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Hanesbrands 10-Q 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Commission file number:
001-32891
(336) 519-8080
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). 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):
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 July 26, 2010, there were 95,663,822 shares of
the registrant’s common stock outstanding.
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, C9 by Champion, Playtex, Bali,
L’eggs, Just My Size, barely there, Wonderbra,
Stedman, Outer Banks, Zorba, Rinbros and Duofold
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 January 2, 2010, particularly under the
caption “Risk Factors.”
All forward-looking statements 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 January 2, 2010, particularly under the
caption “Risk Factors.” We undertake no obligation to
update or revise forward-looking statements that may be made 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 current reports, proxy statements
and other information with the SEC. You can inspect, read and
copy these reports, proxy statements and other information at
the SEC’s Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You can obtain information
regarding the operation of the SEC’s Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a website at www.sec.gov that makes
available reports, proxy statements and other information
regarding issuers that file electronically.
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. By referring to our website,
www.hanesbrands.com, we do not incorporate our website or its
contents into this Quarterly Report on
Form 10-Q.
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PART I
HANESBRANDS
INC.
Condensed Consolidated Statements of Income (in thousands, except per share amounts) (unaudited)
See accompanying notes to Condensed Consolidated Financial
Statements.
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HANESBRANDS
INC.
Condensed Consolidated Balance Sheets (in thousands, except share and per share amounts) (unaudited)
See accompanying notes to Condensed Consolidated Financial
Statements.
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HANESBRANDS
INC.
Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
See accompanying notes to Condensed Consolidated Financial
Statements.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements (dollars and shares in thousands, except per share data) (unaudited)
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 condition
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 interim financial statements reflect all
adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of operations, financial
condition 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.
To reflect a change previously made in the classification of
freight expenses payable, a revision to the six months ended
July 4, 2009 Condensed Consolidated Statement of Cash Flows
was made to reclassify changes in cash related to these payables
from Accrued Liabilities and Other to Accounts Payable. This
reclassification had no impact on the Company’s previously
reported total net cash flows from operating, investing or
financing activities.
In June 2009, the Financial Accounting Standards Board
(“FASB”) issued new accounting rules for transfers of
financial assets. The new rules require greater transparency and
additional disclosures for transfers of financial assets and the
entity’s continuing involvement with them and changes the
requirements for derecognizing financial assets. The new
accounting rules are effective for financial asset transfers
occurring after the beginning of the Company’s first fiscal
year that begins after November 15, 2009. The adoption of
these new rules did not have a material impact on the financial
condition, results of operations or cash flows of the Company.
In June 2009, the FASB issued new accounting rules related to
the accounting and disclosure requirements for the consolidation
of variable interest entities. The new accounting rules are
effective for the Company’s first fiscal year that begins
after November 15, 2009. The adoption of these new rules
did not have a material impact on the financial condition,
results of operations or cash flows of the Company.
Fair
Value Disclosures
In January 2010, the FASB issued new accounting rules related to
the disclosure requirements for fair value measurements. The new
accounting rules require new disclosures regarding significant
transfers between Levels 1 and 2 of the fair value
hierarchy and the activity within Level 3 of the fair value
hierarchy. The new accounting rules also clarify existing
disclosures regarding the level of disaggregation of assets or
liabilities
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
and the valuation techniques and inputs used to measure fair
value. The new accounting rules are effective for the
Company’s first interim fiscal period beginning after
December 15, 2009, except for the disclosures about
purchases, sales, issuances and settlements in the rollforward
of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those
fiscal years. The adoption of the disclosures effective for the
Company’s first interim fiscal period beginning after
December 15, 2009 did not have a material impact on the
Company’s financial condition, results of operations or
cash flows but resulted in certain additional disclosures
reflected in Note 8.
Basic earnings per share (“EPS”) was computed by
dividing net income by the number of weighted average shares of
common stock outstanding during the quarters and six months
ended July 3, 2010 and July 4, 2009. Diluted EPS was
calculated to give effect to all potentially dilutive shares of
common stock using the treasury stock method. The reconciliation
of basic to diluted weighted average shares for the quarters and
six months ended July 3, 2010 and July 4, 2009 is as
follows:
For the quarters ended July 3, 2010 and July 4, 2009,
options to purchase 606 and 5,943 shares of common stock,
respectively, were excluded from the diluted earnings per share
calculation because their effect would be anti-dilutive. For the
six months ended July 3, 2010 and July 4, 2009, 0 and
48 restricted stock units, respectively, and options to purchase
606 and 5,943 shares of common stock, respectively, were
excluded from the diluted earnings per share calculation because
their effect would be anti-dilutive.
Inventories consisted of the following:
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
Allowances
for Trade Accounts Receivable
The changes in the Company’s allowance for doubtful
accounts and allowance for chargebacks and other deductions for
the quarter and six months ended July 3, 2010 are as
follows:
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 receivable and allowed customer chargebacks
and deductions against gross accounts receivable.
Sales
of Accounts Receivable
In March 2010, the Company entered into an agreement to sell
selected trade accounts receivable to a financial institution.
After the sale, the Company does not retain any interests in the
receivables and the financial institution services and collects
these accounts receivable directly from the customer. Net
proceeds of this accounts receivable sale program are recognized
in the Condensed Consolidated Statement of Cash Flows as part of
operating cash flows. The funding fees charged for this program
are recorded in the “Other expenses” line in the
Condensed Consolidated Statement of Income.
During the quarter and six months ended July 3, 2010, the
Company recognized funding fees of $974 and $1,463,
respectively, for sales of accounts receivable to financial
institutions in the “Other expenses” line in the
Condensed Consolidated Statements of Income.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The Company had the following debt at July 3, 2010 and
January 2, 2010:
As of July 3, 2010, the Company had $187,000 outstanding
under the $400,000 revolving loan facility under the senior
secured credit facility that the Company entered into in 2006
(the “2006 Senior Secured Credit Facility”) and
amended and restated in December 2009 (as amended and restated,
the “2009 Senior Secured Credit Facility”), $19,246 of
standby and trade letters of credit issued and outstanding under
this facility and $193,754 of borrowing availability.
On January 29, 2010, in recognition of the lower trade
accounts receivable balance resulting from the sale by the
Company of certain trade accounts receivable to a financial
institution outside the accounts receivable securitization
facility that the Company entered into in November 2007 (the
“Accounts Receivable Securitization Facility”), HBI
Receivables LLC, the Company’s wholly-owned
bankruptcy-remote subsidiary that is a party to such facility,
gave notice to the agent and the managing agents under the
Accounts Receivable Securitization Facility that, as permitted
by the terms of such facility, effective February 11, 2010,
the amount of funding available under the Accounts Receivable
Securitization Facility was being reduced from $250,000 to
$150,000. During the quarter and six months ended July 3,
2010, the Company recognized $0 and $686, respectively, of a
write-off on early extinguishment of debt related to unamortized
debt issuance costs on the Accounts Receivable Securitization
Facility as a result of the reduction in borrowing capacity.
During the quarter and six months ended July 3, 2010, the
Company recognized $1,654 of a write-off on early extinguishment
of debt related to unamortized debt issuance costs on the 2009
Senior Secured Credit Facility as a result of the prepayment of
$57,188 of principal in April 2010. The Company also recognized
$0 and $231 in additional charges related to the amendments of
credit facilities in 2009 during the quarter and six months
ended July 3, 2010, respectively. These charges are
reflected in the “Other expenses” line of the
Condensed Consolidated Statements of Income.
During the quarter and six months ended July 4, 2009, the
Company recognized charges of $168 and $4,114, respectively, in
the “Other expenses” line of the Condensed
Consolidated Statements of Income, which represent certain costs
related to amendments of the 2006 Senior Secured Credit Facility
and the Accounts Receivable Securitization Facility.
As of July 3, 2010, the Company was in compliance with all
covenants under its credit facilities.
The Company uses financial instruments to manage its exposures
to movements in interest rates, foreign exchange rates and
commodity prices. The use of these financial instruments
modifies the Company’s exposure
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
to these risks with the goal of reducing the risk or cost to the
Company. The Company does not use derivatives for trading
purposes and is not a party to leveraged derivative contracts.
The Company recognizes all derivative instruments as either
assets or liabilities at fair value in the Condensed
Consolidated Balance Sheets. The fair value is based upon either
market quotes for actively traded instruments or independent
bids for nonexchange traded instruments. The Company formally
documents its hedge relationships, including identifying the
hedging instruments and the hedged items, as well as its risk
management objectives and strategies for undertaking the hedge
transaction. This process includes linking derivatives that are
designated as hedges of specific assets, liabilities, firm
commitments or forecasted transactions to the hedged risk. On
the date the derivative is entered into, the Company designates
the derivative as a fair value hedge, cash flow hedge, net
investment hedge or a mark to market hedge, and accounts for the
derivative in accordance with its designation. The Company also
formally assesses, both at inception and at least quarterly
thereafter, whether the derivatives are highly effective in
offsetting changes in either the fair value or cash flows of the
hedged item. If it is determined that a derivative ceases to be
a highly effective hedge, or if the anticipated transaction is
no longer likely to occur, the Company discontinues hedge
accounting, and any deferred gains or losses are recorded in the
respective measurement period. The Company currently does not
have any fair value or net investment hedge instruments.
The Company may be exposed to credit losses in the event of
nonperformance by individual counterparties or the entire group
of counterparties to the Company’s derivative contracts.
Risk of nonperformance by counterparties is mitigated by dealing
with highly rated counterparties and by diversifying across
counterparties.
A derivative used as a hedging instrument whose change in fair
value is recognized to act as an economic hedge against changes
in the values of the hedged item is designated a mark to market
hedge.
The Company uses foreign exchange derivative contracts to reduce
the impact of foreign exchange fluctuations on anticipated
intercompany purchase and lending transactions denominated in
foreign currencies. Foreign exchange derivative contracts are
recorded as mark to market hedges when the hedged item is a
recorded asset or liability that is revalued in each accounting
period. Mark to market hedge derivatives relating to
intercompany foreign exchange contracts are reported in the
Condensed Consolidated Statements of Cash Flows as cash flow
from operating activities. As of July 3, 2010, the
U.S. dollar equivalent of commitments to purchase and sell
foreign currencies in the Company’s foreign currency mark
to market hedge derivative portfolio is $11,756 and $41,692,
respectively, using the exchange rate at the reporting date.
A hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset
or liability is designated as a cash flow hedge. The effective
portion of the change in the fair value of a derivative that is
designated as a cash flow hedge is recorded in the
“Accumulated other comprehensive loss” line of the
Condensed Consolidated Balance Sheets. When the impact of the
hedged item is recognized in the income statement, the gain or
loss included in “Accumulated other comprehensive
loss” is reported on the same line in the Condensed
Consolidated Statements of Income as the hedged item.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The Company has executed in the past certain interest rate cash
flow hedges in the form of swaps and caps in order to mitigate
the Company’s exposure to variability in cash flows for the
future interest payments on a designated portion of floating
rate debt. The effective portion of interest rate hedge gains
and losses deferred in “Accumulated other comprehensive
loss” is reclassified into earnings as the underlying debt
interest payments are recognized. Interest rate cash flow hedge
derivatives are reported as a component of interest expense and
therefore are reported as cash flow from operating activities
similar to the manner in which cash interest payments are
reported in the Condensed Consolidated Statements of Cash Flows.
The Company is required under the 2009 Senior Secured Credit
Facility to hedge a portion of its floating rate debt to reduce
interest rate risk caused by floating rate debt issuance. To
comply with this requirement, in the quarter ended April 3,
2010, the Company entered into hedging arrangements whereby it
capped the LIBOR interest rate component on an aggregate of
$490,735 of the floating rate debt under the Floating Rate
Senior Notes at 4.262%. The interest rate cap arrangements, with
notional amounts of $240,735 and $250,000, expire in December
2011.
The Company uses forward exchange and option contracts to reduce
the effect of fluctuating foreign currencies on short-term
foreign currency-denominated transactions, foreign
currency-denominated investments, and other known foreign
currency exposures. Gains and losses on these contracts are
intended to offset losses and gains on the hedged transaction in
an effort to reduce the earnings volatility resulting from
fluctuating foreign currency exchange rates. The effective
portion of foreign exchange hedge gains and losses deferred in
“Accumulated other comprehensive loss” is reclassified
into earnings as the underlying inventory is sold, using
historical inventory turnover rates. The settlement of foreign
exchange hedge derivative contracts related to the purchase of
inventory or other hedged items are reported in the Condensed
Consolidated Statements of Cash Flows as cash flow from
operating activities.
Historically, the principal currencies hedged by the Company
include the Euro, Mexican peso, Canadian dollar and Japanese
yen. Forward exchange contracts mature on the anticipated cash
requirement date of the hedged transaction, generally within one
year. As of July 3, 2010, the U.S. dollar equivalent
of commitments to sell foreign currencies in the Company’s
foreign currency cash flow hedge derivative portfolio was
$28,302, using the exchange rate at that date.
Cotton is the primary raw material used to manufacture many of
the Company’s products and is purchased at market prices.
From time to time, the Company uses commodity financial
instruments to hedge the price of cotton, for which there is a
high correlation between the hedged item and the hedge
instrument. Gains and losses on these contracts are intended to
offset losses and gains on the hedged transactions in an effort
to reduce the earnings volatility resulting from fluctuating
commodity prices. The effective portion of commodity hedge gains
and losses deferred in “Accumulated other comprehensive
loss” is reclassified into earnings as the underlying
inventory is sold, using historical inventory turnover rates.
The settlement of commodity hedge derivative contracts related
to the purchase of inventory is reported in the Condensed
Consolidated Statements of Cash Flows as cash flow from
operating activities. There were no amounts outstanding under
cotton futures or cotton option contracts at July 3, 2010
and January 2, 2010.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The fair values of derivative financial instruments recognized
in the Condensed Consolidated Balance Sheets of the Company were
as follows:
Net
Derivative Gain or Loss
The effect of cash flow hedge derivative instruments on the
Condensed Consolidated Statements of Income and Accumulated
Other Comprehensive Loss is as follows:
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The Company expects to reclassify into earnings during the next
12 months a net loss from Accumulated Other Comprehensive
Loss of approximately $14,783.
The changes in fair value of derivatives excluded from the
Company’s effectiveness assessments and the ineffective
portion of the changes in the fair value of derivatives used as
cash flow hedges are reported in the “Selling, general and
administrative expenses” line in the Condensed Consolidated
Statements of Income. The Company recognized gains (losses) for
the quarter and six months ended July 3, 2010 related to
ineffectiveness of hedging relationships for foreign exchange
contracts of $(2) and $7, respectively. The Company recognized
losses related to ineffectiveness of hedging relationships for
the quarter ended July 4, 2009 of $(150), consisting of
$(143) for interest rate contracts and $(7) for foreign exchange
contracts. The Company recognized gains (losses) related to
ineffectiveness of hedging relationships for the six months
ended July 4, 2009 of $144, consisting of $152 for interest
rate contracts and $(8) for foreign exchange contracts.
The effect of mark to market hedge derivative instruments on the
Condensed Consolidated Statements of Income is as follows:
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. A three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value, is utilized
for disclosing the fair value of the Company’s assets and
liabilities. 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.
12
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
As of July 3, 2010, 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
and foreign exchange rates. The Company’s defined benefit
pension plan investments are not required to be measured at fair
value on a recurring basis. The fair values of interest rate
derivatives are determined with pricing models using LIBOR
interest rate curves, spreads, volatilities and other relevant
information developed using market data and are categorized as
Level 2. The fair values of foreign currency derivatives
are determined using the cash flows of the foreign exchange
contract, discount rates to account for the passage of time and
current foreign exchange market data and are categorized as
Level 2.
There were no changes during the quarter ended July 3, 2010
to the Company’s valuation techniques used to measure asset
and liability fair values on a recurring basis. There were no
transfers between the three level categories and there were no
Level 3 assets or liabilities measured on a quarterly basis
during the quarter ended July 3, 2010. As of July 3,
2010, the Company did not have any non-financial assets or
liabilities that are required to be measured at fair value on a
recurring or non-recurring basis.
The following tables set forth by level within the fair value
hierarchy the Company’s financial assets and liabilities
accounted for at fair value on a recurring basis.
Fair
Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade
accounts receivable, notes receivable and accounts payable
approximated fair value as of July 3, 2010 and
January 2, 2010. The fair value of debt was $1,974,227 and
$1,881,868 as of July 3, 2010 and January 2, 2010 and
had a carrying value of $2,001,187 and $1,892,235, respectively.
The fair values were estimated using quoted market prices as
provided in secondary markets which consider the Company’s
credit risk and market related conditions. The carrying amounts
of the Company’s notes payable approximated fair value as
of July 3, 2010 and January 2, 2010, primarily due to
the short-term nature of these instruments.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The Company’s comprehensive income is as follows:
The Company’s effective income tax rate was (2)% and 7% for
the quarter and six months ended July 3, 2010,
respectively, and 22% for the quarter and six months ended
July 3, 2009.
The effective income tax rate of (2)% and 7% for the quarter and
six months ended July 3, 2010, respectively, was primarily
attributable to a discrete, non-recurring income tax benefit of
approximately $17 million and $20 million for the
quarter and six months ended July 3, 2010, respectively.
The income tax benefit resulted from a change in estimate
associated with the remeasurement of unrecognized tax benefit
accruals and the determination that certain tax positions had
been effectively settled following the finalization of tax
reviews and audits for amounts that were less than originally
anticipated. This non-recurring income tax benefit was partially
offset by a lower proportion of the Company’s earnings
attributed to foreign subsidiaries than in the quarter and six
months ended July 4, 2009 which are taxed at rates lower
than the U.S. statutory rate.
The Company and Sara Lee Corporation (“Sara Lee”)
entered into a tax sharing agreement in connection with the spin
off of the Company from Sara Lee on September 5, 2006.
Under the tax sharing agreement, within 180 days after Sara
Lee filed its final consolidated tax return for the period that
included 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
opening balance sheet as of September 6, 2006 (“as
finally determined”) which has been done. The Company has
the right to participate in the computation of the amount of
deferred taxes. Under the tax sharing agreement, 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.
For purposes of this computation, the Company’s deferred
taxes are the amount of deferred tax benefits (including
deferred tax consequences attributable to deductible temporary
differences and carryforwards) that would be recognized as
assets on the Company’s balance sheet computed in
accordance with GAAP, but without regard to valuation
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
allowances, less the amount of deferred tax liabilities
(including deferred tax consequences attributable to taxable
temporary differences) that would be recognized as liabilities
on the Company’s opening balance sheet computed in
accordance with GAAP, but without regard to valuation
allowances. Neither the Company nor Sara Lee will be required to
make any other payments to the other with respect to deferred
taxes.
Based on the Company’s computation of the final amount of
deferred taxes for the Company’s opening balance sheet as
of September 6, 2006, the amount that is expected to be
collected from Sara Lee based on the Company’s computation
of $72,223, which reflects a preliminary cash installment
received from Sara Lee of $18,000, is included as a receivable
in “Deferred tax assets and other current assets” in
the Condensed Consolidated Balance Sheets as of July 3,
2010 and January 2, 2010. The Company and Sara Lee have
exchanged information in connection with this matter, but Sara
Lee has disagreed with the Company’s computation. In
accordance with the dispute resolution provisions of the tax
sharing agreement, on August 3, 2009, the Company submitted
the dispute to binding arbitration. The arbitration process is
ongoing, and the Company will continue to prosecute its claim.
The Company does not believe that the resolution of this dispute
will have a material impact on the Company’s financial
position, results of operations or cash flows.
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,
Direct to Consumer and International. These segments are
organized principally by product category, geographic location
and distribution channel. Management of each segment is
responsible for the operations of these segments’
businesses but shares a common supply chain and media and
marketing platforms. In October 2009, the Company completed the
sale of its yarn operations and, as a result, the Company no
longer has net sales in the Other segment, which was primarily
comprised of sales of yarn to third parties.
The types of products and services from which each reportable
segment derives its revenues are as follows:
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 January 2, 2010.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
16
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
In accordance with the indenture governing the Company’s
$500,000 Floating Rate Senior Notes issued on December 14,
2006 and the indenture governing the Company’s $500,000
8% Senior Notes issued on December 10, 2009 (together,
the “Indentures”), certain of the Company’s
subsidiaries have guaranteed the Company’s obligations
under the Floating Rate Senior Notes and the 8% Senior
Notes, respectively. 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 Indentures;
(iii) Non-guarantor subsidiaries, on a combined basis;
17
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
(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 and the 8% 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 January 2, 2010, 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.
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
19
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
20
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
21
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
22
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
23
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
The Company has restructured its supply chain over the past
three years to create more efficient production clusters that
utilize fewer, larger facilities and to balance production
capability between the Western Hemisphere and Asia. With its
global supply chain infrastructure substantially in place, the
Company is now focused on optimizing its supply chain to further
enhance efficiency, improve working capital and asset turns and
reduce costs. The Company is focused on optimizing the working
capital needs of its supply chain through several initiatives,
such as supplier-managed inventory for raw materials and sourced
goods ownership arrangements. The consolidation of the
Company’s distribution network is still in process but is
not expected to result in any substantial charges in future
periods. The distribution network consolidation involves the
24
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
implementation of new warehouse management systems and
technology, and opening of new distribution centers and new
third-party logistics providers to replace parts of the
Company’s legacy distribution network.
The reported results for the quarters and six months ended
July 3, 2010 and July 4, 2009 reflect amounts
recognized for restructuring actions, including the impact of
certain actions that were completed for amounts more favorable
than previously estimated. The impact of restructuring efforts
on income before income tax expense is summarized as follows:
The following table illustrates where the costs associated with
these actions are recognized in the Condensed Consolidated
Statements of Income:
Components of the restructuring actions are as follows:
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HANESBRANDS
INC.
Notes to Condensed Consolidated Financial Statements — (Continued) (dollars and shares in thousands, except per share data) (unaudited)
Rollforward of accrued restructuring is as follows:
The accrual balance as of July 3, 2010 is comprised of
$13,054 in current accrued liabilities and $225 in other
noncurrent liabilities. The $13,054 in current accrued
liabilities consists of $6,150 for employee termination and
other benefits and $6,904 for noncancelable lease and other
contractual obligations. The $225 in other noncurrent
liabilities primarily consists of noncancelable lease and other
contractual obligations.
Adjustments to previous estimates resulted from activity related
to prior year restructuring actions.
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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” in this
Quarterly Report on
Form 10-Q
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 January 2, 2010, 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,
L’eggs, Just My Size, barely there, Wonderbra,
Stedman, Outer Banks, Zorba, Rinbros and Duofold. We
design, manufacture, source and sell a broad range of apparel
essentials such as
T-shirts,
bras, panties, men’s underwear, kids’ underwear,
casualwear, activewear, socks and hosiery.
Our operations are managed and reported in five operating
segments, each of which is a reportable segment for financial
reporting purposes: Innerwear, Outerwear, Hosiery, Direct to
Consumer and International. These segments are organized
principally by product category, geographic location and
distribution channel. Management of each segment is responsible
for the operations of these segments’ businesses but shares
a common supply chain and media and marketing platforms. In
October 2009, we completed the sale of our yarn operations and,
as a result, we no longer have net sales in the Other segment,
which was primarily comprised of sales of yarn to third parties.
Our operating results are subject to some variability due to
seasonality and other factors. 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 any 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.
Outlook
We have built a powerful three-plank growth platform designed to
use big brands to increase sales domestically and
internationally, use a low-cost worldwide supply chain to expand
margins, and use strong cash flow to support multiple strategies
to create value.
The first plank of our growth platform is the size and power of
our brands. We have made significant investment in our consumer
insights capability, innovative product development, and
marketing. We have very large U.S. share positions, with
the No. 1 share in all our innerwear categories and
strong positions in outerwear categories, but we have ample
opportunities to further build share. Internationally, our
commercial markets include Mexico, Canada, Japan, India, Brazil
and China where a substantial amount of gross domestic product
growth outside the United States will be concentrated over the
next decade.
The second plank of our growth platform is the unique, low-cost
global supply chain that we have just built. Our low-cost,
high-scale supply chain spans both the Western and Eastern
hemispheres and creates a
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competitive advantage for us around the globe. Our supply chain
has generated significant cost savings, margin expansion and
contributions to cash flow and will continue to do so as we
further optimize our size, scale and production capability. To
support our growth, we have increased our production capacity.
Our Nanjing textile facility started production in the fourth
quarter of 2009 and we expect to ramp up production over the
next 12 months.
The third plank of our growth platform is our ability to
consistently generate strong cash flow. We have the potential to
increase cash flow, and our flexible long-term capital structure
allows us to use cash in executing multiple strategies for
earnings growth, including debt reduction and selective tactical
acquisitions.
Based on strong performance in the first two quarters, we expect
net sales growth of 8% to 10% in the full year 2010 which
reflects net space and distribution gains, an overall increase
in consumer spending, retailer inventory restocking and
favorable foreign currency exchange rates. As a result of the
increased sales expectations, we may invest an incremental
$5 million to $10 million in advertising and trade
spending over the remainder of the year which should restore our
media spending back to a range of $90 to $100 million in an
effort to further build market share growth.
During 2010, we expect our annual gross capital spending to be
relatively comparable to our annual depreciation and
amortization expense and should represent our last year of high
gross capital spending. We expect net capital expenditures of
approximately $60 to $70 million in the full year 2010 to
support our expectation for increasing sales.
We continue to see higher prices for cotton and oil-related
materials in the market, which will impact our results for the
remainder of 2010. After taking into consideration the cotton
costs currently included in inventory, we expect our cost of
cotton to average 69 cents per pound for the full year of 2010
compared to 55 cents per pound for 2009 which will have a
negative impact of approximately $33 million compared to
the full year of 2009. We have continued to see a sustained
increase in the market price of cotton, which will impact our
operating results in the remainder of 2010.
Because of systemic cost inflation, particularly for cotton,
energy and labor, we are working with our customers to offset
cost increases through joint efficiency initiatives as well as
price increases. The timing and size of price increases will
vary by product category. While some price increases will take
effect in the third and fourth quarters of 2010, the majority of
the pricing impact will begin in 2011.
Highlights
from the Second Quarter and Six Months Ended July 3,
2010
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Condensed
Consolidated Results of Operations — Second Quarter
Ended July 3, 2010 Compared with Second Quarter Ended
July 4, 2009
Consolidated net sales were higher by $90 million or 9% in
the second quarter of 2010 compared to the second quarter of
2009, which reflects significant space and distribution gains at
retailers, positive retail sell-through and some inventory
restocking at retail. Our significant space and distribution
gains at retailers contributed approximately 6% of sales growth,
while approximately 3% of growth was driven by increased retail
sell-through, retailer inventory restocking and foreign currency
exchange rates. All three of our largest segments delivered
double digit sales growth in the second quarter of 2010.
Innerwear, Outerwear and International segment net sales were
higher by $51 million (10%), $36 million (16%) and
$16 million (14%), respectively, in the second quarter of
2010 compared to the second quarter of 2009. Direct to Consumer
segment net sales were slightly higher, while Hosiery and Other
segment net sales were lower by $8 million (20%) and
$6 million, respectively, in the second quarter of 2010
compared to the second quarter of 2009.
International segment net sales were higher by 14% in the second
quarter of 2010 compared to the second quarter of 2009, which
reflected a favorable impact of $5 million related to
foreign currency exchange rates due to the strengthening of the
Canadian dollar, Brazilian real, Japanese yen and Mexican peso
compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
International segment net sales were higher by 9% in the second
quarter of 2010 compared to the second quarter of 2009 after
excluding the impact of foreign exchange rates on currency.
There was not a significant shift in
back-to-school
shipments in 2010 compared to 2009 between the months of June
and July.
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As a percent of net sales, our gross profit was 34.8% in the
second quarter of 2010 compared to 33.2% in the second quarter
of 2009, increasing as a result of the items described below.
Our results in the second quarter of 2010 primarily benefited
from higher sales volumes and lower manufacturing costs.
Our gross profit was higher by $47 million in the second
quarter of 2010 compared to the second quarter of 2009 due
primarily to higher sales volume of $49 million, savings
from our prior restructuring actions of $11 million, lower
production costs of $10 million related to lower energy and
oil-related costs, including non-customer freight costs, vendor
price reductions of $10 million, lower
start-up and
shut-down
costs of $5 million associated with the consolidation and
globalization of our supply chain and a $3 million
favorable impact related to foreign currency exchange rates. The
favorable impact of foreign currency exchange rates in our
International segment was primarily due to the strengthening of
the Canadian dollar, Brazilian real, Japanese yen and Mexican
peso compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
Our gross profit was negatively impacted by higher sales
incentives of $12 million, lower product pricing of
$8 million, primarily within the wholesale casualwear
channel, an unfavorable product sales mix of $7 million,
higher cotton costs of $7 million, higher excess and
obsolete inventory costs of $4 million and higher other
manufacturing costs of $2 million. Our sales incentives
were higher due to higher sales volumes and because we made
significant investments to support retailers and position
ourselves for future sales opportunities. The higher excess and
obsolete inventory costs are primarily timing related and only
attributable to a limited number of specific product styles.
The cotton prices reflected in our results were 61 cents per
pound in the second quarter of 2010 compared to 49 cents per
pound in the second quarter of 2009. After taking into
consideration the cotton costs currently included in inventory,
we expect our cost of cotton to average 69 cents per pound for
the full year of 2010 compared to 55 cents per pound for 2009.
We continue to see higher prices for cotton and oil-related
materials in the market, which will impact our results for the
remainder of 2010.
Our selling, general and administrative expenses were
$21 million higher in the second quarter of 2010 compared
to the second quarter of 2009. Our media related media,
advertising and promotion (“MAP”) expenses and
non-media related MAP expenses were higher by $9 million
and $3 million, respectively, during the second quarter of
2010 compared to the second quarter of 2009 when we reduced
spending due to the recession. 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. For example, during the second quarter of 2010 we
launched new television advertising featuring new Hanes
men’s underwear products Comfort Flex waistband
and Lay Flat Collar T-shirts, we introduced new advertising
supporting Playtex 18 Hour cooling products and we
launched new advertising supporting the new barely there
Smart sizes bra sizing system.
We also incurred higher distribution expenses of $9 million
and higher selling and other marketing expenses of
$2 million. The higher distribution expenses were primarily
due to higher sales volumes and other
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incremental costs to service higher demand such as overtime and
rework expenses in our distribution centers while the higher
selling and other marketing expenses were primarily due to
higher sales volumes.
We also incurred higher expenses of $2 million in the
second quarter of 2010 compared to the second quarter of 2009 as
a result of new retail stores or expanding existing stores over
the last 12 months. We opened one retail store during the
second quarter of 2010. Changes due to foreign currency exchange
rates, which are included in the impact of the changes discussed
above, resulted in higher selling, general and administrative
expenses of $2 million in the second quarter of 2010
compared to the second quarter of 2009.
These higher expenses were partially offset by lower stock
compensation and certain other benefit expenses of
$3 million.
During the second quarter of 2009, we incurred $13 million
in restructuring charges, which primarily related to employee
termination and other benefits and other exit costs associated
with facility closures approved during that period that did not
recur in 2010.
Operating profit was higher in the second quarter of 2010
compared to the second quarter of 2009 as a result of higher
gross profit of $47 million and lower restructuring and
related charges of $13 million, partially offset by higher
selling, general and administrative expenses of
$21 million. Changes in foreign currency exchange rates had
a favorable impact on operating profit of $1 million in the
second quarter of 2010 compared to the second quarter of 2009.
During the second quarter of 2010, we wrote off unamortized debt
issuance costs and incurred charges for funding fees associated
with the sales of certain trade accounts receivable to financial
institutions, which combined totaled $3 million. The
write-off related to unamortized debt issuance costs resulted
from the repayment of $57 million of principal under the
senior secured credit facility that we entered into in 2006 (the
“2006 Senior Secured Credit Facility”) and amended and
restated in 2009 (as amended and restated, the “2009 Senior
Secured Credit Facility”).
During the second quarter of 2009, we incurred costs to amend
the accounts receivable securitization facility that we entered
into in November 2007 (the “Accounts Receivable
Securitization Facility”).
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Interest expense, net was lower by $8 million in the second
quarter of 2010 compared to the second quarter of 2009. The
lower interest expense was primarily attributable to lower
outstanding debt balances that reduced interest expense by
$5 million. In addition, the refinancing of our debt
structure in December 2009, which included the amendment and
restatement of the 2006 Senior Secured Credit Facility into the
2009 Senior Secured Credit Facility, the issuance of our
$500 million 8.000% Senior Notes due 2016 (the
“8% Senior Notes”) and the settlement of certain
outstanding interest rate hedging instruments, combined with a
lower London Interbank Offered Rate, or “LIBOR,” and
federal funds rate, caused a net decrease in interest expense in
the second quarter of 2010 compared to the second quarter of
2009 of $3 million.
Our weighted average interest rate on our outstanding debt was
5.44% during the second quarter of 2010 compared to 7.02% in the
second quarter of 2009.
Our effective income tax rate was (2%) in the second quarter of
2010 compared to 22% in the second quarter of 2009. The
effective income tax rate of (2%) for the second quarter of 2010
was primarily attributable to a discrete, non-recurring income
tax benefit of approximately $17 million. The income tax
benefit resulted from a change in estimate associated with the
remeasurement of unrecognized tax benefit accruals and the
determination that certain tax positions had been effectively
settled following the finalization of tax reviews and audits for
amounts that were less than originally anticipated. This
non-recurring income tax benefit was partially offset by a lower
proportion of our earnings attributed to foreign subsidiaries
than in the second quarter of 2009 which are taxed at rates
lower than the U.S. statutory rate.
Our effective tax rate reflects our strategic initiative to make
capital investments outside the United States in our global
supply chain in 2010.
Net income for the second quarter of 2010 was higher than the
second quarter of 2009 primarily due to higher operating profit
of $39 million, lower income tax expense of
$10 million and lower interest expense of $8 million,
partially offset by higher other expenses of $2 million.
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Operating
Results by Business Segment — Second Quarter Ended
July 3, 2010 Compared with Second Quarter Ended
July 4, 2009
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 such segment. The allocation methodology for
the consolidated selling, general and administrative expenses
for the second quarter of 2010 was consistent with the second
quarter of 2009. Our consolidated selling, general and
administrative expenses before segment allocations were
$21 million higher in the second quarter of 2010 compared
to the second quarter of 2009.
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Overall net sales in the Innerwear segment were higher by
$51 million or 10% in the second quarter of 2010 compared
to the second quarter of 2009, primarily due to space and
distribution gains, stronger sales at retail and retailer
inventory restocking. We are driving the growth in our Innerwear
segment by leveraging our scale and consumer insight to gain new
space and distribution. Our strong brands across all
distribution channels and our innovation processes allow us to
take advantage of long-term consumer trends.
Net sales in our Hanes brand male underwear product
category were 23% or $49 million higher in the second
quarter of 2010 compared to the second quarter of 2009,
primarily due to distribution gains related to a new customer in
the discount retail channel, space gains in the mass merchant
and department store channels and increased retail sell through.
The higher Hanes brand male underwear net sales reflect
growth in key segments of this category such as crewneck and
V-neck T-shirts and boxer briefs. Our male underwear product
category continues to benefit from the increased media support
for our Hanes brand and from our identification of key
long-term megatrends such as comfort and dyed and color
products. We have developed innovations to capitalize on these
trends such as the Hanes Lay Flat Collar T-shirts and
Hanes Comfortsoft waist band briefs and boxers.
Higher net sales of $4 million in our socks product
category reflect higher Hanes brand net sales of
$7 million partially offset by lower Champion brand
net sales of $3 million in the second quarter of 2010
compared to the second quarter of 2009. The higher Hanes
brand net sales were primarily due to space gains in the
mass merchant channel and the lower Champion brand net
sales were primarily due to lower net sales in the wholesale
club channel.
Total intimate apparel net sales were $2 million lower in
the second quarter of 2010 compared to the second quarter of
2009. Our bra category net sales were $3 million higher in
the full and average figure sizes driven primarily by space and
distribution gains. Our panties category net sales were lower by
$5 million primarily due to replenishment timing and
certain style exits. From a brand perspective, our net sales
were lower in our Hanes brand by $5 million and our
Playtex brand by $5 million, partially offset by
higher net sales in our smaller brands (barely there,
Just My Size and Wonderbra) of $5 million and
our Bali brand of $4 million.
Innerwear segment gross profit was higher by $19 million in
the second quarter of 2010 compared to the second quarter of
2009. The higher gross profit was primarily due to higher sales
volume of $31 million, savings from our prior restructuring
actions of $7 million, lower production costs of
$6 million related to lower energy and oil-related costs,
including non-customer freight costs and vendor price reductions
of $6 million. These lower costs were partially offset by
higher sales incentives of $15 million due to higher sales
volumes and investments made with retailers, higher excess and
obsolete inventory costs of $5 million, higher other
manufacturing costs of $4 million, higher cotton costs of
$3 million and an unfavorable product sales mix of
$3 million. The higher excess and obsolete inventory costs
are primarily timing related and only attributable to a limited
number of specific product styles.
As a percent of segment net sales, gross profit in the Innerwear
segment was 34.2% in the second quarter of 2010 compared to
33.8% in the second quarter of 2009, increasing as a result of
the items described above.
Innerwear segment operating profit was higher in the second
quarter of 2010 compared to the second quarter of 2009 primarily
as a result of higher gross profit, partially offset by higher
media related MAP expenses of $9 million, higher
distribution expenses of $3 million and higher non-media
related MAP expenses of $2 million.
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Outerwear segment net sales were higher by $36 million or
16% in the second quarter of 2010 compared to the second quarter
of 2009 as a result of space and distribution gains and stronger
sales at retail. Our casualwear category net sales were higher
in both the retail and wholesale channels by $26 million
and $4 million, respectively. The higher net sales in the
retail casualwear channel of 90% reflect space gains primarily
from an exclusive long-term agreement entered into with Wal-Mart
in April 2009 that significantly expanded the presence of our
Just My Size brand. This integrated program with Wal-Mart
develops, sources, and merchandises a line of women’s
clothing designed to meet the needs of plus size women.
Our Champion brand activewear net sales, which continue
to be positively impacted by our marketing investment in the
brand, were higher by $5 million or 5%. Our Champion
brand has achieved consistent growth by focusing on the fast
growing active demographic with a unique moderate price
positioning.
Outerwear segment gross profit was higher by $15 million in
the second quarter of 2010 compared to the second quarter of
2009. The higher gross profit was primarily due to higher sales
volume of $14 million, lower sales incentives of
$6 million, savings from our prior restructuring actions of
$4 million, lower production costs of $3 million
related to lower energy and oil-related costs, including
non-customer freight costs, lower other manufacturing costs of
$3 million primarily related to cost reductions at our
manufacturing facilities and vendor price reductions of
$2 million. These lower costs were partially offset by
lower product pricing of $7 million primarily within the
wholesale casualwear channel, an unfavorable product sales mix
of $6 million and higher cotton costs of $4 million.
As a percent of segment net sales, gross profit in the Outerwear
segment was 23.4% in the second quarter of 2010 compared to
20.6% in the second quarter of 2009, increasing as a result of
the items described above.
Outerwear segment operating profit was higher in the second
quarter of 2010 compared to the second quarter of 2009 primarily
as a result of higher gross profit, partially offset by higher
distribution expenses of $4 million.
Net sales in the Hosiery segment declined by $8 million or
20%, which was 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. The net sales decline rate in the second
quarter was substantially higher than the long-term trend
partially as a result of a shift of approximately
$2 million in net sales from the second quarter to the
first quarter in 2010 due to early shipment of customer
programs. In addition, hosiery products in all channels continue
to be more adversely impacted than other apparel categories by
reduced consumer discretionary spending. The hosiery category
has been in a state of consistent decline for the past decade,
as the trend toward casual dress reduced demand for sheer
hosiery. Generally, we manage the Hosiery segment for cash,
placing an emphasis on reducing our cost structure and managing
cash efficiently.
Hosiery segment gross profit was lower by $3 million in the
second quarter of 2010 compared to the second quarter of 2009.
The lower gross profit for the second quarter of 2010 compared
to the second quarter
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of 2009 was primarily the result of lower sales volume of
$3 million and higher sales incentives of $2 million,
partially offset by lower spending of $2 million in
numerous areas. As a percent of segment net sales, gross profit
in the Hosiery segment was 51.1% in the second quarter of 2010
compared to 48.2% in the second quarter of 2009.
Hosiery segment operating profit was lower in the second quarter
of 2010 compared to the second quarter of 2009 primarily as a
result of lower gross profit.
Direct
to Consumer
Direct to Consumer segment net sales were slightly higher in the
second quarter of 2010 compared to the second quarter of 2009
primarily due to higher net sales related to our Internet
operations, partially offset by lower net sales in our outlet
stores attributable to lower comparable store sales. The lower
comparable store sales of 4% were driven by lower traffic.
Direct to Consumer segment gross profit was flat in the second
quarter of 2010 compared to the second quarter of 2009. Gross
profit was primarily impacted by favorable product sales mix of
$1 million, partially offset by higher other product costs
of $1 million. As a percent of segment net sales, gross
profit in the Direct to Consumer segment was 62.5% in the second
quarter of 2010 compared to 63.2% in the second quarter of 2009.
Direct to Consumer segment operating profit was lower in the
second quarter of 2010 compared to the second quarter of 2009
primarily as a result of higher expenses of $2 million as a
result of new retail stores or expanding existing stores over
the last 12 months, higher non-media related MAP expenses
of $1 million and higher distribution expenses of
$1 million.
Overall net sales in the International segment were higher by
$16 million or 14% in the second quarter of 2010 compared
to the second quarter of 2009, primarily as a result of stronger
net sales in Europe, Canada, Brazil and Mexico, which reflects
space and distribution gains and stronger sales at retail, and a
favorable impact of $5 million related to foreign currency
exchange rates, partially offset by lower sales in Japan.
Excluding the impact of foreign exchange rates on currency,
International segment net sales increased by 9% in the second
quarter of 2010 compared to the second quarter of 2009. The
favorable impact of foreign currency exchange rates in our
International segment was primarily due to the strengthening of
the Canadian dollar, Brazilian real, Japanese yen and Mexican
peso compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
During the second quarter of 2010, we experienced higher net
sales, in each case excluding the impact of foreign currency
exchange rates, in our casualwear business in Europe of
$6 million, in our intimate apparel, male underwear and
socks businesses in Canada of $3 million, in our male
underwear and hosiery businesses in Brazil of $2 million
and in our intimate apparel business in Mexico of
$1 million and higher net sales of $2 million in all
other regions, partially offset by lower net sales in our
activewear business in Japan of
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$3 million. Our innerwear businesses in Canada and Mexico
continue to produce strong sales growth as we hold leading
positions with strong market shares in intimate apparel and male
underwear product categories. In certain international markets
we are focusing on adopting global designs for some product
categories to quickly launch new styles to expand our market
position. The higher net sales reflect our successful efforts to
improve our strong positions.
International segment gross profit was higher by $9 million
in the second quarter of 2010 compared to the second quarter of
2009. The higher gross profit was primarily a result of higher
sales volume of $6 million, a favorable impact related to
foreign currency exchange rates of $3 million, lower other
manufacturing costs of $2 million and vendor price
reductions of $2 million, partially offset by higher sales
incentives of $3 million.
As a percent of segment net sales, gross profit in the
International segment was 38.0% in the second quarter of 2010
compared to 35.2% in the second quarter of 2009, increasing as a
result of the items described above.
International segment operating profit was higher in the second
quarter of 2010 compared to the second quarter of 2009 was
primarily attributable to the higher gross profit, partially
offset by higher selling and other marketing expenses of
$3 million and higher distribution expenses of
$1 million. The changes in foreign currency exchange rates,
which are included in the impact on gross profit above, had a
favorable impact on operating profit of $1 million in the
second quarter of 2010 compared to the second quarter of 2009.
Sales in our Other segment primarily consisted of sales of yarn
to third parties, which were intended to maintain asset
utilization at certain manufacturing facilities and generate
approximate break even margins. In October 2009, we completed
the sale of our yarn operations as a result of which we ceased
making our own yarn and now source all of our yarn requirements
from large-scale yarn suppliers. As a result of the sale of our
yarn operations, we no longer have net sales in our Other
segment.
General corporate expenses were $10 million lower in the
second quarter of 2010 compared to the second quarter of 2009
primarily due to lower
start-up and
shut-down costs of $5 million associated with the
consolidation and globalization of our supply chain and lower
stock compensation and certain other benefits of $4 million.
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Condensed
Consolidated Results of Operations — Six Months Ended
July 3, 2010 Compared with Six Months Ended July 4,
2009
Consolidated net sales were higher by $160 million or 9% in
the six months of 2010 compared to 2009, which reflects
significant space and distribution gains at retailers, positive
retail sell-through and some inventory restocking at retail. Our
significant shelf-space and distribution gains at retailers
contributed approximately 6% of sales growth, while
approximately 3% of growth was driven by increased retail
sell-through, retailer inventory restocking and foreign currency
exchange rates.
Innerwear, Outerwear, Direct to Consumer and International
segment net sales were higher by $84 million (9%),
$61 million (14%), $3 million (2%) and
$31 million (15%), respectively, in the six months of 2010
compared to 2009. Hosiery and Other segment net sales were lower
by $11 million (12%) and $8 million, respectively, in
the six months of 2010 compared to 2009.
International segment net sales were higher by 15% in the six
months of 2010 compared to 2009, which reflected a favorable
impact of $15 million related to foreign currency exchange
rates due to the strengthening of the Canadian dollar, Brazilian
real, Mexican peso and Japanese yen compared to the
U.S. dollar, partially offset by the strengthening of the
U.S. dollar compared to the Euro. International segment net
sales were higher by 8% in the six months of 2010 compared to
2009 after excluding the impact of foreign exchange rates on
currency.
There was not a significant shift in
back-to-school
shipments in 2010 compared to 2009 between the months of June
and July.
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As a percent of net sales, our gross profit was 35.0% in the six
months of 2010 compared to 31.7% in the six months of 2009,
increasing as a result of the items described below. Our results
in the six months of 2010 primarily benefited from higher sales
volumes and lower manufacturing costs.
Our gross profit was higher by $117 million in the six
months of 2010 compared to 2009 due primarily to higher sales
volume of $82 million, lower production costs of
$22 million related to lower energy and oil-related costs,
including non-customer freight costs, vendor price reductions of
$17 million, savings from our prior restructuring actions
of $15 million, lower
start-up and
shut-down
costs of $10 million associated with the consolidation and
globalization of our supply chain, a $7 million favorable
impact related to foreign currency exchange rates, lower cotton
costs of $6 million and lower other manufacturing costs of
$4 million primarily related to cost reductions. The
favorable impact of foreign currency exchange rates in our
International segment was primarily due to the strengthening of
the Canadian dollar, Brazilian real, Mexican peso and Japanese
yen compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
Our gross profit was negatively impacted by an unfavorable
product sales mix of $18 million, higher sales incentives
of $18 million, lower product pricing of $11 million,
primarily within the wholesale casualwear channel, and higher
excess and obsolete inventory costs of $1 million. Our
sales incentives were higher due to higher sales volumes and
because we made significant investments to support retailers and
position ourselves for future sales opportunities.
We incurred one-time restructuring related write-offs of
$3 million in the six months of 2009 for stranded raw
materials and work in process inventory determined not to be
salvageable or cost-effective to relocate, which did not recur
in the six months of 2010.
The cotton prices reflected in our results were 54 cents per
pound in the six months of 2010 compared to 62 cents per pound
in the six months of 2009. After taking into consideration the
cotton costs currently included in inventory, we expect our cost
of cotton to average 69 cents per pound for the full year of
2010 compared to 55 cents per pound for 2009. While cotton and
oil-related costs were lower in the six months of 2010 compared
to the six months of 2009, we continue to see higher prices for
cotton and oil-related materials in the market, which will
impact our results for the remainder of 2010.
Our selling, general and administrative expenses were
$40 million higher in the six months of 2010 compared to
2009. Our media related MAP expenses and non-media related MAP
expenses were higher by $15 million and $9 million,
respectively, during the six months of 2010 compared to 2009
when we reduced spending due to the recession. 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. For example, during the second
quarter of 2010 we launched new television advertising featuring
new Hanes men’s underwear products Comfort Flex
waistband and Lay Flat Collar T-shirts, we introduced new
advertising supporting Playtex 18 Hour cooling products
and we launched new advertising supporting the new barely
there Smart sizes bra sizing system.
We also incurred higher distribution expenses of
$11 million, higher selling and other marketing expenses of
$5 million, higher consulting expenses of $4 million,
and higher technology expenses of $2 million. The higher
distribution expenses were primarily due to higher sales volumes
and other incremental costs to service higher demand such as
overtime and rework expenses in our distribution centers while
the higher selling and other marketing expenses were primarily
due to higher sales volumes.
We also incurred higher expenses of $4 million in the six
months of 2010 compared to 2009 as a result of new retail stores
or expanding existing stores over the last 12 months. We
opened two retail stores during
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the six months of 2010. Changes due to foreign currency exchange
rates, which are included in the impact of the changes discussed
above, resulted in higher selling, general and administrative
expenses of $5 million in the six months of 2010 compared
to 2009.
These higher expenses were partially offset by lower stock
compensation and certain other benefit expenses of
$7 million and savings of $4 million from our prior
restructuring actions.
During the six months of 2009, we incurred $31 million in
restructuring charges, which primarily related to employee
termination and other benefits, exiting supply contracts and
other exit costs associated with facility closures approved
during that period that did not recur in 2010.
Operating profit was higher in the six months of 2010 compared
to 2009 as a result of higher gross profit of $117 million
and lower restructuring and related charges of $31 million,
partially offset by higher selling, general and administrative
expenses of $40 million. Changes in foreign currency
exchange rates had a favorable impact on operating profit of
$2 million in the six months of 2010 compared to 2009.
During the six months of 2010, we wrote off unamortized debt
issuance costs and incurred charges for funding fees associated
with the sales of certain trade accounts receivable to financial
institutions, which combined totaled $4 million. The
write-off related to unamortized debt issuance costs resulted
from the repayment of $57 million of principal under the
2009 Senior Secured Credit Facility and from the reduction in
borrowing capacity available under the Accounts Receivable
Securitization Facility from $250 million to
$150 million that we effected in recognition of our lower
trade accounts receivable balance resulting from the sales of
certain trade accounts receivable to a financial institution
outside the Accounts Receivable Securitization Facility.
During the six months of 2009, we incurred costs to amend the
2006 Senior Secured Credit Facility and the Accounts Receivable
Securitization Facility of $4 million.
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Interest expense, net was lower by $8 million in the six
months of 2010 compared to 2009. The lower interest expense was
primarily attributable to lower outstanding debt balances that
reduced interest expense by $10 million. The refinancing of
our debt structure in December 2009, which included the
amendment and restatement of the 2006 Senior Secured Credit
Facility into the 2009 Senior Secured Credit Facility, the
issuance of the 8% Senior Notes and settlement of certain
outstanding interest rate hedging instruments, combined with a
lower LIBOR and federal funds rate, caused a net increase in
interest expense in the six months of 2010 compared to 2009 of
$2 million.
Our weighted average interest rate on our outstanding debt was
5.46% during the six months of 2010 compared to 6.79% in the six
months of 2009.
We are required under the 2009 Senior Secured Credit Facility to
hedge a portion of our floating rate debt to reduce interest
rate risk caused by floating rate debt issuance. To comply with
this requirement, in the six months of 2010 we entered into
hedging arrangements whereby we capped the LIBOR interest rate
component on an aggregate of $491 million of the floating
rate debt under our $500 million Floating Rate Senior Notes
due 2014 (the “Floating Rate Senior Notes”) at 4.262%.
Our effective income tax rate was 7% in the six months of 2010
compared to 22% in the six months of 2009. The effective income
tax rate of 7% for the six months of 2010 was primarily
attributable to a discrete, non-recurring income tax benefit of
approximately $20 million. The income tax benefit resulted
from a change in estimate associated with the remeasurement of
unrecognized tax benefit accruals and the determination that
certain tax positions had been effectively settled following the
finalization of tax reviews and audits for amounts that were
less than originally anticipated. This non-recurring income tax
benefit was partially offset by a lower proportion of our
earnings attributed to foreign subsidiaries than in the six
months of 2009 which are taxed at rates lower than the
U.S. statutory rate.
Our effective tax rate reflects our strategic initiative to make
capital investments outside the United States in our global
supply chain in 2010.
Net income for the six months of 2010 was higher than the six
months of 2009 primarily due to higher operating profit of
$108 million and lower interest expense of $8 million,
partially offset by higher income tax expense of $5 million.
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Operating
Results by Business Segment — Six Months Ended
July 3, 2010 Compared with Six Months Ended July 4,
2009
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 such segment. The allocation methodology for
the consolidated selling, general and administrative expenses
for the six months of 2010 was consistent with the six months of
2009. Our consolidated selling, general and administrative
expenses before segment allocations were $40 million higher
in the six months of 2010 compared to 2009.
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