Edgar Filing: CARTERS INC

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 OCTOBER 3, 2015 OR

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______

Commission file number:

001-31829

CARTER’S, INC.

(Exact name of Registrant as specified in its charter)



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

Phipps Tower

3438 Peachtree Road NE, Suite 1800

Atlanta, Georgia 30326

(Address of principal executive offices, including zip code)

(678) 791-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes (X) No ( )

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer, accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer (X) Accelerated Filer ( ) Non-Accelerated Filer ( ) Smaller Reporting Company ( )

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (X) No (X)

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Common Stock		Outstanding Shares at October 23, 2015
Common stock, par value $0.01 per share		51,990,421

CARTER’S, INC.

INDEX



			Page
Part I. Financial Information

	Item 1	Financial Statements
		Unaudited Condensed Consolidated Balance Sheets as of October 3, 2015, January 3, 2015, and September 27, 2014	1
		Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and three fiscal quarters ended October 3, 2015 and September 27, 2014	2
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the fiscal quarter and three fiscal quarters ended October 3, 2015 and September 27, 2014	3
		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three fiscal quarters ended October 3, 2015	4
		Unaudited Condensed Consolidated Statements of Cash Flows for the three fiscal quarters ended October 3, 2015 and September 27, 2014	5
		Notes to the Unaudited Condensed Consolidated Financial Statements	6
	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
	Item 3	Quantitative and Qualitative Disclosures about Market Risk	44
	Item 4	Controls and Procedures	44

Part II. Other Information

	Item 1	Legal Proceedings	45
	Item 1A	Risk Factors	45
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	46
	Item 3	Defaults upon Senior Securities	47
	Item 4	Mine Safety Disclosures	47
	Item 5	Other Information	47
	Item 6	Exhibits	47

Signatures			48

Certifications

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARTER’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except for share data)

(unaudited)



	October 3, 2015			January 3, 2015			September 27, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	288,260		$	340,638		$	133,646
Accounts receivable, net	246,565			184,563			232,478
Finished goods inventories	511,520			444,844			519,416
Prepaid expenses and other current assets	37,260			34,788			31,258
Deferred income taxes	34,895			36,625			38,569
Total current assets	1,118,500			1,041,458			955,367
Property, plant, and equipment, net of accumulated depreciation of $276,230, $245,011, and $245,778	361,305			333,097			332,875
Tradenames and other intangibles, net	311,842			317,297			316,046
Goodwill	176,633			181,975			184,196
Deferred debt issuance costs, net	7,235			6,677			7,043
Other assets	12,525			12,592			11,214
Total assets	$	1,988,040		$	1,893,096		$	1,806,741

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	173,594		$	150,243		$	117,329
Other current liabilities	105,199			97,728			100,473
Total current liabilities	278,793			247,971			217,802

Long-term debt	585,278			586,000			586,000
Deferred income taxes	119,499			121,536			113,173
Other long-term liabilities	161,527			150,905			138,185
Total liabilities	$	1,145,097		$	1,106,412		$	1,055,160

Commitments and contingencies - Note 13

Stockholders' equity:
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at October 3, 2015, January 3, 2015, and September 27, 2014	—			—			—
Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 52,076,784, 52,712,193, and 52,977,519 shares issued and outstanding at October 3, 2015, January 3, 2015 and September 27, 2014, respectively	521			527			530
Additional paid-in capital	—			—			—
Accumulated other comprehensive loss	(33,480		)	(23,037		)	(13,627		)
Retained earnings	875,902			809,194			764,678
Total stockholders' equity	842,943			786,684			751,581
Total liabilities and stockholders' equity	$	1,988,040		$	1,893,096		$	1,806,741

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)



	Fiscal quarter ended						Three fiscal quarters ended
	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Net sales	$	849,806		$	798,936		$	2,147,335		$	2,024,645
Cost of goods sold	502,267			477,730			1,252,849			1,196,237
Gross profit	347,539			321,206			894,486			828,408
Selling, general, and administrative expenses	230,017			221,939			650,496			638,349
Royalty income	(12,699		)	(11,190		)	(32,688		)	(29,276		)
Operating income	130,221			110,457			276,678			219,335
Interest expense	6,907			6,843			20,534			20,623
Interest income	(91		)	(45		)	(385		)	(317		)
Other (income) expense, net	(622		)	1,311			(560		)	1,718
Income before income taxes	124,027			102,348			257,089			197,311
Provision for income taxes	44,701			36,462			91,866			71,232
Net income	$	79,326		$	65,886		$	165,223		$	126,079

Basic net income per common share	$	1.52		$	1.24		$	3.15		$	2.36
Diluted net income per common share	$	1.51		$	1.23		$	3.12		$	2.34
Dividend declared and paid per common share	$	0.22		$	0.19		$	0.66		$	0.57

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)

(unaudited)



	Fiscal quarter ended						Three fiscal quarters ended
	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Net income	$	79,326		$	65,886		$	165,223		$	126,079
Other comprehensive income (loss):
Foreign currency translation adjustments	(4,205		)	(3,577		)	(10,443		)	(3,545		)
Comprehensive income	$	75,121		$	62,309		$	154,780		$	122,534

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands, except share amounts)

(unaudited)



	Common stock - shares		Common stock - $			Additional paid-in capital			Accumulated other comprehensive loss			Retained earnings			Total stockholders’ equity

Balance at January 3, 2015	52,712,193		$	527		$	—		$	(23,037	)	$	809,194		$	786,684
Income tax benefit from stock-based compensation	—		—			7,963			—			—			7,963
Exercise of stock options	169,850		2			5,741			—			—			5,743
Withholdings from vesting of restricted stock	(146,467	)	(1		)	(12,574		)	—			—			(12,575		)
Restricted stock activity	125,300		1			(1		)	—			—			—
Stock-based compensation expense	—		—			12,209			—			—			12,209
Issuance of common stock	10,933		—			1,095			—			—			1,095
Repurchase of common stock	(795,025	)	(8		)	(14,433		)	—			(63,898		)	(78,339		)
Cash dividends declared and paid	—		—			—			—			(34,617		)	(34,617		)
Comprehensive income (loss)	—		—						(10,443		)	165,223			154,780
Balance at October 3, 2015	52,076,784		$	521		$	—		$	(33,480	)	$	875,902		$	842,943

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)



	Three fiscal quarters ended
	October 3, 2015			September 27, 2014
Cash flows from operating activities:
Net income	$	165,223		$	126,079
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	44,187			42,831
Amortization of tradenames	5,422			14,157
Accretion of contingent consideration	809			900
Amortization of debt issuance costs	1,246			1,144
Non-cash stock-based compensation expense	13,304			13,883
Unrealized foreign currency exchange loss, net	221			—
Income tax benefit from stock-based compensation	(7,963		)	(4,356		)
Loss on disposal of property, plant, and equipment	80			541
Deferred income taxes	(1,801		)	(8,963		)
Effect of changes in operating assets and liabilities:
Accounts receivable	(61,108		)	(39,133		)
Finished goods inventories	(73,724		)	(104,143		)
Prepaid expenses and other assets	(3,144		)	2,373
Accounts payable and other liabilities	63,282			(20,386		)
Net cash provided by operating activities	146,034			24,927

Cash flows from investing activities:
Capital expenditures	(76,987		)	(83,634		)
Proceeds from sale of property, plant, and equipment	66			143
Net cash used in investing activities	(76,921		)	(83,491		)

Cash flows from financing activities:
Payments of debt issuance costs	(1,495		)	(145		)
Borrowings under secured revolving credit facility	205,586			—
Payments on secured revolving credit facility	(205,237		)	—
Repurchase of common stock	(78,339		)	(62,769		)
Payment of contingent consideration	(7,572		)	(8,901		)
Dividends paid	(34,617		)	(30,453		)
Income tax benefit from stock-based compensation	7,963			4,356
Withholdings from vesting of restricted stock	(12,575		)	(4,472		)
Proceeds from exercise of stock options	5,743			7,771
Net cash used in financing activities	(120,543		)	(94,613		)

Effect of exchange rate changes on cash	(948		)	277
Net decrease in cash and cash equivalents	(52,378		)	(152,900		)
Cash and cash equivalents, beginning of period	340,638			286,546
Cash and cash equivalents, end of period	$	288,260		$	133,646

See accompanying notes to the unaudited condensed consolidated financial statements.

CARTER’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – THE COMPANY

Carter’s, Inc. and its wholly owned subsidiaries (collectively, the “Company,” “its,” "us" and "our") design, source, and market branded childrenswear under the Carter’s, Child of Mine, Just One You, Precious Firsts, OshKosh, and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for wholesale distribution to major domestic and international retailers and for the Company's own retail stores and websites that market its brand name merchandise and other licensed products manufactured by other companies. As of October 3, 2015, the Company operated 577 Carter’s stores in the United States, 232 OshKosh stores in the United States, and 140 stores in Canada.

NOTE 2 – BASIS OF PREPARATION

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

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of stockholder’s equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter and three fiscal quarters ended October 3, 2015 are not necessarily indicative of the results that may be expected for the 2015 fiscal year ending January 2, 2016.

The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

The accompanying condensed consolidated balance sheet as of January 3, 2015 was derived from the Company's audited consolidated financial statements included in its most recently filed Annual Report on Form 10-K. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q. The accounting policies the Company follows are set forth in the Company's Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015. There have been no material changes to these accounting policies, except as disclosed in Note 10, Fair Value Measurements, to update the Company's accounting policy for foreign currency hedging activities.

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

Unless otherwise noted, "three quarters of fiscal 2015" refers to the first three fiscal quarters of fiscal 2015 covering the period January 4, 2015 through October 3, 2015, and "three quarters of 2014" refers to the first three fiscal quarters of fiscal 2014 covering the period December 29, 2013 through September 27, 2014.

NOTE 3 – ACCUMULATED OTHER COMPREHENSIVE LOSS

The components, net of applicable income taxes, of accumulated other comprehensive (loss) consisted of the following:



(dollars in thousands)	October 3, 2015			January 3, 2015			September 27, 2014
Cumulative foreign currency translation adjustments	$	(25,840	)	$	(15,397	)	$	(11,097	)
Pension and post-retirement liability adjustments	(7,640		)	(7,640		)	(2,530		)
Total accumulated other comprehensive loss	$	(33,480	)	$	(23,037	)	$	(13,627	)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Changes in accumulated other comprehensive loss for the third quarter and three quarters of fiscal 2015 consisted of additional losses for foreign currency translation adjustments of approximately $4.2 million and $10.4 million, respectively. Changes consisted of loss for foreign currency translation adjustments of approximately $3.6 million and $3.5 million for the third quarter and three quarters of fiscal 2014, respectively. During the first, second and third quarters of both fiscal 2015 and fiscal 2014, no amounts were reclassified from accumulated other comprehensive loss to the statement of operations.

NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS

The Company’s goodwill and other intangible assets were as follows:



		October 3, 2015						January 3, 2015
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount		Gross amount		Accumulated amortization		Net amount

Carter’s goodwill	Indefinite	$	136,570	$	—	$	136,570	$	136,570	$	—	$	136,570
Bonnie Togs goodwill	Indefinite	40,063		—		40,063		45,405		—		45,405
Total goodwill		$	176,633	$	—	$	176,633	$	181,975	$	—	$	181,975

Carter’s tradename	Indefinite	$	220,233	$	—	$	220,233	$	220,233	$	—	$	220,233
OshKosh tradename	Indefinite	85,500		—		85,500		85,500		—		85,500
Other tradenames	2-20 years	42,012		35,903		6,109		42,073		30,541		11,532
Total tradenames		347,745		35,903		311,842		347,806		30,541		317,265
Non-compete agreements	4 years	208		208		—		257		225		32
Total tradenames and other intangibles, net		$	347,953	$	36,111	$	311,842	$	348,063	$	30,766	$	317,297



		September 27, 2014
(dollars in thousands)	Weighted-average useful life	Gross amount		Accumulated amortization		Net amount

Carter’s goodwill	Indefinite	$	136,570	$	—	$	136,570
Bonnie Togs goodwill	Indefinite	47,626		—		47,626
Total goodwill		$	184,196	$	—	$	184,196

Carter’s tradename	Indefinite	$	220,233	$	—	$	220,233
OshKosh tradename	Indefinite	85,500		—		85,500
Other tradenames	2-3 years	38,548		28,286		10,262
Total tradenames		344,281		28,286		315,995
Non-compete agreements	4 years	270		219		51
Total tradenames and other intangibles, net		$	344,551	$	28,505	$	316,046

The change in the carrying value of the Bonnie Togs goodwill during fiscal 2015 was due solely to changes in foreign currency exchange rates between the Canadian and U.S. dollars that were used for translation in preparing the Company's consolidated financial statements.

The Company recorded approximately $1.0 million and $5.4 million in amortization expense for the fiscal quarter and three fiscal quarters ended October 3, 2015, respectively, and approximately $2.3 million and $14.2 million in amortization expense for the fiscal quarter and three fiscal quarters ended September 27, 2014, respectively. At October 3, 2015, the estimated future amortization expense for these assets is approximately $1.0 million for the remainder of fiscal 2015, $1.9 million for fiscal 2016, $0.2 million for each fiscal year 2017, 2018 and 2019, and $2.7 million thereafter.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 – COMMON STOCK

SHARE REPURCHASES

In the second quarter of fiscal 2013, the Company's Board of Directors authorized the repurchase of shares of the Company's stock in an amount up to $300 million, inclusive of amounts remaining under previous authorizations. In the third quarter of fiscal 2013, the Board approved an additional $400 million share repurchase authorization. The total remaining capacity under the repurchase authorizations as of October 3, 2015 was approximately $106.8 million, based on settled repurchase transactions. The authorizations have no expiration date.

Open Market Repurchases

The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:



	Fiscal quarter ended				Three fiscal quarters ended
	October 3, 2015		September 27, 2014		October 3, 2015		September 27, 2014
Number of shares repurchased	290,800		367,948		795,025		867,099
Aggregate cost of shares repurchased - in millions $	$	29.4	$	26.7	$	78.3	$	62.8
Average price per share	$	101.26	$	72.54	$	98.54	$	72.39

Future repurchases may occur from time to time in the open market, in negotiated transactions, or otherwise. The timing and amount of any repurchases will be determined by the Company’s management, based on its evaluation of market conditions, share price, other investment priorities, and other factors.

Accelerated Stock Repurchase Program

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

DIVIDENDS

During the third quarter of fiscal 2015 and fiscal 2014, the Company paid cash dividends per share of $0.22 and $0.19, respectively. During the three quarters of fiscal 2015 and fiscal 2014, the Company paid cash dividends per share of $0.66 and $0.57, respectively. Future declarations of dividends and the establishment of future record and payment dates are at the discretion of the Company's Board of Directors and based on a number of factors including the Company's future financial performance and other investment priorities.

Provisions in the The William Carter Company's ("TWCC") indenture governing its senior notes and in TWCC's amended secured revolving credit facility could have the effect of restricting the Company's ability to pay future cash dividends on, or make future repurchases of, its common stock. Provisions related to the indenture governing the senior notes are described in the Company's Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015. The Company's secured revolving credit facility was amended in September 2015 as described in the following note to these unaudited condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 – LONG-TERM DEBT

Long-term debt consisted of the following:



(dollars in thousands)	October 3, 2015		January 3, 2015		September 27, 2014
Senior notes	$	400,000	$	400,000	$	400,000
Secured revolving credit facility	185,278		186,000		186,000
Total long-term debt	$	585,278	$	586,000	$	586,000

Amended and Restated Credit Facility

On September 16, 2015, the Company and a syndicate of lenders amended and restated the secured revolving credit facility (the "amended revolving credit facility") to, among other things: (i) refinance the Company's existing credit facility in order to achieve better pricing terms, and (ii) provide additional liquidity to be used for ongoing working capital purposes and for general corporate purposes. The aggregate principal amount of the amended revolving credit facility was increased from $375 million to $500 million to provide for (i) a $400 million U.S. dollar revolving facility (including a $175 million sub-limit for letters of credit and a swing line sub-limit of $50 million) available for borrowings by TWCC and (ii) a $100 million multicurrency revolving facility (including a $40 million sub-limit for letters of credit and a swing line sub-limit of $15 million), available for borrowing by TWCC and certain other subsidiaries of TWCC, in U.S. dollars, Canadian dollars, Euros, Pounds Sterling, or other currencies agreed to by the applicable lenders.

The Company's consolidated statement of cash flows shows the following gross sources and uses of financing cash flows related to the Company's revolving credit facility during fiscal 2015. In the first quarter, the Company replaced $20.0 million of outstanding borrowings under the then-existing amended revolving credit facility with CAD 25.5 million of borrowings, which approximated $20.3 million. Additionally, because of a change in the lead administrative agent and certain changes in commitment amounts among the lenders in the syndication, the third quarter amendment to the Company's secured revolving credit facility led to the repayment and simultaneous re-borrowing of the then-outstanding balance on the secured revolving credit agreement of approximately $185.2 million.

In connection with the amendment, the Company incurred approximately $1.7 million in debt issuance costs during the third quarter of fiscal 2015, of which approximately $1.5 million was paid during the third fiscal quarter of 2015. These newly-incurred debt issuance costs, together with certain existing unamortized debt issuance costs, are being amortized over the remaining term of the amended revolving credit facility (five years). The amended revolving credit facility matures September 16, 2020.

As of October 3, 2015, the interest rate margins applicable to the amended revolving credit facility were 1.375% for LIBOR (London Interbank Offered Rate) rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 1.875%) and 0.375% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 0.875%).

As of October 3, 2015, the Company had approximately $185.3 million in outstanding borrowings under its amended revolving credit facility, exclusive of $9.9 million of outstanding letters of credit. As of October 3, 2015, there was approximately $304.9 million available for future borrowing.

As of October 3, 2015, U.S. dollar borrowings outstanding under the amended revolving credit facility accrued interest at a LIBOR rate plus the applicable base rate, which was equal to 1.58% on that date, and Canadian dollar borrowings accrued interest at a CDOR (Canadian Dollar Offered Rate) plus the applicable base rate, which was equal to 2.14% on that date.

Subject to certain customary exceptions, the amended revolving credit facility contains covenants that restrict the Company's ability to, among other things: (i) create or incur liens, debt, guarantees or other investments, (ii) engage in mergers and consolidations, (iii) pay dividends or other distributions to, and redemptions and repurchases from, equity holders, (iv) prepay, redeem or repurchase subordinated or junior debt, (v) amend organizational documents, and (vi) engage in certain transactions with affiliates.

The amended revolving credit facility also contains affirmative financial covenants. Specifically, the Company will not (i) permit at the end of any four consecutive fiscal quarters the Lease Adjusted Leverage Ratio (defined as, with certain adjustments, the ratio of the Company's consolidated indebtedness plus six times rent expense, as defined, to consolidated net income before interest, taxes, depreciation, amortization, and rent expense ("EBITDAR")) to exceed 4.00:1.00 (provided, however, that if any "Material

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Acquisition" shall occur and the Lease Adjusted Leverage Ratio on a pro forma basis giving effect to the consummation of the Material Acquisition shall be less than 4.00:1.00, then the maximum Lease Adjusted Leverage Ratio may be increased to 4.50:1.00 for the fiscal quarter in which such Material Acquisition is consummated and the three fiscal quarters immediately following the fiscal quarter in which such Material Acquisition shall occur) or (ii) permit at the end of any four consecutive fiscal quarters the 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 2.25:1.00 (provided, however, that if any Material Acquisition shall occur and the Consolidated Fixed Charge Coverage Ratio on a pro forma basis giving effect to the consummation of the Material Acquisition shall be at least 2.25:1.00, then the minimum Consolidated Fixed Charge Coverage Ratio may be decreased to 2.00:1.00 for the fiscal quarter in which such Material Acquisition is consummated and the three fiscal quarters immediately following the fiscal quarter in which such Material Acquisition shall occur).

The amended revolving credit facility also provides that certain covenants fall away and that the liens over the collateral securing each of the Company and certain subsidiaries' collective obligations are released following, among other things, the achievement of, and during the maintenance of, investment grade ratings by Moody's Investor Services, Inc. and Standard & Poor's Ratings Services.

The amended revolving credit facility also provides for incremental facilities in an aggregate amount not to exceed $250 million, either in the form of a commitment increase under the existing credit facility or the incurrence of one or more tranches of term loans (with the aggregate U.S. dollar amount available to the Company not to exceed $200 million and the aggregate multicurrency amount available not to exceed $50 million).

As of October 3, 2015, the Company was in compliance with the financial and other covenants under the amended revolving credit facility.

Senior Notes

As of October 3, 2015, TWCC, a 100% owned subsidiary of Carter's, Inc., had outstanding $400 million principal amount of senior notes bearing interest at a fixed rate of 5.25% per annum and maturing on August 15, 2021. The senior notes are unsecured and are fully and unconditionally guaranteed by Carter's, Inc. and certain subsidiaries of TWCC.

NOTE 7 – STOCK-BASED COMPENSATION

The Company recorded stock-based compensation cost as follows:



	Fiscal quarter ended				Three fiscal quarters ended
(dollars in thousands)	October 3, 2015		September 27, 2014		October 3, 2015		September 27, 2014
Stock options	$	1,015	$	1,039	$	3,359	$	3,498
Restricted stock:
Time-based awards	1,599		1,576		5,294		5,215
Performance-based awards	1,130		1,439		3,556		4,089
Stock awards	—		—		1,095		1,081
Total	$	3,744	$	4,054	$	13,304	$	13,883

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 – EMPLOYEE BENEFIT PLANS

The Company maintains a defined contribution plan and two defined benefit plans. The two defined benefit plans include the OshKosh B'Gosh pension plan and a post-retirement life and medical plan.

OSHKOSH B'GOSH PENSION PLAN

The net periodic pension (benefit) cost included in the statement of operations was comprised of:



	Fiscal quarter ended						Three fiscal quarters ended
(dollars in thousands)	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Interest cost	$	623		$	622		$	1,869		$	1,866
Expected return on plan assets	(785		)	(798		)	(2,355		)	(2,394		)
Recognized actuarial loss	161			21			483			63
Net periodic pension (benefit) cost	$	(1	)	$	(155	)	$	(3	)	$	(465	)

POST-RETIREMENT LIFE AND MEDICAL PLAN

The components of post-retirement benefit expense charged to the statement of operations were as follows:



	Fiscal quarter ended						Three fiscal quarters ended
(dollars in thousands)	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014

Service cost – benefits attributed to service during the period	$	32		$	28		$	96		$	84
Interest cost on accumulated post-retirement benefit obligation	45			57			135			171
Amortization net actuarial gain	(48		)	(52		)	(144		)	(156		)
Curtailment gain	—			(22		)	—			(66		)
Total net periodic post-retirement benefit cost	$	29		$	11		$	87		$	33

NOTE 9 – INCOME TAXES

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

As of October 3, 2015, the Company had gross unrecognized income tax benefits of approximately $9.6 million, of which $6.6 million, if ultimately recognized, may affect the Company’s effective tax rate in the periods settled. The Company has recorded tax positions for which the ultimate deductibility is more likely than not, but for which there is uncertainty about the timing of such deductions.

Included in the reserves for unrecognized tax benefits at October 3, 2015 are approximately $1.5 million of reserves for which the statute of limitations is expected to expire within the next fiscal year. If these tax benefits are ultimately recognized, such recognition, net of federal income taxes, may affect the annual effective tax rate for fiscal 2015 or fiscal 2016 along with the effective tax rate in the quarter in which the benefits are recognized.

The Company recognizes interest related to unrecognized tax benefits as a component of interest expense and recognizes penalties related to unrecognized tax benefits as a component of income tax expense. During the fiscal quarter and three fiscal quarters ended October 3, 2015 and September 27, 2014, interest expense recorded on uncertain tax positions was not significant. The Company had approximately $0.9 million, $0.9 million, and $0.9 million of interest accrued on uncertain tax positions as of October 3, 2015, January 3, 2015, and September 27, 2014, respectively.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 10 – FAIR VALUE MEASUREMENTS

INVESTMENTS

The Company invests in marketable securities, principally equity-based mutual funds, to mitigate the risk associated with the investment return on employee deferrals of compensation. All of the marketable securities owned by the Company are included in other assets on the Company's consolidated balance sheet. The Company had approximately $7.5 million, $7.6 million, and $6.9 million of such Level 1 investments as of October 3, 2015, January 3, 2015, and September 27, 2014, respectively.

Losses on the investments in marketable securities were $0.4 million for the fiscal third quarter and $0.1 million for the three fiscal quarters ended October 3, 2015. These amounts are included in Other (income) expense, net on the Company's consolidated statement of operations. Gains on the investments in marketable securities were not material for the fiscal quarter and three fiscal quarters ended September 27, 2014.

FOREIGN CURRENCY CONTRACTS

As part of the Company's overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, primarily between the U.S. dollar and Canadian dollar, the Company's Canadian subsidiary may use currency contracts to hedge purchases that are made in U.S. dollars, primarily for inventory. As part of this hedging strategy, the Company uses foreign currency forward exchange contracts that have maturities of less than 12 months to provide continuing coverage throughout the hedging period. As currently designed, the Company's contracts are not designated for hedge accounting treatment, and therefore changes in the fair value of these contracts are recorded in Other (income) expense, net in the Company's consolidated statement of operations. Such foreign currency gains and losses include the mark-to-market fair value adjustments at the end of each reporting period related to open contracts, as well as any realized gains and losses on contracts settled during the reporting period. Fair values are calculated by using readily observable market inputs (market-quoted currency exchange rates in effect between U.S. and Canadian dollars), classified as Level 2 within the fair value hierarchy, and included in other current assets or other current liabilities on the Company's consolidated balance sheet. On the consolidated statement of cash flows, it is the Company's policy to include all activity, including cash settlement of the contracts, as a component of cash flows from operations.

At October 3, 2015, the fair values of the open contracts approximated $1.5 million and are included in the Company's consolidated balance sheet within prepaid expenses and other current assets and the notional value was approximately $60.0 million.

During the three quarters of fiscal 2015, the Company recorded unrealized gains of approximately $1.5 million related to the mark-to-market adjustments. Such amounts were not material during the third quarter of fiscal 2015.

The Company recorded realized gains of approximately $1.6 million and $1.9 million for contracts settled during the third quarter of fiscal 2015 and the three quarters of fiscal 2015, respectively. These amounts are included in Other (income) expense, net on the Company's consolidated statement of operations. The Company did not apply hedge accounting treatment on any of these foreign currency contracts.

During the first quarter of fiscal 2015 and in fiscal 2014, the Company did not utilize foreign exchange contracts.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CONTINGENT CONSIDERATION

The following table summarizes the changes in the contingent consideration liability related to the Company's 2011 acquisition of Bonnie Togs:



	Fiscal quarter ended						Three fiscal quarters ended
(dollars in thousands)	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014
Balance at the beginning of period	$	9,022		$	16,848		$	7,711		$	16,348
Payments made	(8,568		)	(8,901		)	(8,568		)	(8,901		)
Accretion	—			444			809			900
Foreign currency translation adjustment	(454		)	(762		)	(1,029		)	(718		)
Final contingent adjustment	—			—			1,077			—
Balance at the end of period	$	—		$	7,629		$	—		$	7,629

The final payment under the earn-out obligation was paid during the third quarter of fiscal 2015, and at October 3, 2015, there was no remaining liability. For this final payment that approximated $8.6 million, approximately $7.6 million is reported in the Company's consolidated statement of cash flows as a financing activity and the remaining portion, which represents the contingency adjustment recognized in the second quarter of fiscal 2015, is reported as an operating activity.

In prior periods, the Company determined the fair value (Level 3 in the fair value hierarchy) of the contingent consideration based upon a probability-weighted discounted cash flow analysis that reflected a high probability that the earnings targets would be met, and a discount rate of 18%.

BORROWINGS

As of October 3, 2015, the fair value of the Company's $185.3 million in outstanding borrowings under its secured revolving credit facility approximated carrying value.

The fair value of the Company's senior notes at October 3, 2015 was approximately $408.0 million. The fair value of these senior notes with a notional value and carrying value of $400 million was estimated by obtaining market quotes given the trade levels of other bonds of the same general issuer type and market-perceived credit quality, and is therefore within Level 2 of the fair value hierarchy.

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
	October 3, 2015			September 27, 2014			October 3, 2015			September 27, 2014

Weighted-average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding	51,740,523			52,356,122			51,960,041			52,788,217
Dilutive effect of equity awards	507,815			470,842			512,861			476,893
Diluted number of common and common equivalent shares outstanding	52,248,338			52,826,964			52,472,902			53,265,110



Basic net income per common share (in thousands, except per share data):
Net income	$	79,326		$	65,886		$	165,223		$	126,079
Income allocated to participating securities	(675		)	(887		)	(1,557		)	(1,706		)
Net income available to common shareholders	$	78,651		$	64,999		$	163,666		$	124,373

Basic net income per common share	$	1.52		$	1.24		$	3.15		$	2.36

Diluted net income per common share (in thousands, except per share data):
Net income	$	79,326		$	65,886		$	165,223		$	126,079
Income allocated to participating securities	(669		)	(880		)	(1,545		)	(1,695		)
Net income available to common shareholders	$	78,657		$	65,006		$	163,678		$	124,384

Diluted net income per common share	$	1.51		$	1.23		$	3.12		$	2.34

Anti-dilutive shares excluded from dilutive earnings per share computation	177,300			234,700			180,000			265,000

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)	October 3, 2015		January 3, 2015		September 27, 2014
Accrued bonuses and incentive compensation	$	12,574	$	18,875	$	11,793
Contingent consideration	—		7,711		7,629
Income taxes payable	25,902		692		19,609
Accrued workers' compensation	1,840		2,662		2,853
Accrued interest	2,771		8,106		2,746
Accrued sales and use taxes	7,421		5,318		8,037
Accrued salaries and wages	9,615		3,576		2,968
Accrued gift certificates	9,356		10,100		8,863
Accrued employee benefits	10,102		17,132		11,481
Accrued and deferred rent	12,286		11,879		10,981
Other current liabilities	13,332		11,677		13,513
Total	$	105,199	$	97,728	$	100,473

Other long-term liabilities consisted of the following:



(dollars in thousands)	October 3, 2015		January 3, 2015		September 27, 2014
Deferred lease incentives	$	70,778	$	67,205	$	65,731
Accrued and deferred rent	47,554		40,656		38,812
Accrued workers' compensation	6,016		4,717		4,270
OshKosh pension plan	11,029		11,031		3,303
Unrecognized tax benefits	10,540		12,230		12,928
Post-retirement life and medical plan	4,731		4,731		5,458
Deferred compensation	8,932		8,388		7,578
Other	1,947		1,947		105
Total	$	161,527	$	150,905	$	138,185

NOTE 13 – COMMITMENTS AND CONTINGENCIES

The Company is subject to various claims and pending or threatened lawsuits in the normal course of business. The Company is not currently a party to any legal proceedings that it believes would have a material adverse impact on its financial position, results of operations, or cash flows.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 14 – SEGMENT INFORMATION

The table below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:



	Fiscal quarter ended										Three fiscal quarters ended
(dollars in thousands)	October 3, 2015			% of Total Net Sales		September 27, 2014			% of Total Net Sales		October 3, 2015			% of Total Net Sales		September 27, 2014			% of Total Net Sales
Net sales:
Carter’s Wholesale	$	343,555		40.4	%	$	309,772		38.8	%	$	824,600		38.4	%	$	781,460		38.6	%
Carter’s Retail (a)	294,928			34.7	%	281,455			35.2	%	799,635			37.2	%	745,473			36.8	%
Total Carter’s (U.S.)	638,483			75.1	%	591,227			74.0	%	1,624,235			75.6	%	1,526,933			75.4	%
OshKosh Retail (a)	98,292			11.6	%	91,427			11.4	%	244,787			11.4	%	222,500			11.0	%
OshKosh Wholesale	18,794			2.2	%	25,107			3.1	%	49,151			2.3	%	52,342			2.6	%
Total OshKosh (U.S.)	117,086			13.8	%	116,534			14.5	%	293,938			13.7	%	274,842			13.6	%
International (b)	94,237			11.1	%	91,175			11.5	%	229,162			10.7	%	222,870			11.0	%
Total net sales	$	849,806		100.0	%	$	798,936		100.0	%	$	2,147,335		100.0	%	$	2,024,645		100.0	%

Operating income (loss):				% of Segment Net Sales					% of Segment Net Sales					% of Segment Net Sales					% of Segment Net Sales
Carter’s Wholesale	$	74,347		21.6	%	$	55,762		18.0	%	$	172,485		20.9	%	$	133,489		17.1	%
Carter’s Retail (a)	51,733			17.5	%	54,501			19.4	%	134,557			16.8	%	137,659			18.5	%
Total Carter’s (U.S.)	126,080			19.7	%	110,263			18.6	%	307,042			18.9	%	271,148			17.8	%
OshKosh Retail (a)	6,171			6.3	%	5,300			5.8	%	3,396			1.4	%	(883		)	(0.4	)%
OshKosh Wholesale	4,487			23.9	%	2,240			8.9	%	9,715			19.8	%	5,125			9.8	%
Total OshKosh (U.S.)	10,658			9.1	%	7,540			6.5	%	13,111			4.5	%	4,242			1.5	%
International (b) (c)	18,220			19.3	%	15,896			17.4	%	30,967			13.5	%	27,039			12.1	%
Corporate expenses (d) (e)	(24,737		)			(23,242		)			(74,442		)			(83,094		)
Total operating income	$	130,221		15.3	%	$	110,457		13.8	%	$	276,678		12.9	%	$	219,335		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 related to the Company's 2011 acquisition of Bonnie Togs of approximately $1.9 million for the three-fiscal-quarter period ended October 3, 2015, and $0.4 million and $0.9 million for the fiscal quarter and the three-fiscal-quarter period ended September 27, 2014, respectively. Also includes expenses of approximately $0.5 million for the three quarters of fiscal 2014 related to the Company's 2014 exit from Japan retail operations.


(d)	Corporate expenses include expenses related to incentive compensation, stock-based compensation, executive management, severance and relocation, finance, building occupancy, information technology, certain legal fees, consulting, and audit fees.


(e)	Includes the following charges:



	Fiscal quarter ended				Three fiscal quarters ended
(dollars in millions)	October 3, 2015		September 27, 2014		October 3, 2015		September 27, 2014
Closure of distribution facility in Hogansville, GA (1)	$	—	$	0.2	$	—	$	0.9
Office consolidation costs	$	—	$	—	$	—	$	6.6
Amortization of tradenames	$	1.0	$	2.3	$	5.4	$	14.2


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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 – FACILITY CLOSURES

OFFICE CONSOLIDATION

In 2013 and 2014, the Company consolidated its Shelton, Connecticut and Atlanta, Georgia offices, as well as certain functions from its other offices, into a new headquarters facility in Atlanta, Georgia. During the first and second quarter of fiscal 2014, approximately $2.0 million and $4.6 million of expense, respectively, were incurred related to the office consolidation project and recorded in SG&A expense. No such expenses were incurred during the third quarter of fiscal 2014, or during the three quarters of fiscal 2015. No additional expenses are expected to be incurred in the future.

The following table summarizes the restructuring reserves related to the office consolidation as of October 3, 2015:



(dollars in millions)	Severance			Other closure costs			Total
Balance at January 3, 2015	$	0.8		$	2.8		$	3.6
Payments during fiscal 2015	(0.5		)	(0.6		)	(1.1		)
Balance at October 3, 2015	$	0.3		$	2.2		$	2.5

The severance reserve is included in other current liabilities and other closure costs are included in other short-term liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet. The Company has completed its consolidation efforts.

At September 27, 2014, restructuring reserves were approximately $4.3 million.

JAPAN RETAIL OPERATIONS

In 2013, the Company made the decision to exit retail operations in Japan based on revised forecasts that did not meet the Company's investment objectives. In connection with the plan to exit these operations, during the first two quarters of fiscal 2014 the Company recorded the following approximate amounts in selling, general and administrative expenses: $0.9 million of accelerated depreciation and $0.6 million in severance and other net costs. Also during the first two quarters of fiscal 2014, a recovery of approximately $1.0 million was recorded in cost of goods sold related to a favorable recovery on inventory. No such costs or recoveries were incurred during the third quarter of fiscal 2014. There were no exit costs or recoveries related to the former Japan operations during the three quarters of fiscal 2015, and no additional costs are expected in the future.

NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS

Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue. The guidance is applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance requires improved disclosures as well as additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The standard is effective for the Company beginning in the first quarter of fiscal 2018, including interim periods within that first fiscal year, and early adoption is now permitted for 2017. Upon becoming effective, the Company will apply the amendments in the updated standard either retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is currently evaluating the impact of adopting this standard on its consolidated financial position, results of operations, and cash flows. Since the original issuance of ASU 2014-09, the FASB has issued several amendments to this guidance, and additional amendments are currently being considered by the FASB.

Presentation of Debt Issuance Costs for Term Debt

In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). Upon adoption, ASU 2015-03 will require debt issuance costs associated with outstanding term debt to be presented in the balance sheet as a direct reduction in the carrying value of the associated debt liability, consistent with the current presentation of a debt discount. For fees paid to lenders to secure revolving lines of credit, such fees will continue to be

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

presented as a deferred charge (asset) on the balance sheet, as clarified in August 2015 by the FASB's issuance of ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Under current guidance prior to ASU 2015-03, all debt issuance costs, for both term debt and revolving lines of credit, are presented in the balance sheet as a deferred charge (asset). ASU 2015-03 is limited to the presentation of debt issuance costs and will not affect the recognition and measurement of debt issuance costs. Upon adoption, ASU 2015-03 must be applied on a retrospective basis and is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. Since ASU 2015-03 involves balance sheet presentation only, its adoption will not have any impact on the Company's results of operations, financial condition, or cash flows.

Simplified Measurement Date for Defined Benefit Plan Assets and Obligations

In April 2015, the FASB issued Accounting Standard Update 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets ("ASU 2015-04"). Upon adoption, ASU 2015-04 will allow employers with fiscal year ends that do not coincide with a calendar month end to make an accounting policy election to measure defined benefit plan assets and obligations as of the end of the month closest to their fiscal year ends (i.e., on an alternative measurement date). An employer that makes this election must consistently apply the practical expedient from year to year and to all of its defined benefit plans. ASU 2015-04 will be effective for interim and fiscal periods beginning after December 15, 2015; prospective application is required and early adoption is permitted. The Company plans to adopt ASU 2015-04 at the beginning of fiscal 2016 and the Company does not expect the adoption to have a material impact on the Company's benefit plans or the Company's results of operations, financial condition, or cash flows.

Simplified Subsequent Measurement of Inventory

In July 2015, the FASB issue Accounting Standard Update 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). Upon adoption by an entity, ASU 2015-11 will simplify the subsequent measurement of inventory by replacing the current lower of cost or market test with a lower of cost and net realizable value test. The new guidance applies only to inventories for which cost is determined by methods other than last-in-first-out (LIFO) and the retail inventory method. For inventory within the scope of ASU 2015-11, entities will be required to compare the cost of inventory to only one measure, its net realizable value, and not the three measures required by current guidance ("market," "subject to a floor," and a "ceiling"). When evidence exists that the net realizable value of inventory is less than its cost (due to damage, physical deterioration, obsolescence, changes in price levels or other causes), entities will recognize the difference as a loss in earnings in the period in which it occurs. ASU 2015-11 is effective for public entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. At this time, the Company does not believe the adoption of ASU 2015-11 will have a material impact on its consolidated financial condition, results of operations, or cash flows.

NOTE 17 – GUARANTOR UNAUDITED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Company’s senior notes constitute debt obligations of its wholly-owned subsidiary, The William Carter Company ("TWCC" or the “Subsidiary Issuer”), are unsecured and are fully and unconditionally guaranteed by Carter’s, Inc. (the “Parent”), by each of the Parent's current domestic subsidiaries (other than TWCC), and, subject to certain exceptions, future restricted subsidiaries that guarantee the Company’s amended revolving credit facility or certain other debt of the Company or the subsidiary guarantors. Under specific customary conditions, the guarantees are not full and unconditional because subsidiary guarantors can be released and relieved of their obligations under customary circumstances contained in the indenture governing the senior notes. These circumstances include among others the following, so long as other applicable provisions of the indentures are adhered to: any sale or other disposition of all or substantially all of the assets of any subsidiary guarantor, any sale or other disposition of capital stock of any subsidiary guarantor, or designation of any restricted subsidiary that is a subsidiary guarantor as an unrestricted subsidiary.

For additional information, refer to the Company's Annual Report on Form 10-K for the 2014 fiscal year ended January 3, 2015.

The unaudited condensed consolidating financial information for the Parent, the Subsidiary Issuer and the guarantor and non-guarantor subsidiaries has been prepared from the books and records maintained by the Company. The accompanying unaudited condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10. The financial information may not necessarily be indicative of the financial position, results of operations, comprehensive

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

income (loss), and cash flows, had the Parent, Subsidiary Issuer, guarantor or non-guarantor subsidiaries operated as independent entities.

Intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions. The Company has accounted for investments in subsidiaries under the equity method. The guarantor subsidiaries are 100% owned directly or indirectly by the Parent and, except as noted above, all guarantees are joint, several and unconditional.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

CARTER’S, INC.

Condensed Consolidating Balance Sheets (unaudited)

As of October 3, 2015

(dollars in thousands)



	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	232,568	$	17,434	$	38,258	$	—		$	288,260
Accounts receivable, net	—		208,369		29,210		8,986		—			246,565
Intercompany receivable	—		87,419		100,357		3,675		(191,451		)	—
Intercompany loan receivable	—		15,000		—		—		(15,000		)	—
Finished goods inventories	—		278,793		216,270		50,553		(34,096		)	511,520
Prepaid expenses and other current assets	—		18,113		14,963		4,184		—			37,260
Deferred income taxes	—		22,739		11,192		964		—			34,895
Total current assets	—		863,001		389,426		106,620		(240,547		)	1,118,500
Property, plant, and equipment, net	—		160,579		171,615		29,111		—			361,305
Goodwill	—		136,570		—		40,063		—			176,633
Tradenames and other intangibles, net	—		226,342		85,500		—		—			311,842
Deferred debt issuance costs, net	—		7,235		—		—		—			7,235
Other assets	—		11,358		784		383		—			12,525
Intercompany long-term receivable	—		—		264,618		—		(264,618		)	—
Intercompany long-term note receivable	—		100,000		—		—		(100,000		)	—
Investment in subsidiaries	842,943		614,624		19,118		—		(1,476,685		)	—
Total assets	$	842,943	$	2,119,709	$	931,061	$	176,177	$	(2,081,850	)	$	1,988,040

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	—	$	100,487	$	59,060	$	14,047	$	—		$	173,594
Intercompany payables	—		102,208		85,814		3,429		(191,451		)	—
Intercompany loan payable	—		—		—		15,000		(15,000		)	—
Other current liabilities	—		57,316		37,905		9,978		—			105,199
Total current liabilities	—		260,011		182,779		42,454		(206,451		)	278,793

Long-term debt	—		566,000		—		19,278		—			585,278
Deferred income taxes	—		80,871		38,628		—		—			119,499
Intercompany long-term liability	—		264,618		—		—		(264,618		)	—
Intercompany long-term note payable	—		—		100,000		—		(100,000		)	—
Other long-term liabilities	—		71,170		78,658		11,699		—			161,527
Stockholders' equity	842,943		877,039		530,996		102,746		(1,510,781		)	842,943
Total liabilities and stockholders' equity	$	842,943	$	2,119,709	$	931,061	$	176,177	$	(2,081,850	)	$	1,988,040

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

As of January 3, 2015

(dollars in thousands)



	Parent		Subsidiary Issuer		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	311,078	$	10,442	$	19,118	$	—		$	340,638
Accounts receivable, net	—		155,192		22,770		6,601		—			184,563
Intercompany receivable	—		58,402		106,137		2,012		(166,551		)	—
Intercompany loan receivable	—		20,000		—		—		(20,000		)	—
Finished goods inventories	—		240,702		191,953		48,463		(36,274		)	444,844
Prepaid expenses and other current assets	—		15,143