HBI-2015.04.04-10Q
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 April 4, 2015
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 24, 2015, there were 401,666,283 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.



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 January 3, 2015, under the caption “Risk Factors,” as well as on 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 January 3, 2015, 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
 
April 4,
2015
 
March 29,
2014
Net sales
$
1,208,921

 
$
1,059,370

Cost of sales
762,690

 
702,593

Gross profit
446,231

 
356,777

Selling, general and administrative expenses
356,300

 
284,989

Operating profit
89,931

 
71,788

Other expenses
382

 
435

Interest expense, net
26,887

 
21,818

Income before income tax expense
62,662

 
49,535

Income tax expense
10,026

 
7,975

Net income
$
52,636

 
$
41,560

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.13

 
$
0.10

Diluted
$
0.13

 
$
0.10



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
 
April 4,
2015
 
March 29,
2014
Net income
$
52,636

 
$
41,560

Other comprehensive income (loss), net of tax of ($3,840) and $807, respectively
4,843

 
(781
)
Comprehensive income
$
57,479

 
$
40,779



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)

 
April 4,
2015
 
January 3,
2015
Assets
 
 
 
Cash and cash equivalents
$
277,067

 
$
239,855

Trade accounts receivable, net
713,113

 
672,048

Inventories
1,692,712

 
1,537,200

Deferred tax assets
211,477

 
215,065

Other current assets
126,319

 
101,064

Total current assets
3,020,688

 
2,765,232

 
 
 
 
Property, net
662,809

 
674,379

Trademarks and other identifiable intangibles, net
650,614

 
691,201

Goodwill
712,410

 
723,120

Deferred tax assets
293,116

 
294,347

Other noncurrent assets
68,289

 
73,502

Total assets
$
5,407,926

 
$
5,221,781

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
613,261

 
$
621,220

Accrued liabilities
459,670

 
495,627

Notes payable
116,742

 
144,438

Accounts Receivable Securitization Facility
199,609

 
210,963

Current portion of long-term debt
11,464

 
14,354

Total current liabilities
1,400,746

 
1,486,602

Long-term debt
1,973,876

 
1,613,997

Pension and postretirement benefits
365,503

 
472,003

Other noncurrent liabilities
264,572

 
262,407

Total liabilities
4,004,697

 
3,835,009

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (50,000,000 authorized shares; $.01 par value)
 
 
 
Issued and outstanding — None

 

Common stock (2,000,000,000 authorized shares; $.01 par value)
 
 
 
Issued and outstanding — 401,444,293 and 400,789,120, respectively
4,014

 
4,008

Additional paid-in capital
290,651

 
290,926

Retained earnings
1,476,310

 
1,464,427

Accumulated other comprehensive loss
(367,746
)
 
(372,589
)
Total stockholders’ equity
1,403,229

 
1,386,772

Total liabilities and stockholders’ equity
$
5,407,926

 
$
5,221,781



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
 
April 4,
2015
 
March 29,
2014
Operating activities:
 
 
 
Net income
$
52,636

 
$
41,560

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of long-lived assets
24,573

 
23,059

Amortization of debt issuance costs
1,690

 
1,426

Stock compensation expense
4,152

 
3,322

Deferred taxes and other
1,446

 
(2,134
)
Changes in assets and liabilities, net of acquisition of business:
 
 
 
Accounts receivable
(58,024
)
 
(34,449
)
Inventories
(180,352
)
 
(120,142
)
Other assets
(6,166
)
 
(8,522
)
Accounts payable
10,534

 
27,943

Accrued liabilities and other
(109,834
)
 
5,701

Net cash from operating activities
(259,345
)
 
(62,236
)
 
 
 
 
Investing activities:
 
 
 
Purchases of property, plant and equipment
(36,368
)
 
(12,224
)
Proceeds from sales of assets
4,735

 
55

Net cash from investing activities
(31,633
)
 
(12,169
)
 
 
 
 
Financing activities:
 
 
 
Borrowings on notes payable
43,828

 
33,494

Repayments on notes payable
(61,137
)
 
(31,016
)
Borrowings on Accounts Receivable Securitization Facility
79,039

 
48,172

Repayments on Accounts Receivable Securitization Facility
(90,393
)
 
(65,083
)
Borrowings on Revolving Loan Facility
1,327,500

 
1,118,000

Repayments on Revolving Loan Facility
(921,000
)
 
(965,000
)
Repayments on Euro Term Loan Facility
(974
)
 

Cash dividends paid
(40,083
)
 
(29,850
)
Taxes paid related to net shares settlement of equity awards
(17,982
)
 
(4,631
)
Excess tax benefit from stock-based compensation
12,833

 
5,602

Other
2,123

 
503

Net cash from financing activities
333,754

 
110,191

Effect of changes in foreign exchange rates on cash
(5,564
)
 
(513
)
Change in cash and cash equivalents
37,212

 
35,273

Cash and cash equivalents at beginning of year
239,855

 
115,863

Cash and cash equivalents at end of period
$
277,067

 
$
151,136



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. A subsidiary of the Company closes one week earlier than the Company’s consolidated quarter end. The difference in reporting one week of financial information for this subsidiary did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Certain prior year amounts in the notes to condensed consolidated financial statements, none of which are material, have been reclassified to conform with the current year presentation. These reclassifications had no impact on the Company’s results of operations.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
(2)
Recent Accounting Pronouncements
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 were effective for the Company in the first quarter of 2015. The new accounting rules did not have an impact on the Company’s financial condition, results of operations or cash flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued new accounting rules related to revenue recognition for contracts with customers requiring revenue recognition based on the transfer of promised goods or services to customers in an amount that reflects consideration the Company expects to be entitled to in exchange for goods or services. The new rules supercede prior revenue recognition requirements and most industry-specific accounting guidance. The new rules will be effective for the Company in the first quarter of 2017 with retrospective application required. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations or cash flows.
Extraordinary and Unusual Items
In January 2015, the FASB issued new accounting rules that remove the concept of extraordinary items from U.S. GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The new rules will be effective for the Company in the first quarter of 2016. 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.
Debt Issuance Costs
In April 2015, the FASB issued new accounting rules, which require debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new rules will be effective for the Company in the first quarter of 2016. 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.

6

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


(3)
Acquisition
In August 2014, MFB International Holdings S.à r.l. (“MF Lux”), a wholly owned subsidiary of the Company, acquired DBA Lux Holding S.A. (“Innerwear Europe”) from SLB Brands Holdings, Ltd and certain individual Innerwear Europe shareholders in an all-cash transaction equal to €400,000 enterprise value less net debt and working capital adjustments as defined in the purchase agreement. Total purchase price was €297,031 (approximately $391,861 based on acquisition date exchange rates). The acquisition was financed through a combination of cash on hand and third party-borrowings.
Innerwear Europe is a leading marketer of intimate apparel, hosiery and underwear in Europe with a portfolio of strong brands including DIM, Nur Die/Nur Der and Lovable. The Company believes the acquisition will create growth and cost savings opportunities and increased scale to serve retailers. Innerwear Europe utilizes a mix of self-owned manufacturing and third-party manufacturers. Factors that contribute to the amount of goodwill recognized for the acquisition include the value of the existing work force and cost savings by utilizing the Company’s low-cost supply chain and expected synergies with existing Company functions. Goodwill associated with the acquisition is not tax deductible.
The allocation of purchase price is preliminary and subject to change. For the quarter ended April 4, 2015, 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, working capital adjustments as defined in the purchase agreement 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 that 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. On March 3, 2015, the Company implemented a four-for-one stock split on the Company’s common stock in the form of a 300% stock dividend. All references to the number of shares outstanding, per share amounts and share options data of the Company’s common shares have been restated to reflect the effect of the split for all periods presented.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Basic weighted average shares outstanding
403,578

 
401,564

Effect of potentially dilutive securities:
 
 
 
Stock options
3,166

 
4,840

Restricted stock units
1,498

 
1,472

Employee stock purchase plan and other
18

 

Diluted weighted average shares outstanding
408,260

 
407,876

For the quarters ended April 4, 2015 and March 29, 2014, there were no options or restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
(5)
Inventories
Inventories consisted of the following: 
 
April 4,
2015
 
January 3,
2015
Raw materials
$
172,480

 
$
155,073

Work in process
176,020

 
164,686

Finished goods
1,344,212

 
1,217,441

 
$
1,692,712

 
$
1,537,200


7

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

(6)
Debt
Debt consisted of the following: 
 
Interest
Rate as of
April 4,
2015
 
Principal Amount
 
Maturity Date
 
April 4,
2015
 
January 3,
2015
 
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Loan Facility
1.83%
 
$
583,000

 
$
176,500

 
July 2018
Euro Term Loan
3.50%
 
387,770

 
436,953

 
August 2021
6.375% Senior Notes
6.38%
 
1,000,000

 
1,000,000

 
December 2020
Accounts Receivable Securitization Facility
1.07%
 
199,609

 
210,963

 
March 2016
Other International Debt
Various
 
14,570

 
14,898

 
Various
 
 
 
2,184,949

 
1,839,314

 
 
Less current maturities
 
 
211,073

 
225,317

 
 
 
 
 
$
1,973,876

 
$
1,613,997

 
 
As of April 4, 2015, the Company had $500,151 of borrowing availability under the $1,100,000 revolving credit facility (the “Revolving Loan Facility”) under its senior secured credit facility (the “Senior Secured Credit Facility”) after taking into account outstanding borrowings and $16,849 of standby and trade letters of credit issued and outstanding under this facility.
The Other International Debt outstanding as of April 4, 2015 consists of mortgage loans and term loans collateralized by fixed assets. These loans have maturity dates ranging from May 2015 to May 2018, and bear interest primarily based on EURIBOR rates ranging from 1.22% to 6.25% as of April 4, 2015.
In March 2015, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment primarily extended the termination date to March 2016.
As of April 4, 2015, 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 January 3, 2015
$
(34,099
)
 
$
4,834

 
$
(564,831
)
 
$
221,507

 
$
(372,589
)
Amounts reclassified from accumulated other comprehensive loss

 
(835
)
 
2,770

 
(693
)
 
1,242

Current-period other comprehensive income (loss) activity
(1,255
)
 
11,185

 
(3,182
)
 
(3,147
)
 
3,601

Balance at April 4, 2015
$
(35,354
)
 
$
15,184

 
$
(565,243
)
 
$
217,667

 
$
(367,746
)

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

The Company had the following reclassifications out of AOCI:
Component of AOCI
 
Location of Reclassification into Income
 
Amount of Reclassification
from AOCI
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Gain on foreign exchange contracts
 
Cost of sales
 
$
835

 
$
675


 
Income tax
 
(507
)
 
(269
)

 
Net of tax
 
328

 
406

 
 
 
 
 
 
 
Amortization of deferred actuarial loss and prior service cost
 
Selling, general and administrative expenses
 
(2,770
)
 
(2,601
)

 
Income tax
 
1,200

 
1,020


 
Net of tax
 
(1,570
)
 
(1,581
)
 
 
 
 
 
 
 
Total reclassifications
 
 
 
$
(1,242
)
 
$
(1,175
)
(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 April 4, 2015, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company’s derivative portfolio was $205,218 and $9,608, respectively, primarily consisting of contracts hedging exposures to the Euro, Canadian dollar, Brazilian real and Australian dollar.
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
 
April 4,
2015
 
January 3,
2015
Hedges
Other current assets
 
$
10,199

 
$
3,447

Non-hedges
Other current assets
 
3,830

 
2,960

Total derivative assets
 
 
14,029

 
6,407

 
 
 
 
 
 
Hedges
Accrued liabilities
 
(235
)
 

Non-hedges
Accrued liabilities
 
(613
)
 
(109
)
Total derivative liabilities
 
 
(848
)
 
(109
)
 
 
 
 
 
 
Net derivative asset
 
 
$
13,181

 
$
6,298

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 AOCI of approximately $15,660.
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.

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

The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
 
Amount of Gain
Recognized in AOCI
(Effective Portion)
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Foreign exchange contracts
$
11,185

 
$
142

 
 
Location of
Gain (Loss)
Reclassified from AOCI into Income
(Effective Portion)
Amount of Gain
Reclassified from AOCI
into Income
(Effective Portion)
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Foreign exchange contracts
Cost of sales
$
835

 
$
675

Derivative Contracts Not Designated As Hedges
The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheet. Any gains or losses resulting from changes in fair value are recognized directly into earnings. 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 Gain (Loss)
Recognized in Income on
Derivative
 
Amount of Gain (Loss)
Recognized in Income
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Foreign exchange contracts
Selling, general and administrative expenses
 
$
3,470

 
$
(50
)
(9)
Fair Value of Assets and Liabilities
As of April 4, 2015, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to foreign exchange rates and deferred compensation plan liabilities. 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 fair value of deferred compensation plans is based on readily available current 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 April 4, 2015 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 April 4, 2015. As of and during the quarter ended April 4, 2015, 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.

10

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

The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.
 
Assets (Liabilities) at Fair Value as of
April 4, 2015
 
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
$

 
$
14,029

 
$

Foreign exchange derivative contracts

 
(848
)
 

 

 
13,181

 

 
 
 
 
 
 
Deferred compensation plan liability

 
(32,871
)
 

 
 
 
 
 
 
Total
$

 
$
(19,690
)
 
$

 
 
Assets (Liabilities) at Fair Value as of
January 3, 2015
 
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
$

 
$
6,407

 
$

Foreign exchange derivative contracts

 
(109
)
 

 

 
6,298

 

 
 
 
 
 
 
Deferred compensation plan liability

 
(28,289
)
 

 
 
 
 
 
 
Total
$

 
$
(21,991
)
 
$

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 April 4, 2015 and January 3, 2015. The carrying amount of trade accounts receivable includes allowance for doubtful accounts, chargebacks and other deductions of $21,008 and $16,856 as of April 4, 2015 and January 3, 2015, respectively. The fair value of debt, which is classified as a Level 2 liability, was $2,254,411 and $1,893,514 as of April 4, 2015 and January 3, 2015, respectively. Debt had a carrying value of $2,184,949 and $1,839,314 as of April 4, 2015 and January 3, 2015, 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 April 4, 2015 and January 3, 2015, primarily due to the short-term nature of these instruments.
(10)
Subsequent Events
On April 6, 2015, the Company completed the acquisition of Knights Holdco, Inc. (“Knights”), a leading seller of licensed collegiate logo apparel in the mass retail channel, from Merit Capital Partners in an all cash transaction valued at approximately $200,000 on an enterprise value basis. The Company funded the acquisition with cash on hand and short-term borrowings under its Revolving Loan Facility.
On April 29, 2015, the Company refinanced its Senior Secured Credit Facility to, among other things, extend the maturity date of the Revolving Loan Facility to April 2020, re-price the Revolving Loan Facility at favorable rates and add an additional $850,000 in term loan borrowings. The Company incurred $9,500 in fees related to this refinancing. After the refinancing, the

11

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

Company’s domestic debt was comprised of a $1,000,000 revolving credit facility, a $425,000 Term Loan A and an additional $425,000 Term Loan B.
(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. 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.
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 that sell products from the Company’s portfolio of leading brands. The Company’s Internet operations are supported by its catalogs.
International primarily relates to the Europe, 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 January 3, 2015. The Company decided in the first quarter of 2015 to revise the manner 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
April 4,
2015
 
March 29,
2014
Net sales:
 
 
 
Innerwear
$
546,174

 
$
571,154

Activewear
298,096

 
294,504

Direct to Consumer
81,501

 
83,714

International
283,150

 
109,998

Total net sales
$
1,208,921

 
$
1,059,370

 
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
Segment operating profit:
 
 
 
Innerwear
$
110,777

 
$
98,005

Activewear
32,751

 
33,745

Direct to Consumer
(2,278
)
 
(1,326
)
International
22,116

 
8,186

Total segment operating profit
163,366

 
138,610

Items not included in segment operating profit:
 
 
 
General corporate expenses
(25,412
)
 
(20,289
)
Acquisition, integration and other action related charges
(43,228
)
 
(42,637
)
Amortization of intangibles
(4,795
)
 
(3,896
)
Total operating profit
89,931

 
71,788

Other expenses
(382
)
 
(435
)
Interest expense, net
(26,887
)
 
(21,818
)
Income before income tax expense
$
62,662

 
$
49,535

For the quarter ended April 4, 2015, the Company incurred acquisition, integration and other action related charges of $43,228, of which $14,068 is reported in the “Cost of sales” line and $29,160 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the quarter ended March 29, 2014, the Company incurred acquisition, integration and other action related charges of $42,637, of which $14,827 is reported in the

12

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

“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)    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 that are eliminated upon consolidation.
 
Condensed Consolidating Statement of Comprehensive Income
Quarter Ended April 4, 2015
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
951,090

 
$
153,174

 
$
792,012

 
$
(687,355
)
 
$
1,208,921

Cost of sales
772,889

 
74,310

 
600,410

 
(684,919
)
 
762,690

Gross profit
178,201

 
78,864

 
191,602

 
(2,436
)
 
446,231

Selling, general and administrative expenses
224,682

 
52,864

 
80,454

 
(1,700
)
 
356,300

Operating profit
(46,481
)
 
26,000

 
111,148

 
(736
)
 
89,931

Equity in earnings of subsidiaries
131,166

 
108,170

 

 
(239,336
)
 

Other expenses
382

 

 

 

 
382

Interest expense, net
19,123

 
(4
)
 
7,782

 
(14
)
 
26,887

Income before income tax expense
65,180

 
134,174

 
103,366

 
(240,058
)
 
62,662

Income tax expense
12,544

 
(11,090
)
 
8,572

 

 
10,026

Net income
$
52,636

 
$
145,264

 
$
94,794

 
$
(240,058
)
 
$
52,636

 
 
 
 
 
 
 
 
 
 
Comprehensive income
$
57,479

 
$
145,264

 
$
90,404

 
$
(235,668
)
 
$
57,479

 

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 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
(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
47,225

 
89,320

 
101,101

 
(188,111
)
 
49,535

Income tax expense
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
April 4, 2015
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
4,243

 
$
12,111

 
$
260,713

 
$

 
$
277,067

Trade accounts receivable, net
100,560

 
39,309

 
573,964

 
(720
)
 
713,113

Inventories
1,113,536

 
144,556

 
583,349

 
(148,729
)
 
1,692,712

Deferred tax assets
197,291

 
3,515

 
10,671

 

 
211,477

Other current assets
56,074

 
9,262

 
60,983

 

 
126,319

Total current assets
1,471,704

 
208,753

 
1,489,680

 
(149,449
)
 
3,020,688

Property, net
90,461

 
40,503

 
531,845

 

 
662,809

Trademarks and other identifiable intangibles, net
4,249

 
77,949

 
568,416

 

 
650,614

Goodwill
232,882

 
124,247

 
355,281

 

 
712,410

Investments in subsidiaries
3,878,036

 
1,940,944

 

 
(5,818,980
)
 

Deferred tax assets
202,820

 
74,703

 
15,593

 

 
293,116

Receivables from related entities
4,794,908

 
4,587,194

 
2,169,608

 
(11,551,710
)
 

Other noncurrent assets
52,430

 
426

 
15,433

 

 
68,289

Total assets
$
10,727,490

 
$
7,054,719

 
$
5,145,856

 
$
(17,520,139
)
 
$
5,407,926

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
345,709

 
$
22,995

 
$
244,557

 
$

 
$
613,261

Accrued liabilities
211,107

 
37,452

 
211,467

 
(356
)
 
459,670

Notes payable

 

 
116,742

 

 
116,742

Accounts Receivable Securitization Facility

 

 
199,609

 

 
199,609

Current portion of long-term debt

 

 
11,464

 

 
11,464

Total current liabilities
556,816

 
60,447

 
783,839

 
(356
)
 
1,400,746

Long-term debt
1,583,000

 

 
390,876

 

 
1,973,876

Pension and postretirement benefits
301,064

 

 
64,439

 

 
365,503

Payables to related entities
6,742,128

 
3,371,383

 
1,438,199

 
(11,551,710
)
 

Other noncurrent liabilities
141,253

 
12,480

 
111,642

 
(803
)
 
264,572

Total liabilities
9,324,261

 
3,444,310

 
2,788,995

 
(11,552,869
)
 
4,004,697

Stockholders’ equity
1,403,229

 
3,610,409

 
2,356,861

 
(5,967,270
)
 
1,403,229

Total liabilities and stockholders’ equity
$
10,727,490

 
$
7,054,719

 
$
5,145,856

 
$
(17,520,139
)
 
$
5,407,926



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
January 3, 2015
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,910

 
$
10,796

 
$
218,149

 
$

 
$
239,855

Trade accounts receivable, net
73,794

 
37,511

 
561,514

 
(771
)
 
672,048

Inventories
958,376

 
120,341

 
607,356

 
(148,873
)
 
1,537,200

Deferred tax assets
200,050

 
3,515

 
11,500

 

 
215,065

Other current assets
38,446

 
11,224

 
51,394

 

 
101,064

Total current assets
1,281,576

 
183,387

 
1,449,913

 
(149,644
)
 
2,765,232

Property, net
88,599

 
46,221

 
539,559

 

 
674,379

Trademarks and other identifiable intangibles, net
4,102

 
79,393

 
607,706

 

 
691,201

Goodwill
232,881

 
124,247

 
365,992

 

 
723,120

Investments in subsidiaries
3,732,783

 
1,792,790

 

 
(5,525,573
)
 

Deferred tax assets
202,910

 
74,735

 
16,702

 

 
294,347

Receivables from related entities
4,585,755

 
4,471,644

 
2,087,280

 
(11,144,679
)
 

Other noncurrent assets
55,540

 
428

 
17,534

 

 
73,502

Total assets
$
10,184,146

 
$
6,772,845

 
$
5,084,686

 
$
(16,819,896
)
 
$
5,221,781

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
353,799

 
$
11,925

 
$
255,496

 
$

 
$
621,220

Accrued liabilities
190,739

 
61,339

 
242,437

 
1,112

 
495,627

Notes payable

 

 
144,438

 

 
144,438

Accounts Receivable Securitization Facility

 

 
210,963

 

 
210,963

Current portion of long-term debt

 

 
14,354

 

 
14,354

Total current liabilities
544,538

 
73,264

 
867,688

 
1,112

 
1,486,602

Long-term debt
1,176,500

 

 
437,497

 

 
1,613,997

Pension and postretirement benefits
399,931

 

 
72,072

 

 
472,003

Payables to related entities
6,544,095

 
3,270,513

 
1,330,071

 
(11,144,679
)
 

Other noncurrent liabilities
132,310

 
12,609

 
118,287

 
(799
)
 
262,407

Total liabilities
8,797,374

 
3,356,386

 
2,825,615

 
(11,144,366
)
 
3,835,009

Stockholders’ equity
1,386,772

 
3,416,459

 
2,259,071

 
(5,675,530
)
 
1,386,772

Total liabilities and stockholders’ equity
$
10,184,146

 
$
6,772,845

 
$
5,084,686

 
$
(16,819,896
)
 
$
5,221,781


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
Three Months Ended April 4, 2015
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash from operating activities
$
(115,241
)
 
$
68,660

 
$
(391,119
)
 
$
178,355

 
$
(259,345
)
Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(8,864
)
 
(3,796
)
 
(23,708
)
 

 
(36,368
)
Proceeds from sales of assets

 
4,322

 
413

 

 
4,735

Net cash from investing activities
(8,864
)
 
526

 
(23,295
)
 

 
(31,633
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable

 

 
43,828

 

 
43,828

Repayments on notes payable

 

 
(61,137
)
 

 
(61,137
)
Borrowings on Accounts Receivable Securitization Facility

 

 
79,039

 

 
79,039

Repayments on Accounts Receivable Securitization Facility

 

 
(90,393
)
 

 
(90,393
)
Borrowings on Revolving Loan Facility
1,327,500

 

 

 

 
1,327,500

Repayments on Revolving Loan Facility
(921,000
)
 

 

 

 
(921,000
)
Repayments on Euro Term Loan Facility

 

 
(974
)
 

 
(974
)
Cash dividends paid
(40,083
)
 

 

 

 
(40,083
)
Taxes paid related to net shares settlement of equity awards
(17,982
)
 

 

 

 
(17,982
)
Excess tax benefit from stock-based compensation
12,833

 

 

 

 
12,833

Other
1,183

 

 
946

 
(6
)
 
2,123

Net transactions with related entities
(245,013
)
 
(67,871
)
 
491,233

 
(178,349
)
 

Net cash from financing activities
117,438

 
(67,871
)
 
462,542

 
(178,355
)
 
333,754

Effect of changes in foreign exchange rates on cash

 

 
(5,564
)
 

 
(5,564
)
Change in cash and cash equivalents
(6,667
)
 
1,315

 
42,564

 

 
37,212

Cash and cash equivalents at beginning of year
10,910

 
10,796

 
218,149

 

 
239,855

Cash and cash equivalents at end of period
$
4,243

 
$
12,111

 
$
260,713

 
$

 
$
277,067



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 Flow
Three Months 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


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 January 3, 2015, 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 January 3, 2015.
Overview
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bali, Playtex, Maidenform, DIM, JMS/Just My Size, L’eggs, Nur Die/Nur Der, Flexees, barely there, Wonderbra, Gear for Sports, Lilyette, Lovable, Rinbros, Shock Absorber, Track N Field, Abanderado and Zorba. 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. A subsidiary of ours closes one week earlier than the consolidated quarter end. The difference in reporting one week of financial information for this subsidiary did not have a material impact on our financial condition, results of operations or cash flows. In the first quarter of 2015, we revised 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.
Highlights from the First Quarter Ended April 4, 2015
Key financial highlights during the quarter are as follows:
Total net sales in the first quarter of 2015 were $1.2 billion, compared with $1.1 billion in the same period of 2014, representing a 14% increase.
Operating profit increased 25% to $90 million in the first quarter of 2015, compared with $72 million in the same period of 2014. As a percentage of sales, operating profit was 7.4% in the first quarter of 2015 compared to 6.8% in the same period of 2014. Included within operating profit for the first quarter of 2015 and 2014 were acquisition, integration and other action related charges of $43 million.
On March 3, 2015, we effected a four-for-one stock split in the form of a stock dividend to stockholders of record as of the close of business on February 9, 2015. All references to the number of common shares outstanding, per share amounts and share options data have been restated to reflect the effect of the split for all periods presented.
Diluted earnings per share increased 30% to $0.13 in the first quarter of 2015, compared with diluted earnings per share of $0.10 in the same period of 2014.
We acquired DBA Lux Holding S.A. (“Innerwear Europe”) on August 29, 2014. The total purchase price paid at closing was €297 million (approximately $392 million based on acquisition date exchange rates). Since the acquisition date, we have paid an additional $7 million in purchase price, primarily related to working capital adjustments. The acquisition was financed through a combination of cash on hand and third party borrowings. We believe the acquisition will create growth and cost savings opportunities and increased scale to serve retailers. The operating results of Innerwear Europe from the date of acquisition are included in the International segment.
Subsequent to quarter end, on April 6, 2015, we completed the acquisition of Knights Holdco Inc. (“Knights”), a leading seller of licensed collegiate logo apparel in the mass retail channel, from Merit Capital Partners, in an all cash transaction valued at approximately $200 million on an enterprise value basis. We funded the acquisition with cash on hand and short-term borrowings. We believe the acquisition will create growth and cost savings opportunities and increased scale to serve retailers.

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Outlook
We expect our 2015 full year sales to be between $5.9 billion and $5.95 billion.
Interest expense and other expenses are expected to be approximately $95 million to $100 million, including approximately $5 million from higher debt balances associated with the Knights acquisition.
We estimate our full year effective income tax rate to be approximately 13% with slightly higher rates in the first half of the year.
We expect cash flow from operations to be $550 million to $600 million, which reflects approximately $100 million in pension contributions. Net capital expenditures are expected to be approximately $80 million to $85 million and dividend payments are expected to be roughly $160 million.
Our current estimate for pretax charges in 2015 for acquisition, integration and other actions is approximately $200 million or more. We currently expect these charges related to Maidenform to be completed by the end of the third quarter of 2015. Foundational charges are expected to be completed by the end of 2015.
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 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 of 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.

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Condensed Consolidated Results of Operations — First Quarter Ended April 4, 2015 Compared with First Quarter Ended March 29, 2014
 
 
Quarter Ended
 
 
 
 
 
April 4,
2015
 
March 29,
2014
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,208,921

 
$
1,059,370

 
$
149,551

 
14.1
 %
Cost of sales
762,690

 
702,593

 
60,097

 
8.6

Gross profit
446,231

 
356,777

 
89,454

 
25.1

Selling, general and administrative expenses
356,300

 
284,989

 
71,311

 
25.0

Operating profit
89,931

 
71,788

 
18,143

 
25.3

Other expenses
382

 
435

 
(53
)
 
(12.2
)
Interest expense, net
26,887

 
21,818

 
5,069

 
23.2

Income before income tax expense
62,662

 
49,535

 
13,127

 
26.5

Income tax expense
10,026

 
7,975

 
2,051

 
25.7

Net income
$
52,636

 
$
41,560

 
$
11,076

 
26.7
 %
Net Sales
Net sales increased 14% during the first quarter of 2015 primarily due to the following:
Acquisition of Innerwear Europe in August 2014, which added an incremental $184 million of net sales in 2015;
Higher net sales in our Activewear segment due to higher sales volume and net space gains at retailers.
Offset by:
Lower sales in our Innerwear segment due to lower sales volume;
Unfavorable foreign currency exchange rates. Excluding this impact, consolidated net sales and International segment net sales increased 15% and 170%, respectively.
Gross Profit
Our gross profit was higher for the first quarter of 2015 as compared to the same period of 2014. The increase in gross profit was attributable to supply chain efficiencies and 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. Included with gross profit in the first quarter of 2015 and the first quarter of 2014 are charges of approximately $14 million and $15 million, respectively, related to acquisition, integration and other action related costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 29.5% in the first quarter of 2015 compared to 26.9% in the same period of 2014. The higher selling, general and administrative expenses were attributable to higher planned marketing and media related spending and higher distribution costs in the first quarter of 2015 compared to the same period of 2014. Included with selling, general and administrative expenses in the first quarter of 2015 and the first quarter of 2014 are charges of approximately $29 million and $28 million, respectively, related to acquisition, integration and other action related costs.
Other Highlights
Interest Expense – higher by $5 million in the first quarter of 2015 compared to the first quarter of 2014 primarily due to higher debt balances related to the acquisition of Innerwear Europe. Our weighted average interest rate on our outstanding debt was 4.04% during the first quarter of 2015, compared to 4.12% in the first quarter of 2014.
Income Tax Expense – our effective income tax rate remained consistent at 16% for the first quarter of 2015 and the first quarter of 2014.

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Operating Results by Business Segment — First Quarter Ended April 4, 2015 Compared with First Quarter Ended March 29, 2014
 
 
Net Sales
 
Operating Profit
 
Quarter Ended
 
Quarter Ended
 
April 4,
2015
 
March 29,
2014
 
April 4,
2015
 
March 29,
2014
 
(dollars in thousands)
Innerwear
$
546,174

 
$
571,154

 
$
110,777

 
$
98,005

Activewear
298,096

 
294,504

 
32,751

 
33,745

Direct to Consumer
81,501

 
83,714

 
(2,278
)
 
(1,326
)
International
283,150

 
109,998

 
22,116

 
8,186

Corporate

 

 
(73,435
)
 
(66,822
)
Total
$
1,208,921

 
$
1,059,370

 
$
89,931

 
$
71,788

Innerwear 
 
Quarter Ended
 
 
 
 
 
April 4,
2015
 
March 29,
2014
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
546,174

 
$
571,154

 
$
(24,980
)
 
(4.4
)%
Segment operating profit
110,777

 
98,005

 
12,772

 
13.0

The lower net sales in our Innerwear segment primarily resulted from the following:
Lower sales in our basics product category primarily due to retail inventory reductions;
Lower sales in the intimates and hosiery product categories as a result of lower sales volume, partially offset by higher product pricing.
Supply chain efficiencies primarily driven by synergies gained from our Maidenform acquisition and our Innovate-to-Elevate strategy continue 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. Offsetting the improvement were higher distribution costs.
Activewear 
 
Quarter Ended
 
 
 
 
 
April 4,
2015
 
March 29,
2014
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
298,096

 
$
294,504

 
$
3,592

 
1.2
 %
Segment operating profit
32,751

 
33,745

 
(994
)
 
(2.9
)
Activewear sales increased due to the following:
Higher sales in our Gear for Sports licensed apparel, primarily due to net space gains and higher sales volume;
Higher sales for our Hanes branded product in branded printwear, primarily as a result of higher sales volume and new program channels.
Offset by:
Lower sales in our Champion branded product in our retail channel, resulted from later timing of space gains and the loss of a seasonal program.
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. Offsetting these benefits were higher distribution costs and unfavorable product mix.

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Direct to Consumer
 
Quarter Ended