Q3 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 SEPTEMBER 27, 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 October 17, 2014
Common stock, par value $0.01 per share
 
52,905,519











CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 27, 2014, December 28, 2013, and September 28, 2013
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended September 27, 2014 and September 28, 2013
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended September 27, 2014 and September 28, 2013
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three fiscal quarters ended September 27, 2014
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended September 27, 2014 and September 28, 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)
 
September 27, 2014
 
December 28, 2013
 
September 28, 2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
133,646

 
$
286,546

 
$
201,819

Accounts receivable, net
232,478

 
193,611

 
245,610

Finished goods inventories, net
519,416

 
417,754

 
440,446

Prepaid expenses and other current assets
31,258

 
35,157

 
22,872

Deferred income taxes
38,569

 
37,313

 
33,456

Total current assets
955,367

 
970,381

 
944,203

Property, plant, and equipment, net
332,875

 
307,885

 
256,225

Tradenames and other intangibles, net
316,046

 
330,258

 
336,596

Goodwill
184,196

 
186,077

 
188,006

Deferred debt issuance costs, net
7,043

 
8,088

 
7,961

Other assets
11,214

 
9,795

 
4,566

Total assets
$
1,806,741

 
$
1,812,484

 
$
1,737,557

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
117,329

 
$
164,010

 
$
158,600

Other current liabilities
100,473

 
105,129

 
85,107

Total current liabilities
217,802

 
269,139

 
243,707

 
 
 
 
 
 
Long-term debt
586,000

 
586,000

 
586,000

Deferred income taxes
113,173

 
121,434

 
110,708

Other long-term liabilities
138,185

 
135,180

 
138,219

Total liabilities
$
1,055,160

 
$
1,111,753

 
$
1,078,634

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 27, 2014, December 28, 2013, and September 28, 2013
—

 
—

 
—

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 52,977,519, 54,541,879 and 54,542,594 shares issued and outstanding at September 27, 2014, December 28, 2013 and September 28, 2013, respectively
530

 
545

 
545

Additional paid-in capital
—

 
4,332

 
—

Accumulated other comprehensive loss
(13,627
)
 
(10,082
)
 
(13,531
)
Retained earnings
764,678

 
705,936

 
671,909

Total stockholders' equity
751,581

 
700,731

 
658,923

Total liabilities and stockholders' equity
$
1,806,741

 
$
1,812,484

 
$
1,737,557



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
 
Three fiscal quarters ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net sales
$
798,936

 
$
760,173

 
$
2,024,645

 
$
1,869,056

Cost of goods sold
477,730

 
450,524

 
1,196,237

 
1,096,100

Gross profit
321,206

 
309,649

 
828,408

 
772,956

Selling, general, and administrative expenses
221,939

 
229,264

 
638,349

 
609,639

Royalty income
(11,190
)
 
(10,691
)
 
(29,276
)
 
(27,440
)
Operating income
110,457

 
91,076

 
219,335

 
190,757

Interest expense
6,843

 
4,133

 
20,623

 
6,681

Interest income
(45
)
 
(138
)
 
(317
)
 
(523
)
Other expense (income), net
1,311

 
(55
)
 
1,718

 
1,049

Income before income taxes
102,348

 
87,136

 
197,311

 
183,550

Provision for income taxes
36,462

 
30,565

 
71,232

 
65,891

Net income
$
65,886

 
$
56,571

 
$
126,079

 
$
117,659

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.24

 
$
0.98

 
$
2.36

 
$
2.00

Diluted net income per common share
$
1.23

 
$
0.97

 
$
2.34

 
$
1.98

Dividend declared and paid per common share
$
0.19

 
$
0.16

 
$
0.57

 
$
0.32


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
 
Three fiscal quarters ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net income
$
65,886

 
$
56,571

 
$
126,079

 
$
117,659

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(3,577
)
 
1,676

 
(3,545
)
 
(2,326
)
Comprehensive income
$
62,309

 
$
58,247

 
$
122,534

 
$
115,333



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
 
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
—

 
—

 
4,356

 
—

 
—

 
4,356

Exercise of stock options
251,876

 
2

 
7,769

 
—

 
—

 
7,771

Withholdings from vesting of restricted stock
(65,391
)
 
(1
)
 
(4,471
)
 
—

 
—

 
(4,472
)
Restricted stock activity
124,849

 
3

 
(3
)
 
—

 
—

 
—

Stock-based compensation expense
—

 
—

 
12,802

 
—

 
—

 
12,802

Issuance of common stock
15,559

 
—

 
1,081

 
—

 
—

 
1,081

Repurchase of common stock
(1,891,253
)
 
(19
)
 
(25,866
)
 
—

 
(36,884
)
 
(62,769
)
Cash dividends declared and paid
—

 
—

 
—

 
—

 
(30,453
)
 
(30,453
)
Comprehensive income
—

 
—

 
—

 
(3,545
)
 
126,079

 
122,534

Balance at September 27, 2014
52,977,519

 
$
530

 
$
—

 
$
(13,627
)
 
$
764,678

 
$
751,581


See accompanying notes to the unaudited condensed consolidated financial statements.

4


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Three fiscal quarters ended
 
September 27, 2014
 
September 28, 2013
Cash flows from operating activities:
 
 
 
Net income
$
126,079

 
$
117,659

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,831

 
36,065

Amortization of H.W. Carter and Sons tradenames
14,157

 
7,271

Non-cash revaluation of contingent consideration
900

 
2,347

Amortization of debt issuance costs
1,144

 
677

Non-cash stock-based compensation expense
13,883

 
12,356

Income tax benefit from stock-based compensation
(4,356
)
 
(10,775
)
Loss on disposal of property, plant, and equipment
541

 
376

Deferred income taxes
(8,963
)
 
(1,469
)
Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
(39,133
)
 
(77,751
)
Inventories
(104,143
)
 
(91,953
)
Prepaid expenses and other assets
2,373

 
(1,061
)
Accounts payable and other liabilities
(20,386
)
 
69,724

Net cash provided by operating activities
24,927

 
63,466

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(83,634
)
 
(129,628
)
Acquisitions
—

 
(38,007
)
Proceeds from sale of property, plant, and equipment
143

 
—

Net cash used in investing activities
(83,491
)
 
(167,635
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from senior notes
—

 
400,000

Payments of debt issuance costs
(145
)
 
(6,487
)
Repurchase of common stock
(62,769
)
 
(454,133
)
Payment of contingent consideration
(8,901
)
 
(14,721
)
Dividends paid
(30,453
)
 
(18,988
)
Income tax benefit from stock-based compensation
4,356

 
10,775

Withholdings from vesting of restricted stock
(4,472
)
 
(4,991
)
Proceeds from exercise of stock options
7,771

 
12,424

Net cash used in financing activities
(94,613
)
 
(76,121
)
 
 
 
 
Effect of exchange rate changes on cash
277

 
(127
)
Net decrease in cash and cash equivalents
(152,900
)
 
(180,417
)
Cash and cash equivalents, beginning of period
286,546

 
382,236

Cash and cash equivalents, end of period
$
133,646

 
$
201,819


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 September 27, 2014, the Company operated 525 Carter’s stores in the United States, 195 OshKosh stores in the United States, and 115 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 September 27, 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 loss consisted of the following, net of income tax:

(dollars in thousands)
September 27, 2014
 
December 28, 2013
 
September 28, 2013
Cumulative foreign currency translation adjustments
$
(11,097
)
 
$
(7,552
)
 
$
(4,392
)
Pension and post-retirement liability adjustment
(2,530
)
 
(2,530
)
 
(9,139
)
Total accumulated other comprehensive loss
$
(13,627
)
 
$
(10,082
)
 
$
(13,531
)



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:
 
 
 
September 27, 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
 
47,626

 
—

 
47,626

 
49,507

 
—

 
49,507

Total goodwill
 
 
$
184,196

 
$
—

 
$
184,196

 
$
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

 
27,745

 
10,262

 
38,007

 
13,588

 
24,419

 Bonnie Togs tradename
2 years
 
541

 
541

 
—

 
562

 
562

 
—

Total tradenames
 
 
344,281


28,286

 
315,995

 
344,302

 
14,150

 
330,152

Non-compete agreements
4 years
 
270

 
219

 
51

 
280

 
174

 
106

Total tradenames and other intangibles, net
 
 
$
344,551

 
$
28,505

 
$
316,046

 
$
344,582

 
$
14,324

 
$
330,258


 
 
 
September 28, 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
 
51,436

 
—

 
51,436

Total goodwill
 
 
$
188,006

 
$
—

 
$
188,006

 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
—

 
85,500

Other tradenames
3 years
 
38,007

 
7,271

 
30,736

 Bonnie Togs tradename    
2 years
 
584

 
584

 
—

Total tradenames
 
 
344,324

 
7,855

 
336,469

Non-compete agreements
4 years
 
291

 
164

 
127

Total tradenames and other intangibles, net
 
 
$
344,615

 
$
8,019

 
$
336,596


The Company recorded approximately $2.3 million and $14.2 million of amortization expense for the fiscal quarter and three fiscal quarters ended September 27, 2014, respectively. The Company recorded approximately $6.3 million and $7.3 million of amortization expense for the fiscal quarter and three fiscal quarters ended September 28, 2013, respectively. The estimated future amortization expense for these assets is approximately $2.3 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 three fiscal quarters ended September 27, 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
 
Three fiscal quarters ended
 
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Number of shares repurchased
 
367,948

 
226,400

 
867,099

 
816,402

Aggregate cost of shares repurchased (in millions)
 
$
26.7

 
$
16.4

 
$
62.8

 
$
54.1

Avg price per share
 
$
72.54

 
$
72.33

 
$
72.39

 
$
66.31


The total remaining capacity under the repurchase authorizations as of September 27, 2014 was approximately $204.5 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 totaling $400 million 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 has 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)
September 27,
2014
 
December 28,
2013
 
September 28,
2013
Senior notes
$
400,000

 
$
400,000

 
$
400,000

Secured revolving credit facility
186,000

 
186,000

 
186,000

Total long-term debt
$
586,000

 
$
586,000

 
$
586,000


As of September 27, 2014, the Company had approximately $186.0 million in borrowings under its secured revolving credit facility, exclusive of $6.5 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 September 27, 2014, was 2.15%. As of September 27, 2014, there was approximately $182.5 million available for future borrowing. As of September 27, 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 September 27, 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
 
Three fiscal quarters ended
(dollars in thousands)
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
Stock options
$
1,039

 
$
1,136

 
$
3,498

 
$
3,644

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
1,576

 
1,666

 
5,215

 
5,148

   Performance-based awards
1,439

 
1,129

 
4,089

 
3,111

   Stock awards
—

 
—

 
1,081

 
453

Total
$
4,054

 
$
3,931

 
$
13,883

 
$
12,356


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

NOTE 8 – EMPLOYEE BENEFIT PLANS
    
OSHKOSH B'GOSH PENSION PLAN
    
The net periodic pension (benefit) cost included in the statement of operations was comprised of:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Interest cost
$
622

 
$
584

 
$
1,866

 
$
1,752

Expected return on plan assets
(798
)
 
(764
)
 
(2,394
)
 
(2,292
)
Recognized actuarial loss
21

 
208

 
63

 
624

Net periodic pension (benefit) cost
$
(155
)
 
$
28

 
$
(465
)
 
$
84


POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement benefit expense charged to the statement of operations was as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
 
 
 
 
 
 
 
 
Service cost – benefits attributed to service during the period
$
28

 
$
40

 
$
84

 
$
120

Interest cost on accumulated post-retirement benefit obligation
57

 
58

 
171

 
174

Amortization net actuarial gain
(52
)
 
(34
)
 
(156
)
 
(102
)
Curtailment gain
(22
)
 
—

 
(66
)
 
—

Total net periodic post-retirement benefit cost
$
11

 
$
64

 
$
33

 
$
192

    
NOTE 9 – INCOME TAXES

As of September 27, 2014, the Company had gross unrecognized income tax benefits of approximately $12.0 million, of which $8.5 million, if ultimately recognized, will 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 are approximately $1.3 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 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 recognizes penalties related to unrecognized tax benefits as a component of income tax expense.  During the fiscal quarter and three fiscal quarters ended September 27, 2014 and September 28, 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 September 27, 2014, December 28, 2013, and September 28, 2013, respectively.     

NOTE 10 – FAIR VALUE MEASUREMENTS

INVESTMENTS


9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 $6.9 million, $5.4 million, and $4.5 million of such Level 1 investments as of September 27, 2014, December 28, 2013, and September 28, 2013, respectively.

During the third fiscal quarter and three fiscal quarters ended September 27, 2014 and September 28, 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
 
Three fiscal quarters ended
(dollars in thousands)
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Balance at the beginning of period
 
$
16,848

 
$
29,950

 
16,348

 
29,704

Payments made
 
(8,901
)
 
(14,721
)
 
(8,901
)
 
(14,721
)
Accretion (income) expense
 
444

 
480

 
900

 
2,347

Foreign currency translation adjustment
 
(762
)
 
791

 
(718
)
 
(830
)
Balance at the end of period
 
$
7,629

 
$
16,500

 
$
7,629

 
$
16,500

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
The contingent consideration liability is a Level 3 fair value measurement. As of September 27, 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 September 27, 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 $410.0 million.


NOTE 11 – EARNINGS PER SHARE

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


10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
 
Three fiscal quarters ended
 
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
52,356,122

 
56,908,631

 
52,788,217

 
57,982,401

Dilutive effect of equity awards
470,842

 
531,514

 
476,893

 
614,045

Diluted number of common and common equivalent shares outstanding
52,826,964

 
57,440,145

 
53,265,110

 
58,596,446

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
65,886

 
$
56,571

 
$
126,079

 
$
117,659

Income allocated to participating securities
(887
)
 
(759
)
 
(1,706
)
 
(1,566
)
Net income available to common shareholders
$
64,999

 
$
55,812

 
$
124,373

 
$
116,093

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.24

 
$
0.98

 
$
2.36

 
$
2.00

 
 
 
 
 
 
 
 
Diluted net income per common share (in thousands, except per share data):

 
 
 
 
 
 
 
Net income
$
65,886

 
$
56,571

 
$
126,079

 
$
117,659

Income allocated to participating securities
(880
)
 
(753
)
 
(1,695
)
 
(1,553
)
Net income available to common shareholders
$
65,006

 
$
55,818

 
$
124,384

 
$
116,106

 
 
 
 
 
 
 
 
Diluted net income per common share
$
1.23

 
$
0.97

 
$
2.34

 
$
1.98

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from dilutive earnings per share computation
234,700

 
339,400

 
265,000

 
355,700







11

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)
September 27,
2014
 
December 28,
2013
 
September 28,
2013
Accrued bonuses and incentive compensation
$
11,793

 
$
19,579

 
$
13,799

Contingent consideration
7,629

 
8,964

 
9,706

Income taxes payable
19,609

 
97

 
1,600

Accrued workers' compensation
2,853

 
7,236

 
6,152

Accrued sales and use taxes
8,037

 
8,486

 
7,256

Accrued salaries and wages
2,968

 
7,609

 
6,224

Accrued gift certificates
8,863

 
7,899

 
6,409

Accrued 401(k) contributions
3,708

 
8,775

 
5,985

Accrued closure costs
1,337

 
9,128

 
8,210

Other current liabilities
33,676

 
27,356

 
19,766

Total
$
100,473

 
$
105,129

 
$
85,107

    
Other long-term liabilities consisted of the following:
(dollars in thousands)
September 27,
2014
 
December 28,
2013
 
September 28,
2013
Deferred lease incentives
65,731

 
$
68,876

 
$
67,988

Accrued rent
38,812

 
31,821

 
26,525

Contingent consideration
—

 
7,384

 
6,794

Accrued workers' compensation
4,270

 
—

 
—

OshKosh pension plan
3,303

 
3,768

 
13,638

Unrecognized tax benefits
12,928

 
11,947

 
11,468

Post-retirement medical plan
5,458

 
5,055

 
6,201

Deferred compensation
7,578

 
6,225

 
5,445

Other
105

 
104

 
160

Total
$
138,185

 
$
135,180

 
$
138,219


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
 
The table below presents certain segment information for the periods indicated:

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
Three fiscal quarters ended
(dollars in thousands)
September 27,
2014
 
% of
Total
 
September 28,
2013
 
% of
Total
 
September 27,
2014
 
% of
Total
 
September 28,
2013
 
% of
Total
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
309,772

 
38.8
 %
 
$
318,607

 
41.9
 %
 
$
781,460

 
38.6
 %
 
$
763,518

 
40.9
 %
Carter’s Retail (a)    
281,455

 
35.2
 %
 
251,028

 
33.0
 %
 
745,473

 
36.8
 %
 
658,827

 
35.2
 %
Total Carter’s
591,227

 
74.0
 %
 
569,635

 
74.9
 %
 
1,526,933

 
75.4
 %
 
1,422,345

 
76.1
 %
OshKosh Retail (a)    
91,427

 
11.4
 %
 
81,894

 
10.8
 %
 
222,500

 
11.0
 %
 
193,662

 
10.4
 %
OshKosh Wholesale
25,107

 
3.1
 %
 
24,583

 
3.2
 %
 
52,342

 
2.6
 %
 
54,070

 
2.9
 %
Total OshKosh
116,534

 
14.5
 %
 
106,477

 
14.0
 %
 
274,842

 
13.6
 %
 
247,732

 
13.4
 %
International (b)     
91,175

 
11.5
 %
 
84,061

 
11.1
 %
 
222,870

 
11.0
 %
 
198,979

 
10.5
 %
Total net sales
$
798,936

 
100.0
 %
 
$
760,173

 
100.0
 %
 
$
2,024,645

 
100.0
 %
 
$
1,869,056

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
Carter’s Wholesale
$
55,762

 
18.0
 %
 
$
56,703

 
17.8
 %
 
$
133,489

 
17.1
 %
 
$
138,186

 
18.1
 %
Carter’s Retail (a)    
54,501

 
19.4
 %
 
47,601

 
19.0
 %
 
137,659

 
18.5
 %
 
120,641

 
18.3
 %
Total Carter’s
110,263

 
18.6
 %
 
104,304

 
18.3
 %
 
271,148

 
17.8
 %
 
258,827

 
18.2
 %
OshKosh Retail (a)    
5,300

 
5.8
 %
 
5,649

 
6.9
 %
 
(883
)
 
(0.4
)%
 
(5,520
)
 
(2.9
)%
OshKosh Wholesale
2,240

 
8.9
 %
 
4,445

 
18.1
 %
 
5,125

 
9.8
 %
 
7,929

 
14.7
 %
Total OshKosh
7,540

 
6.5
 %
 
10,094

 
9.5
 %
 
4,242

 
1.5
 %
 
2,409

 
1.0
 %
International (b) (c)    
15,896

 
17.4
 %
 
15,129

 
18.0
 %
 
27,039

 
12.1
 %
 
27,478

 
13.8
 %
Total segment operating income
133,699

 
16.7
 %
 
129,527

 
17.0
 %
 
302,429

 
14.9
 %
 
288,714

 
15.4
 %
Corporate expenses (d) (e)     
(23,242
)
 
(2.9
)%
 
(38,451
)
 
(5.1
)%
 
(83,094
)
 
(4.1
)%
 
(97,957
)
 
(5.2
)%
Total operating income
$
110,457

 
13.8
 %
 
$
91,076

 
12.0
 %
 
$
219,335

 
10.8
 %
 
$
190,757

 
10.2
 %

(a)
Includes eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income.
(c)
Includes the following net charges:

Fiscal quarter ended
Three fiscal quarters ended
(dollars in millions)
September 27, 2014
 
September 28, 2013
September 27, 2014
 
September 28, 2013
Revaluation of contingent consideration
$
0.4

 
$
0.5

$
0.9

 
$
2.3

Exit from Japan retail operations
$
—

 
$
—

$
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
 
Three fiscal quarters ended
(dollars in millions)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Closure of distribution facility in Hogansville, GA (1)
$
0.2

 
$
0.4

 
$
0.9

 
$
1.0

Office consolidation costs
$
—

 
$
5.9

 
$
6.6

 
$
24.1

Amortization of H.W. Carter and Sons tradenames
$
2.3

 
$
6.3

 
$
14.2

 
$
7.3


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

NOTE 15 – FACILITY CLOSURES

HOGANSVILLE DISTRIBUTION FACILITY
    

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In connection with the plan to close the Hogansville, Georgia distribution facility, the Company recorded approximately $0.4 million and $1.0 million in closing-related charges in selling, general, and administrative expenses for the third fiscal quarter and three fiscal quarters ending September 28, 2013. There were no additional closing-related charges recorded for the third fiscal quarter and three fiscal quarters ending September 27, 2014.

As of September 28, 2013, the restructuring reserves related to the closure of the Hogansville facility were approximately $2.6 million and were included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet. There was no ending liability amount as of September 27, 2014. The salvage value of this facility is estimated to be $2.0 million and is held for sale as of September 27, 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
 
Three fiscal quarters ended
(dollars in millions)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Other closure costs
$
—

 
$
4.7

 
$
5.7

 
$
16.1

Severance and other benefits
—

 
0.6

 
0.9

 
4.7

Accelerated depreciation
—

 
0.6

 
—

 
3.2

Total
$
—

 
$
5.9

 
$
6.6

 
$
24.1


The following table summarizes the restructuring reserves related to the office consolidation as of September 27, 2014:
(dollars in millions)
Severance
 
Other closure costs
 
Total
Balance at December 28, 2013
$
4.7

 
$
1.7

 
$
6.4

Provision
0.9

 
5.7

 
6.6

Payments
(4.3
)
 
(4.9
)
 
(9.2
)
Other
—

 
0.5

 
0.5

Balance at September 27, 2014
$
1.3

 
$
3.0

 
$
4.3


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 September 28, 2013, restructuring reserves were approximately $5.6 million.

The Company has substantially completed its consolidation efforts, and the severance accrual is expected to be substantially paid by the end of fiscal 2014. The Company does not expect to incur any additional costs in fiscal 2014 in connection with the office consolidation.

JAPAN RETAIL OPERATIONS

In the fourth fiscal quarter of 2013, the Company made the decision to exit retail operations in Japan based on revised forecasts which did not meet the Company's investment objectives. The Company recorded the following charges in selling, general, and administrative expenses:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in millions)
September 27, 2014
 
September 27, 2014
Other closure costs
$
—

 
$
(0.3
)
Severance and other benefits
—

 
0.9

Accelerated depreciation
—

 
0.9

Total
$
—

 
$
1.5


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The Company also recorded approximately $1.0 million in cost of goods sold related to a favorable recovery on inventory in the three fiscal quarters ended September 27, 2014. The Company does not expect to incur any additional costs in fiscal 2014 in connection with the exit of retail operations in Japan.

There were no such exit costs related to Japan recorded in the third fiscal quarter and three fiscal quarters ended September 28, 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 September 27, 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
(1.8
)
 
(1.7
)
 
(3.5
)
Balance at September 27, 2014
$
—

 
$
—

 
$
—




NOTE 16 – 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.



15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 17 – 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”), 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.
During the third quarter of fiscal 2014, the Company revised its Guarantor Condensed Consolidating Statements of Comprehensive Income to correct a presentation error related to certain other comprehensive income transactions within the Subsidiary Issuer and Guarantor Subsidiaries columns in the Company’s previously filed Form 10-Q for the first and second fiscal quarters of 2014, which includes the comparative periods, and for the fiscal years ended December 28, 2013 and December 29, 2012.   These presentation items had no effect on the Company’s Consolidated Financial Statements.  The Company concluded that these items were not material to the financial statements taken as a whole, but elected to revise previously reported amounts within this footnote for all periods presented.  Future filings will reflect these revisions.


















16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.
Condensed Consolidating Balance Sheets
As of September 27, 2014
(dollars in thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
106,699

 
$
5,708

 
$
21,239

 
$
—

 
$
133,646

Accounts receivable, net
—

 
198,339

 
25,988

 
8,151

 
—

 
232,478

Intercompany receivable
—

 
89,704

 
86,256

 
10,153

 
(186,113
)
 
—

Intercompany loan receivable
—

 
35,000

 
—

 
—

 
(35,000
)
 
—

Finished goods inventories, net
—

 
270,504

 
236,235

 
58,259

 
(45,582
)
 
519,416

Prepaid expenses and other current assets
—

 
9,151

 
15,053

 
7,054

 
—

 
31,258

Deferred income taxes
—

 
23,860

 
13,026

 
1,683

 
—

 
38,569

Total current assets
—

 
733,257

 
382,266

 
106,539

 
(266,695
)
 
955,367

Property, plant, and equipment, net
—

 
158,401

 
146,908

 
27,566

 
—

 
332,875

Goodwill
—

 
136,570

 
—

 
47,626

 
—

 
184,196

Tradenames and other intangibles, net
—

 
230,495

 
85,500

 
51

 
—

 
316,046

Deferred debt issuance costs, net
—

 
7,043

 
—

 
—

 
—

 
7,043

Other assets
—

 
10,685

 
529

 
—

 
—

 
11,214

Intercompany long term receivable
—

 
—

 
233,039

 
—

 
(233,039
)
 
—

Intercompany long term note receivable
—

 
100,000

 
—

 
—

 
(100,000
)
 
—

Investment in subsidiaries
751,581

 
581,538

 
8,156

 
—

 
(1,341,275
)
 
—

Total assets
$
751,581

 
$
1,957,989

 
$
856,398

 
$
181,782

 
$
(1,941,009
)
 
$
1,806,741

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

 
$
73,951

 
$
32,008

 
$
11,370

 
$
—

 
$
117,329

Intercompany payables
—

 
88,637

 
93,747

 
3,729

 
(186,113
)
 
—

Intercompany loan payable
—

 
—

 
—

 
35,000

 
(35,000
)
 
—

Other current liabilities
—

 
39,007

 
47,401

 
14,065

 
—

 
100,473

Total current liabilities
—

 
201,595

 
173,156

 
64,164

 
(221,113
)
 
217,802

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
—

 
586,000

 
—

 
—

 
—

 
586,000

Deferred income taxes
—

 
70,230

 
42,943

 
—

 
—

 
113,173

Intercompany long term liability
—

 
233,039

 
—

 
—

 
(233,039
)
 
—

Intercompany long term note payable
—

 
—

 
100,000

 
—

 
(100,000
)
 
—

Other long-term liabilities
—

 
69,962

 
55,844

 
12,379

 
—

 
138,185

Stockholders' equity
751,581

 
797,163

 
484,455

 
105,239

 
(1,386,857
)
 
751,581

Total liabilities and stockholders' equity
$
751,581

 
$
1,957,989

 
$
856,398

 
$
181,782

 
$
(1,941,009
)
 
$
1,806,741


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


As of December 28, 2013
(dollars in thousands)
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
278,260

 
$
—

 
$
8,286

 
$
—

 
$
286,546

Accounts receivable, net
—

 
163,264