HBI-2013.03.30-10Q
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 March 30, 2013
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 April 19, 2013, there were 98,543,948 shares of the registrant’s common stock outstanding.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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, Bali, Playtex, Just My Size, L’eggs, barely there, Wonderbra, Gear for Sports, Zorba, Sol y Oro and Rinbros 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, 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 29, 2012, particularly under the caption “Risk Factors,” as well in the “Investors” section of the company's corporate website, www.hanesbrands.com.
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 29, 2012, 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 (Loss)
(in thousands, except per share amounts)
(unaudited)

 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Net sales
$
945,461

 
$
973,133

Cost of sales
618,162

 
718,019

Gross profit
327,299

 
255,114

Selling, general and administrative expenses
242,156

 
244,469

Operating profit
85,143

 
10,645

Other expenses
464

 
645

Interest expense, net
25,623

 
36,995

Income (loss) from continuing operations before income tax expense (benefit)
59,056

 
(26,995
)
Income tax expense (benefit)
7,677

 
(2,724
)
Income (loss) from continuing operations
51,379

 
(24,271
)
Loss from discontinued operations, net of tax

 
(2,559
)
Net income (loss)
$
51,379

 
$
(26,830
)
 
 
 
 
Earnings (loss) per share — basic:
 
 
 
Continuing operations
$
0.52

 
$
(0.25
)
Discontinued operations

 
(0.03
)
Net income (loss)
$
0.52

 
$
(0.27
)
 
 
 
 
Earnings (loss) per share — diluted:
 
 
 
Continuing operations
$
0.51

 
$
(0.25
)
Discontinued operations

 
(0.03
)
Net income (loss)
$
0.51

 
$
(0.27
)


See accompanying notes to Condensed Consolidated Financial Statements.
2

Table of Contents

HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
(unaudited)

 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Net income (loss)
$
51,379

 
$
(26,830
)
Other comprehensive income, net of tax of $1,496 and $1,722, respectively
1,356

 
4,924

Comprehensive income (loss)
$
52,735

 
$
(21,906
)


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)

 
March 30,
2013
 
December 29,
2012
Assets
 
 
 
Cash and cash equivalents
$
68,545

 
$
42,796

Trade accounts receivable, net
550,650

 
506,278

Inventories
1,346,985

 
1,253,136

Deferred tax assets
168,093

 
166,189

Other current assets
63,285

 
59,126

Total current assets
2,197,558

 
2,027,525

 
 
 
 
Property, net
582,382

 
596,158

Trademarks and other identifiable intangibles, net
117,091

 
120,114

Goodwill
433,321

 
433,300

Deferred tax assets
414,789

 
397,529

Other noncurrent assets
61,984

 
57,074

Total assets
$
3,807,125

 
$
3,631,700

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
419,302

 
$
403,644

Accrued liabilities
266,686

 
271,972

Notes payable
29,827

 
26,216

Accounts Receivable Securitization Facility
159,747

 
173,836

Total current liabilities
875,562

 
875,668

Long-term debt
1,435,000

 
1,317,500

Pension and postretirement benefits
423,567

 
446,267

Other noncurrent liabilities
124,442

 
105,399

Total liabilities
2,858,571

 
2,744,834

 
 
 
 
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 — 98,530,883 and 98,269,868, respectively
985

 
983

Additional paid-in capital
300,980

 
292,029

Retained earnings
962,846

 
911,467

Accumulated other comprehensive loss
(316,257
)
 
(317,613
)
Total stockholders’ equity
948,554

 
886,866

Total liabilities and stockholders’ equity
$
3,807,125

 
$
3,631,700



See accompanying notes to Condensed Consolidated Financial Statements.
4

Table of Contents

HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Operating activities:
 
 
 
Net income (loss)
$
51,379

 
$
(26,830
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization of long-lived assets
23,221

 
23,330

Amortization of debt issuance costs
1,679

 
2,476

Amortization of loss on interest rate hedge

 
1,114

Stock compensation expense
2,510

 
1,772

Deferred taxes and other
(1,551
)
 
(1,448
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(44,661
)
 
(51,829
)
Inventories
(95,192
)
 
(8,647
)
Other assets
(12,545
)
 
5,012

Accounts payable
19,087

 
(49,645
)
Accrued liabilities and other
(22,998
)
 
10,580

Net cash used in operating activities
(79,071
)
 
(94,115
)
 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(6,530
)
 
(9,016
)
Net cash used in investing activities
(6,530
)
 
(9,016
)
 
 
 
 
Financing activities:
 
 
 
Borrowings on notes payable
34,210

 
20,671

Repayments on notes payable
(30,571
)
 
(42,217
)
Borrowings on Accounts Receivable Securitization Facility
51,382

 
56,802

Repayments on Accounts Receivable Securitization Facility
(65,471
)
 
(60,365
)
Borrowings on Revolving Loan Facility
953,000

 
804,000

Repayments on Revolving Loan Facility
(835,500
)
 
(676,000
)
Proceeds from stock options exercised
4,406

 
323

Other
347

 
(1,070
)
Net cash provided by financing activities
111,803

 
102,144

Effect of changes in foreign exchange rates on cash
(453
)
 
242

Increase (decrease) in cash and cash equivalents
25,749

 
(745
)
Cash and cash equivalents at beginning of year
42,796

 
35,345

Cash and cash equivalents at end of period
$
68,545

 
$
34,600



See accompanying notes to Condensed Consolidated Financial Statements.
5

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 state 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 completed 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 prior-year disclosures reflect these operations as discontinued operations.
(2)
Recent Accounting Pronouncements
Presentation of Comprehensive Income
In February 2013, the Financial Accounting Standards Board (the “FASB”) issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules were effective for the Company in the first quarter of 2013. The adoption of the new accounting rules did not have a material effect on the Company’s 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 2014 with retrospective application required. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company’s financial condition, results of operations or cash flows.
(3)
Earnings Per Share
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding. 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 is as follows:
 
 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Basic weighted average shares outstanding
99,369

 
98,533

Effect of potentially dilutive securities:

 

Stock options
1,564

 

Restricted stock units
527

 

Diluted weighted average shares outstanding
101,460

 
98,533



6

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

For the quarters ended March 30, 2013 and March 31, 2012, options to purchase 0 and 5,297 shares of common stock and 0 and 691 restricted stock units, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. Because the Company reported a net loss for the quarter ended March 31, 2012, all restricted stock units and stock options were excluded from the computation of diluted loss per share as their effect would have been anti-dilutive.
(4)
Inventories
Inventories consisted of the following: 
 
March 30,
2013
 
December 29,
2012
Raw materials
$
181,616

 
$
167,883

Work in process
139,466

 
143,713

Finished goods
1,025,903

 
941,540

 
$
1,346,985

 
$
1,253,136

(5)
Debt
Debt consisted of the following: 
 
Interest Rate as of March 30, 2013
 
Principal Amount
 
Maturity Date
 
March 30,
2013
 
December 29,
2012
 
Revolving Loan Facility
2.57%
 
$
185,000

 
$
67,500

 
July 2017
6.375% Senior Notes
6.38%
 
1,000,000

 
1,000,000

 
December 2020
8% Senior Notes
8.00%
 
250,000

 
250,000

 
December 2016
Accounts Receivable Securitization Facility
1.27%
 
159,747

 
173,836

 
March 2014
 
 
 
1,594,747

 
1,491,336

 
 
Less current maturities
 
 
159,747

 
173,836

 
 
 
 
 
$
1,435,000

 
$
1,317,500

 
 

As of March 30, 2013, the Company had $402,305 of borrowing availability under the $600,000 revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility after taking into account outstanding borrowings and $12,695 of standby and trade letters of credit issued and outstanding under this facility.
In March 2013, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment decreased certain fee rates and extended the termination date to March 2014.
As of March 30, 2013, the Company was in compliance with all financial covenants under its credit facilities.

7

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

(6)
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) (“AOCI”) are as follows:
 
 
Cumulative Translation Adjustment
 
Foreign Exchange Contracts
 
Defined Benefit Plans
 
Income Taxes
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Balance at December 29, 2012
 
$
(8,340
)
 
$
853

 
$
(512,558
)
 
$
202,432

 
$
(317,613
)
Amounts reclassified from accumulated other comprehensive loss
 

 
42

 
3,862

 
(1,557
)
 
2,347

Current-period other comprehensive income (loss) activity
 
(901
)
 
(151
)
 

 
61

 
(991
)
Balance at March 30, 2013
 
$
(9,241
)
 
$
744

 
$
(508,696
)
 
$
200,936

 
$
(316,257
)
The Company had the following reclassifications out of accumulated other comprehensive income (loss):
Component of AOCI
 
Amount of Reclassification from AOCI
 
Location of Reclassification into Income
 
Quarter Ended
 
 
March 30,
2013
 
March 31,
2012
 
Gain (loss) on foreign exchange contracts
 
$
(42
)
 
$
(33
)
 
Cost of sales
 
 
17

 
13

 
Income tax benefit
 
 
$
(25
)
 
$
(20
)
 
Net of tax
 
 
 
 
 
 
 
Amortization of loss on interest rate hedge
 
$

 
$
(1,114
)
 
Interest expense, net
 
 

 
444

 
Income tax benefit
 
 
$

 
$
(670
)
 
Net of tax
 
 
 
 
 
 
 
Amortization of deferred actuarial loss and
prior service cost
 
$
(3,862
)
 
$
(3,989
)
 
Selling, general and administrative expenses
 
 
1,540

 
1,590

 
Income tax benefit
 
 
$
(2,322
)
 
$
(2,399
)
 
Net of tax
 
 
 
 
 
 
 
Total reclassifications
 
$
(2,347
)
 
$
(3,089
)
 

(7)
Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of March 30, 2013, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company's derivative portfolio was $104,284 and $10,025 respectively, primarily consisting of contracts hedging exposures to the Mexican peso, Canadian dollar, Australian dollar, Brazilian real and Japanese yen.

8

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
 
March 30,
2013
 
December 29,
2012
Hedges
Other current assets
 
$
592

 
$
708

Non-hedges
Other current assets
 
217

 
380

Total derivative assets
 
 
$
809

 
$
1,088

 
 
 
 
 
 
Hedges
Accrued liabilities
 
$
(538
)
 
$
(184
)
Non-hedges
Accrued liabilities
 
(336
)
 
(84
)
Total derivative liabilities
 
 
$
(874
)
 
$
(268
)
 
 
 
 
 
 
Net derivative asset (liability)
 
 
$
(65
)
 
$
820

Cash Flow Hedges
The Company uses forward foreign exchange 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 Company expects to reclassify into earnings during the next 12 months a net loss from Accumulated other comprehensive loss of approximately $190.
The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income (Loss).
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income (Loss) and Accumulated other comprehensive loss is as follows:
  
Amount of
Gain (Loss)
Recognized in
Accumulated Other
Comprehensive Loss
(Effective Portion)
  
Quarter Ended
  
March 30,
2013
 
March 31,
2012
Foreign exchange contracts
$
(151
)
 
$
(793
)

 
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
 
 
March 30,
2013
 
March 31,
2012
Interest rate contracts
Interest expense, net
 
$

 
$
(1,114
)
Foreign exchange contracts
Cost of sales
 
(42
)
 
(33
)
Total
 
 
$
(42
)
 
$
(1,147
)

9

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

Derivative Contracts Not Designated As Hedges
The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income (Loss) is as follows:
 
Location of Loss
Recognized in Income on
Derivative
 
Amount of Gain (Loss)
Recognized in Income
 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Foreign exchange contracts
Selling, general and
administrative expenses
 
$
(1,786
)
 
$
(2,607
)
(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 March 30, 2013, the Company held certain financial assets and liabilities related to foreign exchange derivative contracts that are required to be measured at fair value on a recurring basis. 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. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a recurring basis.
There were no changes during the quarter ended March 30, 2013 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 March 30, 2013. As of March 30, 2013, 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.
 
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
March 30, 2013
 
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
$

 
$
809

 
$

Foreign exchange derivative contracts

 
(874
)
 

Total
$

 
$
(65
)
 
$

 

10

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Assets (Liabilities) at Fair Value as of
December 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
$

 
$
1,088

 
$

Foreign exchange derivative contracts

 
(268
)
 

Total
$

 
$
820

 
$


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 March 30, 2013 and December 29, 2012. The carrying amount of trade accounts receivable includes allowance for doubtful accounts, chargebacks and other deductions of $14,879 and $14,940 as of March 30, 2013 and December 29, 2012, respectively. The fair value of debt, which is classified as a Level 2 liability, was $1,703,397 and $1,609,114 as of March 30, 2013 and December 29, 2012 and had a carrying value of $1,594,747 and $1,491,336, 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, which is classified as a Level 2 liability, approximated fair value as of March 30, 2013 and December 29, 2012, primarily due to the short-term nature of these instruments.
(9)
Income Taxes
The Company’s effective income tax rate was 13% and 10% for the quarters ended March 30, 2013 and March 31, 2012, respectively. The higher effective income tax rate for the quarter ended March 30, 2013 compared to the quarter ended March 31, 2012 was primarily attributable to a higher proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries, partially offset by an income tax benefit of approximately $6,000 in the quarter ended March 30, 2013 related to the retroactive application of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013.
(10)
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 $33,000. The European imagewear business was previously reported within the International segment.
Domestic Imagewear
In 2012, the Company completed the discontinuation of its private-label and Outer Banks domestic imagewear operations that served wholesalers that sell to the screen-print industry. During 2012, the Company incurred pre-tax charges of approximately $63,000, 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 Activewear segment.
 
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:

11

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Quarter Ended
 
March 31,
2012
Net sales
$
35,201

Cost of sales
35,952

Gross profit loss
(751
)
Selling, general and administrative expenses
3,816

Operating loss
(4,567
)
Interest expense, net
3

Loss from discontinued operations before income tax benefit
(4,570
)
Income tax benefit
(2,011
)
Loss from discontinued operations, net of tax
$
(2,559
)
(11)
Business Segment Information
The Company’s operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. In the first quarter of 2013, the Company renamed the Outerwear segment to Activewear to reflect the trend of this category becoming a part of consumers’ active lifestyles and more aptly describe the competitive space of this business. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms.
The types of products and services from which each reportable segment derives its revenues are as follows:
Innerwear sells basic branded products that are replenishment in nature under the product categories of men’s underwear, kids’ underwear, socks and intimates, which includes bras, panties, hosiery and shapewear.
Activewear sells basic branded products that are primarily seasonal in nature under the product categories of branded printwear and retail 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 which sell products from the Company’s portfolio of leading brands. The Company’s Internet operations are supported by its catalogs.
International primarily relates to the Asia, Latin America, Canada and Australia geographic locations that sell products that span across the Innerwear and Activewear reportable segments.
 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses and amortization of 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 29, 2012. The Company decided in the first quarter of 2013 to revise the manner in which the Company allocates certain selling, general and administrative expenses. Certain prior-year segment operating profit disclosures have been revised to conform to the current-year presentation.
 
Quarter Ended
March 30,
2013
 
March 31,
2012
Net sales:
 
 
 
Innerwear
$
497,025

 
$
509,038

Activewear
267,186

 
272,564

Direct to Consumer
80,083

 
84,713

International
101,167

 
106,818

Total net sales
$
945,461

 
$
973,133



12

Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
Segment operating profit (loss):
 
 
 
Innerwear
$
89,742

 
$
53,208

Activewear
21,309

 
(18,678
)
Direct to Consumer
132

 
(761
)
International
2,282

 
4,899

Total segment operating profit
113,465

 
38,668

Items not included in segment operating profit:
 
 
 
General corporate expenses
(24,951
)
 
(24,596
)
Amortization of intangibles
(3,371
)
 
(3,427
)
Total operating profit
85,143

 
10,645

Other expenses
(464
)
 
(645
)
Interest expense, net
(25,623
)
 
(36,995
)
Income (loss) from continuing operations before income tax expense (benefit)
$
59,056

 
$
(26,995
)
(12)
Consolidating Financial Information
In accordance with the indenture governing the Company’s $250,000 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 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 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.
As previously reported, 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 $11,067 and $260,100, respectively, for the quarter ended March 31, 2012.
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.

13

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 (Loss)
Quarter Ended March 30, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
860,755

 
$
132,706

 
$
544,301

 
$
(592,301
)
 
$
945,461

Cost of sales
683,857

 
63,478

 
438,987

 
(568,160
)
 
618,162

Gross profit
176,898

 
69,228

 
105,314

 
(24,141
)
 
327,299

Selling, general and administrative
expenses
173,948

 
38,308

 
31,097

 
(1,197
)
 
242,156

Operating profit
2,950

 
30,920

 
74,217

 
(22,944
)
 
85,143

Equity in earnings of subsidiaries
75,860

 
49,819

 

 
(125,679
)
 

Other expenses
464

 

 

 

 
464

Interest expense, net
24,153

 

 
1,470

 

 
25,623

Income from continuing operations
before income tax expense
54,193

 
80,739

 
72,747

 
(148,623
)
 
59,056

Income tax expense
2,814

 
1,375

 
3,488

 

 
7,677

Income from continuing operations
51,379

 
79,364

 
69,259

 
(148,623
)
 
51,379

Income (loss) from discontinued
operations, net of tax

 

 

 

 

Net income
$
51,379

 
$
79,364

 
$
69,259

 
$
(148,623
)
 
$
51,379

Comprehensive income (loss)
$
52,735

 
$
79,364

 
$
(965
)
 
$
(78,399
)
 
$
52,735


 
Condensed Consolidating Statement of Comprehensive Income (Loss)
Quarter Ended March 31, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
872,060

 
$
140,138

 
$
527,700

 
$
(566,765
)
 
$
973,133

Cost of sales
742,381

 
64,696

 
461,507

 
(550,565
)
 
718,019

Gross profit
129,679

 
75,442

 
66,193

 
(16,200
)
 
255,114

Selling, general and administrative
expenses
176,623

 
35,163

 
33,885

 
(1,202
)
 
244,469

Operating profit (loss)
(46,944
)
 
40,279

 
32,308

 
(14,998
)
 
10,645

Equity in earnings of subsidiaries
43,628

 
21,137

 

 
(64,765
)
 

Other expenses
645

 

 

 

 
645

Interest expense, net
34,506

 
(4
)
 
2,455

 
38

 
36,995

Income (loss) from continuing
operations before income tax
expense (benefit)
(38,467
)
 
61,420

 
29,853

 
(79,801
)
 
(26,995
)
Income tax expense (benefit)
(12,563
)
 
6,754

 
3,085

 

 
(2,724
)
Income (loss) from continuing
operations
(25,904
)
 
54,666

 
26,768

 
(79,801
)
 
(24,271
)
Loss from discontinued operations,
net of tax
(926
)
 

 
(4,969
)
 
3,336

 
(2,559
)
Net income (loss)
$
(26,830
)
 
$
54,666

 
$
21,799

 
$
(76,465
)
 
$
(26,830
)
Comprehensive income (loss)
$
(21,906
)
 
$
54,666

 
$
23,751

 
$
(78,417
)
 
$
(21,906
)


 


14

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
March 30, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,278

 
$
1,751

 
$
62,516

 
$

 
$
68,545

Trade accounts receivable, net
109,543

 
31,105

 
410,110

 
(108
)
 
550,650

Inventories
965,027

 
112,999

 
434,404

 
(165,445
)
 
1,346,985

Deferred tax assets
164,532

 
1,015

 
2,546

 

 
168,093

Other current assets
37,588

 
10,010

 
15,899

 
(212
)
 
63,285

Total current assets
1,280,968

 
156,880

 
925,475

 
(165,765
)
 
2,197,558

Property, net
85,398

 
39,910

 
457,074

 

 
582,382

Trademarks and other identifiable
intangibles, net
9,659

 
91,936

 
15,496

 

 
117,091

Goodwill
232,882

 
124,247

 
76,192

 

 
433,321

Investments in subsidiaries
2,319,130

 
1,310,298

 

 
(3,629,428
)
 

Deferred tax assets
241,242

 
154,325

 
19,222

 

 
414,789

Receivables from related entities
4,122,980

 
3,299,118

 
1,891,946

 
(9,314,044
)
 

Other noncurrent assets
56,672

 
210

 
5,102

 

 
61,984

Total assets
$
8,348,931

 
$
5,176,924

 
$
3,390,507

 
$
(13,109,237
)
 
$
3,807,125

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
245,968

 
$
11,867

 
$
161,467

 
$

 
$
419,302

Accrued liabilities
174,531

 
31,211

 
60,930

 
14

 
266,686

Notes payable

 

 
29,827

 

 
29,827

Accounts Receivable Securitization
Facility

 

 
159,747

 

 
159,747

Total current liabilities
420,499

 
43,078

 
411,971

 
14

 
875,562

Long-term debt
1,435,000

 

 

 

 
1,435,000

Pension and postretirement benefits
411,347

 

 
12,220

 

 
423,567

Payables to related entities
5,033,249

 
2,654,884

 
1,373,003

 
(9,061,136
)
 

Other noncurrent liabilities
100,282

 
10,912

 
13,248

 

 
124,442

Total liabilities
7,400,377

 
2,708,874

 
1,810,442

 
(9,061,122
)
 
2,858,571

Stockholders’ equity
948,554

 
2,468,050

 
1,580,065

 
(4,048,115
)
 
948,554

Total liabilities and stockholders’
equity
$
8,348,931

 
$
5,176,924

 
$
3,390,507

 
$
(13,109,237
)
 
$
3,807,125



15

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 29, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,617

 
$
1,919

 
$
35,260

 
$

 
$
42,796

Trade accounts receivable, net
39,379

 
32,199

 
434,825

 
(125
)
 
506,278

Inventories
882,290

 
102,121

 
413,340

 
(144,615
)
 
1,253,136

Deferred tax assets
161,935

 
1,015

 
3,239

 

 
166,189

Other current assets
30,692

 
11,917

 
16,563

 
(46
)
 
59,126

Total current assets
1,119,913

 
149,171

 
903,227

 
(144,786
)
 
2,027,525

Property, net
90,820

 
41,326

 
464,012

 

 
596,158

Trademarks and other identifiable
intangibles, net
10,662

 
93,727

 
15,725

 

 
120,114

Goodwill
232,882

 
124,247

 
76,171

 

 
433,300

Investments in subsidiaries
2,220,706

 
1,284,516

 

 
(3,505,222
)
 

Deferred tax assets
224,559

 
154,325

 
18,645

 

 
397,529

Receivables from related entities
3,967,079

 
3,198,153

 
1,785,466

 
(8,950,698
)
 

Other noncurrent assets
51,686

 
271

 
5,117

 

 
57,074

Total assets
$
7,918,307

 
$
5,045,736

 
$
3,268,363

 
$
(12,600,706
)
 
$
3,631,700

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
217,645

 
$
8,209

 
$
177,790

 
$

 
$
403,644

Accrued liabilities
145,962

 
57,375

 
68,666

 
(31
)
 
271,972

Notes payable

 

 
26,216

 

 
26,216

Accounts Receivable Securitization
Facility

 

 
173,836

 

 
173,836

Total current liabilities
363,607

 
65,584

 
446,508

 
(31
)
 
875,668

Long-term debt
1,317,500

 

 

 

 
1,317,500

Pension and postretirement benefits
433,490

 

 
12,777

 

 
446,267

Payables to related entities
4,835,465

 
2,582,287

 
1,281,957

 
(8,699,709
)
 

Other noncurrent liabilities
81,379

 
10,977

 
13,043

 

 
105,399

Total liabilities
7,031,441

 
2,658,848

 
1,754,285

 
(8,699,740
)
 
2,744,834

Stockholders’ equity
886,866

 
2,386,888

 
1,514,078

 
(3,900,966
)
 
886,866

Total liabilities and stockholders’
equity
$
7,918,307

 
$
5,045,736

 
$
3,268,363

 
$
(12,600,706
)
 
$
3,631,700


16

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
Quarter Ended March 30, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash provided by (used in) operating
activities
$
(38,387
)
 
$
24,958

 
$
60,034

 
$
(125,676
)
 
$
(79,071
)
Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(117
)
 
(1,088
)
 
(5,325
)
 

 
(6,530
)
Net cash provided by (used in)
investing activities
(117
)
 
(1,088
)
 
(5,325
)
 

 
(6,530
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable

 

 
34,210

 

 
34,210

Repayments on notes payable

 

 
(30,571
)
 

 
(30,571
)
Borrowings on Accounts Receivable
Securitization Facility

 

 
51,382

 

 
51,382

Repayments on Accounts Receivable
Securitization Facility

 

 
(65,471
)
 

 
(65,471
)
Borrowings on Revolving Loan
Facility
953,000

 

 

 

 
953,000

Repayments on Revolving Loan
Facility
(835,500
)
 

 

 

 
(835,500
)
Proceeds from stock options exercised
4,406

 

 

 

 
4,406

Other
598

 

 
(247
)
 
(4
)
 
347

Net transactions with related entities
(85,339
)
 
(24,038
)
 
(16,303
)
 
125,680

 

Net cash provided by (used in)
financing activities
37,165

 
(24,038
)
 
(27,000
)
 
125,676

 
111,803

Effect of changes in foreign exchange
rates on cash

 

 
(453
)
 

 
(453
)
Increase (decrease) in cash and cash
equivalents
(1,339
)
 
(168
)
 
27,256

 

 
25,749

Cash and cash equivalents at beginning of
year
5,617

 
1,919

 
35,260

 

 
42,796

Cash and cash equivalents at end of period
$
4,278

 
$
1,751

 
$
62,516

 
$

 
$
68,545



17

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
Quarter Ended March 31, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash provided by (used in) operating
activities
$
12,631

 
$
(3,743
)
 
$
(38,267
)
 
$
(64,736
)
 
$
(94,115
)
Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(1,368
)
 
(2,181
)
 
(5,467
)
 

 
(9,016
)
Net cash used in investing activities
(1,368
)
 
(2,181
)
 
(5,467
)
 

 
(9,016
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable

 

 
20,671

 

 
20,671

Repayments on notes payable

 

 
(42,217
)
 

 
(42,217
)
Borrowings on Accounts Receivable
Securitization Facility

 

 
56,802

 

 
56,802

Repayments on Accounts Receivable
Securitization Facility

 

 
(60,365
)
 

 
(60,365
)
Borrowings on Revolving Loan
Facility
804,000

 

 

 

 
804,000

Repayments on Revolving Loan
Facility
(676,000
)
 

 

 

 
(676,000
)
Proceeds from stock options exercised
323

 

 

 

 
323

Other
(823
)
 

 
(247
)
 

 
(1,070
)
Net transactions with related entities
(137,964
)
 
4,978

 
68,250

 
64,736

 

Net cash provided by (used in)
financing activities
(10,464
)
 
4,978

 
42,894

 
64,736

 
102,144

Effect of changes in foreign exchange
rates on cash

 

 
242

 

 
242

Increase (decrease) in cash and cash
equivalents
799

 
(946
)
 
(598
)
 

 
(745
)
Cash and cash equivalents at beginning of
year
8,330

 
2,726

 
24,289

 

 
35,345

Cash and cash equivalents at end of period
$
9,129

 
$
1,780

 
$
23,691

 
$

 
$
34,600

(13)
Subsequent Events
As part of the Company’s cash deployment strategy, in April 2013 the Company’s Board of Directors authorized a regular quarterly dividend of $0.20 per share to be paid June 3, 2013 to stockholders of record at the close of business on May 20, 2013.

18

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” 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 29, 2012, which were included in our Annual Report on Form 10-K filed with the SEC. 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 29, 2012.
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, Sol y Oro and Rinbros. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, kids’ underwear, casualwear, activewear, socks and hosiery.
Our operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. In the first quarter of 2013 we renamed the Outerwear segment to Activewear to reflect the trend of this category becoming a part of consumers’ active lifestyles and more aptly describe the competitive space of this business. 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 the first quarter of 2013, we decided to revise the manner in which we allocate certain selling, general and administrative expenses. Certain prior-year segment operating profit disclosures have been revised to conform to the current-year presentation.
In May 2012, we sold our European imagewear business and completed the discontinuation of our 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 prior-year disclosures reflect these operations as discontinued operations.
1st Quarter Highlights
Key quarterly financial highlights include:
Total net sales in the first quarter of 2013 were $945 million, compared with $973 million in the same quarter of 2012, representing a 3% decrease.
Operating profit was $85 million in the first quarter of 2013, compared with $11 million in the same quarter of 2012. As a percentage of sales, operating profit was 9.0% in the first quarter of 2013 compared to 1.1% in the same quarter of 2012.
Diluted earnings per share was $0.51 in the first quarter of 2013, compared with diluted loss per share from continuing operations of $(0.25) in the same quarter of 2012.
Net sales for the first quarter were hampered by a sluggish retail environment as a result of delayed U.S. federal income tax refunds and inclement weather, which reduced store traffic and overall consumer spending. We continue to secure net space gains at retailers through our Innovate-to-Elevate platforms, which integrate the strengths of our iconic brands, low-cost supply chain and product innovation. The quarter’s operating profit margin expanded significantly, benefitting from an improved cotton-cost and product-pricing environment and our Innovate-to-Elevate margin-enhancement initiatives.
Outlook
For the full-year 2013, we expect net sales of approximately $4.6 billion, operating profit of $500 million to $550 million, diluted earnings per share of $3.25 to $3.40 and operating cash flows of $400 million to $500 million. We intend to increase our overall media investment in 2013 by $30 million to $40 million, of which more than two-thirds will occur in the second half.
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. In 2013, we expect to complete our planned debt reduction with the redemption of the remaining $250 million of 8% Senior

19

Table of Contents

Notes. We expect our cash deployment strategy in the future will include a mix of dividends, bolt-on acquisitions and share repurchases. For example, as part of our cash deployment strategy, in April 2013 our Board of Directors authorized a regular quarterly dividend of $0.20 per share to be paid June 3, 2013 to stockholders of record at the close of business on May 20, 2013. The quarterly dividend is the first for us since our spinoff as an independent public company in 2006.
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 shopping 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
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.
Condensed Consolidated Results of Operations — First Quarter Ended March 30, 2013 Compared with First Quarter Ended March 31, 2012
 
 
Quarter Ended
 
 
 
 
 
March 30,
2013
 
March 31,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
945,461

 
$
973,133

 
$
(27,672
)
 
(2.8
)%
Cost of sales
618,162

 
718,019

 
(99,857
)
 
(13.9
)
Gross profit
327,299

 
255,114

 
72,185

 
28.3

Selling, general and administrative expenses
242,156

 
244,469

 
(2,313
)
 
(0.9
)
Operating profit
85,143

 
10,645

 
74,498

 
699.8

Other expenses
464

 
645

 
(181
)
 
(28.1
)
Interest expense, net
25,623

 
36,995

 
(11,372
)
 
(30.7
)
Income (loss) from continuing operations before
 
 
 
 
 
 
 
income tax expense (benefit)
59,056

 
(26,995
)
 
86,051

 
NM

Income tax expense (benefit)
7,677

 
(2,724
)
 
10,401

 
NM

Income (loss) from continuing operations
51,379

 
(24,271
)
 
75,650

 
NM

Loss from discontinued operations, net of tax

 
(2,559
)
 
2,559

 
NM

Net income (loss)
$
51,379

 
$
(26,830
)
 
$
78,209

 
NM


20

Table of Contents

Net Sales
Net sales for the first quarter were hampered by a sluggish retail environment as a result of delayed U.S. federal income tax refunds and inclement weather, which reduced store traffic and overall consumer spending. We continue to secure net space gains at retailers through our Innovate-to-Elevate platforms, which integrate the strengths of our iconic brands, low-cost supply chain and product innovation. The lower net sales primarily resulted from the following:
Lower net sales in our branded printwear product category from the planned reduction of commodity-oriented branded printwear sales to the screen-print industry.
Lower net sales in our intimate apparel product category primarily due to lower net sales of panties and hosiery as a result of lower unit sales volume, partially offset by higher net sales of bras driven by space gains.
Lower net sales in the International segment primarily due to an unfavorable impact of foreign exchange rates.
Higher net sales in our retail activewear product category as a result of space gains and higher unit sales volume.
Gross Profit
As a percentage of net sales, our gross profit was 34.6% in the first quarter of 2013 compared to 26.2% in the first quarter of 2012. The higher gross margin resulted from an improved cotton-cost and product-pricing environment and efficiency savings from our supply chain, partially offset by lower sales volume.
Selling, General and Administrative Expenses
The lower selling, general and administrative expenses were primarily attributable to lower non-media related media, advertising and promotion (“MAP”) expenses and lower distribution expenses, partially offset by higher media related MAP expenses as we continue to restore spending to support our product innovations. As a percentage of net sales, our selling, general and administrative expenses were 25.6% in the first quarter of 2013 compared to 25.1% in the first quarter of 2012.
Other Highlights
Interest Expense - lower by $11 million in the first quarter of 2013 compared to the first quarter of 2012 primarily due to lower outstanding debt balances and lower weighted average interest rate. Our weighted average interest rate on our outstanding debt was 5.46% during the first quarter of 2013, compared to 5.75% in the first quarter of 2012.
Income Tax Expense – our effective income tax rate for continuing operations was 13% and 10% for the first quarter of 2013 and the first quarter of 2012, respectively. The higher effective income tax rate was primarily attributable to a higher proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries, partially offset by an income tax benefit of approximately $6 million in the quarter ended March 30, 2013 related to the retroactive application of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013.
Operating Results by Business Segment — First Quarter Ended March 30, 2013 Compared with First Quarter Ended March 31, 2012
 
 
Net Sales
 
Operating Profit (Loss)
 
Quarter Ended
 
Quarter Ended
 
March 30,
2013
 
March 31,
2012
 
March 30,
2013
 
March 31,
2012
 
(dollars in thousands)
Innerwear
$
497,025

 
$
509,038

 
$
89,742

 
$
53,208

Activewear
267,186

 
272,564

 
21,309

 
(18,678
)
Direct to Consumer
80,083

 
84,713

 
132

 
(761
)
International
101,167

 
106,818

 
2,282

 
4,899

Corporate

 

 
(28,322
)
 
(28,023
)
Total
$
945,461

 
$
973,133

 
$
85,143

 
$
10,645


21

Table of Contents

Innerwear
 
 
Quarter Ended
 
 
 
 
 
March 30,
2013
 
March 31,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
497,025

 
$
509,038

 
$
(12,013
)
 
(2.4
)%
Segment operating profit
89,742

 
53,208

 
36,534

 
68.7

The lower net sales in our Innerwear segment primarily resulted from the following:
Lower net sales in our intimate apparel product category (5%) primarily due to lower net sales of panties and hosiery, partially offset by higher net sales of bras driven by space gains. The lower net sales of panties and hosiery were primarily the result of lower unit sales volume.
Lower net sales in our kids’ underwear category (10%) primarily resulting from lower unit sales volume.
Men's underwear category sales were slightly higher due to space gains and higher unit sales volume offset by a decrease in product pricing.
Higher net sales in our socks category (5%), primarily due to space gains.
The higher Innerwear segment operating profit was primarily due to lower input costs, particularly cotton, and efficiency savings related to our supply chain optimization, partially offset by lower sales volume and lower media related MAP expenses.
Activewear
 
 
Quarter Ended
 
 
 
 
 
March 30,
2013
 
March 31,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
267,186

 
$
272,564

 
$
(5,378
)
 
(2.0
)%
Segment operating profit (loss)
21,309

 
(18,678
)
 
39,987

 
NM

Activewear net sales declined 2% due to a $15 million planned reduction of commodity-oriented branded printwear sales to the screen-print industry. Excluding the impact of the planned reduction, Activewear net sales increased 4%. Net sales were additionally impacted by the following:
Higher net sales in our retail activewear category (6%), primarily due to space gains and higher unit sales volume. Retail Hanes net sales increased by 24% and retail Champion and C9 by Champion increased by 2%.
Lower net sales in our Gear for Sports licensed apparel (3%), primarily due to lower unit sales volume.
The higher Activewear segment operating profit was primarily due to lower input costs, particularly cotton, and efficiency savings related to our supply chain optimization.
Direct to Consumer
 
Quarter Ended
 
 
 
March 30,
2013
 
March 31,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
80,083

 
$
84,713

 
$
(4,630
)
 
(5.5
)%
Segment operating profit (loss)
132

 
(761
)
 
893

 
NM

Due to the sluggish retail environment as a result of delayed U.S. federal income tax refunds and inclement weather, traffic into our outlet stores was impacted resulting in lower net sales in these stores. Comparable store sales were 6% lower in the first quarter of 2013 compared to 2012.
The higher Direct to Consumer segment operating profit was primarily due to lower product costs, partially offset by lower sales volume.

22

Table of Contents

International
 
Quarter Ended
 
 
 
March 30,
2013
 
March 31,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
<