Document

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

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2016 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 21, 2016
Common stock, par value $0.01 per share
 
49,370,980











CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of October 1, 2016, January 2, 2016 and October 3, 2015
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended October 1, 2016 and October 3, 2015
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended October 1, 2016 and October 3, 2015
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the three fiscal quarters ended October 1, 2016
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended October 1, 2016 and October 3, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
 
October 1, 2016
 
January 2, 2016
 
October 3, 2015
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
140,626

 
$
381,209

 
$
288,260

Accounts receivable, net
271,207

 
207,570

 
246,565

Finished goods inventories
552,726

 
469,934

 
511,520

Prepaid expenses and other current assets
43,155

 
37,815

 
36,414

Deferred income taxes
37,600

 
34,080

 
34,895

Total current assets
1,045,314

 
1,130,608

 
1,117,654

Property, plant, and equipment, net of accumulated depreciation of $333,660, $290,636, and $276,230, respectively
388,440

 
371,704

 
361,305

Tradenames, net
308,973

 
310,848

 
311,842

Goodwill
176,956

 
174,874

 
176,633

Other assets
18,022

 
15,620

 
14,940

Total assets
$
1,937,705

 
$
2,003,654

 
$
1,982,374

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
155,223

 
$
157,648

 
$
173,594

Other current liabilities
126,922

 
105,070

 
105,199

Total current liabilities
282,145

 
262,718

 
278,793

 
 
 
 
 
 
Long-term debt, net
580,613

 
578,972

 
579,612

Deferred income taxes
129,278

 
128,838

 
119,499

Other long-term liabilities
169,535

 
158,075

 
161,527

Total liabilities
$
1,161,571

 
$
1,128,603

 
$
1,139,431

 
 
 
 
 
 
Commitments and contingencies - Note 13

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at October 1, 2016, January 2, 2016, and October 3, 2015
—

 
—

 
—

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 49,625,609, 51,764,309, and 52,076,784 shares issued and outstanding at October 1, 2016, January 2, 2016 and October 3, 2015, respectively
496

 
518

 
521

Additional paid-in capital
—

 
—

 
—

Accumulated other comprehensive loss
(31,889
)
 
(36,367
)
 
(33,480
)
Retained earnings
807,527

 
910,900

 
875,902

Total stockholders' equity
776,134

 
875,051

 
842,943

Total liabilities and stockholders' equity
$
1,937,705

 
$
2,003,654

 
$
1,982,374



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
 
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
Net sales
$
901,425

 
$
849,806

 
$
2,264,981

 
$
2,147,335

Cost of goods sold
525,879

 
502,267

 
1,296,324

 
1,252,849

Gross profit
375,546

 
347,539

 
968,657

 
894,486

Selling, general, and administrative expenses
255,322

 
230,017

 
712,782

 
650,496

Royalty income
(10,670
)
 
(12,699
)
 
(31,270
)
 
(32,688
)
Operating income
130,894

 
130,221

 
287,145

 
276,678

Interest expense
6,779

 
6,907

 
20,321

 
20,534

Interest income
(68
)
 
(91
)
 
(453
)
 
(385
)
Other (income) expense, net
(36
)
 
(622
)
 
3,673

 
(560
)
Income before income taxes
124,219

 
124,027

 
263,604

 
257,089

Provision for income taxes
43,408

 
44,701

 
92,615

 
91,866

Net income
$
80,811

 
$
79,326

 
$
170,989

 
$
165,223

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.62

 
$
1.52

 
$
3.37

 
$
3.15

Diluted net income per common share
$
1.60

 
$
1.51

 
$
3.34

 
$
3.12

Dividend declared and paid per common share
$
0.33

 
$
0.22

 
$
0.99

 
$
0.66


See accompanying notes to the unaudited condensed consolidated financial statements.



2


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

 
Fiscal quarter ended
 
Three fiscal quarters ended
 
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
Net income
$
80,811

 
$
79,326

 
$
170,989

 
$
165,223

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
(1,356
)
 
(4,205
)
 
4,478

 
(10,443
)
Comprehensive income
$
79,455

 
$
75,121

 
$
175,467

 
$
154,780



See accompanying notes to the unaudited condensed consolidated financial statements.

3

CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 2, 2016
51,764,309

 
$
518

 
$
—

 
$
(36,367
)
 
$
910,900

 
$
875,051

Income tax benefit from stock-based compensation

 
—

 
4,067

 
—

 
—

 
4,067

Exercise of stock options
144,165

 
1

 
6,385

 
—

 
—

 
6,386

Withholdings from vesting of restricted stock
(90,754
)
 
(1
)
 
(8,593
)
 
—

 
—

 
(8,594
)
Restricted stock activity
155,248

 
2

 
(2
)
 
—

 
—

 
—

Stock-based compensation expense
—

 
—

 
11,852

 
—

 
—

 
11,852

Issuance of common stock
11,588

 
—

 
1,174

 
—

 
—

 
1,174

Repurchase of common stock
(2,358,947
)
 
(24
)
 
(14,883
)
 
—

 
(224,231
)
 
(239,138
)
Cash dividends declared and paid
—

 
—

 
—

 
—

 
(50,131
)
 
(50,131
)
Comprehensive income
—

 
—

 
—

 
4,478

 
170,989

 
175,467

Balance at October 1, 2016
49,625,609

 
$
496

 
$
—

 
$
(31,889
)
 
$
807,527

 
$
776,134


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
 
October 1, 2016
 
October 3, 2015
Cash flows from operating activities:
 
 
 
Net income
$
170,989

 
$
165,223

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
52,384

 
44,187

Amortization of tradenames
1,875

 
5,422

Accretion of contingent consideration
—

 
809

Amortization of debt issuance costs
1,092

 
1,246

Non-cash stock-based compensation expense
13,026

 
13,304

Unrealized foreign currency loss, net
2,361

 
221

Income tax benefit from stock-based compensation
(4,067
)
 
(7,963
)
Loss on disposal of property, plant, and equipment
821

 
80

Deferred income taxes
(2,333
)
 
(1,801
)
Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(63,436
)
 
(61,108
)
Finished goods inventories
(81,011
)
 
(73,724
)
Prepaid expenses and other assets
(10,138
)
 
(3,144
)
Accounts payable and other liabilities
35,011

 
63,282

Net cash provided by operating activities
116,574

 
146,034

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(71,190
)
 
(76,987
)
Proceeds from sale of property, plant, and equipment
216

 
66

Net cash used in investing activities
(70,974
)
 
(76,921
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payments of debt issuance costs
—

 
(1,495
)
Borrowings under secured revolving credit facility
—

 
205,586

Payments on secured revolving credit facility
—

 
(205,237
)
Repurchase of common stock
(239,138
)
 
(78,339
)
Payment of contingent consideration
—

 
(7,572
)
Dividends paid
(50,131
)
 
(34,617
)
Income tax benefit from stock-based compensation
4,067

 
7,963

Withholdings from vesting of restricted stock
(8,594
)
 
(12,575
)
Proceeds from exercise of stock options
6,386

 
5,743

Net cash used in financing activities
(287,410
)
 
(120,543
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
1,227

 
(948
)
Net decrease in cash and cash equivalents
(240,583
)
 
(52,378
)
Cash and cash equivalents, beginning of period
381,209

 
340,638

Cash and cash equivalents, end of period
$
140,626

 
$
288,260


See accompanying notes to the unaudited condensed consolidated financial statements.

5

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
    
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear 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 October 1, 2016, the Company operated 636 Carter’s stores in the United States, 267 OshKosh stores in the United States, and 156 stores in Canada.

NOTE 2 – BASIS OF PREPARATION AND ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholders' equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter and three fiscal quarters ended October 1, 2016 are not necessarily indicative of the results that may be expected for the 2016 fiscal year ending December 31, 2016.

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

The accompanying condensed consolidated balance sheet as of January 2, 2016 was derived from the Company's audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.

The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material subsequent changes to these accounting policies, except as noted below for new accounting pronouncements adopted at the beginning of fiscal 2016.

Adoption of New Accounting Pronouncements At the Beginning of Fiscal 2016

At the beginning of fiscal 2016, the Company adopted the following Accounting Standards Updates ("ASU"): ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"); ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"); and ASU No. 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets ("ASU 2015-04").
ASU 2015-05
The Company prospectively adopted the provisions of ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement at the beginning of fiscal 2016, as it relates to the accounting for fees paid in connection with arrangements with cloud-based software providers. Under the new guidance, unless a software arrangement includes specific elements enabling customers to possess and operate software on platforms other than those offered by the cloud-based provider, the costs of such arrangements are accounted for as an operating expense in the period in which such costs are incurred. The adoption of this guidance did not have a material effect on the Company's financial position, results of operations, or cash flows.


6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

For the Company's adoption of ASU 2015-03, refer to Note 6, Long-Term Debt, accompanying the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q. The Company adopted this guidance effective at the beginning of fiscal 2016 and the provisions have been applied to each prior period presented for comparative purposes.

For the Company's adoption of ASU 2015-04, refer to Note 8, Employee Benefit Plans, accompanying the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q.


NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components, net of applicable income taxes, of accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
October 1, 2016
 
January 2, 2016
 
October 3, 2015
Cumulative foreign currency translation adjustments
$
(25,108
)
 
$
(29,586
)
 
$
(25,840
)
Pension and post-retirement liability adjustments
(6,781
)
 
(6,781
)
 
(7,640
)
Total accumulated other comprehensive loss
$
(31,889
)
 
$
(36,367
)
 
$
(33,480
)

Changes in accumulated other comprehensive loss for the third quarter and the first three quarters of fiscal 2016 consisted of additional losses of $1.4 million and additional gains of $4.5 million for foreign currency translation adjustments, respectively. Changes in accumulated other comprehensive loss for the third quarter and the first three quarters of fiscal 2015 consisted of additional losses of $4.2 million and $10.4 million for foreign currency translation adjustments, respectively. During the first, second and third quarters of both fiscal 2016 and fiscal 2015, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.


NOTE 4 – GOODWILL AND TRADENAMES INTANGIBLE ASSETS

The Company's goodwill and other intangible assets were as follows:
 
 
 
October 1, 2016
 
January 2, 2016
(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

Canadian acquisition
Indefinite
 
40,386

 
—

 
40,386

 
38,304

 
—

 
38,304

Total goodwill
 
 
$
176,956

 
$
—

 
$
176,956

 
$
174,874

 
$
—

 
$
174,874

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
2-20 years
 
42,016

 
38,776

 
3,240

 
41,992

 
36,877

 
5,115

Total tradenames
 
 
$
347,749


$
38,776

 
$
308,973

 
$
347,725

 
$
36,877

 
$
310,848

 
 
 
October 3, 2015
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
Carter's goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

Canadian acquisition
Indefinite
 
40,063

 
—

 
40,063

Total goodwill
 
 
$
176,633

 
$
—

 
$
176,633

 
 
 
 
 
 
 
 
Carter's tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
—

 
85,500

Other tradenames
2-20 years
 
42,012

 
35,903

 
6,109

Total tradenames
 
 
$
347,745

 
$
35,903

 
$
311,842



7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The Company recorded approximately $1.9 million in amortization expense for the first three fiscal quarters ended October 1, 2016. Amortization expense for the third fiscal quarter ended October 1, 2016 was not material. The Company recorded approximately $1.0 million and $5.4 million in amortization expense for the fiscal quarter and the first three fiscal quarters ended October 3, 2015, respectively. At October 1, 2016, one tradename had an unamortized balance of approximately $3.2 million, and the future amortization expense is estimated to be approximately $0.2 million for each of the next five fiscal years.


NOTE 5 – COMMON STOCK

SHARE REPURCHASES

In the second quarter of fiscal 2013, the Company's Board of Directors authorized the repurchase of shares of the Company's stock in an amount up to $300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of fiscal 2013, the Board approved an additional $400 million accelerated share repurchase authorization, which has been completed. On February 24, 2016, the Company's Board of Directors authorized a new $500 million share repurchase program in addition to any amounts remaining under previous authorizations. The total aggregate remaining capacity under all of the outstanding repurchase authorizations as of October 1, 2016 was approximately $335.7 million, based on settled repurchase transactions. The authorizations have no expiration date.

Open Market Repurchases

The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
Number of shares repurchased
587,100

 
290,800

 
2,358,947

 
795,025

Aggregate cost of shares repurchased (dollars in thousands)
$
58,929

 
$
29,445

 
$
239,138

 
$
78,339

Average price per share
$
100.37

 
$
101.26

 
$
101.37

 
$
98.54



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

DIVIDENDS

In the third fiscal quarter and the first three fiscal quarters ended October 1, 2016, the Company paid cash dividends per share of $0.33 and $0.99, respectively. In the third fiscal quarter and the first three fiscal quarters ended October 3, 2015, the Company paid cash dividends per share of $0.22 and $0.66, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and based on a number of factors, including the Company's future financial performance and other investment priorities.

Provisions in the indenture governing the senior notes of The William Carter Company ("TWCC"), a 100% owned subsidiary of the Company, and in TWCC's secured revolving credit facility could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock. Provisions related to the indenture governing the senior notes are described in the Company's Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 6 – LONG-TERM DEBT


Long-term debt consisted of the following:
(dollars in thousands)
October 1, 2016
 
January 2, 2016
 
October 3, 2015
Senior notes at amounts repayable
$
400,000

 
$
400,000

 
$
400,000

Less unamortized issuance-related costs for senior notes
(4,820
)
 
(5,459
)
 
(5,666
)
      Senior notes, net
395,180

 
394,541

 
394,334

Secured revolving credit facility
185,433

 
184,431

 
185,278

Total long-term debt, net
$
580,613

 
$
578,972

 
$
579,612



In the first quarter of fiscal 2015, the Company replaced $20.0 million of outstanding borrowings under the then-existing secured revolving credit facility with CAD 25.5 million of borrowings, which approximated $20.3 million. This transaction is reflected on the Company's consolidated statement of cash flows.


Secured Revolving Credit Facility

As previously disclosed in the Company's most recent Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016, the secured revolving credit facility was amended and restated in September 2015. The aggregate principal amount of the secured revolving credit facility is $500 million consisting of (i) a $400 million U.S. dollar revolving credit facility (including a $175 million sub-limit for letters of credit and a swing line sub-limit of $50 million) available for borrowings by TWCC and (ii) a $100 million multicurrency revolving credit facility (including a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million) available for borrowings by TWCC and certain other subsidiaries of TWCC in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. The secured revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed $250 million, either in the form of a commitment increase under the existing revolving credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount available to the Company not to exceed $200 million and the aggregate multicurrency amount available not to exceed $50 million). The Company's secured revolving credit facility matures on September 16, 2020.

As of October 1, 2016, the Company had approximately $185.4 million in outstanding borrowings under its secured revolving credit facility, exclusive of $4.8 million of outstanding letters of credit. As of October 1, 2016, approximately $309.7 million remained available for future borrowing.

As of October 1, 2016, the interest rate margins applicable to the secured revolving credit facility were 1.375% for LIBOR (London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of October 1, 2016, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which was 1.90% on that date, and Canadian dollar borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) plus the applicable base rate, which was 2.26% on that date.

As disclosed in the Company's most recent Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016, the Company's secured revolving credit facility contains covenants, including affirmative and financial covenants. As of October 1, 2016, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.


Senior Notes


9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of October 1, 2016, TWCC had outstanding $400 million principal amount of senior notes bearing interest at a fixed rate of 5.25% per annum and maturing on August 15, 2021. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC. On the Company's consolidated balance sheet, the senior notes are reported net of certain unamortized issuance-related costs, as described in the following section.


Adoption of New Accounting Pronouncement Related to Debt Issuance Costs

The Company retrospectively adopted the provisions of Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"), at the beginning of fiscal 2016, which requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of a debt discount. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. The guidance did not change the recognition and measurement requirements for debt issuance costs. The Company reclassified $4.8 million, $5.5 million, and $5.7 million of unamortized issuance-related debt costs associated with the Company's senior notes from other assets to Long-term debt, net within its consolidated balance sheets as of October 1, 2016, January 2, 2016, and October 3, 2015, respectively. Other than this balance sheet reclassification, the adoption of ASU 2015-03 did not have an impact on the Company's consolidated financial statements. Fees paid to lenders to secure revolving lines of credit continue to be presented as a deferred charge (asset) on the balance sheet.

NOTE 7 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation expense as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
Stock options
$
960

 
$
1,015

 
$
3,237

 
$
3,359

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
1,809

 
1,599

 
5,671

 
5,294

   Performance-based awards
996

 
1,130

 
2,944

 
3,556

   Stock awards
11

 
—

 
1,174

 
1,095

Total
$
3,776

 
$
3,744

 
$
13,026

 
$
13,304





NOTE 8 – EMPLOYEE BENEFIT PLANS

The Company maintains a defined contribution plan and two defined benefit plans. The two defined benefit plans include the OshKosh B'Gosh pension plan and a post-retirement life and medical plan.
    
OSHKOSH B'GOSH PENSION PLAN
    
The net periodic pension cost (benefit) included in the statement of operations was comprised of:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
Interest cost
$
629

 
$
623

 
$
1,887

 
$
1,869

Expected return on plan assets
(676
)
 
(785
)
 
(2,028
)
 
(2,355
)
Recognized actuarial loss
145

 
161

 
435

 
483

Net periodic pension cost (benefit)
$
98

 
$
(1
)
 
$
294

 
$
(3
)


POST-RETIREMENT LIFE AND MEDICAL PLAN

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The components of post-retirement benefit expense charged to the statement of operations were as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
 
 
 
 
 
 
 
 
Service cost – benefits attributed to service during the period
$
31

 
$
32

 
$
93

 
$
96

Interest cost on accumulated post-retirement benefit obligation
44

 
45

 
132

 
135

Amortization net actuarial gain
(49
)
 
(48
)
 
(147
)
 
(144
)
Total net periodic post-retirement benefit cost
$
26

 
$
29

 
$
78

 
$
87



Simplified Measurement Date for Defined Benefit Plan Assets and Obligations
The Company adopted the provisions of ASU No. 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets ("ASU 2015-04") at the beginning of fiscal 2016. However, the Company is not required to make any such measurements until the end of fiscal 2016. ASU 2015-04 allows employers with fiscal year ends that do not coincide with a calendar month end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year end (i.e., on an alternative measurement date). An employer that makes this election must consistently apply the alternative measurement date from year to year and to all of its defined benefit plans. The Company expects to make the accounting policy election to use December 31 as the measurement date for all of its defined benefit plan assets and obligations for fiscal 2016 and subsequent years. Measurement dates for prior periods will not be impacted. Since the Company's current 52-week fiscal year will end on December 31, 2016, it will not be necessary for the Company to utilize an alternate measurement date for fiscal 2016, and thus the initial adoption of ASU 2015-04 at the beginning of fiscal 2016 will not have an impact on the Company's results of operations, financial condition, or cash flows.

    

NOTE 9 – INCOME TAXES

During the first quarters of fiscal 2016 and 2015, the IRS and various state tax authorities completed examinations of the Company's income tax returns. As a result, the Company recognized income tax benefits related to prior years of approximately $0.4 million and $1.8 million in the first quarters of fiscal 2016 and 2015, respectively. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2012.

As of October 1, 2016, the Company had gross unrecognized income tax benefits of approximately $10.1 million, of which $7.2 million, if ultimately recognized, may affect the Company's effective tax rate in the periods settled.  The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.  

Included in the reserves for unrecognized tax benefits at October 1, 2016 were approximately $1.2 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 2016 or fiscal 2017 along with the effective tax rate in the quarter in which the benefits are recognized. 

The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized tax benefits as a component of income tax expense.  During the fiscal quarter and the first three fiscal quarters ended October 1, 2016 and the fiscal quarter and the first three fiscal quarters ended October 3, 2015, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.9 million, $0.8 million, and $0.9 million of interest accrued on uncertain tax positions as of October 1, 2016, January 2, 2016, and October 3, 2015, respectively.     



NOTE 10 – FAIR VALUE MEASUREMENTS


11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.

 
October 1, 2016
 
 
January 2, 2016
 
 
October 3, 2015
(dollars in millions)
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
11.4

 
$
—

 
$
—

 
 
$
8.6

 
$
—

 
$
—

 
 
$
7.5

 
$
—

 
$
—

Foreign exchange forward contracts (1)
$
—

 
$
—

 
$
—

 
 
$
—

 
$
2.1

 
$
—

 
 
$
—

 
$
1.5

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
$
—

 
$
0.4

 
$
—

 
 
$
—

 
$
—

 
$
—

 
 
$
—

 
$
—

 
$
—

    
(1) Included in Prepaid expenses and other current assets in the Company's condensed consolidated balance sheet.
(2) Included in Other current liabilities in the Company's condensed consolidated balance sheet.


INVESTMENTS

The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation.

Gains on the investments in marketable securities were $0.4 million and $0.8 million for the third fiscal quarter and the first three fiscal quarters ended October 1, 2016, respectively. Losses on the investments in marketable securities were $0.4 million and $0.1 million for the third fiscal quarter and the first three fiscal quarters ended October 3, 2015. These amounts are included in Other expense (income), net on the Company's consolidated statement of operations included in this Quarterly Report on Form 10-Q.


FOREIGN EXCHANGE FORWARD CONTRACTS

Fair values for unsettled foreign exchange forward contracts are calculated by using readily observable market inputs (market-quoted currency exchange rates in effect between U.S. and Canadian dollars).

At October 1, 2016, the notional value of the open foreign currency forward contracts was approximately $6.0 million. These contracts were marked-to-market, or to fair value, resulting in an unrealized loss of approximately $0.4 million at October 1, 2016.

The Company recorded realized losses of approximately $0.6 million and $0.8 million for foreign currency forward contracts settled during the third fiscal quarter and the first three fiscal quarters ended October 1, 2016, respectively. The Company recorded realized gains of approximately $1.6 million and $1.9 million for foreign currency forward contracts settled during the third fiscal quarter and the first three fiscal quarters ended October 3, 2015. These amounts are included in Other expense (income), net on the Company's consolidated statement of operations. The Company did not apply hedge accounting treatment on any of these foreign currency forward contracts.



CONTINGENT CONSIDERATION

The following table summarizes the changes in the contingent consideration liability during the third fiscal quarter and first three fiscal quarters of 2015 related to the Company's 2011 acquisition of Bonnie Togs in Canada:

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 3, 2015
 
October 3, 2015
Balance at the beginning of period
$
9,022

 
$
7,711

Payments made
(8,568
)
 
(8,568
)
Accretion
—

 
809

Foreign currency translation adjustment
(454
)
 
(1,029
)
Final contingent adjustment
—

 
1,077

Balance at the end of period
$
—

 
$
—



The final payment under the earn-out obligation was paid during the third quarter of fiscal 2015. At October 1, 2016, January 2, 2016 and October 3, 2015, the Company had no remaining contingent consideration liability related to the 2011 acquisition of Bonnie Togs in Canada.


BORROWINGS

As of October 1, 2016, the fair value of the Company's $185.4 million in outstanding borrowings under its secured revolving credit facility approximated carrying value.

The fair value of the Company's senior notes at October 1, 2016 was approximately $419 million. The fair value of these senior notes with a notional value and carrying value of $400 million was estimated using a quoted price as provided in the secondary market, which considers the Company's credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.



13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 11 – EARNINGS PER SHARE

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
October 1, 2016
 
October 3, 2015
 
October 1, 2016
 
October 3, 2015
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
49,526,480

 
51,740,523

 
50,282,345

 
51,960,041

Dilutive effect of equity awards
460,271

 
507,815

 
470,050

 
512,861

Diluted number of common and common equivalent shares outstanding
49,986,751

 
52,248,338

 
50,752,395

 
52,472,902

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
80,811

 
$
79,326

 
$
170,989

 
$
165,223

Income allocated to participating securities
(632
)
 
(675
)
 
(1,359
)
 
(1,557
)
Net income available to common shareholders
$
80,179

 
$
78,651

 
$
169,630

 
$
163,666

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.62

 
$
1.52

 
$
3.37

 
$
3.15

 
 
 
 
 
 
 
 
Diluted net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
80,811

 
$
79,326

 
$
170,989

 
$
165,223

Income allocated to participating securities
(627
)
 
(669
)
 
(1,350
)
 
(1,545
)
Net income available to common shareholders
$
80,184

 
$
78,657

 
$
169,639

 
$
163,678

 
 
 
 
 
 
 
 
Diluted net income per common share
$
1.60

 
$
1.51

 
$
3.34

 
$
3.12

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from dilutive earnings per share computation
246,980

 
177,300

 
244,430

 
180,000







14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities that exceeded five percent of total current liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
October 1, 2016
 
January 2, 2016
 
October 3, 2015
Accrued bonuses and incentive compensation
$
10,638

 
$
17,934

 
$
12,574

Income taxes payable
32,242

 
3,802

 
25,902

Accrued employee benefits
10,808

 
19,751

 
10,102

Accrued and deferred rent
14,875

 
12,590

 
12,286

    
Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
October 1, 2016
 
January 2, 2016
 
October 3, 2015
Deferred lease incentives
$
73,840

 
$
70,060

 
$
70,778



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.




15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 – SEGMENT INFORMATION

The table below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 1,
2016
 
% of
Total Net Sales
 
October 3,
2015
 
% of
Total Net Sales
 
October 1,
2016
 
% of
Total Net Sales
 
October 3,
2015
 
% of
Total Net Sales
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
356,258

 
39.5
%
 
$
343,555

 
40.4
%
 
$
842,136

 
37.2
 %
 
$
824,600

 
38.4
%
Carter’s Retail (a)    
314,699

 
34.9
%
 
294,928

 
34.7
%
 
860,854

 
38.0
 %
 
799,635

 
37.2
%
Total Carter’s (U.S.)
670,957

 
74.4
%
 
638,483

 
75.1
%
 
1,702,990

 
75.2
 %
 
1,624,235

 
75.6
%
OshKosh Retail (a)    
106,999

 
11.9
%
 
98,292

 
11.6
%
 
267,715

 
11.8
 %
 
244,787

 
11.4
%
OshKosh Wholesale
17,474

 
1.9
%
 
18,794

 
2.2
%
 
38,772

 
1.7
 %
 
49,151

 
2.3
%
Total OshKosh (U.S.)
124,473

 
13.8
%
 
117,086

 
13.8
%
 
306,487

 
13.5
 %
 
293,938

 
13.7
%
International (b)     
105,995

 
11.8
%
 
94,237

 
11.1
%
 
255,504

 
11.3
 %
 
229,162

 
10.7
%
Total net sales
$
901,425

 
100.0
%
 
$
849,806

 
100.0
%
 
$
2,264,981

 
100.0
 %
 
$
2,147,335

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
Carter’s Wholesale
$
81,551

 
22.9
%
 
$
74,347

 
21.6
%
 
$
187,655

 
22.3
 %
 
$
172,485

 
20.9
%
Carter’s Retail (a)    
48,051

 
15.3
%
 
51,733

 
17.5
%
 
127,738

 
14.8
 %
 
134,557

 
16.8
%
Total Carter’s (U.S.)
129,602

 
19.3
%
 
126,080

 
19.7
%
 
315,393

 
18.5
 %
 
307,042

 
18.9
%
OshKosh Retail (a)    
2,652

 
2.5
%
 
6,171

 
6.3
%
 
(614
)
 
(0.2
)%
 
3,396

 
1.4
%
OshKosh Wholesale
4,450

 
25.5
%
 
4,487

 
23.9
%
 
8,266

 
21.3
 %
 
9,715

 
19.8
%
Total OshKosh (U.S.)
7,102

 
5.7
%
 
10,658

 
9.1
%
 
7,652

 
2.5
 %
 
13,111

 
4.5
%
International (b) (c)    
19,645

 
18.5
%
 
18,220

 
19.3
%
 
37,191

 
14.6
 %
 
30,967

 
13.5
%
Corporate expenses (d) (e) (f)     
(25,455
)
 


 
(24,737
)
 


 
(73,091
)
 


 
(74,442
)
 


Total operating income
$
130,894

 
14.5
%
 
$
130,221

 
15.3
%
 
$
287,145

 
12.7
 %
 
$
276,678

 
12.9
%

(a)
Includes eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income.
(c)
Includes charges associated with the revaluation of the Company's contingent consideration related to the Company's 2011 acquisition of Bonnie Togs of approximately $1.9 million for the first three fiscal quarters ended October 3, 2015.
(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 charges related to the amortization of the H.W. Carter and Sons tradenames of approximate $1.7 million for the first three fiscal quarters ended October 1, 2016, and approximately $1.0 million and $5.3 million for the fiscal quarter and the first three fiscal quarters ended October 3, 2015, respectively.
(f)
Includes charges related to the Company's direct sourcing initiative of $0.5 million for the fiscal quarter and for the three fiscal quarters periods ended October 1, 2016.
    
    

NOTE 15 – PENDING ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which has been codified in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers. This guidance clarifies the principles for recognizing revenue and will be applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance will require improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard is effective for the Company beginning in the first quarter of fiscal

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2018, including interim periods within that first fiscal year, and early adoption is now permitted for 2017. 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. Since the original issuance of ASU 2014-09, the FASB has issued several amendments and updates to this guidance, and additional amendments and updates are currently being considered by the FASB. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial position, results of operations, and cash flows. 


Simplified Subsequent Measurement of Inventory

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). Upon adoption by an entity, ASU 2015-11 will simplify subsequent measurements of inventory by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The new guidance applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by current guidance ("market," "subject to a floor," and a "ceiling"). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities will recognize the difference as a loss in earnings in the period in which it occurs. ASU 2015-11 is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within the year of adoption. Early adoption is permitted. The Company expects to adopt the provisions of ASU 2015-11 at the beginning of fiscal 2017. At this time, the Company does not believe the adoption of ASU 2015-11 will have a material impact on its consolidated financial condition, results of operations, or cash flows.


Balance Sheet Classification of Deferred Taxes

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). Current GAAP requires the deferred taxes for each tax jurisdiction (or tax-paying component of a jurisdiction) to be presented as a net current asset or liability and net noncurrent asset or liability. ASU 2015-17 requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate based on the period in which the attribute is expected to be realized. Upon adoption of ASU 2015-17, all deferred tax assets and liabilities will be classified as noncurrent on an entity's balance sheet. As a result, each jurisdiction will have only one net noncurrent deferred tax asset or liability. ASU 2015-17 will not change the existing guidance that prohibits the offsetting of deferred tax liabilities of one jurisdiction against the deferred tax assets of another jurisdiction. ASU 2015-17 is effective for public entities in fiscal years beginning after December 15, 2016, including interim periods in the year of adoption. Early adoption is permitted, and adoption may be applied either prospectively or retrospectively. The Company plans to adopt ASU 2015-17 at the beginning of the first quarter of fiscal 2017. ASU 2015-17 will only involve classification of certain deferred tax assets and liabilities on the Company's consolidated balance sheet and will have no impact on the Company's results of operations or cash flows. The Company does not expect the adoption of ASU 2015-17 will have a material effect on the Company's consolidated balance sheet.


Leases

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases. Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. The new standard will be effective for the Company at the beginning of fiscal 2019, including interim periods within the year of adoption. The new standard requires a modified retrospective basis, and early adoption is permitted. The Company is still evaluating the potential impacts of ASU 2016-02 on its consolidated financial statements. However, the Company expects that the adoption of ASU 2016-02 will require the Company to recognize right-of-use assets and lease liabilities that will be material to the Company's consolidated balance sheet.


Accounting for Share-Based Payments to Employees


17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which amends ASC Topic 718, Stock Compensation. ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. All tax benefits and deficiencies related to share-based payments will be recognized and recorded through the statement of operations for all awards settled or expiring after the adoption of ASU 2016-09. Currently, tax benefits in excess of compensation costs ("windfalls") are recorded in equity, and tax deficiencies ("shortfalls") are recorded in equity to the extent of previous windfalls and then to the statement of operations. ASU 2016-09 will also require, either prospectively or retrospectively, that all tax-related cash flows resulting from share-based payments be reported as operating activities on the statement of cash flows, a change from the current requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities on the statement of cash flows. Additionally, ASU 2016-09 will allow entities to make an accounting policy election for the impact of most types of forfeitures on the recognition of expense for share-based payment awards by allowing the forfeitures to be either estimated, as is currently required, or recognized when they actually occur. If elected, the change to recognize forfeitures when they occur will be adopted using a modified retrospective approach, with a cumulative effect adjustment recorded to retained earnings. ASU 2016-09 will be effective for the Company at the beginning of fiscal 2017, including interim periods in the year of adoption. Early adoption is permitted in any interim or annual period. The potential impacts that the adoption of ASU 2016-09 will have on the Company's income tax expense or benefit and related cash flows during and after the period of adoption are dependent in part upon future grants and vesting of stock-based compensation awards and other factors that are not fully controllable or predicable by the Company such as the future market price of the Company's common stock, the timing of employee exercises of vested stock options, and the future achievement of performance criteria that affect performance-based awards. However, based on the Company’s stock price as of October 1, 2016 and its outstanding unvested restricted stock awards and unexercised stock options, the Company anticipates that adoption of this pronouncement at the beginning of fiscal 2017 will reduce its income tax expense and increase its net income, and these anticipated income tax benefits will be reported as a component of cash flows from operating activities instead of cash flows from financing activities.
 


18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 16 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

For additional information, refer to the Company's Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016.
The condensed consolidating financial information for the Parent, the Subsidiary Issuer, and the guarantor and non-guarantor subsidiaries has been prepared from the books and records maintained by the Company. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10. The financial information may not necessarily be indicative of the financial position, results of operations, comprehensive income (loss), and cash flows, had the Parent, Subsidiary Issuer, guarantor or non-guarantor subsidiaries operated as independent entities.
Intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several, and unconditional.
In December 2015, as part of a foreign subsidiary restructuring, certain non-guarantor subsidiaries became subsidiaries of certain other non-guarantor subsidiaries. The restructuring did not retroactively impact the prior status of the guarantor and the non-guarantor subsidiaries, and accordingly the condensed consolidating financial information for periods prior to the restructuring have not been adjusted to reflect the restructuring.


19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

As of October 1, 2016
(dollars in thousands)

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

 
$
91,299

 
$
8,477

 
$
40,850

 
$
—

 
$
140,626

Accounts receivable, net
—

 
234,979

 
27,047

 
9,181

 
—

 
271,207

Intercompany receivable
—

 
60,570

 
72,037

 
4,035

 
(136,642
)
 
—

Finished goods inventories
—

 
300,044

 
231,511

 
65,732

 
(44,561
)
 
552,726

Prepaid expenses and other current assets
—

 
22,446

 
15,988

 
4,721

 
—

 
43,155

Deferred income taxes
—

 
20,346

 
15,579

 
1,675

 
—

 
37,600

Total current assets
—

 
729,684

 
370,639

 
126,194

 
(181,203
)
 
1,045,314

Property, plant, and equipment, net
—

 
159,149

 
194,078

 
35,213

 
—

 
388,440

Goodwill
—

 
136,570

 
—

 
40,386

 
—

 
176,956

Tradenames, net
—

 
223,473

 
85,500

 
—

 
—

 
308,973

Other assets
—

 
17,130

 
641

 
251

 
—

 
18,022

Intercompany long-term receivable
—

 
—

 
340,887

 
—

 
(340,887
)
 
—

Intercompany long-term note receivable
—

 
100,000

 
—

 
—

 
(100,000
)
 
—

Investment in subsidiaries
776,134

 
707,381

 
127,447

 
—

 
(1,610,962
)
 
—

Total assets
$
776,134

 
$
2,073,387

 
$
1,119,192

 
$
202,044

 
$
(2,233,052
)
 
$
1,937,705

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

 
$
99,175

 
$
36,003

 
$
20,045

 
$
—

 
$
155,223

Intercompany payables
—

 
74,414

 
58,787

 
3,441

 
(136,642
)
 
—

Other current liabilities
—

 
24,842

 
92,168

 
9,912

 
—

 
126,922

Total current liabilities
—

 
198,431

 
186,958

 
33,398

 
(136,642
)
 
282,145

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, net
—

 
561,180

 
—

 
19,433

 
—

 
580,613

Deferred income taxes
—

 
83,998

 
45,280

 
—

 
—

 
129,278

Intercompany long-term liability
—

 
340,887

 
—

 
—

 
(340,887
)
 
—

Intercompany long-term note payable
—

 
—

 
100,000

 
—

 
(100,000
)
 
—

Other long-term liabilities
—

 
68,196

 
88,906

 
12,433

 
—

 
169,535

Stockholders' equity
776,134

 
820,695

 
698,048

 
136,780

 
(1,655,523
)
 
776,134

Total liabilities and stockholders' equity
$
776,134

 
$
2,073,387

 
$
1,119,192

 
$
202,044

 
$
(2,233,052
)
 
$
1,937,705






20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of January 2, 2016
(dollars in thousands)

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

 
$
325,771

 
$
14,652

 
$
40,786

 
$
—

 
$
381,209

Accounts receivable, net
—

 
178,842

 
23,980

 
4,748

 
—

 
207,570

Intercompany receivable
—

 
52,676

 
133,092

 
3,317

 
(189,085
)
 
—

Finished goods inventories
—

 
271,148

 
184,618

 
48,960

 
(34,792
)
 
469,934

Prepaid expenses and other current assets
—

 
17,460

 
14,261

 
6,094

 
—

 
37,815

Deferred income taxes
—

 
19,502

 
13,544

 
1,034

 
—

 
34,080

Total current assets
—

 
865,399

 
384,147

 
104,939

 
(223,877
)
 
1,130,608

Property, plant, and equipment, net
—

 
162,031

 
180,322

 
29,351

 
—

 
371,704

Goodwill
—

 
136,570

 
—

 
38,304

 
—

 
174,874

Tradenames, net
—

 
225,348

 
85,500

 
—

 
—

 
310,848

Other assets
—

 
14,634

 
665

 
321

 
—

 
15,620

Intercompany long-term receivable
—

 
—

 
294,070

 
—

 
(294,070
)
 
—

Intercompany long-term note receivable
—

 
100,000

 
—

 
—

 
(100,000
)
 
—

Investment in subsidiaries
875,051

 
652,598

 
100,146

 
—

 
(1,627,795
)
 
—

Total assets
$
875,051

 
$
2,156,580

 
$
1,044,850

 
$
172,915

 
$
(2,245,742
)
 
$
2,003,654

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

 
$
93,585

 
$
44,951

 
$
19,112

 
$
—

 
$
157,648

Intercompany payables
—

 
134,694

 
51,362

 
3,029