HBI-2014.03.29-10Q
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 29, 2014
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 18, 2014, there were 99,576,802 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, Maidenform, JMS/Just My Size, L’eggs, Flexees, barely there, Wonderbra, Gear for Sports, Lilyette, Zorba, Rinbros and Sol y Oro 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 28, 2013, under the caption “Risk Factors,” as well in the “Investors” section of our corporate website, www.Hanes.com/investors.
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 28, 2013, 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 read our SEC filings over the Internet at the SEC’s website at www.sec.gov. To receive copies of public records not posted to the SEC’s web site at prescribed rates, you may complete an online form at www.sec.gov, send a fax to (202) 772-9337 or submit a written request to the SEC, Office of FOIA/PA Operations, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information.
We make available free of charge at www.Hanes.com/investors (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.Hanes.com/corporate, 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
 
March 29,
2014
 
March 30,
2013
Net sales
$
1,059,370

 
$
945,461

Cost of sales
702,593

 
618,162

Gross profit
356,777

 
327,299

Selling, general and administrative expenses
284,989

 
242,156

Operating profit
71,788

 
85,143

Other expenses
435

 
464

Interest expense, net
21,818

 
25,623

Income before income tax expense
49,535

 
59,056

Income tax expense
7,975

 
7,677

Net income
$
41,560

 
$
51,379

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.41

 
$
0.52

Diluted
$
0.41

 
$
0.51



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
 
March 29,
2014
 
March 30,
2013
Net income
$
41,560

 
$
51,379

Other comprehensive income (loss), net of tax of $807 and $1,496, respectively
(781
)
 
1,356

Comprehensive income
$
40,779

 
$
52,735



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 29,
2014
 
December 28,
2013
Assets
 
 
 
Cash and cash equivalents
$
151,136

 
$
115,863

Trade accounts receivable, net
611,600

 
578,558

Inventories
1,402,122

 
1,283,331

Deferred tax assets
197,647

 
197,260

Other current assets
78,446

 
68,654

Total current assets
2,440,951

 
2,243,666

 
 
 
 
Property, net
572,575

 
579,883

Trademarks and other identifiable intangibles, net
372,690

 
377,751

Goodwill
626,505

 
626,392

Deferred tax assets
207,758

 
207,426

Other noncurrent assets
53,440

 
54,930

Total assets
$
4,273,919

 
$
4,090,048

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
492,357

 
$
466,270

Accrued liabilities
333,639

 
315,026

Notes payable
38,488

 
36,192

Accounts Receivable Securitization Facility
164,879

 
181,790

Total current liabilities
1,029,363

 
999,278

Long-term debt
1,620,000

 
1,467,000

Pension and postretirement benefits
246,938

 
263,819

Other noncurrent liabilities
131,141

 
129,328

Total liabilities
3,027,442

 
2,859,425

 
 
 
 
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 — 99,576,802 and 99,455,478, respectively
996

 
995

Additional paid-in capital
290,661

 
285,227

Retained earnings
1,192,618

 
1,181,418

Accumulated other comprehensive loss
(237,798
)
 
(237,017
)
Total stockholders’ equity
1,246,477

 
1,230,623

Total liabilities and stockholders’ equity
$
4,273,919

 
$
4,090,048



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 29,
2014
 
March 30,
2013
Operating activities:
 
 
 
Net income
$
41,560

 
$
51,379

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of long-lived assets
23,059

 
23,221

Amortization of debt issuance costs
1,426

 
1,679

Stock compensation expense
3,322

 
2,510

Deferred taxes and other
(2,134
)
 
(1,551
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
(34,449
)
 
(44,661
)
Inventories
(120,142
)
 
(95,192
)
Other assets
(8,522
)
 
(12,545
)
Accounts payable
27,943

 
19,087

Accrued liabilities and other
5,701

 
(21,835
)
Net cash from operating activities
(62,236
)
 
(77,908
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(12,224
)
 
(9,592
)
Proceeds from sales of assets
55

 
3,062

Net cash from investing activities
(12,169
)
 
(6,530
)
 
 
 
 
Financing activities:
 
 
 
Borrowings on notes payable
33,494

 
34,210

Repayments on notes payable
(31,016
)
 
(30,571
)
Borrowings on Accounts Receivable Securitization Facility
48,172

 
51,382

Repayments on Accounts Receivable Securitization Facility
(65,083
)
 
(65,471
)
Borrowings on Revolving Loan Facility
1,118,000

 
953,000

Repayments on Revolving Loan Facility
(965,000
)
 
(835,500
)
Cash dividends paid
(29,850
)
 

Proceeds from stock options exercised

 
4,406

Taxes paid related to net shares settlement of equity awards
(4,631
)
 
(1,163
)
Excess tax benefit from stock-based compensation
5,602

 
328

Other
503

 
19

Net cash from financing activities
110,191

 
110,640

Effect of changes in foreign exchange rates on cash
(513
)
 
(453
)
Change in cash and cash equivalents
35,273

 
25,749

Cash and cash equivalents at beginning of year
115,863

 
42,796

Cash and cash equivalents at end of period
$
151,136

 
$
68,545



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.
Certain prior year amounts in the Condensed Consolidated Statement of Cash Flows, none of which are material, have been reclassified to conform with the current year presentation. These reclassifications within the statements, which relate to a change in the classification of taxes paid related to net shares settlement of equity awards, had no impact on the Company’s results of operations.
(2)
Recent Accounting Pronouncements
Disclosures About Offsetting Assets and Liabilities
In December 2011, the Financial Accounting Standards Board (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 were effective for the Company in the first quarter of 2014 with retrospective application required. 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.
Presentation of an Unrecognized Tax Benefit
In July 2013, the FASB issued new accounting rules related to standardizing the financial statement presentation of an unrecognized tax benefit, or a portion thereof, when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new rules are effective for the Company in the first quarter of 2015 and applied prospectively. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
Discontinued Operations
In April 2014, the FASB issued new accounting rules related to updating the criteria for reporting discontinued operations and enhancing related disclosures requirements. The new rules are effective for the Company in the first quarter of 2015. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
(3)
Maidenform Acquisition
In October 2013, the Company acquired 100% of the outstanding shares of Maidenform Brands, Inc. (“Maidenform”) at $23.50 per share for a total purchase price of $580,505. The acquisition was financed through a combination of cash on hand and short-term borrowing on the Company’s revolving credit facility.
Maidenform is a global intimate apparel brand with a portfolio of well-known brands including Maidenform, Flexees and Lilyette. The Company believes the acquisition will create growth and cost savings opportunities and increased scale to serve

6

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

retailers. Maidenform sourced all of its products from manufacturers, while the Company utilizes its low cost supply chain supplemented by third party manufacturing to maximize the value of Maidenform to retailers and consumers.
The allocation of purchase price is preliminary and subject to change. For the quarter ended March 29, 2014, the Company has not recorded any purchase price adjustments. The primary areas of the purchase price that are not yet finalized are related to certain income taxes and residual goodwill. Accordingly, adjustments will be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances which existed at the valuation date.
 
 
(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. 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 29,
2014
 
March 30,
2013
Basic weighted average shares outstanding
100,391

 
99,369

Effect of potentially dilutive securities:
 
 
 
Stock options
1,210

 
1,564

Restricted stock units
368

 
527

Diluted weighted average shares outstanding
101,969

 
101,460

For the quarters ended March 29, 2014 and March 30, 2013, there were no options or restricted stock units that were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
(5)
Inventories
Inventories consisted of the following: 
 
March 29,
2014
 
December 28,
2013
Raw materials
$
184,087

 
$
170,524

Work in process
146,390

 
142,713

Finished goods
1,071,645

 
970,094

 
$
1,402,122

 
$
1,283,331

(6)
Debt
Debt consisted of the following: 
 
Interest
Rate as of
March 29,
2014
 
Principal Amount
 
Maturity Date
 
March 29,
2014
 
December 28,
2013
 
Revolving Loan Facility
1.65%
 
$
620,000

 
$
467,000

 
July 2018
6.375% Senior Notes
6.38%
 
1,000,000

 
1,000,000

 
December 2020
Accounts Receivable Securitization Facility
1.21%
 
164,879

 
181,790

 
March 2015
 
 
 
1,784,879

 
1,648,790

 
 
Less current maturities
 
 
164,879

 
181,790

 
 
 
 
 
$
1,620,000

 
$
1,467,000

 
 
As of March 29, 2014, the Company had $470,853 of borrowing availability under the $1,100,000 revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility after taking into account outstanding borrowings and $9,147 of standby and trade letters of credit issued and outstanding under this facility.

7

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

In March 2014, 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, revised certain concentration limits and dilution triggers and extended the termination date to March 2015.
As of March 29, 2014, the Company was in compliance with all financial covenants under its credit facilities.
(7)
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss (“AOCI”) are as follows:
 
 
Cumulative Translation Adjustment
 
Foreign Exchange Contracts
 
Defined Benefit Plans
 
Income Taxes
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
Balance at December 28, 2013
 
$
(21,928
)
 
$
2,042

 
$
(357,503
)
 
$
140,372

 
$
(237,017
)
Amounts reclassified from accumulated other comprehensive loss
 

 
(675
)
 
2,601

 
(751
)
 
1,175

Current-period other comprehensive income (loss) activity
 
(2,042
)
 
142

 

 
(56
)
 
(1,956
)
Balance at March 29, 2014
 
$
(23,970
)
 
$
1,509

 
$
(354,902
)
 
$
139,565

 
$
(237,798
)
The Company had the following reclassifications out of Accumulated other comprehensive loss:
Component of AOCI
 
Location of Reclassification into Income
 
Amount of Reclassification from AOCI
 
Quarter Ended
 
March 29,
2014
 
March 30,
2013
Gain (loss) on foreign exchange contracts
 
Cost of sales
 
$
675

 
$
(42
)
Gain (loss) on foreign exchange contracts
 
Income tax
 
(269
)
 
17

Net of tax
 
 
 
406

 
(25
)
 
 
 
 
 
 
 
Amortization of deferred actuarial loss and prior service cost
 
Selling, general and administrative expenses
 
(2,601
)
 
(3,862
)
Amortization of deferred actuarial loss and prior service cost
 
Income tax
 
1,020

 
1,540

Net of tax
 
 
 
(1,581
)
 
(2,322
)
 
 
 
 
 
 
 
Total reclassifications
 
 
 
$
(1,175
)
 
$
(2,347
)
(8)
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 29, 2014, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company’s derivative portfolio was $68,985 and $10,346 respectively, primarily consisting of contracts hedging exposures to the Mexican peso, Canadian dollar, Australian dollar, Brazilian real and Japanese yen.

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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)

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 29,
2014
 
December 28,
2013
Hedges
Other current assets
 
$
472

 
$
32

Non-hedges
Other current assets
 
330

 
970

Total derivative assets
 
 
802

 
1,002

 
 
 
 
 
 
Hedges
Accrued liabilities
 
(556
)
 

Non-hedges
Accrued liabilities
 
(457
)
 
(28
)
Total derivative liabilities
 
 
(1,013
)
 
(28
)
 
 
 
 
 
 
Net derivative asset (liability)
 
 
$
(211
)
 
$
974

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 gain from Accumulated other comprehensive loss of approximately $695.
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.
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)
 
Quarter Ended
 
March 29,
2014
 
March 30,
2013
Foreign exchange contracts
$
142

 
$
(151
)
 
 
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 29,
2014
 
March 30,
2013
Foreign exchange contracts
Cost of sales
 
$
675

 
$
(42
)

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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)

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 is as follows:
 
Location of Loss
Recognized in Income on
Derivative
 
Amount of Gain (Loss)
Recognized in Income
 
Quarter Ended
 
March 29,
2014
 
March 30,
2013
Foreign exchange contracts
Selling, general and administrative expenses
 
$
(50
)
 
$
(1,786
)
(9)
Fair Value of Assets and Liabilities
As of March 29, 2014, 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 29, 2014 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 29, 2014. As of and during the quarter ended March 29, 2014, 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 29, 2014
 
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
$

 
$
802

 
$

Foreign exchange derivative contracts

 
(1,013
)
 

 

 
(211
)
 

 
 
 
 
 
 
Deferred compensation plan liability

 
(16,410
)
 

 
 
 
 
 
 
Total
$

 
$
(16,621
)
 
$

 

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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)

 
Assets (Liabilities) at Fair Value as of
December 28, 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
$

 
$
1,002

 
$

Foreign exchange derivative contracts

 
(28
)
 

 

 
974

 

 
 
 
 
 
 
Deferred compensation plan liability

 
(17,036
)
 

 
 
 
 
 
 
Total
$

 
$
(16,062
)
 
$

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 29, 2014 and December 28, 2013. The carrying amount of trade accounts receivable includes allowance for doubtful accounts, chargebacks and other deductions of $21,247 and $13,336 as of March 29, 2014 and December 28, 2013, respectively. The fair value of debt, which is classified as a Level 2 liability, was $1,880,529 and $1,744,115 as of March 29, 2014 and December 28, 2013 and had a carrying value of $1,784,879 and $1,648,790, 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 29, 2014 and December 28, 2013, primarily due to the short-term nature of these instruments.
(10)
Income Taxes
The Company’s effective income tax rate was 16% and 13% for the quarters ended March 29, 2014 and March 30, 2013, respectively. The higher effective income tax rate for the quarter ended March 29, 2014 compared to the quarter ended March 30, 2013 was primarily attributable to the 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. The benefit was partially offset by a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries, for the quarter ended March 29, 2014 as compared to the quarter ended March 30, 2013.
(11)
Dividends
As part of the Company’s cash deployment strategy, in April 2014 the Company’s Board of Directors authorized a regular quarterly dividend of $0.30 per share to be paid June 3, 2014 to stockholders of record at the close of business on May 13, 2014. In January 2014, the Board of Directors also declared a dividend of $0.30 per share on outstanding common stock which was paid on March 11, 2014.
Cash paid for dividends during the quarters ended March 29, 2014 and March 30, 2013 was $29,850 and $0, respectively.
(12)
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. 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, children’s underwear, socks, panties, hosiery and intimates, which includes bras and shapewear.

11

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

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 28, 2013.
 
Quarter Ended
March 29,
2014
 
March 30,
2013
Net sales:
 
 
 
Innerwear
$
571,154

 
$
497,025

Activewear
294,504

 
267,186

Direct to Consumer
83,714

 
80,083

International
109,998

 
101,167

Total net sales
$
1,059,370

 
$
945,461

 
 
Quarter Ended
 
March 29,
2014
 
March 30,
2013
Segment operating profit (loss):
 
 
 
Innerwear
$
95,755

 
$
89,742

Activewear
31,995

 
21,309

Direct to Consumer
(701
)
 
132

International
8,311

 
2,282

Total segment operating profit
135,360

 
113,465

Items not included in segment operating profit:
 
 
 
General corporate expenses
(17,039
)
 
(24,951
)
Acquisition, integration and other action related charges
(42,637
)
 

Amortization of intangibles
(3,896
)
 
(3,371
)
Total operating profit
71,788

 
85,143

Other expenses
(435
)
 
(464
)
Interest expense, net
(21,818
)
 
(25,623
)
Income before income tax expense
$
49,535

 
$
59,056

The results of Maidenform have been included in the Company’s consolidated financial statements since the date of acquisition and are reported as part of the Innerwear, Direct to Consumer and International segments based on geographic location and distribution channel. The Company incurred acquisition, integration and other action related charges of $42,637 in the first quarter of 2014, of which $14,827 is reported in the “Cost of sales” line and $27,810 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.

12

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

(13)
Consolidating Financial Information
In accordance with the indenture governing the Company’s $1,000,000 6.375% Senior Notes issued on November 9, 2010, as supplemented from time to time, certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the 6.375% Senior Notes. The following presents the condensed consolidating financial information separately for:
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
(ii) Guarantor subsidiaries, on a combined basis, as specified in the 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 the Company’s subsidiaries and (d) record consolidating entries; and
(v) The Company, on a consolidated basis.
The 6.375% Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is 100% owned, directly or indirectly, by Hanesbrands Inc. A guarantor subsidiary’s guarantee can be released in certain customary circumstances. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 
Condensed Consolidating Statement of Comprehensive Income
Quarter Ended March 29, 2014
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
892,330

 
$
219,950

 
$
560,186

 
$
(613,096
)
 
$
1,059,370

Cost of sales
721,146

 
133,481

 
430,550

 
(582,584
)
 
702,593

Gross profit
171,184

 
86,469

 
129,636

 
(30,512
)
 
356,777

Selling, general and administrative expenses
190,705

 
70,023

 
26,479

 
(2,218
)
 
284,989

Operating profit (loss)
(19,521
)
 
16,446

 
103,157

 
(28,294
)
 
71,788

Equity in earnings of subsidiaries
85,065

 
74,860

 

 
(159,925
)
 

Other expenses
435

 

 

 

 
435

Interest expense, net
17,884

 
1,986

 
2,056

 
(108
)
 
21,818

Income before income tax expense (benefit)
47,225

 
89,320

 
101,101

 
(188,111
)
 
49,535

Income tax expense (benefit)
5,665

 
(2,314
)
 
4,624

 

 
7,975

Net income
$
41,560

 
$
91,634

 
$
96,477

 
$
(188,111
)
 
$
41,560

Comprehensive income
$
40,779

 
$
91,634

 
$
94,212

 
$
(185,846
)
 
$
40,779

 

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
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 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

Net income
$
51,379

 
$
79,364

 
$
69,259

 
$
(148,623
)
 
$
51,379

Comprehensive income (loss)
$
52,735

 
$
79,364

 
$
(965
)
 
$
(78,399
)
 
$
52,735

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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 29, 2014
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,241

 
$
6,623

 
$
134,272

 
$

 
$
151,136

Trade accounts receivable, net
75,893

 
70,487

 
466,892

 
(1,672
)
 
611,600

Inventories
1,033,902

 
110,300

 
434,207

 
(176,287
)
 
1,402,122

Deferred tax assets
178,944

 
15,373

 
3,330

 

 
197,647

Other current assets
51,084

 
9,660

 
17,702

 

 
78,446

Total current assets
1,350,064

 
212,443

 
1,056,403

 
(177,959
)
 
2,440,951

Property, net
82,663

 
48,437

 
441,475

 

 
572,575

Trademarks and other identifiable intangibles, net
7,422

 
86,067

 
279,201

 

 
372,690

Goodwill
232,882

 
124,246

 
269,377

 

 
626,505

Investments in subsidiaries
2,984,119

 
1,608,101

 

 
(4,592,220
)
 

Deferred tax assets
139,620

 
53,317

 
14,821

 

 
207,758

Receivables from related entities
4,690,503

 
4,074,578

 
1,922,124

 
(10,687,205
)
 

Other noncurrent assets
51,265

 
345

 
1,830

 

 
53,440

Total assets
$
9,538,538

 
$
6,207,534

 
$
3,985,231

 
$
(15,457,384
)
 
$
4,273,919

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
302,885

 
$
25,821

 
$
163,651

 
$

 
$
492,357

Accrued liabilities
224,707

 
37,518

 
71,077

 
337

 
333,639

Notes payable

 

 
38,488

 

 
38,488

Accounts Receivable Securitization Facility

 

 
164,879

 

 
164,879

Total current liabilities
527,592

 
63,339

 
438,095

 
337

 
1,029,363

Long-term debt
1,620,000

 

 

 

 
1,620,000

Pension and postretirement benefits
238,542

 

 
8,396

 

 
246,938

Payables to related entities
5,798,952

 
3,042,922

 
1,566,775

 
(10,408,649
)
 

Other noncurrent liabilities
106,975

 
12,943

 
11,223

 

 
131,141

Total liabilities
8,292,061

 
3,119,204

 
2,024,489

 
(10,408,312
)
 
3,027,442

Stockholders’ equity
1,246,477

 
3,088,330

 
1,960,742

 
(5,049,072
)
 
1,246,477

Total liabilities and stockholders’ equity
$
9,538,538

 
$
6,207,534

 
$
3,985,231

 
$
(15,457,384
)
 
$
4,273,919



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 28, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,695

 
$
7,811

 
$
102,357

 
$

 
$
115,863

Trade accounts receivable, net
44,366

 
69,944

 
465,662

 
(1,414
)
 
578,558

Inventories
825,300

 
208,250

 
405,756

 
(155,975
)
 
1,283,331

Deferred tax assets
178,732

 
15,373

 
3,155

 

 
197,260

Other current assets
37,429

 
14,354

 
16,871

 

 
68,654

Total current assets
1,091,522

 
315,732

 
993,801

 
(157,389
)
 
2,243,666

Property, net
82,786

 
50,193

 
446,904

 

 
579,883

Trademarks and other identifiable intangibles, net
8,385

 
88,716

 
280,650

 

 
377,751

Goodwill
232,882

 
124,247

 
269,263

 

 
626,392

Investments in subsidiaries
2,881,739

 
1,535,404

 

 
(4,417,143
)
 

Deferred tax assets
139,102

 
53,317

 
15,007

 

 
207,426

Receivables from related entities
4,706,001

 
4,065,909

 
1,987,603

 
(10,759,513
)
 

Other noncurrent assets
52,712

 
412

 
1,806

 

 
54,930

Total assets
$
9,195,129

 
$
6,233,930

 
$
3,995,034

 
$
(15,334,045
)
 
$
4,090,048

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
253,494

 
$
61,964

 
$
150,812

 
$

 
$
466,270

Accrued liabilities
184,653

 
63,906

 
66,497

 
(30
)
 
315,026

Notes payable

 

 
36,192

 

 
36,192

Accounts Receivable Securitization Facility

 

 
181,790

 

 
181,790

Total current liabilities
438,147

 
125,870

 
435,291

 
(30
)
 
999,278

Long-term debt
1,467,000

 

 

 

 
1,467,000

Pension and postretirement benefits
253,299

 
2,159

 
8,361

 

 
263,819

Payables to related entities
5,699,670

 
3,114,701

 
1,673,828

 
(10,488,199
)
 

Other noncurrent liabilities
106,390

 
11,318

 
11,620

 

 
129,328

Total liabilities
7,964,506

 
3,254,048

 
2,129,100

 
(10,488,229
)
 
2,859,425

Stockholders’ equity
1,230,623

 
2,979,882

 
1,865,934

 
(4,845,816
)
 
1,230,623

Total liabilities and stockholders’ equity
$
9,195,129

 
$
6,233,930

 
$
3,995,034

 
$
(15,334,045
)
 
$
4,090,048


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 29, 2014
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash from operating activities
$
(16,895
)
 
$
54,176

 
$
60,424

 
$
(159,941
)
 
$
(62,236
)
Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(4,164
)
 
(1,454
)
 
(6,606
)
 

 
(12,224
)
Proceeds from sales of assets

 

 
55

 

 
55

Net cash from investing activities
(4,164
)
 
(1,454
)
 
(6,551
)
 

 
(12,169
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable

 

 
33,494

 

 
33,494

Repayments on notes payable

 

 
(31,016
)
 

 
(31,016
)
Borrowings on Accounts Receivable Securitization Facility

 

 
48,172

 

 
48,172

Repayments on Accounts Receivable Securitization Facility

 

 
(65,083
)
 

 
(65,083
)
Borrowings on Revolving Loan Facility
1,118,000

 

 

 

 
1,118,000

Repayments on Revolving Loan Facility
(965,000
)
 

 

 

 
(965,000
)
Cash dividends paid
(29,850
)
 

 

 

 
(29,850
)
Taxes paid related to net shares settlement of equity awards
(4,631
)
 

 

 

 
(4,631
)
Excess tax benefit from stock-based compensation
5,602

 

 

 

 
5,602

Other
828

 

 
(325
)
 

 
503

Net transactions with related entities
(99,344
)
 
(53,910
)
 
(6,687
)
 
159,941

 

Net cash from financing activities
25,605

 
(53,910
)
 
(21,445
)
 
159,941

 
110,191

Effect of changes in foreign exchange rates on cash

 

 
(513
)
 

 
(513
)
Change in cash and cash equivalents
4,546

 
(1,188
)
 
31,915

 

 
35,273

Cash and cash equivalents at beginning of year
5,695

 
7,811

 
102,357

 

 
115,863

Cash and cash equivalents at end of period
$
10,241

 
$
6,623

 
$
134,272

 
$

 
$
151,136



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 30, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash from operating activities
$
(37,224
)
 
$
24,958

 
$
60,034

 
$
(125,676
)
 
$
(77,908
)
Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(3,113
)
 
(1,107
)
 
(5,372
)
 

 
(9,592
)
Proceeds from sales of assets
2,996

 
19

 
47

 

 
3,062

Net cash from 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

Taxes paid related to net shares settlement of equity awards
(1,163
)
 

 

 

 
(1,163
)
Excess tax benefit from stock-based compensation
328

 

 

 

 
328

Other
270

 

 
(247
)
 
(4
)
 
19

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

 

Net cash from financing activities
36,002

 
(24,038
)
 
(27,000
)
 
125,676

 
110,640

Effect of changes in foreign exchange rates on cash

 

 
(453
)
 

 
(453
)
Change 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


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 28, 2013, 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 28, 2013.
Overview
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bali, Playtex, Maidenform, JMS/Just My Size, L’eggs, Flexees, barely there, Wonderbra, Gear for Sports, Lilyette, Zorba, Rinbros and Sol y Oro. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, children’s underwear, 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. 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.
Highlights from the First Quarter Ended March 29, 2014
Key financial highlights during the quarter are as follows:
Total net sales in the first quarter of 2014 were $1.1 billion, compared with $945 million in the same quarter of 2013, representing a 12% increase.
Operating profit was $72 million in the first quarter of 2014, compared with $85 million in the same quarter of 2013. As a percentage of sales, operating profit was 6.8% in the first quarter of 2014 compared to 9.0% in the same quarter of 2013.
Diluted earnings per share was $0.41 in the first quarter of 2014, compared with diluted earnings per share of $0.51 in the same quarter of 2013.
Outlook
For the full year 2014, we expect net sales of slightly less than $5.1 billion, including approximately $500 million contributed by Maidenform.
Interest and other related expense is expected to be approximately $85 million for the full year, including approximately $10 million from higher debt balances associated with the Maidenform acquisition.
We expect our full year tax rate to be in the low teens with slightly higher rates in the first half of the year.
We expect cash flow from operations to be $475 million to $575 million for the full year. 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. 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 January 2014 our Board of Directors authorized a regular quarterly dividend of $0.30 per share which was paid in March 2014. Additionally, the Board of Directors authorized another regular quarterly dividend of $0.30 per share in April 2014, to be paid in June 2014.
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 the back-to-school 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

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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, weather, 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 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 29, 2014 Compared with First Quarter Ended March 30, 2013
 
 
Quarter Ended
 
 
 
 
 
March 29,
2014
 
March 30,
2013
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,059,370

 
$
945,461

 
$
113,909

 
12.0
 %
Cost of sales
702,593

 
618,162

 
84,431

 
13.7

Gross profit
356,777

 
327,299

 
29,478

 
9.0

Selling, general and administrative expenses
284,989

 
242,156

 
42,833

 
17.7

Operating profit
71,788

 
85,143

 
(13,355
)
 
(15.7
)
Other expenses
435

 
464

 
(29
)
 
(6.3
)
Interest expense, net
21,818

 
25,623

 
(3,805
)
 
(14.8
)
Income before income tax expense
49,535

 
59,056

 
(9,521
)
 
(16.1
)
Income tax expense
7,975

 
7,677

 
298

 
3.9

Net income
$
41,560

 
$
51,379

 
$
(9,819
)
 
(19.1
)%
Net Sales
Net sales increased 12% during the first quarter primarily due to the acquisition of Maidenform in October 2013, which added an incremental $125 million of net sales in the first quarter of 2014. Net sales were higher (10%) in our Activewear segment as we continue to secure net space gains at retailers through our Innovate-to-Elevate strategy, which helps drive core-product and new-product success. Offsetting the higher net sales were unfavorable foreign currency exchange rates and a soft retail environment disrupted frequently by extreme weather, particularly within our intimate apparel category. Excluding the impact of unfavorable foreign currency exchange rates, consolidated net sales and International segment net sales increased 13% and 19%, respectively.
Gross Profit
Our gross profit was higher for the first quarter of 2014 as compared to the same quarter of 2013 as we improved our gross profit across all segments. The increase in gross profit was attributable to our Innovate-to-Elevate strategy, which combines our brand power, our innovation platforms and our low cost supply chain to drive margin expansion by increasing our price per unit and reducing our cost per unit through supply chain efficiencies. Included with gross profit in the first quarter of 2014 are charges of $15 million related to the Maidenform acquisition and integration and other action related costs related primarily to supply chain optimization and regional alignment of commercial operations.

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Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses was 26.9% in the first quarter of 2014 compared to 25.6% in the first quarter of 2013. The higher selling, general and administrative expenses were attributable to charges of $28 million related to Maidenform acquisition, integration and other action related costs related primarily to supply chain optimization and regional alignment of commercial operations. Additionally, we incurred higher distribution costs due to increased sales volume and higher planned media spending in the first quarter of 2014 compared to the first quarter of 2013.
Other Highlights
Interest Expense - Interest expense was lower by $4 million in the first quarter of 2014 compared to the first quarter of 2013 primarily due to the redemption of the 8% Senior Notes in the fourth quarter of 2013 and a lower weighted average interest rate. Our weighted average interest rate on our outstanding debt was 4.12% during the first quarter of 2014, compared to 5.46% in the first quarter of 2013.
Income Tax Expense – Our effective income tax rate was 16% and 13% for the first quarter of 2014 and the first quarter of 2013, respectively. The higher effective income tax rate was primarily attributable to the benefit of approximately $6 million in the first quarter of 2013 related to the retroactive application of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013. The higher effective income tax rate was partially offset by a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries, for the first quarter of 2014 as compared to the first quarter of 2013.
Operating Results by Business Segment — First Quarter Ended March 29, 2014 Compared with First Quarter Ended March 30, 2013
 
 
Net Sales
 
Operating Profit (Loss)
 
Quarter Ended
 
Quarter Ended
 
March 29,
2014
 
March 30,
2013
 
March 29,
2014
 
March 30,
2013
 
(dollars in thousands)
Innerwear
$
571,154

 
$
497,025

 
$
95,755

 
$
89,742

Activewear
294,504

 
267,186

 
31,995

 
21,309

Direct to Consumer
83,714

 
80,083

 
(701
)
 
132

International
109,998

 
101,167

 
8,311

 
2,282

Corporate

 

 
(63,572
)
 
(28,322
)
Total
$
1,059,370

 
$
945,461

 
$
71,788

 
$
85,143

Innerwear 
 
Quarter Ended
 
 
 
 
 
March 29,
2014
 
March 30,
2013
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
571,154

 
$
497,025

 
$
74,129

 
14.9
%
Segment operating profit
95,755

 
89,742

 
6,013

 
6.7

Innerwear net sales were $74 million higher in the first quarter of 2014 compared to the same quarter in 2013. The higher net sales were driven primarily by incremental sales of Maidenform products and higher sales in our basics category due to higher unit sales volume for our socks and panties categories, partially offset by a soft retail environment for our intimate apparel category, resulting in lower unit sales volume.
Our Innovate-to-Elevate strategy continues to positively impact our Innerwear segment margins as we are able to increase our price per unit with product innovations and reduce our cost per unit through supply chain efficiencies. Offsetting the improvement was lower sales volume within our intimate apparel category and higher trade spending.

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Activewear 
 
Quarter Ended
 
 
 
 
 
March 29,
2014
 
March 30,
2013
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
294,504

 
$
267,186

 
$
27,318

 
10.2
%
Segment operating profit
31,995

 
21,309

 
10,686

 
50.1

The higher net sales in our Activewear segment is primarily attributable to net space gains and higher unit sales volume for Champion products in our retail channel. Champion benefited from innovative platforms such as Vapor performance products and Flexible Fit technology as it increased retail space. Additionally, we had higher net sales of our branded printwear category and Gear for Sports licensed apparel due to favorable product sales mix.
Activewear segment operating margin improved due to higher sales volume and a favorable product sales mix within our Champion brand. Our Innovate-to-Elevate strategy continues to positively impact our Activewear segment margins as we are able to increase our price per unit with product innovations and reduce our cost per unit through supply chain efficiencies. The margin improvement was partially offset by higher planned media spending in the first quarter of 2014 compared to the first quarter of 2013.
Direct to Consumer
 
Quarter Ended
 
 
 
 
 
March 29,
2014
 
March 30,
2013
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
83,714

 
$
80,083

 
$
3,631

 
4.5
%
Segment operating profit (loss)
(701
)
 
132

 
(833
)
 
 NM

Direct to Consumer segment net sales were higher due to the addition of Maidenform sales. Due to unusually high weather-related temporary store closures, comparable store sales were 4% lower in the first quarter of 2014 compared to the same period of 2013.
Direct to Consumer segment operating margin declined 100 basis points due to lower sales volume resulting primarily from the weather-related temporary store closures.
International
 
Quarter Ended
 
 
 
 
 
March 29,
2014
 
March 30,
2013
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
109,998

 
$
101,167

 
$
8,831

 
8.7
%
Segment operating profit
8,311

 
2,282

 
6,029

 
264.2

Sales in the International segment were higher primarily due to the addition of Maidenform sales and higher net sales in Canada as a result of space gains, partially offset by an unfavorable impact of foreign exchange rates. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 19% higher.
International segment operating margin increased 530 basis points to 7.6% primarily due to higher sales volume, partially offset by foreign currency exchange rates.
Corporate
Corporate expenses were higher in the first quarter of 2014 compared to the first quarter of 2013 primarily due to acquisition, integration and other action related charges of $43 million.
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated by operations and availability under the $1.1 billion revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility (the “Senior Secured Credit Facility”), the

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accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) and our international loan facilities.
At March 29, 2014, we had $471 million of borrowing availability under our Revolving Loan Facility (after taking into account outstanding letters of credit), $89 million of borrowing availability under our international loan facilities, $151 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.
We typically use cash during the first half of the year and generate most of our cash flow in the second half of the year. We expect our cash deployment strategy in the future will include a mix of dividends, bolt-on acquisitions and share repurchases.
Dividends
As part of our cash deployment strategy, in January 2014 our Board of Directors authorized a regular quarterly dividend of $0.30 per share which was paid in March 2014. In April 2014, our Board of Directors authorized a regular quarterly dividend of $0.30 per share to be paid June 3, 2014 to stockholders of record at the close of business on May 13, 2014.
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, repurchases of our stock and regular quarterly dividend payments. We believe we have sufficient cash and available borrowings for our foreseeable 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 28, 2013.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the quarters ended March 29, 2014 and March 30, 2013 was derived from our condensed consolidated financial statements.
 
Quarter Ended
 
March 29,
2014