XNYS:CRI Carter's Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012 OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____
TO ______

Commission file number:
001-31829

CARTER’S, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
13-3912933
(state or other jurisdiction of
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

The Proscenium
1170 Peachtree Street NE, Suite 900
Atlanta, Georgia 30309
(Address of principal executive offices, including zip code)
(404) 745-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes (X) No ( )
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No (X)
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock
 
Outstanding Shares at July 25, 2012
Common stock, par value $0.01 per share
 
58,986,724





CARTER’S, INC.
INDEX

 
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
Signatures    
Certifications    
 




PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
(unaudited)
 
June 30,
2012
 
December 31,
2011
 
July 2,
2011
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
  Cash and cash equivalents
$
237,629

 
$
233,494

 
$
86,725

  Accounts receivable, net
131,888

 
157,754

 
124,667

  Finished goods inventories, net
377,857

 
347,215

 
458,114

  Prepaid expenses and other current assets
16,858

 
18,519

 
16,689

  Deferred income taxes
23,838

 
25,165

 
23,687

 
 
 
 
 
 
      Total current assets
788,070

 
782,147

 
709,882

Property, plant, and equipment, net
139,592

 
122,346

 
101,796

Tradenames
306,028

 
306,176

 
306,356

Goodwill
188,621

 
188,679

 
191,050

Deferred debt issuance costs, net
2,270

 
2,624

 
2,978

Other intangible assets, net
221

 
258

 
311

Other assets
436

 
479

 
445

 
 
 
 
 
 
            Total assets
$
1,425,238

 
$
1,402,709

 
$
1,312,818

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
  Current maturities of long-term debt
$

 
$

 
$

  Accounts payable
120,922

 
102,804

 
119,428

  Other current liabilities
34,012

 
49,949

 
37,226

 
 
 
 
 
 
      Total current liabilities
154,934

 
152,753

 
156,654

Long-term debt
186,000

 
236,000

 
236,000

Deferred income taxes
113,355

 
114,421

 
112,261

Other long-term liabilities
103,612

 
93,826

 
75,021

 
 
 
 
 
 
           Total liabilities
557,901

 
597,000

 
579,936

 
 
 
 
 
 
Commitments and contingencies

 

 

Stockholders’ equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at June 30, 2012, December 31, 2011, and July 2, 2011

 

 

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 58,989,420, 58,595,421, and 58,087,327 shares issued and outstanding at June 30, 2012, December 31, 2011, and July 2, 2011, respectively
590

 
586

 
581

Additional paid-in capital
240,427

 
231,738

 
218,857

Accumulated other comprehensive loss
(11,427
)
 
(11,282
)
 
(1,989
)
Retained earnings
637,747

 
584,667

 
515,433

 
 
 
 
 
 
Total stockholders’ equity
867,337

 
805,709

 
732,882

 
 
 
 
 
 
           Total liabilities and stockholders’ equity
$
1,425,238

 
$
1,402,709

 
$
1,312,818


See accompanying notes to the unaudited condensed consolidated financial statements.

1



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)

 
For the
three-month periods ended
 
 
For the
six-month periods ended
 
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Net sales
$
472,162

 
$
394,488

 
 
$
1,023,824

 
$
863,488

Cost of goods sold
288,919

 
259,445

 
 
645,842

 
570,360

 
 
 
 
 
 
 
 
 
Gross profit
183,243

 
135,043

 
 
377,982

 
293,128

Selling, general, and administrative expenses
156,290

 
121,290

 
 
305,995

 
235,070

Royalty income
(7,474
)
 
(8,269
)
 
 
(16,240
)
 
(17,598
)
 
 
 
 
 
 
 
 
 
Operating income
34,427

 
22,022

 
 
88,227

 
75,656

Interest expense, net
1,738

 
1,756

 
 
3,695

 
3,606

Foreign currency (gain) loss
(207
)
 
(231
)
 
 
99

 
(231
)
 
 
 
 
 
 
 
 
 
Income before income taxes
32,896

 
20,497

 
 
84,433

 
72,281

Provision for income taxes
12,091

 
7,838

 
 
31,353

 
27,499

 
 
 
 
 
 
 
 
 
Net income
$
20,805

 
$
12,659

 
 
$
53,080

 
$
44,782

 
 
 
 
 
 
 
 
 
Basic net income per common share (Note 13)
$
0.35

 
$
0.22

 
 
$
0.90

 
$
0.77

Diluted net income per common share (Note 13)
$
0.35

 
$
0.22

 
 
$
0.89

 
$
0.76


See accompanying notes to the unaudited condensed consolidated financial statements.



2



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
For the
three-month periods ended
 
 
For the six-month periods ended
 
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Net income
$
20,805

 
$
12,659

 
 
$
53,080

 
$
44,782

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
    Cumulative foreign currency translation adjustments
(1,340
)
 
(99
)
 
 
(145
)
 
(99
)
Comprehensive income
$
19,465

 
$
12,560

 
 
$
52,935

 
$
44,683



See accompanying notes to the unaudited condensed consolidated financial statements.

3


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(dollars in thousands, except for share data)
(unaudited)

 
Common
stock
 
Additional
paid-in
capital
 
Accumulated other comprehensive
(loss)
income
 
Retained
earnings
 
Total
stockholders’
equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
586

 
$
231,738

 
$
(11,282
)
 
$
584,667

 
$
805,709

Exercise of stock options (114,650 shares)
1

 
2,480

 

 

 
2,481

Issuance of common stock (21,708 shares)

 
1,080

 

 

 
1,080

Withholdings from vesting of restricted stock (53,134 shares)
(1
)
 
(2,407
)
 

 

 
(2,408
)
Income tax benefit from stock-based compensation

 
1,834

 

 

 
1,834

Restricted stock activity
4

 
(4
)
 

 

 

Stock-based compensation expense

 
5,706

 

 

 
5,706

Net income

 

 

 
53,080

 
53,080

Cumulative foreign currency translation adjustments

 

 
(145
)
 

 
(145
)
Balance at June 30, 2012
$
590

 
$
240,427

 
$
(11,427
)
 
$
637,747

 
$
867,337


See accompanying notes to the unaudited condensed consolidated financial statements.

4



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)

 
For the six-month periods ended
 
June 30,
2012
 
July 2,
2011
Cash flows from operating activities:
 
 
 
Net income
$
53,080

 
$
44,782

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
17,606

 
16,367

Non-cash revaluation of contingent consideration
1,779

 

Amortization of Bonnie Togs tradename and non-compete agreements
187

 

Amortization of debt issuance costs
354

 
354

Non-cash stock-based compensation expense
6,351

 
4,883

Income tax benefit from stock-based compensation
(1,834
)
 
(2,840
)
Loss on disposal/sale of property, plant, and equipment
517

 
140

Deferred income taxes
554

 
4,844

Effect of changes in operating assets and liabilities:

 
 
Accounts receivable
25,887

 
(234
)
Inventories
(30,705
)
 
(123,324
)
Prepaid expenses and other assets
1,706

 
1,291

Accounts payable and other liabilities
14,457

 
(32,565
)
 
 
 
 
Net cash provided by (used in) operating activities
89,939

 
(86,302
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(37,711
)
 
(16,086
)
Acquisition of Bonnie Togs

 
(61,199
)
Proceeds from sale of property, plant, and equipment
6

 

 
 
 
 
Net cash used in investing activities
(37,705
)
 
(77,285
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Borrowings under revolving credit facility
2,500

 

Payments on revolving credit facility
(52,500
)
 

Income tax benefit from stock-based compensation
1,834

 
2,840

Withholdings from vesting of restricted stock
(2,408
)
 
(1,602
)
Proceeds from exercise of stock options
2,481

 
1,692

 

 
 
Net cash (used in) provided by financing activities
(48,093
)
 
2,930

 
 
 
 
Effect of exchange rate changes on cash
(6
)
 

Net increase (decrease) in cash and cash equivalents
4,135

 
(160,657
)
Cash and cash equivalents, beginning of period
233,494

 
247,382

 
 
 
 
Cash and cash equivalents, end of period
$
237,629

 
$
86,725


See accompanying notes to the unaudited condensed consolidated financial statements.

5


CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 – THE COMPANY:
    
Carter’s, Inc. and its wholly owned subsidiaries (collectively, the “Company,” “we,” “us,” “its,” and “our”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One You, Precious Firsts, OshKosh, and other brands. Our products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for our 385 Carter’s, 166 OshKosh, and 73 Canadian retail stores that market our brand name merchandise and other licensed products manufactured by other companies.

On June 30, 2011, Northstar Canadian Operations Corp. (“Northstar”), a newly formed Canadian corporation and a wholly owned subsidiary of The William Carter Company ("TWCC") (a wholly owned subsidiary of Carter’s, Inc.), purchased all of the outstanding shares of capital stock of the entities comprising Bonnie Togs (the “Acquisition”), a Canadian specialty retailer focused exclusively on the children’s apparel and accessories marketplace. Our Canadian business sells products under the Carter’s and OshKosh brands, as well as other brands. Prior to the Acquisition, Bonnie Togs was a significant international licensee of the Company.

As a result of the acquisition of Bonnie Togs, the Company reevaluated and realigned certain of its reportable segments, please see Note 12, “Segment Information.”

Our unaudited condensed consolidated balance sheets as of June 30, 2012 and July 2, 2011 and our audited consolidated balance sheet as of December 31, 2011 include Bonnie Togs. The unaudited condensed consolidated statements of operations for the three and six-month periods ended July 2, 2011 were immaterially affected by the acquisition.


NOTE 2 – BASIS OF PREPARATION:

The accompanying unaudited condensed consolidated financial statements include the accounts of Carter’s, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

In our opinion, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of our financial position as of June 30, 2012, the results of our operations for the three and six-month periods ended June 30, 2012 and July 2, 2011, comprehensive income for the three and six-month periods ended June 30, 2012 and July 2, 2011, changes in stockholders’ equity for the six-month period ended June 30, 2012, and cash flows for the six-month periods ended June 30, 2012 and July 2, 2011. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and six-month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2012. Our accompanying condensed consolidated balance sheet as of December 31, 2011 is from our audited consolidated financial statements included in our most recently filed Annual Report on Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and the instructions to Form 10-Q. The accounting policies we follow are set forth in our most recently filed Annual Report on Form 10-K in the notes to our audited consolidated financial statements for the fiscal year ended December 31, 2011.

Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying unaudited condensed consolidated financial statements for the second quarter and first half of fiscal 2012 reflects our financial position as of June 30, 2012. The second quarter and first half of fiscal 2011 ended on July 2, 2011.

Certain prior year amounts have been reclassified to facilitate comparability with current year presentation.


6

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 3 – ACQUISITION OF BONNIE TOGS:

As noted above, on June 30, 2011, Northstar purchased all of the outstanding shares of capital stock of Bonnie Togs for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing. The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015. Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively. Any such payments are not recoverable by the Company in the event of any failure to meet overall targets.

The Company had a discounted contingent consideration liability of approximately $27.3 million as of June 30, 2012, approximately $25.6 million as of December 31, 2011, and $24.3 million as of July 2, 2011, based upon the high probability that Bonnie Togs will attain its earnings targets. The liabilities are included in other long-term liabilities on the accompanying unaudited condensed consolidated balance sheets. The $0.5 million increase in fair value during the second quarter of fiscal 2012, reflects accretion expense of approximately $1.1 million, partially offset by a $0.6 million favorable foreign currency translation adjustment reflected in accumulated other comprehensive income. The $1.7 million increase in the fair value of the liability during the first half of fiscal 2012 reflects accretion expense of approximately $1.8 million, partially offset by a $0.1 million favorable foreign currency translation adjustment reflected in accumulated other comprehensive income. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis. The Company will continue to revalue the contingent consideration at each reporting date.
The following table summarizes the fair values of the assets acquired and liabilities assumed at June 30, 2011, the date of the Acquisition:
(U.S. dollars in thousands)
 
 
 
Current assets
$
40,668

Property, plant, and equipment
13,485

Bonnie Togs Goodwill
54,982

Bonnie Togs tradename    
623
Non-compete agreements
311
Total assets acquired
110,069

Current liabilities
18,231

Non-current liabilities
6,693

Total liabilities assumed
24,924

Net assets acquired
$
85,145


In connection with the Acquisition, the Company recorded total acquired intangible assets of approximately $55.9 million, including $55.0 million of Bonnie Togs goodwill, $0.6 million related to the Bonnie Togs tradename (life of two years), and $0.3 million related to non-compete agreements for certain executives (life of four years).
    
The following unaudited pro forma summary presents information as if Bonnie Togs had been acquired on January 2, 2011 and assumes that there were no other changes in our operations. The pro forma information does not necessarily reflect the actual results that would have occurred had the Company operated the Canadian business since January 2, 2011, nor is it necessarily indicative of the future results of operations of the combined companies.
 
Three-month period ended
 
 
Six-month period ended
(dollars in thousands, except share data)
July 2, 2011
 
 
July 2, 2011
 
 
 
 
 
Pro forma net sales
$
421,904

 
 
$
909,802

Pro forma net income
$
14,812

 
 
$
47,435

Pro forma basic earnings per share
$
0.26

 
 
$
0.82

Pro forma diluted earnings per share
$
0.25

 
 
$
0.81




7

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):

The components of accumulated other comprehensive income (loss) consisted of the following:
(dollars in thousands)
June 30,
2012
 
December 31,
2011
 
July 2,
2011
 
 
 
 
 
 
Cumulative foreign currency translation adjustments
$
(3,269
)
 
$
(3,124
)
 
$
(99
)
Pension/post-retirement liability adjustment
(8,158
)
 
(8,158
)
 
(1,890
)
Total accumulated other comprehensive loss
$
(11,427
)
 
$
(11,282
)
 
$
(1,989
)
    
NOTE 5 – LONG-TERM DEBT:

Long-term debt consisted of the following:
(dollars in thousands)
June 30,
2012
 
December 31,
2011
 
July 2,
2011
Revolving credit facility
$
186,000

 
$
236,000

 
$
236,000

Current maturities

 

 

Total long-term debt
$
186,000

 
$
236,000

 
$
236,000

    
On October 15, 2010, the Company entered into a $375 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) revolving credit facility with Bank of America as sole lead arranger and administrative agent, JP Morgan Chase Bank as syndication agent, and other financial institutions. This revolving credit facility was immediately drawn upon to pay off the Company’s former term loan of $232.2 million and pay transaction fees and expenses of $3.8 million, leaving approximately $130 million available under the revolver for future borrowings (net of letters of credit of approximately $8.6 million). In connection with the repayment of the Company’s former term loan, in the fourth quarter of fiscal 2010 the Company wrote off approximately $1.2 million in unamortized debt issuance costs. In addition, in connection with the revolving credit facility, the Company recorded $3.5 million of debt issuance costs to be amortized over the term of the revolving credit facility (five years). On December 22, 2011, the Company and lenders amended and restated the revolving credit facility to, among other things, provide a U.S. dollar revolving facility of $340 million ($130 million sub-limit for letters of credit and a swing line sub-limit of $40 million) and a $35 million multicurrency revolving facility ($15 million sub-limit for letters of credit and a swing line sub-limit of $5 million), which is available for borrowings by either TWCC or our Canadian subsidiary, in U.S. dollars or Canadian dollars. The term of the revolving credit facility expires October 15, 2015. During the second quarter of fiscal 2012, the Company repaid borrowings under its revolving credit facility of $50.0 million. At June 30, 2012, we had approximately $186.0 million in revolver borrowings (fair value approximates book value), exclusive of $13.3 million of outstanding letters of credit, at an effective interest rate of 2.50%.

The revolving credit facility provides for two pricing options for U.S. dollar facility revolving loans: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the Federal Funds Rate plus ½ of 1%, (y) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its prime rate, or (z) the Eurodollar Rate plus 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50% and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.

The revolving credit facility also provides for two pricing options for multicurrency facility revolving loans denominated in U.S. dollars: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the Federal Funds Rate plus ½ of 1%, (y) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A., Canada Branch in Toronto as its reference rate for loans in U.S. dollars to its Canadian borrowers, or (z) the Eurodollar Rate plus 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50% and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.

8

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 5 – LONG-TERM DEBT: (Continued)

In addition, the revolving credit facility provides for two pricing options for multicurrency facility revolving loans denominated in Canadian dollars: (i) revolving loans on which interest is payable quarterly at a base rate equal to the highest of (x) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A., Canada Branch in Toronto as its prime rate for loans in Canadian Dollars to Canadian Borrowers and (y) the rate of interest in effect for such day for Canadian dollar bankers’ acceptances having a term of one month that appears on the Reuters Screen CDOR Page plus ½ of 1%, plus, in each case, an applicable margin initially equal to 1.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 1.00% to 1.50%, and (ii) revolving loans on which interest accrues for one, two, three, six or if, generally available, nine or twelve month interest periods (but is payable not less frequently than every three months) at a rate of interest per annum equal to an adjusted British Bankers Association LIBOR rate, plus an applicable margin initially equal to 2.25%, which may be adjusted based upon a leverage-based pricing grid ranging from 2.00% to 2.50%.

Amounts outstanding under the revolving credit facility currently accrue interest at a LIBOR rate plus 2.25%.

The revolving credit facility contains and defines financial covenants, including a lease adjusted leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness plus six times rent expense to consolidated net income before interest, taxes, depreciation, amortization, and rent expense (“EBITDAR”)) to exceed (x) if such period ends on or before December 31, 2014, 3.75:1.00 and (y) if such period ends after December 31, 2014, 3.50:1.00; and consolidated fixed charge coverage ratio (defined as, with certain adjustments, the ratio of consolidated EBITDAR to consolidated fixed charges (defined as interest plus rent expense)), for any such period to be less than 2.75:1.00. As of June 30, 2012, the Company believes it was in compliance with its financial debt covenants.

Provisions in our senior credit facility currently restrict the ability of our operating subsidiary, TWCC, from paying cash dividends to our parent company, Carter’s, Inc., in excess of $15.0 million unless TWCC and its consolidated subsidiaries meet certain leverage ratio and minimum availability requirements under the credit facility, which materially restricts Carter’s, Inc. from paying cash dividends on our common stock.  We do not anticipate paying cash dividends on our common stock in the foreseeable future but intend to retain future earnings, if any, for reinvestment in the future operation and expansion of our business and related development activities.  Any future decision to pay cash dividends will be at the discretion of our Board of Directors and will depend upon our financial condition, results of operations, terms of financing arrangements, capital requirements, and any other factors as our Board of Directors deems relevant. 
    

NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS:

In connection with the Acquisition, the Company recorded goodwill and other intangible assets including a Bonnie Togs tradename and non-compete agreements for certain executives of Bonnie Togs, in accordance with accounting guidance on business combinations.

Goodwill as of June 30, 2012, represents the excess of the cost of the acquisition of Carter’s, Inc., which was consummated on August 15, 2001, and the acquisition of Bonnie Togs, which was consummated on June 30, 2011, over the fair value of the net assets acquired. Our goodwill is not deductible for tax purposes. The OshKosh tradename was recorded in connection with the acquisition of OshKosh on July 14, 2005 and adjusted in fiscal 2007 to reflect the impairment of the value. Our Carter’s and Bonnie Togs goodwill and Carter’s and OshKosh tradenames are deemed to have indefinite lives and are not being amortized. The Bonnie Togs tradename and non-compete agreements for certain executives have definite lives and are being amortized over two and four years, respectively.

9

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS: (Continued)

The Company’s intangible assets were as follows:


 
 
June 30, 2012
 
 
December 31, 2011
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s goodwill (1)    
Indefinite
 
$
136,570

 
$

 
$
136,570

 
 
$
136,570

 
$

 
$
136,570

Bonnie Togs goodwill (2)    
Indefinite
 
$
52,051

 
$

 
$
52,051

 
 
$
52,109

 
$

 
$
52,109

Carter’s tradename    
Indefinite
 
$
220,233

 
$

 
$
220,233

 
 
$
220,233

 
$

 
$
220,233

OshKosh tradename    
Indefinite
 
$
85,500

 
$

 
$
85,500

 
 
$
85,500

 
$

 
$
85,500

Bonnie Togs tradename    
2 years
 
$
589

 
$
294

 
$
295

 
 
$
592

 
$
150

 
$
442

Non-compete agreements
4 years
 
$
295

 
$
74

 
$
221

 
 
$
295

 
$
37

 
$
258

 




 
July 2, 2011
 
 
 
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s goodwill (1)    
Indefinite
 
$
136,570

 
$

 
$
136,570

 
 
 
 
 
 
 
Bonnie Togs goodwill (2)    
Indefinite
 
$
54,480

 
$

 
$
54,480

 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$

 
$
220,233

 
 
 
 
 
 
 
OshKosh tradename    
Indefinite
 
$
85,500

 
$

 
$
85,500

 
 
 
 
 
 
 
Bonnie Togs tradename    
2 years
 
$
623

 
$

 
$
623

 
 
 
 
 
 
 
Non-compete agreements
4 years
 
$
311

 
$

 
$
311

 
 
 
 
 
 
 

(1)
$45.9 million of which relates to the Carter’s wholesale segment, $82.0 million of which relates to the Carter’s retail segment, and $8.6 million of which relates to the international segment.
(2)
Relates to the international segment.    

The following is a reconciliation of Bonnie Togs' intangible assets:


  (dollars in thousands)
Bonnie Togs
Goodwill
 
Bonnie Togs
Tradename
 
Non-compete
agreements
 
 
 
 
 
 
Gross Balance at December 31, 2011
$
52,109

 
$
592

 
$
295

Purchase accounting adjustments

 

 

Foreign currency exchange adjustments
(58
)
 
(3
)
 

Gross Balance at June 30, 2012
$
52,051

 
$
589

 
$
295


Amortization expense for intangible assets subject to amortization was approximately $0.1 million and $0.2 million for the three and six-month periods ended June 30, 2012, respectively.


NOTE 7 – INCOME TAXES:

The Company and its subsidiaries file income tax returns in the United States and in various states and local jurisdictions.  The Company’s Canadian subsidiary files income tax returns in Canada and various Canadian provinces. The Internal Revenue Service completed its income tax audit for fiscal 2009 during fiscal 2011. In most cases, the Company is no longer subject to state and local tax authority examinations for years prior to fiscal 2007.






10

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 7 – INCOME TAXES: (Continued)

As of June 30, 2012, the Company had gross unrecognized tax benefits of approximately $9.9 million, $6.9 million of which, if ultimately recognized, will impact the Company’s effective tax rate in the period settled.  The Company has recorded tax positions for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductions.  Because of deferred tax accounting, changes in the timing of these deductions would not impact the annual effective tax rate, but would accelerate the payment of cash to the taxing authorities.

Included in the reserves for unrecognized tax benefits are approximately $1.9 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 impact our annual effective tax rate for fiscal 2012 and the effective tax rate in the quarter in which the benefits are recognized. 

We recognize interest related to unrecognized tax benefits as a component of interest expense and penalties related to unrecognized tax benefits as a component of income tax expense.  During the three and six-month periods ended June 30, 2012, and July 2, 2011, the Company recognized interest expense on uncertain tax positions of approximately $0.1 million and $0.2 million, respectively. The Company had approximately $0.7 million, $0.5 million, and $0.8 million of interest accrued as of June 30, 2012, December 31, 2011, and July 2, 2011, respectively.

    
NOTE 8 – FAIR VALUE MEASUREMENTS:

The Company accounts for its fair value measurements in accordance with accounting guidance which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:
Level 1
- Quoted prices in active markets for identical assets or liabilities
Level 2
- Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3
- Inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
    
The following table summarizes assets and liabilities measured at fair value on a recurring basis:

 
June 30, 2012
 
 
December 31, 2011
 
 
July 2, 2011
(dollars in millions)
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
50.3

 
$

 
$

 
 
$
50.2

 
$

 
$

 
 
$
55.3

 
$

 
$

Foreign exchange forward contracts
$
0.1

 
$

 
$

 
 
$
0.6

 
$

 
$

 
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration
$

 
$

 
$
27.3

 
 
$

 
$

 
$
25.6

 
 
$

 
$

 
$
24.3


11

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 8 – FAIR VALUE MEASUREMENTS: (Continued)

The following summarizes the significant unobservable inputs for our Level 3 fair value measurements at June 30, 2012:

(dollars in millions)
Fair Value
 
Valuation
technique
 
Unobservable
inputs
 
Amount
 
 
 
 
 
 
 
 
Contingent consideration
$
27.3

 
Discounted cash flow
 
Estimated contingent consideration payment
 
$
35

 
 
 
 
 
Discount rate
 
18
%
 
 
 
 
 
Probability assumption
 
100
%
    
At June 30, 2012 and December 31, 2011, we had approximately $50.3 million and $50.2 million, respectively, of cash invested in money market deposit accounts. At July 2, 2011, we had approximately $30.3 million of cash invested in money market deposit accounts and $25.0 million in U.S. Treasury bills.

As of June 30, 2012, December 31, 2011, and July 2, 2011, the fair value of the Company’s outstanding borrowings under the revolving credit facility approximated book value and would have been disclosed as a Level 1 liability in the fair value hierarchy had it been measured at fair value.

As part of the Company's overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily exposure to changes in the value of the U.S. dollar in relation to the Canadian dollar, the Company hedges a portion of its foreign currency exposures anticipated over the ensuing twelve-month period. The Company uses foreign exchange contracts that generally have maturities of up to 12 months to provide continuing coverage throughout the hedging period.

As of June 30, 2012, the Company had contracts for the purchase of $8.0 million of U.S. dollars at fixed rates. The fair value of these forward contracts was an asset of $0.1 million. The Company accounts for these foreign exchange contracts as undesignated positions in accordance with accounting standards on derivatives and hedging. As such, these positions are marked to fair value through earnings at each reporting date.

During the second quarter of fiscal 2012, the Company also recorded a $0.1 million gain on the mark-to-market of foreign currency exchange contracts and a $0.1 million gain on the remeasurement of Bonnie Togs’ foreign denominated payables. During the first half of fiscal 2012, the Company recorded a $0.5 million loss on the mark-to-market of foreign currency exchange contracts and a $0.4 million gain on the remeasurement of Bonnie Togs’ foreign denominated payables.

The fair value of the discounted contingent consideration liability was approximately $27.3 million as of June 30, 2012, $26.8 million as of March 31, 2012 and $25.6 million as of December 31, 2011. The $0.5 million increase in fair value during the second quarter of fiscal 2012, reflects accretion expense of approximately $1.1 million, partially offset by a $0.6 million favorable foreign currency translation adjustment reflected in accumulated other comprehensive income. The $1.7 million increase in fair value during the first half of fiscal 2012, reflects accretion expense of approximately $1.8 million, partially offset by a $0.1 million favorable foreign currency translation adjustment reflected in accumulated other comprehensive income. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis. Changes in the estimated earnout payment, discount rate, or probability assumptions used could materially impact the fair value of the contingent consideration.

12

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 8 – FAIR VALUE MEASUREMENTS: (Continued)

The fair value of our derivative instruments in our accompanying unaudited condensed consolidated balance sheets were as follows:

 
Asset Derivatives
 
 
Liability Derivatives
 
 
 
 
 
 
 
 
 
(dollars in millions)
Balance sheet
location
 
Fair value
 
 
Balance sheet
location
 
Fair value
 
 
 
 
 
 
 
 
 
June 30, 2012
Prepaid expenses and other current assets
 
$
0.1

 
 
Other current liabilities
 
$

December 31, 2011
Prepaid expenses and other current assets
 
$
0.6

 
 
Other current liabilities
 
$

July 2, 2011
Prepaid expenses and other current assets
 
$

 
 
Other current liabilities
 
$


The effect of undesignated derivative instruments on our accompanying unaudited condensed consolidated statements of operations was as follows:
 
For the three-month periods ended
 
 
For the six-month periods ended
 
 
 
 
 
 
 
 
 
(dollars in thousands)
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts gains (losses)
$
126

 
$
231

 
 
$
(504
)
 
$
231



NOTE 9 – EMPLOYEE BENEFIT PLANS:

Under a defined benefit plan frozen in 1991, we offer a comprehensive post-retirement medical plan to current and certain future retirees and their spouses until they become eligible for Medicare or a Medicare Supplement Plan. We also offer life insurance to current and certain future retirees. Employee contributions are required as a condition of participation for both medical benefits and life insurance and our liabilities are net of these expected employee contributions. See Note 8 “Employee Benefit Plans” to our audited consolidated financial statements in our most recently filed Annual Report on Form 10-K for further information.

The components of post-retirement benefit expense charged to operations are as follows:

 
For the
three-month periods ended
 
 
For the six-month periods ended
(dollars in thousands)
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Service cost – benefits attributed to service during the period
$
17

 
$
18

 
 
$
34

 
$
36

Interest cost on accumulated post-retirement benefit obligation
53

 
106

 
 
106

 
212

Amortization net actuarial gain
(18
)
 
(5
)
 
 
(36
)
 
(10
)
Total net periodic post-retirement benefit cost
$
52

 
$
119

 
 
$
104

 
$
238



13

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 9 – EMPLOYEE BENEFIT PLANS: (Continued)

We have an obligation under a defined benefit plan covering certain former officers and their spouses. The component of pension expense charged to operations is as follows:

 
For the
three-month periods ended
 
 
For the six-month periods ended
(dollars in thousands)
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Interest cost on accumulated pension benefit obligation
$
20

 
$
8

 
 
$
40

 
$
16

    
Under a defined benefit pension plan frozen as of December 31, 2005, certain current and former employees of OshKosh are eligible to receive benefits. The net periodic pension (benefit) expense associated with this pension plan and included in the statement of operations was comprised of:

 
For the
three-month periods ended
 
 
For the six-month periods ended
(dollars in thousands)
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Interest cost on accumulated pension benefit obligation
$
597

 
$
613

 
 
$
1,194

 
$
1,227

Expected return on assets
(713
)
 
(778
)
 
 
(1,426
)
 
(1,556
)
Amortization of actuarial loss
178

 

 
 
355

 

Total net periodic pension expense (benefit)
$
62

 
$
(165
)
 
 
$
123

 
$
(329
)

NOTE 10 – COMMON STOCK:

During the second quarter and first half of 2012, the Company issued 21,708 shares of common stock at a fair value of $49.76 per share to non-management board members. In connection with this issuance, the Company recognized approximately $1.1 million in stock-based compensation expense. During the second quarter and first half of fiscal 2011, the Company issued 38,520 shares of common stock at a fair value of $30.38 per share to its non-management board members. In connection with this issuance, we recognized approximately $1.2 million in stock-based compensation expense. The Company received no proceeds from the issuance of these shares.

During fiscal 2007, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company was authorized to purchase up to $100 million of its outstanding common shares. During fiscal 2010, the Company’s Board of Directors approved a share repurchase authorization, pursuant to which the Company is authorized to purchase up to an additional $100 million of its outstanding common shares. As of August 13, 2010, the Company had repurchased outstanding shares in the amount totaling the entire $100 million authorized by the Board of Directors on February 16, 2007.
The Company did not repurchase any shares of its common stock during the first half of fiscal 2012 and 2011 pursuant to any repurchase authorization. Since inception of the repurchase program and through the second quarter of fiscal 2012, the Company repurchased and retired 6,658,410 shares, or approximately $141.1 million, of its common stock at an average price of $21.19 per share. We have reduced common stock by the par value of such shares repurchased and have deducted the remaining excess repurchase price over par value from additional paid-in capital. Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise.  The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

14

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 11 – STOCK-BASED COMPENSATION:

Under the Company’s Amended and Restated Equity Incentive Plan (the “Plan”), the compensation committee of our Board of Directors may award incentive stock options (ISOs and non-ISOs), stock appreciation rights (SARs), restricted stock, unrestricted stock, stock deliverable on a deferred basis (including restricted stock units), and performance-based stock awards. The fair value of time-based or performance-based stock option grants are estimated on the date of grant using the Black-Scholes option pricing method with the following weighted-average assumptions used for grants issued during the six-month period ended June 30, 2012.

 
Assumptions
 
 
Volatility
34.82
%
Risk-free interest rate
1.38
%
Expected term (years)
5.9

Dividend yield

Grant-date fair value
$
15.11


The fair value of restricted stock and restricted stock units (collectively, “restricted stock awards”) is determined based on the quoted closing price of our common stock on the date of grant.

The following table summarizes our stock option and restricted stock awards activity during the six-month period ended June 30, 2012:

 
Stock
options
 
Restricted
stock awards
 
 
 
 
Outstanding, December 31, 2011
1,992,700

 
617,401

 
 
 
 
Granted
345,600

 
324,800

Exercised
(114,650
)
 

Vested restricted stock

 
(141,607
)
Forfeited
(6,300
)
 
(3,025
)
Expired

 

 
 
 
 
Outstanding, June 30, 2012
2,217,350

 
797,569

 
 
 
 
Exercisable, June 30, 2012
1,199,450

 


During the three-month period ended June 30, 2012, we granted 2,000 stock options with a weighted-average Black-Scholes fair value of $18.42 per share and a weighted-average exercise price of $51.46 per share. In connection with this grant, we recognized approximately $1,000 in stock-based compensation expense during the three-month period ended June 30, 2012.

During the six-month period ended June 30, 2012, we granted 345,600 stock options with a weighted-average Black-Scholes fair value of $15.11 per share and a weighted-average exercise price of $42.66 per share. In connection with these grants, we recognized approximately $431,000 in stock-based compensation expense during the six-month period ended June 30, 2012.

During the three-month period ended June 30, 2012, we granted 1,000 restricted stock awards with a weighted-average fair value on the date of grant of $51.46 per share. In connection with these grants, we recognized approximately $1,500 in stock-based compensation expense during the three-month period ended June 30, 2012.

During the six-month period ended June 30, 2012, we granted 324,800 restricted stock awards with a weighted-average fair value on the date of grant of $42.66 per share. In connection with these grants, we recognized approximately $1.2 million in stock-based compensation expense during the six-month period ended June 30, 2012.


15

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


NOTE 11 – STOCK-BASED COMPENSATION: (Continued)
    
During the six-month period ended June 30, 2012, the Company granted our Chief Executive Officer 100,000 performance-based restricted shares at a fair market value of $42.61 per share. In addition, the Company granted our other executive officers 52,000 performance-based restricted shares at a fair market value of $42.61 per share. Vesting of these shares is contingent upon meeting specific performance targets and would occur, if ever, in fiscal 2015. Currently, the Company believes that these targets will be achieved and, accordingly, we will continue to record compensation expense until the restricted shares vest or the Company’s assessment of achievement of the performance criteria changes.

Unrecognized stock-based compensation expense related to outstanding unvested stock options and unvested restricted stock awards is expected to be recorded as follows:
(dollars in thousands)
Stock
options
 
Restricted
stock awards
 
Total
 
 
 
 
 
 
2012 (period from July 1 through December 29, 2012)
$
2,076

 
$
4,146

 
$
6,222

2013
3,597

 
7,343

 
10,940

2014
2,620

 
6,279

 
8,899

2015
1,456

 
3,382

 
4,838

Total
$
9,749

 
$
21,150

 
$
30,899



NOTE 12 – SEGMENT INFORMATION:
 
We report segment information in accordance with accounting guidance on segment reporting, which requires segment information to be disclosed based upon a “management approach.” The management approach refers to the internal reporting that is used by management for making operating decisions and assessing the performance of our reportable segments. We report our corporate expenses separately as they are not included in the internal measures of segment operating performance used by the Company in order to measure the underlying performance of our reportable segments.

As a result of the Acquisition, the Company realigned certain of its reportable segments. Effective October 1, 2011, the Company's reportable segments include Carter’s retail, Carter’s wholesale, OshKosh retail, OshKosh wholesale, and international. Prior periods presented have been recast to conform to the current year presentation.

    

16

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 12 – SEGMENT INFORMATION: (Continued)

The table below presents certain segment information for the periods indicated:
 
For the three-month periods ended
 
For the six-month periods ended
(dollars in thousands)
June 30,
2012
 
% of
Total
 
July 2,
2011
 
% of
Total
 
 
June 30,
2012
 
% of
Total
 
July 2,
2011
 
% of
Total
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
194,523

 
41.2
 %
 
$
172,634

 
43.8
 %
 
 
$
444,008

 
43.4
 %
 
$
414,253

 
48.0
 %
Carter’s Retail (a)    
169,261

 
35.8
 %
 
142,921

 
36.2
 %
 
 
346,465

 
33.8
 %
 
280,783

 
32.5
 %
Total Carter’s
363,784

 
77.0
 %
 
315,555

 
80.0
 %
 
 
790,473

 
77.2
 %
 
695,036

 
80.5
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OshKosh Retail (a)    
58,301

 
12.3
 %
 
57,112

 
14.5
 %
 
 
116,289

 
11.4
 %
 
111,106

 
12.9
 %
OshKosh Wholesale
12,789

 
2.7
 %
 
14,700

 
3.7
 %
 
 
33,063

 
3.2
 %
 
34,776

 
4.0
 %
Total OshKosh
71,090

 
15.1
 %
 
71,812

 
18.2
 %
 
 
149,352

 
14.6
 %
 
145,882

 
16.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International (b)     
37,288

 
7.9
 %
 
7,121

 
1.8
 %
 
 
83,999

 
8.2
 %
 
22,570

 
2.6
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total net sales
$
472,162

 
100.0
 %
 
$
394,488

 
100.0
 %
 
 
$
1,023,824

 
100.0
 %
 
$
863,488

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
35,945

 
18.5
 %
 
$
20,438

 
11.8
 %
 
 
$
76,216

 
17.2
 %
 
$
57,581

 
13.9
 %
Carter’s Retail (a)    
19,951

 
11.8
 %
 
19,392

 
13.6
 %
 
 
50,485

 
14.6
 %
 
46,055

 
16.4
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Carter’s
55,896

 
15.4
 %
 
39,830

 
12.6
 %
 
 
126,701

 
16.0
 %
 
103,636

 
14.9
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
OshKosh Retail (a)    
(9,319
)
 
(16.0
)%
 
(5,719
)
 
(10.0
)%
 
 
(16,778
)
 
(14.4
)%
 
(11,121
)
 
(10.0
)%
OshKosh Wholesale
(574
)
 
(4.5
)%
 
(1,994
)
 
(13.6
)%
 
 
(454
)
 
(1.4
)%
 
(431
)
 
(1.2
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total OshKosh
(9,893
)
 
(13.9
)%
 
(7,713
)
 
(10.7
)%
 
 
(17,232
)
 
(11.5
)%
 
(11,552
)
 
(7.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
International (b)     
6,257

(c)
16.8
 %
 
3,607

 
50.7
 %
 
 
13,724

(c)
16.3
 %
 
8,586

 
38.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total segment operating income
52,260

 
11.1
 %
 
35,724

 
9.1
 %
 
 
123,193

 
12.0
 %
 
100,670

 
11.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses (d)    
(17,833
)
(e)
(3.8
)%
 
(13,702
)
(f)
(3.5
)%
 
 
(34,966
)
(e)
(3.4
)%
 
(25,014
)
(f)
(2.9
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating income
$
34,427

 
7.3
 %
 
$
22,022

 
5.6
 %
 
 
$
88,227

 
8.6
 %
 
$
75,656

 
8.8
 %

(a)
Includes eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income.
(c)
Includes charges of $1.1 million and $1.8 million for the three and six-month periods ended June 30, 2012, respectively, associated with the revaluation of the Company’s contingent consideration.
(d)
Corporate expenses generally include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees.
(e)
Includes $0.7 million and $1.8 million in facility closure-related costs related to the closure of a distribution facility located in Hogansville, Georgia for the three and six-month periods ended June 30, 2012, respectively. For the second quarter of fiscal 2012, the total closure-related costs consisted of severance of $0.3 million, accelerated depreciation (included in selling, general, and administrative expenses) of $0.4 million, and other closure costs of $0.1 million. For the first half of fiscal 2012, the total closure-related costs consisted of severance of $1.4 million, accelerated depreciation (included in selling, general, and administrative expenses) of $0.4 million, and other closure costs of $0.1 million.
(f)
Includes $1.2 million and $2.2 million of professional service fees associated with the Acquisition for the three and six-month period ended July 2, 2011.

In the second quarter and first half of fiscal 2012 and 2011, no customers accounted for 10% or more of our consolidated net sales.

17

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 13 – EARNINGS PER SHARE:

The Company calculates basic and diluted net income per common share in accordance with accounting guidance which requires earnings per share to be calculated pursuant to the two-class method for unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid).

Basic net income per share is calculated by dividing net income for the period by the weighted-average common shares outstanding for the period. Diluted net income per share includes the effect of dilutive instruments, such as stock options and restricted stock awards, and uses the average share price for the period in determining the number of shares that are to be added to the weighted-average number of shares outstanding.     

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
 
For the
three-month periods ended
 
 
For the six-month periods ended
 
June 30,
2012
 
July 2,
2011
 
 
June 30,
2012
 
July 2,
2011
 
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
Basic number of common shares outstanding
58,200,702

 
57,320,717

 
 
58,128,989

 
57,185,008

Dilutive effect of unvested restricted stock
170,495

 
96,845

 
 
174,134

 
101,921

Dilutive effect of stock options
676,321

 
635,425

 
 
645,174

 
665,797

Diluted number of common and common equivalent shares outstanding
59,047,518

 
58,052,987

 
 
58,948,297

 
57,952,726

 
 
 
 
 
 
 
 
 
Basic net income per common share:
 
 
 
 
 
 
 
 
Net income
$
20,805,000

 
$
12,659,000

 
 
$
53,080,000

 
$
44,782,000

Income allocated to participating securities
(281,253
)
 
(140,083
)
 
 
(718,436
)
 
(496,715
)
Net income available to common shareholders
$
20,523,747

 
$
12,518,917

 
 
$
52,361,564

 
$
44,285,285

 
 
 
 
 
 
 
 
 
Basic net income per common share
$
0.35

 
$
0.22

 
 
$
0.90

 
$
0.77

 
 
 
 
 
 
 
 
 
Diluted net income per common share:
 
 
 
 
 
 
 
 
Net income
$
20,805,000

 
$
12,659,000

 
 
$
53,080,000

 
$
44,782,000

Income allocated to participating securities
(278,065
)
 
(138,564
)
 
 
(710,655
)
 
(491,061
)
Net income available to common shareholders
$
20,526,935

 
$
12,520,436

 
 
$
52,369,345

 
$
44,290,939

 
 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.35

 
$
0.22

 
 
$
0.89

 
$
0.76


For the three and six-month periods ended June 30, 2012, anti-dilutive and performance-based restricted shares of 594,950 and 612,550, respectively, were excluded from the computations of diluted earnings per share. For the three and six-month periods ended July 2, 2011, anti-dilutive shares of 953,950 and 1,012,050, respectively, were excluded from the computations of diluted earnings per share.

18

CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)



NOTE 14 – FACILITY CLOSURE:

Consistent with the Company's strategy to strengthen our distribution capabilities, we decided to close our Hogansville, Georgia facility in 2013 and open a new, larger multi-channel distribution facility in Braselton, Georgia. On March 14, 2012, the Company announced to affected employees its plan to close the Hogansville facility. Approximately 210 employees are affected by this closure.

In conjunction with the plan to close the Hogansville distribution facility, the Company recorded approximately $0.7 million and $1.8 million in closing-related costs during the second quarter and first half of fiscal 2012, respectively. The total amount of charges consisted of severance of $0.3 million and $1.4 million, accelerated depreciation (included in selling, general, and administrative expenses) of $0.4 million and other closure costs of $0.1 million and for the second quarter and the first half of fiscal 2012, respectively.
    
As of June 30, 2012, there was approximately $1.4 million of restructuring reserves included in other current liabilities on the accompanying unaudited condensed consolidated balance sheet related to this closure. The Company expects to incur additional closure-related charges of approximately $1.3 million for one-time termination benefits ($0.7 million in fiscal 2012 and $0.6 million in fiscal 2013) and $1.2 million in accelerated depreciation ($0.7 million in fiscal 2012 and $0.5 million in fiscal 2013), and other closure costs of $1.0 million in fiscal 2013. The salvage value of this facility is estimated to be $2.0 million.

When the Company determined that it was probable that the Hogansville facility would be closed, an impairment test was performed under the "held and used" model. We determined that the assets were not impaired; however, the estimated useful lives of the assets were reassessed and depreciation was accelerated over the expected remaining shutdown period.


NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS:

In May 2011, the Financial Accounting Standards Board ("FASB") issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures. This guidance is effective for interim and annual periods beginning after December 15, 2011. The Company has included the required disclosures within Note 8, Fair Value Measurements.
 
In June 2011, the FASB issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both instances, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. In December 2011, the FASB issued guidance to indefinitely defer provisions requiring reclassification adjustments out of other comprehensive income to be presented on the face of the financial statements. The other portions of the original guidance remain unchanged. These standards are effective for interim and annual periods beginning after December 15, 2011, and are to be applied retrospectively. The Company has included such disclosures within this quarterly report.
    
In September 2011, the FASB issued new guidance on testing goodwill for impairment. This guidance gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. This guidance is effective for fiscal years beginning after December 15, 2011. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.


19


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

    
The following is a discussion of our results of operations and current financial position. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this quarterly report.

Our fiscal year ends on the Saturday, in December or January, nearest the last day of December. The accompanying unaudited condensed consolidated financial statements for the second quarter and first half of fiscal 2012 reflect our financial position as of June 30, 2012. The second quarter and first half of fiscal 2011 ended on July 2, 2011.
    
On June 30, 2011, we acquired Bonnie Togs, a Canadian children’s apparel retailer and one of our principal licensees. Specifically, the Company purchased all of the outstanding shares of capital stock of Bonnie Togs (the "Acquisition") for total consideration of up to CAD $95 million, of which USD $61.2 million was paid in cash at closing. The sellers may also be paid contingent consideration ranging from zero to CAD $35 million if the Canadian business meets certain earnings targets for the period beginning July 1, 2011 and ending on June 27, 2015. Sellers may receive a portion of the contingent consideration of up to CAD $25 million if interim earnings targets are met through June 2013 and June 2014, respectively. Any such payments are not recoverable by the Company in the event of any failure to meet overall targets. The Acquisition was immaterial to our consolidated statement of operations for the three and six-month periods ended July 2, 2011 as the Acquisition took place on June 30, 2011.

As of June 30, 2012, the Company had a discounted contingent consideration liability of approximately $27.3 million based upon the high probability that Bonnie Togs will attain its earnings targets and is included in other long-term liabilities on the accompanying unaudited condensed consolidated balance sheet. The fair value of the discounted contingent consideration liability was approximately $26.8 million as of March 31, 2012 and $25.6 million as of December 31, 2011. The $0.5 million increase in fair value during the second quarter of fiscal 2012 reflects accretion expense of approximately $1.1 million, partially offset by a $0.6 million in accumulated other comprehensive income reflecting a favorable foreign currency translation adjustment. The $1.7 million increase in the fair value of the liability during the first half of 2012 reflects accretion expense of $1.8 million, partially offset by a $0.1 million foreign currency translation adjustment reflected in accumulated other comprehensive income. The Company determined the fair value of the contingent consideration based upon a probability-weighted discounted cash flow analysis. The Company will continue to revalue the contingent consideration at each reporting date.

As a result of the Acquisition, the Company realigned certain of its reportable segments. Effect