Results of Operations

Overview

A.T. Cross Company is a leading designer and marketer of branded personal accessories including writing instruments, watches, reading glasses, personal and business accessories and sunglasses.

The Company has been operating in a difficult economic environment in mature as well as 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 a strong brand name, 160-year heritage, reputation for quality and craftsmanship, global distribution network and 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 brands for its COG segment. Details on how the Company's two business segments are achieving these initiatives are presented below. The Company continues to look for appropriate acquisitions that will add to top and bottom line growth.

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, ball-point, fountain and selectip rolling ball pens and mechanical pencils are offered in a variety of styles and finishes. Also under the Cross brand, CAD offers a variety of personal and business accessories including leather goods, reading glasses, watches, desk sets, business totes, cufflinks, and stationery. CAD offers a lower-priced line of writing instruments and after-market refills under the brand name Penatia.

CAD is competing vigorously to build its position as the category leader 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 2008, approximately 12% of CAD revenue was derived from new products launched into the marketplace in 2008. In 2008, CAD launched three new writing instrument product lines - Sauvage, Cross Contour and Century III. Four new finishes were added to the Apogee line as well as a Breast Cancer Awareness pen, which is adorned with a pink ribbon. Two new finishes were added to the Townsend line, three new fashion colors were added to the Autocross line, and two new colors were added to the Tech III collection. Two new finishes were added to the Century II line along with two seasonal print collections - the Kalahari Collection in the spring and the Paisley Collection in the fall. The Company also launched Cross Sage, Cross Sable, Cross Hamilton, and Cross Nile lines for its office superstore customers for the 2008 holiday season.

In 2008, all leather goods, reading glasses, watches, desk sets, business totes, cufflinks and stationery represented almost 7% of CAD sales. We expanded our line of leather accessories by introducing new fashionable colors in select personal business accessories styles and introduced a wide assortment of men's and ladies' wallets. The Company's watch collection expanded in 2008 with the addition of new styles that coordinated with key writing instrument products. Additionally, we supplemented our cufflink assortment with an expanded offering of styles. The Cross Town Computer Bag Collection™ was updated based on seasonal fashion trends and the stationery line was re-introduced with new styles that had an integrated pen.

In addition to bringing new products to the market in 2008, Cross continued to expand merchandising programs around the globe. The Company installed 29 Shop-in-Shops in the stores of existing major retail accounts and new display fixtures were installed in over 1,000 key doors globally. The Company also continued its U.S. direct to consumer mail catalog in 2008.

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 2009.

Cross Optical Group ("COG")

The Company's COG segment consists of its wholly-owned subsidiaries Costa Del Mar Sunglasses, Inc. and Native Eyewear, Inc. These businesses design, manufacture and market high-quality, high-performance polarized sunglasses.

Founded in Florida in 1983, the Costa Del Mar brand has developed a superior reputation for its advanced polarized lens technology and fashionable, yet functional, frame design. Costa Del Mar's lenses are renowned for their clarity. Costa Del Mar upholds the Company's commitment to delivering exceptional product, innovation and quality to consumers. Costa Del Mar has expanded its marketing efforts in order to reach consumers beyond its core market, the saltwater fishing enthusiast in the southeastern United States. The brand is developing consumer awareness in other fishing and water sports categories and is designing and marketing products specifically for female and young consumer groups. Costa Del Mar is also expanding geographically in both domestic and international markets.

Native Eyewear, Inc., which was founded in 1994, also specializes in polarized sunglasses. Native sunglasses are feature-rich, packed with technology 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".

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. In 2008, the COG segment grew its business 33% through new product introductions, the acquisition of Native and expanded distribution. The COG segment contributed $7.9 million of the Company's 2008 consolidated operating income.

Comparison of Fiscal 2008 with Fiscal 2007

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

(THOUSANDS OF DOLLARS)            FISCAL 2008  FISCAL 2007  PERCENTAGE CHANGE
Cross Accessory Division ("CAD")     $111,455     $115,313       (3.3)%
Cross Optical Group ("COG")          $ 48,691     $ 36,572        33.1%
           Consolidated Net Sales    $160,146     $151,885        5.4%

Consolidated net sales were $160.1 million in 2008 compared to $151.9 million in 2007. Sales of Native Eyewear, acquired on March 24, 2008 and included in the Cross Optical Group ("COG"), were $7.7 million in 2008. The effect of foreign exchange was favorable to consolidated 2008 sales results by approximately $0.9 million, or 0.5 percentage points.

CAD sales were unfavorably affected by economic problems in the Americas, as every Americas retail channel reported lower sales performance from a year ago. Offsetting the sales decline in the Americas were increased sales in the Asia and Europe, Middle East and Africa region ("EMEA") regions. The sales increase in Asia was entirely due to foreign exchange. The sales increase in the EMEA region was from emerging markets in India and the Middle East, which offset declines in Europe. The effect of foreign exchange was unfavorable to EMEA 2008 sales results by approximately $0.6 million, or 1.3 percentage points. The effect of foreign exchange was favorable to CAD 2008 sales results by approximately $0.9 million, or 0.8 percentage points.

COG sales in 2008 were driven by double-digit growth of the Costa Del Mar brand and the inclusion of Native Eyewear. The Costa Del Mar increase was due to a number of new product launches, aimed to appeal to women and college students, expanded distribution and an increase in repair revenue.

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

Gross Profit Margins:             FISCAL 2008  FISCAL 2007  PERCENTAGE POINT CHANGE
 CAD                                    54.3%        55.7%           (1.4)
 COG                                    59.2%        57.6%            1.6
 Consolidated Gross Profit Margin       55.8%        56.1%           (0.3)

Consolidated gross margins declined 0.3 percentage points in 2008 compared to 2007. The decline in CAD gross margin was due largely to increased promotional activity, particularly in the second half of the year. CAD segment gross margins were favorably impacted in 2008 by approximately $3.7 million due to the effect of a liquidation of LIFO layers and were decreased by approximately $1.4 million for the inflation impact on ending inventories accounted for on a LIFO basis. In 2007, there was an approximate $0.5 million favorable impact due to the effect of LIFO layers and deflation was nominal. COG segment gross margin improved by 1.6 percentage points from 2007, due to the positive effects of the Native acquisition and productivity improvements.

Consolidated selling, general and administrative ("SG&A") expenses were approximately $69.8 million, 4.3% higher than 2007. SG&A expenses were 43.6% of sales in 2008 and 44.1% of sales in 2007. SG&A expenses for the CAD segment were approximately $51.9 million, or 46.6% of sales, compared to $53.6 million, or 46.5% of sales, in 2007. CAD segment selling and marketing expenses remained flat in 2008 compared to 2007, while administrative expenses decreased 8.1%. Foreign currency exchange gains that are included in CAD segment SG&A expenses approximated $1.1 million and $0.1 million in fiscal 2008 and 2007, respectively. COG segment SG&A expenses of $17.9 million included $3.4 million of SG&A expenses for Native Eyewear, which were incremental to 2007. Excluding these incremental expenses, SG&A expenses for the COG segment were 8.6% higher than 2007.

Service and distribution ("S&D") costs were approximately $7.1 million in 2008. S&D expenses were 4.4% and 3.9% of sales in 2008 and 2007, respectively.

Research and development ("R&D") expenses were approximately $2.4 million in 2008. R&D expenses were 1.5% and 1.7% of sales in 2008 and 2007, respectively.

Restructuring charges of $2.5 million were recorded in the Company's CAD segment in fiscal 2008 compared to $0.3 million in fiscal 2007. These charges were related to the 2008 restructuring program. For an analysis of this restructuring program, see Note D to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

In the fourth quarter of 2008, the Company performed its annual goodwill impairment tests. The Company determined that the entire CAD segment goodwill was fully impaired and recorded a non-cash impairment charge of $3.9 million. The CAD segment goodwill was the result of the acquisition of assets in 1999 associated with the Company's OEM effort. There was no impairment of the COG segment goodwill or other indefinite-lived intangibles. For an analysis of goodwill and the assumptions used for impairment, see Notes A and E to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Interest income was $0.1 million in 2008 compared to $0.3 million in 2007. The decrease was due to lower average interest rates on invested funds.

Interest expense was $0.9 million in 2008 compared to $0.5 million in 2007. The increase was due to the higher level of borrowings.

Other income (expense) was $0.1 million in 2008 compared to essentially zero in 2007. The Company recorded $0.1 million of unrealized gain on short-term investments in 2008.

In 2008, the Company's effective tax rate was 82.1% compared to the Federal tax rate of 35.0%. This increase was due to an impairment charge without a corresponding tax benefit (49.8 percentage point tax rate effect). The income tax provision for the year was also favorably impacted by the recognition of tax benefits, the realization of which was previously considered uncertain. These tax benefits favorably impacted the tax rate by approximately 4 percentage points. For an analysis of income taxes, see Note K 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 2008 was $0.5 million ($0.03 basic and diluted net income per share) compared to fiscal 2007 net income of $6.7 million ($0.45 basic net income per share and $0.43 diluted net income per share).

Comparison of Fiscal 2007 with Fiscal 2006

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

(THOUSANDS OF DOLLARS)  FISCAL 2007  FISCAL 2006  PERCENTAGE CHANGE
CAD                        $115,313     $111,942        3.0%
COG                        $ 36,572     $ 27,394        33.5%
 Consolidated Net Sales    $151,885     $139,336        9.0%

CAD revenue in the Americas declined $2.1 million, or 4.1%, in 2007 compared to 2006. Retail sales in both the U.S. national account and U.S. carriage trade channels were down. U.S. national account sales were down due to weaker than expected holiday sales while U.S. carriage trade sales were down due to a customer's move to a private label brand. This was somewhat offset by increases in both direct-to-consumer ("DTC") and international Americas sales.

Sales in EMEA increased 11.9% compared to 2006. Foreign exchange was favorable to EMEA sales results by approximately 7.8 percentage points and sales volume increased approximately 4.1% for the full year.

Asia revenue of $19.4 million increased 5.2% compared to fiscal 2006. Foreign exchange was unfavorable to Asia sales results by approximately 0.3 percentage points and sales volume increased approximately 5.5% for the full year.

The COG segment increased revenue by 33.5% in 2007 compared to 2006. This increase was due largely to the introduction of new products, improved sell through at key accounts, expanded sales through the Company's website, sales to consumers with new demographics and expanded geographic distribution.

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

Gross Profit Margins:  FISCAL 2007  FISCAL 2006  PERCENTAGE POINT CHANGE
          CAD                55.7%        51.7%            4.0
          COG                57.6%        56.8%            0.8
          Consolidated       56.1%        52.7%            3.4

Consolidated gross margins improved 340 basis points in 2007 compared to 2006. The improvement was due largely to the favorable effect of foreign exchange on sales and the lower manufacturing costs resulting from our transition of writing instrument manufacturing to China. COG segment gross margin improved by 0.8 percentage points from 2006, due to the positive effects of higher new product margins, productivity improvements and a shift to higher margin direct-to-consumer sales.

Consolidated selling, general and administrative ("SG&A") expenses were approximately $66.9 million, 13.1% higher than 2006. SG&A expenses were 44.1% of sales in 2007 and 42.5% of sales in 2006. SG&A expenses for the CAD segment were approximately $53.6 million, or 46.5% of sales, compared to $49.4 million, or 44.1% of sales, in 2006. CAD segment selling and marketing segment expenses increased by 7.7% in support of the Cheshire Oaks store in the UK, Middle East market development and reorganization of the Benelux subsidiary. In addition, CAD administrative expenses increased primarily due to costs associated with becoming Sarbanes-Oxley compliant, higher employee compensation expense and the unfavorable effect of foreign exchange. COG segment SG&A expenses of $13.3 million were 36.4% higher than 2006. The majority of this increase was the result of higher marketing and brand building expenditures and sales volume related items such as sales compensation and commissions.

Service and distribution ("S&D") expenses were approximately $6.0 million in 2007. S&D expenses were 3.9% of sales in both 2007 and 2006.

Research and development ("R&D") expenses were approximately $2.5 million in 2007. R&D expenses were 1.7% of sales in both 2007 and 2006.

Restructuring charges of $0.3 million were recorded in the Company's CAD segment in fiscal 2007 compared to $1.7 million in fiscal 2006. These charges were related to the corporate restructuring program announced in July 2003. For an analysis of the corporate restructuring program, see Note D to the Company's consolidated financial statements in Item 8 of this Annual Report on Form 10-K.

Interest and other (expense) income was $0.2 million of expense in fiscal 2007 compared to $0.3 million of expense in fiscal 2006. The following chart details the major components of interest and other (expense) income:

(THOUSANDS OF DOLLARS)               FISCAL 2007  FISCAL 2006  CHANGE
 Interest income                          $ 338        $ 379   $ (41 )
 Interest expense                          (511 )       (653 )   142
 Other                                        3          (51 )    54
 Interest and Other (Expense) Income      $(170 )      $(325 )  $155

In 2007, the Company's effective tax rate was 28.2% compared to 26.5% in 2006. This change was due to a shift in the mix of domestic and foreign sourced income, adjustments to deferred tax balances and the effect of an accrual to actual tax benefit upon filing the Company's 2006 Federal income tax return in the third quarter of 2007. The income tax provision for the year was also favorably impacted by the recognition of tax benefits, the realization of which was previously considered uncertain. These tax benefits favorable impacted results by $.03 per share, basic and diluted, for the full year 2007. For an analysis of income taxes, see Note K 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 2007 was $6.7 million ($0.45 basic net income per share and $0.43 diluted net income per share) compared to fiscal 2006 net income of $3.3 million ($0.22 net income per share, basic and diluted).

Liquidity and Capital Resources

Historically, the Company's sources of liquidity and capital resources have been its cash, cash equivalents and short-term investments ("cash"), 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, restructuring, contributions to the retirement plans, stock repurchase programs and debt service. The Company expects its future cash needs in 2009 will be met by these historical sources of liquidity and capital.

The Company's cash balance of $19.8 million at January 3, 2009 increased $6.2 million from December 29, 2007. The most significant factors affecting the Company's cash balance are discussed in this section.

Accounts receivable decreased approximately $2.3 million from the prior year. CAD segment accounts receivable of $22.7 million decreased approximately $3.9 million from the prior year, while COG segment accounts receivable of approximately $6.4 million increased approximately $1.6 million from the prior year. The acquisition of Native added $1.2 million to the COG accounts receivable balance. CAD domestic accounts receivable decreased by $2.5 million and CAD foreign writing instruments accounts receivable decreased by $1.4 million.

Total inventory was $26.4 million at January 3, 2009, a decrease of $5.4 million since December 29, 2007. CAD inventory decreased $7.3 million, while COG inventory levels increased by $1.9 million. The primary reason for the decrease in CAD inventory from 2007 to 2008 was a greater emphasis on managing the Company's supply chain in response to lower CAD revenues in the fourth quarter and full year 2008. The acquisition of Native added $1.3 million to the COG inventory balance.

In fiscal 2008, approximately $0.4 million was paid as a result of restructuring programs initiated in 2008. The Company has recognized $2.5 million in restructuring charges related to these programs in 2008, approximately $1.2 million of which are non-cash, and expects to recognize an additional $0.1 million in 2009. As a result of the restructuring programs, approximately 50 manufacturing positions and 27 sales and administrative positions in the United States, and four sales and administrative positions in the United Kingdom will be affected. These restructuring programs will be substantially complete by the end of the first quarter of 2009 and cash payments related to these programs initiated in 2008 is expected to be approximately $0.9 million in 2009.

The Company's working capital was $62.9 million at the end of fiscal 2008, an increase of $4.9 million from fiscal 2007, and its current ratio at the end of fiscal 2008 and 2007 was 3.4:1 and 2.8:1, respectively. Net cash provided by operating activities was $14.3 million in fiscal 2008 compared to net cash used in operating activities of $2.4 million in fiscal 2007.

Additions to property, plant and equipment were approximately $4.5 million in fiscal 2008 and $9.1 million in 2007. In fiscal 2009, the Company expects capital expenditures to be approximately $5.4 million. Depreciation expense in 2009 is expected to be approximately $5.0 million.

In 2002, the Company's Board of Directors authorized a plan to repurchase up to 10% of the outstanding Class A common stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions. Through the fourth quarter of 2008, the Company repurchased approximately 1.4 million shares of stock under this plan for approximately $7.4 million at an average price per share of $5.32. In the fourth quarter of 2008, the Company's Board of Directors authorized a new plan to purchase up to 1.0 million shares of Cross Class A common stock, depending on market conditions. Through the fourth quarter of 2008, the Company repurchased approximately 0.1 million shares of stock under this new plan for approximately $0.4 million at an average price per share of $3.19. In 2008, the Company repurchased a total of approximately 0.4 million shares under these plans for approximately $1.5 million at an average price per share of $4.23.

The Company made cash contributions in 2008 of approximately $1.2 million to its defined benefit pension plan, $1.1 million to its defined contribution retirement plans and $0.1 million to its excess benefit plan. The Company expects to contribute $2.0 million to its defined benefit pension plan, $1.0 million to its defined contribution retirement plans and $0.1 million to its excess benefit plan in 2009.

The Company has a $35 million secured line of credit with Bank of America, N.A.. 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 agreement requires the Company to maintain a minimum consolidated tangible net worth on an annually tested basis, a minimum ratio of adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") to required debt service payments, and a maximum ratio of debt to consolidated EBITDA over any four-quarter period, each of which is calculated in accordance with the agreement. The company was either in compliance with, or has received a waiver of any defaults under its various debt covenants as of January 3, 2009. Subsequent to January 3, 2009 the credit agreement was amended to update certain ratios for changes in pension asset valuations and current and anticipated restructuring activities. At January 3, 2009, the Company had $21.7 million outstanding on this line of credit, bearing interest at a rate of 3.18% and the unused and available portion was $13.3 million. In 2008, the Company increased the outstanding balance on this secured line of credit balance by $18.8 million to finance the acquisition of Native Eyewear, Inc.

The Company expects fiscal 2009 research and development expenses to be approximately $2.7 million.

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 2009 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 2008, cash available for domestic operations was approximately $14.0 million and cash available for international operations was approximately $5.8 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 3.64%.

The Company leases manufacturing, office and warehouse space and certain equipment under non-cancelable operating leases. All leases expire prior to the end of 2017. Future minimum lease payments under all non-cancelable leases, including renewal options the Company believes it will exercise, and other contractual obligations at January 3, 2009 were approximately:

                                    LESS THAN 1                                   MORE THAN 5
(THOUSANDS OF DOLLARS)     TOTAL       YEAR       1 TO 3 YEARS    3 TO 5 YEARS       YEARS
Line of Credit,          $23,309        $ -           $23,309             $ -          $ -
Including Interest *
Operating Leases          21,371      3,116             7,920           4,820        5,515
Uncertain Tax              2,485        928               625             736          196
Liabilities
Pension Plan Obligations   2,000      2,000                 -               -            -
Legal Obligations            800        200               600               -            -
Purchase Obligations         109        105                 4               -            -

* Interest on the line of credit was calculated using the interest rate as of January 3, 2009 over the remaining life of the note.

Off Balance Sheet Arrangements

The Company has no material off balance sheet arrangements.

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.

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 . . .