10-Q 1 q2201710-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 1, 2017 OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____
TO ______
Commission file number:
001-31829
CARTER’S, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
13-3912933
(state or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

Phipps Tower
3438 Peachtree Road NE, Suite 1800
Atlanta, Georgia 30326
(Address of principal executive offices, including zip code)
(678) 791-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes (X) No ( )
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer," "accelerated filer," "smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer (X) Accelerated Filer ( )
Non-Accelerated Filer ( ) (Do not check if a smaller reporting company) Smaller Reporting Company ( )
Emerging Growth Company ( )

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (X) No (X)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock
 
Outstanding Shares at July 21, 2017
Common stock, par value $0.01 per share
 
47,834,177









CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of July 1, 2017, December 31, 2016 and July 2, 2016
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and two fiscal quarters ended July 1, 2017 and July 2, 2016
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and two fiscal quarters ended July 1, 2017 and July 2, 2016
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the two fiscal quarters ended July 1, 2017
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the two fiscal quarters ended July 1, 2017 and July 2, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
 
July 1, 2017
 
December 31, 2016
 
July 2, 2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
173,564

 
$
299,358

 
$
205,080

Accounts receivable, net
165,183

 
202,471

 
150,633

Finished goods inventories
610,423

 
487,591

 
587,434

Prepaid expenses and other current assets
44,527

 
32,180

 
46,189

Deferred income taxes

 
35,486

 
32,816

Total current assets
993,697

 
1,057,086

 
1,022,152

Property, plant, and equipment, net of accumulated depreciation of $384,881, $345,907, and $317,580, respectively
382,472

 
385,874

 
386,034

Tradenames and other intangible assets, net
400,735

 
308,928

 
309,017

Goodwill
231,709

 
176,009

 
177,540

Other assets
23,246

 
18,700

 
17,749

Total assets
$
2,031,859

 
$
1,946,597

 
$
1,912,492

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
217,340

 
$
158,432

 
$
190,366

Other current liabilities
94,644

 
119,177

 
80,595

Total current liabilities
311,984

 
277,609

 
270,961

 
 
 
 
 
 
Long-term debt, net
661,846

 
580,376

 
580,678

Deferred income taxes
133,251

 
130,656

 
128,682

Other long-term liabilities
174,867

 
169,832

 
165,469

Total liabilities
$
1,281,948

 
$
1,158,473

 
$
1,145,790

 
 
 
 
 
 
Commitments and contingencies - Note 13

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at July 1, 2017, December 31, 2016, and July 2, 2016

 

 

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 47,971,577, 48,948,670 and 50,194,955 shares issued and outstanding at July 1, 2017, December 31, 2016 and July 2, 2016, respectively
480

 
489

 
502

Accumulated other comprehensive loss
(30,653
)
 
(34,740
)
 
(30,533
)
Retained earnings
780,084

 
822,375

 
796,733

Total stockholders' equity
749,911

 
788,124

 
766,702

Total liabilities and stockholders' equity
$
2,031,859

 
$
1,946,597

 
$
1,912,492



See accompanying notes to the unaudited condensed consolidated financial statements.

1




CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Net sales
$
692,117

 
$
639,471

 
$
1,424,872

 
$
1,363,556

Cost of goods sold
388,660

 
357,289

 
805,613

 
770,445

Gross profit
303,457

 
282,182

 
619,259

 
593,111

Selling, general, and administrative expenses
250,146

 
228,464

 
497,940

 
457,460

Royalty income
(11,210
)
 
(9,525
)
 
(21,768
)
 
(20,600
)
Operating income
64,521

 
63,243

 
143,087

 
156,251

Interest expense
7,194

 
6,803

 
14,298

 
13,542

Interest income
(79
)
 
(178
)
 
(218
)
 
(385
)
Other (income) expense, net
(544
)
 
516

 
(765
)
 
3,709

Income before income taxes
57,950

 
56,102

 
129,772

 
139,385

Provision for income taxes
20,025

 
19,904

 
45,183

 
49,207

Net income
$
37,925

 
$
36,198

 
$
84,589

 
$
90,178

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.79

 
$
0.72

 
$
1.75

 
$
1.77

Diluted net income per common share
$
0.78

 
$
0.71

 
$
1.73

 
$
1.75

Dividend declared and paid per common share
$
0.37

 
$
0.33

 
$
0.74

 
$
0.66


See accompanying notes to the unaudited condensed consolidated financial statements.



2



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
Fiscal quarter ended
 
Two fiscal quarters ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Net income
$
37,925

 
$
36,198

 
$
84,589

 
$
90,178

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,140

 
548

 
4,087

 
5,834

Comprehensive income
$
41,065

 
$
36,746

 
$
88,676

 
$
96,012



See accompanying notes to the unaudited condensed consolidated financial statements.

3


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
48,948,670

 
$
489

 
$

 
$
(34,740
)
 
$
822,375

 
$
788,124

Exercise of stock options
60,660

 
1

 
3,121

 

 

 
3,122

Withholdings from vesting of restricted stock
(65,804
)
 
(1
)
 
(5,589
)
 

 

 
(5,590
)
Restricted stock activity
145,600

 
1

 
(1
)
 

 

 

Stock-based compensation

 

 
8,464

 

 

 
8,464

Issuance of common stock
13,860

 
1

 
1,181

 

 

 
1,182

Repurchase of common stock
(1,131,409
)
 
(11
)
 
(7,176
)
 

 
(91,049
)
 
(98,236
)
Cash dividends declared and paid

 

 

 

 
(35,831
)
 
(35,831
)
Comprehensive income

 

 

 
4,087

 
84,589

 
88,676

Balance at July 1, 2017
47,971,577

 
$
480

 
$

 
$
(30,653
)
 
$
780,084

 
$
749,911


See accompanying notes to the unaudited condensed consolidated financial statements.

4



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Two fiscal quarters ended
 
July 1, 2017
 
July 2, 2016
Cash flows from operating activities:
 
 
 
Net income
$
84,589

 
$
90,178

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
39,705

 
34,916

Amortization of tradenames
892

 
1,831

Amortization of fair value step up of inventory
400

 

Amortization of debt issuance costs
749

 
725

Non-cash stock-based compensation expense
9,646

 
9,250

Foreign currency (gain) loss, net
(555
)
 
3,130

Income tax benefit from stock-based compensation

 
(3,684
)
Loss on disposal of property, plant, and equipment
221

 
133

Deferred income taxes
3,227

 
1,258

Effect of changes in operating assets and liabilities, net of acquisition:
 
 
 
Accounts receivable, net
57,215

 
57,229

Finished goods inventories
(91,846
)
 
(114,817
)
Prepaid expenses and other assets
(13,871
)
 
(12,643
)
Accounts payable and other liabilities
16,961

 
18,093

Net cash provided by operating activities
107,333

 
85,599

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(34,276
)
 
(49,698
)
Acquisition of Skip Hop Holdings, Inc., net of cash acquired
(143,704
)
 

Proceeds from sale of property, plant, and equipment

 
193

Net cash used in investing activities
(177,980
)
 
(49,505
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under secured revolving credit facility
100,000

 

Payments on secured revolving credit facility
(18,965
)
 

Repurchases of common stock
(98,236
)
 
(180,209
)
Dividends paid
(35,831
)
 
(33,679
)
Income tax benefit from stock-based compensation

 
3,684

Withholdings from vestings of restricted stock
(5,590
)
 
(8,508
)
Proceeds from exercises of stock options
3,122

 
5,101

Net cash used in financing activities
(55,500
)
 
(213,611
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
353

 
1,388

Net decrease in cash and cash equivalents
(125,794
)
 
(176,129
)
Cash and cash equivalents, beginning of period
299,358

 
381,209

Cash and cash equivalents, end of period
$
173,564

 
$
205,080


See accompanying notes to the unaudited condensed consolidated financial statements.

5


CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
    
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear and related products under the Carter's, Child of Mine, Just One YouPrecious FirstsSimple JoysOshKosh B'gosh ("OshKosh"), Skip Hop and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company's own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of July 1, 2017, the Company operated 978 retail stores.

NOTE 2 – BASIS OF PREPARATION AND BUSINESS ACQUISITION

The accompanying unaudited condensed consolidated financial statements include the accounts of Carter's, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC"). All intercompany transactions and balances have been eliminated in consolidation. 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholders' equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter and two fiscal quarters ended July 1, 2017 are not necessarily indicative of the results that may be expected for the 2017 fiscal year ending December 30, 2017.

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from the Company's audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.

Skip Hop Acquisition

Carter's, Inc.'s wholly-owned subsidiary, The William Carter Company ("TWCC"), acquired 100% of the voting equity interests of Skip Hop after the close of business on February 22, 2017. The accompanying unaudited condensed consolidated financial statements and footnotes include Skip Hop Holdings, Inc. and subsidiaries ("Skip Hop") from February 23, 2017. The acquisition of Skip Hop expanded the Company’s product offerings to include complementary essential core products for families with young children. Skip Hop's product lines include diaper bags, kid’s backpacks, travel accessories, home gear, and hardline goods for playtime, mealtime, and bath time. Skip Hop's products are sold through wholesale and eCommerce channels.

The Skip Hop purchase was deemed to be the acquisition of a business under the provisions of Accounting Standards Codification ("ASC") No. 805, Business Combinations. Based on the purchase price, Skip Hop's assets, and Skip Hop's pre-tax operating income prior to the acquisition, the acquired Skip Hop business does not meet the materiality requirements for preparation and presentation of pro forma financial information.

The majority of Skip Hop's wholesale operations became a part of the Company's U.S. Wholesale operating segment, with the remainder becoming part of the Company's International operating segment. Skip Hop's eCommerce retail operations became part of the Company's U.S. Retail operating segment.


6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the second quarter of fiscal 2017, Skip Hop contributed approximately $25.0 million to the Company's consolidated net sales and produced an operating loss of approximately $(0.8) million. Between the acquisition date and the end of the Company's second quarter of fiscal 2017, Skip Hop contributed approximately $35.4 million of net sales to the Company's consolidated net sales and produced an operating loss of approximately $(0.4) million.

The measurement period, as defined under the provisions of ASC 805, is open for certain Skip Hop assets and liabilities. The purchase price is subject to a working capital adjustment, plus a potential future payment of up to $10 million contingent upon the achievement of certain financial performance targets in fiscal 2017. Provisional amounts recognized at acquisition in the first quarter of fiscal 2017 and the measurement period adjustments made during the second quarter of fiscal 2017 were as follows:

(in millions)
 
 
 
 
 
Revised
 
 
Provisional
 
Measurement Period
 
Provisional
 
 
Amounts
 
Adjustments
 
Amounts
 
 
 
 
 
 
 
Net assets acquired:
 
 
 
 
 
 
Assets acquired
 
$
55.5

 
$
(0.6
)
 
$
54.9

Liabilities assumed
 
(23.2
)
 
3.0

 
(20.2
)
Net assets acquired
 
32.3

 
2.4

 
34.7

 
 
 
 
 
 
 
Goodwill *
 
56.6

 
(2.4
)
 
54.2

Tradename
 
56.8

 

 
56.8

Customer relationships
 
35.9

 

 
35.9

Deferred income tax liabilities
 
(33.5
)
 

 
(33.5
)
Preliminary purchase price
 
148.1

 

 
148.1

Less cash acquired
 
(0.8
)
 

 
(0.8
)
Less estimated contingent consideration
 
(3.6
)
 

 
(3.6
)
Net cash paid
 
$
143.7

 

 
$
143.7

 
 
 
 
 
 
 
* Not deductible for income taxes
 
 
 
 
 
 

Under the provisions of ASU No. 2015-16, "Simplifying the Accounting for Measurement Period Adjustments," the cumulative impact of any measurement period adjustments on current periods and prior periods is recognized in the period that the adjustment is determined.


Accounting Policies

The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material subsequent changes to these accounting policies, except as noted below for new accounting pronouncements adopted at the beginning of fiscal 2017.


Adoption of New Accounting Pronouncements At the Beginning of Fiscal 2017

Accounting for Share-Based Payments to Employees (ASU 2016-09)

At the beginning of its first quarter of fiscal 2017, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amended ASC Topic 718, Stock Compensation. The adoption of this ASU affected the Company's consolidated financial statements as follows.


7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations. This change is required to be applied prospectively upon adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption. For the second quarter and first two quarters of fiscal 2017, the Company’s provision for income taxes on its consolidated statement of operations includes a benefit of approximately $0.2 million and $1.2 million, respectively, related to net excess income tax benefits for settlements of share-based payments during the those fiscal periods. For the second quarter and first two quarters of fiscal 2016, the Company recognized net excess income tax benefits of approximately $0.6 million and $3.7 million, respectively, for share-based payments settled during those periods. These net tax benefits were recorded directly to the Company’s consolidated statement of stockholders’ equity and have not been reclassified to the Company’s consolidated statement of operations, in accordance with adoption and transition provisions of ASU 2016-09.

Consolidated Statement of Cash Flows - ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments, such as excess income tax benefits, are to be reported as operating activities on the statement of cash flows, a change from the prior requirement to present windfall income tax benefits as an inflow from financing activities and an offsetting outflow from operating activities. As permitted, the Company elected to apply these provisions prospectively to its consolidated statement of cash flows, and accordingly, periods prior to fiscal 2017 have not been adjusted.

Additionally, ASU 2016-09 clarifies that all cash payments made to taxing authorities on the employees' behalf for withheld shares at settlement are presented as financing activities on the statement of cash flows. This change must be applied retrospectively. The presentation requirements did not result in reclassification for any prior periods since such cash flows have historically been presented as a financing activity by the Company on its consolidated statement of cash flows.

The Company elected to continue to estimate forfeitures expected to occur to determine the amount of share-based compensation cost to recognize in each period, as permitted by ASU 2016-09. Accordingly, no cumulative effect was recorded in retained earnings on the Company’s consolidated statement of stockholders’ equity at the beginning of fiscal 2017 upon the adoption of ASU 2016-09.


Simplified Subsequent Measurement of Inventory (ASU 2015-11)

At the beginning of its first quarter of fiscal 2017, the Company adopted the provisions of ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). ASU 2015-11 simplifies subsequent measurements of inventory by replacing the lower of cost or market test, required under prior guidance, with a lower of cost and net realizable value test. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities are required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by prior guidance ("market," "subject to a floor," and a "ceiling"). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities recognize the difference as a loss in earnings in the period in which it occurs. The adoption of ASU 2015-11 was not material to the Company's consolidated financial condition, results of operations, or cash flows.


Balance Sheet Classification of Deferred Taxes (ASU 2015-17)

At the beginning of the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 simplifies the balance sheet presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities for each tax-paying jurisdiction as non-current on the balance sheet. Prior guidance required the deferred taxes for each tax-paying jurisdiction to be presented as a net current asset or liability and net non-current asset or liability. The Company's prospective adoption of ASU 2015-17 impacts the classification of deferred tax assets and liabilities on any balance sheet that reports the Company's financial position for any date after December 31, 2016. Balance sheets for prior periods have not been adjusted. The adoption of ASU 2015-17 has no impact on the Company's results of operations or cash flows.




8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
July 1, 2017
 
December 31, 2016
 
July 2, 2016
Cumulative foreign currency translation adjustments
$
(23,537
)
 
$
(27,624
)
 
$
(23,752
)
Pension and post-retirement obligations (1)
(7,116
)
 
(7,116
)
 
(6,781
)
Total accumulated other comprehensive loss
$
(30,653
)
 
$
(34,740
)
 
$
(30,533
)
    
(1) Net of income taxes of $4.2 million, $4.2 million, and $4.0 million, respectively.


Changes in accumulated other comprehensive loss for the second quarter and first two quarters of fiscal 2017 consisted of net gains of $3.1 million and $4.1 million for foreign currency translation adjustments, respectively. Changes in accumulated other comprehensive loss for the second quarter and first two quarters of fiscal 2016 consisted of gains of $0.5 million and $5.8 million, respectively, for foreign currency translation adjustments. During the first and second quarters of both fiscal 2017 and fiscal 2016, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.


NOTE 4 – GOODWILL AND INTANGIBLE ASSETS

The Company's goodwill and intangible assets were as follows:
 
 
 
July 1, 2017
 
December 31, 2016
(dollars in thousands)
Weighted-average useful life
 
Gross fair value
 
Accumulated amortization
 
Net amount
 
Gross fair value
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter's goodwill
Indefinite
 
$
136,570

 
$

 
$
136,570

 
$
136,570

 
$

 
$
136,570

Canada acquisition
Indefinite
 
40,897

 

 
40,897

 
39,439

 

 
39,439

 Skip Hop acquisition (1)
Indefinite
 
54,242

 

 
54,242

 

 

 

Total goodwill
 
 
$
231,709

 
$

 
$
231,709

 
$
176,009

 
$

 
$
176,009

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter's tradename    
Indefinite
 
$
220,233

 
$

 
$
220,233

 
$
220,233

 
$

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 

 
85,500

 
85,500

 

 
85,500

 Skip Hop tradename (1)
Indefinite
 
56,800

 

 
56,800

 

 

 

 Finite-life tradenames
2-20 years
 
42,021

 
38,915

 
3,106

 
42,005

 
38,810

 
3,195

Total tradenames
 
 
$
404,554


$
38,915

 
$
365,639

 
$
347,738

 
$
38,810

 
$
308,928

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Skip Hop customer relationships (1)
15 years
 
35,900

 
804

 
35,096

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total tradenames and other intangibles, net
 
 
$
440,454

 
$
39,719

 
$
400,735

 
$
347,738

 
$
38,810

 
$
308,928


(1) Subject to revision. The measurement period, as defined in ASC 805, Business Combinations, is open for certain assets and liabilities related to the Skip Hop business acquisition that closed on February 22, 2017.



9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
 
July 2, 2016
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
Carter's goodwill
Indefinite
 
$
136,570

 
$

 
$
136,570

Canadian acquisition
Indefinite
 
40,970

 

 
40,970

Total goodwill
 
 
$
177,540

 
$

 
$
177,540

 
 
 
 
 
 
 
 
Carter's tradename    
Indefinite
 
$
220,233

 
$

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 

 
85,500

Finite-life tradenames
2-20 years
 
42,022

 
38,738

 
3,284

Total tradenames
 
 
$
347,755

 
$
38,738

 
$
309,017


The substantial majority of Skip Hop's wholesale operations became part of the Company's U.S. Wholesale reportable segment, with the remainder becoming part of the Company's International reportable segment. Skip Hop's eCommerce operations became part of the U.S. Retail reportable segment.

Changes in the carrying values between comparative periods for goodwill related to the Company's 2011 acquisition of its Canadian business (Bonnie Togs) were due to fluctuations in the foreign currency exchange rates between the Canadian and U.S. dollar that were used in the remeasurement process for preparing the Company's consolidated financial statements. The portion of the changes in the carrying values for other trademarks, including the related accumulated amortization, that was not attributable to amortization expense was also impacted by these same foreign currency exchange rate fluctuations.

Included in finite-life tradenames is the Company's exclusive rights to the Carter's brands in Chile, including trademark registrations. The Company acquired the Chile rights in 2014 for approximately $3.6 million in cash. This intangible tradename is being amortized over 20 years using a straight-line method, resulting in approximately $0.2 million of amortization expense for each fiscal year during the life of intangible asset. During the first quarter and first two quarters of fiscal 2016, the Company also recorded amortization expense of approximately $0.8 million and $1.7 million, respectively, for the H.W. Carter and Sons tradenames, which have been fully amortized.

For the Skip Hop customer relationships intangible asset acquired in February 2017, the Company recorded approximately $0.6 million and $0.8 million, respectively, of amortization expense for the fiscal quarter and two fiscal quarters ended July 1, 2017. Future amortization expense is estimated to be approximately $2.4 million each year for the next 15 years.



NOTE 5 – COMMON STOCK

SHARE REPURCHASES

The total aggregate remaining capacity under outstanding repurchase authorizations as of July 1, 2017 was approximately $176.2 million, based on settled repurchase transactions. The authorizations have no expiration date.

Open Market Repurchases

The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Number of shares repurchased
587,465

 
1,049,483

 
1,131,409

 
1,771,847

Aggregate cost of shares repurchased (dollars in thousands)
$
51,605

 
$
108,648

 
$
98,236

 
$
180,209

Average price per share
$
87.84

 
$
103.52

 
$
86.82

 
$
101.71


10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be determined by the Company's management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

DIVIDENDS

In the second fiscal quarter and two fiscal quarters ended July 1, 2017, the Company paid cash dividends per share of $0.37 and $0.74, respectively. In the second fiscal quarter and two fiscal quarters ended July 2, 2016, the Company declared and paid cash dividends per share of $0.33 and $0.66, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and based on a number of factors, including the Company's future financial performance and other investment priorities.

Provisions in the indenture governing the senior notes of TWCC and in TWCC's secured revolving credit facility could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock. Provisions related to the indenture governing the senior notes are described in the Company's Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016.


NOTE 6 – LONG-TERM DEBT


Long-term debt consisted of the following:
(dollars in thousands)
July 1, 2017
 
December 31, 2016
 
July 2, 2016
Senior notes at amounts repayable
$
400,000

 
$
400,000

 
$
400,000

Less unamortized issuance-related costs for senior notes
(4,154
)
 
(4,601
)
 
(5,036
)
      Senior notes, net
395,846

 
395,399

 
394,964

Secured revolving credit facility
266,000

 
184,977

 
185,714

Total long-term debt, net
$
661,846

 
$
580,376

 
$
580,678


On July 19, 2017, the Company borrowed an additional $100 million under its secured revolving credit facility primarily for seasonal working capital needs, bringing total outstanding borrowings under this facility to $366 million, excluding accrued interest.


Secured Revolving Credit Facility

The aggregate principal amount of the Company's amended and restated secured revolving credit facility is $500 million consisting of (i) a $400 million U.S. dollar revolving credit facility (including a $175 million sub-limit for letters of credit and a swing line sub-limit of $50 million) available for borrowings by TWCC and (ii) a $100 million multicurrency revolving credit facility (including a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million) available for borrowings by TWCC and certain other subsidiaries of TWCC in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. The secured revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed $250 million, either in the form of a commitment increase under the existing revolving credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount available to the Company not to exceed $200 million and the aggregate multicurrency amount available not to exceed $50 million). The Company's secured revolving credit facility matures on September 16, 2020.

As of July 1, 2017, the Company had $266.0 million in outstanding borrowings under its secured revolving credit facility, exclusive of $4.5 million of outstanding letters of credit. As of July 1, 2017, approximately $229.5 million remained available for future borrowing. All outstanding borrowings under the Company's secured revolving credit facility are classified as non-current liabilities on the Company's consolidated balance sheet because of the contractual repayment terms under the credit facility.


11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of July 1, 2017, the interest rate margins applicable to the secured revolving credit facility were 1.375% for LIBOR (London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of July 1, 2017, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which resulted in a weighted average borrowing rate of 2.55%. All outstanding Canadian dollar borrowings were repaid during the first quarter of fiscal 2017. There were no Canadian dollar borrowings during the second quarter of fiscal 2017.

As disclosed in the Company's most recent Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016, the Company's secured revolving credit facility contains covenants, including affirmative and financial covenants. As of July 1, 2017, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.


Senior Notes

As of July 1, 2017, TWCC had outstanding $400 million principal amount of senior notes bearing interest at a fixed rate of 5.25% per annum and maturing on August 15, 2021. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC. On the Company's consolidated balance sheet, the senior notes are reported net of certain unamortized issuance-related costs, as described in the table above.


NOTE 7 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation expense as follows:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Stock options
$
955

 
$
981

 
$
2,199

 
$
2,277

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
2,832

 
1,717

 
5,144

 
3,862

   Performance-based awards
1,080

 
832

 
2,303

 
1,947

   Stock awards

 
1,164

 

 
1,164

Total
$
4,867

 
$
4,694

 
$
9,646

 
$
9,250



NOTE 8 – EMPLOYEE BENEFIT PLANS

The Company maintains a defined contribution plan and two frozen defined benefit plans. The two frozen defined benefit plans include the OshKosh B'Gosh pension plan and a post-retirement life and medical plan.
    
OSHKOSH B'GOSH PENSION PLAN
    
The components of net periodic pension cost included in the statement of operations were comprised of:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Interest cost
$
611

 
$
629

 
$
1,222

 
$
1,258

Expected return on plan assets
(650
)
 
(676
)
 
(1,300
)
 
(1,352
)
Recognized actuarial loss
170

 
145

 
340

 
290

Net periodic pension cost
$
131

 
$
98

 
$
262

 
$
196




12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement (benefit) cost included in the statement of operations were comprised of:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
Service cost – benefits attributed to service during the period
$
7

 
$
31

 
$
14

 
$
62

Interest cost on accumulated post-retirement benefit obligation
34

 
44

 
68

 
88

Amortization net actuarial gain
(76
)
 
(49
)
 
(152
)
 
(98
)
Total net periodic post-retirement (benefit) cost
$
(35
)
 
$
26

 
$
(70
)
 
$
52




    

NOTE 9 – INCOME TAXES

As of July 1, 2017, the Company had gross unrecognized income tax benefits of approximately $11.5 million, of which $8.2 million, if ultimately recognized, may affect the Company's effective tax rate in the periods settled.  The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.  

Included in the reserves for unrecognized tax benefits at July 1, 2017 were approximately $1.5 million of reserves for which the statute of limitations is expected to expire within the next fiscal year.  If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2017 or fiscal 2018 along with the effective tax rate in the quarter in which the benefits are recognized. 

The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized tax benefits as a component of income tax expense.  During the fiscal quarter and two fiscal quarters ended July 1, 2017 and the fiscal quarter and two fiscal quarters ended July 2, 2016, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $1.1 million, $0.8 million, and $0.8 million of interest accrued on uncertain tax positions as of July 1, 2017, December 31, 2016, and July 2, 2016, respectively.

As disclosed in note 2, the Company's adoption of ASU 2016-09 benefited consolidated income tax expense by approximately $1.2 million for the first two quarters of fiscal 2017. The adoption of ASU 2016-09 had no impact on income tax expense for prior periods.

As disclosed in note 2, the Company prospectively adopted the provisions for classification of deferred income tax assets and liabilities on the Company's consolidated balance sheet at the beginning of fiscal 2017. Classifications for deferred income tax assets and liabilities for prior periods have not been adjusted on the Company's consolidated balance sheets.    

Deferred income tax liabilities on the Company's consolidated balance sheet at July 1, 2017 increased by $33.5 million due to the acquisition of Skip Hop during the first quarter of fiscal 2017.

For the full fiscal year 2017, the Company estimates that its consolidated effective income tax rate will be approximately 35.0%.



NOTE 10 – FAIR VALUE MEASUREMENTS

The following table summarizes assets and liabilities that are remeasured at fair value each reporting period:


13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
July 1, 2017
 
 
December 31, 2016
 
 
July 2, 2016
(dollars in millions)
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments (1)
$
15.3

 

 

 
 
$
12.3

 

 

 
 
$
10.9

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration (2)

 

 
$
3.6

 
 

 

 

 
 

 

 

 
Foreign exchange forward contracts (3)

 

 

 
 

 

 

 
 

 
$
1.3

 


(1) Included in Other Assets on the Company's consolidated balance sheet.
(2) Included in Other Current Liabilities on the Company's consolidated balance sheet.
(3) Included in Other Current Liabilities on the Company's consolidated balance sheet.

INVESTMENTS

The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. Gains on the investments in marketable securities were $0.5 million and $1.2 million for the fiscal quarter and two fiscal quarters ended July 1, 2017, respectively, and were $0.7 million and $0.3 million for the fiscal quarter and two fiscal quarters ended July 2, 2016, respectively. These amounts are included in Other (income) expense, net.


CONTINGENT CONSIDERATION

In connection with the Company's acquisition of Skip Hop on February 22, 2017, the Company may be obligated to pay an amount up to $10 million of additional cash consideration to the sellers of Skip Hop if the acquired business achieves certain financial performance targets in fiscal 2017 for net sales and adjusted operating margin, as defined in the stock purchase agreement. The Company has preliminarily estimated the discounted fair value of this contingency to be approximately $3.6 million (undiscounted approximately $3.8 million) based on weighted probabilities of 25%, 25% and 50% for each possible payment amount under the earnout. The Company remeasures the fair value of this contingency at the end of each reporting period in fiscal 2017.


FOREIGN EXCHANGE FORWARD CONTRACTS

Fair values for unsettled foreign exchange forward contracts are calculated by using readily observable market inputs (market-quoted currency exchange rates in effect between U.S. and Canadian dollars) and are classified as Level 2 within the fair value hierarchy. At July 1, 2017 and December 31, 2016, there were no open foreign currency contracts. At July 2, 2016, the notional value of the open foreign currency forward contracts was approximately $20.0 million.


DEBT OBLIGATIONS

The Company's outstanding debt obligations are reflected in the consolidated balance sheet at carrying value. These debt obligations are not remeasured at fair value each reporting period, however the following fair value disclosures are provided:

As of July 1, 2017, the fair value of the Company's $266.0 million in outstanding borrowings under its secured revolving credit facility approximated carrying value. On July 19, 2017, the Company borrowed an additional $100 million under its secured revolving credit facility primarily for seasonal working capital needs, bringing total outstanding borrowings under this facility to $366 million. Fair value approximates carrying value of $366 million.

The fair value of the Company's senior notes at July 1, 2017 was approximately $412 million. The fair value of these senior notes with a notional value and carrying value of $400 million was estimated using a quoted price as provided in the secondary market, which considers the Company's credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 11 – EARNINGS PER SHARE

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
July 1, 2017
 
July 2, 2016
 
July 1, 2017
 
July 2, 2016
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
47,863,618

 
50,143,568

 
48,093,155

 
50,660,278

Dilutive effect of equity awards
550,726

 
469,114

 
552,866

 
468,632

Diluted number of common and common equivalent shares outstanding
48,414,344

 
50,612,682

 
48,646,021

 
51,128,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
37,925

 
$
36,198

 
$
84,589

 
$
90,178

Income allocated to participating securities
(291
)
 
(279
)
 
(660
)
 
(720
)
Net income available to common shareholders
$
37,634

 
$
35,919

 
$
83,929

 
$
89,458

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.79

 
$
0.72

 
$
1.75

 
$
1.77

 
 
 
 
 
 
 
 
Diluted net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
37,925

 
$
36,198

 
$
84,589

 
$
90,178

Income allocated to participating securities
(289
)
 
(278
)
 
(656
)
 
(715
)
Net income available to common shareholders
$
37,636

 
$
35,920

 
$
83,933

 
$
89,463

 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.78

 
$
0.71

 
$
1.73

 
$
1.75

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from diluted earnings per share computation
663,531

 
233,570

 
596,297

 
233,570







15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities that exceeded five percent of total current liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
July 1, 2017
 
December 31, 2016
 
July 2, 2016
Accrued bonuses and incentive compensation
$
5,959

 
$
16,834

 
$
6,694

Accrued employee benefits
10,227

 
17,165

 
8,718

Accrued and deferred rent
17,767

 
15,632

 
13,930

    
Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
July 1, 2017
 
December 31, 2016
 
July 2, 2016
Deferred lease incentives
$
74,344

 
$
74,015

 
$
71,884



NOTE 13 – COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims and pending or threatened lawsuits in the normal course of business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse impact on its financial position, results of operations, or cash flows.


NOTE 14 – SEGMENT INFORMATION

At the beginning of fiscal 2017, the Company combined its Carter's Retail and OshKosh Retail into a single U.S. Retail operating segment, and its Carter's Wholesale and OshKosh Wholesale into a single U.S. Wholesale operating segment, in order to reflect the sales-channel approach the Company's executive management now uses to evaluate its business performance and manage operations in the U.S.  The Company's International segment was not affected by these changes. The Company's reportable segments are now U.S. Retail, U.S. Wholesale, and International.

Prior periods have been conformed to reflect the Company's current segment structure by adding together Carter's Retail and OshKosh Retail as U.S. Retail and Carter's Wholesale and OshKosh Wholesale as U.S. Wholesale. Prior results for the International segment and Corporate expenses were not impacted.

The table below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
July 1,
2017
 
% of
Total Net Sales
 
July 2,
2016
 
% of
Total Net Sales
 
July 1,
2017
 
% of
Total Net Sales
 
July 2,
2016
 
% of
Total Net Sales
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Wholesale
$
217,710

 
31.5
%
 
$
215,122

 
33.6
%
 
$
510,265

 
35.8
%
 
$
507,176

 
37.2
%
U.S. Retail (a)
391,822

 
56.6
%
 
352,782

 
55.2
%
 
755,593

 
53.0
%
 
706,871

 
51.8
%
International (b)     
82,585

 
11.9
%
 
71,567

 
11.2
%
 
159,014

 
11.2
%
 
149,509

 
11.0
%
Total net sales
$
692,117

 
100.0
%
 
$
639,471

 
100.0
%
 
$
1,424,872

 
100.0
%
 
$
1,363,556

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
U.S. Wholesale (g)
$
35,806

 
16.4
%
 
$
41,509

 
19.3
%
 
$
105,501

 
20.7
%
 
$
109,920

 
21.7
%
U.S. Retail (a) (g)
42,342

 
10.8
%
 
36,952

 
10.5
%
 
72,242

 
9.6
%
 
76,421

 
10.8
%
International (b) (g)    
7,597

 
9.2
%
 
9,105

 
12.7
%
 
11,282

 
7.1
%
 
17,546

 
11.7
%
Corporate expenses (c) (d) (e) (f)    
(21,224
)
 


 
(24,323
)
 


 
(45,938
)
 


 
(47,636
)
 


Total operating income
$
64,521

 
9.3
%
 
$
63,243

 
9.9
%
 
$
143,087

 
10.0
%
 
$
156,251

 
11.5
%

(a)
Includes retail store and eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales.
(c)
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, office occupancy, information technology, certain legal fees, consulting, and audit fees.
(d)
Includes expenses related to the amortization of the H.W. Carter and Sons tradenames of approximately $0.8 million and $1.7 million for the fiscal quarter and two fiscal quarters ended July 2, 2016, respectively.
(e)
Includes acquisition-related expenses of approximately $0.6 million and $1.8 million for fiscal quarter the two fiscal quarters ended July 1, 2017, respectively.
(f)
Includes charges related to the Company's direct sourcing initiative of approximately $0.1 and $0.3 million for the fiscal quarter and two fiscal quarters ended July 1, 2017, respectively.
(g)
A total of $0.4 million of certain costs related to inventory acquired from Skip Hop is included in operating income between U.S. Wholesale, U.S. Retail, and International for the fiscal quarter and two fiscal quarters ended July 1, 2017.
    

NOTE 15 – PENDING ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition (ASC 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which since has been codified in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). This guidance clarifies the principles for recognizing revenue and will be applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance will require improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Since its original issuance, the FASB has issued several updates to this guidance, and additional updates are possible. The standard will be effective for the Company at the beginning of fiscal 2018, including interim periods within that fiscal year. Upon adoption, the Company will apply the provisions of ASC 606 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. Based on an assessment of the Company's significant sources of revenue, at this time the Company does not believe that the adoption of ASC 606, including any of the policy elections required or permitted by ASC 606, will have a material impact on its consolidated financial position, results of operations or cash flows. Based on this assessment, at this time the Company does not believe the adoption of ASC 606 will have a significant impact on processes, systems, or controls.


Leases (ASU 2016-02)

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842 ("ASU 2016-02"). Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. ASU

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2016-02 will have little or no impact on an entity's results of operations or cash flows. The new standard will be effective for the Company at the beginning of fiscal 2019, including interim periods within the year of adoption. The new standard requires a modified retrospective basis, and early adoption is permitted. The Company is still evaluating the potential impacts of ASU 2016-02 on its consolidated balance sheet. However, the Company expects that the adoption of ASU 2016-02 will require the Company to recognize right-of-use assets and lease liabilities that will be material to the Company's consolidated balance sheet.


Credit Losses (ASU 2016-13)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, an entity will recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019 with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods therein. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable.


Classification of Costs Related to Defined Benefit Pension and Other Post-retirement Benefit Plans (ASU 2017-07)

In March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 will change how employers that sponsor defined benefit pension and/or other post-retirement benefit plans present the net periodic benefit costs in the statement of operations. Under this new guidance, an employer's statement of operations will present service cost arising in the current period in the same income statement line item as other employee compensation. However, all other components of current period costs related to defined benefit plans, such as prior service costs and actuarial gains and losses, will be presented on the income statement on a line item outside (or below) operating income. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. Presentation of the components of net periodic benefit cost on the income statement will be applied retrospectively. The impact that ASU 2017-07 will have on the Company's operating income will depend on future periodic pension costs related to the Company's current frozen defined benefit pension plan and post-retirement medical benefit plan. However, based on these costs in recent annual and interim reporting periods, the adoption of ASU 2017-07 is not expected to be material to the Company's operating income.


Goodwill Impairment Testing (ASU 2017-04)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, ASU 2017-04 will be applied prospectively. Adoption for public companies is effective for annual and interim impairment test performed in periods after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.


18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Statement of Cash Flows (ASU 2016-15)
 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) ("ASU 2016-15"). This ASU represents a consensus of the FASB’s Emerging Issues Task Force on eight separate issues that each impact classifications on the statement of cash flows. In particular, issue number three addresses the classification of contingent consideration payments made after a business combination. Under ASU 2016-15, cash payments made soon after an acquisition’s consummation date (i.e., approximately three months or less) will be classified as cash outflows from investing activities. Payments made thereafter will be classified as cash outflows from financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities. For public business entities, ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  The guidance requires application using a retrospective transition method.  Early adoption is permitted, provided that all of the amendments are adopted in the same period. At the current time, none of the other items contained in ASU 2016-15 are expected to impact the Company's classifications on its consolidated statement of cash flows.


Modifications to Share-based Compensation Awards (ASU 2017-09)

In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation Topic 718-Scope of Modification Accounting ("ASU 2017-09"). This guidance will clarify when changes to the terms and conditions of share-based payment awards must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions, or classification of an award changes. ASU 2017-07 is effective for the Company at the beginning of fiscal 2018, including interim periods within fiscal 2018. Early adoption is permitted. The guidance will be applied prospectively to awards modified on or after adoption. The impact that ASU 2017-09 may have on the Company's results of operations, financial condition, or cash flows subsequent to adoption will be dependent on the terms and conditions of any modifications made to share-based awards after fiscal 2017.

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company’s senior notes constitute debt obligations of its wholly-owned subsidiary, The William Carter Company ("TWCC" or the "Subsidiary Issuer"), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the "Parent"), by certain of the Parent's current domestic subsidiaries (other than TWCC), and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s secured revolving credit facility or certain other debt of the Company or the subsidiary guarantors. Under specific customary conditions, the guarantees are not full and unconditional because subsidiary guarantors can be released and relieved of their obligations under customary circumstances contained in the indenture governing the senior notes. These circumstances include, among others, the following, so long as other applicable provisions of the indentures are adhered to: any sale or other disposition of all or substantially all of the assets of any subsidiary guarantor, any sale or other disposition of capital stock of any subsidiary guarantor, or designation of any restricted subsidiary that is a subsidiary guarantor as an unrestricted subsidiary.

For additional information, refer to the Company's Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016.
The condensed consolidating financial information for the Parent, the Subsidiary Issuer, and the guarantor and non-guarantor subsidiaries has been prepared from the books and records maintained by the Company. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10. The financial information may not necessarily be indicative of the financial position, results of operations, comprehensive income (loss), and cash flows, had the Parent, Subsidiary Issuer, guarantor or non-guarantor subsidiaries operated as independent entities.
Intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several, and unconditional.



20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.
Condensed Consolidating Balance Sheets (unaudited)

As of July 1, 2017
(dollars in thousands)

 
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
127,907

 
$
11,435

 
$
34,222

 
$

 
$
173,564

Accounts receivable, net

 
124,885

 
35,765

 
4,533

 

 
165,183

Intercompany receivable

 
56,526

 
61,911

 
25,588

 
(144,025
)
 

Finished goods inventories

 
346,963

 
207,368

 
68,262

 
(12,170
)
 
610,423

Prepaid expenses and other current assets

 
16,684

 
18,002

 
9,841

 

 
44,527

Total current assets

 
672,965

 
334,481

 
142,446

 
(156,195
)
 
993,697

Property, plant, and equipment, net

 
150,796

 
195,209

 
36,467

 

 
382,472

Goodwill

 
136,570

 
53,635

 
41,504

 

 
231,709

Tradenames and other intangible assets, net

 
223,339

 
177,396

 

 

 
400,735

Other assets

 
20,901

 
447

 
1,898

 

 
23,246

Intercompany long-term receivable

 

 
411,475

 

 
(411,475
)
 

Intercompany long-term note receivable

 
100,000

 

 

 
(100,000
)
 

Investment in subsidiaries
749,911

 
936,310

 
167,809

 

 
(1,854,030
)
 

Total assets
$
749,911

 
$
2,240,881

 
$
1,340,452

 
$
222,315

 
$
(2,521,700
)
 
$
2,031,859

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
151,770

 
$
47,695

 
$
17,875

 
$

 
$
217,340

Intercompany payables

 
82,539

 
57,034

 
4,452

 
(144,025
)
 

Other current liabilities

 
32,973

 
53,114

 
8,557

 

 
94,644

Total current liabilities

 
267,282

 
157,843

 
30,884

 
(144,025
)
 
311,984

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, net

 
661,846

 

 

 

 
661,846

Deferred income taxes

 
69,750

 
63,400

 
101

 

 
133,251

Intercompany long-term liability

 
411,475

 

 

 
(411,475
)
 

Intercompany long-term note payable

 

 
100,000

 

 
(100,000
)
 

Other long-term liabilities

 
68,447

 
92,236

 
14,184

 

 
174,867

Stockholders' equity
749,911

 
762,081

 
926,973

 
177,146

 
(1,866,200
)
 
749,911

Total liabilities and stockholders' equity
$
749,911

 
$
2,240,881

 
$
1,340,452

 
$
222,315

 
$
(2,521,700
)
 
$
2,031,859






21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


As of December 31, 2016
(dollars in thousands)

 
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
229,056

 
$
11,817

 
$
58,485

 
$

 
$
299,358

Accounts receivable, net

 
176,825

 
18,315

 
7,331

 

 
202,471

Intercompany receivable

 
55,902

 
74,681

 
14,601

 
(145,184
)
 

Finished goods inventories

 
278,696

 
174,542

 
60,153

 
(25,800
)
 
487,591

Prepaid expenses and other current assets

 
11,402

 
16,028

 
4,750

 

 
32,180

Deferred income taxes

 
18,476

 
15,440

 
1,570

 

 
35,486

Total current assets

 
770,357

 
310,823

 
146,890

 
(170,984
)
 
1,057,086

Property, plant, and equipment, net

 
155,187

 
194,691

 
35,996

 

 
385,874

Goodwill

 
136,570

 

 
39,439

 

 
176,009

Tradenames and other intangible assets, net

 
223,428

 
85,500

 

 

 
308,928

Other assets

 
17,771

 
605

 
324

 

 
18,700

Intercompany long-term receivable

 

 
428,436

 

 
(428,436
)
 

Intercompany long-term note receivable

 
100,000

 

 

 
(100,000
)
 

Investment in subsidiaries
788,124

 
753,753

 
145,076

 

 
(1,686,953
)
 

Total assets
$
788,124

 
$
2,157,066

 
$
1,165,131

 
$
222,649

 
$
(2,386,373
)
 
$
1,946,597

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
97,103

 
$
41,947

 
$
19,382

 
$

 
$
158,432

Intercompany payables

 
85,894