ACQUISITIONS

The Company completed two separate business acquisitions, "Skip Hop" and "Carter's Mexico," during fiscal 2017. Each acquisition was deemed to be the acquisition of a business under the provisions of Accounting Standards Codification ("ASC") No. 805, Business Combinations.

Based on their purchase prices and pre-acquisition operating results and assets, neither of the businesses acquired in fiscal 2017 met the materiality requirements for preparation and presentation of pro forma financial information, either individually or in the aggregate.

Acquisition of Mexican Licensee

On August 1, 2017, the Company, through certain of its wholly-owned subsidiaries, acquired the outstanding equity of the Company's licensee in Mexico and a related entity (collectively "Carter's Mexico"). Both entities are incorporated under Mexican law. Prior to the acquisition, Carter's Mexico was primarily a licensee and wholesale customer of the Company. Through this acquisition, the Company obtained a network of retail stores in Mexico and control of wholesale business relationships in Mexico. The acquisition is expected to strengthen the Company's operations in Mexico and further increase its overall market share in the North American market for children's apparel and accessories. Upon acquisition, Carter's Mexico became part of the Company's International operating and reportable segment. At the acquisition date, all of the goodwill from the Carter's Mexico acquisition was assigned to the International reportable segment.

The Company's consolidated financial statements reflect the consolidation of the financial position, results of operations and cash flows of Carter's Mexico beginning August 1, 2017.

The measurement period, as defined under the provisions of ASC 805, is still open for this acquisition. Adjustments related to a working capital settlement, settlements of certain pre-acquisition tax matters, and the finalizations of fair value estimates for certain assets and liabilities may be made. Included among the assets acquired, and the preliminary fair values assigned to them as of December 30, 2017, were inventories of approximately $8.3 million, a customer relationships intangible asset of approximately $3.5 million, and goodwill of approximately $6.2 million. In addition, the Company paid approximately $1.4 million in acquisition-related costs during fiscal 2017 for Carter's Mexico.

Acquisition of Skip Hop

Carter's, Inc.'s wholly-owned subsidiary, The William Carter Company ("TWCC"), acquired 100% of the voting equity interests of privately-owned Skip Hop Holdings, Inc. and subsidiaries ("Skip Hop") after the close of business on February 22, 2017. The Company's consolidated financial statements and accompanying notes include Skip Hop results beginning on February 23, 2017. The acquisition expanded the Company’s product offerings to include complementary essential core products for families with young children. The Skip Hop branded product line includes diaper bags, kid’s backpacks, travel accessories, home gear, and hardline goods for playtime, mealtime, and bath time. Skip Hop branded products are now sold through the Company's wholesale, retail store, and eCommerce channels. At acquisition date, Skip Hop's goodwill was assigned to reportable segments as follows: 62% to U.S. Wholesale, 34% to International, and 4% to U.S. Retail.

The measurement period is no longer open for the Skip Hop acquisition.

During fiscal 2017, Skip Hop branded products contributed approximately $96.3 million to the Company's consolidated net sales. The Company paid approximately $2.0 million and $2.4 million in acquisition-related costs for Skip Hop in fiscal 2017 and fiscal 2016, respectively.

Assets acquired and liabilities assumed, including all measurement period adjustments, were as follows:



(in millions)

Assets acquired:
Current assets, including cash acquired of $0.8 million	$	50.0
Goodwill *	46.0
Tradename	56.8
Customer relationships	47.3
Other non-current assets	3.9
Total assets acquired	$	204.0

Liabilities assumed:
Current liabilities	$	20.8
Deferred income tax liabilities	36.3
Total liabilities assumed	$	57.1
	.
Net assets acquired	$	146.9
Less cash acquired at acquisition	$	(0.8	)
Less estimated contingent consideration (1)	$	(3.6	)
Net purchase price (2)	$	142.5

* Not deductible for income taxes

(1) This amount represented the estimated fair value of the contingent earn out liability based on facts and circumstances known and existing on acquisition date concerning the expected achievement of certain financial performance targets for fiscal 2017 as described in the stock purchase agreement. Facts and circumstances that occurred subsequent to the acquisition during fiscal 2017 indicated that this contingent earn out arrangement would not be achieved, and therefore approximately $3.6 million was credited to the Company's earnings during the third quarter of fiscal 2017. This credit has no related income tax provision and has been classified entirely as a credit to corporate Selling, General & Administrative (SG&A) expenses.

(2) Reflects a working capital settlement of approximately $1.3 million.

For both business acquisitions made in fiscal 2017, the fair value of customer relationships was based on the excess earnings method while the fair value of tradenames was based on the relief from royalty method. The categorization of the fair value framework used for these methods are considered Level 3 due to the subjective nature of the unobservable inputs used to determine the fair value.

The goodwill represents the intangible assets that do not qualify for separate recognition and is primarily the result of expected synergies, vertical integration as a market for selling inventory, and the acquired workforce. Goodwill related to acquisitions made in fiscal 2017 is generally not deductible by the Company for income tax purposes.