Hanesbrands (HBI)

portfolio with respect to our long-term debt that will be effective in the fourth quarter of 2008 which takes into consideration derivatives that become effective and expire subsequent to the third quarter of 2008.

 

 

In May 2008, Standard & Poor’s Ratings Services raised its corporate credit rating for us to BB- from B+, and also raised our bank loan and unsecured debt ratings. Standard & Poor’s stated that the rating upgrade reflects our positive operating momentum as a stand-alone entity since our spin-off from Sara Lee in September 2006, and also stated that our credit protection measures and operating results have improved and are in line with Standard & Poor’s expectations. Standard & Poor’s also noted that management is on track in executing our strategies. Standard & Poor’s current outlook for us is “stable.”

 

existing cash balances and cash generated by operations, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.

 

We expect to be able to manage our working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. Depending on conditions in the capital markets and other factors, we will from time to time consider other financing transactions, the proceeds of which could be used to refinance current indebtedness or for other purposes. We continue to monitor the impact, if any, of the current conditions in the credit markets on our operations. Our access to financing at reasonable interest rates could become influenced by the economic and credit market environment. In May 2008, Standard & Poor’s Ratings Services raised its corporate credit rating for us to BB- from B+, and also raised our bank loan and unsecured debt ratings. Standard & Poor’s stated that the rating upgrade reflects our positive operating momentum as a stand-alone entity since our spin-off from Sara Lee Corporation (“Sara Lee”) in September 2006, and also stated that our credit protection measures and operating results have improved and are in line with Standard & Poor’s expectations. Standard & Poor’s also noted that management is on track in executing our strategies. Standard & Poor’s current outlook for us is “stable.”

 

The following has or is expected to impact liquidity:

 

 

technology systems across our company over the next several years. This process involves the replacement of eight independent information technology platforms so that our business functions are served by fewer platforms.

 

While capital spending could vary significantly from year to year, we anticipate that our capital spending over the next three years could be as high as $500 million as we execute our supply chain consolidation and globalization strategy and complete the integration and consolidation of our technology systems. Capital spending in any given year over the next three years could be as high as $100 million in excess of our annual depreciation and amortization expense until the completion of actions related to our globalization strategy at which time we would expect our annual capital spending to be relatively comparable to our annual depreciation and amortization expense. The majority of our capital spending will be focused on growing our supply chain operations in Central America, the Caribbean Basin and Asia. These locations will enable us to expand and leverage our large production scale as we balance our supply chain across hemispheres.

 

As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices (which would increase the cost of shipping), interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting production in facilities outside the United States, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns.

 

Our U.S. qualified pension plans are currently approximately 97% funded which should result in minimal pension funding requirements in the future. Due to the current funded status of the plans, we are not required to make any mandatory contributions to our pension plans in 2008.

 

$430 million available for borrowing. We believe that our cash provided from operating activities, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet presently foreseeable financial requirements.

 

The following has or is expected to impact liquidity:

 

 

We expect to continue the restructuring efforts that we have undertaken since the spin off from Sara Lee. The implementation of these efforts, which are designed to improve operating efficiencies and lower costs, has resulted and is likely to continue to result in significant costs and savings. As further plans are developed and approved by management and in some cases our board of directors, we expect to recognize additional restructuring to eliminate duplicative functions within the organization and transition a significant portion of our manufacturing capacity to lower-cost locations. As part of our efforts to consolidate our operations, we also expect to continue to incur costs associated with the integration of our information technology systems across our company over the next several years. This process involves the replacement of eight independent information technology platforms so that our business functions are served by fewer platforms.

 

While capital spending could vary significantly from year to year, we anticipate that our capital spending over the next three years could be as high as $500 million as we execute our supply chain consolidation and globalization strategy and complete the integration and consolidation of our technology systems. Capital spending in any given year over the next three years could be as high as $100 million in excess of our annual depreciation and amortization expense until the completion of actions related to our globalization strategy at which time we would expect our annual capital spending to be relatively comparable to our annual depreciation and amortization expense. The majority of our capital spending will be focused on growing our supply chain operations in Central America, the Caribbean Basin, and Asia. These locations will enable us to expand and leverage our large production scale as we balance our supply chain across hemispheres. In 2007, we acquired our second offshore textile plant, the 1,300-employee textile manufacturing operations of Industrias Duraflex, S.A. de C.V., in San Juan Opico, El Salvador. This acquisition provides a textile base in Central America from which to expand and leverage our large scale as well as supply our sewing network throughout Central America. Also, we announced plans in 2007 to build a textile production plant in Nanjing, China, which will be our first company-owned textile production facility in Asia. The Nanjing textile facility will enable us to expand and leverage our production scale in Asia as we balance our supply chain across hemispheres. In December 2007, we acquired the 900-employee sheer hosiery facility in Las Lourdes, El Salvador of Inversiones Bonaventure, S.A. de C.V. For the past 12 years, these operations had been a primary contract sewing operation for Hanes and L’eggs hosiery products. The acquisition streamlines a critical part of our overall hosiery supply chain and is part of our strategy to operate larger, company-owned production facilities.

 

As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices (which would increase the cost of shipping), interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting production in offshore facilities, increasing our cost of sales, disrupting merchandise deliveries, delaying

receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns.

 

As a result of provisions of the Pension Protection Act of 2006, we are required by law, commencing with plan years beginning after 2007, to make larger contributions to our pension plans than Sara Lee made with respect to these plans in past years. However, the final separation of our pension plan assets and liabilities from those of Sara Lee in 2007 resulted in a higher total amount of pension assets being transferred to us than was originally estimated prior to the spin off which, together with our voluntary contributions of $48 million in 2006 and $48 million in 2007 to our pension plans, has resulted in our U.S. qualified pension plans currently being approximately 97% funded which should result in minimal pension funding requirements in the future.

 

 

Our primary sources of liquidity are our cash flows from
operating activities and availability under our revolving loan
facility. We believe our ability to generate cash from operating
activities is one of our fundamental financial strengths. For
the year ended December 29, 2007, we generated
$359 million in cash from operating activities and have
$174 million in cash and cash equivalents at
December 29, 2007. Barring unforeseen events, we expect
cash flows from operating activities to be consistent in 2008
and in future years. In addition, at December 29, 2007, our
$500 million revolving loan facility remains undrawn and,
after taking into account outstanding letters of credit, has

$430 million available for borrowing. We believe that our
cash provided from operating activities, together with our
available credit capacity, will enable us to comply with the
terms of our indebtedness and meet presently foreseeable
financial requirements.

 

The following has or is expected to impact liquidity:

 

 

We expect to continue the restructuring efforts that we have
undertaken since the spin off from Sara Lee. The implementation
of these efforts, which are designed to improve operating
efficiencies and lower costs, has resulted and is likely to
continue to result in significant costs and savings. As further
plans are developed and approved by management and in some cases
our board of directors, we expect to recognize additional
restructuring to eliminate duplicative functions within the
organization and transition a significant portion of our
manufacturing capacity to lower-cost locations. As part of our
efforts to consolidate our operations, we also expect to
continue to incur costs associated with the integration of our
information technology systems across our company over the next
several years. This process involves the replacement of eight
independent information technology platforms so that our
business functions are served by fewer platforms.

 

While capital spending could vary significantly from year to
year, we anticipate that our capital spending over the next
three years could be as high as $500 million as we execute
our supply chain consolidation and globalization strategy and
complete the integration and consolidation of our technology
systems. Capital spending in any given year over the next three
years could be as high as $100 million in excess of our
annual depreciation and amortization expense until the
completion of actions related to our globalization strategy at
which time we would expect our annual capital spending to be
relatively comparable to our annual depreciation and
amortization expense. The majority of our capital spending will
be focused on growing our supply chain operations in Central
America, the Caribbean Basin, and Asia. These locations will
enable us to expand and leverage our large production scale as
we balance our supply chain across hemispheres. In 2007, we
acquired our second offshore textile plant, the 1,300-employee
textile manufacturing operations of Industrias Duraflex, S.A. de
C.V., in San Juan Opico, El Salvador. This acquisition
provides a textile base in Central America from which to expand
and leverage our large scale as well as supply our sewing
network throughout Central America. Also, we announced plans in
2007 to build a textile production plant in Nanjing, China,
which will be our first company-owned textile production
facility in Asia. The Nanjing textile facility will enable us to
expand and leverage our production scale in Asia as we balance
our supply chain across hemispheres. In December 2007, we
acquired the 900-employee sheer hosiery facility in Las Lourdes,
El Salvador of Inversiones Bonaventure, S.A. de C.V. For the
past 12 years, these operations had been a primary contract
sewing operation for Hanes and L’eggs hosiery
products. The acquisition streamlines a critical part of our
overall hosiery supply chain and is part of our strategy to
operate larger, company-owned production facilities.

 

As we continue to add new manufacturing capacity in Central
America, the Caribbean Basin and Asia, our exposure to events
that could disrupt our foreign supply chain, including political
instability, acts of war or terrorism or other international
events resulting in the disruption of trade, disruptions in
shipping and freight forwarding services, increases in oil
prices (which would increase the cost of shipping),
interruptions in the availability of basic services and
infrastructure and fluctuations in foreign currency exchange
rates, is increased. Disruptions in our foreign supply chain
could negatively impact our liquidity by interrupting production
in offshore facilities, increasing our cost of sales, disrupting
merchandise deliveries, delaying

receipt of the products into the United States or preventing us
from sourcing our products at all. Depending on timing, these
events could also result in lost sales, cancellation charges or
excessive markdowns.

 

As a result of provisions of the Pension Protection Act of 2006,
we are required by law, commencing with plan years beginning
after 2007, to make larger contributions to our pension plans
than Sara Lee made with respect to these plans in past years.
However, the final separation of our pension plan assets and
liabilities from those of Sara Lee in 2007 resulted in a higher
total amount of pension assets being transferred to us than was
originally estimated prior to the spin off which, together with
our voluntary contributions of $48 million in 2006 and
$48 million in 2007 to our pension plans, has resulted in
our U.S. qualified pension plans currently being
approximately 97% funded which should result in minimal pension
funding requirements in the future.

 

related to these efforts. We also expect to continue to incur costs associated with the integration of our information technology systems across our company over the next several years.

 

As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices (which would increase the cost of shipping), interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting production in offshore facilities, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns. For a discussion of these and other risk factors facing our business, see the risk factors section of our Report on Form 10-KT for the six months ended December 30, 2006 and “Risk Factors” in this Quarterly Report on Form 10-Q.

 

As a result of provisions of the Pension Protection Act of 2006, we are required, commencing with plan years beginning after 2007, to make larger contributions to our pension plans than Sara Lee made with respect to these plans in past years. The final separation of our pension plan assets and liabilities from those of Sara Lee which will result in a higher total amount of pension assets being transferred to us than was originally estimated prior to the spin off, together with our contributions of $48 million in December 2006, $42 million in March 2007 and $6 million in September 2007 to our pension plans, has resulted in our qualified pension plans currently being approximately 97% funded which should result in minimal pension funding requirements in the future. We have met our minimum funding requirements for 2007.

 

As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices (which would increase the cost of shipping), interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting production in offshore facilities, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns. For a discussion of these and other risk factors facing our business, see the risk factors section of our Report on Form 10-KT for the six months ended December 30, 2006.

 

As a result of provisions of the Pension Protection Act of 2006, we are required, commencing with plan years beginning after 2007, to make larger contributions to our pension plans than Sara Lee made with respect to these plans in past years. We contributed $48 million in December 2006 and $42 million in March 2007 based upon minimum funding estimates. While these contribution payments fulfill our minimum funding requirements through fiscal 2007, if financial conditions change or if the assumptions we have used to calculate our pension costs and obligations turn out to be inaccurate, we could be required to make contributions to the pension plans in excess of our current expectations for future years. A significant increase in our funding obligations could have a negative impact on our liquidity. As of June 30, 2007, assets estimated to represent approximately 75% of the total assets for the Hanesbrands Inc. Pension and Retirement Plan have been transferred from Sara Lee’s master trust to the master trust we maintain. A final transfer of assets from Sara Lee’s master trust to the master trust maintained by us will occur later in fiscal 2007 once the allocation of assets and liabilities has been completed in accordance with governmental regulations. The fair value of plan assets represents a best estimate based upon a percentage allocation of total assets of Sara Lee’s master trust and will be adjusted once the final transfer is made, with an adjustment to the liability.

 

timing, these events could also result in lost sales, cancellation charges or excessive markdowns. For a discussion of these and other risk factors facing our business, see the risk factors section of our Report on Form 10-KT for the six months ended December 30, 2006.

 

As a result of provisions of the Pension Protection Act of 2006, we are required, commencing with plan years beginning after 2007, to make larger contributions to our pension plans than Sara Lee made with respect to these plans in past years. We contributed $48 million in December 2006 and $42 million in March 2007 based upon minimum funding estimates. While these contribution payments fulfill our minimum funding requirements through fiscal 2007, if financial conditions change or if the assumptions we have used to calculate our pension costs and obligations turn out to be inaccurate, we could be required to make contributions to the pension plans in excess of our current expectations for future years. A significant increase in our funding obligations could have a negative impact on our liquidity.

 

production in offshore facilities, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns.

 

We assumed approximately $299 million in unfunded employee benefit liabilities for pension, postretirement and other retirement benefit qualified and nonqualified plans from Sara Lee in connection with the spin off that occurred on September 5, 2006. Included in these liabilities are pension obligations which have not been reflected in our historical financial statements prior to the spin off, because these obligations have historically been obligations of Sara Lee. The pension obligations we assumed are approximately $225 million more than the corresponding pension assets we acquired. In addition, we could be required to make contributions to the pension plans in excess of our current expectations if financial conditions change or if the assumptions we have used to calculate our pension costs and obligations turn out to be inaccurate. A significant increase in our funding obligations could have a negative impact on our liquidity.

 

activities, together with our available credit capacity, will enable us to comply with the terms of our new indebtedness and meet presently foreseeable financial requirements.

 

We expect to continue the restructuring efforts that we have undertaken over the last several years. For example, we recently announced the closure of two facilities in the United States and one in Mexico and announced the closure of three distribution centers in the United States. The implementation of these efforts, which are designed to improve operating efficiencies and lower costs, has resulted and is likely to continue to result in significant costs. As further plans are developed and approved by management and our board of directors, we expect to recognize additional restructuring costs to eliminate duplicative functions within the organization and transition a significant portion of our manufacturing capacity to lower-cost locations. We also expect to incur costs associated with the integration of our information technology systems across our company.

 

As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices, which would increase the cost of shipping, interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting production in offshore facilities, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns.

 

We assumed $299 million in unfunded employee benefit liabilities for pension, postretirement and other retirement benefit qualified and nonqualified plans from Sara Lee in connection with the spin off that occurred on September 5, 2006. Because these obligations have historically been obligations of Sara Lee, no amounts were reflected in our October 1, 2005 Condensed Combined and Consolidated Balance Sheet. The pension obligations we assumed are $225 million more than the corresponding pension assets we acquired. These obligations have been reflected in our September 30, 2006 Condensed Combined and Consolidated Balance Sheet. In addition, we could be required to make contributions to the pension plans in excess of our current expectations if financial conditions change or if the assumptions we have used to calculate our pension costs and obligations turn out to be inaccurate. A significant increase in our funding obligations could have a negative impact on our liquidity.

 

The exact amount of contributions made to pension plans by us in any year is dependent upon a number of factors, and historically included minimum funding requirements in the jurisdictions in which Sara Lee operates and Sara Lee’s policy of charging its operating units for pension costs. In connection with the spin off which occurred on September 5, 2006, we established the Hanesbrands Inc. Pension and Retirement Plan, which assumed the portion of the underfunded liabilities and the portion of the assets of pension plans sponsored by Sara Lee that relate to our employees. In addition, we assumed sponsorship of certain other Sara Lee plans and will continue sponsorship of the Playtex Apparel Inc. Pension Plan and the National Textiles, L.L.C. Pension Plan. We are required to make periodic pension contributions to the assumed plans, the Playtex Apparel Inc. Pension Plan, the National Textiles, L.L.C. Pension Plan and the Hanesbrands Inc. Pension and Retirement Plan. The levels of contribution will differ from historical levels of contributions to Sara Lee due to a number of factors, including the funded status of the plans as of the completion of the spin off, as well as our operation as a stand-alone company, financing costs, tax positions and jurisdictional funding requirements. As a result of provisions of the Pension Protection Act of 2006, we may be required, commencing with plan years beginning after 2007, to make larger contributions to our pension plans than Sara Lee made with respect to these plans in past years.