Q1 2015 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 4, 2015 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 24, 2015
Common stock, par value $0.01 per share
 
52,538,616













CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of April 4, 2015, January 3, 2015, and March 29, 2014
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarters ended April 4, 2015 and March 29, 2014
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarters ended April 4, 2015 and March 29, 2014
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the fiscal quarter ended April 4, 2015
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the fiscal quarters ended April 4, 2015 and March 29, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 




PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
(unaudited)
 
April 4, 2015
 
January 3, 2015
 
March 29, 2014
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
377,400

 
$
340,638

 
$
277,236

Accounts receivable, net
195,593

 
184,563

 
205,166

Finished goods inventories
358,014

 
444,844

 
363,018

Prepaid expenses and other current assets
34,718

 
34,788

 
26,362

Deferred income taxes
32,842

 
36,625

 
37,343

Total current assets
998,567

 
1,041,458

 
909,125

Property, plant, and equipment, net of accumulated depreciation of $257,394, $245,011, and $220,847
341,658

 
333,097

 
316,786

Tradenames and other intangibles, net
314,955

 
317,297

 
323,967

Goodwill
178,859

 
181,975

 
184,604

Deferred debt issuance costs, net
6,361

 
6,677

 
7,758

Other assets
12,786

 
12,592

 
10,109

Total assets
$
1,853,186

 
$
1,893,096

 
$
1,752,349

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
94,129

 
$
150,243

 
$
103,439

Other current liabilities
93,403

 
97,728

 
75,235

Total current liabilities
187,532

 
247,971

 
178,674

 
 
 
 
 
 
Long-term debt
586,349

 
586,000

 
586,000

Deferred income taxes
120,275

 
121,536

 
118,032

Other long-term liabilities
153,317

 
150,905

 
140,493

Total liabilities
$
1,047,473

 
$
1,106,412

 
$
1,023,199

 
 
 
 
 
 
Commitments and contingencies

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at April 4, 2015, January 3, 2015, and March 29, 2014

 

 

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 52,615,316, 52,712,193, and 53,742,906 shares issued and outstanding at April 4, 2015, January 3, 2015 and March 29, 2014, respectively
526

 
527

 
537

Additional paid-in capital

 

 
11,420

Accumulated other comprehensive loss
(29,031
)
 
(23,037
)
 
(12,842
)
Retained earnings
834,218

 
809,194

 
730,035

Total stockholders' equity
805,713

 
786,684

 
729,150

Total liabilities and stockholders' equity
$
1,853,186

 
$
1,893,096

 
$
1,752,349



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 4, 2015
 
March 29, 2014
Net sales
 
$
684,764

 
$
651,643

Cost of goods sold
 
400,712

 
389,918

Gross profit
 
284,052

 
261,725

Selling, general, and administrative expenses
 
211,183

 
210,095

Royalty income
 
(11,636
)
 
(9,901
)
Operating income
 
84,505

 
61,531

Interest expense
 
6,692

 
6,897

Interest income
 
(137
)
 
(132
)
Other expense, net
 
1,962

 
596

Income before income taxes
 
75,988

 
54,170

Provision for income taxes
 
26,196

 
19,873

Net income
 
$
49,792

 
$
34,297

 
 
 
 
 
Basic net income per common share
 
$0.94
 
$0.64
Diluted net income per common share
 
$0.94
 
$0.63
Dividend declared and paid per common share
 
$0.22
 
$0.19

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 4, 2015
 
March 29, 2014
Net income
 
$
49,792

 
$
34,297

Other comprehensive income (loss):
 
 
 
 
Foreign currency translation adjustments
 
(5,994
)
 
(2,760
)
Comprehensive income
 
$
43,798

 
$
31,537



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 3, 2015
$
52,712,193

 
$
527

 
$

 
$
(23,037
)
 
$
809,194

 
$
786,684

Income tax benefit from stock-based compensation

 

 
5,771

 

 

 
5,771

Exercise of stock options
74,575

 
1

 
2,767

 

 

 
2,768

Withholdings from vesting of restricted stock
(144,002
)
 
(1
)
 
(12,330
)
 

 

 
(12,331
)
Restricted stock activity
130,450

 
1

 
(1
)
 

 

 

Stock-based compensation expense

 

 
4,740

 

 

 
4,740

Repurchase of common stock
(157,900
)
 
(2
)
 
(947
)
 

 
(13,171
)
 
(14,120
)
Cash dividends declared and paid

 

 

 

 
(11,597
)
 
(11,597
)
Comprehensive income (loss)

 

 

 
(5,994
)
 
49,792

 
43,798

Balance at April 4, 2015
$
52,615,316

 
$
526

 
$

 
$
(29,031
)
 
$
834,218

 
$
805,713


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 4, 2015
 
March 29, 2014
Cash flows from operating activities:
 
 
 
Net income
$
49,792

 
$
34,297

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,875

 
15,354

Amortization of tradenames
2,325

 
6,271

Accretion of contingent consideration
483

 
454

Amortization of debt issuance costs
280

 
375

Non-cash stock-based compensation expense
4,740

 
4,535

Foreign currency exchange loss
1,652

 

Income tax benefit from stock-based compensation
(5,771
)
 
(3,370
)
Loss on disposal of property, plant, and equipment
52

 
189

Deferred income taxes
2,207

 
(3,320
)
Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,402
)
 
(11,725
)
Inventories
83,349

 
53,309

Prepaid expenses and other assets
(472
)
 
8,424

Accounts payable and other liabilities
(54,886
)
 
(74,233
)
Net cash provided by operating activities
87,224

 
30,560

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(20,760
)
 
(32,083
)
Proceeds from sale of property, plant, and equipment
76

 

Net cash used in investing activities
(20,684
)
 
(32,083
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Payments of debt issuance costs

 
(55
)
Borrowings under secured revolving credit facility
20,349

 

Payments on secured revolving credit facility
(20,000
)
 

Repurchase of common stock
(14,120
)
 
(2,292
)
Dividends paid
(11,597
)
 
(10,208
)
Income tax benefit from stock-based compensation
5,771

 
3,370

Withholdings from vesting of restricted stock
(12,331
)
 
(4,079
)
Proceeds from exercise of stock options
2,768

 
5,546

Net cash used in financing activities
(29,160
)
 
(7,718
)
 
 
 
 
Effect of exchange rate changes on cash
(618
)
 
(69
)
Net increase (decrease) in cash and cash equivalents
36,762

 
(9,310
)
Cash and cash equivalents, beginning of period
340,638

 
286,546

Cash and cash equivalents, end of period
$
377,400

 
$
277,236


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 4, 2015, the Company operated 549 Carter’s stores in the United States, 208 OshKosh stores in the United States, and 127 stores in Canada.

NOTE 2 – BASIS OF PREPARATION

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholder’s equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended April 4, 2015 are not necessarily indicative of the results that may be expected for the 2015 fiscal year ending January 2, 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 3, 2015 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 the Company's Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015. There have been no material subsequent changes to these accounting policies.

The Company's fiscal year ends on the Saturday in December or January, nearest the last day of December, resulting in an additional week of results every five or six years. As a result, fiscal 2014, which ended on January 3, 2015, contained 53 weeks. Fiscal 2015, which will end on January 2, 2016, contains 52 weeks. The first fiscal quarter of 2015 and 2014 each contained 13 weeks.

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 4, 2015
 
January 3, 2015
 
March 29, 2014
Cumulative foreign currency translation adjustments
$
(21,391
)
 
$
(15,397
)
 
$
(10,312
)
Pension and post-retirement liability adjustments
(7,640
)
 
(7,640
)
 
(2,530
)
Total accumulated other comprehensive loss
$
(29,031
)
 
$
(23,037
)
 
$
(12,842
)

Changes in accumulated other comprehensive loss for the first quarters of fiscal 2015 and 2014 consisted of additional losses for foreign currency translation adjustments of approximately $6.0 million and $2.8 million, respectively. During the first quarters of fiscal 2015 and 2014, no amounts were reclassified from other accumulated other comprehensive loss to the statement of operations.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s goodwill and other intangible assets were as follows:
 
 
 
April 4, 2015
 
January 3, 2015
(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
 
42,289

 

 
42,289

 
45,405

 

 
45,405

Total goodwill
 
 
$
178,859

 
$

 
$
178,859

 
$
181,975

 
$

 
$
181,975

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
42,037

 
32,830

 
9,207

 
42,073

 
30,541

 
11,532

Total tradenames
 
 
347,770


32,830

 
314,940

 
347,806

 
30,541

 
317,265

Non-compete agreements
4 years
 
220

 
205

 
15

 
257

 
225

 
32

Total tradenames and other intangibles, net
 
 
$
347,990

 
$
33,035

 
$
314,955

 
$
348,063

 
$
30,766

 
$
317,297


 
 
 
March 29, 2014
(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
 
48,034

 

 
48,034

Total goodwill
 
 
$
184,604

 
$

 
$
184,604

 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$

 
$
220,233

OshKosh tradename    
Indefinite
 
85,500

 

 
85,500

Other tradenames
2-3 years
 
38,552

 
20,404

 
18,148

Total tradenames
 
 
344,285

 
20,404

 
323,881

Non-compete agreements
4 years
 
272

 
186

 
86

Total tradenames and other intangibles, net
 
 
$
344,557

 
$
20,590

 
$
323,967


The Company recorded approximately $2.3 million and $6.3 million in amortization expense for the fiscal quarters ended April 4, 2015 and March 29, 2014, respectively. The estimated future amortization expense for these assets is approximately $4.1 million for the remainder of fiscal 2015, $1.9 million for fiscal 2016, $0.2 million for each fiscal year 2017, 2018 and 2019, and $2.6 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 in an amount up to$300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of 2013, the Board approved an additional $400 million share repurchase authorization. The total remaining capacity under the repurchase authorizations as of April 4, 2015 was approximately $171.0 million. The authorizations have no expiration date.


Open Market Repurchases

During the first quarter of fiscal 2015, the Company repurchased and retired 157,900 shares in open market transactions with an average share price of $89.43 for an aggregate purchase price of $14.1 million. During the first quarter fiscal 2014, the

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Company repurchased and retired 30,151 shares, in open market transactions, with an average share price of $76.03 for an aggregate purchase price of $2.3 million.

Future repurchases may occur from time to time in the open market, in 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.

Accelerated Stock Repurchase Program

On August 29, 2013, the Company entered into two fixed-dollar uncollared accelerated stock repurchase agreements (the "ASR agreements") totaling $400 million. The ASR agreements were settled in January 2014. As of the date of settlement, the Company had received a total of approximately 5.6 million shares, of which one million shares were received in January 2014. All shares received under the ASR agreements were retired upon receipt.

DIVIDENDS

In the first quarters of fiscal 2015 and fiscal 2014, the Company paid cash dividends per share of $0.22 and $0.19, 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 Company's secured revolving credit facility and indenture governing its senior notes could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock as further described in the Company's Annual Report for Form 10-K for the 2014 fiscal year ended January 3, 2015.

NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following:
(dollars in thousands)
April 4, 2015
 
January 3, 2015
 
March 29, 2014
Senior notes
$
400,000

 
$
400,000

 
$
400,000

Secured revolving credit facility
186,349

 
186,000

 
186,000

Total long-term debt
$
586,349

 
$
586,000

 
$
586,000


Secured Revolving Credit Facility

As of April 4, 2015, the Company had $186.3 million in outstanding borrowings under its secured revolving credit facility, exclusive of $7.9 million of outstanding letters of credit. During the first quarter of fiscal 2015, the Company replaced $20.0 million of outstanding borrowings with CAD $25.5 million of borrowings in Canadian dollars, which approximated $20.3 million. Amounts outstanding under the revolving credit facility currently accrue interest at a LIBOR rate plus Base Rate, which, as of April 4, 2015, was 1.93% for U.S. dollar borrowings and 2.74% for Canadian dollar borrowings. As of April 4, 2015, there was approximately $180.8 million available for future borrowing.

As of April 4, 2015, the Company was in compliance with the financial debt covenants under the secured revolving credit facility.

Senior Notes

As of April 4, 2015, The William Carter Company ("TWCC"), a 100% owned subsidiary of Carter's Inc., had outstanding $400 million principal amount of senior notes bearing interest at a 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.


NOTE 7 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation cost as follows:

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 
 
Fiscal quarter ended
(dollars in thousands)
 
April 4, 2015
 
March 29, 2014
Stock options
 
$
1,324

 
$
1,370

Restricted stock:
 
 
 
 
   Time-based awards
 
2,083

 
1,941

   Performance-based awards
 
1,333

 
1,224

Total
 
$
4,740

 
$
4,535


All stock-based compensation expense was reflected as a component of selling, general, and administrative expenses, where other forms of compensation were recorded.

On February 18, 2015, 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:  177,900 stock options with an exercise price of $82.40 each; 84,800 shares of time-based restricted stock awards with a grant-date fair value of $82.40 each; and 50,600 shares of performance-based restricted stock awards with a grant-date fair value of $82.40 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. For the first quarter of fiscal 2014, a total of 151,500 restricted stock awards (time and performance based) vested with a weighted average grant-date fair value of $39.65 each.

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 4, 2015
 
March 29, 2014
Interest cost
 
$
623

 
$
622

Expected return on plan assets
 
(785
)
 
(798
)
Recognized actuarial loss
 
161

 
21

Net periodic pension (benefit) cost
 
$
(1
)
 
$
(155
)


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 4, 2015
 
March 29, 2014
 
 
 
 
 
Service cost – benefits attributed to service during the period
 
$
32

 
$
28

Interest cost on accumulated post-retirement benefit obligation
 
45

 
57

Amortization net actuarial gain
 
(48
)
 
(51
)
Curtailment gain
 

 
(22
)
Total net periodic post-retirement benefit cost
 
$
29

 
$
12


9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

    


NOTE 9 – INCOME TAXES

During the first quarter of fiscal 2015, the Company recognized prior-year income tax benefits of approximately $1.8 million due to a favorable settlement of an ongoing IRS audit of fiscal 2011, 2012 and 2013, in addition to a favorable settlement of an ongoing state income tax audit. These settlements decreased the Company's effective tax rate for the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014.

As of April 4, 2015, the Company had gross unrecognized income tax benefits of approximately $9.3 million, of which $6.3 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 4, 2015 are approximately $1.7 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 2015 or fiscal 2016 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 4, 2015 and March 29, 2014, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.8 million, $0.9 million, and $0.9 million of interest accrued on uncertain tax positions as of April 4, 2015, January 3, 2015, and March 29, 2014, respectively.     

NOTE 10 – FAIR VALUE MEASUREMENTS

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. All of the marketable securities owned by the Company are included in other assets on the Company's consolidated balance sheet. The Company had approximately $7.9 million, $7.6 million, and $5.5 million of such Level 1 investments as of April 4, 2015, January 3, 2015, and March 29, 2014, respectively.

Gains on the investments in marketable securities were $0.2 million for the first quarter of fiscal 2015 and were not significant for the first quarter of fiscal 2014.


10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONTINGENT CONSIDERATION

The following table summarizes the changes in the remaining contingent consideration liability related to the Company's
2011 acquisition of Bonnie Togs:
 
 
 
Fiscal quarter ended
(dollars in thousands)
 
 
April 4, 2015
 
March 29, 2014
Balance at the beginning of period
 
 
7,711

 
16,348

Accretion
 
 
483

 
454

Foreign currency translation adjustment
 
 
(533
)
 
(487
)
Balance at the end of period
 
 
$
7,661

 
$
16,315

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
The contingent consideration liability is a Level 3 fair value measurement. As of April 4, 2015, the Company determined the fair value of contingent consideration based upon a probability-weighted discounted cash flow analysis that reflects a high probability that the earnings targets will be met, and a discount rate of 18%.

BORROWINGS

As of April 4, 2015, the Level 2 fair value of the Company's $186.3 million in outstanding borrowings under its secured revolving credit facility approximated carrying value. The fair value of the Company's $400 million in senior notes was estimated by obtaining market quotes given the trade levels of other bonds of the same general issuer type and market-perceived credit quality and is therefore within Level 2 of the fair value hierarchy. The fair value of the outstanding senior notes as of April 4, 2015 was approximately $414.0 million.

































11


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 4, 2015
 
March 29, 2014
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
Basic number of common shares outstanding
 
52,119,215

 
53,172,459

Dilutive effect of equity awards
 
495,386

 
501,322

Diluted number of common and common equivalent shares outstanding
 
52,614,601

 
53,673,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income per common share (in thousands, except per share data):
 
 
 
 
Net income
 
$
49,792

 
$
34,297

Income allocated to participating securities
 
(560
)
 
(470
)
Net income available to common shareholders
 
$
49,232

 
$
33,827

 
 
 
 
 
Basic net income per common share
 
$
0.94

 
$
0.64

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

 
 
 
 
Net income
 
$
49,792

 
$
34,297

Income allocated to participating securities
 
(556
)
 
(467
)
Net income available to common shareholders
 
$
49,236

 
$
33,830

 
 
 
 
 
Diluted net income per common share
 
$
0.94

 
$
0.63

 
 
 
 
 
Anti-dilutive shares excluded from dilutive earnings per share computation
 
183,400

 
269,650







12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities consisted of the following:
(dollars in thousands)
April 4, 2015
 
January 3, 2015
 
March 29, 2014
Accrued bonuses and incentive compensation
$
4,396

 
$
18,875

 
$
3,196

Contingent consideration
7,661

 
7,711

 
8,878

Income taxes payable
18,410

 
692

 
6,637

Accrued workers' compensation
3,057

 
2,662

 
7,392

Accrued interest
2,759

 
8,106

 
2,874

Accrued sales and use taxes
7,653

 
5,318

 
7,307

Accrued salaries and wages
8,111

 
3,576

 
3,405

Accrued gift certificates
9,882

 
10,100

 
7,877

Accrued 401(k) contributions
1,296

 
10,073

 
893

Accrued closure costs
633

 
835

 
7,754

Other current liabilities
29,545

 
29,780

 
19,022

Total
$
93,403

 
$
97,728

 
$
75,235

    
Other long-term liabilities consisted of the following:
(dollars in thousands)
April 4, 2015
 
January 3, 2015
 
March 29, 2014
Deferred lease incentives
$
68,652

 
$
67,205

 
$
69,900

Accrued rent
43,504

 
40,656

 
34,446

Contingent consideration

 

 
7,437

Accrued workers' compensation
4,717

 
4,717

 

OshKosh pension plan
11,029

 
11,031

 
3,613

Unrecognized tax benefits
10,087

 
12,230

 
12,505

Post-retirement life and medical plan
4,731

 
4,731

 
5,069

Deferred compensation
8,710

 
8,388

 
7,420

Other
1,887

 
1,947

 
103

Total
$
153,317

 
$
150,905

 
$
140,493


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.




13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 – SEGMENT INFORMATION

The table below presents certain segment information for the periods indicated:
 
Fiscal quarter ended
(dollars in thousands)
April 4,
2015
 
% of
Total Net Sales
 
March 29,
2014
 
% of
Total Net Sales
Net sales:
 
 
 
 
 
 
 
Carter’s Wholesale
$
269,315

 
39.3
 %
 
$
271,628

 
41.7
 %
Carter’s Retail (a)    
257,727

 
37.7
 %
 
230,328

 
35.3
 %
Total Carter’s (U.S.)
527,042

 
77.0
 %
 
501,956

 
77.0
 %
OshKosh Retail (a)    
73,042

 
10.7
 %
 
63,558

 
9.8
 %
OshKosh Wholesale
16,051

 
2.3
 %
 
15,585

 
2.4
 %
Total OshKosh (U.S.)
89,093

 
13.0
 %
 
79,143

 
12.2
 %
International (b)     
68,629

 
10.0
 %
 
70,544

 
10.8
 %
Total net sales
$
684,764

 
100.0
 %
 
$
651,643

 
100.0
 %
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
% of
Segment
Net Sales
 
 
 
% of
Segment
Net Sales
Carter’s Wholesale
$
57,931

 
21.5
 %
 
$
46,867

 
17.3
 %
Carter’s Retail (a)    
44,493

 
17.3
 %
 
42,979

 
18.7
 %
Total Carter’s (U.S.)
102,424

 
19.4
 %
 
89,846

 
17.9
 %
OshKosh Retail (a)    
(960
)
 
(1.3
)%
 
(4,489
)
 
(7.1
)%
OshKosh Wholesale
2,979

 
18.6
 %
 
2,025

 
13.0
 %
Total OshKosh (U.S.)
2,019

 
2.3
 %
 
(2,464
)
 
(3.1
)%
International (b) (c)    
6,511

 
9.5
 %
 
4,036

 
5.7
 %
Corporate expenses (d) (e)     
(26,449
)
 
 
 
(29,887
)
 
 
Total operating income
$
84,505

 
12.3
 %
 
$
61,531

 
9.4
 %

(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 each of the first quarters of fiscal 2015 and 2014. Also includes a benefit of approximately $0.4 million for the first quarter of fiscal 2014 related to a favorable recovery on inventory related to the Company's exit from Japan retail operations.
(d)
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees.
(e)
Includes the following charges:
 
Fiscal quarter ended
(dollars in millions)
April 4, 2015
 
March 29, 2014
Closure of distribution facility in Hogansville, GA (1)
$

 
$
0.3

Office consolidation costs
$

 
$
2.0

Amortization of tradenames
$
2.3

 
$
6.3


(1) Continuing operating costs associated with the closure of the Company's distribution facility in Hogansville, Georgia. This facility was sold in          December 2014.    
    



14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 – FACILITY CLOSURES

OFFICE CONSOLIDATION    

The Company consolidated its Shelton, Connecticut and Atlanta, Georgia offices, as well as certain functions from its other offices, into a new headquarters facility in Atlanta, Georgia. During the first quarter of fiscal 2014, approximately $2.0 million of expense, including $0.6 million of severance costs, were incurred related to the office consolidation project. No such expenses were incurred during the first quarter of fiscal 2015, and no additional expenses are expected to be incurred in the future.

The following table summarizes the restructuring reserves related to the office consolidation as of April 4, 2015:
(dollars in millions)
Severance
 
Other closure costs
 
Total
Balance at January 3, 2015
$
0.8

 
$
2.8

 
$
3.6

Provision

 

 

Payments
(0.2
)
 
(0.3
)
 
(0.5
)
Other

 

 

Balance at April 4, 2015
$
0.6

 
$
2.5

 
$
3.1


The severance reserve is included in other current liabilities and other closure costs are included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. The Company has completed its consolidation efforts. The severance accrual is expected to be substantially paid during fiscal 2015.

As of March 29, 2014, restructuring reserves were approximately $5.6 million.


JAPAN RETAIL OPERATIONS

In 2013, the Company made the decision to exit retail operations in Japan based on revised forecasts that did not meet the Company's investment objectives. In connection with the plan to exit these operations, during the first quarter of fiscal 2014, the Company recorded approximately $0.6 million of accelerated depreciation in selling, general, and administrative expenses and approximately $1.0 million in cost of goods sold related to a favorable recovery on inventory. There were no exit costs or recoveries related to the former Japan operations during the first quarter of fiscal 2015.


NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue. The guidance is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance requires improved disclosures 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 2017, including interim periods within that first fiscal year, and early adoption is not permitted. Upon becoming effective, the Company will apply the amendments in the updated standard either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the impact of adopting this standard on its consolidated financial position, results of operations, and cash flows.
On April 1, 2015, the FASB voted to propose a deferral of the effective date of the new revenue standard by one year, but to permit entities to adopt one year earlier if they choose (i.e., the original effective date). The proposal is currently undergoing the FASB's due process requirement, which includes a 30-day period for public comment.




15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Presentation of Debt Issuance Costs
In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). Upon adoption, ASU 2015-03 will require debt issuance costs to be presented in the balance sheet as a direct reduction in the carrying value of the associated debt liability, consistent with the current presentation of a debt discount. Under current guidance prior to ASU 2015-03, debt issuance costs are presented in the balance sheet as a deferred charge (asset). ASU 2015-03 is limited to the presentation of debt issuance costs and will not affect the recognition and measurement of debt issuance costs. Upon adoption, ASU 2015-03 must be applied on a retrospective basis and is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Since ASU 2015-03 involves balance sheet presentation only, its adoption will not have any impact on the Company's results of operations, financial condition, or cash flows. The Company is evaluating a decision to early adopt ASU 2015-03 prior to its mandatory effective date.

Simplified Measurement Date for Defined Benefit Plan Assets and Obligations
In April 2015, the FASB issued Accounting Standard Update 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets ("ASU 2015-04"). Upon adoption, ASU 2015-04 will allow 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 ends (i.e., on an alternative measurement date). An employer that makes this election must consistently apply the practical expedient from year to year and to all of its defined benefit plans. ASU 2015-04 will be effective for interim and fiscal periods beginning after December 15, 2015; prospective application is required and early adoption is permitted. The Company's fiscal year ends on the Saturday in December or January nearest the last day of December, and the Company has defined benefit plans. The Company is currently evaluating the policy election that will be allowed upon the adoption of ASU 2015-04.

NOTE 17 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company’s senior notes constitute debt obligations of its wholly-owned subsidiary, The William Carter Company ("TWCC" or the “Subsidiary Issuer”), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the “Parent”) by each of the Company’s current domestic subsidiaries, and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s senior secured revolving credit facility or certain other debt of the Company or the subsidiary guarantors. For additional information, refer to the Company's Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015.
The unaudited 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 unaudited 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.
During fiscal 2014, the Company revised its Guarantor Condensed Consolidating Statements of Comprehensive Income to correct a presentation error related to certain other comprehensive income (loss) transactions within the Subsidiary Issuer and Guarantor Subsidiaries columns in the Company’s previously filed Form 10-Q for the first and second fiscal quarters of 2014, which included the comparative periods, and for the fiscal years ended December 28, 2013 and December 29, 2012.   These presentation items had no effect on the Company’s Consolidated Financial Statements.  The Company concluded that these items were not material to the financial statements taken as a whole, but elected to revise previously reported amounts within this footnote for all periods presented.  Future filings will reflect these revisions.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

 
173,892

 
179,932

 
40,563

 
(36,373
)
 
358,014

Prepaid expenses and other current assets

 
13,329

 
13,369

 
8,020

 

 
34,718

Deferred income taxes

 
18,673

 
12,356

 
1,813

 

 
32,842

Total current assets

 
774,590

 
330,320

 
78,457

 
(184,800
)
 
998,567

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

Deferred debt issuance costs, net

 
6,361

 

 

 

 
6,361

Other assets

 
11,934

 
852

 

 

 
12,786

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

 
$
2,007,555

 
$
863,704

 
$
148,251

 
$
(1,972,037
)
 
$
1,853,186

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
61,014

 
$
22,936

 
$
10,179

 
$

 
$
94,129

Intercompany payables

 
84,259

 
60,851

 
3,316

 
(148,427
)
 

Other current liabilities

 
25,078

 
54,833

 
13,492

 

 
93,403

Total current liabilities

 
170,351

 
138,620

 
26,987

 
(148,427
)
 
187,532

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
566,000

 

 
20,349

 

 
586,349

Deferred income taxes

 
80,185

 
40,090

 

 

 
120,275

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

 
$
2,007,555

 
$
863,704

 
$
148,251

 
$
(1,972,037
)
 
$
1,853,186



17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of January 3, 2015
(dollars in thousands)
 
Parent
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
311,078

 
$
10,442

 
$
19,118

 
$

 
$
340,638

Accounts receivable, net

 
155,192

 
22,770

 
6,601

 

 
184,563

Intercompany receivable

 
58,402

 
106,137

 
2,012

 
(166,551
)
 

Intercompany loan receivable

 
20,000

 

 

 
(20,000
)
 

Finished goods inventories, net

 
240,702

 
191,953

 
48,463

 
(36,274
)
 
444,844

Prepaid expenses and other current assets

 
15,143

 
13,059

 
6,586

 

 
34,788

Deferred income taxes

 
21,308

 
12,983

 
2,334

 

 
36,625

Total current assets

 
821,825

 
357,344

 
85,114

 
(222,825
)
 
1,041,458

Property, plant, and equipment, net

 
158,017

 
147,076

 
28,004

 

 
333,097

Goodwill

 
136,570

 

 
45,405

 

 
181,975

Tradenames and other intangibles, net

 
231,765

 
85,500

 
32

 

 
317,297

Deferred debt issuance costs, net

 
6,677

 

 

 

 
6,677

Other assets

 
11,781

 
811

 

 

 
12,592

Intercompany long term receivable

 

 
274,584

 

 
(274,584
)
 

Intercompany long term note receivable

 
100,000

 

 

 
(100,000
)
 

Investment in subsidiaries
786,684

 
591,735

 
9,647

 

 
(1,388,066
)
 

Total assets
$
786,684

 
$
2,058,370

 
$
874,962

 
$
158,555

 
$
(1,985,475
)
 
$
1,893,096

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
102,233

 
$
37,869

 
$
10,141

 
$

 
$
150,243

Intercompany payables

 
105,940

 
55,812

 
4,799

 
(166,551
)
 

Intercompany loan payables

 

 

 
20,000

 
(20,000
)
 

Other current liabilities

 
15,782

 
67,793

 
14,153

 

 
97,728

Total current liabilities

 
223,955

 
161,474

 
49,093

 
(186,551
)
 
247,971

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
586,000

 

 

 

 
586,000

Deferred income taxes

 
81,406

 
40,130

 

 

 
121,536

Intercompany long term liability

 
274,584

 

 

 
(274,584
)
 

Intercompany long term note payable

 

 
100,000

 

 
(100,000
)
 

Other long-term liabilities

 
69,467

 
68,426

 
13,012

 

 
150,905

Stockholders' equity
786,684

 
822,958

 
504,932

 
96,450

 
(1,424,340
)
 
786,684

Total liabilities and stockholders' equity
$
786,684

 
$
2,058,370

 
$
874,962

 
$
158,555

 
$
(1,985,475
)
 
$
1,893,096





18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)



As of March 29, 2014
(dollars in thousands)

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

 
$
264,128

 
$

 
$
13,108

 
$

 
$
277,236

Accounts receivable, net

 
178,034

 
18,504

 
8,628

 

 
205,166

Intercompany receivable

 
54,911

 
80,281

 
12,078

 
(147,270
)
 

Intercompany loan receivable

 
10,000

 

 

 
(10,000
)
 

Finished goods inventories, net

 
177,816

 
180,133

 
35,933

 
(30,864
)
 
363,018

Prepaid expenses and other current assets

 
10,137

 
12,306

 
3,919

 

 
26,362

Deferred income taxes

 
24,252

 
12,155

 
936

 

 
37,343

Total current assets

 
719,278

 
303,379

 
74,602

 
(188,134
)
 
909,125

Property, plant, and equipment, net

 
154,045

 
137,170

 
25,571

 

 
316,786

Goodwill

 
136,570

 

 
48,034

 

 
184,604

Tradenames and other intangibles, net

 
238,382

 
85,500

 
85

 

 
323,967

Deferred debt issuance costs, net

 
7,758

 

 

 

 
7,758

Other assets

 
10,107

 
2

 

 

 
10,109

Intercompany long term receivable

 

 
261,259

 

 
(261,259
)
 

Intercompany long term note receivable

 
100,000

 

 

 
(100,000
)
 

Investment in subsidiaries
729,150

 
555,914

 
2,487

 

 
(1,287,551
)
 

Total assets
$
729,150

 
$
1,922,054

 
$
789,797

 
$
148,292

 
$
(1,836,944
)
 
$
1,752,349

 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$

 
$
68,708

 
$
28,654

 
$
6,077

 
$

 
$
103,439

Intercompany payables

 
78,020

 
62,719

 
6,531

 
(147,270
)
 

Intercompany loan payables

 

 

 
10,000

 
(10,000
)
 

Other current liabilities

 
29,124

 
33,638

 
12,473

 

 
75,235

Total current liabilities

 
175,852

 
125,011

 
35,081

 
(157,270
)
 
178,674

Long-term debt

 
586,000

 

 

 

 
586,000

Deferred income taxes

 
74,832

 
43,200

 

 

 
118,032

Intercompany long term liability

 
261,259

 

 

 
(261,259
)
 

Intercompany long term note payable

 

 
100,000

 

 
(100,000
)
 

Other long-term liabilities

 
64,097

 
57,852

 
18,544

 

 
140,493

Stockholders' equity
729,150

 
760,014

 
463,734

 
94,667

 
(1,318,415
)
 
729,150

Total liabilities and stockholders' equity
$
729,150

 
$
1,922,054

 
$
789,797

 
$
148,292

 
$
(1,836,944
)
 
$
1,752,349



19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Operations (unaudited)

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

 
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


20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


For the fiscal quarter ended March 29, 2014
(dollars in thousands)


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

 
$
407,365

 
$
321,708

 
$
49,158

 
$
(126,588
)
 
$
651,643

Cost of goods sold

 
293,774

 
188,020

 
30,059

 
(121,935
)
 
389,918

Gross profit

 
113,591

 
133,688

 
19,099

 
(4,653
)
 
261,725

Selling, general, and administrative expenses

 
48,527

 
146,417

 
22,932

 
(7,781
)
 
210,095

Royalty income

 
(8,045
)
 
(4,027
)
 

 
2,171

 
(9,901
)
Operating income

 
73,109

 
(8,702
)
 
(3,833
)
 
957

 
61,531

Interest expense

 
6,897

 
1,313

 
24

 
(1,337
)
 
6,897

Interest income

 
(1,469
)
 

 

 
1,337

 
(132
)
(Income) loss in subsidiaries
(34,297
)
 
17,435

 
(586
)
 

 
17,448

 

Other (income) expense, net

 
(57
)
 
57

 
596

 

 
596

Income (loss) before income taxes
34,297

 
50,303

 
(9,486
)
 
(4,453
)
 
(16,491
)
 
54,170

Provision for income taxes

 
16,963

 
3,740

 
(830
)
 

 
19,873

Net income (loss)
$
34,297

 
$
33,340

 
$
(13,226
)
 
$
(3,623
)
 
$
(16,491
)
 
$
34,297



21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Comprehensive Income (unaudited)

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




For the fiscal quarter ended March 29, 2014
(dollars in thousands)

 
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
 
$
34,297

 
$
33,340

 
$
(13,226
)
 
$
(3,623
)
 
$
(16,491
)
 
$
34,297

Foreign currency translation adjustments
 
$
(2,760
)
 
$
(2,760
)
 
$
(132
)
 
$
(2,760
)
 
$
5,652

 
$
(2,760
)
Comprehensive income (loss)
 
$
31,537

 
$
30,580

 
$
(13,358
)
 
$
(6,383
)
 
$
(10,839
)
 
$
31,537


22


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Statements of Cash Flows (unaudited)

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 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

Payments on secured revolving credit facility
 

 
(20,000
)
 

 

 

 
(20,000
)
Dividends paid
 
(11,597
)
 

 

 

 

 
(11,597
)
Repurchase of common stock
 
(14,120
)
 

 

 

 

 
(14,120
)
Income tax benefit from stock-based compensation
 

 
4,540

 
1,231

 

 

 
5,771

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









23


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

For the fiscal quarter ended March 29, 2014
(dollars in thousands)

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

 
$
44,470

 
$
(12,284
)
 
$
(1,626
)
 
$

 
$
30,560

 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 

 
(18,417
)
 
(10,994
)
 
(2,672
)
 

 
(32,083
)
Intercompany investing activity
 
11,033

 
3,772

 
(2,305
)
 

 
(12,500
)
 

Issuance of intercompany loan
 
 
 
(10,000
)
 
 
 
 
 
10,000

 
 
Net cash provided by (used in) investing activities
 
11,033

 
(24,645
)
 
(13,299
)
 
(2,672
)
 
(2,500
)
 
(32,083
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Intercompany financing activity
 

 
(34,969
)
 
23,280

 
(811
)
 
12,500

 

Proceeds from intercompany loan
 

 

 

 
10,000

 
(10,000
)
 

Dividends Paid
 
(10,208
)
 

 

 

 

 
(10,208
)
Payment on debt issuance costs
 

 
(55
)
 

 

 

 
(55
)
Income tax benefit from stock-based compensation
 

 
1,067

 
2,303

 

 

 
3,370

Repurchase of common stock
 
(2,292
)
 

 

 

 

 
(2,292
)
Withholdings from vesting of restricted stock
 
(4,079
)
 

 

 

 

 
(4,079
)
Proceeds from exercise of stock options
 
5,546

 

 

 

 

 
5,546

Net cash (used in) provided by financing activities
 
(11,033
)
 
(33,957
)
 
25,583

 
9,189

 
2,500

 
(7,718
)
Effect of exchange rate changes on cash
 

 

 

 
(69
)
 

 
(69
)
Net (decrease) increase in cash and cash equivalents
 

 
(14,132
)
 

 
4,822

 

 
(9,310
)
Cash and cash equivalents, beginning of period
 

 
278,260

 

 
8,286

 

 
286,546

Cash and cash equivalents, end of period
 
$

 
$
264,128

 
$

 
$
13,108

 
$

 
$
277,236




24


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
        
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 our Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015.

Our Business

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 its line of 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 the brands 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.


25

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 4,
2015
 
March 29,
2014
 
 
 
 
 
Net sales
 
 
 
 
Carter’s Wholesale
 
39.3
 %
 
41.7
 %
Carter’s Retail
 
37.7
 %
 
35.3
 %
Total Carter’s (U.S.)
 
77.0
 %
 
77.0
 %
 
 
 
 
 
OshKosh Retail
 
10.7
 %
 
9.8
 %
OshKosh Wholesale
 
2.3
 %
 
2.4
 %
Total OshKosh (U.S.)
 
13.0
 %
 
12.2
 %
 
 
 
 
 
International
 
10.0
 %
 
10.8
 %
 
 
 
 
 
Consolidated net sales
 
100.0
 %
 
100.0
 %
Cost of goods sold
 
58.5
 %
 
59.8
 %
 
 
 
 
 
Gross margin
 
41.5
 %
 
40.2
 %
Selling, general, and administrative expenses
 
30.8
 %
 
32.2
 %
Royalty Income
 
(1.7
)%
 
(1.5
)%
 
 
 
 
 
Operating income
 
12.3
 %
 
9.4
 %
Interest expense
 
1.0
 %
 
1.1
 %
Interest income
 
 %
 
 %
Other expense (income), net
 
0.3
 %
 
0.1
 %
 
 
 
 
 
Income before income taxes
 
11.1
 %
 
8.3
 %
Provision for income taxes
 
3.8
 %
 
3.0
 %
Net income
 
7.3
 %
 
5.3
 %
 
 
 
 
 
Number of retail stores at end of period:
 
 
 
 
Carter’s - U.S.
 
549

 
491

OshKosh - U.S.
 
208

 
186

International
 
127

 
103

 
 
 
 
 
Total retail stores
 
884

 
780



Note: Results may not be additive due to rounding.



26

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



FISCAL QUARTER ENDED APRIL 4, 2015 COMPARED WITH FISCAL QUARTER ENDED MARCH 29, 2014

CONSOLIDATED NET SALES

In the first quarter of fiscal 2015, consolidated net sales increased $33.1 million, or 5.1%, to $684.8 million, reflecting strong sales growth in our Carter's Retail and OshKosh Retail segments and slight growth in our Oshkosh Wholesale segment. Sales growth was partially offset by slight declines in our Carter's Wholesale segment and in our International segment. Changes in foreign currency exchange rates in the first quarter of fiscal 2015, as compared to the first fiscal quarter of 2014, negatively impacted our consolidated net sales by approximately $5.6 million, or 0.9%.

Net sales by segment, and each segment's percentage of consolidated net sales, were as follows for the first quarters of fiscal 2015 and 2014:
 
 
Fiscal quarter ended
(dollars in thousands)
 
April 4, 2015
 
% of
Total
 
March 29, 2014
 
% of
Total
 
 
 
 
 
 
 
 
 
Net sales:
 
 
 
 
 
 
 
 
Carter’s Wholesale
 
$
269,315

 
39.3
%
 
$
271,628

 
41.7
%
Carter’s Retail
 
257,727

 
37.7
%
 
230,328

 
35.3
%
Total Carter’s (U.S.)
 
527,042

 
77.0
%
 
501,956

 
77.0
%
 
 
 
 
 
 
 
 
 
OshKosh Retail
 
$
73,042

 
10.7
%
 
$
63,558

 
9.8
%
OshKosh Wholesale
 
16,051

 
2.3
%
 
15,585

 
2.4
%
   Total OshKosh (U.S.)
 
89,093

 
13.0
%
 
79,143

 
12.2
%
International
 
68,629

 
10.0
%
 
70,544

 
10.8
%
Total net sales
 
$
684,764

 
100.0
%
 
$
651,643

 
100.0
%

CARTER’S WHOLESALE SALES

Carter’s wholesale sales decreased $2.3 million, or 0.9%, in the first quarter of fiscal 2015 to $269.3 million. This decrease was primarily due to a 3% decrease in the number of units shipped, partially offset by a 2% increase in the average price per unit as compared to the first quarter of fiscal 2014.


CARTER’S RETAIL SALES

Carter’s retail segment sales increased $27.4 million, or 11.9%, in the first quarter of fiscal 2015 to $257.7 million. The increase was driven primarily by a/an:

Increase of $18.5 million in sales from new store openings;
Increase of $6.6 million in sales from eCommerce;
Increase of $3.8 million in comparable store sales; and
Decrease of $1.5 million related to store closings.

Carter's direct-to-consumer comparable sales for the first quarter of fiscal 2015 increased 0.7%, comprised of eCommerce comparable sales growth of 8.1%, partially offset by a retail stores comparable sales decline of 1.2%. Although Carter's retail comparable store sales increased $3.8 million during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, comparable store sales declined 1.2% in the first quarter of 2015 when a comparable period of January 5, 2014 to April 5, 2014 is used to represent the first quarter of 2014. This decrease was the result of a decline in the average transaction value, partially offset by an increase in the number of transactions.


27

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


During the first quarter of fiscal 2015, we opened 20 Carter's retail stores and closed 2 stores. A total of 549 Carter’s retail stores were open as of April 4, 2015. During fiscal 2015, we plan to open approximately 65 Carter's retail stores, many of which will be in a "side-by-side" format with an OshKosh retail store, and close four stores.

OSHKOSH RETAIL SALES
    
OshKosh retail sales increased $9.5 million, or 14.9%, in the first quarter of fiscal 2015 to $73.0 million. The increase was driven primarily by a/an:

Increase of $5.2 million in sales from new store openings;
Increase of $3.2 million in sales from eCommerce;
Increase of $2.3 million in comparable store sales; and
Decrease of $1.2 million related to store closings.

OshKosh direct-to-consumer comparable sales for the first quarter of fiscal 2015 increased 5.2%, comprised of eCommerce comparable sales growth of 20.3% and a retail stores comparable sales increase of 1.5%. Although OshKosh retail comparable store sales increased $2.3 million during the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014, comparable store sales increased 1.5% in the first quarter of 2015 when a comparable period of January 5, 2014 to April 5, 2014 is used to represent the first quarter of 2014. This increase was driven by higher transaction volume.

During the first quarter of fiscal 2015, we opened 9 OshKosh retail stores and closed 1 store. A total of 208 OshKosh retail stores were open as of April 4, 2015. During fiscal 2015, we plan to open approximately 45 OshKosh retail stores, most of which will be in a "side-by-side" format with a Carter's retail store, and close five stores.
 

OSHKOSH WHOLESALE SALES
    
OshKosh wholesale sales increased $0.5 million, or 3.0%, in the first quarter of fiscal 2015 to $16.1 million. This increase was primarily the result of a 5% increase in the average price per unit, partially offset by a 1.6% decline in units shipped as compared to the first quarter of fiscal 2014.


INTERNATIONAL SALES

International sales decreased $1.9 million, or 2.7%, in the first quarter of fiscal 2015 to $68.6 million. Unfavorable currency exchange rates between the U.S. dollar and the Canadian dollar negatively impacted International net sales by approximately $5.6 million, or 7.9%, in the first quarter of fiscal 2015.

The overall $1.9 million decrease reflected a/an:
 
Increase of $4.3 million in sales in our Canadian retail locations;
Increase of $2.1 million in sales from eCommerce primarily due to the launch of our Canadian website;
Decrease of $4.4 million in sales related to the exit of retail operations in Japan in 2014;
Decrease of $3.4 million in sales in our Canadian wholesale business primarily due to the Target bankruptcy; and
Decrease of $0.5 million in wholesale sales in our other international locations.

The increase in sales in our Canadian retail stores reflects a 7.0% increase in comparable store sales in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014.

During the first quarter of fiscal 2015, we opened 3 retail stores in Canada and had no closures. A total of 127 retail stores were open in Canada as of April 4, 2015. For all of fiscal 2015, we plan to open approximately 20 retail stores in Canada.

GROSS MARGIN AND GROSS PROFIT

Our consolidated gross margin increased from 40.2% in the first quarter of fiscal 2014 to 41.5% in the first quarter of fiscal 2015. This 1.3% margin improvement was driven by our Carter's and OshKosh wholesale segments.


28

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


Our consolidated gross profit increased $22.3 million, or 8.5%, to $284.1 million in the first quarter of fiscal 2015. This $22.3 million improvement was driven by all of our operating segments except International, as discussed in the section entitled Operating Income, below.
    
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 companies that include such distribution costs in their cost of goods sold.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

SG&A expenses in the first quarter of fiscal 2015 increased $1.1 million, or 0.5%, to $211.2 million. As a percentage of net sales, SG&A expenses decreased from 32.2% to 30.8% in the first quarter of fiscal 2015.

The decrease in SG&A expenses, as a percentage of net sales, in the first quarter of fiscal 2015 reflected:

$4.0 million in reduced amortization for the H.W. Carter & Sons trademark;
$2.7 million in lower provisions for accounts receivable;
$3.0 million absence of expenses associated with operating and exit activities of our former Japan business;
$2.0 million in lower costs associated with our office consolidation project;
$1.3 million in lower costs for external consultants; and
$1.2 million in lower costs for distribution.

Partially offset by:
$8.8 million increase in costs related to retail store operations; and
$1.5 million increase in costs related to information technology.


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 2015 was approximately $11.6 million. This reflects an increase of $1.7 million, or 17.5%, when compared to the first quarter of fiscal 2014. This increase reflects domestic growth in both our Carter's and OshKosh licensed revenues along with timing of favorable settlements with our licensees.


OPERATING INCOME

Consolidated operating income increased $23.0 million, or 37.3%, to $84.5 million in the first quarter of fiscal 2015 compared to the first quarter of fiscal 2014. The table below summarizes the changes in each of our segments' operating results when comparing the first quarter of fiscal 2015 to the first quarter of fiscal 2014:

(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 2014
 
$
46,867

 
$
42,979

 
$
2,025

 
$
(4,489
)
 
$
4,036

 
$
(29,887
)
 
$
61,531

Increase (decrease):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
 
5,679

 
12,198

 
340

 
4,545

 
(55
)
 
(380
)
 
22,327

Royalty income
 
484

 
310

 
498

 
119

 
324

 

 
1,735

SG&A expenses
 
(4,901
)
 
10,994

 
(116
)
 
1,135

 
(2,206
)
 
(3,818
)
 
1,088

Operating income (loss) for first quarter of fiscal 2015
 
$
57,931

 
$
44,493

 
$
2,979

 
$
(960
)
 
$
6,511

 
$
(26,449
)

$
84,505

 
 
(a)
 
(b)
 
(c)
 
(d)
 
(e)
 
(f)
 
 

(a) Carter's wholesale operating income in the first quarter of fiscal 2015 increased $11.1 million, or 23.6%, from the first quarter of fiscal 2014 to $57.9 million. The segment's operating margin increased from 17.3% in the first quarter of fiscal 2014 to 21.5% in first quarter of fiscal 2015. The primary drivers of the change in operating income were a/an:

29

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



Increase in gross profit of $5.7 million primarily due to lower off-price sales and lower inventory reserves, slightly offset by lower sales as previously discussed;
Increase in royalty income of $0.5 million; and
Decrease in SG&A expenses of $4.9 million driven primarily by decreases in provisions for accounts receivable and lower distribution and freight costs.

(b) Carter's retail operating income increased by $1.5 million, or 3.5%, to $44.5 million in the first quarter of fiscal 2015. This segment's operating margin decreased from 18.7% to 17.3% in the first quarter of fiscal 2015. The primary drivers of the change in operating income were an:

Increase in gross profit of $12.2 million primarily due to higher sales as previously discussed, partially offset by higher product costs;
Increase in royalty income of $0.3 million; and
Increase of $11.0 million in SG&A expenses comprised mostly of an:
Increase of $8.0 million in retail store operating expenses due to an increase in the number of stores; and
Increase of $2.7 million in distribution and freight costs.

(c) OshKosh wholesale operating income increased by $1.0 million, or 47.1%, to $3.0 million in the first quarter of fiscal 2015. This segment's operating margin increased from 13.0% to 18.6% in first quarter of fiscal 2015. The primary drivers of the change in operating income were a/an:

Increase in gross profit of $0.3 million primarily due to higher sales as previously discussed;
Increase in royalty income of $0.5 million; and
Decrease of $0.1 million in SG&A expenses.

(d) OshKosh retail operating loss improved by $3.5 million, or 78.6%, from $(4.5) million in the first quarter of fiscal 2014 to $(1.0) million in the first quarter of fiscal 2015. The segment's operating margin increased from (7.1)% to (1.3)% in the first quarter of fiscal 2015. The primary drivers of the change in operating income were an:

Increase in gross profit of $4.5 million due primarily to higher sales as previously discussed, partially offset by higher product costs;
Increase in royalty income of $0.1 million; and
Increase in SG&A expenses of $1.1 million due mainly to additional retail stores in 2015.

(e) International operating income increased by $2.5 million, or 61.3%, to $6.5 million in the first quarter of fiscal 2015. This segment's operating margin increased from 5.7% to 9.5% in the first quarter of fiscal 2015. The primary drivers of the change in operating income were a/an:

Decrease of $2.2 million in SG&A expenses primarily due to the exit from our former Japan retail operations; and
Increase in royalty income of $0.3 million.

(f) Corporate operating expenses decreased by $3.4 million, or 11.5%, in first quarter of fiscal 2015. Corporate expenses as a percentage of consolidated net sales decreased from 4.6% to 3.9% in first quarter of fiscal 2015. The decrease in operating expenses primarily reflected a/an:

Decrease of $4.0 million in amortization expense for the H.W. Carter & Sons tradename;
Decrease of $2.0 million in expenses related to the office consolidation project and facility closures;
Increase of $1.3 million in expenses related to information technology; and
Increase of $0.8 million in expenses related to insurance and other employee benefits.







30

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


INTEREST EXPENSE

Interest expense in the first quarter of fiscal 2015 was comparable to the first quarter of fiscal 2014. Weighted-average borrowings for the first quarters of fiscal 2015 and 2014 were approximately $586.0 million at an effective interest rate of 4.64% for both quarters.


INCOME TAXES

Our consolidated effective income tax rate for the first quarter of fiscal 2015 was 34.5% as compared to 36.7% for the first quarter of fiscal 2014. The decrease in the rate for the first quarter of fiscal 2015 was primarily due to favorable settlements of federal and state tax audits for 2011, 2012 and 2013. For the full fiscal year 2015, we expect our consolidated effective income tax rate to be approximately 36.0%.


NET INCOME

Our consolidated net income for the first quarter of fiscal 2015 increased by $15.5 million, or 45.2%, to $49.8 million as compared to $34.3 million in the first quarter of fiscal 2014.


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 2014 fiscal year ended January 3, 2015.

As of April 4, 2015, the Company has approximately $377.4 million of cash and cash equivalents in major financial institutions, including approximately $21.2 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 the Company and third-party rating agencies.

BALANCE SHEET

Net accounts receivable at April 4, 2015 were $195.6 million compared to $205.2 million at March 29, 2014 and $184.6 million at January 3, 2015. The decrease of $9.6 million, or 4.7%, as compared to March 29, 2014 reflects the slight decrease in net sales from our wholesale customers and the improvement in the timing of collection of receivables. Due to the seasonal nature of our operations, the net accounts receivable balance at April 4, 2015 is not comparable to the net accounts receivable balance of $184.6 million at January 3, 2015.

Inventories at April 4, 2015 were $358.0 million compared to $363.0 million at March 29, 2014 and $444.8 million at January 3, 2015. The decrease of $5.0 million, or 1.4%, as compared to March 29, 2014, primarily reflects reductions in store inventory levels, partially offset by business growth. Due to the seasonal nature of our operations, the net inventories balance at April 4, 2015 is not comparable to the net inventories balance of $444.8 million at January 3, 2015.


CASH FLOW

Net cash provided by operating activities for the first quarter of fiscal 2015 was $87.2 million compared to net cash provided by operating activities of $30.6 million in the first quarter of fiscal 2014. This increase in operating cash flow primarily reflects an

31

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


increase in net income and favorable movements in net working capital primarily due to the timing of inventory purchases and other payments.

Capital expenditures were $20.8 million in the first quarter of fiscal 2015 compared to $32.1 million in the first quarter of fiscal 2014, primarily reflecting expenditures of approximately $12.8 million for our U.S. and international retail store openings and remodelings, $3.2 million for information technology initiatives, and $2.7 million for distribution and office facilities.

We plan to invest approximately $130 million in capital expenditures in fiscal 2015, primarily for our U.S. and international retail store openings and remodelings, and information technology.

Net cash used in financing activities was $29.2 million in the first quarter of fiscal 2015 compared to $7.7 million in the first quarter of fiscal 2014. This increase primarily reflects higher repurchases of our common stock and increases in withholding taxes for vested restricted shares issued under our employee stock-based compensation plan.

SECURED REVOLVING CREDIT FACILITY

We have a $375.0 million revolving credit facility which provides a U.S. dollar revolving facility of $340.0 million ($175.0 million sub-limit for letters of credit and a swing line sub-limit of $40.0 million) plus a $35.0 million multi-currency revolving facility ($15.0 million sub-limit for letters of credit and a swing line sub-limit of $5.0 million), which is available for borrowings by either our The William Carter Company ("TWCC") subsidiary or our Canadian subsidiary, in U.S. dollars, Canadian dollars or other currencies agreed to by the applicable lenders. The revolving credit facility expires August 31, 2017.

At April 4, 2015, we had $186.3 million in outstanding borrowings under our revolving credit facility, exclusive of $7.9 million of outstanding letters of credit, leaving approximately $180.8 million available for future borrowings. The $186.3 million in outstanding borrowings at April 4, 2015 included CAD $25.5 million of outstanding borrowings in Canadian dollars, which translated to approximately $20.3 million based on currency exchange rates at April 4, 2015.

The secured revolving credit facility provides for different pricing options based on, among other things, the currency being borrowed and our leverage. Amounts outstanding under the secured revolving credit facility as of April 4, 2015 were accruing interest at an annual rate of 1.93% (LIBOR rate plus Base Rate) for U.S. dollar borrowings and an annual rate of 2.74% (LIBOR rate plus Base Rate) for Canadian dollar borrowings.

As of April 4, 2015, we were in compliance with the financial debt covenants under our secured revolving credit facility.

SENIOR NOTES

As of April 4, 2015, our wholly-owned operating subsidiary 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. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.


BONNIE TOGS ACQUISITION

As of April 4, 2015, a discounted contingent consideration liability of approximately $7.7 million remains and is classified as a current liability.


SHARE REPURCHASES

Open Market Purchases

Pursuant to the previously announced share repurchase authorizations by our Board of Directors, during 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. During the first quarter of fiscal 2014, the Company repurchased and retired 30,151 shares in open market transactions for approximately $2.3 million, at an average price of $76.03 per share. The total remaining capacity under the repurchase authorizations as of April 4, 2015 was approximately $171.0 million. Future repurchases may be

32

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


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 2015 and 2014, our Company paid quarterly cash dividends of $0.22 and $0.19 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.

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 the first half of our 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 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 significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, to our audited consolidated financial statements included in our most recent Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015. 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 our critical accounting policies and estimates from those described in our most recent Annual Report on Form 10-K.

Information related to pending adoption of recently issued accounting standards is provided in Note 16, Recent Accounting Pronouncements, to the accompanying unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q.

FORWARD-LOOKING STATEMENTS

Statements contained herein that relate to our future performance, including, without limitation, statements with respect to our anticipated results of operations or level of business for fiscal 2015 or any other future period, are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 as expected, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Certain risks that may cause our results to differ from those anticipated are described in Item 1A of Part I of our most recent Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015.

33



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 risk and interest rates. These risks, and our strategies to manage our exposure to them, are discussed below.

We contract for production with third parties primarily in Asia. While these contracts are stated in United States 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 United States dollar and the local currencies of these contractors. We cannot quantify the potential impact of future currency fluctuations on net income (loss) in future years. To date, such exchange fluctuations have not had a material impact on our financial condition or results of operations.

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).

Transactions by our Canadian subsidiary may be denominated in a currency other than the entity’s functional currency, which is the Canadian dollar. Fluctuations in exchange rates, primarily between the United States dollar and the Canadian dollar, may affect our results of operations, financial position, and cash flows. Transaction gains and losses are recorded in our Statement of Operations within Other Expense, net.

For our secured revolving credit facility, during the first quarter of fiscal 2015 we replaced approximately $20.0 million of outstanding borrowings with CAD $25.5 million of borrowings in Canadian dollars, which approximated $20.3 million. Outstanding borrowings under our secured revolving credit facility that are repayable in a currency other than the U.S. dollar are subject to future changes in currency exchange rates.

Our operating results are subject to risk from interest rate fluctuations on our secured revolving credit facility, which carries variable interest rates. Weighted-average variable rate borrowings as of April 4, 2015 were $186.0 million. An increase or decrease of 1% in the effective interest rate on that amount would have increased or decreased our annual pretax interest cost by approximately $1.9 million.


OTHER RISKS

We enter into various purchase order commitments with our suppliers. We have the ability to 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 (the “Exchange Act”)) as of the end of the period covered by this report. 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 4, 2015.

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 2015 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.



34


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 2014 fiscal year ended January 3, 2015.

35


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 2015:

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
 
 
 
 
 
 
 
 
 
January 5, 2015 through January 31, 2015
 
9,600

 
$85.19
 
9,600

 
$184,319,167
 
 
 
 
 
 
 
 
 
February 1, 2015 through February 28, 2015
 
159,602

 
$85.31
 
15,600

 
$183,035,409
 
 
 
 
 
 
 
 
 
March 1, 2015 through April 4, 2015
 
132,700

 
$90.58
 
132,700

 
$171,016,041
 
 
 
 
 
 
 
 
 
Total
 
301,902

 

 
157,900

 
 

(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 144,002 shares surrendered between January 5, 2015 and April 4, 2015.

(2)
Amounts purchased during the first quarter of 2015 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.


36


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
 
 
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.


37



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.


Date : April 29, 2015
/s/ MICHAEL D. CASEY
 
Michael D. Casey
 
Chief Executive Officer
 
(Principal Executive Officer)



Date : April 29, 2015
/s/ RICHARD F. WESTENBERGER
 
Richard F. Westenberger
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and Accounting Officer)




38