Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2011

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 001-32891

Hanesbrands Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

(State of incorporation)

 

20-3552316

(I.R.S. employer identification no.)

1000 East Hanes Mill Road

Winston-Salem, North Carolina

(Address of principal executive office)

 

27105

(Zip code)

(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 ¨

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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ    Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)    Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No þ

As of October 28, 2011, there were 97,170,548 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

      Page   

Forward-Looking Statements

     1   

Where You Can Find More Information

     1   
PART I      

Item 1.

  

Financial Statements (unaudited):

  
   Condensed Consolidated Statements of Income for the quarters and nine months ended October 1, 2011 and October 2, 2010      2   
  

Condensed Consolidated Balance Sheets at October 1, 2011 and January 1, 2011

     3   
   Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2011 and October 2, 2010      4   
  

Notes to Condensed Consolidated Financial Statements

     5   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     25   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     46   

Item 4.

  

Controls and Procedures

     46   
PART II      

Item 1.

  

Legal Proceedings

     47   

Item 1A.

  

Risk Factors

     47   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 3.

  

Defaults Upon Senior Securities

     47   

Item 4.

  

(Removed and Reserved)

     47   

Item 5.

  

Other Information

     47   

Item 6.

  

Exhibits

     47   
Signatures      48   
Index to Exhibits      E-1   

Trademarks, Trade Names and Service Marks

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 may 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, Duofold and Gear for Sports 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

FORWARD-LOOKING STATEMENTS

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, statements under the headings “Outlook for 2011” and “Business and Industry Trends” and other information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include 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 1, 2011, 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 1, 2011, 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.

WHERE YOU CAN FIND MORE INFORMATION

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 corporate website, www.hanesbrands.com, or any of our other websites, we do not incorporate any such website or its contents into this Quarterly Report on Form 10-Q.

 

1


Table of Contents

PART I

 

Item 1. Financial Statements

HANESBRANDS INC.

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

 

     Quarter Ended      Nine Months Ended  
     October 1,
2011
     October 2,
2010
     October 1,
2011
     October 2,
2010
 

Net sales

   $ 1,230,185      $ 1,173,362      $ 3,491,828      $ 3,177,054  

Cost of sales

     804,742        809,487        2,284,620        2,110,943  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     425,443        363,875        1,207,208        1,066,111  

Selling, general and administrative expenses

     272,761        249,815        804,215        743,534  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

     152,682        114,060        402,993        322,577  

Other expenses

     880        1,094        2,295        5,128  

Interest expense, net

     38,262        36,326        118,545        110,394  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     113,540        76,640        282,153        207,055  

Income tax expense

     22,708        15,328        56,430        23,818  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 90,832      $ 61,312      $ 225,723      $ 183,237  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

           

Basic

   $ 0.93      $ 0.64      $ 2.31      $ 1.90  

Diluted

   $ 0.91      $ 0.63      $ 2.28      $ 1.87  

Weighted average shares outstanding:

           

Basic

     97,925        96,496        97,559        96,417  

Diluted

     99,535        97,752        99,200        97,790  

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)

 

     October 1,
2011
    January 1,
2011
 
Assets     

Cash and cash equivalents

   $ 47,997     $ 43,671  

Trade accounts receivable less allowances of $16,779 at October 1, 2011 and $19,192 at January 1, 2011

     589,439       503,243  

Inventories

     1,726,372       1,322,719  

Deferred tax assets

     146,357       149,431  

Other current assets

     64,694       128,607  
  

 

 

   

 

 

 

Total current assets

     2,574,859       2,147,671  
  

 

 

   

 

 

 

Property, net

     636,409       631,254  

Trademarks and other identifiable intangibles, net

     173,156       178,622  

Goodwill

     432,671       430,144  

Deferred tax assets and other noncurrent assets

     401,485       402,311  
  

 

 

   

 

 

 

Total assets

   $ 4,218,580     $ 3,790,002  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Accounts payable

   $ 505,884     $ 412,369  

Accrued liabilities

     322,588       276,303  

Notes payable

     34,111       50,678  

Current portion of debt

     175,000       90,000  
  

 

 

   

 

 

 

Total current liabilities

     1,037,583       829,350  
  

 

 

   

 

 

 

Long-term debt

     2,005,735       1,990,735  

Other noncurrent liabilities

     425,021       407,243  
  

 

 

   

 

 

 

Total liabilities

     3,468,339       3,227,328  
  

 

 

   

 

 

 

Stockholders’ equity:

    

Preferred stock (50,000,000 authorized shares; $.01 par value)

    

Issued and outstanding — None

              

Common stock (500,000,000 authorized shares; $.01 par value)

    

Issued and outstanding — 97,165,403 at October 1, 2011 and 96,207,025 at January 1, 2011

     972       962  

Additional paid-in capital

     257,881       294,829  

Retained earnings

     705,820       480,098  

Accumulated other comprehensive loss

     (214,432     (213,215
  

 

 

   

 

 

 

Total stockholders’ equity

     750,241       562,674  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,218,580     $ 3,790,002  
  

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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HANESBRANDS INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended  
     October 1,
2011
    October 2,
2010
 

Operating activities:

    

Net income

   $ 225,723     $ 183,237  

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation

     55,707       54,232  

Amortization of intangibles

     10,861       9,046  

Write-off on early extinguishment of debt

            2,340  

Amortization of debt issuance costs

     7,799       9,724  

Amortization of loss on interest rate hedge

     8,928       13,732  

Stock compensation expense

     5,901       8,320  

Deferred taxes and other

     2,970       (10,224

Changes in assets and liabilities:

    

Accounts receivable

     (90,942     (77,782

Inventories

     (404,801     (333,132

Other assets

     2,305       9,112  

Accounts payable

     93,526       109,964  

Accrued liabilities and other

     55,149       (15,643
  

 

 

   

 

 

 

Net cash used in operating activities

     (26,874     (37,074
  

 

 

   

 

 

 

Investing activities:

    

Purchases of property, plant and equipment

     (68,744     (78,570

Acquisition of business

     (9,154       

Proceeds from sales of assets

     12,659       45,469  

Other

            (519
  

 

 

   

 

 

 

Net cash used in investing activities

     (65,239     (33,620
  

 

 

   

 

 

 

Financing activities:

    

Borrowings on notes payable

     305,257       991,061  

Repayments on notes payable

     (322,185     (1,015,338

Borrowings on Accounts Receivable Securitization Facility

     229,396       191,424  

Repayments on Accounts Receivable Securitization Facility

     (144,396     (141,424

Borrowings on Revolving Loan Facility

     2,448,500       1,597,500  

Repayments on Revolving Loan Facility

     (2,433,500     (1,459,000

Payments to amend credit facilities

     (3,757     (1,688

Proceeds from stock options exercised

     16,784       3,437  

Repayment of debt under 2009 Senior Secured Credit Facility

            (59,063

Other

     1,393       308  
  

 

 

   

 

 

 

Net cash provided by financing activities

     97,492       107,217  
  

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

     (1,053     30  
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     4,326       36,553  

Cash and cash equivalents at beginning of year

     43,671       38,943  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,997     $ 75,496  
  

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands, except per share data)

(unaudited)

 

(1) Basis of Presentation

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial 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.

 

(2) Recent Accounting Pronouncements

Fair Value Disclosures

In January 2010, the Financial Accounting Standards Board (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 and the valuation techniques and inputs used to measure fair value. The new accounting rules were effective for the Company in the first quarter of 2010, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures were effective for the Company in the first quarter of 2011. The adoption of these new rules 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.

Fair Value Measurements

In May 2011, the FASB issued new accounting rules related to fair value measurements. The new accounting rules clarify some existing concepts, eliminate wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, change some principles to achieve convergence between GAAP and IFRS. The new accounting rules result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. The new accounting rules also expand the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The new accounting rules will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

Presentation of Comprehensive Income

In June 2011, the FASB issued new accounting rules that require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of equity. The new accounting rules will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company’s financial condition, results of operations or cash flows.

Goodwill Impairment Testing

In September 2011, the FASB issued new accounting rules related to testing goodwill for impairment. The new accounting rules permit an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the two-step goodwill impairment test prescribed under current accounting rules. Otherwise, the two-step goodwill impairment test is not required. The new accounting rules will be effective for the Company beginning after December 15, 2011. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

(3) Earnings Per Share

Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding during the quarters and nine months ended October 1, 2011 and October 2, 2010. 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 outstanding for the quarters and nine months ended October 1, 2011 and October 2, 2010 is as follows:

     Quarter Ended      Nine Months Ended  
     October 1,
2011
     October 2,
2010
     October 1,
2011
     October 2,
2010
 

Basic weighted average shares outstanding

     97,925        96,496        97,559        96,417  

Effect of potentially dilutive securities:

           

Stock options

     1,230        664        1,221        781  

Restricted stock units

     377        589        418        591  

Employee stock purchase plan and other

     3        3        2        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     99,535        97,752        99,200        97,790  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the quarters ended October 1, 2011 and October 2, 2010, 13 and 0 restricted stock units, respectively, and options to purchase 0 and 606 shares of common stock, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the nine months ended October 1, 2011 and October 2, 2010, 13 and 0 restricted stock units, respectively, and options to purchase 6 and 606 shares of common stock, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

(4) Trade Accounts Receivable

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 nine months ended October 1, 2011 are as follows:

     Allowance
for
Doubtful
Accounts
    Allowance
for
Chargebacks
and Other
Deductions
    Total  

Balance at January 1, 2011

   $ 11,116     $ 8,076     $ 19,192  

Charged to expenses

     (1,419     1,538       119  

Deductions and write-offs

     (220     (1,609     (1,829
  

 

 

   

 

 

   

 

 

 

Balance at April 2, 2011

     9,477       8,005       17,482  
  

 

 

   

 

 

   

 

 

 

Charged to expenses

     (171     1,467       1,296  

Deductions and write-offs

     (26     (1,509     (1,535
  

 

 

   

 

 

   

 

 

 

Balance at July 2, 2011

     9,280       7,963       17,243  
  

 

 

   

 

 

   

 

 

 

Charged to expenses

     766       1,110       1,876  

Deductions and write-offs

     (810     (1,530     (2,340
  

 

 

   

 

 

   

 

 

 

Balance at October 1, 2011

   $ 9,236     $ 7,543     $ 16,779  
  

 

 

   

 

 

   

 

 

 

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

The Company has entered into agreements to sell selected trade accounts receivable to financial institutions. After the sale, the Company does not retain any interests in the receivables and the applicable financial institution services and collects these accounts receivable directly from the customer. Net proceeds of these accounts receivable sale programs are recognized in the Condensed Consolidated Statements of Cash Flows as part of operating cash flows. The Company recognized funding fees of $880 and $2,295 during the quarter and nine months ended October 1, 2011 and $1,094 and $2,557 during the quarter and nine months ended October 2, 2010, respectively, for sales of accounts receivable to financial institutions in the “Other expenses” line in the Condensed Consolidated Statements of Income.

 

(5) Inventories

Inventories consisted of the following:

     October 1,
2011
     January 1,
2011
 

Raw materials

   $ 235,785      $ 155,744  

Work in process

     130,135        109,304  

Finished goods

     1,360,452        1,057,671  
  

 

 

    

 

 

 
   $ 1,726,372      $ 1,322,719  
  

 

 

    

 

 

 

 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

(6) Debt

The Company had the following debt at October 1, 2011 and January 1, 2011:

     Interest
Rate as of
October 1,
2011
    Principal Amount      Maturity Date
       October 1,
2011
     January 1,
2011
    

Revolving Loan Facility

     5.50   $ 15,000      $       December 2015

6.375% Senior Notes

     6.38     1,000,000        1,000,000      December 2020

8% Senior Notes

     8.00     500,000        500,000      December 2016

Floating Rate Senior Notes

     3.77     490,735        490,735      December 2014

Accounts Receivable Securitization Facility

     1.43     175,000        90,000      March 2012
    

 

 

    

 

 

    
       2,180,735        2,080,735     

Less current maturities

       175,000        90,000     
    

 

 

    

 

 

    
     $ 2,005,735      $ 1,990,735     
    

 

 

    

 

 

    

As of October 1, 2011, the Company had $15,000 outstanding under the $600,000 revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility that it entered into in 2006 and amended and restated in December 2009 (as amended and restated, the “2009 Senior Secured Credit Facility”), $12,729 of standby and trade letters of credit issued and outstanding under this facility and $572,271 of borrowing availability.

In February 2011, the Company amended the 2009 Senior Secured Credit Facility, which includes the Revolving Loan Facility, to reflect improved debt ratings. This amendment reduced the interest rate, extended the maturity date by two years to December 10, 2015, and increased the flexibility of debt covenants and the use of excess cash flow. In addition, the commitment fee for the unused portion of revolving loan commitments was reduced from 75 basis points to 50 basis points. Further, the applicable margin pricing grid for the loans, which varies based on the Company’s Leverage Ratio (as defined below), was reduced by 125 basis points at each applicable Leverage Ratio level.

Pursuant to this amendment, the ratio of total debt to EBITDA (the “Leverage Ratio”) that the Company may not exceed was increased from 4.00 to 1 for each fiscal quarter ending between October 16, 2010 and April 15, 2011 to 4.50 to 1, and will decline over time to 3.75 to 1. Also, the minimum ratio of EBITDA to consolidated total interest expense that the Company is required to maintain was decreased from 3.25 to 1 for each fiscal quarter ending between July 16, 2011 and October 15, 2012 to 3.00 to 1 and will increase over time to 3.25 to 1. In addition, the Company will be required to maintain a maximum ratio of senior secured indebtedness to EBITDA, which for each fiscal quarter ending between October 16, 2010 and October 15, 2012 cannot exceed 2.50 to 1 and will decline over time to 2.00 to 1. The methods of calculating all of the components used in these ratios are included in the 2009 Senior Secured Credit Facility. This amendment also significantly increased the flexibility of the indebtedness, investment and restricted payments baskets and use of excess cash flow under the 2009 Senior Secured Credit Facility. The Company incurred $3,089 in debt amendment fees in connection with the amendment, which will be amortized over the term of the 2009 Senior Secured Credit Facility.

In January 2011, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”) to provide for two of the subsidiaries acquired by the Company in the Gear for Sports acquisition, in addition to the Company, to sell, on a revolving

 

8


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

basis, certain domestic trade receivables pursuant to this facility. Prior to this amendment, the Accounts Receivable Securitization Facility contained the same financial ratio provisions as those contained in the 2009 Senior Secured Credit Facility. Pursuant to this amendment, the Company is required to maintain the financial ratios and other financial covenants contained from time to time in the 2009 Senior Secured Credit Facility, provided that any changes to such covenants after the date of this amendment will only be applicable for purposes of the Accounts Receivable Securitization Facility if approved by the managing agents under the Accounts Receivable Securitization Facility or their affiliates. This amendment also provided for certain other amendments to the Accounts Receivable Securitization Facility, including extending the termination date to March 31, 2011. In connection with this amendment, certain fees were due to the managing agents and certain fees payable to the committed purchasers and the conduit purchasers were decreased.

The Company also amended the Accounts Receivable Securitization Facility in March 2011. In order to take greater advantage of favorable interest rates, the amount of funding available under the Accounts Receivable Securitization Facility, which was initially $250,000 and which the Company reduced to $150,000 effective February 2010, was increased to $225,000. This amendment also provided for certain other amendments to the Accounts Receivable Securitization Facility, including extending the termination date to March 16, 2012. In addition, certain of the factors that contribute to the overall availability of funding were modified in a manner that, taken together, could result in an increase in the amount of funding that will be available under the facility. The Company incurred $668 in debt amendment fees in connection with the amendment, which will be amortized over the term of the Accounts Receivable Securitization Facility.

As of October 1, 2011, the Company was in compliance with all financial covenants under its credit facilities.

 

(7) Financial Instruments and Risk Management

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 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.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

Mark to Market Hedges

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.

Mark to Market Hedges — Intercompany Foreign Exchange Transactions

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 October 1, 2011, 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 was $1,000 and $76,406, respectively, using the exchange rate at the reporting date.

Cash Flow Hedges

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.

Cash Flow Hedges — Interest Rate Derivatives

From time to time, the Company uses 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 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.

Cash Flow Hedges — Foreign Currency Derivatives

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

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

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 October 1, 2011, the U.S. dollar equivalent of commitments to sell foreign currencies in the Company’s foreign currency cash flow hedge derivative portfolio was $25,822, using the exchange rate at the reporting date.

Cash Flow Hedges — Commodity Derivatives

Cotton is the primary raw material used to manufacture many of the Company’s products and is purchased at market prices. The Company is able to lock in the cost of cotton reflected in the price it pays for yarn from its primary yarn suppliers in an attempt to protect its business from the volatility of the market price of cotton. In addition, 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. There were no amounts outstanding under cotton futures or cotton option contracts at October 1, 2011 and January 1, 2011.

Fair Values of Derivative Instruments

The fair values of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:

          Fair Value  
     Balance Sheet Location    October 1,
2011
    January 1,
2011
 

Derivative assets — hedges

       

Interest rate contracts

   Other current assets    $      $ 3  

Foreign exchange contracts

   Other current assets      1,533       408  
     

 

 

   

 

 

 

Total derivative assets — hedges

        1,533       411  
     

 

 

   

 

 

 

Derivative assets — non-hedges

       

Foreign exchange contracts

   Other current assets      760         
     

 

 

   

 

 

 

Total derivative assets

      $ 2,293     $ 411  
     

 

 

   

 

 

 

Derivative liabilities — hedges

       

Foreign exchange contracts

   Accrued liabilities      (127     (874
     

 

 

   

 

 

 

Total derivative liabilities — hedges

        (127     (874
     

 

 

   

 

 

 

Derivative liabilities — non-hedges

       

Foreign exchange contracts

   Accrued liabilities      (436     (471
     

 

 

   

 

 

 

Total derivative liabilities

      $ (563   $ (1,345
     

 

 

   

 

 

 

Net derivative asset (liability)

      $ 1,730     $ (934
     

 

 

   

 

 

 

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

Net Derivative Gain or Loss

The effect of cash flow hedge derivative instruments is as follows:

     Amount of
Gain (Loss)
Recognized in
Accumulated Other
Comprehensive Loss

(Effective Portion)
   

Location of

Gain (Loss)

Reclassified from
Accumulated Other
Comprehensive

Loss into Income

(Effective Portion)

   Amount of
Gain (Loss)
Reclassified from
Accumulated

Other Comprehensive
Loss into Income
(Effective Portion)
 
     Quarter Ended        Quarter Ended  
     October 1,
2011
     October 2,
2010
       October 1,
2011
    October 2,
2010
 

Interest rate contracts

   $       $ (82   Interest expense, net    $ (2,550   $ (4,214

Foreign exchange contracts

     3,486        (2,387   Cost of sales      (96     (514
  

 

 

    

 

 

      

 

 

   

 

 

 

Total

   $ 3,486      $ (2,469      $ (2,646   $ (4,728
  

 

 

    

 

 

      

 

 

   

 

 

 

 

     Amount of
Gain (Loss)
Recognized in
Accumulated Other

Comprehensive Loss
(Effective Portion)
   

Location of

Gain (Loss)

Reclassified from

Accumulated Other

Comprehensive

Loss into Income

(Effective Portion)

   Amount of
Gain (Loss)
Reclassified from

Accumulated
Other Comprehensive
Loss into  Income

(Effective Portion)
 
     Nine Months Ended        Nine Months Ended  
     October 1,
2011
    October 2,
2010
       October 1,
2011
    October 2,
2010
 

Interest rate contracts

   $ (3   $ (499   Interest expense, net    $ (9,187   $ (13,836

Foreign exchange contracts

     223       (2,096   Cost of sales      (1,013     (1,138
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ 220     $ (2,595      $ (10,200   $ (14,974
  

 

 

   

 

 

      

 

 

   

 

 

 

The Company expects to reclassify into earnings during the next 12 months a net loss from “Accumulated other comprehensive loss” of approximately $6,848. The amounts deferred in “Accumulated other comprehensive loss” associated with a Floating Rate Senior Notes interest rate hedge that was terminated at the time the Company entered into the 2009 Senior Secured Credit Facility were frozen at the termination date and will be amortized over the original remaining term of the interest rate hedge instrument. The unamortized balance in “Accumulated other comprehensive loss” was $8,115 as of October 1, 2011.

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 “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Income. The Company recognized gains for the quarter and nine months ended October 1, 2011 related to ineffectiveness of hedging relationships for foreign exchange contracts of $254 and $191, respectively. The Company recognized gains (losses) for the quarter and nine months ended October 2, 2010 related to ineffectiveness of hedging relationships for foreign exchange contracts of $(1) and $6, respectively.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

The effect of mark to market hedge derivative instruments on the Condensed Consolidated Statements of Income is as follows:

        Amount of Gain (Loss)
Recognized in Income
    Amount of Gain  (Loss)
Recognized in Income
 
   

Location of Gain (Loss)

Recognized in Income

on Derivative

  Quarter Ended     Nine Months Ended  
       October 1,
2011
    October 2,
2010
    October 1,
2011
    October 2,
2010
 

Foreign exchange contracts

  Selling, general and administrative expenses   $ 756     $ (1,838   $ (2,330   $ (1,309
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 756     $ (1,838   $ (2,330   $ (1,309
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(8) Fair Value of Assets and Liabilities

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.

As of October 1, 2011, 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 October 1, 2011 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 October 1, 2011. As of and during the quarter and nine months ended October 1, 2011, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

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.

     Assets (Liabilities) at Fair Value as of
October 1, 2011
 
     Quoted Prices
In Active
Markets for

Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Foreign exchange derivative contracts

   $       $ 2,293     $   

Foreign exchange derivative contracts

             (563       
  

 

 

    

 

 

   

 

 

 

Total

   $       $ 1,730     $   
  

 

 

    

 

 

   

 

 

 

 

     Assets (Liabilities) at Fair Value as of
January 1, 2011
 
     Quoted Prices
In  Active

Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Foreign exchange derivative contracts

   $       $ 408     $   

Foreign exchange derivative contracts

             (1,345       

Interest rate derivative contracts

             3         
  

 

 

    

 

 

   

 

 

 

Total

   $       $ (934   $   
  

 

 

    

 

 

   

 

 

 

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 October 1, 2011 and January 1, 2011. The fair value of debt was $2,149,091 and $2,060,828 as of October 1, 2011 and January 1, 2011 and had a carrying value of $2,180,735 and $2,080,735, 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 October 1, 2011 and January 1, 2011, primarily due to the short-term nature of these instruments.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

(9) Comprehensive Income

The Company’s comprehensive income is as follows:

    Quarter Ended     Nine Months Ended  
    October 1,
2011
    October 2,
2010
    October 1,
2011
    October 2,
2010
 

Net income

  $ 90,832     $ 61,312     $ 225,723     $ 183,237  

Translation adjustments

    (14,254     8,399       (7,483     2,079  

Amortization of loss on interest rate hedge, net of tax of $982, $1,672, $3,560 and $5,476, respectively

    1,481       2,519       5,368       8,256  

Net unrealized gain (loss) on qualifying cash flow hedges, net of tax of $1,463, $(771), $595 and $(540), respectively

    2,206       (1,162     897       (814

Recognition of loss from pension plan settlement, net of tax of $0, $53, $0 and $53, respectively.

           69              69  

Amounts amortized into net periodic cost:

       

Prior service cost, net of tax of $3, $3, $9 and $9, respectively

    4       4       12       12  

Actuarial loss, net of tax of $908, $860, $2,724 and $2,580, respectively

    1,370       1,297       4,110       3,891  
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 81,639     $ 72,438     $ 228,627     $ 196,730  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(10) Income Taxes

The Company’s effective income tax rate was 20% for the quarter and nine months ended October 1, 2011, and 20% and 12% for the quarter and nine months ended October 2, 2010, respectively. The lower effective income tax rate of 12% for the nine months ended October 2, 2010 was primarily attributable to a one-time income tax benefit of approximately $20,000 resulting from the finalization of tax reviews and audits for amounts that were less than originally anticipated.

As previously disclosed, the Company and Sara Lee Corporation (“Sara Lee”) have disagreed as to the amount of deferred taxes that should have been attributable to the Company’s United States and Canadian operations on the Company’s opening balance sheet as of September 6, 2006 following its spin off from Sara Lee. The computation of this amount is governed by a tax sharing agreement entered into in connection with the spin off. The Company and Sara Lee have had differing interpretations of the tax sharing agreement, and, in accordance with the dispute resolution provisions of the agreement, the Company and Sara Lee submitted that dispute to arbitration before a three-member tribunal in August 2009. A hearing was held in August 2010. 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 the Company expected to collect 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, was included as a receivable in “Other current assets.”

On July 1, 2011, the tribunal issued a 2-1 decision in which the majority disagreed with the Company’s interpretation of the tax sharing agreement and awarded the Company $3,291, plus interest based on the majority’s interpretation of the tax sharing agreement. This amount reflects other payments made or acknowledged to be owed by the parties under the tax sharing agreement. As a result of the tribunal’s decision, during the second quarter of 2011 the Company recorded a non-cash transaction that reduced “Other current assets” and “Additional paid-in capital” by $68,523.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

Under section 2.12 of the tax sharing agreement with Sara Lee discussed above, in 2010, the Company recorded a liability of approximately $15,000 to Sara Lee for amounts related to income generated prior to the spin off from Sara Lee which were repatriated in periods since the spin off. The liability is included in “Accounts payable” in the Condensed Consolidated Balance Sheets as of October 1, 2011 and January 1, 2011 with the resulting offset recorded as a reduction to “Additional paid-in capital.” Except for the amounts reflected in this Note 10, to the best of the Company’s knowledge, there are no material amounts owed to or from Sara Lee under the tax sharing agreement.

 

(11) Business Segment Information

The Company’s operations are managed and reported in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to Consumer and International. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses but the segments share a common supply chain and media and marketing platforms.

The types of products and services from which each reportable segment derives its revenues are as follows:

 

   

Innerwear sells basic branded products that are replenishment in nature under the product categories of women’s intimate apparel, men’s underwear, kids’ underwear and socks.

 

   

Outerwear sells basic branded products that are primarily seasonal in nature under the product categories of casualwear and activewear, as well as licensed logo apparel in collegiate bookstores and other channels.

 

   

Hosiery sells products in categories such as pantyhose, knee highs and tights.

 

   

Direct to Consumer includes the Company’s value-based (“outlet”) stores and Internet operations which sell products from the Company’s portfolio of leading brands. The Company’s Internet operations are supported by its catalogs.

 

   

International primarily relates to the Latin America, Asia, Canada, Europe and Australia geographic locations which sell products that span across the Innerwear, Outerwear and Hosiery reportable segments.

The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses and amortization of trademarks and other identifiable intangibles. 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 1, 2011. Certain prior year segment operating profit disclosures have been revised to conform to the current year presentation. These changes were primarily the result of the Company’s decision to cease allocating certain compensation related expenses to the segments.

000000000000 000000000000 000000000000 000000000000
     Quarter Ended      Nine Months Ended  
     October 1,
2011
     October 2,
2010
     October 1,
2011
     October 2,
2010
 

Net sales:

           

Innerwear

   $ 515,263      $ 512,486      $ 1,571,277      $ 1,522,553  

Outerwear

     432,804        389,474        1,094,888        894,653  

Hosiery

     34,481        37,442        113,051        117,273  

Direct to Consumer

     97,565        100,327        277,819        278,680  

International

     150,072        133,633        434,793        363,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 1,230,185      $ 1,173,362      $ 3,491,828      $ 3,177,054  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

00000000000 00000000000 00000000000 00000000000
     Quarter Ended     Nine Months Ended  
     October 1,
2011
    October 2,
2010
    October 1,
2011
    October 2,
2010
 

Segment operating profit:

        

Innerwear

   $ 79,353     $ 55,249     $ 231,321     $ 225,896  

Outerwear

     55,602       38,349       117,025       61,034  

Hosiery

     8,792       11,223       34,465       39,224  

Direct to Consumer

     12,308       10,569       22,070       18,898  

International

     15,839       16,748       53,614       42,462  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating profit

     171,894       132,138       458,495       387,514  

Items not included in segment operating profit:

        

General corporate expenses

     (15,587     (15,160     (44,641     (55,891

Amortization of trademarks and other identifiable intangibles

     (3,625     (2,918     (10,861     (9,046
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating profit

     152,682       114,060       402,993       322,577  

Other expenses

     (880     (1,094     (2,295     (5,128

Interest expense, net

     (38,262     (36,326     (118,545     (110,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

   $ 113,540     $ 76,640     $ 282,153     $ 207,055  
  

 

 

   

 

 

   

 

 

   

 

 

 
00000000000 00000000000 00000000000 00000000000
     Quarter Ended      Nine Months Ended  
     October 1,
      2011      
     October 2,
      2010      
     October 1,
      2011      
     October 2,
      2010      
 

Depreciation and amortization expense:

           

Innerwear

   $ 9,293      $ 8,631      $ 28,286      $ 25,847  

Outerwear

     5,938        5,337        16,931        15,026  

Hosiery

     361        629        1,227        2,157  

Direct to Consumer

     1,805        1,589        5,291        4,359  

International

     619        418        1,680        1,573  
  

 

 

    

 

 

    

 

 

    

 

 

 
     18,016        16,604        53,415        48,962  

Corporate

     4,417        3,945        13,153        14,316  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

   $ 22,433      $ 20,549      $ 66,568      $ 63,278  
  

 

 

    

 

 

    

 

 

    

 

 

 
00000000000 00000000000 00000000000 00000000000
     Quarter Ended      Nine Months Ended  
     October 1,
    2011    
     October 2,
    2010    
     October 1,
    2011    
     October 2,
    2010    
 

Additions to long-lived assets:

           

Innerwear

   $ 8,063      $ 10,186      $ 27,758      $ 37,326  

Outerwear

     10,188        6,348        28,857        25,998  

Hosiery

     320        124        610        426  

Direct to Consumer

     661        2,388        5,670        9,741  

International

     884        504        2,492        1,763  
  

 

 

    

 

 

    

 

 

    

 

 

 
     20,116        19,550        65,387        75,254  

Corporate

     888        921        3,357        3,316  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total additions to long-lived assets

   $ 21,004      $ 20,471      $ 68,744      $ 78,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

(12) Consolidating Financial Information

In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, the indenture governing the Company’s $500,000 8% Senior Notes issued on December 10, 2009 and the indenture governing the Company’s $1,000,000 6.375% Senior Notes issued on November 9, 2010 (together, the “Indentures”), certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes, the 8% Senior Notes and the 6.375% 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;

(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, the 8% Senior Notes and the 6.375% 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. A guarantor subsidiary’s guarantee can be released in certain customary circumstances. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, 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.

     Condensed Consolidating Statement of Income
Quarter Ended October 1, 2011
 
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Consolidating
Entries and
Eliminations
    Consolidated  

Net sales

   $ 1,033,841     $ 191,387     $ 965,469      $ (960,512   $ 1,230,185  

Cost of sales

     854,113       96,888       878,838        (1,025,097     804,742  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     179,728       94,499       86,631        64,585       425,443  

Selling, general and administrative expenses

     200,507       32,897       40,535        (1,178     272,761  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

     (20,779     61,602       46,096        65,763       152,682  

Equity in earnings (loss) of subsidiaries

     157,422       34,198               (191,620       

Other expenses

     880                             880  

Interest expense, net

     35,802       (1     2,461               38,262  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax expense

     99,961       95,801       43,635        (125,857     113,540  

Income tax expense

     9,129       7,479       6,100               22,708  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 90,832     $ 88,322     $ 37,535      $ (125,857   $ 90,832  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

18


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

     Condensed Consolidating Statement of Income
Quarter Ended October 2, 2010
 
     Parent
Company
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Consolidating
Entries and
Eliminations
    Consolidated  

Net sales

   $ 1,104,713      $ 113,915     $ 830,265      $ (875,531   $ 1,173,362  

Cost of sales

     875,963        43,270       748,701        (858,447     809,487  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     228,750        70,645       81,564        (17,084     363,875  

Selling, general and administrative expenses

     201,440        20,282       27,784        309       249,815  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

     27,310        50,363       53,780        (17,393     114,060  

Equity in earnings (loss) of subsidiaries

     71,944        33,908               (105,852       

Other expenses

     1,094                              1,094  

Interest expense, net

     33,678        (22     2,673        (3     36,326  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax expense

     64,482        84,293       51,107        (123,242     76,640  

Income tax expense

     3,170        7,635       4,523               15,328  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 61,312      $ 76,658     $ 46,584      $ (123,242   $ 61,312  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     Condensed Consolidating Statement of Income
Nine Months Ended October 1, 2011
 
     Parent
Company
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Consolidating
Entries and
Eliminations
    Consolidated  

Net sales

   $ 3,059,251      $ 501,886     $ 2,824,447      $ (2,893,756   $ 3,491,828  

Cost of sales

     2,411,850        240,932       2,495,031        (2,863,193     2,284,620  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     647,401        260,954       329,416        (30,563     1,207,208  

Selling, general and administrative expenses

     597,983        98,775       109,484        (2,027     804,215  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

     49,418        162,179       219,932        (28,536     402,993  

Equity in earnings (loss) of subsidiaries

     308,288        147,809               (456,097       

Other expenses

     2,295                              2,295  

Interest expense, net

     110,773        (35     7,807               118,545  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax expense

     244,638        310,023       212,125        (484,633     282,153  

Income tax expense

     18,915        21,353       16,162               56,430  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 225,723      $ 288,670     $ 195,963      $ (484,633   $ 225,723  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

19


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

     Condensed Consolidating Statement of Income
Nine Months Ended October 2, 2010
 
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
     Consolidating
Entries and
Eliminations
    Consolidated  

Net sales

   $ 3,034,863     $ 319,231     $ 2,317,522      $ (2,494,562   $ 3,177,054  

Cost of sales

     2,423,688       118,694       2,054,675        (2,486,114     2,110,943  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     611,175       200,537       262,847        (8,448     1,066,111  

Selling, general and administrative expenses

     589,755       69,018       83,734        1,027       743,534  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

     21,420       131,519       179,113        (9,475     322,577  

Equity in earnings (loss) of

           

subsidiaries

     260,220       117,996               (378,216       

Other expenses

     5,128                             5,128  

Interest expense, net

     101,490       (67     8,971               110,394  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

     175,022       249,582       170,142        (387,691     207,055  

Income tax expense (benefit)

     (8,215     20,271       11,762               23,818  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 183,237     $ 229,311     $ 158,380      $ (387,691   $ 183,237  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

     Condensed Consolidating Balance Sheet
October 1, 2011
 
     Parent
Company
    Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
Assets            

Cash and cash equivalents

   $ 12,526     $ 2,055      $ 33,416     $      $ 47,997  

Trade accounts receivable less allowances

     5,928       61,290        527,955       (5,734     589,439  

Inventories

     1,251,668       119,703        453,423       (98,422     1,726,372  

Deferred tax assets

     156,023       1,996        (11,662            146,357  

Other current assets

     31,336       9,888        23,642       (172     64,694  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     1,457,481       194,932        1,026,774       (104,328     2,574,859  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Property, net

     109,538       48,138        478,733              636,409  

Trademarks and other identifiable intangibles, net

     14,425       136,196        22,535              173,156  

Goodwill

     232,882       124,214        75,575              432,671  

Investments in subsidiaries

     1,843,114       1,033,858               (2,876,972       

Deferred tax assets and other noncurrent assets

     (105,222     472,501        253,512       (219,306     401,485  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,552,218     $ 2,009,839      $ 1,857,129     $ (3,200,606   $ 4,218,580  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’

Equity

           

Accounts payable

   $ 237,446     $ 19,201      $ 249,237     $      $ 505,884  

Accrued liabilities

     192,751       50,307        79,575       (45     322,588  

Notes payable

                    34,111              34,111  

Current portion of debt

                    175,000              175,000  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     430,197       69,508        537,923       (45     1,037,583  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Long-term debt

     2,005,735                             2,005,735  

Other noncurrent liabilities

     366,045       36,086        22,890              425,021  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     2,801,977       105,594        560,813       (45     3,468,339  

Stockholders’ equity

     750,241       1,904,245        1,296,316       (3,200,561     750,241  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,552,218     $ 2,009,839      $ 1,857,129     $ (3,200,606   $ 4,218,580  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

     Condensed Consolidating Balance Sheet
January 1, 2011
 
     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
Assets             

Cash and cash equivalents

   $ 17,535      $ 2,039      $ 24,097     $      $ 43,671  

Trade accounts receivable less allowances

     50,375        35,256        417,612              503,243  

Inventories

     954,073        100,435        355,908       (87,697     1,322,719  

Deferred tax assets

     160,178        2,005        (12,752            149,431  

Other current assets

     95,702        11,475        21,646       (216     128,607  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     1,277,863        151,210        806,511       (87,913     2,147,671  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Property, net

     118,596        47,842        464,816              631,254  

Trademarks and other identifiable intangibles, net

     16,006        141,635        20,981              178,622  

Goodwill

     232,882        124,214        73,048              430,144  

Investments in subsidiaries

     1,542,231        886,349               (2,428,580       

Deferred tax assets and other noncurrent assets

     115,500        350,862        146,859       (210,910     402,311  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,303,078      $ 1,702,112      $ 1,512,215     $ (2,727,403   $ 3,790,002  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Stockholders’

Equity

            

Accounts payable

   $ 243,169      $ 17,198      $ 152,002     $      $ 412,369  

Accrued liabilities

     150,831        55,502        69,979       (9     276,303  

Notes payable

                     50,678              50,678  

Current portion of debt

                     90,000              90,000  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     394,000        72,700        362,659       (9     829,350  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Long-term debt

     1,990,735                              1,990,735  

Other noncurrent liabilities

     355,669        35,072        16,502              407,243  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     2,740,404        107,772        379,161       (9     3,227,328  

Stockholders’ equity

     562,674        1,594,340        1,133,054       (2,727,394     562,674  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,303,078      $ 1,702,112      $ 1,512,215     $ (2,727,403   $ 3,790,002  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

     Condensed Consolidating Statement of Cash Flows
Nine Months Ended October 1, 2011
 
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  

Net cash provided by (used in) operating activities

   $ 377,231     $ 131,185     $ (75,437   $ (459,853   $ (26,874
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

          

Purchases of property, plant and equipment

     (11,598     (8,151     (48,995            (68,744

Acquisition of business

                   (9,154            (9,154

Proceeds from sales of assets

     364       67       12,228              12,659  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (11,234     (8,084     (45,921            (65,239
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

          

Borrowings on notes payable

                   305,257              305,257  

Repayments on notes payable

                   (322,185            (322,185

Borrowings on Accounts Receivable Securitization Facility

                   229,396              229,396  

Repayments on Accounts Receivable Securitization Facility

                   (144,396            (144,396

Borrowings on Revolving Loan Facility

     2,448,500                            2,448,500  

Repayments on Revolving Loan Facility

     (2,433,500                          (2,433,500

Payments to amend credit facilities

     (3,089            (668            (3,757

Proceeds from stock options exercised

     16,784                            16,784  

Other

     1,430              (37            1,393  

Net transactions with related entities

     (401,131     (123,085     64,363       459,853         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (371,006     (123,085     131,730       459,853       97,492  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

                   (1,053            (1,053
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (5,009     16       9,319              4,326  

Cash and cash equivalents at beginning of year

     17,535       2,039       24,097              43,671  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 12,526     $ 2,055     $ 33,416     $      $ 47,997  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

(dollars and shares in thousands, except per share data)

(unaudited)

 

    Condensed Consolidating Statement of Cash Flows
Nine Months Ended October 2, 2010
 
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  

Net cash provided by (used in) operating activities

  $ 168,472     $ 124,951     $ 46,204     $ (376,701   $ (37,074
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Purchases of property, plant and equipment

    (21,652     (8,989     (47,929            (78,570

Proceeds from sales of assets

    44,436              1,033              45,469  

Other

    (519                          (519
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    22,265       (8,989     (46,896            (33,620
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Borrowings on notes payable

                  991,061              991,061  

Repayments on notes payable

                  (1,015,338            (1,015,338

Borrowings on Accounts Receivable Securitization Facility

                  191,424              191,424  

Repayments on Accounts Receivable Securitization Facility

                  (141,424            (141,424

Borrowings on Revolving Loan Facility

    1,597,500                            1,597,500  

Repayments on Revolving Loan Facility

    (1,459,000                          (1,459,000

Payments to amend credit facilities

    (1,688                          (1,688

Proceeds from stock options exercised

    3,437                            3,437  

Repayment of debt under 2009 Senior Secured Credit Facility

    (59,063                          (59,063

Other

    342              (34            308  

Net transactions with related entities

    (245,549     (116,352     (14,800     376,701         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (164,021     (116,352     10,889       376,701       107,217  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

                  30              30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

    26,716       (390     10,227              36,553  

Cash and cash equivalents at beginning of year

    12,805       1,646       24,492              38,943  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 39,521     $ 1,256     $ 34,719     $      $ 75,496  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” 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 1, 2011, 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.

Overview

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, Duofold and Gear for Sports. We design, manufacture, source and sell a broad range of basic apparel 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. Each segment has its own management that is responsible for the operations of the segment’s businesses but the segments share a common supply chain and media and marketing platforms. Certain prior year segment operating profit disclosures have been revised to conform to the current year presentation. These changes were primarily the result of our decision to cease allocating certain compensation related expenses to the segments.

Seasonality and Other Factors

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. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.

Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary spending by consumers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, electricity power rates, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.

 

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Outlook for 2011

We expect net sales of $1.2 billion to $1.3 billion for the fourth quarter of 2011, or $4.7 billion to $4.8 billion for the full year of 2011. Our expectations for net sales reflect a cautious outlook for the fourth quarter.

Because of systemic cost inflation in 2011 as described below, particularly for cotton, energy and labor, we have taken price increases as warranted by cost inflation. The timing, magnitude and frequency of price increases have varied by product category, channel of trade, and country, with some increases as frequently as quarterly. Demand elasticity effects have been factored into our net sales projections for the fourth quarter and full year of 2011.

For 2011, we believe we know the majority of our costs, with cotton prices locked in for the full year. Our current 2011 earnings expectations assume we will realize efficiency savings from our supply chain optimization of approximately $40 million to $45 million in 2011, of which $34 million has already been realized in the nine months of 2011. Our expectations also assume that we will eliminate the majority of excess 2010 freight and other distribution costs related to servicing sales growth of approximately $30 million to $35 million, of which $8 million was eliminated in the third quarter and approximately $25 million to $30 million is expected to be eliminated in the fourth quarter of 2011. Approximately two-thirds of the eliminated excess costs will come from gross profit and one-third will come from selling, general and administrative expenses. Our earnings expectations also assume continued investment in trade and media spending consistent with our historical rate, slightly higher interest expense, and a higher full-year tax rate that could range from a percentage in the teens to the low 20s.

As a result of the cost inflation and higher product pricing, we expect a negative impact on our cash flow from higher working capital, in particular higher accounts receivable and inventories, partially offset by higher accounts payable. We typically use cash for the first half of the year and generate most of our cash flow in the second half of the year.

Year-end 2011 inventory is expected to be approximately $250 million to $300 million higher than year-end 2010 as a result of high inflationary costs.

Business and Industry Trends

Inflation and Changing Prices

The economic environment in which we are operating continues to be uncertain and volatile, which could have unanticipated adverse effects on our business during the remainder of 2011 and beyond. We have seen a sustained increase in various input costs, such as cotton and oil-related materials, utilities, freight and wages, which have impacted our results in 2011 and will continue to do so through at least the first half of 2012. The estimated impact of cost inflation could be approximately $270 million to $280 million higher in 2011 over 2010.

Although nearly 40% of our business, such as bras, sheer hosiery and portions of our activewear categories, is not cotton-based, and we have sold our yarn operations, we are still exposed to fluctuations in the cost of cotton. Rising demand for cotton resulting from the economic recovery, weather-related supply disruptions, significant declines in U.S. inventory and a sharp rise in the futures market for cotton caused cotton prices to surge upward during 2010 and early 2011. During 2010, cotton prices hit their highest levels in 140 years. Increases in the cost of cotton can result in higher costs in the price we pay for yarn from our large-scale yarn suppliers. Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by, among other factors, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. We are able to lock in the cost of cotton reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect our business from the volatility of the market price of cotton. However, our business can be affected by dramatic movements in cotton prices. The nine months of 2011 reflect an average cost of cotton of 88 cents per pound. After taking into consideration the cotton costs currently included in our finished goods inventory and cotton prices we have locked in, we expect the average cost of cotton will exceed $1.00 per pound for the full year, which will have a negative impact of approximately $140 million to $145 million when compared to 2010. These amounts do not include the impact of cotton costs on the cost of sourced goods.

 

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Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodities and other raw materials, such as dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by rises in consumer income, which also could have a negative impact on spending.

Given the systemic cost inflation that the apparel industry is currently experiencing, many apparel retailers and manufacturers implemented price increases in 2011 in order to maintain satisfactory margins. Higher raw material costs, including cotton, and higher labor costs overseas are the primary reasons that price increases are needed to manage the inflated costs. If we incur increased costs for materials, including cotton, and labor that we are unable to recoup through price increases or improved efficiencies, or if consumer spending declines, our business, results of operations, financial condition and cash flows may be adversely affected.

Other Business and Industry Trends

The basic apparel market is highly competitive and evolving rapidly. Competition is generally based upon brand name recognition, price, product quality, selection, service and purchasing convenience. The majority of our core styles continue from year to year, with variations only in color, fabric or design details. Some products, however, such as intimate apparel, activewear and sheer hosiery, do have more of an emphasis on style and innovation. Our businesses face competition from other large corporations and foreign manufacturers, as well as smaller companies, department stores, specialty stores and other retailers that market and sell basic apparel products under private labels that compete directly with our brands.

Anticipating changes in and managing our operations in response to consumer preferences remains an important element of our business. In recent years, we have experienced changes in our net sales and cash flows in accordance with changes in consumer preferences and trends. For example, we expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences. The Hosiery segment only comprised 4% of our net sales in 2010 however, and as a result, the decline in the Hosiery segment has not had a significant impact on our net sales, revenues or cash flows. Generally, we manage the Hosiery segment for cash, placing an emphasis on reducing our cost structure and managing cash efficiently.

Economic Trends and other Developments that Impact our Business

We are operating in an uncertain and volatile economic environment, which could have unanticipated adverse effects on our business. We have experienced substantial pressure on profitability due to the economic climate, such as higher cotton, energy and labor costs. Rising demand for cotton resulting from the economic recovery, weather-related supply disruptions, significant declines in U.S. inventory and a sharp rise in the futures market for cotton caused cotton prices to surge upward in 2010 and early 2011. Because of systemic cost inflation in 2011, particularly for cotton, energy and labor, we have taken price increases as warranted by cost inflation. The timing, magnitude and frequency of price increases have varied by product category, channel of trade, and country, with some increases as frequently as quarterly.

Highlights from the Third Quarter and Nine Months Ended October 1, 2011

 

   

Total net sales in the third quarter of 2011 were $1.23 billion, compared with $1.17 billion in the same quarter of 2010, representing a 4.8% increase. Total net sales in the first nine months of 2011 were $3.49 billion, compared with $3.18 billion in the same period of 2010, representing a 9.9% increase.

 

   

Operating profit was $153 million in the third quarter of 2011, compared with $114 million in the same quarter of 2010. As a percent of sales, operating profit was 12.4% in the third quarter of 2011 compared to 9.7% in the same quarter of 2010. The operating margin of 12.4% in the third quarter of 2011 is the highest since our spin off in September 2006. Operating profit was $403 million in the first nine months

 

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of 2011, compared with $323 million in the same period of 2010. As a percent of sales, operating profit was 11.5% in the first nine months of 2011 compared to 10.2% in the same period of 2010.

 

   

Diluted earnings per share were $0.91 in the third quarter of 2011, compared with $0.63 in the same quarter of 2010. Diluted earnings per share were $2.28 in the first nine months of 2011, compared with $1.87 in the same period of 2010.

 

   

Gross capital expenditures were $69 million during the first nine months of 2011, compared with $79 million in the same period of 2010. Proceeds from sales of assets were $13 million in the first nine months of 2011 and $45 million in the same period of 2010.

Condensed Consolidated Results of Operations — Third Quarter Ended October 1, 2011 Compared with Third Quarter Ended October 2, 2010

 

     Quarter Ended               
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Net sales

   $ 1,230,185      $ 1,173,362      $ 56,823       4.8 

Cost of sales

     804,742        809,487        (4,745     (0.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     425,443        363,875        61,568       16.9  

Selling, general and administrative expenses

     272,761        249,815        22,946       9.2  
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

     152,682        114,060        38,622       33.9  

Other expenses

     880        1,094        (214     (19.6

Interest expense, net

     38,262        36,326        1,936       5.3  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income tax expense

     113,540        76,640        36,900       48.1  

Income tax expense

     22,708        15,328        7,380       48.1  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 90,832      $ 61,312      $ 29,520       48.1 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Sales

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net sales

   $ 1,230,185      $ 1,173,362      $ 56,823        4.8 

Consolidated net sales were higher by $57 million or 5% in the third quarter of 2011 compared to the third quarter of 2010. The third quarter of 2011 is our seventh consecutive quarter of growth. The net sales growth reflects net price increases, incremental net sales from Gear for Sports, which was acquired in the fourth quarter of 2010, and a favorable impact from foreign currency exchange rates, partially offset by lower unit sales volume in most categories.

Our three largest segments, Innerwear, Outerwear and International, demonstrated growth in net sales, with Outerwear and International delivering double digit sales growth. Outerwear, International and Innerwear segment net sales were higher by $43 million (11%), $16 million (12%) and $3 million (1%), respectively. Hosiery and Direct to Consumer segment net sales were lower by $3 million (8%) and $3 million (3%), respectively.

 

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Gross Profit

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Gross profit

   $ 425,443      $ 363,875      $ 61,568        16.9 

As a percent of net sales, our gross profit was 34.6% in the third quarter of 2011 compared to 31.0% in the third quarter of 2010. Our gross profit was higher by $62 million in the third quarter of 2011 compared to the third quarter of 2010. The higher gross profit was primarily attributable to higher gross profit of $29 million from the Outerwear segment, of which $27 million was attributable to Gear for Sports, $28 million from the Innerwear segment and $8 million from the International segment, partially offset by lower gross profit of $3 million from the Hosiery segment and slightly lower gross profit from the Direct to Consumer segment. General corporate expenses within gross profit, which are not allocated to segments, were slightly higher in the third quarter of 2011 compared to the third quarter of 2010.

Our results in the third quarter of 2011 benefited primarily from net price increases of $115 million, which includes the impact of lower sales incentives of $3 million, favorable product sales mix of $18 million, efficiency savings from our supply chain optimization of $11 million, a favorable impact related to foreign currency exchange rates of $3 million and lower start-up and shut-down costs of $2 million and were negatively impacted by higher input costs of $56 million, particularly cotton and energy and oil-related materials, lower sales volumes of $29 million and higher other manufacturing costs of $2 million, which is net of the elimination of $6 million of excess 2010 costs related to servicing sales growth.

The average cotton price reflected in our results was 97 cents per pound in the third quarter of 2011 compared to 72 cents per pound in the third quarter of 2010. After taking into consideration the cotton costs currently included in our finished goods inventory and cotton prices we have locked in, we expect the average cost of cotton will exceed $1.00 per pound for the full year. These amounts do not include the impact of cotton costs on the cost of sourced goods. While cotton prices have declined in recent months, we will continue to have higher prices for cotton and oil-related materials reflected in our cost of sales, which will impact our results for the remainder of 2011 and the first half of 2012.

Selling, General and Administrative Expenses

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 272,761      $ 249,815      $ 22,946        9.2 

Our selling, general and administrative expenses were $23 million higher in the third quarter of 2011 compared to the third quarter of 2010. As a percent of net sales our selling, general and administrative expenses were 22.2% in the third quarter of 2011 compared to 21.3% in the third quarter of 2010. Outerwear, International and Innerwear segment selling, general and administrative expenses were higher by $12 million, $9 million and $4 million, respectively, and Direct to Consumer and Hosiery segment selling, general and administrative expenses were lower by $2 million and $1 million, respectively. General corporate expenses within selling, general and administrative expenses, which are not allocated to segments, were flat in the third quarter of 2011 compared to the third quarter of 2010.

The higher selling, general and administrative expenses were primarily attributable to higher selling and other marketing expenses of $11 million, incremental administrative costs of $3 million attributable to Gear for Sports, higher media related media, advertising and promotion (“MAP”) expenses of $2 million, higher stock compensation and certain other benefit costs of $2 million, higher distribution expenses of $2 million, which is net of the elimination of $2 million of excess 2010 costs related to servicing sales growth, and higher expenses as a result of opening new retail stores or expanding existing stores of $2 million.

 

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Operating Profit

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Operating profit

   $ 152,682      $ 114,060      $ 38,622        33.9 

The higher operating profit was primarily attributable to higher operating profit of $24 million from the Innerwear segment, $17 million from the Outerwear segment and $2 million from the Direct to Consumer segment, partially offset by lower operating profit of $2 million from the Hosiery segment and $1 million from the International segment.

Other Expenses

 

     Quarter Ended               
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Other expenses

   $ 880      $ 1,094      $ (214     (19.6 )% 

During the third quarter of 2011 and the third quarter of 2010, we incurred charges of $1 million for funding fees associated with the sales of certain trade accounts receivable to financial institutions.

Interest Expense, Net

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Interest expense, net

   $ 38,262      $ 36,326      $ 1,936        5.3 

Interest expense, net was higher by $2 million in the third quarter of 2011 compared to the third quarter of 2010. The higher interest expense was primarily attributable to higher outstanding debt balances that increased interest expense by $3 million. Our weighted average interest rate on our outstanding debt, which excludes the impact of noncash items such as the amortization of debt issuance costs, was 5.50% during the third quarter of 2011 compared to 6.21% in the third quarter of 2010.

Income Tax Expense

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Income tax expense

   $ 22,708      $ 15,328      $ 7,380        48.1 

Our effective income tax rate was 20% in the third quarter of 2011 and the third quarter of 2010.

Net Income

 

     Quarter Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net income

   $ 90,832      $ 61,312      $ 29,520        48.1 

Net income for the third quarter of 2011 was higher than the third quarter of 2010 primarily due to higher operating profit of $39 million, partially offset by higher income tax expense of $7 million and higher interest expense of $2 million.

 

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Operating Results by Business Segment — Third Quarter Ended October 1, 2011 Compared with Third Quarter Ended October 2, 2010

 

     Quarter Ended        
     October 1,     October 2,     Higher     Percent  
     2011     2010     (Lower)     Change  
     (dollars in thousands)  

Net sales:

        

Innerwear

   $ 515,263     $ 512,486     $ 2,777       0.5 

Outerwear

     432,804       389,474       43,330       11.1  

Hosiery

     34,481       37,442       (2,961     (7.9

Direct to Consumer

     97,565       100,327       (2,762     (2.8

International

     150,072       133,633       16,439       12.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,230,185     $ 1,173,362     $ 56,823       4.8 
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating profit:

        

Innerwear

   $ 79,353     $ 55,249     $ 24,104       43.6 

Outerwear

     55,602       38,349       17,253       45.0  

Hosiery

     8,792       11,223       (2,431     (21.7

Direct to Consumer

     12,308       10,569       1,739       16.5  

International

     15,839       16,748       (909     (5.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating profit

     171,894       132,138       39,756       30.1  

Items not included in segment operating profit:

        

General corporate expenses

     (15,587     (15,160     427       2.8  

Amortization of trademarks and other intangibles

     (3,625     (2,918     707       24.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating profit

     152,682       114,060       38,622       33.9  

Other expenses

     (880     (1,094     (214     (19.6

Interest expense, net

     (38,262     (36,326     1,936       5.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

   $ 113,540     $ 76,640     $ 36,900       48.1 
  

 

 

   

 

 

   

 

 

   

 

 

 

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. Certain prior year segment selling, general and administrative expenses have been revised to conform to the current year presentation. These changes were primarily the result of our decision to cease allocating certain compensation related expenses to the segments. Other than this change, the allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2011 was consistent with the third quarter of 2010. Our consolidated selling, general and administrative expenses before segment allocations were $23 million higher in the third quarter of 2011 compared to the third quarter of 2010.

Innerwear

 

     Quarter Ended         
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net sales

   $ 515,263      $ 512,486      $ 2,777        0.5 

Segment operating profit

     79,353        55,249        24,104        43.6  

Overall net sales in the Innerwear segment were higher by $3 million in the third quarter of 2011 compared to the third quarter of 2010, primarily due to stronger net sales in our male underwear and socks product categories, partially offset by lower net sales in our intimate apparel product category.

 

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Net sales in the male underwear product category were 10% or $22 million higher in the third quarter of 2011 compared to the third quarter of 2010, primarily due to net price increases, partially offset by lower unit sales volume.

Higher net sales of $3 million or 4% in our socks product category reflect higher Hanes brand net sales of $5 million, partially offset by lower Champion brand net sales of $3 million in the third quarter of 2011 compared to the third quarter of 2010. The higher Hanes brand net sales were primarily due to net price increases, partially offset by lower unit sales volume, and the lower Champion brand net sales were primarily attributable to the loss of a seasonal program.

Intimate apparel net sales were $22 million or 10% lower in the third quarter of 2011 compared to the third quarter of 2010. Our panties and bra product category net sales were both lower by $11 million, primarily due to lower unit sales volume resulting from a softness in the intimate apparel category, partially offset by net price increases.

Innerwear segment gross profit was higher by $28 million in the third quarter of 2011 compared to the third quarter of 2010. The higher gross profit was primarily due to higher net product pricing of $67 million, which includes the impact of higher sales incentives of $2 million, efficiency savings related to our supply chain optimization of $6 million, favorable product sales mix of $3 million, lower excess and obsolete inventory costs of $2 million and lower other manufacturing costs of $2 million. The lower other manufacturing costs of $2 million includes the elimination of $6 million of excess 2010 costs related to servicing sales growth. These factors were offset by $29 million of higher input costs such as cotton costs related to finished goods manufactured internally in our facilities, vendor prices, wages and energy and oil-related materials and lower sales volume of $25 million.

Innerwear segment operating profit was higher in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of higher gross profit, partially offset by higher distribution expenses of $2 million related to higher costs to implement our price increases partially offset by the elimination of excess 2010 costs related to servicing sales growth.

Outerwear

 

     Quarter Ended         
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net sales

   $ 432,804      $ 389,474      $ 43,330        11.1 

Segment operating profit

     55,602        38,349        17,253        45.0  

Outerwear segment net sales were higher by $43 million or 11% in the third quarter of 2011 compared to the third quarter of 2010. Outerwear’s segment net sales include the impact of Gear for Sports, which was acquired in the fourth quarter of 2010 and contributed $83 million or 21 percentage points of the segment’s net sales growth and $27 million of gross profit for the third quarter of 2011. The Gear for Sports business includes sales of licensed logo apparel in collegiate bookstores and other channels.

Our Champion brand activewear net sales were lower by $7 million or 4% due to lower shipments to the wholesale club channel, partially offset by higher unit sales volume.

Our casualwear category net sales were lower in the retail channel by $26 million and in the wholesale channel by $6 million. The lower net sales in the retail casualwear channel were primarily attributable to a retailer’s decision to focus our Just My Size brand toward more core basics versus a mix with fashion-oriented lines, partially offset by net price increases. The lower net sales in the wholesale casualwear channel of 7% were primarily due to lower unit sales volume, partially offset by net price increases.

Outerwear segment gross profit was higher by $29 million in the third quarter of 2011 compared to the third quarter of 2010. The higher gross profit was primarily due to higher net product pricing of $29 million, which includes the impact of lower sales incentives of $4 million, favorable product sales mix of $22 million, efficiency

 

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savings related to our supply chain optimization of $4 million and higher sales volume of $3 million. These lower costs were partially offset by $23 million of higher input costs such as cotton costs related to finished goods manufactured internally in our facilities, vendor prices, wages and energy and oil-related materials, higher excess and obsolete inventory costs of $3 million and higher other manufacturing costs of $2 million.

Outerwear segment operating profit was higher in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of higher gross profit, partially offset by higher selling and other marketing expenses of $8 million and incremental administrative costs of $3 million attributable to Gear for Sports. The higher selling and other marketing expenses were primarily due to incremental costs resulting from the acquisition of Gear for Sports.

Hosiery

 

     Quarter Ended         
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Net sales

   $ 34,481      $ 37,442      $ (2,961     (7.9 )% 

Segment operating profit

     8,792        11,223        (2,431     (21.7

Net sales in the Hosiery segment were lower by $3 million or 8%, which was primarily due to lower net sales of our Hanes brand in the national chain and mass merchant channels and lower net sales of our L’eggs brand to mass retailers and food and drug stores. 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 third quarter of 2011 compared to the third quarter of 2010. The lower gross profit was primarily the result of lower sales volume of $2 million.

Hosiery segment operating profit was lower in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of lower gross profit.

Direct to Consumer

 

     Quarter Ended         
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Net sales

   $ 97,565      $ 100,327      $ (2,762     (2.8 )% 

Segment operating profit

     12,308        10,569        1,739       16.5  

Direct to Consumer segment net sales were lower by $3 million or 3% in the third quarter of 2011 compared to the third quarter of 2010 due to lower net sales related to our Internet operations of $3 million. Net sales in our outlet stores were slightly higher in the third quarter of 2011 compared to the third quarter of 2010. Comparable store sales were flat in the third quarter of 2011 compared to the third quarter of 2010.

Direct to Consumer segment gross profit was slightly lower in the third quarter of 2011 compared to the third quarter of 2010 primarily due to higher net product pricing of $4 million, offset by lower sales volume of $4 million.

Direct to Consumer segment operating profit was higher in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of lower non-media MAP expenses of $3 million, partially offset by higher expenses of $2 million as a result of opening new retail stores or expanding existing stores.

 

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International

 

     Quarter Ended         
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Net sales

   $ 150,072      $ 133,633      $ 16,439       12.3 

Segment operating profit

     15,839        16,748        (909     (5.4

Overall net sales in the International segment were higher by $16 million or 12% in the third quarter of 2011 compared to the third quarter of 2010, primarily as a result of sales growth in Asia, Latin America and Australia, reflecting net price increases, space gains and a favorable impact of $8 million related to foreign currency exchange rates. Excluding the impact of foreign exchange rates on currency, International segment net sales were higher by 6% in third quarter of 2011 compared to the third quarter of 2010. The favorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the Japanese yen, Canadian dollar and Brazilian real compared to the U.S. dollar.

During the third quarter of 2011, we experienced higher net sales, in each case excluding the impact of foreign currency exchange rates, in our activewear and intimate apparel businesses in Asia of $7 million, in our male underwear and intimate apparel businesses in Latin America of $6 million and in our activewear business in Australia of $5 million, which benefited from the acquisition of the assets of the TNF Group Unit Trust from TNF Group Pty Ltd, as trustee, and of Player Sportswear Unit Trust from Player Sportswear Pty Ltd, as trustee (collectively, “TNF”) in April 2011, partially offset by lower net sales in our intimate apparel business in Canada of $7 million and in our casualwear business in Europe of $2 million. 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 $8 million in the third quarter of 2011 compared to the third quarter of 2010. The higher gross profit was primarily a result of higher net product pricing of $14 million, which includes the impact of lower sales incentives of $1 million and a favorable impact related to foreign currency exchange rates of $3 million, partially offset by lower sales volume of $3 million, unfavorable product sales mix of $3 million and vendor price increases of $2 million.

International segment operating profit was slightly lower in the third quarter of 2011 compared to the third quarter of 2010, which was primarily attributable to higher selling and other marketing expenses of $3 million, higher distribution expenses of $2 million, higher media related MAP expenses of $1 million and higher non-media related MAP expenses of $1 million, partially offset by higher gross profit. The higher selling and marketing expenses were primarily due to incremental costs resulting from the acquisition of the assets of TNF and costs associated with the growth of our business in China. 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 third quarter of 2011 compared to the third quarter of 2010.

General Corporate Expenses

General corporate expenses were flat in the third quarter of 2011 compared to the third quarter of 2010 primarily due to lower start-up and shut-down costs of $2 million associated with the consolidation and globalization of our supply chain, offset by higher stock compensation and certain other benefit costs of $2 million.

 

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Condensed Consolidated Results of Operations — Nine Months Ended October 1, 2011 Compared with Nine Months Ended October 2, 2010

 

     Nine Months Ended               
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Net sales

   $ 3,491,828      $ 3,177,054      $ 314,774       9.9 

Cost of sales

     2,284,620        2,110,943        173,677       8.2  
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     1,207,208        1,066,111        141,097       13.2  

Selling, general and administrative expenses

     804,215        743,534        60,681       8.2  
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

     402,993        322,577        80,416       24.9  

Other expenses

     2,295        5,128        (2,833     (55.2

Interest expense, net

     118,545        110,394        8,151       7.4  
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before income tax expense

     282,153        207,055        75,098       36.3  

Income tax expense

     56,430        23,818        32,612       136.9  
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 225,723      $ 183,237      $ 42,486       23.2 
  

 

 

    

 

 

    

 

 

   

 

 

 

Net Sales

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net sales

   $ 3,491,828      $ 3,177,054      $ 314,774        9.9 

Consolidated net sales were higher by $315 million or 10% in the nine months of 2011 compared to 2010. The net sales growth reflects net price increases, incremental net sales from Gear for Sports and a favorable impact from foreign currency exchange rates, partially offset by lower unit sales volume in most categories.

Our three largest segments, Innerwear, Outerwear and International, demonstrated growth in net sales, with Outerwear and International delivering high double digit sales growth. Outerwear, International and Innerwear segment net sales were higher by $200 million (22%), $71 million (20%) and $49 million (3%), respectively. Hosiery and Direct to Consumer segment net sales were lower by $4 million (4%) and $1 million (< 1%).

Gross Profit

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Gross profit

   $ 1,207,208      $ 1,066,111      $ 141,097        13.2 

As a percent of net sales, our gross profit was 34.6% in the nine months of 2011 compared to 33.6% in the nine months of 2010. Our gross profit was higher by $141 million in the nine months of 2011 compared to 2010. The higher gross profit was primarily attributable to higher gross profit of $90 million from the Outerwear segment, of which $65 million was attributable to Gear for Sports, $31 million from the International segment, $21 million from the Innerwear segment and $1 million from the Direct to Consumer segment, partially offset by lower gross profit of $9 million from the Hosiery segment. General corporate expenses within gross profit, which are not allocated to segments, were $6 million lower in the nine months of 2011 compared to 2010.

Our results in the nine months of 2011 benefited primarily from net price increases of $206 million, which is net of the impact of higher sales incentives of $34 million, efficiency savings from our supply chain optimization of $34 million, higher sales volumes of $28 million, favorable product sales mix of $22 million, a favorable impact related to foreign currency exchange rates of $11 million, receipt of a one-time termination fee

 

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of $5 million related to a royalty license agreement and lower start-up and shut-down costs of $5 million and were negatively impacted by higher input costs of $142 million, particularly cotton and energy and oil-related materials, higher other manufacturing costs of $20 million, which is net of the elimination of $3 million of excess 2010 costs related to servicing sales growth, and higher excess and obsolete inventory costs of $7 million.

The average cotton price reflected in our results was 88 cents per pound in the nine months of 2011 compared to 62 cents per pound in the nine months of 2010. After taking into consideration the cotton costs currently included in our finished goods inventory and cotton prices we have locked in, we expect the average cost of cotton will exceed $1.00 per pound for the full year. These amounts do not include the impact of cotton costs on the cost of sourced goods. While cotton prices have declined in recent months, we will continue to have higher prices for cotton and oil-related materials reflected in our cost of sales, which will impact our results for the remainder of 2011 and the first half of 2012.

Selling, General and Administrative Expenses

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 804,215      $ 743,534      $ 60,681        8.2 

Our selling, general and administrative expenses were $61 million higher in the nine months of 2011 compared to 2010. As a percent of net sales our selling, general and administrative expenses were 23.0% in the nine months of 2011 compared to 23.4% in 2010. Outerwear, International and Innerwear segment selling, general and administrative expenses were higher by $34 million, $19 million and $16 million, respectively, and Hosiery and Direct to Consumer segment selling, general and administrative expenses were lower by $4 million and $2 million, respectively. General corporate expenses within selling, general and administrative expenses, which are not allocated to segments, were $5 million lower in the nine months of 2011 compared to 2010.

The higher selling, general and administrative expenses were primarily attributable to higher selling and other marketing expenses of $32 million, higher distribution expenses of $14 million, which is net of the elimination of $5 million of excess 2010 costs related to servicing sales growth, incremental administrative costs of $7 million attributable to Gear for Sports, higher expenses of $5 million as a result of opening new retail stores or expanding existing stores and higher media related MAP expenses of $4 million, partially offset by lower pension expense of $3 million.

Operating Profit

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Operating profit

   $ 402,993      $ 322,577      $ 80,416        24.9 

The higher operating profit was primarily attributable to higher operating profit of $56 million from the Outerwear segment, $11 million from the International segment, $5 million from the Innerwear segment and $3 million from the Direct to Consumer segment and lower general corporate expenses of $11 million which are not allocated to segments, partially offset by lower operating profit of $5 million from the Hosiery segment.

Other Expenses

 

     Nine Months Ended               
     October 1,      October 2,      Higher     Percent  
     2011      2010      (Lower)     Change  
     (dollars in thousands)  

Other expenses

   $ 2,295      $ 5,128      $ (2,833     (55.2 )% 

 

 

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During the nine months of 2011, we incurred charges of $2 million for funding fees associated with the sales of certain trade accounts receivable to financial institutions.

During the nine 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 $5 million. The write-off of 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 and amended and restated in 2009 (as amended and restated, the “2009 Senior Secured Credit Facility”) and from the reduction in borrowing capacity available under the accounts receivable securitization facility that we entered into in November 2007 (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.

Interest Expense, Net

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Interest expense, net

   $ 118,545      $ 110,394      $ 8,151        7.4 

Interest expense, net was higher by $8 million in the nine months of 2011 compared to 2010. The higher interest expense was primarily attributable to higher outstanding debt balances that increased interest expense by $12 million. In addition, the refinancing of our debt structure in November 2010, which included the sale of our $1 billion 6.375% Senior Notes, and the amendment of the 2009 Senior Secured Credit Facility in February 2011, together with a higher LIBOR, combined caused a net decrease in interest expense in the nine months of 2011 of $4 million.

Our weighted average interest rate on our outstanding debt was 5.62% during the nine months of 2011 compared to 5.71% in the nine months of 2010.

Income Tax Expense

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Income tax expense

   $ 56,430      $ 23,818      $ 32,612        136.9 

Our effective income tax rate was 20% in the nine months of 2011 compared to 12% in the nine months of 2010. The higher effective income tax rate for the nine months of 2011 compared to the nine months of 2010 was primarily attributable to a one-time benefit of $20 million in the nine months of 2010 resulting from 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 higher proportion of our earnings attributed to foreign subsidiaries than in the nine months of 2010, which are taxed at rates lower than the U.S. statutory rate.

Net Income

 

     Nine Months Ended                
     October 1,      October 2,      Higher      Percent  
     2011      2010      (Lower)      Change  
     (dollars in thousands)  

Net income

   $ 225,723      $ 183,237      $ 42,486        23.2 

Net income for the nine months of 2011 was higher than the nine months of 2010 primarily due to higher operating profit of $80 million and lower other expenses of $3 million, partially offset by higher income tax expense of $33 million and higher interest expense of $8 million.

 

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Operating Results by Business Segment — Nine Months Ended October 1, 2011 Compared with Nine Months Ended October 2, 2010

 

     Nine Months Ended        
     October 1,     October 2,     Higher     Percent  
     2011     2010     (Lower)     Change  
     (dollars in thousands)  

Net sales:

        

Innerwear

   $ 1,571,277     $ 1,522,553     $ 48,724       3.2 

Outerwear

     1,094,888       894,653       200,235       22.4  

Hosiery

     113,051       117,273       (4,222     (3.6

Direct to Consumer

     277,819       278,680       (861     (0.3

International

     434,793       363,895       70,898       19.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 3,491,828     $ 3,177,054     $ 314,774       9.9 
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating profit:

        

Innerwear

   $ 231,321     $ 225,896     $ 5,425       2.4 

Outerwear

     117,025       61,034       55,991       91.7  

Hosiery

     34,465       39,224       (4,759     (12.1

Direct to Consumer

     22,070       18,898       3,172       16.8  

International

     53,614       42,462       11,152       26.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating profit

     458,495       387,514       70,981