CARTERS INC - Quarter Report: 2016 April (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 APRIL 2, 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 April 22, 2016 | ||
Common stock, par value $0.01 per share | 50,770,965 |
CARTER’S, INC.
INDEX
Page | |||
Unaudited Condensed Consolidated Balance Sheets as of April 2, 2016, January 2, 2016 and April 4, 2015 | |||
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarters ended April 2, 2016 and April 4, 2015 | |||
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarters ended April 2, 2016 and April 4, 2015 | |||
Unaudited Condensed Consolidated Statement of Changes in Stockholders' Equity for the fiscal quarter ended April 2, 2016 | |||
Unaudited Condensed Consolidated Statements of Cash Flows for the fiscal quarters ended April 2, 2016 and April 4, 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 for share data)
(unaudited)
April 2, 2016 | January 2, 2016 | April 4, 2015 | |||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 395,141 | $ | 381,209 | $ | 377,400 | |||||
Accounts receivable, net | 192,569 | 207,570 | 195,593 | ||||||||
Finished goods inventories | 376,499 | 469,934 | 358,014 | ||||||||
Prepaid expenses and other current assets | 36,791 | 37,815 | 33,894 | ||||||||
Deferred income taxes | 31,841 | 34,080 | 32,842 | ||||||||
Total current assets | 1,032,841 | 1,130,608 | 997,743 | ||||||||
Property, plant, and equipment, net of accumulated depreciation of $307,449, $290,636, and $257,394, respectively | 377,273 | 371,704 | 341,658 | ||||||||
Tradenames and other intangibles, net | 309,853 | 310,848 | 314,955 | ||||||||
Goodwill | 177,238 | 174,874 | 178,859 | ||||||||
Other assets | 15,258 | 15,620 | 13,898 | ||||||||
Total assets | $ | 1,912,463 | $ | 2,003,654 | $ | 1,847,113 | |||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 90,387 | $ | 157,648 | $ | 94,133 | |||||
Other current liabilities | 102,494 | 105,070 | 93,403 | ||||||||
Total current liabilities | 192,881 | 262,718 | 187,536 | ||||||||
Long-term debt, net | 580,319 | 578,972 | 580,273 | ||||||||
Deferred income taxes | 128,815 | 128,838 | 120,274 | ||||||||
Other long-term liabilities | 161,731 | 158,075 | 153,317 | ||||||||
Total liabilities | $ | 1,063,746 | $ | 1,128,603 | $ | 1,041,400 | |||||
Commitments and contingencies - Note 13 | |||||||||||
Stockholders' equity: | |||||||||||
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 2, 2016, January 2, 2016, and April 4, 2015 | — | — | — | ||||||||
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 51,206,395, 51,764,309, and 52,615,316 shares issued and outstanding at April 2, 2016, January 2, 2016 and April 4, 2015, respectively | 512 | 518 | 526 | ||||||||
Additional paid-in capital | — | — | — | ||||||||
Accumulated other comprehensive loss | (31,081 | ) | (36,367 | ) | (29,031 | ) | |||||
Retained earnings | 879,286 | 910,900 | 834,218 | ||||||||
Total stockholders' equity | 848,717 | 875,051 | 805,713 | ||||||||
Total liabilities and stockholders' equity | $ | 1,912,463 | $ | 2,003,654 | $ | 1,847,113 |
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 | |||||||
April 2, 2016 | April 4, 2015 | ||||||
Net sales | $ | 724,085 | $ | 684,764 | |||
Cost of goods sold | 413,156 | 400,712 | |||||
Gross profit | 310,929 | 284,052 | |||||
Selling, general, and administrative expenses | 228,996 | 211,183 | |||||
Royalty income | (11,075 | ) | (11,636 | ) | |||
Operating income | 93,008 | 84,505 | |||||
Interest expense | 6,739 | 6,692 | |||||
Interest income | (207 | ) | (137 | ) | |||
Other expense, net | 3,193 | 1,962 | |||||
Income before income taxes | 83,283 | 75,988 | |||||
Provision for income taxes | 29,303 | 26,196 | |||||
Net income | $ | 53,980 | $ | 49,792 | |||
Basic net income per common share | $ | 1.05 | $ | 0.94 | |||
Diluted net income per common share | $ | 1.04 | $ | 0.94 | |||
Dividend declared and paid per common share | $ | 0.33 | $ | 0.22 |
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 | |||||||
April 2, 2016 | April 4, 2015 | ||||||
Net income | $ | 53,980 | $ | 49,792 | |||
Other comprehensive income (loss): | |||||||
Foreign currency translation adjustments | 5,286 | (5,994 | ) | ||||
Comprehensive income | $ | 59,266 | $ | 43,798 |
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 | — | — | 3,144 | — | — | 3,144 | ||||||||||||||||
Exercise of stock options | 87,225 | 1 | 3,746 | — | — | 3,747 | ||||||||||||||||
Withholdings from vesting of restricted stock | (89,368 | ) | (1 | ) | (8,453 | ) | — | — | (8,454 | ) | ||||||||||||
Restricted stock activity | 166,593 | 1 | (1 | ) | — | — | — | |||||||||||||||
Stock-based compensation expense | — | — | 4,556 | — | — | 4,556 | ||||||||||||||||
Issuance of common stock | — | — | — | — | — | — | ||||||||||||||||
Repurchase of common stock | (722,364 | ) | (7 | ) | (2,992 | ) | — | (68,562 | ) | (71,561 | ) | |||||||||||
Cash dividends declared and paid | — | — | — | — | (17,032 | ) | (17,032 | ) | ||||||||||||||
Comprehensive income (loss) | — | — | — | 5,286 | 53,980 | 59,266 | ||||||||||||||||
Balance at April 2, 2016 | 51,206,395 | $ | 512 | $ | — | $ | (31,081 | ) | $ | 879,286 | $ | 848,717 |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Fiscal quarter ended | |||||||
April 2, 2016 | April 4, 2015 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 53,980 | $ | 49,792 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | 17,177 | 14,875 | |||||
Amortization of tradenames | 995 | 2,325 | |||||
Accretion of contingent consideration | — | 483 | |||||
Amortization of debt issuance costs | 361 | 280 | |||||
Non-cash stock-based compensation expense | 4,556 | 4,740 | |||||
Unrealized foreign currency exchange loss, net | 3,780 | 1,652 | |||||
Income tax benefit from stock-based compensation | (3,144 | ) | (5,771 | ) | |||
Loss on disposal of property, plant, and equipment | 192 | 52 | |||||
Deferred income taxes | 2,226 | 2,207 | |||||
Effect of changes in operating assets and liabilities: | |||||||
Accounts receivable, net | 15,247 | (11,402 | ) | ||||
Finished goods inventories | 96,056 | 83,349 | |||||
Prepaid expenses and other assets | (576 | ) | (472 | ) | |||
Accounts payable and other liabilities | (62,568 | ) | (54,886 | ) | |||
Net cash provided by operating activities | 128,282 | 87,224 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (25,552 | ) | (20,760 | ) | |||
Proceeds from sale of property, plant, and equipment | — | 76 | |||||
Net cash used in investing activities | (25,552 | ) | (20,684 | ) | |||
Cash flows from financing activities: | |||||||
Borrowings under secured revolving credit facility | — | 20,349 | |||||
Payments on secured revolving credit facility | — | (20,000 | ) | ||||
Repurchase of common stock | (71,561 | ) | (14,120 | ) | |||
Dividends paid | (17,032 | ) | (11,597 | ) | |||
Income tax benefit from stock-based compensation | 3,144 | 5,771 | |||||
Withholdings from vesting of restricted stock | (8,454 | ) | (12,331 | ) | |||
Proceeds from exercise of stock options | 3,747 | 2,768 | |||||
Net cash used in financing activities | (90,156 | ) | (29,160 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | 1,358 | (618 | ) | ||||
Net increase in cash and cash equivalents | 13,932 | 36,762 | |||||
Cash and cash equivalents, beginning of period | 381,209 | 340,638 | |||||
Cash and cash equivalents, end of period | $ | 395,141 | $ | 377,400 |
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 April 2, 2016, the Company operated 610 Carter’s stores in the United States, 251 OshKosh stores in the United States, and 149 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 ended April 2, 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 in the fiscal quarter ended April 2, 2016.
Adoption of New Accounting Pronouncements During the Fiscal Quarter Ended April 2, 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 was not material to 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 adoption of this guidance was 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) | April 2, 2016 | January 2, 2016 | April 4, 2015 | ||||||||
Cumulative foreign currency translation adjustments | $ | (24,300 | ) | $ | (29,586 | ) | $ | (21,391 | ) | ||
Pension and post-retirement liability adjustments | (6,781 | ) | (6,781 | ) | (7,640 | ) | |||||
Total accumulated other comprehensive loss | $ | (31,081 | ) | $ | (36,367 | ) | $ | (29,031 | ) |
Changes in accumulated other comprehensive loss consisted of additional gains of $5.3 million and additional losses of $6.0 million for foreign currency translation adjustments for the first quarters of fiscal 2016 and fiscal 2015, respectively. During the first quarters of fiscal 2016 and fiscal 2015, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.
NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS
The Company's goodwill and other intangible assets were as follows:
April 2, 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 | ||||||||||||
Bonnie Togs goodwill | Indefinite | 40,668 | — | 40,668 | 38,304 | — | 38,304 | ||||||||||||||||||
Total goodwill | $ | 177,238 | $ | — | $ | 177,238 | $ | 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 | 42,019 | 37,899 | 4,120 | 41,992 | 36,877 | 5,115 | ||||||||||||||||||
Total tradenames | $ | 347,752 | $ | 37,899 | $ | 309,853 | $ | 347,725 | $ | 36,877 | $ | 310,848 | |||||||||||||
Non-compete agreements | 4 years | 211 | 211 | — | 199 | 199 | — | ||||||||||||||||||
Total tradenames and other intangibles, net | $ | 347,963 | $ | 38,110 | $ | 309,853 | $ | 347,924 | $ | 37,076 | $ | 310,848 |
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
April 4, 2015 | |||||||||||||
(dollars in thousands) | Weighted-average useful life | Gross amount | Accumulated amortization | Net amount | |||||||||
Carter's goodwill | Indefinite | $ | 136,570 | $ | — | $ | 136,570 | ||||||
Bonnie Togs goodwill | Indefinite | 42,289 | — | 42,289 | |||||||||
Total goodwill | $ | 178,859 | $ | — | $ | 178,859 | |||||||
Carter's tradename | Indefinite | $ | 220,233 | $ | — | $ | 220,233 | ||||||
OshKosh tradename | Indefinite | 85,500 | — | 85,500 | |||||||||
Other tradenames | 2-20 years | 42,037 | 32,830 | 9,207 | |||||||||
Total tradenames | $ | 347,770 | $ | 32,830 | $ | 314,940 | |||||||
Non-compete agreements | 4 years | 220 | 205 | 15 | |||||||||
Total tradenames and other intangibles, net | $ | 347,990 | $ | 33,035 | $ | 314,955 |
The changes in the carrying value of Bonnie Togs goodwill between the comparative periods 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 $1.0 million and $2.3 million in amortization expense for the fiscal quarters ended April 2, 2016 and April 4, 2015, respectively. At April 2, 2016, the estimated future amortization expense for these assets is approximately $0.9 million for the remainder of fiscal 2016, $0.2 million for fiscal 2017, $0.2 million for each of fiscal year 2018, 2019 and 2020, and $2.5 million thereafter.
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 amounts remaining under previous authorizations. The total remaining capacity under the outstanding repurchase authorizations as of April 2, 2016 was approximately $503.3 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 | |||||||
April 2, 2016 | April 4, 2015 | ||||||
Number of shares repurchased | 722,364 | 157,900 | |||||
Aggregate cost of shares repurchased - in thousands $ | $ | 71,561 | $ | 14,120 | |||
Average price per share | $ | 99.07 | $ | 89.43 |
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 first quarters of fiscal 2016 and fiscal 2015, the Company paid cash dividends per share of $0.33 and $0.22, 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.
NOTE 6 – LONG-TERM DEBT
Long-term debt consisted of the following:
(dollars in thousands) | April 2, 2016 | January 2, 2016 | April 4, 2015 | ||||||||
Senior notes at amounts repayable | $ | 400,000 | $ | 400,000 | $ | 400,000 | |||||
Less unamortized issuance-related costs for senior notes | (5,250 | ) | (5,459 | ) | (6,076 | ) | |||||
Senior notes, net | 394,750 | 394,541 | 393,924 | ||||||||
Secured revolving credit facility | 185,569 | 184,431 | 186,349 | ||||||||
Total long-term debt, net | $ | 580,319 | $ | 578,972 | $ | 580,273 |
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 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 September 16, 2020.
As of April 2, 2016, the Company had approximately $185.6 million in outstanding borrowings under its secured revolving credit facility, exclusive of $4.9 million of outstanding letters of credit. As of April 2, 2016, there was approximately $309.6 million available for future borrowing.
As of April 2, 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
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 April 2, 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 1.80% on that date, and Canadian dollar borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) plus the applicable base rate, which was 2.24% on that date.
As disclosed in the Company's most recent Annual Report on Form 10-K for the fiscal year ended January 2, 2016, the Company's secured revolving credit facility contains covenants, including affirmative and financial covenants. As of April 2, 2016, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.
Senior Notes
As of April 2, 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 $5.3 million, $5.5 million, and $6.1 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 April 2, 2016, January 2, 2016, and April 4, 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 | |||||||
(dollars in thousands) | April 2, 2016 | April 4, 2015 | |||||
Stock options | $ | 1,296 | $ | 1,324 | |||
Restricted stock: | |||||||
Time-based awards | 2,145 | 2,083 | |||||
Performance-based awards | 1,115 | 1,333 | |||||
Total | $ | 4,556 | $ | 4,740 |
On February 16, 2016, the Company's Board of Directors approved the issuance of the following new awards to certain key employees under the Company's existing stock-based compensation plan, subject to vesting: 204,100 stock options with an exercise price of $90.66 each; 116,644 shares of time-based restricted stock awards with a grant-date fair value of $90.66 each; and 53,070 shares of performance-based restricted stock awards with a grant-date fair value of $90.66 each.
During the first quarter of fiscal 2016, a total of 199,937 restricted stock awards (time- and performance-based) vested with a weighted-average grant-date fair value of $60.23 each. During the first quarter of fiscal 2015, a total of 331,163 restricted stock awards (time- and performance-based) vested with a weighted average grant-date fair value of $41.16 each.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 (benefit) cost included in the statement of operations was comprised of:
Fiscal quarter ended | |||||||
(dollars in thousands) | April 2, 2016 | April 4, 2015 | |||||
Interest cost | $ | 629 | $ | 623 | |||
Expected return on plan assets | (676 | ) | (785 | ) | |||
Recognized actuarial loss | 145 | 161 | |||||
Net periodic pension (benefit) cost | $ | 98 | $ | (1 | ) |
POST-RETIREMENT LIFE AND MEDICAL PLAN
The components of post-retirement benefit expense charged to the statement of operations were as follows:
Fiscal quarter ended | |||||||
(dollars in thousands) | April 2, 2016 | April 4, 2015 | |||||
Service cost – benefits attributed to service during the period | $ | 31 | $ | 32 | |||
Interest cost on accumulated post-retirement benefit obligation | 44 | 45 | |||||
Amortization net actuarial gain | (49 | ) | (48 | ) | |||
Total net periodic post-retirement benefit cost | $ | 26 | $ | 29 |
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. The Company does not expect the use of the alternative measurement date of December 31, 2016 to have a material impact on the Company's results of operations, financial condition, or cash flows.
NOTE 9 – INCOME TAXES
In the first quarter of fiscal 2015, the Internal Revenue Service completed an income tax audit for fiscal 2011- 2013. As a result of the settlement of this audit and an ongoing state income tax audit, the Company recognized prior-year income tax benefits of
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
approximately $1.8 million in the first quarter of fiscal 2015. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2012.
As of April 2, 2016, the Company had gross unrecognized income tax benefits of approximately $9.2 million, of which $6.4 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 April 2, 2016 are approximately $1.0 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 quarters ended April 2, 2016 and April 4, 2015, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.7 million, $0.8 million, and $0.8 million of interest accrued on uncertain tax positions as of April 2, 2016, January 2, 2016, and April 4, 2015, respectively.
NOTE 10 – FAIR VALUE MEASUREMENTS
April 2, 2016 | January 2, 2016 | April 4, 2015 | |||||||||||||||||||||||||||||||||||
(dollars in millions) | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||||||||||
Investments | $ | 8.2 | $ | — | $ | — | $ | 8.6 | $ | — | $ | — | $ | 7.9 | $ | — | $ | — | |||||||||||||||||||
Foreign exchange forward contracts (1) | $ | — | $ | 0.1 | $ | — | $ | — | $ | 2.1 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||||||||
Foreign exchange forward contracts (2) | $ | — | $ | 2.1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||
Contingent consideration | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 7.7 |
(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.
Losses on the investments in marketable securities were $0.4 million for the fiscal quarter ended April 2, 2016. Gains on the investments in marketable securities were $0.2 million for the fiscal quarter ended April 4, 2015. These amounts are included in Other expense, net on the Company's consolidated statement of operations included in this Quarterly Report on Form 10-Q.
FOREIGN CURRENCY 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 April 2, 2016, the notional value of the open foreign currency forward contracts was $44.0 million.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company recorded realized gains of approximately $0.8 million for contracts settled during the first quarter of fiscal 2016. These amounts are included in Other expense, net on the Company's consolidated statement of operations. The Company did not apply hedge accounting treatment on any of these foreign currency contracts.
The Company recorded approximately $2.0 million of unrealized losses on open contracts that were marked to market as of April 2, 2016.
During the first quarter of fiscal 2015, the Company had no foreign exchange contracts.
CONTINGENT CONSIDERATION
The following table summarizes the changes in the contingent consideration liability during the first quarter of fiscal 2015 related to the Company's 2011 acquisition of Bonnie Togs:
Fiscal quarter ended | |||
(dollars in thousands) | April 4, 2015 | ||
Balance at the beginning of period | $ | 7,711 | |
Accretion | 483 | ||
Foreign currency translation adjustment | (533 | ) | |
Balance at the end of period | $ | 7,661 |
At April 2, 2016 and January 2, 2016, the Company had no remaining contingent consideration liability.
BORROWINGS
As of April 2, 2016, the fair value of the Company's $185.6 million in outstanding borrowings under its secured revolving credit facility approximated carrying value.
The fair value of the Company's senior notes at April 2, 2016 was approximately $413 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 | |||||||
April 2, 2016 | April 4, 2015 | ||||||
Weighted-average number of common and common equivalent shares outstanding: | |||||||
Basic number of common shares outstanding | 51,176,987 | 52,119,215 | |||||
Dilutive effect of equity awards | 467,103 | 495,386 | |||||
Diluted number of common and common equivalent shares outstanding | 51,644,090 | 52,614,601 | |||||
Basic net income per common share (in thousands, except per share data): | |||||||
Net income | $ | 53,980 | $ | 49,792 | |||
Income allocated to participating securities | (444 | ) | (560 | ) | |||
Net income available to common shareholders | $ | 53,536 | $ | 49,232 | |||
Basic net income per common share | $ | 1.05 | $ | 0.94 | |||
Diluted net income per common share (in thousands, except per share data): | |||||||
Net income | $ | 53,980 | $ | 49,792 | |||
Income allocated to participating securities | (441 | ) | (556 | ) | |||
Net income available to common shareholders | $ | 53,539 | $ | 49,236 | |||
Diluted net income per common share | $ | 1.04 | $ | 0.94 | |||
Anti-dilutive shares excluded from dilutive earnings per share computation | 386,030 | 183,400 |
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) | April 2, 2016 | January 2, 2016 | April 4, 2015 | ||||||||
Accrued bonuses and incentive compensation | $ | 4,148 | $ | 17,934 | $ | 4,396 | |||||
Income taxes payable | 19,195 | 3,802 | 18,410 | ||||||||
Accrued customer loyalty program reserve | 10,276 | 7,037 | — | ||||||||
Accrued salaries and wages | 10,284 | 3,377 | 8,111 | ||||||||
Unredeemed gift cards | 9,996 | 10,940 | 9,882 | ||||||||
Accrued employee benefits | 8,157 | 19,751 | 7,498 | ||||||||
Accrued and deferred rent | 13,409 | 12,590 | 12,480 |
Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:
(dollars in thousands) | April 2, 2016 | January 2, 2016 | April 4, 2015 | ||||||||
Deferred lease incentives | $ | 72,086 | $ | 70,060 | $ | 68,652 |
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 | |||||||||||||
(dollars in thousands) | April 2, 2016 | % of Total Net Sales | April 4, 2015 | % of Total Net Sales | |||||||||
Net sales: | |||||||||||||
Carter’s Wholesale | $ | 280,140 | 38.7 | % | $ | 269,315 | 39.3 | % | |||||
Carter’s Retail (a) | 272,323 | 37.6 | % | 257,727 | 37.7 | % | |||||||
Total Carter’s (U.S.) | 552,463 | 76.3 | % | 527,042 | 77.0 | % | |||||||
OshKosh Retail (a) | 81,766 | 11.3 | % | 73,042 | 10.7 | % | |||||||
OshKosh Wholesale | 11,914 | 1.6 | % | 16,051 | 2.3 | % | |||||||
Total OshKosh (U.S.) | 93,680 | 12.9 | % | 89,093 | 13.0 | % | |||||||
International (b) | 77,942 | 10.8 | % | 68,629 | 10.0 | % | |||||||
Total net sales | $ | 724,085 | 100.0 | % | $ | 684,764 | 100.0 | % | |||||
Operating income (loss): | % of Segment Net Sales | % of Segment Net Sales | |||||||||||
Carter’s Wholesale | $ | 66,205 | 23.6 | % | $ | 57,931 | 21.5 | % | |||||
Carter’s Retail (a) | 41,254 | 15.1 | % | 44,493 | 17.3 | % | |||||||
Total Carter’s (U.S.) | 107,459 | 19.5 | % | 102,424 | 19.4 | % | |||||||
OshKosh Retail (a) | (1,785 | ) | (2.2 | )% | (960 | ) | (1.3 | )% | |||||
OshKosh Wholesale | 2,206 | 18.5 | % | 2,979 | 18.6 | % | |||||||
Total OshKosh (U.S.) | 421 | 0.4 | % | 2,019 | 2.3 | % | |||||||
International (b) (c) | 8,441 | 10.8 | % | 6,511 | 9.5 | % | |||||||
Corporate expenses (d) (e) | (23,313 | ) | (26,449 | ) | |||||||||
Total operating income | $ | 93,008 | 12.8 | % | $ | 84,505 | 12.3 | % |
(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 $0.5 million for the fiscal quarter ended April 4, 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 tradenames of $1.0 million for the fiscal quarter ended April 2, 2016, and $2.3 million for the fiscal quarter ended April 4, 2015. |
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 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
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
application. The Company is currently evaluating the impact of adopting this guidance on its consolidated financial position, results of operations, and cash flows. 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.
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 the subsequent measurement 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. This 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 to be material to 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 may be applied on a full retrospective basis or 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
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Arrangements ("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
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Company is still evaluating the potential impacts of ASU 2016-09 on its consolidated financial statements.
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.
18
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Balance Sheets (unaudited)
As of April 2, 2016
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 331,672 | $ | 19,802 | $ | 43,667 | $ | — | $ | 395,141 | |||||||||||
Accounts receivable, net | — | 166,843 | 20,212 | 5,514 | — | 192,569 | |||||||||||||||||
Intercompany receivable | — | 67,203 | 120,901 | 5,157 | (193,261 | ) | — | ||||||||||||||||
Finished goods inventories | — | 189,225 | 186,901 | 40,421 | (40,048 | ) | 376,499 | ||||||||||||||||
Prepaid expenses and other current assets | — | 17,879 | 14,273 | 4,639 | — | 36,791 | |||||||||||||||||
Deferred income taxes | — | 14,766 | 14,696 | 2,379 | — | 31,841 | |||||||||||||||||
Total current assets | — | 787,588 | 376,785 | 101,777 | (233,309 | ) | 1,032,841 | ||||||||||||||||
Property, plant, and equipment, net | — | 162,110 | 184,548 | 30,615 | — | 377,273 | |||||||||||||||||
Goodwill | — | 136,570 | — | 40,668 | — | 177,238 | |||||||||||||||||
Tradenames and other intangibles, net | — | 224,353 | 85,500 | — | — | 309,853 | |||||||||||||||||
Other assets | — | 14,164 | 795 | 299 | — | 15,258 | |||||||||||||||||
Intercompany long-term receivable | — | — | 294,017 | — | (294,017 | ) | — | ||||||||||||||||
Intercompany long-term note receivable | — | 100,000 | — | — | (100,000 | ) | — | ||||||||||||||||
Investment in subsidiaries | 848,717 | 676,350 | 106,542 | — | (1,631,609 | ) | — | ||||||||||||||||
Total assets | $ | 848,717 | $ | 2,101,135 | $ | 1,048,187 | $ | 173,359 | $ | (2,258,935 | ) | $ | 1,912,463 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | — | $ | 58,626 | $ | 19,554 | $ | 12,207 | $ | — | $ | 90,387 | |||||||||||
Intercompany payables | — | 124,763 | 65,188 | 3,310 | (193,261 | ) | — | ||||||||||||||||
Other current liabilities | — | 23,801 | 68,514 | 10,179 | — | 102,494 | |||||||||||||||||
Total current liabilities | — | 207,190 | 153,256 | 25,696 | (193,261 | ) | 192,881 | ||||||||||||||||
Long-term debt, net | — | 560,751 | — | 19,568 | — | 580,319 | |||||||||||||||||
Deferred income taxes | — | 83,925 | 44,890 | — | — | 128,815 | |||||||||||||||||
Intercompany long-term liability | — | 294,017 | — | — | (294,017 | ) | — | ||||||||||||||||
Intercompany long-term note payable | — | — | 100,000 | — | (100,000 | ) | — | ||||||||||||||||
Other long-term liabilities | — | 66,487 | 83,027 | 12,217 | — | 161,731 | |||||||||||||||||
Stockholders' equity | 848,717 | 888,765 | 667,014 | 115,878 | (1,671,657 | ) | 848,717 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 848,717 | $ | 2,101,135 | $ | 1,048,187 | $ | 173,359 | $ | (2,258,935 | ) | $ | 1,912,463 |
19
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 and other intangibles, 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 |
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of April 4, 2015
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||
ASSETS | |||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 338,709 | $ | 17,505 | $ | 21,186 | $ | — | $ | 377,400 | |||||||||||
Accounts receivable, net | — | 167,196 | 22,250 | 6,147 | — | 195,593 | |||||||||||||||||
Intercompany receivable | — | 62,791 | 84,908 | 728 | (148,427 | ) | — | ||||||||||||||||
Finished goods inventories | — | 173,892 | 179,932 | 40,563 | (36,373 | ) | 358,014 | ||||||||||||||||
Prepaid expenses and other current assets | — | 12,505 | 13,369 | 8,020 | — | 33,894 | |||||||||||||||||
Deferred income taxes | — | 18,673 | 12,356 | 1,813 | — | 32,842 | |||||||||||||||||
Total current assets | — | 773,766 | 330,320 | 78,457 | (184,800 | ) | 997,743 | ||||||||||||||||
Property, plant, and equipment, net | — | 157,206 | 156,962 | 27,490 | — | 341,658 | |||||||||||||||||
Goodwill | — | 136,570 | — | 42,289 | — | 178,859 | |||||||||||||||||
Tradenames and other intangibles, net | — | 229,440 | 85,500 | 15 | — | 314,955 | |||||||||||||||||
Other assets | — | 13,046 | 852 | — | — | 13,898 | |||||||||||||||||
Intercompany long-term receivable | — | — | 279,897 | — | (279,897 | ) | — | ||||||||||||||||
Intercompany long-term note receivable | — | 100,000 | — | — | (100,000 | ) | — | ||||||||||||||||
Investment in subsidiaries | 805,713 | 591,454 | 10,173 | — | (1,407,340 | ) | — | ||||||||||||||||
Total assets | $ | 805,713 | $ | 2,001,482 | $ | 863,704 | $ | 148,251 | $ | (1,972,037 | ) | $ | 1,847,113 | ||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||
Accounts payable | $ | — | $ | 61,013 | $ | 22,937 | $ | 10,183 | $ | — | $ | 94,133 | |||||||||||
Intercompany payables | — | 84,259 | 60,851 | 3,316 | (148,427 | ) | — | ||||||||||||||||
Other current liabilities | — | 25,078 | 54,833 | 13,492 | — | 93,403 | |||||||||||||||||
Total current liabilities | — | 170,350 | 138,621 | 26,991 | (148,427 | ) | 187,536 | ||||||||||||||||
Long-term debt, net | — | 559,928 | — | 20,345 | — | 580,273 | |||||||||||||||||
Deferred income taxes | — | 80,185 | 40,089 | — | — | 120,274 | |||||||||||||||||
Intercompany long-term liability | — | 279,897 | — | — | (279,897 | ) | — | ||||||||||||||||
Intercompany long-term note payable | — | — | 100,000 | — | (100,000 | ) | — | ||||||||||||||||
Other long-term liabilities | — | 69,035 | 72,026 | 12,256 | — | 153,317 | |||||||||||||||||
Stockholders' equity | 805,713 | 842,087 | 512,968 | 88,659 | (1,443,713 | ) | 805,713 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 805,713 | $ | 2,001,482 | $ | 863,704 | $ | 148,251 | $ | (1,972,037 | ) | $ | 1,847,113 |
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Operations (unaudited)
For the fiscal quarter ended April 2, 2016
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 451,196 | $ | 381,280 | $ | 55,830 | $ | (164,221 | ) | $ | 724,085 | ||||||||||
Cost of goods sold | — | 321,100 | 211,028 | 33,091 | (152,063 | ) | 413,156 | ||||||||||||||||
Gross profit | — | 130,096 | 170,252 | 22,739 | (12,158 | ) | 310,929 | ||||||||||||||||
Selling, general, and administrative expenses | — | 42,587 | 172,142 | 23,377 | (9,110 | ) | 228,996 | ||||||||||||||||
Royalty income | — | (9,072 | ) | (4,211 | ) | — | 2,208 | (11,075 | ) | ||||||||||||||
Operating income (loss) | — | 96,581 | 2,321 | (638 | ) | (5,256 | ) | 93,008 | |||||||||||||||
Interest expense | — | 6,608 | 845 | 103 | (817 | ) | 6,739 | ||||||||||||||||
Interest income | — | (985 | ) | — | (39 | ) | 817 | (207 | ) | ||||||||||||||
(Income) loss in subsidiaries | (53,980 | ) | 6,496 | 3,340 | — | 44,144 | — | ||||||||||||||||
Other expense (income), net | — | 200 | (214 | ) | 3,207 | — | 3,193 | ||||||||||||||||
Income (loss) before income taxes | 53,980 | 84,262 | (1,650 | ) | (3,909 | ) | (49,400 | ) | 83,283 | ||||||||||||||
Provision for income taxes | — | 25,026 | 4,846 | (569 | ) | — | 29,303 | ||||||||||||||||
Net income (loss) | $ | 53,980 | $ | 59,236 | $ | (6,496 | ) | $ | (3,340 | ) | $ | (49,400 | ) | $ | 53,980 |
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the fiscal quarter ended April 4, 2015
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | ||||||||||||||||||
Net sales | $ | — | $ | 435,286 | $ | 359,396 | $ | 47,120 | $ | (157,038 | ) | $ | 684,764 | ||||||||||
Cost of goods sold | — | 298,211 | 222,915 | 30,479 | (150,893 | ) | 400,712 | ||||||||||||||||
Gross profit | — | 137,075 | 136,481 | 16,641 | (6,145 | ) | 284,052 | ||||||||||||||||
Selling, general, and administrative expenses | — | 42,249 | 157,263 | 19,831 | (8,160 | ) | 211,183 | ||||||||||||||||
Royalty income | — | (9,039 | ) | (4,711 | ) | — | 2,114 | (11,636 | ) | ||||||||||||||
Operating income (loss) | — | 103,865 | (16,071 | ) | (3,190 | ) | (99 | ) | 84,505 | ||||||||||||||
Interest expense | — | 6,662 | 1,343 | 115 | (1,428 | ) | 6,692 | ||||||||||||||||
Interest income | — | (1,557 | ) | — | (8 | ) | 1,428 | (137 | ) | ||||||||||||||
(Income) loss in subsidiaries | (49,792 | ) | 23,394 | (520 | ) | — | 26,918 | — | |||||||||||||||
Other (income) expense, net | — | (146 | ) | 137 | 1,971 | — | 1,962 | ||||||||||||||||
Income (loss) before income taxes | 49,792 | 75,512 | (17,031 | ) | (5,268 | ) | (27,017 | ) | 75,988 | ||||||||||||||
Provision for income taxes | — | 25,621 | 1,980 | (1,405 | ) | — | 26,196 | ||||||||||||||||
Net income (loss) | $ | 49,792 | $ | 49,891 | $ | (19,011 | ) | $ | (3,863 | ) | $ | (27,017 | ) | $ | 49,792 |
23
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Comprehensive Income (unaudited)
For the fiscal quarter ended April 2, 2016
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||||||
Net income (loss) | $ | 53,980 | $ | 59,236 | $ | (6,496 | ) | $ | (3,340 | ) | $ | (49,400 | ) | $ | 53,980 | |||||||||
Foreign currency translation adjustments | 5,286 | 5,286 | 5,286 | 5,286 | (15,858 | ) | 5,286 | |||||||||||||||||
Comprehensive income (loss) | $ | 59,266 | $ | 64,522 | $ | (1,210 | ) | $ | 1,946 | $ | (65,258 | ) | $ | 59,266 |
For the fiscal quarter ended April 4, 2015
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||||||
Net income (loss) | $ | 49,792 | $ | 49,891 | $ | (19,011 | ) | $ | (3,863 | ) | $ | (27,017 | ) | $ | 49,792 | |||||||||
Foreign currency translation adjustments | (5,994 | ) | (5,994 | ) | 8 | (5,994 | ) | 11,980 | (5,994 | ) | ||||||||||||||
Comprehensive income (loss) | $ | 43,798 | $ | 43,897 | $ | (19,003 | ) | $ | (9,857 | ) | $ | (15,037 | ) | $ | 43,798 |
24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Cash Flows (unaudited)
For the fiscal quarter ended April 2, 2016
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||||||
Cash flows provided by operating activities: | $ | — | $ | 117,433 | $ | 8,504 | $ | 2,345 | $ | — | $ | 128,282 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Capital expenditures | — | (8,825 | ) | (15,433 | ) | (1,294 | ) | — | (25,552 | ) | ||||||||||||||
Intercompany investing activity | 93,300 | (3,250 | ) | (1,457 | ) | — | (88,593 | ) | — | |||||||||||||||
Net cash provided by (used in) investing activities | 93,300 | (12,075 | ) | (16,890 | ) | (1,294 | ) | (88,593 | ) | (25,552 | ) | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Intercompany financing activity | — | (101,144 | ) | 12,079 | 472 | 88,593 | — | |||||||||||||||||
Dividends paid | (17,032 | ) | — | — | — | — | (17,032 | ) | ||||||||||||||||
Repurchase of common stock | (71,561 | ) | — | — | — | — | (71,561 | ) | ||||||||||||||||
Income tax benefit from stock-based compensation | — | 1,687 | 1,457 | — | — | 3,144 | ||||||||||||||||||
Withholdings from vesting of restricted stock | (8,454 | ) | — | — | — | — | (8,454 | ) | ||||||||||||||||
Proceeds from exercise of stock options | 3,747 | — | — | — | — | 3,747 | ||||||||||||||||||
Net cash (used in) provided by financing activities | (93,300 | ) | (99,457 | ) | 13,536 | 472 | 88,593 | (90,156 | ) | |||||||||||||||
Effect of exchange rate changes on cash | — | — | — | 1,358 | — | 1,358 | ||||||||||||||||||
Net increase in cash and cash equivalents | — | 5,901 | 5,150 | 2,881 | — | 13,932 | ||||||||||||||||||
Cash and cash equivalents, beginning of period | — | 325,771 | 14,652 | 40,786 | — | 381,209 | ||||||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 331,672 | $ | 19,802 | $ | 43,667 | $ | — | $ | 395,141 |
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the fiscal quarter ended April 4, 2015
(dollars in thousands)
Parent | Subsidiary Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidating Adjustments | Consolidated | |||||||||||||||||||
Cash flows provided by (used in) operating activities: | $ | — | $ | 78,186 | $ | 3,969 | $ | 5,069 | $ | — | $ | 87,224 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||
Capital expenditures | — | (5,517 | ) | (12,701 | ) | (2,542 | ) | — | (20,760 | ) | ||||||||||||||
Intercompany investing activity | 35,280 | (8,332 | ) | (1,232 | ) | — | (25,716 | ) | — | |||||||||||||||
Proceeds from repayment of intercompany loan | — | 20,000 | — | — | (20,000 | ) | — | |||||||||||||||||
Proceeds from sale of property, plant and equipment | — | 69 | — | 7 | — | 76 | ||||||||||||||||||
Net cash provided by (used in) investing activities | 35,280 | 6,220 | (13,933 | ) | (2,535 | ) | (45,716 | ) | (20,684 | ) | ||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||
Intercompany financing activity | — | (41,315 | ) | 15,796 | (197 | ) | 25,716 | — | ||||||||||||||||
Repayment of intercompany loan | — | — | — | (20,000 | ) | 20,000 | — | |||||||||||||||||
Borrowings under secured revolving credit facility | — | — | — | 20,349 | — | 20,349 | ||||||||||||||||||
Payment on secured revolving credit facility | — | (20,000 | ) | — | — | — | (20,000 | ) | ||||||||||||||||
Dividends Paid | (11,597 | ) | — | — | — | — | (11,597 | ) | ||||||||||||||||
Income tax benefit from stock-based compensation | — | 4,540 | 1,231 | — | — | 5,771 | ||||||||||||||||||
Repurchase of common stock | (14,120 | ) | — | — | — | — | (14,120 | ) | ||||||||||||||||
Withholdings from vesting of restricted stock | (12,331 | ) | — | — | — | — | (12,331 | ) | ||||||||||||||||
Proceeds from exercise of stock options | 2,768 | — | — | — | — | 2,768 | ||||||||||||||||||
Net cash (used in) provided by financing activities | (35,280 | ) | (56,775 | ) | 17,027 | 152 | 45,716 | (29,160 | ) | |||||||||||||||
Effect of exchange rate changes on cash | — | — | — | (618 | ) | — | (618 | ) | ||||||||||||||||
Net increase in cash and cash equivalents | — | 27,631 | 7,063 | 2,068 | — | 36,762 | ||||||||||||||||||
Cash and cash equivalents, beginning of period | — | 311,078 | 10,442 | 19,118 | — | 340,638 | ||||||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 338,709 | $ | 17,505 | $ | 21,186 | $ | — | $ | 377,400 |
26
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 second 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 12, 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.
27
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 | |||||
April 2, 2016 | April 4, 2015 | ||||
Net sales | |||||
Carter’s Wholesale | 38.7 | % | 39.3 | % | |
Carter’s Retail | 37.6 | % | 37.7 | % | |
Total Carter’s (U.S.) | 76.3 | % | 77.0 | % | |
OshKosh Retail | 11.3 | % | 10.7 | % | |
OshKosh Wholesale | 1.6 | % | 2.3 | % | |
Total OshKosh (U.S.) | 12.9 | % | 13.0 | % | |
International | 10.8 | % | 10.0 | % | |
Consolidated net sales | 100.0 | % | 100.0 | % | |
Cost of goods sold | 57.1 | % | 58.5 | % | |
Gross margin | 42.9 | % | 41.5 | % | |
Selling, general, and administrative expenses | 31.6 | % | 30.8 | % | |
Royalty Income | (1.5 | )% | (1.7 | )% | |
Operating income | 12.8 | % | 12.3 | % | |
Interest expense | 0.9 | % | 1.0 | % | |
Interest income | n/m | n/m | |||
Other expense, net | 0.4 | % | 0.3 | % | |
Income before income taxes | 11.5 | % | 11.1 | % | |
Provision for income taxes | 4.0 | % | 3.8 | % | |
Net income | 7.5 | % | 7.3 | % | |
Number of retail stores at end of period: | |||||
Carter’s - U.S. | 610 | 549 | |||
OshKosh - U.S. | 251 | 208 | |||
International | 149 | 127 | |||
Total retail stores | 1,010 | 884 |
n/m - rounds to less than 0.1%, therefore not material.
Note: Results may not be additive due to rounding.
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 April 2, 2016 and April 4, 2015, the U.S. store count data presented in the preceding table included 107 and 60 "side-by-side" locations for Carter's and OshKosh, respectively.
28
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 | ||||||
First quarter of fiscal 2016: | Openings | 16 | 11 | 2 | 29 | ||||
Closings | — | 1 | — | 1 | |||||
Approximate projections for fiscal 2016: | Openings | 60 | 50 | 20 | 130 | ||||
Closings | 4 | 5 | 1 | 10 |
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.
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 remodeled stores and certain relocated stores. A store or eCommerce website becomes comparable following 13 consecutive full months of operations. 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.
FISCAL QUARTER ENDED APRIL 2, 2016 COMPARED TO FISCAL QUARTER ENDED APRIL 4, 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 First Fiscal Quarter from 2015 to 2016 | ||||
Increase (Decrease) | ||||
Carter's Retail | OshKosh Retail | |||
Stores | (4.0)% | (1.9)% | ||
eCommerce | +15.2% | +19.8% | ||
Total Retail | (0.1)% | +2.7% |
The decrease in Carter's Retail comparable store sales during the first quarter of fiscal 2016 as compared to the first quarter of fiscal 2015 was primarily due to a decrease in the number of transactions, partially offset by higher average price per unit. The decrease in OshKosh Retail comparable store sales during the first quarter of fiscal 2016 as compared to the first quarter of fiscal 2015 was primarily due to a decrease in the number of transactions and lower average price per unit.
During the first quarter of fiscal 2016, we believe that total retail comparable sales were negatively impacted by lower demand from international tourists shopping in our U.S. stores and eCommerce websites, likely resulting from the strength of the U.S. dollar relative to other global currencies.
The increases in eCommerce comparable store sales during the first quarter of fiscal 2016 as compared to the first quarter of fiscal 2015 were primarily due to increases in the number of transactions.
CONSOLIDATED NET SALES
29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In the first quarter of fiscal 2016, consolidated net sales increased $39.3 million, or 5.7%, to $724.1 million from $684.8 million in the first quarter of fiscal 2015. The increase reflected sales growth in all of our segments except for the OshKosh Wholesale segment, as presented below. Changes in foreign currency exchange rates in the first quarter of fiscal 2016, as compared to the first quarter of fiscal 2015, negatively impacted our consolidated net sales by approximately $4.5 million, or 0.7%.
Net sales by segment, and each segment's percentage of consolidated net sales, were as follows:
Fiscal quarter ended | |||||||||||||
(dollars in thousands) | April 2, 2016 | % of Total | April 4, 2015 | % of Total | |||||||||
Net sales: | |||||||||||||
Carter’s Wholesale | $ | 280,140 | 38.7 | % | $ | 269,315 | 39.3 | % | |||||
Carter’s Retail | 272,323 | 37.6 | % | 257,727 | 37.7 | % | |||||||
Total Carter’s (U.S.) | 552,463 | 76.3 | % | 527,042 | 77.0 | % | |||||||
OshKosh Retail | 81,766 | 11.3 | % | 73,042 | 10.7 | % | |||||||
OshKosh Wholesale | 11,914 | 1.6 | % | 16,051 | 2.3 | % | |||||||
Total OshKosh (U.S.) | 93,680 | 12.9 | % | 89,093 | 13.0 | % | |||||||
International | 77,942 | 10.8 | % | 68,629 | 10.0 | % | |||||||
Total net sales | $ | 724,085 | 100.0 | % | $ | 684,764 | 100.0 | % |
CARTER'S WHOLESALE SALES (U.S.)
Carter's Wholesale segment net sales increased $10.8 million, or 4.0%, in the first quarter of fiscal 2016 to $280.1 million from $269.3 million in the first quarter of fiscal 2015. This 4.0% increase in net sales was primarily due to a 2.7% increase in the number of units shipped reflecting increased product demand, in part due to timing of orders, and a new playwear initiative. Additionally, the average price per unit increased by 1.3%, reflecting product mix.
CARTER'S RETAIL SALES (U.S.)
Carter's Retail segment net sales increased $14.6 million, or 5.7%, in the first quarter of fiscal 2016 to $272.3 million from $257.7 million in the first quarter of fiscal 2015. This increase in net sales primarily reflected a/an:
• | Increase of $15.8 million from new stores; |
• | Increase of $7.6 million from eCommerce sales; |
• | Decrease of $8.2 million in comparable store sales; and |
• | Decrease of $0.8 million due to the impact of store closings. |
OSHKOSH RETAIL SALES (U.S.)
OshKosh Retail segment net sales increased $8.7 million, or 11.9%, in the first quarter of fiscal 2016 to $81.8 million from $73.0 million in the first quarter of fiscal 2015. This increase in net sales primarily reflected a/an:
• | Increase of $8.4 million from new stores; |
• | Increase of $2.8 million from eCommerce sales; |
• | Decrease of $1.5 million due to the impact of store closings; and |
• | Decrease of $1.0 million in comparable store sales. |
OSHKOSH WHOLESALE SALES (U.S.)
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
OshKosh Wholesale segment net sales decreased $4.1 million, or 25.8%, in the first quarter of fiscal 2016 to $11.9 million from $16.1 million in the first quarter of fiscal 2015. This decrease was primarily due to a 26.8% decrease in the number of units shipped mainly due to lower seasonal bookings, partially offset by a 1.0% increase in the average price per unit.
INTERNATIONAL SALES
International segment net sales increased $9.3 million, or 13.6%, in the first quarter of fiscal 2016 to $77.9 million from $68.6 million in the first quarter of fiscal 2015. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, negatively impacted International segment net sales by approximately $4.5 million, or 6.6%, in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015.
The $9.3 million increase in net sales primarily reflected a/an:
• | Increase of $5.6 million from our Canadian retail stores; |
• | Increase of $3.3 million from eCommerce, primarily driven by the 2015 launch of our eCommerce website in China; |
• | Increase of $2.9 million from international wholesale locations, excluding Canada; and |
• | Decrease of $2.2 million in our Canada wholesale business primarily due to the Target Canada bankruptcy that occurred in early 2015. |
Compared to the first quarter of fiscal 2015, our Canadian total retail comparable sales increased 14.9% in the first quarter of fiscal 2016, primarily due to retail stores comparable sales growth of 12.8% and eCommerce comparable sales growth of 46.6%.
GROSS MARGIN AND GROSS PROFIT
Our consolidated gross margin increased from 41.5% in the first quarter of fiscal 2015 to 42.9% in the first quarter of fiscal 2016, primarily due to lower product costs and increased margin in our International segment.
Our consolidated gross profit increased $26.9 million, or 9.5%, to $310.9 million in the first quarter of fiscal 2016 from $284.1 million in the first quarter of fiscal 2015, primarily due to the increase in sales as previously discussed.
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 first quarter of fiscal 2016 increased $17.8 million, or 8.4%, to $229.0 million from $211.2 million in the first quarter of fiscal 2015. As a percentage of net sales, SG&A expenses increased from 30.8% in the first quarter of fiscal 2015 to 31.6% in the first quarter of fiscal 2016.
The increase in SG&A expenses, as a percentage of net sales, in the first quarter of fiscal 2016 primarily reflected a:
• | $15.2 million increase in expenses related to retail store operations, primarily due to new store openings; |
• | $3.0 million increase in expenses related to our domestic and international eCommerce operations; |
• | $2.2 million increase in expenses related to marketing and brand management; |
which were partially offset by a:
• | $1.8 million decrease in amortization expense, primarily for the H.W. Carter & Sons trademarks; |
• | $1.6 million decrease in insurance and other employee related benefits costs; |
• | $1.1 million decrease in legal, general management, and wholesale territory management expenses; |
• | $0.8 million decrease in provisions for accounts receivable; and |
• | $0.4 million decrease in performance-based compensation expenses. |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 first quarter of fiscal 2016 was approximately $11.1 million. This reflects a decrease of $0.6 million, or 4.8%, from $11.6 million in the first quarter of fiscal 2015, primarily due to the absence of favorable settlements in the first quarter of fiscal 2016.
OPERATING INCOME
Consolidated operating income increased $8.5 million, or 10.1%, to $93.0 million in the first quarter of fiscal 2016 from $84.5 million in the first quarter of fiscal 2015. Consolidated operating margin increased from 12.3% in the first quarter of fiscal 2015 to 12.8% in the first quarter of fiscal 2016. The table below summarizes the changes in each of our segments' operating results and unallocated corporate expenses between the fiscal periods indicated:
(dollars in thousands) | Carter's Wholesale | Carter's Retail | OshKosh Wholesale | OshKosh Retail | International | Corporate Expenses | Total | |||||||||||||||||||||
Operating income (loss) for first quarter of fiscal 2015 | $ | 57,931 | $ | 44,493 | $ | 2,979 | $ | (960 | ) | $ | 6,511 | $ | (26,449 | ) | $ | 84,505 | ||||||||||||
Favorable (unfavorable) change in the first quarter of fiscal 2016 | ||||||||||||||||||||||||||||
Gross profit | 7,516 | 10,383 | (1,227 | ) | 4,138 | 6,470 | (403 | ) | 26,877 | |||||||||||||||||||
Royalty income | (647 | ) | 229 | (165 | ) | (45 | ) | 67 | — | (561 | ) | |||||||||||||||||
SG&A expenses | 1,405 | (13,851 | ) | 619 | (4,918 | ) | (4,607 | ) | 3,539 | (17,813 | ) | |||||||||||||||||
Operating income (loss) for first quarter of fiscal 2016 | $ | 66,205 | $ | 41,254 | $ | 2,206 | $ | (1,785 | ) | $ | 8,441 | $ | (23,313 | ) | $ | 93,008 | ||||||||||||
The following table summarizes the operating margin for each of our five operating segments in the first quarter of fiscal 2016 and fiscal 2015, as well as the primary drivers of the change in operating margin between those two periods. Each driver is presented in terms of the difference in that driver's margin (based on net sales) between the first quarter of fiscal 2016 and the first quarter of fiscal 2015, in each case expressed in basis points ("bps").
(dollars in thousands) | Carter's Wholesale | Carter's Retail | OshKosh Wholesale | OshKosh Retail | International | ||||||||||
Operating margin for the first quarter of fiscal 2015 | 21.5 | % | 17.3 | % | 18.6 | % | (1.3 | )% | 9.5 | % | |||||
Favorable (unfavorable) bps change in the first quarter of fiscal 2016 | |||||||||||||||
Gross profit | 160 bps | 90 bps | (230) bps | — | 330 bps | ||||||||||
Royalty income | (30) bps | — | 380 bps | (10) bps | (20) bps | ||||||||||
SG&A expenses | 80 bps | (310) bps | (160) bps | (80) bps | (180) bps | ||||||||||
Operating margin for the first quarter of fiscal 2016 | 23.6 | % | 15.1 | % | 18.5 | % | (2.2 | )% | 10.8 | % | |||||
(a) | (b) | (c) | (d) | (e) |
(a) Carter's Wholesale segment operating income in the first quarter of fiscal 2016 increased $8.3 million, or 14.3%, to $66.2 million from $57.9 million in the first quarter of fiscal 2015. The segment's operating margin increased 210 bps from 21.5% in the first quarter of fiscal 2015 to 23.6% in the first quarter of fiscal 2016. The primary drivers of the change in operating margin were a:
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
• | 160 bps increase in gross profit due to favorable product costs and higher average price per unit, partially offset by higher inventory related charges; |
• | 80 bps decrease in SG&A expenses, primarily due to a: |
• | 40 bps decrease primarily in distribution expenses, driven primarily by efficiencies at our Braselton, Georgia distribution center; and |
• | 30 bps decrease in provisions for accounts receivable; and |
• | 30 bps decrease in royalty income. |
(b) Carter's Retail segment operating income decreased by $3.2 million, or 7.3%, to $41.3 million in the first quarter of fiscal 2016 from $44.5 million in the first quarter of fiscal 2015. This segment's operating margin decreased 220 bps from 17.3% in the first quarter of fiscal 2015 to 15.1% in the first quarter of fiscal 2016. The primary drivers of the change in operating margin were a:
• | 90 bps increase in gross profit primarily due to favorable product costs, partially offset by lower average price per unit; and |
• | 310 bps increase in SG&A expenses, primarily due to a: |
• | 220 bps increase in expenses associated with new retail stores; |
• | 60 bps increase in marketing expenses; and |
• | 30 bps increase in performance-based compensation expenses. |
(c) OshKosh Wholesale segment operating income decreased by $0.8 million, or 25.9%, to $2.2 million in the first quarter of fiscal 2016 from $3.0 million in the first quarter of fiscal 2015. This segment's operating margin decreased 10 bps from 18.6% in the first quarter of fiscal 2015 to 18.5% in the first quarter of fiscal 2016. The primary drivers of the change in operating margin were a:
• | 380 bps increase in royalty income primarily due to sales growth from our licensees; |
• | 230 bps decrease in gross profit primarily due to higher inventory related charges; partially offset by lower product costs, and higher average price per unit; and |
• | 160 bps increase in SG&A expenses primarily due to a: |
• | 160 bps increase in marketing expenses; |
• | 110 bps increase in provisions for accounts receivable; |
• | 100 bps increase in distribution expenses; and |
• | 250 bps decrease in performance-based compensation expenses. |
(d) OshKosh Retail segment operating income decreased by $0.8 million, or 85.9%, from an operating loss of $1.0 million in the first quarter of fiscal 2015 to an operating loss of $1.8 million in the first quarter of fiscal 2016. The segment's operating margin decreased 90 bps from (1.3)% in the first quarter of fiscal 2015 to (2.2)% in the first quarter of fiscal 2016. The primary drivers of the change in operating margin were a:
• | 80 bps increase in SG&A expenses primarily due to a: |
• | 140 bps increase in expenses associated with new retail stores; |
• | 40 bps increase in marketing expenses; and |
• | 80 bps decrease primarily in distribution expenses. |
(e) International segment operating income increased by $1.9 million, or 29.6%, to $8.4 million in the first quarter of fiscal 2016 from $6.5 million in the first quarter of 2015. This segment's operating margin increased 130 bps from 9.5% in the first quarter of fiscal 2015 to 10.8% in the first quarter of fiscal 2016. The primary drivers of the change in operating margin were a:
• | 330 bps increase in gross profit, primarily driven by growth in higher margin retail store and eCommerce channels, partially offset by unfavorable foreign currency impacts; |
• | 20 bps decrease in royalty income; and |
• | 180 bps increase in SG&A expenses primarily due to a: |
• | 200 bps increase in expenses associated with new retail stores and China eCommerce; |
• | 90 bps increase in performance-based compensation expenses; |
• | 50 bps decrease in marketing expenses; and |
• | 20 bps decrease in provisions for accounts receivable. |
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Unallocated corporate expenses decreased by $3.1 million, or 11.9%, in the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. Unallocated corporate expenses as a percentage of consolidated net sales decreased from 3.9% in the first quarter of fiscal 2015 to 3.2% in the first quarter of fiscal 2016. The decrease in corporate expenses primarily reflected a/an:
• | Decrease of $1.6 million in insurance and other employee related benefits costs; |
• | Decrease of $1.3 million in amortization of the H.W. Carter & Sons tradenames; |
• | Decrease of $1.2 million in performance-based compensation; and |
• | Increase of $1.0 million in expenses related to information technology. |
INTEREST EXPENSE
Interest expense and effective interest rate calculations include the amortization of debt issuance costs.
Interest expense in the first quarter of both fiscal 2016 and 2015 was approximately $6.7 million. Weighted-average borrowings for the first quarter of fiscal 2016 were approximately $584.6 million with an effective interest rate of 4.59%, compared to weighted-average borrowings for the first quarter of fiscal 2015 of $586.0 million with an effective interest rate of 4.64%. The decrease in the effective interest rate for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 was primarily due to lower interest rates on the U.S. and Canadian borrowings outstanding under our secured revolving credit facility in 2016.
OTHER EXPENSE, NET
Other expense, net is comprised primarily of net losses and gains on foreign currency transactions and foreign currency contracts. The amounts related to foreign currency represented a net loss of $3.2 million and $2.0 million for the first quarter of fiscal 2016 and the first quarter of fiscal 2015, respectively. There were no foreign currency contracts in the first quarter of fiscal 2015.
INCOME TAXES
Our consolidated effective income tax rate for the first quarter of fiscal 2016 was 35.2% compared to 34.5% for the first quarter of fiscal 2015. The lower effective rate for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2016 was primarily due to 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 35.4%.
NET INCOME
Our consolidated net income for the first quarter of fiscal 2016 increased by $4.2 million, or 8.4%, to $54.0 million compared to $49.8 million in the first quarter of fiscal 2015, 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 in Item 1.A., Risk Factors, in our Annual Report on Form 10-K for the 2015 fiscal year ended January 2, 2016.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
As of April 2, 2016, the Company had approximately $395.1 million of cash and cash equivalents in major financial institutions, including approximately $43.7 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 April 2, 2016 were $192.6 million compared to $195.6 million at April 4, 2015 and $207.6 million at January 2, 2016. The overall decrease of $3.0 million, or 1.5%, at April 2, 2016 compared to April 4, 2015 primarily reflected improvements in the timing of payments from customers, partially offset by lower provisions for accounts receivable. Due to the seasonal nature of our operations, the net accounts receivable balance at April 2, 2016 is not comparable to the net accounts receivable balance of $207.6 million at January 2, 2016.
Inventories at April 2, 2016 were $376.5 million compared to $358.0 million at April 4, 2015 and $469.9 million at January 2, 2016. The increase of $18.5 million, or 5.2%, at April 2, 2016 compared to April 4, 2015 primarily reflected business growth. Due to the seasonal nature of our operations, the inventories balance at April 2, 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 quarter of fiscal 2016 was $128.3 million compared to net cash provided by operating activities of $87.2 million in the first quarter of fiscal 2015. This increase in operating cash flow primarily reflected an increase in net income and favorable movements in net working capital due in part to the timing of collections of accounts receivable.
Capital expenditures were $25.6 million in the first quarter of fiscal 2016 compared to $20.8 million in the first quarter of fiscal 2015, primarily reflecting 2016 expenditures of approximately $15.3 million for our U.S. and international retail store openings and re-modelings, $7.0 million for information technology initiatives, and $2.6 million for distribution and office facilities.
We plan to invest approximately $115.0 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 $90.2 million in the first quarter of fiscal 2016 compared to $29.2 million in the first quarter of fiscal 2015. This increase in fiscal 2016 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 April 2, 2016, we had $185.6 million in outstanding borrowings under our secured revolving credit facility, exclusive of $4.9 million of outstanding letters of credit. As of April 2, 2016, there was approximately $309.6 million available for future borrowing.
35
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 April 2, 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 1.80% on that date, and Canadian borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) plus the applicable base rate, which was 2.24% on that date.
As of April 2, 2016, we were in compliance with the financial and other covenants under our secured revolving credit facility.
SENIOR NOTES
As of April 2, 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 $5.3 million, $5.5 million and $6.1 million unamortized issuance-related debt costs at April 2, 2016, January 2, 2016 and April 4, 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 quarter of fiscal 2016, the Company repurchased and retired 722,364 shares in open market transactions for approximately $71.6 million at an average price of $99.07 per share. In the first quarter of fiscal 2015, the Company repurchased and retired 157,900 shares in open market transactions for approximately $14.1 million, at an average price of $89.43 per share.
The total remaining capacity under all remaining repurchase authorizations as of April 2, 2016 was approximately $503.3 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 quarters of fiscal 2016 and 2015, we paid quarterly cash dividends of $0.33 and $0.22 per share, respectively. 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 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
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
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
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 or 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
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 April 2, 2016 were $185.6 million. An
37
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 April 2, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal controls over financial reporting during the first 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 first 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) | ||||
January 3, 2016 through January 30, 2016 | 101,864 | $91.34 | 101,864 | $65,542,885 | ||||
January 31, 2016 through February 27, 2016 | 182,268 | $90.35 | 92,900 | $557,148,977 | ||||
February 28, 2016 through April 2, 2016 | 527,600 | $102.09 | 527,600 | $503,285,958 | ||||
Total | 811,732 | 722,364 |
(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 89,368 shares surrendered between January 3, 2016 and April 2, 2016. |
(2) | Share purchases during the first 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 the approximately $65.5 million remaining at April 2, 2016 under previous authorizations described above. |
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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 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 with the Securities and Exchange Commission 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.
April 28, 2016 | /s/ MICHAEL D. CASEY |
Michael D. Casey | |
Chief Executive Officer | |
(Principal Executive Officer) |
April 28, 2016 | /s/ RICHARD F. WESTENBERGER |
Richard F. Westenberger | |
Executive Vice President and | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |
41