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 SEPTEMBER 30, 2017 OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____
TO ______
Commission file number:
001-31829
CARTER’S, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
13-3912933
(state or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (X) No (X)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock
 
Outstanding Shares at October 20, 2017
Common stock, par value $0.01 per share
 
47,323,325







CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017, December 31, 2016 and October 1, 2016
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended September 30, 2017 and October 1, 2016
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended September 30, 2017 and October 1, 2016
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the three fiscal quarters ended September 30, 2017
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended September 30, 2017 and October 1, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
 
September 30, 2017
 
December 31, 2016
 
October 1, 2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
105,370

 
$
299,358

 
$
140,626

Accounts receivable, net
285,651

 
202,471

 
271,207

Finished goods inventories
609,996

 
487,591

 
552,726

Prepaid expenses and other current assets
48,083

 
32,180

 
43,155

Deferred income taxes
—

 
35,486

 
37,600

Total current assets
1,049,100

 
1,057,086

 
1,045,314

Property, plant, and equipment, net of accumulated depreciation of $387,041, $345,907, and $333,660, respectively
382,014

 
385,874

 
388,440

Tradenames and other intangible assets, net
412,217

 
308,928

 
308,973

Goodwill
234,193

 
176,009

 
176,956

Other assets
26,539

 
18,700

 
18,022

Total assets
$
2,104,063

 
$
1,946,597

 
$
1,937,705

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
193,878

 
$
158,432

 
$
155,223

Other current liabilities
134,031

 
119,177

 
126,922

Total current liabilities
327,909

 
277,609

 
282,145

 
 
 
 
 
 
Long-term debt, net
687,074

 
580,376

 
580,613

Deferred income taxes
138,239

 
130,656

 
129,278

Other long-term liabilities
178,878

 
169,832

 
169,535

Total liabilities
$
1,332,100

 
$
1,158,473

 
$
1,161,571

 
 
 
 
 
 
Commitments and contingencies - Note 14

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 30, 2017, December 31, 2016, and October 1, 2016
—

 
—

 
—

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 47,419,316, 48,948,670 and 49,625,609 shares issued and outstanding at September 30, 2017, December 31, 2016 and October 1, 2016, respectively
474

 
489

 
496

Accumulated other comprehensive loss
(26,496
)
 
(34,740
)
 
(31,889
)
Retained earnings
797,985

 
822,375

 
807,527

Total stockholders' equity
771,963

 
788,124

 
776,134

Total liabilities and stockholders' equity
$
2,104,063

 
$
1,946,597

 
$
1,937,705



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 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net sales
$
948,232

 
$
901,425

 
$
2,373,104

 
$
2,264,981

Cost of goods sold
544,384

 
525,879

 
1,349,997

 
1,296,324

Gross profit
403,848

 
375,546

 
1,023,107

 
968,657

Selling, general, and administrative expenses
283,480

 
255,322

 
781,420

 
712,782

Royalty income
(10,350
)
 
(10,670
)
 
(32,118
)
 
(31,270
)
Operating income
130,718

 
130,894

 
273,805

 
287,145

Interest expense
8,061

 
6,779

 
22,359

 
20,321

Interest income
(41
)
 
(68
)
 
(259
)
 
(453
)
Other (income) expense, net
(815
)
 
(36
)
 
(1,580
)
 
3,673

Income before income taxes
123,513

 
124,219

 
253,285

 
263,604

Provision for income taxes
41,027

 
43,408

 
86,210

 
92,615

Net income
$
82,486

 
$
80,811

 
$
167,075

 
$
170,989

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.73

 
$
1.62

 
$
3.47

 
$
3.37

Diluted net income per common share
$
1.71

 
$
1.60

 
$
3.43

 
$
3.34

Dividend declared and paid per common share
$
0.37

 
$
0.33

 
$
1.11

 
$
0.99


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 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Net income
$
82,486

 
$
80,811

 
$
167,075

 
$
170,989

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,157

 
(1,356
)
 
8,244

 
4,478

Comprehensive income
$
86,643

 
$
79,455

 
$
175,319

 
$
175,467



See accompanying notes to the unaudited condensed consolidated financial statements.

3

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

 
$
489

 
$
—

 
$
(34,740
)
 
$
822,375

 
$
788,124

Exercise of stock options
105,860

 
1

 
5,139

 
—

 
—

 
5,140

Withholdings from vesting of restricted stock
(66,577
)
 
(1
)
 
(5,653
)
 
—

 
—

 
(5,654
)
Restricted stock activity
145,090

 
1

 
(1
)
 
—

 
—

 
—

Stock-based compensation
—

 
—

 
12,269

 
—

 
—

 
12,269

Issuance of common stock
13,860

 
1

 
1,181

 
—

 
—

 
1,182

Repurchase of common stock
(1,727,587
)
 
(17
)
 
(12,935
)
 
—

 
(138,022
)
 
(150,974
)
Cash dividends declared and paid
—

 
—

 
—

 
—

 
(53,443
)
 
(53,443
)
Comprehensive income
—

 
—

 
—

 
8,244

 
167,075

 
175,319

Balance at September 30, 2017
47,419,316

 
$
474

 
$
—

 
$
(26,496
)
 
$
797,985

 
$
771,963


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 30, 2017
 
October 1, 2016
Cash flows from operating activities:
 
 
 
Net income
$
167,075

 
$
170,989

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
60,455

 
52,384

Amortization of intangible assets
1,687

 
1,875

Adjustment to earn-out liability
(3,600
)
 
—

Amortization of debt issuance costs
1,143

 
1,092

Non-cash stock-based compensation expense
13,451

 
13,026

Foreign currency (gain) loss, net
(1,154
)
 
2,361

Income tax benefit from stock-based compensation
—

 
(4,067
)
Loss on disposal of property, plant, and equipment
602

 
821

Deferred income taxes
(841
)
 
(2,333
)
Effect of changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
(62,298
)
 
(63,436
)
Finished goods inventories
(81,285
)
 
(81,011
)
Prepaid expenses and other assets
(17,754
)
 
(10,138
)
Accounts payable and other liabilities
40,025

 
35,011

Net cash provided by operating activities
117,506

 
116,574

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(51,656
)
 
(71,190
)
Acquisitions of businesses, net of cash acquired
(159,365
)
 
—

Proceeds from sale of property, plant, and equipment
—

 
216

Net cash used in investing activities
(211,021
)
 
(70,974
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payment of debt issuance costs
(2,138
)
 
—

Borrowings under secured revolving credit facility
200,000

 
—

Payments on secured revolving credit facility
(93,965
)
 
—

Repurchases of common stock
(150,974
)
 
(239,138
)
Dividends paid
(53,443
)
 
(50,131
)
Income tax benefit from stock-based compensation
—

 
4,067

Withholdings from vestings of restricted stock
(5,654
)
 
(8,594
)
Proceeds from exercises of stock options
5,140

 
6,386

Net cash used in financing activities
(101,034
)
 
(287,410
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
561

 
1,227

Net decrease in cash and cash equivalents
(193,988
)
 
(240,583
)
Cash and cash equivalents, beginning of period
299,358

 
381,209

Cash and cash equivalents, end of period
$
105,370

 
$
140,626


See accompanying notes to the unaudited condensed consolidated financial statements.

5

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
    
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear and related products under the Carter's, Child of Mine, Just One You, Precious Firsts, Simple Joys, OshKosh B'gosh ("OshKosh"), Skip Hop and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company's own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of September 30, 2017, the Company operated 1,033 retail stores in North America.


NOTE 2 – BASIS OF PRESENTATION

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 September 30, 2017 are not necessarily indicative of the results that may be expected for the 2017 fiscal year ending December 30, 2017.

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

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

Accounting Policies

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

Adoption of New Accounting Pronouncements At the Beginning of Fiscal 2017

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

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

Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

of previous windfalls, and then to operations. This change is required to be applied prospectively upon adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption. For the third quarter and first three quarters of fiscal 2017, the Company’s provision for income taxes on its consolidated statement of operations includes a benefit of approximately $0.5 million and $1.7 million, respectively, related to net excess income tax benefits for settlements of share-based payments during the those fiscal periods. For the third quarter and first three quarters of fiscal 2016, the Company recognized net excess income tax benefits of approximately $0.4 million and $4.1 million, respectively, for share-based payments settled during those periods. These net tax benefits were recorded directly to the Company’s consolidated statement of stockholders’ equity and have not been reclassified to the Company’s consolidated statement of operations, in accordance with adoption and transition provisions of ASU 2016-09.

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

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

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


Simplified Subsequent Measurement of Inventory (ASU 2015-11)

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


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

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

NOTE 3 – BUSINESS ACQUISITIONS

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


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

The measurement period, as defined under the provisions of ASC 805, is still open for both business acquisitions. Under the provisions of ASU No. 2015-16, "Simplifying the Accounting for Measurement Period Adjustments," the cumulative impact of any measurement period adjustments on current periods and prior periods is recognized in the period that the adjustment is determined, including the effect on prior period earnings.

Acquisition of Mexican Licensee

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

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

The measurement period, as defined under the provisions of ASC 805, is still open for this acquisition. Adjustments related to a working capital settlement, settlements of certain pre-acquisition tax matters, and the finalizations of fair value estimates for certain assets and liabilities may be made. Included among the assets acquired, and the preliminary fair values assigned to them, were inventories of approximately $8.3 million, customer relationships intangible asset of approximately $3.5 million, and goodwill of approximately $6.1 million.

Acquisition of Skip Hop

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

The measurement period, as defined under the provisions of ASC 805, is still open for Skip Hop. The purchase price of Skip Hop is subject to a working capital settlement and the resolution of certain pre-acquisition income tax matters.

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

During the third quarter and first three quarters of fiscal 2017, Skip Hop contributed approximately $27.9 million and $63.3 million, respectively, to the Company's consolidated net sales.

Provisional amounts for assets and liabilities recognized at acquisition for Skip Hop during the first quarter of fiscal 2017 and adjustments made during the second and third quarters of fiscal 2017 were as follows:


8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

 
$
(1.8
)
 
$
53.7

Liabilities assumed
 
(23.2
)
 
3.0

 
(20.2
)
Net assets acquired
 
32.3

 
1.2

 
33.5

 
 
 
 
 
 
 
Goodwill *
 
56.6

 
(7.4
)
 
49.2

Tradename
 
56.8

 
—

 
56.8

Customer relationships
 
35.9

 
8.9

 
44.8

Deferred income tax liabilities
 
(33.5
)
 
(2.7
)
 
(36.2
)
Preliminary purchase price
 
148.1

 
—

 
148.1

Less cash acquired
 
(0.8
)
 
—

 
(0.8
)
Less estimated contingent consideration (1)
 
(3.6
)
 
—

 
(3.6
)
Net cash paid
 
$
143.7

 
—

 
$
143.7

 
 
 
 
 
 
 
* Not deductible for income taxes
 
 
 
 
 
 

(1) This amount represented the estimated fair value of the contingent earn out liability based on facts and circumstances
known and existing on acquisition date concerning the expected achievement of certain financial performance targets
for fiscal 2017 as described in the stock purchase agreement. Facts and circumstances that occurred during the third
quarter of fiscal 2017 indicate that it is highly unlikely that the Company will be required to make any payments to
the sellers under the contingent earn out arrangement, and therefore approximately $3.6 million was credited to the Company's earnings during the third quarter. This credit has no related income tax provision and has been classified entirely
as a credit to corporate Selling, General & Administrative (SG&A) expenses.



NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
September 30, 2017
 
December 31, 2016
 
October 1, 2016
Cumulative foreign currency translation adjustments
$
(19,380
)
 
$
(27,624
)
 
$
(25,108
)
Pension and post-retirement obligations (1)
(7,116
)
 
(7,116
)
 
(6,781
)
Total accumulated other comprehensive loss
$
(26,496
)
 
$
(34,740
)
 
$
(31,889
)
    
(1) Net of income taxes of $4.2 million, $4.2 million, and $4.0 million, respectively.


Changes in accumulated other comprehensive loss for the third quarter and first three quarters of fiscal 2017 consisted of other comprehensive income of $4.2 million and $8.2 million for foreign currency translation adjustments, respectively. Changes in accumulated other comprehensive loss for the third quarter and first three quarters of fiscal 2016 consisted of other comprehensive losses of $1.4 million and other comprehensive income of $4.5 million, respectively, for foreign currency translation adjustments. During the first three quarters of both fiscal 2017 and fiscal 2016, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.


NOTE 5 – GOODWILL AND INTANGIBLE ASSETS

The Company's goodwill and intangible assets were as follows:

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
 
September 30, 2017
 
December 31, 2016
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter's
Indefinite
 
$
136,570

 
 
 
$
136,570

 
$
136,570

 
 
 
$
136,570

Canada
Indefinite
 
42,514

 
 
 
42,514

 
39,439

 
 
 
39,439

 Skip Hop (1)
Indefinite
 
49,190

 
 
 
49,190

 
—

 
 
 
—

 Carter's Mexico (1)
Indefinite
 
5,919

 
 
 
5,919

 
—

 
 
 
—

Total goodwill
 
 
$
234,193

 
 
 
$
234,193

 
$
176,009

 
 
 
$
176,009

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter's tradename    
Indefinite
 
$
220,233

 
 
 
$
220,233

 
$
220,233

 
 
 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
 
 
85,500

 
85,500

 
 
 
85,500

 Skip Hop tradename (1)
Indefinite
 
56,800

 
 
 
56,800

 
—

 
 
 
—

 Finite-life tradenames
2-20 years
 
42,040

 
$
38,978

 
3,062

 
42,005

 
$
38,810

 
3,195

Total tradenames
 
 
$
404,573


$
38,978

 
$
365,595

 
$
347,738

 
$
38,810

 
$
308,928

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Skip Hop customer relationships (1)
15 years
 
$
44,800

 
$
1,554

 
$
43,246

 
$
—

 
$
—

 
$
—

Carter's Mexico customer relationships (1)
 
 
3,376

 
—

 
3,376

 
—

 
—

 
—

Total customer relationships
 
 
$
48,176

 
$
1,554

 
$
46,622

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total tradenames and other intangibles, net
 
 
$
452,749

 
$
40,532

 
$
412,217

 
$
347,738

 
$
38,810

 
$
308,928


(1) Subject to revision. The measurement period, as defined in ASC 805, Business Combinations, is still open for the Skip Hop and Carter's Mexico business acquisitions. See Note 3.


 
 
 
October 1, 2016
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
Carter's goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

Canadian acquisition
Indefinite
 
40,386

 
—

 
40,386

Total goodwill
 
 
$
176,956

 
$
—

 
$
176,956

 
 
 
 
 
 
 
 
Carter's tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 
—

 
85,500

Finite-life tradenames
2-20 years
 
42,016

 
38,776

 
3,240

Total tradenames
 
 
$
347,749

 
$
38,776

 
$
308,973


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

Included in finite-life tradenames is the Company's exclusive rights to the Carter's brands in Chile, including trademark registrations. The Company acquired the Chile rights in 2014 for approximately $3.6 million in cash. This intangible tradename is being amortized over 20 years using a straight-line method, resulting in approximately $0.2 million of amortization expense for each fiscal year during the life of intangible asset.

For the Skip Hop customer relationships intangible asset acquired in February 2017, the Company recorded approximately $0.8 million and $1.6 million, respectively, of amortization expense for the fiscal quarter and three fiscal quarters ended September 30, 2017. Future amortization expense is estimated to be approximately $3.0 million each year for the next 15 years. The substantial majority of Skip Hop's wholesale operations became part of the Company's U.S. Wholesale reportable segment and

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

the remainder became part of the Company's International reportable segment. Skip Hop's eCommerce operations became part of the U.S. Retail reportable segment.

Carter's Mexico became part of the Company's International operating and reportable segment.

NOTE 6 – COMMON STOCK

SHARE REPURCHASES

The total aggregate remaining capacity under outstanding repurchase authorizations as of September 30, 2017 was approximately $123.4 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
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Number of shares repurchased
596,178

 
587,100

 
1,727,587

 
2,358,947

Aggregate cost of shares repurchased (dollars in thousands)
$
52,742

 
$
58,929

 
$
150,974

 
$
239,138

Average price per share
$
88.47

 
$
100.37

 
$
87.39

 
$
101.37



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 three fiscal quarters ended September 30, 2017, the Company paid cash dividends per share of $0.37 and $1.11, respectively. In the third fiscal quarter and three fiscal quarters ended October 1, 2016, the Company declared and paid cash dividends per share of $0.33 and $0.99, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and based on a number of factors, including the Company's future financial performance and other investment priorities.

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


NOTE 7 – LONG-TERM DEBT


Long-term debt consisted of the following:

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(dollars in thousands)
September 30, 2017
 
December 31, 2016
 
October 1, 2016
Senior notes at amounts repayable
$
400,000

 
$
400,000

 
$
400,000

Less unamortized issuance-related costs for senior notes
(3,926
)
 
(4,601
)
 
(4,820
)
      Senior notes, net
396,074

 
395,399

 
395,180

Secured revolving credit facility
291,000

 
184,977

 
185,433

Total long-term debt, net
$
687,074

 
$
580,376

 
$
580,613


Secured Revolving Credit Facility

On August 25, 2017, The William Carter Company ("TWCC"), a wholly-owned subsidiary of the Company, and a syndicate of lenders entered into a fourth amended and restated secured revolving credit agreement. 

The secured revolving credit facility provides: (i) an extension of the term of the facility to August 22, 2022 and (ii) an aggregate credit line of $750 million which includes a $650 million U.S. dollar facility and a $100 million multicurrency facility denominated in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. The $650 million U.S. dollar facility is inclusive of a $100 million sub-limit for letters of credit and a swing line sub-limit of $70 million. The $100 million multicurrency facility is inclusive of a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million.

In addition, the secured revolving credit facility includes incremental borrowing facilities up to $425 million, which is comprised of an incremental $350 million U.S. dollar revolving credit facility and an incremental $75 million multicurrency revolving credit facility. The incremental U.S. dollar revolving credit facility can increase to an unlimited borrowing amount so long as the consolidated first lien leverage ratio (as defined in the secured revolving credit facility) does not exceed 2.25:1.00.

In connection with the amendment, the Company paid approximately $2.1 million in debt issuance costs. These newly-incurred debt issuance costs, together with existing unamortized debt issuance costs, are being amortized over the five-year remaining term of the secured revolving credit facility.

As of September 30, 2017, the Company had $291.0 million in outstanding borrowings under its secured revolving credit facility, exclusive of $4.5 million of outstanding letters of credit. As of September 30, 2017, approximately $454.5 million remained available for future borrowing. All outstanding borrowings under the Company's secured revolving credit facility are classified as non-current liabilities on the Company's consolidated balance sheet because of the contractual repayment terms under the credit facility.

As of September 30, 2017, the interest rate margins applicable to the secured revolving credit facility were 1.375% for LIBOR (London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of September 30, 2017, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which resulted in a borrowing rate of 2.61%. All outstanding Canadian dollar borrowings were repaid during the first quarter of fiscal 2017. There were no Canadian dollar borrowings during the second and third quarters of fiscal 2017.

The Company's secured revolving credit facility, as amended and restated, contains covenants, including affirmative and financial covenants. As of September 30, 2017, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.


Senior Notes

As of September 30, 2017, TWCC had outstanding $400 million principal amount of senior notes bearing interest at a fixed rate of 5.25% per annum and maturing on August 15, 2021. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC. On the Company's consolidated balance sheet, the senior notes are reported net of certain unamortized issuance-related costs, as shown in the table above.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 8 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation expense as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Stock options
$
983

 
$
960

 
$
3,182

 
$
3,237

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
1,706

 
1,820

 
5,668

 
5,682

   Performance-based awards
1,116

 
996

 
3,419

 
2,944

   Stock awards
—

 
—

 
1,182

 
1,163

Total
$
3,805

 
$
3,776

 
$
13,451

 
$
13,026



NOTE 9 – EMPLOYEE BENEFIT PLANS

The Company maintains a defined contribution plan and two frozen defined benefit plans. The two frozen defined benefit plans include the OshKosh B'Gosh pension plan and a post-retirement life and medical plan.
    
OSHKOSH B'GOSH PENSION PLAN
    
The components of net periodic pension cost included in the statement of operations were comprised of:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Interest cost
$
611

 
$
629

 
$
1,833

 
$
1,887

Expected return on plan assets
(650
)
 
(676
)
 
(1,950
)
 
(2,028
)
Recognized actuarial loss
170

 
145

 
510

 
435

Net periodic pension cost
$
131

 
$
98

 
$
393

 
$
294



POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement (benefit) cost included in the statement of operations were comprised of:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
Service cost – benefits attributed to service during the period
$
7

 
$
31

 
$
21

 
$
93

Interest cost on accumulated post-retirement benefit obligation
34

 
44

 
102

 
132

Amortization of net actuarial gain
(76
)
 
(49
)
 
(228
)
 
(147
)
Total net periodic post-retirement (benefit) cost
$
(35
)
 
$
26

 
$
(105
)
 
$
78


    

NOTE 10 – INCOME TAXES

As of September 30, 2017, the Company had gross unrecognized income tax benefits of approximately $12.8 million, of which $8.4 million, if ultimately recognized, may affect the Company's effective tax rate in the periods settled.  The Company has

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 September 30, 2017 were approximately $1.5 million of reserves for which the statute of limitations is expected to expire within the next fiscal year.  If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2017 or fiscal 2018 along with the effective tax rate in the quarter in which the benefits are recognized. 

The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized tax benefits as a component of income tax expense.  During the fiscal quarter and three fiscal quarters ended September 30, 2017 and the fiscal quarter and three fiscal quarters ended October 1, 2016, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $1.1 million, $0.8 million, and $0.9 million of interest accrued on uncertain tax positions as of September 30, 2017, December 31, 2016, and October 1, 2016, respectively.

As disclosed in note 2, the Company's adoption of ASU 2016-09 benefited consolidated income tax expense by approximately $1.7 million for the first three quarters of fiscal 2017. The adoption of ASU 2016-09 had no impact on income tax expense for financial reporting purposes in prior periods.

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

Deferred income tax liabilities on the Company's consolidated balance sheet at September 30, 2017 increased by $36.2 million, including measurement period adjustments, due to the acquisition of Skip Hop.

For the full fiscal year 2017, the Company estimates that its consolidated effective income tax rate will be approximately 34.0%.


NOTE 11 – FAIR VALUE MEASUREMENTS

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

 
September 30, 2017
 
 
December 31, 2016
 
 
October 1, 2016
(dollars in millions)
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments (1)
$
15.7

 
—

 
—

 
 
$
12.3

 
—

 
—

 
 
$
11.4

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts (2)
—

 
$
0.2

 
—

 
 
—

 
—

 
—

 
 
—

 
$
0.4

 
—


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


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 $1.6 million for the fiscal quarter and three fiscal quarters ended September 30, 2017, respectively, and were $0.4 million and $0.8 million for the fiscal quarter and three fiscal quarters ended October 1, 2016, respectively. These amounts are included in Other (income) expense, net.


14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


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) and are classified as Level 2 within the fair value hierarchy. At September 30, 2017 and October 1, 2016, the notional value of the open foreign currency forward contracts was approximately $4.6 million and $6.0 million, respectively. At December 31, 2016, there were no open foreign currency contracts.


DEBT OBLIGATIONS

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

•
As of September 30, 2017, the fair value of the Company's $291.0 million in outstanding borrowings under its secured revolving credit facility approximated carrying value.

•
The fair value of the Company's senior notes at September 30, 2017 was approximately $412 million. The fair value of these senior notes with a notional value and carrying value of $400 million was estimated using a quoted price as provided in the secondary market, which considers the Company's credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.

15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


NOTE 12 – 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
 
September 30, 2017
 
October 1, 2016
 
September 30, 2017
 
October 1, 2016
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
47,303,074

 
49,526,480

 
47,829,794

 
50,282,345

Dilutive effect of equity awards
541,325

 
460,271

 
549,213

 
470,050

Diluted number of common and common equivalent shares outstanding
47,844,399

 
49,986,751

 
48,379,007

 
50,752,395

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
82,486

 
$
80,811

 
$
167,075

 
$
170,989

Income allocated to participating securities
(653
)
 
(632
)
 
(1,314
)
 
(1,359
)
Net income available to common shareholders
$
81,833

 
$
80,179

 
$
165,761

 
$
169,630

 
 
 
 
 
 
 
 
Basic net income per common share
$
1.73

 
$
1.62

 
$
3.47

 
$
3.37

 
 
 
 
 
 
 
 
Diluted net income per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income
$
82,486

 
$
80,811

 
$
167,075

 
$
170,989

Income allocated to participating securities
(647
)
 
(627
)
 
(1,304
)
 
(1,350
)
Net income available to common shareholders
$
81,839

 
$
80,184

 
$
165,771

 
$
169,639

 
 
 
 
 
 
 
 
Diluted net income per common share
$
1.71

 
$
1.60

 
$
3.43

 
$
3.34

 
 
 
 
 
 
 
 
Anti-dilutive awards excluded from diluted earnings per share computation
662,130

 
246,980

 
618,826

 
244,430







16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – 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)
September 30, 2017
 
December 31, 2016
 
October 1, 2016
Accrued bonuses and incentive compensation
$
9,328

 
$
16,834

 
$
10,638

Income taxes payable
28,393

 
8,458

 
32,242

Accrued employee benefits
12,503

 
17,165

 
10,808

Accrued and deferred rent
18,160

 
15,632

 
14,875

    
Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
September 30, 2017
 
December 31, 2016
 
October 1, 2016
Deferred lease incentives
$
76,599

 
$
74,015

 
$
73,840



NOTE 14 – 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 15 – SEGMENT INFORMATION

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

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

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

17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 30,
2017
 
% of
Total Net Sales
 
October 1,
2016
 
% of
Total Net Sales
 
September 30,
2017
 
% of
Total Net Sales
 
October 1,
2016
 
% of
Total Net Sales
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Wholesale
$
369,577

 
39.0
%
 
$
373,732

 
41.4
%
 
$
879,842

 
37.1
%
 
$
880,908

 
38.9
%
U.S. Retail (a)
454,032

 
47.9
%
 
421,698

 
46.8
%
 
1,209,625

 
50.9
%
 
1,128,569

 
49.8
%
International (b)     
124,623

 
13.1
%
 
105,995

 
11.8
%
 
283,637

 
12.0
%
 
255,504

 
11.3
%
Total net sales
$
948,232

 
100.0
%
 
$
901,425

 
100.0
%
 
$
2,373,104

 
100.0
%
 
$
2,264,981

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
U.S. Wholesale (e)
$
78,572

 
21.3
%
 
$
86,001

 
23.0
%
 
$
184,073

 
20.9
%
 
$
195,921

 
22.2
%
U.S. Retail (a) (d) (e)
55,789

 
12.3
%
 
50,703

 
12.0
%
 
128,031

 
10.6
%
 
127,124

 
11.3
%
International (b) (e)    
16,726

 
13.4
%
 
19,645

 
18.5
%
 
28,008

 
9.9
%
 
37,191

 
14.6
%
Corporate expenses (c) (f)
(20,369
)
 


 
(25,455
)
 


 
(66,307
)
 


 
(73,091
)
 


Total operating income
$
130,718

 
13.8
%
 
$
130,894

 
14.5
%
 
$
273,805

 
11.5
%
 
$
287,145

 
12.7
%

(a)
Includes retail store and eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales.
(c)
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, office occupancy, information technology, certain legal fees, consulting, and audit fees.
(d)
Includes approximately $2.7 million of expenses recognized during the third quarter and first three quarters of fiscal 2017 related to store restructuring costs.
(e)
$0.4 million and $0.8 million of certain costs related to inventory acquired from Skip Hop are included in the operating income of U.S. Wholesale, U.S. Retail, and International for the fiscal quarter and three fiscal quarters ended September 30, 2017, respectively.
(f)
Includes the following charges (credits):

 
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in millions)
 
September 30,
2017
 
October 1,
2016
 
September 30,
2017
 
October 1,
2016
Amortization of H.W. Carter and Sons tradenames
 
$
—

 
$
—

 
$
—

 
$
1.7

Acquisition contingency fair value adjustment
 
$
(3.6
)
 
$
—

 
$
(3.6
)
 
$
—

Direct sourcing initiative
 
$
0.1

 
$
0.5

 
$
0.3

 
$
0.5

Acquisition-related costs *
 
$
0.8

 
$
—

 
$
3.3

 
$
—


* The $3.3 million for the three fiscal quarters ended September 30, 2017 includes approximately $0.7 million of costs incurred during the first and second quarters of fiscal 2017 that were not originally reported as acquisition-related costs.



NOTE 16 – PENDING ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition (ASC 606)

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which since has been codified in Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). This guidance clarifies the principles for recognizing revenue and will be applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance will require improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Since its original issuance, the FASB has issued several updates to this guidance, and additional updates are possible. The standard will be effective for the Company at the beginning of fiscal 2018, including interim periods within that fiscal year. Upon adoption, the Company will apply the provisions of ASC 606 retrospectively to each prior reporting period presented with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company has

18

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

substantially completed an assessment of the potential effects that ASC 606 may have on all significant sources of revenue. Based on this assessment, the Company does not believe that the adoption of ASC 606, including any of the policy elections required or permitted by ASC 606, will have a material effect on its consolidated financial position, results of operations, cash flows, processes, systems, or controls, but will require significant footnote disclosures.


Leases (ASU 2016-02)

In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02, Leases-Topic 842, which has been codified in ASC 842, Leases ("ASC 842"). 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 effects of ASC 842. The adoption of ASC 842 will require the Company to recognize material non-current assets and liabilities for right-of-use assets and operating lease liabilities on its consolidated balance sheet, but is not expected to have a material effect on the Company's results of operations or cash flows. ASC 842 will also require additional footnote disclosures to the Company's consolidated financial statements.


Credit Losses (ASU 2016-13)

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


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

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





19

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Goodwill Impairment Testing (ASU 2017-04)

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


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


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

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


Definition of a Business (ASU 2017-01)

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). This guidance will assist entities in determining if acquired assets constitute the acquisition of a business or the acquisition of assets for accounting and reporting purposes. This distinction is important because only a business can recognize goodwill. In practice prior to ASU 2017-01, if revenues were generated immediately before and after a transaction, the acquisition was typically considered a business. Under ASU 2017-01, requiring entities to further assess the substance of the processes they acquire will likely reduce the number of transactions accounted for as business acquisitions. ASU 2017-01 is effective prospectively for the Company at the beginning of fiscal 2018, including interim periods within fiscal 2018. Early adoption is permitted, including for interim or annual periods in which the financial statements have not been issued or made available for issuance. The impact that ASU 2017-01 may have on the Company's financial position, results of operations or cash flows will depend on the nature of any acquisition commencing after the Company's adoption of this ASU.

20

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 17 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

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

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



21

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

As of September 30, 2017
(dollars in thousands)

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

 
$
56,715

 
$
17,771

 
$
30,884

 
$
—

 
$
105,370

Accounts receivable, net
—

 
229,425

 
37,165

 
19,061

 
—

 
285,651

Intercompany receivable
—

 
113,950

 
114,420

 
35,964

 
(264,334
)
 
—

Finished goods inventories
—

 
311,260

 
245,934

 
74,631

 
(21,829
)
 
609,996

Prepaid expenses and other current assets
—

 
18,339

 
20,036

 
9,708

 
—

 
48,083

Total current assets
—

 
729,689

 
435,326

 
170,248

 
(286,163
)
 
1,049,100

Property, plant, and equipment, net
—

 
149,889

 
192,065

 
40,060

 
—

 
382,014

Goodwill
—

 
136,570

 
48,566

 
49,057

 
—

 
234,193

Tradenames and other intangible assets, net
—

 
223,295

 
185,546

 
3,376

 
—

 
412,217

Other assets
—

 
23,274

 
1,533

 
1,732

 
—

 
26,539

Intercompany long-term receivable
—

 
—

 
411,787

 
—

 
(411,787
)
 
—

Intercompany long-term note receivable
—

 
100,000

 
—

 
—

 
(100,000
)
 
—

Investment in subsidiaries
771,963

 
983,708

 
204,093

 
—

 
(1,959,764
)
 
—

Total assets
$
771,963

 
$
2,346,425

 
$
1,478,916

 
$
264,473

 
$
(2,757,714
)
 
$
2,104,063

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

 
$
120,892

 
$
54,334

 
$
18,652

 
$
—

 
$
193,878

Intercompany payables
—

 
148,416

 
111,972

 
3,946

 
(264,334
)
 
—

Other current liabilities
—

 
45,657

 
75,865

 
12,509

 
—

 
134,031

Total current liabilities
—

 
314,965

 
242,171

 
35,107

 
(264,334
)
 
327,909

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, net
—

 
687,074

 
—

 
—

 
—

 
687,074

Deferred income taxes
—

 
70,290

 
67,050

 
899

 
—

 
138,239

Intercompany long-term liability
—

 
411,787

 
—

 
—

 
(411,787
)
 
—

Intercompany long-term note payable
—

 
—

 
100,000

 
—

 
(100,000
)
 
—

Other long-term liabilities
—

 
68,517

 
95,329

 
15,032

 
—

 
178,878

Stockholders' equity
771,963

 
793,792

 
974,366

 
213,435

 
(1,981,593
)
 
771,963

Total liabilities and stockholders' equity
$
771,963

 
$
2,346,425

 
$
1,478,916

 
$
264,473

 
$
(2,757,714
)
 
$
2,104,063






22

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


As of December 31, 2016
(dollars in thousands)

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

 
$
229,056

 
$
11,817

 
$
58,485

 
$
—

 
$
299,358

Accounts receivable, net
—

 
176,825

 
18,315

 
7,331

 
—

 
202,471

Intercompany receivable
—

 
55,902

 
74,681

 
14,601

 
(145,184
)
 
—

Finished goods inventories
—

 
278,696

 
174,542

 
60,153

 
(25,800
)
 
487,591

Prepaid expenses and other current assets
—

 
11,402

 
16,028

 
4,750

 
—

 
32,180

Deferred income taxes
—

 
18,476

 
15,440

 
1,570

 
—

 
35,486

Total current assets
—

 
770,357

 
310,823

 
146,890

 
(170,984
)
 
1,057,086

Property, plant, and equipment, net
—

 
155,187

 
194,691

 
35,996

 
—

 
385,874

Goodwill
—

 
136,570

 
—

 
39,439

 
—

 
176,009

Tradenames and other intangible assets, net
—

 
223,428

 
85,500

 
—