Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
or
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¨ | 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
(Exact name of registrant as specified in its charter)
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Maryland | | 20-3552316 |
(State of incorporation) | | (I.R.S. employer identification no.) |
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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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | x | | Accelerated filer | | ¨ | | | | | |
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Non-accelerated filer | | ¨ | | Smaller reporting company | | ¨ | | Emerging growth company | | ¨ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ¨
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 July 27, 2018, there were 360,507,281 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 30, 2017, under the caption “Risk Factors,” and available 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 December 30, 2017, 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.
PART I
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Item 1. | Financial Statements |
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
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| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 3,186,947 |
| | $ | 3,026,965 |
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Cost of sales | 1,055,487 |
| | 1,000,708 |
| | 1,948,070 |
| | 1,841,532 |
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Gross profit | 659,956 |
| | 645,902 |
| | 1,238,877 |
| | 1,185,433 |
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Selling, general and administrative expenses | 439,893 |
| | 412,197 |
| | 872,756 |
| | 825,299 |
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Operating profit | 220,063 |
| | 233,705 |
| | 366,121 |
| | 360,134 |
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Other expenses | 6,570 |
| | 6,422 |
| | 12,331 |
| | 12,967 |
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Interest expense, net | 48,430 |
| | 44,130 |
| | 94,193 |
| | 86,267 |
|
Income from continuing operations before income tax expense | 165,063 |
| | 183,153 |
| | 259,597 |
| | 260,900 |
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Income tax expense | 24,430 |
| | 10,989 |
| | 39,555 |
| | 15,654 |
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Income from continuing operations | 140,633 |
| | 172,164 |
| | 220,042 |
| | 245,246 |
|
Income (loss) from discontinued operations, net of tax | — |
| | 368 |
| | — |
| | (2,097 | ) |
Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | 220,042 |
| | $ | 243,149 |
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| | | | | | | |
Earnings (loss) per share — basic: | | | | | | | |
Continuing operations | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
|
Discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) |
Net income | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
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| | | | | | | |
Earnings (loss) per share — diluted: | | | | | | | |
Continuing operations | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
|
Discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) |
Net income | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.65 |
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See accompanying notes to Condensed Consolidated Financial Statements.
2
HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
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| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | 220,042 |
| | $ | 243,149 |
|
Other comprehensive income (loss), net of tax of ($9,982), $2,351, ($11,079) and $6,443, respectively | (21,855 | ) | | (11,928 | ) | | (33,348 | ) | | 4,298 |
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Comprehensive income | $ | 118,778 |
| | $ | 160,604 |
| | $ | 186,694 |
| | $ | 247,447 |
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See accompanying notes to Condensed Consolidated Financial Statements.
3
HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
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| | | | | | | |
| June 30, 2018 | | December 30, 2017 |
Assets | | | |
Cash and cash equivalents | $ | 397,971 |
| | $ | 421,566 |
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Trade accounts receivable, net | 973,807 |
| | 903,318 |
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Inventories | 2,112,211 |
| | 1,874,990 |
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Other current assets | 132,757 |
| | 186,496 |
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Total current assets | 3,616,746 |
| | 3,386,370 |
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Property, net | 617,302 |
| | 623,991 |
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Trademarks and other identifiable intangibles, net | 1,610,567 |
| | 1,402,857 |
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Goodwill | 1,259,010 |
| | 1,167,007 |
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Deferred tax assets | 218,269 |
| | 234,932 |
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Other noncurrent assets | 105,992 |
| | 79,618 |
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Total assets | $ | 7,427,886 |
| | $ | 6,894,775 |
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Liabilities and Stockholders’ Equity | | | |
Accounts payable | $ | 935,176 |
| | $ | 867,649 |
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Accrued liabilities | 506,360 |
| | 649,634 |
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Notes payable | 14,540 |
| | 11,873 |
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Accounts Receivable Securitization Facility | 153,386 |
| | 125,209 |
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Current portion of long-term debt | 181,349 |
| | 124,380 |
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Total current liabilities | 1,790,811 |
| | 1,778,745 |
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Long-term debt | 4,149,201 |
| | 3,702,054 |
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Pension and postretirement benefits | 388,256 |
| | 405,238 |
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Other noncurrent liabilities | 332,427 |
| | 322,536 |
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Total liabilities | 6,660,695 |
| | 6,208,573 |
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Stockholders’ equity: | | | |
Preferred stock (50,000,000 authorized shares; $.01 par value) | | | |
Issued and outstanding — None | — |
| | — |
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Common stock (2,000,000,000 authorized shares; $.01 par value) | | | |
Issued and outstanding — 360,503,574 and 360,125,894, respectively | 3,605 |
| | 3,601 |
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Additional paid-in capital | 275,120 |
| | 271,462 |
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Retained earnings | 961,020 |
| | 850,345 |
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Accumulated other comprehensive loss | (472,554 | ) | | (439,206 | ) |
Total stockholders’ equity | 767,191 |
| | 686,202 |
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Total liabilities and stockholders’ equity | $ | 7,427,886 |
| | $ | 6,894,775 |
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See accompanying notes to Condensed Consolidated Financial Statements.
4
HANESBRANDS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
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| | | | | | | |
| Six Months Ended |
| June 30, 2018 | | July 1, 2017 |
Operating activities: | | | |
Net income | $ | 220,042 |
| | $ | 243,149 |
|
Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation and amortization of long-lived assets | 65,493 |
| | 58,095 |
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Write-off on early extinguishment of debt | — |
| | 1,559 |
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Amortization of debt issuance costs | 4,627 |
| | 5,437 |
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Stock compensation expense | 3,033 |
| | 4,388 |
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Deferred taxes and other | (6,709 | ) | | 6,543 |
|
Changes in assets and liabilities, net of acquisition of business: | | | |
Accounts receivable | (81,512 | ) | | (79,429 | ) |
Inventories | (244,743 | ) | | (130,554 | ) |
Other assets | (6,193 | ) | | (48,901 | ) |
Accounts payable | 68,777 |
| | 9,019 |
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Accrued pension and postretirement benefits | (7,438 | ) | | 11,025 |
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Accrued liabilities and other | (79,775 | ) | | (46,081 | ) |
Net cash from operating activities | (64,398 | ) | | 34,250 |
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Investing activities: | | | |
Purchases of property, plant and equipment | (40,640 | ) | | (30,838 | ) |
Proceeds from sales of assets | 1,840 |
| | 4,378 |
|
Acquisition of business, net of cash acquired | (334,916 | ) | | (524 | ) |
Disposition of businesses | — |
| | 40,285 |
|
Net cash from investing activities | (373,716 | ) | | 13,301 |
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Financing activities: | | | |
Borrowings on notes payable | 153,901 |
| | 141,384 |
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Repayments on notes payable | (153,772 | ) | | (128,987 | ) |
Borrowings on Accounts Receivable Securitization Facility | 114,477 |
| | 262,216 |
|
Repayments on Accounts Receivable Securitization Facility | (86,300 | ) | | (103,128 | ) |
Borrowings on Revolving Loan Facilities | 2,025,860 |
| | 2,147,299 |
|
Repayments on Revolving Loan Facilities | (1,498,000 | ) | | (1,747,500 | ) |
Repayments on Term Loan Facilities | (21,250 | ) | | (128,215 | ) |
Repayments on International Debt | (1,105 | ) | | (43,141 | ) |
Share repurchases | — |
| | (299,919 | ) |
Cash dividends paid | (108,115 | ) | | (110,529 | ) |
Payment of contingent consideration | (3,540 | ) | | (41,250 | ) |
Taxes paid related to net shares settlement of equity awards | (4,185 | ) | | (6,228 | ) |
Other | (88 | ) | | 2,787 |
|
Net cash from financing activities | 417,883 |
| | (55,211 | ) |
Effect of changes in foreign exchange rates on cash | 20,176 |
| | (3,170 | ) |
Change in cash, cash equivalents and restricted cash | (55 | ) | | (10,830 | ) |
Cash and cash equivalents at beginning of year | 421,566 |
| | 460,245 |
|
Cash, cash equivalents and restricted cash at end of period | 421,511 |
| | 449,415 |
|
Less restricted cash at end of period | 23,540 |
| | — |
|
Cash and cash equivalents per balance sheet at end of period | $ | 397,971 |
| | $ | 449,415 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
5
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
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. 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. Four subsidiaries of the Company close on a day which is less than a week different than the Company’s consolidated quarter end. The difference in reporting of financial information for these subsidiaries did not have a material impact on the Company’s financial condition, results of operations or cash flows.
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 year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
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(2) | Recent Accounting Pronouncements |
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, a new accounting standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The new standard was effective for the Company in the first quarter of 2018 and applied using a modified retrospective method. The Company has included enhanced disclosures related to disaggregation of revenue sources and accounting policies. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows, but did result in additional disclosures. Refer to Note, “Revenue Recognition.”
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The new guidance addresses the classification of debt prepayment and extinguishment costs and contingent consideration payments made after a business combination. The new standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This standard requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company adopted the provisions of ASU 2016-18 in the first quarter of 2018 using the retrospective transition method. The Company did not have restricted cash in prior periods, therefore the adoption of the new guidance did not have an impact to previously reported cash flows. The Condensed Consolidated Statement of Cash Flow for the six months ended June 30, 2018 includes restricted cash of $23,540.
Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost.” The new rules require that an employer
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
report the service cost component in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The new standard was effective for the Company in the first quarter of 2018 and applied with retrospective treatment. Accordingly, the Company reclassified $5,028 and $10,189 from the “Selling, general and administrative expenses” line to the “Other expenses” line within the Condensed Consolidated Statements of Income for the quarter and six months ended July 1, 2017, respectively. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The new rules eliminate the exception for an intra-entity transfer of an asset other than inventory, which aligns the recognition of income tax consequences for such transfers. The new rules require the recognition of current and deferred income taxes resulting from these transfers when the transfer occurs rather than when it is sold to an external party. The new standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740).” The new rules amended the SEC Staff Accounting Bulletin No. 118 (“SAB 118”) to incorporate the impact of the Tax Cuts and Jobs Act. The new standard was effective for the Company in the first quarter of 2018 and will be considered in the Company’s tax related disclosures throughout the year.
Definition of a Business
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new rules provide for the application of a screen test to consider whether substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If the screen test determines this to be true, the set is not a business. The new standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Stock Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” The new rules provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. Under the new rules, an entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the original award is modified. The new standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Financial Instruments
In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10).” The new rules clarify previously issued guidance regarding determination of the fair value of financial instruments. The new standard will be effective for the Company in the third quarter of 2018. The Company does not expect the adoption of the new accounting standard to have a material impact on the Company’s financial condition, results of operations and cash flows.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases,” which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. The standard will also result in enhanced quantitative and qualitative disclosures surrounding leases. The new rules will be effective for the Company in the first quarter of 2019. The Company has established a cross-functional implementation team to analyze the impact and implement the new standard. The
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Company has collected relevant data in order to evaluate lease arrangements, assess potential embedded leases and evaluate accounting policy elections. The Company is also evaluating its processes and internal controls to identify any changes necessary as a result of the new rules. To assist in the implementation and enable the preparation of the required financial disclosures, the Company has identified a global lease management and accounting software. While the Company is still evaluating the impact of the new rules, the Company expects that this adoption will result in material increases in assets and liabilities in its consolidated balance sheet and enhanced disclosures and has not identified any information that would indicate that the new guidance will have a material impact on the Company’s results of operations or cash flows.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The new rules expand the hedging strategies that qualify for hedge accounting, including contractually-specified price components of a commodity purchase or sale, hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets and liabilities, hedges of the portion of a closed portfolio of prepayable assets and partial-term hedges of fixed-rate assets and liabilities. The new rules also allow additional time to complete hedge effectiveness testing and allow qualitative assessments subsequent to initial quantitative tests if there is a supportable expectation that the hedge will remain highly effective. The new rules will be effective for the Company in the first quarter of 2019, with early adoption permitted. 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 and cash flows.
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new rules allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The new rules will be effective for the Company in the first quarter of 2019. The Company is in the process of assessing the impact of the new accounting rules on the Company’s financial condition and does not expect the adoption of the new accounting rules to have a material impact on the Company’s results of operations or cash flows.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new rules simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2020. 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 and cash flows.
On December 31, 2017, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”) using the modified retrospective method applied to contracts which were pending as of December 31, 2017. Financial results included in the Company’s Condensed Consolidated Statement of Income for the quarter and six months ended June 30, 2018 are presented under Topic 606, while prior year amounts have not been restated and continue to be reported in accordance with ASC 605, “Revenue Recognition” (“Topic 605”). As a result of adopting Topic 606, the Company did not adjust opening retained earnings.
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which occurs at a point in time, upon either shipment or delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates for variable consideration. Variable consideration includes trade discounts, rebates, volume-based incentives, cooperative advertising and product returns, which are offered within contracts between the Company and its customers, employing the practical expedient for contract costs. Incidental items that are immaterial to the context of the contract are recognized as expense at the transaction date.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
The following table presents the Company’s revenues disaggregated by method of purchase:
|
| | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | June 30, 2018 |
Third-party brick-and-mortar wholesale | $ | 1,345,992 |
| | $ | 2,510,300 |
|
Consumer-directed | 369,451 |
| | 676,647 |
|
Total net sales | $ | 1,715,443 |
| | $ | 3,186,947 |
|
Revenue Sources
Third-Party Brick-and-Mortar Wholesale Revenue
Third-party brick-and-mortar wholesale revenue is primarily generated through sales to retailers to support their brick-and-mortar operations. Also included within third-party brick-and-mortar wholesale revenues is revenue from royalty agreements. The Company earns royalties through license agreements with manufacturers of other consumer products that incorporate certain of the Company’s brands. The Company accrues revenue earned under these contracts based upon reported sales from the licensees.
Consumer-Directed Revenue
Consumer-directed revenue is primarily generated through sales driven directly by the consumer through company-operated stores and e-commerce platforms, which include both owned sites and the sites of the Company’s retail customers.
Variable Consideration
Trade discounts and rebates
The Company provides customers with discounts and rebates that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the product revenue is recognized. The cost of these incentives is estimated using a number of factors, including historical utilization and redemption rates. The Company includes incentives offered in the form of free products in the determination of cost of sales.
Volume based incentives
Volume-based incentives involve rebates or refunds of cash that are redeemable only if the customer completes a specified number of sales transactions. Under these incentive programs, the Company estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with the customer.
Cooperative advertising
Under cooperative advertising arrangements, the Company agrees to reimburse the retailer for a portion of the costs incurred by the retailer to advertise and promote certain of the Company’s products. The Company recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity takes place.
Product returns
The Company generally offers customers a limited right of return for a purchased product. The Company estimates the amount of its product sales that may be returned by its customers and records this as a reduction of revenue in the period the related product revenue is recognized.
For all variable consideration, where appropriate, the Company estimates the amount using the expected value, which takes into consideration historical experience, current contractual requirements, specific known market events and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the customer is entitled based on the terms of the contracts.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Bras N Things
On February 12, 2018, the Company acquired 100% of the outstanding equity of BNT Holdco Pty Limited (“Bras N Things”) for a total purchase price of A$498,236 (US$391,572), which included a cash payment of A$428,956 (US$337,123), an indemnification escrow of A$31,988 (US$25,140) and debt assumed of A$34,280 (US$26,942). During the quarter ended June 30, 2018, the purchase consideration was reduced by A$3,012 (US$2,367) associated with the final working capital adjustment, resulting in a revised purchase price of A$495,224 (US$389,205).
U.S. dollar equivalents are based on acquisition date exchange rates. The Company funded the acquisition with a combination of short-term borrowings under its Revolving Loan Facility and cash on hand. The A$31,988 indemnification escrow is held in a retention account for a period of 18 months after the date of the acquisition to secure indemnification claims or other obligations of the sellers under the purchase agreement. The remaining balance of the indemnification escrow, including interest earned, if any, will be paid to the sellers at the end of the 18 month period. The indemnification escrow, held in one of the Company’s bank accounts, is recognized and classified as restricted cash and included in the “Other noncurrent assets” line of the Condensed Consolidated Balance Sheet.
Bras N Things contributed net revenues of $47,587 and pretax earnings of $8,970 (excluding acquisition and integration related charges of approximately $3,276) since the date of acquisition. The results of Bras N Things have been included in the Company’s condensed consolidated financial statements since the date of acquisition and are reported as part of the International segment.
Bras N Things is a leading intimate apparel retailer and e-commerce business in Australia, New Zealand and South Africa. Bras N Things sells proprietary bras, panties and lingerie sets through a retail network of approximately 170 stores and an e-commerce platform. The Company believes this acquisition will create opportunities for expansion of the Bras N Things’ consumer-directed sales model. Factors that contribute to the amount of goodwill recognized for the acquisition include the value of entry into the outlet store sector, expansion of online presence, including the third-party marketplace, and expected synergies with existing Company functions. Goodwill associated with the acquisition is not tax deductible.
The Bras N Things trademark and brand name, which management believes to have an indefinite life, has been valued at $275,071. Amortizable intangible assets have been assigned values of $2,358 for noncompete agreements and $785 for customer lists. Noncompete agreements and the customer list are being amortized over three years.
The allocation of purchase price is preliminary and subject to change. The primary areas of the purchase price allocation that are not yet finalized are related to income taxes and residual goodwill. Accordingly, adjustments may 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 acquisition date. The acquired assets and liabilities as of the date of acquisition (February 12, 2018) include the following: |
| | | |
Cash and cash equivalents | $ | 2,765 |
|
Accounts receivable, net | 197 |
|
Inventories | 9,610 |
|
Other current assets | 1,637 |
|
Property, net | 12,013 |
|
Trademarks and other identifiable intangibles | 278,214 |
|
Deferred tax assets and other noncurrent assets | 2,539 |
|
Total assets acquired | 306,975 |
|
Accounts payable | 4,929 |
|
Accrued liabilities and other | 16,339 |
|
Deferred tax liabilities and other noncurrent liabilities | 7,663 |
|
Total liabilities assumed | 28,931 |
|
Net assets acquired | 278,044 |
|
Goodwill | 111,161 |
|
Total purchase price | $ | 389,205 |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Total purchase price of the Bras N Things acquisition consisted of the following components:
|
| | | |
Cash consideration paid | $ | 337,123 |
|
Indemnification escrow asset | 25,140 |
|
Debt assumed | 26,942 |
|
Total purchase price | $ | 389,205 |
|
Since February 12, 2018, goodwill decreased by $1,463 as a result of measurement period adjustments, primarily related to working capital adjustments.
Unaudited pro forma results of operations for the Company are presented below assuming that the 2018 acquisition of Bras N Things had occurred on January 1, 2017. Pro forma operating results for the quarter and six months ended July 1, 2017 include expenses totaling $307 and $1,436 respectively, for acquisition-related adjustments primarily related to inventory and intangible assets.
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Net sales | $ | 1,715,443 |
| | $ | 1,673,533 |
| | $ | 3,205,007 |
| | $ | 3,080,706 |
|
Net income from continuing operations | 141,395 |
| | 172,226 |
| | 223,586 |
| | 248,300 |
|
Earnings per share from continuing operations: | | | | | | | |
Basic | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.62 |
| | $ | 0.67 |
|
Diluted | 0.39 |
| | 0.47 |
| | 0.62 |
| | 0.67 |
|
Champion Europe
In 2016, the Company acquired 100% of Champion Europe S.p.A. (“Champion Europe”), in an all-cash transaction valued at €220,751 (US$245,554) on an enterprise value basis, less working capital adjustments as defined in the purchase agreement, which included an estimated contingent consideration of €40,700 (US$45,277). The final contingent consideration for the Champion Europe acquisition was determined to be €64,250 (US$73,738), of which €37,820 (US$41,250) was paid in April 2017 and €26,430 (US$32,488) was paid in February 2018. U.S. dollar equivalents are based on acquisition date or payment date exchange rates, as applicable.
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 | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Basic weighted average shares outstanding | 362,011 |
| | 365,911 |
| | 361,944 |
| | 370,075 |
|
Effect of potentially dilutive securities: | | | | | | | |
Stock options | 876 |
| | 1,565 |
| | 968 |
| | 1,605 |
|
Restricted stock units | 367 |
| | 515 |
| | 333 |
| | 466 |
|
Employee stock purchase plan and other | — |
| | 1 |
| | — |
| | 1 |
|
Diluted weighted average shares outstanding | 363,254 |
| | 367,992 |
| | 363,245 |
| | 372,147 |
|
There were 14 restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarter and six months ended June 30, 2018. For the quarter and six months ended July 1, 2017, there were no restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the quarters and six months ended June 30, 2018 and July 1, 2017, there were no anti-dilutive options to purchase shares of common stock.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
For the quarters ended June 30, 2018 and July 1, 2017, the Company declared cash dividends of $0.15 per share. For the six months ended June 30, 2018 and July 1, 2017, the Company declared cash dividends of $0.30 per share.
On July 24, 2018, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding shares of common stock to be paid on September 5, 2018 to stockholders of record at the close of business on August 14, 2018.
On April 27, 2016, the Company’s Board of Directors approved the current share repurchase program for up to 40,000 shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. The Company did not repurchase any shares during the quarter and six months ended June 30, 2018 and quarter ended July 1, 2017. For the six months ended July 1, 2017, the Company entered into transactions to repurchase 14,696 shares at a weighted average purchase price of $20.39 per share. The shares were repurchased at a total cost of $299,919. At June 30, 2018, the remaining repurchase authorization totaled 20,360 shares. The program does not obligate the Company to acquire any particular amount of common stock and may be suspended or discontinued at any time at the Company’s discretion.
Inventories consisted of the following:
|
| | | | | | | |
| June 30, 2018 | | December 30, 2017 |
Raw materials | $ | 137,205 |
| | $ | 129,287 |
|
Work in process | 214,679 |
| | 226,659 |
|
Finished goods | 1,760,327 |
| | 1,519,044 |
|
| $ | 2,112,211 |
| | $ | 1,874,990 |
|
Debt consisted of the following:
|
| | | | | | | | | | | |
| Interest Rate as of June 30, 2018 | | Principal Amount | | Maturity Date |
| June 30, 2018 | | December 30, 2017 | |
Senior Secured Credit Facility: | | | | | | | |
Revolving Loan Facility | 3.60% | | $ | 488,000 |
| | $ | — |
| | December 2022 |
Term Loan A | 3.48% | | 731,250 |
| | 750,000 |
| | December 2022 |
Term Loan B | 3.84% | | 497,500 |
| | 500,000 |
| | December 2024 |
Australian Term A-1 | 3.47% | | 128,860 |
| | 135,826 |
| | July 2019 |
4.875% Senior Notes | 4.88% | | 900,000 |
| | 900,000 |
| | May 2026 |
4.625% Senior Notes | 4.63% | | 900,000 |
| | 900,000 |
| | May 2024 |
3.5% Senior Notes | 3.50% | | 584,249 |
| | 599,649 |
| | June 2024 |
European Revolving Loan Facility | 1.50% | | 116,850 |
| | 81,539 |
| | September 2018 |
Accounts Receivable Securitization Facility | 2.81% | | 153,386 |
| | 125,209 |
| | March 2019 |
Other International Debt | Various | | 22,103 |
| | 1,044 |
| | Various |
| | | 4,522,198 |
| | 3,993,267 |
| | |
Less long-term debt issuance cost | | | 38,262 |
| | 41,624 |
| | |
Less current maturities | | | 334,735 |
| | 249,589 |
| | |
| | | $ | 4,149,201 |
| | $ | 3,702,054 |
| | |
As of June 30, 2018, the Company had $507,915 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account outstanding borrowings and $4,085 of standby and trade letters of credit issued and outstanding under this facility. The Company’s maximum borrowing capacity under the Accounts Receivable Securitization Facility was $200,000 as of June 30, 2018, however based on the outstanding borrowings and net eligible receivables balance within the collateral pool, the Accounts Receivable Securitization Facility was fully utilized as of June 30, 2018. Borrowings under the Accounts
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Receivable Securitization Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans and also subject to a fluctuating facility limit, not to exceed $225,000. The Company had $47,710 of borrowing availability under the Australian Revolving Loan Facility, no borrowing availability under the European Revolving Loan Facility and $120,726 of borrowing availability under other international lines of credit after taking into account outstanding borrowings and letters of credit outstanding under the applicable facility.
In March 2018, 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 maturity date to March 2019. In June 2018, the Company amended the Accounts Receivable Securitization Facility to remove certain receivables from being pledged as collateral for the facility and reduce the maximum availability to $225,000.
As of June 30, 2018, the Company was in compliance with all financial covenants under its credit facilities.
| |
(8) | Accumulated Other Comprehensive Loss |
The components of accumulated other comprehensive loss (“AOCI”) are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment | | Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at December 30, 2017 | $ | (43,505 | ) | | $ | (25,461 | ) | | $ | (614,000 | ) | | $ | 243,760 |
| | $ | (439,206 | ) |
Amounts reclassified from accumulated other comprehensive loss | — |
| | 7,219 |
| | 8,015 |
| | (3,659 | ) | | 11,575 |
|
Current-period other comprehensive income (loss) activity | (62,777 | ) | | 25,274 |
| | — |
| | (7,420 | ) | | (44,923 | ) |
| | | | | | | | | |
Balance at June 30, 2018 | $ | (106,282 | ) | | $ | 7,032 |
| | $ | (605,985 | ) | | $ | 232,681 |
| | $ | (472,554 | ) |
The Company had the following reclassifications out of AOCI:
|
| | | | | | | | | | | | | | | | | | |
Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification from AOCI | | Amount of Reclassification from AOCI |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Gain (loss) on foreign exchange contracts | | Cost of sales | | $ | (5,554 | ) | | $ | 2,636 |
| | $ | (7,219 | ) | | $ | 2,934 |
|
| | Income tax | | 1,113 |
| | (1,012 | ) | | 1,415 |
| | (1,125 | ) |
| | Net of tax | | (4,441 | ) | | 1,624 |
| | (5,804 | ) | | 1,809 |
|
Amortization of deferred actuarial loss and prior service cost | | Other expenses | | (4,948 | ) | | (4,768 | ) | | (8,015 | ) | | (9,578 | ) |
| | Income tax | | 1,066 |
| | 1,831 |
| | 2,244 |
| | 3,678 |
|
| | Net of tax | | (3,882 | ) | | (2,937 | ) | | (5,771 | ) | | (5,900 | ) |
| | | | | | | | | | |
Total reclassifications | | | | $ | (8,323 | ) | | $ | (1,313 | ) | | $ | (11,575 | ) | | $ | (4,091 | ) |
| |
(9) | Financial Instruments and Risk Management |
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of June 30, 2018, the notional U.S. dollar equivalent of the Company’s derivative portfolio was $581,464, primarily consisting of contracts hedging exposures to the Euro, Australian dollar, Canadian dollar and Mexican peso.
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 |
| June 30, 2018 | | December 30, 2017 |
Hedges | Other current assets | | $ | 18,325 |
| | $ | 1,464 |
|
Non-hedges | Other current assets | | 4,122 |
| | 136 |
|
Total derivative assets | | | 22,447 |
| | 1,600 |
|
| | | | | |
Hedges | Accrued liabilities | | (732 | ) | | (14,750 | ) |
Non-hedges | Accrued liabilities | | (703 | ) | | (7,818 | ) |
Total derivative liabilities | | | (1,435 | ) | | (22,568 | ) |
| | | | | |
Net derivative asset (liability) | | | $ | 21,012 |
| | $ | (20,968 | ) |
Cash Flow Hedges
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. The 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 $7,987.
The ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Cost of sales” line in the Condensed Consolidated Statements of Income.
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
|
| | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI (Effective Portion) | | Amount of Gain (Loss) Recognized in AOCI (Effective Portion) |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Foreign exchange contracts | $ | 26,982 |
| | $ | (8,167 | ) | | $ | 25,274 |
| | $ | (26,281 | ) |
|
| | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
| | Quarter Ended | | Six Months Ended |
| | June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Foreign exchange contracts | Cost of sales | | $ | (5,554 | ) | | $ | 2,636 |
| | $ | (7,219 | ) | | $ | 2,934 |
|
Mark to Market Hedges
A derivative used as a hedging instrument whose change in fair value is recognized to act as an economic hedge against changes in the values of the hedged item is designated a mark to market hedge. The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
balances and intercompany lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheets. 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 Derivatives | | Amount of Gain (Loss) Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Foreign exchange contracts | Cost of sales | | $ | 10,011 |
| | $ | — |
| | $ | 19,111 |
| | $ | — |
|
Foreign exchange contracts | Selling, general and administrative expenses | | 472 |
| | (411 | ) | | 775 |
| | (4,675 | ) |
Total | | | $ | 10,483 |
| | $ | (411 | ) | | $ | 19,886 |
| | $ | (4,675 | ) |
| |
(10) | Fair Value of Assets and Liabilities |
As of June 30, 2018, 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 exchange rate 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 which are all based on inputs readily available in public markets and are categorized as Level 2. The fair value of deferred compensation plans is based on readily available current market data and is 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 June 30, 2018 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers into or out of Level 1, Level 2 or Level 3 during the quarter ended June 30, 2018. As of and during the quarter and six months ended June 30, 2018, 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 June 30, 2018 |
| Total | | 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 - assets | $ | 22,447 |
| | $ | — |
| | $ | 22,447 |
| | $ | — |
|
Foreign exchange derivative contracts - liabilities | (1,435 | ) | | — |
| | (1,435 | ) | | — |
|
| 21,012 |
| | — |
| | 21,012 |
| | — |
|
Deferred compensation plan liability | (49,329 | ) | | — |
| | (49,329 | ) | | — |
|
Total | $ | (28,317 | ) | | $ | — |
| | $ | (28,317 | ) | | $ | — |
|
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 30, 2017 |
| Total | | 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 - assets | $ | 1,600 |
| | $ | — |
| | $ | 1,600 |
| | $ | — |
|
Foreign exchange derivative contracts - liabilities | (22,568 | ) | | — |
| | (22,568 | ) | | — |
|
| (20,968 | ) | | — |
| | (20,968 | ) | | — |
|
Deferred compensation plan liability | (52,758 | ) | | — |
| | (52,758 | ) | | — |
|
Total | $ | (73,726 | ) | | $ | — |
| | $ | (73,726 | ) | | $ | — |
|
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 June 30, 2018 and December 30, 2017. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $28,489 and $26,096 as of June 30, 2018 and December 30, 2017, respectively. The fair value of debt, which is classified as a Level 2 liability, was $4,495,967 and $4,093,229 as of June 30, 2018 and December 30, 2017, respectively. Debt had a carrying value of $4,522,198 and $3,993,267 as of June 30, 2018 and December 30, 2017, 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 June 30, 2018 and December 30, 2017, primarily due to the short-term nature of these instruments.
The Company’s effective income tax rate for continuing operations was 14.8% and 6.0% for the quarters ended June 30, 2018 and July 1, 2017, respectively. The Company’s effective income tax rate for continuing operations was 15.2% and 6.0% for the six months ended June 30, 2018 and July 1, 2017, respectively. The higher effective income tax rate for the quarter and six months ended June 30, 2018 compared to the quarter and six months ended July 1, 2017 was primarily due to certain provisions of the Tax Cuts and Jobs Act (the “Tax Act”), specifically the base-broadening provision which imposed a new minimum tax on global intangible low-tax income (“GILTI”).
The recently enacted Tax Act significantly revised U.S. corporate income tax law by, among other things, reducing the federal income tax rate to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In response to the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, or in circumstances where estimates cannot be made, to disclose and recognize at a later date. For the year ended December 30, 2017, the Company included in its financial statements provisional charges for the revaluation of the Company’s net domestic deferred tax assets, the transition tax, as well as other less material provisions of the Tax Act.
As of June 30, 2018, the Company is in the process of evaluating the impact of the Tax Act on being partially reinvested with respect to prior year undistributed earnings. A provisional charge of $4,659 was recognized in the quarter ended June 30, 2018 for actual and planned permanent repatriations; however, the Company is continuing to evaluate the overall impact of its partial permanent reinvestment assertion. Furthermore, a provisional benefit of $4,022 was recognized related to the refinement of the Company’s transition tax. There are no additional changes at this time to the provisional amounts recorded as of the year ended December 30, 2017. The accounting is expected to be completed and disclosed within the one-year measurement period as allowed by SAB 118.
During the first quarter ended March 31, 2018, the Company finalized its accounting policy decision with respect to the new GILTI tax rules, and has concluded that GILTI will be treated as a periodic charge in the year in which it arises, and will not record deferred taxes for the basis associated with GILTI earnings.
For the quarter ended March 31, 2018 and six months ended June 30, 2018, the Company recorded a liability for an unrecognized tax benefit of $17,643, related to the acquisition of Bras N Things, as part of purchase accounting.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
| |
(12) | Discontinued Operations |
As part of the Company’s acquisition of Hanes Australasia in 2016, the Company acquired Hanes Australasia’s legacy Dunlop Flooring and Tontine Pillow businesses. The Company concluded that these businesses were not a strategic fit; therefore, the decision was made to divest the businesses.
In February 2017, the Company sold its Dunlop Flooring business for A$34,564 (US$26,219) in net cash proceeds at the time of sale, with an additional A$1,334 (US$1,012) of proceeds received in April 2017 related to a working capital adjustment, resulting in a pre-tax loss of A$2,715 (US$2,083). U.S. dollar equivalents are based on exchange rates on the date of the sale transaction. The Dunlop Flooring business was reported as part of discontinued operations since the date of acquisition.
In March 2017, the Company sold its Tontine Pillow business for A$13,500 (US$10,363) in net cash proceeds at the time of sale. A working capital adjustment of A$966 (US$742) was paid to the buyer in April 2017, resulting in a net pre-tax gain of A$2,415 (US$1,856). U.S. dollar equivalents are based on exchange rates on the date of the sale transaction. The Tontine Pillow business was reported as part of discontinued operations since the date of acquisition.
The operating results of these discontinued operations only reflect revenues and expenses that are directly attributable to these businesses that were eliminated from ongoing operations. The key components from discontinued operations related to the Dunlop Flooring and Tontine Pillow businesses were as follows:
|
| | | | | | | |
| Quarter Ended | | Six Months Ended |
| July 1, 2017 | | July 1, 2017 |
Net sales | $ | — |
| | $ | 6,865 |
|
Cost of sales | — |
| | 4,507 |
|
Gross profit | — |
| | 2,358 |
|
Selling, general and administrative expenses | (2 | ) | | 3,729 |
|
Operating profit (loss) | 2 |
| | (1,371 | ) |
Other expenses | — |
| | 303 |
|
Net (gain) loss on disposal of businesses | (524 | ) | | 242 |
|
Income (loss) from discontinued operations before income tax expense | 526 |
| | (1,916 | ) |
Income tax expense | 158 |
| | 181 |
|
Net income (loss) from discontinued operations, net of tax | $ | 368 |
| | $ | (2,097 | ) |
| |
(13) | Business Segment Information |
The Company’s operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. 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. Other consists of the Company’s U.S. value-based (“outlet”) stores and U.S. hosiery business.
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, panties, children’s underwear, socks and intimate apparel, 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, mass retail and other channels. |
| |
• | International primarily relates to the Europe, Australia, Asia, Latin America and Canada 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, acquisition, integration and other action-related charges and amortization
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
of intangibles. In the first quarter of 2018, the Company eliminated the allocation of certain corporate overhead selling, general and administrative expenses related to the legal, human resources, information technology, finance and real estate departments to the segments, in order to reflect the manner in which the business is managed and results are reviewed by the chief executive officer, who is the Company’s chief operating decision maker. Prior year segment operating profit disclosures have been revised to conform to the current year presentation. 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 30, 2017.
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Net sales: | | | | | | | |
Innerwear | $ | 694,694 |
| | $ | 719,006 |
| | $ | 1,185,772 |
| | $ | 1,224,196 |
|
Activewear | 405,785 |
| | 379,756 |
| | 751,910 |
| | 707,099 |
|
International | 545,862 |
| | 475,242 |
| | 1,115,749 |
| | 952,640 |
|
Other | 69,102 |
| | 72,606 |
| | 133,516 |
| | 143,030 |
|
Total net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 3,186,947 |
| | $ | 3,026,965 |
|
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
Segment operating profit: | | | | | | | |
Innerwear | $ | 159,129 |
| | $ | 177,628 |
| | $ | 260,548 |
| | $ | 294,250 |
|
Activewear | 57,508 |
| | 58,972 |
| | 95,795 |
| | 102,322 |
|
International | 76,558 |
| | 60,147 |
| | 153,619 |
| | 112,809 |
|
Other | 7,160 |
| | 7,716 |
| | 9,787 |
| | 10,344 |
|
Total segment operating profit | 300,355 |
| | 304,463 |
| | 519,749 |
| | 519,725 |
|
Items not included in segment operating profit: | | | | | | | |
General corporate expenses | (46,002 | ) | | (38,565 | ) | | (90,533 | ) | | (81,846 | ) |
Acquisition, integration and other action-related charges | (25,165 | ) | | (26,062 | ) | | (44,782 | ) | | (64,429 | ) |
Amortization of intangibles | (9,125 | ) | | (6,131 | ) | | (18,313 | ) | | (13,316 | ) |
Total operating profit | 220,063 |
| | 233,705 |
| | 366,121 |
| | 360,134 |
|
Other expenses | (6,570 | ) | | (6,422 | ) | | (12,331 | ) | | (12,967 | ) |
Interest expense, net | (48,430 | ) | | (44,130 | ) | | (94,193 | ) | | (86,267 | ) |
Income from continuing operations before income tax expense | $ | 165,063 |
| | $ | 183,153 |
| | $ | 259,597 |
| | $ | 260,900 |
|
For the quarter ended June 30, 2018, the Company incurred $25,165 of acquisition, integration and other action-related charges that impact operating profit, of which $11,083 is reported in the “Cost of sales” line and $14,082 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the quarter ended July 1, 2017, the Company incurred $26,062 of acquisition-related and integration charges, of which $4,284 is reported in the “Cost of sales” line and $21,778 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
For the six months ended June 30, 2018, the Company incurred acquisition, integration and other action-related charges that impact operating profit of $44,782, of which $21,836 is reported in the “Cost of sales” line and $22,946 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the six months ended July 1, 2017, the Company incurred acquisition-related and integration charges of $64,429, of which $19,759 is reported in the “Cost of sales” line and $44,670 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
As part of the Hanes Europe Innerwear acquisition strategy, in 2015 the Company identified management and administrative positions that were considered non-essential and/or duplicative that have or will be eliminated. As of December 30, 2017, the Company had accrued $22,302 for expected benefit payments related to employee termination and
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
other benefits for affected employees. During the six months ended June 30, 2018, there were $4,577 of benefit payments and foreign currency adjustments, resulting in an ending accrual of $17,725, of which $9,535 and $8,190 is included in the “Accrued liabilities” and “Other noncurrent liabilities” lines of the Condensed Consolidated Balance Sheet, respectively.
|
| |
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 30, 2017, 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 30, 2017.
Overview
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bonds, Maidenform, DIM, Bali, Playtex, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei, Gear for Sports, Bras N Things and Alternative. 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 three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. In the first quarter of 2018, we eliminated the allocation of certain corporate overhead selling, general and administrative expenses related to the legal, human resources, information technology, finance and real estate departments to the segments, in order to reflect the manner in which the business is managed and results are reviewed by the chief executive officer, who is our chief operating decision maker. Prior year segment operating profit disclosures have been revised to conform to the current year presentation.
Highlights from the Second Quarter Ended June 30, 2018
Key financial highlights are as follows:
| |
• | Total net sales in the second quarter of 2018 were $1.72 billion, compared with $1.65 billion in the same period of 2017, representing a 4% increase. |
| |
• | Operating profit decreased 6% to $220 million in the second quarter of 2018, compared with $234 million in the same period of 2017. As a percentage of sales, operating profit was 12.8% in the second quarter of 2018 compared to 14.2% in the same period of 2017. Included within operating profit for both the second quarter of 2018 and 2017 were acquisition, integration and other action-related charges of $25 million and $26 million, respectively. |
| |
• | Diluted earnings per share from continuing operations decreased 17% to $0.39 in the second quarter of 2018, compared with $0.47 in the same period of 2017. |
Outlook
We expect 2018 net sales of $6.72 billion to $6.82 billion.
Interest and other expenses are expected to be approximately $207 million, combined.
We expect the 2018 full-year tax rate to be approximately 16%.
We expect cash flow from operations to be in the range of $675 million to $750 million. We expect capital expenditures of approximately $90 million to $100 million.
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 or change delivery schedules, manage
on-hand inventory levels, 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, 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 — Second Quarter Ended June 30, 2018 Compared with Second Quarter Ended July 1, 2017
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 68,833 |
| | 4.2 | % |
Cost of sales | 1,055,487 |
| | 1,000,708 |
| | 54,779 |
| | 5.5 |
|
Gross profit | 659,956 |
| | 645,902 |
| | 14,054 |
| | 2.2 |
|
Selling, general and administrative expenses | 439,893 |
| | 412,197 |
| | 27,696 |
| | 6.7 |
|
Operating profit | 220,063 |
| | 233,705 |
| | (13,642 | ) | | (5.8 | ) |
Other expenses | 6,570 |
| | 6,422 |
| | 148 |
| | 2.3 |
|
Interest expense, net | 48,430 |
| | 44,130 |
| | 4,300 |
| | 9.7 |
|
Income from continuing operations before income tax expense | 165,063 |
| | 183,153 |
| | (18,090 | ) | | (9.9 | ) |
Income tax expense | 24,430 |
| | 10,989 |
| | 13,441 |
| | 122.3 |
|
Income from continuing operations | 140,633 |
| | 172,164 |
| | (31,531 | ) | | (18.3 | ) |
Income from discontinued operations, net of tax | — |
| | 368 |
| | (368 | ) | | NM |
|
Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | (31,899 | ) | | (18.5 | )% |
Net Sales
Net sales increased 4% during the second quarter of 2018 primarily due to the following:
| |
• | Acquisition of Bras N Things in 2018 and Alternative Apparel in 2017, which added incremental net sales of $52 million in the second quarter of 2018; |
| |
• | Organic sales on a constant currency basis, defined as sales excluding the impact of foreign currency and businesses acquired within 12 months, increased slightly in the quarter driven by performance of our key growth initiatives. Strong growth in our global Champion brand and online sales was offset in part by declines in our intimate apparel and Hanes activewear businesses; and |
| |
• | Favorable impact from foreign exchange rates in our International businesses of approximately $16 million. |
Gross Profit
Gross profit as a percentage of sales was 38.5%, a decrease from prior year of approximately 70 basis points. Gross margin decreased as expansion in our international gross margin and continued realization of acquisition synergies were more
than offset by higher input costs, product mix within our Innerwear segment and higher acquisition-related and integration charges. Included in gross profit in the second quarters of 2018 and 2017 are charges of $11 million and $4 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 25.6% for the second quarter of 2018 compared to 25.0% in the same period of 2017. Included in selling, general and administrative expenses were charges of $14 million and $22 million of acquisition, integration and other action-related costs for the second quarters of 2018 and 2017, respectively. Selling, general and administrative expenses, as a percentage of net sales, increased slightly due to planned investments to support our brands and growth strategies, higher distribution expenses from short term labor inefficiencies and higher proportion of selling, general and administrative costs at our recently acquired businesses, partially offset by continued realization of acquisition synergies and lower acquisition, integration and other action-related costs for the second quarter of 2018 compared to the second quarter of 2017.
Other Highlights
Interest Expense – higher by $4 million in the second quarter of 2018 compared to the second quarter of 2017 driven by higher debt balances and higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 3.87% during the second quarter of 2018, compared to 3.76% in the second quarter of 2017.
Income Tax Expense – our effective income tax rate was 14.8% and 6.0% for the second quarters of 2018 and 2017, respectively. The higher tax rate in 2018 compared to the same period of 2017 is primarily due to certain provisions of the Tax Act, specifically the base-broadening provision which imposed a new minimum tax on global intangible low-tax income (“GILTI”).
Operating Results by Business Segment — Second Quarter Ended June 30, 2018 Compared with Second Quarter Ended July 1, 2017
|
| | | | | | | | | | | | | | | |
| Net Sales | | Operating Profit |
| Quarter Ended | | Quarter Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
| (dollars in thousands) |
Innerwear | $ | 694,694 |
| | $ | 719,006 |
| | $ | 159,129 |
| | $ | 177,628 |
|
Activewear | 405,785 |
| | 379,756 |
| | 57,508 |
| | 58,972 |
|
International | 545,862 |
| | 475,242 |
| | 76,558 |
| | 60,147 |
|
Other | 69,102 |
| | 72,606 |
| | 7,160 |
| | 7,716 |
|
Corporate | — |
| | — |
| | (80,292 | ) | | (70,758 | ) |
Total | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 220,063 |
| | $ | 233,705 |
|
Innerwear
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 694,694 |
| | $ | 719,006 |
| | $ | (24,312 | ) | | (3.4 | )% |
Segment operating profit | 159,129 |
| | 177,628 |
| | (18,499 | ) | | (10.4 | ) |
Segment operating margin | 22.9 | % | | 24.7 | % | | | | |
Innerwear net sales decreased as strength in our basics business was more than offset by declines in our intimate apparel business. Net sales in our basic apparel increased approximately 50 basis points compared to the same period a year ago driven by improving point-of-sale trends and strength in men’s underwear and women’s panties, which more than offset the expected short-term pressure from door closures. In addition, we are seeing a strong reception to our latest innovation, Comfort Flex Fit. Net sales across our intimate apparel business decreased, primarily driven by declines in the off-price retail and mass merchant channels.
Innerwear operating margin was 22.9%, representing a decline from the same period a year ago due to the impact from higher raw material costs and product mix, which was partially offset by lower selling, general and administrative expenses as a result of our prior year’s corporate headcount reduction efforts.
Activewear
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 405,785 |
| | $ | 379,756 |
| | $ | 26,029 |
| | 6.9 | % |
Segment operating profit | 57,508 |
| | 58,972 |
| | (1,464 | ) | | (2.5 | ) |
Segment operating margin | 14.2 | % | | 15.5 | % | | | | |
Activewear net sales increased as a result of our acquisition of Alternative Apparel in 2017, which contributed incremental net sales of $20 million, as well as approximately 1.5% increase in net sales among our Champion and licensed sports apparel businesses. Core Champion sales, which we define as Champion sales outside of the mass retail channel, were up nearly 73% in the quarter driven by strong consumer demand, space gains in the sports specialty channels and growth in the online channel. Growth in core Champion sales and licensed sports apparel in the mass channel more than offset the decline in the Champion mass business, which we believe is mature, and the decline in our Hanes activewear business, within the mass retail channel, due to space reductions.
Activewear operating margin was 14.2%, representing a decline from prior year as favorable product mix and cost savings associated with prior year’s corporate headcount reduction efforts were offset by higher raw material costs, start-up manufacturing inefficiencies and higher distribution costs.
International
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 545,862 |
| | $ | 475,242 |
| | $ | 70,620 |
| | 14.9 | % |
Segment operating profit | 76,558 |
| | 60,147 |
| | 16,411 |
| | 27.3 |
|
Segment operating margin | 14.0 | % | | 12.7 | % | | | | |
Net sales in the International segment were higher as a result of the following:
| |
• | Our acquisition of Bras N Things in the first quarter of 2018, which contributed incremental net sales of nearly $32 million; |
| |
• | Increased net sales driven by our global Champion sales growth, primarily in the Europe and Asia markets; and |
| |
• | Favorable impact of foreign currency exchange rates of approximately $16 million. |
International operating margin was 14.0%, an increase from prior year primarily due to scale efficiencies and continued realization of acquisition synergies coupled with high margin contributions from the recently acquired Bras N Things business.
Other
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 69,102 |
| | $ | 72,606 |
| | $ | (3,504 | ) | | (4.8 | )% |
Segment operating profit | 7,160 |
| | 7,716 |
| | (556 | ) | | (7.2 | ) |
Segment operating margin | 10.4 | % | | 10.6 | % | | | | |
Other net sales were lower as a result of slower traffic at our outlet stores. Operating margin decreased slightly due to decrease in sales volume offset partially by continued cost savings efforts.
Corporate
Corporate expenses included certain administrative costs and acquisition, integration and other action-related charges. Acquisition, integration and other action-related costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, information technology costs and similar charges. Smaller acquisitions and other action-
related costs include acquisition and integration charges for our smaller acquisitions such as Alternative Apparel, as well as other action-related costs related to supply chain network changes.
|
| | | | | | | |
| Quarter Ended |
| June 30, 2018 | | July 1, 2017 |
| (dollars in thousands) |
Acquisition, integration and other action-related costs: |
| | |
Hanes Europe Innerwear | $ | 8,455 |
| | $ | 10,514 |
|
Hanes Australasia | 6,647 |
| | 5,970 |
|
Bras N Things | 2,031 |
| | — |
|
Champion Europe | 1,078 |
| | 4,399 |
|
Smaller acquisitions and other action-related costs | 6,954 |
| | 5,179 |
|
Total acquisition, integration and other action-related costs | $ | 25,165 |
| | $ | 26,062 |
|
Condensed Consolidated Results of Operations — Six Months Ended June 30, 2018 Compared with Six Months Ended July 1, 2017
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 3,186,947 |
| | $ | 3,026,965 |
| | $ | 159,982 |
| | 5.3 | % |
Cost of sales | 1,948,070 |
| | 1,841,532 |
| | 106,538 |
| | 5.8 |
|
Gross profit | 1,238,877 |
| | 1,185,433 |
| | 53,444 |
| | 4.5 |
|
Selling, general and administrative expenses | 872,756 |
| | 825,299 |
| | 47,457 |
| | 5.8 |
|
Operating profit | 366,121 |
| | 360,134 |
| | 5,987 |
| | 1.7 |
|
Other expenses | 12,331 |
| | 12,967 |
| | (636 | ) | | (4.9 | ) |
Interest expense, net | 94,193 |
| | 86,267 |
| | 7,926 |
| | 9.2 |
|
Income from continuing operations before income tax expense | 259,597 |
| | 260,900 |
| | (1,303 | ) | | (0.5 | ) |
Income tax expense | 39,555 |
| | 15,654 |
| | 23,901 |
| | 152.7 |
|
Income from continuing operations | 220,042 |
| | 245,246 |
| | (25,204 | ) | | (10.3 | ) |
Loss from discontinued operations, net of tax | — |
| | (2,097 | ) | | 2,097 |
| | NM |
|
Net income | $ | 220,042 |
| | $ | 243,149 |
| | $ | (23,107 | ) | | (9.5 | )% |
Net Sales
Net sales increased 5% in the six months of 2018 compared to the same period of 2017 as a result of the following:
| |
• | Acquisitions of Bras N Things in 2018 and Alternative Apparel in 2017, which added incremental net sales of $84 million in the six months of 2018; |
| |
• | Organic sales on a constant currency basis, defined as sales excluding the impact of foreign currency and businesses acquired within 12 months, increased approximately 50 basis points in the six months of 2018 driven by strong growth in our global Champion and online sales, offset in part by declines in our intimate apparel and Hanes activewear businesses; and |
| |
• | Favorable impact from foreign exchange rates in our International businesses of approximately $60 million. |
Gross Profit
Gross profit as a percentage of sales for the six months of 2018 was 38.9%, a decrease from the same period of the prior year of approximately 30 basis points. The gross margin decreased as expansion in our international gross margin and continued realization of acquisition synergies were more than offset by higher input costs and higher acquisition, integration and other action-related charges. Included in gross profit in the six months of 2018 and 2017 are charges of $22 million and $20 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 27.4% for the six months of 2018 compared to 27.3% in the same period of 2017. Included in selling, general and administrative expenses were charges of $23
million and $45 million of acquisition, integration and other action-related costs for the six months of 2018 and 2017, respectively. Selling, general and administrative expenses, as a percentage of net sales, increased slightly due to higher distribution expenses from short term labor inefficiencies and higher proportion of selling, general and administrative costs at our recently acquired businesses, offset partially by continued realization of acquisition synergies, lower acquisition, integration and other action-related costs for the six months of 2018 compared to 2017 and cost savings realized from the corporate headcount reduction efforts in 2017.
Other Highlights
Interest Expense – higher by $8 million for the six months of 2018 compared to 2017 primarily due to higher debt balances and higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 3.81% for the six months of 2018 and 3.75% for the six months of 2017.
Income Tax Expense – our effective income tax rate was 15.2% and 6.0% for the six months of 2018 and 2017, respectively. The higher effective income tax rate for the six months of 2018 compared to 2017 was primarily due to certain provisions of the Tax Act, specifically the base-broadening provision which imposed a new minimum tax on GILTI.
Discontinued Operations – the results of our discontinued operations include the operations of two businesses, Dunlop Flooring and Tontine Pillow, which were purchased in the Hanes Australasia acquisition in 2016 and sold during the first quarter of 2017.
Operating Results by Business Segment — Six Months Ended June 30, 2018 Compared with Six Months Ended July 1, 2017
|
| | | | | | | | | | | | | | | |
| Net Sales | | Operating Profit |
| Six Months Ended | | Six Months Ended |
| June 30, 2018 | | July 1, 2017 | | June 30, 2018 | | July 1, 2017 |
| (dollars in thousands) |
Innerwear | $ | 1,185,772 |
| | $ | 1,224,196 |
| | $ | 260,548 |
| | $ | 294,250 |
|
Activewear | 751,910 |
| | 707,099 |
| | 95,795 |
| | 102,322 |
|
International | 1,115,749 |
| | 952,640 |
| | 153,619 |
| | 112,809 |
|
Other | $ | 133,516 |
| | 143,030 |
| | 9,787 |
| | 10,344 |
|
Corporate | — |
| | — |
| | (153,628 | ) | | (159,591 | ) |
Total | $ | 3,186,947 |
| | $ | 3,026,965 |
| | $ | 366,121 |
| | $ | 360,134 |
|
Innerwear
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,185,772 |
| | $ | 1,224,196 |
| | $ | (38,424 | ) | | (3.1 | )% |
Segment operating profit | 260,548 |
| | 294,250 |
| | (33,702 | ) | | (11.5 | ) |
Segment operating margin | 22.0 | % | | 24.0 | % | | | | |
Innerwear net sales decreased due to softness in our intimate apparel business. Net sales in our basic apparel business remained flat to slightly up compared to the same period a year ago driven by strength in our men’s underwear and women’s panties businesses. Net sales across our intimate apparel businesses declined primarily driven by decreased sales within the off-price retail and mass merchant channels and continued impact from mid-tier and department store door closures.
Innerwear operating margin was 22.0%, representing a reduction from the same period a year ago due to the impact from higher raw material costs and product mix, which was partially offset by lower selling, general and administrative expenses as a result of our prior year’s corporate headcount reduction efforts.
Activewear |
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 751,910 |
| | $ | 707,099 |
| | $ | 44,811 |
| | 6.3 | % |
Segment operating profit | 95,795 |
| | 102,322 |
| | (6,527 | ) | | (6.4 | ) |
Segment operating margin | 12.7 | % | | 14.5 | % | | | | |
Activewear net sales increased as a result of our acquisition of Alternative Apparel in 2017, which contributed incremental net sales in 2018 of $36 million, as well as approximately 1% increase in net sales among our other activewear businesses. Core Champion sales, which we define as Champion sales outside of the mass retail channel, were up in excess of 60% in the six months driven by strong consumer demand, space gains in the sports specialty channels and growth in the online channel. Growth in core Champion sales more than offset declines in the Champion at mass business, which we believe is mature, and the decline in our Hanes activewear business, within the mass retail channel, due to space reductions.
Activewear operating margin was 12.7%, representing a decline from prior year as favorable product mix and cost savings associated with prior year’s corporate headcount reduction efforts were more than offset by higher raw material costs, higher distribution costs driven by labor inefficiencies and higher proportion of selling, general and administrative expenses from our recently acquired businesses.
International
|
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,115,749 |
| | $ | 952,640 |
| | $ | 163,109 |
| | 17.1 | % |
Segment operating profit | 153,619 |
| | 112,809 |
| | 40,810 |
| | 36.2 |
|
Segment operating margin | 13.8 | % | | 11.8 | % | | | | |
Net sales in the International segment were higher as a result of the following:
| |
• | Our acquisition of Bras N Things in the first quarter of 2018, which contributed incremental net sales of $48 million; |
| |
• | Increased net sales driven by our global Champion sales growth, primarily in the Europe and Asia markets; and |
| |
• | Favorable impact of foreign currency exchange rates of approximately $60 million. |
International operating margin was 13.8%, an increase from prior year primarily due to scale efficiencies, favorable mix and the continued realization of acquisition synergies coupled with high margin contributions from the recently acquired Bras N Things business.
Other |
| | | | | | | | | | | | | | |
| Six Months Ended | | | | |
| June 30, 2018 | | July 1, 2017 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 133,516 |
| | $ | 143,030 |
| | $ | (9,514 | ) | | (6.7 | )% |
Segment operating profit | 9,787 |
| | 10,344 |
| | (557 | ) | | (5.4 | ) |
Segment operating margin | 7.3 | % | | 7.2 | % | | | | |
Other net sales were lower as a result of continued declines in hosiery sales in the U.S. and slower traffic at our outlet stores. Operating margin increased slightly as a result of our continued cost control more than offsetting the lower sales volume.
Corporate
Corporate expenses included certain administrative costs and acquisition, integration and other action-related charges. Acquisition, integration and other action-related costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items,
facility closures, inventory write-offs, information technology costs, and similar charges. Smaller acquisitions and other action-related costs include acquisition and integration charges for our smaller acquisitions such as Alternative Apparel, as well as other action-related costs related to supply chain network changes.
|
| | | | | | | |
| Six Months Ended |
| June 30, 2018 | | July 1, 2017 |
| (dollars in thousands) |
Acquisition, integration and other action-related costs: | | | |
Hanes Europe Innerwear | $ | 17,031 |
| | $ | 30,392 |
|
Hanes Australasia | 12,739 |
| | 17,978 |
|
Bras N Things | 3,276 |
| | — |
|
Champion Europe | 2,958 |
| | 5,567 |
|
Smaller acquisitions and other action-related costs | 8,778 |
| | 10,492 |
|
Total acquisition, integration and other action-related costs | $ | 44,782 |
| | $ | 64,429 |
|
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated by operations and availability under our revolving credit facility (the “Revolving Loan Facility”), our senior secured credit facility (the “Senior Secured Credit Facility”), our accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) and our international loan facilities.
We had the following borrowing capacity and availability under our credit facilities as of June 30, 2018:
|
| | | | | | | |
| As of June 30, 2018 |
Borrowing Capacity | | Borrowing Availability |
| (dollars in thousands) |
Senior Secured Credit Facility: | | | |
Revolving Loan Facility | $ | 1,000,000 |
| | $ | 507,915 |
|
Australian Revolving Loan Facility | 47,710 |
| | 47,710 |
|
European Revolving Loan Facility | 116,850 |
| | — |
|
Accounts Receivable Securitization Facility1 | 200,000 |
| | — |
|
Other international credit facilities | 179,443 |
| | 120,726 |
|
Total liquidity from credit facilities | $ | 1,544,003 |
| | $ | 676,351 |
|
1Borrowing availability under the Accounts Receivable Securitization Facility is subject to a quarterly fluctuating facility limit, not to exceed $225 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans.
At June 30, 2018, we had $398 million in cash and cash equivalents. We currently believe that our existing cash balances and cash generated by operations, typically in the second half of the year, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.
The following have impacted or may impact our liquidity:
| |
• | we have principal and interest obligations under our debt; |
| |
• | we acquired Bras N Things in February 2018 and Alternative Apparel in October 2017 and we may pursue additional strategic business acquisitions in the future; |
| |
• | we expect to continue to invest in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building; |
| |
• | contributions to our pension plans; |
| |
• | our Board of Directors has authorized a regular quarterly dividend; and |
| |
• | our Board of Directors has authorized share repurchases. |
Dividends
In January and April 2018, our Board of Directors declared a regular quarterly dividend of $0.15 per share, which were paid in March and June 2018. On July 24, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding shares of common stock to be paid on September 5, 2018 to stockholders of record at the close of business on August 14, 2018.
Share Repurchase Program
In April 2016, our Board of Directors approved the current share repurchase program for up to 40 million shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. We did not repurchase any shares during the six months ended June 30, 2018. For the six months ended July 1, 2017 we repurchased approximately 15 million shares at a weighted average purchase price of $20.39. The shares were repurchased at a total cost of $300 million. At June 30, 2018, the remaining repurchase authorization totaled approximately 20 million shares. The program does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time at our discretion.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our credit 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, business acquisitions, 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 30, 2017.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the six months ended June 30, 2018 and July 1, 2017 was derived from our condensed consolidated financial statements.
|
| | | | | | | |
| Six Months Ended |
| June 30, 2018 | | July 1, 2017 |
| (dollars in thousands) |
Operating activities | $ | (64,398 | ) | | $ | 34,250 | |