ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
|
July 2, 2016
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
173,564
|
|
|
$
|
299,358
|
|
|
$
|
205,080
|
|
Accounts receivable, net
|
165,183
|
|
|
202,471
|
|
|
150,633
|
|
Finished goods inventories
|
610,423
|
|
|
487,591
|
|
|
587,434
|
|
Prepaid expenses and other current assets
|
44,527
|
|
|
32,180
|
|
|
46,189
|
|
Deferred income taxes
|
—
|
|
|
35,486
|
|
|
32,816
|
|
Total current assets
|
993,697
|
|
|
1,057,086
|
|
|
1,022,152
|
|
Property, plant, and equipment, net of accumulated depreciation of $384,881, $345,907, and $317,580, respectively
|
382,472
|
|
|
385,874
|
|
|
386,034
|
|
Tradenames and other intangible assets, net
|
400,735
|
|
|
308,928
|
|
|
309,017
|
|
Goodwill
|
231,709
|
|
|
176,009
|
|
|
177,540
|
|
Other assets
|
23,246
|
|
|
18,700
|
|
|
17,749
|
|
Total assets
|
$
|
2,031,859
|
|
|
$
|
1,946,597
|
|
|
$
|
1,912,492
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
217,340
|
|
|
$
|
158,432
|
|
|
$
|
190,366
|
|
Other current liabilities
|
94,644
|
|
|
119,177
|
|
|
80,595
|
|
Total current liabilities
|
311,984
|
|
|
277,609
|
|
|
270,961
|
|
|
|
|
|
|
|
Long-term debt, net
|
661,846
|
|
|
580,376
|
|
|
580,678
|
|
Deferred income taxes
|
133,251
|
|
|
130,656
|
|
|
128,682
|
|
Other long-term liabilities
|
174,867
|
|
|
169,832
|
|
|
165,469
|
|
Total liabilities
|
$
|
1,281,948
|
|
|
$
|
1,158,473
|
|
|
$
|
1,145,790
|
|
|
|
|
|
|
|
Commitments and contingencies - Note 13
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at July 1, 2017, December 31, 2016, and July 2, 2016
|
—
|
|
|
—
|
|
|
—
|
|
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 47,971,577, 48,948,670 and 50,194,955 shares issued and outstanding at July 1, 2017, December 31, 2016 and July 2, 2016, respectively
|
480
|
|
|
489
|
|
|
502
|
|
Accumulated other comprehensive loss
|
(30,653
|
)
|
|
(34,740
|
)
|
|
(30,533
|
)
|
Retained earnings
|
780,084
|
|
|
822,375
|
|
|
796,733
|
|
Total stockholders' equity
|
749,911
|
|
|
788,124
|
|
|
766,702
|
|
Total liabilities and stockholders' equity
|
$
|
2,031,859
|
|
|
$
|
1,946,597
|
|
|
$
|
1,912,492
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Net sales
|
$
|
692,117
|
|
|
$
|
639,471
|
|
|
$
|
1,424,872
|
|
|
$
|
1,363,556
|
|
Cost of goods sold
|
388,660
|
|
|
357,289
|
|
|
805,613
|
|
|
770,445
|
|
Gross profit
|
303,457
|
|
|
282,182
|
|
|
619,259
|
|
|
593,111
|
|
Selling, general, and administrative expenses
|
250,146
|
|
|
228,464
|
|
|
497,940
|
|
|
457,460
|
|
Royalty income
|
(11,210
|
)
|
|
(9,525
|
)
|
|
(21,768
|
)
|
|
(20,600
|
)
|
Operating income
|
64,521
|
|
|
63,243
|
|
|
143,087
|
|
|
156,251
|
|
Interest expense
|
7,194
|
|
|
6,803
|
|
|
14,298
|
|
|
13,542
|
|
Interest income
|
(79
|
)
|
|
(178
|
)
|
|
(218
|
)
|
|
(385
|
)
|
Other (income) expense, net
|
(544
|
)
|
|
516
|
|
|
(765
|
)
|
|
3,709
|
|
Income before income taxes
|
57,950
|
|
|
56,102
|
|
|
129,772
|
|
|
139,385
|
|
Provision for income taxes
|
20,025
|
|
|
19,904
|
|
|
45,183
|
|
|
49,207
|
|
Net income
|
$
|
37,925
|
|
|
$
|
36,198
|
|
|
$
|
84,589
|
|
|
$
|
90,178
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.79
|
|
|
$
|
0.72
|
|
|
$
|
1.75
|
|
|
$
|
1.77
|
|
Diluted net income per common share
|
$
|
0.78
|
|
|
$
|
0.71
|
|
|
$
|
1.73
|
|
|
$
|
1.75
|
|
Dividend declared and paid per common share
|
$
|
0.37
|
|
|
$
|
0.33
|
|
|
$
|
0.74
|
|
|
$
|
0.66
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Net income
|
$
|
37,925
|
|
|
$
|
36,198
|
|
|
$
|
84,589
|
|
|
$
|
90,178
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
3,140
|
|
|
548
|
|
|
4,087
|
|
|
5,834
|
|
Comprehensive income
|
$
|
41,065
|
|
|
$
|
36,746
|
|
|
$
|
88,676
|
|
|
$
|
96,012
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock - shares
|
|
Common
stock - $
|
|
Additional
paid-in
capital
|
|
Accumulated other comprehensive
loss
|
|
Retained
earnings
|
|
Total
stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
48,948,670
|
|
|
$
|
489
|
|
|
$
|
—
|
|
|
$
|
(34,740
|
)
|
|
$
|
822,375
|
|
|
$
|
788,124
|
|
Exercise of stock options
|
60,660
|
|
|
1
|
|
|
3,121
|
|
|
—
|
|
|
—
|
|
|
3,122
|
|
Withholdings from vesting of restricted stock
|
(65,804
|
)
|
|
(1
|
)
|
|
(5,589
|
)
|
|
—
|
|
|
—
|
|
|
(5,590
|
)
|
Restricted stock activity
|
145,600
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
8,464
|
|
|
—
|
|
|
—
|
|
|
8,464
|
|
Issuance of common stock
|
13,860
|
|
|
1
|
|
|
1,181
|
|
|
—
|
|
|
—
|
|
|
1,182
|
|
Repurchase of common stock
|
(1,131,409
|
)
|
|
(11
|
)
|
|
(7,176
|
)
|
|
—
|
|
|
(91,049
|
)
|
|
(98,236
|
)
|
Cash dividends declared and paid
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,831
|
)
|
|
(35,831
|
)
|
Comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
4,087
|
|
|
84,589
|
|
|
88,676
|
|
Balance at July 1, 2017
|
47,971,577
|
|
|
$
|
480
|
|
|
$
|
—
|
|
|
$
|
(30,653
|
)
|
|
$
|
780,084
|
|
|
$
|
749,911
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Two fiscal quarters ended
|
|
July 1, 2017
|
|
July 2, 2016
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
84,589
|
|
|
$
|
90,178
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
39,705
|
|
|
34,916
|
|
Amortization of tradenames
|
892
|
|
|
1,831
|
|
Amortization of fair value step up of inventory
|
400
|
|
|
—
|
|
Amortization of debt issuance costs
|
749
|
|
|
725
|
|
Non-cash stock-based compensation expense
|
9,646
|
|
|
9,250
|
|
Foreign currency (gain) loss, net
|
(555
|
)
|
|
3,130
|
|
Income tax benefit from stock-based compensation
|
—
|
|
|
(3,684
|
)
|
Loss on disposal of property, plant, and equipment
|
221
|
|
|
133
|
|
Deferred income taxes
|
3,227
|
|
|
1,258
|
|
Effect of changes in operating assets and liabilities, net of acquisition:
|
|
|
|
Accounts receivable, net
|
57,215
|
|
|
57,229
|
|
Finished goods inventories
|
(91,846
|
)
|
|
(114,817
|
)
|
Prepaid expenses and other assets
|
(13,871
|
)
|
|
(12,643
|
)
|
Accounts payable and other liabilities
|
16,961
|
|
|
18,093
|
|
Net cash provided by operating activities
|
107,333
|
|
|
85,599
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(34,276
|
)
|
|
(49,698
|
)
|
Acquisition of Skip Hop Holdings, Inc., net of cash acquired
|
(143,704
|
)
|
|
—
|
|
Proceeds from sale of property, plant, and equipment
|
—
|
|
|
193
|
|
Net cash used in investing activities
|
(177,980
|
)
|
|
(49,505
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Borrowings under secured revolving credit facility
|
100,000
|
|
|
—
|
|
Payments on secured revolving credit facility
|
(18,965
|
)
|
|
—
|
|
Repurchases of common stock
|
(98,236
|
)
|
|
(180,209
|
)
|
Dividends paid
|
(35,831
|
)
|
|
(33,679
|
)
|
Income tax benefit from stock-based compensation
|
—
|
|
|
3,684
|
|
Withholdings from vestings of restricted stock
|
(5,590
|
)
|
|
(8,508
|
)
|
Proceeds from exercises of stock options
|
3,122
|
|
|
5,101
|
|
Net cash used in financing activities
|
(55,500
|
)
|
|
(213,611
|
)
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
353
|
|
|
1,388
|
|
Net decrease in cash and cash equivalents
|
(125,794
|
)
|
|
(176,129
|
)
|
Cash and cash equivalents, beginning of period
|
299,358
|
|
|
381,209
|
|
Cash and cash equivalents, end of period
|
$
|
173,564
|
|
|
$
|
205,080
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear and related products under the
Carter's
,
Child of Mine
,
Just One You
,
Precious Firsts
,
Simple Joys
,
OshKosh B'gosh
("
OshKosh
"),
Skip Hop
and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company's own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of
July 1, 2017
, the Company operated
978
retail stores.
NOTE 2 – BASIS OF PREPARATION AND BUSINESS ACQUISITION
The accompanying unaudited condensed consolidated financial statements include the accounts of Carter's, Inc. and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for interim financial information and the rules and regulations of the Securities and Exchange Commission (the "SEC"). All intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholders' equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter and two fiscal quarters ended
July 1, 2017
are not necessarily indicative of the results that may be expected for the 2017 fiscal year ending
December 30, 2017
.
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
The accompanying condensed consolidated balance sheet as of
December 31, 2016
was derived from the Company's audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
Skip Hop Acquisition
Carter's, Inc.'s wholly-owned subsidiary, The William Carter Company ("TWCC"), acquired
100%
of the voting equity interests of Skip Hop after the close of business on February 22, 2017. The accompanying unaudited condensed consolidated financial statements and footnotes include Skip Hop Holdings, Inc. and subsidiaries ("Skip Hop") from February 23, 2017. The acquisition of Skip Hop expanded the Company’s product offerings to include complementary essential core products for families with young children. Skip Hop's product lines include diaper bags, kid’s backpacks, travel accessories, home gear, and hardline goods for playtime, mealtime, and bath time. Skip Hop's products are sold through wholesale and eCommerce channels.
The Skip Hop purchase was deemed to be the acquisition of a business under the provisions of Accounting Standards Codification ("ASC") No. 805,
Business Combinations
. Based on the purchase price, Skip Hop's assets, and Skip Hop's pre-tax operating income prior to the acquisition, the acquired Skip Hop business does not meet the materiality requirements for preparation and presentation of pro forma financial information.
The majority of Skip Hop's wholesale operations became a part of the Company's U.S. Wholesale operating segment, with the remainder becoming part of the Company's International operating segment. Skip Hop's eCommerce retail operations became part of the Company's U.S. Retail operating segment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the second quarter of fiscal 2017, Skip Hop contributed approximately
$25.0 million
to the Company's consolidated net sales and produced an operating loss of approximately
$(0.8) million
. Between the acquisition date and the end of the Company's second quarter of fiscal 2017, Skip Hop contributed approximately
$35.4 million
of net sales to the Company's consolidated net sales and produced an operating loss of approximately
$(0.4) million
.
The measurement period, as defined under the provisions of ASC 805, is open for certain Skip Hop assets and liabilities. The purchase price is subject to a working capital adjustment, plus a potential future payment of up to
$10 million
contingent upon the achievement of certain financial performance targets in fiscal 2017. Provisional amounts recognized at acquisition in the first quarter of fiscal 2017 and the measurement period adjustments made during the second quarter of fiscal 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Revised
|
|
|
Provisional
|
|
Measurement Period
|
|
Provisional
|
|
|
Amounts
|
|
Adjustments
|
|
Amounts
|
|
|
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
|
|
Assets acquired
|
|
$
|
55.5
|
|
|
$
|
(0.6
|
)
|
|
$
|
54.9
|
|
Liabilities assumed
|
|
(23.2
|
)
|
|
3.0
|
|
|
(20.2
|
)
|
Net assets acquired
|
|
32.3
|
|
|
2.4
|
|
|
34.7
|
|
|
|
|
|
|
|
|
Goodwill *
|
|
56.6
|
|
|
(2.4
|
)
|
|
54.2
|
|
Tradename
|
|
56.8
|
|
|
—
|
|
|
56.8
|
|
Customer relationships
|
|
35.9
|
|
|
—
|
|
|
35.9
|
|
Deferred income tax liabilities
|
|
(33.5
|
)
|
|
—
|
|
|
(33.5
|
)
|
Preliminary purchase price
|
|
148.1
|
|
|
—
|
|
|
148.1
|
|
Less cash acquired
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
Less estimated contingent consideration
|
|
(3.6
|
)
|
|
—
|
|
|
(3.6
|
)
|
Net cash paid
|
|
$
|
143.7
|
|
|
—
|
|
|
$
|
143.7
|
|
|
|
|
|
|
|
|
* Not deductible for income taxes
|
|
|
|
|
|
|
Under the provisions of ASU No. 2015-16, "
Simplifying the Accounting for Measurement Period Adjustments
," the cumulative impact of any measurement period adjustments on current periods and prior periods is recognized in the period that the adjustment is determined.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material subsequent changes to these accounting policies, except as noted below for new accounting pronouncements adopted at the beginning of fiscal 2017.
Adoption of New Accounting Pronouncements At the Beginning of Fiscal 2017
Accounting for Share-Based Payments to Employees (ASU 2016-09)
At the beginning of its first quarter of fiscal 2017, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
("ASU 2016-09"), which amended ASC Topic 718,
Stock Compensation
. The adoption of this ASU affected the Company's consolidated financial statements as follows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidated Statement of Operations - ASU 2016-09 imposes a new requirement to record all of the excess income tax benefits and deficiencies (that result from an increase or decrease in the value of an award from grant date to settlement date) related to share-based payments at settlement through the statement of operations instead of the former requirement to record income tax benefits in excess of compensation cost ("windfalls") in equity, and income tax deficiencies ("shortfalls") in equity to the extent of previous windfalls, and then to operations. This change is required to be applied prospectively upon adoption of ASU 2016-09 to all excess income tax benefits and deficiencies resulting from settlements of share-based payments after the date of adoption. For the second quarter and first two quarters of fiscal 2017, the Company’s provision for income taxes on its consolidated statement of operations includes a benefit of approximately
$0.2 million
and
$1.2 million
, respectively, related to net excess income tax benefits for settlements of share-based payments during the those fiscal periods. For the second quarter and first two quarters of fiscal 2016, the Company recognized net excess income tax benefits of approximately
$0.6 million
and
$3.7 million
, respectively, for share-based payments settled during those periods. These net tax benefits were recorded directly to the Company’s consolidated statement of stockholders’ equity and have not been reclassified to the Company’s consolidated statement of operations, in accordance with adoption and transition provisions of ASU 2016-09.
Consolidated Statement of Cash Flows - ASU 2016-09 requires that all income tax-related cash flows resulting from share-based payments, such as excess income tax benefits, are to be reported as operating activities on the statement of cash flows, a change from the prior requirement to present windfall income tax benefits as an inflow from financing activities and an offsetting outflow from operating activities. As permitted, the Company elected to apply these provisions prospectively to its consolidated statement of cash flows, and accordingly, periods prior to fiscal 2017 have not been adjusted.
Additionally, ASU 2016-09 clarifies that all cash payments made to taxing authorities on the employees' behalf for withheld shares at settlement are presented as financing activities on the statement of cash flows. This change must be applied retrospectively. The presentation requirements did not result in reclassification for any prior periods since such cash flows have historically been presented as a financing activity by the Company on its consolidated statement of cash flows.
The Company elected to continue to estimate forfeitures expected to occur to determine the amount of share-based compensation cost to recognize in each period, as permitted by ASU 2016-09. Accordingly, no cumulative effect was recorded in retained earnings on the Company’s consolidated statement of stockholders’ equity at the beginning of fiscal 2017 upon the adoption of ASU 2016-09.
Simplified Subsequent Measurement of Inventory (ASU 2015-11)
At the beginning of its first quarter of fiscal 2017, the Company adopted the provisions of ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
("ASU 2015-11"). ASU 2015-11 simplifies subsequent measurements of inventory by replacing the lower of cost or market test, required under prior guidance, with a lower of cost and net realizable value test. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities are required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by prior guidance ("market," "subject to a floor," and a "ceiling"). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities recognize the difference as a loss in earnings in the period in which it occurs. The adoption of ASU 2015-11 was not material to the Company's consolidated financial condition, results of operations, or cash flows.
Balance Sheet Classification of Deferred Taxes (ASU 2015-17)
At the beginning of the first quarter of fiscal 2017, the Company prospectively adopted the provisions of ASU No. 2015-17,
Balance Sheet Classification of Deferred Taxes
("ASU 2015-17"). ASU 2015-17 simplifies the balance sheet presentation of deferred income taxes by reporting the net amount of deferred tax assets and liabilities for each tax-paying jurisdiction as non-current on the balance sheet. Prior guidance required the deferred taxes for each tax-paying jurisdiction to be presented as a net current asset or liability and net non-current asset or liability. The Company's prospective adoption of ASU 2015-17 impacts the classification of deferred tax assets and liabilities on any balance sheet that reports the Company's financial position for any date after December 31, 2016. Balance sheets for prior periods have not been adjusted. The adoption of ASU 2015-17 has no impact on the Company's results of operations or cash flows.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
July 1, 2017
|
|
December 31, 2016
|
|
July 2, 2016
|
Cumulative foreign currency translation adjustments
|
$
|
(23,537
|
)
|
|
$
|
(27,624
|
)
|
|
$
|
(23,752
|
)
|
Pension and post-retirement obligations (1)
|
(7,116
|
)
|
|
(7,116
|
)
|
|
(6,781
|
)
|
Total accumulated other comprehensive loss
|
$
|
(30,653
|
)
|
|
$
|
(34,740
|
)
|
|
$
|
(30,533
|
)
|
(1) Net of income taxes of
$4.2 million
,
$4.2 million
, and
$4.0 million
, respectively.
Changes in accumulated other comprehensive loss for the
second
quarter and first two quarters of fiscal
2017
consisted of net gains of
$3.1 million
and
$4.1 million
for foreign currency translation adjustments, respectively. Changes in accumulated other comprehensive loss for the
second
quarter and first two quarters of fiscal
2016
consisted of gains of
$0.5 million
and
$5.8 million
, respectively, for foreign currency translation adjustments. During the first and
second
quarters of both fiscal
2017
and fiscal
2016
, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.
NOTE 4 – GOODWILL AND INTANGIBLE ASSETS
The Company's goodwill and intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
(dollars in thousands)
|
Weighted-average useful life
|
|
Gross fair value
|
|
Accumulated amortization
|
|
Net amount
|
|
Gross fair value
|
|
Accumulated amortization
|
|
Net amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter's goodwill
|
Indefinite
|
|
$
|
136,570
|
|
|
$
|
—
|
|
|
$
|
136,570
|
|
|
$
|
136,570
|
|
|
$
|
—
|
|
|
$
|
136,570
|
|
Canada acquisition
|
Indefinite
|
|
40,897
|
|
|
—
|
|
|
40,897
|
|
|
39,439
|
|
|
—
|
|
|
39,439
|
|
Skip Hop acquisition
(1)
|
Indefinite
|
|
54,242
|
|
|
—
|
|
|
54,242
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total goodwill
|
|
|
$
|
231,709
|
|
|
$
|
—
|
|
|
$
|
231,709
|
|
|
$
|
176,009
|
|
|
$
|
—
|
|
|
$
|
176,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carter's
tradename
|
Indefinite
|
|
$
|
220,233
|
|
|
$
|
—
|
|
|
$
|
220,233
|
|
|
$
|
220,233
|
|
|
$
|
—
|
|
|
$
|
220,233
|
|
OshKosh
tradename
|
Indefinite
|
|
85,500
|
|
|
—
|
|
|
85,500
|
|
|
85,500
|
|
|
—
|
|
|
85,500
|
|
Skip Hop
tradename
(1)
|
Indefinite
|
|
56,800
|
|
|
—
|
|
|
56,800
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Finite-life tradenames
|
2-20 years
|
|
42,021
|
|
|
38,915
|
|
|
3,106
|
|
|
42,005
|
|
|
38,810
|
|
|
3,195
|
|
Total tradenames
|
|
|
$
|
404,554
|
|
|
$
|
38,915
|
|
|
$
|
365,639
|
|
|
$
|
347,738
|
|
|
$
|
38,810
|
|
|
$
|
308,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skip Hop customer relationships
(1)
|
15 years
|
|
35,900
|
|
|
804
|
|
|
35,096
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tradenames and other intangibles, net
|
|
|
$
|
440,454
|
|
|
$
|
39,719
|
|
|
$
|
400,735
|
|
|
$
|
347,738
|
|
|
$
|
38,810
|
|
|
$
|
308,928
|
|
(1) Subject to revision. The measurement period, as defined in ASC 805, Business Combinations, is open for certain assets and liabilities related to the Skip Hop business acquisition that closed on February 22, 2017.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2, 2016
|
(dollars in thousands)
|
Weighted-average useful life
|
|
Gross amount
|
|
Accumulated amortization
|
|
Net amount
|
|
|
|
|
|
|
|
|
Carter's goodwill
|
Indefinite
|
|
$
|
136,570
|
|
|
$
|
—
|
|
|
$
|
136,570
|
|
Canadian acquisition
|
Indefinite
|
|
40,970
|
|
|
—
|
|
|
40,970
|
|
Total goodwill
|
|
|
$
|
177,540
|
|
|
$
|
—
|
|
|
$
|
177,540
|
|
|
|
|
|
|
|
|
|
Carter's
tradename
|
Indefinite
|
|
$
|
220,233
|
|
|
$
|
—
|
|
|
$
|
220,233
|
|
OshKosh
tradename
|
Indefinite
|
|
85,500
|
|
|
—
|
|
|
85,500
|
|
Finite-life tradenames
|
2-20 years
|
|
42,022
|
|
|
38,738
|
|
|
3,284
|
|
Total tradenames
|
|
|
$
|
347,755
|
|
|
$
|
38,738
|
|
|
$
|
309,017
|
|
The substantial majority of Skip Hop's wholesale operations became part of the Company's U.S. Wholesale reportable segment, with the remainder becoming part of the Company's International reportable segment. Skip Hop's eCommerce operations became part of the U.S. Retail reportable segment.
Changes in the carrying values between comparative periods for goodwill related to the Company's 2011 acquisition of its Canadian business (Bonnie Togs) were due to fluctuations in the foreign currency exchange rates between the Canadian and U.S. dollar that were used in the remeasurement process for preparing the Company's consolidated financial statements. The portion of the changes in the carrying values for other trademarks, including the related accumulated amortization, that was not attributable to amortization expense was also impacted by these same foreign currency exchange rate fluctuations.
Included in finite-life tradenames is the Company's exclusive rights to the
Carter's
brands in Chile, including trademark registrations. The Company acquired the Chile rights in 2014 for approximately
$3.6 million
in cash. This intangible tradename is being amortized over
20
years using a straight-line method, resulting in approximately
$0.2 million
of amortization expense for each fiscal year during the life of intangible asset. During the first quarter and first two quarters of fiscal 2016, the Company also recorded amortization expense of approximately
$0.8 million
and
$1.7 million
, respectively, for the H.W. Carter and Sons tradenames, which have been fully amortized.
For the Skip Hop customer relationships intangible asset acquired in February 2017, the Company recorded approximately
$0.6 million
and
$0.8 million
, respectively, of amortization expense for the fiscal quarter and two fiscal quarters ended July 1, 2017. Future amortization expense is estimated to be approximately
$2.4 million
each year for the next
15
years.
NOTE 5 – COMMON STOCK
SHARE REPURCHASES
The total aggregate remaining capacity under outstanding repurchase authorizations as of
July 1, 2017
was approximately
$176.2 million
, based on settled repurchase transactions. The authorizations have no expiration date.
Open Market Repurchases
The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Number of shares repurchased
|
587,465
|
|
|
1,049,483
|
|
|
1,131,409
|
|
|
1,771,847
|
|
Aggregate cost of shares repurchased (dollars in thousands)
|
$
|
51,605
|
|
|
$
|
108,648
|
|
|
$
|
98,236
|
|
|
$
|
180,209
|
|
Average price per share
|
$
|
87.84
|
|
|
$
|
103.52
|
|
|
$
|
86.82
|
|
|
$
|
101.71
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Future repurchases may occur from time to time in the open market, in privately negotiated transactions, or otherwise. The timing and amount of any repurchases will be determined by the Company's management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.
DIVIDENDS
In the
second
fiscal quarter and two fiscal quarters ended
July 1, 2017
, the Company paid cash dividends per share of $
0.37
and $
0.74
, respectively. In the second fiscal quarter and two fiscal quarters ended
July 2, 2016
, the Company declared and paid cash dividends per share of $
0.33
and $
0.66
, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and based on a number of factors, including the Company's future financial performance and other investment priorities.
Provisions in the indenture governing the senior notes of TWCC and in TWCC's secured revolving credit facility could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock. Provisions related to the indenture governing the senior notes are described in the Company's Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016.
NOTE 6 – LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
July 1, 2017
|
|
December 31, 2016
|
|
July 2, 2016
|
Senior notes at amounts repayable
|
$
|
400,000
|
|
|
$
|
400,000
|
|
|
$
|
400,000
|
|
Less unamortized issuance-related costs for senior notes
|
(4,154
|
)
|
|
(4,601
|
)
|
|
(5,036
|
)
|
Senior notes, net
|
395,846
|
|
|
395,399
|
|
|
394,964
|
|
Secured revolving credit facility
|
266,000
|
|
|
184,977
|
|
|
185,714
|
|
Total long-term debt, net
|
$
|
661,846
|
|
|
$
|
580,376
|
|
|
$
|
580,678
|
|
On July 19, 2017, the Company borrowed an additional
$100 million
under its secured revolving credit facility primarily for seasonal working capital needs, bringing total outstanding borrowings under this facility to
$366 million
, excluding accrued interest.
Secured Revolving Credit Facility
The aggregate principal amount of the Company's amended and restated secured revolving credit facility is
$500 million
consisting of (i) a
$400 million
U.S. dollar revolving credit facility (including a
$175 million
sub-limit for letters of credit and a swing line sub-limit of
$50 million
) available for borrowings by TWCC and (ii) a
$100 million
multicurrency revolving credit facility (including a
$40 million
sub-limit for letters of credit and a swing line sub-limit of
$15 million
) available for borrowings by TWCC and certain other subsidiaries of TWCC in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. The secured revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed
$250 million
, either in the form of a commitment increase under the existing revolving credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount available to the Company not to exceed
$200 million
and the aggregate multicurrency amount available not to exceed
$50 million
). The Company's secured revolving credit facility matures on
September 16, 2020
.
As of
July 1, 2017
, the Company had
$266.0 million
in outstanding borrowings under its secured revolving credit facility, exclusive of
$4.5 million
of outstanding letters of credit. As of
July 1, 2017
, approximately
$229.5 million
remained available for future borrowing. All outstanding borrowings under the Company's secured revolving credit facility are classified as non-current liabilities on the Company's consolidated balance sheet because of the contractual repayment terms under the credit facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
July 1, 2017
, the interest rate margins applicable to the secured revolving credit facility were
1.375%
for
LIBOR
(London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from
1.125%
to
1.875%
) and
0.375%
for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from
0.125%
to
0.875%
).
As of
July 1, 2017
, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a
LIBOR
rate plus the applicable
base rate
, which resulted in a weighted average borrowing rate of
2.55%
. All outstanding Canadian dollar borrowings were repaid during the first quarter of fiscal 2017. There were no Canadian dollar borrowings during the second quarter of fiscal 2017.
As disclosed in the Company's most recent Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016, the Company's secured revolving credit facility contains covenants, including affirmative and financial covenants. As of
July 1, 2017
, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.
Senior Notes
As of
July 1, 2017
, TWCC had outstanding
$400 million
principal amount of senior notes bearing interest at a fixed rate of
5.25%
per annum and maturing on August 15, 2021. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC. On the Company's consolidated balance sheet, the senior notes are reported net of certain unamortized issuance-related costs, as described in the table above.
NOTE 7 – STOCK-BASED COMPENSATION
The Company recorded stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
(dollars in thousands)
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Stock options
|
$
|
955
|
|
|
$
|
981
|
|
|
$
|
2,199
|
|
|
$
|
2,277
|
|
Restricted stock:
|
|
|
|
|
|
|
|
Time-based awards
|
2,832
|
|
|
1,717
|
|
|
5,144
|
|
|
3,862
|
|
Performance-based awards
|
1,080
|
|
|
832
|
|
|
2,303
|
|
|
1,947
|
|
Stock awards
|
—
|
|
|
1,164
|
|
|
—
|
|
|
1,164
|
|
Total
|
$
|
4,867
|
|
|
$
|
4,694
|
|
|
$
|
9,646
|
|
|
$
|
9,250
|
|
NOTE 8 – EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution plan and two frozen defined benefit plans. The two frozen defined benefit plans include the OshKosh B'Gosh pension plan and a post-retirement life and medical plan.
OSHKOSH B'GOSH PENSION PLAN
The components of net periodic pension cost included in the statement of operations were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
(dollars in thousands)
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Interest cost
|
$
|
611
|
|
|
$
|
629
|
|
|
$
|
1,222
|
|
|
$
|
1,258
|
|
Expected return on plan assets
|
(650
|
)
|
|
(676
|
)
|
|
(1,300
|
)
|
|
(1,352
|
)
|
Recognized actuarial loss
|
170
|
|
|
145
|
|
|
340
|
|
|
290
|
|
Net periodic pension cost
|
$
|
131
|
|
|
$
|
98
|
|
|
$
|
262
|
|
|
$
|
196
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
POST-RETIREMENT LIFE AND MEDICAL PLAN
The components of post-retirement (benefit) cost included in the statement of operations were comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
(dollars in thousands)
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
Service cost – benefits attributed to service during the period
|
$
|
7
|
|
|
$
|
31
|
|
|
$
|
14
|
|
|
$
|
62
|
|
Interest cost on accumulated post-retirement benefit obligation
|
34
|
|
|
44
|
|
|
68
|
|
|
88
|
|
Amortization net actuarial gain
|
(76
|
)
|
|
(49
|
)
|
|
(152
|
)
|
|
(98
|
)
|
Total net periodic post-retirement (benefit) cost
|
$
|
(35
|
)
|
|
$
|
26
|
|
|
$
|
(70
|
)
|
|
$
|
52
|
|
NOTE 9 – INCOME TAXES
As of
July 1, 2017
, the Company had gross unrecognized income tax benefits of approximately
$11.5 million
, of which
$8.2 million
, if ultimately recognized, may affect the Company's effective tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.
Included in the reserves for unrecognized tax benefits at
July 1, 2017
were approximately
$1.5 million
of reserves for which the statute of limitations is expected to expire within the next fiscal year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2017 or fiscal 2018 along with the effective tax rate in the quarter in which the benefits are recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal quarter and two fiscal quarters ended July 1, 2017 and the fiscal quarter and two fiscal quarters ended July 2, 2016, interest expense recorded on uncertain tax positions was not significant. The Company had approximately
$1.1 million
,
$0.8 million
, and
$0.8 million
of interest accrued on uncertain tax positions as of
July 1, 2017
,
December 31, 2016
, and
July 2, 2016
, respectively.
As disclosed in note 2, the Company's adoption of ASU 2016-09 benefited consolidated income tax expense by approximately
$1.2 million
for the first two quarters of fiscal 2017. The adoption of ASU 2016-09 had no impact on income tax expense for prior periods.
As disclosed in note 2, the Company prospectively adopted the provisions for classification of deferred income tax assets and liabilities on the Company's consolidated balance sheet at the beginning of fiscal 2017. Classifications for deferred income tax assets and liabilities for prior periods have not been adjusted on the Company's consolidated balance sheets.
Deferred income tax liabilities on the Company's consolidated balance sheet at July 1, 2017 increased by
$33.5 million
due to the acquisition of Skip Hop during the first quarter of fiscal 2017.
For the full fiscal year
2017
, the Company estimates that its consolidated effective income tax rate will be approximately
35.0%
.
NOTE 10 – FAIR VALUE MEASUREMENTS
The following table summarizes assets and liabilities that are remeasured at fair value each reporting period:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
|
December 31, 2016
|
|
|
July 2, 2016
|
(dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments (1)
|
$
|
15.3
|
|
|
—
|
|
|
—
|
|
|
|
$
|
12.3
|
|
|
—
|
|
|
—
|
|
|
|
$
|
10.9
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration (2)
|
—
|
|
|
—
|
|
|
$
|
3.6
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign exchange forward contracts (3)
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1.3
|
|
|
—
|
|
(1) Included in Other Assets on the Company's consolidated balance sheet.
(2) Included in Other Current Liabilities on the Company's consolidated balance sheet.
(3) Included in Other Current Liabilities on the Company's consolidated balance sheet.
INVESTMENTS
The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. Gains on the investments in marketable securities were
$0.5 million
and
$1.2 million
for the fiscal quarter and two fiscal quarters ended
July 1, 2017
, respectively, and were
$0.7 million
and
$0.3 million
for the fiscal quarter and two fiscal quarters ended
July 2, 2016
, respectively. These amounts are included in Other (income) expense, net.
CONTINGENT CONSIDERATION
In connection with the Company's acquisition of Skip Hop on February 22, 2017, the Company may be obligated to pay an amount up to
$10 million
of additional cash consideration to the sellers of Skip Hop if the acquired business achieves certain financial performance targets in fiscal 2017 for net sales and adjusted operating margin, as defined in the stock purchase agreement. The Company has preliminarily estimated the discounted fair value of this contingency to be approximately
$3.6 million
(undiscounted approximately
$3.8 million
) based on weighted probabilities of
25%
,
25%
and
50%
for each possible payment amount under the earnout. The Company remeasures the fair value of this contingency at the end of each reporting period in fiscal 2017.
FOREIGN EXCHANGE FORWARD CONTRACTS
Fair values for unsettled foreign exchange forward contracts are calculated by using readily observable market inputs (market-quoted currency exchange rates in effect between U.S. and Canadian dollars) and are classified as Level 2 within the fair value hierarchy. At July 1, 2017 and December 31, 2016, there were no open foreign currency contracts. At July 2, 2016, the notional value of the open foreign currency forward contracts was approximately
$20.0 million
.
DEBT OBLIGATIONS
The Company's outstanding debt obligations are reflected in the consolidated balance sheet at carrying value. These debt obligations are not remeasured at fair value each reporting period, however the following fair value disclosures are provided:
|
|
•
|
As of
July 1, 2017
, the fair value of the Company's
$266.0 million
in outstanding borrowings under its secured revolving credit facility approximated carrying value. On July 19, 2017, the Company borrowed an additional
$100 million
under its secured revolving credit facility primarily for seasonal working capital needs, bringing total outstanding borrowings under this facility to
$366 million
. Fair value approximates carrying value of
$366 million
.
|
|
|
•
|
The fair value of the Company's senior notes at
July 1, 2017
was approximately
$412 million
. The fair value of these senior notes with a notional value and carrying value of
$400 million
was estimated using a quoted price as provided in the secondary market, which considers
the Company's credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.
|
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
|
|
Two fiscal quarters ended
|
|
July 1, 2017
|
|
July 2, 2016
|
|
July 1, 2017
|
|
July 2, 2016
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common equivalent shares outstanding:
|
|
|
|
|
|
|
|
Basic number of common shares outstanding
|
47,863,618
|
|
|
50,143,568
|
|
|
48,093,155
|
|
|
50,660,278
|
|
Dilutive effect of equity awards
|
550,726
|
|
|
469,114
|
|
|
552,866
|
|
|
468,632
|
|
Diluted number of common and common equivalent shares outstanding
|
48,414,344
|
|
|
50,612,682
|
|
|
48,646,021
|
|
|
51,128,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
Net income
|
$
|
37,925
|
|
|
$
|
36,198
|
|
|
$
|
84,589
|
|
|
$
|
90,178
|
|
Income allocated to participating securities
|
(291
|
)
|
|
(279
|
)
|
|
(660
|
)
|
|
(720
|
)
|
Net income available to common shareholders
|
$
|
37,634
|
|
|
$
|
35,919
|
|
|
$
|
83,929
|
|
|
$
|
89,458
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
$
|
0.79
|
|
|
$
|
0.72
|
|
|
$
|
1.75
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
Net income
|
$
|
37,925
|
|
|
$
|
36,198
|
|
|
$
|
84,589
|
|
|
$
|
90,178
|
|
Income allocated to participating securities
|
(289
|
)
|
|
(278
|
)
|
|
(656
|
)
|
|
(715
|
)
|
Net income available to common shareholders
|
$
|
37,636
|
|
|
$
|
35,920
|
|
|
$
|
83,933
|
|
|
$
|
89,463
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
$
|
0.78
|
|
|
$
|
0.71
|
|
|
$
|
1.73
|
|
|
$
|
1.75
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from diluted earnings per share computation
|
663,531
|
|
|
233,570
|
|
|
596,297
|
|
|
233,570
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES
Other current liabilities that exceeded five percent of total current liabilities, at the end of any comparable period, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
July 1, 2017
|
|
December 31, 2016
|
|
July 2, 2016
|
Accrued bonuses and incentive compensation
|
$
|
5,959
|
|
|
$
|
16,834
|
|
|
$
|
6,694
|
|
Accrued employee benefits
|
10,227
|
|
|
17,165
|
|
|
8,718
|
|
Accrued and deferred rent
|
17,767
|
|
|
15,632
|
|
|
13,930
|
|
Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
July 1, 2017
|
|
December 31, 2016
|
|
July 2, 2016
|
Deferred lease incentives
|
$
|
74,344
|
|
|
$
|
74,015
|
|
|
$
|
71,884
|
|
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.
NOTE 14 – SEGMENT INFORMATION
At the beginning of fiscal 2017, the Company combined its Carter's Retail and OshKosh Retail into a single U.S. Retail operating segment, and its Carter's Wholesale and OshKosh Wholesale into a single U.S. Wholesale operating segment, in order to reflect the sales-channel approach the Company's executive management now uses to evaluate its business performance and manage operations in the U.S. The Company's International segment was not affected by these changes. The Company's reportable segments are now U.S. Retail, U.S. Wholesale, and International.
Prior periods have been conformed to reflect the Company's current segment structure by adding together Carter's Retail and OshKosh Retail as U.S. Retail and Carter's Wholesale and OshKosh Wholesale as U.S. Wholesale. Prior results for the International segment and Corporate expenses were not impacted.
The table below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
(dollars in thousands)
|
July 1,
2017
|
|
% of
Total Net Sales
|
|
July 2,
2016
|
|
% of
Total Net Sales
|
|
July 1,
2017
|
|
% of
Total Net Sales
|
|
July 2,
2016
|
|
% of
Total Net Sales
|
Net sales
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Wholesale
|
$
|
217,710
|
|
|
31.5
|
%
|
|
$
|
215,122
|
|
|
33.6
|
%
|
|
$
|
510,265
|
|
|
35.8
|
%
|
|
$
|
507,176
|
|
|
37.2
|
%
|
U.S. Retail (a)
|
391,822
|
|
|
56.6
|
%
|
|
352,782
|
|
|
55.2
|
%
|
|
755,593
|
|
|
53.0
|
%
|
|
706,871
|
|
|
51.8
|
%
|
International (b)
|
82,585
|
|
|
11.9
|
%
|
|
71,567
|
|
|
11.2
|
%
|
|
159,014
|
|
|
11.2
|
%
|
|
149,509
|
|
|
11.0
|
%
|
Total net sales
|
$
|
692,117
|
|
|
100.0
|
%
|
|
$
|
639,471
|
|
|
100.0
|
%
|
|
$
|
1,424,872
|
|
|
100.0
|
%
|
|
$
|
1,363,556
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
:
|
|
|
% of
Segment
Net Sales
|
|
|
|
% of
Segment
Net Sales
|
|
|
|
% of
Segment
Net Sales
|
|
|
|
% of
Segment
Net Sales
|
U.S. Wholesale (g)
|
$
|
35,806
|
|
|
16.4
|
%
|
|
$
|
41,509
|
|
|
19.3
|
%
|
|
$
|
105,501
|
|
|
20.7
|
%
|
|
$
|
109,920
|
|
|
21.7
|
%
|
U.S. Retail (a) (g)
|
42,342
|
|
|
10.8
|
%
|
|
36,952
|
|
|
10.5
|
%
|
|
72,242
|
|
|
9.6
|
%
|
|
76,421
|
|
|
10.8
|
%
|
International (b) (g)
|
7,597
|
|
|
9.2
|
%
|
|
9,105
|
|
|
12.7
|
%
|
|
11,282
|
|
|
7.1
|
%
|
|
17,546
|
|
|
11.7
|
%
|
Corporate expenses (c) (d) (e) (f)
|
(21,224
|
)
|
|
|
|
|
(24,323
|
)
|
|
|
|
|
(45,938
|
)
|
|
|
|
|
(47,636
|
)
|
|
|
|
Total operating income
|
$
|
64,521
|
|
|
9.3
|
%
|
|
$
|
63,243
|
|
|
9.9
|
%
|
|
$
|
143,087
|
|
|
10.0
|
%
|
|
$
|
156,251
|
|
|
11.5
|
%
|
|
|
(a)
|
Includes retail store and eCommerce results.
|
|
|
(b)
|
Net sales include international retail, eCommerce, and wholesale sales.
|
|
|
(c)
|
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, office occupancy, information technology, certain legal fees, consulting, and audit fees.
|
|
|
(d)
|
Includes expenses related to the amortization of the H.W. Carter and Sons tradenames of approximately
$0.8 million
and
$1.7 million
for the fiscal quarter and two fiscal quarters ended
July 2, 2016
, respectively.
|
|
|
(e)
|
Includes acquisition-related expenses of approximately
$0.6 million
and
$1.8 million
for fiscal quarter the two fiscal quarters ended July 1, 2017, respectively.
|
|
|
(f)
|
Includes charges related to the Company's direct sourcing initiative of approximately
$0.1
and
$0.3 million
for the fiscal quarter and two fiscal quarters ended July 1, 2017, respectively.
|
|
|
(g)
|
A total of
$0.4 million
of certain costs related to inventory acquired from Skip Hop is included in operating income between U.S. Wholesale, U.S. Retail, and International for the fiscal quarter and two fiscal quarters ended July 1, 2017.
|
NOTE 15 – PENDING ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition (ASC 606)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which since has been codified in Accounting Standards Codification ("ASC") 606,
Revenue from Contracts with Customers
("ASC 606"). This guidance clarifies the principles for recognizing revenue and will be applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance will require improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. Since its original issuance, the FASB has issued several updates to this guidance, and additional updates are possible. The standard will be effective for the Company at the beginning of fiscal 2018, including interim periods within that fiscal year. Upon adoption, the Company will apply the provisions of ASC 606 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. Based on an assessment of the Company's significant sources of revenue, at this time the Company does not believe that the adoption of ASC 606, including any of the policy elections required or permitted by ASC 606, will have a material impact on its consolidated financial position, results of operations or cash flows. Based on this assessment, at this time the Company does not believe the adoption of ASC 606 will have a significant impact on processes, systems, or controls.
Leases (ASU 2016-02)
In February 2016, the FASB issued new lease accounting guidance in ASU No. 2016-02,
Leases-Topic 842
("ASU 2016-02"). Under this new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases): 1) a lease liability equal to the lessee's obligation to make lease payments arising from a lease, measured on a discounted basis and 2) a right-of-use asset which will represent the lessee's right to use, or control the use of, a specified asset for the lease term. ASU
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2016-02 will have little or no impact on an entity's results of operations or cash flows. The new standard will be effective for the Company at the beginning of fiscal 2019, including interim periods within the year of adoption. The new standard requires a modified retrospective basis, and early adoption is permitted. The Company is still evaluating the potential impacts of ASU 2016-02 on its consolidated balance sheet. However, the Company expects that the adoption of ASU 2016-02 will require the Company to recognize right-of-use assets and lease liabilities that will be material to the Company's consolidated balance sheet.
Credit Losses (ASU 2016-13)
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13")
.
This new guidance will change how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 will replace the current "incurred loss" model with an "expected loss" model. Under the "incurred loss" model, a loss (or allowance) is recognized only when an event has occurred (such as a payment delinquency) that causes the entity to believe that a loss is probable (i.e., that it has been "incurred"). Under the "expected loss" model, an entity will recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The "incurred loss" model considers past events and current conditions, while the "expected loss" model includes expectations for the future which have yet to occur. ASU 2016-13 is effective for public companies for fiscal years beginning after December 15, 2019 with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods therein. The standard will require entities to record a cumulative-effect adjustment to the balance sheet as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the potential impact that ASU 2016-13 may have on the timing of recognizing future provisions for expected losses on the Company's accounts receivable.
Classification of Costs Related to Defined Benefit Pension and Other Post-retirement Benefit Plans
(ASU 2017-07)
In March 2017, the FASB issued ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost
("ASU 2017-07")
.
ASU 2017-07 will change how employers that sponsor defined benefit pension and/or other post-retirement benefit plans present the net periodic benefit costs in the statement of operations. Under this new guidance, an employer's statement of operations will present service cost arising in the current period in the same income statement line item as other employee compensation. However, all other components of current period costs related to defined benefit plans, such as prior service costs and actuarial gains and losses, will be presented on the income statement on a line item outside (or below) operating income. For public companies, the guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. Presentation of the components of net periodic benefit cost on the income statement will be applied retrospectively. The impact that ASU 2017-07 will have on the Company's operating income will depend on future periodic pension costs related to the Company's current frozen defined benefit pension plan and post-retirement medical benefit plan. However, based on these costs in recent annual and interim reporting periods, the adoption of ASU 2017-07 is not expected to be material to the Company's operating income.
Goodwill Impairment Testing
(ASU 2017-04)
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04")
.
ASU 2017-04 will eliminate the requirement to calculate the implied fair value of goodwill (step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 will not change the current guidance for completing Step 1 of the goodwill impairment test, and an entity will still be able to perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. Upon adoption, ASU 2017-04 will be applied prospectively. Adoption for public companies is effective for annual and interim impairment test performed in periods after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The impact that ASU 2017-04 may have on the Company's financial condition or results of operations will depend on the circumstances of any goodwill impairment event that may occur after adoption.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statement of Cash Flows
(ASU 2016-15)
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
("ASU 2016-15"). This ASU represents a consensus of the FASB’s Emerging Issues Task Force on eight separate issues that each impact classifications on the statement of cash flows. In particular, issue number three addresses the classification of contingent consideration payments made after a business combination. Under ASU 2016-15, cash payments made soon after an acquisition’s consummation date (i.e., approximately three months or less) will be classified as cash outflows from investing activities. Payments made thereafter will be classified as cash outflows from financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability will be classified as cash outflows from operating activities. For public business entities, ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The guidance requires application using a retrospective transition method. Early adoption is permitted, provided that all of the amendments are adopted in the same period. At the current time, none of the other items contained in ASU 2016-15 are expected to impact the Company's classifications on its consolidated statement of cash flows.
Modifications to Share-based Compensation Awards (ASU 2017-09)
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation Topic 718-Scope of Modification Accounting
("ASU 2017-09"). This guidance will clarify when changes to the terms and conditions of share-based payment awards must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions, or classification of an award changes. ASU 2017-07 is effective for the Company at the beginning of fiscal 2018, including interim periods within fiscal 2018. Early adoption is permitted. The guidance will be applied prospectively to awards modified on or after adoption. The impact that ASU 2017-09 may have on the Company's results of operations, financial condition, or cash flows subsequent to adoption will be dependent on the terms and conditions of any modifications made to share-based awards after fiscal 2017.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company’s senior notes constitute debt obligations of its wholly-owned subsidiary, The William Carter Company ("TWCC" or the "Subsidiary Issuer"), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the "Parent"), by certain of the Parent's current domestic subsidiaries (other than TWCC), and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s secured revolving credit facility or certain other debt of the Company or the subsidiary guarantors. Under specific customary conditions, the guarantees are not full and unconditional because subsidiary guarantors can be released and relieved of their obligations under customary circumstances contained in the indenture governing the senior notes. These circumstances include, among others, the following, so long as other applicable provisions of the indentures are adhered to: any sale or other disposition of all or substantially all of the assets of any subsidiary guarantor, any sale or other disposition of capital stock of any subsidiary guarantor, or designation of any restricted subsidiary that is a subsidiary guarantor as an unrestricted subsidiary.
For additional information, refer to the Company's Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016.
The condensed consolidating financial information for the Parent, the Subsidiary Issuer, and the guarantor and non-guarantor subsidiaries has been prepared from the books and records maintained by the Company. The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10. The financial information may not necessarily be indicative of the financial position, results of operations, comprehensive income (loss), and cash flows, had the Parent, Subsidiary Issuer, guarantor or non-guarantor subsidiaries operated as independent entities.
Intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and all guarantees are joint, several, and unconditional.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Balance Sheets (unaudited)
As of
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
127,907
|
|
|
$
|
11,435
|
|
|
$
|
34,222
|
|
|
$
|
—
|
|
|
$
|
173,564
|
|
Accounts receivable, net
|
—
|
|
|
124,885
|
|
|
35,765
|
|
|
4,533
|
|
|
—
|
|
|
165,183
|
|
Intercompany receivable
|
—
|
|
|
56,526
|
|
|
61,911
|
|
|
25,588
|
|
|
(144,025
|
)
|
|
—
|
|
Finished goods inventories
|
—
|
|
|
346,963
|
|
|
207,368
|
|
|
68,262
|
|
|
(12,170
|
)
|
|
610,423
|
|
Prepaid expenses and other current assets
|
—
|
|
|
16,684
|
|
|
18,002
|
|
|
9,841
|
|
|
—
|
|
|
44,527
|
|
Total current assets
|
—
|
|
|
672,965
|
|
|
334,481
|
|
|
142,446
|
|
|
(156,195
|
)
|
|
993,697
|
|
Property, plant, and equipment, net
|
—
|
|
|
150,796
|
|
|
195,209
|
|
|
36,467
|
|
|
—
|
|
|
382,472
|
|
Goodwill
|
—
|
|
|
136,570
|
|
|
53,635
|
|
|
41,504
|
|
|
—
|
|
|
231,709
|
|
Tradenames and other intangible assets, net
|
—
|
|
|
223,339
|
|
|
177,396
|
|
|
—
|
|
|
—
|
|
|
400,735
|
|
Other assets
|
—
|
|
|
20,901
|
|
|
447
|
|
|
1,898
|
|
|
—
|
|
|
23,246
|
|
Intercompany long-term receivable
|
—
|
|
|
—
|
|
|
411,475
|
|
|
—
|
|
|
(411,475
|
)
|
|
—
|
|
Intercompany long-term note receivable
|
—
|
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Investment in subsidiaries
|
749,911
|
|
|
936,310
|
|
|
167,809
|
|
|
—
|
|
|
(1,854,030
|
)
|
|
—
|
|
Total assets
|
$
|
749,911
|
|
|
$
|
2,240,881
|
|
|
$
|
1,340,452
|
|
|
$
|
222,315
|
|
|
$
|
(2,521,700
|
)
|
|
$
|
2,031,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
151,770
|
|
|
$
|
47,695
|
|
|
$
|
17,875
|
|
|
$
|
—
|
|
|
$
|
217,340
|
|
Intercompany payables
|
—
|
|
|
82,539
|
|
|
57,034
|
|
|
4,452
|
|
|
(144,025
|
)
|
|
—
|
|
Other current liabilities
|
—
|
|
|
32,973
|
|
|
53,114
|
|
|
8,557
|
|
|
—
|
|
|
94,644
|
|
Total current liabilities
|
—
|
|
|
267,282
|
|
|
157,843
|
|
|
30,884
|
|
|
(144,025
|
)
|
|
311,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
—
|
|
|
661,846
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
661,846
|
|
Deferred income taxes
|
—
|
|
|
69,750
|
|
|
63,400
|
|
|
101
|
|
|
—
|
|
|
133,251
|
|
Intercompany long-term liability
|
—
|
|
|
411,475
|
|
|
—
|
|
|
—
|
|
|
(411,475
|
)
|
|
—
|
|
Intercompany long-term note payable
|
—
|
|
|
—
|
|
|
100,000
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Other long-term liabilities
|
—
|
|
|
68,447
|
|
|
92,236
|
|
|
14,184
|
|
|
—
|
|
|
174,867
|
|
Stockholders' equity
|
749,911
|
|
|
762,081
|
|
|
926,973
|
|
|
177,146
|
|
|
(1,866,200
|
)
|
|
749,911
|
|
Total liabilities and stockholders' equity
|
$
|
749,911
|
|
|
$
|
2,240,881
|
|
|
$
|
1,340,452
|
|
|
$
|
222,315
|
|
|
$
|
(2,521,700
|
)
|
|
$
|
2,031,859
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
229,056
|
|
|
$
|
11,817
|
|
|
$
|
58,485
|
|
|
$
|
—
|
|
|
$
|
299,358
|
|
Accounts receivable, net
|
—
|
|
|
176,825
|
|
|
18,315
|
|
|
7,331
|
|
|
—
|
|
|
202,471
|
|
Intercompany receivable
|
—
|
|
|
55,902
|
|
|
74,681
|
|
|
14,601
|
|
|
(145,184
|
)
|
|
—
|
|
Finished goods inventories
|
—
|
|
|
278,696
|
|
|
174,542
|
|
|
60,153
|
|
|
(25,800
|
)
|
|
487,591
|
|
Prepaid expenses and other current assets
|
—
|
|
|
11,402
|
|
|
16,028
|
|
|
4,750
|
|
|
—
|
|
|
32,180
|
|
Deferred income taxes
|
—
|
|
|
18,476
|
|
|
15,440
|
|
|
1,570
|
|
|
—
|
|
|
35,486
|
|
Total current assets
|
—
|
|
|
770,357
|
|
|
310,823
|
|
|
146,890
|
|
|
(170,984
|
)
|
|
1,057,086
|
|
Property, plant, and equipment, net
|
—
|
|
|
155,187
|
|
|
194,691
|
|
|
35,996
|
|
|
—
|
|
|
385,874
|
|
Goodwill
|
—
|
|
|
136,570
|
|
|
—
|
|
|
39,439
|
|
|
—
|
|
|
176,009
|
|
Tradenames and other intangible assets, net
|
—
|
|
|
223,428
|
|
|
85,500
|
|
|
—
|
|
|
—
|
|
|
308,928
|
|
Other assets
|
—
|
|
|
17,771
|
|
|
605
|
|
|
324
|
|
|
—
|
|
|
18,700
|
|
Intercompany long-term receivable
|
—
|
|
|
—
|
|
|
428,436
|
|
|
—
|
|
|
(428,436
|
)
|
|
—
|
|
Intercompany long-term note receivable
|
—
|
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Investment in subsidiaries
|
788,124
|
|
|
753,753
|
|
|
145,076
|
|
|
—
|
|
|
(1,686,953
|
)
|
|
—
|
|
Total assets
|
$
|
788,124
|
|
|
$
|
2,157,066
|
|
|
$
|
1,165,131
|
|
|
$
|
222,649
|
|
|
$
|
(2,386,373
|
)
|
|
$
|
1,946,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
97,103
|
|
|
$
|
41,947
|
|
|
$
|
19,382
|
|
|
$
|
—
|
|
|
$
|
158,432
|
|
Intercompany payables
|
—
|
|
|
85,894
|
|
|
55,257
|
|
|
4,033
|
|
|
(145,184
|
)
|
|
—
|
|
Other current liabilities
|
—
|
|
|
16,473
|
|
|
90,718
|
|
|
11,986
|
|
|
—
|
|
|
119,177
|
|
Total current liabilities
|
—
|
|
|
199,470
|
|
|
187,922
|
|
|
35,401
|
|
|
(145,184
|
)
|
|
277,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net
|
—
|
|
|
561,399
|
|
|
—
|
|
|
18,977
|
|
|
—
|
|
|
580,376
|
|
Deferred income taxes
|
—
|
|
|
87,116
|
|
|
43,540
|
|
|
—
|
|
|
—
|
|
|
130,656
|
|
Intercompany long-term liability
|
—
|
|
|
428,436
|
|
|
—
|
|
|
—
|
|
|
(428,436
|
)
|
|
—
|
|
Intercompany long-term note payable
|
—
|
|
|
—
|
|
|
100,000
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Other long-term liabilities
|
—
|
|
|
66,721
|
|
|
89,252
|
|
|
13,859
|
|
|
—
|
|
|
169,832
|
|
Stockholders' equity
|
788,124
|
|
|
813,924
|
|
|
744,417
|
|
|
154,412
|
|
|
(1,712,753
|
)
|
|
788,124
|
|
Total liabilities and stockholders' equity
|
$
|
788,124
|
|
|
$
|
2,157,066
|
|
|
$
|
1,165,131
|
|
|
$
|
222,649
|
|
|
$
|
(2,386,373
|
)
|
|
$
|
1,946,597
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
—
|
|
|
$
|
159,191
|
|
|
$
|
11,233
|
|
|
$
|
34,656
|
|
|
$
|
—
|
|
|
$
|
205,080
|
|
Accounts receivable, net
|
—
|
|
|
126,501
|
|
|
19,844
|
|
|
4,288
|
|
|
—
|
|
|
150,633
|
|
Intercompany receivable
|
—
|
|
|
62,988
|
|
|
115,545
|
|
|
6,820
|
|
|
(185,353
|
)
|
|
—
|
|
Finished goods inventories
|
—
|
|
|
344,479
|
|
|
212,739
|
|
|
67,367
|
|
|
(37,151
|
)
|
|
587,434
|
|
Prepaid expenses and other current assets
|
—
|
|
|
25,362
|
|
|
15,142
|
|
|
5,685
|
|
|
—
|
|
|
46,189
|
|
Deferred income taxes
|
—
|
|
|
17,452
|
|
|
13,545
|
|
|
1,819
|
|
|
—
|
|
|
32,816
|
|
Total current assets
|
—
|
|
|
735,973
|
|
|
388,048
|
|
|
120,635
|
|
|
(222,504
|
)
|
|
1,022,152
|
|
Property, plant, and equipment, net
|
—
|
|
|
162,536
|
|
|
191,895
|
|
|
31,603
|
|
|
—
|
|
|
386,034
|
|
Goodwill
|
—
|
|
|
136,570
|
|
|
—
|
|
|
40,970
|
|
|
—
|
|
|
177,540
|
|
Tradenames and other intangible assets, net
|
—
|
|
|
223,517
|
|
|
85,500
|
|
|
—
|
|
|
—
|
|
|
309,017
|
|
Other assets
|
—
|
|
|
16,705
|
|
|
708
|
|
|
336
|
|
|
—
|
|
|
17,749
|
|
Intercompany long-term receivable
|
—
|
|
|
—
|
|
|
297,756
|
|
|
—
|
|
|
(297,756
|
)
|
|
—
|
|
Intercompany long-term note receivable
|
—
|
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Investment in subsidiaries
|
766,702
|
|
|
692,654
|
|
|
119,250
|
|
|
—
|
|
|
(1,578,606
|
)
|
|
—
|
|
Total assets
|
$
|
766,702
|
|
|
$
|
2,067,955
|
|
|
$
|
1,083,157
|
|
|
$
|
193,544
|
|
|
$
|
(2,198,866
|
)
|
|
$
|
1,912,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
—
|
|
|
$
|
125,742
|
|
|
$
|
44,406
|
|
|
$
|
20,218
|
|
|
$
|
—
|
|
|
$
|
190,366
|
|
Intercompany payables
|
—
|
|
|
120,695
|
|
|
61,774
|
|
|
2,884
|
|
|
(185,353
|
)
|
|
—
|
|
Other current liabilities
|
—
|
|
|
7,293
|
|
|
63,500
|
|
|
9,802
|
|
|
—
|
|
|
80,595
|
|
Total current liabilities
|
—
|
|
|
253,730
|
|
|
169,680
|
|
|
32,904
|
|
|
(185,353
|
)
|
|
270,961
|
|
Long-term debt, net
|
—
|
|
|
560,964
|
|
|
—
|
|
|
19,714
|
|
|
—
|
|
|
580,678
|
|
Deferred income taxes
|
—
|
|
|
83,601
|
|
|
45,081
|
|
|
—
|
|
|
—
|
|
|
128,682
|
|
Intercompany long-term liability
|
—
|
|
|
297,756
|
|
|
—
|
|
|
—
|
|
|
(297,756
|
)
|
|
—
|
|
Intercompany long-term note payable
|
—
|
|
|
—
|
|
|
100,000
|
|
|
—
|
|
|
(100,000
|
)
|
|
—
|
|
Other long-term liabilities
|
—
|
|
|
68,051
|
|
|
85,078
|
|
|
12,340
|
|
|
—
|
|
|
165,469
|
|
Stockholders' equity
|
766,702
|
|
|
803,853
|
|
|
683,318
|
|
|
128,586
|
|
|
(1,615,757
|
)
|
|
766,702
|
|
Total liabilities and stockholders' equity
|
$
|
766,702
|
|
|
$
|
2,067,955
|
|
|
$
|
1,083,157
|
|
|
$
|
193,544
|
|
|
$
|
(2,198,866
|
)
|
|
$
|
1,912,492
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Operations (unaudited)
For the fiscal quarter ended
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net sales
|
$
|
—
|
|
|
$
|
352,814
|
|
|
$
|
435,321
|
|
|
$
|
71,886
|
|
|
$
|
(167,904
|
)
|
|
$
|
692,117
|
|
Cost of goods sold
|
—
|
|
|
260,902
|
|
|
257,323
|
|
|
37,019
|
|
|
(166,584
|
)
|
|
388,660
|
|
Gross profit
|
—
|
|
|
91,912
|
|
|
177,998
|
|
|
34,867
|
|
|
(1,320
|
)
|
|
303,457
|
|
Selling, general, and administrative expenses
|
—
|
|
|
38,295
|
|
|
193,865
|
|
|
26,292
|
|
|
(8,306
|
)
|
|
250,146
|
|
Royalty income
|
—
|
|
|
(8,905
|
)
|
|
(4,882
|
)
|
|
—
|
|
|
2,577
|
|
|
(11,210
|
)
|
Operating income (loss)
|
—
|
|
|
62,522
|
|
|
(10,985
|
)
|
|
8,575
|
|
|
4,409
|
|
|
64,521
|
|
Interest expense
|
—
|
|
|
7,138
|
|
|
1,377
|
|
|
6
|
|
|
(1,327
|
)
|
|
7,194
|
|
Interest income
|
—
|
|
|
(1,400
|
)
|
|
—
|
|
|
(6
|
)
|
|
1,327
|
|
|
(79
|
)
|
(Income) loss in subsidiaries
|
(37,925
|
)
|
|
7,022
|
|
|
(6,807
|
)
|
|
—
|
|
|
37,710
|
|
|
—
|
|
Other (income) expense, net
|
—
|
|
|
(257
|
)
|
|
280
|
|
|
(567
|
)
|
|
—
|
|
|
(544
|
)
|
Income (loss) before income taxes
|
37,925
|
|
|
50,019
|
|
|
(5,835
|
)
|
|
9,142
|
|
|
(33,301
|
)
|
|
57,950
|
|
Provision for income taxes
|
—
|
|
|
16,503
|
|
|
1,186
|
|
|
2,336
|
|
|
—
|
|
|
20,025
|
|
Net income (loss)
|
$
|
37,925
|
|
|
$
|
33,516
|
|
|
$
|
(7,021
|
)
|
|
$
|
6,806
|
|
|
$
|
(33,301
|
)
|
|
$
|
37,925
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the fiscal quarter ended
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
Net sales
|
$
|
—
|
|
|
$
|
361,366
|
|
|
$
|
374,806
|
|
|
$
|
66,218
|
|
|
$
|
(162,919
|
)
|
|
$
|
639,471
|
|
Cost of goods sold
|
—
|
|
|
264,791
|
|
|
220,976
|
|
|
30,976
|
|
|
(159,454
|
)
|
|
357,289
|
|
Gross profit
|
—
|
|
|
96,575
|
|
|
153,830
|
|
|
35,242
|
|
|
(3,465
|
)
|
|
282,182
|
|
Selling, general, and administrative expenses
|
—
|
|
|
40,434
|
|
|
173,924
|
|
|
22,514
|
|
|
(8,408
|
)
|
|
228,464
|
|
Royalty income
|
—
|
|
|
(7,057
|
)
|
|
(4,514
|
)
|
|
—
|
|
|
2,046
|
|
|
(9,525
|
)
|
Operating income (loss)
|
—
|
|
|
63,198
|
|
|
(15,580
|
)
|
|
12,728
|
|
|
2,897
|
|
|
63,243
|
|
Interest expense
|
—
|
|
|
6,667
|
|
|
1,861
|
|
|
112
|
|
|
(1,837
|
)
|
|
6,803
|
|
Interest income
|
—
|
|
|
(1,989
|
)
|
|
—
|
|
|
(26
|
)
|
|
1,837
|
|
|
(178
|
)
|
(Income) loss in subsidiaries
|
(36,198
|
)
|
|
10,335
|
|
|
(9,397
|
)
|
|
—
|
|
|
35,260
|
|
|
—
|
|
Other (income) expense, net
|
—
|
|
|
(373
|
)
|
|
387
|
|
|
502
|
|
|
—
|
|
|
516
|
|
Income (loss) before income taxes
|
36,198
|
|
|
48,558
|
|
|
(8,431
|
)
|
|
12,140
|
|
|
(32,363
|
)
|
|
56,102
|
|
Provision for income taxes
|
—
|
|
|
15,258
|
|
|
1,903
|
|
|
2,743
|
|
|
—
|
|
|
19,904
|
|
Net income (loss)
|
$
|
36,198
|
|
|
$
|
33,300
|
|
|
$
|
(10,334
|
)
|
|
$
|
9,397
|
|
|
$
|
(32,363
|
)
|
|
$
|
36,198
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Operations (unaudited)
For the two fiscal quarters ended
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net sales
|
$
|
—
|
|
|
$
|
806,329
|
|
|
$
|
831,100
|
|
|
$
|
132,917
|
|
|
$
|
(345,474
|
)
|
|
$
|
1,424,872
|
|
Cost of goods sold
|
—
|
|
|
591,535
|
|
|
486,089
|
|
|
74,448
|
|
|
(346,459
|
)
|
|
805,613
|
|
Gross profit
|
—
|
|
|
214,794
|
|
|
345,011
|
|
|
58,469
|
|
|
985
|
|
|
619,259
|
|
Selling, general, and administrative expenses
|
—
|
|
|
79,227
|
|
|
383,369
|
|
|
52,563
|
|
|
(17,219
|
)
|
|
497,940
|
|
Royalty income
|
—
|
|
|
(17,335
|
)
|
|
(9,007
|
)
|
|
—
|
|
|
4,574
|
|
|
(21,768
|
)
|
Operating income (loss)
|
—
|
|
|
152,902
|
|
|
(29,351
|
)
|
|
5,906
|
|
|
13,630
|
|
|
143,087
|
|
Interest expense
|
—
|
|
|
14,111
|
|
|
2,746
|
|
|
95
|
|
|
(2,654
|
)
|
|
14,298
|
|
Interest income
|
—
|
|
|
(2,839
|
)
|
|
—
|
|
|
(33
|
)
|
|
2,654
|
|
|
(218
|
)
|
(Income) loss in subsidiaries
|
(84,589
|
)
|
|
28,053
|
|
|
(4,358
|
)
|
|
—
|
|
|
60,894
|
|
|
—
|
|
Other (income) expense, net
|
—
|
|
|
(625
|
)
|
|
648
|
|
|
(788
|
)
|
|
—
|
|
|
(765
|
)
|
Income (loss) before income taxes
|
84,589
|
|
|
114,202
|
|
|
(28,387
|
)
|
|
6,632
|
|
|
(47,264
|
)
|
|
129,772
|
|
Provision for (benefit from) income taxes
|
—
|
|
|
43,243
|
|
|
(334
|
)
|
|
2,274
|
|
|
—
|
|
|
45,183
|
|
Net income (loss)
|
$
|
84,589
|
|
|
$
|
70,959
|
|
|
$
|
(28,053
|
)
|
|
$
|
4,358
|
|
|
$
|
(47,264
|
)
|
|
$
|
84,589
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the two fiscal quarters ended
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Consolidating
Adjustments
|
|
Consolidated
|
Net sales
|
$
|
—
|
|
|
$
|
812,562
|
|
|
$
|
756,086
|
|
|
$
|
122,048
|
|
|
$
|
(327,140
|
)
|
|
$
|
1,363,556
|
|
Cost of goods sold
|
—
|
|
|
585,891
|
|
|
432,004
|
|
|
64,067
|
|
|
(311,517
|
)
|
|
770,445
|
|
Gross profit
|
—
|
|
|
226,671
|
|
|
324,082
|
|
|
57,981
|
|
|
(15,623
|
)
|
|
593,111
|
|
Selling, general, and administrative expenses
|
—
|
|
|
83,021
|
|
|
346,066
|
|
|
45,891
|
|
|
(17,518
|
)
|
|
457,460
|
|
Royalty income
|
—
|
|
|
(16,129
|
)
|
|
(8,725
|
)
|
|
—
|
|
|
4,254
|
|
|
(20,600
|
)
|
Operating income (loss)
|
—
|
|
|
159,779
|
|
|
(13,259
|
)
|
|
12,090
|
|
|
(2,359
|
)
|
|
156,251
|
|
Interest expense
|
—
|
|
|
13,275
|
|
|
2,706
|
|
|
215
|
|
|
(2,654
|
)
|
|
13,542
|
|
Interest income
|
—
|
|
|
(2,974
|
)
|
|
—
|
|
|
(65
|
)
|
|
2,654
|
|
|
(385
|
)
|
(Income) loss in subsidiaries
|
(90,178
|
)
|
|
16,831
|
|
|
(6,057
|
)
|
|
—
|
|
|
79,404
|
|
|
—
|
|
Other expense (income), net
|
—
|
|
|
(173
|
)
|
|
173
|
|
|
3,709
|
|
|
—
|
|
|
3,709
|
|
Income (loss) before income taxes
|
90,178
|
|
|
132,820
|
|
|
(10,081
|
)
|
|
8,231
|
|
|
(81,763
|
)
|
|
139,385
|
|
Provision for income taxes
|
—
|
|
|
40,284
|
|
|
6,749
|
|
|
2,174
|
|
|
—
|
|
|
49,207
|
|
Net income (loss)
|
$
|
90,178
|
|
|
$
|
92,536
|
|
|
$
|
(16,830
|
)
|
|
$
|
6,057
|
|
|
$
|
(81,763
|
)
|
|
$
|
90,178
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Comprehensive Income (unaudited)
For the fiscal quarter ended
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net income (loss)
|
|
$
|
37,925
|
|
|
$
|
33,516
|
|
|
$
|
(7,021
|
)
|
|
$
|
6,806
|
|
|
$
|
(33,301
|
)
|
|
$
|
37,925
|
|
Foreign currency translation adjustments
|
|
3,140
|
|
|
3,140
|
|
|
3,140
|
|
|
3,140
|
|
|
(9,420
|
)
|
|
3,140
|
|
Comprehensive income (loss)
|
|
$
|
41,065
|
|
|
$
|
36,656
|
|
|
$
|
(3,881
|
)
|
|
$
|
9,946
|
|
|
$
|
(42,721
|
)
|
|
$
|
41,065
|
|
For the fiscal quarter ended
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net income (loss)
|
|
$
|
36,198
|
|
|
$
|
33,300
|
|
|
$
|
(10,334
|
)
|
|
$
|
9,397
|
|
|
$
|
(32,363
|
)
|
|
$
|
36,198
|
|
Foreign currency translation adjustments
|
|
548
|
|
|
548
|
|
|
548
|
|
|
548
|
|
|
(1,644
|
)
|
|
548
|
|
Comprehensive income (loss)
|
|
$
|
36,746
|
|
|
$
|
33,848
|
|
|
$
|
(9,786
|
)
|
|
$
|
9,945
|
|
|
$
|
(34,007
|
)
|
|
$
|
36,746
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Comprehensive Income (unaudited)
For the two fiscal quarters ended
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net income (loss)
|
|
$
|
84,589
|
|
|
$
|
70,959
|
|
|
$
|
(28,053
|
)
|
|
$
|
4,358
|
|
|
$
|
(47,264
|
)
|
|
$
|
84,589
|
|
Foreign currency translation adjustments
|
|
4,087
|
|
|
4,087
|
|
|
4,087
|
|
|
4,087
|
|
|
(12,261
|
)
|
|
4,087
|
|
Comprehensive income (loss)
|
|
$
|
88,676
|
|
|
$
|
75,046
|
|
|
$
|
(23,966
|
)
|
|
$
|
8,445
|
|
|
$
|
(59,525
|
)
|
|
$
|
88,676
|
|
For the two fiscal quarters ended
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net income (loss)
|
|
$
|
90,178
|
|
|
$
|
92,536
|
|
|
$
|
(16,830
|
)
|
|
$
|
6,057
|
|
|
$
|
(81,763
|
)
|
|
$
|
90,178
|
|
Foreign currency translation adjustments
|
|
5,834
|
|
|
5,834
|
|
|
5,834
|
|
|
5,834
|
|
|
(17,502
|
)
|
|
5,834
|
|
Comprehensive income (loss)
|
|
$
|
96,012
|
|
|
$
|
98,370
|
|
|
$
|
(10,996
|
)
|
|
$
|
11,891
|
|
|
$
|
(99,265
|
)
|
|
$
|
96,012
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
CARTER’S, INC.
Condensed Consolidating Statements of Cash Flows (unaudited)
For the two fiscal quarters ended
July 1, 2017
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Cash flows provided by (used in) operating activities:
|
|
$
|
—
|
|
|
$
|
120,884
|
|
|
$
|
(13,661
|
)
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
107,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
—
|
|
|
(10,594
|
)
|
|
(19,719
|
)
|
|
(3,963
|
)
|
|
—
|
|
|
(34,276
|
)
|
Intercompany investing activity
|
|
136,535
|
|
|
(2,468
|
)
|
|
—
|
|
|
—
|
|
|
(134,067
|
)
|
|
—
|
|
Acquisition of business, net of cash acquired
|
|
—
|
|
|
(144,520
|
)
|
|
746
|
|
|
70
|
|
|
—
|
|
|
(143,704
|
)
|
Net cash provided by (used in) investing activities
|
|
136,535
|
|
|
(157,582
|
)
|
|
(18,973
|
)
|
|
(3,893
|
)
|
|
(134,067
|
)
|
|
(177,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany financing activity
|
|
—
|
|
|
(164,451
|
)
|
|
32,252
|
|
|
(1,868
|
)
|
|
134,067
|
|
|
—
|
|
Borrowings under secured revolving credit facility
|
|
—
|
|
|
100,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100,000
|
|
Payments on secured revolving credit facility
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(18,965
|
)
|
|
—
|
|
|
(18,965
|
)
|
Dividends paid
|
|
(35,831
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,831
|
)
|
Repurchases of common stock
|
|
(98,236
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(98,236
|
)
|
Withholdings from vestings of restricted stock
|
|
(5,590
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,590
|
)
|
Proceeds from exercises of stock options
|
|
3,122
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,122
|
|
Net cash (used in) provided by financing activities
|
|
(136,535
|
)
|
|
(64,451
|
)
|
|
32,252
|
|
|
(20,833
|
)
|
|
134,067
|
|
|
(55,500
|
)
|
Effect of exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
353
|
|
|
—
|
|
|
353
|
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(101,149
|
)
|
|
(382
|
)
|
|
(24,263
|
)
|
|
—
|
|
|
(125,794
|
)
|
Cash and cash equivalents, beginning of period
|
|
—
|
|
|
229,056
|
|
|
11,817
|
|
|
58,485
|
|
|
—
|
|
|
299,358
|
|
Cash and cash equivalents, end of period
|
|
$
|
—
|
|
|
$
|
127,907
|
|
|
$
|
11,435
|
|
|
$
|
34,222
|
|
|
$
|
—
|
|
|
$
|
173,564
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the two fiscal quarters ended
July 2, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiary Issuer
|
|
Guarantor Subsidiaries
|
|
Non-Guarantor Subsidiaries
|
|
Consolidating Adjustments
|
|
Consolidated
|
Cash flows provided by (used in) operating activities:
|
|
$
|
—
|
|
|
$
|
75,255
|
|
|
$
|
12,749
|
|
|
$
|
(2,405
|
)
|
|
$
|
—
|
|
|
$
|
85,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
—
|
|
|
(15,895
|
)
|
|
(30,274
|
)
|
|
(3,529
|
)
|
|
—
|
|
|
(49,698
|
)
|
Intercompany investing activity
|
|
217,295
|
|
|
(1,784
|
)
|
|
(1,623
|
)
|
|
—
|
|
|
(213,888
|
)
|
|
—
|
|
Proceeds from sale of property, plant and equipment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
—
|
|
|
193
|
|
Net cash provided by (used in) investing activities
|
|
217,295
|
|
|
(17,679
|
)
|
|
(31,897
|
)
|
|
(3,336
|
)
|
|
(213,888
|
)
|
|
(49,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany financing activity
|
|
—
|
|
|
(226,217
|
)
|
|
14,106
|
|
|
(1,777
|
)
|
|
213,888
|
|
|
—
|
|
Dividends Paid
|
|
(33,679
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(33,679
|
)
|
Income tax benefit from stock-based compensation
|
|
—
|
|
|
2,061
|
|
|
1,623
|
|
|
—
|
|
|
—
|
|
|
3,684
|
|
Repurchases of common stock
|
|
(180,209
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(180,209
|
)
|
Withholdings from vestings of restricted stock
|
|
(8,508
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,508
|
)
|
Proceeds from exercises of stock options
|
|
5,101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,101
|
|
Net cash (used in) provided by financing activities
|
|
(217,295
|
)
|
|
(224,156
|
)
|
|
15,729
|
|
|
(1,777
|
)
|
|
213,888
|
|
|
(213,611
|
)
|
Effect of exchange rate changes on cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,388
|
|
|
—
|
|
|
1,388
|
|
Net decrease in cash and cash equivalents
|
|
—
|
|
|
(166,580
|
)
|
|
(3,419
|
)
|
|
(6,130
|
)
|
|
—
|
|
|
(176,129
|
)
|
Cash and cash equivalents, beginning of period
|
|
—
|
|
|
325,771
|
|
|
14,652
|
|
|
40,786
|
|
|
—
|
|
|
381,209
|
|
Cash and cash equivalents, end of period
|
|
$
|
—
|
|
|
$
|
159,191
|
|
|
$
|
11,233
|
|
|
$
|
34,656
|
|
|
$
|
—
|
|
|
$
|
205,080
|
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 relating to our future performance, including, without limitation, statements with respect to our anticipated financial results for any other quarter or period in fiscal 2017 or any other future period, assessment of our performance and financial position, and drivers of our sales and earnings growth. Such statements are based on current expectations only, and are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks or uncertainties materialize or not materialize, or should any of the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. Certain of the risks and uncertainties that could cause actual results and performance to differ materially are described under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.
OVERVIEW
We are the largest branded marketer in the United States ("U.S.") and in Canada of apparel exclusively for babies and young children. We own the
Carter's
and
OshKosh B'gosh
("
OshKosh
") brands, two of the most recognized brands in the marketplace. Established in 1865, our
Carter's
brand is recognized and trusted by consumers for high-quality apparel and accessories for children sizes newborn to eight. Established in 1895,
OshKosh
is a well-known brand, trusted by consumers for apparel and accessories for children sizes newborn to 14, with a focus on playclothes for toddlers and young children. Given each brand's product category emphasis and brand aesthetic, we believe they provide a complementary product offering. We have extensive experience in the young children's apparel market and focus on delivering products that satisfy our consumers' needs.
We market high-quality products at an attractive value proposition for consumers, and offer multiple product categories. Our multi-channel international business model - retail stores, online and wholesale - enables us to reach a broad range of consumers around the world.
We acquired 100% ownership in Skip Hop Holdings, Inc. and its subsidiaries ("Skip Hop") after the close of business on February 22, 2017. The balance sheet, results of operations and cash flows for Skip Hop are included in our consolidated financial statements beginning on February 23, 2017. Skip Hop's products are sold in U.S. and international wholesale and eCommerce channels primarily to families with young children, and the product lines include diaper bags, kid’s backpacks, travel accessories, home gear, and hardline goods for playtime, mealtime, and bath time.
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the 2016 fiscal year ended
December 31, 2016
.
Segments
At the beginning of fiscal 2017, we combined our Carter's Retail and OshKosh Retail into a single U.S. Retail operating segment, and our Carter's Wholesale and OshKosh Wholesale into a single U.S. Wholesale operating segment, to reflect the sales-channel approach executive management now uses to evaluate business performance and manage operations in the U.S. Our International segment was not affected by these changes. Our reportable segments are now U.S. Retail, U.S. Wholesale, and International. Prior periods have been conformed to reflect our current segment structure.
Our U.S. Retail segment consists of revenue from sales of products in the United States, including
Carter’s,
OshKosh
and
Skip Hop
products, through our retail and online stores. Similarly, our U.S. Wholesale segment consists of revenue from sales in the United States of
Carter’s,
OshKosh
and
Skip Hop
products, respectively, through our wholesale partners. Finally, our International segment consists of income from sales of
Carter’s,
OshKosh
and
Skip Hop
products through retail and online stores outside the United States, primarily through our retail and online stores in Canada and stores operated by our international partners, as well as sales to our international wholesale partners.
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, selected statement of operations data expressed as a percentage of consolidated net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
|
July 1,
2017
|
|
July 2,
2016
|
|
July 1,
2017
|
|
July 2,
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
U.S. Wholesale
|
31.5
|
%
|
|
33.6
|
%
|
|
35.8
|
%
|
|
37.2
|
%
|
U.S. Retail
|
56.6
|
%
|
|
55.2
|
%
|
|
53.0
|
%
|
|
51.8
|
%
|
International
|
11.9
|
%
|
|
11.2
|
%
|
|
11.2
|
%
|
|
11.0
|
%
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of goods sold
|
56.2
|
%
|
|
55.9
|
%
|
|
56.5
|
%
|
|
56.5
|
%
|
|
|
|
|
|
|
|
|
Gross margin
|
43.8
|
%
|
|
44.1
|
%
|
|
43.5
|
%
|
|
43.5
|
%
|
Selling, general, and administrative expenses
|
36.1
|
%
|
|
35.7
|
%
|
|
34.9
|
%
|
|
33.5
|
%
|
Royalty income
|
(1.6
|
)%
|
|
(1.5
|
)%
|
|
(1.5
|
)%
|
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
Operating income
|
9.3
|
%
|
|
9.9
|
%
|
|
10.0
|
%
|
|
11.5
|
%
|
Interest expense
|
1.0
|
%
|
|
1.1
|
%
|
|
1.0
|
%
|
|
1.0
|
%
|
Interest income
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
Other (income) expense, net
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
Income before income taxes
|
8.4
|
%
|
|
8.8
|
%
|
|
9.1
|
%
|
|
10.2
|
%
|
Provision for income taxes
|
2.9
|
%
|
|
3.1
|
%
|
|
3.2
|
%
|
|
3.6
|
%
|
Net income
|
5.5
|
%
|
|
5.7
|
%
|
|
5.9
|
%
|
|
6.6
|
%
|
n/m - rounds to less than 0.1%, therefore not material.
Note: Results may not be additive due to rounding.
COMPARABLE SALES METRICS
Our management's discussion and analysis includes comparable sales metrics for our company-owned retail stores and our eCommerce websites in our U.S. Retail and International segments.
For all periods presented herein, our comparable store sales metrics include sales for all stores and eCommerce websites that were open during the comparable fiscal period, including stand-alone format stores that converted to dual-branded format stores and certain remodeled or relocated stores. A store becomes comparable following 13 consecutive full fiscal months of operations. If a store relocates within the same center with no business interruption or material change in square footage, the sales of such store will continue to be included in the comparable store metrics. If a store relocates to another center, or there is a material change in square footage, such store is treated as a new store. Stores that are closed during the relevant fiscal period are included in the comparable store sales metrics up to the last full fiscal month of operations.
The method of calculating sales metrics varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as that of other retailers.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
SECOND FISCAL QUARTER AND TWO FISCAL QUARTERS ENDED
JULY 1, 2017
COMPARED TO SECOND FISCAL QUARTER AND TWO FISCAL QUARTERS ENDED
JULY 2, 2016
CONSOLIDATED NET SALES
In the
second
quarter of fiscal
2017
, consolidated net sales
increased
$52.6 million
, or
8.2%
, to
$692.1 million
from
$639.5 million
in the
second
quarter of fiscal
2016
. For the first two quarters of fiscal 2017, consolidated net sales
increased
$61.3 million
, or
4.5%
, to
$1.42 billion
from
$1.36 billion
in the first two quarters of fiscal 2016. The increases for the fiscal quarter and year-to-date period in fiscal 2017 were primarily driven by our U.S. Retail segment. Changes in foreign currency exchange rates in the
second
quarter and first two quarters of fiscal
2017
, as compared to the
second
quarter and first two quarters of fiscal
2016
, had an unfavorable impact on our consolidated net sales of approximately
$2.6 million
and
$1.2 million
, respectively.
Net sales by segment, and each segment's percentage of consolidated net sales, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal quarter ended
|
|
Two fiscal quarters ended
|
(dollars in thousands)
|
July 1, 2017
|
|
% of
Total
|
|
July 2, 2016
|
|
% of
Total
|
|
July 1, 2017
|
|
% of
Total
|
|
July 2, 2016
|
|
% of
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Wholesale
|
$
|
217,710
|
|
|
31.5
|
%
|
|
$
|
215,122
|
|
|
33.6
|
%
|
|
$
|
510,265
|
|
|
35.8
|
%
|
|
$
|
507,176
|
|
|
37.2
|
%
|
U.S. Retail
|
391,822
|
|
|
56.6
|
%
|
|
352,782
|
|
|
55.2
|
%
|
|
755,593
|
|
|
53.0
|
%
|
|
706,871
|
|
|
51.8
|
%
|
International
|
82,585
|
|
|
11.9
|
%
|
|
71,567
|
|
|
11.2
|
%
|
|
159,014
|
|
|
11.2
|
%
|
|
149,509
|
|
|
11.0
|
%
|
Total net sales
|
$
|
692,117
|
|
|
100.0
|
%
|
|
$
|
639,471
|
|
|
100.0
|
%
|
|
$
|
1,424,872
|
|
|
100.0
|
%
|
|
$
|
1,363,556
|
|
|
100.0
|
%
|
U.S. WHOLESALE SALES
U.S. Wholesale segment net sales
increased
$2.6 million
, or
1.2%
, in the
second
quarter of fiscal
2017
to
$217.7 million
from
$215.1 million
in the
second
quarter of fiscal
2016
. During the second quarter of fiscal 2017, Skip Hop's wholesale net sales in the U.S. were approximately $15.1 million. Net sales for the remaining U.S. Wholesale segment declined due to a decrease in demand, which reflected a 2.8% decrease in the number of units shipped and a
3.1%
decrease in the average price per unit.
U.S. Wholesale segment net sales
increased
$3.1 million
, or
0.6%
, in the first two quarters of fiscal
2017
to
$510.3 million
from
$507.2 million
in the first two quarters of fiscal
2016
. During the post-acquisition period of February 23 to July 1, 2017, Skip Hop's wholesale net sales in the U.S. were approximately $21.9 million. Net sales for the remaining U.S. Wholesale segment declined due to a decrease in demand, which reflected a 2.2% decrease in the number of units shipped and a 1.6% decrease in the average price per unit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
U.S. RETAIL SALES
Store Count Data for U.S. Retail Stores
|
|
|
|
|
|
|
U.S. Retail Stores
|
|
|
|
Store count at December 31, 2016
|
|
792
|
|
Openings
|
|
26
|
|
Closings
|
|
(8
|
)
|
Store count at July 1, 2017
|
|
810
|
|
|
|
|
Approximate new store projections for all of fiscal 2017:
|
|
|
Openings
|
|
58
|
|
Closings
|
|
(13
|
)
|
Comparable Sales
|
|
|
|
|
|
Increase (Decrease)
|
|
Change for Second Fiscal Quarter from 2016 to 2017
|
|
Change for First Two Fiscal Quarters from 2016 to 2017
|
|
|
|
|
|
Retail stores
|
|
+0.4%
|
|
(5.0)%
|
eCommerce
|
|
+27.6%
|
|
+23.5%
|
Total
|
|
+6.0%
|
|
+1.1%
|
The increase in comparable retail store sales during the second quarter of fiscal 2017 compared to the second quarter of fiscal 2016 was primarily due to an increase in the number of transactions, partially offset by a lower average transaction price.
The increases in eCommerce comparable sales during the second quarter and first two quarters of fiscal
2017
compared to the corresponding periods in fiscal 2016 were due to increases in the number of transactions.
Sales Results
U.S. Retail segment net sales
increased
approximately
$39.0 million
, or
11.1%
, in the
second
quarter of fiscal
2017
to
$391.8 million
from
$352.8 million
in the
second
quarter of fiscal
2016
. This
increase
in net sales primarily reflected a/an:
|
|
•
|
Increase of
$20.7 million
from new and non-comparable store sales;
|
|
|
•
|
Increase of
$19.6 million
from eCommerce sales, including Skip Hop;
|
|
|
•
|
Increase of
$0.6 million
in comparable store sales; and
|
|
|
•
|
Decrease of
$2.8 million
due to the impact of store closings.
|
U.S. Retail segment net sales
increased
$48.7 million
, or
6.9%
, in the first two quarters of fiscal
2017
to
$755.6 million
from
$706.9 million
in the first two quarters of fiscal
2016
. This
increase
in net sales primarily reflected a/an:
|
|
•
|
Increase of $41.3 million from new and non-comparable store sales;
|
|
|
•
|
Increase of $37.2 million from eCommerce sales, including Skip Hop;
|
|
|
•
|
Decrease of $27.1 million in comparable store sales; and
|
|
|
•
|
Decrease of $5.6 million due to the impact of store closings.
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
INTERNATIONAL SALES
International segment net sales
increased
$11.0 million
, or
15.4%
, in the
second
quarter of fiscal
2017
to
$82.6 million
from
$71.6 million
in the
second
quarter of fiscal
2016
. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had an unfavorable impact on International segment net sales of approximately
$2.6 million
in the
second
quarter of fiscal
2017
compared to the
second
quarter of fiscal
2016
. During the second quarter of fiscal 2017, Skip Hop's international sales were approximately $9.1 million.
The
$11.0 million
increase in net sales in our International segment primarily reflected a/an:
|
|
•
|
Increase of $9.7
million
primarily from our Skip Hop wholesale businesses;
|
|
|
•
|
Decrease of $3.7 million from our other international wholesale partners in certain markets;
|
|
|
•
|
Increase of $3.8 million from our retail stores in Canada; and
|
|
|
•
|
Increase of
$1.2 million
from eCommerce, primarily from our websites in Canada and China.
|
International segment net sales
increased
$9.5 million
, or
6.4%
, in the first two quarters of fiscal
2017
to
$159.0 million
from
$149.5 million
in the first two quarters of fiscal
2016
. Changes in foreign currency exchange rates, primarily between the U.S. dollar and the Canadian dollar, had an unfavorable impact on International segment net sales of approximately
$1.2 million
in the first two quarters of fiscal
2017
compared to the first two quarters of fiscal
2016
. For the post-acquisition period of February 23 to July 1, 2017, Skip Hop's international sales were approximately $12.3 million.
The
$9.5 million
increase in net sales in our International segment primarily reflected a/an:
|
|
•
|
Increase of $14.3
million
primarily from our Skip Hop and China wholesale businesses;
|
|
|
•
|
Decrease of $11.6 million from our other international wholesale partners in certain markets;
|
|
|
•
|
Increase of $3.7 million from our retail stores in Canada; and
|
|
|
•
|
Increase of $3.1 million from eCommerce, primarily from our websites in Canada and China.
|
Compared to the
second
quarter of fiscal
2016
, our Canadian total retail comparable sales increased
8.2%
in the
second
quarter of fiscal
2017
, primarily due to eCommerce comparable sales growth of
46.8%
and retail stores comparable sales growth of
5.9%
. Compared to the first two quarters of fiscal 2016, our Canadian total retail comparable sales increased 0.1% in the first two quarters of fiscal 2017, primarily due to eCommerce comparable sales growth of 43.1%, which was offset by a retail store comparable sales decline of 2.9%.
Store Count Data for Canada Retail Stores
|
|
|
|
|
|
|
Canada Retail Stores
|
|
|
|
Store count at December 31, 2016
|
|
164
|
|
Openings
|
|
6
|
|
Closings
|
|
(2
|
)
|
Store count at July 1, 2017
|
|
168
|
|
|
|
|
Approximate new store projections for all of fiscal 2017:
|
|
|
Openings
|
|
16
|
|
Closings
|
|
2
|
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
GROSS MARGIN AND GROSS PROFIT
Our consolidated gross margin
decreased
from
44.1%
in the
second
quarter of fiscal
2016
to
43.8%
in the
second
quarter of fiscal
2017
primarily due to lower margins in our wholesale channels and higher provisions for inventory, partially offset by an increase in net sales for our higher-margin retail business. Our consolidated gross profit
increased
$21.3 million
, or
7.5%
, to
$303.5 million
in the
second
quarter of fiscal
2017
from
$282.2 million
in the
second
quarter of fiscal
2016
primarily due to the increase in net sales.
Our consolidated gross margin was
43.5%
for the first two quarters of fiscal
2016
and
2017
. Our consolidated gross profit
increased
$26.1 million
, or
4.4%
, to
$619.3 million
in the first two quarters of fiscal
2017
from
$593.1 million
in the first two quarters of fiscal
2016
primarily due to the increase in net sales.
We include distribution costs in selling, general, and administrative ("SG&A") expenses. Accordingly, our gross margin and gross profit may not be comparable to other entities that include such distribution costs in their cost of goods sold.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES
Consolidated SG&A expenses in the
second
quarter of fiscal
2017
increased
$21.7 million
, or
9.5%
, to
$250.1 million
from
$228.5 million
in the
second
quarter of fiscal
2016
. As a percentage of net sales, SG&A expenses
increased
from
35.7%
in the
second
quarter of fiscal
2016
to
36.1%
in the
second
quarter of fiscal
2017
.
The increase in SG&A expenses, as a percentage of net sales, in the
second
quarter of fiscal
2017
primarily reflected a:
|
|
•
|
$11.5 million
increase in expenses related to retail store operations, primarily due to new store openings;
|
|
|
•
|
$7.8 million increase in expenses related to selling, distribution, and administrative expenses for Skip Hop;
|
|
|
•
|
$2.8 million increase in expenses related to eCommerce operations;
|
|
|
•
|
$2.4 million increase in expenses related to marketing and brand management;
|
|
|
•
|
$2.1 million increase in performance-based compensation expenses; and
|
|
|
•
|
$0.6 million increase in expenses related to business development.
|
which were partially offset by a:
|
|
•
|
$2.8 million decrease in other general and administrative expenses;
|
|
|
•
|
$1.9 million decrease in information technology and systems costs; and
|
|
|
•
|
$0.8 million decrease in amortization of the H.W.Carter & Sons trademarks.
|
Consolidated SG&A expenses in the first two quarters of fiscal
2017
increased
$40.5 million
, or
8.8%
, to
$497.9 million
from
$457.5 million
in the first two quarters of fiscal
2016
. As a percentage of net sales, SG&A expenses
increased
from
33.5%
in the first two quarters of fiscal
2016
to
34.9%
in the first two quarters of fiscal
2017
.
The increase in SG&A expenses, as a percentage of net sales, in the first two quarters of fiscal
2017
primarily reflected a:
|
|
•
|
$21.8 million increase in expenses related to retail store operations, primarily due to new store openings;
|
|
|
•
|
$10.5 million increase in expenses related to selling, distribution, and administrative expenses for Skip Hop;
|
|
|
•
|
$6.1 million increase in expenses related to eCommerce operations;
|
|
|
•
|
$3.9 million increase in expenses related to marketing and brand management;
|
|
|
•
|
$2.7 million increase in expenses related to Skip Hop acquisition costs, direct sourcing initiatives and business
|
development; and
|
|
•
|
$0.4 million increase in performance-based compensation expenses.
|
which were partially offset by a:
|
|
•
|
$2.2 million decrease in information technology and systems costs;
|
|
|
•
|
$1.7 million decrease in amortization of the H.W.Carter & Sons trademarks; and
|
|
|
•
|
$1.0 million decrease in other general and administrative expenses.
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
ROYALTY INCOME
We license the use of our
Carter's
,
Just One You
,
Child of Mine
,
OshKosh B'gosh
,
OshKosh
,
Genuine Kids from OshKosh
,
and Precious Firsts
brand names.
Royalty income from these brands for the
second
quarter of fiscal
2017
increased
$1.7 million
, or
17.7%
, to
$11.2 million
from
$9.5 million
in the
second
quarter of fiscal
2016
. Royalty income from these brands for the first two quarters of fiscal 2017
increased
$1.2 million
, or
5.7%
, to
$21.8 million
from
$20.6 million
in the first two quarters of fiscal
2016
. These increases were primarily attributable to sales growth from our domestic licensees, partially offset by decreases in income from certain licensees due to the insourcing of formerly licensed product categories.
OPERATING INCOME
Consolidated operating income
increased
$1.3 million
, or
2.0%
, to
$64.5 million
in the
second
quarter of fiscal
2017
from
$63.2 million
in the
second
quarter of fiscal
2016
. Consolidated operating income
decreased
$13.2 million
, or
8.4%
, to
$143.1 million
in the first two quarters of fiscal
2017
from
$156.3 million
in the first two quarters of fiscal
2016
.
Consolidated operating margin
decreased
from
9.9%
in the
second
quarter of fiscal
2016
to
9.3%
in the
second
quarter of fiscal
2017
. Consolidated operating margin
decreased
from
11.5%
in the first two quarters of fiscal
2016
to
10.0%
in the first two quarters of fiscal
2017
. The tables below summarize the changes in each of our segments' operating results and unallocated corporate expenses between the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
U.S. Wholesale
|
|
U.S. Retail
|
|
International
|
|
Corporate Expenses
|
|
Total
|
Operating income (loss) for second quarter of fiscal 2016
|
|
$
|
41,509
|
|
|
$
|
36,952
|
|
|
$
|
9,105
|
|
|
$
|
(24,323
|
)
|
|
$
|
63,243
|
|
Favorable (unfavorable) change in the second quarter of fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
(946
|
)
|
|
18,216
|
|
|
4,225
|
|
|
(220
|
)
|
|
21,275
|
|
Royalty income
|
|
(314
|
)
|
|
1,971
|
|
|
28
|
|
|
—
|
|
|
1,685
|
|
SG&A expenses
|
|
(4,443
|
)
|
|
(14,797
|
)
|
|
(5,761
|
)
|
|
3,319
|
|
|
(21,682
|
)
|
Operating income (loss) for second quarter of fiscal 2017
|
|
$
|
35,806
|
|
|
$
|
42,342
|
|
|
$
|
7,597
|
|
|
$
|
(21,224
|
)
|
|
$
|
64,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
U.S. Wholesale
|
|
U.S. Retail
|
|
International
|
|
Corporate Expenses
|
|
Total
|
Operating income (loss) for two quarters of fiscal 2016
|
|
$
|
109,920
|
|
|
$
|
76,421
|
|
|
$
|
17,546
|
|
|
$
|
(47,636
|
)
|
|
$
|
156,251
|
|
Favorable (unfavorable) change in the two quarters of fiscal 2017
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
1,469
|
|
|
22,221
|
|
|
2,294
|
|
|
164
|
|
|
26,148
|
|
Royalty income
|
|
(515
|
)
|
|
2,490
|
|
|
(807
|
)
|
|
—
|
|
|
1,168
|
|
SG&A expenses
|
|
(5,373
|
)
|
|
(28,890
|
)
|
|
(7,751
|
)
|
|
1,534
|
|
|
(40,480
|
)
|
Operating income (loss) for two quarters of fiscal 2017
|
|
$
|
105,501
|
|
|
$
|
72,242
|
|
|
$
|
11,282
|
|
|
$
|
(45,938
|
)
|
|
$
|
143,087
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The following tables present changes in the operating margin for each of our three operating segments. The primary drivers of these changes are presented in terms of the difference in each driver's margin (based on net sales) between the respective periods, in each case expressed in basis points ("bps"). The first table presents the changes between the second quarter of fiscal 2016 and the second quarter of fiscal 2017. The second table presents the changes between the first two quarters of fiscal 2016 and the first two quarters of fiscal 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Wholesale
|
|
U.S. Retail
|
|
International
|
Operating margin for the second quarter of fiscal 2016
|
|
19.3
|
%
|
|
10.5
|
%
|
|
12.7
|
%
|
Favorable (unfavorable) bps change in the second quarter of fiscal 2017
|
|
|
|
|
|
|
Gross profit
|
|
(80) bps
|
|
|
(60) bps
|
|
|
(140) bps
|
|
Royalty income
|
|
(20) bps
|
|
|
40 bps
|
|
|
(20) bps
|
|
SG&A expenses
|
|
(190) bps
|
|
|
50 bps
|
|
|
(190) bps
|
|
Operating margin for the second quarter of fiscal 2017
|
|
16.4
|
%
|
|
10.8
|
%
|
|
9.2
|
%
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Wholesale
|
|
U.S. Retail
|
|
International
|
Operating margin for the first two quarters of fiscal 2016
|
|
21.7
|
%
|
|
10.8
|
%
|
|
11.7
|
%
|
Favorable (unfavorable) bps change in the first two quarters of fiscal 2017
|
|
|
|
|
|
|
Gross profit
|
|
10 bps
|
|
|
(50) bps
|
|
|
(130) bps
|
|
Royalty income
|
|
(10) bps
|
|
|
30 bps
|
|
|
(60) bps
|
|
SG&A expenses
|
|
(100) bps
|
|
|
(100) bps
|
|
|
(270) bps
|
|
Operating margin for the first two quarters of fiscal 2017
|
|
20.7
|
%
|
|
9.6
|
%
|
|
7.1
|
%
|
|
|
(aa)
|
|
(bb)
|
|
(cc)
|
(a) U.S. Wholesale segment operating income in the
second
quarter of fiscal
2017
decreased
$
5.7 million
, or
13.7%
, to
$35.8 million
from
$41.5 million
in the
second
quarter of fiscal
2016
. The segment's operating margin
decreased
290
bps from
19.3%
in the
second
quarter of fiscal
2016
to
16.4%
in the
second
quarter of fiscal
2017
. The primary drivers of the change in operating margin were a:
|
|
•
|
80 bps decrease in gross profit primarily due to higher customer support and sourcing costs;
|
|
|
•
|
190 bps increase in SG&A expenses, primarily due to a:
|
|
|
◦
|
120bps increase in administrative, distribution, and selling expenses;
|
|
|
◦
|
40 bps increase in marketing and brand management expenses;
|
|
|
◦
|
20 bps increase in provisions for accounts receivable; and
|
|
|
•
|
20 bps decrease in royalty income due to the insourcing of formerly licensed product categories.
|
(aa) U.S. Wholesale segment operating income in the first two quarters of fiscal
2017
decreased
$
4.4 million
, or
4.0%
, to
$105.5 million
from
$109.9 million
in the first two quarters of fiscal
2016
. The segment's operating margin
decreased
100
bps from
21.7%
in the first two quarters of fiscal
2016
to
20.7%
in the first two quarters of fiscal
2017
. The primary drivers of the change in operating margin were a:
|
|
•
|
10 bps increase in gross profit;
|
|
|
•
|
100 bps increase in SG&A expenses, primarily due to a:
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
◦
|
100 bps increase in distribution, selling, and administrative expenses;
|
|
|
◦
|
20 bps increase in marketing and brand management expenses; and
|
|
|
◦
|
10 bps decrease in provisions for accounts receivable.
|
(b) U.S. Retail segment operating income
increased
by
$5.4 million
, or
14.6%
, to
$42.3 million
in the
second
quarter of fiscal
2017
from
$37.0 million
in the
second
quarter of fiscal
2016
. This segment's operating margin
increased
30
bps from
10.5%
in the
second
quarter of fiscal
2016
to
10.8%
in the
second
quarter of fiscal
2017
. The primary drivers of the change in operating margin were a:
|
|
•
|
60 bps decrease in gross profit due to increased promotional activity and provisions for inventory, partially offset by lower product costs;
|
|
|
•
|
50 bps decrease in SG&A expenses, primarily due to a:
|
|
|
•
|
100 bps decrease in expenses associated with new retail stores;
|
|
|
•
|
20 bps increase in marketing and brand management expenses.
|
|
|
•
|
20 bps increase in expenses related to eCommerce expansion; and
|
|
|
•
|
40 bps increase in royalty income due to sales growth from our domestic licensees.
|
(bb) U.S. Retail segment operating income
decreased
by
$4.2 million
, or
5.5%
, to
$72.2 million
in the first two quarters of fiscal
2017
from
$76.4 million
in the first two quarters of fiscal
2016
. This segment's operating margin
decreased
120
bps from
10.8%
in the first two quarters of fiscal
2016
to
9.6%
in the first two quarters of fiscal
2017
. The primary drivers of the change in operating margin were a:
|
|
•
|
50 bps decrease in gross profit due to increased promotional activity and provisions for inventory, partially offset by lower products costs;
|
|
|
•
|
100 bps increase in SG&A expenses, primarily due to a:
|
|
|
•
|
40 bps increase in expenses associated with eCommerce expansion;
|
|
|
•
|
20 bps increase in expenses associated with new retail stores;
|
|
|
•
|
20 bps increase in distribution and freight expenses;
|
|
|
•
|
20 bps increase in marketing and brand management expenses; and
|
|
|
•
|
30 bps increase in royalty income due to sales growth from our domestic licensees.
|
(c) International segment operating income
decreased
by
$1.5 million
, or
16.6%
, to
$7.6 million
in the
second
quarter of fiscal
2017
from
$9.1 million
in the
second
quarter of
2016
. This segment's operating margin
decreased
350
bps from
12.7%
in the
second
quarter of fiscal
2016
to
9.2%
in the
second
quarter of fiscal
2017
. The primary drivers of the change in operating margin were a:
|
|
•
|
140 bps decrease in gross profit primarily due to a lower average gross margin for wholesale business and unfavorable foreign currency impacts, partially offset by lower provisions for inventory;
|
|
|
•
|
190 bps increase in SG&A expenses, primarily due to a:
|
|
|
•
|
90 bps increase in expenses associated with new retail stores;
|
|
|
•
|
90 bps increase in provisions for accounts receivable;
|
|
|
•
|
80 bps increase in selling and marketing expenses;
|
|
|
•
|
30 bps increase in general and administrative expenses;
|
|
|
•
|
10 bps increase in expenses associated with eCommerce;
|
|
|
•
|
140 bps decrease in distribution and freight expenses; and
|
|
|
•
|
20 bps decrease in royalty income due to a reduction in the number of licensees.
|
(cc) International segment operating income
decreased
by
$6.3 million
, or
35.7%
, to
$11.3 million
in the first two quarters of fiscal
2017
from
$17.5 million
in the first two quarters of
2016
. This segment's operating margin
decreased
460
bps from
11.7%
in the first two quarters of fiscal
2016
to
7.1%
in the first two quarters of fiscal
2017
. The primary drivers of the change in operating margin were a/an:
|
|
•
|
130 bps decrease in gross profit, primarily due to a lower average gross margin for wholesale business and unfavorable foreign currency exchange impacts;
|
|
|
•
|
270 bps increase in SG&A expenses, primarily due to a:
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
|
|
•
|
170 bps increase in expenses associated with new retail stores;
|
|
|
•
|
70 bps increase in expenses associated with eCommerce;
|
|
|
•
|
60 bps increase in selling and marketing expenses;
|
|
|
•
|
50 bps increase in provisions for accounts receivable;
|
|
|
•
|
30 bps decrease in general and administrative expenses;
|
|
|
•
|
100 bps decrease in distribution expenses; and
|
|
|
•
|
60 bps decrease in royalty income due to a reduction in the number of licensees.
|
Unallocated Corporate Expenses
Unallocated corporate expenses
decreased
by
$3.1 million
, or
12.7%
, in the
second
quarter of fiscal
2017
compared to the
second
quarter of fiscal
2016
, primarily due to a reduction in information technology investments. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased from
3.8%
in the
second
quarter of fiscal
2016
to
3.1%
in the
second
quarter of fiscal
2017
.
Unallocated corporate expenses
decreased
by
$1.7 million
, or
3.6%
, in the first two quarters of fiscal
2017
compared to the first two quarters of fiscal
2016
, primarily due to a reduction in information technology investments, partially offset by acquisition related costs and direct sourcing initiatives. Unallocated corporate expenses, as a percentage of consolidated net sales, decreased from
3.5%
in the first two quarters of fiscal
2016
to
3.2%
in the first two quarters of fiscal
2017
.
INTEREST EXPENSE
Interest expense and effective interest rate calculations include the amortization of debt issuance costs.
Interest expense in the
second
quarter of fiscal
2017
and
2016
was approximately
$7.2 million
and
$6.8 million
, respectively. Weighted-average borrowings for the
second
quarter of fiscal
2017
were approximately
$595.7 million
with an effective interest rate of
4.69%
, compared to weighted-average borrowings for the
second
quarter of fiscal
2016
of
$585.7 million
with an effective interest rate of
4.54%
. The increase in weighted-average borrowings during the second quarter of fiscal 2017 was attributable to additional net borrowings under our secured revolving credit facility.
Interest expense in the first two quarters of fiscal
2017
and
2016
was approximately
$14.3 million
and
$13.5 million
, respectively. Weighted-average borrowings over the course of the first two quarters of fiscal
2017
were approximately $602.1 million with an effective interest rate of 4.62%, compared to weighted-average borrowings for the first two quarters of fiscal
2016
of $585.1 million with an effective interest rate of 4.58%. The increase in weighted-average borrowings during the first two quarters of fiscal 2017 was attributable to additional net borrowings under our secured revolving credit facility.
The increases in the effective interest rates for the
second
quarter and first two quarters of fiscal
2017
compared to the
second
quarter and first two quarters of fiscal
2016
were due to higher LIBOR rates for the variable portions of outstanding borrowings on our secured revolving credit facility during the 2017 periods, partially offset by a higher proportion of outstanding borrowings under our secured revolving credit facility during both periods of fiscal 2017. Borrowings under our secured revolving credit facility accrue interest at a lower interest rate than our senior notes.
On our consolidated balance sheets, unamortized debt issuance costs associated with our senior notes are presented as a direct reduction in the carrying value of the associated debt liability for all periods presented.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net is primarily composed of gains and losses on foreign currency transactions and, if utilized during a reporting period, gains and losses on foreign currency forward contracts. These amounts represented a net gain of $0.6 million and $0.8 million for the second quarter and first two quarters of fiscal 2017, respectively. These amounts represented a net loss of $0.5 million and $3.7 million for the second quarter and first two quarters of fiscal 2016, respectively. There were no open or settled foreign currency forward contracts at any time during fiscal 2017.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
INCOME TAXES
Our consolidated effective income tax rate for the
second
quarter of fiscal
2017
was
34.6%
compared to
35.5%
for the
second
quarter of fiscal
2016
. Our consolidated effective income tax rate for the first two quarters of fiscal
2017
was
34.8%
compared to
35.3%
for the first two quarters of fiscal
2016
. The lower effective rates for both periods in fiscal
2017
were primarily due to changes in the mix of taxable income among our domestic and international tax-paying entities and the new accounting guidance which requires excess income tax benefits realized from settled stock-based compensation awards to be reflected as a benefit to income tax expense instead of a credit to additional paid-in capital.
For the full fiscal year
2017
, we estimate our consolidated effective income tax rate to be approximately
35.0%
.
NET INCOME
Our consolidated net income for the
second
quarter of fiscal
2017
increased
by
$1.7 million
, or
4.8%
, to
$37.9 million
compared to
$36.2 million
in the
second
quarter of fiscal
2016
. Our consolidated net income for the first two quarters of fiscal
2017
decreased
by
$5.6 million
, or
6.2%
, to
$84.6 million
compared to
$90.2 million
in the first two quarters of fiscal
2016
. These changes were due to the factors previously discussed.
FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY
Our ongoing cash needs are primarily 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, and we believe that we also have access to the capital markets. Further, we do not expect current economic conditions to prevent us from meeting our cash requirements. These sources of liquidity may be affected by events described in our risk factors, as further discussed under the heading "Risk Factors" in our most recently filed Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission from time to time.
As of
July 1, 2017
, the Company had approximately
$173.6 million
of cash and cash equivalents in major financial institutions, including approximately
$34.2 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 us and third-party rating agencies.
BALANCE SHEET
Net accounts receivable at
July 1, 2017
were
$165.2 million
compared to
$150.6 million
at
July 2, 2016
and
$202.5 million
at
December 31, 2016
. The overall
increase
of
$14.6 million
, or
9.7%
, at
July 1, 2017
compared to
July 2, 2016
primarily reflected the Skip Hop acquisition. Due to the seasonal nature of our operations, the net accounts receivable balance at
July 1, 2017
is not comparable to the net accounts receivable balance of
$202.5 million
at
December 31, 2016
.
Inventories at
July 1, 2017
were
$610.4 million
compared to
$587.4 million
at
July 2, 2016
and
$487.6 million
at
December 31, 2016
. The
increase
of
$23.0 million
, or
3.9%
, at
July 1, 2017
compared to
July 2, 2016
primarily reflected business growth. Due to the seasonal nature of our operations, the inventories balance at
July 1, 2017
is not comparable to the inventories balance of
$487.6 million
at
December 31, 2016
.
CASH FLOW
Net cash provided by operating activities for the first two quarters of fiscal
2017
was
$107.3 million
compared to net cash provided by operating activities of
$85.6 million
in the first two quarters of fiscal
2016
. This increase in operating cash flow for the 2017 period primarily reflected favorable changes in net working capital due to timing of payments and receipts, partially offset by lower net income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Net cash used in investing activities for the first two quarters of fiscal 2017 reflected the $143.7 million paid, net of cash acquired, on February 22, 2017 to acquire all of the outstanding stock of Skip Hop. Capital expenditures were
$34.3 million
in the first two quarters of fiscal
2017
compared to
$49.7 million
in the first two quarters of fiscal
2016
, primarily reflecting 2017 expenditures of approximately
$20.7 million
for our U.S. and international retail store openings and re-modelings,
$6.3 million
for information technology initiatives,
$4.7 million
for distribution and office facilities, and
$0.7 million
for wholesale fixtures. Capital expenditures in the first two quarters of fiscal 2016 primarily reflected approximately $29.4 million for our U.S. and international retail store openings and re-modelings, $13.4 million for information technology initiatives, $4.4 million for distribution and office facilities, and $1.3 million for wholesale fixtures.
We plan to invest approximately
$90 million
in total capital expenditures for all of fiscal 2017, primarily for our U.S. and international retail store openings and re-modelings, and information technology initiatives.
Net cash used in financing activities was
$55.5 million
in the first two quarters of fiscal
2017
compared to
$213.6 million
in the first two quarters of fiscal
2016
. The decrease in cash used for the 2017 period primarily reflected decreases in repurchases of our common stock and a net increase in borrowings under our secured revolving credit facility.
On July 19, 2017, we borrowed an additional $100 million under our secured revolving credit facility primarily for seasonal working capital purposes, bringing total outstanding borrowings under this credit facility to $366 million, excluding accrued interest. By the end of fiscal 2017, we expect to make repayments in order to reduce the amount of these outstanding borrowings.
SECURED REVOLVING CREDIT FACILITY
Our amended and restated secured revolving credit facility provides for (i) a
$400 million
U.S. dollar revolving facility (including a
$175 million
sub-limit for letters of credit and a swing line sub-limit of
$50 million
) available for borrowings in U.S. dollars and (ii) a
$100 million
multicurrency revolving facility (including a
$40 million
sub-limit for letters of credit and a swing line sub-limit of
$15 million
) available for borrowings denominated in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders. Our secured revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed $250 million, either in the form of a commitment increase under the existing credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount not to exceed $200 million and the aggregate multicurrency amount not to exceed $50 million). Our secured revolving credit facility matures
September 16, 2020
.
As of
July 1, 2017
, we had
$266.0 million
in outstanding borrowings under our secured revolving credit facility, exclusive of
$4.5 million
of outstanding letters of credit. As of
July 1, 2017
, approximately
$229.5 million
was available for future borrowing. All outstanding borrowings under our secured revolving credit facility are classified as non-current liabilities on our consolidated balance sheet because of the contractual repayment terms under the credit facility. However, these repayment terms also allow us to repay some or all of the outstanding borrowings at any time.
The interest rate margins applicable to our secured revolving credit facility are presently
1.375%
for
LIBOR
rate loans (which may be adjusted based on a leverage-based pricing grid ranging from
1.125%
to
1.875%
) and
0.375%
for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from
0.125%
to
0.875%
)
.
As of
July 1, 2017
, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a
LIBOR
rate plus the applicable
base rate
, which resulted in a weighted average borrowing rate of
2.55%
. All outstanding Canadian dollar borrowings were repaid during the first quarter of fiscal 2017. There were no Canadian dollar borrowings during the second quarter of fiscal 2017.
As of
July 1, 2017
, we were in compliance with the financial and other covenants under our secured revolving credit facility.
SENIOR NOTES
As of
July 1, 2017
, our wholly-owned operating subsidiary The William Carter Company ("TWCC") had
$400.0 million
principal amount of senior notes outstanding, bearing interest at a fixed rate of
5.25%
per annum, and maturing on August 15,
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
2021. On our consolidated balance sheet, the
$400.0 million
outstanding is reported net of
$4.2 million
,
$4.6 million
and
$5.0 million
unamortized issuance-related debt costs at
July 1, 2017
,
December 31, 2016
and
July 2, 2016
, respectively. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.
SHARE REPURCHASES
In the first two quarters of fiscal
2017
, the Company repurchased and retired
1,131,409
shares in open market transactions for approximately
$98.2 million
at an average price of
$86.82
per share. In the first two quarters of fiscal
2016
, the Company repurchased and retired
1,771,847
shares in open market transactions for approximately
$180.2 million
, at an average price of
$101.71
per share.
The total remaining capacity under all remaining repurchase authorizations as of
July 1, 2017
was approximately
$176.2 million
. Future repurchases may be made in the open market or in privately negotiated transactions, with the level and timing of activity being at management's discretion depending on market conditions, share price, other investment priorities, and other factors. The share repurchase authorizations have no expiration date.
DIVIDENDS
In the first and second quarters of fiscal
2017
, we paid quarterly cash dividends of
$0.37
per share in each quarter. In the first and second quarters of fiscal 2016, we paid quarterly cash dividends of
$0.33
per share in each quarter. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of our Board of Directors and will be based on a number of factors, including our future financial performance and other investment priorities.
As disclosed in our most recent Annual Report on Form 10-K for the 2016 fiscal year ended December 31, 2016, provisions in our secured revolving credit facility and indenture governing our senior notes could have the effect of restricting our ability to pay future cash dividends on or make future repurchases of our common stock.
SEASONALITY
We experience seasonal fluctuations in our sales and profitability due to the timing of certain holidays and key retail shopping periods, which generally have resulted in declines in our net sales and gross profit in the first half of our fiscal year versus the second half. Accordingly, our results of operations during any interim period during the fiscal year may not be indicative of the results we expect for the full fiscal year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our critical accounting policies and estimates are described under the heading "Critical Accounting Policies and Estimates" in Item 7 of our most recent Annual Report on Form 10-K for the 2016 fiscal year ended
December 31, 2016
. Our critical accounting policies and estimates are those policies that require management's most difficult and subjective judgments and may result in the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies and estimates include: revenue recognition and accounts receivable allowance, inventory, goodwill and tradename, accrued expenses, loss contingencies, accounting for income taxes, foreign currency, employee benefit plans, and stock-based compensation arrangements. There have been no material changes in these critical accounting policies and estimates from those described in our most recent Annual Report on Form 10-K, except for the impact that the adoption of ASU 2016-09,
Accounting for Share-Based Payments to Employees
and ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
had on our policies as disclosed under the header "Adoption of New Accounting Pronouncements At the Beginning of Fiscal 2017" in
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Note 2,
Basis of Presentation
, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.
Additionally, information related to the pending adoption of recently issued accounting standards is provided in Note 15,
Pending Adoption of Recent Accounting Pronouncements
, to the accompanying unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.