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Hanesbrands 10-Q 2008
FORM 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 27, 2008
    or
o
  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: 001-32891
 
 
     
Maryland
(State of incorporation)
  20-3552316
(I.R.S. employer identification no.)
     
1000 East Hanes Mill Road
Winston-Salem, North Carolina
(Address of principal executive office)
  27105
(Zip 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 þ     No o
 
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of October 29, 2008, there were 93,480,321 shares of the registrant’s common stock outstanding.
 


 

 
 
                 
        Page
 
    1  
    1  
 
PART I
      Financial Statements (unaudited):        
        Condensed Consolidated Statements of Income for the quarters and nine months ended September 27, 2008 and September 29, 2007     2  
        Condensed Consolidated Balance Sheets at September 27, 2008 and December 29, 2007     3  
        Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2008 and September 29, 2007     4  
        Notes to Condensed Consolidated Financial Statements     5  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
      Quantitative and Qualitative Disclosures about Market Risk     50  
      Controls and Procedures     51  
      Controls and Procedures     51  
 
PART II
      Legal Proceedings     51  
      Risk Factors     51  
      Unregistered Sales of Equity Securities and Use of Proceeds     52  
      Defaults Upon Senior Securities     52  
      Submission of Matters to a Vote of Security Holders     52  
      Other Information     52  
      Exhibits     52  
    53  
    E-1  
 EX-10.3
 EX-10.4
 EX-10.5
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
 
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, Playtex, Bali, Just My Size, barely there, Wonderbra, C9 by Champion, L’eggs, Outer Banks and Stedman marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.


Table of Contents

 
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
 
Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 29, 2007, including under the caption “Risk Factors.”
 
All forward-looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 29, 2007, including under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
 
 
We file annual, quarterly and special reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the public reference facilities the SEC maintains at 100 F Street, N.E., Washington, D.C. 20549.
 
We make available free of charge at www.hanesbrands.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. You can also obtain copies of these materials at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically with it. By referring to our Web site, www.hanesbrands.com, we do not incorporate our Web site or its contents into this Quarterly Report on Form 10-Q.


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Table of Contents

 
PART I
 
Item 1.  Financial Statements
 
HANESBRANDS
 
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Net sales
  $ 1,153,635     $ 1,153,606     $ 3,213,653     $ 3,315,407  
Cost of sales
    811,851       792,587       2,145,949       2,234,352  
                                 
Gross profit
    341,784       361,019       1,067,704       1,081,055  
Selling, general and administrative expenses
    255,228       253,233       776,267       773,817  
Restructuring
    28,355       2,062       32,355       44,533  
                                 
Operating profit
    58,201       105,724       259,082       262,705  
Other expenses
          889             1,440  
Interest expense, net
    37,253       49,270       115,282       152,217  
                                 
Income before income tax expense
    20,948       55,565       143,800       109,048  
Income tax expense
    5,028       16,669       34,512       32,714  
                                 
Net income
  $ 15,920     $ 38,896     $ 109,288     $ 76,334  
                                 
Earnings per share:
                               
Basic
  $ 0.17     $ 0.41     $ 1.16     $ 0.79  
Diluted
  $ 0.17     $ 0.40     $ 1.14     $ 0.79  
Weighted average shares outstanding:
                               
Basic
    93,992       95,664       94,283       96,100  
Diluted
    95,018       96,615       95,483       96,682  
 
See accompanying notes to Condensed Consolidated Financial Statements.


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Table of Contents

HANESBRANDS
 
 
                 
    September 27,
    December 29,
 
    2008     2007  
 
Assets
               
Cash and cash equivalents
  $ 86,212     $ 174,236  
Trade accounts receivable, less allowances of $23,951 at September 27, 2008 and $31,642 at December 29, 2007
    562,937       575,069  
Inventories
    1,359,008       1,117,052  
Deferred tax assets and other current assets
    244,224       227,977  
                 
Total current assets
    2,252,381       2,094,334  
                 
Property, net
    562,963       534,286  
Trademarks and other identifiable intangibles, net
    155,879       151,266  
Goodwill
    318,112       310,425  
Deferred tax assets and other noncurrent assets
    338,303       349,172  
                 
Total assets
  $ 3,627,638     $ 3,439,483  
                 
                 
Liabilities and Stockholders’ Equity
               
Accounts payable
  $ 322,824     $ 289,166  
Accrued liabilities
    377,232       380,239  
Notes payable
    71,528       19,577  
                 
Total current liabilities
    771,584       688,982  
                 
Long-term debt
    2,315,250       2,315,250  
Other noncurrent liabilities
    159,870       146,347  
                 
Total liabilities
    3,246,704       3,150,579  
                 
Stockholders’ equity:
               
Preferred stock (50,000,000 authorized shares; $.01 par value) Issued and outstanding — None
           
Common stock (500,000,000 authorized shares; $.01 par value) Issued and outstanding — 93,355,527 at September 27, 2008 and 95,232,478 at December 29, 2007
    934       954  
Additional paid-in capital
    222,338       199,019  
Retained earnings
    199,641       117,849  
Accumulated other comprehensive loss
    (41,979 )     (28,918 )
                 
Total stockholders’ equity
    380,934       288,904  
                 
Total liabilities and stockholders’ equity
  $ 3,627,638     $ 3,439,483  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


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HANESBRANDS
 
(in thousands)
(unaudited)
 
                 
    Nine Months Ended  
    September 27,
    September 29,
 
    2008     2007  
 
Operating activities:
               
Net income
  $ 109,288     $ 76,334  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation
    68,930       95,405  
Amortization of intangibles
    8,683       4,516  
Restructuring
    (5,591 )     (3,446 )
Losses on early extinguishment of debt
          1,440  
Amortization of debt issuance costs
    4,523       4,937  
Stock compensation expense
    23,052       27,141  
Deferred taxes and other
    (6,329 )     (12,351 )
Changes in assets and liabilities, net of acquisition:
               
Accounts receivable
    11,565       (109,494 )
Inventories
    (242,711 )     38,121  
Other assets
    (17,068 )     23,539  
Accounts payable
    32,808       67,954  
Accrued liabilities
    (5,771 )     21,747  
                 
Net cash (used in) provided by operating activities
    (18,621 )     235,843  
                 
Investing activities:
               
Purchases of property, plant and equipment
    (123,319 )     (45,387 )
Acquisition of business
    (10,011 )     (17,380 )
Proceeds from sales of assets
    24,329       13,022  
Other
    (643 )     (575 )
                 
Net cash used in investing activities
    (109,644 )     (50,320 )
                 
Financing activities:
               
Principal payments on capital lease obligations
    (707 )     (914 )
Borrowings on notes payable
    316,958       29,969  
Repayments on notes payable
    (265,195 )     (26,845 )
Cost of debt issuance
    (69 )     (2,533 )
Borrowings on revolving loan facility
    524,000        
Repayments on revolving loan facility
    (524,000 )      
Repayments of debt under credit facilities
          (128,125 )
Decrease in bank overdraft 
          (834 )
Proceeds from stock options exercised
    2,200       5,464  
Stock repurchases
    (30,275 )     (44,473 )
Borrowings on accounts receivable securitization
    20,944        
Repayments on accounts receivable securitization
    (20,944 )      
Transaction with Sara Lee Corporation
    18,000        
Other
    (136 )     552  
                 
Net cash provided by (used in) financing activities
    40,776       (167,739 )
                 
Effect of changes in foreign exchange rates on cash
    (535 )     2,620  
                 
(Decrease) increase in cash and cash equivalents
    (88,024 )     20,404  
Cash and cash equivalents at beginning of year
    174,236       155,973  
                 
Cash and cash equivalents at end of period
  $ 86,212     $ 176,377  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
 
(1)   Basis of Presentation
 
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial position and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
 
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
 
During the second quarter ended June 28, 2008, the Company acquired a sewing operation in Thailand, resulting in approximately $3,600 of additional goodwill. The Company also added two sewing facilities in Vietnam during the second quarter ended June 28, 2008.
 
Certain prior year amounts in the condensed consolidated financial statements, none of which are material, have been reclassified to conform with the current year presentation. These reclassifications, which relate to changes in the classification of inventory, segment assets, segment depreciation and amortization expense, segment additions to long-lived assets and consolidating financial information, had no impact on the Company’s results of operations.
 
(2)   Recently Issued Accounting Pronouncements
 
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for the Company’s financial assets and liabilities on December 30, 2007. The FASB approved a one-year deferral of the adoption of SFAS 157 as it relates to non-financial assets and liabilities with the issuance in February 2008 of FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, as a result of which implementation by the Company is now required on January 4, 2009. The partial adoption of SFAS 157 in the first quarter ended March 29, 2008 had no material impact on the financial condition, results of operations or cash flows of the Company, but resulted in certain additional disclosures reflected in Note 9. The Company is in the process of evaluating the impact of SFAS 157 as it relates to its non-financial assets and liabilities.
 
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
and its effects. Under SFAS 141R, a company would be required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement would also require that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination be recognized in income from continuing operations in the period of the combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
 
 
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believe that the adoption of SFAS 160 will have a material impact on its results of operations or financial position.
 
 
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements of FASB Statement No. 133 about an entity’s derivative instruments and hedging activities to include more detailed qualitative disclosures and expanded quantitative disclosures. The provisions of SFAS 161 are effective for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS 161 will not have a material impact on the Company’s results of operations.


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
(3)   Earnings Per Share
 
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding during the third quarters and nine months ended September 27, 2008 and September 29, 2007. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock. The reconciliation of basic to diluted weighted average shares for the third quarters and nine months ended September 27, 2008 and September 29, 2007 is as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Basic weighted average shares
    93,992       95,664       94,283       96,100  
Effect of potentially dilutive securities:
                               
Stock options
    151       346       383       221  
Restricted stock units
    871       603       812       361  
Employee stock purchase plan
    4       2       5        
                                 
Diluted weighted average shares
    95,018       96,615       95,483       96,682  
                                 
 
Options to purchase 2,454 and 1,458 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the third quarter and nine months ended September 27, 2008, respectively.
 
Options to purchase 998 and 1,008 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the third quarter and nine months ended September 29, 2007, respectively.
 
(4)   Stock-Based Compensation
 
During the first quarter ended March 29, 2008, the Company granted options to purchase 1,340 shares of common stock pursuant to the Hanesbrands Inc. Omnibus Incentive Plan of 2006 (the “Omnibus Plan”) at an exercise price of $25.10 per share, which was the closing price of Hanesbrands’ stock on the date of grant. These options can be exercised over a term of seven years and vest ratably over one to three years. The fair value of each option granted during the first quarter ended March 29, 2008 was estimated as of the date of grant using the Black-Scholes option-pricing model using the following assumptions: volatility of 28%; expected terms of 3.8 — 4.5 years; dividend yield of 0%; and risk-free interest rates ranging from 2.45% to 2.64%. The Company uses the volatility of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions due to the limited trading history of the Company’s common stock since the Company’s spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006. The Company utilized the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the first quarter ended March 29, 2008. SEC Staff Accounting Bulletin No. 110, which was issued in December 2007, amends SEC Staff Accounting Bulletin No. 107 and gives a limited extension on using the simplified method for valuing stock option grants to eligible public companies that do not have sufficient historical exercise patterns on options granted to employees. The weighted average fair value of individual options granted during the first quarter ended March 29, 2008 was $7.04.
 
During the first quarter ended March 29, 2008, the Company granted 540 restricted stock units (“RSUs”) pursuant to the Omnibus Plan with a grant date fair value of $25.10 which was the closing price of Hanesbrands’ stock on the date of grant. During the third quarter ended September 27, 2008, the Company


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
granted 10 RSUs pursuant to the Omnibus Plan with a grant date fair value of $21.44 which was the closing price of Hanesbrands’ stock on the date of grant. Upon the achievement of defined service conditions, the RSUs are converted into shares of the Company’s common stock on a one-for-one basis and issued to the grantees. All RSUs vest solely upon continued future service to the Company. Share-based compensation expense for these awards is recognized over the period during which the grantees provide the requisite service to the Company.
 
During the third quarter and nine months ended September 27, 2008, 35 and 93 shares, respectively, were purchased under the Hanesbrands Inc. Employee Stock Purchase Plan of 2006 (the “ESPP”) by eligible employees. During the third quarter and nine months ended September 29, 2007, 33 and 46 shares, respectively, were purchased under the ESPP by eligible employees. The Company had 2,271 shares of common stock available for issuance under the ESPP as of September 27, 2008.
 
(5)   Restructuring
 
Since becoming an independent company, the Company has undertaken a variety of restructuring efforts in connection with its consolidation and globalization strategy designed to improve operating efficiencies and lower costs. As a result of these efforts, the Company expects to incur approximately $250,000 in restructuring and related charges over the three year period following the spin off from Sara Lee on September 5, 2006, of which approximately half is expected to be noncash. As of September 27, 2008, the Company has recognized approximately $173,000 in restructuring and related charges related to these efforts since September 5, 2006. Of these charges, approximately $70,000 relates to accelerated depreciation of buildings and equipment for facilities that have been or will be closed, approximately $68,000 relates to employee termination and other benefits, approximately $21,000 relates to lease termination and other costs and approximately $14,000 relates to write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate. Accelerated depreciation related to the Company’s manufacturing facilities and distribution centers that have been or will be closed is reflected in the “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statements of Income. The write-offs of stranded raw materials and work in process inventory are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income.
 
The impact of restructuring efforts on income before income tax expense is summarized as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Restructuring programs:
                               
Year ended January 3, 2009 restructuring actions
  $ 46,633     $     $ 52,069     $  
Year ended December 29, 2007 restructuring actions
    691       15,786       7,719       64,838  
Six months ended December 30, 2006 restructuring actions
    (3,430 )     (922 )     (3,417 )     11,677  
Year ended July 1, 2006 and prior restructuring actions
    12       (51 )     (53 )     (603 )
                                 
Decrease in income before income tax expense
  $ 43,906     $ 14,813     $ 56,318     $ 75,912  
                                 


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The following table illustrates where the costs associated with these actions are recognized in the Condensed Consolidated Statements of Income:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Cost of sales
  $ 18,038     $ 11,802     $ 25,229     $ 29,482  
Selling, general and administrative expenses
    (2,487 )     949       (1,266 )     1,897  
Restructuring
    28,355       2,062       32,355       44,533  
                                 
Decrease in income before income tax expense
  $ 43,906     $ 14,813     $ 56,318     $ 75,912  
                                 
 
Components of the restructuring actions are as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Accelerated depreciation
  $ 1,524     $ 12,565     $ 9,936     $ 31,193  
Employee termination and other benefits
    21,283       1,533       25,203       33,636  
Inventory write-offs
    14,027       186       14,027       186  
Noncancelable lease and other contractual obligations
    7,072       529       7,152       10,897  
                                 
    $ 43,906     $ 14,813     $ 56,318     $ 75,912  
                                 
 
Rollforward of accrued restructuring is as follows:
 
         
    Nine Months Ended  
    September 27,
 
    2008  
 
Beginning accrual
  $ 23,350  
Restructuring expenses
    36,636  
Cash payments
    (24,625 )
Adjustments to restructuring expenses
    (5,662 )
         
Ending accrual
  $ 29,699  
         
 
The accrual balance as of September 27, 2008 is comprised of $29,139 in current accrued liabilities, primarily related to employee termination and other benefits, and $560 in other noncurrent liabilities, primarily related to lease termination payments, in the Condensed Consolidated Balance Sheet.
 
Adjustments to previous estimates are primarily attributable to employee termination and other benefits and lease termination costs and resulted from actual costs to settle obligations being lower than expected. The adjustments were reflected in the “Restructuring” line of the Condensed Consolidated Statements of Income.
 
 
During the nine months ended September 27, 2008, the Company approved actions to close 11 manufacturing facilities and two distribution centers and eliminate approximately 9,400 positions in El Salvador, Mexico, Costa Rica, Honduras and the United States. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations in Asia, the Caribbean Basin and Central America. The distribution capacity will be relocated to the Company’s West Coast distribution facility in California in order to expand capacity for goods


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
the Company sources from Asia. The Company recorded charges of $46,633 and $52,069 in the third quarter and nine months ended September 27, 2008, respectively. The Company recognized $21,741 and $27,099 in the third quarter and nine months ended September 27, 2008, respectively, which represents employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group, $1,734 and $1,812 in the third quarter and nine months ended September 27, 2008, respectively, for accelerated depreciation of buildings and equipment, $9,131 in each of the third quarter and nine months ended September 27, 2008 for noncancelable lease and other contractual obligations related to the closure of certain manufacturing facilities and $14,027 in each of the third quarter and nine months ended September 27, 2008 for write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of certain manufacturing facilities. These charges are reflected in the “Restructuring” and “Cost of sales” lines of the Condensed Consolidated Statement of Income. All actions are expected to be completed within a 12-month period.
 
(6)   Inventories
 
Inventories consisted of the following:
 
                 
    September 27,
    December 29,
 
    2008     2007  
 
Raw materials
  $ 187,726     $ 176,758  
Work in process
    141,536       122,724  
Finished goods
    1,029,746       817,570  
                 
    $ 1,359,008     $ 1,117,052  
                 
 
(7)   Allowances for Trade Accounts Receivable
 
The changes in the Company’s allowance for doubtful accounts and allowance for chargebacks and other deductions for the third quarter and nine months ended September 27, 2008 are as follows:
 
                         
          Allowance for
       
    Allowance for
    Chargebacks
       
    Doubtful
    and Other
       
    Accounts     Deductions     Total  
 
Balance at December 29, 2007:
  $ 9,328     $ 22,314     $ 31,642  
Charged to expenses
    84       3,419       3,503  
Deductions and write-offs
    (3,311 )     (12,059 )     (15,370 )
                         
Balance at March 29, 2008:
    6,101       13,674       19,775  
                         
Charged to expenses
    1,334       2,564       3,898  
Deductions and write-offs
    (753 )     (3,593 )     (4,346 )
                         
Balance at June 28, 2008:
    6,682       12,645       19,327  
                         
Charged to expenses
    7,071       69       7,140  
Deductions and write-offs
    (468 )     (2,048 )     (2,516 )
                         
Balance at September 27, 2008:
  $ 13,285     $ 10,666     $ 23,951  
                         
 
Charges to the allowance for doubtful accounts are reflected in the “Selling, general and administrative expenses” line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the “Net sales” line of the Condensed Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease income, represent write-offs of previously reserved accounts receivables and allowed customer chargebacks and deductions against gross accounts receivable.


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
(8)   Long-Term Debt
 
The Company had the following long-term debt at September 27, 2008 and December 29, 2007:
 
                             
    Interest
                 
    Rate as of
    Principal Amount      
    September 27,
    September 27,
    December 29,
     
    2008     2008     2007     Maturity Date
 
Senior Secured Credit Facility:
                           
Term A
    4.15 %   $ 139,000     $ 139,000     September 2012
Term B
    4.55 %     976,250       976,250     September 2013
Revolving Loan Facility
    5.50 %               September 2011
Second Lien Credit Facility
    6.55 %     450,000       450,000     March 2014
Floating Rate Senior Notes
    6.51 %     500,000       500,000     December 2014
Accounts Receivable Securitization
    3.24 %     250,000       250,000     November 2010
                             
            $ 2,315,250     $ 2,315,250      
                             
 
As of September 27, 2008, the Company had $0 outstanding under the Senior Secured Credit Facility’s $500,000 Revolving Loan Facility and $57,139 of standby and trade letters of credit issued and outstanding under this facility.
 
Availability of funding under the accounts receivable securitization depends primarily upon the eligible outstanding receivables balance. As of September 27, 2008, the Company had $250,000 outstanding under the accounts receivable securitization. The total amount of receivables used as collateral for the accounts receivable securitization was $481,720 and $495,245 at September 27, 2008 and December 29, 2007, respectively, and is reported on the Company’s Condensed Consolidated Balance Sheets in trade accounts receivables, less allowances.
 
During the third quarter and nine months ended September 29, 2007, the Company recognized $889 and $1,440, respectively, of losses on early extinguishment of debt related to unamortized debt issuance costs on the Senior Secured Credit Facility as a result of prepayments of $50,000 of principal in June 2007 and $75,000 of principal made in September 2007. These losses are reflected in the “Other expenses” line of the Condensed Consolidated Statements of Income.
 
On August 21, 2008, the Company entered into a Second Amendment (the “Second Amendment”) to the Senior Secured Credit Facility dated as of September 5, 2006 and a First Amendment (the “First Amendment”) to the Second Lien Credit Facility dated as of September 5, 2006. Pursuant to the Second Amendment and the First Amendment, the amount of unsecured indebtedness which the Company and its subsidiaries that are obligors pursuant to the Senior Secured Credit Facility and the Second Lien Credit Facility, respectively, may incur under senior notes was increased from $500,000 to $1,000,000. The provisions of the Senior Secured Credit Facility and the Second Lien Credit Facility that require the proceeds of the issuance of any such notes be applied to repay amounts due with respect to these Credit Facilities, and specify how any such proceeds will be applied, remain unchanged.
 
(9)   Fair Value of Financial Assets and Liabilities
 
The Company has adopted the provisions of SFAS 157 as of December 30, 2007 for its financial assets and liabilities. Although having partially adopted SFAS 157 has had no material impact on its financial condition, results of operations or cash flows, the Company is now required to provide additional disclosures


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
as part of its financial statements. SFAS 157 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in SFAS 157. The three valuation techniques are as follows:
 
  •  Market approach — prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
  •  Cost approach — amount that would be required to replace the service capacity of an asset or replacement cost.
 
  •  Income approach — techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
 
The Company primarily applies the market approach for commodity derivatives and the income approach for interest rate and foreign currency derivatives for recurring fair value measurements and attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
 
As of September 27, 2008, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to interest rates, foreign exchange rates and cotton. The fair values of cotton derivatives are determined based on quoted prices in public markets and are categorized as Level 1. The fair values of interest rate and foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2. The Company does not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the third quarter and nine months ended September 27, 2008. There were no changes during the third quarter and nine months ended September 27, 2008 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis.
 
The following table sets forth by level within SFAS 157’s fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis at September 27, 2008. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
                         
    Assets (Liabilities) at Fair Value as of September 27, 2008
    Quoted Prices
       
    In Active
  Significant
   
    Markets for
  Other
  Significant
    Identical
  Observable
  Unobservable
    Assets
  Inputs
  Inputs
    (Level 1)   (Level 2)   (Level 3)
 
Derivative contracts, net
  $     $ (23,309 )   $  
                         
Total
  $     $ (23,309 )   $  
                         


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The determination of fair values above incorporates various factors required under SFAS 157. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements, but also the impact of the Company’s nonperformance risk on its liabilities.
 
(10)   Comprehensive Income
 
SFAS No. 130, Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, amounts amortized into net periodic benefit cost as required by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, and unrealized gains and losses on qualifying cash flow hedges, are combined, net of their related tax effect, to arrive at comprehensive income. The Company’s comprehensive income is as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Net income
  $ 15,920     $ 38,896     $ 109,288     $ 76,334  
Translation adjustments
    (8,196 )     9,389       (5,506 )     17,023  
Net unrealized loss on qualifying cash flow hedges, net of tax benefit of $(1,297), $(3,558), $(1,443), and $(824), respectively
    (2,038 )     (5,589 )     (2,267 )     (1,295 )
Recognition of loss from pension plan curtailment, net of tax benefit of $(547)
    859             859        
Postretirement income released through other comprehensive income, net of tax of $842
          (1,323 )           (1,323 )
Amounts amortized into net periodic income:
                               
Prior service cost (benefit), net of tax (benefit) of $(4), $778, $(12) and $2,336, respectively
    6       (1,223 )     18       (3,669 )
Actuarial loss (gain), net of tax (benefit) of $(15), $754, $(45) and $24, respectively
    24       (1,184 )     72       (37 )
                                 
Comprehensive income
  $ 6,575     $ 38,966     $ 102,464     $ 87,033  
                                 
 
(11)   Income Taxes
 
For the third quarters and nine months ended September 27, 2008 and September 29, 2007, income taxes have been computed consistent with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.”
 
The difference in the estimated annual effective income tax rates of 24% for the third quarter and nine months ended September 27, 2008 and 30% for the third quarter and nine months ended September 29, 2007 and the U.S. statutory rate of 35% is primarily attributable to unremitted earnings of foreign subsidiaries taxed


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
at rates less than the U.S. statutory rate. The Company’s estimated annual effective tax rate is reflective of its strategic initiative to make substantial capital investments outside the United States in its global supply chain in 2008.
 
Within 180 days after Sara Lee filed its final consolidated tax return for the period that includes September 5, 2006, Sara Lee was required to deliver to the Company a computation of the amount of deferred taxes attributable to the Company’s United States and Canadian operations that would be included on the Company’s balance sheet as of September 6, 2006. If substituting the amount of deferred taxes as finally determined for the amount of estimated deferred taxes that were included on that balance sheet at the time of the spin off causes a decrease in the net book value reflected on that balance sheet, then Sara Lee will be required to pay the Company the amount of such decrease. If such substitution causes an increase in the net book value reflected on that balance sheet, then the Company will be required to pay Sara Lee the amount of such increase. Although the final settlement of any amounts due has not been determined, during the second quarter ended June 28, 2008, the Company received a preliminary cash installment of $18,000 from Sara Lee.
 
(12)   Business Segment Information
 
The Company’s operations are managed and reported in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these businesses.
 
The types of products and services from which each reportable segment derives its revenues are as follows:
 
  •  Innerwear sells basic branded products that are replenishment in nature under the product categories of women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear.
 
  •  Outerwear sells basic branded products that are seasonal in nature under the product categories of casualwear and activewear.
 
  •  Hosiery sells products in categories such as pantyhose and knee highs.
 
  •  International relates to the Latin America, Asia, Canada and Europe geographic locations which sell products that span across the Innerwear, Outerwear and Hosiery reportable segments.
 
  •  Other is comprised of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and generate break even margins.
 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, amortization of trademarks and other identifiable intangibles and restructuring and related accelerated depreciation charges and inventory write-offs. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 29, 2007.


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Certain prior year segment assets, depreciation and amortization expense and additions to long-lived assets disclosures have been revised to conform to the current year presentation.
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Net sales:
                               
Innerwear
  $ 650,372     $ 635,167     $ 1,830,437     $ 1,917,118  
Outerwear
    348,467       349,352       880,809       896,583  
Hosiery
    50,197       64,120       166,672       189,215  
International
    116,581       103,341       352,120       303,119  
Other
    4,769       13,587       20,064       46,629  
                                 
Total segment net sales(1)
    1,170,386       1,165,567       3,250,102       3,352,664  
Intersegment(2)
    (16,751 )     (11,961 )     (36,449 )     (37,257 )
                                 
Total net sales
  $ 1,153,635     $ 1,153,606     $ 3,213,653     $ 3,315,407  
                                 
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Segment operating profit:
                               
Innerwear
  $ 71,097     $ 63,173     $ 204,714     $ 243,821  
Outerwear
    19,243       36,051       55,587       54,453  
Hosiery
    13,081       18,670       52,944       52,849  
International
    14,010       9,616       47,662       34,321  
Other
    314       (306 )     304       (17 )
                                 
Total segment operating profit
    117,745       127,204       361,211       385,427  
Items not included in segment operating profit:
                               
General corporate expenses
    (12,593 )     (5,225 )     (37,128 )     (42,294 )
Amortization of trademarks and other identifiable intangibles
    (3,045 )     (1,442 )     (8,683 )     (4,516 )
Restructuring
    (28,355 )     (2,062 )     (32,355 )     (44,533 )
Inventory write-offs included in cost of sales
    (14,027 )     (186 )     (14,027 )     (186 )
Accelerated depreciation included in cost of sales
    (4,011 )     (11,616 )     (11,202 )     (29,296 )
Accelerated depreciation included in selling, general and administrative expenses
    2,487       (949 )     1,266       (1,897 )
                                 
Total operating profit
    58,201       105,724       259,082       262,705  
Other expenses
          (889 )           (1,440 )
Interest expense, net
    (37,253 )     (49,270 )     (115,282 )     (152,217 )
                                 
Income before income tax expense
  $ 20,948     $ 55,565     $ 143,800     $ 109,048  
                                 
 


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                 
    September 27,
    December 29,
 
    2008     2007  
 
Assets:
               
Innerwear
  $ 1,341,991     $ 1,247,441  
Outerwear
    909,161       754,178  
Hosiery
    99,191       97,804  
International
    231,379       232,142  
Other
    11,733       16,807  
                 
      2,593,455       2,348,372  
Corporate(3)
    1,034,183       1,091,111  
                 
Total assets
  $ 3,627,638     $ 3,439,483  
                 
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Depreciation and amortization expense:
                               
Innerwear
  $ 10,610     $ 9,970     $ 32,642     $ 32,611  
Outerwear
    5,652       6,152       18,461       18,693  
Hosiery
    1,441       2,444       4,626       7,823  
International
    583       1,129       1,755       3,173  
Other
    198       668       793       1,564  
                                 
      18,484       20,363       58,277       63,864  
Corporate
    4,169       13,295       19,336       36,057  
                                 
Total depreciation and amortization expense
  $ 22,653     $ 33,658     $ 77,613     $ 99,921  
                                 
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Additions to long-lived assets:
                               
Innerwear
  $ 25,377     $ 10,297     $ 51,880     $ 19,824  
Outerwear
    21,217       6,603       53,357       10,263  
Hosiery
    9       188       327       1,286  
International
    724       456       1,866       1,335  
Other
    16       578       30       637  
                                 
      47,343       18,122       107,460       33,345  
Corporate
    2,426       8,977       15,859       12,042  
                                 
Total additions to long-lived assets
  $ 49,769     $ 27,099     $ 123,319     $ 45,387  
                                 
 
 
(1) Includes sales between segments. Such sales are at transfer prices that are at cost plus markup or at prices equivalent to market value.

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(2) Intersegment sales included in the segments’ net sales are as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    September 27,
    September 29,
    September 27,
    September 29,
 
    2008     2007     2008     2007  
 
Innerwear
  $ 4,270     $ 1,670     $ 6,468     $ 5,057  
Outerwear
    8,538       5,475       19,303       17,254  
Hosiery
    3,603       4,124       9,293       12,692  
International
    340       692       1,385       2,254  
Other
                       
                                 
Total
  $ 16,751     $ 11,961     $ 36,449     $ 37,257  
                                 
 
 
(3) Principally cash and equivalents, certain fixed assets, net deferred tax assets, goodwill, trademarks and other identifiable intangibles, and certain other noncurrent assets.
 
(13)   Consolidating Financial Information
 
In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes. The following presents the condensed consolidating financial information separately for:
 
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
 
(ii) Guarantor subsidiaries, on a combined basis, as specified in the indenture governing the Floating Rate Senior Notes;
 
(iii) Non-guarantor subsidiaries, on a combined basis;
 
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate intercompany profit in inventory, (c) eliminate the investments in our subsidiaries and (d) record consolidating entries; and
 
(v) Parent Company, on a consolidated basis.
 
The Floating Rate Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is wholly owned, directly or indirectly, by Hanesbrands Inc. Each entity in the consolidating financial information follows the same accounting policies as described in the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 29, 2007, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 
Certain prior period amounts have been reclassified to conform to the current year presentation and legal entity structure relating to the classification of the investment in subsidiary balances and related equity in earnings of subsidiaries.
 


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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,253,006     $ 112,281     $ 770,153     $ (981,805 )   $ 1,153,635  
Cost of sales
    953,856       42,439       683,669       (868,113 )     811,851  
                                         
Gross profit
    299,150       69,842       86,484       (113,692 )     341,784  
Selling, general and administrative expenses
    205,633       17,566       32,146       (117 )     255,228  
Restructuring
    24,036       139       4,180             28,355  
                                         
Operating profit (loss)
    69,481       52,137       50,158       (113,575 )     58,201  
Equity in earnings (loss) of subsidiaries
    (32,753 )     45,678             (12,925 )      
Interest expense, net
    24,964       7,733       4,543       13       37,253  
                                         
Income (loss) before income tax expense (benefit)
    11,764       90,082       45,615       (126,513 )     20,948  
Income tax expense (benefit)
    (4,156 )     3,938       5,246             5,028  
                                         
Net income (loss)
  $ 15,920     $ 86,144     $ 40,369     $ (126,513 )   $ 15,920  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended September 29, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,143,537     $ 229,998     $ 621,840     $ (841,769 )   $ 1,153,606  
Cost of sales
    878,409       164,846       545,064       (795,732 )     792,587  
                                         
Gross profit
    265,128       65,152       76,776       (46,037 )     361,019  
Selling, general and administrative expenses
    199,450       (54,260 )     (16,162 )     124,205       253,233  
Restructuring
    905       67       1,090             2,062  
                                         
Operating profit (loss)
    64,773       119,345       91,848       (170,242 )     105,724  
Equity in earnings (loss) of subsidiaries
    31,496       37,420             (68,916 )      
Other expenses
    889                         889  
Interest expense, net
    38,797       10,633       (168 )     8       49,270  
                                         
Income (loss) before income tax expense (benefit)
    56,583       146,132       92,016       (239,166 )     55,565  
Income tax expense (benefit)
    17,687       6,404       (7,422 )           16,669  
                                         
Net income (loss)
  $ 38,896     $ 139,728     $ 99,438     $ (239,166 )   $ 38,896  
                                         
 

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Nine Months Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 3,362,897     $ 321,419     $ 2,176,844     $ (2,647,507 )   $ 3,213,653  
Cost of sales
    2,626,383       125,794       1,910,886       (2,517,114 )     2,145,949  
                                         
Gross profit
    736,514       195,625       265,958       (130,393 )     1,067,704  
Selling, general and administrative expenses
    651,345       56,566       67,911       445       776,267  
Restructuring
    23,942       266       8,147             32,355  
                                         
Operating profit (loss)
    61,227       138,793       189,900       (130,838 )     259,082  
Equity in earnings (loss) of subsidiaries
    132,451       125,829             (258,280 )      
Interest expense, net
    76,750       24,595       13,931       6       115,282  
                                         
Income (loss) before income tax expense
    116,928       240,027       175,969       (389,124 )     143,800  
Income tax expense
    7,640       9,453       17,419             34,512  
                                         
Net income (loss)
  $ 109,288     $ 230,574     $ 158,550     $ (389,124 )   $ 109,288  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Nine Months Ended September 29, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 3,284,987     $ 660,117     $ 1,863,661     $ (2,493,358 )   $ 3,315,407  
Cost of sales
    2,498,548       485,058       1,644,007       (2,393,261 )     2,234,352  
                                         
Gross profit
    786,439       175,059       219,654       (100,097 )     1,081,055  
Selling, general and administrative expenses
    660,861       (51,777 )     40,212       124,521       773,817  
Restructuring
    43,466       72       995             44,533  
                                         
Operating profit (loss)
    82,112       226,764       178,447       (224,618 )     262,705  
Equity in earnings (loss) of subsidiaries
    132,846       104,184             (237,030 )      
Other expenses
    1,440                         1,440  
Interest expense, net
    121,041       31,903       (731 )     4       152,217  
                                         
Income (loss) before income tax expense
    92,477       299,045       179,178       (461,652 )     109,048  
Income tax expense
    16,143       10,355       6,216             32,714  
                                         
Net income (loss)
  $ 76,334     $ 288,690     $ 172,962     $ (461,652 )   $ 76,334  
                                         
 

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 34,960     $ 1,720     $ 49,532     $     $ 86,212  
Trade accounts receivable
    (6,359 )     6,959       564,055       (1,718 )     562,937  
Inventories
    1,116,124       54,091       334,380       (145,587 )     1,359,008  
Deferred tax assets and other current assets
    198,721       8,232       39,456       (2,185 )     244,224  
                                         
Total current assets
    1,343,446       71,002       987,423       (149,490 )     2,252,381  
                                         
Property, net
    236,731       12,830       313,402             562,963  
Trademarks and other identifiable intangibles, net
    34,296       115,949       5,634             155,879  
Goodwill
    232,882       16,934       68,296             318,112  
Investments in subsidiaries
    537,675       673,309             (1,210,984 )      
Deferred tax assets and other noncurrent assets
    199,499       348,357       (131,439 )     (78,114 )     338,303  
                                         
Total assets
  $ 2,584,529     $ 1,238,381     $ 1,243,316     $ (1,438,588 )   $ 3,627,638  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 155,493     $ 3,188     $ 78,496     $ 85,647     $ 322,824  
Accrued liabilities
    287,553       29,845       62,468       (2,634 )     377,232  
Notes payable
                71,528             71,528  
                                         
Total current liabilities
    443,046       33,033       212,492       83,013       771,584  
                                         
Long-term debt
    1,615,250       450,000       250,000             2,315,250  
Other noncurrent liabilities
    145,299       1,845       8,302       4,424       159,870  
                                         
Total liabilities
    2,203,595       484,878       470,794       87,437       3,246,704  
Stockholders’ equity
    380,934       753,503       772,522       (1,526,025 )     380,934  
                                         
Total liabilities and stockholders’ equity
  $ 2,584,529     $ 1,238,381     $ 1,243,316     $ (1,438,588 )   $ 3,627,638  
                                         
 

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    December 29, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 84,476     $ 6,329     $ 83,431     $     $ 174,236  
Trade accounts receivable
    (13,135 )     4,389       586,327       (2,512 )     575,069  
Inventories
    827,312       47,443       281,224       (38,927 )     1,117,052  
Deferred tax assets and other current assets
    196,451       3,888       30,013       (2,375 )     227,977  
                                         
Total current assets
    1,095,104       62,049       980,995       (43,814 )     2,094,334  
                                         
Property, net
    286,081       6,979       241,226             534,286  
Trademarks and other identifiable intangibles, net
    25,955       119,682       5,629             151,266  
Goodwill
    232,882       16,934       60,609             310,425  
Investments in subsidiaries
    424,746       585,168             (1,009,914 )      
Deferred tax assets and other noncurrent assets
    386,070       249,621       (232,117 )     (54,402 )     349,172  
                                         
Total assets
  $ 2,450,838     $ 1,040,433     $ 1,056,342     $ (1,108,130 )   $ 3,439,483  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 127,887     $ 4,344     $ 71,288     $ 85,647     $ 289,166  
Accrued liabilities
    299,078       22,537       61,294       (2,670 )     380,239  
Notes payable
                19,577             19,577  
                                         
Total current liabilities
    426,965       26,881       152,159       82,977       688,982  
                                         
Long-term debt
    1,615,250       450,000       250,000             2,315,250  
Other noncurrent liabilities
    119,719       1,773       19,854       5,001       146,347  
                                         
Total liabilities
    2,161,934       478,654       422,013       87,978       3,150,579  
Stockholders’ equity
    288,904       561,779       634,329       (1,196,108 )     288,904  
                                         
Total liabilities and stockholders’ equity
  $ 2,450,838     $ 1,040,433     $ 1,056,342     $ (1,108,130 )   $ 3,439,483  
                                         
 

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Nine Months Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ (28,878 )   $ 133,333     $ 136,650     $ (259,726 )   $ (18,621 )
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (25,211 )     (8,852 )     (89,256 )           (123,319 )
Acquisition of business
                (10,011 )           (10,011 )
Proceeds from sales of assets
    20,059       38       4,232             24,329  
Other
    (89 )                 (554 )     (643 )
                                         
Net cash used in investing activities
    (5,241 )     (8,814 )     (95,035 )     (554 )     (109,644 )
                                         
Financing activities:
                                       
Principal payments on capital lease obligations
    (700 )           (7 )           (707 )
Borrowings on notes payable
                316,958             316,958  
Repayments on notes payable
                (265,195 )           (265,195 )
Cost of debt issuance
    (48 )     (10 )     (11 )           (69 )
Borrowings on revolving loan facility
    524,000                         524,000  
Repayments on revolving loan facility
    (524,000 )                       (524,000 )
Proceeds from stock options exercised
    2,200                         2,200  
Stock repurchases
    (30,275 )                       (30,275 )
Borrowings on accounts receivable securitization
                20,944             20,944  
Repayments on accounts receivable securitization
                (20,944 )           (20,944 )
Transaction with Sara Lee Corporation
    18,000                         18,000  
Other
    (136 )                       (136 )
Net transactions with related entities
    (4,438 )     (129,118 )     (126,724 )     260,280        
                                         
Net cash provided by (used in) financing activities
    (15,397 )     (129,128 )     (74,979 )     260,280       40,776  
                                         
Effect of changes in foreign exchange rates on cash
                (535 )           (535 )
                                         
Decrease in cash and cash equivalents
    (49,516 )     (4,609 )     (33,899 )           (88,024 )
Cash and cash equivalents at beginning of year
    84,476       6,329       83,431             174,236  
                                         
Cash and cash equivalents at end of period
  $ 34,960     $ 1,720     $ 49,532     $     $ 86,212  
                                         
 

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HANESBRANDS

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Nine Months Ended September 29, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ 313,752     $ 188,626     $ 48,214     $ (314,749 )   $ 235,843  
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (25,680 )     (6,048 )     (13,659 )           (45,387 )
Acquisition of business
                (17,380 )           (17,380 )
Proceeds from sales of assets
    7,286       4,870       866             13,022  
Other
    (1,444 )     103       3       763       (575 )
                                         
Net cash provided by (used in) investing activities
    (19,838 )     (1,075 )     (30,170 )     763       (50,320 )
                                         
Financing activities:
                                       
Principal payments on capital lease obligations
    (888 )     (26 )                 (914 )
Borrowings on notes payable
                29,969             29,969  
Repayments on notes payable
                (26,845 )           (26,845 )
Cost of debt issuance
    (2,415 )     (118 )                 (2,533 )
Repayment of debt under credit facilities
    (128,125 )                       (128,125 )
Decrease in bank overdraft
                (834 )           (834 )
Proceeds from stock options exercised
    5,464                         5,464  
Stock repurchases
    (44,473 )                       (44,473 )
Other
    552                         552  
Net transactions with related entities
    (156,631 )     (187,818 )     30,463       313,986        
                                         
Net cash provided by (used in) financing activities
    (326,516 )     (187,962 )     32,753       313,986       (167,739 )
                                         
Effect of changes in foreign exchange rates on cash
                2,620             2,620  
                                         
Increase (decrease) in cash and cash equivalents
    (32,602 )     (411 )     53,417             20,404  
Cash and cash equivalents at beginning of year
    60,960       (1,251 )     96,264             155,973  
                                         
Cash and cash equivalents at end of period
  $ 28,358     $ (1,662 )   $ 149,681     $     $ 176,377  
                                         
 
(14)   Subsequent Event
 
Subsequent to September 27, 2008, the Company entered into interest rate swap agreements with a notional amount totaling $400,000, as a result of which the Company has fixed LIBOR on a portion of its outstanding debt at 2.80% for a 2-year term.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” and “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 29, 2007, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K.
 
 
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Playtex, Bali, Just My Size, barely there and Wonderbra. We design, manufacture, source and sell a broad range of apparel essentials such as t-shirts, bras, panties, men’s underwear, kids’ underwear, socks, hosiery, casualwear and activewear.
 
Our operations are managed in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these businesses.
 
  •  Innerwear.  The Innerwear segment focuses on core apparel essentials, and consists of products such as women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear, marketed under well-known brands that are trusted by consumers. We are an intimate apparel category leader in the United States with our Hanes, Playtex, Bali, Just My Size, barely there, and Wonderbra brands. We are also a leading manufacturer and marketer of men’s underwear and kids’ underwear under the Hanes and Champion brand names. Our net sales for the nine months ended September 27, 2008 from our Innerwear segment were $1.8 billion, representing approximately 56% of total segment net sales.
 
  •  Outerwear.  We are a leader in the casualwear and activewear markets through our Hanes, Champion and Just My Size brands, where we offer products such as t-shirts and fleece. Our casualwear lines offer a range of quality, comfortable clothing for men, women and children marketed under the Hanes and Just My Size brands. The Just My Size brand offers casual apparel designed exclusively to meet the needs of plus-size women. In addition to activewear for men and women, Champion provides uniforms for athletic programs and includes an apparel program, C9 by Champion, at Target stores. We also license our Champion name for collegiate apparel and footwear. We also supply our t-shirts, sportshirts and fleece products primarily to wholesalers, who then resell to screen printers and embellishers, through brands such as Hanes, Champion and Outer Banks. Our net sales for the nine months ended September 27, 2008 from our Outerwear segment were $881 million, representing approximately 27% of total segment net sales.
 
  •  Hosiery.  We are the leading marketer of women’s sheer hosiery in the United States. We compete in the hosiery market by striving to offer superior values and executing integrated marketing activities, as well as focusing on the style of our hosiery products. We market hosiery products under our Hanes, L’eggs and Just My Size brands. Our net sales for the nine months ended September 27, 2008 from our Hosiery segment were $167 million, representing approximately 5% of total segment net sales. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.


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  •  International.  International includes products that span across the Innerwear, Outerwear and Hosiery reportable segments and are marketed under the Hanes, Champion, Wonderbra, Playtex, Rinbros, Bali and Stedman brands. Our net sales for the nine months ended September 27, 2008 from our International segment were $352 million, representing approximately 11% of total segment net sales and included sales in Latin America, Asia, Canada and Europe. Canada, Europe, Japan and Mexico are our largest international markets, and we also have sales offices in India and China.
 
  •  Other.  Our net sales for the nine months ended September 27, 2008 in our Other segment were $20 million, representing approximately 1% of total segment net sales and are comprised of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and generate break even margins. Net sales from our Other segment are expected to continue to decline during the remainder of this year and to ultimately become insignificant to us.
 
Our operating results are subject to some variability. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. Sales are typically higher in the last two quarters (July to December) of each fiscal year. Socks, hosiery and fleece products generally have higher sales during this period as a result of cooler weather, back-to-school shopping and holidays. Sales levels in a period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. For example, we experienced a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. Our results of operations are also impacted by fluctuations and volatility in the price of cotton and the timing of actual spending for our media, advertising and promotion expenses. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
 
Our operating results are also impacted by economic factors, some of which are beyond our control. Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. In addition, inflation often is accompanied by higher interest rates, which could have a negative impact on spending, in which case our margins could decrease. Moreover, increases in inflation may not be matched by rises in income, which also could have a negative impact on spending. If we incur increased costs that are unable to be recouped, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we have informed our retail customers that we are raising domestic prices effective during the first quarter of 2009. We are implementing an average gross price increase of four percent in our domestic product categories. The range of price increases varies by individual product category.
 
 
  •  Diluted earnings per share were $0.17 in the third quarter of 2008, compared with $0.40 in the same quarter in 2007. Diluted earnings per share were $1.14 in the nine month period in 2008, compared with $0.79 in the same nine month period in 2007.
 
  •  Operating profit was $58 million in the third quarter of 2008, compared with $106 million in the same quarter in 2007. Operating profit was $259 million in the nine month period in 2008, compared with $263 million in the same nine month period in 2007.
 
  •  Total net sales in the third quarter of 2008 of $1.15 billion were comparable to the same quarter in 2007. Total net sales in the nine month period in 2008 were lower by $102 million at $3.21 billion compared to the same nine month period in 2007.
 
  •  During the first nine months of 2008, we approved actions to close 11 manufacturing facilities and two distribution centers in El Salvador, Mexico, Costa Rica, Honduras and the United States. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations


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  in Asia, the Caribbean Basin and Central America. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. In addition, we completed several such actions in the first nine months of 2008 that were approved in 2007.
 
  •  Capital expenditures were $123 million during the first nine months of 2008 as we continued to build out our textile and sewing network in Asia, the Caribbean Basin and Central America.
 
  •  We repurchased $30 million of company stock during the first nine months of 2008.
 
  •  We ended the third quarter of 2008 with $443 million of borrowing availability under our revolving loan facility, $86 million in cash and cash equivalents and $47 million of borrowing availability under our international loan facilities.
 
Condensed Consolidated Results of Operations — Third Quarter Ended September 27, 2008 Compared with Third Quarter Ended September 29, 2007
 
                                 
    Quarter Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,153,635     $ 1,153,606     $ 29       0.0 %
Cost of sales
    811,851       792,587       19,264       2.4  
                                 
Gross profit
    341,784       361,019       (19,235 )     (5.3 )
Selling, general and administrative expenses
    255,228       253,233       1,995       0.8  
Restructuring
    28,355       2,062       26,293       NM  
                                 
Operating profit
    58,201       105,724       (47,523 )     (45.0 )
Other expenses
          889       (889 )     NM  
Interest expense, net
    37,253       49,270       (12,017 )     (24.4 )
                                 
Income before income tax expense
    20,948       55,565       (34,617 )     (62.3 )
Income tax expense
    5,028       16,669       (11,641 )     (69.8 )
                                 
Net income
  $ 15,920     $ 38,896     $ (22,976 )     (59.1 )%
                                 
                                 
Net Sales
                               
    Quarter Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,153,635     $ 1,153,606     $ 29       0.0 %
 
Consolidated net sales in the third quarter of 2008 were comparable to 2007. Sales levels were impacted by softer sales at retail and, as anticipated, lower Other segment sales offset by a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. Our Innerwear and International segment net sales were higher by $15 million (2%) and $13 million (13%), respectively, and were offset by lower net sales in our Outerwear, Hosiery and Other segments of $1 million (0%), $14 million (22%) and $9 million (65%), respectively, and higher intersegment sales eliminations of $5 million. Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, softness in the retail environment can impact our results in the short-term, as it did in the third quarter of 2008. Softer sales at retail during the third quarter of 2008 were reflective of a difficult economic and retail environment in which the ultimate consumers of our products have been significantly limiting their discretionary spending and visiting retail stores less frequently.
 
The higher net sales in our Innerwear segment were primarily due to an increase in sales in the Hanes brand male underwear product category of $23 million, which includes the impact of exiting a license


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arrangement for a boys’ character underwear program in early 2008 that lowered sales by $4 million. Net sales of our Playtex brand intimate apparel were $11 million higher and net sales of our Bali brand intimate apparel were flat in the third quarter of 2008 compared to 2007. In addition, we experienced a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008, which primarily impacted our underwear, socks and intimate apparel product categories. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million. Intimate apparel sales in our secondary brands (barely there, Wonderbra and Just My Size) were lower by $13 million which we believe was primarily attributable to softer sales at retail as noted above. In addition, intimate apparel sales in our Hanes brand were lower by $7 million.
 
The higher net sales in our International segment were driven by a favorable impact of $7 million related to foreign currency exchange rates and by the growth in our casualwear businesses in Europe and Asia and our male underwear business in Canada. The favorable impact of foreign currency exchange rates was primarily due to the strengthening of the Euro, Japanese yen and Brazilian real.
 
In our Outerwear segment, net sales of our Champion brand activewear increased by double digits in the third quarter of 2008 compared to 2007, and were offset by lower net sales of our casualwear product categories. Net sales in our Hosiery segment declined substantially more than the long-term trend primarily due to lower sales of our L’eggs brand to mass retailers and food and drug stores and our Hanes brand to national chains and department stores in the third quarter of 2008 compared to last year. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
The decline in net sales for our Other segment is primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties. We expect this decline to continue during the remainder of this year and sales for this segment to ultimately become insignificant to us.
 
 
                                 
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 341,784     $ 361,019     $ (19,235 )     (5.3 )%
 
As a percent of net sales, our gross profit percentage was 29.6% in the third quarter of 2008 compared to 31.3% in 2007. The lower gross profit percentage was primarily due to one-time restructuring related write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate of $14 million in the third quarter of 2008 offset by lower accelerated depreciation of $8 million in connection with the consolidation and globalization of our supply chain. In addition, we experienced higher production costs of $7 million related to higher energy and oil related costs including freight costs, higher cotton costs of $12 million, $6 million of unfavorable timing in cost recognition that is expected to reverse in the fourth quarter, unfavorable product sales mix of $5 million, other vendor price increases of $4 million, lower sales volume of $4 million and higher other manufacturing overhead costs of $3 million.
 
The cotton prices reflected in our results were 69 cents per pound in the third quarter of 2008 as compared to 57 cents per pound in 2007. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 66 cents per pound for the full year 2008.
 
These higher expenses were partially offset by $7 million of savings from our cost reduction initiatives and prior restructuring actions, lower on-going excess and obsolete inventory costs of $7 million, lower sales incentives of $6 million, lower start-up and shut down costs associated with our consolidation and globalization of our supply chain of $3 million, a favorable impact related to foreign currency exchange rates of $3 million and higher product sales pricing of $2 million. The favorable foreign currency exchange rate impact in our International segment was primarily due to the strengthening of the Euro, Japanese yen and Brazilian real.


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    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 255,228     $ 253,233     $ 1,995       0.8 %
 
Our selling, general and administrative expenses were $2 million higher in the third quarter of 2008 compared to 2007. Our cost reduction efforts resulted in lower expenses in the third quarter of 2008 compared to 2007 related to lower technology consulting expenses of $4 million, savings of $3 million from our prior restructuring actions primarily for compensation and related benefits, lower accelerated depreciation of $3 million, lower media related media, advertising and promotion expenses (“MAP”) of $2 million and lower non-media related MAP expenses of $2 million. MAP expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions. In addition, $2 million of spin off and related charges recognized in the third quarter of 2007 did not recur in 2008.
 
The above lower expenses were offset by higher bad debt expense of $7 million primarily related to the bankruptcy of Mervyn’s LLC and its affiliated entities (“Mervyn’s”), higher distribution expenses of $2 million and higher computer software amortization expense of $2 million in the third quarter of 2008 compared to 2007. Approximately half of the higher distribution expenses in the third quarter of 2008 compared to 2007 were postage and freight related and the other half related to rework expenses in our distribution centers. Our pension income of $3 million was lower by $4 million which is primarily attributable to an adjustment that reduced pension expense in 2007 related to the final separation of our pension assets and liabilities from those of Sara Lee Corporation (“Sara Lee”). We also incurred higher expenses of $1 million in the third quarter of 2008 compared to 2007 as a result of opening 10 retail stores over the last 12 months. In addition, we incurred $2 million in amortization of gain on curtailment of postretirement benefits in the third quarter of 2007 which did not recur in 2008.
 
Our cost reduction efforts have allowed us to offset investments in our strategic initiatives which were $6 million lower in the third quarter of 2008 compared to 2007 for media related MAP expenses and technology consulting expenses.
                                 
Restructuring
                               
                                 
                                 
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Restructuring
  $ 28,355     $ 2,062     $ 26,293       NM  
 
During the third quarter of 2008, we approved actions to close nine manufacturing facilities and eliminate approximately 8,100 positions in El Salvador, Mexico, Costa Rica, Honduras and the United States during the next twelve months. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations in Asia, the Caribbean Basin and Central America. We recorded a charge of $21 million that was primarily attributable to employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group and $9 million in charges related to exiting supply contracts, which was partially offset by a $2 million favorable settlement of a lease obligation for a lower amount than previously estimated.
 
In the third quarter of 2008, we recorded $14 million in one-time write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of the nine manufacturing facilities in the “Cost of sales” line. In addition, in connection with our consolidation and globalization strategy, in the third quarters of 2008 and 2007, we recognized non-cash charges of $4 million and $12 million, respectively, in the “Cost of sales” line and a non-cash credit of $2 million and a non-cash charge of $1 million, respectively, in the “Selling, general and administrative


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expenses” line in the third quarters of 2008 and 2007 related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the third quarter of 2007, we incurred $2 million in restructuring charges which primarily related to employee termination and other benefits associated with previously approved actions for plant closures.
 
 
                                 
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 58,201     $ 105,724     $ (47,523 )     (45.0 )%
 
Operating profit was lower in the third quarter of 2008 primarily as a result of higher restructuring and related charges for nine facility closures of $29 million and lower gross profit due to increases in manufacturing input costs for cotton, freight and energy and other oil related costs, all of which exceeded our savings from executing our consolidation and globalization strategy during the third quarter of 2008.
                                 
Other Expenses
                               
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Other expenses
  $     $ 889     $ (889 )     NM  
 
During the third quarter of 2007, we recognized a loss on early extinguishment of debt related to unamortized debt issuance costs on our senior secured credit facility for the prepayment of $75 million of principal in September 2007.
                                 
Interest Expense, Net
                               
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 37,253     $ 49,270     $ (12,017 )     (24.4 )%
 
Interest expense, net was lower by $12 million in the third quarter of 2008 compared to 2007. The lower interest expense is primarily attributable to a lower weighted average interest rate, $9 million of which resulted from a lower LIBOR and $1 million of which resulted from reduced interest rates achieved through changes in our financing structure such as our accounts receivable securitization that we entered into in November 2007. In addition, interest expense was reduced by $2 million as a result of our net prepayments of long-term debt during 2007 of $178 million. Our weighted average interest rate on our outstanding debt was 5.80% during the third quarter of 2008 compared to 7.71% in 2007.
 
During the third quarter of 2008, we terminated an interest rate cap with a notional amount of $250 million and a capped interest rate of 5.75%. At September 27, 2008, we had outstanding interest rate hedging arrangements whereby we have capped the interest rate on $700 million of our floating rate debt at 5.75% and had fixed the interest rate on $600 million of our floating rate debt at 5.04%. Approximately 56% of our total debt outstanding at September 27, 2008 was at a fixed or capped rate.
 
During and subsequent to the third quarter of 2008, we entered into additional interest rate hedging arrangements that will become effective during the fourth quarter of 2008 that, combined with expirations of other portions of our interest rate derivative portfolio, will result in approximately 86% of our floating rate debt bearing interest at a fixed or capped rate. Once these interest rate hedging arrangements become effective


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in the fourth quarter of 2008, the interest rate on $600 million of our floating rate debt will be capped at 3.50% and the interest rate on $1.4 billion of our floating rate debt will be fixed at a weighted average rate of 4.17%.
 
 
                                 
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $ 5,028     $ 16,669     $ (11,641 )     (69.8 )%
 
Our estimated annual effective income tax rate was 24% in the third quarter of 2008 compared to 30% in 2007. The lower effective income tax expense is primarily attributable to lower pre-tax income and higher unremitted earnings from foreign subsidiaries in the third quarter of 2008 taxed at rates less than the U.S. statutory rate. Our estimated annual effective tax rate is reflective of our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2008.
                                 
Net Income
                               
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net income
  $ 15,920     $ 38,896     $ (22,976 )     (59.1 )%
 
Net income for the third quarter of 2008 was lower than 2007 primarily due to lower operating profit resulting in part from higher restructuring and related charges and higher manufacturing input costs, which were partially offset by savings from our cost reduction initiatives, lower interest expense and a lower income tax expense.


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Operating Results by Business Segment — Third Quarter Ended September 27, 2008 Compared with Third Quarter Ended September 29, 2007
 
                                 
    Quarter Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 650,372     $ 635,167     $ 15,205       2.4 %
Outerwear
    348,467       349,352       (885 )     (0.3 )
Hosiery
    50,197       64,120       (13,923 )     (21.7 )
International
    116,581       103,341       13,240       12.8  
Other
    4,769       13,587       (8,818 )     (64.9 )
                                 
Total segment net sales
    1,170,386       1,165,567       4,819       0.4  
Intersegment
    (16,751 )     (11,961 )     4,790       40.0  
                                 
Total net sales
  $ 1,153,635     $ 1,153,606     $ 29       (0.0 )%
Segment operating profit:
                               
Innerwear
  $ 71,097     $ 63,173     $ 7,924       12.5 %
Outerwear
    19,243       36,051       (16,808 )     (46.6 )
Hosiery
    13,081       18,670       (5,589 )     (29.9 )
International
    14,010       9,616       4,394       45.7  
Other
    314       (306 )     620       202.6  
                                 
Total segment operating profit
  $ 117,745     $ 127,204     $ (9,459 )     (7.4 )%
Items not included in segment operating profit:
                               
General corporate expenses
  $ (12,593 )   $ (5,225 )   $ 7,368       141.0 %
Amortization of trademarks and other intangibles
    (3,045 )     (1,442 )     1,603       111.2  
Restructuring
    (28,355 )     (2,062 )     26,293       NM  
Inventory write-off included in cost of sales
    (14,027 )     (186 )     13,841       NM  
Accelerated depreciation included in cost of sales
    (4,011 )     (11,616 )     (7,605 )     (65.5 )
Accelerated depreciation included in selling, general and administrative expenses
    2,487       (949 )     (3,436 )     (362.1 )
                                 
Total operating profit
    58,201       105,724       (47,523 )     (45.0 )
Other expenses
          (889 )     (889 )     NM  
Interest expense, net
    (37,253 )     (49,270 )     (12,017 )     (24.4 )
                                 
Income before income tax expense
  $ 20,948     $ 55,565     $ (34,617 )     (62.3 )%
                                 


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    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 650,372     $ 635,167     $ 15,205       2.4 %
Segment operating profit
    71,097       63,173       7,924       12.5  
 
Overall net sales in the Innerwear segment were higher by $15 million or 2% in the third quarter of 2008 compared to 2007. The higher net sales were primarily due to an increase in the Hanes brand male underwear product category of $23 million, which includes the impact of exiting a license arrangement for a boys’ character underwear program in early 2008 that lowered sales by $4 million. Net sales of our Playtex brand intimate apparel were $11 million higher and net sales of our Bali brand intimate apparel were flat in the third quarter of 2008 compared to 2007. In addition, we experienced a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008, which primarily impacted our underwear, socks and intimate apparel product categories. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million. Intimate apparel sales in our secondary brands (barely there, Wonderbra and Just My Size) were lower by $13 million which we believe was primarily attributable to softer sales at retail. In addition, intimate apparel sales in our Hanes brand were lower by $7 million.
 
As a percent of segment net sales, gross profit percentage in the Innerwear segment was 34.4% in the third quarter of 2008 compared to 35.7% in 2007. The lower gross profit is primarily attributable to higher cotton costs of $5 million, higher production costs of $3 million, other vendor price increases of $2 million and higher other manufacturing overhead costs of $2 million. The higher production costs were related to higher energy and oil related costs including freight costs. These factors were partially offset by lower sales incentives of $5 million and lower on-going excess and obsolete inventory costs of $4 million.
 
The higher Innerwear segment operating profit in the third quarter of 2008 compared to 2007 is primarily attributable to lower media related MAP expenses of $7 million, lower non-media related MAP expenses of $4 million, savings from prior restructuring actions of $2 million and lower technology consulting expenses of $2 million partially offset by lower gross profit and higher bad debt expense of $4 million primarily related to the Mervyn’s bankruptcy. In addition, we incurred higher expenses of $1 million in the third quarter of 2008 compared to 2007 as a result of opening 10 retail stores over the last 12 months. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was $2 million higher in the third quarter of 2008 compared to 2007.
                                 
Outerwear
                               
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 348,467     $ 349,352     $ (885 )     (0.3 )%
Segment operating profit
    19,243       36,051       (16,808 )     (46.6 )
 
Net sales in the Outerwear segment were slightly lower by $1 million in the third quarter of 2008 compared to 2007 primarily as a result of higher net sales of Champion brand activewear of $17 million and higher intersegment sales of $3 million offset by lower net sales of retail casualwear of $17 million and lower net sales through our embellishment channel of $6 million, primarily in promotional t-shirts, offset by higher fleece sales.


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As a percent of segment net sales, gross profit percentage in the Outerwear segment was 21.1% in the third quarter of 2008 compared to 23.6% in 2007. The lower gross profit is primarily attributable to higher cotton costs of $7 million, $6 million of unfavorable timing in cost recognition that is expected to reverse in the fourth quarter, higher production costs of $4 million, other vendor price increases of $1 million and unfavorable product sales mix of $1 million partially offset by savings from our cost reduction initiatives and prior restructuring actions of $5 million, higher product sales pricing of $3 million and lower on-going excess and obsolete inventory costs of $2 million. The higher production costs were related to higher energy and oil related costs including freight costs.
 
The lower Outerwear segment operating profit in the third quarter of 2008 compared to 2007 is primarily attributable to lower gross profit, higher media related MAP expenses of $4 million, higher bad debt expense of $2 million primarily related to the Mervyn’s bankruptcy, higher non-media related MAP expenses of $2 million and higher distribution expenses of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was $2 million higher in the third quarter of 2008 compared to 2007.
 
 
                                 
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 50,197     $ 64,120     $ (13,923 )     (21.7 )%
Segment operating profit
    13,081       18,670       (5,589 )     (29.9 )
 
Net sales in the Hosiery segment declined by $14 million or 22%, which was substantially more than the long-term trend primarily due to lower sales of our L’eggs brand to mass retailers and food and drug stores and lower sales of the Hanes brand to national chains and department stores. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
As a percent of segment net sales, gross profit percentage was 42.4% in the third quarter of 2008 compared to 46.4% in 2007 primarily due to unfavorable sales mix of $5 million, lower sales volume of $4 million and other vendor price increases of $1 million partially offset by savings from our cost reduction initiatives and prior restructuring actions of $1 million and lower sales incentives of $1 million.
 
Hosiery segment operating profit was lower in the third quarter of 2008 compared to 2007 primarily due to lower gross profit partially offset by lower distribution expenses of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was $2 million higher in the third quarter of 2008 compared to 2007.


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    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 116,581     $ 103,341     $ 13,240       12.8 %
Segment operating profit
    14,010       9,616       4,394       45.7  
 
Overall net sales in the International segment were higher by $13 million or 13% in the third quarter of 2008 compared to 2007. During the third quarter of 2008 our net sales were higher, in each case including the impact of foreign currency, in Asia of $5 million, Europe of $4 million and Canada of $3 million. The growth in our European casualwear business was driven by the strength of the Stedman brand that is sold in the embellishment channel. Higher sales in our Champion brand casualwear business in Asia and our Hanes brand male underwear business in Canada also contributed to the sales growth. Changes in foreign currency exchange rates had a favorable impact on net sales of $7 million in the third quarter of 2008 compared to 2007. The favorable impact was primarily due to the strengthening of the Euro, Japanese yen and Brazilian real.
 
As a percent of segment net sales, gross profit percentage was 40.1% in the third quarter of 2008 compared to 39.2% in 2007. The higher gross profit was primarily attributable to a favorable impact related to foreign currency exchange rates of $3 million and favorable product sales mix of $3 million.
 
The higher International segment operating profit in the third quarter of 2008 compared to 2007 is primarily attributable to the higher gross profit partially offset by higher distribution expenses of $1 million. Changes in foreign currency exchange rates, which are included in the impact on gross profit above, had a favorable impact on segment operating profit of $1 million in the third quarter of 2008 compared to 2007.
                                 
Other
                               
    Quarter Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 4,769     $ 13,587     $ (8,818 )     (64.9 )%
Segment operating profit
    314       (306 )     620       202.6  
 
Overall lower net sales from our Other segment were primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties. We expect this decline to continue during the remainder of this year and sales for this segment to ultimately become insignificant to us. Net sales in this segment are generated for the purpose of maintaining asset utilization at certain manufacturing facilities and generating break even margins.
 
 
General corporate expenses were higher in the third quarter of 2008 compared to 2007 primarily due to $7 million of lower net cost allocations to the segments, a $5 million adjustment that reduced pension expense in 2007 related to the final separation of our pension assets and liabilities from those of Sara Lee, $2 million in amortization of gain on curtailment of postretirement benefits in the third quarter of 2007 which did not recur in 2008 and $2 million in losses from foreign currency derivatives partially offset by $4 million of higher gains on sales of assets, lower start-up and shut down costs associated with our consolidation and globalization of our supply chain of $3 million and $2 million of spin off and related charges recognized in the third quarter of 2007 which did not recur in 2008.


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Condensed Consolidated Results of Operations — Nine Months Ended September 27, 2008 Compared with Nine Months Ended September 29, 2007
 
                                 
    Nine Months Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 3,213,653     $ 3,315,407     $ (101,754 )     (3.1 )%
Cost of sales
    2,145,949       2,234,352       (88,403 )     (4.0 )
                                 
Gross profit
    1,067,704       1,081,055       (13,351 )     (1.2 )
Selling, general and administrative expenses
    776,267       773,817       2,450       0.3  
Restructuring
    32,355       44,533       (12,178 )     (27.3 )
                                 
Operating profit
    259,082       262,705       (3,623 )     (1.4 )
Other expenses
          1,440       (1,440 )     NM  
Interest expense, net
    115,282       152,217       (36,935 )     (24.3 )
                                 
Income before income tax expense
    143,800       109,048       34,752       31.9  
Income tax expense
    34,512       32,714       1,798       5.5  
                                 
Net income
  $ 109,288     $ 76,334     $ 32,954       43.2 %
                                 
                                 
Net Sales
                               
    Nine Months Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 3,213,653     $ 3,315,407     $ (101,754 )     (3.1 )%
 
Consolidated net sales were lower by $102 million or 3% in the nine months of 2008 compared to 2007 primarily due to softer sales at retail which are reflective of a difficult economic and retail environment in which the ultimate consumers of our products have been significantly limiting their discretionary spending and visiting retail stores less frequently. Our Innerwear, Outerwear, Hosiery and Other segment net sales were lower by $87 million (5%), $16 million (2%), $23 million (12%) and $27 million (57%), respectively, and were partially offset by higher net sales in our International segment of $49 million (16%). Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, softness in the retail environment can impact our results in the short-term, as it did in the nine months of 2008.
 
The lower net sales in our Innerwear segment were primarily due to a decline in the intimate apparel, socks, sleepwear and thermals product categories. Total intimate apparel net sales were $64 million lower in the nine months of 2008 compared to 2007. We experienced lower intimate apparel sales in our secondary brands (barely there, Just My Size, and Wonderbra) of $36 million, our Hanes brand of $31 million and our private label brands of $9 million which we believe was primarily attributable to softer sales at retail as noted above. In the nine months of 2008 compared to 2007, our Playtex brand intimate apparel net sales were higher by $16 million and our Bali brand intimate apparel net sales were lower by $4 million. We have experienced higher net sales in our male underwear product category of $3 million, which includes the impact of exiting a license arrangement for a boys’ character underwear program in early 2008 that lowered sales by $11 million. In addition, net sales of socks, sleepwear and thermals product categories were lower in the nine months of 2008 compared to 2007 by $15 million, $6 million and $6 million, respectively.
 
In our Outerwear segment, net sales of our Champion brand activewear were higher in the nine months of 2008 compared to 2007, and were offset by lower net sales of our casualwear product categories. Net sales in our Hosiery segment declined substantially more than the long-term trend primarily due to lower sales of the Hanes brand to national chains and department stores and our L’eggs brand to mass retailers and food and


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drug stores in the nine months of 2008 compared to last year. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
The overall lower net sales were partially offset by higher net sales in our International segment that were driven by a favorable impact of $31 million related to foreign currency exchange rates and by the growth in our casualwear businesses in Europe and Asia and our male underwear business in Canada. The favorable impact of foreign currency exchange rates was primarily due to the strengthening of the Euro, Japanese yen, Canadian dollar and Brazilian real.
 
The decline in net sales for our Other segment is primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties. We expect this decline to continue during the remainder of this year and sales for this segment to ultimately become insignificant to us.
 
                                 
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 1,067,704     $ 1,081,055     $ (13,351 )     (1.2 )%
 
As a percent of net sales, our gross profit percentage was 33.2% in the nine months of 2008 compared to 32.6% in 2007. While the gross profit percentage was higher, gross profit dollars were lower for the nine months of 2008 compared to 2007 primarily as a result of lower sales. The lower gross profit is primarily attributable to $46 million of lower sales volume, higher cotton costs of $13 million, $11 million of higher production costs related to higher energy and oil related costs including freight costs, unfavorable product sales mix of $7 million, other vendor price increases of $7 million, $6 million of higher freight costs due to a greater use of air freight and $6 million of unfavorable timing in cost recognition that is expected to reverse in the fourth quarter. In addition, in connection with the consolidation and globalization of our supply chain we incurred one-time restructuring related write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate of $14 million in 2008 which were offset by lower accelerated depreciation of $18 million.
 
The cotton prices reflected in our results were 62 cents per pound in the nine months of 2008 as compared to 57 cents per pound in 2007. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 66 cents per pound for the full year 2008.
 
These higher expenses were primarily offset by $31 million of savings from our cost reduction initiatives and prior restructuring actions, a $13 million favorable impact related to foreign currency exchange rates, lower sales incentives of $11 million, lower other manufacturing overhead costs of $12 million, lower on-going excess and obsolete inventory costs of $8 million and $4 million of lower start-up and shut down costs associated with our consolidation and globalization of our supply chain. The favorable foreign currency exchange rate impact in our International segment was primarily due to the strengthening of the Euro, Japanese yen, Canadian dollar and Brazilian real.
                                 
Selling, General and Administrative Expenses
                               
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 776,267     $ 773,817     $ 2,450       0.3 %
 
Our selling, general and administrative expenses were $2 million higher in the nine months of 2008 compared to 2007. Our cost reduction efforts resulted in lower expenses in the nine months of 2008 compared to 2007 related to savings of $16 million from our prior restructuring actions primarily for compensation and related benefits, lower non-media related MAP expenses of $5 million, lower stock compensation expense of


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$4 million and lower accelerated depreciation of $3 million. In addition, spin off and related charges of $3 million recognized in 2007 did not recur in 2008. In addition, our pension income of $8 million was higher by $4 million which included an adjustment that reduced pension expense in 2007 related to the final separation of our pension assets and liabilities from those of Sara Lee.
 
Our media related MAP expenses were $4 million higher in the nine months of 2008 primarily to support the launch of Hanes No Ride Up Panties and marketing initiatives for Champion and Playtex in the first half of 2008. MAP expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions. We experienced higher technology consulting and related expenses of $11 million, higher computer software amortization of $4 million, higher distribution expenses of $5 million and higher bad debt expense of $7 million primarily related to the Mervyn’s bankruptcy in the nine months of 2008 compared to 2007. Approximately half of the higher distribution expenses in the third quarter of 2008 compared to 2007 were postage and freight related and the other half related to rework expenses in our distribution centers. We also incurred higher expenses of $2 million in the nine months of 2008 compared to 2007 as a result of opening 10 retail stores over the last 12 months. In addition, we incurred $6 million in amortization of gain on curtailment of postretirement benefits in the nine months of 2007 which did not recur in 2008.
 
Our cost reduction efforts have allowed us to offset higher investments in our strategic initiatives of higher technology consulting expenses of $6 million and higher MAP expenses of $4 million during the nine months of 2008 compared to 2007.
 
 
                                 
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Restructuring
  $ 32,355     $ 44,533     $ (12,178 )     (27.3 )%
 
During the nine month period in 2008, we approved actions to close 11 manufacturing facilities and two distribution centers and eliminate approximately 9,400 positions in El Salvador, Mexico, Costa Rica, Honduras and the United States during the next twelve months. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations in Asia, the Caribbean Basin and Central America. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. We recorded a charge of $25 million that was primarily attributable to employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group and $9 million in charges related to exiting supply contracts, which was partially offset by a $2 million favorable settlement of a lease obligation for a lower amount than previously estimated.
 
In the nine months of 2008, we recorded $14 million in one-time write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of manufacturing facilities in the “Cost of sales” line. In addition, in connection with our consolidation and globalization strategy, in the nine months in 2008 and 2007, we recognized non-cash charges of $11 million and $29 million, respectively, in the “Cost of sales” line and a non-cash credit of $1 million and a non-cash charge of $2 million, respectively, in the “Selling, general and administrative expenses” line in the nine months of 2008 and 2007 related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the same nine months of 2007, we incurred $45 million in restructuring charges which primarily related to a charge of $35 million related to employee termination and other benefits associated with plant


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closures approved during that period and the elimination of certain management and administrative positions and a $10 million charge for estimated lease termination costs associated with facility closures.
 
                                 
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 259,082     $ 262,705     $ (3,623 )     (1.4 )%
 
Operating profit was slightly lower in the nine months of 2008 compared to 2007 as a result of lower gross profit due to increases in manufacturing input costs for cotton, freight and energy and other oil related costs, all of which exceeded our savings from executing our consolidation and globalization strategy during the nine months of 2008, partially offset by lower restructuring and related charges for facility closures of $20 million.
                                 
Other Expenses
                               
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Other expenses
  $     $ 1,440     $ (1,440 )     NM  
 
During the nine months of 2007, we recognized losses on early extinguishment of debt related to unamortized debt issuance costs on our senior secured credit facility for the prepayment of $50 million of principal in June 2007 and $75 million of principal in September 2007.
                                 
Interest Expense, Net
                               
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 115,282     $ 152,217     $ (36,935 )     (24.3 )%
 
Interest expense, net was lower by $37 million in the nine months of 2008 compared to 2007. The lower interest expense is primarily attributable to a lower weighted average interest rate, $25 million of which resulted from a lower LIBOR and $4 million of which resulted from reduced interest rates achieved through changes in our financing structure such as the February 2007 amendment to our senior secured credit facility and our accounts receivable securitization that we entered into in November 2007. In addition, interest expense was reduced by $8 million as a result of our net prepayments of long-term debt during 2007 of $178 million. Our weighted average interest rate on our outstanding debt was 6.17% during the nine months of 2008 compared to 7.82% in 2007.
 
During the third quarter of 2008, we terminated an interest rate cap with a notional amount of $250 million and a capped interest rate of 5.75%. At September 27, 2008, we had outstanding interest rate hedging arrangements whereby we have capped the interest rate on $700 million of our floating rate debt at 5.75% and had fixed the interest rate on $600 million of our floating rate debt at 5.04%. Approximately 56% of our total debt outstanding at September 27, 2008 was at a fixed or capped rate.
 
During and subsequent to the third quarter of 2008, we entered into additional interest rate hedging arrangements that will become effective during the fourth quarter of 2008 that, combined with expirations of other portions of our interest rate derivative portfolio, will result in approximately 86% of our floating rate debt bearing interest at a fixed or capped rate. Once these interest rate hedging arrangements become effective in the fourth quarter of 2008, the interest rate on $600 million of our floating rate debt will be capped at 3.50% and the interest rate on $1.4 billion of our floating rate debt will be fixed at a weighted average rate of 4.17%.


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    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $ 34,512     $ 32,714     $ 1,798       5.5 %
 
Our estimated annual effective income tax rate was 24% in the nine months of 2008 compared to 30% in 2007. The higher income tax expense is attributable primarily to higher pre-tax income partially offset by a lower effective income tax rate. The lower effective income tax rate is primarily due to higher unremitted earnings from foreign subsidiaries in the nine months of 2008 taxed at rates less than the U.S. statutory rate. Our estimated annual effective tax rate is reflective of our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2008.
                                 
Net Income
                               
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net income
  $ 109,288     $ 76,334     $ 32,954       43.2 %
 
Net income for the nine months of 2008 was higher than 2007 primarily due to lower interest expense, lower restructuring and related charges and a lower effective income tax rate partially offset by lower gross profit resulting from higher manufacturing input costs.


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Operating Results by Business Segment — Nine Months Ended September 27, 2008 Compared with Nine Months Ended September 29, 2007
 
                                 
    Nine Months Ended              
    September 27,
    September 29,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 1,830,437     $ 1,917,118     $ (86,681 )     (4.5 )%
Outerwear
    880,809       896,583       (15,774 )     (1.8 )
Hosiery
    166,672       189,215       (22,543 )     (11.9 )
International
    352,120       303,119       49,001       16.2  
Other
    20,064       46,629       (26,565 )     (57.0 )
                                 
Total segment net sales
    3,250,102       3,352,664       (102,562 )     (3.1 )
Intersegment
    (36,449 )     (37,257 )     (808 )     (2.2 )
                                 
Total net sales
  $ 3,213,653     $ 3,315,407     $ (101,754 )     (3.1 )%
Segment operating profit:
                               
Innerwear
  $ 204,714     $ 243,821     $ (39,107 )     (16.0 )%
Outerwear
    55,587       54,453       1,134       2.1  
Hosiery
    52,944       52,849       95       0.2  
International
    47,662       34,321       13,341       38.9  
Other
    304       (17 )     321       NM  
                                 
Total segment operating profit
  $ 361,211     $ 385,427     $ (24,216 )     (6.3 )%
Items not included in segment operating profit:
                               
General corporate expenses
  $ (37,128 )   $ (42,294 )   $ (5,166 )     (12.2 )%
Amortization of trademarks and other intangibles
    (8,683 )     (4,516 )     4,167       92.3  
Restructuring
    (32,355 )     (44,533 )     (12,178 )     (27.3 )
Inventory write-off included in cost of sales
    (14,027 )     (186 )     13,841       NM  
Accelerated depreciation included in cost of sales
    (11,202 )     (29,296 )     (18,094 )     (61.8 )
Accelerated depreciation included in selling, general and administrative expenses
    1,266       (1,897 )     (3,163 )     (166.7 )
                                 
Total operating profit
    259,082       262,705       (3,623 )     (1.4 )
Other expenses
          (1,440 )     (1,440 )     NM  
Interest expense, net
    (115,282 )     (152,217 )     (36,935 )     (24.3 )
                                 
Income before income tax expense
  $ 143,800     $ 109,048     $ 34,752       31.9 %
                                 


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    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 1,830,437     $ 1,917,118     $ (86,681 )     (4.5 )%
Segment operating profit
    204,714       243,821       (39,107 )     (16.0 )
 
Overall net sales in the Innerwear segment were lower by $87 million or 5% in the nine months of 2008 compared to 2007. The lower net sales in our Innerwear segment were primarily due to a decline in the intimate apparel, socks, thermals and sleepwear product categories. We experienced softer sales at retail which resulted in lower intimate apparel sales in our secondary brands (barely there, Just My Size and Wonderbra) of $36 million, lower Hanes brand intimate apparel sales of $31 million and lower sales of private label brands of $9 million. In the nine months of 2008 compared to 2007, our Playtex brand intimate apparel net sales were higher by $16 million offset by lower Bali brand intimate apparel net sales of $4 million. Lower net sales in our socks product category reflects a decline in our Hanes brand of $10 million and Champion brand of $5 million. In addition, net sales of sleepwear and thermals product categories were each lower in the nine months of 2008 compared to 2007 by $6 million. Net sales were higher in our male underwear product category by $3 million, which includes the impact of exiting a license arrangement for a boys’ character underwear program in early 2008 that lowered sales by $11 million.
 
As a percent of segment net sales, gross profit percentage in the Innerwear segment was 37.1% in the nine months of 2008 compared to 37.6% in 2007. The lower gross profit is attributable to lower sales volume of $37 million, unfavorable product sales mix of $17 million, $7 million of higher freight costs due to a greater use of air freight, higher production costs of $5 million, lower product sales pricing of $5 million, higher cotton costs of $5 million, other vendor price increases of $4 million and higher other manufacturing overhead costs of $2 million. The higher production costs were related to higher energy and oil related costs including freight costs. These higher costs were offset by $18 million of savings from our cost reduction initiatives and prior restructuring actions, lower sales incentives of $12 million and lower on-going excess and obsolete inventory costs of $9 million.
 
The lower Innerwear segment operating profit in the nine months of 2008 compared to 2007 is primarily attributable to lower gross profit, higher technology consulting and related expenses of $6 million, higher bad debt expense of $4 million primarily related to the Mervyn’s bankruptcy and higher distribution expenses of $2 million partially offset by savings from prior restructuring actions of $11 million, lower non-media related MAP expenses of $4 million and lower spending in various areas of $2 million. In addition, we incurred higher expenses of $2 million in the nine months of 2008 compared to 2007 as a result of opening 10 retail stores over the last 12 months. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the nine months of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was $2 million higher in the nine months of 2008 compared to 2007.
                                 
Outerwear
                               
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 880,809     $ 896,583     $ (15,774 )     (1.8 )%
Segment operating profit
    55,587       54,453       1,134       2.1  
 
Net sales in the Outerwear segment were lower by $16 million or 2% in the nine months of 2008 compared to 2007 primarily as a result of lower net sales of retail casualwear of $29 million and lower net sales through our embellishment channel of $16 million, primarily in promotional t-shirts, offset by higher


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fleece sales. These decreases were offset by higher net sales of Champion brand activewear of $28 million and higher intersegment sales of $2 million.
 
As a percent of segment net sales, gross profit percentage in the Outerwear segment was 23.1% in the nine months of 2008 compared to 21.7% in 2007. The improvement in gross profit is primarily attributable to savings from our cost reduction initiatives and prior restructuring actions of $11 million, favorable product sales mix of $11 million, lower other manufacturing overhead costs of $11 million, higher product sales pricing of $5 million and lower freight costs of $2 million. These lower costs were partially offset by higher cotton costs of $8 million, higher production costs of $6 million, $6 million of unfavorable timing in cost recognition that is expected to reverse in the fourth quarter, higher on-going excess and obsolete inventory costs of $4 million, lower sales volume of $4 million, higher sales incentives of $2 million and other vendor price increases of $1 million. The higher production costs were related to higher energy and oil related costs including freight costs.
 
The higher Outerwear segment operating profit in the nine months of 2008 compared to 2007 is primarily attributable to higher gross profit and savings from our cost reduction initiatives and prior restructuring actions of $5 million partially offset by higher technology consulting and related expenses of $4 million, higher distribution expenses of $3 million, higher bad debt expense of $2 million primarily related to the Mervyn’s bankruptcy, higher media-related MAP expenses of $1 million and higher non-media related MAP expenses of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the nine months of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was $2 million higher in the nine months of 2008 compared to 2007.
 
 
                                 
    Nine Months Ended        
    September 27,
  September 29,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 166,672     $ 189,215     $ (22,543 )     (11.9 )%
Segment operating profit
    52,944       52,849       95       0.2  
 
Net sales in the Hosiery segment declined by $23 million or 12%, which was substantially more than the long-term trend primarily due to lower sales of the Hanes brand to national chains and department stores and the L’eggs brand to mass retailers and food and drug stores. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
As a percent of segment net sales, gross profit percentage was 48.6% in the nine months of 2008 compared to 46.7% in 2007. While the gross profit percentage was higher, gross profit dollars were lower for the nine months of 2008 compared to 2007 as a result of unfavorable product sales mix of $9 million, lower sales volume of $6 million and other vendor price increases of $2 million partially offset by savings from our cost reduction initiatives and prior restructuring actions of $3 million, lower sales incentives of $3 million, lower other manufacturing overhead costs of $2 million and lower on-going excess and obsolete inventory costs of $2 million.
 
Hosiery segment operating profit was flat in the nine months of 2008 compared to 2007 primarily due to lower distribution expenses of $3 million and savings from our cost reduction initiatives and prior restructuring actions of $2 million and lower non-media related MAP expenses of $1 million partially offset by the lower gross profit. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the nine months of 2008 is consistent with 2007.


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