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Carters Inc (CRI) SEC Filing 10-Q Quarterly report for the period ending Saturday, June 27, 2020

Carters Inc

CIK: 1060822 Ticker: CRI


EXHIBIT 99.1
                                                
carters_logoa01a01a01a01a19.jpg
 
Contact:
 
Sean McHugh
 
Vice President & Treasurer
 
(678) 791-7615

Carters, Inc. Reports Second Quarter Fiscal 2020 Results

Net sales $515 million, decline of 30%
Diluted EPS $0.19; adjusted diluted EPS $0.54
Results reflect significant disruption from COVID-19 pandemic
North American retail stores closed for much of second quarter
Strong online demand - U.S. eCommerce comparable sales +101%
Strong growth in sales of exclusive brands to Target, Walmart and Amazon
$1.5 billion in liquidity at quarter end
ATLANTA, July 24, 2020 - Carter’s, Inc. (NYSE:CRI), the largest branded marketer in North America of apparel exclusively for babies and young children, today reported its second quarter fiscal 2020 results.
“We had a strong finish to the second quarter. Thankfully, the disruption to our business due to the pandemic and related store closures was less meaningful than we expected,” said Michael D. Casey, Chairman and Chief Executive Officer. “In the second quarter, we continued to see good demand from our largest wholesale customers whose stores remained open, and we were also able to serve the needs of families with young children through our very profitable eCommerce operations.
“By the end of June, substantially all of our stores in the United States had reopened and we saw strong demand for our brands over the July 4th holiday shopping period.
“In the second quarter, we strengthened our brand marketing, improved price realization with more effective promotions, controlled spending, reduced our exposure to excess inventories and improved liquidity.
“We are now entering the largest portion of our year with respect to sales and earnings contribution. Given the strength of our brands and extensive market presence, we believe we are well-positioned to weather

1

The following information was filed by Carters Inc (CRI) on Friday, July 24, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common stock, par value $0.01 per share
CRI
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files). Yes x No ☐



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes No x
As of July 17, 2020, there were 43,635,081 shares of the registrant's common stock outstanding.








CARTER’S, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of June 27, 2020, December 28, 2019 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Operations for the fiscal quarter and two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the fiscal quarter and two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity for the fiscal quarters ended June 27, 2020, March 28, 2020, June 29, 2019 and March 30, 2019
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the two fiscal quarters ended June 27, 2020 and June 29, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARTER’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(unaudited)
 
June 27, 2020
 
December 28, 2019
 
June 29, 2019
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,000,581

 
$
214,311

 
$
118,458

Accounts receivable, net of allowance for credit losses of $9,242, $6,354, $3,786, respectively
165,578

 
251,005

 
168,176

Finished goods inventories, net of inventory reserves of $32,092, $9,283, and $14,119, respectively
672,205

 
593,987

 
697,559

Prepaid expenses and other current assets
51,180

 
48,454

 
56,813

Total current assets
1,889,544

 
1,107,757

 
1,041,006

Property, plant, and equipment, net of accumulated depreciation of $559,142, $523,848, and $486,319, respectively
287,941

 
320,168

 
333,600

Operating lease assets
648,505

 
687,024

 
705,631

Tradenames, net
308,017

 
334,642

 
365,567

Goodwill
208,573

 
229,026

 
228,860

Customer relationships, net
38,950

 
41,126

 
42,825

Other assets
31,104

 
33,374

 
29,671

Total assets
$
3,412,634

 
$
2,753,117

 
$
2,747,160

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
458,075

 
$
183,641

 
$
232,869

Current operating lease liabilities
163,665

 
160,228

 
154,719

Other current liabilities
80,634

 
131,631

 
85,483

Total current liabilities
702,374

 
475,500

 
473,071

 
 
 
 
 
 
Long-term debt, net
1,232,649

 
594,672

 
604,377

Deferred income taxes
63,850

 
74,370

 
91,190

Long-term operating lease liabilities
620,063

 
664,372

 
688,650

Other long-term liabilities
60,420

 
64,073

 
61,975

Total liabilities
$
2,679,356

 
$
1,872,987

 
$
1,919,263

 
 
 
 
 
 
Commitments and contingencies - Note 14

 

 

 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
Preferred stock; par value $.01 per share; 100,000 shares authorized; none issued or outstanding at June 27, 2020, December 28, 2019, and June 29, 2019
$

 
$

 
$

Common stock, voting; par value $.01 per share; 150,000,000 shares authorized; 43,636,176, 43,963,103 and 44,868,563 shares issued and outstanding at June 27, 2020, December 28, 2019, and June 29, 2019, respectively
436

 
440

 
449

Additional paid-in capital
5,539

 

 

Accumulated other comprehensive loss
(45,045
)
 
(35,634
)
 
(36,561
)
Retained earnings
772,348

 
915,324

 
864,009

Total stockholders' equity
733,278

 
880,130

 
827,897

Total liabilities and stockholders' equity
$
3,412,634

 
$
2,753,117

 
$
2,747,160

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
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Net sales
$
514,885

 
$
734,384

 
$
1,169,357

 
$
1,475,442

Cost of goods sold
284,073

 
410,390

 
687,445

 
835,528

Adverse purchase commitments (inventory and raw materials)
(4,703
)
 
998

 
18,134

 
1,051

Gross profit
235,515

 
322,996

 
463,778

 
638,863

Royalty income, net
3,588

 
9,635

 
10,926

 
18,179

Selling, general, and administrative expenses
218,149

 
268,155

 
487,986

 
531,807

Goodwill impairment

 

 
17,742

 

Intangible asset impairment

 

 
26,500

 

Operating income (loss)
20,954

 
64,476

 
(57,524
)
 
125,235

Interest expense
15,312

 
9,072

 
24,176

 
18,701

Interest income
(423
)
 
(509
)
 
(887
)
 
(737
)
Other expense (income), net
587

 
202

 
5,405

 
(9
)
Loss on extinguishment of debt

 

 

 
7,823

Income (loss) before income taxes
5,478

 
55,711

 
(86,218
)
 
99,457

Income tax (benefit) provision
(2,678
)
 
11,774

 
(15,680
)
 
21,054

Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

 
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.73

Diluted net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.72

Dividend declared and paid per common share
$

 
$
0.50

 
$
0.60

 
$
1.00

See accompanying notes to the unaudited condensed consolidated financial statements.

2


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
(unaudited)
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,581

 
2,867

 
(9,411
)
 
5,778

Comprehensive income (loss)
$
11,737

 
$
46,804

 
$
(79,949
)
 
$
84,181

See accompanying notes to the unaudited condensed consolidated financial statements.

3


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS 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, 2018
45,629,014

 
$
456

 
$

 
$
(40,839
)
 
$
909,816

 
$
869,433

Exercise of stock options
72,192

 
1

 
4,779

 

 

 
4,780

Withholdings from vesting
of restricted stock
(43,844
)
 

 
(4,077
)
 

 

 
(4,077
)
Restricted stock activity
182,722

 
2

 
(2
)
 

 

 

Stock-based compensation expense

 

 
4,613

 

 

 
4,613

Repurchase of common stock
(460,257
)
 
(5
)
 
(5,313
)
 

 
(34,648
)
 
(39,966
)
Cash dividends declared and paid

 

 

 

 
(22,756
)
 
(22,756
)
Comprehensive income

 

 

 
2,911

 
34,466

 
37,377

Reclassification of tax effects(*)

 

 

 
(1,500
)
 
1,500

 

Balance at March 30, 2019
45,379,827

 
$
454

 
$

 
$
(39,428
)
 
$
888,378

 
$
849,404

Exercise of stock options
26,264

 

 
1,566

 

 

 
1,566

Withholdings from vesting
of restricted stock
(505
)
 

 
(49
)
 

 

 
(49
)
Restricted stock activity
8,597

 

 

 

 

 

Stock-based compensation expense

 

 
5,194

 

 

 
5,194

Repurchase of common stock
(545,620
)
 
(5
)
 
(6,711
)
 

 
(45,761
)
 
(52,477
)
Cash dividends declared and paid

 

 

 

 
(22,545
)
 
(22,545
)
Comprehensive income

 

 

 
2,867

 
43,937

 
46,804

Balance at June 29, 2019
44,868,563

 
$
449

 
$

 
$
(36,561
)
 
$
864,009

 
$
827,897

(*)
The Company reclassified $1.5 million of tax benefits from "Accumulated other comprehensive loss" to "Retained earnings" for the tax effects resulting from the December 22, 2017 enactment of the Tax Cut and Jobs Act in accordance with the adoption of ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in the first quarter of fiscal 2019.
 
Common stock - shares
 
Common
stock - $
 
Additional
paid-in
capital
 
Accumulated other comprehensive
loss
 
Retained
earnings
 
Total
stockholders’
equity
Balance at December 28, 2019
43,963,103

 
$
440

 
$

 
$
(35,634
)
 
$
915,324

 
$
880,130

Exercise of stock options
33,158

 

 
1,840

 

 

 
1,840

Withholdings from vesting
of restricted stock
(43,611
)
 

 
(4,712
)
 

 

 
(4,712
)
Restricted stock activity
132,759

 
1

 
(1
)
 

 

 

Stock-based compensation expense

 

 
1,945

 

 

 
1,945

Repurchase of common stock
(474,684
)
 
(5
)
 
928

 

 
(46,178
)
 
(45,255
)
Cash dividends declared and paid

 

 

 

 
(26,260
)
 
(26,260
)
Comprehensive loss

 

 

 
(12,992
)
 
(78,694
)
 
(91,686
)
Balance at March 28, 2020
43,610,725

 
$
436

 
$

 
$
(48,626
)
 
$
764,192

 
$
716,002

Exercise of stock options
14,180

 

 
1,076

 

 

 
1,076

Withholdings from vesting
of restricted stock
(1,016
)
 

 
(77
)
 

 

 
(77
)
Restricted stock activity
12,287

 

 

 

 

 

Stock-based compensation expense

 

 
4,540

 

 

 
4,540

Comprehensive income

 

 

 
3,581

 
8,156

 
11,737

Balance at June 27, 2020
43,636,176

 
$
436

 
$
5,539

 
$
(45,045
)
 
$
772,348

 
$
733,278


See accompanying notes to the unaudited condensed consolidated financial statements

4


CARTER’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(70,538
)
 
$
78,403

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant, and equipment
43,774

 
44,991

Amortization of intangible assets
1,858

 
1,874

Provisions for (recoveries of) excess and obsolete inventory
23,058

 
(938
)
Goodwill impairment
17,742

 

Intangible asset impairments
26,500

 

Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries
7,332

 
385

Amortization of debt issuance costs
916

 
737

Stock-based compensation expense
6,485

 
9,807

Unrealized foreign currency exchange loss (gain), net
1,621

 
(142
)
Provisions for (recoveries of) doubtful accounts receivable from customers
3,036

 
(2,869
)
Loss on extinguishment of debt

 
7,823

Deferred income taxes (benefit) expense
(10,559
)
 
4,268

Effect of changes in operating assets and liabilities:
 
 
 
Accounts receivable
80,566

 
93,315

Finished goods inventories
(106,922
)
 
(119,508
)
Prepaid expenses and other assets
(852
)
 
(18,298
)
Accounts payable and other liabilities
214,796

 
4,617

Net cash provided by operating activities
$
238,813

 
$
104,465

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
$
(16,708
)
 
$
(24,992
)
Disposals and recoveries from property, plant, and equipment

 
749

Net cash used in investing activities
$
(16,708
)
 
$
(24,243
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from senior notes due 2025
$
500,000

 
$

Proceeds from senior notes due 2027

 
500,000

Payment of senior notes due 2021

 
(400,000
)
Premiums paid to extinguish debt

 
(5,252
)
Payment of debt issuance costs
(7,639
)
 
(5,793
)
Borrowings under secured revolving credit facility
644,000

 
80,000

Payments on secured revolving credit facility
(500,000
)
 
(166,000
)
Repurchases of common stock
(45,255
)
 
(92,443
)
Dividends paid
(26,260
)
 
(45,260
)
Withholdings from vestings of restricted stock
(4,789
)
 
(4,126
)
Proceeds from exercises of stock options
2,916

 
6,346

Net cash provided by (used in) financing activities
$
562,973

 
$
(132,528
)
 
 
 
 
Net effect of exchange rate changes on cash and cash equivalents
1,192

 
687

Net increase (decrease) in cash and cash equivalents
$
786,270

 
$
(51,619
)
Cash and cash equivalents, beginning of period
214,311

 
170,077

Cash and cash equivalents, end of period
$
1,000,581

 
$
118,458

See accompanying notes to the unaudited condensed consolidated financial statements.

5


CARTER’S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 – THE COMPANY
Carter's, Inc. and its wholly owned subsidiaries (collectively, the "Company," "its," "us" and "our") design, source, and market branded childrenswear and accessories under the Carter's, OshKosh B'gosh ("OshKosh"), Skip Hop, Child of Mine, Just One You, Simple JoysPrecious Baby, Little Planet, and other brands. The Company's products are sourced through contractual arrangements with manufacturers worldwide for: 1) wholesale distribution to leading department stores, national chains, and specialty retailers domestically and internationally and 2) distribution to the Company's own retail stores and eCommerce sites that market its brand name merchandise and other licensed products manufactured by other companies.
NOTE 2 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of the Company 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 (loss), statement of stockholders' equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the fiscal quarter ended June 27, 2020 are not necessarily indicative of the results that may be expected for the current fiscal year ending January 2, 2021.
The preparation of these unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
The accompanying condensed consolidated balance sheet as of December 28, 2019 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.
Revision of Previously Issued Financial Statements
During the second quarter of fiscal year 2020, it was determined that there were amounts presented incorrectly in the statement of cash flows for the annual and interim year to date periods subsequent to the December 30, 2018 adoption of ASC 842, Leases, due to the presentation of the non-cash impact of the initial and subsequent recognition of the Right of Use (“ROU”) assets and lease liabilities within the “Prepaid expenses and other assets” and “Accounts payable and other liabilities” line items, respectively, within operating cash flows. This incorrect presentation had no impact on net cash (used in) provided by operating activities for any of the periods. We assessed the materiality of the incorrect presentation and concluded that the previously issued financial statements were not materially misstated. The presentation errors resulted in an offsetting overstatement of cash used for prepaid expenses and other assets and cash provided by accounts payable and other liabilities of $739 million, $773 million and $815 million for the three, six and nine-months ended March 30, 2019, June 29, 2019 and September 28, 2019, respectively, $828 million for the year ended December 28, 2019 and $29 million for the three months ended March 28, 2020. The accompanying unaudited condensed consolidated statement of cash flows appropriately reflect the corrected presentation of these non-cash activities. In addition, the Company has reclassified and will reclassify prior comparable period amounts to present ROU asset amortization and lease liability payment activity on a net basis within the “Accounts payable and other liabilities” line item. The revisions to the nine months ended September 30, 2019, year ended December 31, 2019 and three months ended March 31, 2020 will be presented in future Forms 10-Q and 10-K filings. We will continue to provide supplemental noncash cash flow disclosure information in the notes to the financial statements, as well as correct for the omission of such disclosure during the 2019 interim periods in connection with our 2020 quarterly filings.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

COVID-19
In December 2019, an outbreak of a new strain of coronavirus (“COVID-19”) began in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a pandemic and the President of the United States declared a national emergency. As a result of COVID-19, the Company temporarily closed its retail stores in North America and implemented several actions during fiscal 2020 to enhance liquidity and financial flexibility including the deferral of lease payments, reductions in discretionary spending, amending its revolving credit facility, issuing $500 million principal amount of senior notes, and suspending dividends and share repurchases.
Beginning in April 2020, the Company suspended rent payments under the leases for our temporarily closed stores in North America and has been in discussions with landlords to obtain rent concessions. The Company considered the Financial Accounting Standards Board's ("FASB") recent guidance regarding lease concessions as a result of the effects of the COVID-19 pandemic and has elected to treat these rent concessions as lease modifications. Lease modifications resulting from COVID-19 related rent concessions were not material to the financial statements for the fiscal quarter ended June 27, 2020. The Company has resumed making the required rent payments under the leases for the stores that reopened as of the end of the fiscal quarter. See Note 4, Leases, for further details on deferral of rent payments under these leases.
On May 4, 2020, the Company, through its wholly owned subsidiary, The William Carter Company ("TWCC"), successfully amended its revolving credit facility. This amendment provided for, among other things, a waiver of financial covenants through the balance of fiscal year 2020, revised covenant requirements through the third quarter of fiscal year 2021 and the ability to raise additional unsecured financing at the Company’s discretion. Additionally, on May 11, 2020, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025. See Note 8, Long-Term Debt, for further details on the amendment to the revolving credit facility and the issuance of $500 million principal amount of senior notes.
The Company announced in the first two quarters of fiscal 2020, that in connection with the COVID-19 pandemic, it suspended its common stock share repurchase program and its quarterly cash dividend. The Company's Board of Directors will evaluate future capital distributions, including dividend declarations, based on a number of factors, including business conditions, our financial performance, and other considerations.
The Company also assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 27, 2020 and through the date of this report filing. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory reserves, adverse inventory and fabric purchase commitments, stock based compensation, and the carrying value of our goodwill and other long-lived assets. Based on these assessments, in the second quarter of fiscal 2020, the Company recorded impairments on operating lease assets and other long-lived assets for our underperforming retail stores of $3.7 million, and a benefit in excess inventory and fabric purchase commitment charges of $9.9 million related to better than expected sales of inventory that was reserved for in the first fiscal quarter of 2020 due to COVID-19 related disruptions. For the two fiscal quarters ending June 27, 2020, the Company recorded impairments on operating lease assets and other long-lived assets for our underperforming retail stores of $5.0 million, inventory related charges of $23.1 million, adverse inventory and fabric purchase commitments of $18.1 million, intangible asset impairments of $26.5 million, and goodwill impairment of $17.7 million. There could be a further material impact to our consolidated financial statements in future reporting periods if at a future date we determine that these assessments of the magnitude and duration of COVID-19, as well as other factors, were incorrect.
Additional COVID-19 related charges in the second quarter of fiscal 2020 include incremental payroll continuation and employee related costs of $7.3 million, costs associated with additional protective equipment and cleaning supplies of $4.1 million, restructuring costs of $2.3 million, and other COVID-19-related costs of $1.1 million, as well as a payroll tax benefit of $1.8 million.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies. New accounting pronouncements adopted at the beginning of fiscal 2020 are noted below.
Credit Losses (ASU 2016-13)
At the beginning of fiscal 2020, the Company adopted Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This new

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

guidance changed how entities account for credit impairment for trade and other receivables, as well as for certain financial assets and other instruments. ASU 2016-13 replaced the previous "incurred loss" model with an "expected loss" model, that requires an entity to recognize a loss (or allowance) upon initial recognition of the asset that reflects all future events that will lead to a loss being realized, regardless of whether it is probable that the future event will occur. The Company estimates current expected credit losses based on collection history and management’s assessment of the current economic trends, business environment, customers’ financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. The effect of the adoption of ASU 2016-13 was not material to the Company's consolidated financial statements.
Goodwill Impairment Testing (ASU 2017-04)
At the beginning of fiscal 2020, the Company adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill (step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on the current step 1). Any impairment charge will be limited to the amount of goodwill allocated to an impacted reporting unit. ASU 2017-04 does not change the current guidance for completing step 1 of the goodwill impairment test, and an entity can still perform the current optional qualitative goodwill impairment assessment before determining whether to proceed to step 1. The effect of the adoption of ASU 2017-04 had no impact to the Company's consolidated financial statements. During the first quarter of fiscal 2020, the Company conducted an interim quantitative impairment assessment on the goodwill ascribed to the Other International reporting unit. As a result of this assessment and based on the application of ASU 2017-04, a goodwill impairment charge of $17.7 million was recorded to our Other International reporting unit. See Note 6, Goodwill and Intangible Assets, for further details on the impairment charge and valuation methodology.
Simplifying the Accounting for Income Taxes (Topic 740)
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Amendments include removal of certain exceptions to the general principles of Topic 740, "Income Taxes," and simplification in several other areas. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, and interim periods therein, with early adoption permitted. The Company elected to early adopt this guidance in the first quarter of fiscal 2020. The Company retrospectively adopted the provision related to the classification of taxes partially based on income and has determined that the adoption of this standard did not have a material impact on its prior period financial statements. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis. The effect of the adoption of ASU 2019-12 was not material to the Company's consolidated financial statements.
NOTE 3 - REVENUE RECOGNITION
The Company’s revenues are earned from contracts or arrangements with retail and wholesale customers and licensees. Contracts include written agreements as well as arrangements that are implied by customary practices or law.
Disaggregation of Revenue
The Company sells its products directly to consumers ("direct-to-consumer") and to other retail companies and partners that subsequently sell the products directly to their own retail customers. The Company also earns royalties from certain of its licensees. Disaggregated revenues from these sources for the second quarter and two quarters ended fiscal 2020 and 2019 were as follows:
 
 
Fiscal quarter ended June 27, 2020
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
151,744

 
$
15,541

 
$
167,285

Direct-to-consumer
 
316,016

 

 
31,584

 
347,600

 
 
$
316,016

 
$
151,744

 
$
47,125

 
$
514,885

 
 
 
 
 
 
 
 
 
Royalty income
 
$
1,252

 
$
1,508

 
$
828

 
$
3,588


8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)




 
 
Two fiscal quarters ended June 27, 2020
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
403,874

 
$
54,272

 
$
458,146

Direct-to-consumer
 
636,733

 

 
74,478

 
711,211

 
 
$
636,733

 
$
403,874

 
$
128,750

 
$
1,169,357

 
 
 
 
 
 
 
 
 
Royalty income
 
$
3,746

 
$
5,590

 
$
1,590

 
$
10,926

 
 
Fiscal quarter ended June 29, 2019
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
229,091

 
$
24,742

 
$
253,833

Direct-to-consumer
 
423,128

 

 
57,423

 
480,551

 
 
$
423,128

 
$
229,091

 
$
82,165

 
$
734,384

 
 
 
 
 
 
 
 
 
Royalty income
 
$
4,452

 
$
4,162

 
$
1,021

 
$
9,635

 
 
Two fiscal quarters ended June 29, 2019
(dollars in thousands)
 
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Wholesale channel
 
$

 
$
504,458

 
$
65,530

 
$
569,988

Direct-to-consumer
 
800,182

 

 
105,272

 
905,454

 
 
$
800,182

 
$
504,458

 
$
170,802

 
$
1,475,442

 
 
 
 
 
 
 
 
 
Royalty income
 
$
6,443

 
$
10,012

 
$
1,724

 
$
18,179


Accounts Receivable from Customers and Licensees
The components of Accounts receivable, net, were as follows:
(dollars in thousands)
 
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Trade receivables from wholesale customers, net(*)
 
$
159,043

 
$
239,059

 
$
156,256

Royalties receivable
 
5,371

 
6,982

 
8,469

Tenant allowances and other receivables
 
15,188

 
16,247

 
12,273

Total gross receivables
 
$
179,602

 
$
262,288

 
$
176,998

Less:
 
 
 
 
 
 
Wholesale accounts receivable reserves
 
(14,024
)
 
(11,283
)
 
(8,822
)
Accounts receivable, net(*)
 
$
165,578

 
$
251,005

 
$
168,176


(*)
The Company reclassified $1.7 million and $1.6 million of customer support related items from Wholesale accounts receivable reserves into Trade receivables from wholesale customers, net for the periods ended December 28, 2019 and June 29, 2019, respectively.
Contract Assets and Liabilities
The Company's contract assets are not material.

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Contract Liabilities
The Company recognizes a contract liability when it has received consideration from a customer and has a future obligation to transfer goods to the customer. Total contract liabilities consisted of the following amounts:        
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Contract liabilities - current:


 


 
 
Unredeemed gift cards
$
15,667

 
$
17,563

 
$
13,804

Unredeemed customer loyalty rewards
4,664

 
5,615

 
5,610

Carter's credit card - upfront bonus(1)
714

 
714

 
714

Total contract liabilities - current(2)
$
21,045

 
$
23,892

 
$
20,128

(1)
Carter's credit card - upfront bonus - the Company received an upfront signing bonus from a third-party financial institution, which will be recognized as revenue on a straight-line basis over the term of the agreement. This amount reflects the current portion of this bonus to be recognized as revenue over the next twelve months.
(2)
Included with Other current liabilities on the Company's consolidated balance sheets.
NOTE 4 - LEASES
We have operating leases for retail stores, distribution centers, corporate offices, data centers, and certain equipment. The Company's leases generally have initial terms ranging from 1 year to 10 years, some of which may include options to extend the leases for up to 5 years, and some of which may include options to early terminate the lease.
As of June 27, 2020, the Company's finance leases were not material to the consolidated balance sheets, consolidated statements of operations, or statements of cash flows.
As a result of the COVID-19 pandemic, the Company suspended rent payments under the leases for our temporarily closed stores in North America. The Company has continued to recognize expense and has established an accrual for the fixed rent payments that were not made. As of June 27, 2020, the Company accrued $35.8 million in fixed rent payments. The accrued rent was included within accounts payable on the Company's consolidated balance sheets. The Company has resumed making the required rent payments under the leases for the stores that reopened as of the end of the fiscal quarter.
In the second quarter and first two quarters of fiscal 2020, the Company recorded operating lease asset impairment charges totaling $3.2 million and $4.7 million, respectively related to underperforming stores primarily as a result of decreased net revenues and cash flow projections resulting from the COVID-19 disruption and other facility and office closures. See Note 11, Fair Value Measurements, for further details on the fair value calculations for operating lease assets for the retail stores.
The following components of lease expense are included in Selling, general and administrative expenses on the Company's consolidated statements of operations for the second quarter and first two quarters of fiscal 2020 and 2019:
 
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Operating lease cost
 
$
45,527

 
$
44,688

 
$
91,950

 
$
87,907

Variable lease cost (*)
 
19,219

 
14,753

 
35,504

 
31,201

Net lease cost
 
$
64,746

 
$
59,441

 
$
127,454

 
$
119,108

(*)
Includes short-term leases, which are immaterial, and operating lease asset impairment charges
Supplemental balance sheet information related to leases was as follows:
 
 
Fiscal quarter ended
 
 
June 27, 2020
 
June 29, 2019
Weighted average remaining operating lease term (years)
 
5.7
 
6.2
Weighted average discount rate for operating leases
 
3.95%
 
4.45%

Cash paid for amounts included in the measurement of operating lease liabilities in the second quarter and first two quarters of fiscal 2020 was $47.6 million and $97.8 million, respectively. The total cash paid reflects the contractual amounts due to be

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

paid in cash. For the fiscal quarter ended June 27, 2020, the Company deferred cash payments of $35.8 million of these amounts, which are included in the statement of cash flows as part of the change in Accounts payable and other liabilities.
Cash paid for amounts included in the measurement of operating lease liabilities in the second quarter and two quarters of fiscal 2019 was $47.9 million and $95.2 million, respectively.
Non-cash transactions to recognize operating assets and liabilities for the second quarter and first two quarters of fiscal 2020 were $15.8 million and $45.2 million, respectively. Non-cash transactions to recognize operating assets and liabilities for the second quarter and first two quarters of fiscal 2019 were $34.4 million and $54.4 million, respectively.
As of June 27, 2020, the maturities of lease liabilities were as follows:
(dollars in thousands)
Operating leases
Remainder of 2020
$
96,877

2021
183,977

2022
157,716

2023
130,122

2024
105,001

After 2024
203,133

Total lease payments
$
876,826

Less: Interest
(93,098
)
Present value of lease liabilities(*)
$
783,728

(*)
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. We used the incremental borrowing rate on December 30, 2018, for operating leases that commenced prior to that date.
As of June 27, 2020, the minimum rental commitments for additional operating lease contracts that have not yet commenced, primarily for retail stores, are $12.6 million. These operating leases will commence between fiscal year 2020 and fiscal year 2023 with lease terms of 6 years to 10 years.
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of Accumulated other comprehensive loss consisted of the following:
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Cumulative foreign currency translation adjustments
$
(35,933
)
 
$
(26,522
)
 
$
(27,186
)
Pension and post-retirement obligations(*)
(9,112
)
 
(9,112
)
 
(9,375
)
Total accumulated other comprehensive loss
$
(45,045
)
 
$
(35,634
)
 
$
(36,561
)

(*)
Net of income taxes of $2.8 million, $2.8 million, and $2.9 million for the period ended June 27, 2020, December 28, 2019, and June 29, 2019, respectively.
During the first two quarters of both fiscal 2020 and fiscal 2019, no amounts were reclassified from Accumulated other comprehensive loss to the statement of operations.

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 – GOODWILL AND INTANGIBLE ASSETS
The balances and changes in the carrying amount of goodwill attributable to each segment were as follows:
(dollars in thousands)
U.S. Retail
 
U.S. Wholesale
 
International
 
Total
Balance at December 29, 2018
$
83,934

 
$
74,454

 
$
68,713

 
$
227,101

Foreign currency impact

 

 
1,759

 
1,759

Balance at June 29, 2019
$
83,934

 
$
74,454

 
$
70,472

 
$
228,860

 
 
 
 
 
 
 
 
Balance at December 28, 2019
$
83,934

 
$
74,454

 
$
70,638

 
$
229,026

Goodwill impairment(*)

 

 
(17,742
)
 
(17,742
)
Foreign currency impact

 

 
(2,711
)
 
(2,711
)
Balance at June 27, 2020
$
83,934

 
$
74,454

 
$
50,185

 
$
208,573

(*)
In the first quarter of fiscal 2020, a charge of $17.7 million was recorded to reflect the impairment of the value ascribed to the goodwill in the Other International reporting unit in the International segment.
A summary of the carrying value of the Company's intangible assets were as follows:
 
 
 
June 27, 2020
 
December 28, 2019
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
 
Gross amount
 
Accumulated amortization
 
Net amount
Carter's tradename
Indefinite
 
$
220,233

 
$

 
$
220,233

 
$
220,233

 
$

 
$
220,233

OshKosh tradename(1)
Indefinite
 
70,000

 

 
70,000

 
85,500

 

 
85,500

Skip Hop tradename(2)
Indefinite
 
15,000

 

 
15,000

 
26,000

 

 
26,000

Finite-life tradenames
5-20 years
 
3,911

 
1,127

 
2,784

 
3,911

 
1,002

 
2,909

Total tradenames, net
 
 
$
309,144


$
1,127

 
$
308,017

 
$
335,644

 
$
1,002

 
$
334,642

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Skip Hop customer relationships
15 years
 
$
47,300

 
$
10,245

 
$
37,055

 
$
47,300

 
$
8,657

 
$
38,643

Carter's Mexico customer relationships
10 years
 
2,814

 
919

 
1,895

 
3,258

 
775

 
2,483

Total customer relationships, net
 
 
$
50,114

 
$
11,164

 
$
38,950

 
$
50,558

 
$
9,432

 
$
41,126

(1)
In the first quarter of fiscal 2020, a charge of $13.6 million, $1.6 million, and $0.3 million was recorded on our indefinite-lived OshKosh tradename asset in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset.
(2)
In the first quarter of fiscal 2020, a charge of $6.8 million, $3.7 million, and $0.5 million was recorded on our indefinite-lived Skip Hop tradename asset in the U.S. Wholesale, International, and U.S. Retail segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived Skip Hop tradename asset. Fiscal 2019 includes a tradename impairment charge of $30.8 million on our indefinite-lived Skip Hop tradename asset.
 
 
 
June 29, 2019
(dollars in thousands)
Weighted-average useful life
 
Gross amount
 
Accumulated amortization
 
Net amount
Carter's tradename
Indefinite
 
$
220,233

 
$

 
$
220,233

OshKosh tradename
Indefinite
 
85,500

 

 
85,500

Skip Hop tradename
Indefinite
 
56,800

 

 
56,800

Finite-life tradenames
5-20 years
 
3,911

 
877

 
3,034

Total tradenames, net
 
 
$
366,444

 
$
877

 
$
365,567

 
 
 
 
 
 
 
 
Skip Hop customer relationships
15 years
 
$
47,300

 
$
7,068

 
$
40,232

Carter's Mexico customer relationships
10 years
 
3,209

 
616

 
2,593

Total customer relationships, net
 
 
$
50,509

 
$
7,684

 
$
42,825


The carrying values of goodwill and indefinite-lived tradename assets are subject to annual impairment reviews as of the last day of each fiscal year. Between annual assessments, impairment reviews may also be triggered by any significant events or changes in circumstances affecting our business. Due to the decrease in the Company's market capitalization, lower than

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

expected actual sales, and lower projected sales and profitability, primarily due to the impacts from the outbreak of COVID-19, the Company concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, the Company conducted interim quantitative impairment assessments of the goodwill ascribed to the Other International reporting unit recorded in connection with the allocation of goodwill to the newly created International segment as a result of the acquisition of Bonnie Togs in 2011 and on the value of the Company's indefinite-lived OshKosh and Skip Hop tradename assets that was recorded in connection with the acquisition of OshKosh B'Gosh Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively.
The goodwill impairment assessment for the Other International reporting unit was performed in accordance with ASC 350, "Intangibles--Goodwill and Other" ("ASC 350") and compares the carrying value of the Other International reporting unit to its fair value. Consistent with prior practice, the fair value of the Other International reporting unit was determined using discounted cash flows ("income approach") and relevant data from guideline public companies ("market approach"). As a result of this assessment, a goodwill impairment charge of $17.7 million was recorded to our Other International reporting unit in the International segment during the first quarter of fiscal 2020. The goodwill impairment charge recorded on our Other International reporting unit during the first quarter of fiscal 2020 included charges of $9.4 million, $5.2 million, and $3.1 million to Skip Hop, Carter's, and Carter's Mexico goodwill, respectively.
The OshKosh and Skip Hop indefinite-lived tradename asset assessments were performed in accordance with ASC 350 and were determined using a discounted cash flow analysis which examined the hypothetical cost savings that accrue as a result of not having to license the tradename from another owner. Based on these assessments, charges of $15.5 million and $11.0 million were recorded during the first quarter of fiscal 2020 on our indefinite-lived OshKosh and Skip Hop tradename assets, respectively. The charge recorded during the first quarter of fiscal 2020 on our indefinite-lived OshKosh tradename asset included charges of $13.6 million, $1.6 million, and $0.3 million in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset. The charge recorded on our indefinite-lived Skip Hop tradename asset during the first quarter of fiscal 2020 included charges of $6.8 million, $3.7 million, and $0.5 million in the U.S. Wholesale, International, and U.S. Retail segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived Skip Hop tradename asset. The carrying values of the Company's indefinite-lived OshKosh and Skip Hop tradename assets after the impairment charges and as of June 27, 2020 were $70.0 million and $15.0 million, respectively.
There were no impairments of goodwill or indefinite-lived or indefinite-lived intangible assets during the second quarter of fiscal 2020. Although the Company determined that no further impairment exists for the Company's other goodwill or indefinite-lived or definite-lived intangible assets, these assets could be at risk for impairment should global economic conditions continue to deteriorate as a result of COVID-19.
Amortization expense for intangible assets subject to amortization was approximately $0.9 million for both second fiscal quarters ended June 27, 2020 and June 29, 2019. Amortization expense was approximately $1.9 million for each of the first two quarters of fiscal 2020 and for the first two quarters of fiscal 2019.
The estimated amortization expense for the next five fiscal years is as follows:
(dollars in thousands)
Amortization expense
2021
$
3,694

2022
$
3,694

2023
$
3,652

2024
$
3,622

2025
$
3,622


NOTE 7 – COMMON STOCK
Open Market Share Repurchases
The total aggregate remaining capacity under outstanding repurchase authorizations as of June 27, 2020 was approximately $650.4 million, based on settled repurchase transactions. The authorizations have no expiration date.

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

The Company repurchased and retired shares in open market transactions in the following amounts for the fiscal periods indicated:
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Number of shares repurchased

 
545,620

 
474,684

 
1,005,877

Aggregate cost of shares repurchased (dollars in thousands)
$

 
$
52,477

 
$
45,255

 
$
92,443

Average price per share
$

 
$
96.18

 
$
95.34

 
$
91.90


On March 26, 2020, the Company announced, that in connection with the COVID-19 pandemic, it suspended its common stock share repurchase program. The timing and amount of any future repurchases will be determined by the Company based on its evaluation of market conditions, share price, other investment priorities, and other factors.
Dividends
In the first fiscal quarter ended March 28, 2020, the Company declared and paid cash dividends per share of $0.60. On May 1, 2020, in connection with the COVID-19 pandemic, the Company suspended its quarterly cash dividend. As a result, the Company did not declare or pay cash dividends in the second fiscal quarter ended June 27, 2020. The Board of Directors will evaluate future dividend declarations based on a number of factors, including business conditions, the Company's financial performance, and other considerations. In the second fiscal quarter and two fiscal quarters ended June 29, 2019, the Company declared and paid cash dividends per share of $0.50 and $1.00, respectively.
Provisions in the Company's secured revolving credit facility have the effect of restricting the Company's ability to pay cash dividends on, or make future repurchases of, its common stock through the date the Company delivers its financial statements and associated certificates relating to the third fiscal quarter of 2021, and could have the effect of restricting the Company's ability to do so thereafter, as described in the Company's Annual Report on Form 10-K for the 2019 fiscal year ended December 28, 2019, and in Note 8, Long-Term Debt.
NOTE 8 – LONG-TERM DEBT
Long-term debt consisted of the following:
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
5.500% Senior Notes due 2025
$
500,000

 
$

 
$

5.625% Senior Notes due 2027
500,000

 
500,000

 
500,000

Senior notes at amounts repayable
$
1,000,000

 
$
500,000

 
$
500,000

Less unamortized issuance-related costs for senior notes
(11,351
)
 
(5,328
)
 
(5,623
)
      Senior notes, net
$
988,649

 
$
494,672

 
$
494,377

Secured revolving credit facility
244,000

 
100,000

 
110,000

Total long-term debt, net
$
1,232,649

 
$
594,672

 
$
604,377


Secured Revolving Credit Facility
To improve the Company's cash position in light of the uncertainty and disruption related to COVID-19, the Company drew $639.0 million under its secured revolving credit facility in the month of March 2020, and in May 2020 repaid a portion of the outstanding borrowings with the net proceeds of a new $500 million senior notes offering, as discussed below, and cash on hand. As of June 27, 2020, the Company had $244.0 million in outstanding borrowings under its secured revolving credit facility, exclusive of $5.0 million of outstanding letters of credit. As of June 27, 2020, approximately $501.0 million was available for future borrowing. All outstanding borrowings under the Company's secured revolving credit facility are classified as non-current liabilities on the Company's consolidated balance sheets because of the contractual repayment terms under the credit facility.
On May 4, 2020, the Company, through its wholly owned subsidiary, The William Carter Company ("TWCC"), entered into Amendment No.2 ("Amendment") to its fourth amended and restated credit agreement. This Amendment provided for, among other things, a waiver of financial covenants through the balance of fiscal year 2020, revised covenant requirements through the third quarter of fiscal year 2021 and the ability to raise additional unsecured financing, at the Company’s discretion.

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

Among other things, the Amendment provides that the Consolidated Fixed Charge Coverage Ratio and Lease Adjusted Leverage Ratio covenants, in each case, as defined in the Amendment, are waived during the period from and including the second fiscal quarter of 2020 through and including the fourth fiscal quarter of 2020. Thereafter, the Lease Adjusted Leverage Ratio is set at 5.50:1.00 for the first fiscal quarter of 2021 and, during the remainder of 2021, gradually steps down to 4.00:1.00 for the fourth fiscal quarter of 2021 and, subject to the consummation of a Material Acquisition (as defined in the Amendment), thereafter. The Consolidated Fixed Charge Coverage Ratio is set at 1.25:1.00 for the first fiscal quarter of 2021 and, during the remainder of 2021 and, gradually steps back up to 1.85:1.00 for the fourth fiscal quarter of 2021 and, subject to the consummation of a Material Acquisition, thereafter.
In addition, the Amendment provides that during the period from May 4, 2020 through the date the Company delivers its financial statements and associated certificates relating to the third fiscal quarter of 2021, the Company must maintain a minimum liquidity (defined as cash-on-hand plus availability under its secured revolving credit facility) on the last day of each fiscal month of at least $700 million. Also, during this period, the availability of certain exceptions to the lien, investment, indebtedness, and restricted payment negative covenants (including those related to dividend payments and share repurchases) are limited or removed, and any incremental credit extensions and the possibility of a collateral and covenant release periods are suspended.
Additionally, the Amendment provides that, among other things during the period from May 4, 2020 through the date the Company delivers its financial statements and associated certificates relating to the third quarter of fiscal 2021, interest rate margins applicable to the secured revolving credit facility will increase to 2.125% for LIBOR rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 1.125% to 2.375%) and 1.125% for base rate loans (which may be adjusted based on a leverage-based pricing grid ranging from 0.125% to 1.375%). The Amendment also provides for a commitment fee initially equal to 0.35% per annum and ranging from 0.15% per annum to 0.40% per annum, based upon a leverage-based pricing grid, which is payable quarterly in arrears with respect to the average daily unused portion of the revolving loan commitments.
Approximately $1.2 million, including both bank fees and other third party expenses, has been capitalized in connection with the amendment and is being amortized over the remaining term of the secured revolving credit facility.
The interest rate margins applicable to our secured revolving credit facility as of June 27, 2020 were 2.125% for LIBOR rate loans and 1.125% for base rate loans.
As of June 27, 2020, U.S. dollar borrowings outstanding under the secured revolving credit facility accrued interest at a LIBOR rate plus the applicable margin, which resulted in a weighted-average borrowing rate of 3.13%. There were no foreign currency borrowings outstanding on June 27, 2020.
As of June 27, 2020, the Company was in compliance with the financial and other covenants under the secured revolving credit facility.
Senior Notes
On May 11, 2020, TWCC issued $500 million principal amount of senior notes at par, bearing interest at a rate of 5.500% per annum, and maturing on May 15, 2025, all of which were outstanding as of June 27, 2020. TWCC received net proceeds from the offering of the senior notes of approximately $494.5 million, after deducting underwriting fees, which TWCC used to repay borrowings outstanding under the Company's secured revolving credit facility. Approximately $6.5 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.
Additionally, as of June 27, 2020, the Company had outstanding $500 million principal amount of senior notes at par, bearing interest at a rate of 5.625% per annum, and maturing on March 15, 2027.

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 – STOCK-BASED COMPENSATION
The Company recorded stock-based compensation expense as follows:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Stock options
$
585

 
$
895

 
$
1,468

 
$
2,242

Restricted stock:
 
 
 
 
 
 
 
   Time-based awards
2,360

 
2,198

 
5,349

 
4,746

   Performance-based awards

 
940

 
(1,927
)
 
1,658

   Stock awards
1,595

 
1,161

 
1,595

 
1,161

Total
$
4,540

 
$
5,194

 
$
6,485

 
$
9,807


The Company recognizes compensation cost ratably over the applicable performance periods based on the estimated probability of achievement of its performance targets at the end of each period. During the first quarter of fiscal 2020, the achievement of performance target estimates was revised resulting in a $2.8 million reversal of previously recognized stock-based compensation expense.
NOTE 10 – INCOME TAXES
As of June 27, 2020, the Company had gross unrecognized income tax benefits of approximately $13.9 million, of which $11.9 million, if ultimately recognized, may affect the Company's effective income 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 June 27, 2020 is approximately $2.1 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 income tax rate for fiscal 2020 or fiscal 2021 along with the effective income 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 income tax benefits as a component of income tax expense. During the second fiscal quarter ended June 27, 2020 and June 29, 2019, interest expense on uncertain tax positions was not material. During each of the first two quarters of fiscal 2020 and fiscal 2019, interest expense recorded on uncertain tax positions was $0.5 million. The Company had approximately $2.8 million, $2.3 million, and $2.4 million of interest accrued on uncertain tax positions as of June 27, 2020, December 28, 2019, and June 29, 2019, respectively.
The Company early adopted the provisions of ASU 2019-12 in the first quarter of 2020 in order to simplify its income tax accounting disclosures during 2020 as a result of incurring an operating loss. The Company retrospectively adopted the provision related to the classification of taxes partially based on income and has determined that the adoption of this standard did not have a material impact on its prior period financial statements. The provisions related to intra period tax allocation and interim recognition of enactment of tax laws are being adopted on a prospective basis.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act, ("CARES Act") was signed into law. This law includes several taxpayer favorable provisions that may impact the Company, including an employee retention credit, relaxed interest expense limitations, a carryback of net operating losses, accelerated depreciation on certain store build out costs, and the deferral of employer FICA taxes. It is likely that this act will reduce the Company’s cash requirement for taxes over the balance of fiscal 2020.
NOTE 11 – 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 are included in Other assets on the accompanying consolidated balance sheets, and their aggregate fair values were approximately $16.4 million, $19.7 million, and $17.3 million at June 27, 2020, December 28, 2019, and June 29, 2019, respectively. These investments are classified as Level 1 within the fair value hierarchy. Gains on the investments in marketable securities were $1.1 million for the second fiscal quarter ended June 27, 2020. Gains on the investments in marketable securities were not material for the second fiscal

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

quarter ended June 29, 2019. Losses on the investments in marketable securities were $1.9 million for the two fiscal quarters ended June 27, 2020. Gains on the investments in marketable securities were $1.7 million for the two fiscal quarters ended June 29, 2019. These amounts are included in Other expense (income), net on the Company's consolidated statement of operations.
Borrowings
As of June 27, 2020, the fair value of the Company's $244.0 million in outstanding borrowings under its secured revolving credit facility approximated the carrying value.
The fair value of the Company's senior notes at June 27, 2020 was approximately $1.04 billion. The fair value of these senior notes with a notional value and carrying value (gross of debt cost) of $1.00 billion was estimated using a quoted price as provided in the secondary market, which considers the Company's credit risk and market related conditions, and is therefore within Level 2 of the fair value hierarchy.
Impairment of long-lived tangible assets
Long lived assets, which for us primarily consist of operating lease assets and store assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of cash flows of other groups of assets, which for our retail stores, is at the store level. For impaired assets, we recognize a loss equal to the difference between the carrying amount of the asset or asset group and its estimated fair value, which is recorded in Selling, general and administrative expenses on the Company's consolidated statements of operations. For operating lease assets, the Company determines the fair value of the assets by discounting the estimated market rental rates over the remaining term of the lease. These estimates can be affected by factors such as future store results, real estate demand, store closure plans, property specific discount rates, and economic conditions that can be difficult to predict. These fair value measurements qualify as level 3 measurements in the fair value hierarchy.
The impact of the COVID-19 pandemic resulted in a qualitative indication of impairment related to our store long-lived assets. During the second quarter and first two quarters of fiscal 2020, the Company recorded impairment charges of operating lease assets and other long-lived assets for our underperforming retail stores of $3.7 million and $5.0 million, respectively. The impairment charges were recorded in Selling, general and administrative expenses on the Company's consolidated statements of operations.
Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).
Due to the decrease in the Company's market capitalization, lower than expected actual sales, and lower projected sales and profitability due to the impacts from the outbreak of COVID-19, the Company concluded that impairment indicators existed for the first quarter of fiscal 2020. As a result, during the first quarter of fiscal 2020, the Company conducted interim quantitative impairment assessments on goodwill ascribed to the Other International reporting unit and on the value of the Company's indefinite-lived OshKosh and Skip Hop tradename assets that was recorded in connection with the acquisition of OshKosh B'Gosh, Inc. in July 2005 and Skip Hop Holdings, Inc. in February 2017, respectively.
Based on these assessments, a goodwill impairment charge of $17.7 million was recorded during the first quarter of fiscal 2020 to our Other International reporting unit in the International segment and charges of $15.5 million and $11.0 million were recorded on our indefinite-lived OshKosh and Skip Hop tradename assets, respectively. The charge recorded on our indefinite-lived OshKosh tradename asset during the first quarter of fiscal 2020 included charges of $13.6 million, $1.6 million, and $0.3 million in the U.S. Retail, U.S. Wholesale, and International segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived OshKosh tradename asset. The charge recorded on our indefinite-lived Skip Hop tradename asset during the first quarter of fiscal 2020 included charges of $6.8 million, $3.7 million, and $0.5 million in the U.S. Wholesale, International, and U.S. Retail segments, respectively, to reflect the impairment of the value ascribed to the indefinite-lived Skip Hop tradename asset. The carrying values of the Company's indefinite-lived OshKosh and Skip Hop tradename asset after the impairment charge and as of June 27, 2020 were $70.0 million and $15.0 million, respectively. See Note 6, Goodwill and Intangibles, for further details on the impairment charges and valuation methodologies.

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 – EARNINGS PER SHARE
The following is a reconciliation of basic common shares outstanding to diluted common and common equivalent shares outstanding:
 
Fiscal quarter ended
 
Two fiscal quarters ended
 
June 27, 2020
 
June 29, 2019
 
June 27, 2020
 
June 29, 2019
Weighted-average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic number of common shares outstanding
43,162,571

 
44,706,307

 
43,259,103

 
44,888,552

Dilutive effect of equity awards(*)
147,480

 
332,070

 

 
310,479

Diluted number of common and common equivalent shares outstanding
43,310,051

 
45,038,377

 
43,259,103

 
45,199,031

 
 
 
 
 
 
 
 
Basic net income (loss) per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

Income allocated to participating securities
(86
)
 
(396
)
 
(252
)
 
(685
)
Net income (loss) available to common shareholders
$
8,070

 
$
43,541

 
$
(70,790
)
 
$
77,718

 
 
 
 
 
 
 
 
Basic net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.73

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share (in thousands, except per share data):
 
 
 
 
 
 
 
Net income (loss)
$
8,156

 
$
43,937

 
$
(70,538
)
 
$
78,403

Income allocated to participating securities
(86
)
 
(395
)
 
(252
)
 
(683
)
Net income (loss) available to common shareholders
$
8,070

 
$
43,542

 
$
(70,790
)
 
$
77,720

 
 
 
 
 
 
 
 
Diluted net income (loss) per common share
$
0.19

 
$
0.97

 
$
(1.64
)
 
$
1.72

 
 
 
 
 
 
 
 
Anti-dilutive awards excluded from diluted earnings per share computation
957,041

 
311,300

 
559,470

 
513,742

(*)
For the two fiscal quarters ended June 27, 2020, there were 230,286 potentially dilutive equity awards that were excluded from the diluted earnings per share calculation because the Company incurred a net loss for this period and their inclusion would be anti-dilutive.
NOTE 13 – OTHER CURRENT AND LONG-TERM LIABILITIES
Other current liabilities that exceeded five percent of total current liabilities, at the end of any comparable period, were as follows:
(dollars in thousands)
June 27, 2020
 
December 28, 2019
 
June 29, 2019
Income taxes payable
$
2,389

 
$
23,269

 
$
7,600


There are no Other long-term liabilities that exceeded five percent of total liabilities, at the end of any comparable period.
NOTE 14 – 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.
The Company's contractual obligations and commitments include obligations associated with leases, the secured revolving credit agreement, senior notes, employee benefit plans, and facility consolidations/closures as disclosed in Note 16, Organizational Restructuring and Office Consolidation, to the consolidated financial statements.
The Company also has minimum inventory purchase commitments, including fabric commitments, with our suppliers which secure a portion of our material needs for future seasons. In light of the COVID-19 pandemic, some of our orders may be canceled. For the second fiscal quarter ended June 27, 2020, the Company reserved $18.8 million for adverse inventory and fabric purchase commitments.

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 15 – SEGMENT INFORMATION
The tables below presents certain information for our reportable segments and unallocated corporate expenses for the periods indicated:
 
Fiscal quarter ended
 
Two fiscal quarters ended
(dollars in thousands)
June 27, 2020
 
% of
total net sales
 
June 29, 2019
 
% of
total net sales
 
June 27,
2020
 
% of
Total Net Sales
 
June 29,
2019
 
% of
Total Net Sales
Net sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Retail
$
316,016

 
61.4
 %
 
$
423,128

 
57.6
 %
 
$
636,733

 
54.5
 %
 
$
800,182

 
54.2
 %
U.S. Wholesale
151,744

 
29.5
 %
 
229,091

 
31.2
 %
 
403,874

 
34.5
 %
 
504,458

 
34.2
 %
International    
47,125

 
9.1
 %
 
82,165

 
11.2
 %
 
128,750
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