Q2 2014 10-Q

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 JUNE 28, 2014 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, or a smaller reporting company. See definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )
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 18, 2014
Common stock, par value $0.01 per share
 
53,142,916











CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of June 28, 2014, December 28, 2013, and June 29, 2013
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and two fiscal quarters ended June 28, 2014 and June 29, 2013
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and two fiscal quarters ended June 28, 2014 and June 29, 2013
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the two fiscal quarters ended June 28, 2014
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the two fiscal quarters ended June 28, 2014 and June 29, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 



PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
(unaudited)
 
June 28, 2014
 
December 28, 2013
 
June 29, 2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
207,920

 
$
286,546

 
$
312,132

Accounts receivable, net
133,885

 
193,611

 
133,277

Finished goods inventories, net
538,233

 
417,754

 
429,223

Prepaid expenses and other current assets
43,684

 
35,157

 
48,621

Deferred income taxes
36,534

 
37,313

 
32,948

Total current assets
960,256

 
970,381

 
956,201

Property, plant, and equipment, net
325,675

 
307,885

 
208,094

Tradenames and other intangibles, net
318,346

 
330,258

 
342,883

Goodwill
186,173

 
186,077

 
186,957

Deferred debt issuance costs, net
7,407

 
8,088

 
2,486

Other assets
11,305

 
9,795

 
5,130

Total assets
$
1,809,162

 
$
1,812,484

 
$
1,701,751

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
164,199

 
$
164,010

 
$
199,588

Other current liabilities
75,561

 
105,129

 
74,062

Total current liabilities
239,760

 
269,139

 
273,650

 
 
 
 
 
 
Long-term debt
586,000

 
586,000

 
186,000

Deferred income taxes
114,878

 
121,434

 
112,171

Other long-term liabilities
148,152

 
135,180

 
108,993

Total liabilities
$
1,088,790

 
$
1,111,753

 
$
680,814

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at June 28, 2014, December 28, 2013, and June 29, 2013
—

 
—

 
—

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 53,311,864, 54,541,879 and 59,353,894 shares issued and outstanding at June 28, 2014, December 28, 2013 and June 29, 2013, respectively
533

 
545

 
594

Additional paid-in capital
—

 
4,332

 
238,167

Accumulated other comprehensive loss
(10,050
)
 
(10,082
)
 
(15,207
)
Retained earnings
729,889

 
705,936

 
797,383

Total stockholders' equity
720,372

 
700,731

 
1,020,937

Total liabilities and stockholders' equity
$
1,809,162

 
$
1,812,484

 
$
1,701,751



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
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net sales
$
574,065

 
$
517,874

 
$
1,225,709

 
$
1,108,883

Cost of goods sold
328,588

 
297,629

 
718,507

 
645,576

Gross profit
245,477

 
220,245

 
507,202

 
463,307

Selling, general, and administrative expenses
206,315

 
195,014

 
416,410

 
380,375

Royalty income
(8,185
)
 
(7,507
)
 
(18,086
)
 
(16,749
)
Operating income
47,347

 
32,738

 
108,878

 
99,681

Interest expense
6,882

 
1,254

 
13,780

 
2,547

Interest income
(140
)
 
(194
)
 
(272
)
 
(384
)
Other expense (income), net
(189
)
 
531

 
407

 
1,104

Income before income taxes
40,794

 
31,147

 
94,963

 
96,414

Provision for income taxes
14,897

 
11,474

 
34,770

 
35,326

Net income
$
25,897

 
$
19,673

 
$
60,193

 
$
61,088

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.48

 
$
0.33

 
$
1.12

 
$
1.03

Diluted net income per common share
$
0.48

 
$
0.33

 
$
1.11

 
$
1.02

Dividend declared and paid per common share
$
0.19

 
$
0.16

 
$
0.38

 
$
0.16


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
 
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Net income
$
25,897

 
$
19,673

 
$
60,193

 
$
61,088

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,792

 
(2,537
)
 
32

 
(4,002
)
Comprehensive income
$
28,689

 
$
17,136

 
$
60,225

 
$
57,086



See accompanying notes to the unaudited condensed consolidated financial statements.


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) income
 
Retained
earnings
 
Total
stockholders’
equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 28, 2013
54,541,879

 
$
545

 
$
4,332

 
$
(10,082
)
 
$
705,936

 
$
700,731

Income tax benefit from stock-based compensation
—

 
—

 
3,750

 
—

 
—

 
3,750

Exercise of stock options
213,926

 
1

 
6,547

 
—

 
—

 
6,548

Withholdings from vesting of restricted stock
(62,645
)
 


 
(4,251
)
 
—

 
—

 
(4,251
)
Restricted stock activity
126,450

 
2

 
(2
)
 
—

 
—

 
—

Stock-based compensation expense
—

 
—

 
8,748

 
—

 
—

 
8,748

Issuance of common stock
15,559

 
—

 
1,081

 
—

 
—

 
1,081

Repurchase of common stock
(1,523,305
)
 
(15
)
 
(20,205
)
 
—

 
(15,860
)
 
(36,080
)
Cash dividends declared and paid
—

 
—

 
—

 
—

 
(20,380
)
 
(20,380
)
Comprehensive income
—

 
—

 

 
32

 
60,193

 
60,225

Balance at June 28, 2014
53,311,864

 
$
533

 
$
—

 
$
(10,050
)
 
$
729,889

 
$
720,372


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
 
June 28, 2014
 
June 29, 2013
Cash flows from operating activities:
 
 
 
Net income
$
60,193

 
$
61,088

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,679

 
24,936

Amortization of H.W. Carter and Sons tradenames
11,877

 
1,000

Non-cash revaluation of contingent consideration
451

 
1,866

Amortization of debt issuance costs
763

 
392

Non-cash stock-based compensation expense
9,829

 
8,425

Income tax benefit from stock-based compensation
(3,750
)
 
(9,929
)
Loss on disposal of property, plant, and equipment
544

 
112

Deferred income taxes
(5,626
)
 
557

Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
59,761

 
34,519

Inventories
(120,383
)
 
(81,361
)
Prepaid expenses and other assets
(9,979
)
 
(28,136
)
Accounts payable and other liabilities
(235
)
 
56,371

Net cash provided by operating activities
33,124

 
69,840

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(61,300
)
 
(70,566
)
Acquisitions
—

 
(38,007
)
Proceeds from sale of property, plant, and equipment
134

 
—

Net cash used in investing activities
(61,166
)
 
(108,573
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payments of debt issuance costs
(114
)
 
—

Repurchase of common stock
(36,080
)
 
(37,757
)
Dividends paid
(20,380
)
 
(9,522
)
Income tax benefit from stock-based compensation
3,750

 
9,929

Withholdings from vesting of restricted stock
(4,251
)
 
(4,539
)
Proceeds from exercise of stock options
6,548

 
11,210

Net cash used in financing activities
(50,527
)
 
(30,679
)
 
 
 
 
Effect of exchange rate changes on cash
(57
)
 
(692
)
Net decrease in cash and cash equivalents
(78,626
)
 
(70,104
)
Cash and cash equivalents, beginning of period
286,546

 
382,236

Cash and cash equivalents, end of period
$
207,920

 
$
312,132


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” and “its”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One You, Precious Firsts, OshKosh, and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for the Company's own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of June 28, 2014, the Company operated 509 Carter’s stores in the United States, 187 OshKosh stores in the United States, and 110 stores in Canada.

NOTE 2 – BASIS OF PREPARATION

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 stockholder’s 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 ended June 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending January 3, 2015.

The accompanying condensed consolidated balance sheet as of December 28, 2013 is 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. The accounting policies the Company follows are set forth in the Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Certain prior year amounts have been reclassified to facilitate comparability with current year presentation.

The Company's fiscal year ends on the Saturday, in December or January, nearest the last day of December, resulting in an additional week of results every five or six years. As a result, fiscal 2014, ending on January 3, 2015 will be comprised of 53 weeks.

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive income (loss) consisted of the following:

(dollars in thousands)
June 28, 2014
 
December 28, 2013
 
June 29, 2013
Cumulative foreign currency translation adjustments
$
(7,520
)
 
$
(7,552
)
 
$
(6,068
)
Pension and post-retirement liability adjustment
(2,530
)
 
(2,530
)
 
(9,139
)
Total accumulated other comprehensive income (loss)
$
(10,050
)
 
$
(10,082
)
 
$
(15,207
)



6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s goodwill and other intangible assets were as follows:
 
 
 
June 28, 2014
 
December 28, 2013
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

 
$
136,570

 
$
—

 
$
136,570

Bonnie Togs goodwill     
Indefinite
 
49,603

 
—

 
49,603

 
49,507

 
—

 
49,507

Total goodwill
 
 
$
186,173

 
$
—

 
$
186,173

 
$
186,077

 
$
—

 
$
186,077

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
—

 
85,500

 
85,500

 
—

 
85,500

 Other tradenames
3 years
 
38,007

 
25,465

 
12,542

 
38,007

 
13,588

 
24,419

 Bonnie Togs tradename
2 years
 
563

 
563

 
—

 
562

 
562

 
—

Total tradenames
 
 
344,303


26,028

 
318,275

 
344,302

 
14,150

 
330,152

Non-compete agreements
4 years
 
281

 
210

 
71

 
280

 
174

 
106

Total tradenames and other intangibles, net
 
 
$
344,584

 
$
26,238

 
$
318,346

 
$
344,582

 
$
14,324

 
$
330,258


 
 
 
June 29, 2013
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
Carter’s goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

Bonnie Togs goodwill     
Indefinite
 
50,387

 
—

 
50,387

Total goodwill
 
 
$
186,957

 
$
—

 
$
186,957

 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
—

 
85,500

Other tradenames
3 years
 
38,007

 
1,000

 
37,007

 Bonnie Togs tradename    
2 years
 
572

 
572

 
—

Total tradenames
 
 
344,312

 
1,572

 
342,740

Non-compete agreements
4 years
 
285

 
142

 
143

Total tradenames and other intangibles, net
 
 
$
344,597

 
$
1,714

 
$
342,883


The Company recorded approximately $5.6 million and $11.9 million of amortization expense for the fiscal quarter and two fiscal quarters ended June 28, 2014. The Company recorded approximately $1.1 million of amortization expense for the fiscal quarter and two fiscal quarters ended June 29, 2013. The estimated future amortization expense for these assets is approximately $4.6 million for the remainder of fiscal 2014, $6.2 million for fiscal 2015, and $1.8 million for fiscal 2016.

NOTE 5 – COMMON STOCK:

Pursuant to the previously announced share repurchase authorizations by the Board of Directors, during the fiscal quarter and two fiscal quarters ended June 28, 2014, the Company repurchased and retired shares in open market transactions in the following amounts:


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Number of shares repurchased
 
477,551

 
433,402

 
499,151

 
590,002

Aggregate cost of shares repurchased (in millions)
 
$
34.4

 
$
28.8

 
$
36.1

 
$
37.8

Avg price per share
 
$
72.10

 
$
66.49

 
$
72.28

 
$
63.99


The total remaining capacity under the repurchase authorizations as of June 28, 2014 was approximately $231.2 million. The authorizations have no expiration date.

Accelerated Stock Repurchase Program

On August 29, 2013, the Company entered into two fixed dollar accelerated stock repurchase (ASR) agreements which were settled during January 2014 with approximately one million additional shares received by the Company with a fair market value, at trade date, of approximately $70.3 million. Under the ASR agreements, the Company had received and retired a total of approximately 5.6 million shares.


NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following:
(dollars in thousands)
June 28,
2014
 
December 28,
2013
 
June 29,
2013
Senior notes
$
400,000

 
$
400,000

 
$
—

Secured revolving credit facility
186,000

 
186,000

 
186,000

Total long-term debt
$
586,000

 
$
586,000

 
$
186,000


As of June 28, 2014, the Company had approximately $186.0 million in borrowings under its secured revolving credit facility, exclusive of $8.0 million of outstanding letters of credit. Amounts outstanding under the revolving credit facility currently accrue interest at a LIBOR rate plus 2.00%, which, as of June 28, 2014, was 2.15%. As of June 28, 2014, there was approximately $181.0 million available for future borrowing. As of June 28, 2014, The William Carter Company ("TWCC"), a 100% owned subsidiary of Carter's Inc. had outstanding $400 million principal amount of senior notes, bearing interest at a 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.

As of June 28, 2014 the Company was in compliance with the financial debt covenants under the secured revolving credit facility.

NOTE 7 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation cost as follows:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Stock options
$
1,089

 
$
1,233

 
$
2,459

 
$
2,508

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
1,697

 
1,791

 
3,639

 
3,482

   Performance-based awards
1,427

 
1,156

 
2,650

 
1,982

   Stock awards
1,081

 
180

 
1,081

 
453

Total
$
5,294

 
$
4,360

 
$
9,829

 
$
8,425


All of the cost of stock-based compensation was reflected as a component of selling, general, and administrative expenses.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


STOCK OPTIONS

The following table summarizes the Company's stock option activity for the two fiscal quarters ended June 28, 2014:
 
Number of shares
 
Weighted- average exercise price
 
Weighted-average remaining contractual terms (years)
 
Aggregate intrinsic value
(in thousands)
 
 
 
 
 
 
 
 
Outstanding, December 28, 2013
1,677,741

 
$
35.37

 
 
 
 
Granted
226,700

 
68.61

 
 
 
 
Exercised
(213,926
)
 
30.61

 
 
 
 
Forfeited
(63,408
)
 
47.35

 
 
 
 
Expired
—

 
—

 
 
 
 
Outstanding, June 28, 2014
1,627,107

 
$
40.16

 
6.91
 
$
46,914

Vested and Expected to Vest, June 28, 2014
1,555,647

 
$
39.45

 
6.85
 
$
45,926

Exercisable, June 28, 2014
923,652

 
$
28.82

 
5.67
 
$
37,081

    
The intrinsic value of stock options exercised during the two fiscal quarters ended June 28, 2014 and June 29, 2013 was approximately $9.6 million and $27.2 million, respectively. At June 28, 2014, there was approximately $9.7 million of unrecognized compensation cost (net of estimated forfeitures) related to stock options which is expected to be recognized over a weighted-average period of approximately 2.8 years.

The table below presents the assumptions used to calculate the fair value of options granted:
 
Two fiscal quarters ended
 
June 28,
2014
 
June 29,
2013
 
 
 
 
Expected volatility
30.86
%
 
33.17
%
Risk-free interest rate
1.82
%
 
1.12
%
Expected term (years)
6.0

 
6.0

Dividend yield
1.11
%
 
—
%
Weighted average fair value of options granted
$
19.83

 
$
20.15


RESTRICTED STOCK AWARDS

The following table summarizes activity related to all restricted stock awards during the two fiscal quarters ended June 28, 2014:
 
Restricted
stock
awards
 
Weighted-average grant-date
fair value
 
 
 
 
Outstanding, December 28, 2013
786,189

 
$
44.87

Granted
189,109

 
$
68.89

Vested restricted stock
(172,609
)
 
$
42.45

Forfeited
(51,458
)
 
$
46.84

Outstanding, June 28, 2014
751,231

 
$
51.34


Time-based Restricted Stock Awards

At June 28, 2014, there was approximately $15.2 million of unrecognized compensation cost (net of estimated forfeitures) related to restricted stock which is expected to be recognized over a weighted-average period of approximately 2.8 years.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


Performance-based Restricted Stock Awards

During the first fiscal quarter of 2014, the Company granted its executive officers 61,200 performance restricted shares at a fair market value of $68.49 per share. During the first fiscal quarter of 2013, the Company granted its executive officers an aggregate of 118,200 performance-based restricted shares at a fair market value of $59.27 per share.

Vesting of the performance restricted shares granted in the first quarter of fiscal 2014 and 2013 is contingent upon meeting specific performance targets through 2015 (in the case of the fiscal 2013 awards) and 2016 (in the case of the fiscal 2014 awards). Currently, the Company believes that the respective targets will be achieved and has recorded compensation expense based on the proration of the total ultimate expected value of the award.

At June 28, 2014, there was approximately $8.5 million of unrecognized compensation cost (net of estimated forfeitures) related to performance-based restricted stock awards which is expected to be recognized over a weighted-average period of approximately 1.9 years.

NOTE 8 – EMPLOYEE BENEFIT PLANS
    
OSHKOSH B'GOSH PENSION PLAN
    
The net periodic pension cost included in the statement of operations was comprised of:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
Interest cost
$
622

 
$
584

 
$
1,244

 
$
1,168

Expected return on plan assets
(798
)
 
(764
)
 
(1,596
)
 
(1,528
)
Recognized actuarial loss
21

 
207

 
42

 
414

Net periodic pension (benefit) cost
$
(155
)
 
$
27

 
$
(310
)
 
$
54


POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement benefit expense charged to the statement of operations are as follows:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in thousands)
June 28, 2014
 
June 29, 2013
June 28, 2014
 
June 29, 2013
 
 
 
 
 
 
 
Service cost – benefits attributed to service during the period
$
28

 
$
40

$
56

 
$
80

Interest cost on accumulated post-retirement benefit obligation
57

 
58

114

 
116

Amortization net actuarial gain
(52
)
 
(34
)
(104
)
 
(68
)
Curtailment gain
(22
)
 
—

(44
)
 
—

Total net periodic post-retirement benefit cost
$
11

 
$
64

$
22

 
$
128

    
NOTE 9 – INCOME TAXES

As of June 28, 2014, the Company had gross unrecognized tax benefits of approximately $11.8 million, of which $8.4 million, if ultimately recognized, will affect the Company’s effective tax rate in the period 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.  Because of deferred tax accounting, changes in the timing of these deductions would not affect the annual effective tax rate, but could accelerate the payment of cash to the taxing authorities.

Included in the reserves for unrecognized tax benefits are approximately $1.7 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

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

of federal income taxes, may affect the annual effective tax rate for fiscal 2014 or fiscal 2015 and 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 penalties related to unrecognized tax benefits as a component of income tax expense.  During the fiscal quarter and two fiscal quarters ended June 28, 2014 and June 29, 2013, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.9 million, $0.8 million, and $0.8 million of interest accrued on uncertain tax positions as of June 28, 2014, December 28, 2013, and June 29, 2013, respectively.     

NOTE 10 – FAIR VALUE MEASUREMENTS

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. The Company had approximately $6.7 million, $5.4 million, and $4.5 million of such Level 1 investments as of June 28, 2014, December 28, 2013, and June 29, 2013, respectively.

During the fiscal quarter and two fiscal quarters ended June 28, 2014 and June 29, 2013, gains on the investments in marketable securities were not significant.

CONTINGENT CONSIDERATION

The following table summarizes the changes in the contingent consideration liability related to the Company's acquisition of Bonnie Togs on June 30, 2011:
 
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in thousands)
 
June 28, 2014
 
June 29, 2013
June 28, 2014
 
June 29, 2013
 
 
 
 
 
 
 
 
Balance at the beginning of period
 
$
16,315

 
$
30,021

16,348

 
29,704

Payments made
 
—

 
—

—

 
—

Accretion (income) expense
 
(8
)
 
979

451

 
1,866

Foreign currency translation adjustment
 
541

 
(1,050
)
49

 
(1,620
)
Balance at the end of period
 
$
16,848

 
$
29,950

$
16,848

 
$
29,950

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
The contingent consideration liability is a Level 3 fair value measurement. As of June 28, 2014, the Company determined the fair value of contingent consideration based upon a probability-weighted discounted cash flow analysis, reflecting a high probability that the earnings targets will be met and a discount rate of 18%.

BORROWINGS

As of June 28, 2014, the Level 2 fair value of the Company's $186 million in borrowings under its secured revolving credit facility approximated carrying value. The Level 2 fair value of the Company's $400 million in senior notes outstanding was approximately $418.0 million.


NOTE 11 – EARNINGS PER SHARE

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


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
52,836,070

 
58,567,558

 
53,004,264

 
58,519,286

Dilutive effect of equity awards
455,116

 
588,622

 
478,426

 
648,072

Diluted number of common and common equivalent shares outstanding
53,291,186

 
59,156,180

 
53,482,690

 
59,167,358

 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
25,897

 
$
19,673

 
$
60,193

 
$
61,088

Income allocated to participating securities
(345
)
 
(265
)
 
(812
)
 
(811
)
Net income available to common shareholders
$
25,552

 
$
19,408

 
$
59,381

 
$
60,277

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.48

 
$
0.33

 
$
1.12

 
$
1.03

 
 
 
 
 
 
 
 
Diluted net income per common share:
 
 
 
 
 
 
 
Net income
$
25,897

 
$
19,673

 
$
60,193

 
$
61,088

Income allocated to participating securities
(343
)
 
(263
)
 
(807
)
 
(803
)
Net income available to common shareholders
$
25,554

 
$
19,410

 
$
59,386

 
$
60,285

 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.48

 
$
0.33

 
$
1.11

 
$
1.02

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from dilutive earnings per share computation
268,850

 
350,200

 
268,850

 
362,500







12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities consisted of the following:
(dollars in thousands)
June 28,
2014
 
December 28,
2013
 
June 29,
2013
Accrued bonuses and incentive compensation
$
6,320

 
$
19,579

 
$
8,008

Contingent consideration
9,360

 
8,964

 
14,262

Accrued workers' compensation
7,458

 
7,236

 
6,163

Accrued sales and use taxes
4,961

 
8,486

 
4,113

Accrued salaries and wages
5,744

 
7,609

 
6,049

Accrued gift certificates
8,422

 
7,899

 
6,315

Accrued 401(k) contributions
2,026

 
8,775

 
3,325

Accrued closure costs
3,487

 
9,128

 
9,264

Other current liabilities
27,783

 
27,453

 
16,563

Total
$
75,561

 
$
105,129

 
$
74,062

    
Other long-term liabilities consisted of the following:
(dollars in thousands)
June 28,
2014
 
December 28,
2013
 
June 29,
2013
Deferred lease incentives
$
71,821

 
$
68,876

 
$
33,335

Accrued rent
39,534

 
31,821

 
22,878

Contingent consideration
7,488

 
7,384

 
15,688

OshKosh pension plan
3,458

 
3,768

 
13,611

Unrecognized tax benefits
12,756

 
11,947

 
11,421

Post-retirement medical plan
5,122

 
5,055

 
6,329

Deferred compensation
7,869

 
6,225

 
5,699

Other
104

 
104

 
32

Total
$
148,152

 
$
135,180

 
$
108,993



13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – SEGMENT INFORMATION
 
The table below presents certain segment information for the periods indicated:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in thousands)
June 28,
2014
 
% of
Total
 
June 29,
2013
 
% of
Total
 
June 28,
2014
 
% of
Total
 
June 29,
2013
 
% of
Total
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
200,059

 
34.8
 %
 
$
196,734

 
38.0
 %
 
$
471,688

 
38.5
 %
 
$
444,912

 
40.1
 %
Carter’s Retail (a)    
233,690

 
40.7
 %
 
199,370

 
38.5
 %
 
464,018

 
37.9
 %
 
407,799

 
36.8
 %
Total Carter’s
433,749

 
75.5
 %
 
396,104

 
76.5
 %
 
935,706

 
76.4
 %
 
852,711

 
76.9
 %
OshKosh Retail (a)    
67,515

 
11.8
 %
 
56,423

 
10.9
 %
 
131,073

 
10.7
 %
 
111,768

 
10.1
 %
OshKosh Wholesale
11,649

 
2.0
 %
 
11,301

 
2.2
 %
 
27,235

 
2.2
 %
 
29,487

 
2.7
 %
Total OshKosh
79,164

 
13.8
 %
 
67,724

 
13.1
 %
 
158,308

 
12.9
 %
 
141,255

 
12.8
 %
International (b)     
61,152

 
10.7
 %
 
54,046

 
10.4
 %
 
131,695

 
10.7
 %
 
114,917

 
10.3
 %
Total net sales
$
574,065

 
100.0
 %
 
$
517,874

 
100.0
 %
 
$
1,225,709

 
100.0
 %
 
$
1,108,883

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
Carter’s Wholesale
$
30,860

 
15.4
 %
 
$
31,298

 
15.9
 %
 
$
77,727

 
16.5
 %
 
$
81,482

 
18.3
 %
Carter’s Retail (a)    
40,179

 
17.2
 %
 
33,256

 
16.7
 %
 
83,158

 
17.9
 %
 
73,040

 
17.9
 %
Total Carter’s
71,039

 
16.4
 %
 
64,554

 
16.3
 %
 
160,885

 
17.2
 %
 
154,522

 
18.1
 %
OshKosh Retail (a)    
(1,694
)
 
(2.5
)%
 
(6,073
)
 
(10.8
)%
 
(6,183
)
 
(4.7
)%
 
(11,168
)
 
(10.0
)%
OshKosh Wholesale
859

 
7.4
 %
 
681

 
6.0
 %
 
2,885

 
10.6
 %
 
3,484

 
11.8
 %
Total OshKosh
(835
)
 
(1.1
)%
 
(5,392
)
 
(8.0
)%
 
(3,298
)
 
(2.1
)%
 
(7,684
)
 
(5.4
)%
International (b) (c)    
7,107

 
11.6
 %
 
7,353

 
13.6
 %
 
11,143

 
8.5
 %
 
12,349

 
10.7
 %
Total segment operating income
77,311

 
13.5
 %
 
66,515

 
12.8
 %
 
168,730

 
13.8
 %
 
159,187

 
14.4
 %
Corporate expenses (d) (e)     
(29,964
)
 
(5.2
)%
 
(33,777
)
 
(6.5
)%
 
(59,852
)
 
(4.9
)%
 
(59,506
)
 
(5.4
)%
Total operating income
$
47,347

 
8.2
 %
 
$
32,738

 
6.3
 %
 
$
108,878

 
8.9
 %
 
$
99,681

 
9.0
 %

(a)
Includes eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income.
(c)
Includes the following charges:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in millions)
June 28, 2014
 
June 29, 2013
June 28, 2014
 
June 29, 2013
Revaluation of contingent consideration
$
—

 
$
1.0

$
0.5

 
$
1.9

Exit from Japan retail operations
$
0.9

 
$
—

$
0.5

 
$
—


(d)
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees.
(e)    Includes the following charges:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in millions)
June 28, 2014
 
June 29, 2013
June 28, 2014
 
June 29, 2013
Closure of distribution facility in Hogansville, GA (1)
$
0.3

 
$
—

$
0.6

 
$
0.6

Office consolidation costs
$
4.6

 
$
10.2

$
6.6

 
$
18.2

Amortization of H.W. Carter and Sons tradenames
$
5.6

 
$
1.0

$
11.9

 
$
1.0


(1) Continuing operating costs associated with the closure of the Company's distribution facility in Hogansville, Georgia.
    

NOTE 14 – FACILITY CLOSURE

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


HOGANSVILLE DISTRIBUTION FACILITY
    
In connection with the plan to close the Hogansville, Georgia distribution facility, the Company recorded the following charges in selling, general, and administrative expenses:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in millions)
June 28, 2014
 
June 29, 2013
 
June 28, 2014
 
June 29, 2013
 
 
 
 
 
 
 
 
Severance
$
—

 
$
(0.2
)
 
$
—

 
$
0.3

Accelerated depreciation
—

 
0.1

 
—

 
0.3

Total
$
—

 
$
—

 
$
—

 
$
0.6


The following table summarizes the restructuring reserves related to the closure of the Hogansville facility which are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet as of June 28, 2014:
(dollars in millions)
Severance
 
Other closure costs
 
Total
Balance at December 28, 2013
$
1.2

 
$
0.1

 
$
1.3

Provision
—

 
—

 
—

Payments
(1.2
)
 
(0.1
)
 
(1.3
)
Balance at June 28, 2014
$
—

 
$
—

 
$
—


As of June 29, 2013, restructuring reserves were approximately $2.3 million. The salvage value of this facility is estimated to be $2.0 million and is held for sale as of June 28, 2014.
   
OFFICE CONSOLIDATION    

In connection with the Company's plan to consolidate into a new headquarters facility in Atlanta, Georgia, the Company recorded the following charges in selling, general, and administrative expenses:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in millions)
June 28, 2014
 
June 29, 2013
June 28, 2014
 
June 29, 2013
Other closure costs
$
4.3

 
$
6.2

$
5.7

 
$
11.2

Severance and other benefits
0.3

 
2.7

0.9

 
4.5

Accelerated depreciation
—

 
1.3

—

 
2.5

Total
$
4.6

 
$
10.2

$
6.6

 
$
18.2


The following table summarizes the restructuring reserves related to the office consolidation as of June 28, 2014:
(dollars in thousands)
Severance
 
Other closure costs
 
Total
Balance at December 28, 2013
$
4.7

 
$
1.7

 
$
6.4

Provision
0.9

 
5.7

 
6.6

Payments
(2.9
)
 
(4.7
)
 
(7.6
)
Other
$
—

 
$
0.5

 
$
0.5

Balance at June 28, 2014
$
2.7

 
$
3.2

 
$
5.9


The severance reserve is included in other current liabilities and other closure costs are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet.

As of June 29, 2013, restructuring reserves were approximately $7.0 million.


15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company has substantially completed its consolidation efforts as of December 28, 2013, and the severance accrual is expected to be substantially paid by the end of fiscal 2014. The Company expects to incur approximately $0.5 million in additional costs in fiscal 2014 in connection with the office consolidation.

JAPAN RETAIL OPERATIONS

In the fourth quarter of 2013, the Company made the decision to exit retail operations in Japan based on revised forecasts which do not meet the Company's investment objectives. The Company recorded the following charges in selling, general, and administrative expenses:
 
Fiscal quarter ended
Two fiscal quarters ended
(dollars in millions)
June 28, 2014
June 28, 2014
Other closure costs
$
0.4

$
(0.3
)
Severance and other benefits
0.2

0.9

Accelerated depreciation
0.3

0.9

Total
$
0.9

$
1.5


The Company also recorded approximately $1.0 million in cost of goods sold related to a favorable recovery on inventory in the two fiscal quarters ended June 28, 2014.

There were no such exit costs related to Japan recorded in the fiscal quarter and two fiscal quarters ended June 29, 2013.

The following table summarizes the restructuring reserves related to the exit of retail operations in Japan, which are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet as of June 28, 2014:

(dollars in millions)
Severance
 
Other closure costs
 
Total
Balance at December 28, 2013
$
0.9

 
$
2.0

 
$
2.9

Provision
0.9

 
(0.3
)
 
0.6

Payments
(1.2
)
 
(1.7
)
 
(2.9
)
Balance at June 28, 2014
$
0.6

 
$
—

 
$
0.6


The Company expects to incur approximately $0.3 million of additional costs in fiscal 2014 in connection with the exit of retail operations in Japan. Payments under the accruals as of June 28, 2014 are expected to be paid by the end of fiscal 2014.
 
NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, an accounting standard update was issued that clarifies the principles for recognizing revenue. The guidance is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard is effective for the Company beginning in the first quarter of fiscal 2017, including interim periods within that fiscal year. Early application is not permitted. Upon becoming effective, the Company will apply the amendments in the updated standard 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. The Company is evaluating the impact of adopting this standard on its consolidated financial position, results of operations, and cash flows.



16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company’s senior notes constitute debt obligations of TWCC (the “Issuer”), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the “Parent”), and by each of the Company’s current domestic subsidiaries, and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s senior secured revolving credit facility or certain other debt of the Company or the subsidiary guarantors.
The condensed consolidating financial information for the Parent, the 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, and cash flows, had the Parent, 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.
















17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.
Condensed Consolidating Balance Sheets
As of June 28, 2014
(dollars in thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
191,491

 
$
—

 
$
16,429

 
$
—

 
$
207,920

Accounts receivable, net
—

 
112,126

 
15,924

 
5,835

 
—

 
133,885

Intercompany receivable
—

 
57,106

 
92,532

 
12,800

 
(162,438
)
 
—

Intercompany loan receivable
—

 
10,000

 
—

 
—

 
(10,000
)
 
—

Finished goods inventories, net
—

 
299,688

 
212,817

 
57,369

 
(31,641
)
 
538,233

Prepaid expenses and other current assets
—

 
23,700

 
13,906

 
6,078

 
—

 
43,684

Deferred income taxes
—

 
22,136

 
13,130

 
1,268

 
—

 
36,534

Total current assets
—

 
716,247

 
348,309

 
99,779

 
(204,079
)
 
960,256

Property, plant, and equipment, net
—

 
157,289

 
140,538

 
27,848

 
—

 
325,675

Goodwill
—

 
136,570

 
—

 
49,603

 
—

 
186,173

Tradenames and other intangibles, net
—

 
232,776

 
85,500

 
70

 
—

 
318,346

Deferred debt issuance costs, net
—

 
7,407

 
—

 
—

 
—

 
7,407

Other assets
—

 
11,305

 
—

 
—

 
—

 
11,305

Intercompany long term receivable
—

 
—

 
221,496

 
—

 
(221,496
)
 
—

Intercompany long term note receivable
—

 
100,000

 
—

 
—

 
(100,000
)
 
—

Investment in subsidiaries
720,372

 
562,665

 
4,725

 
—

 
(1,287,762
)
 
—

Total assets
$
720,372

 
$
1,924,259

 
$
800,568

 
$
177,300

 
$
(1,813,337
)
 
$
1,809,162

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
—

 
$
105,126

 
$
35,802

 
$
23,271

 
$
—

 
$
164,199

Intercompany payables
—

 
90,697

 
64,911

 
6,830

 
(162,438
)