Form 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended July 4, 2009
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 001-32891
 
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
 
     
Maryland   20-3552316
(State of incorporation)   (I.R.S. employer identification no.)
     
1000 East Hanes Mill Road
Winston-Salem, North Carolina
(Address of principal executive office)
  27105
(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 þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of August 3, 2009, there were 94,739,884 shares of the registrant’s common stock outstanding.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
    1  
    1  
             
               
      Financial Statements (unaudited):        
        Condensed Consolidated Statements of Income for the quarters and six months ended July 4, 2009 and June 28, 2008     2  
        Condensed Consolidated Balance Sheets at July 4, 2009 and January 3, 2009     3  
        Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2009 and June 28, 2008     4  
        Notes to Condensed Consolidated Financial Statements     5  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     30  
      Quantitative and Qualitative Disclosures about Market Risk     57  
      Controls and Procedures     57  
      Controls and Procedures     58  
       
PART II        
      Legal Proceedings     58  
      Risk Factors     58  
      Unregistered Sales of Equity Securities and Use of Proceeds     58  
      Defaults Upon Senior Securities     58  
      Submission of Matters to a Vote of Security Holders     58  
      Other Information     58  
      Exhibits     58  
Signatures     59  
Index to Exhibits     E-1  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
Trademarks, Trade Names and Service Marks
 
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just My Size, barely there, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofold marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.


Table of Contents

 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
 
Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended January 3, 2009, particularly under the caption “Risk Factors.”
 
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended January 3, 2009, particularly under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements 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 special reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.
 
We make available free of charge at www.hanesbrands.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our Web site, www.hanesbrands.com, we do not incorporate our Web site or its contents into this Quarterly Report on Form 10-Q.


1


Table of Contents

 
PART I
 
Item 1.  Financial Statements
 
HANESBRANDS INC.
 
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Net sales
  $ 986,022     $ 1,072,171     $ 1,843,863     $ 2,060,018  
Cost of sales
    658,631       691,215       1,258,596       1,334,098  
                                 
Gross profit
    327,391       380,956       585,267       725,920  
Selling, general and administrative expenses
    230,699       266,427       453,937       521,039  
Restructuring
    12,544       1,442       31,215       4,000  
                                 
Operating profit
    84,148       113,087       100,115       200,881  
Other expenses
    168             4,114        
Interest expense, net
    44,807       37,635       81,607       78,029  
                                 
Income before income tax expense
    39,173       75,452       14,394       122,852  
Income tax expense
    8,618       18,108       3,167       29,484  
                                 
Net income
  $ 30,555     $ 57,344     $ 11,227     $ 93,368  
                                 
Earnings per share:
                               
Basic
  $ 0.32     $ 0.61     $ 0.12     $ 0.99  
Diluted
  $ 0.32     $ 0.60     $ 0.12     $ 0.97  
Weighted average shares outstanding:
                               
Basic
    95,023       94,355       94,724       94,395  
Diluted
    96,167       96,059       95,607       95,839  
 
See accompanying notes to Condensed Consolidated Financial Statements.


2


Table of Contents

HANESBRANDS INC.
 
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
 
                 
    July 4,
    January 3,
 
    2009     2009  
 
Assets
               
Cash and cash equivalents
  $ 47,561     $ 67,342  
Trade accounts receivable less allowances of $23,649 at July 4, 2009 and $21,897 at January 3, 2009
    505,302       404,930  
Inventories
    1,234,543       1,290,530  
Deferred tax assets and other current assets
    325,111       347,523  
                 
Total current assets
    2,112,517       2,110,325  
                 
Property, net
    617,072       588,189  
Trademarks and other identifiable intangibles, net
    141,668       147,443  
Goodwill
    322,002       322,002  
Deferred tax assets and other noncurrent assets
    382,832       366,090  
                 
Total assets
  $ 3,576,091     $ 3,534,049  
                 
                 
Liabilities and Stockholders’ Equity                
Accounts payable
  $ 288,840     $ 325,518  
Accrued liabilities
    295,861       315,392  
Notes payable
    64,013       61,734  
Accounts Receivable Securitization Facility
    226,000       45,640  
                 
Total current liabilities
    874,714       748,284  
                 
Long-term debt
    1,993,930       2,130,907  
Other noncurrent liabilities
    468,302       469,703  
                 
Total liabilities
    3,336,946       3,348,894  
                 
Stockholders’ equity:
               
Preferred stock (50,000,000 authorized shares; $.01 par value)
               
Issued and outstanding — None
           
Common stock (500,000,000 authorized shares; $.01 par value)
               
Issued and outstanding — 94,739,884 at July 4, 2009 and 93,520,132 at January 3, 2009
    947       935  
Additional paid-in capital
    272,722       248,167  
Retained earnings
    228,750       217,522  
Accumulated other comprehensive loss
    (263,274 )     (281,469 )
                 
Total stockholders’ equity
    239,145       185,155  
                 
Total liabilities and stockholders’ equity
  $ 3,576,091     $ 3,534,049  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


3


Table of Contents

HANESBRANDS INC.
 
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
                 
    Six Months Ended  
    July 4,
    June 28,
 
    2009     2008  
 
Operating activities:
               
Net income
  $ 11,227     $ 93,368  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation
    39,448       49,322  
Amortization of intangibles
    6,181       5,638  
Restructuring
    (1,554 )     (2,631 )
Charges incurred for amendments of credit facilities
    4,114        
Amortization of debt issuance costs
    4,915       3,015  
Stock compensation expense
    18,382       15,101  
Deferred taxes and other
    (7,281 )     (7,959 )
Changes in assets and liabilities:
               
Accounts receivable
    (98,093 )     31,183  
Inventories
    59,144       (221,340 )
Other assets
    18,915       (8,909 )
Accounts payable
    (36,215 )     29,821  
Accrued liabilities and other
    7,334       (36,571 )
                 
Net cash provided by (used in) operating activities
    26,517       (49,962 )
                 
Investing activities:
               
Purchases of property, plant and equipment
    (77,816 )     (73,550 )
Acquisition of business
          (9,994 )
Proceeds from sales of assets
    8,779       9,524  
                 
Net cash used in investing activities
    (69,037 )     (74,020 )
                 
Financing activities:
               
Borrowings on notes payable
    818,880       210,016  
Repayments on notes payable
    (816,676 )     (171,346 )
Payments to amend credit facilities
    (22,165 )     (69 )
Borrowings on revolving loan facility
    949,525       155,000  
Repayments on revolving loan facility
    (889,525 )     (155,000 )
Borrowings on Accounts Receivable Securitization Facility
    128,009       20,389  
Repayments on Accounts Receivable Securitization Facility
    (144,626 )     (20,389 )
Proceeds from stock options exercised
          382  
Stock repurchases
          (10,860 )
Transaction with Sara Lee Corporation
          18,000  
Other
    (594 )     (590 )
                 
Net cash provided by financing activities
    22,828       45,533  
                 
Effect of changes in foreign exchange rates on cash
    (89 )     1,131  
                 
Decrease in cash and cash equivalents
    (19,781 )     (77,318 )
Cash and cash equivalents at beginning of year
    67,342       174,236  
                 
Cash and cash equivalents at end of period
  $ 47,561     $ 96,918  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


4


Table of Contents

HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
 
(1)   Basis of Presentation
 
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. The Company has also evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through August 6, 2009, the day the financial statements were issued.
 
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
 
(2)   Recent Accounting Pronouncements
 
Fair Value Measurements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 became effective for the Company’s financial assets and liabilities on December 30, 2007. The FASB approved a one-year deferral of the adoption of SFAS 157 as it relates to non-financial assets and liabilities with the issuance in February 2008 of FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, as a result of which implementation by the Company was required on January 4, 2009. The partial adoption of SFAS 157 in the first quarter ended March 29, 2008 for financial assets and liabilities and the first quarter ended April 4, 2009 for non-financial assets and liabilities had no material impact on the financial condition, results of operations or cash flows of the Company, but resulted in certain additional disclosures reflected in Note 9.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). The objective of SFAS 160 is to improve the relevance, comparability and transparency of the financial information that a company provides in its consolidated financial statements. SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. The Company adopted SFAS 160 in the first quarter ended April 4, 2009. The adoption of


5


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
SFAS 160 did not have a material impact on the Company’s financial condition, results of operations or cash flows.
 
Disclosures About Derivative Instruments and Hedging Activities
 
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands the disclosure requirements of FASB Statement No. 133 about an entity’s derivative instruments and hedging activities. The Company adopted SFAS 161 in the first quarter ended April 4, 2009. The adoption of SFAS 161 did not have a material impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 8.
 
Interim Disclosures about Fair Value of Financial Instruments
 
In April 2009, the FASB issued Staff Position No. 107-1 and Accounting Principal Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This statement also amends Accounting Principal Board Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. FSP 107-1 is effective for interim and annual periods ending after June 15, 2009. Since FSP 107-1 only requires additional disclosures, the adoption of the statement had no material impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 9.
 
Subsequent Events
 
In May 2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS 165”). SFAS 165 provides guidance on the Company’s assessment and disclosure of subsequent events, and clarifies that the Company must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued for both interim and annual financial reporting periods. SFAS 165 is effective prospectively for the Company’s interim and annual periods ending after June 15, 2009. The adoption of the SFAS 165 did not have an impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 1.
 
Employers’ Disclosures about Postretirement Benefit Plan Assets
 
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). FSP 132(R)-1 expands the disclosure requirements of FASB Statement No. 132(R) to include more detailed disclosures about an employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets, similar to the disclosure requirements of SFAS 157. FSP 132(R)-1 is effective for fiscal years ending after December 15, 2009. Since FSP 132(R)-1 only requires additional disclosures, adoption of the statement is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.
 
Accounting for Transfers of Financial Assets
 
In June 2009, the FASB issued Statement No. 166, Accounting for Transfers of Financial Assets (“SFAS 166”). SFAS 166 amends the derecognition guidance and the accounting and disclosures required by


6


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
FASB Statement No. 140. SFAS 166 is effective for financial asset transfers occurring after the beginning of the Company’s first fiscal year that begins after November 15, 2009. The Company is evaluating the impact of adoption of this statement on the financial condition, results of operations and cash flows of the Company.
 
Amendments to FASB Interpretation No. 46(R)
 
In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS 167”). SFAS 167 amends the consolidation guidance that applies to variable interest entities. SFAS 167 is effective for the Company’s first fiscal year that begins after November 15, 2009. The Company is evaluating the impact of adoption of this statement on the financial condition, results of operations and cash flows of the Company.
 
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
 
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
 
(3)   Earnings Per Share
 
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding during the quarters and six months ended July 4, 2009 and June 28, 2008. 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 for the quarters and six months ended July 4, 2009 and June 28, 2008 is as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Basic weighted average shares
    95,023       94,355       94,724       94,395  
Effect of potentially dilutive securities:
                               
Stock options
          777             510  
Restricted stock units
    1,049       923       730       932  
Employee stock purchase plan and other
    95       4       153       2  
                                 
Diluted weighted average shares
    96,167       96,059       95,607       95,839  
                                 
 
Options to purchase 5,943 and 140 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarters ended July 4, 2009 and June 28, 2008, respectively. Options to purchase 5,943 and 1,480 shares of common stock and 48 and 0 restricted stock units were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the six months ended July 4, 2009 and June 28, 2008, respectively.


7


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(4)   Restructuring
 
Since becoming an independent company, the Company has undertaken a variety of restructuring efforts in connection with its consolidation and globalization strategy designed to improve operating efficiencies and lower costs. As a result of this strategy, the Company expects to incur approximately $250,000 in restructuring and related charges over the three year period following the spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006, of which approximately half is expected to be noncash. As of July 4, 2009, the Company has recognized approximately $247,000 and announced approximately $241,000 in restructuring and related charges related to this strategy since September 5, 2006. Of the amounts recognized, approximately $94,000 relates to employee termination and other benefits, approximately $87,000 relates to accelerated depreciation of buildings and equipment for facilities that have been or will be closed, approximately $24,000 relates to noncancelable lease and other contractual obligations, approximately $22,000 relates to write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate, approximately $11,000 relates to impairments of fixed assets and approximately $9,000 relates to other exit costs such as equipment moving costs. Accelerated depreciation related to the Company’s manufacturing facilities and distribution centers that have been or will be closed is reflected in the “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statements of Income. The write-offs of stranded raw materials and work in process inventory are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income.
 
The reported results for the quarters and six months ended July 4, 2009 and June 28, 2008 reflect amounts recognized for restructuring actions, including the impact of certain actions that were completed for amounts more favorable than previously estimated. The impact of restructuring efforts on income before income tax expense is summarized as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Restructuring programs:
                               
Year ended January 2, 2010 restructuring actions
  $ 10,589     $     $ 19,244     $  
Year ended January 3, 2009 restructuring actions
    820       2,494       13,875       5,436  
Year ended December 29, 2007 restructuring actions
    1,096       4,172       3,641       7,028  
Six months ended December 30, 2006 and prior restructuring actions
    159       (13 )     331       (52 )
                                 
    $ 12,664     $ 6,653     $ 37,091     $ 12,412  
                                 
 
The following table illustrates where the costs associated with these actions are recognized in the Condensed Consolidated Statements of Income:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Cost of sales
  $ (65 )   $ 4,633     $ 5,521     $ 7,191  
Selling, general and administrative expenses
    185       578       355       1,221  
Restructuring
    12,544       1,442       31,215       4,000  
                                 
    $ 12,664     $ 6,653     $ 37,091     $ 12,412  
                                 


8


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Components of the restructuring actions are as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Accelerated depreciation
  $ (39 )   $ 5,211     $ 2,629     $ 8,412  
Inventory write-offs
    159             3,247        
Employee termination and other benefits
    9,569       1,362       15,210       3,920  
Noncancelable lease and other contractual obligations
                               
and other
    2,975       80       16,005       80  
                                 
    $ 12,664     $ 6,653     $ 37,091     $ 12,412  
                                 
 
Rollforward of accrued restructuring is as follows:
 
         
    Six Months Ended
 
    July 4,
 
    2009  
 
Beginning accrual
  $ 21,793  
Restructuring expenses
    32,774  
Cash payments
    (28,312 )
Adjustments to restructuring expenses
    (2,489 )
         
Ending accrual
  $ 23,766  
         
 
The accrual balance as of July 4, 2009 is comprised of $19,293 in current accrued liabilities and $4,473 in other noncurrent liabilities. The $19,293 in current accrued liabilities consists of $13,707 for employee termination and other benefits and $5,586 for noncancelable lease and other contractual obligations. The $4,473 in other noncurrent liabilities primarily consists of noncancelable lease and other contractual obligations.
 
Adjustments to previous estimates resulted from actual costs to settle obligations being lower than expected. The adjustments were reflected in the “Restructuring” line of the Condensed Consolidated Statements of Income.
 
Year Ended January 2, 2010 Actions
 
During the six months ended July 4, 2009, the Company approved actions to close three manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras and Canada, and eliminate an aggregate of approximately 2,800 positions in those countries and El Salvador. The production capacity represented by the manufacturing facilities has been relocated to lower cost locations in Asia, Central America and the Caribbean Basin. The distribution capacity has been relocated to the Company’s West Coast distribution center in California in order to expand capacity for goods the Company sources from Asia. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. The Company recorded charges of $10,589 and $19,244 in the quarter and six months ended July 4, 2009, respectively, related to these actions. In the quarter and six months ended July 4, 2009, the Company recognized $9,978 and $16,242, respectively, for employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group, $6 and $1,368, respectively, for noncancelable lease and other contractual obligations related to the closure of certain manufacturing facilities, $15 and $858, respectively, for write-offs of stranded


9


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of certain manufacturing facilities, $448 and $577, respectively, for other exit costs and $142 and $199, respectively, for accelerated depreciation of buildings and equipment. These charges are reflected in the “Restructuring,” “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statement of Income. All actions are expected to be completed within a 12-month period.
 
Year Ended January 3, 2009 Actions
 
During the six months ended July 4, 2009, the Company recognized additional charges, as well as credits for certain actions which were completed for amounts more favorable than previously estimated, associated with facility closures announced in the year ended January 3, 2009, resulting in a decrease of $820 and $13,875 to income before income tax expense for the quarter and six months ended July 4, 2009, respectively. In the quarter and six months ended July 4, 2009, the Company recognized credits of $686 and charges of $7,257, respectively, for noncancelable lease and other contractual obligations associated with plant closures announced in the year ended January 3, 2009, charges of $1,362 and $4,229, respectively, for other exit costs and charges of $144 and $2,389, respectively, for write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of certain manufacturing facilities. These charges are reflected in the “Restructuring” and “Cost of sales” lines of the Condensed Consolidated Statements of Income.
 
(5)   Inventories
 
Inventories consisted of the following:
 
                 
    July 4,
    January 3,
 
    2009     2009  
 
Raw materials
  $ 161,784     $ 172,494  
Work in process
    96,815       116,800  
Finished goods
    975,944       1,001,236  
                 
    $ 1,234,543     $ 1,290,530  
                 
 
(6)   Allowances for Trade Accounts Receivable
 
The changes in the Company’s allowance for doubtful accounts and allowance for chargebacks and other deductions for the quarter and six months ended July 4, 2009 are as follows:
 
                         
          Allowance for
       
    Allowance for
    Chargebacks
       
    Doubtful
    and Other
       
    Accounts     Deductions     Total  
 
Balance at January 3, 2009
  $ 12,555     $ 9,342     $ 21,897  
Charged to expenses
    1,301       (481 )     820  
Deductions and write-offs
    (634 )     (822 )     (1,456 )
                         
Balance at April 4, 2009
    13,222       8,039       21,261  
                         
Charged to expenses
    594       2,669       3,263  
Deductions and write-offs
    33       (908 )     (875 )
                         
Balance at July 4, 2009
  $ 13,849     $ 9,800     $ 23,649  
                         


10


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Charges to the allowance for doubtful accounts are reflected in the “Selling, general and administrative expenses” line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the “Net sales” line of the Condensed Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease income, represent write-offs of previously reserved accounts receivables and allowed customer chargebacks and deductions against gross accounts receivable.
 
(7)   Debt
 
The Company had the following debt at July 4, 2009 and January 3, 2009:
 
                             
    Interest
                 
    Rate as of
    Principal Amount      
    July 4,
    July 4,
    January 3,
     
    2009     2009     2009     Maturity Date
 
Senior Secured Credit Facility:
                           
Term A
    5.59 %   $ 139,000     $ 139,000     September 2012
Term B
    5.80 %     851,250       851,250     September 2013
Revolving Loan Facility
    4.79 %     60,000           September 2011
Second Lien Credit Facility
    4.84 %     450,000       450,000     March 2014
Floating Rate Senior Notes
    4.59 %     493,680       493,680     December 2014
Accounts Receivable Securitization Facility
    4.70 %     226,000       242,617     April 2010
                             
              2,219,930       2,176,547      
Less current maturities
            226,000       45,640      
                             
            $ 1,993,930     $ 2,130,907      
                             
 
As of July 4, 2009, the Company had $60,000 outstanding under the Senior Secured Credit Facility’s $500,000 Revolving Loan Facility and $25,351 of standby and trade letters of credit issued and outstanding under this facility.
 
Availability of funding under the Accounts Receivable Securitization Facility depends primarily upon the eligible outstanding receivables balance. The total amount of receivables used as collateral for the Accounts Receivable Securitization Facility was $424,252 and $331,470 at July 4, 2009 and January 3, 2009, respectively, and is reported on the Company’s Condensed Consolidated Balance Sheets in “Trade accounts receivable less allowances.”
 
On March 10, 2009, the Company entered into a Third Amendment (the “Third Amendment”) to the Senior Secured Credit Facility dated as of September 5, 2006. Pursuant to the Third Amendment, the ratio of debt to EBITDA (earnings before income taxes, depreciation expense and amortization) for the preceding four quarters, or leverage ratio, was increased from 3.75 to 1 in the first quarter of 2009 to 4.25 to 1, from 3.5 to 1 in the second quarter of 2009 to 4.2 to 1, from 3.25 to 1 in the third quarter of 2009 to 3.95 to 1, and from 3.0 to 1 in the fourth quarter of 2009 to 3.6 to 1. After 2009, the leverage ratio will decrease from 3.6 to 1 until it reaches 3.0 to 1 in the third quarter of 2011. In addition, pursuant to the Third Amendment, the ratio of EBITDA for the preceding four quarters to consolidated interest expense for such period, or interest coverage ratio, was decreased from 3.0 to 1 in the second and third quarters of 2009 to 2.5 to 1 and from 3.25 to 1 in the fourth quarter of 2009 to 2.5 to 1. After 2009, the interest coverage ratio will increase from 2.5 to 1 until it reaches 3.25 to 1 in the third quarter of 2011.


11


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
At the Company’s option, borrowings under the Senior Secured Credit Facility may be maintained from time to time as (a) “Base Rate” loans, which bear interest at the higher of (i) 1/2 of 1% in excess of the federal funds rate and (ii) the rate published in the Wall Street Journal as the “prime rate” (or equivalent), in each case in effect from time to time, plus the applicable margin in effect from time to time, or (b) LIBOR-based loans, which bear interest at the “LIBO Rate” (as defined in the Senior Secured Credit Facility and adjusted for maximum reserves), for the respective interest period plus the applicable margin in effect from time to time. Pursuant to the Third Amendment, the applicable margins for the Senior Secured Credit Facility were increased by 300 basis points.
 
The Third Amendment also provides for certain other amendments to the Senior Secured Credit Facility, including increasing the percentage of “Excess Cash Flow” as calculated pursuant to the Senior Secured Credit Facility, which is used to determine whether, and the extent to which, the Company is required in certain circumstances to make certain mandatory prepayments. The Company paid $20,570 in debt amendment fees in connection with entering into the Third Amendment of which $16,792 will be amortized over the term of the Senior Secured Credit Facility.
 
On March 16, 2009, the Company and HBI Receivables LLC (“HBI Receivables”), a wholly-owned bankruptcy-remote subsidiary of Hanesbrands, entered into Amendment No. 1 (the “First Amendment”) to the Accounts Receivable Securitization Facility dated as of November 27, 2007. The Accounts Receivable Securitization Facility contains the same leverage ratio and interest coverage ratio provisions as the Senior Secured Credit Facility. The First Amendment effects the same changes to the leverage ratio and the interest coverage ratio that are effected by the Third Amendment described above. Pursuant to the First Amendment, the rate that would be payable to the conduit purchasers or the committed purchasers party to the Accounts Receivable Securitization Facility in the event of certain defaults is increased from 1% over the prime rate to 3% over the greatest of (i) the one-month LIBO rate plus 1%, (ii) the weighted average rates on federal funds transactions plus 0.5%, or (iii) the prime rate. Also pursuant to the First Amendment, several of the factors that contribute to the overall availability of funding have been amended in a manner that would be expected to generally reduce the amount of funding that will be available under the Accounts Receivable Securitization Facility. The First Amendment also provides for certain other amendments to the Accounts Receivable Securitization Facility, including changing the termination date for the Accounts Receivable Securitization Facility from November 27, 2010 to March 15, 2010, and requiring that HBI Receivables make certain payments to a conduit purchaser, a committed purchaser, or certain entities that provide funding to or are affiliated with them, in the event that assets and liabilities of a conduit purchaser are consolidated for financial and/or regulatory accounting purposes with certain other entities. The Company paid $145 in debt amendment fees in connection with entering into the First Amendment, which will be amortized over the term of the Accounts Receivable Securitization Facility, and wrote off $168 of unamortized debt issuance costs.
 
On April 13, 2009, the Company and HBI Receivables entered into Amendment No. 2 (the “Second Amendment”) to the Accounts Receivable Securitization Facility. Pursuant to the Second Amendment, several of the factors that contribute to the overall availability of funding have been amended in a manner that is expected to generally increase over time the amount of funding that will be available under the Accounts Receivable Securitization Facility as compared to the amount that would be available pursuant to the First Amendment. The Second Amendment also provides for certain other amendments to the Accounts Receivable Securitization Facility, including changing the termination date for the Accounts Receivable Securitization Facility from March 15, 2010 to April 12, 2010. In addition, HSBC Securities (USA) Inc. replaced JPMorgan Chase Bank, N.A. as agent under the Accounts Receivable Securitization Facility, PNC Bank, N.A. replaced JPMorgan Chase Bank, N.A. as a managing agent, and PNC Bank, N.A. and an affiliate of PNC Bank, N.A. replaced affiliates of JPMorgan Chase Bank, N.A. as a committed purchaser and a conduit purchaser, respectively. The Company paid $1,450 in debt amendment fees in connection with entering into the Second


12


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Amendment, which will be amortized over the term of the Accounts Receivable Securitization Facility, and wrote off $168 of unamortized debt issuance costs.
 
As of July 4, 2009, the Company was in compliance with all covenants under its credit facilities.
 
During the quarter and six months ended July 4, 2009, the Company recognized charges of $168 and $4,114, respectively, in the “Other expenses” line of the Condensed Consolidated Statements of Income, which represent certain costs related to the amendments of the Senior Secured Credit Facility and the Accounts Receivable Securitization Facility.
 
(8)   Financial Instruments and Risk Management
 
The Company uses financial instruments to manage its exposures to movements in interest rates, foreign exchange rates and commodity prices. The use of these financial instruments modifies the Company’s exposure to these risks with the goal of reducing the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivative contracts.
 
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The fair value is based upon either market quotes for actively traded instruments or independent bids for nonexchange traded instruments. The Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions to the hedged risk. On the date the derivative is entered into, the Company designates the derivative as a fair value hedge, cash flow hedge, net investment hedge or a mark to market hedge, and accounts for the derivative in accordance with its designation. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the Company discontinues hedge accounting, and any deferred gains or losses are recorded in the respective measurement period. The Company currently does not have any fair value or net investment hedge instruments.
 
Each of the Company’s derivative contracts is governed by the International Swaps and Derivatives Association master agreement. If the Company were to default on or be unable to perform its responsibilities with respect to a counterparty under this agreement, the counterparty could request immediate payment on any derivative instruments in net liability positions. As of July 4, 2009, all of the counterparties to the Company’s derivative instruments in net liability positions are lenders under the Senior Secured Credit Facility. Consistent with the terms of the Senior Secured Credit Facility, derivative instruments with a counterparty that is also a lender under the Senior Secured Credit Facility are secured by the same collateral that secures the Company’s obligations under the Senior Secured Credit Facility.
 
The Company may be exposed to credit losses in the event of nonperformance by individual counterparties or the entire group of counterparties to the Company’s derivative contracts. Risk of nonperformance by counterparties is mitigated by dealing with highly rated counterparties and by diversifying across counterparties.
 
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.


13


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Market to Market Hedges — Intercompany Foreign Exchange Transactions
 
The Company uses foreign exchange derivative contracts to reduce the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. Mark to market hedge derivatives relating to intercompany foreign exchange contracts are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities. As of July 4, 2009, the U.S. dollar equivalent of commitments to purchase and sell foreign currencies in our foreign currency mark to market hedge derivative portfolio is $58,808 and $39,758, respectively, using the exchange rate at the reporting date.
 
Cash Flow Hedges
 
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in the “Accumulated other comprehensive loss” line of the Condensed Consolidated Balance Sheets. When the impact of the hedged item is recognized in the income statement, the gain or loss included in accumulated other comprehensive income (loss) is reported on the same line in the Condensed Consolidated Statements of Income as the hedged item.
 
Cash Flow Hedges — Interest Rate Derivatives
 
The Company is required under the Senior Secured Credit Facility and the Second Lien Credit Facility to hedge a portion of its floating rate debt to reduce interest rate risk caused by floating rate debt issuance. The Company has executed certain interest rate cash flow hedges in the form of swaps and caps in order to mitigate the Company’s exposure to variability in cash flows for the future interest payments on a designated portion of borrowings. Given the recent turmoil in the financial and credit markets, the Company expanded its interest rate hedging portfolio at what the Company believes to be advantageous rates that are expected to minimize the Company’s overall interest rate risk. The effective portion of interest rate hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying debt interest payments are recognized. Interest rate cash flow hedge derivatives are reported as a component of interest expense and therefore are reported as cash flow from operating activities similar to the manner in which cash interest payments are reported in the Condensed Consolidated Statements of Cash Flows.
 
At July 4, 2009 and January 3, 2009, the Company had outstanding interest rate hedging arrangements whereby it has capped the interest rate on $400,000 of its floating rate debt at 3.50% and has fixed the interest rate on $1,393,680 of its floating rate debt at a weighted average rate of 4.16%. Approximately 81% and 82% of the Company’s total debt outstanding at July 4, 2009 and January 3, 2009, respectively, was at a fixed or capped LIBOR rate. There have been no changes in the Company’s interest rate derivative portfolio during the quarter and six months ended July 4, 2009.
 
Cash Flow Hedges — Foreign Currency Derivatives
 
The Company uses forward exchange and option contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments, and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates. The effective portion of foreign exchange hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of foreign exchange hedge derivative contracts related to the purchase of inventory or other hedged items are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities.


14


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Historically, the principal currencies hedged by the Company include the Euro, Mexican peso, Canadian dollar and Japanese yen. Forward exchange contracts mature on the anticipated cash requirement date of the hedged transaction, generally within one year. As of July 4, 2009, the U.S. dollar equivalent of commitments to sell foreign currencies in the Company’s foreign currency cash flow hedge derivative portfolio was $28,113, using the exchange rate at the reporting date.
 
Cash Flow Hedges — Commodity Derivatives
 
Cotton is the primary raw material the Company uses to manufacture many of its products and is purchased at market prices. From time to time, the Company uses commodity financial instruments to hedge the price of cotton, for which there is a high correlation between the hedged item and the hedge instrument. Gains and losses on these contracts are intended to offset losses and gains on the hedged transactions in an effort to reduce the earnings volatility resulting from fluctuating commodity prices. The effective portion of commodity hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of commodity hedge derivative contracts related to the purchase of inventory is reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities. There were no amounts outstanding under cotton futures or cotton option contracts at July 4, 2009 and January 3, 2009.
 
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:
 
                     
        Fair Value  
        July 4,
    January 3,
 
    Balance Sheet Location   2009     2009  
 
Derivative assets — hedges
                   
Interest rate contracts
  Other current assets   $     $ 46  
Foreign exchange contracts
  Other current assets     35       1,209  
                     
Total derivative assets — hedges
        35       1,255  
                     
Derivatives assets — non-hedges
                   
Foreign exchange contracts
  Other current assets     844       3,286  
                     
Total derivative assets
      $ 879     $ 4,541  
                     
Derivatives liabilities — hedges
                   
Interest rate contracts
  Accrued liabilities   $ (2,834 )   $ (6,084 )
Interest rate contracts
  Other noncurrent liabilities     (61,967 )     (76,927 )
Foreign exchange contracts
  Accrued liabilities     (409 )     (1,347 )
                     
Total derivatives liabilities — hedges
        (65,210 )     (84,358 )
                     
Derivatives liabilities — non-hedges
                   
Foreign exchange contracts
  Accrued liabilities     (1,715 )     (533 )
                     
Total derivative liabilities
      $ (66,925 )   $ (84,891 )
                     
Net derivative liability
      $ (66,046 )   $ (80,350 )
                     


15


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Net Derivative Gain or Loss
 
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and Accumulated Other Comprehensive Loss is as follows:
 
                                     
                    Amount of
 
    Amount of
        Gain (Loss)
 
    Gain (Loss)
        Reclassified from
 
    Recognized in
    Location of
  Accumulated
 
    Accumulated Other
    Gain (Loss)
  Other Comprehensive
 
    Comprehensive Loss
    Reclassified from
  Loss into Income
 
    (Effective Portion)
    Accumulated Other
  (Effective Portion)
 
    Quarter Ended     Comprehensive
  Quarter Ended  
    July 4,
    June 28,
    Loss into Income
  July 4,
    June 28,
 
    2009     2008     (Effective Portion)   2009     2008  
 
Interest rate contracts
  $ 6,996     $ 14,383     Interest expense, net   $ 101     $ 198  
Foreign exchange contracts
    (1,739 )     643     Cost of sales     219       920  
Commodity contracts
          126     Cost of sales           (433 )
                                     
Total
  $ 5,257     $ 15,152         $ 320     $ 685  
                                     
 
                                     
                    Amount of
 
    Amount of
        Gain (Loss)
 
    Gain (Loss)
        Reclassified from
 
    Recognized in
    Location of
  Accumulated
 
    Accumulated Other
    Gain (Loss)
  Other Comprehensive
 
    Comprehensive Loss
    Reclassified from
  Loss into Income
 
    (Effective Portion)
    Accumulated Other
  (Effective Portion)
 
    Six Months Ended     Comprehensive
  Six Months Ended  
    July 4,
    June 28,
    Loss into Income
  July 4,
    June 28,
 
    2009     2008     (Effective Portion)   2009     2008  
 
Interest rate contracts
  $ 18,012     $ (448 )   Interest expense, net   $ 129     $ 371  
Foreign exchange contracts
    (869 )     (1,199 )   Cost of sales     (1,113 )     1,573  
Commodity contracts
          (208 )   Cost of sales     96       (464 )
                                     
Total
  $ 17,143     $ (1,855 )       $ (888 )   $ 1,480  
                                     
 
The Company expects to reclassify into earnings during the next 12 months a net loss from Accumulated Other Comprehensive Loss of approximately $3,172.
 
The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. The Company recognized losses related to ineffectiveness of hedging relationships for the quarter ended July 4, 2009 of $(150), consisting of $(143) for interest rate contracts and $(7) for foreign exchange contracts. The Company recognized gains (losses) related to ineffectiveness of hedging relationships for the quarter ended June 28, 2008 of $4, consisting of $(12) for interest rate contracts and $16 for foreign exchange contracts. The Company recognized gains (losses) related to ineffectiveness of hedging relationships for the six months ended July 4, 2009 of $144, consisting of $152 for interest rate contracts and $(8) for foreign exchange contracts. The Company recognized losses related to ineffectiveness of hedging relationships for the six months ended June 28, 2008 of $(187), consisting of $(12) for interest rate contracts and $(175) for foreign exchange contracts.


16


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The effect of mark to market hedge derivative instruments on the Condensed Consolidated Statements of Income is as follows:
 
                                     
        Amount of Gain (Loss) Recognized in Income  
        Quarter Ended     Six Months Ended  
    Location of Gain (Loss)
  July 4,
    June 28,
    July 4,
    June 28,
 
    Recognized in Income on Derivative   2009     2008     2009     2008  
 
Foreign exchange contracts
  Selling, general and administrative expenses   $ 1,132     $ 284     $ 1,176     $ 356  
                                     
Total
      $ 1,132     $ 284     $ 1,176     $ 356  
                                     
 
(9)   Fair Value of Assets and Liabilities
 
Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. A three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is utilized for disclosing the fair value of the Company’s assets and liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
 
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
 
  •  Market approach — prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
  •  Cost approach — amount that would be required to replace the service capacity of an asset or replacement cost.
 
  •  Income approach — techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
 
The Company primarily applies the market approach for commodity derivatives and the income approach for interest rate and foreign currency derivatives for recurring fair value measurements and attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The determination of fair values incorporates various factors that include not only the credit standing of the counterparties involved and the impact of credit enhancements, but also the impact of the Company’s nonperformance risk on its liabilities. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
 
Assets and Liabilities Measured on a Recurring Basis
 
As of July 4, 2009, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to interest rates and foreign exchange rates. The fair values of cotton derivatives are determined based on quoted prices in public markets and are categorized as Level 1. The fair values of interest rate and foreign exchange


17


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets and are categorized as Level 2. The Company does not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the quarter and six months ended July 4, 2009. There were no changes during the quarter and six months ended July 4, 2009 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of July 4, 2009, the Company did not have any non-financial assets or liabilities that are required to be measured at fair value on a 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
 
    July 4, 2009  
    Quoted Prices
             
    in Active
    Significant
       
    Markets for
    Other
    Significant
 
    Identical
    Observable
    Unobservable
 
    Assets
    Inputs
    Inputs
 
    (Level 1)     (Level 2)     (Level 3)  
 
Derivative contracts, net
  $     $ (66,046 )   $  
                         
Total
  $     $ (66,046 )   $  
                         
 
                                 
          Assets (Liabilities) at Fair Value as of
 
          January 3, 2009  
          Quoted Prices
             
          in Active
    Significant
       
          Markets for
    Other
    Significant
 
          Identical
    Observable
    Unobservable
 
          Assets
    Inputs
    Inputs
 
          (Level 1)     (Level 2)     (Level 3)  
 
Derivative contracts, net
          $     $ (80,350 )   $  
                                 
Total
          $     $ (80,350 )   $  
                                 
 
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 July 4, 2009 and January 3, 2009. The fair value of debt was $2,090,444 and $1,753,885 as of July 4, 2009 and January 3, 2009 and had a carrying value of $2,219,930 and $2,176,547, respectively. The fair values were estimated using quoted market prices as provided in secondary markets which consider the Company’s credit risk and market related conditions. The carrying amounts of the Company’s notes payable approximated fair value as of July 4, 2009 and January 3, 2009, primarily due to the short-term nature of these instruments.


18


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(10)   Comprehensive Income
 
The Company’s comprehensive income is as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Net income
  $ 30,555     $ 57,344     $ 11,227     $ 93,368  
Translation adjustments
    10,791       4,220       8,256       2,690  
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax expense (benefit) of $2,170, $6,161, $6,324 and ($146), respectively
    3,407       9,677       9,931       (229 )
Amounts amortized into net periodic income:
                               
Prior service cost, net of tax $3, $4, $6 and $8, respectively
    4       6       8       12  
Actuarial loss, net of tax of $810, $15, $1,620 and $30, respectively
    1,271       24       2,542       48  
                                 
Comprehensive income
  $ 46,028     $ 71,271     $ 31,964     $ 95,889  
                                 
 
(11)   Income Taxes
 
The difference in the estimated annual effective income tax rates of 22% for the quarter and six months ended July 4, 2009 and 24% for the quarter and six months ended June 28, 2008 and the U.S. statutory rate of 35% is primarily attributable to unremitted earnings of foreign subsidiaries taxed at rates lower than the U.S. statutory rate. The Company’s estimated annual effective tax rate reflects its strategic initiative to make substantial capital investments outside the United States in its global supply chain in 2009.
 
The Company and Sara Lee entered into a tax sharing agreement in connection with the spin off of the Company from Sara Lee on September 5, 2006. Under the tax sharing agreement, within 180 days after Sara Lee filed its final consolidated tax return for the period that included September 5, 2006, Sara Lee was required to deliver to the Company a computation of the amount of deferred taxes attributable to the Company’s United States and Canadian operations that would be included on the Company’s opening balance sheet as of September 6, 2006 (“as finally determined”) which has been done. The Company has the right to participate in the computation of the amount of deferred taxes. Under the tax sharing agreement, if substituting the amount of deferred taxes as finally determined for the amount of estimated deferred taxes that were included on that balance sheet at the time of the spin off causes a decrease in the net book value reflected on that balance sheet, then Sara Lee will be required to pay the Company the amount of such decrease. If such substitution causes an increase in the net book value reflected on that balance sheet, then the Company will be required to pay Sara Lee the amount of such increase. For purposes of this computation, the Company’s deferred taxes are the amount of deferred tax benefits (including deferred tax consequences attributable to deductible temporary differences and carryforwards) that would be recognized as assets on the Company’s balance sheet computed in accordance with GAAP, but without regard to valuation allowances, less the amount of deferred tax liabilities (including deferred tax consequences attributable to taxable temporary differences) that would be recognized as liabilities on the Company’s opening balance sheet computed in accordance with GAAP, but without regard to valuation allowances. Neither the Company nor Sara Lee will be required to make any other payments to the other with respect to deferred taxes.


19


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The Company’s computation of the final amount of deferred taxes for the Company’s opening balance sheet as of September 6, 2006 is as follows:
 
         
Estimated deferred taxes subject to the tax sharing agreement included in opening balance sheet on September 6, 2006
  $ 450,683  
Final calculation of deferred taxes subject to the tax sharing agreement
    360,460  
         
Decrease in deferred taxes as of opening balance sheet on September 6, 2006
    90,223  
Preliminary cash installment received from Sara Lee
    18,000  
         
Amount due from Sara Lee
  $ 72,223  
         
 
The amount that is expected to be collected from Sara Lee based on the Company’s computation of $72,223 is included as a receivable in Deferred tax assets and other current assets in the Condensed Consolidated Balance Sheet as of July 4, 2009. The Company and Sara Lee have exchanged information in connection with this matter, but Sara Lee has disagreed with the Company’s computation. In accordance with the dispute resolution provisions of the tax sharing agreement, on August 3, 2009, the Company submitted the dispute to binding arbitration. The Company does not believe that the resolution of this dispute will have a material impact on the Company’s financial position, results of operations or cash flows.
 
(12)   Business Segment Information
 
The Company’s operations are managed and reported in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, International, Hosiery and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these segments’ businesses but shares a common supply chain and media and marketing platforms.
 
The types of products and services from which each reportable segment derives its revenues are as follows:
 
  •  Innerwear sells basic branded products that are replenishment in nature under the product categories of women’s intimate apparel, men’s underwear, kids’ underwear, socks and thermals. The Company’s direct-to-consumer retail operations are included within the Innerwear segment.
 
  •  Outerwear sells basic branded products that are seasonal in nature under the product categories of casualwear and activewear.
 
  •  International relates to the Latin America, Asia, Canada and Europe geographic locations which sell products that span across the Innerwear, Outerwear and Hosiery reportable segments.
 
  •  Hosiery sells products in categories such as pantyhose and knee highs.
 
  •  Other is comprised of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and are intended to generate break even margins.
 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, amortization of trademarks and other identifiable intangibles and restructuring and related accelerated depreciation charges and inventory write-offs. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 3, 2009.


20


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Net sales:
                               
Innerwear
  $ 611,779     $ 636,335     $ 1,125,593     $ 1,180,065  
Outerwear
    231,654       260,137       446,561       532,342  
International
    104,073       130,903       187,275       235,539  
Hosiery
    42,584       49,734       95,356       116,475  
Other
    5,634       4,174       8,277       15,295  
                                 
Total segment net sales(1)
    995,724       1,081,283       1,863,062       2,079,716  
Intersegment(2)
    (9,702 )     (9,112 )     (19,199 )     (19,698 )
                                 
Total net sales
  $ 986,022     $ 1,072,171     $ 1,843,863     $ 2,060,018  
                                 
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Segment operating profit (loss):
                               
Innerwear
  $ 92,563     $ 79,942     $ 141,118     $ 133,617  
Outerwear
    3,666       19,927       (12,100 )     36,344  
International
    8,804       18,848       18,872       33,652  
Hosiery
    12,280       15,742       28,844       39,863  
Other
    (2,233 )     830       (2,683 )     (10 )
                                 
Total segment operating profit
    115,080       135,289       174,051       243,466  
Items not included in segment operating profit:
                               
General corporate expenses
    (15,176 )     (12,584 )     (30,664 )     (24,535 )
Amortization of trademarks and other identifiable
                               
intangibles
    (3,092 )     (2,965 )     (6,181 )     (5,638 )
Restructuring
    (12,544 )     (1,442 )     (31,215 )     (4,000 )
Inventory write-offs included in cost of sales
    (159 )           (3,247 )      
Accelerated depreciation included in cost of sales
    224       (4,633 )     (2,274 )     (7,191 )
Accelerated depreciation included in selling,
                               
general and administrative expenses
    (185 )     (578 )     (355 )     (1,221 )
                                 
Total operating profit
    84,148       113,087       100,115       200,881  
Other expenses
    (168 )           (4,114 )      
Interest expense, net
    (44,807 )     (37,635 )     (81,607 )     (78,029 )
                                 
Income before income tax expense
  $ 39,173     $ 75,452     $ 14,394     $ 122,852  
                                 
 


21


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Depreciation and amortization expense:
                               
Innerwear
  $ 10,811     $ 11,481     $ 21,222     $ 22,032  
Outerwear
    5,490       5,679       11,053       12,809  
International
    486       749       986       1,172  
Hosiery
    1,055       1,554       2,211       3,185  
Other
    86       258       131       595  
                                 
      17,928       19,721       35,603       39,793  
Corporate
    3,651       8,975       10,026       15,167  
                                 
Total depreciation and amortization expense
  $ 21,579     $ 28,696     $ 45,629     $ 54,960  
                                 
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Additions to long-lived assets:
                               
Innerwear
  $ 10,949     $ 19,101     $ 33,616     $ 26,503  
Outerwear
    8,965       19,138       39,777       32,140  
International
    322       668       525       1,142  
Hosiery
    102       239       402       318  
Other
    16       11       28       14  
                                 
      20,354       39,157       74,348       60,117  
Corporate
    1,729       6,813       3,468       13,433  
                                 
Total additions to long-lived assets
  $ 22,083     $ 45,970     $ 77,816     $ 73,550  
                                 
 
 
(1) Includes sales between segments. Such sales are at transfer prices that are at cost plus markup or at prices equivalent to market value.
 
(2) Intersegment sales included in the segments’ net sales are as follows:
 
                                 
    Quarter Ended     Six Months Ended  
    July 4,
    June 28,
    July 4,
    June 28,
 
    2009     2008     2009     2008  
 
Innerwear
  $ 1,034     $ 1,006     $ 1,866     $ 2,362  
Outerwear
    5,548       5,227       10,795       10,657  
International
    220       370       451       1,039  
Hosiery
    2,900       2,509       6,087       5,640  
Other
                       
                                 
Total
  $ 9,702     $ 9,112     $ 19,199     $ 19,698  
                                 

22


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(13)   Consolidating Financial Information
 
In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes. The following presents the condensed consolidating financial information separately for:
 
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
 
(ii) Guarantor subsidiaries, on a combined basis, as specified in the indenture governing the Floating Rate Senior Notes;
 
(iii) Non-guarantor subsidiaries, on a combined basis;
 
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate intercompany profit in inventory, (c) eliminate the investments in our subsidiaries and (d) record consolidating entries; and
 
(v) Parent Company, on a consolidated basis.
 
The Floating Rate Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is wholly owned, directly or indirectly, by Hanesbrands Inc. Each entity in the consolidating financial information follows the same accounting policies as described in the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended January 3, 2009, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 


23


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended July 4, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,013,607     $ 109,757     $ 732,070     $ (869,412 )   $ 986,022  
Cost of sales
    794,669       38,355       660,423       (834,816 )     658,631  
                                         
Gross profit
    218,938       71,402       71,647       (34,596 )     327,391  
Selling, general and administrative expenses
    186,533       21,051       22,804       311       230,699  
Restructuring
    11,888             656             12,544  
                                         
Operating profit (loss)
    20,517       50,351       48,187       (34,907 )     84,148  
Equity in earnings (loss) of subsidiaries
    49,916       30,024             (79,940 )      
Other expenses
    168                         168  
Interest expense, net
    34,044       5,766       4,984       13       44,807  
                                         
Income (loss) before income tax expense
    36,221       74,609       43,203       (114,860 )     39,173  
Income tax expense
    5,666       199       2,753             8,618  
                                         
Net income (loss)
  $ 30,555     $ 74,410     $ 40,450     $ (114,860 )   $ 30,555  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,086,432     $ 111,692     $ 761,732     $ (887,685 )   $ 1,072,171  
Cost of sales
    871,358       44,142       666,379       (890,664 )     691,215  
                                         
Gross profit
    215,074       67,550       95,353       2,979       380,956  
Selling, general and administrative expenses
    226,412       17,409       22,491       115       266,427  
Restructuring
    421       127       894             1,442  
                                         
Operating profit (loss)
    (11,759 )     50,014       71,968       2,864       113,087  
Equity in earnings (loss) of subsidiaries
    101,498       43,374             (144,872 )      
Interest expense, net
    25,443       7,971       4,228       (7 )     37,635  
                                         
Income (loss) before income tax expense
    64,296       85,417       67,740       (142,001 )     75,452  
Income tax expense
    6,952       3,397       7,759             18,108  
                                         
Net income (loss)
  $ 57,344     $ 82,020     $ 59,981     $ (142,001 )   $ 57,344  
                                         
 

24


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Six Months Ended July 4, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,932,137     $ 201,989     $ 1,386,066     $ (1,676,329 )   $ 1,843,863  
Cost of sales
    1,612,074       72,835       1,234,922       (1,661,235 )     1,258,596  
                                         
Gross profit
    320,063       129,154       151,144       (15,094 )     585,267  
Selling, general and administrative expenses
    364,094       44,060       45,029       754       453,937  
Restructuring
    28,024             3,191             31,215  
                                         
Operating profit (loss)
    (72,055 )     85,094       102,924       (15,848 )     100,115  
Equity in earnings (loss) of subsidiaries
    143,345       74,178             (217,523 )      
Other expenses
    4,114                         4,114  
Interest expense, net
    61,679       12,238       7,679       11       81,607  
                                         
Income (loss) before income tax expense (benefit)
    5,497       147,034       95,245       (233,382 )     14,394  
Income tax expense (benefit)
    (5,730 )     2,859       6,038             3,167  
                                         
Net income (loss)
  $ 11,227     $ 144,175     $ 89,207     $ (233,382 )   $ 11,227  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Six Months Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 2,109,891     $ 209,138     $ 1,406,691     $ (1,665,702 )   $ 2,060,018  
Cost of sales
    1,672,527       83,355       1,227,217       (1,649,001 )     1,334,098  
                                         
Gross profit
    437,364       125,783       179,474       (16,701 )     725,920  
Selling, general and administrative expenses
    445,712       39,000       35,765       562       521,039  
Restructuring
    (94 )     127       3,967             4,000  
                                         
Operating profit (loss)
    (8,254 )     86,656       139,742       (17,263 )     200,881  
Equity in earnings (loss) of subsidiaries
    165,204       80,151             (245,355 )      
Interest expense, net
    51,786       16,862       9,388       (7 )     78,029  
                                         
Income (loss) before income tax expense
    105,164       149,945       130,354       (262,611 )     122,852  
Income tax expense
    11,796       5,515       12,173             29,484  
                                         
Net income (loss)
  $ 93,368     $ 144,430     $ 118,181     $ (262,611 )   $ 93,368  
                                         

25


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    July 4, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 14,516     $ 1,813     $ 31,232     $     $ 47,561  
Trade accounts receivable less allowances
    (2,444 )     5,699       504,783       (2,736 )     505,302  
Inventories
    977,795       56,439       333,588       (133,279 )     1,234,543  
Deferred tax assets and other current assets
    269,262       10,885       47,241       (2,277 )     325,111  
                                         
Total current assets
    1,259,129       74,836       916,844       (138,292 )     2,112,517  
                                         
Property, net
    187,540       18,125       411,407             617,072  
Trademarks and other identifiable intangibles, net
    23,730       112,299       5,639             141,668  
Goodwill
    232,882       16,935       72,185             322,002  
Investments in subsidiaries
    697,913       738,281             (1,436,194 )      
Deferred tax assets and other noncurrent assets
    154,577       444,117       (119,773 )     (96,089 )     382,832  
                                         
Total assets
  $ 2,555,771     $ 1,404,593     $ 1,286,302     $ (1,670,575 )   $ 3,576,091  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 114,975     $ 2,095     $ 86,122     $ 85,648     $ 288,840  
Accrued liabilities
    214,397       25,500       55,964             295,861  
Notes payable
                64,013             64,013  
Accounts Receivable Securitization Facility
                226,000             226,000  
                                         
Total current liabilities
    329,372       27,595       432,099       85,648       874,714  
                                         
Long-term debt
    1,543,930       450,000                   1,993,930  
Other noncurrent liabilities
    443,324       2,549       18,215       4,214       468,302  
                                         
Total liabilities
    2,316,626       480,144       450,314       89,862       3,336,946  
Stockholders’ equity
    239,145       924,449       835,988       (1,760,437 )     239,145  
                                         
Total liabilities and stockholders’ equity
  $ 2,555,771     $ 1,404,593     $ 1,286,302     $ (1,670,575 )   $ 3,576,091  
                                         


26


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    January 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 16,210     $ 2,355     $ 48,777     $     $ 67,342  
Trade accounts receivable less allowances
    (4,956 )     6,096       406,305       (2,515 )     404,930  
Inventories
    1,078,048       49,581       295,946       (133,045 )     1,290,530  
Deferred tax assets and other current assets
    288,208       10,158       49,734       (577 )     347,523  
                                         
Total current assets
    1,377,510       68,190       800,762       (136,137 )     2,110,325  
                                         
Property, net
    208,844       13,914       365,431             588,189  
Trademarks and other identifiable intangibles, net
    27,199       114,630       5,614             147,443  
Goodwill
    232,882       16,934       72,186             322,002  
Investments in subsidiaries
    545,866       649,513             (1,195,379 )      
Deferred tax assets and other noncurrent assets
    91,401       397,802       (37,980 )     (85,133 )     366,090  
                                         
Total assets
  $ 2,483,702     $ 1,260,983     $ 1,206,013     $ (1,416,649 )   $ 3,534,049  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 161,734     $ 3,980     $ 74,157     $ 85,647     $ 325,518  
Accrued liabilities
    229,631       30,875       57,555       (2,669 )     315,392  
Notes payable
                61,734             61,734  
Accounts Receivable Securitization Facility
                45,640             45,640  
                                         
Total current liabilities
    391,365       34,855       239,086       82,978       748,284  
                                         
Long-term debt
    1,483,930       450,000       196,977             2,130,907  
Other noncurrent liabilities
    423,252       7,344       34,968       4,139       469,703  
                                         
Total liabilities
    2,298,547       492,199       471,031       87,117       3,348,894  
Stockholders’ equity
    185,155       768,784       734,982       (1,503,766 )     185,155  
                                         
Total liabilities and stockholders’ equity
  $ 2,483,702     $ 1,260,983     $ 1,206,013     $ (1,416,649 )   $ 3,534,049  
                                         
 


27


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Six Months Ended July 4, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ 219,500     $ 79,876     $ (55,260 )   $ (217,599 )   $ 26,517  
                                         
Investing activities:
                                       
Purchases of property and equipment
    (9,807 )     (6,074 )     (61,935 )           (77,816 )
Proceeds from sales of assets
    5,589             3,190             8,779  
Other
    (73 )                 73        
                                         
Net cash provided by (used in) investing activities
    (4,291 )     (6,074 )     (58,745 )     73       (69,037 )
                                         
Financing activities:
                                       
Borrowings on notes payable
                818,880             818,880  
Repayments on notes payable
                (816,676 )           (816,676 )
Payments to amend credit facilities
    (20,570 )           (1,595 )           (22,165 )
Borrowings on revolving loan facility
    949,525                         949,525  
Repayments on revolving loan facility
    (889,525 )                       (889,525 )
Borrowing on Accounts Receivable Securitization Facility
                128,009             128,009  
Repayments on Accounts Receivable Securitization Facility
                (144,626 )           (144,626 )
Other
    (579 )           (15 )           (594 )
Net transactions with related entities
    (255,754 )     (74,344 )     112,572       217,526        
                                         
Net cash provided by (used in) financing activities
    (216,903 )     (74,344 )     96,549       217,526       22,828  
                                         
Effect of changes in foreign exchange rates on cash
                (89 )           (89 )
                                         
Decrease in cash and cash equivalents
    (1,694 )     (542 )     (17,545 )           (19,781 )
Cash and cash equivalents at beginning of year
    16,210       2,355       48,777             67,342  
                                         
Cash and cash equivalents at end of period
  $ 14,516     $ 1,813     $ 31,232     $     $ 47,561  
                                         
 

28


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Six Months Ended June 28, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ (15,285 )   $ 83,519     $ 128,725     $ (246,921 )   $ (49,962 )
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (18,178 )     (5,364 )     (50,008 )           (73,550 )
Acquisition of business
                (9,994 )           (9,994 )
Proceeds from sales of assets
    7,242       3       2,279             9,524  
Other
    435                   (435 )      
                                         
Net cash used in investing activities
    (10,501 )     (5,361 )     (57,723 )     (435 )     (74,020 )
                                         
Financing activities:
                                       
Borrowings on notes payable
                210,016             210,016  
Repayments on notes payable
                (171,346 )           (171,346 )
Payments to amend credit facilities
    (48 )     (10 )     (11 )           (69 )
Borrowings on revolving loan facility
    155,000                         155,000  
Repayments on revolving loan facility
    (155,000 )                       (155,000 )
Borrowings on Accounts Receivable Securitization Facility
                20,389             20,389  
Repayments on Accounts Receivable Securitization Facility
                (20,389 )           (20,389 )
Proceeds from stock options exercised
    382                         382  
Stock repurchases
    (10,860 )                       (10,860 )
Transaction with Sara Lee Corporation
    18,000                         18,000  
Other
    (590 )                       (590 )
Net transactions with related entities
    (37,013 )     (82,372 )     (127,971 )     247,356        
                                         
Net cash provided by (used in) financing activities
    (30,129 )     (82,382 )     (89,312 )     247,356       45,533  
                                         
Effect of changes in foreign exchange rates on cash
                1,131             1,131  
                                         
Decrease in cash and cash equivalents
    (55,915 )     (4,224 )     (17,179 )           (77,318 )
Cash and cash equivalents at beginning of year
    84,476       6,329       83,431             174,236  
                                         
Cash and cash equivalents at end of period
  $ 28,561     $ 2,105     $ 66,252     $     $ 96,918  
                                         

29


Table of Contents

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 3, 2009, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K.
 
Overview
 
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just My Size, barely there, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofold. We design, manufacture, source and sell a broad range of apparel essentials such as t-shirts, bras, panties, men’s underwear, kids’ underwear, casualwear, activewear, socks and hosiery.
 
Our operations are managed in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, International, Hosiery and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these segments’ businesses but shares a common supply chain and media and marketing platforms.
 
  •  Innerwear.  The Innerwear segment focuses on core apparel essentials, and consists of products such as women’s intimate apparel, men’s underwear, kids’ underwear, socks and thermals, marketed under well-known brands that are trusted by consumers. We are an intimate apparel category leader in the United States with our Hanes, Playtex, Bali, barely there, Just My Size and Wonderbra brands. We are also a leading manufacturer and marketer of men’s underwear and kids’ underwear under the Hanes, Champion, C9 by Champion and Polo Ralph Lauren brand names. Our direct-to-consumer retail operations are included within the Innerwear segment. The retail operations include our value-based (“outlet”) stores, internet operations and catalogs which sell products from our portfolio of leading brands. As of July 4, 2009 and January 3, 2009, we had 227 and 213 outlet stores, respectively. Net sales for the six months ended July 4, 2009 from our Innerwear segment were $1.13 billion, representing approximately 60% of total segment net sales.
 
  •  Outerwear.  We are a leader in the casualwear and activewear markets through our Hanes, Champion and Just My Size brands, where we offer products such as t-shirts and fleece. Our casualwear lines offer a range of quality, comfortable clothing for men, women and children marketed under the Hanes and Just My Size brands. The Just My Size brand offers casual apparel designed exclusively to meet the needs of plus-size women. In addition to activewear for men and women, Champion provides uniforms for athletic programs and includes an apparel program, C9 by Champion, at Target stores. We also license our Champion name for collegiate apparel and footwear. We also supply our t-shirts, sportshirts and fleece products primarily to wholesalers, who then resell to screen printers and embellishers, through brands such as Hanes, Champion, Outer Banks and Hanes Beefy-T. Net sales for the six months ended July 4, 2009 from our Outerwear segment were $447 million, representing approximately 24% of total segment net sales.
 
  •  International.  International includes products that span across the Innerwear, Outerwear and Hosiery reportable segments and are primarily marketed under the Hanes, Wonderbra, Champion, Stedman, Playtex, Zorba, Rinbros, Kendall, Sol y Oro, Ritmo and Bali brands. Net sales for the six months ended


30


Table of Contents

  July 4, 2009 from our International segment were $187 million, representing approximately 10% of total segment net sales and included sales in Latin America, Asia, Canada and Europe. Canada, Europe, Japan and Mexico are our largest international markets, and we also have sales offices in India and China.
 
  •  Hosiery.  We are the leading marketer of women’s sheer hosiery in the United States. We compete in the hosiery market by striving to offer superior values and executing integrated marketing activities, as well as focusing on the style of our hosiery products. We market hosiery products under our L’eggs, Hanes and Just My Size brands. Net sales for the six months ended July 4, 2009 from our Hosiery segment were $95 million, representing approximately 5% of total segment net sales. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
  •  Other.  Our Other segment consists of sales of nonfinished products such as yarn and certain other materials in the United States and Latin America that maintain asset utilization at certain manufacturing facilities and are intended to generate break even margins. Net sales for the six months ended July 4, 2009 in our Other segment were $8 million, representing approximately 1% of total segment net sales. Net sales from our Other segment are expected to continue to be insignificant to us as we complete the implementation of our consolidation and globalization efforts.
 
Consolidation and Globalization Strategy
 
We expect to continue our restructuring efforts through 2009 as we continue to execute our consolidation and globalization strategy. We have closed plant locations, reduced our workforce and relocated some of our manufacturing capacity to lower cost locations in Asia, Central America and the Caribbean Basin. During the six months ended July 4, 2009, in furtherance of our consolidation and globalization strategy, we approved actions to close three manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras and Canada, and eliminate an aggregate of approximately 2,800 positions in those countries and El Salvador. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. We also have recognized accelerated depreciation with respect to owned or leased assets associated with manufacturing facilities and distribution centers which closed during 2009 or we anticipate closing in the next year as part of our consolidation and globalization strategy. While we believe that this strategy has had and will continue to have a beneficial impact on our operational efficiency and cost structure, we have incurred significant costs to implement these initiatives. In particular, we have recorded charges for severance and other employment-related obligations relating to workforce reductions, as well as payments in connection with lease and other contract terminations. In addition, we incurred charges for one-time write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of manufacturing facilities. These amounts are included in the “Cost of sales,” “Restructuring” and “Selling, general and administrative expenses” lines of our statements of income.
 
We have made significant progress in our multiyear goal of generating gross savings that could approach or exceed $200 million. As a result of the restructuring actions taken since our spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006, our cost structure has been reduced and efficiencies improved, generating savings of $39 million during the six months ended July 4, 2009. In addition to the savings generated from restructuring actions, we benefited from $19 million in savings related to other cost reduction initiatives during the six months ended July 4, 2009.
 
Seasonality and Other Factors
 
Our operating results are subject to some variability. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. Sales are typically higher in the last two quarters (July to December) of each fiscal year. Socks, hosiery and fleece products generally have higher sales during this period as a result of cooler weather, back-to-school shopping and holidays. Sales levels in any period are also impacted by customers’ decisions to increase or decrease their inventory levels in


31


Table of Contents

response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. For example, we have experienced a shift in timing by our largest retail customers of back-to-school programs between June and July the last two years. Our results of operations are also impacted by fluctuations and volatility in the price of cotton and oil-related materials and the timing of actual spending for our media, advertising and promotion expenses. 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 our customers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, electricity power rates, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
 
Inflation and Changing Prices
 
Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, a significant portion of our products are manufactured in other countries and declines in the value of the U.S. dollar may result in higher manufacturing costs. Similarly, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices, rose during the summer of 2008 as a result of inflation and other factors. In addition, inflation often is accompanied by higher interest rates, which could have a negative impact on spending, in which case our margins could decrease. Moreover, increases in inflation may not be matched by rises in income, which also could have a negative impact on spending. If we incur increased costs that we are unable to recoup, or if consumer spending continues to decrease generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our operating results, we raised domestic prices effective February 2009. We implemented an average gross price increase of four percent in our domestic product categories. The range of price increases varies by individual product category.
 
Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. While we do enter into short-term supply agreements and hedges from time to time in an attempt to protect our business from the volatility of the market price of cotton, our business can be affected by dramatic movements in cotton prices, although cotton historically represents only 8% of our cost of sales. The cotton prices reflected in our results were 62 cents per pound for the six months ended July 4, 2009 and 58 cents per pound for the six months ended June 28, 2008. After taking into consideration the cotton costs currently included in inventory and short-term supply agreements, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008. In addition, during the summer of 2008 we experienced a spike in oil-related commodity prices and other raw materials used in our products, such as dyes and chemicals, and increases in other costs, such as fuel, energy and utility costs. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold.


32


Table of Contents

Highlights from the Second Quarter and Six Months Ended July 4, 2009
 
  •  Total net sales in the second quarter of 2009 were $986 million, compared with $1.07 billion in the same quarter of 2008. Total net sales in the six-month period in 2009 were $1.84 billion, compared with $2.06 billion in the same six-month period of 2008.
 
  •  Operating profit was $84 million in the second quarter of 2009, compared with $113 million in the same quarter of 2008. Operating profit was $100 million in the six-month period in 2009, compared with $201 million in the same six-month period of 2008.
 
  •  Diluted earnings per share were $0.32 in the second quarter of 2009, compared with $0.60 in the same quarter of 2008. Diluted earnings per share were $0.12 in the six-month period in 2009, compared with $0.97 in the same six-month period of 2008.
 
  •  During the first six months of 2009, we approved actions to close three manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras and Canada, and eliminate an aggregate of approximately 2,800 positions in those countries and El Salvador. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. In addition, we completed several such actions in 2009 that were approved in 2008.
 
  •  Gross capital expenditures were $78 million during the first six months of 2009 as we continued to build out our textile and sewing network in Asia, Central America and the Caribbean Basin.
 
  •  We amended our Senior Secured Credit Facility and Accounts Receivable Securitization Facility to provide for additional cushion for the leverage ratio and interest coverage ratio covenant requirements.
 
  •  We ended the second quarter of 2009 with $415 million of borrowing availability under our $500 million revolving loan facility (the “Revolving Loan Facility”), $48 million in cash and cash equivalents and $67 million of borrowing availability under our international loan facilities.
 
Consolidated Results of Operations — Second Quarter Ended July 4, 2009 Compared with Second Quarter Ended June 28, 2008
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 986,022     $ 1,072,171     $ (86,149 )     (8.0 )%
Cost of sales
    658,631       691,215       (32,584 )     (4.7 )
                                 
Gross profit
    327,391       380,956       (53,565 )     (14.1 )
Selling, general and administrative expenses
    230,699       266,427       (35,728 )     (13.4 )
Restructuring
    12,544       1,442       11,102       769.9  
                                 
Operating profit
    84,148       113,087       (28,939 )     (25.6 )
Other expenses
    168             168       NM  
Interest expense, net
    44,807       37,635       7,172       19.1  
                                 
Income before income tax expense
    39,173       75,452       (36,279 )     (48.1 )
Income tax expense
    8,618       18,108       (9,490 )     (52.4 )
                                 
Net income
  $ 30,555     $ 57,344     $ (26,789 )     (46.7 )%
                                 


33


Table of Contents

Net Sales
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 986,022     $ 1,072,171     $ (86,149 )      (8.0 )%
 
Consolidated net sales were lower by $86 million or 8% in the second quarter of 2009 compared to the second quarter of 2008 which reflects an improvement in the double-digit sales decline rate over the past two quarters. The net sales decline in the second quarter of 2009 is primarily attributed to the recessionary environment that continued into this quarter. Retail sales for apparel continued to decline quarter over quarter at most of our largest customers as the continuing recession, growing job losses and tight access to credit constrained consumer spending. Retailer inventory levels during the second quarter of 2009 mostly remained flat compared to the first quarter of 2009 and in line with current retail sales trends. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
Innerwear, Outerwear, International and Hosiery segment net sales were lower by $25 million (4%), $28 million (11%), $27 million (20%) and $7 million (14%), respectively, in the second quarter of 2009 compared to the second quarter of 2008.
 
Innerwear segment net sales were lower (4%) in the second quarter of 2009 compared to the second quarter of 2008, primarily due to lower net sales of intimate apparel (6%) and socks (9%) primarily due to weak sales at retail in this difficult economic environment. Male underwear net sales were flat in the second quarter of 2009 compared to the second quarter of 2008.
 
Outerwear segment net sales were lower (11%) in the second quarter of 2009 compared to the second quarter of 2008, primarily due to the lower casualwear net sales in both the retail and wholesale channels, partially offset by higher net sales (10%) of our Champion brand activewear. Results for the second quarter of 2009 were negatively impacted by losses of seasonal programs in the retail casualwear channel that also impacted results for the first quarter of 2009 but will not continue to impact our results after the second quarter.
 
International segment net sales were lower (20%) in the second quarter of 2009 compared to the second quarter of 2008, primarily attributable to an unfavorable impact of $13 million related to foreign currency exchange rates and weak demand globally primarily in Europe, Canada and Japan which are experiencing recessionary environments similar to the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 11% in the second quarter of 2009 compared to the second quarter of 2008.
 
Hosiery segment net sales were lower (14%) in the second quarter of 2009 compared to the second quarter of 2008, which was substantially more than the long-term industry trend. Hosiery products in all channels continue to be more adversely impacted by reduced consumer discretionary spending than other apparel categories.
 
Gross Profit
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Gross profit
  $ 327,391     $   380,956     $ (53,565 )     (14.1 )%
 
Our gross profit was lower by $54 million in the second quarter of 2009 compared to the second quarter of 2008. Gross profit was lower due to lower sales volume of $50 million, unfavorable product sales mix of $17 million and higher sales incentives of $5 million. Other factors contributing to lower gross profit were higher other manufacturing costs of $19 million, primarily related to lower volume and operating efficiencies at our manufacturing facilities, higher production costs of $11 million related to higher energy and oil-related


34


Table of Contents

costs, including freight costs, other vendor price increases of $9 million, higher cost of finished goods sourced from third party manufacturers of $7 million primarily resulting from foreign exchange transaction losses and a $4 million unfavorable impact related to foreign currency exchange rates. Energy and oil-related costs were higher due to a spike in oil-related commodity prices during the summer of 2008. Our results in the second quarter of 2009 continued to reflect higher costs for oil-related materials, but in the second half of 2009 our results will begin to benefit from the lower oil-related material costs and improved other manufacturing costs. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar, Euro and Brazilian real.
 
Our higher expenses were partially offset by higher product pricing of $37 million before increased sales incentives, savings from our cost reduction initiatives and prior restructuring actions of $13 million, lower cotton costs of $9 million, lower on-going excess and obsolete inventory costs of $6 million and lower accelerated depreciation of $5 million. The higher product pricing is due to the implementation of an average gross price increase of four percent in our domestic product categories in February 2009. The range of price increases varies by individual product category. The lower excess and obsolete inventory costs in the second quarter of 2009 are attributable to both our continuous evaluation of inventory levels and simplification of our product category offerings. We realized these benefits by driving down obsolete inventory levels through aggressive management and promotions.
 
The cotton prices reflected in our results were 49 cents per pound in the second quarter of 2009 as compared to 63 cents per pound in the second quarter of 2008. After taking into consideration the cotton costs currently included in inventory and short-term supply agreements, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008.
 
As a percent of net sales, our gross profit was 33.2% in the second quarter of 2009 compared to 35.5% in the second quarter of 2008, declining as a result of the items described above.
 
Selling, General and Administrative Expenses
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Selling, general and administrative expenses
  $ 230,699     $ 266,427     $ (35,728 )     (13.4 )%
 
Our selling, general and administrative expenses were $36 million lower in the second quarter of 2009 compared to the second quarter of 2008. Our focus on cost reductions resulted in lower expenses in the second quarter of 2009 compared to the second quarter of 2008 related to savings of $8 million from our prior restructuring actions for compensation and related benefits, lower technology expenses of $6 million, lower selling and other marketing related expenses of $4 million and lower consulting related expenses of $2 million. In addition, our distribution expenses were lower by $5 million in the second quarter of 2009 compared to 2008 which is primarily attributable to lower sales volume that reduced our labor, postage and freight expenses and lower rework expenses in our distribution centers.
 
Our media related media, advertising and promotion (“MAP”) expenses were $19 million lower in the second quarter of 2009 compared to the second quarter of 2008 as we chose to reduce our spending. MAP 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.
 
Our pension expense, which is noncash, was higher by $8 million in the second quarter of 2009 compared to the second quarter of 2008. The higher pension expense is primarily due to the lower funded status of our pension plans at the end of 2008, which resulted from a decline in the fair value of plan assets due to the stock market’s performance during 2008 and a higher discount rate at the end of 2008. We also incurred higher expenses of $2 million in the second quarter of 2009 compared to the second quarter of 2008 as a result of opening retail stores. We opened 11 retail stores during the second quarter of 2009. Changes due to foreign currency exchange rates, which are included in the impact of the changes above, resulted in lower


35


Table of Contents

selling, general and administrative expenses of $3 million in the second quarter of 2009 compared to the second quarter of 2008.
 
Restructuring
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Restructuring
  $ 12,544     $  1,442     $  11,102       769.9 %
 
During the second quarter of 2009, we approved an action to close one distribution center in the United States and eliminate approximately 200 positions. The distribution capacity will be relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. In addition, approximately 250 management and administrative positions were eliminated, with the majority of these positions based in the United States. We recorded charges related to employee termination and other benefits of $10 million recognized in accordance with benefit plans previously communicated to the affected employee group and other exit costs of $3 million primarily related to moving equipment and inventory from closed facilities.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the second quarter of 2008, we incurred $1 million in restructuring charges which primarily related to employee termination and other benefits associated with plant closures approved during that period.
 
Operating Profit
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Operating profit
  $ 84,148     $ 113,087     $ (28,939 )      (25.6 )%
 
Operating profit was lower in the second quarter of 2009 compared to the second quarter of 2008 as a result of lower gross profit of $54 million and higher restructuring and related charges of $11 million, partially offset by lower selling, general and administrative expenses of $36 million. Changes in foreign currency exchange rates had an unfavorable impact on operating profit of $1 million in the second quarter of 2009 compared to the second quarter of 2008.
 
Other Expenses
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Other expenses
  $    168     $       —     $     168         NM  
 
During the second quarter of 2009, we incurred costs to amend the Accounts Receivable Securitization Facility. This second amendment to that facility is expected to generally increase over time the amount of funding that will be available under the facility as compared to the amount that would be available pursuant to the amendment to that facility that we entered into in March 2009 to provide for additional cushion in our financial covenant requirements.


36


Table of Contents

Interest Expense, Net
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Interest expense, net
  $ 44,807     $ 37,635     $   7,172        19.1 %
 
Interest expense, net was higher by $7 million in the second quarter of 2009 compared to the second quarter of 2008. The amendments of our Senior Secured Credit Facility and Accounts Receivable Securitization Facility, which increased our interest-rate margin by 300 basis points and 325 basis points, respectively, increased interest expense in the second quarter of 2009 by $11 million, which was partially offset by a lower London Interbank Offered Rate, or “LIBOR,” that reduced interest expense by $4 million. Our weighted average interest rate on our outstanding debt was 7.02% during the second quarter of 2009 compared to 6.02% in the second quarter of 2008.
 
At July 4, 2009, we had outstanding interest rate hedging arrangements whereby we have capped the interest rate on $400 million of our floating rate debt at 3.50% and have fixed the interest rate on $1.4 billion of our floating rate debt at approximately 4.16%. Approximately 81% of our total debt outstanding at July 4, 2009 was at a fixed or capped LIBOR rate.
 
Income Tax Expense
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Income tax expense
  $  8,618     $ 18,108     $  (9,490 )     (52.4 )%
 
Our estimated annual effective income tax rate was 22% in the second quarter of 2009 compared to 24% in the second quarter of 2008. The lower effective income tax rate is attributable primarily to higher unremitted earnings from foreign subsidiaries in the second quarter of 2009 taxed at rates lower than the U.S. statutory rate. Our estimated annual effective tax rate reflects our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2009.
 
Net Income
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net income
  $ 30,555     $ 57,344     $ (26,789 )     (46.7 )%
 
Net income for the second quarter of 2009 was lower than the second quarter of 2008 primarily due to lower operating profit of $29 million and higher interest expense of $7 million, partially offset by lower income tax expense of $9 million.


37


Table of Contents

Operating Results by Business Segment — Second Quarter Ended July 4, 2009 Compared with Second Quarter Ended June 28, 2008
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 611,779     $ 636,335     $ (24,556 )     (3.9 )%
Outerwear
    231,654       260,137       (28,483 )     (10.9 )
International
    104,073       130,903       (26,830 )     (20.5 )
Hosiery
    42,584       49,734       (7,150 )     (14.4 )
Other
    5,634       4,174       1,460       35.0  
                                 
Total segment net sales
    995,724       1,081,283       (85,559 )     (7.9 )
Intersegment
    (9,702 )     (9,112 )     590       6.5  
                                 
Total net sales
  $ 986,022     $ 1,072,171     $ (86,149 )     (8.0 )%
Segment operating profit (loss):
                               
Innerwear
  $ 92,563     $ 79,942     $ 12,621       15.8 %
Outerwear
    3,666       19,927       (16,261 )     (81.6 )
International
    8,804       18,848       (10,044 )     (53.3 )
Hosiery
    12,280       15,742       (3,462 )     (22.0 )
Other
    (2,233 )     830       (3,063 )     (369.0 )
                                 
Total segment operating profit:
    115,080       135,289       (20,209 )     (14.9 )
Items not included in segment operating profit:
                               
General corporate expenses
    (15,176 )     (12,584 )     2,592       20.6  
Amortization of trademarks and other intangibles
    (3,092 )     (2,965 )     127       4.3  
Restructuring
    (12,544 )     (1,442 )     11,102       769.9  
Inventory write-off included in cost of sales
    (159 )           159       NM  
Accelerated depreciation included in cost of sales
    224       (4,633 )     (4,857 )     (104.8 )
Accelerated depreciation included in selling, general and administrative expenses
    (185 )     (578 )     (393 )     (68.0 )
                                 
Total operating profit
    84,148       113,087       (28,939 )     (25.6 )
                                 
Other expenses
    (168 )           168       NM  
Interest expense, net
    (44,807 )     (37,635 )     7,172       19.1  
                                 
Income before income tax expense
  $ 39,173     $ 75,452     $ (36,279 )     (48.1 )%
                                 
 
Innerwear
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
          (dollars in thousands)        
 
Net sales
  $ 611,779     $   636,335     $ (24,556 )     (3.9 )%
Segment operating profit
    92,563       79,942       12,621         15.8  
 
Overall net sales in the Innerwear segment were lower by $25 million or 4% in the second quarter of 2009 compared to the second quarter of 2008 as we continued to be negatively impacted by weak consumer demand related to the recessionary environment. The rate of sales decline for our Innerwear segment continued to improve as compared to the previous two quarters. Total intimate apparel net sales were $14 million lower


38


Table of Contents

in the second quarter of 2009 compared to the second quarter of 2008. Our intimate apparel net sales, which we believe were primarily attributable to weaker sales at retail, were lower in our Playtex brand of $8 million, our smaller brands (barely there, Just My Size and Wonderbra) of $4 million and our Hanes brand of $3 million. Our Bali brand intimate apparel net sales were $3 million higher compared to the second quarter of 2008.
 
Net sales in our male underwear product category were flat in the second quarter of 2009 compared to the second quarter of 2008. Lower net sales in our socks product category reflect a decline in men’s and kids’ Hanes brand net sales of $6 million in the second quarter of 2009 compared to the second quarter of 2008. Net sales in our direct-to-consumer retail business were slightly lower due to lower internet sales, partially offset by higher sales at our outlet stores resulting from the addition of recently opened retail stores. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
The Innerwear segment gross profit was lower by $10 million in the second quarter of 2009 compared to the second quarter of 2008. The lower gross profit is due to lower sales volume of $23 million, higher production costs of $7 million related to higher energy and oil-related costs, including freight costs, higher sales incentives of $6 million, other vendor price increases of $6 million, unfavorable product sales mix of $5 million and higher other manufacturing costs of $5 million. These higher costs were partially offset by higher product pricing of $24 million before increased sales incentives, savings from our cost reduction initiatives and prior restructuring actions of $8 million, lower on-going excess and obsolete inventory costs of $7 million and lower cotton costs of $3 million.
 
As a percent of segment net sales, gross profit in the Innerwear segment was 38.7% in the second quarter of 2009 compared to 38.8% in the second quarter of 2008, slightly declining as a result of the items described above.
 
The higher Innerwear segment operating profit in the second quarter of 2009 compared to the second quarter of 2008 is primarily attributable to lower media related MAP expenses of $17 million, savings of $5 million from prior restructuring actions primarily for compensation and related benefits, lower technology expenses of $3 million and lower distribution expenses of $3 million, partially offset by lower gross profit, higher pension expense of $4 million and higher expenses of $2 million as a result of opening retail stores. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2009 is consistent with the second quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $36 million lower in the second quarter of 2009 compared to the second quarter of 2008.
 
Outerwear
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 231,654     $ 260,137     $ (28,483 )     (10.9 )%
Segment operating profit
    3,666       19,927       (16,261 )     (81.6 )
 
Net sales in the Outerwear segment were lower by $28 million or 11% in the second quarter of 2009 compared to the second quarter of 2008, primarily as a result of lower casualwear net sales in both our retail and wholesale channels of $25 million and $15 million, respectively. The lower retail casualwear net sales reflect a $37 million impact due to the losses of seasonal programs not renewed for 2009, partially offset by additional sales in the second quarter of 2009 resulting from an exclusive long-term agreement entered into with Wal-Mart in April 2009 that significantly expands the presence of our Just My Size brand in all Wal-Mart stores. The losses of seasonal programs also impacted results for the first quarter of 2009 but will not continue to impact our results after this quarter. These decreases were partially offset by higher net sales of our


39


Table of Contents

Champion brand activewear of $10 million. Our Champion brand sales continue to benefit from our marketing investment in the brand.
 
The Outerwear segment gross profit was lower by $22 million in the second quarter of 2009 compared to the second quarter of 2008. The lower gross profit is due to lower sales volume of $11 million, higher other manufacturing costs of $11 million primarily related to lower volume and operating efficiencies at our manufacturing facilities, unfavorable product sales mix of $6 million, higher sales incentives of $4 million, higher production costs of $4 million related to higher energy and oil-related costs, including freight costs, and other vendor price increases of $2 million. These higher costs were partially offset by higher product pricing of $7 million before increased sales incentives, lower cotton costs of $6 million and savings of $5 million from our cost reduction initiatives and prior restructuring actions.
 
As a percent of segment net sales, gross profit in the Outerwear segment was 18.7% in the second quarter of 2009 compared to 25.0% in the second quarter of 2008, declining as a result of the items described above.
 
The lower Outerwear segment operating profit in the second quarter of 2009 compared to the second quarter of 2008 is primarily attributable to lower gross profit and higher pension expense of $2 million, partially offset by savings of $3 million from our cost reduction initiatives and prior restructuring actions, lower media related MAP expenses of $2 million and lower technology expenses of $2 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2009 is consistent with the second quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $36 million lower in the second quarter of 2009 compared to the second quarter of 2008.
 
International
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
          (dollars in thousands)        
 
Net sales
  $ 104,073     $ 130,903     $ (26,830 )     (20.5 )%
Segment operating profit
    8,804       18,848       (10,044 )     (53.3 )
 
Overall net sales in the International segment were lower by $27 million or 20% in the second quarter of 2009 compared to the second quarter of 2008 primarily attributable to an unfavorable impact of $13 million related to foreign currency exchange rates and weak demand globally primarily in Europe, Canada, and Japan which are experiencing recessionary environments similar to that in the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 11% in the second quarter of 2009 compared to the second quarter of 2008. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar, Euro and Brazilian real. During the second quarter of 2009, we experienced lower net sales, in each case excluding the impact of foreign currency exchange rates, in our casualwear business in Europe of $9 million, in our casualwear business in Puerto Rico of $3 million resulting from moving the distribution capacity to the United States, in our intimate apparel business in Canada of $2 million and in our male underwear business in Japan of $1 million, partially offset by higher sales in Mexico of $2 million in our intimate apparel and male underwear businesses.
 
The International segment gross profit was lower by $15 million in the second quarter of 2009 compared to the second quarter of 2008. The lower gross profit is a result of lower sales volume of $8 million, higher cost of finished goods sourced from third party manufacturers of $7 million primarily resulting from foreign exchange transaction losses, an unfavorable impact related to foreign currency exchange rates of $4 million and an unfavorable product sales mix of $2 million. These higher costs were partially offset by higher product pricing of $3 million and lower sales incentives of $3 million.


40


Table of Contents

As a percent of segment net sales, gross profit in the International segment was 35.8% in the second quarter of 2009 compared to the second quarter of 2008 at 40.2%, declining as a result of the items described above.
 
The lower International segment operating profit in the second quarter of 2009 compared to the second quarter of 2008 is primarily attributable to the lower gross profit, partially offset by lower selling and other marketing related expenses of $4 million. The changes in foreign currency exchange rates, which are included in the impact on gross profit above, had an unfavorable impact on segment operating profit of $1 million in the second quarter of 2009 compared to the second quarter of 2008.
 
Hosiery
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 42,584     $ 49,734     $ (7,150 )      (14.4 )%
Segment operating profit
    12,280       15,742       (3,462 )     (22.0 )
 
Net sales in the Hosiery segment declined by $7 million or 14%, which was substantially more than the long-term industry trend primarily due to lower sales of our L’eggs brand to mass retailers and food and drug stores and our Hanes brand to national chains and department stores. Hosiery products continue to be more adversely impacted by reduced consumer discretionary spending than other apparel categories, which contributes to weaker retail sales and lowering of inventory levels by retailers. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences. Generally, we manage the Hosiery segment for cash, placing an emphasis on reducing our cost structure and managing cash efficiently.
 
The Hosiery segment gross profit was lower by $5 million in the second quarter of 2009 compared to the second quarter of 2008. The lower gross profit for the second quarter of 2009 compared to the second quarter of 2008 is the result of lower sales volume of $7 million and higher other manufacturing costs of $2 million partially offset by higher product pricing of $3 million and lower sales incentives of $2 million.
 
As a percent of segment net sales, gross profit in the Hosiery segment was 44.3% in the second quarter of 2009 compared to 48.9% in the second quarter of 2008, declining as a result of the items described above.
 
The lower Hosiery segment operating profit in the second quarter of 2009 compared to the second quarter of 2008 is primarily attributable to lower gross profit. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the second quarter of 2009 is consistent with the second quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $36 million lower in the second quarter of 2009 compared to the second quarter of 2008.
 
Other
 
                                 
    Quarter Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 5,634     $  4,174     $ 1,460       35.0 %
Segment operating profit (loss)
    (2,233 )     830       (3,063 )     (369.0 )
 
Sales in our Other segment consist of sales of nonfinished fabric and yarn to third parties which are intended to maintain asset utilization at certain manufacturing facilities and generate break even margins. We expect sales of our Other segment to continue to be insignificant to us as we complete the implementation of our consolidation and globalization efforts.


41


Table of Contents

General Corporate Expenses
 
General corporate expenses were higher in the second quarter of 2009 compared to the second quarter of 2008 primarily due to $4 million of higher foreign exchange transaction losses, partially offset by $2 million of higher gains on sales of assets.
 
Condensed Consolidated Results of Operations — Six Months Ended July 4, 2009 Compared with Six Months Ended June 28, 2008
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,843,863     $ 2,060,018     $ (216,155 )     (10.5 )%
Cost of sales
    1,258,596       1,334,098       (75,502 )     (5.7 )
                                 
Gross profit
    585,267       725,920       (140,653 )     (19.4 )
Selling, general and administrative expenses
    453,937       521,039       (67,102 )     (12.9 )
Restructuring
    31,215       4,000       27,215       680.4  
                                 
Operating profit
    100,115       200,881       (100,766 )     (50.2 )
Other expenses
    4,114             4,114       NM  
Interest expense, net
    81,607       78,029       3,578       4.6  
                                 
Income before income tax expense
    14,394       122,852       (108,458 )     (88.3 )
Income tax expense
    3,167       29,484       (26,317 )     (89.3 )
                                 
Net income
  $ 11,227     $ 93,368     $ (82,141 )     (88.0 )%
                                 
 
Net Sales
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
          (dollars in thousands)        
 
Net sales
  $ 1,843,863     $ 2,060,018     $ (216,155 )     (10.5 )%
 
Consolidated net sales were lower by $216 million or 10% in the six months of 2009 compared to 2008. The net sales decline in the six months of 2009 is primarily attributed to the recessionary environment that continued into the first half of 2009. Retail sales for apparel continued to decline during 2009 at most of our largest customers as the continuing recession, growing job losses and tight access to credit constrained consumer spending. Retailer inventory levels during the first half of 2009 are in line with current retail sales trends. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
Innerwear, Outerwear, International and Hosiery segment net sales were lower by $54 million (5%), $86 million (16%), $48 million (20%) and $21 million (18%), respectively, in the six months of 2009 compared to 2008. Our Other segment net sales, as expected, were lower by $7 million in the six months of 2009 compared to 2008.
 
Innerwear segment net sales were lower (5%) in the six months of 2009 compared to 2008, primarily due to lower net sales of intimate apparel (11%) and socks (10%) primarily due to weak sales at retail in this difficult economic environment, partially offset by stronger net sales (7%) in our male underwear product category.
 
Outerwear segment net sales were lower (16%) in the six months of 2009 compared to 2008, primarily due to the lower casualwear net sales in both the retail and wholesale channels, partially offset by higher net sales (9%) of our Champion brand activewear. Results for the six months of 2009 were negatively impacted by


42


Table of Contents

losses of seasonal programs in the retail casualwear channel that will not continue to impact our results in the second half of 2009.
 
International segment net sales were lower (20%) in the six months of 2009 compared to 2008, primarily attributable to an unfavorable impact of $24 million related to foreign currency exchange rates and weak demand globally primarily in Europe, Canada and Japan which are experiencing recessionary environments similar to the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 10% in the six months of 2009 compared to 2008.
 
Hosiery segment net sales were lower (18%) in the six months of 2009 compared to 2008, which was substantially more than the long-term industry trend. Hosiery products in all channels continue to be more adversely impacted by reduced consumer discretionary spending than other apparel categories.
 
Gross Profit
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Gross profit
  $ 585,267     $ 725,920     $ (140,653 )     (19.4 )%
 
Our gross profit was lower by $141 million in the six months of 2009 compared to 2008. Gross profit was lower due to lower sales volume of $98 million, unfavorable product sales mix of $37 million and higher sales incentives of $8 million. Other factors contributing to lower gross profit were higher other manufacturing costs of $33 million primarily related to lower volume and operating efficiencies at our manufacturing facilities, higher production costs of $23 million related to higher energy and oil-related costs, including freight costs, other vendor price increases of $14 million, a $9 million unfavorable impact related to foreign currency exchange rates, higher cost of finished goods sourced from third party manufacturers of $8 million primarily resulting from foreign exchange transaction losses, higher cotton costs of $6 million and $4 million of higher start-up and shutdown costs associated with the consolidation and globalization of our supply chain. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar, Euro and Brazilian real. In addition, in connection with the consolidation and globalization of our supply chain, we incurred one-time restructuring related write-offs of $3 million in the six months of 2009 for stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate, which were offset by lower accelerated depreciation of $5 million.
 
These higher expenses were partially offset by higher product pricing of $63 million before increased sales incentives, savings from our cost reduction initiatives and prior restructuring actions of $25 million and lower on-going excess and obsolete inventory costs of $11 million. The higher product pricing is due to the implementation of an average gross price increase of four percent in our domestic product categories in February 2009. The range of price increases varies by individual product category. The lower excess and obsolete inventory costs in the first half of 2009 are attributable to both our continuous evaluation of inventory levels and simplification of our product category offerings. We realized these benefits by driving down obsolete inventory levels through aggressive management and promotions.
 
The cotton prices reflected in our results were 62 cents per pound in the six months of 2009 as compared to 58 cents per pound in 2008. Energy and oil-related costs were higher due to a spike in oil-related commodity prices during the summer of 2008. Our results in the six months of 2009 were impacted by higher costs for cotton and oil-related materials, however we started to benefit in the second quarter from lower cotton costs and will begin to benefit in the second half of 2009 from the lower oil-related material costs and improved other manufacturing costs. After taking into consideration the cotton costs currently included in inventory and short-term supply agreements, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008.
 
As a percent of net sales, our gross profit was 31.7% in the six months of 2009 compared to 35.2% in 2008, declining as a result of the items described above.


43


Table of Contents

Selling, General and Administrative Expenses
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Selling, general and administrative expenses
  $ 453,937     $ 521,039     $ (67,102 )     (12.9 )%
 
Our selling, general and administrative expenses were $67 million lower in the six months of 2009 compared to 2008. Our focus on cost reductions resulted in lower expenses in the six months of 2009 compared to 2008 related to lower technology expenses of $19 million, savings of $14 million from our prior restructuring actions for compensation and related benefits, lower selling and other marketing related expenses of $4 million, lower non-media related MAP expenses of $3 million, lower consulting related expenses of $3 million and lower accelerated depreciation of $1 million. In addition, our distribution expenses were lower by $8 million in the second quarter of 2009 compared to 2008, which is primarily attributable to lower sales volume that reduced our labor, postage and freight expenses and lower rework expenses in our distribution centers.
 
Our media related MAP expenses were $34 million lower in the six months of 2009 compared to 2008 as we chose to reduce our spending. In addition, our media related MAP expenses were higher in the six months of 2008 to support the launch of Hanes No Ride Up Panties and marketing initiatives for Playtex. MAP 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.
 
Our pension and stock compensation expenses, which are noncash, were higher by $16 million and $3 million, respectively, in the six months of 2009 compared to 2008. The higher pension expense is primarily due to the lower funded status of our pension plans at the end of 2008, which resulted from a decline in the fair value of plan assets due to the stock market’s performance during 2008 and a higher discount rate at the end of 2008. We also incurred higher expenses of $3 million in the six months of 2009 compared to 2008 as a result of opening retail stores. We opened 15 retail stores during the six months of 2009. Changes due to foreign currency exchange rates, which are included in the impact of the changes above, resulted in lower selling, general and administrative expenses of $7 million in the six months of 2009 compared to 2008.
 
Restructuring
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
          (dollars in thousands)        
 
Restructuring
  $  31,215     $   4,000     $  27,215       680.4 %
 
During the six months of 2009, we approved actions to close three manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras and Canada, and eliminate an aggregate of approximately 2,800 positions in those countries and El Salvador. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations in Asia, Central America and the Caribbean Basin. The distribution capacity has been relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. We recorded charges related to employee termination and other benefits of $15 million recognized in accordance with benefit plans previously communicated to the affected employee group, exiting supply contracts of $9 million and other exit costs of $7 million related to moving equipment and inventory from closed facilities and fixed asset impairment charges.
 
In the six months of 2009, we recorded one-time write-offs of $3 million of stranded raw materials and work in process inventory related to the closure of manufacturing facilities and recorded in the “Cost of sales” line. The raw materials and work in process inventory was determined not to be salvageable or cost-effective to relocate. In addition, in connection with our consolidation and globalization strategy, we recognized non-cash charges of $2 million and $7 million in six months of 2009 and the six months of 2008, respectively, in


44


Table of Contents

the “Cost of sales” line and a noncash charge of $1 million in the “Selling, general and administrative expenses” line in the six months of 2008 related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the six months of 2008, we incurred $4 million in restructuring charges which primarily related to employee termination and other benefits associated with plant closures approved during that period.
 
Operating Profit
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Operating profit
  $ 100,115     $ 200,881     $ (100,766 )     (50.2 )%
 
Operating profit was lower in the six months of 2009 compared to 2008 as a result of lower gross profit of $141 million and higher restructuring and related charges of $27 million, partially offset by lower selling, general and administrative expenses of $67 million. Changes in foreign currency exchange rates had an unfavorable impact on operating profit of $2 million in the six months of 2009 compared to 2008.
 
Other Expenses
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Other expenses
  $   4,114     $       —     $     4,114       NM  
 
During the six months of 2009, we incurred costs of $4 million to amend the Senior Secured Credit Facility and the Accounts Receivable Securitization Facility. In March 2009, we amended these credit facilities to provide for additional cushion in our financial covenant requirements. These amendments delay the most restrictive debt-leverage ratio requirements from the fourth quarter of 2009 to the third quarter of 2011. In April 2009, we amended the Accounts Receivable Securitization Facility to generally increase over time the amount of funding that will be available under the facility as compared to the amount that would be available pursuant to the amendment to that facility that we entered into in March 2009.
 
Interest Expense, Net
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Interest expense, net
  $  81,607     $  78,029     $     3,578        4.6 %
 
Interest expense, net was higher by $4 million in the six months of 2009 compared to 2008. The amendments of our Senior Secured Credit Facility and Accounts Receivable Securitization Facility, which increased our interest-rate margin by 300 basis points and 325 basis points, respectively, increased interest expense in the six months of 2009 by $14 million, which was partially offset by a lower LIBOR that reduced interest expense by $11 million. Our weighted average interest rate on our outstanding debt was 6.79% during the six months of 2009 compared to 6.35% in 2008.
 
At July 4, 2009, we had outstanding interest rate hedging arrangements whereby we have capped the interest rate on $400 million of our floating rate debt at 3.50% and have fixed the interest rate on $1.4 billion of our floating rate debt at approximately 4.16%. Approximately 81% of our total debt outstanding at July 4, 2009 was at a fixed or capped LIBOR rate.


45


Table of Contents

Income Tax Expense
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Income tax expense
  $ 3,167     $ 29,484     $ (26,317 )     (89.3 )%
 
Our estimated annual effective income tax rate was 22% in the six months of 2009 compared to 24% in 2008. The lower effective income tax rate is attributable primarily to higher unremitted earnings from foreign subsidiaries in the six months of 2009 taxed at rates lower than the U.S. statutory rate. Our estimated annual effective tax rate reflects our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2009.
 
Net Income
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net income
  $ 11,227     $ 93,368     $ (82,141 )     (88.0 )%
 
Net income for the six months of 2009 was lower than 2008 primarily due to lower operating profit of $101 million, higher other expenses of $4 million and higher interest expense of $4 million, partially offset by lower income tax expense of $26 million.


46


Table of Contents

Operating Results by Business Segment — Six Months Ended July 4, 2009 Compared with Six Months Ended June 28, 2008
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 1,125,593     $ 1,180,065     $ (54,472 )     (4.6 )%
Outerwear
    446,561       532,342       (85,781 )     (16.1 )
International
    187,275       235,539       (48,264 )     (20.5 )
Hosiery
    95,356       116,475       (21,119 )     (18.1 )
Other
    8,277       15,295       (7,018 )     (45.9 )
                                 
Total segment net sales
    1,863,062       2,079,716       (216,654 )     (10.4 )
Intersegment
    (19,199 )     (19,698 )     (499 )     (2.5 )
                                 
Total net sales
  $ 1,843,863     $ 2,060,018     $ (216,155 )     (10.5 )%
Segment operating profit (loss):
                               
Innerwear
  $ 141,118     $ 133,617     $ 7,501       5.6 %
Outerwear
    (12,100 )     36,344       (48,444 )     (133.3 )
International
    18,872       33,652       (14,780 )     (43.9 )
Hosiery
    28,844       39,863       (11,019 )     (27.6 )
Other
    (2,683 )     (10 )     (2,673 )     NM  
                                 
Total segment operating profit
    174,051       243,466       (69,415 )     (28.5 )
Items not included in segment operating profit:
                               
General corporate expenses
    (30,664 )     (24,535 )     6,129       25.0  
Amortization of trademarks and other intangibles
    (6,181 )     (5,638 )     543       9.6  
Restructuring
    (31,215 )     (4,000 )     27,215       680.4  
Inventory write-off included in cost of sales
    (3,247 )           3,247       NM  
Accelerated depreciation included in cost of sales
    (2,274 )     (7,191 )     (4,917 )     (68.4 )
Accelerated depreciation included in selling,
                               
general and administrative expenses
    (355 )     (1,221 )     (866 )     (70.9 )
                                 
Total operating profit
    100,115       200,881       (100,766 )     (50.2 )
Other expenses
    (4,114 )           4,114       NM  
Interest expense, net
    (81,607 )     (78,029 )     3,578       4.6  
                                 
Income before income tax expense
  $ 14,394     $ 122,852     $ (108,458 )     (88.3 )%
                                 
 
Innerwear
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,125,593     $ 1,180,065     $ (54,472 )     (4.6 )%
Segment operating profit
    141,118       133,617       7,501       5.6  
 
Overall net sales in the Innerwear segment were lower by $54 million or 5% in the six months of 2009 compared to 2008 as we continued to be negatively impacted by weak consumer demand related to the recessionary environment.


47


Table of Contents

Total intimate apparel net sales were $55 million lower in the six months of 2009 compared to 2008. Our intimate apparel net sales, which we believe were primarily attributable to weaker sales at retail, were lower in our Hanes brand of $21 million, our Playtex brand of $17 million, our smaller brands (barely there, Just My Size and Wonderbra) of $16 million. Our Bali brand intimate apparel net sales were $2 million higher compared to 2008.
 
Total male underwear net sales were $18 million higher in the six months of 2009 compared to 2008 which reflect higher net sales in our Hanes brand of $25 million, partially offset by lower net sales of our Champion brand of $5 million. The higher Hanes brand male underwear sales reflect growth in key segments of this category such as crewneck and V-neck T-shirts and boxer briefs and product innovations like the Comfort Fit waistbands. Lower net sales in our socks products category reflect a decline in men’s and kids’ Hanes brand net sales of $10 million and Champion brand net sales of $4 million in the six months of 2009 compared to 2008. Net sales in our direct-to-consumer retail business were $2 million lower due to lower internet sales, partially offset by higher sales at our outlet stores resulting from the addition of recently opened retail stores. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
The Innerwear segment gross profit was lower by $34 million in the six months of 2009 compared to 2008. The lower gross profit is due to lower sales volume of $40 million, higher production costs of $13 million related to higher energy and oil-related costs, including freight costs, unfavorable product sales mix of $12 million, higher other manufacturing costs of $11 million, higher sales incentives of $8 million, other vendor price increases of $8 million and higher cotton costs of $3 million. These higher costs were partially offset by higher product pricing of $40 million before increased sales incentives, savings from our cost reduction initiatives and prior restructuring actions of $13 million and lower on-going excess and obsolete inventory costs of $8 million.
 
As a percent of segment net sales, gross profit in the Innerwear segment was 37.4% in the six months of 2009 compared to 38.5% in 2008, declining as a result of the items described above.
 
The higher Innerwear segment operating profit in the six months of 2009 compared to 2008 is primarily attributable to lower media related MAP expenses of $32 million, lower technology expenses of $10 million, savings of $9 million from prior restructuring actions primarily for compensation and related benefits and lower distribution expenses of $3 million, partially offset by lower gross profit, higher pension expense of $9 million and higher expenses of $3 million as a result of opening retail stores. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2009 is consistent with 2008. Our consolidated selling, general and administrative expenses before segment allocations was $67 million lower in the six months of 2009 compared to 2008.
 
Outerwear
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 446,561     $ 532,342     $ (85,781 )     (16.1 )%
Segment operating profit
    (12,100 )     36,344       (48,444 )     (133.3 )
 
Net sales in the Outerwear segment were lower by $86 million or 16% in the six months of 2009 compared to 2008, primarily as a result of lower casualwear net sales in both our retail and wholesale channels of $73 million and $33 million, respectively. The lower retail casualwear net sales reflect an $89 million impact due to the losses of seasonal programs not renewed for 2009, partially offset by additional sales in the second quarter of 2009 resulting from an exclusive long-term agreement entered into with Wal-Mart in April 2009 that significantly expands the presence of our Just My Size brand in all Wal-Mart stores. The losses of


48


Table of Contents

seasonal programs will not continue to impact our results in the second half of 2009. These decreases were partially offset by higher net sales of our Champion brand activewear of $16 million. Our Champion brand sales continue to benefit from our marketing investment in the brand.
 
The Outerwear segment gross profit was lower by $60 million in the six months of 2009 compared to 2008. The lower gross profit is due to lower sales volume of $24 million, unfavorable product sales mix of $23 million, higher other manufacturing costs of $16 million, higher production costs of $10 million related to higher energy and oil-related costs, including freight costs, other vendor price increases of $5 million, higher sales incentives of $5 million and higher cotton costs of $3 million. These higher costs were partially offset by higher product pricing of $13 million before increased sales incentives, savings of $12 million from our cost reduction initiatives and prior restructuring actions and lower on-going excess and obsolete inventory costs of $2 million.
 
As a percent of segment net sales, gross profit in the Outerwear segment was 15.7% in the six months of 2009 compared to 24.4% in 2008, declining as a result of the items described above.
 
The Outerwear segment operating loss in the six months of 2009 compared to the segment operating profit in 2008 is primarily attributable to lower gross profit and higher pension expense of $4 million, partially offset by lower technology expenses of $5 million, savings of $4 million from our cost reduction initiatives and prior restructuring actions, lower non-media related MAP expenses of $3 million and lower distribution expenses of $2 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2009 is consistent with 2008. Our consolidated selling, general and administrative expenses before segment allocations was $67 million lower in the six months of 2009 compared to 2008.
 
International
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 187,275     $ 235,539     $ (48,264 )     (20.5 )%
Segment operating profit
    18,872       33,652       (14,780 )     (43.9 )
 
Overall net sales in the International segment were lower by $48 million or 20% in the six months of 2009 compared to 2008 primarily attributable to an unfavorable impact of $24 million related to foreign currency exchange rates and weak demand globally primarily in Europe, Canada, and Japan which are experiencing recessionary environments similar to that in the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 10% in the six months of 2009 compared to 2008. The unfavorable impact of foreign currency exchange rates was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar, Euro and Brazilian real. During the six months of 2009, we experienced lower net sales, in each case excluding the impact of foreign currency exchange rates, in our casualwear business in Europe of $14 million, in our casualwear business in Puerto Rico of $6 million resulting from moving the distribution capacity to the United States, in our intimate apparel business in Canada of $5 million and in our male underwear business in Japan of $3 million, partially offset by higher sales in Mexico of $4 million in our intimate apparel and male underwear businesses.
 
The International segment gross profit was lower by $24 million in the six months of 2009 compared to 2008. The lower gross profit is a result of lower sales volume of $12 million, an unfavorable impact related to foreign currency exchange rates of $9 million, higher cost of finished goods sourced from third party manufacturers of $8 million primarily resulting from foreign exchange transaction losses and an unfavorable product sales mix of $4 million. These higher costs were partially offset by higher product pricing of $5 million and lower sales incentives of $3 million.


49


Table of Contents

As a percent of segment net sales, gross profit in the International segment was 39.0% in the six months of 2009 compared to 2008 at 41.3%, declining as a result of the items described above.
 
The lower International segment operating profit in the six months of 2009 compared to 2008 is primarily attributable to the lower gross profit, partially offset by lower selling and other marketing related expenses of $4 million, lower distribution expenses of $2 million and lower media related MAP expenses of $1 million. The changes in foreign currency exchange rates, which are included in the impact on gross profit above, had an unfavorable impact on segment operating profit of $2 million in the six months of 2009 compared to 2008.
 
Hosiery
 
                                 
    Six Months Ended              
    July 4,
    June 28,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 95,356     $ 116,475     $ (21,119 )     (18.1 )%
Segment operating profit
    28,844       39,863       (11,019 )     (27.6 )
 
Net sales in the Hosiery segment declined by $21 million or 18%, which was substantially more than the long-term industry trend primarily due to lower sales of our L’eggs brand to mass retailers and food and drug stores and our Hanes brand to national chains and department stores. Hosiery products continue to be more adversely impacted by reduced consumer discretionary spending than other apparel categories, which contributes to weaker retail sales and lowering of inventory levels by retailers. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences. Generally, we manage the Hosiery segment for cash, placing an emphasis on reducing our cost structure and managing cash efficiently.
 
The Hosiery segment gross profit was lower by $16 million in the six months of 2009 compared to 2008. The lower gross profit for the six months of 2009 compared to 2008 is the result of lower sales volume of $16 million and higher other manufacturing costs of $6 million, partially offset by higher product pricing of $6 million and lower sales incentives of $2 million.
 
As a percent of segment net sales, gross profit in the Hosiery segment was 46.2% in the six months of 2009 compared to 51.3% in 2008, declining as a result of the items described above.
 
The lower Hosiery segment operating profit in the six months of 2009 compared to 2008 is primarily attributable to lower gross profit, partially offset by lower distribution expenses of $2 million and lower technology expenses of $1 million. A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the six months of 2009 is consistent with 2008. Our consolidated selling, general and administrative expenses before segment allocations was $67 million lower in the six months of 2009 compared to 2008.
 
Other