Q3 2013 10-Q

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

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2013 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 October 18, 2013
Common stock, par value $0.01 per share
 
54,525,894











CARTER’S, INC.
INDEX
 
 
 
Page
Part I. Financial Information
 
 
 
 
 
 
Item 1
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended September 28, 2013 and September 29, 2012
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended September 28, 2013 and September 29, 2012
 
 
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three fiscal quarters ended September 28, 2013
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended September 28, 2013 and September 29, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1
 
 
 
Item 3
Defaults upon Senior Securities
 
 
 
 
 
 
 
 
 
 
 
 



PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
(unaudited)
 
September 28,
2013
 
December 29, 2012
 
September 29,
2012
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
  Cash and cash equivalents
$
201,819

 
$
382,236

 
$
254,321

  Accounts receivable, net
245,610

 
168,046

 
200,156

  Finished goods inventories, net
440,446

 
349,530

 
375,102

  Prepaid expenses and other current assets
22,872

 
22,216

 
16,913

  Deferred income taxes
33,456

 
35,675

 
29,984

      Total current assets
944,203

 
957,703

 
876,476

Property, plant, and equipment, net
256,225

 
170,110

 
153,330

Goodwill
188,006

 
189,749

 
190,470

Tradenames and other intangibles, net
336,596

 
306,072

 
306,172

Deferred debt issuance costs, net
7,961

 
2,878

 
3,074

Other assets
4,566

 
3,597

 
3,268

            Total assets
$
1,737,557

 
$
1,630,109

 
$
1,532,790

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
  Accounts payable
$
158,600

 
$
149,625

 
$
115,005

  Other current liabilities
85,107

 
94,610

 
89,158

      Total current liabilities
243,707

 
244,235

 
204,163

Long-term debt
586,000

 
186,000

 
186,000

Deferred income taxes
110,708

 
114,341

 
113,280

Other long-term liabilities
138,219

 
100,054

 
95,905

           Total liabilities
$
1,078,634

 
$
644,630

 
$
599,348

 
 
 
 
 
 
Commitments and contingencies


 


 


 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at September 28, 2013, December 29, 2012, and September 29, 2012, respectively
—

 
—

 
—

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 54,542,594, 59,126,639, and 59,035,891 shares issued and outstanding at September 28, 2013, December 29, 2012, and September 29, 2012, respectively
545

 
591

 
590

Additional paid-in capital
—

 
250,276

 
244,861

Accumulated other comprehensive loss
(13,531
)
 
(11,205
)
 
(9,134
)
Retained earnings
671,909

 
745,817

 
697,125

Total stockholders’ equity
658,923

 
985,479

 
933,442

           Total liabilities and stockholders’ equity
$
1,737,557

 
$
1,630,109

 
$
1,532,790


See accompanying notes to the unaudited condensed consolidated financial statements.

1



CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
(unaudited)
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
 
 
 
 
 
 
 
 
 
Net sales
$
760,173

 
$
668,657

 
$
1,869,056

 
$
1,692,481

 
Cost of goods sold
450,524

 
398,580

 
1,096,100

 
1,044,422

 
Gross profit
309,649

 
270,077

 
772,956

 
648,059

 
Selling, general, and administrative expenses
229,264

 
185,167

 
609,639

 
491,162

 
Royalty income
(10,691
)
 
(10,482
)
 
(27,440
)
 
(26,722
)
 
Operating income
91,076

 
95,392

 
190,757

 
183,619

 
Interest expense, net
3,995

 
1,657

 
6,158

 
5,279

 
Other (income) expense, net
(55
)
 
(190
)
 
1,049

 
(18
)
 
Income before income taxes
87,136

 
93,925

 
183,550

 
178,358

 
Provision for income taxes
30,565

 
34,547

 
65,891

 
65,900

 
Net income
$
56,571

 
$
59,378

 
$
117,659

 
$
112,458

 
 
 
 
 
 
 
 
 
 
Basic net income per common share
$
0.98

 
$
1.01

 
$
2.00

 
$
1.91

 
 
 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.97

 
$
0.99

 
$
1.98

 
$
1.88


 
 
 
 
 
 
 
 
 
Dividend declared and paid per common share
$
0.16

 
$
—

 
$
0.32

 
$
—

 

See accompanying notes to the unaudited condensed consolidated financial statements.



2


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)
 
Fiscal quarter ended
 
 
Three fiscal quarters ended
 
September 28,
2013
 
September 29,
2012
 
 
September 28,
2013
 
September 29,
2012
 
 
 
 
 
 
 
 
 
Net income
$
56,571

 
$
59,378

 
 
$
117,659

 
$
112,458

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,676

 
2,293

 
 
(2,326
)
 
2,148

Comprehensive income
$
58,247

 
$
61,671

 
 
$
115,333

 
$
114,606



See accompanying notes to the unaudited condensed consolidated financial statements.

3

CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(amounts in thousands, except share amounts)
(unaudited)
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 29, 2012
59,126,639

 
$
591

 
$
250,276

 
$
(11,205
)
 
$
745,817

 
$
985,479

Income tax benefit from stock-based compensation
—

 
—

 
10,775

 
—

 
—

 
10,775

Exercise of stock options
654,700

 
6

 
12,447

 
—

 
—

 
12,453

Withholdings from vesting of restricted stock
(102,249
)
 
(1
)
 
(4,990
)
 
—

 
—

 
(4,991
)
Restricted stock activity
274,231

 
3

 
(3
)
 
—

 
—

 
—

Stock-based compensation expense
—

 
—

 
11,903

 
—

 
—

 
11,903

Issuance of common stock
16,173

 
—

 
1,080

 
—

 
—

 
1,080

Repurchase of common stock
(5,426,900
)
 
(54
)
 
(281,488
)
 
—

 
(172,591
)
 
(454,133
)
Cash dividends declared and paid
—

 
—

 
—

 
—

 
(18,976
)
 
(18,976
)
Comprehensive income
—

 
—

 
—

 
(2,326
)
 
117,659

 
115,333

Balance at September 28, 2013
54,542,594

 
$
545

 
$
—

 
$
(13,531
)
 
$
671,909

 
$
658,923


See accompanying notes to the unaudited condensed consolidated financial statements.

4


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Three fiscal quarters ended
 
September 28,
2013
 
September 29,
2012
Cash flows from operating activities:
 
 
 
Net income
$
117,659

 
$
112,458

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
     Depreciation and amortization
43,336

 
26,619

     Accretion of contingent consideration
2,347

 
2,883

     Amortization of debt issuance costs
677

 
681

     Stock-based compensation expense
12,356

 
9,718

     Income tax benefit from stock-based compensation
(10,775
)
 
(2,387
)
     Loss on disposal of property, plant, and equipment
376

 
747

     Deferred income taxes
(1,469
)
 
(5,612
)
Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
(77,751
)
 
(42,209
)
Inventories
(91,953
)
 
(26,963
)
Prepaid expenses and other assets
(1,061
)
 
(332
)
Accounts payable and other liabilities
69,724

 
53,612

Net cash provided by operating activities
63,466

 
129,215

 
 
 
 
Cash flows from investing activities:
 
 
 
     Capital expenditures
(129,628
)
 
(59,816
)
     Acquisition of tradenames
(38,007
)
 
—

     Proceeds from sale of property, plant, and equipment
—

 
6

Net cash used in investing activities
(167,635
)
 
(59,810
)
 
 
 
 
Cash flows from financing activities:
 
 
 
  Proceeds from senior notes
400,000

 
—

  Payment of debt issuance costs
(6,487
)
 
(1,916
)
     Borrowings under revolving credit facility
—

 
2,500

     Payments on revolving credit facility
—

 
(52,500
)
     Repurchase of common stock
(454,133
)
 
—

     Payment of contingent consideration
(14,721
)
 
—

     Dividends paid
(18,988
)
 
—

     Income tax benefit from stock-based compensation
10,775

 
2,387

     Withholdings from vesting of restricted stock
(4,991
)
 
(2,794
)
     Proceeds from exercise of stock options
12,424

 
3,650

 

 
 
Net cash used in financing activities
(76,121
)
 
(48,673
)
 
 
 
 
Effect of exchange rate changes on cash
(127
)
 
95

Net (decrease) increase in cash and cash equivalents
(180,417
)
 
20,827

Cash and cash equivalents, beginning of period
382,236

 
233,494

 
 
 
 
Cash and cash equivalents, end of period
$
201,819

 
$
254,321


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” and “its”) design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One You, Precious Firsts, OshKosh, and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for its 455 Carter’s, 170 OshKosh, 96 Canadian and 16 Japanese retail stores that market its brand name merchandise and other licensed products manufactured by other companies.

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 the opinion of management, the Company’s accompanying unaudited condensed consolidated financial statements contain all adjustments necessary for a fair statement of its financial position as of September 28, 2013, the results of operations and comprehensive income for the fiscal quarter and the three fiscal quarters ended September 28, 2013 and September 29, 2012, its cash flows for the three fiscal quarters ended September 28, 2013 and September 29, 2012, and its changes in stockholders' equity for the three fiscal quarters ended September 28, 2013. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter and three fiscal quarters ended September 28, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2013.

The accompanying condensed consolidated balance sheet as of December 29, 2012 is 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 generally accepted accounting principles in the United States of America (“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 the Company follows are set forth in the Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

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

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
September 28,
2013
 
December 29,
2012
 
September 29,
2012
 
 
 
 
 
 
Cumulative foreign currency translation adjustments
$
(4,392
)
 
$
(2,066
)
 
$
(976
)
Pension and post-retirement liability adjustment
(9,139
)
 
(9,139
)
 
(8,158
)
Total accumulated other comprehensive loss
$
(13,531
)
 
$
(11,205
)
 
$
(9,134
)


6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisition of Tradenames

On June 13, 2013, the Company acquired worldwide rights to the Carter's Watch the Wear and H.W. Carter & Sons brands, including trademark registrations. The Company acquired these worldwide rights for defensive purposes to reduce brand confusion and facilitate expansion in certain key international markets. The total consideration paid was approximately $38.0 million in cash and was accounted for as an asset acquisition. These tradenames are being amortized over three years, using an accelerated amortization method. The Company recorded approximately $6.3 million and $7.3 million in amortization expense during the fiscal quarter and three fiscal quarters ended September 28, 2013, respectively. The estimated future amortization expense for these assets is approximately $6.3 million for the remainder of fiscal 2013, $16.4 million for fiscal 2014, $6.2 million for fiscal 2015, and $1.7 million for fiscal 2016.

Balance Sheet Components

The Company’s goodwill and other intangible assets were as follows:
 
 
 
September 28, 2013
 
December 29, 2012
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

 
$
136,570

 
$
—

 
$
136,570

Bonnie Togs goodwill     
Indefinite
 
$
51,436

 
$
—

 
$
51,436

 
$
53,179

 
$
—

 
$
53,179

Total goodwill
 
 
$
188,006

 
$
—

 
$
188,006

 
$
189,749

 
$
—

 
$
189,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

 
$
220,233

 
$
—

 
$
220,233

OshKosh tradename    
Indefinite
 
$
85,500

 
$
—

 
$
85,500

 
$
85,500

 
$
—

 
$
85,500

 Other tradenames
3 years
 
$
38,007

 
$
7,271

 
$
30,736

 
$
—

 
$
—

 
$
—

 Bonnie Togs tradename
2 years
 
$
584

 
$
584

 
$
—

 
$
604

 
$
453

 
$
151

Total tradenames
 
 
$
344,324

 
$
7,855

 
$
336,469

 
$
306,337

 
$
453

 
$
305,884

Non-compete agreements
4 years
 
$
291

 
$
164

 
$
127

 
$
301

 
$
113

 
$
188

Total tradenames and other intangibles, net
 
 
$
344,615

 
$
8,019

 
$
336,596

 
$
306,638

 
$
566

 
$
306,072


 
 
 
September 29, 2012
 
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
 
 
 
 
 
 
 
 
 
Carter’s goodwill
Indefinite
 
$
136,570

 
$
—

 
$
136,570

 
Bonnie Togs goodwill     
Indefinite
 
$
53,900

 
$
—

 
$
53,900

 
Total goodwill
 
 
$
190,470

 
$
—

 
$
190,470

 
 
 
 
 
 
 
 
 
 
Carter’s tradename    
Indefinite
 
$
220,233

 
$
—

 
$
220,233

 
OshKosh tradename    
Indefinite
 
$
85,500

 
$
—

 
$
85,500

 
 Bonnie Togs tradename    
2 years
 
$
612

 
$
383

 
$
229

 
Total tradenames
 
 
$
306,345

 
$
383

 
$
305,962

 
Non-compete agreements
4 years
 
$
305

 
$
95

 
$
210

 
Total tradenames and other intangibles, net
 
 
$
306,650

 
$
478

 
$
306,172

 

NOTE 5 – COMMON STOCK:

Share Repurchases


7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

In the second quarter of fiscal 2013, the Company's Board of Directors approved a $300 million share repurchase authorization, including amounts remaining under the previous authorizations. On August 22, 2013, the Company's Board of Directors approved an additional $400 million authorization for share repurchases.

In the first and second fiscal quarters of 2013, the Company repurchased shares on the open market. In the third fiscal quarter of 2013, the Company repurchased shares on the open market in addition to acquiring shares under an accelerated stock repurchase program.

The total remaining capacity under the repurchase authorizations as of September 28, 2013, was approximately $267.2 million. The authorizations have no expiration date.

Open Market Purchases

During the three fiscal quarters ended September 28, 2013, the Company repurchased and retired shares, in open market transactions, in the following amounts:
 
Number of shares repurchased
 
Aggregate cost of shares repurchased (in millions)
 
Average price per share
Shares repurchased and retired in Q1 2013
156,600

 

$8.9

 

$57.10

Shares repurchased and retired in Q2 2013
433,402

 

$28.8

 

$66.49

Shares repurchased and retired in Q3 2013
226,400

 

$16.4

 

$72.33

Shares repurchased and retired through September 28, 2013
816,402

 

$54.1

 

$66.31


The Company did not purchase any shares of its common stock during the three fiscal quarters ended September 29, 2012.

Accelerated Stock Repurchase Program

On August 29, 2013, the Company entered into a $300 million fixed dollar uncollared accelerated stock repurchase agreement (the “Uncollared ASR Agreement”) and a $100 million fixed dollar collared accelerated stock repurchase agreement (the “Collared ASR Agreement”), each with JPMorgan Chase Bank, N. A. ("JPMorgan").

Under the Uncollared ASR Agreement, the Company paid $300 million from cash on hand to JPMorgan to repurchase outstanding shares of the Company's common stock. Under the Collared ASR Agreement, the Company paid $100 million from cash on hand to JPMorgan to repurchase outstanding shares of the Company's common stock. As of September 28, 2013, JPMorgan had delivered approximately 4.6 million shares to the Company with a fair market value, at trade date, of approximately $328.4 million. The Company expects that JPMorgan will deliver additional shares to the Company as part of the final settlement of the ASR Agreements which expire in the second fiscal quarter of 2014. All shares received under the ASR Agreements were retired upon receipt.

The specific number of shares that the Company will ultimately repurchase will be determined at the completion of the term of the Agreements based, generally, on the daily volume-weighted average share price of the Company's common stock during a period of up to eight months, less an agreed discount. For shares repurchased under the Collared ASR Agreement, the amount of shares is subject to additional provisions that establish a minimum and maximum number of repurchased shares. Such minimum and maximum share numbers will be based, generally, on the daily volume-weighted average share price of the Company's common stock over the period during which JPMorgan established an initial hedge position.

The ASR agreements are being treated as equity classified forward contracts indexed to the Company's own stock. Upon final settlement of the Agreements, the Company may be entitled to receive additional shares of common stock, or under certain circumstances, be required to remit a settlement amount to JPMorgan, payable, at the Company's option, in cash or common stock. The Company expects that it will receive additional shares upon final settlement of the Agreements.

As of September 28, 2013, the amount of additional shares that the Company would have received under the ASR agreements, if settled on that date, was approximately 0.8 million shares.

Dividend

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


In the second and third fiscal quarters of 2013, the Company's Board of Directors authorized quarterly cash dividends of $0.16 per share paid on June 14, 2013, for shareholders of record at the close of business on May 31, 2013, and paid on September 13, 2013, for shareholders of record at the close of business on September 3, 2013. Future declarations of quarterly dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors based on a number of factors, including the Company's future financial performance and other investment priorities.

Provisions in the Company's secured revolving credit facility and indenture governing its senior notes could have the effect of restricting the Company’s ability to pay future cash dividends on or make future repurchases of its common stock.

NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following:
(dollars in thousands)
September 28,
2013
 
December 29,
2012
 
September 29,
2012
Senior notes due 2021
$
400,000

 
$
—

 
$
—

Revolving credit facility
$
186,000

 
$
186,000

 
$
186,000

Total long-term debt
$
586,000

 
$
186,000

 
$
186,000


Senior Notes
On August 12, 2013, the Company's 100% owned subsidiary, The William Carter Company ("TWCC") issued $400 million principal amount of senior notes (the “senior notes”) at par, bearing interest at a rate of 5.25% per annum, and maturing on August 15, 2021, all of which were outstanding as of September 28, 2013. TWCC received net proceeds from the offering of the senior notes of approximately $394.2 million, after deducting bank fees. Approximately $7.1 million, including both bank fees and other third party expenses, has been capitalized in connection with the issuance and is being amortized over the term of the senior notes.
The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.

At any time prior to August 15, 2017, TWCC may redeem all or part of the senior notes at 100% of the principal amount redeemed plus an applicable premium and accrued and unpaid interest. On and after August 15, 2017, TWCC may redeem all or part of the senior notes at the redemption prices (expressed as percentages of principal amount of the senior notes to be redeemed) set forth below, plus accrued and unpaid interest. The redemption price applicable where the redemption occurs during the twelve-month period beginning on August 15 of each of the years indicated is as follows:
Year
 
Percentage
2017
 
102.625%
2018
 
101.313%
2019 and thereafter
 
100.000%

In addition, until August 15, 2016, TWCC may, at its option, redeem up to 35% of the aggregate principal amount of the senior notes at a redemption price equal to 105.250% of the aggregate principal amount, plus accrued and unpaid interest, subject to certain terms, with the proceeds of certain equity offerings.

Upon the occurrence of specific kinds of changes of control, unless a redemption notice with respect to all the outstanding senior notes has previously or concurrently been mailed or delivered, TWCC will be required to make an offer to purchase the senior notes at 101% of their principal amount. In addition, if TWCC or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances TWCC will be required to use the net proceeds to make an offer to purchase the senior notes at 100% of their principal amount.

The indenture governing the senior notes includes a number of covenants, that, among other things and subject to certain exceptions, restrict TWCC's ability and the ability of certain of its subsidiaries to: (a) incur, assume or guarantee additional indebtedness; (b) issue disqualified stock and preferred stock; (c) pay dividends or make distributions or other restricted payments; (d) prepay, redeem or repurchase certain debt; (e) make loans and investments (including joint ventures); (f) incur liens; (g) create restrictions on the payment of dividends or other amounts from restricted subsidiaries that are not guarantors of the notes; (h) sell

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

or otherwise dispose of assets, including capital stock of subsidiaries; (i) consolidate or merge with or into, or sell substantially all of TWCC's assets to, another person; (j) designate subsidiaries as unrestricted subsidiaries; and (k) enter into transactions with affiliates. Additionally, the terms of the notes contain customary affirmative covenants and provide for events of default which, if certain of them occur, would permit the trustee or the holders of at least 25% in principal amount of the then total outstanding senior notes to declare all amounts owning under the notes to be due and payable. Carter's, Inc. is not subject to these covenants.

If TWCC fails to timely complete a required registered exchange offer, the Company will be required to pay additional interest on the senior notes.
 
Secured Revolving Credit Facility
    
As of September 28, 2013, the Company had approximately $186.0 million in borrowings under its secured revolving credit facility, exclusive of $12.3 million of outstanding letters of credit. Amounts outstanding under the revolving credit facility currently accrue interest at a LIBOR rate plus 1.50%, which, as of September 28, 2013, was 1.68%. As of September 28, 2013, there was approximately $176.7 million available for future borrowing.

As of September 28, 2013, the Company was in compliance with its financial debt covenants under the revolving credit facility.

NOTE 7 – STOCK-BASED COMPENSATION
    
The Company recorded stock-based compensation cost as follows:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Stock options
$
1,136

 
$
1,038

 
$
3,644

 
$
3,081

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
1,666

 
1,398

 
5,148

 
3,990

   Performance-based awards
1,129

 
662

 
3,111

 
1,732

   Stock awards
—

 
270

 
453

 
915

Total
$
3,931

 
$
3,368

 
$
12,356

 
$
9,718


All of the cost of stock-based compensation was reflected as a component of selling, general, and administrative expenses.

STOCK OPTIONS

The following table summarizes the Company's stock option activity for the three fiscal quarters ended September 28, 2013:
 
Number of shares
 
Weighted- average exercise price
 
Weighted-average remaining contractual terms (years)
 
Aggregate intrinsic value
(in thousands)
 
 
 
 
 
 
 
 
Outstanding, December 29, 2012
2,078,433

 
$
26.14

 
 
 
 
Granted
345,200

 
$
59.67

 
 
 
 
Exercised
(654,700
)
 
$
18.98

 
 
 
 
Forfeited
(66,625
)
 
$
36.49

 
 
 
 
Expired
—

 
$
—

 
 
 
 
Outstanding, September 28, 2013
1,702,308

 
$
35.29

 
7.16
 
$
69,346

Vested and Expected to Vest, September 28, 2013
1,641,727

 
$
34.91

 
7.12
 
$
67,516

Exercisable, September 28, 2013
843,854

 
$
25.20

 
5.87
 
$
42,894

    
The intrinsic value of stock options exercised during the three fiscal quarters ended September 28, 2013 and September 29, 2012 was approximately $29.4 million and $4.7 million, respectively. At September 28, 2013, there was approximately $10.1 million of unrecognized compensation cost (net of estimated forfeitures) related to stock options which is expected to be recognized over a weighted-average period of approximately 2.8 years.

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


The table below presents the assumptions used to calculate the fair value of options granted:
 
Three fiscal quarters ended
 
September 28,
2013
 
September 29,
2012
 
 
 
 
Expected volatility
33.15
%
 
34.80
%
Risk-free interest rate
1.14
%
 
1.37
%
Expected term (years)
6.0

 
5.9

Dividend yield
0.91
%
 
—
%
Weighted average fair value of options granted
$
20.18

 
$
15.16


RESTRICTED STOCK AWARDS

The following table summarizes activity related to all restricted stock awards during the three fiscal quarters ended September 28, 2013:
 
Restricted
stock
awards
 
Weighted-average grant-date
fair value
 
 
 
 
Outstanding, December 29, 2012
766,929

 
$
33.97

Granted
317,073

 
$
59.87

Vested
(234,305
)
 
$
31.22

Forfeited
(44,575
)
 
$
36.89

Outstanding, September 28, 2013
805,122

 
$
44.81


Time-based Restricted Stock Awards

At September 28, 2013, there was approximately $15.1 million of unrecognized compensation cost (net of estimated forfeitures) related to restricted stock which is expected to be recognized over a weighted-average period of approximately 2.8 years.

Performance-based Restricted Stock Awards

During the first fiscal quarter of 2012, the Company granted its executive officers an aggregate of 152,000 performance-based restricted shares at a fair market value of $42.61 per share. During the first fiscal quarter of 2013, the Company granted its executive officers an aggregate of 118,200 performance-based restricted shares at a fair market value of $59.27 per share.

Vesting of these shares is contingent upon meeting specific performance targets through 2014 (in the case of the fiscal 2012 awards) or 2015 (in the case of the fiscal 2013 awards). Currently, the Company believes that the respective targets will be achieved and has recorded compensation expense based on the proration of the total ultimate expected value of the award.

At September 28, 2013, there was approximately $9.7 million of unrecognized compensation cost (net of estimated forfeitures) related to performance-based restricted stock awards which is expected to be recognized over a weighted-average period of approximately 2.2 years.

NOTE 8 – EMPLOYEE BENEFIT PLANS
    
OSHKOSH B'GOSH PENSION PLAN
    

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The net periodic pension cost included in the statement of operations was comprised of:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Interest cost
$
584

 
$
597

 
$
1,752

 
$
1,791

Expected return on plan assets
(764
)
 
(713
)
 
(2,292
)
 
(2,139
)
Recognized actuarial loss
208

 
178

 
624

 
533

Net periodic pension cost
$
28

 
$
62

 
$
84

 
$
185


POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement benefit expense charged to the statement of operations are as follows:
 
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
 
 
 
 
 
 
 
 
 
Service cost – benefits attributed to service during the period
 
$
40

 
$
17

 
$
120

 
$
51

Interest cost on accumulated post-retirement benefit obligation
 
58

 
53

 
174

 
159

Amortization net actuarial gain
 
(34
)
 
(18
)
 
(102
)
 
(54
)
Total net periodic post-retirement benefit cost
 
$
64

 
$
52

 
$
192

 
$
156

    
NOTE 9 – INCOME TAXES

As of September 28, 2013, the Company had gross unrecognized tax benefits of approximately $10.6 million, of which $7.5 million, if ultimately recognized, will affect the Company’s effective tax rate in the period 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.  Because of deferred tax accounting, changes in the timing of these deductions would not affect the annual effective tax rate, but could accelerate the payment of cash to the taxing authorities.

Included in the reserves for unrecognized tax benefits are approximately $1.6 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 2013 or fiscal 2014 and the effective tax rate in the quarter in which the benefits are recognized. 

During the third quarter of fiscal 2013 and 2012, the Company reversed approximately $1.0 million and $0.8 million, respectively, of reserves due to the expiration of applicable statutes of limitations or audit settlements during the quarter.

The Company recognizes 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 fiscal quarter and the three fiscal quarters ended September 28, 2013 and September 29, 2012, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.8 million, $0.7 million, and $0.7 million of interest accrued on uncertain tax positions as of September 28, 2013, December 29, 2012, and September 29, 2012, respectively.     

NOTE 10 – FAIR VALUE MEASUREMENTS

INVESTMENTS

In fiscal 2012, the Company began investing in marketable securities, principally equity based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. The Company had approximately $4.5 million and $3.2 million of such Level 1 investments as of September 28, 2013 and December 29, 2012, respectively. There were no such investments as of September 29, 2012.


12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

All of the marketable securities purchased were included in other assets in the accompanying unaudited condensed consolidated balance sheets. During the fiscal quarter and the three fiscal quarters ended September 28, 2013, gains on the investments in marketable securities were not significant.

CONTINGENT CONSIDERATION

The following table summarizes the changes in the contingent consideration liability related to the Company's acquisition of Bonnie Togs on June 30, 2011:
 
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in thousands)
 
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
 
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
29,950

 
$
27,305

 
$
29,704

 
$
25,566

Payments made
 
$
(14,721
)
 
$
—

 
$
(14,721
)
 
$
—

Accretion expense
 
480

 
1,100

 
2,347

 
2,881

Foreign currency translation adjustment
 
791

 
989

 
(830
)
 
947

Balance at end of period
 
$
16,500

 
$
29,394

 
$
16,500

 
$
29,394

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
The contingent consideration liability is a Level 3 fair value measurement. As of September 28, 2013, the Company determined the fair value of contingent consideration based upon a probability-weighted discounted cash flow analysis, reflecting a high probability that the earnings targets will be met and at a discount rate of 18%.

BORROWINGS

As of September 28, 2013, the fair value of the Company's $186.0 million in borrowings under its secured revolving credit facility and its $400.0 million in senior notes outstanding both approximated carrying value.

OTHER

As of September 29, 2012, the Company had contracts for the purchase of $8.0 million of U.S. dollars at fixed rates. The Level 1 fair value of these forward contracts was a liability of $0.1 million. During the fiscal quarter and three fiscal quarters ended September 29, 2012, the Company recorded a loss on the mark-to-market of foreign currency exchange contracts of approximately $0.4 million and a loss of approximately $0.8 million, respectively, on these contracts.

The Company did not enter into any foreign exchange forward contracts during the three fiscal quarters ended September 28, 2013 and there were no such contracts outstanding at September 28, 2013.


13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 – EARNINGS PER SHARE

The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
 
 
 
 
 
 
 
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
56,908,631

 
58,267,398

 
57,982,401

 
58,175,125

Dilutive effect of equity awards
531,514

 
882,729

 
614,045

 
843,565

Diluted number of common and common equivalent shares outstanding
57,440,145

 
59,150,127

 
58,596,446

 
59,018,690

 
 
 
 
 
 
 
 
Basic net income per common share:
 
 
 
 
 
 
 
Net income
$
56,571,000

 
$
59,378,000

 
$
117,659,000

 
$
112,458,000

Income allocated to participating securities
(759,297
)
 
(775,127
)
 
(1,566,258
)
 
(1,470,338
)
Net income available to common shareholders
$
55,811,703

 
$
58,602,873

 
$
116,092,742

 
$
110,987,662

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.98

 
$
1.01

 
$
2.00

 
$
1.91

 
 
 
 
 
 
 
 
Diluted net income per common share:
 
 
 
 
 
 
 
Net income
$
56,571,000

 
$
59,378,000

 
$
117,659,000

 
$
112,458,000

Income allocated to participating securities
(753,449
)
 
(766,127
)
 
(1,552,539
)
 
(1,453,966
)
Net income available to common shareholders
$
55,817,551

 
$
58,611,873

 
$
116,106,461

 
$
111,004,034

 
 
 
 
 
 
 
 
Diluted net income per common share
$
0.97

 
$
0.99

 
$
1.98

 
$
1.88

 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from dilutive earnings per share computation
339,400

 
573,550

 
355,700

 
598,250


In connection with the ASR Agreements discussed in the common stock footnote, the Company received a total of approximately 4.6 million shares as of September 28, 2013. The shares were retired upon receipt and, accordingly, reduced the Company's weighted average shares outstanding for purposes of the calculation of earnings per share.
The Company evaluated the ASR Agreements for their potential dilution of earnings per share and has determined that, based on calculations under the ASR Agreements, as of September 28, 2013, it would not be required to deliver additional shares to JPMorgan. Further, based on the volume-weighted average price calculated as of September 28, 2013, the Company would have received approximately 0.8 million shares had the ASR Agreements been settled on that date. The Company has determined that these shares would have had an anti-dilutive effect and has excluded these shares from the diluted earnings per share calculation for the fiscal quarter and three fiscal quarters ended September 28, 2013.
The amount of shares to be received upon final settlement may increase or decrease depending upon the volume-weighted average price of the Company's common stock during the remaining term of the ASR Agreements. The ASR Program will be completed no later than the second quarter of fiscal 2014 and is expected to result in a decrease to the Company's issued and outstanding shares upon completion.



14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – OTHER CURRENT AND LONG-TERM LIABILITIES

Other current liabilities consisted of the following:
(dollars in thousands)
September 28,
2013
 
December 29,
2012
 
September 29,
2012
Accrued bonuses and incentive compensation
$
13,799

 
$
30,541

 
$
14,292

Contingent consideration
9,706

 
14,442

 
15,000

Income taxes payable
1,600

 
1,476

 
18,757

Accrued workers' compensation
6,152

 
5,446

 
5,630

Accrued sales and use taxes
7,256

 
5,402

 
6,059

Accrued salaries and wages
6,224

 
5,517

 
2,495

Accrued gift certificates
6,409

 
6,011

 
4,870

Accrued 401(k) contributions
5,985

 
6,200

 
4,114

Accrued closure costs
8,210

 
4,274

 
1,840

Other current liabilities
19,766

 
15,301

 
16,101

Total
$
85,107

 
$
94,610

 
$
89,158

    
Other long-term liabilities consisted of the following:
(dollars in thousands)
September 28,
2013
 
December 29,
2012
 
September 29,
2012
Deferred lease incentives
$
67,988

 
$
29,913

 
$
29,352

Accrued rent
26,525

 
20,485

 
18,877

Contingent consideration
6,794

 
15,262

 
14,394

OshKosh pension plan
13,638

 
13,557

 
11,642

Unrecognized tax benefits
11,468

 
10,479

 
10,784

Post-retirement medical plan
6,201

 
6,201

 
6,660

Deferred compensation
5,445

 
3,996

 
3,495

Other
160

 
161

 
701

Total
$
138,219

 
$
100,054

 
$
95,905



15

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 – SEGMENT INFORMATION
 
The table below presents certain segment information for the periods indicated:
 
Fiscal quarter ended
Three fiscal quarters ended
(dollars in thousands)
September 28,
2013
 
% of
Total
 
September 29,
2012
 
% of
Total
 
September 28,
2013
 
% of
Total
 
September 29,
2012
 
% of
Total
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carter’s Wholesale
$
318,607

 
41.9
 %
 
$
275,577

 
41.2
 %
 
$
763,518

 
40.9
 %
 
$
719,585

 
42.5
 %
Carter’s Retail (a)    
251,028

 
33.0
 %
 
217,299

 
32.5
 %
 
658,827

 
35.2
 %
 
563,764

 
33.3
 %
Total Carter’s
569,635

 
74.9
 %
 
492,876

 
73.7
 %
 
1,422,345

 
76.1
 %
 
1,283,349

 
75.8
 %
OshKosh Retail (a)    
81,894

 
10.8
 %
 
78,070

 
11.7
 %
 
193,662

 
10.4
 %
 
194,359

 
11.5
 %
OshKosh Wholesale
24,583

 
3.2
 %
 
28,276

 
4.2
 %
 
54,070

 
2.9
 %
 
61,339

 
3.6
 %
Total OshKosh
106,477

 
14.0
 %
 
106,346

 
15.9
 %
 
247,732

 
13.4
 %
 
255,698

 
15.1
 %
International (b)     
84,061

 
11.1
 %
 
69,435

 
10.4
 %
 
198,979

 
10.5
 %
 
153,434

 
9.1
 %
Total net sales
$
760,173

 
100.0
 %
 
$
668,657

 
100.0
 %
 
$
1,869,056

 
100.0
 %
 
$
1,692,481

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
 
 
 
% of
segment
net sales
Carter’s Wholesale
$
56,703

 
17.8
 %
 
$
53,425

 
19.4
 %
 
$
138,186

 
18.1
 %
 
$
129,123

 
17.9
 %
Carter’s Retail (a)    
47,601

 
19.0
 %
 
43,050

 
19.8
 %
 
120,641

 
18.3
 %
 
93,539

 
16.6
 %
Total Carter’s
104,304

 
18.3
 %
 
96,475

 
19.6
 %
 
258,827

 
18.2
 %
 
222,662

 
17.4
 %
OshKosh Retail (a)    
5,649

 
6.9
 %
 
3,397

 
4.4
 %
 
(5,520
)
 
(2.9
)%
 
(13,285
)
 
(6.8
)%
OshKosh Wholesale
4,445

 
18.1
 %
 
2,445

 
8.6
 %
 
7,929

 
14.7
 %
 
3,131

 
5.1
 %
Total OshKosh
10,094

 
9.5
 %
 
5,842

 
5.5
 %
 
2,409

 
1.0
 %
 
(10,154
)
 
(4.0
)%
International (b) (c)    
15,129

 
18.0
 %
 
15,984

 
23.0
 %
 
27,478

 
13.8
 %
 
28,985

 
18.9
 %
Total segment operating income
129,527

 
17.0
 %
 
118,301

 
17.7
 %
 
288,714

 
15.4
 %
 
241,493

 
14.3
 %
Corporate expenses (d) (e)     
(38,451
)
 
(5.1
)%
 
(22,909
)
 
(3.4
)%
 
(97,957
)
 
(5.2
)%
 
(57,874
)
 
(3.4
)%
Total operating income
$
91,076

 
12.0
 %
 
$
95,392

 
14.3
 %
 
$
190,757

 
10.2
 %
 
$
183,619

 
10.8
 %

(a)
Includes eCommerce results.
(b)
Net sales include international retail, eCommerce, and wholesale sales. Operating income includes international licensing income.
(c)
Includes charges associated with the revaluation of the Company’s contingent consideration of $0.5 million and $2.3 million for the fiscal quarter and three fiscal quarters ended September 28, 2013, respectively, and $1.1 million and $2.9 million for the quarter and three fiscal quarters ended September 29, 2012, respectively.
(d)
Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees.
(e)    Includes the following charges:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in millions)
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
Closure of distribution facility in Hogansville, GA
$
0.4

 
$
0.8

 
$
1.0

 
$
2.6

Office consolidation costs
$
5.9

 
$
—

 
$
24.1

 
$
—

Amortization of H.W. Carter and Sons tradenames
$
6.3

 
$
—

 
$
7.3

 
$
—


NOTE 14 – FACILITY CLOSURE

HOGANSVILLE DISTRIBUTION FACILITY
    
In conjunction with the plan to close the Hogansville distribution facility, the Company recorded expense of approximately $0.4 million and $1.0 million in closing-related costs during the fiscal quarter and three fiscal quarters ended September 28, 2013.

16

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company recorded approximately $0.8 million and $2.6 million in closing-related costs during the fiscal quarter and three fiscal quarters ended September 29, 2012, respectively.

The total amount of charges consisted of the following components:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in millions)
September 28, 2013
 
September 29, 2012
 
September 28, 2013
 
September 29, 2012
 
 
 
 
 
 
 
 
Severance
$
0.3

 
$
0.3

 
$
0.5

 
$
1.7

Accelerated depreciation
0.1

 
0.4

 
0.4

 
0.8

Other closure costs
—

 
0.1

 
—

 
0.1

Total
$
0.4

 
$
0.8

 
$
1.0

 
$
2.6


The following table summarizes restructuring reserves related to the closure of the Hogansville facility which are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet as of September 28, 2013:
(dollars in thousands)
Severance
 
Other closure costs
 
Total
Balance at December 29, 2012
$
2,039

 
$
—

 
$
2,039

Provision
433

 
9

 
442

Payments
—

 
—

 
—

Balance at March 30, 2013
$
2,472

 
$
9

 
$
2,481

Provision
$
(179
)
 
9

 
(170
)
Payments
—

 
—

 
—

Balance at June 29, 2013
$
2,293

 
$
18

 
$
2,311

Provision
$
261

 
6

 
$
267

Payments
—

 
(2
)
 
(2
)
Balance at September 28, 2013
$
2,554

 
$
22

 
$
2,576


As of September 29, 2012 restructuring reserves were approximately $1.8 million.

In conjunction with the plan to close the Hogansville, Georgia distribution facility, the Company expects to incur, in total for fiscal 2013, closure-related charges of approximately $2.5 million, comprising $1.0 million for one-time termination benefits, $0.5 million in accelerated depreciation, and other closure costs of $1.0 million.
   
OFFICE CONSOLIDATION    

In connection with the plan to consolidate its Shelton, Connecticut and Atlanta, Georgia offices, as well as certain functions from its other offices, into a new headquarters facility in Atlanta, Georgia, the Company recorded approximately $5.9 million and $24.1 million in closing-related costs in the fiscal quarter and three fiscal quarters ended September 28, 2013, respectively.

The total amount of charges consisted of the following:
 
Fiscal quarter ended
 
Three fiscal quarters ended
(dollars in millions)
September 28, 2013
 
September 28, 2013
Recruiting, relocation and other closure costs
$
4.7

 
$
16.1

Severance and other benefits
0.6

 
4.7

Accelerated depreciation
0.6

 
3.2

Total
$
5.9

 
$
24.1



17

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes restructuring reserves related to the office consolidation which are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet as of September 28, 2013:
(dollars in thousands)
Severance
 
Other closure costs
 
Total
Balance at December 29, 2012
$
2,235

 
$
—

 
$
2,235

Provision
1,806

 
4,900

 
6,706

Payments
—

 
(4,900
)
 
(4,900
)
Balance at March 30, 2013
$
4,041

 
$
—

 
$
4,041

Provision
2,700

 
6,200

 
8,900

Payments
—

 
(5,988
)
 
(5,988
)
Balance at June 29, 2013
$
6,741

 
$
212

 
$
6,953

Provision
600

 
4,700

 
5,300

Payments
(1,919
)
 
(4,700
)
 
(6,619
)
Balance at September 28, 2013
$
5,422

 
$
212

 
$
5,634


The Company expects to substantially complete this consolidation by the end of fiscal 2013. The Company anticipates pre-tax consolidation-related expenses for the full year of fiscal 2013 to be approximately $38 - $42 million. Included in the total are cash charges of approximately $36 million, comprising $16 million of recruiting and relocation expenses, $6 million of employee severance and other benefit costs, $7 million of lease-related charges, and $7 million of other closure costs. The Company also expects approximately $4 million in non-cash accelerated depreciation expense.

NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board issued guidance finalizing the reporting of amounts reclassified out of accumulated other comprehensive income. The new standard requires disclosure, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The guidance is effective for annual reporting periods and interim periods within those years, beginning after December 15, 2012. In the first fiscal quarter of 2013, the Company adopted the guidance and determined that there were no significant amounts reclassified in the period that would require enhanced disclosure.

18

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
        
The following is a discussion of our results of operations and current financial condition. This should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes and our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

Our Business

We are the largest branded marketer in the United States of apparel exclusively for babies and young children. We own two of the most highly recognized and most trusted brand names in the children's apparel industry, Carter's and OshKosh B'gosh ("OshKosh"). Established in 1865, our Carter's brand is recognized and trusted by consumers for high-quality apparel for children sizes newborn to seven. Established in 1895, OshKosh is a well-known brand, trusted by consumers for its line of apparel for children sizes newborn to 12. We have extensive experience in the young children's apparel market and focus on delivering products that satisfy our consumers' needs. Our strategy is to market high-quality, essential core products at prices that deliver an attractive value proposition for consumers.


19
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales, and (ii) the number of retail stores open at the end of each period:
 
Fiscal quarter ended
 
Three fiscal quarters ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
Carter’s Wholesale
41.9
 %
 
41.2
 %
 
40.9
 %
 
42.5
 %
Carter’s Retail
33.0
 %
 
32.5
 %
 
35.2
 %
 
33.3
 %
Total Carter’s
74.9
 %
 
73.7
 %
 
76.1
 %
 
75.8
 %
 
 
 
 
 
 
 
 
OshKosh Retail
10.8
 %
 
11.7
 %
 
10.4
 %
 
11.5
 %
OshKosh Wholesale
3.2
 %
 
4.2
 %
 
2.9
 %
 
3.6
 %
Total OshKosh
14.0
 %
 
15.9
 %
 
13.4
 %
 
15.1
 %
 
 
 
 
 
 
 
 
International
11.1
 %
 
10.4
 %
 
10.5
 %
 
9.1
 %
 
 
 
 
 
 
 
 
Consolidated net sales
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
59.3
 %
 
59.6
 %
 
58.6
 %
 
61.7
 %
 
 
 
 
 
 
 
 
Gross profit