CARTERS INC
For the period ended Dec 30, 2023. Filed Feb 27, 2024.
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FY2023 · Filed Feb 27, 2024
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Item 8. Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Carter’s, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Carter's, Inc. and its subsidiaries (the “Company”) as of December 30, 2023 and December 31, 2022, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders' equity and of cash flows for each of the three years in the period ended December 30, 2023, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 30, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition - U.S. Wholesale
As described in Notes 2 and 3 to the consolidated financial statements, the Company’s U.S. wholesale revenue was $1,014,584 thousand for the year ended December 30, 2023. The Company relies on shipping terms to determine when performance obligations are satisfied. The Company recognizes the revenue once control passes to the customer. When goods are shipped to wholesale customers “FOB Shipping Point,” control of the goods is transferred to the customer at the time of shipment. When goods are shipped to wholesale customers “FOB Destination,” control of the goods is transferred to the customer when the goods reach the customer. The transaction price is the amount of consideration the Company expects to receive under the arrangement. The Company is required to estimate variable consideration (if any) and to factor that estimation into the determination of the transaction price. The Company may offer sales incentives to wholesale customers including discounts.
The principal consideration for our determination that performing procedures relating to U.S. wholesale revenue recognition is a critical audit matter is a high degree of auditor effort in performing procedures related to the Company’s revenue recognition.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the recording of U.S. wholesale revenue at the transaction price once control passes to the customer. These procedures also included, among others (i) testing U.S. wholesale revenue transactions by evaluating the issuance and settlement of invoices and credit memos, tracing transactions not settled to a detailed listing of accounts receivable, and testing the completeness and accuracy of data provided by management; (ii) testing the completeness, accuracy, and occurrence of a sample of sales incentive transactions by obtaining and inspecting source documents, including support for the nature of the incentive, amount, and agreement with the customer; and (iii) confirming a sample of outstanding customer invoice balances as of December 30, 2023, and for confirmations not returned, obtaining and inspecting source documents, such as invoices, proof of shipment, and subsequent cash receipts.
/s/PricewaterhouseCoopers LLP
Atlanta, Georgia
February 27, 2024
We have served as the Company’s auditor since at least 1968. We have not been able to determine the specific year we began serving as auditor of the Company.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for share data)
| December 30, 2023 | December 31, 2022 | |
|---|---|---|
| ASSETS | ||
| Current assets: | ||
| Cash and cash equivalents | $351,213 | $211,748 |
| Accounts receivable, net of allowance for credit losses of $4,754 and $7,189, respectively | 183,774 | 198,587 |
| Finished goods inventories | 537,125 | 744,573 |
| Prepaid expenses and other current assets | 29,131 | 33,812 |
| Total current assets | 1,101,243 | 1,188,720 |
| Property, plant, and equipment, net | 183,111 | 189,822 |
| Operating lease assets | 528,407 | 492,335 |
| Tradenames, net | 298,186 | 298,393 |
| Goodwill | 210,537 | 209,333 |
| Customer relationships, net | 27,238 | 30,564 |
| Other assets | 29,891 | 30,548 |
| Total assets | $2,378,613 | $2,439,715 |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||
| Current liabilities: | ||
| Accounts payable | $242,149 | $264,078 |
| Current operating lease liabilities | 135,369 | 142,432 |
| Other current liabilities | 134,344 | 122,439 |
| Total current liabilities | 511,862 | 528,949 |
| Long-term debt, net | 497,354 | 616,624 |
| Deferred income taxes | 41,470 | 41,235 |
| Long-term operating lease liabilities | 448,810 | 421,741 |
| Other long-term liabilities | 33,867 | 34,757 |
| Total liabilities | $1,533,363 | $1,643,306 |
| Shareholders’ equity: | ||
| Preferred stock; par value $0.01 per share; 100,000 shares authorized; none issued or outstanding | $— | $— |
| Common stock, voting; par value $0.01 per share; 150,000,000 shares authorized; 36,551,221 and 37,692,132 shares issued and outstanding, respectively | 366 | 377 |
| Additional paid-in capital | — | — |
| Accumulated other comprehensive loss | (23,915) | (34,338) |
| Retained earnings | 868,799 | 830,370 |
| Total shareholders’ equity | 845,250 | 796,409 |
| Total liabilities and shareholders’ equity | $2,378,613 | $2,439,715 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
| For the fiscal year ended | |||
|---|---|---|---|
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |
| Net sales | $2,945,594 | $3,212,733 | $3,486,440 |
| Cost of goods sold | 1,549,659 | 1,740,375 | 1,824,166 |
| Gross profit | 1,395,935 | 1,472,358 | 1,662,274 |
| Royalty income, net | 21,410 | 25,820 | 28,681 |
| Selling, general, and administrative expenses | 1,093,940 | 1,110,007 | 1,193,876 |
| Intangible asset impairment | — | 9,000 | — |
| Operating income | 323,405 | 379,171 | 497,079 |
| Interest expense | 33,973 | 42,781 | 60,294 |
| Interest income | (4,776) | (1,261) | (1,096) |
| Other (income) expense, net | (8,034) | 975 | (409) |
| Loss on extinguishment of debt | — | 19,940 | — |
| Income before income taxes | 302,242 | 316,736 | 438,290 |
| Income tax provision | 69,742 | 66,698 | 98,542 |
| Net income | $232,500 | $250,038 | $339,748 |
| Basic net income per common share | $6.24 | $6.34 | $7.83 |
| Diluted net income per common share | $6.24 | $6.34 | $7.81 |
| Dividend declared and paid per common share | $3.00 | $3.00 | $1.40 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the fiscal year ended | |||
|---|---|---|---|
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |
| Net income | $232,500 | $250,038 | $339,748 |
| Other comprehensive income: | |||
| Unrealized gain on OshKosh defined benefit plan, net of tax of $(50), $(540), and $(1,220) for the fiscal years 2023, 2022, and 2021, respectively | 160 | 1,739 | 3,973 |
| Unrealized (loss) gain on Carter’s post-retirement benefit obligation, net of tax of $100, $(100), and $40 for fiscal years 2023, 2022, and 2021, respectively | (330) | 344 | (115) |
| Foreign currency translation adjustments | 10,593 | (7,524) | 5 |
| Total other comprehensive income (loss) | 10,423 | (5,441) | 3,863 |
| Comprehensive income | $242,923 | $244,597 | $343,611 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the fiscal year ended | |||
|---|---|---|---|
| December 30, 2023 | December 31, 2022 | January 1, 2022 | |
| Cash flows from operating activities: | |||
| Net income | $232,500 | $250,038 | $339,748 |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
| Depreciation of property, plant, and equipment | 60,407 | 61,543 | 90,378 |
| Amortization of intangible assets | 3,732 | 3,733 | 3,730 |
| (Recoveries of) provisions for excess and obsolete inventory, net | (10,439) | 5,039 | 4,042 |
| Intangible asset impairment | — | 9,000 | — |
| Gain on partial termination of corporate lease | (4,366) | — | — |
| Other asset impairments and loss on disposal of property, plant and equipment, net of recoveries | 3,078 | 372 | 213 |
| Amortization of debt issuance costs | 1,586 | 1,950 | 3,052 |
| Stock-based compensation expense | 19,463 | 21,879 | 21,029 |
| Unrealized foreign currency exchange (gain) loss, net | (207) | (78) | 371 |
| Provisions for doubtful accounts receivable from customers | 471 | 75 | 1,345 |
| Loss on extinguishment of debt | — | 19,940 | — |
| Unrealized (gain) loss on investments | (2,237) | 2,475 | (2,279) |
| Deferred income tax benefit | (600) | (740) | (13,532) |
| Other | — | 919 | — |
| Effect of changes in operating assets and liabilities: | |||
| Accounts receivable | 15,453 | 32,683 | (46,480) |
| Finished goods inventories | 222,920 | (106,763) | (52,914) |
| Prepaid expenses and other assets | 4,317 | 14,897 | 20,665 |
| Accounts payable and other liabilities | (16,946) | (228,601) | (101,110) |
| Net cash provided by operating activities | $529,132 | $88,361 | $268,258 |
| Cash flows from investing activities: | |||
| Capital expenditures | $(59,860) | $(40,364) | $(37,442) |
| Proceeds from sale of investments | — | — | 5,000 |
| Net cash used in investing activities | $(59,860) | $(40,364) | $(32,442) |
| Cash flows from financing activities: | |||
| Payment of senior notes due 2025 | $— | $(500,000) | $— |
| Premiums paid to extinguish debt | — | (15,678) | — |
| Payments of debt issuance costs | — | (2,420) | (223) |
| Borrowings under secured revolving credit facility | 70,000 | 240,000 | — |
| Payments on secured revolving credit facility | (190,000) | (120,000) | — |
| Repurchases of common stock | (100,034) | (299,667) | (299,339) |
| Dividends paid | (112,005) | (118,113) | (60,124) |
| Withholdings from vesting of restricted stock | (5,024) | (6,930) | (4,019) |
| Proceeds from exercise of stock options | 4,418 | 4,457 | 10,995 |
| Other | — | (919) | — |
| Net cash used in financing activities | $(332,645) | $(819,270) | $(352,710) |
| Net effect of exchange rate changes on cash and cash equivalents | 2,838 | (1,273) | (1,135) |
| Net increase (decrease) in cash and cash equivalents | $139,465 | $(772,546) | $(118,029) |
| Cash and cash equivalents, beginning of fiscal year | 211,748 | 984,294 | 1,102,323 |
| Cash and cash equivalents, end of fiscal year | $351,213 | $211,748 | $984,294 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Common stock - shares | Commonstock - $ | Additionalpaid-incapital | Accumulated other comprehensive(loss)income | Retainedearnings | Totalshareholders’equity | |
|---|---|---|---|---|---|---|
| Balance at January 2, 2021 | 43,780,075 | $438 | $17,752 | $(32,760) | $952,603 | $938,033 |
| Exercise of stock options | 178,803 | 1 | 10,994 | — | — | 10,995 |
| Withholdings from vesting of restricted stock | (41,523) | — | (4,019) | — | — | (4,019) |
| Restricted stock activity | 199,134 | 2 | (2) | — | — | — |
| Stock-based compensation expense | — | — | 21,029 | — | — | 21,029 |
| Repurchases of common stock | (2,967,619) | (30) | (45,754) | — | (253,555) | (299,339) |
| Cash dividends declared and paid of $1.40 per common share | — | — | — | — | (60,124) | (60,124) |
| Comprehensive income | — | — | — | 3,863 | 339,748 | 343,611 |
| Balance at January 1, 2022 | 41,148,870 | $411 | $— | $(28,897) | $978,672 | $950,186 |
| Exercise of stock options | 76,550 | — | 4,457 | — | — | 4,457 |
| Withholdings from vesting of restricted stock | (74,307) | — | (6,930) | — | — | (6,930) |
| Restricted stock activity | 288,206 | 3 | (3) | — | — | — |
| Stock-based compensation expense | — | — | 21,879 | — | — | 21,879 |
| Repurchases of common stock | (3,747,187) | (37) | (19,403) | — | (280,227) | (299,667) |
| Cash dividends declared and paid of $3.00 per common share | — | — | — | — | (118,113) | (118,113) |
| Comprehensive income | — | — | — | (5,441) | 250,038 | 244,597 |
| Balance at December 31, 2022 | 37,692,132 | $377 | $— | $(34,338) | $830,370 | $796,409 |
| Exercise of stock options | 64,700 | 1 | 4,417 | — | — | 4,418 |
| Withholdings from vesting of restricted stock | (64,952) | (1) | (4,652) | — | (371) | (5,024) |
| Restricted stock activity | 305,610 | 3 | (3) | — | — | — |
| Stock-based compensation expense | — | — | 19,463 | — | — | 19,463 |
| Repurchases of common stock | (1,446,269) | (14) | (18,325) | — | (81,695) | (100,034) |
| Cash dividends declared and paid of $3.00 per common share | — | — | — | — | (112,005) | (112,005) |
| Comprehensive income | — | — | — | 10,423 | 232,500 | 242,923 |
| Other | — | — | (900) | — | — | (900) |
| Balance at December 30, 2023 | 36,551,221 | $366 | $— | $(23,915) | $868,799 | $845,250 |
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.