XNYS:HBI Hanesbrands Inc Quarterly Report 10-Q Filing - 9/29/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 29, 2012

or

 

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

For the transition period from                     to                     

Commission file number: 001-32891

 

 

Hanesbrands Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   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) 519-8080

(Registrant’s telephone number including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

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

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

As of October 19, 2012, there were 97,859,546 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Forward-Looking Statements

     1   

Where You Can Find More Information

     1   

PART I

    

Item 1.

  Financial Statements (unaudited):   
  Condensed Consolidated Statements of Income for the quarters and nine months ended September 29, 2012 and October 1, 2011      2   
  Condensed Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 29, 2012 and October 1, 2011      3   
  Condensed Consolidated Balance Sheets at September 29, 2012 and December 31, 2011      4   
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2012 and October 1, 2011      5   
  Notes to Condensed Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      38   

Item 4.

  Controls and Procedures      38   

PART II

    

Item 1.

  Legal Proceedings      39   

Item 1A.

  Risk Factors      39   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      39   

Item 3.

  Defaults Upon Senior Securities      39   

Item 4.

  Mine Safety Disclosures      39   

Item 5.

  Other Information      39   

Item 6.

  Exhibits      39   

Signatures

     40   

Index to Exhibits

     E-1   

Trademarks, Trade Names and Service Marks

We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that may appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just My Size, barely there, Wonderbra, Zorba, Rinbros, Duofold and Gear for Sports marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.


Table of Contents

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, statements under the heading “Outlook” and other information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.

Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will result or will 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 31, 2011, particularly under the caption “Risk Factors,” as well in the investors section of the company’s corporate website, http://tiny.cc/HanesBrandsIR.

All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2011, particularly under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room, which is located at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.

We make available free of charge at www.hanesbrands.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.hanesbrands.com, or any of our other websites, we do not incorporate any such website or its contents into this Quarterly Report on Form 10-Q.

 

1


Table of Contents

PART I

 

Item 1. Financial Statements

HANESBRANDS INC.

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(unaudited)

 

     Quarter Ended      Nine Months Ended  
     September 29,
2012
    October 1,
2011
     September 29,
2012
    October 1,
2011
 

Net sales

   $ 1,218,681     $ 1,185,304      $ 3,372,465     $ 3,333,340  

Cost of sales

     818,751       771,251        2,350,489       2,168,305  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     399,930       414,053        1,021,976       1,165,035  

Selling, general and administrative expenses

     243,422       269,109        734,872       792,177  
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

     156,508       144,944        287,104       372,858  

Other expenses

     3,373       880        4,829       2,295  

Interest expense, net

     32,897       38,255        106,503       118,483  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax expense

     120,238       105,809        175,772       252,080  

Income tax expense

     9,055       20,739        21,544       48,283  
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     111,183       85,070        154,228       203,797  

Income (loss) from discontinued operations, net of tax

     (1,291     5,762        (69,935     21,926  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 109,892     $ 90,832      $ 84,293     $ 225,723  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share — basic:

         

Continuing operations

   $ 1.13     $ 0.87      $ 1.56     $ 2.09  

Discontinued operations

     (0.01     0.06        (0.71     0.22  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 1.11     $ 0.93      $ 0.85     $ 2.31  
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per share — diluted:

         

Continuing operations

   $ 1.11     $ 0.85      $ 1.54     $ 2.05  

Discontinued operations

     (0.01     0.06        (0.70     0.22  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 1.09     $ 0.91      $ 0.84     $ 2.28  
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding:

         

Basic

     98,707       97,925        98,611       97,559  

Diluted

     100,472       99,535        100,131       99,200  

See accompanying notes to Condensed Consolidated Financial Statements.

 

2


Table of Contents

HANESBRANDS INC.

Condensed Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

     Quarter Ended     Nine Months Ended  
     September 29,
2012
     October 1,
2011
    September 29,
2012
     October 1,
2011
 

Net income

   $ 109,892      $ 90,832     $ 84,293      $ 225,723  

Other comprehensive income (loss), net of tax of $1,581, $3,356, $4,357 and $6,888, respectively

     4,881        (9,193     8,196        2,904  
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 114,773      $ 81,639     $ 92,489      $ 228,627  
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

3


Table of Contents

HANESBRANDS INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(unaudited)

 

     September 29,
2012
    December 31,
2011
 
Assets     

Cash and cash equivalents

   $ 182,269     $ 35,345  

Trade accounts receivable, net

     585,490       470,713  

Inventories

     1,340,776       1,607,555  

Deferred tax assets

     156,932       154,667  

Other current assets

     53,387       62,511  
  

 

 

   

 

 

 

Total current assets

     2,318,854       2,330,791  
  

 

 

   

 

 

 

Property, net

     606,011       635,406  

Trademarks and other identifiable intangibles, net

     123,071       169,675  

Goodwill

     433,321       433,396  

Deferred tax assets

     396,667       394,220  

Other noncurrent assets

     61,635       71,181  
  

 

 

   

 

 

 

Total assets

   $ 3,939,559     $ 4,034,669  
  

 

 

   

 

 

 
Liabilities and Stockholders’ Equity     

Accounts payable

   $ 429,166     $ 451,525  

Accrued liabilities

     259,772       252,186  

Notes payable

     50,778       63,075  

Accounts Receivable Securitization Facility

     193,975       166,933  

Current portion of long-term debt

     145,185         
  

 

 

   

 

 

 

Total current liabilities

     1,078,876       933,719  
  

 

 

   

 

 

 

Long-term debt

     1,500,000       1,807,777  

Pension and postretirement benefits

     471,335       485,688  

Other noncurrent liabilities

     112,281       126,424  
  

 

 

   

 

 

 

Total liabilities

     3,162,492       3,353,608  
  

 

 

   

 

 

 

Stockholders’ equity:

    

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

    

Issued and outstanding — None

              

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

    

Issued and outstanding — 97,856,406 and 97,517,325, respectively

     979       975  

Additional paid-in capital

     277,260       266,551  

Retained earnings

     831,079       746,786  

Accumulated other comprehensive loss

     (332,251     (333,251
  

 

 

   

 

 

 

Total stockholders’ equity

     777,067       681,061  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,939,559     $ 4,034,669  
  

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

HANESBRANDS INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     Nine Months Ended  
     September 29,
2012
    October 1,
2011
 

Operating activities:

    

Net income

   $ 84,293     $ 225,723  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization of long-lived assets

     70,096       66,568  

Impairment of intangibles

     37,425         

Loss on disposition of business

     31,811         

Amortization of debt issuance costs

     7,077       7,799  

Amortization of loss on interest rate hedge

     3,164       8,928  

Stock compensation expense

     6,722       5,901  

Deferred taxes and other

     (12,020     2,970  

Changes in assets and liabilities, net of acquisition and disposition of businesses:

    

Accounts receivable

     (122,929     (90,942

Inventories

     230,427       (404,801

Other assets

     12,702       2,305  

Accounts payable

     (18,503     93,526  

Accrued liabilities and other

     (20,860     55,149  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     309,405       (26,874
  

 

 

   

 

 

 

Investing activities:

    

Capital expenditures

     (29,162     (56,085

Acquisition of business

            (9,154

Disposition of business

     12,708         
  

 

 

   

 

 

 

Net cash used in investing activities

     (16,454     (65,239
  

 

 

   

 

 

 

Financing activities:

    

Borrowings on notes payable

     43,251       305,257  

Repayments on notes payable

     (55,645     (322,185

Borrowings on Accounts Receivable Securitization Facility

     156,817       229,396  

Repayments on Accounts Receivable Securitization Facility

     (129,775     (144,396

Borrowings on Revolving Loan Facility

     2,177,000       2,448,500  

Repayments on Revolving Loan Facility

     (2,191,500     (2,433,500

Redemption of Floating Rate Senior Notes

     (148,092       

Proceeds from stock options exercised

     4,103       16,784  

Other

     (2,348     (2,364
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (146,189     97,492  
  

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

     162       (1,053
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     146,924       4,326  

Cash and cash equivalents at beginning of year

     35,345       43,671  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 182,269     $ 47,997  
  

 

 

   

 

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements

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

(unaudited)

 

(1) Basis of Presentation

These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to present fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.

In May 2012, the Company sold its European imagewear business, and the Company is completing the discontinuation of its private-label and Outer Banks domestic imagewear operations which served wholesalers that sell to the screen-print industry. As a result of these actions, the current year and prior-year disclosures reflect these operations as discontinued operations.

 

(2) Recent Accounting Pronouncements

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued new accounting rules related to fair value measurements. The new accounting rules clarify some existing concepts, eliminate wording differences between GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, change some principles to achieve convergence between GAAP and IFRS. The new accounting rules result in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and IFRS. The new accounting rules also expand the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The adoption of the new accounting rules in the first quarter of 2012 did not have a material effect on our financial condition, results of operations or cash flows.

Presentation of Comprehensive Income

In June 2011, the FASB issued new accounting rules that require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. The new accounting rules eliminate the option to present components of other comprehensive income as part of the statement of equity. The adoption of the new accounting rules in the first quarter of 2012 did not have a material effect on our financial condition, results of operations or cash flows.

 

6


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

In December 2011, the FASB issued new accounting rules which deferred certain provisions of the rules issued in June 2011 that required entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. Accordingly, this requirement is indefinitely deferred.

Goodwill Impairment Testing

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

Disclosures About Offsetting Assets and Liabilities

In December 2011, the FASB issued new accounting rules related to new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new rules are effective for the Company in the first quarter of 2015 with retrospective application required. The Company does not expect the adoption of the new accounting rules to have a material effect on our financial condition, results of operations or cash flows.

 

(3) Discontinued Operations

European Imagewear

In May 2012, the Company sold its European imagewear business to Smartwares, B.V. for €15,000 (approximately $13,000, net of fees and other transaction related costs) in cash proceeds, resulting in a pre-tax loss of approximately $32,000. The European imagewear business was previously reported within the International segment.

Domestic Imagewear

The Company is completing the discontinuation of its private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. During the second quarter of 2012, the Company incurred pre-tax charges of approximately $58,000, substantially all noncash, for the write-down of intangibles, inventory markdowns and other related items. The private-label and Outer Banks domestic imagewear operations were previously reported within the Outerwear segment.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

The operating results of these discontinued operations only reflect revenues and expenses that are directly attributable to these businesses and that will be eliminated from ongoing operations. The key components from discontinued operations related to the European and domestic imagewear businesses were as follows:

 

     Quarter Ended      Nine Months Ended  
     September 29,
2012
    October 1,
2011
     September 29,
2012
    October 1,
2011
 

Net sales

   $ 14,915     $ 44,881      $ 88,769     $ 158,488  

Cost of sales

     16,512       33,491        116,174       116,315  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit (loss)

     (1,597     11,390        (27,405     42,173  

Selling, general and administrative expenses

     293       3,651        7,005       12,037  

Impairment of intangibles

     (172             37,425         
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

     (1,718     7,739        (71,835     30,136  

Interest expense, net

            7        4       62  

Loss on disposal of business

     195               31,811         
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations before income tax expense (benefit)

     (1,913     7,732        (103,650     30,074  

Income tax expense (benefit)

     (622     1,970        (33,715     8,148  
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income (loss) from discontinued operations, net of tax

   $ (1,291   $ 5,762      $ (69,935   $ 21,926  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(4) Earnings Per Share

Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding during the quarters and nine months ended September 29, 2012 and October 1, 2011. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock using the treasury stock method. The reconciliation of basic to diluted weighted average shares outstanding for the quarters and nine months ended September 29, 2012 and October 1, 2011 is as follows:

 

     Quarter Ended      Nine Months Ended  
     September 29,
2012
     October 1,
2011
     September 29,
2012
     October 1,
2011
 

Basic weighted average shares outstanding

     98,707        97,925        98,611        97,559  

Effect of potentially dilutive securities:

           

Stock options

     1,366        1,230        1,192        1,221  

Restricted stock units

     398        377        327        418  

Employee stock purchase plan and other

     1        3        1        2  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     100,472        99,535        100,131        99,200  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the quarters ended September 29, 2012 and October 1, 2011, 0 and 13 restricted stock units, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the nine months ended September 29, 2012 and October 1, 2011, options to purchase 1 and 6 shares of common stock and 11 and 13 restricted stock units, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.

 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

(5) Inventories

Inventories consisted of the following:

 

     September 29,
2012
     December 31,
2011
 

Raw materials

   $ 177,693      $ 231,781  

Work in process

     136,399        129,827  

Finished goods

     1,026,684        1,245,947  
  

 

 

    

 

 

 
   $ 1,340,776      $ 1,607,555  
  

 

 

    

 

 

 

 

(6) Debt

The Company had the following debt at September 29, 2012 and December 31, 2011:

 

     Interest
Rate as  of

September 29,
2012
    Principal Amount      Maturity Date
       September 29,
2012
     December 31,
2011
    

Revolving Loan Facility

          $       $ 14,500      July 2017

6.375% Senior Notes

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

8% Senior Notes

     8.00     500,000        500,000      December 2016

Floating Rate Senior Notes

     4.11     145,185        293,277      December 2014

Accounts Receivable Securitization Facility

     1.30     193,975        166,933      March 2013
    

 

 

    

 

 

    
       1,839,160        1,974,710     

Less current maturities

       339,160        166,933     
    

 

 

    

 

 

    
     $ 1,500,000      $ 1,807,777     
    

 

 

    

 

 

    

As of September 29, 2012, the Company had $0 outstanding under the $600,000 revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility that it entered into in 2006 and amended and restated in December 2009 (as amended and restated, the “2009 Senior Secured Credit Facility”), $10,876 of standby and trade letters of credit issued and outstanding under this facility and $589,124 of borrowing availability.

In July 2012, the Company amended the Revolving Loan Facility to reduce the interest rate by 100 basis points and extend the maturity date to (i) July 2017 or (ii) September 2016, if the Company’s 8% Senior Notes have not been refinanced or repaid or the maturity date thereof has not otherwise been extended beyond July 2017 by September 2016.

In July 2012, the Company redeemed $148,092 of the Floating Rate Senior Notes at 100% of the principal amount thereof. In October 2012, the Company redeemed the remaining $145,185 of the Floating Rate Senior Notes at 100% of the principal amount thereof.

In March 2012, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment decreased certain usage fee rates and extended the termination date to March 2013.

 

9


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

As of September 29, 2012, the Company was in compliance with all financial covenants under its credit facilities.

 

(7) Financial Instruments and Risk Management

The Company uses financial instruments to manage its exposures to movements in interest rates, foreign exchange rates and commodity prices. The use of these financial instruments modifies the Company’s exposure to these risks with the goal of reducing the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivative contracts.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The fair value is based upon either market quotes for actively traded instruments or independent bids for nonexchange traded instruments. The Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions to the hedged risk. On the date the derivative is entered into, the Company designates the derivative as a fair value hedge, cash flow hedge, net investment hedge or a mark to market hedge, and accounts for the derivative in accordance with its designation. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the Company discontinues hedge accounting, and any deferred gains or losses are recorded in the respective measurement period. The Company currently does not have any fair value or net investment hedge instruments.

The Company may be exposed to credit losses in the event of nonperformance by individual counterparties or the entire group of counterparties to the Company’s derivative contracts. Risk of nonperformance by counterparties is mitigated by dealing with highly rated counterparties and by diversifying across counterparties.

Cash Flow Hedges

A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in the “Accumulated other comprehensive loss” line of the Condensed Consolidated Balance Sheets. When the impact of the hedged item is recognized in the income statement, the gain or loss included in “Accumulated other comprehensive loss” is reported on the same line in the Condensed Consolidated Statements of Income as the hedged item.

Cash Flow Hedges — Interest Rate Derivatives

From time to time, the Company uses interest rate cash flow hedges in the form of swaps and caps in order to mitigate the Company’s exposure to variability in cash flows for the future interest payments on a designated portion of floating rate debt. The effective portion of interest rate hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying debt interest payments are recognized. Interest rate cash flow hedge derivatives are reported as a component of interest expense and therefore are reported as cash flow from operating activities similar to the manner in which cash interest payments are reported in the Condensed Consolidated Statements of Cash Flows.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

Cash Flow Hedges — Foreign Currency Derivatives

The Company uses forward exchange and option contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. The effective portion of foreign exchange hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of foreign exchange hedge derivative contracts related to the purchase of inventory or other hedged items are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities.

Historically, the principal currencies hedged by the Company include the Mexican peso, Canadian dollar, Japanese yen and Euro. Forward exchange contracts mature on the anticipated cash requirement date of the hedged transaction, generally within one year. As of September 29, 2012, the notional U.S. dollar equivalent of commitments to sell foreign currencies in the Company’s foreign currency cash flow hedge derivative portfolio was $37,832.

Cash Flow Hedges — Commodity Derivatives

Cotton is the primary raw material used to manufacture many of the Company’s products and is purchased at market prices. The Company is able to lock in the cost of cotton reflected in the price it pays for yarn from its primary yarn suppliers in an attempt to protect its business from the volatility of the market price of cotton. In addition, from time to time, the Company uses commodity financial instruments to hedge the price of cotton, for which there is a high correlation between the hedged item and the hedge instrument. Gains and losses on these contracts are intended to offset losses and gains on the hedged transactions in an effort to reduce the earnings volatility resulting from fluctuating commodity prices. The effective portion of commodity hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of commodity derivative contracts related to the purchase of inventory is reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities. There were no amounts outstanding under cotton futures or cotton option contracts at September 29, 2012 and December 31, 2011.

Mark to Market Hedges

A derivative used as a hedging instrument whose change in fair value is recognized to act as an economic hedge against changes in the values of the hedged item is designated a mark to market hedge.

Mark to Market Hedges — Intercompany Foreign Exchange Transactions

The Company uses foreign exchange derivative contracts to reduce the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. Mark to market hedge derivatives relating to intercompany foreign exchange contracts are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities. As of September 29, 2012, the notional U.S. dollar equivalent of commitments to purchase and sell foreign currencies in the Company’s foreign currency mark to market hedge derivative portfolio was $2,450 and $46,828, respectively.

 

11


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

Fair Values of Derivative Instruments

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

 

     Balance Sheet Location      Fair Value  
        September 29,
2012
    December 31,
2011
 

Derivative assets — hedges

       

Foreign exchange contracts

     Other current assets       $ 11     $ 3,205  
     

 

 

   

 

 

 

Total derivative assets — hedges

        11       3,205  
     

 

 

   

 

 

 

Derivative assets — non-hedges

       

Foreign exchange contracts

     Other current assets         96       455  
     

 

 

   

 

 

 

Total derivative assets

      $ 107     $ 3,660  
     

 

 

   

 

 

 

Derivative liabilities — hedges

       

Foreign exchange contracts

     Accrued liabilities       $ (609   $ (205
     

 

 

   

 

 

 

Total derivative liabilities — hedges

        (609     (205
     

 

 

   

 

 

 

Derivative liabilities — non-hedges

       

Foreign exchange contracts

     Accrued liabilities         (319     (388
     

 

 

   

 

 

 

Total derivative liabilities

      $ (928   $ (593
     

 

 

   

 

 

 

Net derivative asset (liability)

      $ (821   $ 3,067  
     

 

 

   

 

 

 

 

12


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

Net Derivative Gain or Loss

The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and Accumulated Other Comprehensive Loss is as follows:

 

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

Location of

Gain (Loss)

Reclassified from

Accumulated Other
Comprehensive

Loss into Income

(Effective Portion)

  Amount of
Gain (Loss)
Reclassified from

Accumulated
Other Comprehensive Loss
into Income (Effective
Portion)
 
     Quarter Ended       Quarter Ended  
     September 29,
2012
    October 1,
2011
      September 29,
2012
    October 1,
2011
 

Interest rate contracts

  $      $      Interest expense, net   $ (1,004   $ (2,550

Foreign exchange contracts

    (985     2,561     Cost of sales     41       314  

Foreign exchange contracts

           925     Income (loss) from discontinued operations, net of tax            (410
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (985   $ 3,486       $ (963   $ (2,646
 

 

 

   

 

 

     

 

 

   

 

 

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

Location of

Gain (Loss)

Reclassified from

Accumulated Other
Comprehensive

Loss into Income

(Effective Portion)

  Amount of
Gain (Loss)
Reclassified from

Accumulated
Other Comprehensive

Loss into Income
(Effective Portion)
 
     Nine Months Ended       Nine Months Ended  
     September 29,
2012
    October 1,
2011
      September 29,
2012
    October 1,
2011
 

Interest rate contracts

  $      $ (3   Interest expense, net   $ (3,164   $ (9,187

Foreign exchange contracts

    (1,250     512     Cost of sales     (1     (707

Foreign exchange contracts

    83       (289   Income (loss) from discontinued operations, net of tax     3,039       (306
 

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (1,167   $ 220       $ (126   $ (10,200
 

 

 

   

 

 

     

 

 

   

 

 

 

The Company expects to reclassify into earnings during the next 12 months a net gain from Accumulated Other Comprehensive Loss of approximately $236.

The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in “Selling, general and administrative expenses” and “Income (loss) from discontinued operations, net of tax” in the Condensed Consolidated Statements of Income. The Company recognized a loss related to ineffectiveness of hedging relationships for the quarter ended September 29, 2012 for foreign exchange contracts of $420 and a gain related to ineffectiveness of hedging relationships for the nine months of 2012 for foreign exchange contracts of $179. The Company recognized gains related to ineffectiveness of hedging relationships for the quarter and nine months ended October 1, 2011 for foreign exchange contracts of $254 and $191, respectively.

 

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Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

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

 

     Location of Loss
Recognized in Income on
Derivative
  Amount of Gain (Loss)
Recognized in Income
    Amount of Gain (Loss)
Recognized in Income
 
       Quarter Ended     Nine Months Ended  
       September 29,
2012
    October 1,
2011
    September 29,
2012
    October 1,
2011
 

Foreign exchange contracts

  Selling, general and
administrative expenses
  $ (1,891   $ 756     $ (3,952   $ (2,330
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ (1,891   $ 756     $ (3,952   $ (2,330
   

 

 

   

 

 

   

 

 

   

 

 

 

 

(8) Fair Value of Assets and Liabilities

Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. A three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is utilized for disclosing the fair value of the Company’s assets and liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of September 29, 2012, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to interest rates and foreign exchange rates. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a recurring basis. The fair values of interest rate derivatives are determined with pricing models using LIBOR interest rate curves, spreads, volatilities and other relevant information developed using market data and are categorized as Level 2. The fair values of foreign currency derivatives are determined using the cash flows of the foreign exchange contract, discount rates to account for the passage of time and current foreign exchange market data and are categorized as Level 2.

There were no changes during the quarter ended September 29, 2012 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers between the three level categories and there were no Level 3 assets or liabilities measured on a quarterly basis during the quarter ended September 29, 2012. As of and during the quarter and nine months ended September 29, 2012, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.

 

14


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.

 

      Assets (Liabilities) at Fair Value as of
September 29, 2012
 
     Quoted Prices In
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Foreign exchange derivative contracts

   $       $ 107     $   

Foreign exchange derivative contracts

             (928       
  

 

 

    

 

 

   

 

 

 

Total

   $       $ (821   $   
  

 

 

    

 

 

   

 

 

 

 

     Assets (Liabilities) at Fair Value as of
December 31, 2011
 
     Quoted Prices In
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Foreign exchange derivative contracts

   $       $ 3,660     $   

Foreign exchange derivative contracts

             (593       
  

 

 

    

 

 

   

 

 

 

Total

   $       $ 3,067     $   
  

 

 

    

 

 

   

 

 

 

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of September 29, 2012 and December 31, 2011. The carrying amount of trade accounts receivable includes allowance for doubtful accounts, chargebacks and other deductions of $16,393 and $17,418 as of September 29, 2012 and December 31, 2011, respectively. The fair value of debt, which is classified as a Level 2 liability, was $1,982,050 and $2,030,240 as of September 29, 2012 and December 31, 2011 and had a carrying value of $1,839,160 and $1,974,710, respectively. The fair values were estimated using quoted market prices as provided in secondary markets which consider the Company’s credit risk and market related conditions. The carrying amounts of the Company’s notes payable approximated fair value as of September 29, 2012 and December 31, 2011, primarily due to the short-term nature of these instruments.

 

(9) Income Taxes

The Company’s effective income tax rate for continuing operations was 8% and 12% for the quarter and nine months ended September 29, 2012, and 20% and 19% for the quarter and nine months ended October 1, 2011, respectively. The lower effective income tax rate for the quarter and nine months ended September 29, 2012 compared to the quarter and nine months ended October 1, 2011 was primarily attributable to an income tax benefit of approximately $9,000 in the quarter ended September 29, 2012 related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations and an income tax benefit of approximately $4,000 in the quarter ended September 29, 2012 related to an increase in research and development tax credits.

 

15


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

The Company’s effective income tax rate for discontinued operations was 33% for the quarter and nine months ended September 29, 2012, and 25% and 27% for the quarter and nine months ended October 1, 2011, respectively.

 

(10) Business Segment Information

As a result of the reduced size of sheer hosiery and changing trends, the Company decided in the first quarter of 2012 to change its external segment reporting to include hosiery operations within the Innerwear segment. Hosiery had previously been reported as a separate segment. Prior-year segment sales and operating profit results, including other minor allocation changes, have been revised to conform to the current-year presentation. As a result of these changes, the Company’s operations are now managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Direct to Consumer and International. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses but the segments share a common supply chain and media and marketing platforms.

In addition, as described in Note 3, the Company sold its European imagewear business and is completing the discontinuation of its private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. As a result, the current year and prior-year segment disclosures do not reflect the sales and operating profit results of these discontinued 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 men’s underwear, kids’ underwear, socks, and intimates, which includes bras, panties, hosiery and shapewear.

 

   

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

 

   

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

 

   

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

 

16


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

The Company evaluates the operating performance of its segments based upon segment operating profit, that is defined as operating profit before general corporate expenses and amortization of trademarks and other identifiable intangibles. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2011.

 

     Quarter Ended     Nine Months Ended  
   September  29,
2012
    October  1,
2011
    September  29,
2012
    October  1,
2011
 
        

Net sales:

        

Innerwear

   $ 574,278     $ 558,422     $ 1,748,256     $ 1,711,802  

Outerwear

     413,033       392,683       981,021       970,776  

Direct to Consumer

     99,111       97,565       278,396       277,819  

International

     132,259       136,634       364,792       372,943  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,218,681     $ 1,185,304     $ 3,372,465     $ 3,333,340  
  

 

 

   

 

 

   

 

 

   

 

 

 
     Quarter Ended     Nine Months Ended  
   September  29,
2012
    October 1,
2011
    September  29,
2012
    October 1,
2011
 
        

Segment operating profit:

        

Innerwear

   $ 96,841     $ 88,372     $ 269,718     $ 265,974  

Outerwear

     46,339       48,379       24,118       94,265  

Direct to Consumer

     14,412       12,268       24,773       21,955  

International

     17,574       14,797       33,964       43,275  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating profit

     175,166       163,816       352,573       425,469  

Items not included in segment operating profit:

        

General corporate expenses

     (15,311     (15,680     (55,370     (43,052

Amortization of trademarks and other identifiable intangibles

     (3,347     (3,192     (10,099     (9,559
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating profit

     156,508       144,944       287,104       372,858  

Other expenses

     (3,373     (880     (4,829     (2,295

Interest expense, net

     (32,897     (38,255     (106,503     (118,483
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

   $ 120,238     $ 105,809     $ 175,772     $ 252,080  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

(11) Consolidating Financial Information

In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, the indenture governing the Company’s $500,000 8% Senior Notes issued on December 10, 2009 and the indenture governing the Company’s $1,000,000 6.375% Senior Notes issued on November 9, 2010 (together, the “Indentures”), certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes, the 8% Senior Notes and the 6.375% Senior Notes, respectively. The following presents the condensed consolidating financial information separately for:

(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;

(ii) Guarantor subsidiaries, on a combined basis, as specified in the Indentures;

(iii) Non-guarantor subsidiaries, on a combined basis;

(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate intercompany profit in inventory, (c) eliminate the investments in our subsidiaries and (d) record consolidating entries; and

(v) The Company, on a consolidated basis.

The Floating Rate Senior Notes, the 8% Senior Notes and the 6.375% Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is wholly owned, directly or indirectly, by Hanesbrands Inc. A guarantor subsidiary’s guarantee can be released in certain customary circumstances. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.

The Condensed Consolidating Statements of Comprehensive Income for all periods presented have been revised to correct the net sales and cost of sales amounts for intercompany transactions related to the Parent Company and Non-Guarantor Subsidiaries. These revisions reduced net sales and cost of sales for the Parent Company and Non-Guarantor Subsidiaries and reduced the eliminations amounts for the total of the two by $10,787 and $301,720, respectively, for the quarter ended October 1, 2011 and $31,888 and $874,942, respectively, for the nine months ended October 1, 2011.

The impact on net sales and cost of sales within each specified column is the same amount for all periods and these revisions did not impact consolidated or guarantor results.

 

18


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

    Condensed Consolidating Statement of Comprehensive Income
Quarter Ended September 29, 2012
 
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
         
         

Net sales

  $ 1,015,571     $ 197,538     $ 632,167     $ (626,595   $ 1,218,681  

Cost of sales

    824,981       99,793       494,452       (600,475     818,751  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    190,590       97,745       137,715       (26,120     399,930  

Selling, general and administrative expenses

    187,016       32,865       24,758       (1,217     243,422  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    3,574       64,880       112,957       (24,903     156,508  

Equity in earnings of subsidiaries

    135,794       78,342              (214,136       

Other expenses

    3,373                            3,373  

Interest expense, net

    30,214       (1     2,687       (3     32,897  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense (benefit)

    105,781       143,223       110,270       (239,036     120,238  

Income tax expense (benefit)

    (5,567     8,926       5,696              9,055  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    111,348       134,297       104,574       (239,036     111,183  

Income (loss) from discontinued operations, net of tax

    (1,456            165              (1,291
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 109,892     $ 134,297     $ 104,739     $ (239,036   $ 109,892  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 114,773     $ 134,297     $ 105,962     $ (240,259   $ 114,773  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Net sales

  $ 991,610     $ 191,387     $ 650,312     $ (648,005   $ 1,185,304  

Cost of sales

    818,471       96,888       568,481       (712,589     771,251  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    173,139       94,499       81,831       64,584       414,053  

Selling, general and administrative expenses

    199,465       32,897       37,039       (292     269,109  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    (26,326     61,602       44,792       64,876       144,944  

Equity in earnings of subsidiaries

    157,422       34,198              (191,620       

Other expenses

    880                            880  

Interest expense, net

    35,802       (1     2,454              38,255  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

    94,414       95,801       42,338       (126,744     105,809  

Income tax expense

    7,733       7,479       5,527              20,739  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    86,681       88,322       36,811       (126,744     85,070  

Income from discontinued operations, net of tax

    4,151              724       887       5,762  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 81,639     $ 88,322     $ 25,500     $ (113,822   $ 81,639  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

    Condensed Consolidating Statement of Comprehensive Income
Nine Months Ended September 29, 2012
 
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
         
         

Net sales

  $ 2,909,716     $ 499,345     $ 1,727,880     $ (1,764,476   $ 3,372,465  

Cost of sales

    2,399,275       239,531       1,414,140       (1,702,457     2,350,489  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    510,441       259,814       313,740       (62,019     1,021,976  

Selling, general and administrative expenses

    548,650       97,836       91,767       (3,381     734,872  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    (38,209     161,978       221,973       (58,638     287,104  

Equity in earnings of subsidiaries

    238,712       153,265              (391,977       

Other expenses

    4,829                            4,829  

Interest expense, net

    98,534       (8     7,979       (2     106,503  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense (benefit)

    97,140       315,251       213,994       (450,613     175,772  

Income tax expense (benefit)

    (14,646     24,656       11,534              21,544  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    111,786       290,595       202,460       (450,613     154,228  

Loss from discontinued operations, net of tax

    (27,493     (31,791     (14,636     3,985       (69,935
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 84,293     $ 258,804     $ 187,824     $ (446,628   $ 84,293  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 92,489     $ 258,804     $ 187,116     $ (445,920   $ 92,489  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Net sales

  $ 2,930,724     $ 501,886     $ 1,887,656     $ (1,986,926   $ 3,333,340  

Cost of sales

    2,304,124       240,932       1,579,612       (1,956,363     2,168,305  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    626,600       260,954       308,044       (30,563     1,165,035  

Selling, general and administrative expenses

    595,121       98,775       98,972       (691     792,177  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    31,479       162,179       209,072       (29,872     372,858  

Equity in earnings of subsidiaries

    308,288       147,809              (456,097       

Other expenses

    2,295                            2,295  

Interest expense, net

    110,773       (35     7,745              118,483  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income tax expense

    226,699       310,023       201,327       (485,969     252,080  

Income tax expense

    14,532       21,353       12,398              48,283  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    212,167       288,670       188,929       (485,969     203,797  

Income from discontinued operations, net of tax

    13,556              7,034       1,336       21,926  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 228,627     $ 288,670     $ 189,417     $ (478,087   $ 228,627  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

     Condensed Consolidating Balance Sheet
September 29, 2012
 
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
          
          
Assets           

Cash and cash equivalents

   $ 92,026     $ 3,029     $ 87,214     $      $ 182,269  

Trade accounts receivable, net

     50,140       56,008       479,342              585,490  

Inventories

     946,144       124,792       407,498       (137,658     1,340,776  

Deferred tax assets

     172,306       (1,105     (14,269            156,932  

Other current assets

     23,414       10,317       19,681       (25     53,387  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,284,030       193,041       979,466       (137,683     2,318,854  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, net

     93,376       43,598       469,037              606,011  

Trademarks and other identifiable intangibles, net

     11,603       95,483       15,985              123,071  

Goodwill

     232,882       124,247       76,192              433,321  

Investments in subsidiaries

     2,130,565       1,201,656              (3,332,221       

Deferred tax assets

     177,857       177,432       41,378              396,667  

Other noncurrent assets

     (628,351     533,986       402,029       (246,029     61,635  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,301,962     $ 2,369,443     $ 1,984,087     $ (3,715,933   $ 3,939,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Stockholders’ Equity           

Accounts payable

   $ 223,267     $ 16,199     $ 189,700     $      $ 429,166  

Accrued liabilities

     134,595       54,242       70,945       (10     259,772  

Notes payable

                   50,778              50,778  

Accounts Receivable Securitization

          

Facility

                   193,975              193,975  

Current portion of long-term debt

     145,185                            145,185  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     503,047       70,441       505,398       (10     1,078,876  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     1,500,000                            1,500,000  

Pension and postretirement benefits

     460,535              10,800              471,335  

Other noncurrent liabilities

     61,313       35,871       15,096       1       112,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,524,895       106,312       531,294       (9     3,162,492  

Stockholders’ equity

     777,067       2,263,131       1,452,793       (3,715,924     777,067  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,301,962     $ 2,369,443     $ 1,984,087     $ (3,715,933   $ 3,939,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

     Condensed Consolidating Balance Sheet
December 31, 2011
 
     Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  
Assets           

Cash and cash equivalents

   $ 8,330     $ 2,726     $ 24,289     $      $ 35,345  

Trade accounts receivable, net

     24,452       32,535       418,052       (4,326     470,713  

Inventories

     1,172,582       112,229       423,829       (101,085     1,607,555  

Deferred tax assets

     168,843       (1,105     (13,071            154,667  

Other current assets

     26,626       10,282       25,785       (182     62,511  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     1,400,833       156,667       878,884       (105,593     2,330,791  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, net

     107,482       46,553       481,371              635,406  

Trademarks and other identifiable intangibles, net

     13,430       134,110       22,135              169,675  

Goodwill

     232,882       124,247       76,267              433,396  

Investments in subsidiaries

     1,897,579       1,059,475              (2,957,054       

Deferred tax assets

     175,981       177,432       40,807              394,220  

Other noncurrent assets

     (432,466     381,951       345,157       (223,461     71,181  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,395,721     $ 2,080,435     $ 1,844,621     $ (3,286,108   $ 4,034,669  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Liabilities and Stockholders’ Equity           

Accounts payable

   $ 236,913     $ 17,036     $ 197,576     $      $ 451,525  

Accrued liabilities

     120,807       53,669       77,713       (3     252,186  

Notes payable

                   63,075              63,075  

Accounts Receivable Securitization Facility

                   166,933              166,933  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     357,720       70,705       505,297       (3     933,719  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     1,807,777                            1,807,777  

Pension and postretirement benefits

     474,786              10,902              485,688  

Other noncurrent liabilities

     74,377       36,434       15,613              126,424  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,714,660       107,139       531,812       (3     3,353,608  

Stockholders’ equity

     681,061       1,973,296       1,312,809       (3,286,105     681,061  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,395,721     $ 2,080,435     $ 1,844,621     $ (3,286,108   $ 4,034,669  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

    Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 29, 2012
 
    Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidating
Entries and
Eliminations
    Consolidated  

Net cash provided by operating activities

  $ 531,201      $ 116,698     $ 53,477      $ (391,971   $ 309,405  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Capital expenditures

    (6,107     (5,147     (17,908            (29,162

Disposition of business

                  12,708              12,708  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (6,107     (5,147     (5,200            (16,454
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Borrowings on notes payable

                  43,251              43,251  

Repayments on notes payable

                  (55,645            (55,645

Borrowings on Accounts Receivable Securitization Facility

                  156,817              156,817  

Repayments on Accounts Receivable Securitization Facility

                  (129,775            (129,775

Borrowings on Revolving Loan Facility

    2,177,000                            2,177,000  

Repayments on Revolving Loan Facility

    (2,191,500                          (2,191,500

Redemption of Floating Rate Senior Notes

    (148,092                          (148,092

Proceeds from stock options exercised

    4,103                            4,103  

Other

    (2,051            (297            (2,348

Net transactions with related entities

    (280,859     (111,248     136       391,971         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    (441,399     (111,248     14,487        391,971       (146,189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

    1              161              162  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

    83,696       303       62,925              146,924  

Cash and cash equivalents at beginning of year

    8,330       2,726       24,289              35,345  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 92,026     $ 3,029     $ 87,214     $      $ 182,269  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)

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

(unaudited)

 

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

Net cash provided by (used in) operating activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Capital expenditures

    (11,234     (8,084     (36,767            (56,085

Acquisition of business

                  (9,154            (9,154
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Borrowings on notes payable

                  305,257              305,257  

Repayments on notes payable

                  (322,185            (322,185

Borrowings on Accounts Receivable Securitization Facility

                  229,396              229,396  

Repayments on Accounts Receivable Securitization Facility

                  (144,396            (144,396

Borrowings on Revolving Loan Facility

    2,448,500                            2,448,500  

Repayments on Revolving Loan Facility

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

Proceeds from stock options exercised

    16,784                            16,784  

Other

    (1,659            (705            (2,364

Net transactions with related entities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of changes in foreign exchange rates on cash

                  (1,053            (1,053
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

    (5,009     16       9,319              4,326  

Cash and cash equivalents at beginning of year

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2011, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2011, those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K and in the investors section of the company’s corporate website, http://tiny.cc/HanesBrandsIR.

Overview

We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bali, Playtex, Just My Size, L’eggs, barely there, Wonderbra, Gear for Sports, Zorba, Rinbros, Sol y Oro and Duofold. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, kids’ underwear, casualwear, activewear, socks and hosiery.

As a result of the reduced size of our sheer hosiery business and changing trends, we decided in the first quarter of 2012 to change our external segment reporting to include hosiery operations within the Innerwear segment. Hosiery had previously been reported as a separate segment. Prior-year segment sales and operating profit results, including other minor allocation changes, have been revised to conform to the current-year presentation. As a result of these changes, our operations are now managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Direct to Consumer and International. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms.

Discontinued Operations

We narrowed the focus of our worldwide imagewear business during the second quarter of 2012, which led us to sell our European imagewear business and discontinue our private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry.

The sale of our European imagewear business to Smartwares, B.V. for €15 million (approximately $13 million, net of fees and other transaction related costs) in cash proceeds, resulted in a pre-tax loss of approximately $32 million in the second quarter of 2012. The sale of our European imagewear business is consistent with our strategic direction to narrow the focus of our worldwide imagewear business by restructuring to exit noncore segments and reduce risk.

In connection with the discontinuation of our private-label and Outer Banks domestic imagewear operations, we incurred pre-tax charges of approximately $58 million in the second quarter of 2012, substantially all noncash, for the write-down of intangibles, inventory markdowns and other related items.

The execution of our new worldwide imagewear strategy allows us to focus our imagewear business (now known as branded printwear) on Hanes and Champion branded products in the United States with improved

 

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operating margins. This restructuring is expected to result in a smaller, more profitable and less volatile operation in the longer term. Our branded printwear operations will continue to operate and serve the branded domestic screen-print market with the results of these operations being reported in the Outerwear segment. Annual sales of our branded printwear business are expected to be approximately $150 million in 2013 down from projected annual net sales of $180 million to $190 million in 2012.

As a result of these actions, the current year and prior-year disclosures reflect these operations as discontinued operations.

Outlook

We continue to operate in an uncertain and volatile economic environment. After taking into consideration our worldwide imagewear restructuring and operating performance in the first nine months of 2012, we expect diluted earnings per share from continuing operations of $2.54 to $2.60 in 2012, compared with previous guidance of $2.50 to $2.60. Net sales are expected to be approximately $4.52 billion in 2012, compared with previous guidance of $4.52 billion to $4.57 billion.

Our guidance is based on the following facts. Product pricing, shelf space, and promotion plans for the remainder of 2012 have been finalized with major retail accounts. All commodity costs have been fixed for the remainder of the year, with the company incurring significantly lower cotton and other inflation impacts the remainder of the year.

We are focused on delivering profitable growth and remain highly committed to strong cash flow generation and utilizing that cash flow to pay down debt. Through expected improvements in working capital, primarily from reduction in inventory as a result of declining cotton costs and unit levels, and operating results, we expect to generate approximately $545 million in operating cash flows in 2012, the high end of the previous range of $445 million to $545 million. We have already started executing our debt reduction plan by redeeming approximately $148 million of the Floating Rate Senior Notes in July 2012, with the remaining balance of $145 million redeemed in October 2012. We typically use cash for the first half of the year and generate most of our cash flow in the second half of the year.

Seasonality and Other Factors

Our operating results are subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. We generally have higher sales during back-to-school shopping and holiday selling seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.

Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary spending by consumers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our

 

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products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.

Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as casualwear and activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to customers’ preferences and discretionary spending.

Highlights from the Third Quarter and Nine Months Ended September 29, 2012

 

   

Total net sales in the third quarter of 2012 were $1.22 billion, compared with $1.19 billion in the same quarter of 2011, representing a 3% increase. Total net sales in the nine months of 2012 were $3.37 billion, compared to $3.33 billion in the same period of 2011.

 

   

Operating profit was $157 million in the third quarter of 2012, compared with $145 million in the same quarter of 2011. As a percent of sales, operating profit was 12.8% in the third quarter of 2012 compared to 12.2% in the same quarter of 2011. Operating profit was $287 million in the nine months of 2012, compared with $373 million in the same period of 2011. As a percent of sales, operating profit was 8.5% in the nine months of 2012, compared to 11.2% in the same period of 2011.

 

   

Diluted earnings per share from continuing operations was $1.11 in the third quarter of 2012, compared with $0.85 in the same quarter of 2011. Diluted earnings per share from continuing operations was $1.54 in the nine months of 2012, compared to $2.05 in the same period of 2011.

 

   

Net capital expenditures were $29 million during the nine months of 2012, compared to $56 million in the same period of 2011.

 

   

We have already started executing our debt reduction plan by redeeming approximately $148 million of the Floating Rate Senior Notes in July 2012, with the remaining balance of $145 million redeemed in October 2012.

 

   

We narrowed the focus of our worldwide imagewear business during the second quarter of 2012, resulting in the sale of our European imagewear business and the discontinuation of our private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. The sale of our European imagewear business to Smartwares, B.V. resulted in a pre-tax loss of approximately $32 million in the second quarter of 2012. In connection with the discontinuation of our private-label and Outer Banks domestic imagewear operations, we incurred pre-tax charges of approximately $58 million in the second quarter of 2012, substantially all noncash, for the write-down of intangibles, inventory markdowns and other related items.

 

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Condensed Consolidated Results of Operations — Third Quarter Ended September 29, 2012 Compared with Third Quarter Ended October 1, 2011

 

     Quarter Ended               
     September 29,
2012
    October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 1,218,681     $ 1,185,304      $ 33,377       2.8  % 

Cost of sales

     818,751       771,251        47,500       6.2  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     399,930       414,053        (14,123     (3.4

Selling, general and administrative expenses

     243,422       269,109        (25,687     (9.5
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

     156,508       144,944        11,564       8.0  

Other expenses

     3,373       880        2,493       283.3  

Interest expense, net

     32,897       38,255        (5,358     (14.0
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax expense

     120,238       105,809        14,429       13.6  

Income tax expense

     9,055       20,739        (11,684     (56.3
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     111,183       85,070        26,113       30.7  

Income (loss) from discontinued operations, net of tax

     (1,291     5,762        (7,053     NM   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 109,892     $ 90,832      $ 19,060       21.0  % 
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Sales

Consolidated net sales were higher by $33 million, or 3%, in the third quarter of 2012 compared to the third quarter of 2011. The higher net sales primarily resulted from the following:

 

 

Stronger net sales in our men’s underwear and kids’ underwear product categories primarily resulting from price increases and space gains, partially offset by lower unit sales volume within the men’s underwear category.

 

 

Higher net sales in activewear product category and Gear for Sports licensed apparel as a result of space gains and higher unit sales volume.

 

 

Lower net sales in our casualwear product category primarily attributable to lower unit sales volume.

 

 

Lower net sales in our branded printwear product category as a result of lower unit sales volume, especially in lightweight commodity-oriented products.

Gross Profit

Gross profit was $14 million lower in the third quarter of 2012 as compared to the third quarter of 2011. As a percentage of net sales, our gross profit was 32.8% in the third quarter of 2012 compared to 34.9% in the third quarter of 2011. The lower gross profit resulted from cost inflation, primarily higher cotton costs, partially offset by price increases, efficiency savings from our supply chain and lower excess and obsolete inventory costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $26 million lower in the third quarter of 2012 compared to the third quarter of 2011. The lower selling, general and administrative expenses were primarily attributable to lower media spending and lower distribution expenses. As a percentage of net sales, our selling, general and administrative expenses were 20.0% in the third quarter of 2012 compared to 22.7% in the third quarter of 2011.

 

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Other Highlights

Interest Expense – lower by $5 million in the third quarter of 2012 compared to the third quarter of 2011 primarily due to lower outstanding debt balances. Our weighted average interest rate on our outstanding debt was 5.76% during the third quarter of 2012, compared to 5.50% in the third quarter of 2011.

Income Tax Expense – our effective income tax rate for continuing operations was 8% and 20% for the third quarter of 2012 and the third quarter of 2011, respectively. The lower effective income tax rate was primarily attributable to an income tax benefit of approximately $9 million in the third quarter of 2012 related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations and an income tax benefit of approximately $4 million in the third quarter of 2012 related to an increase in research and development tax credits.

Discontinued Operations – the results of our discontinued operations include the sale of our European imagewear business and the discontinuation of our private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry.

Operating Results by Business Segment — Third Quarter Ended September 29, 2012 Compared with Third Quarter Ended October 1, 2011

 

     Net Sales      Operating Profit  
     Quarter Ended      Quarter Ended  
     September 29,
2012
     October 1,
2011
     September 29,
2012
    October 1,
2011
 
     (dollars in thousands)  

Innerwear

   $ 574,278      $ 558,422      $ 96,841     $ 88,372  

Outerwear

     413,033        392,683        46,339       48,379  

Direct to Consumer

     99,111        97,565        14,412       12,268  

International

     132,259        136,634        17,574       14,797  

Corporate

                     (18,658     (18,872
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 1,218,681      $ 1,185,304      $ 156,508     $ 144,944  
  

 

 

    

 

 

    

 

 

   

 

 

 

Innerwear

 

     Quarter Ended                
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
     Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 574,278      $ 558,422      $ 15,856        2.8  % 

Segment operating profit

     96,841        88,372        8,469        9.6  

Overall net sales in the Innerwear segment were higher by $16 million, or 3%, in the third quarter of 2012 compared to the third quarter of 2011. Excluding the declines associated with a mid-tier retail customer that is undergoing a major strategic shift, net sales increased 5% in the third quarter of 2012. The higher net sales were primarily driven by the following:

 

 

Stronger net sales in our men’s underwear (9%) and kids’ underwear (10%) categories primarily resulting from price increases and space gains, partially offset by lower unit sales volume within the men’s underwear category.

 

 

Socks category net sales were flat, primarily due to price increases and space gains, offset by lower unit sales volume.

 

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Lower net sales in our intimate apparel category (2%), primarily due to lower net sales of bras and hosiery, partially offset by higher net sales of panties. The lower intimate apparel net sales was primarily the result of lower unit sales volume, partially offset by price increases and space gains.

Innerwear segment operating profit was $8 million higher in the third quarter of 2012 compared to the third quarter of 2011 primarily due to price increases, efficiency savings related to our supply chain optimization, lower media spending and lower distribution expenses. These lower costs were partially offset by cost inflation, particularly cotton, and lower unit sales volume.

Outerwear

 

     Quarter Ended               
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 413,033      $ 392,683      $ 20,350       5.2  % 

Segment operating profit

     46,339        48,379        (2,040     (4.2

Outerwear segment net sales were higher by $20 million, or 5%, in the third quarter of 2012 compared to the third quarter of 2011. The higher net sales were primarily due to the following:

 

 

Higher net sales in our activewear category (15%), primarily due to higher unit sales volume and space gains.

 

 

Higher net sales in our Gear for Sports licensed apparel (7%), primarily due to higher unit sales volume and space gains.

 

 

Lower net sales in our casualwear product category (3%) is primarily attributable to lower unit sales volume.

 

 

Lower net sales in our branded printwear category (7%), primarily due to lower unit sales volume especially in lightweight commodity-oriented products.

Outerwear segment operating profit was $2 million lower in the third quarter of 2012 compared to the third quarter of 2011 primarily due to cost inflation, mostly related to higher cotton prices, partially offset by efficiency savings related to our supply chain optimization and lower excess and obsolete inventory costs.

Direct to Consumer

 

     Quarter Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
     Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 99,111      $ 97,565      $ 1,546        1.6  % 

Segment operating profit

     14,412        12,268        2,144        17.5  

Direct to Consumer segment net sales were higher by $2 million in the third quarter of 2012 compared to the third quarter of 2011 primarily due to higher net sales related to our Internet operations. Comparable store sales were 1% higher in the third quarter of 2012 compared to 2011.

Direct to Consumer segment operating profit was $2 million higher in the third quarter of 2012 compared to 2011 primarily due to price increases and lower spending.

 

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International

 

     Quarter Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 132,259      $ 136,634      $ (4,375     (3.2 ) % 

Segment operating profit

     17,574        14,797        2,777       18.8  

Overall net sales in the International segment were lower by $4 million, or 3%, in the third quarter of 2012 compared to the third quarter of 2011 primarily due to an unfavorable impact of foreign exchange rates.

Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 2% higher, primarily due to higher unit sales volume in our intimate apparel product category in Canada and in our socks and casualwear product categories in Asia.

International segment operating profit was higher by $3 million in the third quarter of 2012 compared to 2011 primarily due to lower media spending and price increases, which were offset by cost inflation and an unfavorable impact related to foreign currency exchange rates.

General Corporate Expenses

General corporate expenses were slightly lower in the third quarter of 2012 compared to the third quarter of 2011 primarily due to higher foreign exchange transactions gains, partially offset by higher compensation-related expenses, such as long-term incentive compensation costs and pension expense.

Condensed Consolidated Results of Operations — Nine Months Ended September 29, 2012 Compared with Nine Months Ended October 1, 2011

 

     Nine Months Ended               
     September 29,
2012
    October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 3,372,465     $ 3,333,340      $ 39,125       1.2  % 

Cost of sales

     2,350,489       2,168,305        182,184       8.4  
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     1,021,976       1,165,035        (143,059     (12.3

Selling, general and administrative expenses

     734,872       792,177        (57,305     (7.2
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

     287,104       372,858        (85,754     (23.0

Other expenses

     4,829       2,295        2,534       110.4  

Interest expense, net

     106,503       118,483        (11,980     (10.1
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax expense

     175,772       252,080        (76,308     (30.3

Income tax expense

     21,544       48,283        (26,739     (55.4
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     154,228       203,797        (49,569     (24.3

Income (loss) from discontinued operations, net of tax

     (69,935     21,926        (91,861     NM   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 84,293     $ 225,723      $ (141,430     (62.7 ) % 
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Net Sales

Consolidated net sales were higher by $39 million, or 1%, in the nine months of 2012 compared to the same period of 2011. The higher net sales primarily resulted from the following:

 

 

Stronger net sales of our men’s underwear and kids’ underwear product categories primarily resulting from price increases and space gains, partially offset by lower unit sales volume.

 

 

Higher net sales in activewear and casualwear product categories as a result of higher unit sales volume and space gains.

 

 

Lower net sales in our intimate apparel product category primarily due to lower net sales of bras and hosiery, partially offset by higher net sales of panties. The lower intimate apparel net sales were primarily the result of lower unit sales volume, partially offset by price increases and space gains.

 

 

Lower net sales in our branded printwear category primarily due to lower unit sales volume, especially in lightweight commodity-oriented products.

 

 

Lower net sales in the International segment primarily due to an unfavorable impact of foreign exchange rates.

Gross Profit

Gross profit was $143 million lower in the nine months of 2012 as compared to the same period of 2011. As a percentage of net sales, our gross profit was 30.3% in the nine months of 2012 compared to 35.0% in the same period of 2011. The lower gross profit was impacted by cost inflation, primarily higher cotton costs, partially offset by price increases and efficiency savings from our supply chain.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $57 million lower in the nine months of 2012 compared to the same period of 2011. The lower selling, general and administrative expenses were primarily attributable to lower media spending and lower distribution expenses. As a percentage of net sales, our selling, general and administrative expenses were 21.8% in the nine months of 2012 compared to 23.8% in the same period of 2011.

Other Highlights

Interest Expense lower by $12 million in the nine months of 2012 compared to the same period of 2011 primarily due to lower outstanding debt balances. Our weighted average interest rate on our outstanding debt was 5.74% during the nine months of 2012 compared to 5.62% in the same period of 2011.

Income Tax Expense – our effective income tax rate for continuing operations was 12% and 19% for the nine months 2012 and the same period of 2011, respectively. The lower effective income tax rate was primarily attributable to an income tax benefit of approximately $9 million in the nine months of 2012 related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations and an income tax benefit of approximately $4 million in the nine months of 2012 related to an increase in research and development tax credits.

Discontinued Operations – the results of our discontinued operations include the sale of our European imagewear business and the discontinuation of our private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. In addition to the operations of these businesses, the following charges were included in discontinued operations:

 

 

The sale of our European imagewear business to Smartwares, B.V. for €15 million (approximately $13 million, net of fees and other transaction related costs) in cash proceeds, resulted in a pre-tax loss of approximately $32 million in the second quarter of 2012.

 

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In connection with the discontinuation of our private-label and Outer Banks domestic imagewear operations, we incurred pre-tax charges of approximately $58 million in the second quarter of 2012, substantially all noncash, for the write-down of intangibles, inventory markdowns and other related items.

Operating Results by Business Segment — Nine Months Ended September 29, 2012 Compared with Nine Months Ended October 1, 2011

 

     Net Sales      Operating Profit  
     Nine Months Ended      Nine Months Ended  
     September 29,
2012
     October 1,
2011
     September 29,
2012
    October 1,
2011
 
     (dollars in thousands)  

Innerwear

   $ 1,748,256      $ 1,711,802      $ 269,718     $ 265,974  

Outerwear

     981,021        970,776        24,118       94,265  

Direct to Consumer

     278,396        277,819        24,773       21,955  

International

     364,792        372,943        33,964       43,275  

Corporate

                     (65,469     (52,611
  

 

 

    

 

 

    

 

 

   

 

 

 

Total net sales

   $ 3,372,465      $ 3,333,340      $ 287,104     $ 372,858  
  

 

 

    

 

 

    

 

 

   

 

 

 

Innerwear

 

     Nine Months Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
     Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 1,748,256      $ 1,711,802      $ 36,454        2.1  % 

Segment operating profit

     269,718        265,974        3,744        1.4  

Overall net sales in the Innerwear segment were higher by $36 million, or 2%, in the nine months of 2012 compared to the same period of 2011. Excluding the declines associated with a mid-tier retail customer that is undergoing a major strategic shift, net sales increased 4% in the nine months of 2012. Innerwear net sales growth has increased for three consecutive quarters in 2012. The higher net sales were primarily driven by the following:

 

 

Stronger net sales in our men’s underwear (6%) and kids’ underwear (15%) categories primarily resulting from price increases and space gains, partially offset by lower unit sales volume.

 

 

Lower net sales in our intimate apparel category (2%), primarily due to lower net sales of bras and hosiery, partially offset by higher net sales of panties. The lower intimate apparel net sales were primarily the result of lower unit sales volume, partially offset by price increases and space gains.

 

 

Lower net sales in our socks product category (2%), primarily due to lower Hanes brand net sales partially offset by higher Champion brand net sales. The lower Hanes brand net sales were primarily due to lower unit sales volume, partially offset by price increases, while the higher Champion brand net sales were driven primarily by higher unit sales volume and space gains.

Innerwear segment operating profit was $4 million higher in the nine months of 2012 compared to the same period of 2011 primarily due to price increases, efficiency savings related to our supply chain optimization, lower media spending and lower distribution costs. These lower costs were partially offset by cost inflation, particularly cotton, and lower unit sales volume.

 

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Outerwear

 

     Nine Months Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 981,021      $ 970,776      $ 10,245       1.1  % 

Segment operating profit

     24,118        94,265        (70,147     (74.4

Outerwear segment net sales were higher by $10 million, or 1%, in the nine months of 2012 compared to the same period of 2011. The higher net sales were primarily due to the following:

 

 

Higher net sales in our activewear category (12%), primarily due to higher unit sales volume, price increases and space gains.

 

 

Higher net sales in our retail casualwear category (4%), primarily due to space gains for our Hanes brand in the mass merchant channel.

 

 

Lower net sales in our branded printwear category (23%), primarily due to lower unit sales volume especially in lightweight commodity-oriented products.

Outerwear segment operating profit was $70 million lower in the six months of 2012 compared to the same period of 2011 primarily due to cost inflation, mostly related to cotton. These higher costs were partially offset by efficiency savings related to our supply chain optimization, lower excess and obsolete inventory costs and lower media spending.

Direct to Consumer

 

     Nine Months Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
     Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 278,396      $ 277,819      $ 577        0.2  % 

Segment operating profit

     24,773        21,955        2,818        12.8  

Direct to Consumer segment net sales were higher by $1 million in the nine months of 2012 compared to the same period of 2011 due to higher net sales related to our Internet operations. Comparable store sales were 1% higher in the nine months of 2012 compared to the same period of 2011.

Direct to Consumer segment operating profit was $3 million higher in the nine months of 2012 compared to the same period of 2011 primarily due to price increases and lower media spending, partially offset by unfavorable product sales mix.

International

 

     Nine Months Ended         
     September 29,
2012
     October 1,
2011
     Higher
(Lower)
    Percent
Change
 
     (dollars in thousands)  

Net sales

   $ 364,792      $ 372,943      $ (8,151     (2.2 ) % 

Segment operating profit

     33,964        43,275        (9,311     (21.5

 

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Overall net sales in the International segment were lower by $8 million, or 2%, in the nine months of 2012 compared to the same period of 2011 primarily due to an unfavorable impact of foreign exchange rates. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were higher by 3%. Excluding the impact of foreign currency, net sales were impacted by the following:

 

 

Higher net sales in our activewear category in Australia primarily resulting from a benefit from the acquisition of the assets of the TNF Group Unit Trust from TNF Group Pty Ltd, as trustee, and of Player Sportswear Unit Trust from Player Sportswear Pty Ltd, as trustee (collectively “TNF”) in April 2011.

 

 

Higher net sales in Latin America primarily due to space gains and higher unit sales volume in our retail casualwear category in Brazil and price increases in our intimate apparel category in Argentina.

 

 

Lower net sales in Asia primarily resulting from a one-time termination fee of $5 million that we received in the first quarter of 2011 related to a royalty license agreement.

International segment operating profit was lower by $9 million in the nine months of 2012 compared to the same period of 2011. In addition to increased cotton costs and other inflation, the lower operating profit was attributable to a one-time termination fee of $5 million that we received in 2011 related to a royalty license agreement and an unfavorable impact related to foreign currency exchange rates. These higher costs were partially offset by lower media spending and price increases.

General Corporate Expenses

General corporate expenses were higher in the nine months of 2012 compared to the same period of 2011 primarily due to costs related to supply chain actions and higher compensation-related expenses, such as long-term incentive compensation costs and pension expense, partially offset by higher foreign exchange transactions gains.

Liquidity and Capital Resources

Trends and Uncertainties Affecting Liquidity

Our primary sources of liquidity are cash generated by operations and availability under the $600 million revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility that we entered into in 2006 and amended and restated in December 2009 (the “2009 Senior Secured Credit Facility”), the accounts receivable securitization facility that we entered into in November 2007 (the “Accounts Receivable Securitization Facility”) and our international loan facilities. At September 29, 2012, we had $589 million of borrowing availability under our Revolving Loan Facility (after taking into account outstanding letters of credit), $87 million of borrowing availability under our international loan facilities, $182 million in cash and cash equivalents, and no borrowing availability under our Accounts Receivable Securitization Facility. We currently believe that our 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.

The following have impacted or are expected to impact liquidity:

 

   

we have principal and interest obligations under our debt;

 

   

we expect to continue to invest in efforts to improve operating efficiencies and lower costs;

 

   

we may selectively pursue strategic acquisitions;

 

   

we may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could significantly impact our effective income tax rate; and

 

   

our board of directors has authorized the repurchase of up to 10 million shares of our stock in the open market over the next few years (2.8 million of which we have repurchased as of September 29, 2012 at a cost of $75 million).

 

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We expect to be able to manage our working capital levels and capital expenditure amounts to maintain sufficient levels of liquidity. Although we may choose to pursue strategic acquisitions or repurchase our stock in the open market, during 2012 and 2013 we intend to utilize cash flow primarily for the reduction of long-term debt.

During the nine months of 2012 we have incurred approximately $19 million of charges in 2012 for supply chain actions primarily associated with the imagewear restructuring. Offsetting these charges are efficiency savings from our supply chain optimization initiatives of approximately $31 million we realized during the nine months of 2012. We expect to realize approximately $40 million of efficiency savings for the full year in 2012.

Inflation and Changing Prices

The economic environment in which we are operating continues to be uncertain and volatile, which could have unanticipated adverse effects on our business during the remainder of 2012 and beyond. For example, our results in the nine months of 2012 were significantly impacted by a sustained increase in various input costs, such as cotton and oil-related materials, utilities, freight and wages. However, with the recent decline in cotton prices, the most significant contributor to our cost inflation is now behind us. Based on current market conditions, we expect the impact of cost inflation to be approximately $250 million in 2012. Cost inflation impacted our results in the nine months of 2012 by approximately $270 million. The year to date cost inflation will be offset by a reduction in input costs in the fourth quarter of 2012 as compared to the fourth quarter of 2011, primarily due to lower cotton costs.

Cash Requirements for Our Business

We rely on our cash flows generated from operations and the borrowing capacity under our Revolving Loan Facility, Accounts Receivable Securitization Facility and international loan facilities to meet the cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, contributions to our pension plans and repurchases of our stock. We believe we have sufficient cash and available borrowings for our liquidity needs.

There have been no significant changes in the cash requirements for our business from those described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Sources and Uses of Our Cash

The information presented below regarding the sources and uses of our cash flows for the nine months ended September 29, 2012 and October 1, 2011 was derived from our consolidated financial statements.

 

     Nine Months Ended  
     September 29,
2012
    October 1,
2011
 
     (dollars in thousands)  

Operating activities

   $ 309,405     $ (26,874

Investing activities

     (16,454     (65,239

Financing activities

     (146,189     97,492  

Effect of changes in foreign currency exchange rates on cash

     162       (1,053
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     146,924       4,326  

Cash and cash equivalents at beginning of year

     35,345       43,671  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 182,269     $ 47,997  
  

 

 

   

 

 

 

 

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Operating Activities

Net cash provided by operating activities was $309 million in the nine months of 2012 compared to net cash used in operating activities of $27 million in the same period of 2011. The higher net cash from operating activities is primarily attributable to improved working capital resulting from a reduction in inventory levels caused by declining cotton costs and unit levels.

Investing Activities

Net cash used in investing activities was $16 million in the nine months of 2012 compared to $65 million in the same period of 2011. The lower net cash used in investing activities was primarily the result of lower net capital expenditures of $27 million and net cash proceeds of $13 million from the sale of the European imagewear business in 2012. In addition, we used cash of $9 million in 2011 related to the acquisition of TNF in April 2011.

Financing Activities

Net cash used in financing activities was $146 million in the nine months of 2012 compared to net cash provided by financing activities of $97 million in 2011. The lower net cash from financing activities was primarily the result of redeeming our Floating Rate Senior Notes in the amount of $148 million in July 2012 and lower net borrowings on our Accounts Receivable Securitization Facility and Revolving Loan Facility.

Financing Arrangements

During 2012, the following changes have been made to our financing arrangements:

 

   

In March 2012, we amended the Accounts Receivable Securitization Facility. This amendment decreased certain usage fee rates and extended the termination date to March 2013.

 

   

In July 2012, we redeemed approximately $148 million of the Floating Rate Senior Notes at 100% of the principal amount thereof and redeemed the remaining balance of $145 million in October 2012.

 

   

In July 2012, we amended the Revolving Loan Facility to reduce the interest rate by 100 basis points and extend the maturity date to September 2016 with the provision that it will be extended to July 2017 if we redeem or refinance our 8% Senior Notes prior to September 2016.

As of September 29, 2012, we were in compliance with all financial covenants under our credit facilities. We expect to maintain compliance with our covenants for the foreseeable future, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 or other SEC filings could cause noncompliance.

There have been no other significant changes in the financing arrangements from those described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.

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 condition 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

 

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discussed in Note 2, titled “Summary of Significant Accounting Policies,” to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 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 31, 2011. There have been no material changes in these policies during the quarter ended September 29, 2012.

Recently Issued Accounting Pronouncements

Disclosures About Offsetting Assets and Liabilities

In December 2011, the FASB issued new accounting rules related to new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new rules are effective for us in the first quarter of 2015 with retrospective application required. We do not expect the adoption of the new accounting rules to have a material effect on our financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no 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 31, 2011.

 

Item 4. Controls and Procedures

As required by Exchange Act Rule 13a-15(b), our management, including our 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Table of Contents

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, financial condition or cash flows.

 

Item 1A. Risk Factors

No updates to report.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are filed or furnished as part of this Quarterly Report on Form 10-Q.

 

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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/    Richard D. Moss

      Richard D. Moss
      Chief Financial Officer
      (Duly authorized officer and principal financial officer)

Date: October 24, 2012

 

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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 December 15, 2008).
  31.1    Certification of Richard A. Noll, Chief Executive Officer.
  31.2    Certification of Richard D. Moss, Chief Financial Officer.
  32.1    Section 1350 Certification of Richard A. Noll, Chief Executive Officer.
  32.2    Section 1350 Certification of Richard D. Moss, Chief Financial Officer.
        101.INS XBRL    Instance Document
        101.SCH XBRL    Taxonomy Extension Schema Document
        101.CAL XBRL    Taxonomy Extension Calculation Linkbase Document
        101.LAB XBRL    Taxonomy Extension Label Linkbase Document
        101.PRE XBRL    Taxonomy Extension Presentation Linkbase Document
        101.DEF XBRL    Taxonomy Extension Definition Linkbase Document

 

E-1

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