitive categories.  The Company has challenged itself to build upon its unique attributes in order to develop a vibrant, diversified and forward-looking company poised for sustainable growth and long-term profit.  Such attributes include: strong brand names, an over 160 year heritage, a reputation for quality and craftsmanship, a global distribution network, and a strong balance sheet.  The Company established several strategic initiatives to build upon these attributes and overcome its challenges, including: becoming an innovative leader in the fine writing category, extending the Cross brand into new categories, developing avenues for diversification, streamlining its CAD operating structure and seeking additional brand assets to add scale.  COG has provided the business with an avenue of diversification and added two new brands to the Company’s portfolio: Costa and Native.  These brands uphold the Company’s reputation as an innovative leader with award-winning high-quality products.  Details on how the Company's two business segments are achieving these initiatives are presented below.

In February 2013, the Company announced that it is exploring strategic alternatives for its Cross Accessory Division.  The Company has not made a decision to pursue any specific transaction or any other strategic alternative, and there is no set timetable for the strategic review process.

 

Cross Accessory Division (“CAD”)

 

The Company has been a manufacturer and marketer of fine quality writing instruments since 1846.  Sold primarily under the Cross brand, ballpoint, fountain and Selectip rolling ball pens and mechanical pencils are offered in a variety of styles and finishes.  Cross also manufactures and markets a line of FranklinCovey entry level price point refillable writing instruments.  Also under the Cross brand, CAD offers a variety of personal and business accessories including leather goods, reading glasses, desk sets and stationery.  The Company has license agreements with a third party to develop and sell Cross watches and cufflinks.

CAD is competing vigorously to build its position in terms of product innovation, marketing and merchandising.  To this end, a number of initiatives, many of which are described below, have been implemented.  In 2012, approximately 9% of CAD revenue was derived from new products launched into the marketplace.  In 2012, CAD launched several new writing instrument product lines:  Cross Click, Tech4, Sauvage Forever Pearl, Special Edition Year of the Snake, a Disney Anniversary pen as well as the addition of a stylus feature to our Tech3 multifunction pen.  The Company also launched several gift sets for its office superstore customers for the 2012 holiday season.

In 2012, all leather goods, reading glasses, watches, desk sets, cufflinks and stationery represented approximately 7% of CAD sales.  The Company's stationery collection expanded in 2012 with the addition of several new fashionable styles and colors.

In addition to bringing new products to market in 2012, Cross expanded the global self-serve program.  The Company rolled out over 300 new fixtures featuring a range of reading glasses, stationery and writing instruments.

The Cross brand has strong consumer awareness and, more importantly, consumers associate the Cross name with innovation, quality and style.  The strong awareness of our name and the positive attributes associated with our brand support the extension of the Cross brand into related personal accessory categories.  CAD has moved into categories that allow us to further utilize our existing sourcing infrastructure and global distribution network.  A priority for all of our brand extensions is to incorporate the quality, design and craftsmanship that consumers enjoy from Cross' fine writing instruments.  We have developed a foothold in these categories and look forward to further strengthening our presence in select categories in 2013.

 

Cross Optical Group (“COG”)

 

The Company's COG segment consists of its wholly-owned subsidiary, Cross Optical Group, Inc.  This business designs, manufactures and markets high-quality, high-performance polarized sunglasses under the brand names Costa and Native.

Founded in Florida in 1983, the Costa brand has developed a superior reputation for its advanced polarized lens technology and functional frame design.  Costa upholds the Company's commitment to delivering exceptional product, innovation and quality to consumers.  Costa's lenses are renowned for their clarity; the patented 580 lens technology is considered by many to be one of the best performing sunglass lens in the marketplace.  In 2011, Costa entered into the

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prescription sunglass business.  Costa’s core market has traditionally been the saltwater fishing enthusiast in the southeastern United States.  As such, Costa has a long-term commitment to conservation initiatives that protect and sustain vital fisheries.  Costa has expanded its marketing efforts to reach consumers beyond its core market by developing consumer awareness in other fishing categories,  geographies and demographics.  Costa sponsors related lifestyle activities such as Kenny Chesney concert tours and sells limited edition Kenny Chesney sunglasses.  Costa's collection features a broad range of styles that appeal to a wide consumer demographic.  The brand is expanding geographically in both domestic and international markets.

Native, which was founded in 1994, also specializes in polarized sunglasses.  Native products are feature-rich and are priced from $89 to $139.  The collection consists primarily of high-performance sport wraps that are designed for mountain and trail enthusiasts who are active in the “human powered sports” such as biking, running and climbing.  Native frames are very light weight and known for their exceptional fit, features sought after by professional athletes and active sport enthusiasts alike.  Native’s Odyssey series, launched in 2012, features the N3^™ lens; one of the most advanced polarized lenses on the market.

The creation of the Cross Optical Group has proven to be very successful.  As a result, the Company is benefiting from revenue diversification and a substantial contribution to the bottom line.

 

Comparison of Fiscal 2012 with Fiscal 2011

 

The following chart details net sales performance by segment and operating unit:

 

 

Consolidated net sales were $180.5 million in 2012 compared to $174.6 million in 2011.  The effect of foreign exchange was unfavorable to consolidated 2012 sales results by approximately $1.1 million, or 0.6 percentage point. 

CAD sales increases in the America and Asia regions were offset by declines in Europe.  The effect of foreign exchange was unfavorable to CAD 2012 sales results by approximately $1.1 million, or 1.0 percentage point.

COG sales in 2012 were driven by growth of the Costa brand.  The increase in Costa sales was due to new product launches, expanded distribution, an increase in revenue from repairs, apparel and accessories as well as the 2011 introduction of Costa Rx prescription sunglasses.  Native sales were lower due to supply chain issues.

The following chart details gross profit margins for both segments as well as the consolidated gross profit margins:

 

 

Consolidated selling, general and administrative (“SG&A”) expenses were approximately $75.2 million, 0.9% higher than 2011.  SG&A expenses were 41.6% of sales in 2012 compared to 42.6% of sales in 2011.  SG&A expenses for the CAD segment were approximately $45.3 million, or 46.5% of sales, compared to $47.2 million, or 46.2% of sales, in 2011.  Foreign currency exchange gains (losses) that are included in the CAD segment SG&A expenses approximated $0.3 million in fiscal 2012  and ($1.7) million in 2011.  COG segment SG&A expenses of $29.9 million, were 9.8% higher than 2011 primarily due to higher selling expenses related to the sales volume increase.

Research and development (“R&D”) expenses were approximately $2.7 million in 2012 and 2011.  R&D expenses were approximately 2% of sales in 2012 and 2011.

Interest expense was $0.5 million and $0.7 million in 2012 and 2011, respectively.  Lower interest expense in 2012 was due to lower average borrowings.

In 2012, the Company's effective tax rate was 28.3% compared to the Federal tax rate of 35.0%.  This difference was due to the effect of income sourced from lower taxed foreign jurisdictions.  The income tax expense was also favorably impacted by the recognition of $0.3 million of tax benefits, the realization of which was previously considered uncertain.  For an analysis of income taxes, see Note J to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

As a result of the foregoing, consolidated net income in fiscal 2012 was $9.1 million ($0.74 basic and $0.70 diluted net income per share) compared to fiscal 2011 net income of $8.3 million ($0.68 basic and $0.64 diluted net income per share).

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Comparison of Fiscal 2011 with Fiscal 2010

 

The following chart details net sales performance by segment and operating unit:

 

 

Consolidated net sales were $174.6 million in 2011 compared to $158.3 million in 2010.  The effect of foreign exchange was favorable to consolidated 2011 sales results by approximately $2.4 million, or 1.5 percentage points. 

CAD sales benefitted from the economic recovery as every region reported higher sales performance from a year ago.  The effect of foreign exchange was favorable to CAD 2011 sales results by approximately $2.4 million, or 2.4 percentage points.

COG sales in 2011 were primarily driven by growth of the Costa brand.  The increase in Costa sales was due to new product launches aimed to appeal to a non-fishing demographic, expanded distribution, an increase in revenue from repairs, apparel and accessories as well as the 2011 introduction of Costa Rx prescription sunglasses.  Native brand sales also increased from the prior year.

The following chart details gross profit margins for both segments as well as the consolidated gross profit margins:

 

 

Consolidated selling, general and administrative (“SG&A”) expenses were approximately $74.4 million, 8.2% higher than 2010.  SG&A expenses were 42.6% of sales in 2011 compared to 43.5% of sales in 2010.  SG&A expenses for the CAD segment were approximately $47.2 million, or 46.2% of sales, compared to $45.7 million, or 46.7% of sales, in 2010.  Foreign currency exchange losses that are included in the CAD segment SG&A expenses approximated $1.7 million and $1.2 million in fiscal 2011 and 2010, respectively.  COG segment SG&A expenses of $27.2 million, were 17.7% higher than 2010 primarily due to higher selling and marketing expenses related to the sales volume increase.

Research and development (“R&D”) expenses were approximately $2.7 million in 2011 and $2.8 million in 2010.  R&D expenses were approximately 2% of sales in 2011 and 2010.

Interest expense was $0.7 million and $1.0 million in 2011 and 2010, respectively.  Lower interest expense in 2011 was due to lower interest rates.

Other (expense) income was expense of $0.2 million and $0.3 million in 2011 and 2010, respectively.

In 2011, the Company's effective tax rate was 25.5% compared to the Federal tax rate of 35.0%.  This difference was due to the effect of income sourced from lower taxed foreign jurisdictions.  For fiscal years 2008 through 2010, the Company’s earnings in China were subject to a tax rate of 12.5%, which is half the statutory tax rate.  Beginning in 2011, earnings in China are subject to the full statutory rate of 25%.  The income tax expense was also favorably impacted by the recognition of $0.2 million of tax benefits, the realization of which was previously considered uncertain.  For an analysis of income taxes, see Note J to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

As a result of the foregoing, consolidated net income in fiscal 2011 was $8.3 million ($0.68 basic and $0.64 diluted net income per share) compared to fiscal 2010 net income of $6.2 million ($0.49 basic and $0.48 diluted net income per share).

 

Liquidity and Capital Resources

 

Historically, the Company's sources of liquidity and capital resources have been its cash and cash equivalents (“cash”), short term investments, cash generated from operations and amounts available under the Company's line of credit.  These sources have been sufficient in the past to support the Company's routine operating requirements, capital projects, contributions to the retirement plans, stock repurchase programs and debt service.  The Company expects its future cash needs in 2013 will be met by these historical sources of liquidity and capital.

Cash provided by operating activities was $16.9 million for fiscal 2012 reflecting continued positive cash generation from operations.  The Company was able to fund financing and investing activities described below and end 2012 with a cash and short-term investments balance of $27.3 million at December 29, 2012,  up $1.4 million from December 31, 2011.

Total inventory was $38.0 million at December 29, 2012, an increase of $1.5 million since December 31, 2011.  CAD inventory decreased $1.6 million and COG inventory increased $3.1 million.  The primary reason for the decrease in CAD inventory was strict inventory control due to declining CAD sales.  COG’s increase was due to increased levels of Native inventory and higher projected first quarter 2013 sales.

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The Company made cash contributions in 2012 of approximately $5.8 million to its defined benefit pension plans, $2.5 million of which was an additional voluntary contribution.  The Company expects to contribute $2.1 million to its defined benefit pension plans in 2013.  The Company expects to meet or exceed its minimum funding requirements for its defined benefit plans in future years.  The Company anticipates these future funding requirements to be between $2.1 million and $3.1 million per year.  Additionally, the Company made cash contributions in 2012 of approximately $0.7 million to its defined contribution retirement plans and expects to contribute $0.9 million to its defined contribution retirement plans in 2013

Cash used in investing activities of $6.2 million principally reflects additions to property, plant and equipment of approximately $5.6 million.  In fiscal 2013, the Company expects capital expenditures to be approximately $8.0 million.

Cash provided by financing activities for the fiscal 2012 principally reflects the repayment of $6.2 million on the Company's credit facility and the acquisition of treasury shares under the Company's stock buyback program.  In 2008, the Company's Board of Directors authorized a plan to purchase up to 1.0 million shares of Cross Class A common stock, depending on market conditions.  On February 22, 2012, the Company’s Board of Directors authorized a 0.7 million share increase to the 2008 program.    Cumulatively, through December 29, 2012, the Company purchased approximately 1.1 million shares of stock under this plan for approximately $7.6 million at an average price per share of $6.71.  In 2012, the Company purchased a total of approximately 0.4 million shares under this plan for approximately $4.0 million at an average price per share of $10.04.

The Company expects fiscal 2013 research and development expenses to be approximately $3.0 million.

The Company has a $40 million secured line of credit with a bank.  This credit facility matures on July 28, 2013.    The Company intends to secure a new credit facility prior to July 28, 2013.    Under the current agreement, the Company has the option to borrow at various interest rates depending upon the type of borrowings made and the Company's consolidated leverage ratio.  At December 29, 2012, the Company had $15.0 million outstanding on this line of credit, bearing interest at a rate of 2.0% and the unused and available portion was $25.0 million.  The Company was in compliance with its various debt covenants as of December 29, 2012.  The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures and a minimum ratio of adjusted EBITDA to required debt service payments over any four-quarter period, each of which is calculated in accordance with the agreement:

 

The Company believes that existing cash and cash provided by operations, supplemented as appropriate by the Company's borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, the stock repurchase plans and contributions to the retirement plans.  Should operating cash flows in 2013 not materialize as projected, the Company has a number of planned alternatives to ensure that it will have sufficient cash to meet its operating needs.  These alternatives include implementation of strict cost controls on discretionary spending and delaying non-critical research and development, capital projects and completion of the stock repurchase plan.

At the end of fiscal 2012, cash and short-term investments available for domestic operations was approximately $17.3 million and cash available for international operations was approximately $10.0 million.

 

Contractual Obligations and Commercial Commitments

 

Interest rate swap agreements effectively fix the interest rate on a portion of the Company's line of credit at 1.2%.

The Company leases manufacturing, office and warehouse space and certain equipment under non-cancelable operating leases.  All leases expire prior to the end of 2026.  Future minimum lease payments under all non-cancelable leases, including renewal options the Company believes it will exercise, and other contractual obligations at December 29, 2012 were approximately:

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Off Balance Sheet Arrangements

 

The Company has no material off balance sheet arrangements.

 

Impact of Inflation and Changing Prices

 

The Company's two operating segments are subject to the effects of general inflation as well as fluctuations in foreign currencies.  Policies and programs are in place to manage the potential risks in these areas.  The Company has generally been successful in controlling cost increases due to general inflation.  The Company continues to review its suppliers in order to obtain lower costs and higher quality on many of its raw materials and purchased components.

The Company typically enters into foreign currency exchange contracts to economically hedge that portion of its net financial position exposed to foreign currency fluctuations.

 

New Accounting Pronouncements

 

For a description of new accounting pronouncements that affect the Company and the status of the Company's implementation thereof, see the “New Accounting Pronouncements” section of Note A to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.  None are expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

Critical Accounting Policies and Estimates

 

Management's discussion and analysis of financial condition, results of operations and cash flows are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosures of contingent liabilities.  We evaluate our policies and estimates on an ongoing basis, including those related to tax contingencies, inventory adjustments, warranty reserves, retirement obligations, impairment of assets and revenue recognition.  Management bases its estimates on historical experience and various other assumptions that are believed to be 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.

We have identified the following policies as critical to an understanding of our results of operations and financial condition.  This is not a comprehensive list of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management's judgment in its application.  There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.  For further discussion of our accounting policies, see Note A “Significant Accounting Policies” to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

 

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Inventory Methods and Realizable Value.  Our global inventories are carried at the lower of cost or market, which requires us to estimate adjustments for both obsolescence and the market value we can expect to receive for our on hand inventory.  Since we are required to produce our product with sufficient lead time to satisfy global distribution and expected demand during seasonal peak periods, we are subject to the risks of consumer acceptance of the products we have produced.  We assess our need for obsolescence and market value adjustments based on a variety of factors including historical demand, future marketing plans and alternative uses for raw material and work-in-process.

 

Warranty Reserves.  CAD's Cross-branded writing instruments are sold with a full warranty of unlimited duration against mechanical failure.  Costa and Native sunglasses are sold with a lifetime warranty against defects in materials and workmanship.  In establishing the accrual for warranty costs, management analyzes trends of several factors, measured over a period of several years that impact the Company's cost to service the warranties.  The most significant factors include: the operating costs of the service department, unit sales, the number of units that are returned for warranty repair and the cost of product repairs.  The estimates affecting the warranty reserve are updated annually.

 

Retirement Obligations.  Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of pension expense and liability measurement.  We evaluate these critical assumptions annually.  Other assumptions involve demographic factors such as retirement, mortality, turnover and rate of compensation increases.  The discount rate enables us to state expected future cash flow as a present value on the measurement date.  The guideline for setting this rate is a high-quality long-term corporate bond rate.  A lower discount rate increases the present value of benefit obligations and increases pension expense.  We decreased our discount rates to 3.73% in 2012 from 4.21% in 2011 on domestic plans and to 3.3% in 2012 from 4.7% in 2011 on foreign plans, to reflect market interest rate conditions.  To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class.  A lower expected rate of return on pension plan assets will increase pension expense.  Our long-term expected return on plan assets was 7.8% in 2012 and 2011 for domestic plans, and 2.7% in 2012 and 3.8% in 2011 for foreign plans. 

 

Impairment of Long-Lived Assets.    Goodwill and other indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances occur that would indicate a potential decline in their fair value.  The Company performs the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise.  The Company has identified two reporting units, consisting of the CAD and COG segments.  In 2012 and 2011, all goodwill and indefinite-lived intangibles were held by the COG segment.

In 2011, the Company determined the fair value of the COG reporting unit’s goodwill using established income and market valuation approaches.  The test resulted in a fair value of 139% in excess of the reporting units carrying value, including the goodwill.  In 2012, under Accounting Standards Update (“ASU”) No 2011-08, “Testing Goodwill for Impairment,” the Company performed a qualitative assessment to determine if further impairment testing was necessary.  This qualitative assessment is intended to determine whether it is more likely than not (having a likelihood of more than 50%) that the fair value is less than its carry amount.  In making its assessment, the Company considered a number of factors, such as macro-economic conditions, industry and market considerations, cost factors, segment financial performance, entity-specific events and share price.  Based upon the above factors, it is considered more likely than not (having a likelihood of more than 50%) that the fair value of the COG reporting unit is more than its carrying value.  Therefore based on the qualitative assessment, goodwill was not considered impaired as of November 24, 2012.

The Company determined the fair value of the COG reporting unit’s indefinite-lived intangible assets, consisting of two trade names, “Costa” ($3.4 million carrying value) and “Native” ($3.5 million carrying value), using a forward-looking relief from royalty model.  The significant assumptions used in the forward-looking relief from royalty method include: revenue growth, royalty rates and discount rate.  The Company performed a sensitivity analysis on the significant assumptions and has determined that a change in its assumptions, as follows, would not impact its conclusion regarding the fair value of the Costa trade name: reduce projected revenue growth rates by 10%, reduce projected royalty rate by 5.0% or increase the discount rate by 100 basis points.  The Native trade name is more sensitive to changes in the assumptions underlying the relief from royalty method, particularly projected revenue growth rates.  In order to recover the asset in full, a five year average growth rate of 10% needs to be achieved.  Each 100 basis point reduction in the assumed growth rate would result in an impairment of approximately $0.1 million.  The Company has determined that indefinite-lived intangibles were recoverable as of December 29, 2012.

 

Revenue Recognition.  Revenue recognition requires estimates of product returns, discounts and rebates at the time revenue is recognized.  These estimates are based on customer communication and historical experience.  Should these estimates change, there could be a material effect on revenue recognized.

 

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For additional information regarding management's estimates, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K and “Forward-Looking Statements” below.

 

Forward-Looking Statements

 

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “propose,” “should,” “will” and similar terms and phrases are used in this Annual Report on Form 10-K to identify forward-looking statements, including but not limited to the performance of Cross branded writing instruments, readers and personal accessory products; consumers’ willingness to continue to participate in the writing instrument category; consumers’ willingness to continue to engage in Costa’s prescription sunglass program and to respond favorably to Native’s N3 lens technology; the planned geographic and demographic expansion of Costa and Native; statements related to the introduction of new products; statements related to sales growth in our CAD business via cross.com and expansion of our licensing efforts; the availability of necessary raw materials and manufacturing technologies at favorable pricing terms; anticipated compliance with laws and regulations (including but not limited to environmental laws); and anticipated sufficiency of available working capital.  These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable.  These statements also relate to our future prospects, developments and business strategies.

These forward-looking statements are made based on management's expectations and beliefs concerning future events affecting the Company and are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond our control.  These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.  For a discussion of risks and uncertainties associated with these forward-looking statements, see “Risk Factors” in Item 1A of this Annual Report on Form 10-K. 

Forward-looking statements speak only as of the date the statements are made.  You should not put undue reliance on any forward-looking statements.  The Company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws.  If the Company does update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.  Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the SEC.

 

 

 

Current economic conditions and market disruptions may adversely affect the Company's business and results of operations.  Financial markets throughout the world have been experiencing extreme disruption in recent months, including, among other things, volatility in security prices, diminished liquidity and credit availability, rating downgrades and declining valuations of certain investments, failure and potential failures of major financial institutions and unprecedented government support of financial institutions.  These developments and the related general economic downturn may adversely impact the Company's business and financial condition in a number of ways, including impacts beyond those typically associated with other recent downturns in the U.S. and foreign economies.  The current tightening of credit in financial markets and the general economic downturn may adversely affect the ability of Cross' customers, suppliers, and channel partners (e.g., distributors) to obtain financing for purchases and operations.  The tightening could result in a decrease in demand for the Company's products, negatively impact Cross' ability to collect its accounts receivable on a timely basis, result in additional reserves for uncollectible accounts receivable being required, and in the event of a contraction in Cross' sales, could require additional reserves for inventory obsolescence.

Foreign currency exchange rates and fluctuations in those rates may affect the Company's ability to realize projected growth rates in its sales and earnings.  The Company derives approximately 38% of its revenues from outside the United States.  The Company's ability to realize projected growth rates in sales and earnings could be adversely affected if the U.S. dollar strengthens significantly against foreign currencies.  The Company's foreign exchange exposure is generated primarily from its international operating subsidiaries.  The Company seeks to minimize the impact of foreign currency fluctuations by hedging certain foreign currency denominated balance sheet positions with foreign currency forward exchange contracts.  Most of these contracts are short-term, generally expire in one to three months and a 5% change in exchange rates would not subject the Company to material market risk.  Although the Company has programs in place to manage foreign currency exchange risk on certain foreign currency denominated balance sheet positions, and on a portion of certain foreign currency denominated cash flows, significant volatility and fluctuations in the rates of exchange for the U.S. dollar against currencies such as the Euro, the British Pound, the Chinese Renminbi and the Japanese Yen could adversely affect the Company's financial position and results of operations.

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The Company maintains a $40 million secured line of credit with a bank.  Under this agreement, the Company has the option to borrow at various interest rates depending upon the type of borrowings made and the Company's consolidated leverage ratio.  The Company believes that changes in interest rates would not be material to its operations, due to its anticipated level of borrowings.  There was $15.0 million and $21.2 million outstanding under the Company's line of credit at December 29, 2012 and December 31, 2011, respectively.

The Company entered into interest rate swap agreements that effectively fix the interest rate on a portion of its line of credit at 1.2% per annum.  At December 29, 2012, the notional value of the interest rate swap was $15.0 million.

 

 

 

 

 

 

INDEX

 

 

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
A.T. Cross Company
Lincoln, Rhode Island

We have audited the accompanying consolidated balance sheets of A.T. Cross Company and subsidiaries (the “Company”) as of December 29, 2012 and December 31, 2011, and the related consolidated statements of income, comprehensive income,  changes in shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2012.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 2012 and December 31, 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 29, 2012, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.

 

 

 

 

 

DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 13, 2013

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CONSOLIDATED BALANCE SHEETS
A.T. CROSS COMPANY & SUBSIDIARIES

 

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF INCOME
A.T. CROSS COMPANY & SUBSIDIARIES

 

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
A.T. CROSS COMPANY & SUBSIDIARIES

 

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
A.T. CROSS COMPANY & SUBSIDIARIES

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

A.T. CROSS COMPANY & SUBSIDIARIES

 

 

 

 

 

 

 

See notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.T. CROSS COMPANY & SUBSIDIARIES
December 29, 2012

 

 

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation and Nature of Operations:  The consolidated financial statements include the accounts of A.T. Cross Company and its subsidiaries (the “Company”).  Upon consolidation, intercompany accounts and transactions are eliminated.

The Company has two reportable segments: Cross Accessory Division (“CAD”), and Cross Optical Group (“COG”).  The Company's CAD segment designs, manufactures and markets writing instruments throughout the world and is an OEM of writing instruments.  Writing instrument products are sold under the Cross brand as well as the FranklinCovey brand.  They include ball-point pens, fountain pens, Selectip rolling ball pens, mechanical pencils and writing instrument accessories such as refills and desk sets.  Also under the Cross brand, CAD offers a variety of personal and business accessories including leather goods, reading glasses, desk sets and stationery.  The Company has license agreements with a third party to develop and sell Cross watches and cufflinks.  The Company's COG segment designs, manufactures and markets sunglasses throughout the United States under the Costa and Native brand names.  The Company evaluates segment performance based upon operating profit or loss.  The Company's reportable segments are strategic business units that offer different product lines.  They are managed separately, as each unit requires different technologies and marketing strategies.

The Company operates on a 52/53 week fiscal year, ending on the last Saturday closest to December 31.  A fiscal year usually consists of four 13 week fiscal quarters.  Fiscal 2008 was a 53 week year with 14 weeks in the fourth quarter.  Fiscal years 2012, 2011, 2010 and 2009 were 52-week years ended December 29, 2012, December 31, 2011, January 1, 2011 and January 2, 2010, respectively.   The Company has historically recorded its highest sales in the fourth quarter.

The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated to the date of issuance of these financial statements.

The accounting policies of the Company are described in this summary of significant accounting policies.

 

Accounting for Estimates:  The preparation of financial statements, in accordance with accounting principles generally accepted in the United States of America (“GAAP”), requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements.  Actual results may differ from these estimates.  The significant estimates in the Company's consolidated financial statements include sales returns and allowances, allowance for doubtful accounts receivable, realizable value of inventory, impairment of long-lived assets and goodwill, warranty, retirement obligations and income taxes.

 

Cash Equivalents and Short-Term Investments:  The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  Short-term investments are stated at fair value.  Gains or losses on short-term investments, both realized and unrealized, are included in other (expense) income.  At December 29, 2012 and December 31, 2011, approximately 31% and  40%, respectively, of the Company's cash and cash equivalents were on deposit with one financial institution.

 

Allowance for Doubtful Accounts:  The Company determines its allowance for doubtful accounts based on historical percentages of aged accounts receivable and specific customer accounts when, in management’s opinion, they are deemed uncollectable.  Following is a summary of the allowance for doubtful accounts for the three years ended December 29, 2012:

 

 

Inventories:  The Company’s inventories are valued at the lower of cost or market.  Cost is determined using the FIFO method.

 

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Property, Plant and Equipment, and Related Depreciation:  Property, plant and equipment are stated at historical cost.  Depreciation expense was $5.0 million, $5.3 million and $5.4 million in fiscal 2012, 2011 and 2010, respectively.  Provisions for depreciation are computed using a combination of accelerated and straight-line methods, which are intended to depreciate the cost of such assets over their estimated useful lives, which are as follows:

 

 

 

The components of Property, Plant and Equipment are as follows:

 

 

Long-Lived Assets:  The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value, less the cost to sell.

 

Goodwill and Other Intangible Assets:  Goodwill and certain intangible assets with indefinite lives are not amortized but are subject to annual impairment tests, more frequently if events or circumstances occur that would indicate a potential decline in their fair value.  The Company has identified two reporting units, consisting of the CAD and COG segments.  The Company performs the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise.  The Company determines the fair value of the reporting units using accepted accounting standard methodologies and the values of certain intangible assets with indefinite lives, consisting of two COG segment trade names, using a forward-looking relief from royalty model.

 

Warranty Costs:  CAD's Cross-branded writing instruments are sold with a full warranty of unlimited duration against mechanical failure.  CAD's accessories are sold with a one-year warranty against mechanical failure and defects in workmanship and timepieces are warranted for a period of two years.   Costa and Native sunglasses are sold with a lifetime warranty against defects in materials and workmanship.  Estimated warranty costs are accrued at the time of sale.  The most significant factors in the estimation of warranty cost liabilities include the operating efficiency and related cost of the service department, unit sales and the number of units that are eventually returned for warranty repair.  The current portions of accrued warranty costs were $0.4 million at December 29, 2012 and $0.5 million at December 31, 2011, and were recorded in accrued expenses and other liabilities.  The following chart reflects the activity in aggregate accrued warranty costs:

 

 

 

Revenue Recognition:  Revenue from sales is recognized when the following criteria are met: persuasive evidence of an arrangement exists, title to the goods has passed to the customer, the sales price is fixed or determinable, and collection of the sales price is reasonably assured.  Provisions are made at the time the related revenue is recognized for estimated product returns, discounts and rebates.

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Marketing Support Costs:  The costs of marketing support, including advertising, are charged to expense as incurred and amounted to approximately $13.8 million, $13.7 million and  $12.3 million for fiscal 2012, 2011 and 2010, respectively.  Accrued marketing support expenses were approximately $2.5 million at December 29, 2012 and $2.3 million at December 31, 2011 and are included in accrued expenses and other liabilities.

 

Derivatives:  The Company has a program in place to manage foreign currency risk.  As part of that program, the Company can enter into foreign currency exchange contracts to hedge anticipated foreign currency transactions or commitments, primarily purchases of materials and products from foreign suppliers, and certain foreign currency denominated balance sheet positions.  The terms of the contracts are generally less than three months. Forward exchange contracts generally do not qualify for hedge accounting and gains and losses are included in SG&A expenses.

The Company also uses interest rate swaps to manage its exposure to changing interest rates that result from variable rate debt.  These swaps effectively fix the interest rate on a portion of the Company's line of credit at 1.2%.

Realized and unrealized gains and losses on contracts intended to hedge specific forecasted transactions or commitments, if any, that are designated and qualify for hedge accounting are deferred and recorded as a component of accumulated other comprehensive loss and accounted for as part of the transaction.  Contracts are recorded at fair value on the balance sheet as a component of other current assets or accrued expenses and other liabilities.

 

Stock-Based Compensation:  The Company recognizes stock-based employment compensation arrangements based on the estimated fair value of stock-based awards exchanged for employee services received and recognizes compensation cost based on the fair value of the award on the date of grant, recognized ratably over the requisite service period for awards expected to vest.  The service period is the period over which the employee performs the related services, which is normally the same as the vesting period.

 

Income Taxes:  Provisions for Federal, state and non-U.S. income taxes are calculated on reported income before income taxes based on current tax law and also include, in the current period, the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities.  Such provisions differ from the amounts currently receivable or payable because certain items of income and expense are recognized in different time periods for financial reporting purposes than for income tax purposes.  Significant judgment is required in determining income tax provisions and evaluating tax positions.

The Company records a liability associated with an uncertain income tax benefit, for a position taken or intended to be taken, if we determine that it is not more likely than not that such benefit will be sustained upon review of the taxing authority.  The Company also records a tax position as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.

 

Basic and Diluted Net Income Per Share:  Basic net income per share is computed by dividing net income by the weighted average number of total shares of Class A and Class B common stock outstanding during the year.  Diluted net income per share is computed by dividing net income by diluted weighted average shares outstanding.  Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares.  To the extent that their effect is dilutive, potential common shares include common stock options and non-vested equity shares based on the treasury stock method.  There is no anti-dilutive effect of securities for the three years ended December 29, 2012.

 

Environmental Contingencies:  The Company is subject to contingencies pursuant to environmental laws and regulations under various state, Federal and foreign laws, including CERCLA.  The Company typically estimates potential costs based on information obtained from the U.S. Environmental Protection Agency, or counterpart state agency and/or studies prepared by independent consultants, including the total estimated costs for the site and the expected cost-sharing, if any, with other “potentially responsible parties,” and the Company accrues liabilities when they are probable and estimable.

 

New Accounting Pronouncements:  In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment.  The ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the goodwill accounting standard.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted this pronouncement in 2012.  In July 2012, the FASB issued an ASU which expanded the scope of this valuation testing methodology to include all indefinite-lived assets and is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  We do not expect the new ASU to have a material effect on our financial position, results of operations or cash flows. 

 

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NOTE B - INVENTORIES

 

The Company’s inventories are valued at the lower of cost or market.  Cost is determined using the FIFO method.  The components of inventory are as follows:

 

 

 

NOTE C - RESTRUCTURING CHARGES

 

In 2008, the Company restructured Cross Accessory Division ("CAD") Lincoln based manufacturing operations in order to increase its competitiveness in the global marketplace by further leveraging the investment in China manufacturing operations.  The Company also closed several underperforming retail stores and reduced headcount at its Lincoln facility.  These restructuring programs moved Lincoln manufacturing operations to the Company's China facility and reduced the total retail store count by four.   Approximately 50 manufacturing positions and 27 sales and administrative positions in the United States, and four sales and administrative positions in the United Kingdom were affected by these programs.  In 2009, the Company expanded its restructuring efforts to further reduce headcount at its Lincoln and European facilities.  The Company incurred pre-tax restructuring charges of approximately $4.4 million since the inception of these programs.  Of this $4.4 million, approximately $2.4 million was for severance and related expenses and approximately $2.0 million was for transition and other costs.    Restructuring charges paid in fiscal 2010 were $0.8 million.  No restructuring charges were incurred in fiscal 2010, 2011 or 2012. 

 

NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment tests, more frequently if events or circumstances occur that would indicate a potential decline in their fair value.  The Company has identified two reporting units, consisting of the CAD and COG segments.  The Company performs the assessment annually during the fourth quarter or on an interim basis if potential impairment indicators arise.  The fair value of the reporting unit's goodwill is determined using accepted accounting standard methodologies and the fair value of other indefinite-lived intangible assets, consisting of two COG segment trade names, is determined using a forward relief from royalty method.

In 2012, 2011 and 2010, the Company's annual impairment tests indicated that all remaining goodwill and indefinite-lived intangibles were not impaired.    The cumulative goodwill impairment loss of $3.9 million related to the CAD segment.

At December 29, 2012 and December 31, 2011, the carrying value of goodwill was approximately $15.3 million.  The entire goodwill balance is related to the COG segment and $11.9 million of it, the goodwill resulting from the 2008 acquisition of Native, is expected to be tax deductible.    As the goodwill is all U.S. Dollar denominated, there is no translation adjustment.

Other intangibles consisted of the following:

 

 

 

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The Company uses the straight-line method to amortize patents and trademarks over an average five-year life and customer relationships over a seven-year life.  Amortization expense was approximately $0.7 million, $0.7 million and $1.2 million for fiscal years 2012, 2011 and 2010,  respectively.  The estimated future amortization expense for other intangibles remaining as of December 29, 2012 is as follows:

 

 

 

NOTE E - LINE OF CREDIT

 

The Company maintains a $40.0 million revolving line of credit with Bank of America, N.A. (the “Bank”).  Under the line of credit agreement, the Bank agreed to make loans to the Company in an aggregate amount not to exceed $40.0 million, including up to $10.0 million equivalent in Eurocurrency loans denominated in pounds sterling or Euro (“Eurocurrency Loans”) and up to $30.0 million of other committed loans to the Company (“Committed Loans”) at any time. As part of the aggregate availability, the Bank may also issue up to $7.5 million in letters of credit.  Subject to the limits on availability and the other terms and conditions of this credit agreement, amounts may be borrowed, repaid and reborrowed without penalty.  This credit facility matures on July 28, 2013.

The interest rate for the Committed Loans will be, at the Company's option, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or (ii) the higher of the federal funds rate plus 50 basis points or the Bank's prime rate plus an applicable margin.  The interest rate for any Eurocurrency Loans will be an interest settlement rate for deposits in pounds sterling or Euro plus an applicable margin.  The applicable margin for LIBOR and Eurocurrency loans will be an amount between 1.75% and 2.25%, and the applicable margin for federal funds or the Bank's prime rate will be an amount between 0.25% and 0.75%, which will vary from time to time based upon the Company's consolidated leverage ratio.

Under the line of credit agreement, the Company has agreed to comply with certain affirmative and negative covenants.  The most restrictive covenant requires the Company to maintain a maximum ratio of consolidated funded indebtedness to consolidated adjusted EBITDA over any four-quarter period.  The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures, each of which is calculated in accordance with the agreement.  Amounts due under the credit agreement are guaranteed by certain domestic and foreign subsidiaries of the Company.  Amounts due are also secured by a pledge of the assets of the Company and those of certain of its domestic subsidiaries.

At December 29, 2012, the outstanding balance of the Company's line of credit was $15.0 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $25.0 million.   At December 31, 2011, the outstanding balance of the Company's line of credit was $21.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $18.8 million.

 

NOTE F - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME ITEMS

 

 

 

NOTE G - FINANCIAL INSTRUMENTS

 

The following table details the United States dollar equivalent of foreign exchange contracts outstanding at December 29, 2012 and December 31, 2011, along with maturity dates and any unrealized gain (loss).  The net unrealized gain (loss) is recorded in SG&A in the consolidated statements of income, since the Company did not apply hedge accounting to these contracts.

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Foreign currency exchange gains (losses) that are included in SG&A expenses approximated $0.3  million, ($1.7) million and ($1.2) million in fiscal 2012, 2011 and 2010, respectively.

In the third quarter of 2010, the Company entered into a forward interest rate swap agreement with an initial notional amount of $15.0 million and a term of three years.  This swap effectively fixes the interest rate on a portion of the Company’s line of credit at approximately 1.2%.  The item being hedged is the first interest payment to be made on $15.0 million of principal expected to occur each month beginning March 31, 2011.  The Company measures hedge ineffectiveness using the “hypothetical” derivative method.  This swap has been designated a cash flow hedge and the effect of the mark-to-market valuation is recorded as an adjustment, net of tax, to accumulated other comprehensive loss.  From inception to December 29, 2012, the effect of the mark-to-market valuations, net of tax, was an unrealized loss of approximately $0.1 million and is included as a component of accumulated other comprehensive loss.

The fair value of forward foreign exchange contracts, based on quoted spot exchange rates, are reported in other current assets or accrued expenses and other liabilities.  The fair value of cash and cash equivalents approximates the recorded amounts, due to the short period of time to maturity.  The carrying amount of long-term debt approximates fair value as a result of the variable interest rate.  The fair value of the interest rate swap agreements, based upon market observable data, was ($0.1) million at December 29, 2012 and ($0.2) million at December 31, 2011 and was reported in accrued expenses and other liabilities.

 

NOTE H - EMPLOYEE BENEFIT PLANS

 

The Company has non-contributory defined benefit pension plans and defined contribution retirement plans (consisting of savings plans and a non-contributory profit sharing plan), which cover substantially all domestic employees.

On March 30, 2006, the Company's Board of Directors voted to freeze the Company's domestic non-contributory defined benefit pension plan effective May 20, 2006.

The Company's matching contributions to its savings plans are made in cash. In fiscal 2012, 2011 and 2010 expenses related to this plan were approximately $0.7 million, $0.8 million and $0.7 million, respectively.  There were no profit sharing plan contributions during this three-year period.  The Company also maintains a deferred compensation plan that is offered to certain key executives and non-employee directors.  Employees of foreign subsidiaries generally receive retirement benefits from Company sponsored defined benefit or defined contribution plans or from statutory plans administered by governmental agencies in their countries.  The Company does not provide its employees with any postretirement benefits other than those described above.

The Company's measurement date for these benefits is the Company's fiscal year end.

Benefits under the defined benefit plans are based on the employee's years of service and compensation, as defined.  While there is no requirement under any of these plans to invest in the Company's stock, the defined contribution retirement

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plan offers the Company's stock as an investment option.  The Company's funding policy is consistent with applicable local laws and regulations.

The following chart sets forth the defined benefit plans' combined funded status and amounts recognized in the Company's consolidated balance sheet at the end of each fiscal year:

 

 

 

 

 

 

 

 

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The Company decreased the discount rate on domestic and foreign plans in 2012 to reflect market interest rate conditions.  In establishing the long-term rate of return on assets assumption of 7.8%, the Company indexed its targeted allocation percentage by asset category against the long-term expected returns on the frozen domestic plan for those asset categories.  That weighted-average return approximates 7.8%.  The Company monitors investment results against benchmarks such as the Russell 1000 Growth Index and the Russell 2000 Value Index for the equity portion of the portfolio and the Barclays Capital US Long Credit A+ Index for fixed income investments.  Meeting or exceeding those benchmarks over time would provide a reasonable expectation of achieving the 7.8% assumption.

 

 

 

The investment objective of the Plan is to exceed the actuarial long-term rate of return on assets assumption of 7.8%.  To that end, it is the Plan's practice to invest the assets in accordance with the targeted allocation established for each asset category.  These targeted asset allocation ranges have been established in accordance with the overall risk and return objectives of the portfolio.  The Plan employs other risk management practices that stress diversification and liquidity.  For equity investments, no more than 10% of the equity portfolio can be invested in one issuer and typically no more than 20% of equity assets can be invested in one industry.  Shares must be listed on major stock exchanges to assure liquidity.  Debt securities are similarly governed by risk management rules.  No more than 5% of the total portfolio may be invested in one issuer (except the United States government), and no one issuer can exceed 5% of the outstanding shares of that issuer.  There are also quality ratings associated with debt securities that the Plan managers must adhere to.  Certain assets or transactions are prohibited in the management of Plan assets, such as commodities, real estate (except mutual funds or REITS), venture capital, private placements, purchasing securities on margin and short selling.

The Company made cash contributions in 2012 of approximately $5.8  million to its defined benefit pension plans, $2.5 million of which was an additional voluntary contribution.  The Company expects to contribute $2.1 million to its defined benefit pension plans in 2013. 

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

 

 

 

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The fair value framework requires the categorization of pension plan assets into three levels based upon the assumptions (inputs) used to price the pension plan assets.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

 

 

 

The fair values of our financial assets are categorized as follows:

 

 

 

 

NOTE I - OMNIBUS INCENTIVE PLAN (THE “OI PLAN”)

 

The Company's OI Plan permits the Compensation Committee of the Board of Directors of the Company to grant various long-term incentive awards, generally equity based, to officers and key employees from one pool of reserved shares.  The OI Plan provides for grants of awards, including but not limited to Non-Qualified Stock Options, at an exercise price determined by the Compensation Committee; Stock Appreciation Rights, which are rights to receive an amount equal to the increase, between the date of grant and the date of exercise, in the fair market value of the number of shares of common stock subject to the Stock Appreciation Right; Non-Vested Equity Shares, which are common shares that have certain conditions attached to them that must be satisfied in order to have unencumbered rights to them; and Performance Awards, which are awards in common shares or cash.  The OI Plan has no definite expiration date but may be terminated by the Board of Directors at any time.  At December 29, 2012, there were 1,646,586 shares reserved and 537,596 shares available to be issued under the OI Plan.

The fair value of each stock option granted under the Company's OI Plan was estimated on the date of grant using the Black-Scholes option-pricing model.  It should be noted that the option-pricing model used was designed to value readily tradable stock options with relatively short lives.  The options granted to employees are not tradable and have contractual lives of up to ten years unless employment is terminated.  However, management believes that the assumptions used and the model applied to value the awards yield a reasonable estimate of the fair value of the grants made under the circumstances. No stock options were granted in 2012.  At December 29, 2012, the total unamortized expense for stock options under the OI Plan was approximately $0.1 million.  Other information related to stock options follows:

 

 

 

 

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The fair value of non-vested equity shares granted under the Company's OI Plan was determined on the date of grant.  At December 29, 2012, the total unrecognized compensation expense for Non-Vested Equity Shares under the OI Plan was approximately $4.7 million with a weighted-average life of 1.9 years.  Other information related to non-vested equity shares follows:

 

 

Director Retainers are shares of Company stock issued to Directors for services performed for the Company; they vest upon issuance.  The expense related to Director Retainer shares for 2012, 2011 and 2010  was $0.2 million, $0.1 million and $0.2 million, respectively.

The related tax benefit (provision) on compensation expense recognized under the OI Plan was $0.7  million,  $0.8 million and ($0.1) million in fiscal 2012, 2011 and 2010, respectively.

 

Stock plan activity during the year ended December 29, 2012 was as follows:

 

 

 

The Company also has an Employee Stock Purchase Plan (the “ESP Plan”), allowing eligible employees, other than officers and directors, to purchase shares of the Company's Class A common stock at 10% less than the mean between the high and low prices of the stock on the date of purchase.  A maximum of 320,000 shares is available under the ESP Plan, and the aggregate numbers of shares reserved and available for purchase under the ESP Plan were 74,236,  76,610 and 78,134 at December 29, 2012,  December 31, 2011 and January 1, 2011, respectively.

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NOTE J - INCOME TAXES

 

The components of income before income taxes were:

 

The provision for income taxes consists of the following:

 

 

The reconciliation of income taxes computed at the statutory Federal income tax rate to the provision for income taxes from operations is as follows:

 

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 29, 2012 and December 31, 2011 are as follows:

 

 

 

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At December 29, 2012 and December 31, 2011, undistributed earnings of foreign subsidiaries amounted to approximately $39.9 million and $35.5 million, respectively.  These earnings could become subject to additional tax if they are remitted as dividends or if certain other circumstances exist.  The amount of additional taxes that might be payable on the undistributed foreign earnings of $39.9 million approximates $9.5 million.  This amount has not been recorded because it is the Company's intention to permanently invest the remainder of the undistributed earnings of its foreign subsidiaries in the growth of business outside the United States.

At December 29, 2012, the Company had state net operating loss carryforwards of approximately $23.6 million, which expire in fiscal years from 2013 to 2031.  Net operating loss carryforwards for certain foreign subsidiaries were approximately $3.8 million for tax purposes.  A portion of these losses will expire in fiscal years from 2013 to 2025 and a portion does not expire.  A valuation allowance has been provided for the foreign and state net operating losses and temporary differences that are estimated to expire before they are utilized.  The decrease of $0.8 million in 2012 and the increase of $0.3 million in 2011 in the valuation allowance primarily related to changes in state deferred tax assets.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense.  In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.  It is management's assertion based on the evaluation of this evidence that it is more likely than not that sufficient future taxable income will be generated to realize the tax benefit of the deferred tax assets, net of the valuation allowance.

As of December 29, 2012, the liability for uncertain tax positions is $0.5 million and $0.4 million of the unrecognized tax benefit would impact the Company's effective tax rate, if recognized.

The following is a tabular reconciliation of beginning and ending balances of unrecognized tax benefits.

 

 

The Company is currently subject to audit by the Internal Revenue Service (“IRS”) and certain foreign jurisdictions for the calendar years ended 2009 through 2012.  In certain foreign jurisdictions, the Company is currently subject to audit for tax years prior to 2009; this varies depending on the jurisdiction.  The Company and its subsidiaries' state income tax returns are subject to audit for the calendar years ended 2008 through 2012.

As of December 29, 2012 and December 31, 2011, the Company had accrued $0.1 million of interest and an immaterial amount of penalties related to uncertain tax positions.  The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for income taxes.  The liabilities recorded under the accounting standard related to

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uncertain tax positions, including tax, interest and penalty, are included in other long-term liabilities on the Company's consolidated balance sheet.

The Company is subject to income taxes in many jurisdictions around the world.  Significant judgment is required in determining the worldwide provision for income taxes.  In the ordinary course of business, there are many transactions and calculations in which the ultimate tax determination is uncertain. Although the Company believes the estimates for uncertain tax positions are reasonable and recorded in accordance with accounting standards, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals.  Additional taxes assessed as a result of an audit or litigation could have a material effect on the Company's income tax provision and net income in the period or periods in which the determination is made.  Changes in estimates made in fiscal 2012 and 2011 were the result of more precise information, current actions by taxing authorities and the expiration of statutes of limitation in certain jurisdictions.

 

NOTE K - SEGMENT INFORMATION

 

The following chart sets forth segment information for the Company for the three fiscal years ended December 29, 2012:

 

 

Total Company and segment operating income (loss) reconciles to consolidated income before income taxes by the inclusion of interest income, interest expense and other income.

The Company defines long-lived assets as property, plant and equipment and intangibles.

 

Geographic Information: 

 

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NOTE L - COMMITMENTS AND CONTINGENCIES

 

The Company leases administrative facilities and/or manufacturing and warehouse space for its CAD segment operations in Rhode Island, U.S., the United Kingdom, France, Japan, Hong Kong, Taiwan, Singapore and China.  The CAD segment also leases a  retail facility in the United Kingdom.  The Company's COG segment leases administrative and warehouse facilities in Florida and Colorado.  All leases expire prior to the end of 2026.   Real estate taxes, insurance, and maintenance expenses are generally obligations of the Company.  It is expected that in the ordinary course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 2013.   Rent expense for leased facilities was approximately $3.9 million, $3.5 million and $3.5 million in 2012, 2011 and 2010, respectively.  At December 29, 2012, future minimum lease payments under all such non-cancelable leases, including renewal options the Company believes it will exercise, were approximately: 

 

 

 

The Company was named as one of approximately ninety defendants in a contribution suit brought by CCL/Unilever relating to the J.M. Mills Landfill Site (the “Site”), which is part of the Peterson/Puritan Superfund Site in Cumberland, Rhode Island.  These complaints alleged that the Company was liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for contribution for Site investigation costs.  The Company has reached settlement of the case and paid a settlement amount of approximately $0.2 million in 2010.

The Company expects that the Federal Environmental Protection Agency ("EPA") will select a remedy for the Site in 2013.   At that time, the EPA will initiate an administrative process (the "Special Notice Process") pursuant to CERCLA whereby the EPA will request that those entities that the EPA contends arranged for the disposal of hazardous materials at the Site (the PRPs), undertake the selected remedy at the Site.  The EPA contends that the Company is a PRP at the Site.  During the Special Notice Process, the Company and the other PRPs will engage in negotiations with the EPA regarding the remedy, and among themselves regarding the contribution of each PRP to overall remediation costs.  Neither the cost of the remedy nor the identity of all PRPs is known at this time.  Therefore it is not possible to assess the outcome of the Special Notice Process as it may relate to the Company's contribution to remediation costs.

The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business.  To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

 

NOTE M - COMMON STOCK

 

Holders of Class A common stock have the right to elect one-third of the number of directors from time to time fixed by the holders of Class A and Class B common stock voting together as a single class. Holders of Class B common stock have the right to elect the remaining directors. Class A and Class B common stock vote together as a single class to reserve shares to be issued pursuant to options granted with respect to the acquisition of assets or shares of another company under certain circumstances.  Except as described above or as otherwise required by law, all voting power is vested in the holders of Class B common stock.

 

NOTE N - FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

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The fair values of our financial assets and liabilities are categorized as follows:

 

 

 

 

Accounts receivable are recorded at net realizable value, which approximates fair value.  Accounts payable, included in accounts payable, accrued expenses and other current liabilities, are recorded at historical cost, which approximates fair value due to the short-term nature of the liabilities.  Long-term debt is recorded at historical cost, which approximates fair value due to the variable interest rate.

The effective portion of the pre-tax gains (losses) on our derivative instruments are categorized in the following table:

 

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NOTE O - SHORT-TERM INVESTMENTS

 

At December 29, 2012, the Company had short-term equity investments with a value of $0.2 million classified as trading securities.  Realized and unrealized gains or losses on short-term investments are included in other (expense) income. The net unrealized gain (loss) on short-term investments held on December 29, 2012 was not material.

 

NOTE P - RELATED PARTY TRANSACTIONS

 

Pursuant to a Stock Redemption Agreement with Galal Doss, a director and major stockholder of the Company at that time, the Company purchased approximately 1.4 million shares of the Company’s Class A common stock in 2010 for approximately $5.6 million.    

 

NOTE Q - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a tabulation of the unaudited quarterly results of operations for the years ended December 29, 2012 and December 31, 2011.

 

 

 

 

 

 

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None

 

 

 

 

We have established disclosure controls and procedures designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K.  Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of December 29, 2012.

 

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f).  Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway commission.  Based on this evaluation under the framework in Internal control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 29, 2012.

Our internal control over financial reporting as of December 29, 2012, has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

 

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2012 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

None

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
A.T. Cross Company
Lincoln, Rhode Island

We have audited the internal control over financial reporting of A.T. Cross Company and subsidiaries (the “Company”) as of December 29, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  The Company's management is responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.  Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 29, 2012, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of the Company as of and for the year ended December 29, 2012 and our report dated March 13, 2013 expressed an unqualified opinion on those financial statements.  

 

 

 

DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 13, 2013

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PART III

 

 

See “Election of Directors,” “Corporate Governance,” “Committees of the Board of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the registrant's definitive proxy statement for the 2013 annual meeting of shareholders, which sections are incorporated by reference herein.  See also the “Executive Officers of the Company” section of “Business” in Item 1 of this Annual Report on Form 10-K.

We have a Code of Ethics and Business Conduct that applies to all of our employees, including our chief executive officer and senior financial and accounting officers, which meets the requirements of a “code of ethics” as defined in Item 406 of Regulation S-K.  The text of our Code of Ethics and Business Conduct is posted in the Investor Relations section of our website, www.cross.com.  Disclosure regarding any amendments to, or waivers from, provisions of our code of ethics and business conduct that apply to our chief executive officer and senior financial and accounting officers will be included in a Current Report on Form 8-K within four business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is permitted by the rules of the NASDAQ Stock Exchange.

 

 

See “Executive Compensation, Compensation Discussion and Analysis,” “Compensation Committee Report” and “Director Compensation” in the registrant's definitive proxy statement for the 2013 annual meeting of shareholders, which section is incorporated by reference herein.  Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K.

 

 

See “Security Ownership of Certain Beneficial Owners and Management” in the registrant's definitive proxy statement for the 2013 annual meeting of shareholders, which section is incorporated by reference herein.

 

Equity Compensation Plan Information

 

The following table details the Company's equity compensation plans as of December 29, 2012:

 

 

 

See “Election of Directors” in the registrant's definitive proxy statement for the 2013 annual meeting of shareholders, which sections are incorporated by reference herein.

 

 

See “Appointment of Independent Public Accountants” and “Principal Accounting Firm Fees” in the registrant's definitive proxy statement for the 2013 annual meeting of shareholders, which sections are incorporated by reference herein.

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PART IV

 

 

 

 

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SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated:

 

 

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