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CARTERS INC - Quarter Report: 2016 October (Form 10-Q)


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

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 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

 
(189,085
)
 

Other current liabilities

 
12,996

 
80,908

 
11,166

 

 
105,070

Total current liabilities

 
241,275

 
177,221

 
33,307

 
(189,085
)
 
262,718

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt, net

 
560,541

 

 
18,431

 

 
578,972

Deferred income taxes

 
84,038

 
44,800

 

 

 
128,838

Intercompany long-term liability

 
294,070

 

 

 
(294,070
)
 

Intercompany long-term note payable

 

 
100,000

 

 
(100,000
)
 

Other long-term liabilities

 
66,813

 
79,568

 
11,694

 

 
158,075

Stockholders' equity
875,051

 
909,843

 
643,261

 
109,483

 
(1,662,587
)
 
875,051

Total liabilities and stockholders' equity
$
875,051

 
$
2,156,580

 
$
1,044,850

 
$
172,915

 
$
(2,245,742
)
 
$
2,003,654









21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of October 3, 2015
(dollars in thousands)

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

 
$
232,568

 
$
17,434

 
$
38,258

 
$

 
$
288,260

Accounts receivable, net

 
208,369

 
29,210

 
8,986

 

 
246,565

Intercompany receivable

 
87,419

 
100,357

 
3,675

 
(191,451
)
 

Intercompany loan receivable

 
15,000

 

 

 
(15,000
)
 

Finished goods inventories

 
278,793

 
216,270

 
50,553

 
(34,096
)
 
511,520

Prepaid expenses and other current assets

 
17,267

 
14,963

 
4,184

 

 
36,414

Deferred income taxes

 
22,739

 
11,192

 
964

 

 
34,895

Total current assets

 
862,155

 
389,426

 
106,620

 
(240,547
)
 
1,117,654

Property, plant, and equipment, net

 
160,579

 
171,615

 
29,111

 

 
361,305

Goodwill

 
136,570

 

 
40,063

 

 
176,633

Tradenames and other intangibles, net

 
226,342

 
85,500

 

 

 
311,842

Other assets

 
13,773

 
784

 
383

 

 
14,940

Intercompany long-term receivable

 

 
264,618

 

 
(264,618
)
 

Intercompany long-term note receivable

 
100,000

 

 

 
(100,000
)
 

Investment in subsidiaries
842,943

 
614,624

 
19,118

 

 
(1,476,685
)
 

Total assets
$
842,943

 
$
2,114,043

 
$
931,061

 
$
176,177

 
$
(2,081,850
)
 
$
1,982,374

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
100,487

 
$
59,060

 
$
14,047

 
$

 
$
173,594

Intercompany payables

 
102,208

 
85,814

 
3,429

 
(191,451
)
 

Intercompany loan payables

 

 

 
15,000

 
(15,000
)
 

Other current liabilities

 
57,316

 
37,905

 
9,978

 

 
105,199

Total current liabilities

 
260,011

 
182,779

 
42,454

 
(206,451
)
 
278,793

Long-term debt, net

 
560,334

 

 
19,278

 

 
579,612

Deferred income taxes

 
80,871

 
38,628

 

 

 
119,499

Intercompany long-term liability

 
264,618

 

 

 
(264,618
)
 

Intercompany long-term note payable

 

 
100,000

 

 
(100,000
)
 

Other long-term liabilities

 
71,170

 
78,658

 
11,699

 

 
161,527

Stockholders' equity
842,943

 
877,039

 
530,996

 
102,746

 
(1,510,781
)
 
842,943

Total liabilities and stockholders' equity
$
842,943

 
$
2,114,043

 
$
931,061

 
$
176,177

 
$
(2,081,850
)
 
$
1,982,374



22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Operations (unaudited)

For the fiscal quarter ended October 1, 2016
(dollars in thousands)

 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net sales
$

 
$
584,206

 
$
452,755

 
$
79,631

 
$
(215,167
)
 
$
901,425

Cost of goods sold

 
409,937

 
274,521

 
43,060

 
(201,639
)
 
525,879

Gross profit

 
174,269

 
178,234

 
36,571

 
(13,528
)
 
375,546

Selling, general, and administrative expenses

 
49,965

 
187,298

 
26,796

 
(8,737
)
 
255,322

Royalty income

 
(7,624
)
 
(5,665
)
 

 
2,619

 
(10,670
)
Operating income (loss)

 
131,928

 
(3,399
)
 
9,775

 
(7,410
)
 
130,894

Interest expense

 
6,634

 
1,364

 
108

 
(1,327
)
 
6,779

Interest income

 
(1,379
)
 

 
(16
)
 
1,327

 
(68
)
(Income) loss in subsidiaries
(80,811
)
 
9,249

 
(6,682
)
 

 
78,244

 

Other (income) expense, net

 
(204
)
 
259

 
(91
)
 

 
(36
)
Income (loss) before income taxes
80,811

 
117,628

 
1,660

 
9,774

 
(85,654
)
 
124,219

Provision for income taxes

 
29,407

 
10,909

 
3,092

 

 
43,408

Net income (loss)
$
80,811

 
$
88,221

 
$
(9,249
)
 
$
6,682

 
$
(85,654
)
 
$
80,811


23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


For the fiscal quarter ended October 3, 2015
(dollars in thousands)

 
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
539,181

 
$
427,028

 
$
71,068

 
$
(187,471
)
 
$
849,806

Cost of goods sold

 
380,427

 
263,009

 
39,180

 
(180,349
)
 
502,267

Gross profit

 
158,754

 
164,019

 
31,888

 
(7,122
)
 
347,539

Selling, general, and administrative expenses

 
49,317

 
169,379

 
20,708

 
(9,387
)
 
230,017

Royalty income

 
(9,175
)
 
(5,983
)
 

 
2,459

 
(12,699
)
Operating income (loss)

 
118,612

 
623

 
11,180

 
(194
)
 
130,221

Interest expense

 
6,754

 
1,318

 
169

 
(1,334
)
 
6,907

Interest income

 
(1,400
)
 

 
(25
)
 
1,334

 
(91
)
(Income) loss in subsidiaries
(79,326
)
 
(1,645
)
 
(3,904
)
 

 
84,875

 

Other (income) expense, net

 
251

 
(269
)
 
(604
)
 

 
(622
)
Income (loss) before income taxes
79,326

 
114,652

 
3,478

 
11,640

 
(85,069
)
 
124,027

Provision for income taxes

 
35,132

 
6,098

 
3,471

 

 
44,701

Net income (loss)
$
79,326

 
$
79,520

 
$
(2,620
)
 
$
8,169

 
$
(85,069
)
 
$
79,326



24


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Operations (unaudited)

For the three fiscal quarters ended October 1, 2016
(dollars in thousands)

 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net sales
$

 
$
1,396,768

 
$
1,208,841

 
$
201,679

 
$
(542,307
)
 
$
2,264,981

Cost of goods sold

 
995,828

 
706,525

 
107,127

 
(513,156
)
 
1,296,324

Gross profit

 
400,940

 
502,316

 
94,552

 
(29,151
)
 
968,657

Selling, general, and administrative expenses

 
132,986

 
533,364

 
72,687

 
(26,255
)
 
712,782

Royalty income

 
(23,753
)
 
(14,390
)
 

 
6,873

 
(31,270
)
Operating income (loss)

 
291,707

 
(16,658
)
 
21,865

 
(9,769
)
 
287,145

Interest expense

 
19,909

 
4,070

 
323

 
(3,981
)
 
20,321

Interest income

 
(4,353
)
 

 
(81
)
 
3,981

 
(453
)
(Income) loss in subsidiaries
(170,989
)
 
26,079

 
(12,739
)
 

 
157,649

 

Other (income) expense, net

 
(377
)
 
432

 
3,618

 

 
3,673

Income (loss) before income taxes
170,989

 
250,449

 
(8,421
)
 
18,005

 
(167,418
)
 
263,604

Provision for income taxes

 
69,691

 
17,658

 
5,266

 

 
92,615

Net income (loss)
$
170,989

 
$
180,758

 
$
(26,079
)
 
$
12,739

 
$
(167,418
)
 
$
170,989


25


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


For the three fiscal quarters ended October 3, 2015
(dollars in thousands)

 
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
Net sales
$

 
$
1,336,785

 
$
1,137,585

 
$
170,826

 
$
(497,861
)
 
$
2,147,335

Cost of goods sold

 
932,937

 
699,769

 
96,788

 
(476,645
)
 
1,252,849

Gross profit

 
403,848

 
437,816

 
74,038

 
(21,216
)
 
894,486

Selling, general, and administrative expenses

 
133,733

 
484,278

 
62,208

 
(29,723
)
 
650,496

Royalty income

 
(24,555
)
 
(14,462
)
 

 
6,329

 
(32,688
)
Operating income (loss)

 
294,670

 
(32,000
)
 
11,830

 
2,178

 
276,678

Interest expense

 
20,189

 
3,994

 
425

 
(4,074
)
 
20,534

Interest income

 
(4,402
)
 

 
(57
)
 
4,074

 
(385
)
(Income) loss in subsidiaries
(165,223
)
 
31,055

 
(7,466
)
 

 
141,634

 

Other (income) expense, net

 
56

 
(106
)
 
(510
)
 

 
(560
)
Income (loss) before income taxes
165,223

 
247,772

 
(28,422
)
 
11,972

 
(139,456
)
 
257,089

Provision for income taxes

 
84,727

 
3,211

 
3,928

 

 
91,866

Net income (loss)
$
165,223

 
$
163,045

 
$
(31,633
)
 
$
8,044

 
$
(139,456
)
 
$
165,223



26


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Comprehensive Income (unaudited)

For the fiscal quarter ended October 1, 2016
(dollars in thousands)

 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
 
$
80,811

 
$
88,221

 
$
(9,249
)
 
$
6,682

 
$
(85,654
)
 
$
80,811

Foreign currency translation adjustments
 
(1,356
)
 
(1,356
)
 
(1,356
)
 
(1,356
)
 
4,068

 
(1,356
)
Comprehensive income (loss)
 
$
79,455

 
$
86,865

 
$
(10,605
)
 
$
5,326

 
$
(81,586
)
 
$
79,455


For the fiscal quarter ended October 3, 2015
(dollars in thousands)

 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
 
$
79,326

 
$
79,520

 
$
(2,620
)
 
$
8,169

 
$
(85,069
)
 
$
79,326

Foreign currency translation adjustments
 
(4,205
)
 
(4,205
)
 
(69
)
 
(4,205
)
 
8,479

 
(4,205
)
Comprehensive income (loss)
 
$
75,121

 
$
75,315

 
$
(2,689
)
 
$
3,964

 
$
(76,590
)
 
$
75,121


27


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Comprehensive Income (unaudited)

For the three fiscal quarters ended October 1, 2016
(dollars in thousands)
 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
 
$
170,989

 
$
180,758

 
$
(26,079
)
 
$
12,739

 
$
(167,418
)
 
$
170,989

Foreign currency translation adjustments
 
4,478

 
4,478

 
4,478

 
4,478

 
(13,434
)
 
4,478

Comprehensive income (loss)
 
$
175,467

 
$
185,236

 
$
(21,601
)
 
$
17,217

 
$
(180,852
)
 
$
175,467



For the three fiscal quarters ended October 3, 2015
(dollars in thousands)
 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
 
$
165,223

 
$
163,045

 
$
(31,633
)
 
$
8,044

 
$
(139,456
)
 
$
165,223

Foreign currency translation adjustments
 
(10,443
)
 
(10,443
)
 
(38
)
 
(10,443
)
 
20,924

 
(10,443
)
Comprehensive income (loss)
 
$
154,780

 
$
152,602

 
$
(31,671
)
 
$
(2,399
)
 
$
(118,532
)
 
$
154,780





28


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Cash Flows (unaudited)

For the three fiscal quarters ended October 1, 2016
(dollars in thousands)

 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Cash flows provided by (used in) operating activities:
 
$

 
$
88,493

 
$
24,058

 
$
4,023

 
$

 
$
116,574

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 

 
(19,782
)
 
(44,304
)
 
(7,104
)
 

 
(71,190
)
Intercompany investing activity
 
291,477

 
(353
)
 
(1,855
)
 

 
(289,269
)
 

Proceeds from sale of property, plant and equipment
 

 
23

 

 
193

 

 
216

Net cash provided by (used in) investing activities
 
291,477

 
(20,112
)
 
(46,159
)
 
(6,911
)
 
(289,269
)
 
(70,974
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Intercompany financing activity
 

 
(305,065
)
 
14,071

 
1,725

 
289,269

 

Dividends paid
 
(50,131
)
 

 

 

 

 
(50,131
)
Repurchase of common stock
 
(239,138
)
 

 

 

 

 
(239,138
)
Income tax benefit from stock-based compensation
 

 
2,212

 
1,855

 

 

 
4,067

Withholdings from vesting of restricted stock
 
(8,594
)
 

 

 

 

 
(8,594
)
Proceeds from exercise of stock options
 
6,386

 

 

 

 

 
6,386

Net cash (used in) provided by financing activities
 
(291,477
)
 
(302,853
)
 
15,926

 
1,725

 
289,269

 
(287,410
)
Effect of exchange rate changes on cash
 

 

 

 
1,227

 

 
1,227

Net (decrease) increase in cash and cash equivalents
 

 
(234,472
)
 
(6,175
)
 
64

 

 
(240,583
)
Cash and cash equivalents, beginning of period
 

 
325,771

 
14,652

 
40,786

 

 
381,209

Cash and cash equivalents, end of period
 
$

 
$
91,299

 
$
8,477

 
$
40,850

 
$

 
$
140,626















29


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




For the three fiscal quarters ended October 3, 2015
(dollars in thousands)

 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Cash flows provided by (used in) operating activities:
 
$

 
$
85,213

 
$
38,022

 
$
22,799

 
$

 
$
146,034

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 

 
(21,953
)
 
(46,876
)
 
(8,158
)
 

 
(76,987
)
Intercompany investing activity
 
119,788

 
4,357

 
(2,607
)
 
(8,582
)
 
(112,956
)
 

Issuance of intercompany loan
 

 
(15,000
)
 

 

 
15,000

 

Proceeds from repayment of intercompany loan
 

 
20,000

 

 

 
(20,000
)
 

Proceeds from sale of property, plant and equipment
 

 
59

 

 
7

 

 
66

Net cash provided by (used in) investing activities
 
119,788

 
(12,537
)
 
(49,483
)
 
(16,733
)
 
(117,956
)
 
(76,921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Intercompany financing activity
 

 
(127,475
)
 
15,846

 
(1,327
)
 
112,956

 

Repayment of intercompany loan
 

 

 

 
(20,000
)
 
20,000

 

Borrowings from intercompany loan
 

 

 

 
15,000

 
(15,000
)
 

Borrowings under secured revolving credit facility
 

 
166,000

 

 
39,586

 

 
205,586

Payment on secured revolving credit facility
 

 
(186,000
)
 

 
(19,237
)
 

 
(205,237
)
Dividends Paid
 
(34,617
)
 

 

 

 

 
(34,617
)
Payment on debt issuance costs
 

 
(1,495
)
 

 

 

 
(1,495
)
Payment of contingent consideration
 

 
(7,572
)
 

 

 

 
(7,572
)
Income tax benefit from stock-based compensation
 

 
5,356

 
2,607

 

 

 
7,963

Repurchase of common stock
 
(78,339
)
 

 

 

 

 
(78,339
)
Withholdings from vesting of restricted stock
 
(12,575
)
 

 

 

 

 
(12,575
)
Proceeds from exercise of stock options
 
5,743

 

 

 

 

 
5,743

Net cash (used in) provided by financing activities
 
(119,788
)
 
(151,186
)
 
18,453

 
14,022

 
117,956

 
(120,543
)
Effect of exchange rate changes on cash
 

 

 

 
(948
)
 

 
(948
)
Net (decrease) increase in cash and cash equivalents
 

 
(78,510
)
 
6,992

 
19,140

 

 
(52,378
)
Cash and cash equivalents, beginning of period
 

 
311,078

 
10,442

 
19,118

 

 
340,638

Cash and cash equivalents, end of period
 
$

 
$
232,568

 
$
17,434

 
$
38,258

 
$

 
$
288,260


30


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS



FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 relating to our future performance, including, without limitation, statements with respect to our anticipated financial results for the fourth quarter of fiscal 2016 and fiscal year 2016, or any other future period, assessment of our performance and financial position, and drivers of our sales and earnings growth. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or not materialize, or should any of the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Certain of the risks and uncertainties that could cause actual results and performance to differ materially are described under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.
OVERVIEW

We are the largest branded marketer in the United States ("U.S.") and in Canada of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children's apparel industry, Carter's and OshKosh B'gosh ("OshKosh"). Established in 1865, our Carter's brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to eight. Established in 1895, OshKosh is a well-known brand, trusted by consumers for apparel for children sizes newborn to 14, with a focus on playclothes for toddlers and young children. Given each brand's product category emphasis and brand aesthetic, we believe they provide a complementary product offering. We have extensive experience in the young children's apparel market and focus on delivering products that satisfy our consumers' needs. Our strategy is to market high-quality, essential core products at prices that deliver an attractive value proposition for consumers.

The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016.



31

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of consolidated net sales and (ii) the number of retail stores open at the end of each period:
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
Carter’s Wholesale
39.5
 %
 
40.4
 %
 
37.2
 %
 
38.4
 %
Carter’s Retail
34.9
 %
 
34.7
 %
 
38.0
 %
 
37.2
 %
Total Carter’s (U.S.)
74.4
 %
 
75.1
 %
 
75.2
 %
 
75.6
 %
 
 
 
 
 
 
 
 
OshKosh Retail
11.9
 %
 
11.6
 %
 
11.8
 %
 
11.4
 %
OshKosh Wholesale
1.9
 %
 
2.2
 %
 
1.7
 %
 
2.3
 %
Total OshKosh (U.S.)
13.8
 %
 
13.8
 %
 
13.5
 %
 
13.7
 %
 
 
 
 
 
 
 
 
International
11.8
 %
 
11.1
 %
 
11.3
 %
 
10.7
 %
 
 
 
 
 
 
 
 
Consolidated net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
58.3
 %
 
59.1
 %
 
57.2
 %
 
58.3
 %
 
 
 
 
 
 
 
 
Gross margin
41.7
 %
 
40.9
 %
 
42.8
 %
 
41.7
 %
Selling, general, and administrative expenses
28.3
 %
 
27.1
 %
 
31.5
 %
 
30.3
 %
Royalty income
(1.2
)%
 
(1.5
)%
 
(1.4
)%
 
(1.5
)%
 
 
 
 
 
 
 
 
Operating income
14.5
 %
 
15.3
 %
 
12.7
 %
 
12.9
 %
Interest expense
0.8
 %
 
0.8
 %
 
0.9
 %
 
1.0
 %
Interest income
n/m

 
n/m

 
n/m

 
n/m

Other expense (income), net
n/m

 
(0.1
)%
 
0.2
 %
 
n/m

 
 
 
 
 
 
 
 
Income before income taxes
13.8
 %
 
14.6
 %
 
11.6
 %
 
11.9
 %
Provision for income taxes
4.8
 %
 
5.3
 %
 
4.1
 %
 
4.2
 %
Net income
9.0
 %
 
9.3
 %
 
7.5
 %
 
7.7
 %
 
 
 
 
 
 
 
 
Number of retail stores at end of period:
 
 
 
 
 
 
 
Carter’s - U.S.
 
 
 
 
636

 
577

OshKosh - U.S.
 
 
 
 
267

 
232

International (all in Canada)
 
 
 
 
156

 
140

Total retail stores
 
 
 
 
1,059

 
949


n/m - rounds to less than 0.1%, therefore not material.
Note: Results may not be additive due to rounding.


32

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


STORE COUNT DATA
 
 
 
Carter's Retail
 
OshKosh Retail
 
Canada
 
Total
 
 
 
 
 
 
 
 
 
 
Third quarter of fiscal 2016:
Openings
 
13
 
7
 
6
 
26
 
Closings
 
1
 
2
 
 
3
Three quarters of fiscal 2016:
Openings
 
44
 
30
 
9
 
83
 
Closings
 
2
 
4
 
 
6
Approximate projections for fiscal 2016:
Openings
 
64
 
43
 
16
 
123
 
Closings
 
4
 
5
 
 
9

Substantially all of the OshKosh retail store openings included in the above table are in a "side-by-side" format with a Carter's retail store. We operate "side-by-side" locations wherein adjacent retail stores for our Carter's and OshKosh brands are connected, allowing customers to shop for both brands in a single location. Each "side-by-side" location is counted as one Carter's retail store and one OshKosh retail store. As of October 1, 2016 and October 3, 2015, the U.S. store count data presented in the above table included 127 and 86 "side-by-side" locations, respectively.

COMPARABLE SALES METRICS

Our comparable store sales metrics include sales for all stores and eCommerce websites that were open during the comparable fiscal period, including certain remodeled stores and relocated stores. A store or eCommerce website becomes comparable following 13 consecutive full months of operation. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center, or if there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to and including the last full fiscal month of operations.


THIRD FISCAL QUARTER AND FIRST THREE FISCAL QUARTERS ENDED OCTOBER 1, 2016 COMPARED TO THIRD FISCAL QUARTER AND FIRST THREE FISCAL QUARTERS ENDED OCTOBER 3, 2015

U.S. COMPARABLE RETAIL SALES

Changes in comparable sales for our two U.S. retail segments, Carter's Retail and Oshkosh Retail, were as follows:

 
 
Comparable Sales
 
 
Change for Third Fiscal Quarter from 2015 to 2016
Change for Three Fiscal Quarters from 2015 to 2016
Increase (Decrease)
 
 
 
 
 
 
 
 
 
Carter's Retail
 
OshKosh Retail
Carter's Retail
 
OshKosh Retail
 
 
 
 
 
 
 
 
Retail stores
 
(4.1)%
 
(3.0)%
(2.4)%
 
(3.5)%
eCommerce
 
+25.2%
 
+34.8%
+19.7%
 
+24.9%
Total
 
+2.1%
 
+4.1%
+2.1%
 
+2.1%

The decreases in comparable retail store sales for Carter's and OshKosh during the third quarter and the first three quarters of fiscal 2016, as compared to the comparable fiscal periods in 2015, were primarily due to decreases in the number of transactions due to lower demand for seasonal products and a lower average price per unit.

For the year-to-date period ended October 1, 2016, we believe that Carter's and OshKosh retail comparable sales were negatively affected by lower demand from international consumers shopping in our U.S. stores and eCommerce websites, which was likely influenced by the strength of the U.S. dollar relative to other currencies. However, we believe these effects were less pronounced in the third quarter of fiscal 2016 as our U.S. retail businesses experienced stabilization in demand from international customers.

33

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


  
The increases in eCommerce comparable sales for Carter's and OshKosh during both periods in fiscal 2016, as compared to the comparable fiscal periods in 2015, were primarily due to an increase in the number of transactions.



CONSOLIDATED NET SALES

In the third quarter of fiscal 2016, consolidated net sales increased $51.6 million, or 6.1%, to $901.4 million from $849.8 million in the third quarter of fiscal 2015. For the first three quarters of fiscal 2016, consolidated net sales increased $117.6 million, or 5.5%, to $2.26 billion from $2.15 billion in the first three quarters of fiscal 2015. The increases during both periods reflected sales growth in all of our segments except OshKosh Wholesale, as presented below. Changes in foreign currency exchange rates in the third quarter of fiscal 2016 as compared to the third quarter of fiscal 2015 had a favorable impact on our consolidated net sales of approximately $0.3 million. Changes in foreign currency exchange rates in the first three quarters of fiscal 2016 as compared to the first three quarters of fiscal 2015 had an unfavorable impact on our consolidated net sales of approximately $6.7 million.

Net sales by segment, and each segment's percentage of consolidated net sales, were as follows:

 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
October 1, 2016
 
% of
Total
 
October 3, 2015
 
% of
Total
 
October 1, 2016
 
% of
Total
 
October 3, 2015
 
% of
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
356,258

 
39.5
%
 
$
343,555

 
40.4
%
 
$
842,136

 
37.2
%
 
$
824,600

 
38.4
%
Carter’s Retail
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
$
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
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
%


CARTER'S WHOLESALE SALES (U.S.)

Carter's Wholesale segment net sales increased $12.7 million, or 3.7%, in the third quarter of fiscal 2016 to $356.3 million from $343.6 million in the third quarter of fiscal 2015. This increase in net sales was primarily the result of a 2.8% increase in the average price per unit due to a favorable product mix and a 0.9% increase in the number of units shipped.

Carter's Wholesale segment net sales increased $17.5 million, or 2.1%, in the first three quarters of fiscal 2016 to $842.1 million from $824.6 million in the first three quarters of fiscal 2015. This increase in net sales was primarily a result of a 2.4% increase in the average price per unit due to favorable product mix, partially offset by a 0.3% decrease in the number of units shipped.


CARTER'S RETAIL SALES (U.S.)

Carter's Retail segment net sales increased $19.8 million, or 6.7%, in the third quarter of fiscal 2016 to $314.7 million from $294.9 million in the third quarter of fiscal 2015. This increase in net sales primarily reflected a/an:

Increase of $16.4 million from new stores;
Increase of $15.0 million from eCommerce sales;

34

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


Decrease of $9.5 million in comparable store sales; and
Decrease of $1.1 million due to the impact of store closings.

Carter's Retail segment net sales increased $61.2 million, or 7.7%, in the first three quarters of fiscal 2016 to $860.9 million from $799.6 million in the first three quarters of fiscal 2015. This increase in net sales primarily reflected a/an:

Increase of $50.6 million from new stores;
Increase of $31.0 million from eCommerce sales;
Decrease of $15.0 million in comparable store sales; and
Decrease of $2.5 million due to the impact of store closings.


OSHKOSH RETAIL SALES (U.S.)
    
OshKosh Retail segment net sales increased $8.7 million, or 8.9%, in the third quarter of fiscal 2016 to $107.0 million from $98.3 million in the third quarter of fiscal 2015. This increase in net sales primarily reflected a/an:

Increase of $8.1 million from new stores;
Increase of $6.0 million from eCommerce sales;
Decrease of $2.3 million in comparable store sales; and
Decrease of $2.2 million due to the impact of store closings.

OshKosh Retail segment net sales increased $22.9 million, or 9.4%, in the first three quarters of fiscal 2016 to $267.7 million from $244.8 million in the first three quarters of fiscal 2015. This increase in net sales primarily reflected a/an:

Increase of $25.3 million from new stores;
Increase of $11.3 million from eCommerce sales;
Decrease of $6.6 million in comparable store sales; and
Decrease of $5.8 million due to the impact of store closings.


OSHKOSH WHOLESALE SALES (U.S.)
    
OshKosh Wholesale segment net sales decreased $1.3 million, or 7.0%, in the third quarter of fiscal 2016 to $17.5 million from $18.8 million in the third quarter of fiscal 2015. This decrease was primarily due to a 3.8% decrease in the number of units shipped mainly due to a decline in seasonal bookings, and a 3.2% decrease in the average price per unit.

OshKosh Wholesale segment net sales decreased $10.4 million, or 21.1%, in the first three quarters of fiscal 2016 to $38.8 million from $49.2 million in the first three quarters of fiscal 2015. This decrease was primarily due to a 20.1% decrease in the number of units shipped mainly due to a decline in seasonal bookings, and a 1.0% decrease in the average price per unit.


INTERNATIONAL SALES

International segment net sales increased $11.8 million, or 12.5%, in the third quarter of fiscal 2016 to $106.0 million from $94.2 million in the third quarter of fiscal 2015. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar had a favorable impact on International segment net sales of approximately $0.3 million in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015.


The $11.8 million increase in net sales in the International segment primarily reflected an:
 
Increase of $5.8 million from our international wholesale businesses;
Increase of $4.8 million from our Canadian retail stores; and
Increase of $1.2 million from eCommerce, primarily driven by our eCommerce websites in Canada.



35

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


International segment net sales increased $26.3 million, or 11.5%, in the first three quarters of fiscal 2016 to $255.5 million from $229.2 million in the first three quarters of fiscal 2015. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar had an unfavorable impact on International segment net sales of approximately $6.7 million for the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015.


The $26.3 million increase in net sales in the International segment primarily reflected a/an:
 
Increase of $15.9 million from our Canadian retail stores;
Increase of $8.2 million from eCommerce, primarily driven by our eCommerce website in China;
Increase of $5.8 million from our international wholesale businesses other than Canada; and
Decrease of $3.6 million in our Canada wholesale business due, in part, to the Target Canada bankruptcy that occurred in early 2015.

Compared to the third quarter of fiscal 2015, our Canadian total retail comparable sales increased 1.6% in the third quarter of fiscal 2016, primarily due to eCommerce comparable sales growth of 37.2%, partially offset by retail stores comparable sales decline of 0.5%. Compared to the first three quarters of fiscal 2015, our Canadian total retail comparable sales increased 7.2% in the first three quarters of fiscal 2016, primarily due to retail stores comparable sales growth of 5.4% and eCommerce comparable sales growth of 37.3%.


GROSS MARGIN AND GROSS PROFIT

Our consolidated gross margin increased from 40.9% in the third quarter of fiscal 2015 to 41.7% in the third quarter of fiscal 2016, primarily due to favorable product costs, partially offset by increased promotional pricing in our retail businesses. Our consolidated gross profit increased $28.0 million, or 8.1%, to $375.5 million in the third quarter of fiscal 2016 from $347.5 million in the third quarter of fiscal 2015 due to the increase in sales and favorable product costs.

Our consolidated gross margin increased from 41.7% in the first three quarters of fiscal 2015 to 42.8% in the first three quarters of fiscal 2016, primarily due to favorable product costs and product mix. Our consolidated gross profit increased $74.2 million, or 8.3%, to $968.7 million in the first three quarters of fiscal 2016 from $894.5 million in the first three quarters of fiscal 2015, due to the increase in sales and favorable product costs.

We include distribution costs in selling, general, and administrative ("SG&A") expenses. Accordingly, our gross margin and gross profit may not be comparable to other entities that include such distribution costs in their cost of goods sold.


SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES

Consolidated SG&A expenses in the third quarter of fiscal 2016 increased $25.3 million, or 11.0%, to $255.3 million from $230.0 million in the third quarter of fiscal 2015. As a percentage of net sales, SG&A expenses increased from 27.1% in the third quarter of fiscal 2015 to 28.3% in the third quarter of fiscal 2016.

The increase in SG&A expenses, as a percentage of net sales, in the third quarter of fiscal 2016 primarily reflected a:

$14.3 million increase in expenses related to retail store operations, primarily due to new store openings;
$4.6 million increase in expenses related to our domestic and international eCommerce operations;
$2.8 million increase in expenses related to information technology and systems;
$2.0 million increase in expenses related to distribution expenses;
$1.7 million increase in expenses related to other general and administrative expenses; and
$1.0 million insurance recovery that decreased SG&A expenses during the third quarter of fiscal 2015.


which were partially offset by a:

$1.2 million decrease in insurance and employee benefits costs;
$1.0 million decrease in amortization of the H.W.Carter & Sons trademarks;

36

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


$0.7 million decrease in performance-based compensation expenses; and
$0.6 million decrease in marketing expenses.

Consolidated SG&A expenses in the first three quarters of fiscal 2016 increased $62.3 million, or 9.6%, to $712.8 million from $650.5 million in the first three quarters of fiscal 2015. As a percentage of net sales, SG&A expenses increased from 30.3% in the first three quarters of fiscal 2015 to 31.5% in the first three quarters of fiscal 2016.

The increase in SG&A expenses, as a percentage of net sales, in the first three quarters of fiscal 2016 primarily reflected a:

$42.3 million increase in expenses related to retail store operations, primarily due to new store openings;
$10.5 million increase in expenses related to our domestic and international eCommerce operations;
$7.5 million increase in expenses related to information technology and systems;
$4.4 million increase in expenses related to marketing and brand management;
$2.9 million increase in expenses related to other general and administrative expenses;
$2.3 million increase in expenses related to distribution and freight; and
$1.0 million insurance recovery that decreased SG&A expenses during the third quarter of fiscal 2015.


which were partially offset by a:

$3.5 million decrease in amortization of the H.W. Carter & Sons trademarks;
$2.8 million decrease in insurance and employee benefits costs;
$1.9 million decrease in performance-based compensation expenses; and
$1.5 million decrease in wholesale and domestic licensing expenses.


ROYALTY INCOME

We license the use of our Carter's, Just One You, Child of Mine, OshKosh B'gosh, OshKosh, Genuine Kids from OshKosh, and Precious Firsts brand names. Royalty income from these brands for the third quarter of fiscal 2016 decreased $2.0 million, or 16.0%, to $10.7 million from $12.7 million in the third quarter of fiscal 2015. Royalty income from these brands for the first three quarters of fiscal 2016 decreased $1.4 million, or 4.3%, to $31.3 million from $32.7 million in the first three quarters of fiscal 2015. The decreases in both of the fiscal 2016 periods, as compared to the corresponding fiscal 2015 periods, were attributable to a decrease in income from certain licensees due in part to the insourcing of formerly licensed product categories, partially offset by sales growth from other domestic licensees. We benefited from favorable settlements in the first quarter of fiscal 2015.


OPERATING INCOME

Consolidated operating income increased $0.7 million, or 0.5%, to $130.9 million in the third quarter of fiscal 2016 from $130.2 million in the third quarter of fiscal 2015. Consolidated operating income increased $10.5 million, or 3.8%, to $287.1 million in the first three quarters of fiscal 2016 from $276.7 million in the first three quarters of fiscal 2015. Consolidated operating margin decreased from 15.3% in the third quarter of fiscal 2015 to 14.5% in the third quarter of fiscal 2016. Consolidated operating margin decreased from 12.9% in the first three quarters of fiscal 2015 to 12.7% in the first three quarters of fiscal 2016. The tables below summarize the changes in each of our segments' operating results and unallocated corporate expenses between the fiscal periods indicated:


37

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


(dollars in thousands)
 
Carter's Wholesale
 
Carter's Retail
 
OshKosh Wholesale
 
OshKosh Retail
 
International
 
Corporate Expenses
 
Total
Operating income (loss) for third quarter of fiscal 2015
 
$
74,347

 
$
51,733

 
$
4,487

 
$
6,171

 
$
18,220

 
$
(24,737
)
 
$
130,221

Favorable (unfavorable) change in the third quarter of fiscal 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
8,812

 
10,218

 
(1,058
)
 
2,616

 
7,210

 
209

 
28,007

Royalty income
 
(851
)
 
(567
)
 
296

 
(328
)
 
(579
)
 

 
(2,029
)
SG&A expenses
 
(757
)
 
(13,333
)
 
725

 
(5,807
)
 
(5,206
)
 
(927
)
 
(25,305
)
Operating income (loss) for third quarter of fiscal 2016
 
$
81,551

 
$
48,051

 
$
4,450

 
$
2,652

 
$
19,645

 
$
(25,455
)

$
130,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(dollars in thousands)
 
Carter's Wholesale
 
Carter's Retail
 
OshKosh Wholesale
 
OshKosh Retail
 
International
 
Corporate Expenses
 
Total
Operating income (loss) for the first three quarters of fiscal 2015
 
$
172,485

 
$
134,557

 
$
9,715

 
$
3,396

 
$
30,967

 
$
(74,442
)
 
$
276,678

Favorable (unfavorable) change in the three quarters of fiscal 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
16,382

 
33,204

 
(3,810
)
 
10,724

 
17,700

 
(29
)
 
74,171

Royalty income
 
(1,113
)
 
60

 
132

 
162

 
(659
)
 

 
(1,418
)
SG&A expenses
 
(99
)
 
(40,083
)
 
2,229

 
(14,896
)
 
(10,817
)
 
1,380

 
(62,286
)
Operating income (loss) for the first three quarters of fiscal 2016
 
$
187,655

 
$
127,738

 
$
8,266

 
$
(614
)
 
$
37,191

 
$
(73,091
)
 
$
287,145

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


The following tables present changes in the operating margin for each of our five operating segments. The primary drivers of these changes are presented in terms of the difference in each driver's margin (based on net sales) between the respective periods, in each case expressed in basis points ("bps"). The first table presents the changes between the third quarter of fiscal 2015 and the third quarter of fiscal 2016. The second table presents the changes between the first three quarters of fiscal 2015 and the first three quarters of fiscal 2016.
 
 
Carter's Wholesale
 
Carter's Retail
 
OshKosh Wholesale
 
OshKosh Retail
 
International
Operating margin for the third quarter of fiscal 2015
 
21.6
%
 
17.5
%
 
23.9
%
 
6.3
%
 
19.3
%
Favorable (unfavorable) bps change in the third quarter of fiscal 2016
 
 
 
 
 
 
 
 
 
 
Gross profit
 
150 bps

 
(10) bps

 
(410) bps

 
(150) bps

 
190 bps

Royalty income
 
(30) bps

 
(20) bps

 
290 bps

 
(40) bps

 
(80) bps

SG&A expenses
 
10 bps

 
(190) bps

 
280 bps

 
(190) bps

 
(190) bps

Operating margin for the third quarter of fiscal 2016
 
22.9
%
 
15.3
%
 
25.5
%
 
2.5
%
 
18.5
%
 
 
(a)
 
(b)
 
(c)
 
(d)
 
(e)



38

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


 
 
Carter's Wholesale
 
Carter's Retail
 
OshKosh Wholesale
 
OshKosh Retail
 
International
Operating margin for the first three quarters of fiscal 2015
 
20.9
%
 
16.8
%
 
19.8
%
 
1.4
 %
 
13.5
%
Favorable (unfavorable) bps change in the three quarters of fiscal 2016
 
 
 
 
 
 
 
 
 
 
Gross profit
 
140 bps

 

 
(330) bps

 
(10) bps

 
240 bps

Royalty income
 
(20) bps

 

 
430 bps

 

 
(50) bps

SG&A expenses
 
20 bps

 
(200) bps

 
50 bps

 
(150) bps

 
(80) bps

Operating margin for the first three quarters of fiscal 2016
 
22.3
%
 
14.8
%
 
21.3
%
 
(0.2
)%
 
14.6
%
 
 
(aa)
 
(bb)
 
(cc)
 
(dd)
 
(ee)


(a) Carter's Wholesale segment operating income in the third quarter of fiscal 2016 increased $7.2 million, or 9.7%, to $81.6 million from $74.3 million in the third quarter of fiscal 2015. The segment's operating margin increased 130 bps from 21.6% in the third quarter of fiscal 2015 to 22.9% in the third quarter of fiscal 2016. The primary drivers of the change in operating margin were a/an:

150 bps increase in gross profit due to favorable product costs and improved pricing due to changes in product mix;
30 bps decrease in royalty income due to insourcing formerly licensed product categories and a reserve against certain licensee receivables.


(aa) Carter's Wholesale segment operating income in the first three quarters of fiscal 2016 increased $15.2 million, or 8.8%, to $187.7 million from $172.5 million in the first three quarters of fiscal 2015. The segment's operating margin increased 140 bps from 20.9% in the first three quarters of fiscal 2015 to 22.3% in the first three quarters of fiscal 2016. The primary drivers of the change in operating margin were a/an:

140 bps increase in gross profit due to favorable product costs and improved pricing due to changes in product mix;
20 bps decrease in SG&A expenses, primarily due to a decrease in distribution and freight expenses, driven by efficiencies at our Braselton, Georgia distribution center; and
20 bps decrease in royalty income.

(b) Carter's Retail segment operating income decreased by $3.7 million, or 7.1%, to $48.1 million in the third quarter of fiscal 2016 from $51.7 million in the third quarter of fiscal 2015. This segment's operating margin decreased 220 bps from 17.5% in the third quarter of fiscal 2015 to 15.3% in the third quarter of fiscal 2016. The primary drivers of the change in operating margin were a/an:

10 bps decrease in gross profit due to increased promotional environment, offset by favorable changes in product costs;
190 bps increase in SG&A expenses, primarily due to a:
150 bps increase in expenses associated with new retail stores;
30 bps increase in distribution and freight expenses; and
20 bps decrease in royalty income.

(bb) Carter's Retail segment operating income decreased by $6.8 million, or 5.1%, to $127.7 million in the first three quarters of fiscal 2016 from $134.6 million in the first three quarters of fiscal 2015. This segment's operating margin decreased 200 bps from 16.8% in the first three quarters of fiscal 2015 to 14.8% in the first three quarters of fiscal 2016. The primary drivers of the change in operating margin were a/an:

200 bps increase in SG&A expenses, primarily due to a:

39

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


140 bps increase in expenses associated with new retail stores; and
30 bps increase in marketing expenses.

(c) OshKosh Wholesale segment operating income was both $4.5 million in the third quarter of fiscal 2016 and fiscal 2015. This segment's operating margin increased 160 bps from 23.9% in the third quarter of fiscal 2015 to 25.5% in the third quarter of fiscal 2016. The primary drivers of the change in operating margin were a/an:

410 bps decrease in gross profit primarily due to customer sales mix, partially offset by favorable changes in product costs;
280 bps decrease in SG&A expenses primarily due to a:
230 bps decrease in performance-based compensation expenses;
150 bps decrease in provisions for accounts receivable;
80 bps decrease in distribution and freight expenses;
180 bps increase in marketing expenses; and
290 bps increase in royalty income due to sales growth from our licensees.


(cc) OshKosh Wholesale segment operating income decreased by $1.4 million, or 14.9%, to $8.3 million in the first three quarters of fiscal 2016 from $9.7 million in the first three quarters of fiscal 2015. This segment's operating margin increased 150 bps from 19.8% in the first three quarters of fiscal 2015 to 21.3% in the first three quarters of fiscal 2016. The primary drivers of the change in operating margin were a/an:

330 bps decrease in gross profit primarily due to higher provisions for inventory, partially offset by favorable changes in product costs;
50 bps decrease in SG&A expenses primarily due to a/an:
230 bps decrease in performance-based compensation expenses;
190 bps increase in marketing expenses; and
430 bps increase in royalty income primarily due to sales growth from our licensees;


(d) OshKosh Retail segment operating income decreased by $3.5 million, or 57.0%, from an operating income of $6.2 million in the third quarter of fiscal 2015 to an operating income of $2.7 million in the third quarter of fiscal 2016. The segment's operating margin decreased 380 bps from 6.3% in the third quarter of fiscal 2015 to 2.5% in the third quarter of fiscal 2016. The primary drivers of the change in operating margin were a/an:

150 bps decrease in gross profit primarily due to an increased promotional environment, partially offset by lower product costs;
190 bps increase in SG&A expenses primarily due to a/an:
180 bps increase in expenses associated with new retail stores;
50 bps increase in distribution and freight expenses;
20 bps decrease in performance-based compensation expenses;
20 bps decrease in marketing expenses; and
40 bps decrease in royalty income.


(dd) OshKosh Retail segment operating income decreased by $4.0 million, or 118.1%, from an operating income of $3.4 million in the first three quarters of fiscal 2015 to an operating loss of $0.6 million in the first three quarters of fiscal 2016. The segment's operating margin decreased 160 bps from 1.4% in the first three quarters of fiscal 2015 to (0.2)% in the first three quarters of fiscal 2016. The primary drivers of the change in operating margin were a/an:

150 bps increase in SG&A expenses primarily due to a/an:
180 bps increase in expenses associated with new retail stores;
20 bps decrease in distribution and freight expenses; and
20 bps decrease in performance-based compensation expenses.



40

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


(e) International segment operating income increased by $1.4 million, or 7.8%, to $19.6 million in the third quarter of fiscal 2016 from $18.2 million in the third quarter of 2015. This segment's operating margin decreased 80 bps from 19.3% in the third quarter of fiscal 2015 to 18.5% in the third quarter of fiscal 2016. The primary drivers of the change in operating margin were a/an:

190 bps increase in gross profit, primarily driven by growth in higher margin retail store and eCommerce channels, improved price realization, and benefit from direct sourcing;
190 bps increase in SG&A expenses primarily due to a/an:
100 bps increase in expenses associated with new retail stores and new China wholesale business;
60 bps increase in marketing expenses; and
80 bps decrease in royalty income due to a reduction in the number of licensees.


(ee) International segment operating income increased by $6.2 million, or 20.1%, to $37.2 million in the first three quarters of fiscal 2016 from $31.0 million in the first three quarters of 2015. This segment's operating margin increased 110 bps from 13.5% in the first three quarters of fiscal 2015 to 14.6% in the first three quarters of fiscal 2016. The primary drivers of the change in operating margin were a/an:

240 bps increase in gross profit, primarily driven by growth in higher margin retail store and eCommerce channels, partially offset by unfavorable foreign currency exchange impacts;
80 bps increase in SG&A expenses primarily due to a/an:
110 bps increase in expenses associated with new retail stores, China eCommerce and new China wholesale business;
20 bps increase in distribution and freight expenses;
20 bps increase in performance-based compensation expenses;
20 bps increase in information technology expenses;
80 bps decrease in accretion expense for contingent consideration related to the Bonnie Togs acquisition; and
50 bps decrease in royalty income due to a reduction in licensees.


Unallocated Corporate Expenses

Unallocated corporate expenses increased by $0.7 million, or 2.9%, in the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased from 2.9% in the third quarter of of fiscal 2015 to 2.8% in the third quarter of fiscal 2016. The increase in corporate expenses primarily reflected a/an:

Increase of $1.7 million in other general and administrative expenses;
Increase of $1.4 million in expenses related to information technology and systems;
Decrease of $1.1 million in insurance and other employee related benefits costs; and
Decrease of $1.0 million in amortization of the H.W. Carter & Sons tradenames.


Unallocated corporate expenses decreased by $1.4 million, or 1.8%, in the first three quarters of fiscal 2016 compared to the first three quarters of fiscal 2015. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased from 3.5% in the first three quarters of fiscal 2015 to 3.2% in the first three quarters of fiscal 2016. The decrease in corporate expenses primarily reflected a/an:

Decrease of $3.5 million in amortization of the H.W. Carter & Sons tradenames;
Decrease of $2.8 million in performance-based compensation;
Decrease of $1.9 million in insurance and other employee related benefits costs;
Increase of $3.5 million in expenses related to information technology and systems; and
Increase of $2.9 million in other general and administrative expenses.


INTEREST EXPENSE

41

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)



Interest expense and effective interest rate calculations include the amortization of debt issuance costs.

Interest expense in the third quarter of fiscal 2016 and 2015 was approximately $6.8 million and $6.9 million, respectively. Weighted-average borrowings for the third quarter of fiscal 2016 were approximately $585.6 million with an effective interest rate of 4.57%, compared to weighted-average borrowings for the third quarter of fiscal 2015 of $585.5 million with an effective interest rate of 4.69%.

Interest expense in the first three quarters of fiscal 2016 and 2015 was approximately $20.3 million and $20.5 million, respectively. Weighted-average borrowings for the first three quarters of fiscal 2016 were approximately $585.3 million with an effective interest rate of 4.58%, compared to weighted-average borrowings for the first three quarters of fiscal 2015 of $586.4 million with an effective interest rate of 4.65%.

The decreases in the effective interest rate for the third quarter and the first three quarters of fiscal 2016 compared to the third quarter and the first three quarters of fiscal 2015 was primarily due to lower borrowing costs on the U.S. and Canadian borrowings outstanding under our secured revolving credit facility in fiscal 2016.


OTHER EXPENSE (INCOME), NET

Other expense (income), net is comprised primarily of unrealized gains and losses from unsettled foreign currency forward contracts and unsettled foreign currency transactions, and realized gains and losses on settled foreign currency forward contracts and settled foreign currency transactions. These amounts represented a net gain of $0.1 million and a net loss of $3.6 million for the third quarter and the first three quarters of fiscal 2016, respectively. These amounts represented a net gain of $0.6 million and a net gain of $0.5 million for the third quarter and the first three quarters of fiscal 2015, respectively.


INCOME TAXES

Our consolidated effective income tax rate for the third quarter of fiscal 2016 was 34.9% compared to 36.0% for the third quarter of fiscal 2015. Our consolidated effective income tax rate for the first three quarters of fiscal 2016 was 35.1% compared to 35.7% for the first three quarters of fiscal 2015. The lower effective rates both periods in fiscal 2016 were primarily due to expansion of our international business, partially offset by favorable settlements of federal and state tax audits for 2011, 2012, and 2013 during the first quarter of fiscal 2015.

For the full fiscal year 2016, we estimate our consolidated effective income tax rate to be approximately 35.2%.


NET INCOME

Our consolidated net income for the third quarter of fiscal 2016 increased by $1.5 million, or 1.9%, to $80.8 million compared to $79.3 million in the third quarter of fiscal 2015. Our consolidated net income for the first three quarters of fiscal 2016 increased by $5.8 million, or 3.5%, to $171.0 million compared to $165.2 million in the first three quarters of fiscal 2015. The increases were due to the factors previously discussed.


FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY

Our primary cash needs are for working capital and capital expenditures. We expect that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flow from operations, and borrowings available under our secured revolving credit facility. We expect that these sources will fund our ongoing requirements for the foreseeable future. Further, we do not expect current economic conditions to prevent us from meeting our cash requirements. These sources of liquidity may be affected by events described in our risk factors, as further discussed under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.


42

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


As of October 1, 2016, the Company had approximately $140.6 million of cash and cash equivalents in major financial institutions, including approximately $40.9 million in financial institutions located outside of the United States. We maintain cash deposits with major financial institutions that exceed the insurance coverage limits provided by the Federal Deposit Insurance Corporation in the United States and by similar insurers for deposits located outside the United States.  To mitigate this risk, we utilize a policy of allocating cash deposits among major financial institutions that have been evaluated by us and third-party rating agencies.


BALANCE SHEET

Net accounts receivable at October 1, 2016 were $271.2 million compared to $246.6 million at October 3, 2015 and $207.6 million at January 2, 2016. The overall increase of $24.6 million, or 10.0%, at October 1, 2016 compared to October 3, 2015 primarily reflected sales growth. Due to the seasonal nature of our operations, the net accounts receivable balance at October 1, 2016 is not comparable to the net accounts receivable balance of $207.6 million at January 2, 2016.

Inventories at October 1, 2016 were $552.7 million compared to $511.5 million at October 3, 2015 and $469.9 million at January 2, 2016. The increase of $41.2 million, or 8.1%, at October 1, 2016 compared to October 3, 2015 primarily reflected business growth and the timing of inventory purchases. Due to the seasonal nature of our operations, the inventories balance at October 1, 2016 is not comparable to the inventories balance of $469.9 million at January 2, 2016.


CASH FLOW

Net cash provided by operating activities for the first three quarters of fiscal 2016 was $116.6 million compared to net cash provided by operating activities of $146.0 million in the first three quarters of fiscal 2015. This decrease in operating cash flow for the 2016 period reflected unfavorable changes in net working capital primarily due to the timing of payments, partially offset by an increase in net income.

Capital expenditures were $71.2 million in the first three quarters of fiscal 2016 compared to $77.0 million in the first three quarters of fiscal 2015, primarily reflecting 2016 expenditures of approximately $42.8 million for our U.S. and international retail store openings and re-modelings, $17.4 million for information technology initiatives, $5.3 million for distribution and office facilities, and $2.1 million for wholesale fixtures.

We plan to invest approximately $105 million in total capital expenditures for all of fiscal 2016, primarily for our U.S. and international retail store openings and re-modelings, and information technology initiatives.

Net cash used in financing activities was $287.4 million in the first three quarters of fiscal 2016 compared to $120.5 million in the first three quarters of fiscal 2015. This increase in cash used during the 2016 period primarily reflected increases in repurchases of our common stock and higher dividend payments.


SECURED REVOLVING CREDIT FACILITY

Our secured revolving credit facility, which was amended and restated in September 2015, provides for (i) a $400 million U.S. dollar revolving facility (including a $175 million sub-limit for letters of credit and a swing line sub-limit of $50 million) available for borrowings in U.S. dollars and (ii) a $100 million multicurrency revolving facility (including a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million) available for borrowings denominated in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. Our 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 credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount not to exceed $200 million and the aggregate multicurrency amount not to exceed $50 million). Our secured revolving credit facility matures September 16, 2020.

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


43

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


The interest rate margins applicable to our secured revolving credit facility are presently 1.375% for LIBOR 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 equal to 1.90% on that date, and Canadian borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) plus the applicable base rate, which was 2.26% on that date.

As of October 1, 2016, we were in compliance with the financial and other covenants under our secured revolving credit facility.


SENIOR NOTES

As of October 1, 2016, our wholly-owned operating subsidiary The William Carter Company ("TWCC") had $400.0 million principal amount of senior notes outstanding, bearing interest at a fixed rate of 5.25% per annum, and maturing on August 15, 2021. On our consolidated balance sheet, the $400.0 million outstanding is reported net of $4.8 million, $5.5 million and $5.7 million unamortized issuance-related debt costs at October 1, 2016, January 2, 2016 and October 3, 2015, respectively. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.


SHARE REPURCHASES

On February 24, 2016, our Board of Directors authorized a new $500 million share repurchase program, in addition to the amounts remaining under previous authorizations. In the first three quarters of fiscal 2016, the Company repurchased and retired 2,358,947 shares in open market transactions for approximately $239.1 million at an average price of $101.37 per share. In the first three quarters of fiscal 2015, the Company repurchased and retired 795,025 shares in open market transactions for approximately $78.3 million, at an average price of $98.54 per share.

The total remaining capacity under all remaining repurchase authorizations as of October 1, 2016 was approximately $335.7 million. Future repurchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at management's discretion depending on market conditions, share price, other investment priorities, and other factors. The share repurchase authorizations have no expiration date.


DIVIDENDS

In the first, second and third quarters of fiscal 2016, we paid quarterly cash dividends of $0.33 per share in each quarter. In the first, second and third quarters of fiscal 2015, we paid quarterly cash dividends of $0.22 per share in each quarter. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors and will be based on a number of factors, including our future financial performance and other investment priorities.

As disclosed in our most recent Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016, provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock.

SEASONALITY

We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally have resulted in declines in our net sales and gross profit in the first half of our fiscal year versus the second half. Accordingly, our results of operations during any interim period during the fiscal year may not be indicative of the results we expect for the full fiscal year.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES


44

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Our critical accounting policies and estimates are described under the heading "Critical Accounting Policies and Estimates" in Item 7 of our most recent Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016. Our critical accounting policies and estimates are those policies that require management's most difficult and subjective judgments and may result in the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include: revenue recognition and accounts receivable allowance, inventory, goodwill and tradename, accrued expenses, loss contingencies, accounting for income taxes, foreign currency, employee benefit plans, and stock-based compensation arrangements. There have been no material changes in these critical accounting policies and estimates from those described in our most recent Annual Report on Form 10-K, except to update the Company's accounting policy for the measurement date used for defined benefit plan assets and obligations as disclosed in Note 8, Employee Benefit Plans, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.

Additionally, information related to the pending adoption of recently issued accounting standards is provided in Note 15, Pending Adoption of Recent Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Currency and Interest Rate Risks

In the operation of our business, we have market risk exposures including those related to foreign currency and interest rates. We employ various strategies to attempt to minimize our exposure to these risks.

Currency Risk

We contract for production with third parties, primarily in Asia. While these contracts are stated in U.S. dollars, there can be no assurance that the cost for the future production of our products will not be affected by exchange rate fluctuations between the U.S. dollar and the local currencies of these contractors. Due to the number of currencies involved, we cannot quantify the potential impact of future currency fluctuations on our financial position, results of operations, or cash flows for future periods.

The financial statements of our foreign subsidiaries that are denominated in functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities and weighted-average exchange rates for revenues and expenses. Gains and losses resulting from translating assets and liabilities from the functional currency to U.S. dollars are included in accumulated other comprehensive income (loss).

Fluctuations in exchange rates, primarily between the U.S. dollar and the Canadian dollar, may affect our results of operations, financial position, and cash flows. Transactions by our Canadian subsidiary may be denominated in a currency other than the entity's functional currency, which is the Canadian dollar. Foreign currency transaction gains and losses also include the impact of non-current intercompany loans with foreign subsidiaries that are marked to market. In our statement of operations, these gains and losses are recorded within Other expense, net.

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily between the U.S. dollar and Canadian dollar, our Canadian subsidiary may use foreign currency forward contracts to hedge purchases that are made in U.S. dollars, primarily for inventory purchases. As part of this strategy, we use foreign currency forward exchange contracts that have maturities of less than 12 months to provide continuing coverage throughout the hedging period.

Interest Rate Risk

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Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. Our weighted-average variable rate borrowings outstanding as of October 1, 2016 were $185.4 million. An increase or decrease of 1% in the effective interest rate on that amount would increase or decrease our annual pre-tax interest expense by approximately $1.9 million.


Other Risks

We enter into various purchase order commitments with our suppliers. We can cancel these arrangements, although in some instances we may be subject to a termination charge reflecting a percentage of work performed prior to cancellation.


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of October 1, 2016.



Changes in Internal Control over Financial Reporting

In connection with the Company’s continuing efforts to enhance its internal controls over financial reporting, at the beginning of the third quarter of fiscal 2016 the Company completed the replacement of a financial information system used to process and record certain of the Company’s financial transactions.  Testing is ongoing and expected to be completed during the fourth quarter of fiscal 2016.

Other than this financial system replacement, there were no changes in the Company's internal controls over financial reporting during the third quarter of fiscal 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


PART II


ITEM 1. LEGAL PROCEEDINGS
 
The Company is subject to various claims and pending or threatened lawsuits in the normal course of our business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse effect on its financial position, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors described in our Form 10-K for the 2015 fiscal year ended January 2, 2016.


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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchases
    
The following table provides information about share repurchases during the third quarter of fiscal 2016:

Period
 
Total number
of shares
purchased
(1)
 
Average price paid per share
 
Total number of shares purchased as part of publicly announced plans or programs (2)
 
Approximate
dollar value of shares that may
yet be
purchased
under the plans
or programs (3)
 
 
 
 
 
 
 
 
 
July 3, 2016 through July 30, 2016
 
151,700
 
$108.10
 
151,700
 
$378,239,427
 
 
 
 
 
 
 
 
 
July 31, 2016 through August 27, 2016
 
181,662
 
$100.45
 
180,800
 
$360,078,297
 
 
 
 
 
 
 
 
 
August 28, 2016 through October 1, 2016
 
254,600
 
$95.71
 
254,600
 
$335,709,538
 
 
 
 
 
 
 
 
 
Total
 
587,962
 

 
587,100
 
 

(1)
Includes shares of our common stock surrendered by our employees to satisfy required tax withholding upon the vesting of restricted stock awards. There were 862 shares surrendered between July 3, 2016 and October 1, 2016.

(2)
Share purchases during the third quarter of fiscal 2016 were made in compliance with all applicable rules and regulations and in accordance with the share repurchase authorizations described in Note 5 to our accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

(3)
On February 24, 2016, our Board of Directors authorized a new $500 million share repurchase program. The new share repurchase authorization permits us to repurchase shares of our common stock up to $500 million, in addition to any amounts remaining under previous authorizations.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

N/A

ITEM 4. MINE SAFETY DISCLOSURES

N/A

ITEM 5. OTHER INFORMATION

N/A

ITEM 6. EXHIBITS
Exhibit Number
Description of Exhibits
 
 
3.1
Certificate of Incorporation of Carter's, Inc., as amended on May 12, 2006 (incorporated by reference to Exhibit 3.1 of Carter's, Inc.'s Quarterly Report on Form 10-Q filed on October 29, 2015).
3.2
Amended and Restated By-Laws of Carter's, Inc. (incorporated by reference to Exhibit 3.2 of Carter's, Inc.'s Current Report on Form 8-K filed on August 26, 2015).
31.1
Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification.
31.2
Rule 13a-15(e)/15d-15(e) and 13a-15(f)/15d-15(f) Certification.
32
Section 1350 Certification.
101
Interactive Data File.


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SIGNATURES
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.


CARTER’S, INC.


October 27, 2016
/s/ MICHAEL D. CASEY
 
Michael D. Casey
 
Chief Executive Officer
 
(Principal Executive Officer)



October 27, 2016
/s/ RICHARD F. WESTENBERGER
 
Richard F. Westenberger
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)




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