Hanesbrands Inc.
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 June 28, 2008
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 001-32891
 
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
 
     
Maryland
  20-3552316
(State of incorporation)   (I.R.S. employer identification no.)
     
1000 East Hanes Mill Road
Winston-Salem, North Carolina
  27105
(Address of principal executive office)
  (Zip code)
 
(336) 519-4400
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of July 30, 2008, there were 93,768,953 shares of the registrant’s common stock outstanding.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
    1  
    1  
 
PART I
      Financial Statements (unaudited):        
        Condensed Consolidated Statements of Income for the quarters and six months ended June 28, 2008 and June 30, 2007     2  
        Condensed Consolidated Balance Sheets at June 28, 2008 and December 29, 2007     3  
        Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 and June 30, 2007     4  
        Notes to Condensed Consolidated Financial Statements     5  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
      Quantitative and Qualitative Disclosures about Market Risk     46  
      Controls and Procedures     47  
      Controls and Procedures     47  
 
PART II
      Legal Proceedings     47  
      Risk Factors     47  
      Unregistered Sales of Equity Securities and Use of Proceeds     48  
      Defaults Upon Senior Securities     48  
      Submission of Matters to a Vote of Security Holders     48  
      Other Information     49  
      Exhibits     49  
    50  
Index to Exhibits
    E-1  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 
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 appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, Playtex, Bali, Just My Size, barely there, Wonderbra, C9 by Champion, L’eggs, Outer Banks and Stedman marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.


Table of Contents

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


Table of Contents

 
PART I
 
Item 1. Financial Statements
 
HANESBRANDS

Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Net sales
  $ 1,072,171     $ 1,121,907     $ 2,060,018     $ 2,161,801  
Cost of sales
    691,215       741,550       1,334,098       1,441,765  
                                 
Gross profit
    380,956       380,357       725,920       720,036  
Selling, general and administrative expenses
    266,427       266,017       521,039       520,584  
Restructuring
    1,442       26,225       4,000       42,471  
                                 
Operating profit
    113,087       88,115       200,881       156,981  
Other expenses
          551             551  
Interest expense, net
    37,635       51,230       78,029       102,947  
                                 
Income before income tax expense
    75,452       36,334       122,852       53,483  
Income tax expense
    18,108       10,900       29,484       16,045  
                                 
Net income
  $ 57,344     $ 25,434     $ 93,368     $ 37,438  
                                 
Earnings per share:
                               
Basic
  $ 0.61     $ 0.26     $ 0.99     $ 0.39  
Diluted
  $ 0.60     $ 0.26     $ 0.97     $ 0.39  
Weighted average shares outstanding:
                               
Basic
    94,355       96,254       94,395       96,343  
Diluted
    96,059       97,224       95,839       97,136  
 
See accompanying notes to Condensed Consolidated Financial Statements.


2


Table of Contents

HANESBRANDS

Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
                 
    June 28, 2008     December 29, 2007  
 
Assets
               
Cash and cash equivalents
  $ 96,918     $ 174,236  
Trade accounts receivable, less allowances of $19,327 at June 28, 2008 and $31,642 at December 29, 2007
    547,617       575,069  
Inventories
    1,342,184       1,117,052  
Deferred tax assets and other current assets
    236,021       227,977  
                 
Total current assets
    2,222,740       2,094,334  
                 
Property, net
    547,162       534,286  
Trademarks and other identifiable intangibles, net
    157,727       151,266  
Goodwill
    316,257       310,425  
Deferred tax assets and other noncurrent assets
    333,685       349,172  
                 
Total assets
  $ 3,577,571     $ 3,439,483  
                 
Liabilities and Stockholders’ Equity
               
Accounts payable
  $ 320,651     $ 289,166  
Accrued liabilities
    349,867       380,239  
Notes payable
    58,636       19,577  
                 
Total current liabilities
    729,154       688,982  
                 
Long-term debt
    2,315,250       2,315,250  
Other noncurrent liabilities
    142,420       146,347  
                 
Total liabilities
    3,186,824       3,150,579  
                 
Stockholders’ equity:
               
Preferred stock (50,000,000 authorized shares; $.01 par value) Issued and outstanding — None
           
Common stock (500,000,000 authorized shares; $.01 par value) Issued and outstanding — 94,038,303 at June 28, 2008 and 95,232,478 at December 29, 2007
    940       954  
Additional paid-in capital
    215,027       199,019  
Retained earnings
    201,271       117,849  
Accumulated other comprehensive loss
    (26,491 )     (28,918 )
                 
Total stockholders’ equity
    390,747       288,904  
                 
Total liabilities and stockholders’ equity
  $ 3,577,571     $ 3,439,483  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


3


Table of Contents

HANESBRANDS

Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
                 
    Six Months Ended  
    June 28, 2008     June 30, 2007  
 
Operating activities:
               
Net income
  $ 93,368     $ 37,438  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Depreciation
    49,322       63,189  
Amortization of intangibles
    5,638       3,074  
Restructuring
    (2,631 )     (3,222 )
Loss on early extinguishment of debt
          551  
Amortization of debt issuance costs
    3,015       3,289  
Stock compensation expense
    15,101       19,133  
Deferred taxes and other
    (7,959 )     (7,986 )
Changes in assets and liabilities, net of acquisition:
               
Accounts receivable
    31,183       (65,716 )
Inventories
    (221,340 )     (11,012 )
Other assets
    (8,909 )     15,085  
Accounts payable
    29,821       32,355  
Accrued liabilities
    (36,571 )     15,380  
                 
Net cash (used in) provided by operating activities
    (49,962 )     101,558  
                 
Investing activities:
               
Purchases of property, plant and equipment
    (73,550 )     (18,288 )
Acquisition of business
    (9,994 )      
Proceeds from sales of assets
    9,524       8,198  
Other
          (1,395 )
                 
Net cash used in investing activities
    (74,020 )     (11,485 )
                 
Financing activities:
               
Principal payments on capital lease obligations
    (523 )     (588 )
Borrowings on notes payable
    210,016       14,038  
Repayments on notes payable
    (171,346 )     (15,483 )
Cost of debt issuance
    (69 )     (2,243 )
Borrowings on revolving loan facility
    155,000        
Repayments on revolving loan facility
    (155,000 )      
Repayments of debt under credit facilities
          (53,125 )
Decrease in bank overdraft 
          (834 )
Proceeds from stock options exercised
    382       2,803  
Stock repurchases
    (10,860 )     (15,885 )
Borrowings on accounts receivable securitization
    20,389        
Repayments on accounts receivable securitization
    (20,389 )      
Transaction with Sara Lee Corporation
    18,000        
Other
    (67 )     613  
                 
Net cash provided by (used in) financing activities
    45,533       (70,704 )
                 
Effect of changes in foreign exchange rates on cash
    1,131       1,051  
                 
(Decrease) increase in cash and cash equivalents
    (77,318 )     20,420  
Cash and cash equivalents at beginning of year
    174,236       155,973  
                 
Cash and cash equivalents at end of period
  $ 96,918     $ 176,393  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


4


Table of Contents

HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
 
(1)   Basis of Presentation
 
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial position and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial position and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
 
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
 
During the second quarter ended June 28, 2008, the Company acquired a sewing operation in Thailand, resulting in $3,571 of additional goodwill. The Company also added two sewing facilities in Vietnam during the second quarter ended June 28, 2008.
 
Certain prior year amounts in the condensed consolidated financial statements, none of which are material, have been reclassified to conform with the current year presentation. These reclassifications, which relate to changes in the classification of inventory, segment assets, segment depreciation and amortization expense, segment additions to long-lived assets and consolidating financial information, had no impact on the Company’s results of operations.
 
(2)   Recently Issued Accounting Pronouncements
 
Fair Value Measurements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for the Company’s financial assets and liabilities on December 30, 2007. The FASB approved a one-year deferral of the adoption of SFAS 157 as it relates to non-financial assets and liabilities with the issuance in February 2008 of FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, as a result of which implementation by the Company is now required on January 4, 2009. The partial adoption of SFAS 157 in the first quarter ended March 29, 2008 had no material impact on the financial condition, results of operations or cash flows of the Company, but resulted in certain additional disclosures reflected in Note 9. The Company is in the process of evaluating the impact of SFAS 157 as it relates to its non-financial assets and liabilities.
 
Fair Value Option for Financial Assets and Financial Liabilities
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not


5


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
currently required to be measured at fair value under generally accepted accounting principles and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of SFAS 159 became effective for the Company on December 30, 2007. As permitted by SFAS 159, the Company elected not to adopt the fair value option.
 
Business Combinations
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination and its effects. Under SFAS 141R, a company would be required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement would also require that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination be recognized in income from continuing operations in the period of the combination. The Company is in the process of analyzing the impact of SFAS 141R, which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believe that the adoption of SFAS 160 will have a material impact on its results of operations or financial position.
 
Disclosures About Derivative Instruments and Hedging Activities
 
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements of FASB Statement No. 133 about an entity’s derivative instruments and hedging activities to include more detailed qualitative disclosures and expanded quantitative disclosures. The provisions of SFAS 161 are effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company is currently evaluating the impact that SFAS 161 will have on its results of operations and financial position.


6


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The Hierarchy of Generally Accepted Accounting Principles
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements presented in conformity with GAAP. This statement is effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Professional Standards AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS 162 will not have a material impact on the Company’s results of operations or financial position.
 
(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 second quarters and six months ended June 28, 2008 and June 30, 2007. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock. The reconciliation of basic to diluted weighted average shares for the second quarters and six months ended June 28, 2008 and June 30, 2007 is as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Basic weighted average shares
    94,355       96,254       94,395       96,343  
Effect of potentially dilutive securities:
                               
Stock options
    777       207       510       180  
Restricted stock units
    923       761       932       612  
Employee stock purchase plan
    4       2       2       1  
                                 
Diluted weighted average shares
    96,059       97,224       95,839       97,136  
                                 
 
Options to purchase 140 and 1,480 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the second quarter and six months ended June 28, 2008, respectively.
 
Options to purchase 1,023 and 2,096 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the second quarter and six months ended June 30, 2007, respectively.
 
(4)   Stock-Based Compensation
 
During the first quarter ended March 29, 2008, the Company granted options to purchase 1,340 shares of common stock pursuant to the Hanesbrands Inc. Omnibus Incentive Plan of 2006 (the “Omnibus Plan”) at an exercise price of $25.10 per share, which was the closing price of Hanesbrands’ stock on the date of grant. These options can be exercised over a term of seven years and vest ratably over one to three years. The fair value of each option granted during the first quarter ended March 29, 2008 was estimated as of the date of grant using the Black-Scholes option-pricing model using the following assumptions: volatility of 28%; expected terms of 3.8 — 4.5 years; dividend yield of 0%; and risk-free interest rates ranging from 2.45% to 2.64%. The Company uses the volatility of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions due to the limited trading history of the Company’s common stock since the Company’s spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006. The Company utilized the simplified method outlined in SEC Staff Accounting


7


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Bulletin No. 107 to estimate expected lives for options granted during the first quarter ended March 29, 2008. SEC Staff Accounting Bulletin No. 110, which was issued in December 2007, amends SEC Staff Accounting Bulletin No. 107 and gives a limited extension on using the simplified method for valuing stock option grants to eligible public companies that do not have sufficient historical exercise patterns on options granted to employees. The weighted average fair value of individual options granted during the first quarter ended March 29, 2008 was $7.04.
 
During the first quarter ended March 29, 2008, the Company granted 540 restricted stock units (“RSU“s) pursuant to the Omnibus Plan. Upon the achievement of defined service conditions, the RSUs are converted into shares of the Company’s common stock on a one-for-one basis and issued to the grantees. All RSUs vest solely upon continued future service to the Company. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation expense is recognized over the period during which the grantees provide the requisite service to the Company. The grant date fair value of the RSUs was $25.10.
 
During the quarter and six months ended June 28, 2008, 24 and 58 shares, respectively, were purchased under the Hanesbrands Inc. Employee Stock Purchase Plan of 2006 (the “ESPP”) by eligible employees. During the quarter and six months ended June 30, 2007, 13 shares were purchased under the ESPP by eligible employees. The Company had 2,306 shares of common stock available for issuance under the ESPP as of June 28, 2008.
 
(5)   Restructuring
 
Since becoming an independent company, the Company has undertaken a variety of restructuring efforts in connection with its consolidation and globalization strategy designed to improve operating efficiencies and lower costs. As a result of these efforts, the Company expects to incur approximately $250,000 in restructuring and related charges over the three year period following the spin off from Sara Lee on September 5, 2006, of which approximately half is expected to be noncash. As of June 28, 2008, the Company has recognized approximately $129,000 in restructuring and related charges related to these efforts since September 5, 2006. Of these charges, approximately $48,000 relates to employee termination and other benefits, approximately $69,000 relates to accelerated depreciation of buildings and equipment for facilities that have been or will be closed, and approximately $12,000 relates to lease termination and other costs. Accelerated depreciation related to the Company’s manufacturing facilities and distribution centers that have been or will be closed is reflected in the “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statements of Income.


8


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The impact of restructuring on income before income tax expense is summarized as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Restructuring programs:
                               
Year ended January 3, 2009 restructuring actions
  $ 2,494     $     $ 5,436     $  
Year ended December 29, 2007 restructuring actions
    4,172       41,404       7,028       49,052  
Six months ended December 30, 2006 restructuring actions
          (1,049 )     13       12,599  
Year ended July 1, 2006 and prior restructuring actions
    (13 )     (769 )     (65 )     (552 )
                                 
Decrease in income before income tax expense
  $ 6,653     $ 39,586     $ 12,412     $ 61,099  
                                 
 
The following table illustrates where the costs associated with these actions are recognized in the Condensed Consolidated Statements of Income:
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Cost of sales
  $ 4,633     $ 12,413     $ 7,191     $ 17,680  
Selling, general and administrative expenses
    578       948       1,221       948  
Restructuring
    1,442       26,225       4,000       42,471  
                                 
Decrease in income before income tax expense
  $ 6,653     $ 39,586     $ 12,412     $ 61,099  
                                 
 
Components of the restructuring actions are as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Accelerated depreciation
  $ 5,211     $ 13,361     $ 8,412     $ 18,628  
Employee termination and other benefits
    1,362       26,088       3,920       32,103  
Noncancelable lease and other contractual obligations
    80       137       80       10,368  
                                 
    $ 6,653     $ 39,586     $ 12,412     $ 61,099  
                                 
 
Rollforward of accrued restructuring is as follows:
 
         
    Six Months Ended  
    June 28,
 
    2008  
 
Beginning accrual
  $ 23,350  
Restructuring expenses
    6,702  
Cash payments
    (10,650 )
Adjustments to restructuring expenses
    (2,702 )
         
Ending accrual
  $ 16,700  
         


9


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The accrual balance as of June 28, 2008 is comprised of $13,408 in current accrued liabilities, primarily related to employee termination and other benefits, and $3,292 in other noncurrent liabilities, primarily related to lease termination payments, in the Condensed Consolidated Balance Sheet.
 
Adjustments to previous estimates are primarily attributable to employee termination and other benefits and resulted from actual costs to settle obligations being lower than expected. The adjustments were reflected in the “Restructuring” line of the Condensed Consolidated Statements of Income.
 
Year Ended January 3, 2009 Actions
 
During the six months ended June 28, 2008, the Company approved actions to close two manufacturing facilities and two distribution centers and eliminate approximately 1,300 positions in Heredia, Costa Rica, Aguascalientes, Mexico and the United States. The production capacity related to the manufacturing facilities will be relocated to lower cost locations in Asia and Central America. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. The Company recorded charges of $2,494 and $5,436 in the second quarter and six months ended June 28, 2008, respectively. The Company recognized $2,416 and $5,358 in the second quarter and six months ended June 28, 2008, respectively, which represents employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group and $78 in the second quarter and six months ended June 28, 2008 for accelerated depreciation of buildings and equipment. These charges are reflected in the “Restructuring” and “Cost of sales” lines of the Condensed Consolidated Statement of Income. All actions are expected to be completed within a 12-month period.
 
(6)   Inventories
 
Inventories consisted of the following:
 
                 
    June 28,
    December 29,
 
    2008     2007  
 
Raw materials
  $ 189,772     $ 176,758  
Work in process
    146,628       122,724  
Finished goods
    1,005,784       817,570  
                 
    $ 1,342,184     $ 1,117,052  
                 


10


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
(7)   Allowances for Trade Accounts Receivable
 
The changes in the Company’s allowance for doubtful accounts and allowance for chargebacks and other deductions for the quarter and six months ended June 28, 2008 are as follows:
 
                         
          Allowance for
       
    Allowance for
    Chargebacks
       
    Doubtful
    and Other
       
    Accounts     Deductions     Total  
 
Balance at December 29, 2007:
  $ 9,328     $ 22,314     $ 31,642  
Charged to expenses
    84       3,419       3,503  
Deductions and write-offs
    (3,311 )     (12,059 )     (15,370 )
                         
Balance at March 29, 2008:
    6,101       13,674       19,775  
                         
Charged to expenses
    1,334       2,564       3,898  
Deductions and write-offs
    (753 )     (3,593 )     (4,346 )
                         
Balance at June 28, 2008:
  $ 6,682     $ 12,645     $ 19,327  
                         
 
Charges to the allowance for doubtful accounts are reflected in the “Selling, general and administrative expenses” line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the “Net sales” line of the Condensed Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease income, represent write-offs of previously reserved accounts receivables and allowed customer chargebacks and deductions against gross accounts receivable.
 
(8)   Long-Term Debt
 
The Company had the following long-term debt at June 28, 2008 and December 29, 2007:
 
                         
    Interest
             
    Rate as of
    Principal Amount  
    June 28,
    June 28,
    December 29,
 
    2008     2008     2007  
 
Senior Secured Credit Facility:
                       
Term A
    4.15 %   $ 139,000     $ 139,000  
Term B
    4.64 %     976,250       976,250  
Second Lien Credit Facility
    6.66 %     450,000       450,000  
Floating Rate Senior Notes
    6.51 %     500,000       500,000  
Accounts Receivable Securitization
    3.09 %     250,000       250,000  
                         
            $ 2,315,250     $ 2,315,250  
                         
 
As of June 28, 2008, the Company had $0 outstanding under the Senior Secured Credit Facility’s $500,000 Revolving Loan Facility and $61,734 of standby and trade letters of credit issued and outstanding under this facility.
 
Availability of funding under the accounts receivable securitization depends primarily upon the eligible outstanding receivables balance. As of June 28, 2008, the Company had $250,000 outstanding under the accounts receivable securitization. The total amount of receivables used as collateral for the accounts receivable securitization was $455,619 and $495,245 at June 28, 2008 and December 29, 2007, respectively,


11


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
and is reported on the Company’s Condensed Consolidated Balance Sheets in trade accounts receivables less allowances.
 
During the second quarter and six months ended June 30, 2007, the Company recognized $551 of loss on early extinguishment of debt related to unamortized debt issuance costs on the Senior Secured Credit Facility as a result of the prepayment of $50,000 of principal in June 2007. This loss is reflected in the “Other expenses” line of the Condensed Consolidated Statements of Income.
 
(9)   Fair Value of Financial Assets and Liabilities
 
The Company has adopted the provisions of SFAS 157 as of December 30, 2007 for its financial assets and liabilities. Although this partial adoption of SFAS 157 had no material impact on its financial condition, results of operations or cash flows, the Company is now required to provide additional disclosures as part of its financial statements. SFAS 157 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in SFAS 157. The three valuation techniques are as follows:
 
  •  Market approach — prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
  •  Cost approach — amount that would be required to replace the service capacity of an asset or replacement cost.
 
  •  Income approach — techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
 
The Company primarily applies the market approach for commodity derivatives and the income approach for interest rate and foreign currency derivatives for recurring fair value measurements and attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
 
As of June 28, 2008, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to interest rates, foreign exchange rates and cotton. The fair values of cotton derivatives are determined based on quoted prices in public markets and are categorized as Level 1. The fair values of interest rate and foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2. The Company does not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the second quarter ended June 28, 2008. There were no changes to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis.


12


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The following table sets forth by level within SFAS 157’s fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis at June 28, 2008. As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
                         
    Assets (Liabilities) at Fair Value as of June 28, 2008
    Quoted Prices
       
    In Active
  Significant
   
    Markets for
  Other
  Significant
    Identical
  Observable
  Unobservable
    Assets
  Inputs
  Inputs
    (Level 1)   (Level 2)   (Level 3)
 
Derivative contracts, net
  $     $ 16,620     $  
                         
Total
  $     $ 16,620     $  
                         
 
The determination of fair values above incorporates various factors required under SFAS 157. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements, but also the impact of the Company’s nonperformance risk on its liabilities.
 
(10)   Comprehensive Income
 
SFAS No. 130, Reporting Comprehensive Income, requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, amounts amortized into net periodic benefit cost as required by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, and unrealized gains and losses on qualifying cash flow hedges, are combined, net of their related tax effect, to arrive at comprehensive income. The Company’s comprehensive income is as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Net income
  $ 57,344     $ 25,434     $ 93,368     $ 37,438  
Translation adjustments
    4,220       7,161       2,690       7,634  
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax (benefit) of $6,161, $4,218, ($146), and $2,733, respectively
    9,677       6,625       (229 )     4,294  
Amounts amortized into net periodic income:
                               
Prior service cost (benefit), net of tax (benefit) of $4, ($779), $8 and ($1,557), respectively
    6       (1,223 )     12       (2,446 )
Actuarial loss, net of tax of $15, $364, $30 and $730, respectively
    24       573       48       1,147  
                                 
Comprehensive income
  $ 71,271     $ 38,570     $ 95,889     $ 48,067  
                                 


13


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
(11)   Income Taxes
 
For the second quarters and six months ended June 28, 2008 and June 30, 2007, income taxes have been computed consistent with Accounting Principles Board Opinion No. 28, “Interim Financial Reporting” and FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods.”
 
The difference in the estimated annual effective income tax rates of 24% for the second quarter and six months ended June 28, 2008 and 30% for the second quarter and six months ended June 30, 2007 and the U.S. statutory rate of 35% is primarily attributable to unremitted earnings of foreign subsidiaries taxed at rates less than the U.S. statutory rate. The Company’s estimated annual effective tax rate is reflective of its strategic initiative to make substantial capital investments outside the United States in its global supply chain in 2008.
 
Within 180 days after Sara Lee files its final consolidated tax return for the period that includes September 5, 2006, which is expected to occur by September 2008, Sara Lee is required to deliver to the Company a computation of the amount of deferred taxes attributable to the Company’s United States and Canadian operations that would be included on the Company’s balance sheet as of September 6, 2006. If substituting the amount of deferred taxes as finally determined for the amount of estimated deferred taxes that were included on that balance sheet at the time of the spin off causes a decrease in the net book value reflected on that balance sheet, then Sara Lee will be required to pay the Company the amount of such decrease. If such substitution causes an increase in the net book value reflected on that balance sheet, then the Company will be required to pay Sara Lee the amount of such increase. Although Sara Lee has not delivered its computation of the amount of these deferred taxes and final settlement of any amounts due has not been determined, during the second quarter ended June 28, 2008, the Company received a preliminary cash installment of $18,000 from Sara Lee.
 
(12)   Business Segment Information
 
The Company’s operations are managed and reported in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these businesses.
 
The types of products and services from which each reportable segment derives its revenues are as follows:
 
  •  Innerwear sells basic branded products that are replenishment in nature under the product categories of women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear.
 
  •  Outerwear sells basic branded products that are seasonal in nature under the product categories of casualwear and activewear.
 
  •  Hosiery sells products in categories such as pantyhose and knee highs.
 
  •  International relates to the Latin America, Asia, Canada and Europe geographic locations which sell products that span across the Innerwear, Outerwear and Hosiery reportable segments.
 
  •  Other is comprised of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and generate break even margins.
 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, amortization of trademarks and other identifiable intangibles and restructuring and related accelerated depreciation charges. The accounting policies


14


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 29, 2007.
 
Certain prior year segment assets, depreciation and amortization expense and additions to long-lived assets disclosures have been revised to conform to the current year presentation.
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Net sales:
                               
Innerwear
  $ 636,335     $ 691,504     $ 1,180,065     $ 1,281,951  
Outerwear
    260,137       263,596       532,342       547,231  
Hosiery
    49,734       51,402       116,475       125,095  
International
    130,903       109,001       235,539       199,778  
Other
    4,174       17,644       15,295       33,042  
                                 
Total segment net sales(1)
    1,081,283       1,133,147       2,079,716       2,187,097  
Intersegment(2)
    (9,112 )     (11,240 )     (19,698 )     (25,296 )
                                 
Total net sales
  $ 1,072,171     $ 1,121,907     $ 2,060,018     $ 2,161,801  
                                 
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Segment operating profit:
                               
Innerwear
  $ 79,942     $ 104,680     $ 133,617     $ 180,648  
Outerwear
    19,927       12,302       36,344       18,402  
Hosiery
    15,742       14,134       39,863       34,179  
International
    18,848       16,927       33,652       24,705  
Other
    830       1,064       (10 )     289  
                                 
Total segment operating profit
    135,289       149,107       243,466       258,223  
Items not included in segment operating profit:
                               
General corporate expenses
    (12,584 )     (19,892 )     (24,535 )     (37,069 )
Amortization of trademarks and other identifiable intangibles
    (2,965 )     (1,514 )     (5,638 )     (3,074 )
Restructuring
    (1,442 )     (26,225 )     (4,000 )     (42,471 )
Accelerated depreciation included in cost of sales
    (4,633 )     (12,413 )     (7,191 )     (17,680 )
Accelerated depreciation included in selling, general and administrative expenses
    (578 )     (948 )     (1,221 )     (948 )
                                 
Total operating profit
    113,087       88,115       200,881       156,981  
Other expenses
          (551 )           (551 )
Interest expense, net
    (37,635 )     (51,230 )     (78,029 )     (102,947 )
                                 
Income before income tax expense
  $ 75,452     $ 36,334     $ 122,852     $ 53,483  
                                 
 


15


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                 
    June 28,
    December 29,
 
    2008     2007  
 
Assets:
               
Innerwear
  $ 1,358,884     $ 1,247,441  
Outerwear
    820,463       754,178  
Hosiery
    95,605       97,804  
International
    242,601       232,142  
Other
    14,910       16,807  
                 
      2,532,463       2,348,372  
Corporate(3)
    1,045,108       1,091,111  
                 
Total assets
  $ 3,577,571     $ 3,439,483  
                 
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Depreciation and amortization expense:
                               
Innerwear
  $ 11,481     $ 11,322     $ 22,032     $ 22,641  
Outerwear
    5,679       5,644       12,809       12,541  
Hosiery
    1,554       2,837       3,185       5,379  
International
    749       1,223       1,172       2,044  
Other
    258       763       595       896  
                                 
      19,721       21,789       39,793       43,501  
Corporate
    8,975       16,304       15,167       22,762  
                                 
Total depreciation and amortization expense
  $ 28,696     $ 38,093     $ 54,960     $ 66,263  
                                 
 
                                 
    Quarter Ended     Six Months Ended  
    June 28,
    June 30,
    June 28,
    June 30,
 
    2008     2007     2008     2007  
 
Additions to long-lived assets:
                               
Innerwear
  $ 19,101     $ 5,666     $ 26,503     $ 9,527  
Outerwear
    19,138       1,723       32,140       3,660  
Hosiery
    239       794       318       1,098  
International
    668       519       1,142       879  
Other
    11       52       14       59  
                                 
      39,157       8,754       60,117       15,223  
Corporate
    6,813       2,140       13,433       3,065  
                                 
Total additions to long-lived assets
  $ 45,970     $ 10,894     $ 73,550     $ 18,288  
                                 
 
 
(1) Includes sales between segments. Such sales are at transfer prices that are at cost plus markup or at prices equivalent to market value.

16


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(2) Intersegment sales included in the segments’ net sales are as follows:
 
                                 
    Quarter Ended   Six Months Ended
    June 28,
  June 30,
  June 28,
  June 30,
    2008   2007   2008   2007
 
Innerwear
  $ 1,006     $ 1,662     $ 2,362     $ 3,387  
Outerwear
    5,227       4,981       10,657       11,779  
Hosiery
    2,509       3,744       5,640       8,568  
International
    370       853       1,039       1,562  
Other
                       
                                 
Total
  $ 9,112     $ 11,240     $ 19,698     $ 25,296  
                                 
 
(3) Principally cash and equivalents, certain fixed assets, net deferred tax assets, goodwill, trademarks and other identifiable intangibles, and certain other noncurrent assets.
 
(13)   Consolidating Financial Information
 
In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes. The following presents the condensed consolidating financial information separately for:
 
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
 
(ii) Guarantor subsidiaries, on a combined basis, as specified in the indenture governing the Floating Rate Senior Notes;
 
(iii) Non-guarantor subsidiaries, on a combined basis;
 
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate intercompany profit in inventory, (c) eliminate the investments in our subsidiaries and (d) record consolidating entries; and
 
(v) Parent Company, on a consolidated basis.
 
The Floating Rate Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is wholly owned, directly or indirectly, by Hanesbrands Inc. Each entity in the consolidating financial information follows the same accounting policies as described in the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 29, 2007, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 
Certain prior period amounts have been reclassified to conform to the current year presentation and legal entity structure relating to the classification of the investment in subsidiary balances and related equity in earnings of subsidiaries.


17


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,086,432     $ 111,692     $ 761,732     $ (887,685 )   $ 1,072,171  
Cost of sales
    871,358       44,142       666,379       (890,664 )     691,215  
                                         
Gross profit
    215,074       67,550       95,353       2,979       380,956  
Selling, general and administrative expenses
    226,412       17,409       22,491       115       266,427  
Restructuring
    421       127       894             1,442  
                                         
Operating profit (loss)
    (11,759 )     50,014       71,968       2,864       113,087  
                                         
Equity in earnings (loss) of subsidiaries
    101,498       43,374             (144,872 )      
Interest expense, net
    25,443       7,971       4,228       (7 )     37,635  
                                         
Income (loss) before income tax expense (benefit)
    64,296       85,417       67,740       (142,001 )     75,452  
Income tax expense
    6,952       3,397       7,759             18,108  
                                         
Net income (loss)
  $ 57,344     $ 82,020     $ 59,981     $ (142,001 )   $ 57,344  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended June 30, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,098,747     $ 227,523     $ 642,120     $ (846,483 )   $ 1,121,907  
Cost of sales
    814,234       169,805       562,340       (804,829 )     741,550  
                                         
Gross profit
    284,513       57,718       79,780       (41,654 )     380,357  
Selling, general and administrative expenses
    240,564       (1,098 )     31,857       (5,306 )     266,017  
Restructuring
    26,660       5       (440 )           26,225  
                                         
Operating profit (loss)
    17,289       58,811       48,363       (36,348 )     88,115  
Equity in earnings (loss) of subsidiaries
    59,879       40,892             (100,771 )      
Other expenses
    551                         551  
Interest expense, net
    40,802       10,633       (208 )     3       51,230  
                                         
Income (loss) before income tax expense (benefit)
    35,815       89,070       48,571       (137,122 )     36,334  
Income tax expense (benefit)
    10,381       2,778       (2,259 )           10,900  
                                         
Net income (loss)
  $ 25,434     $ 86,292     $ 50,830     $ (137,122 )   $ 25,434  
                                         
 


18


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Six Months Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 2,109,891     $ 209,138     $ 1,406,691     $ (1,665,702 )   $ 2,060,018  
Cost of sales
    1,672,527       83,355       1,227,217       (1,649,001 )     1,334,098  
                                         
Gross profit
    437,364       125,783       179,474       (16,701 )     725,920  
Selling, general and administrative expenses
    445,712       39,000       35,765       562       521,039  
Restructuring
    (94 )     127       3,967             4,000  
                                         
Operating profit (loss)
    (8,254 )     86,656       139,742       (17,263 )     200,881  
                                         
Equity in earnings (loss) of subsidiaries
    165,204       80,151             (245,355 )      
Interest expense, net
    51,786       16,862       9,388       (7 )     78,029  
                                         
Income (loss) before income tax expense (benefit)
    105,164       149,945       130,354       (262,611 )     122,852  
Income tax expense
    11,796       5,515       12,173             29,484  
                                         
Net income (loss)
  $ 93,368     $ 144,430     $ 118,181     $ (262,611 )   $ 93,368  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Six Months Ended June 30, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 2,141,450     $ 430,119     $ 1,241,821     $ (1,651,589 )   $ 2,161,801  
Cost of sales
    1,620,139       320,212       1,098,943       (1,597,529 )     1,441,765  
                                         
Gross profit
    521,311       109,907       142,878       (54,060 )     720,036  
Selling, general and administrative expenses
    461,411       2,484       56,373       316       520,584  
Restructuring
    42,561       5       (95 )           42,471  
                                         
Operating profit (loss)
    17,339       107,418       86,600       (54,376 )     156,981  
Equity in earnings (loss) of subsidiaries
    112,607       67,290             (179,897 )      
Other expenses
    551                         551  
Interest expense, net
    82,244       21,270       (563 )     (4 )     102,947  
                                         
Income (loss) before income tax expense (benefit)
    47,151       153,438       87,163       (234,269 )     53,483  
Income tax expense
    9,713       3,951       2,381             16,045  
                                         
Net income (loss)
  $ 37,438     $ 149,487     $ 84,782     $ (234,269 )   $ 37,438  
                                         
 

19


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 28,561     $ 2,105     $ 66,252     $     $ 96,918  
Trade accounts receivable
    (4,676 )     8,602       547,195       (3,504 )     547,617  
Inventories
    1,081,001       50,513       249,606       (38,936 )     1,342,184  
Deferred tax assets and other current assets
    191,762       8,559       38,029       (2,329 )     236,021  
                                         
Total current assets
    1,296,648       69,779       901,082       (44,769 )     2,222,740  
                                         
Property, net
    253,658       10,274       283,230             547,162  
Trademarks and other identifiable intangibles, net
    34,967       117,175       5,585             157,727  
Goodwill
    232,882       16,934       66,441             316,257  
Investments in subsidiaries
    583,528       655,138             (1,238,666 )      
Deferred tax assets and other noncurrent assets
    138,888       307,444       (43,488 )     (69,159 )     333,685  
                                         
Total assets
  $ 2,540,571     $ 1,176,744     $ 1,212,850     $ (1,352,594 )   $ 3,577,571  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 150,578     $ 4,358     $ 80,067     $ 85,648     $ 320,651  
Accrued liabilities
    270,407       25,919       56,215       (2,674 )     349,867  
Notes payable
                58,636             58,636  
                                         
Total current liabilities
    420,985       30,277       194,918       82,974       729,154  
                                         
Long-term debt
    1,615,250       450,000       250,000             2,315,250  
Other noncurrent liabilities
    113,589       1,660       22,625       4,546       142,420  
                                         
Total liabilities
    2,149,824       481,937       467,543       87,520       3,186,824  
Stockholders’ equity
    390,747       694,807       745,307       (1,440,114 )     390,747  
                                         
Total liabilities and stockholders’ equity
  $ 2,540,571     $ 1,176,744     $ 1,212,850     $ (1,352,594 )   $ 3,577,571  
                                         
 

20


Table of Contents

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

21


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Six Months Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ (15,285 )   $ 83,519     $ 128,725     $ (246,921 )   $ (49,962 )
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (18,178 )     (5,364 )     (50,008 )           (73,550 )
Acquisition of business
                (9,994 )           (9,994 )
Proceeds from sales of assets
    7,242       3       2,279             9,524  
Other
    435                   (435 )      
                                         
Net cash used in investing activities
    (10,501 )     (5,361 )     (57,723 )     (435 )     (74,020 )
                                         
Financing activities:
                                       
Principal payments on capital lease obligations
    (523 )                       (523 )
Borrowings on notes payable
                210,016             210,016  
Repayments on notes payable
                (171,346 )           (171,346 )
Cost of debt issuance
    (48 )     (10 )     (11 )           (69 )
Borrowings on revolving loan facility
    155,000                         155,000  
Repayments on revolving loan facility
    (155,000 )                       (155,000 )
Proceeds from stock options exercised
    382                         382  
Stock repurchases
    (10,860 )                       (10,860 )
Borrowings on accounts receivable securitization
                20,389             20,389  
Repayments on accounts receivable securitization
                (20,389 )           (20,389 )
Transaction with Sara Lee Corporation
    18,000                         18,000  
Other
    (67 )                       (67 )
Net transactions with related entities
    (37,013 )     (82,372 )     (127,971 )     247,356        
                                         
Net cash provided by (used in) financing activities
    (30,129 )     (82,382 )     (89,312 )     247,356       45,533  
                                         
Effect of changes in foreign exchange rates on cash
                1,131             1,131  
                                         
Decrease in cash and cash equivalents
    (55,915 )     (4,224 )     (17,179 )           (77,318 )
Cash and cash equivalents at beginning of year
    84,476       6,329       83,431             174,236  
                                         
Cash and cash equivalents at end of period
  $ 28,561     $ 2,105     $ 66,252     $     $ 96,918  
                                         
 

22


Table of Contents

 
HANESBRANDS
 
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Six Months Ended June 30, 2007  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ 171,140     $ 148,577     $ (50,277 )   $ (167,882 )   $ 101,558  
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (12,831 )     (1,357 )     (4,100 )           (18,288 )
Proceeds from sales of assets
    5,272       2,261       665             8,198  
Other
    12,602       1,381       (9,077 )     (6,301 )     (1,395 )
                                         
Net cash provided by (used in) investing activities
    5,043       2,285       (12,512 )     (6,301 )     (11,485 )
                                         
Financing activities:
                                       
Principal payments on capital lease obligations
    (562 )     (26 )                 (588 )
Borrowings on notes payable
                14,038             14,038  
Repayments on notes payable
                (15,483 )           (15,483 )
Cost of debt issuance
    (2,172 )     (71 )                 (2,243 )
Repayment of debt under credit facilities
    (53,125 )                       (53,125 )
Decrease in bank overdraft
                (834 )           (834 )
Proceeds from stock options exercised
    2,803                         2,803  
Stock repurchases
    (15,885 )                       (15,885 )
Other
    613                         613  
Net transactions with related entities
    (119,633 )     (149,210 )     94,660       174,183        
                                         
Net cash provided by (used in) financing activities
    (187,961 )     (149,307 )     92,381       174,183       (70,704 )
                                         
Effect of changes in foreign exchange rates on cash
                1,051             1,051  
                                         
Increase (decrease) in cash and cash equivalents
    (11,778 )     1,555       30,643             20,420  
Cash and cash equivalents at beginning of year
    60,960       (1,251 )     96,264             155,973  
                                         
Cash and cash equivalents at end of period
  $ 49,182     $ 304     $ 126,907     $     $ 176,393  
                                         
 
(14)   Subsequent Event
 
Subsequent to June 28, 2008, the Company entered into an interest rate swap with a notional amount of $500,000, as a result of which the interest rate on the Company’s floating rate senior notes has been fixed at 7.64% for a 4-year term. In connection with this transaction, the Company terminated an interest rate cap with a notional amount of $250,000 with an interest rate of 5.75%.

23


Table of Contents

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” for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 29, 2007, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K.
 
Overview
 
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Playtex, Bali, Just My Size, barely there and Wonderbra. We design, manufacture, source and sell a broad range of apparel essentials such as t-shirts, bras, panties, men’s underwear, kids’ underwear, socks, hosiery, casualwear and activewear.
 
Our operations are managed in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these businesses.
 
  •  Innerwear.  The Innerwear segment focuses on core apparel essentials, and consists of products such as women’s intimate apparel, men’s underwear, kids’ underwear, socks, thermals and sleepwear, marketed under well-known brands that are trusted by consumers. We are an intimate apparel category leader in the United States with our Hanes, Playtex, Bali, Just My Size, barely there, and Wonderbra brands. We are also a leading manufacturer and marketer of men’s underwear and kids’ underwear under the Hanes and Champion brand names. Our net sales for the six months ended June 28, 2008 from our Innerwear segment were $1.18 billion, representing approximately 57% of total segment net sales.
 
  •  Outerwear.  We are a leader in the casualwear and activewear markets through our Hanes, Champion and Just My Size brands, where we offer products such as t-shirts and fleece. Our casualwear lines offer a range of quality, comfortable clothing for men, women and children marketed under the Hanes and Just My Size brands. The Just My Size brand offers casual apparel designed exclusively to meet the needs of plus-size women. In addition to activewear for men and women, Champion provides uniforms for athletic programs and includes an apparel program, C9 by Champion, at Target stores. We also license our Champion name for collegiate apparel and footwear. We also supply our t-shirts, sportshirts and fleece products primarily to wholesalers, who then resell to screen printers and embellishers, through brands such as Hanes, Champion and Outer Banks. Our net sales for the six months ended June 28, 2008 from our Outerwear segment were $532 million, representing approximately 26% of total segment net sales.
 
  •  Hosiery.  We are the leading marketer of women’s sheer hosiery in the United States. We compete in the hosiery market by striving to offer superior values and executing integrated marketing activities, as well as focusing on the style of our hosiery products. We market hosiery products under our Hanes, L’eggs and Just My Size brands. Our net sales for the six months ended June 28, 2008 from our Hosiery segment were $116 million, representing approximately 5% of total segment net sales. Although the decline has slowed in recent years, we expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.


24


Table of Contents

 
  •  International.  International includes products that span across the Innerwear, Outerwear and Hosiery reportable segments and include products marketed under the Hanes, Champion, Wonderbra, Playtex, Rinbros, Bali and Stedman brands. Our net sales for the six months ended June 28, 2008 from our International segment were $236 million, representing approximately 11% of total segment net sales and included sales in Latin America, Asia, Canada and Europe. Canada, Europe, Japan and Mexico are our largest international markets, and we also have sales offices in India and China.
 
  •  Other.  Our net sales for the six months ended June 28, 2008 in our Other segment were $15 million, representing approximately 1% of total segment net sales and are comprised of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and generate break even margins.
 
Our operating results are subject to some variability. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. Sales are typically higher in the last two quarters (July to December) of each fiscal year. Socks, hosiery and fleece products generally have higher sales during this period as a result of cooler weather, back-to-school shopping and holidays. Sales levels in a period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Our results of operations are also impacted by fluctuations and volatility in the price of cotton and the timing of actual spending for our media, advertising and promotion expenses. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
 
Highlights from the Second Quarter and Six Months Ended June 28, 2008
 
  •  Diluted earnings per share were $0.60 in the second quarter of 2008, compared with $0.26 in the same quarter in 2007. Diluted earnings per share were $0.97 in the six month period in 2008, compared with $0.39 in the same six month period in 2007.
 
  •  Operating profit was $113 million in the second quarter of 2008, up from $88 million in the same quarter in 2007. Operating profit was $201 million in the six month period in 2008, up from $157 million in the same six month period in 2007.
 
  •  Total net sales in the second quarter of 2008 were lower by $50 million at $1.07 billion compared to the same quarter in 2007. Total net sales in the six month period in 2008 were lower by $102 million at $2.06 billion compared to the same six month period in 2007.
 
  •  During the first six months of 2008, we approved actions to close two manufacturing facilities and two distribution centers in Heredia, Costa Rica, Aguascalientes, Mexico and the United States. The production capacity related to the manufacturing facilities will be relocated to lower cost locations in Asia and Central America. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. In addition, we completed several such actions in the first six months of 2008 that were approved in 2007.
 
  •  Capital expenditures were $74 million during the first six months of 2008 as we continued to build out our textile and sewing network in Asia and Central America.
 
  •  During the second quarter of 2008, we added three company-owned sewing plants in Southeast Asia — two in Vietnam and one in Thailand — giving us four sewing plants in Asia.
 
  •  We repurchased $11 million of company stock during the first six months of 2008.
 
  •  We ended the second quarter of 2008 with an excess of $598 million of liquidity, which consists of $438 million of borrowing availability under our undrawn revolving loan facility, $97 million in cash and cash equivalents and $63 million of borrowing availability under our international loan facilities.


25


Table of Contents

 
Condensed Consolidated Results of Operations — Second Quarter Ended June 28, 2008 Compared with Second Quarter Ended June 30, 2007
 
                                 
    Quarter Ended              
    June 28,
    June 30,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,072,171     $ 1,121,907     $ (49,736 )     (4.4 )%
Cost of sales
    691,215       741,550       (50,335 )     (6.8 )
                                 
Gross profit
    380,956       380,357       599       0.2  
Selling, general and administrative expenses
    266,427       266,017       410       0.2  
Restructuring
    1,442       26,225       (24,783 )     (94.5 )
                                 
Operating profit
    113,087       88,115       24,972       28.3  
Other expenses
          551       (551 )     NM  
Interest expense, net
    37,635       51,230       (13,595 )     (26.5 )
                                 
Income before income tax expense
    75,452       36,334       39,118       107.7  
Income tax expense
    18,108       10,900       7,208       66.1  
                                 
Net income
  $ 57,344     $ 25,434     $ 31,910       125.5 %
                                 
 
Net Sales
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 1,072,171     $ 1,121,907     $ (49,736 )      (4.4 )%
 
Consolidated net sales were lower by $50 million or 4% in the second quarter of 2008 compared to 2007 primarily due to softer sales at retail of our intimate apparel and a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. Our Innerwear, Outerwear, Hosiery and Other segment net sales were lower by $55 million (8%), $3 million (1%), $2 million (3%) and $13 million (76%), respectively, and were partially offset by higher net sales in our International segment of $22 million (20%). Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, softness in the retail environment can impact our results in the short-term, as it did in the first half of 2008. Sales to our retail customers during the first half of 2008 were reflective of a difficult economic and retail environment in which the ultimate consumers of our products have been limiting their discretionary spending and visiting retail stores less frequently.
 
The lower net sales in the Innerwear segment were primarily due to a decline in the intimate apparel, socks and kids’ underwear product categories. Total intimate apparel net sales were $35 million lower this quarter compared to last year. We believe there have been softer sales at retail of our intimate apparel product category primarily in our Hanes and secondary brands (Just My Size, barely there and Wonderbra) and private label brands. In the second quarter of 2008 compared to 2007 net sales in our Bali brand intimate apparel were flat and net sales in our Playtex brand intimate apparel were $5 million higher. In addition, we exited a license arrangement for a boys’ character underwear program in 2008 which accounted for $4 million of the overall decrease in net sales. We believe a large portion of the net sales decline this quarter is related to a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million.
 
The decline in net sales for our Other segment is primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties which we expect to continue the remainder of this year.


26


Table of Contents

Net sales of Champion activewear were higher in the second quarter of 2008 compared to 2007, which mostly offset lower sales in our casualwear product categories. Net sales in the Hosiery segment were only slightly lower primarily due to lower sales of our Hanes brand to national chains and department stores in the second quarter of 2008 compared to last year. Although the decline has slowed in recent years, 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 lower overall net sales were partially offset by higher net sales in the International segment that were driven by a favorable impact of $13 million related to foreign currency exchange rates and by the growth in the European casualwear business. The favorable impact was primarily due to the strengthening of the Euro, Japanese yen, Canadian dollar and Brazilian real.
 
Gross Profit
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 380,956     $ 380,357     $ 599          0.2 %
 
As a percent of net sales, our gross profit percentage was 35.5% in the second quarter of 2008 compared to 33.9% in 2007. The higher gross profit percentage was primarily due to $13 million of savings from our cost reduction initiatives and prior restructuring actions, lower accelerated depreciation of $8 million, lower sales incentives of $7 million and a favorable impact related to foreign currency exchange rates of $5 million. The favorable foreign currency exchange rate impact in our International segment was primarily due to the strengthening of the Euro, Japanese yen, Canadian dollar and Brazilian real.
 
These lower costs were primarily offset by lower sales volume of $24 million, slightly higher production costs of $3 million and higher freight costs of $2 million.
 
Our per pound cotton costs were $3 million higher in the second quarter of 2008 as compared to 2007. The cotton prices reflected in our results were 63 cents per pound in the second quarter of 2008 as compared to 58 cents per pound in 2007. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 66 cents per pound for the full year 2008.
 
Selling, General and Administrative Expenses
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 266,427     $ 266,017     $ 410          0.2 %
 
Our selling, general and administrative expenses were flat in the second quarter of 2008 compared to 2007. Our cost reduction efforts resulted in lower expenses in the second quarter of 2008 compared to 2007 related to $5 million of savings from our prior restructuring actions primarily for compensation and related benefits, lower media related media, advertising and promotion expenses (“MAP”) of $4 million and $4 million of lower pension expense. MAP expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
 
The above lower expenses were offset by higher distribution expenses of $4 million, $4 million of higher technology consulting and related expenses and $2 million of higher computer software amortization expense in the second quarter of 2008 compared to 2007. Approximately half of the higher distribution expenses in the second quarter of 2008 compared to 2007 were postage and freight related and the other half related to rework expenses in our distribution centers. In addition, we incurred $2 million in amortization of gain on curtailment of postretirement benefits in the second quarter of 2007 which did not recur in 2008.


27


Table of Contents

Our cost reduction efforts have allowed us to offset investments in our strategic initiatives which were $4 million lower in the second quarter of 2008 compared to 2007 for media related MAP expenses and technology consulting expenses.
 
Restructuring
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Restructuring
  $ 1,442     $ 26,225     $ (24,783 )     (94.5 )%
 
During the second quarter of 2008, we approved actions to close two distribution centers and eliminate approximately 200 positions in the United States during the next twelve months. This capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. We recorded a charge of $2 million primarily attributable to employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group. In connection with our consolidation and globalization strategy, in the second quarters of 2008 and 2007, we recognized non-cash charges of $5 million and $12 million, respectively, in the “Cost of sales” line and non-cash charges of $1 million in the “Selling, general and administrative expenses” line in the second quarter of each of 2008 and 2007 related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.
 
During the second quarter of 2007, we incurred $26 million in restructuring charges which primarily related to employee termination and other benefits associated with previously approved actions for plant closures and the elimination of certain management and administrative positions.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
Operating Profit
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 113,087     $ 88,115     $ 24,972          28.3 %
 
Operating profit was higher in the second quarter of 2008 primarily as a result of lower restructuring charges for facility closures of $25 million. Our ability to control costs and execute our consolidation and globalization strategy in addition to incurring lower investments in our strategic initiatives of $4 million offset higher costs in other areas.
 
Other Expenses
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Other expenses
  $     $ 551     $ (551 )        NM  
 
During the second quarter of 2007, we recognized a loss on early extinguishment of debt related to unamortized debt issuance costs on our senior secured credit facility for the prepayment of $50 million of principal in June 2007.


28


Table of Contents

Interest Expense, net
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 37,635     $ 51,230     $ (13,595 )     (26.5 )%
 
Interest expense, net was lower by $14 million in the second quarter of 2008 compared to 2007. The lower interest expense is primarily attributable to a lower weighted average interest rate, $10 million of which resulted from a lower LIBOR and $1 million of which resulted from reduced interest rates achieved through changes in our financing structure such as our accounts receivable securitization that we entered into in November 2007. In addition, interest expense was reduced by $3 million as a result of our net prepayments of long-term debt during 2007 of $178 million. Our weighted average interest rate on our outstanding debt was 6.02% during the second quarter of 2008 compared to 7.86% in 2007.
 
Income Tax Expense
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $ 18,108     $ 10,900     $ 7,208       66.1 %
 
Our estimated annual effective income tax rate was 24% in the second quarter of 2008 compared to 30% in 2007. The higher income tax expense is attributable primarily to higher pre-tax income partially offset by a lower effective income tax rate. The lower effective income tax rate is primarily attributable to higher unremitted earnings from foreign subsidiaries in the second quarter of 2008 taxed at rates less than the U.S. statutory rate. Our estimated annual effective tax rate is reflective of our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2008.
 
Net Income
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net income
  $ 57,344     $ 25,434     $ 31,910       125.5 %
 
Net income for the second quarter of 2008 was higher than 2007 primarily due to higher gross profit from cost reduction efforts, lower restructuring charges, lower interest expense and a lower effective income tax rate.


29


Table of Contents

Operating Results by Business Segment — Second Quarter Ended June 28, 2008 Compared with Second Quarter Ended June 30, 2007
 
                                 
    Quarter Ended              
    June 28,
    June 30,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 636,335     $ 691,504     $ (55,169 )     (8.0 )%
Outerwear
    260,137       263,596       (3,459 )     (1.3 )
Hosiery
    49,734       51,402       (1,668 )     (3.2 )
International
    130,903       109,001       21,902       20.1  
Other
    4,174       17,644       (13,470 )     (76.3 )
                                 
Total segment net sales
    1,081,283       1,133,147       (51,864 )     (4.6 )
Intersegment
    (9,112 )     (11,240 )     (2,128 )     (18.9 )
                                 
Total net sales
  $ 1,072,171     $ 1,121,907     $ (49,736 )     (4.4 )%
Segment operating profit:
                               
Innerwear
  $ 79,942     $ 104,680     $ (24,738 )     (23.6 )%
Outerwear
    19,927       12,302       7,625       62.0  
Hosiery
    15,742       14,134       1,608       11.4  
International
    18,848       16,927       1,921       11.3  
Other
    830       1,064       (234 )     (22.0 )
                                 
Total segment operating profit
  $ 135,289     $ 149,107     $ (13,818 )     (9.3 )%
Items not included in segment operating profit:
                               
General corporate expenses
  $ (12,584 )   $ (19,892 )   $ (7,308 )     (36.7 )%
Amortization of trademarks and other intangibles
    (2,965 )     (1,514 )     1,451       95.8  
Restructuring
    (1,442 )     (26,225 )     (24,783 )     (94.5 )
Accelerated depreciation included in cost of sales
    (4,633 )     (12,413 )     (7,780 )     (62.7 )
Accelerated depreciation included in selling, general and administrative expenses
    (578 )     (948 )     (370 )     (39.0 )
                                 
Total operating profit
    113,087       88,115       24,972       28.3  
Other expenses
          (551 )     (551 )     NM  
Interest expense, net
    (37,635 )     (51,230 )     (13,595 )     (26.5 )
                                 
Income before income tax expense
  $ 75,452     $ 36,334     $ 39,118       107.7 %
                                 


30


Table of Contents

Innerwear
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 636,335     $ 691,504     $ (55,169 )     (8.0 )%
Segment operating profit
    79,942       104,680       (24,738 )     (23.6 )
 
Overall net sales in the Innerwear segment were lower by $55 million or 8% in the second quarter of 2008 compared to 2007. The lower net sales were primarily due to a decline in sales of intimate apparel, socks and kids’ underwear product categories. We experienced softer sales at retail which resulted in lower Hanes brand intimate apparel sales of $22 million, lower intimate apparel sales in our secondary brands (Just My Size, barely there and Wonderbra) of $14 million and lower sales of private label brands of $4 million. In the second quarter of 2008 compared to 2007 net sales in our Bali brand intimate apparel were flat and net sales in our Playtex brand intimate apparel were $5 million higher. In addition, we experienced lower Hanes brand kids’ underwear sales of $9 million, lower Hanes brand sock sales of $5 million and Hanes brand sleepwear sales of $2 million. We exited a license arrangement for a boys’ character underwear program in 2008 which accounted for $4 million of the overall decrease in the Hanes kids’ underwear sales. We believe the net sales decline this quarter, including some of the declines noted above, was impacted by a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million.
 
As a percent of segment net sales, gross profit percentage in the Innerwear segment was 38.8% in the second quarter of 2008 compared to 38.6% in 2007. While the gross profit percentage was higher, gross profit dollars were lower for the second quarter of 2008 compared to 2007 as a result of lower net sales. The lower gross profit is primarily attributable to lower sales volume of $22 million, unfavorable product sales mix of $8 million, higher production costs of $4 million, lower product sales pricing of $2 million and higher cotton costs of $1 million. These factors were partially offset by savings from our cost reduction initiatives and prior restructuring actions of $10 million and lower sales incentives of $7 million.
 
The lower Innerwear segment operating profit in the second quarter of 2008 compared to 2007 is primarily attributable to lower gross profit on lower sales volume, higher distribution expenses of $3 million, higher technology consulting and related expenses of $3 million and higher non-media related MAP expenses of $1 million partially offset by savings from prior restructuring actions of $4 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the second quarter of 2008 compared to 2007.
 
Outerwear
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 260,137     $ 263,596     $ (3,459 )     (1.3 )%
Segment operating profit
    19,927       12,302       7,625       62.0  
 
Net sales in the Outerwear segment were slightly lower by $3 million or 1% in the second quarter of 2008 compared to 2007 primarily as a result of lower net sales of retail casualwear of $6 million and lower net sales through our embellishment channel of $4 million, primarily in promotional t-shirts, offset by higher fleece sales. These decreases were mostly offset by higher net sales of Champion brand activewear of $9 million.


31


Table of Contents

As a percent of segment net sales, gross profit percentage in the Outerwear segment was 25.0% in the second quarter of 2008 compared to 22.1% in 2007. The higher gross profit is primarily attributable to favorable product sales mix of $6 million, savings from our cost reduction initiatives and prior restructuring actions of $2 million, higher product sales pricing of $2 million and lower production costs of $2 million partially offset by higher cotton costs of $2 million and higher excess and obsolete inventory costs of $2 million.
 
The higher Outerwear segment operating profit in the second quarter of 2008 compared to 2007 is primarily attributable to higher gross profit and lower MAP expenses of $3 million and savings from our cost reduction initiatives and prior restructuring actions of $2 million partially offset by higher distribution expenses of $1 million, higher technology consulting and related expenses of $1 million, higher non-media related MAP expenses of $1 million and $2 million of higher spending in numerous areas. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the second quarter of 2008 compared to 2007.
 
Hosiery
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 49,734     $ 51,402     $ (1,668 )     (3.2 )%
Segment operating profit
    15,742       14,134       1,608       11.4  
 
Net sales in the Hosiery segment were slightly lower by $2 million or 3% in the second quarter of 2008 compared to 2007 primarily due to lower sales of the Hanes brand to national chains and department stores. Although the decline has slowed in recent years, we expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
As a percent of segment net sales, gross profit percentage was 48.9% in the second quarter of 2008 compared to 48.6% in 2007 primarily due to savings from our cost reduction initiatives and prior restructuring actions of $1 million and lower excess and obsolete inventory costs of $1 million. These lower expenses were partially offset by higher production costs of $1 million and lower sales volume of $1 million.
 
Hosiery segment operating profit was higher in the second quarter of 2008 compared to 2007 primarily due to lower non-media related MAP expenses of $1 million and lower distribution expenses of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the second quarter of 2008 compared to 2007.
 
International
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 130,903     $ 109,001     $ 21,902       20.1 %
Segment operating profit
    18,848       16,927       1,921       11.3  
 
Overall net sales in the International segment were higher by $22 million or 20% in the second quarter of 2008 compared to 2007. During the second quarter of 2008 we experienced higher net sales, in each case including the impact of foreign currency, in Europe of $10 million, Asia of $6 million, Canada of $4 million


32


Table of Contents

and Latin America of $4 million. The growth in our European casualwear business was driven by the strength of the Stedman brand that is sold in the embellishment channel. Changes in foreign currency exchange rates had a favorable impact on net sales of $13 million in the second quarter of 2008 compared to 2007. The favorable impact was primarily due to the strengthening of the Euro, Japanese yen, Canadian dollar and Brazilian real.
 
As a percent of segment net sales, gross profit percentage was 40.2% in the second quarter of 2008 compared to 42.9% in 2007. While the gross profit percentage was lower, gross profit dollars were higher for the second quarter of 2008 compared to 2007 as the result of higher net sales. The higher gross profit was primarily attributable to a favorable impact related to foreign currency exchange rates of $5 million and lower excess and obsolete inventory costs of $2 million partially offset by higher sales incentives of $1 million.
 
The higher International segment operating profit in the second quarter of 2008 compared to 2007 is primarily attributable to the higher gross profit partially offset by higher distribution expenses of $1 million and $2 million of higher spending in numerous areas. Changes in foreign currency exchange rates, which are included in the impact on gross profit above, had a favorable impact on segment operating profit of $2 million in the second quarter of 2008 compared to 2007.
 
Other
 
                                 
    Quarter Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 4,174     $ 17,644     $ (13,470 )     (76.3 )%
Segment operating profit
    830       1,064       (234 )     (22.0 )
 
Overall lower net sales from our Other segment were primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties which we expect to continue the remainder of this year. Net sales in this segment are generated for the purpose of maintaining asset utilization at certain manufacturing facilities and generating break even margins.
 
General Corporate Expenses
 
General corporate expenses were lower in the second quarter of 2008 compared to 2007 primarily due to $6 million of higher net cost allocations to segments and $1 million of higher capital gains.
 
Condensed Consolidated Results of Operations — Six Months Ended June 28, 2008 Compared with Six Months Ended June 30, 2007
 
                                 
    Six Months Ended              
    June 28,
    June 30,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 2,060,018     $ 2,161,801     $ (101,783 )     (4.7 )%
Cost of sales
    1,334,098       1,441,765       (107,667 )     (7.5 )
                                 
Gross profit
    725,920       720,036       5,884       0.8  
Selling, general and administrative expenses
    521,039       520,584       455       0.1  
Restructuring
    4,000       42,471       (38,471 )     (90.6 )
                                 
Operating profit
    200,881       156,981       43,900       28.0  
Other expenses
          551       (551 )     NM  
Interest expense, net
    78,029       102,947       (24,918 )     (24.2 )
                                 
Income before income tax expense
    122,852       53,483       69,369       129.7  
Income tax expense
    29,484       16,045       13,439       83.8  
                                 
Net income
  $ 93,368     $ 37,438     $ 55,930       149.4 %
                                 


33


Table of Contents

Net Sales
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 2,060,018     $ 2,161,801     $ (101,783 )     (4.7 )%
 
Consolidated net sales were lower by $102 million or 5% in the six months of 2008 compared to 2007 primarily due to softer sales at retail of our intimate apparel and a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. Our Innerwear, Outerwear, Hosiery and Other segment net sales were lower by $102 million (8%), $15 million (3%), $9 million (7%) and $18 million (54%), respectively, and were partially offset by higher net sales in our International segment of $36 million (18%) and lower intersegment sales eliminations of $6 million. Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, softness in the retail environment can impact our results in the short-term, as it did in the six months of 2008. Sales to our retail customers during the six months of 2008 were reflective of a difficult economic and retail environment in which the ultimate consumers of our products have been limiting their discretionary spending and visiting retail stores less frequently.
 
The lower net sales in the Innerwear segment were primarily due to a decline in the intimate apparel, socks and underwear product categories. Total intimate apparel net sales were $53 million lower in the six months of 2008 compared to 2007. We believe there have been softer sales at retail of our intimate apparel product category primarily in our Hanes and secondary brands (Just My Size, barely there and Wonderbra) and private label brands. In the six months of 2008 compared to 2007, our Playtex brand intimate apparel net sales were higher by $5 million offset by lower Bali brand intimate apparel net sales of $4 million. In addition, we exited a license arrangement for a boys’ character underwear program in 2008 which accounted for $7 million of the overall decrease in net sales. We believe a large portion of the net sales decline in the six months of 2008 compared to 2007 is related to a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million.
 
The decline in net sales for our Other segment is primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties which we expect to continue the remainder of this year.
 
Net sales of Champion activewear were higher the six months of 2008 compared to 2007, which mostly offset the lower sales in our casualwear product categories. Net sales in the Hosiery segment were lower primarily due to lower sales of our Hanes brand to national chains and department stores in the six months of 2008 compared to last year. Although the decline has slowed in recent years, we expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
The overall lower net sales were partially offset by higher net sales in the International segment that were driven by a favorable impact of $23 million related to foreign currency exchange rates and by the growth in the European casualwear business. The favorable impact was primarily due to the strengthening of the Euro, Canadian dollar, Japanese yen and Brazilian real.
 
Gross Profit
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 725,920     $ 720,036     $ 5,884       0.8 %
 
As a percent of net sales, our gross profit percentage was 35.2% in the six months of 2008 compared to 33.3% in 2007. The higher gross profit percentage was primarily due to $24 million of savings from our cost reduction initiatives and prior restructuring actions, lower accelerated depreciation of $11 million, a $10 million


34


Table of Contents

favorable impact related to foreign currency exchange rates, $9 million of lower production costs and lower sales incentives of $5 million. The favorable foreign currency exchange rate impact in our International segment was primarily due to the strengthening of the Euro, Canadian dollar, Japanese yen and Brazilian real.
 
These lower costs were primarily offset by $43 million of lower sales volume, higher freight costs of $7 million, $2 million of unfavorable product sales mix and lower product sales pricing of $2 million.
 
Our per pound cotton costs were $1 million higher in the six months of 2008 as compared to 2007. The cotton prices reflected in our results were 58 cents per pound in the six months of 2008 as compared to 57 cents per pound in 2007. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 66 cents per pound for the full year 2008.
 
Selling, General and Administrative Expenses
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 521,039     $ 520,584     $ 455       0.1 %
 
Our selling, general and administrative expenses were flat in the six months of 2008 compared to 2007. Our media related MAP expenses were higher in the six months of 2008 primarily to support the launch of Hanes No Ride Up Panties and marketing initiatives for Playtex. We experienced higher technology consulting and related expenses of $13 million, higher MAP expenses of $6 million, higher computer software amortization of $3 million and $3 million of higher distribution expenses in the six months of 2008 compared to 2007. In addition, we incurred $4 million in amortization of gain on curtailment of postretirement benefits in the six months of 2007 which did not recur in 2008.
 
The higher expenses were offset by $13 million of savings from our prior restructuring actions primarily for compensation and related benefits, $8 million of lower pension expense, $3 million of lower stock compensation expense, and $3 million of lower non-media related MAP expenses. MAP expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
 
Our cost reduction efforts have allowed us to offset higher investments in our strategic initiatives of higher MAP expenses of $6 million and higher technology consulting expenses of $9 million during the six months of 2008 compared to 2007.
 
Restructuring
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Restructuring
  $ 4,000     $ 42,471     $ (38,471 )     (90.6 )%
 
During the six month period in 2008, we approved actions to close two manufacturing facilities and two distribution centers and eliminate approximately 1,300 positions in Heredia, Costa Rica, Aguascalientes, Mexico and the United States during the next twelve months. The production capacity related to the manufacturing facilities will be relocated to lower cost locations in Asia and Central America. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. We recorded a charge of $5 million primarily attributable to employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group. In connection with our consolidation and globalization strategy, in the six months in 2008 and 2007 we recognized non-cash charges of $7 million and $18 million, respectively, in the “Cost of sales” line and non-cash charges of $1 million in the “Selling, general and administrative expenses” line in the six months of each of 2008 and 2007 related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.


35


Table of Contents

During the same six months of 2007, we incurred $42 million in restructuring charges which primarily related to a charge of $32 million related to employee termination and other benefits associated with previously approved actions for plant closures and the elimination of certain management and administrative positions and a $10 million charge for estimated lease termination costs associated with facility closures.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
Operating Profit
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 200,881     $ 156,981     $ 43,900       28.0 %
 
Operating profit was higher in the six months of 2008 by $44 million compared to 2007 primarily as a result of higher gross profit of $6 million and lower restructuring charges of $38 million. Our ability to control costs and execute our consolidation and globalization strategy has allowed us to offset higher investments in our strategic initiatives of $15 million during the six months of 2008 compared to 2007.
 
Other Expenses
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Other expenses
  $     $ 551     $ (551 )     NM  
 
During the six months of 2007, we recognized a loss on early extinguishment of debt related to unamortized debt issuance costs on our senior secured credit facility for the prepayment of $50 million of principal in June 2007.
 
Interest Expense, Net
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 78,029     $ 102,947     $ (24,918 )     (24.2 )%
 
Interest expense, net was lower by $25 million in the six months of 2008 compared to 2007. The lower interest expense is primarily attributable to a lower weighted average interest rate, $16 million of which resulted from a lower LIBOR and $3 million of which resulted from reduced interest rates achieved through changes in our financing structure such as the February 2007 amendment to our senior secured credit facility and our accounts receivable securitization that we entered into in November 2007. In addition, interest expense was reduced by $6 million as a result of our net prepayments of long-term debt during 2007 of $178 million. Our weighted average interest rate on our outstanding debt was 6.35% during the six months of 2008 compared to 7.87% in 2007.
 
Income Tax Expense
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $ 29,484     $ 16,045     $ 13,439       83.8 %


36


Table of Contents

Our estimated annual effective income tax rate was 24% in the six months of 2008 compared to 30% in 2007. The higher income tax expense is attributable primarily to higher pre-tax income partially offset by a lower effective income tax rate. The lower effective income tax rate is primarily attributable to higher unremitted earnings from foreign subsidiaries in the six months of 2008 taxed at rates less than the U.S. statutory rate. Our estimated annual effective tax rate is reflective of our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2008.
 
Net Income
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net income
  $ 93,368     $ 37,438     $ 55,930       149.4 %
 
Net income for the six months of 2008 was higher than 2007 primarily due to higher gross profit from cost reduction efforts, lower restructuring charges, lower interest expense and a lower effective income tax rate.
 
Operating Results by Business Segment — Six Months Ended June 28, 2008 Compared with Six Months Ended June 30, 2007
 
                                 
    Six Months Ended              
    June 28,
    June 30,
    Higher
    Percent
 
    2008     2007     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 1,180,065     $ 1,281,951     $ (101,886 )     (7.9 )%
Outerwear
    532,342       547,231       (14,889 )     (2.7 )
Hosiery
    116,475       125,095       (8,620 )     (6.9 )
International
    235,539       199,778       35,761       17.9  
Other
    15,295       33,042       (17,747 )     (53.7 )
                                 
Total segment net sales
    2,079,716       2,187,097       (107,381 )     (4.9 )
Intersegment
    (19,698 )     (25,296 )     (5,598 )     (22.1 )
                                 
Total net sales
  $ 2,060,018     $ 2,161,801     $ (101,783 )     (4.7 )%
Segment operating profit:
                               
Innerwear
  $ 133,617     $ 180,648     $ (47,031 )     (26.0 )%
Outerwear
    36,344       18,402       17,942       97.5  
Hosiery
    39,863       34,179       5,684       16.6  
International
    33,652       24,705       8,947       36.2  
Other
    (10 )     289       (299 )     (103.5 )
                                 
Total segment operating profit
  $ 243,466     $ 258,223     $ (14,757 )     (5.7 )%
Items not included in segment operating profit:
                               
General corporate expenses
  $ (24,535 )   $ (37,069 )   $ (12,534 )     (33.8 )%
Amortization of trademarks and other intangibles
    (5,638 )     (3,074 )     2,564       83.4  
Restructuring
    (4,000 )     (42,471 )     (38,471 )     (90.6 )
Accelerated depreciation included in cost of sales
    (7,191 )     (17,680 )     (10,489 )     (59.3 )
Accelerated depreciation included in selling, general and administrative expenses
    (1,221 )     (948 )     273       28.8  
                                 
Total operating profit
    200,881       156,981       43,900       28.0  
Other expenses
          (551 )     (551 )     NM  
Interest expense, net
    (78,029 )     (102,947 )     (24,918 )     (24.2 )
                                 
Income before income tax expense
  $ 122,852     $ 53,483     $ 69,369       129.7 %
                                 


37


Table of Contents

Innerwear
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 1,180,065     $ 1,281,951     $ (101,886 )     (7.9 )%
Segment operating profit
    133,617       180,648       (47,031 )     (26.0 )
 
Overall net sales in the Innerwear segment were lower by $102 million or 8% in the six months of 2008 compared to 2007. The lower net sales in the Innerwear segment were primarily due to a decline in sales of intimate apparel, underwear and sock product categories. We experienced softer sales at retail which resulted in lower intimate apparel sales in our secondary brands (Just My Size, barely there and Wonderbra) of $24 million, lower Hanes brand intimate apparel sales of $24 million and lower sales of private label brands of $8 million. In the six months of 2008 compared to 2007, our Playtex brand intimate apparel net sales were higher by $5 million offset by lower Bali brand intimate apparel net sales of $4 million. In addition, we experienced lower Hanes brand kids’ underwear sales of $15 million, lower Hanes brand men’s underwear sales of $9 million, lower Hanes brand sock sales of $8 million, lower Hanes sleepwear sales of $6 million and lower Champion brand sock sales of $5 million. We exited a license arrangement for a boys’ character underwear program in 2008 which accounted for $7 million of the overall decrease in the Hanes brand kids’ underwear sales. We believe the net sales decline during the six months of 2008, including some of the declines noted above, was impacted by a shift in timing by our largest retail customers of back-to-school programs from June to July in 2008. The amount of our back-to-school shipments that shifted from June to July 2008 was approximately $25 million.
 
As a percent of segment net sales, gross profit percentage in the Innerwear segment was 38.5% in the six months of 2008 compared to 38.6% in 2007. The lower gross profit dollars are attributable to lower sales volume of $37 million, unfavorable product sales mix of $17 million, higher freight costs of $6 million, higher production costs of $5 million, lower product sales pricing of $3 million and higher cotton costs of $1 million. These higher costs were offset by $17 million of savings from our cost reduction initiatives and prior restructuring actions, lower sales incentives of $7 million and lower excess and obsolete inventory costs of $5 million.
 
The lower Innerwear segment operating profit in the six months of 2008 compared to 2007 is primarily attributable to lower gross profit and higher MAP expenses of $9 million, higher technology consulting and related expenses of $7 million and higher distribution expenses of $2 million partially offset by savings from prior restructuring actions of $9 million. Our media related MAP expenses were higher in the six months of 2008 primarily to support the launch of Hanes No Ride Up Panties and marketing initiatives for Playtex. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the six months of 2008 compared to 2007.
 
Outerwear
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 532,342     $ 547,231     $ (14,889 )     (2.7 )%
Segment operating profit
    36,344       18,402       17,942       97.5  
 
Net sales in the Outerwear segment were lower by $15 million or 3% in the six months of 2008 compared to 2007 primarily as a result of lower net sales of retail casualwear of $13 million and lower net sales through


38


Table of Contents

our embellishment channel of $11 million, primarily in promotional t-shirts, offset by higher fleece sales. These decreases were partially offset by higher net sales of Champion brand activewear of $11 million.
 
As a percent of segment net sales, gross profit percentage in the Outerwear segment was 24.4% in the six months of 2008 compared to 20.5% in 2007. The improvement in gross profit is primarily attributable to favorable product sales mix of $13 million, lower production costs of $12 million and savings from our cost reduction initiatives and prior restructuring actions of $5 million partially offset by higher excess and obsolete inventory costs of $6 million, lower sales volume of $3 million and higher sales incentives of $3 million.
 
The higher Outerwear segment operating profit in the six months of 2008 compared to 2007 is primarily attributable to higher gross profit and savings from our cost reduction initiatives and prior restructuring actions of $4 million and lower MAP expenses of $3 million partially offset by higher technology consulting and related expenses of $5 million and higher distribution expenses of $2 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the six months of 2008 compared to 2007.
 
Hosiery
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 116,475     $ 125,095     $ (8,620 )     (6.9 )%
Segment operating profit
    39,863       34,179       5,684       16.6  
 
Net sales in the Hosiery segment were lower by $9 million or 7% in the six months of 2008 compared to 2007 primarily due to lower sales of the Hanes brand to national chains and department stores and the L’eggs brand to mass retailers and food and drug stores. Although the decline has slowed in recent years, we expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
As a percent of segment net sales, gross profit percentage was 51.3% in the six months of 2008 compared to 46.9% in 2007 primarily due to lower production costs of $2 million, savings from our cost reduction initiatives and prior restructuring actions of $2 million, lower sales incentives of $2 million and lower excess and obsolete inventory costs of $2 million partially offset by unfavorable product sales mix of $4 million and lower sales volume of $2 million.
 
Hosiery segment operating profit was higher in the six months of 2008 compared to 2007 primarily due to the higher gross profit, lower distribution expenses of $2 million, lower non-media related MAP expenses of $2 million and savings from our cost reduction initiatives and prior restructuring actions of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to each segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2008 is consistent with 2007. Our consolidated selling, general and administrative expenses before segment allocations was flat in the six months of 2008 compared to 2007.


39


Table of Contents

International
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 235,539     $ 199,778     $ 35,761       17.9 %
Segment operating profit
    33,652       24,705       8,947       36.2  
 
Overall net sales in the International segment were higher by $36 million or 18% in the six months of 2008 compared to 2007. During the six months of 2008, we experienced higher net sales, in each case including the impact of foreign currency, in Europe of $15 million, Canada of $9 million, Asia of $7 million and Latin America of $7 million. The growth in our European casualwear business was driven by the strength of the Stedman brand that is sold in the embellishment channel. Changes in foreign currency exchange rates had a favorable impact on net sales of $23 million in the six months of 2008 compared to 2007. The favorable impact was primarily due to the strengthening of the Euro, Canadian dollar, Japanese yen and Brazilian real.
 
As a percent of segment net sales, gross profit percentage was 41.3% in the six months of 2008 compared to 2007 at 42.0%. While the gross profit percentage was lower, gross profit dollars were higher for the six months of 2008 compared to 2007 as a result of higher sales and favorable exchange rates. The higher gross profit was primarily attributable to a favorable impact related to foreign currency exchange rates of $10 million and a favorable product sales mix of $4 million.
 
The higher International segment operating profit in the six months of 2008 compared to 2007 is primarily attributable to the higher gross profit partially offset by higher distribution expenses of $2 million and $2 million of slightly higher spending in numerous areas. Changes in foreign currency exchange rates, which are included in the impact on gross profit above, had a favorable impact on segment operating profit of $4 million in the six months of 2008 compared to 2007.
 
Other
 
                                 
    Six Months Ended        
    June 28,
  June 30,
  Higher
  Percent
    2008   2007   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 15,295     $ 33,042     $ (17,747 )     (53.7 )%
Segment operating profit
    (10 )     289       (299 )     (103.5 )
 
Overall lower net sales from our Other segment were primarily due to the continued vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of nonfinished fabric and yarn to third parties which we expect to continue the remainder of this year. Net sales in this segment are generated for the purpose of maintaining asset utilization at certain manufacturing facilities and generating break even margins.
 
General Corporate Expenses
 
General corporate expenses were lower in the six months of 2008 compared to 2007 primarily due to $5 million of higher net cost allocations to segments, $3 million of lower start-up and shut-down costs, $3 million of lower foreign exchange transaction gains and $2 million of higher capital gains.
 
Liquidity and Capital Resources
 
Trends and Uncertainties Affecting Liquidity
 
Our primary sources of liquidity are our cash generated by operations and availability under our revolving loan facility and our international loan facilities. At June 28, 2008, we have in excess of $598 million of liquidity, which consists of $438 million of borrowing availability under our undrawn $500 million revolving loan facility (after taking into account outstanding letters of credit), $97 million in cash and cash equivalents and $63 million of borrowing availability under our international loan facilities. We currently believe that our


40


Table of Contents

existing cash balances and cash generated by operations, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.
 
We expect to be able to manage our working capital levels and capital expenditure amounts so as to maintain sufficient levels of liquidity. Depending on conditions in the capital markets and other factors, we will from time to time consider other financing transactions, the proceeds of which could be used to refinance current indebtedness or for other purposes. We continue to monitor the impact, if any, of the current conditions in the credit markets on our operations. Our access to financing at reasonable interest rates could become influenced by the economic and credit market environment. In May 2008, Standard & Poor’s Ratings Services raised its corporate credit rating for us to BB- from B+, and also raised our bank loan and unsecured debt ratings. Standard & Poor’s stated that the rating upgrade reflects our positive operating momentum as a stand-alone entity since our spin-off from Sara Lee Corporation (“Sara Lee”) in September 2006, and also stated that our credit protection measures and operating results have improved and are in line with Standard & Poor’s expectations. Standard & Poor’s also noted that management is on track in executing our strategies. Standard & Poor’s current outlook for us is “stable.”
 
The following has or is expected to impact liquidity:
 
  •  we have principal and interest obligations under our long-term debt;
 
  •  we expect to continue to invest in efforts to improve operating efficiencies and lower costs;
 
  •  we expect to continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia;
 
  •  we anticipate that we will decrease the portion of the income of our foreign subsidiaries that is expected to be remitted to the United States, which could significantly decrease our effective income tax rate; and
 
  •  we expect to repurchase up to 10 million shares of our stock in the open market over the next few years, 2.0 million of which we have repurchased as of June 28, 2008.
 
Consolidation and Globalization Strategy
 
We expect to continue our restructuring efforts as we continue to execute our consolidation and globalization strategy. The implementation of these efforts, which are designed to improve operating efficiencies and lower costs, has resulted and is likely to continue to result in significant costs and savings as well as higher inventory levels for a period of time. As further plans are developed and approved by management and in some cases our board of directors, we expect to recognize additional restructuring to eliminate duplicative functions within the organization and transition a significant portion of our manufacturing capacity to lower-cost locations.
 
While capital spending could vary significantly from year to year, we anticipate that our capital spending over the next three years could be as high as $500 million as we execute our supply chain consolidation and globalization strategy and complete the integration and consolidation of our technology systems. Capital spending in any given year over the next three years could be as high as $100 million in excess of our annual depreciation and amortization expense until the completion of actions related to our globalization strategy at which time we would expect our annual capital spending to be relatively comparable to our annual depreciation and amortization expense. The majority of our capital spending will be focused on growing our supply chain operations in Central America, the Caribbean Basin and Asia. These locations will enable us to expand and leverage our large production scale as we balance our supply chain across hemispheres.
 
As we continue to add new manufacturing capacity in Central America, the Caribbean Basin and Asia, our exposure to events that could disrupt our foreign supply chain, including political instability, acts of war or terrorism or other international events resulting in the disruption of trade, disruptions in shipping and freight forwarding services, increases in oil prices (which would increase the cost of shipping), interruptions in the availability of basic services and infrastructure and fluctuations in foreign currency exchange rates, is increased. Disruptions in our foreign supply chain could negatively impact our liquidity by interrupting


41


Table of Contents

production in facilities outside the United States, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of the products into the United States or preventing us from sourcing our products at all. Depending on timing, these events could also result in lost sales, cancellation charges or excessive markdowns.
 
Rising Input Costs and Inflation
 
Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by 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. While we do enter into short-term supply agreements and hedges in an attempt to protect our business from the volatility of the market price of cotton, our business can be affected by dramatic movements in cotton prices, although cotton has historically represented only 6% of our cost of sales. Cotton prices were 58 cents per pound for the six months ended June 28, 2008 and 57 cents per pound for the six months ended June 30, 2007. Taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 66 cents per pound for the full year 2008. The price of cotton currently in our inventory has risen to the low 70 cents per pound range which is the price that will impact our operating results in the third and fourth quarters of 2008. The prices for the cotton crop grown this summer season, which will impact our operating results in 2009, have risen to the mid 70 cents per pound range. In addition, we continue to experience cost inflation with regards to other raw materials used in our products, such as dyes and chemicals, and increases in other costs, such as fuel, energy and utility costs.
 
Our ability to sell our products at competitive prices is subject to certain economic factors, some of which are beyond our control. Inflation could have a material adverse effect on our business and results of operations, especially given the constraints on our ability to pass on incremental costs due to price increases or other factors. A sustained trend of significantly increased inflationary pressure could have a material adverse effect on our business and results of operations. Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. In this regard, a significant portion of our products are manufactured in other countries and a further decline in the value of the U.S. dollar may result in higher manufacturing costs. Similarly the cost of the materials that are used in our manufacturing process, such as cotton, are increasing as a result of inflation and other factors. In addition, inflation often is accompanied by higher interest rates, which could have a negative impact on spending, in which case our margins could decrease. Moreover, increases in inflation may not be matched by rises in income, which also could have a negative impact on spending. If we incur increased costs that are unable to recoup, or if consumer spending decreases generally, our business, results of operations, financial condition and cash flows may be adversely affected.
 
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 our customers. 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 of our control. Our customers’ 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. For example, we are now starting to experience increased inflationary pressure on our product costs. The increase in our product costs may not be offset by comparable rises in the income of consumers of our products. These consumers may choose to purchase fewer of our products or lower-priced products of our competitors in response to higher prices for our products. If this occurs, or if unfavorable economic conditions continue to challenge the consumer environment, our business, results of operations, financial condition and cash flows could be adversely affected.


42


Table of Contents

Pension Plans
 
Our U.S. qualified pension plans are currently approximately 92% funded which should result in minimal pension funding requirements in the future. Due to the current funded status of the plans, we are not required to make any mandatory contributions to our pension plans in 2008.
 
Consolidated Cash Flows
 
The information presented below regarding the sources and uses of our cash flows for the six months ended June 28, 2008 and June 30, 2007 was derived from our consolidated financial statements.
 
                 
    Six Months Ended  
    June 28,
    June 30,
 
    2008     2007  
    (dollars in thousands)  
 
Operating activities
  $ (49,962 )   $ 101,558  
Investing activities
    (74,020 )     (11,485 )
Financing activities
    45,533       (70,704 )
Effect of changes in foreign currency exchange rates on cash
    1,131       1,051  
                 
Increase (decrease) in cash and cash equivalents
  $ (77,318 )   $ 20,420  
Cash and cash equivalents at beginning of year
    174,236       155,973  
                 
Cash and cash equivalents at end of period
  $ 96,918     $ 176,393  
                 
 
Operating Activities
 
 Net cash used in operating activities was $50 million in the six months of 2008 compared to cash provided by operating activities of $102 million in 2007. The net change in cash from operating activities of $152 million for the six months of 2008 compared to 2007 is attributable to the higher uses of our working capital which was primarily driven by changes in inventory and accrued liabilities offset by accounts receivable and accounts payable. Inventory grew $221 million from December 2007 primarily due to increases in levels to service our business over the next eighteen months as we execute our consolidation and globalization strategy and to build for back-to-school programs, as well as a shift in timing by our largest retail customers of back-to-school programs from June to July 2008, all of which had a combined impact of approximately $159 million. In addition, cost increases for inputs such as cotton, oil, freight and currency were approximately $47 million. We continually monitor our inventory levels to best balance current supply and demand with potential future demand that typically surges when consumers no longer postpone purchases in our product categories.
 
Investing Activities
 
Net cash used in investing activities was $74 million in the six months of 2008 compared to $12 million in 2007. The higher net cash used in investing activities of $62 million for the six months of 2008 compared to 2007 was primarily the result of higher capital expenditures and an acquisition of a sewing operation in Thailand. During the six month period in 2008 capital expenditures were $74 million as we continue to build out our textile and sewing network in Central America and Asia and invest in our technology strategic initiatives. Also, we received cash proceeds from sales of assets of $10 million, primarily from dispositions of plant and equipment associated with our restructuring initiatives.
 
Financing Activities
 
Net cash provided by financing activities was $46 million in the six months of 2008 compared to cash used in financing activities of $71 million in 2007. The higher net cash provided by financing activities of $117 million for the six months of 2008 compared to 2007 was primarily the result of higher net borrowings on notes payable of $39 million, the prepayment of $50 million of principal under our senior secured credit facility in 2007, the receipt from Sara Lee of $18 million in cash and lower stock repurchases of $5 million.


43


Table of Contents

Cash and Cash Equivalents
 
As of June 28, 2008 and December 29, 2007, cash and cash equivalents were $97 million and $174 million, respectively. The lower cash and cash equivalents as of June 28, 2008 was primarily the result of net capital expenditures of $64 million, $11 million of stock repurchases, the acquisition of a sewing operation in Thailand for $10 million and $49 million related to other uses of working capital partially offset by $39 million of net borrowings on notes payable and the receipt from Sara Lee of $18 million in cash.
 
Critical Accounting Policies and Estimates
 
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial position in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 2, titled “Summary of Significant Accounting Policies,” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 29, 2007.
 
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 29, 2007. There have been no material changes during the six months ended June 28, 2008 in these policies.
 
Recently Issued Accounting Pronouncements
 
Fair Value Measurements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 was effective for our financial assets and liabilities on December 30, 2007. The FASB approved a one-year deferral of the adoption of SFAS 157 as it relates to non-financial assets and liabilities with the issuance in February 2008 of FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, as a result of which implementation by us is now required on January 4, 2009. The partial adoption of SFAS 157 in the first quarter ended March 29, 2008 had no material impact on our financial condition, results of operations or cash flows, but resulted in certain additional disclosures reflected in Note 9 of the Condensed Consolidated Financial Statements. We are in the process of evaluating the impact of SFAS 157 as it relates to our non-financial assets and liabilities.
 
SFAS 157 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize market data or assumptions that market participants would use in pricing the asset or liability. SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.


44


Table of Contents

Assets and liabilities measured at fair value are based on one or more of three valuation techniques noted in SFAS 157. The three valuation techniques are as follows:
 
  •  Market approach — prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
  •  Cost approach — amount that would be required to replace the service capacity of an asset or replacement cost.
 
  •  Income approach — techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
 
We primarily apply the market approach for commodity derivatives and the income approach for interest rate and foreign currency derivatives for recurring fair value measurements and attempt to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
 
As of June 28, 2008, we held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of our derivative instruments related to interest rates, foreign exchange rates and cotton. The fair values of cotton derivatives are determined based on quoted prices in public markets and are categorized as Level 1. The fair values of interest rate and foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2. We do not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the six months ended June 28, 2008. There were no changes to our valuation technique used to measure asset and liability fair values on a recurring basis.
 
As required by SFAS 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. The determination of fair values incorporates various factors required under SFAS 157. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements, but also the impact of our nonperformance risk on our liabilities.
 
Fair Value Option for Financial Assets and Financial Liabilities
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value under generally accepted accounting principles and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The provisions of SFAS 159 became effective for us on December 30, 2007. As permitted by SFAS 159, we elected not to adopt the fair value option.
 
Business Combinations
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). The objective of SFAS 141R is to improve the relevance, representational faithfulness, and comparability of the information that a company provides in its financial reports about a business combination and its effects. Under SFAS 141R, a company would be required to recognize the assets acquired, liabilities assumed, contractual contingencies and contingent consideration measured at their fair value at the acquisition date. It further requires that research and development assets acquired in a business combination that have no alternative future use be measured at their acquisition-date fair value and then immediately charged to expense, and that acquisition-related costs are to be recognized separately from the acquisition and expensed as incurred. Among other changes, this statement would also require that “negative goodwill” be recognized in earnings as a gain attributable to the acquisition, and any deferred tax benefits resulting from a business combination be recognized in income from continuing operations in the period of the combination. We are in the process of


45


Table of Contents

analyzing the impact of SFAS 141R, which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a company provides in its consolidated financial statements. SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not believe that the adoption of SFAS 160 will have a material impact on our results of operations or financial position.
 
Disclosures About Derivative Instruments and Hedging Activities
 
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements of FASB Statement No. 133 about an entity’s derivative instruments and hedging activities to include more detailed qualitative disclosures and expanded quantitative disclosures. The provisions of SFAS 161 are effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We are currently evaluating the impact that SFAS 161 will have on our results of operations and financial position.
 
The Hierarchy of Generally Accepted Accounting Principles
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements presented in conformity with GAAP. This statement is effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board amendments to AICPA Professional Standards AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS 162 will not have a material impact on our results of operations or financial position.
 
Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
We are required under our senior secured credit facility and our second lien credit facility to hedge a portion of our floating rate debt to reduce interest rate risk caused by floating rate debt issuance. At June 28, 2008, we have outstanding hedging arrangements whereby we capped the interest rate on $950 million of our floating rate debt at 5.75%. We also entered into interest rate swaps tied to the 3-month and 6-month LIBOR rates whereby we fixed the interest rate on an aggregate of $600 million of our floating rate debt. Approximately 67% of our total debt outstanding at June 28, 2008 is at a fixed or capped rate. Due to the recent significant changes in the credit markets, the fair values of our interest rate hedging instruments have increased approximately $14.4 million and decreased $0.5 million during the quarter and six months ended June 28, 2008, respectively. This activity has been deferred into Accumulated Other Comprehensive Loss in our Condensed Consolidated Balance Sheet until the hedged transactions impact our earnings. Subsequent to June 28, 2008, we entered into an interest rate swap with a notional amount of $500 million, as a result of which the interest rate on our floating rate senior notes has been fixed at 7.64% for a 4-year term. In connection with this transaction, we terminated an interest rate cap with a notional amount of $250 million with an interest rate of 5.75%.


46


Table of Contents

Cotton is the primary raw material we use to manufacture many of our products. While we attempt to protect our business from the volatility of the market price of cotton through short-term supply agreements and hedges, our business can be adversely affected by dramatic movements in cotton prices. The price of cotton has recently exceeded its historical trading range of 30 to 70 cents per pound. The price of cotton currently in our inventory has risen to the low 70 cents per pound range which is the price that will impact our operating results in the third and fourth quarters of 2008. Additionally, the prices for the cotton crop grown this summer season, which will impact our operating results in 2009, have risen to the mid 70 cents per pound range. The ultimate effect of these pricing levels on our earnings cannot be quantified, as the effect of movements in cotton prices on industry selling prices are uncertain, but any dramatic increase in the price of cotton could have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
There have been no other significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended December 29, 2007.
 
Item 4.   Controls and Procedures
 
As required by Exchange Act Rule 13a-15(b), our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
 
During the second quarter ended June 28, 2008, in connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including the Chief Executive Officer and Chief Financial Officer, concluded that the following changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to affect, our internal control over financial reporting. We migrated certain of our businesses to the order-to-cash module of SAP, an enterprise resource planning system. As this system’s full capabilities are utilized, we expect it to further enhance our internal control environment by automating manual processes, improving management visibility and standardizing processes. This conversion to a new system required changes in internal controls. Testing of the controls related to the new module is ongoing and is included in the scope of management’s assessment of its internal controls over financial reporting for 2008.
 
Item 4T.   Controls and Procedures
 
Not applicable.
 
PART II
 
Item 1.   Legal Proceedings
 
Although we are subject to various claims and legal actions that occur from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe could have a material adverse effect on our business, results of operations or financial condition.
 
Item 1A.   Risk Factors
 
There are no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 29, 2007.


47


Table of Contents

 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table provides information about purchases by Hanesbrands during the second quarter ended June 28, 2008 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
 
Issuer Purchases of Equity Securities
 
                                 
                      Maximum Number
 
                      (or Approximate
 
                Total Number of
    Dollar Value) of
 
                Shares Purchased
    Shares that May Yet
 
    Total Number of
          as Part of Publicly
    Be Purchased Under
 
    Shares
    Average Price
    Announced Plans or
    the Plans or
 
Period
  Purchased     Paid per Share     Programs(1)     Programs(1)  
 
03/30/08 — 05/03/08
        $             8,052,026  
05/04/08 — 05/31/08
                      8,052,026  
06/01/08 — 06/28/08
    90,500       28.51       90,500       7,961,526  
                                 
Total
    90,500     $ 28.51       90,500       7,961,526  
                                 
 
 
(1) These repurchases were made pursuant to the repurchase program that was approved by our board of directors in January 2007 and announced in February 2007, which authorizes us to purchase up to 10 million shares of our common stock from time to time.
 
Item 3.   Defaults Upon Senior Securities
 
None.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
Our 2008 Annual Meeting of Stockholders (the “Annual Meeting”) was held on April 22, 2008 in New York, New York. A total of 78,798,990 shares of our common stock (83.79% of all shares entitled to vote at the Annual Meeting) were represented at the Annual Meeting, in person or by proxy. Our stockholders were asked to elect nine directors, and all nominees were elected, as indicated by the following voting tabulation:
 
                 
Name of Nominee
  For     Withheld  
 
Lee A. Chaden
    78,002,100       796,890  
Charles W. Coker
    78,176,467       622,523  
Bobby J. Griffin
    78,530,237       268,753  
James C. Johnson
    77.956,187       842,803  
Jessica T. Mathews
    78,323,600       566,390  
J. Patrick Mulcahy
    78,523,014       275,976  
Richard A. Noll
    78,500,570       298,420  
Alice M. Peterson
    78,248,679       550,311  
Andrew J. Schindler
    77,929,179       869,811  
 
Our stockholders were asked to approve the Hanesbrands Inc. Omnibus Incentive Plan of 2006. Of the total votes cast, 56,580,776 votes were cast for the proposal and 6,094,814 votes were cast against the proposal, and there were 549,350 abstentions and 15,574,050 broker non-votes.


48


Table of Contents

Our stockholders were also asked to approve the Hanesbrands Inc. Performance-Based Annual Incentive Plan. Of the total votes cast, 59,785,939 votes were cast for the proposal and 2,890,743 votes were cast against the proposal, and there were 537,558 abstentions and 15,584,750 broker non-votes.
 
Our stockholders were also asked to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for our 2008 fiscal year. Of the total votes cast, 78,542,490 votes were cast for the proposal, 125,460 votes were cast against the proposal, and there were 131,040 abstentions.
 
Item 5.   Other Information
 
None.
 
Item 6.   Exhibits
 
The exhibits listed in the accompanying Exhibit Index on page E-1 are filed or furnished as part of this Quarterly Report on Form 10-Q.


49


Table of Contents

 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
HANESBRANDS INC.
 
  By: 
/s/  E. Lee Wyatt Jr.
E. Lee Wyatt Jr.
Executive Vice President,
Chief Financial Officer
 
Date: August 1, 2008


50


Table of Contents

INDEX TO EXHIBITS
 
         
Exhibit
   
Number
 
Description
 
  3 .1   Articles of Amendment and Restatement of Hanesbrands Inc. (incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5, 2006).
  3 .2   Articles Supplementary (Junior Participating Preferred Stock, Series A) (incorporated by reference from Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5, 2006).
  3 .3   Amended and Restated Bylaws of Hanesbrands Inc. (incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2007).
  3 .4   Certificate of Formation of BA International, L.L.C. (incorporated by reference from Exhibit 3.4 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .5   Limited Liability Company Agreement of BA International, L.L.C. (incorporated by reference from Exhibit 3.5 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .6   Certificate of Incorporation of Caribesock, Inc., together with Certificate of Change of Location of Registered Office and Registered Agent (incorporated by reference from Exhibit 3.6 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .7   Bylaws of Caribesock, Inc. (incorporated by reference from Exhibit 3.7 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .8   Certificate of Incorporation of Caribetex, Inc., together with Certificate of Change of Location of Registered Office and Registered Agent (incorporated by reference from Exhibit 3.8 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .9   Bylaws of Caribetex, Inc. (incorporated by reference from Exhibit 3.9 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .10   Certificate of Formation of CASA International, LLC (incorporated by reference from Exhibit 3.10 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .11   Limited Liability Company Agreement of CASA International, LLC (incorporated by reference from Exhibit 3.11 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .12   Certificate of Incorporation of Ceibena Del, Inc., together with Certificate of Change of Location of Registered Office and Registered Agent (incorporated by reference from Exhibit 3.12 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .13   Bylaws of Ceibena Del, Inc. (incorporated by reference from Exhibit 3.13 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .14   Certificate of Formation of Hanes Menswear, LLC, together with Certificate of Conversion from a Corporation to a Limited Liability Company Pursuant to Section 18-214 of the Limited Liability Company Act and Certificate of Change of Location of Registered Office and Registered Agent (incorporated by reference from Exhibit 3.14 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).


E-1


Table of Contents

         
Exhibit
   
Number
 
Description
 
  3 .15   Limited Liability Company Agreement of Hanes Menswear, LLC (incorporated by reference from Exhibit 3.15 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .16   Certificate of Incorporation of HPR, Inc., together with Certificate of Merger of Hanes Puerto Rico, Inc. into HPR, Inc. (now known as Hanes Puerto Rico, Inc.) (incorporated by reference from Exhibit 3.16 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .17   Bylaws of Hanes Puerto Rico, Inc. (incorporated by reference from Exhibit 3.17 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .18   Articles of Organization of Sara Lee Direct, LLC, together with Articles of Amendment reflecting the change of the entity’s name to Hanesbrands Direct, LLC (incorporated by reference from Exhibit 3.18 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .19   Limited Liability Company Agreement of Sara Lee Direct, LLC (now known as Hanesbrands Direct, LLC) (incorporated by reference from Exhibit 3.19 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .20   Certificate of Incorporation of Sara Lee Distribution, Inc., together with Certificate of Amendment of Certificate of Incorporation of Sara Lee Distribution, Inc. reflecting the change of the entity’s name to Hanesbrands Distribution, Inc. (incorporated by reference from Exhibit 3.20 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .21   Bylaws of Sara Lee Distribution, Inc. (now known as Hanesbrands Distribution, Inc.)(incorporated by reference from Exhibit 3.21 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .22   Certificate of Formation of HBI Branded Apparel Enterprises, LLC (incorporated by reference from Exhibit 3.22 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .23   Operating Agreement of HBI Branded Apparel Enterprises, LLC (incorporated by reference from Exhibit 3.23 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .24   Certificate of Incorporation of HBI Branded Apparel Limited, Inc. (incorporated by reference from Exhibit 3.24 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .25   Bylaws of HBI Branded Apparel Limited, Inc. (incorporated by reference from Exhibit 3.25 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .26   Certificate of Formation of HbI International, LLC (incorporated by reference from Exhibit 3.26 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .27   Limited Liability Company Agreement of HbI International, LLC (incorporated by reference from Exhibit 3.27 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .28   Certificate of Formation of SL Sourcing, LLC, together with Certificate of Amendment to the Certificate of Formation of SL Sourcing, LLC reflecting the change of the entity’s name to HBI Sourcing, LLC (incorporated by reference from Exhibit 3.28 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).

E-2


Table of Contents

         
Exhibit
   
Number
 
Description
 
  3 .29   Limited Liability Company Agreement of SL Sourcing, LLC (now known as HBI Sourcing, LLC) (incorporated by reference from Exhibit 3.29 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .30   Certificate of Formation of Inner Self LLC (incorporated by reference from Exhibit 3.30 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .31   Limited Liability Company Agreement of Inner Self LLC (incorporated by reference from Exhibit 3.31 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .32   Certificate of Formation of Jasper-Costa Rica, L.L.C. (incorporated by reference from Exhibit 3.32 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .33   Amended and Restated Limited Liability Company Agreement of Jasper-Costa Rica, L.L.C.(incorporated by reference from Exhibit 3.33 to the Registrant’s Registration Statement on Form S-4 (Commission file number 333-142371) filed with the Securities and Exchange Commission on April 26, 2007).
  3 .34   Certificate of Formation of Playtex Dorado, LLC, together with Certificate of Conversion from a Corporation to a Limited Liability Company Pursuant to Section 18-214 of the Limited Liability Company Act (incorporated by reference from