e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32891
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
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Maryland
(State of incorporation)
1000 East Hanes Mill Road
Winston-Salem, North Carolina
(Address of principal executive
office)
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20-3552316
(I.R.S. employer identification
no.)
27105
(Zip code) |
(336) 519-8080
(Registrants telephone number
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share and related
Preferred Stock Purchase Rights
Name of each exchange on which registered:
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference into Part III of this Form
10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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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 July 2, 2009, the aggregate market value of the registrants common stock held by
non-affiliates was approximately $1,387,889,493 (based on the closing price of the common stock of
$14.72 per share on that date, as reported on the New York Stock Exchange and, for purposes of this
computation only, the assumption that all of the registrants directors and executive officers are
affiliates and that beneficial holders of 5% or more of the outstanding common stock are not
affiliates).
As
of February 1, 2010, there were 95,399,708 shares of the registrants common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference to portions of the registrants
proxy statement for its 2010 annual meeting of stockholders.
TABLE OF CONTENTS
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 Annual Report on Form 10-K include the Hanes, Champion,
C9 by Champion, Playtex, Bali, Leggs, 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 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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
(the Exchange Act). 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 Business, Risk Factors and
Managements 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. The
following include some but not all of the factors that could cause actual results or events to
differ materially from those anticipated:
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our ability to successfully manage social, political, economic, legal and other
conditions affecting our supply chain, such as disruption of markets, changes in import and
export laws, currency restrictions and currency exchange rate fluctuations; |
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the impact of dramatic changes in the volatile market price of cotton and increases in
prices of other materials used in our products; |
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the impact of natural disasters; |
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the impact of increases in prices of oil-related materials and other costs such as
energy and utility costs; |
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our ability to effectively manage our inventory and reduce inventory reserves; |
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our ability to continue to effectively distribute our products through our distribution
network as we continue to consolidate our distribution network; |
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our ability to optimize our global supply chain; |
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current economic conditions; |
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consumer spending levels; |
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the risk of inflation or deflation; |
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financial difficulties experienced by, or loss of or reduction in sales to, any of our
top customers or groups of customers; |
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gains and losses in the shelf space that our customers devote to our products; |
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the highly competitive and evolving nature of the industry in which we compete; |
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our ability to keep pace with changing consumer preferences; |
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our debt and debt service requirements that restrict our operating and financial
flexibility and impose interest and financing costs;
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the financial ratios that our debt instruments require us to maintain; |
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future financial performance, including availability, terms and deployment of capital; |
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our ability to comply with environmental and occupational health and safety laws and
regulations; |
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costs and adverse publicity from violations of labor or environmental laws by us or our
suppliers; |
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our ability to attract and retain key personnel; |
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new litigation or developments in existing litigation; and |
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possible terrorist attacks and ongoing military action in the Middle East and other
parts of the world. |
There may be other factors that may cause our actual results to differ materially from the
forward-looking statements. Our actual results, performance or achievements could differ materially
from those expressed in, or implied by, the forward-looking statements. We can give no assurances
that any of the events anticipated by the forward-looking statements will occur or, if any of them
does, what impact they will have on our results of operations and financial condition. You should
carefully read the factors described in the Risk Factors section of this Annual Report on Form
10-K for a description of certain risks that could, among other things, cause our actual results to
differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K
and are expressly qualified in their entirety by the cautionary statements included in this Annual
Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements that
may be made to reflect events or circumstances that arise after the date made or to reflect the
occurrence of unanticipated events, other than as required by law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the
Securities and Exchange Commission (the SEC). You can inspect, read and copy these reports, proxy
statements and other information at the SECs Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. You can obtain information regarding the operation of the SECs 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 Annual Report on Form 10-K.
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PART I
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes,
Champion, Playtex, Bali, Leggs, 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, mens underwear, kids underwear, casualwear,
activewear, socks and hosiery.
The apparel essentials sector of the apparel industry is characterized by frequently
replenished items, such as T-shirts, bras, panties, mens underwear, kids underwear, socks and
hosiery. Growth and sales in the apparel essentials sector are not primarily driven by fashion, in
contrast to other areas of the broader apparel industry. We focus on the core attributes of
comfort, fit and value, while remaining current with regard to consumer trends. The majority of our
core styles continue from year to year, with variations only in color, fabric or design details.
Some products, however, such as intimate apparel, activewear and sheer hosiery, do have an emphasis
on style and innovation. We continue to invest in our largest and strongest brands to achieve our
long-term growth goals. In addition to designing and marketing apparel essentials, we have a long
history of operating a global supply chain that incorporates a mix of self-manufacturing,
third-party contractors and third-party sourcing.
Our fiscal year ends on the Saturday closest to December 31 and, until it was changed during
2006, ended on the Saturday closest to June 30. All references to 2009, 2008 and 2007 relate
to the 52 week fiscal year ended on January 2, 2010, the 53 week fiscal year ended on January 3,
2009 and the 52 week fiscal year ended on December 29, 2007, respectively.
During the fourth quarter of 2009, as we sought to drive more outerwear sales through our retail
operations by expanding our Hanes and Champion offerings, we made the decision to change our
internal organizational structure so that our retail operations, previously included in our
Innerwear segment, would be a separate Direct to Consumer segment. As a result, our operations
are managed and reported in six operating segments, each of which is a reportable segment for
financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to Consumer, International and
Other. Certain other insignificant changes between segments have been reflected in the segment disclosures to conform to the current organizational structure.
The following table summarizes our operating segments by category:
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Primary Products |
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Primary Brands |
Innerwear
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Intimate apparel, such as bras,
panties and shapewear
Mens underwear and kids underwear
Socks
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Hanes, Playtex, Bali,
barely there, Just My
Size, Wonderbra
Hanes, Polo Ralph Lauren*
Hanes, Champion |
Outerwear
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Activewear, such as performance
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Champion, Duofold |
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T-shirts and shorts, fleece, sports
bras and thermals |
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Casualwear, such as T-shirts, fleece and sport shirts
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Hanes, Just My Size,
Outer Banks, Champion, Hanes Beefy-T |
Hosiery
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Hosiery
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Leggs, Hanes, Donna Karan,* DKNY,* |
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Just My Size |
Direct to Consumer
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Activewear, mens underwear,
kids underwear, intimate apparel, socks, hosiery and casualwear
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Bali, Hanes, Playtex, Champion,
barely there, Leggs, Just My Size |
International
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Activewear, mens underwear,
kids underwear, intimate apparel, socks, hosiery and casualwear
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Hanes, Champion, Wonderbra,**
Playtex,** Stedman, Zorba, Rinbros, Kendall,* Sol y Oro, Bali, Ritmo, |
Other
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Nonfinished products, primarily yarn
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Not applicable |
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Brand used under a license agreement. |
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As a result of the February 2006 sale of the European branded apparel business of Sara Lee
Corporation, or Sara Lee, we are not permitted to sell this brand in the member states of
the European Union, or the EU, several other European countries and South Africa. |
Our brands have a strong heritage in the apparel essentials industry. According to The NPD
Group/Consumer Tracking Service, or NPD, our brands hold either the number one or number two U.S.
market position by sales value in most product categories in which we compete, for the 12 month
period ended December 31, 2009. In 2009, Hanes was number one for the sixth consecutive year as the
most preferred mens apparel brand, womens intimate apparel brand and childrens apparel brand of
consumers in Retailing Today magazines Top Brands Study. Additionally, we had five of the top
ten intimate apparel brands preferred by consumers in the Retailing Today study Hanes, Playtex,
Bali, Just My Size and Leggs. In 2008, the most recent year in which the survey was conducted,
Hanes was number one for the fifth consecutive year on the Womens Wear Daily Top 100 Brands
Survey for apparel and accessory brands that women know best.
Our products are sold through multiple distribution channels. During 2009, approximately 45%
of our net sales were to mass merchants in the United States, 16% were to national chains and department stores in the United States, 11%
were in our International segment, 10% were in our Direct to Consumer segment in the United States, and 18% were to
other retail channels in the United States such as embellishers, specialty retailers and sporting goods stores. We have
strong, long-term relationships with our top customers, including relationships of more than ten
years with each of our top ten customers. The size and operational scale of the high-volume
retailers with which we do business require extensive category and product knowledge and
specialized services regarding the quantity, quality and planning of product orders. We have
organized multifunctional customer management teams, which has allowed us to form strategic
long-term relationships with these customers and efficiently focus resources on category, product
and service expertise. We also have customer-specific programs such as the C9 by Champion products
marketed and sold through Target stores and the recently expanded presence at Wal-Mart stores of
our Just My Size brand.
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Our ability to react to changing customer needs and industry trends is key to our success. Our
design, research and product development teams, in partnership with our marketing teams, drive our
efforts to bring innovations to market. We seek to leverage our insights into consumer demand in
the apparel essentials industry to develop new products within our existing lines and to modify our
existing core products in ways that make them more appealing, addressing changing customer needs
and industry trends. Examples of our recent innovations include:
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Hanes dyed V-neck underwear T-shirts in black, gray and navy colors (2009). |
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Champion 360° Max Support sports bra that controls movement in all directions, scientifically
tested on athletes to deliver 360° support (2009).
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Playtex 18 Hour Seamless Smoothing bra that features fused fabric to smooth sides and
back (2009). |
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Bali Natural Uplift bras that feature advanced lift for the bust without adding size
(2009). |
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Hanes No Ride Up panties, specially designed for a better fit that helps women stay
wedgie-free (2008). |
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Hanes Lay Flat Collar T-shirts and Hanes No Ride Up boxer briefs, the brands latest
innovation in product comfort and fit (2008). |
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Playtex 18 Hour Active Lifestyle bra that features active styling with wickable fabric
(2008). |
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Bali Concealers bras, with revolutionary concealing petals for complete modesty (2008). |
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Hanes Concealing Petals bras (2008). |
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Hanes Comfortsoft T-shirt (2007). |
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Hanes All Over Comfort bras (2007). |
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Bali Passion for Comfort bras, designed to be the ultimate comfort bra, features a silky
smooth lining for a luxurious feel against the body (2007). |
We have restructured our supply chain over the past three years to create more efficient
production clusters that utilize fewer, larger facilities and to balance our production capability
between the Western Hemisphere and Asia. 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. With our global supply chain infrastructure substantially in place, we are now
focused on optimizing our supply chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the working capital needs of our supply
chain through several initiatives, such as supplier-managed inventory for raw materials and sourced
goods ownership relationships. We completed the construction of a textile production plant in
Nanjing, China which is our first company-owned textile facility in Asia. Production commenced in
the fourth quarter of 2009 and we expect to ramp up production over
the next 18 months. The Nanjing facility,
along with our other textile facilities and arrangements with outside contractors, enables us to
expand and leverage our production scale as we balance our supply chain across hemispheres to
support our production capacity. The consolidation of our distribution network is still in process
but will not result in any substantial charges in future periods. The distribution network
consolidation involves the implementation of new warehouse management systems and technology, and
opening of new distribution centers and new third-party logistics providers to replace parts of our
legacy distribution network.
Our Brands
Our portfolio of leading brands is designed to address the needs and wants of various consumer
segments across a broad range of apparel essentials products. Each of our brands has a particular
consumer positioning that distinguishes it from its competitors and guides its advertising and
product development. We discuss some of our most important brands in more detail below.
Hanes is the largest and most widely recognized brand in our portfolio. In 2009, Hanes was
number one for the sixth consecutive year as the most preferred mens apparel brand, womens
intimate apparel brand and childrens apparel brand of consumers in Retailing Today magazines Top
Brands Study. In 2008, the most recent year the survey was conducted, Hanes was number one for the
fifth consecutive year on the Womens Wear Daily Top 100 Brands Survey for apparel and accessory
brands that women know best. The Hanes brand covers all of our product categories, including mens
underwear, kids underwear, bras, panties, socks, T-shirts, fleece and sheer hosiery.
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Hanes stands for outstanding comfort, style and value. According to Millward Brown Market
Research, Hanes is found in 85% of the U.S. households that have purchased mens or womens
casual clothing or underwear in the 12-month period ended December 31, 2009.
Champion is our second-largest brand. Specializing in athletic and other performance apparel,
the Champion brand is designed for everyday athletes. We believe that Champions combination of
comfort, fit and style provides athletes with mobility, durability and up-to-date styles, all
product qualities that are important in the sale of athletic products. We also distribute C9 by
Champion products exclusively through Target stores.
Playtex, the third-largest brand within our portfolio, offers a line of bras, panties and
shapewear, including products that offer solutions for hard to fit figures. Bali is the
fourth-largest brand within our portfolio. Bali offers a range of bras, panties and shapewear sold
in the department store channel. Our brand portfolio also includes the following well-known brands:
Leggs, Just My Size, barely there, Wonderbra, Outer Banks and Duofold. We entered into an
agreement with Wal-Mart in April 2009 that significantly expanded the presence of our Just My Size
brand. These brands serve to round out our product offerings, allowing us to give consumers a
variety of options to meet their diverse needs.
Our Segments
During the fourth quarter of 2009, as we sought to drive more outerwear sales through our retail
operations by expanding our Hanes and Champion offerings, we made the decision to change our
internal organizational structure so that our retail operations, previously included in our
Innerwear segment, would be a separate Direct to Consumer segment. As a result, our operations
are managed and reported in six operating segments, each of which is a reportable segment for
financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to Consumer, International and
Other. Certain other insignificant changes between segments have been reflected in the segment disclosures
to conform to the current organizational structure. These segments are organized principally by
product category, geographic location and distribution channel. Management of each segment is
responsible for the operations of these segments businesses but shares a common supply chain and
media and marketing platforms. For more information about our segments, see Note 20 to our
financial statements included in this Annual Report on Form 10-K.
Innerwear
The Innerwear segment focuses on core apparel essentials, and consists of products such as
womens intimate apparel, mens underwear, kids underwear, and socks, 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 mens underwear and kids underwear under the Hanes and Polo
Ralph Lauren brand names. During 2009, net sales from our Innerwear segment were $1.8 billion,
representing approximately 47% of total net sales.
Outerwear
We are a leader in the casualwear and activewear markets through our Hanes, Champion , Just My
Size and Duofold 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 2009, we entered into a multi-year agreement to provide a womens
casualwear program with our Just My Size brand at Wal-Mart stores. 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, sport shirts and fleece products, including brands such as
Hanes, Champion, Outer Banks and Hanes Beefy-T, to customers, primarily wholesalers, who then
resell to screen printers and embellishers. During 2009, net sales from our Outerwear segment were
$1.1 billion, representing approximately 27% of total net sales.
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Hosiery
We are the leading marketer of womens 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
Leggs, Hanes and Just My Size brands. During 2009, net sales from our Hosiery segment were $186
million, representing approximately 5% of total 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.
Direct to Consumer
Our Direct to Consumer operations include our value-based (outlet) stores and Internet
operations which sell products from our portfolio of leading brands. We sell our branded products
directly to consumers through our outlet stores, as well as our Web sites operating under the
Hanes, One Hanes Place, Just My Size and Champion names. Our Internet operations are supported by
our catalogs. As of January 2, 2010 and January 3, 2009, we had 228 and 213 outlet stores,
respectively. During 2009, net sales from our Direct to Consumer segment were $370 million,
representing approximately 10% of total net sales.
International
International includes products that span across the Innerwear, Outerwear and Hosiery
reportable segments and are primarily marketed under the Hanes, Champion, Wonderbra, Playtex,
Stedman, Zorba, Rinbros, Kendall, Sol y Oro, Bali and Ritmo brands. During 2009, net sales from our
International segment were $438 million, representing approximately 11% of total net sales and
included sales in Latin America, Asia, Canada, Europe and South America. Our largest international
markets are Canada, Japan, Mexico, Europe and Brazil, and we also have sales offices in India and
China.
Other
Our Other segment primarily consists of sales of yarn to third parties in the United States
and Latin America that maintain asset utilization at certain manufacturing facilities and are
intended to generate approximate break even margins. During 2009, net sales from our Other segment
were $13 million, representing less than 1% of total net sales. In October 2009, we completed the
sale of our yarn operations as a result of which we ceased making our own yarn and now source all
of our yarn requirements from large-scale yarn suppliers. As a result of the sale of our yarn
operations we will no longer have net sales in our Other segment in the future.
Design, Research and Product Development
At the core of our design, research and product development capabilities is a team of
approximately 300 professionals. We have combined our design, research and development teams into
an integrated group for all of our product categories. A facility located in Winston-Salem, North
Carolina, is the center of our research, technical design and product development efforts. We also
employ creative design and product development personnel in our design center in New York City. In
2009, 2008 and 2007, we spent approximately $46 million, $46 million and $45 million, respectively,
on design, research and product development, including the
development of new and improved products.
Customers
In 2009, approximately 89% of our net sales were to customers in the United States and
approximately 11% were to customers outside the United States. Domestically, almost 81% of our net
sales were wholesale sales to retailers, 11% were direct to consumers and 8% were wholesale sales
to third-party embellishers. We have well-established relationships with some of the largest
apparel retailers in the world. Our largest customers are Wal-Mart Stores, Inc., or Wal-Mart,
Target Corporation, or Target, and Kohls Corporation, or Kohls, accounting for 27%, 17% and
7%, respectively, of our total sales in 2009. As is common in the apparel essentials industry, we
generally do not have purchase agreements that obligate our customers to purchase our products.
However, all of our key customer relationships have been in place for
ten years or more. Wal-Mart, Target and Kohls are our only customers with sales that exceed 10% of
any individual segments sales. In
our Innerwear segment, Wal-Mart accounted for 40% of sales, Target
accounted for 16% of sales and Kohls accounted for 12% of sales
during 2009. In our Outerwear segment, Target accounted for
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34% of sales and Wal-Mart accounted for 19% of sales during 2009. In our Hosiery segment,
Wal-Mart accounted for 27% of sales during 2009 and Target accounted for 10% of sales during 2009.
Due to their size and operational scale, high-volume retailers such as Wal-Mart and Target
require extensive category and product knowledge and specialized services regarding the quantity,
quality and timing of product orders. We have organized multifunctional customer management teams,
which has allowed us to form strategic long-term relationships with these customers and efficiently
focus resources on category, product and service expertise. Smaller regional customers attracted to
our leading brands and quality products also represent an important component of our distribution.
Our organizational model provides for an efficient use of resources that delivers a high level of
category and channel expertise and services to these customers.
Sales
to the mass merchant channel in the United States accounted for approximately 45% of our net sales in 2009.
We sell all of our product categories in this channel primarily under our Hanes, Just My Size and
Playtex brands. Mass merchants feature high-volume, low-cost sales of basic apparel items along
with a diverse variety of consumer goods products, such as grocery and drug products and other hard
lines, and are characterized by large retailers, such as Wal-Mart. Wal-Mart, which accounted for
approximately 27% of our net sales in 2009, is our largest mass merchant customer.
Sales to the
national chains and department stores channel in the United States accounted for approximately 16% of
our net sales in 2009. These retailers target a higher-income consumer than mass merchants, focus
more of their sales on apparel items rather than other consumer goods such as grocery and drug
products, and are characterized by large retailers such as Kohls, JC Penney Company, Inc. and
Sears Holdings Corporation. We sell all of our product categories in this channel. Traditional
department stores target higher-income consumers and carry more high-end, fashion conscious
products than national chains or mass merchants and tend to operate in higher-income areas and
commercial centers. Traditional department stores are characterized by large retailers such as
Macys and Dillards, Inc. We sell products in our intimate apparel, hosiery and underwear
categories through department stores.
Sales
in our Direct to Consumer segment in the United States accounted for approximately 10% of our net sales in
2009. We sell our branded products directly to consumers through our 228 outlet stores, as well as
our Web sites operating under the Hanes, One Hanes Place, Just My Size and Champion names. Our
outlet stores are value-based, offering the consumer a savings of 25% to 40% off suggested retail
prices, and sell first-quality, excess, post-season, obsolete and slightly imperfect products. Our
Web sites, supported by our catalogs, address the growing direct to consumer channel that operates
in todays 24/7 retail environment, and we have an active database of approximately four million
consumers receiving our catalogs and emails. Our Web sites continue to experience growth as more
consumers embrace this retail shopping channel.
Sales in our International segment represented approximately 11% of our net sales in 2009, and
included sales in Latin America, Asia, Canada, Europe and South America. Our largest international
markets are Canada, Japan, Mexico, Europe and Brazil, and we also have sales offices in India and
China. We operate in several locations in Latin America including Mexico, Argentina, Brazil and
Central America. From an export business perspective, we use distributors to service customers in
the Middle East and Asia, and have a limited presence in Latin America. The brands that are the
primary focus of the export business include Hanes and Champion socks, Champion activewear, Hanes
underwear and Bali, Playtex, Wonderbra and barely there intimate apparel. As discussed below under
Intellectual Property, we are not permitted to sell Wonderbra and Playtex branded products in the
member states of the EU, several other European countries, and South Africa. For more information about our sales on a geographic basis, see Note 21 to our financial statements.
Sales in other channels in the United States represented approximately 18% of our net sales in 2009. We sell
T-shirts, golf and sport shirts and fleece sweatshirts to third-party embellishers primarily under
our Hanes, Hanes Beefy-T and Outer Banks brands. Sales to third-party embellishers accounted for
approximately 7% of our net sales in 2009. We also sell a significant range of our underwear,
activewear and socks products under the Champion brand to wholesale clubs, such as Costco, and
sporting goods stores, such as The Sports Authority, Inc. We sell primarily legwear and underwear
products under the Hanes and Leggs brands to food, drug and variety stores. We sell products that
span across our Innerwear, Outerwear and Hosiery segments to the U.S. military for sale to
servicemen and servicewomen.
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Inventory
Effective inventory management is a key component of our future success. Because our customers
generally do not purchase our products under long-term supply contracts, but rather on a purchase
order basis, effective inventory management requires close coordination with the customer base.
Through Kanban, a multi-initiative effort that determines production quantities, and in doing so,
facilitates just-in-time production and ordering systems, as well as inventory management, demand
prioritization and related initiatives, we seek to ensure that products are available to meet
customer demands while effectively managing inventory levels. We also employ various other types of
inventory management techniques that include collaborative forecasting and planning,
supplier-managed inventory, key event management and various forms of replenishment management
processes. Our supplier-managed inventory initiative is intended to shift raw material ownership
and management to our suppliers until consumption, freeing up cash and improving response time. We
have demand management planners in our customer management group who work closely with customers to
develop demand forecasts that are passed to the supply chain. We also have professionals within the
customer management group who coordinate daily with our larger customers to help ensure that our
customers planned inventory levels are in fact available at their individual retail outlets.
Additionally, within our supply chain organization we have dedicated professionals who translate
the demand forecast into our inventory strategy and specific production plans. These individuals
work closely with our customer management team to balance inventory investment/exposure with
customer service targets.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors.
Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in
demand for certain items. 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 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.
Marketing
Our strategy is to bring consumer-driven innovation to market in a compelling way. Our
approach is to build targeted, effective multimedia advertising and marketing campaigns to increase
awareness of our key brands. Driving growth platforms across categories is a major element of our
strategy as it enables us to meet key consumer needs and leverage advertising dollars. We believe
that the strength of our consumer insights, our distinctive brand propositions and our focus on
integrated marketing give us a competitive advantage in the fragmented apparel marketplace.
In 2009, we launched a number of new advertising and marketing initiatives:
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We launched a new television advertising campaign in support of Hanes Comfort Fit socks
for the family. |
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We announced that our Champion and Duofold brands have partnered with accomplished
international mountaineer and motivational speaker Jamie Clarke to lead Expedition
Hanesbrands, a Mount Everest expedition in 2010 designed to drive brand awareness and
showcase our research and development innovation and textile science leadership. |
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In connection with our Expedition Hanesbrands initiative, Champion launched a new
Whats Your Everest marketing campaign and online community to support people in reaching
their personal aspirations and goals. |
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Hanes became the Official Apparel Sponsor of Passionately Pink for the Cure, a
fund-raising program created by Susan G. Komen for the Cure that inspires breast cancer
advocacy and honors those affected by the disease. Hanes also offers a special pink
collection of panties, bras, socks and graphic tees, and has created a campaign Web site,
www.hanespink.com, that features interactive content to inspire people to make a difference
in the breast cancer support community. |
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Champion was selected by US Lacrosse, the sports national governing body, as the
Official Performance Apparel of US Lacrosse and Champion has the right to manufacture
apparel with the US Lacrosse logo that will be sold to participating teams. In addition to
the apparel partnership, the 2010 US Lacrosse National Convention, the largest
lacrosse-specific educational and networking opportunity in the country, will be presented
by Champion. |
We also continued some of our existing advertising and marketing initiatives:
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We continued our mens underwear advertising featuring Michael Jordan, in support of
Hanes Lay Flat Collar T-shirts and No Ride Up boxer briefs. |
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We continued our television advertising featuring Sarah Chalke in another Look Who
advertising campaign in support of our Hanes No Ride Up panties. |
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We continued our alliance with The Walt Disney Company by opening Disney Design-a-Tee
presented by Hanes, an innovative next-generation store for apparel souvenirs at the Walt
Disney World Resort in Orlando, Florida, an interactive T-shirt design and printing store
that enables Disney guests to enhance their magical Disney experience with a personalized
custom-designed Hanes T-shirt printed while they wait. |
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We continued our How You Play national advertising campaign for Champion that we
launched in 2007. The campaign includes print, out-of-home and online components and is
designed to capture the everyday moments of fun and sport in a series of cool and hip
lifestyle images. |
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We continued the Live Beautifully campaign for our Bali brand, launched in the Spring
of 2007. The print, television and online advertising campaign features Bali bras and
panties from its Passion for Comfort, Seductive Curves and Cotton Creations lines. |
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We continued our innovative and expressive advertising and marketing campaign called
Girl Talk, launched in September 2007, in which confident, everyday women talk about
their breasts, in support of our Playtex 18 Hour and Playtex Secrets product lines. |
Distribution
As of January 2, 2010, we distributed our products for the U.S. market from a total of 19
distribution centers. These facilities include 17 facilities located in the United States and two
facilities located outside the United States in regions where we manufacture our products. We
internally manage and operate 13 of these facilities, and we use third-party logistics providers
who operate the other six facilities on our behalf. International distribution operations use a
combination of third-party logistics providers, as well as owned and operated distribution
operations, to distribute goods to our various international markets.
We have reduced the number of distribution centers from the 48 that we maintained at the time
of the spin off to 33 as of January 2, 2010. The consolidation of our distribution network is
still in process but will not result in any substantial charges in future periods. The
distribution network consolidation involves the implementation of new warehouse management systems
and technology, and opening of new distribution centers and new third-party logistics providers to
replace parts of our legacy distribution network. In January 2009, we began shipping products from
a new 1.3 million square foot distribution center in Perris, California.
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Manufacturing and Sourcing
During 2009, approximately 70% of our finished goods sold were manufactured through a
combination of facilities we own and operate and facilities owned and operated by third-party
contractors who perform some of the steps in the manufacturing process for us, such as cutting
and/or sewing. We sourced the remainder of our finished goods from third-party manufacturers who
supply us with finished products based on our designs. We believe that our balanced approach to
product supply, which relies on a combination of owned, contracted and sourced manufacturing
located across different geographic regions, increases the efficiency of our operations, reduces
product costs and offers customers a reliable source of supply.
Finished Goods That Are Manufactured by Hanesbrands
The manufacturing process for the finished goods that we manufacture begins with raw materials
we obtain from suppliers. The principal raw materials in our product categories are cotton and
synthetics. Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating
cost of cotton, which is affected by, among other factors, weather, consumer demand, speculation on
the commodities market and the relative valuations and fluctuations of the currencies of producer
versus consumer countries and other factors that are generally unpredictable and beyond our
control. We employ a dollar cost averaging
strategy by entering into hedging contracts on cotton designed to protect us
from severe market fluctuations in the wholesale prices of cotton. In addition to cotton yarn and
cotton-based textiles, we use thread, narrow elastic and trim for product identification, buttons,
zippers, snaps and lace.
Fluctuations in crude oil or petroleum prices may also influence the prices of items used in
our business, such as chemicals, dyestuffs, polyester yarn and foam. Alternate sources of these
materials and services are readily available. Cotton and synthetic materials are typically spun
into yarn, which is then knitted into cotton, synthetic and blended fabrics. Although historically
we have spun a significant portion of the yarn and knit a significant portion of the fabrics we use
in our owned and operated facilities, in October 2009, we completed the sale of our yarn operations
as a result of which we ceased making our own yarn and now source all of our yarn requirements from
large-scale yarn suppliers. To a lesser extent, we purchase fabric from several domestic and
international suppliers in conjunction with scheduled production. These fabrics are cut and sewn
into finished products, either by us or by third-party contractors. Most of our cutting and sewing
operations are strategically located in Asia, Central America and the Caribbean Basin.
Rising fuel, energy and utility costs may have a significant impact on our manufacturing
costs. These costs may fluctuate due to a number of factors outside our control, including
government policy and regulation, foreign exchange rates and weather conditions.
We continued to consolidate our manufacturing facilities and currently operate 41
manufacturing facilities, down from 70 at the time of our spin off. In making decisions about the
location of manufacturing operations and third-party sources of supply, we consider a number of
factors, including labor, local operating costs, quality, regional infrastructure, applicable
quotas and duties, and freight costs. During the fourth quarter of 2009, we commenced production
at our textile production plant in Nanjing, China, our first company-owned textile production
facility in Asia. The Nanjing textile facility will enable us to expand and leverage our production
scale in Asia as we balance our supply chain across hemispheres, thereby diversifying our
production risks. During the fourth quarter of 2008, we commenced production at our 500,000 square
foot sock manufacturing facility in El Salvador. This facility, co-located with textile
manufacturing operations that we acquired in 2007, provides a manufacturing base in Central America
from which to leverage our production scale at a lower cost location. In October 2008, we acquired
a 370-employee embroidery and screen-print facility in Honduras. For the past eight years, these
operations have produced embroidered and screen-printed apparel for us. This acquisition better
positions us for long-term growth in these segments. During the second quarter of 2008, we added
three company-owned sewing plants in Southeast Asia two in Vietnam and one in Thailand giving
us four sewing plants in Asia.
Finished Goods That Are Manufactured by Third Parties
In addition to our manufacturing capabilities, we also source finished goods we design from
third-party
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manufacturers, also referred to as turnkey products. Many of these turnkey products are
sourced from international suppliers by our strategic sourcing hubs in Hong Kong and other
locations in Asia.
All contracted and sourced manufacturing must meet our high quality standards. Further, all
contractors and third-party manufacturers must be preaudited and adhere to our strict supplier and
business practices guidelines. These requirements provide strict standards covering hours of work,
age of workers, health and safety conditions and conformity with local laws and Hanesbrands
standards. Each new supplier must be inspected and agree to comprehensive compliance terms prior to
performance of any production on our behalf. We audit compliance with these standards and maintain
strict compliance performance records. In addition to our audit procedures, we require certain of
our suppliers to be Worldwide Responsible Apparel Production, or WRAP, certified. WRAP is a
recognized apparel certification program that independently monitors and certifies compliance with
certain specified manufacturing standards that are intended to ensure that a given factory produces
sewn goods under lawful, humane, and ethical conditions. WRAP uses third-party, independent
certification firms and requires factory-by-factory certification.
Trade Regulation
We are exposed to certain risks of doing business outside of the United States. We import
goods from company-owned facilities in Asia, Central America, the Caribbean Basin and Mexico, and
from suppliers in those areas and in Europe, South America, Africa and the Middle East. These
import transactions are subject to customs, trade and other laws and regulations governing their
entry into the United States and to tariffs applicable to such merchandise.
In addition, much of the merchandise we import is subject to duty free entry into the United
States under various trade preferences and/or free trade agreements provided the goods meet certain
criteria and characteristics. Compliance with these specific requirements as well as all other
requirements is reviewed periodically by the United States Customs and Border Control and other
governmental agencies.
Finally, imported apparel merchandise may be subject to various restrictive trade actions
initiated by the United States government, domestic industry, labor or other parties under various
U.S. laws. Such actions could result in the U.S. government imposing quotas or additional tariffs
against apparel under special safeguard actions applicable to China, other safeguard actions
applicable to any country, or antidumping or countervailing duties applicable to specific products
from specific countries. Currently there are no such actions, additional, special or safeguard
duties or quotas imposed against products which we import. Our management evaluates the possible
impact of these and similar actions on our ability to import products from China and other
countries. If such safeguards or duties were to be imposed, we do not expect that these restraints
would have a material impact on us.
Moreover, our management monitors new developments and risks relating to duties, tariffs and
quotas. Changes in these areas have the potential to harm or, in some cases, benefit our business.
In response to the changing import environment management has chosen to continue its balanced
approach to manufacturing and sourcing. We attempt to limit our sourcing exposure through
geographic diversification with a mix of company-owned and contracted production, as well as shifts
of production among countries and contractors. We will continue to manage our supply chain from a
global perspective and adjust as needed to changes in the global production environment.
We also monitor a number of international security risks. We are a member of the Customs-Trade
Partnership Against Terrorism, or C-TPAT, a partnership between the government and private sector
initiated after the events of September 11, 2001 to improve supply chain and border security.
C-TPAT partners work with U.S. Customs and Border Protection to protect their supply chains from
concealment of terrorist weapons, including weapons of mass destruction. In exchange, U.S. Customs
and Border Protection provides reduced inspections at the port of arrival and expedited processing
at the border.
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Competition
The apparel essentials market is highly competitive and rapidly evolving. Competition
generally is based upon price, brand name recognition, product quality, selection, service and
purchasing convenience. Our businesses face competition today from other large corporations and
foreign manufacturers. Fruit of the Loom, Inc., a subsidiary of Berkshire Hathaway Inc., competes
with us across most of our segments through its own offerings and those of its Russell Corporation
and Vanity Fair Intimates offerings. Other competitors in our
Innerwear segment include Limited Brands, Inc.s Victorias
Secret brand, Jockey International, Inc., Warnaco
Group Inc. and Maidenform Brands, Inc. Other competitors in our Outerwear
segment include various private label and controlled brands sold by
many of our customers,
Gildan Activewear, Inc. and Gap Inc. We also compete with many small manufacturers across all of our business
segments, including our International segment. Additionally, department stores and other retailers,
including many of our customers, market and sell apparel essentials products under private labels
that compete directly with our brands.
Our competitive strengths include our strong brands with leading market positions, our
high-volume, core essentials focus, our significant scale of operations, our global supply chain
and our strong customer relationships.
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Strong Brands with Leading Market Positions. According to NPD, our brands hold either
the number one or number two U.S. market position by sales value in most product categories
in which we compete, for the 12 month period ended December 31, 2009. According to NPD,
our largest brand, Hanes, is the top-selling apparel brand in the United States by units
sold, for the 12 month period ended December 31, 2009. |
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High-Volume, Core Essentials Focus. We sell high-volume, frequently replenished apparel
essentials. The majority of our core styles continue from year to year, with variations
only in color, fabric or design details, and are frequently replenished by consumers. We
believe that our status as a high-volume seller of core apparel essentials creates a more
stable and predictable revenue base and reduces our exposure to dramatic fashion shifts
often observed in the general apparel industry. |
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Significant Scale of Operations. According to NPD, we are the largest seller of apparel
essentials in the United States as measured by units sold for the 12 month period ended
December 31, 2009. Most of our products are sold to large retailers that have high-volume
demands. We believe that we are able to leverage our significant scale of operations to
provide us with greater manufacturing efficiencies, purchasing power and product design,
marketing and customer management resources than our smaller competitors. |
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Global Supply Chain. We have restructured our supply chain over the past three years to
create more efficient production clusters that utilize fewer, larger facilities and to
balance our production capability between the Western Hemisphere and Asia. With our global
supply chain infrastructure substantially in place, we are now focused on optimizing our
supply chain to further enhance efficiency, improve working capital and asset turns and
reduce costs. |
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Strong Customer Relationships. We sell our products primarily through large,
high-volume retailers, including mass merchants, department stores and national chains. We
have strong, long-term relationships with our top customers, including relationships of
more than ten years with each of our top ten customers. We have aligned significant parts
of our organization with corresponding parts of our customers organizations. We also have
entered into customer-specific programs such as the C9 by Champion products marketed and
sold through Target stores and the recently expanded presence at Wal-Mart of our Just My
Size brand. |
Intellectual Property
Overview
We market our products under hundreds of trademarks and service marks in the United States and
other countries around the world, the most widely recognized of which are Hanes, Champion, C9 by
Champion, Playtex, Bali, Leggs, Just My Size, barely there, Wonderbra, Stedman, Outer Banks,
Zorba, Rinbros and Duofold. Some of our products are sold under trademarks that have been licensed
from third parties, such as Polo Ralph Lauren mens underwear, and we also hold licenses from
various toy and media companies that give us the right to use certain of
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their proprietary characters, names and trademarks.
Some of our own trademarks are licensed to third parties, such as Champion for
athletic-oriented accessories. In the United States, the Playtex trademark is owned by Playtex
Marketing Corporation, of which we own a 50% interest and which grants to us a perpetual
royalty-free license to the Playtex trademark on and in connection with the sale of apparel in the
United States and Canada. The other 50% interest in Playtex Marketing Corporation is owned by
Playtex Products, Inc., an unrelated third-party, who has a perpetual royalty-free license to the
Playtex trademark on and in connection with the sale of non-apparel products in the United States.
Outside the United States and Canada, we own the Playtex trademark and perpetually license such
trademark to Playtex Products, Inc. for non-apparel products. In addition, as described below, as
part of Sara Lees sale in February 2006 of its European branded apparel business, an affiliate of
Sun Capital Partners, Inc., or Sun Capital, has an exclusive, perpetual, royalty-free license to
manufacture, sell and distribute apparel products under the Wonderbra and Playtex trademarks in the
member states of the EU, as well as several other European nations and South Africa. We also own a
number of copyrights. Our trademarks and copyrights are important to our marketing efforts and have
substantial value. We aggressively protect these trademarks and copyrights from infringement and
dilution through appropriate measures, including court actions and administrative proceedings.
Although the laws vary by jurisdiction, trademarks generally remain valid as long as they are
in use and/or their registrations are properly maintained. Most of the trademarks in our portfolio,
including our core brands, are covered by trademark registrations in the countries of the world in
which we do business, with registration periods generally ranging between seven and 10 years
depending on the country. Trademark registrations can be renewed indefinitely as long as the
trademarks are in use. We have an active program designed to ensure that our trademarks are
registered, renewed, protected and maintained. We plan to continue to use all of our core
trademarks and plan to renew the registrations for such trademarks for as long as we continue to
use them. Most of our copyrights are unregistered, although we have a sizable portfolio of
copyrighted lace designs that are the subject of a number of registrations at the U.S. Copyright
Office.
We place high importance on product innovation and design, and a number of these innovations
and designs are the subject of patents. However, we do not regard any segment of our business as
being dependent upon any single patent or group of related patents. In addition, we own proprietary
trade secrets, technology, and know how that we have not patented.
Shared Trademark Relationship with Sun Capital
In February 2006, Sara Lee sold its European branded apparel business to an affiliate of Sun
Capital. In connection with the sale, Sun Capital received an exclusive, perpetual, royalty-free
license to manufacture, sell and distribute apparel products under the Wonderbra and Playtex
trademarks in the member states of the EU, as well as Belarus, Bosnia-Herzegovina, Bulgaria,
Croatia, Macedonia, Moldova, Morocco, Norway, Romania, Russia, Serbia-Montenegro, South Africa,
Switzerland, Ukraine, Andorra, Albania, Channel Islands, Lichtenstein, Monaco, Gibraltar,
Guadeloupe, Martinique, Reunion and French Guyana, which we refer to as the Covered Nations. We
are not permitted to sell Wonderbra and Playtex branded products in the Covered Nations, and Sun
Capital is not permitted to sell Wonderbra and Playtex branded products outside of the Covered
Nations. In connection with the sale, we also have received an exclusive, perpetual royalty-free
license to sell DIM and UNNO branded products in Panama, Honduras, El Salvador, Costa Rica,
Nicaragua, Belize, Guatemala, Mexico, Puerto Rico, the United States, Canada and, for DIM products,
Japan. We are not permitted to sell DIM or UNNO branded apparel products outside of these countries
and Sun Capital is not permitted to sell DIM or UNNO branded apparel products inside these
countries. In addition, the rights to certain European-originated brands previously part of Sara
Lees branded apparel portfolio were transferred to Sun Capital and are not included in our brand
portfolio.
Licensing Relationship with Tupperware Corporation
In December 2005, Sara Lee sold its direct selling business, which markets cosmetics, skin
care products, toiletries and clothing in 18 countries, to Tupperware Corporation, or Tupperware.
In connection with the sale, Dart Industries Inc., or Dart, an affiliate of Tupperware, received
a three-year exclusive license agreement, which has been extended to March 31, 2010, to use the C
Logo, Champion U.S.A., Wonderbra, W by Wonderbra, The One and Only Wonderbra, Playtex, Just My Size
and Hanes trademarks for the manufacture and sale, under the applicable brands, of certain mens
and womens apparel in the Philippines, including underwear, socks, sportswear
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products, bras, panties and girdles. Dart also received a ten-year, royalty-free, exclusive
license to use the Girls Attitudes trademark for the manufacture and sale of certain toiletries,
cosmetics, intimate apparel, underwear, sportswear, watches, bags and towels in the Philippines.
The rights and obligations under these agreements were assigned to us as part of the spin off.
In connection with the sale of Sara Lees direct selling business, Tupperware also signed two
five-year distributorship agreements providing Tupperware with the right to distribute and sell,
through door-to-door and similar channels, Playtex, Champion, Rinbros, Aire, Wonderbra, Hanes and
Teens by Hanes apparel items in Mexico that we have discontinued and/or determined to be obsolete.
The agreements also provide Tupperware with the exclusive right for five years to distribute and
sell through such channels such apparel items sold by us in the ordinary course of business. The
agreements also grant a limited right to use such trademarks solely in connection with the
distribution and sale of those products in Mexico.
Under the terms of the agreements, we reserve the right to apply for, prosecute and maintain
trademark registrations in Mexico for those products covered by the distributorship agreement. The
rights and obligations under these agreements were assigned to us as part of the spin off.
Corporate Social Responsibility
We have a formal corporate social responsibility (CSR) program that consists of five core
initiatives: a global business practices ethics program for all employees worldwide; a facility
compliance program that seeks to ensure company and supplier plants meet our labor and social
compliance standards; a product safety program; a global environmental management system that seeks
to reduce the environmental impact of our operations; and a commitment to corporate philanthropy
which seeks to meet the fundamental needs of the communities in which we live and work. We
employ over 15 full-time CSR personnel across the world to manage our program.
In February 2008, we joined the Fair Labor Association and are currently undergoing the final
stages of the Fair Labor Associations two-year implementation process for accreditation of our
internal global social compliance program. The Fair Labor Association works with industry, civil
society organizations and colleges and universities to protect workers rights and improve working
conditions in factories around the world. Participating companies in the Fair Labor Association
are required to fulfill 10 company obligations, including conducting internal monitoring of
facilities, submitting to independent monitoring audits and verification, and managing and
reporting information on their compliance efforts. The Fair Labor Association conducts unannounced
independent external monitoring audits of a sample of a participating companys plants and
suppliers and publishes the results of those audits for the public to review.
We are committed to reducing our greenhouse gas footprint and our
contribution to global climate change. We have implemented a
comprehensive corporate energy policy. We manage this commitment by
reducing our energy consumption as much as possible, exploring better
supply chain management to reduce our use of energy-intensive
transportation, adopting cleaner technologies where possible and
actively tracking our energy metrics. We have partnered closely with
Energy Star, a joint program of the U.S. Environmental Protection
Agency and the U.S. Department of Energy that helps save money and
protect the environment through energy efficient products and
practices.
We also incorporate Leadership in Energy and Environmental Design, or LEED-based practices
into many remodeling and new construction projects for our facilities around the world. We earned
the U.S. Green Building Councils sustainability certification for our Bentonville, Arkansas sales
office. We are also currently working on LEED certification of manufacturing facilities in El
Salvador, Vietnam and China and our distribution center in Perris, California. Sustainable
features of the Perris facility include reduction of energy usage through extensive use of natural
skylighting, motion-detection lighting, a design that does not require heating or air conditioning
for a comfortable working environment, reduction of water usage compared with typical warehouses of
its size through low-water bathroom fixtures and low-water landscaping, innovative site grading
techniques and use of locally produced concrete and steel and many other LEED concepts such as use
of paints, carpets and other materials with low volatile organic compound content, an
organic-focused pest control program that minimizes chemical pesticide use, location near public
transportation to reduce the parking lot size and reliance on automobile transportation, preferred
parking for low-emission and low-energy vehicles, and on-site bicycle storage and shower and
changing room facilities.
Our corporate philanthropic efforts are focused on meeting the fundamental needs of the
communities in which we live and work. Last year, we were again the largest corporate giver to our
local United Way in Forsyth County, North Carolina, with our corporate and employee gifts totaling
nearly $2 million. While we do not have company-owned operations in Haiti, we donated over $2.2
million in apparel to the relief effort, made a $25,000 cash donation to CARE, and donated food and
other staples directly to the employees of third-party contractors we
use in Port-au-Prince in early 2010.
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Environmental Matters
We have a well-developed environmental program that focuses heavily on energy use (in
particular the use of renewable energy), water use and treatment, and the use of chemicals that
comply with our restricted substances list. We are subject to various federal, state, local and
foreign laws and regulations that govern our activities, operations and products that may have
adverse environmental, health and safety effects, including laws and regulations relating to
generating emissions, water discharges, waste, product and packaging content and workplace safety.
Noncompliance with these laws and regulations may result in substantial monetary penalties and
criminal sanctions. We are aware of hazardous substances or petroleum releases at a few of our
facilities and are working with the relevant environmental authorities to investigate and address
such releases. We also have been identified as a potentially responsible party at a few waste
disposal sites undergoing investigation and cleanup under the federal Comprehensive Environmental
Response, Compensation and Liability Act (commonly known as Superfund) or state Superfund
equivalent programs. Where we have determined that a liability has been incurred and the amount of
the loss can reasonably be estimated, we have accrued amounts in our balance sheet for losses
related to these sites. Compliance with environmental laws and regulations and our remedial
environmental obligations historically have not had a material impact on our operations, and we are
not aware of any proposed regulations or remedial obligations that could trigger significant costs
or capital expenditures in order to comply.
Governmental Regulation
Finally, we are subject to U.S. federal, state and local laws and regulations that could
affect our business, including those promulgated under the Occupational Safety and Health Act, the
Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification
Act, the rules and regulations of the Consumer Products Safety Commission and various environmental
laws and regulations. While we have had a product safety program in place for many years focused
heavily on childrens products, we have reinforced our product safety team and technological
capabilities to ensure that we are fully in compliance with the new Consumer Products Safety
Improvement Act. Our international businesses are subject to similar laws and regulations in the
countries in which they operate. Our operations also are subject to various international trade
agreements and regulations. See Trade Regulation. While we believe that we are in compliance
in all material respects with all applicable governmental regulations, current governmental
regulations may change or become more stringent or unforeseen events may occur, any of which could
have a material adverse effect on our financial position or results of operations.
Employees
As of January 2, 2010, we had approximately 47,400 employees, approximately 7,800 of whom were
located in the United States. Of the employees located in the United States, approximately 2,400
were full or part-time employees in our stores within our direct to consumer channel. As of January
2, 2010, in the United States, approximately 25 employees were covered by collective bargaining
agreements. Some of our international employees were also covered by collective bargaining
agreements. We believe our relationships with our employees are good.
This section describes circumstances or events that could have a negative effect on our
financial results or operations or that could change, for the worse, existing trends in our
businesses. The occurrence of one or more of the circumstances or events described below could have
a material adverse effect on our financial condition, results of operations and cash flows or on
the trading prices of our common stock. The risks and uncertainties described in this Annual Report
on Form 10-K are not the only ones facing us. Additional risks and uncertainties that currently are
not known to us or that we currently believe are immaterial also may adversely affect our
businesses and operations.
17
Our supply chain relies on an extensive network of operations and any disruption to or adverse
impact on such operations may adversely affect our business, results of operations, financial
condition and cash flows.
We have an extensive global supply chain. A significant portion of our products are
manufactured in or sourced from locations in Asia, Central America, the Caribbean Basin and Mexico
and we are continuing to add new manufacturing capacity in Asia, Central America and the Caribbean
Basin. Potential events that may disrupt our supply chain operations include:
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political instability and acts of war or terrorism or other international events
resulting in the disruption of trade; |
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disruptions in shipping and freight forwarding services; |
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increases in oil prices, which would increase the cost of shipping; |
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interruptions in the availability of basic services and infrastructure, including power
shortages; |
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fluctuations in foreign currency exchange rates resulting in uncertainty as to future
asset and liability values, cost of goods and results of operations that are denominated in
foreign currencies; |
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extraordinary weather conditions or natural disasters, such as hurricanes, earthquakes,
tsunamis, floods or fires; and |
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the occurrence of an epidemic, the spread of which may impact our ability to obtain
products on a timely basis. |
Disruptions in our supply chain could negatively impact our business by interrupting
production, increasing our cost of sales, disrupting merchandise deliveries, delaying receipt of
products into the United States or preventing us from sourcing our products at all. Depending on
timing, these events could also result in lost sales, cancellation charges or excessive markdowns.
All of the foregoing can have an adverse effect on our business, results of operations, financial
condition and cash flows.
Significant fluctuations and volatility in the price of cotton and other raw materials we purchase
may have a material adverse effect on our business, results of operations, financial condition and
cash flows.
Cotton is the primary raw material used in the manufacturing of many of our products. While we
have sold our yarn operations, we are still exposed to fluctuations in the cost of cotton.
Increases in the cost of cotton can result in higher costs in the price we pay for yarn from our
large-scale yarn suppliers. 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 attempt to protect our business from the volatility of the market price of cotton through
employing a dollar cost
averaging strategy by entering into hedging contracts from time to time, our business can be adversely affected
by dramatic movements in cotton prices. The cotton prices reflected in our results were 55 cents
per pound in 2009 and 65 cents per pound in 2008. The ultimate effect of these pricing levels on
our earnings cannot be quantified, as the effect of movements in cotton prices on industry selling
prices are uncertain, but any dramatic increase in the price of cotton could have a material
adverse effect on our business, results of operations, financial condition and cash flows.
We are not always successful in our efforts to protect our business from the volatility of the
market price of cotton, and our business can be
adversely affected by dramatic movements in cotton prices. For example, we estimate that a change
of $0.01 per pound in cotton prices would affect our annual raw material costs by $3 million, at
current levels of production. The ultimate effect of this change on our earnings cannot be
quantified, as the effect of movements in cotton prices on industry selling prices are uncertain,
but any dramatic increase in the price of cotton would have a material adverse effect on our
business, results of operations, financial condition and cash flows.
In addition, oil-related commodity prices and the costs of other raw materials used in our
products, such as dyes and chemicals, and other costs, such as fuel, energy and utility costs, may
fluctuate due to a number of factors outside our control, including government policy and
regulation and weather conditions. For example, we estimate
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that a change of $10.00 per barrel in the price of oil would affect our freight costs by
approximately $3 million, at current levels of usage.
The loss of one or more of our suppliers of finished goods or raw materials may interrupt our
supplies and materially harm our business.
We purchase all of the raw materials used in our products and approximately 30% of the apparel
designed by us from a limited number of third-party suppliers and manufacturers. Our ability to
meet our customers needs depends on our ability to maintain an uninterrupted supply of raw
materials and finished products from our third-party suppliers and manufacturers. Our business,
financial condition or results of operations could be adversely affected if any of our principal
third-party suppliers or manufacturers experience financial difficulties that they are not able to
overcome resulting from the deterioration in worldwide economic conditions, reproduction problems,
lack of capacity or transportation disruptions. The magnitude of this risk depends upon the timing
of any interruptions, the materials or products that the third-party manufacturers provide and the
volume of production.
Our dependence on third parties for raw materials and finished products subjects us to the
risk of supplier failure and customer dissatisfaction with the quality of our products. Quality
failures by our third-party manufacturers or changes in their financial or business condition that
affect their production could disrupt our ability to supply quality products to our customers and
thereby materially harm our business.
If we fail to manage our inventory effectively, we may be required to establish additional
inventory reserves or we may not carry enough inventory to meet customer demands, causing us to
suffer lower margins or losses.
We are faced with the constant challenge of balancing our inventory with our ability to meet
marketplace needs. We continually monitor our inventory levels to best balance current supply and
demand with potential future demand that typically surges when consumers no longer postpone
purchases in our product categories, and we are continuing to implement strategies such as
supplier-managed inventory. Inventory reserves can result from the complexity of our supply chain,
a long manufacturing process and the seasonal nature of certain products. Increases in inventory
levels may also be needed to service our business as we continue to optimize our supply chain to
further enhance efficiency, improve working capital and asset turns and reduce costs. As a result,
we could be subject to high levels of obsolescence and excess stock. Based on discussions with our
customers and internally generated projections, we produce, purchase and/or store raw material and
finished goods inventory to meet our expected demand for delivery. However, we sell a large number
of our products to a small number of customers, and these customers generally are not required by
contract to purchase our goods. If, after producing and storing inventory in anticipation of
deliveries, demand is lower than expected, we may have to hold inventory for extended periods or
sell excess inventory at reduced prices, in some cases below our cost. There are inherent
uncertainties related to the recoverability of inventory, and it is possible that market factors
and other conditions underlying the valuation of inventory may change in the future and result in
further reserve requirements. Excess inventory charges can reduce gross margins or result in
operating losses, lowered plant and equipment utilization and lowered fixed operating cost
absorption, all of which could have a material adverse effect on our business, results of
operations, financial condition or cash flows.
Conversely, we also are exposed to lost business opportunities if we underestimate market
demand and produce too little inventory for any particular period. Because sales of our products
are generally not made under contract, if we do not carry enough inventory to satisfy our
customers demands for our products within an acceptable time frame, they may seek to fulfill their
demands from one or several of our competitors and may reduce the amount of business they do with
us. Any such action could have a material adverse effect on our business, results of operations,
financial condition and cash flows.
We may not be able to achieve the benefits we are seeking through optimizing our supply chain,
which could impair our ability to further enhance efficiency, improve working capital and asset
turns and reduce costs.
We have restructured our supply chain over the past three years to create more efficient
production clusters that utilize fewer, larger facilities and to balance our production capability
between the Western Hemisphere and Asia. 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 and our global supply chain infrastructure is substantially in place, we are
now focused on optimizing our supply chain to further enhance efficiency, improve
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working capital and asset turns and reduce costs. If we are not able to optimize our supply
chain, we may not be successful at improving working capital and asset turns and reducing costs.
The consolidation of our distribution network is still in process but will not result in any
substantial charges in future periods. The distribution network consolidation involves the
implementation of new warehouse management systems and technology, and opening of new distribution
centers and new third-party logistics providers to replace parts of our legacy distribution
network.
Our business could be harmed if we are unable to deliver our products to the market due to problems
with our distribution network.
We distribute our products from facilities that we operate as well as facilities that are
operated by third-party logistics providers. These facilities include a combination of owned,
leased and contracted distribution centers. We have reduced the number of distribution centers
from the 48 that we maintained at the time of the spin off to 33 as of January 2, 2010. In January
2009, we began shipping products from a new 1.3 million square foot distribution center in Perris,
California. The consolidation of our distribution is still in process but will not result in any
substantial charges in future periods. The distribution network consolidation involves the
implementation of new warehouse management systems and technology, and opening of new distribution
centers and new third-party logistics providers to replace parts of our legacy distribution
network. Because substantially all of our products are distributed from a relatively small number
of locations, our operations could also be interrupted by extraordinary weather conditions or
natural disasters, such as hurricanes, earthquakes, tsunamis, floods or fires near our distribution
centers. We maintain business interruption insurance, but it may not adequately protect us from the
adverse effects that could be caused by significant disruptions to our distribution network. In
addition, our distribution network is dependent on the timely performance of services by third
parties, including the transportation of product to and from our distribution facilities. If we are
unable to successfully operate our distribution network, our business, results of operations,
financial condition and cash flows could be adversely affected.
Current economic conditions may adversely impact demand for our products, reduce access to credit
and cause our customers and others with which we do business to suffer financial hardship, all of
which could adversely impact our business, results of operations, financial condition and cash
flows.
Worldwide economic conditions have deteriorated significantly since mid-2008 in many countries
and regions, including the United States, and may remain depressed for the foreseeable future.
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, consumers
uncertainty about financial conditions, 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.
During the past several years, various retailers, including some of our largest customers, have
experienced significant difficulties, including restructurings, bankruptcies and liquidations, and
the inability of retailers to overcome these difficulties may increase due to worldwide economic
conditions. This could adversely affect us because our customers generally pay us after goods are
delivered. Adverse changes in a customers financial position could cause us to limit or
discontinue business with that customer, require us to assume more credit risk relating to that
customers future purchases or limit our ability to collect accounts receivable relating to
previous purchases by that customer. 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.
Any of these occurrences could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Our product costs may also increase, and these increases may not be offset by comparable rises
in the income of consumers of our products. These consumers may choose to purchase fewer of our
products or 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. If any of these events occur, or if unfavorable economic conditions
continue to challenge the consumer environment, our business, results of operations, financial
condition and cash flows could be adversely affected.
In addition, economic conditions, including decreased access to credit, may result in
financial difficulties
20
leading to restructurings, bankruptcies, liquidations and other unfavorable events for our
customers, suppliers of raw materials and finished goods, logistics and other service providers and
financial institutions which are counterparties to our credit facilities and derivatives
transactions. In addition, the inability of these third parties to overcome these difficulties may
increase. For example, several customers filed for bankruptcy during 2008 and 2009. If third
parties on which we rely for raw materials, finished goods or services are unable to overcome
difficulties resulting from the deterioration in worldwide economic conditions and provide us with
the materials and services we need, or if counterparties to our credit facilities or derivatives
transactions do not perform their obligations, our business, results of operations, financial
condition and cash flows could be adversely affected.
Due to the extensive nature of our foreign operations, fluctuations in foreign currency exchange
rates could negatively impact our results of operations.
We sell a majority of our products in transactions denominated in U.S. dollars; however, we
purchase many of our raw materials, pay a portion of our wages and make other payments in our
supply chain in foreign currencies. As a result, when the U.S. dollar weakens against any of these
currencies, our cost of sales could increase substantially. Outside the United States, we may pay
for materials or finished products in U.S. dollars, and in some cases a strengthening of the U.S.
dollar could effectively increase our costs where we use foreign currency to purchase the U.S.
dollars we need to make such payments. We use foreign exchange forward and option contracts to
hedge material exposure to adverse changes in foreign exchange rates. We are also exposed to gains
and losses resulting from the effect that fluctuations in foreign currency exchange rates have on
the reported results in our financial statements due to the translation of operating results and
financial position of our foreign subsidiaries.
We rely on a relatively small number of customers for a significant portion of our sales, and the
loss of or material reduction in sales to any of our top customers would have a material adverse
effect on our business, results of operations, financial condition and cash flows.
In 2009, our top ten customers accounted for 65% of our net sales and our top customers,
Wal-Mart and Target, accounted for 27% and 17% of our net sales, respectively. We expect that these
customers will continue to represent a significant portion of our net sales in the future. In
addition, our top customers are the largest market participants in our primary distribution
channels across all of our product lines. Any loss of or material reduction in sales to any of our
top ten customers, especially Wal-Mart and Target, would be difficult to recapture, and would have
a material adverse effect on our business, results of operations, financial condition and cash
flows.
Sales to our customers could be reduced if they devote less selling space to apparel products,
which could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
Over time, some of our customers that sell a variety of goods may devote less selling space to
apparel products. If any of our customers devote less selling space to apparel products, our sales
to those customers could be reduced even if we maintain our share of their apparel business. Any
material reduction in sales resulting from reductions in apparel selling space could have a
material adverse effect on our business, results of operations, financial condition and cash flows.
Current market returns have had a negative impact on the return on plan assets for our pension and
other postemployment plans, which may require significant funding.
As widely reported, financial markets in the United States, Europe and Asia have been
experiencing extreme disruption since mid-2008. As a result of this disruption in the domestic and
international equity and bond markets, our pension plans and other postemployment plans had an
increase in asset values of approximately 8% during 2009 and had a decrease of 32% during 2008. We
are unable to predict the significant variations in asset values or the severity or duration of the
current disruptions in the financial markets and the adverse economic conditions in the United
States, Europe and Asia. The funded status of these plans, and the related cost reflected in our
financial statements, are affected by various factors that are subject to an inherent degree of
uncertainty, particularly in the current economic environment. Under the Pension Protection Act of
2006 (the Pension Protection Act), continued losses of asset values may necessitate increased
funding of the plans in the future to meet minimum federal government requirements. The continued
downward pressure on the asset values of these plans may require us to fund obligations earlier
than we had originally planned, which would have a negative impact on cash flows from operations.
We generally do not sell our products under contracts, and, as a result, our customers are
generally not contractually obligated to purchase our products, which causes some uncertainty as to
future sales and inventory levels.
We generally do not enter into purchase agreements that obligate our customers to purchase our
products, and as a result, most of our sales are made on a purchase order basis. If any of our
customers experiences a significant downturn in its business, or fails to remain committed to our
products or brands, the customer is generally under no contractual obligation to purchase our
products and, consequently, may reduce or discontinue purchases from us. In the past, such actions
have resulted in a decrease in sales and an increase in our inventory and have had an adverse
effect on our business, results of operations, financial condition and cash flows. If such actions
occur again in the future, our business, results of operations and financial condition will likely
be similarly affected.
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Our existing customers may require products on an exclusive basis, forms of economic support and
other changes that could be harmful to our business.
Customers increasingly may require us to provide them with some of our products on an
exclusive basis, which could cause an increase in the number of stock keeping units, or SKUs, we
must carry and, consequently, increase our inventory levels and working capital requirements.
Moreover, our customers may increasingly seek markdown allowances, incentives and other forms of
economic support which reduce our gross margins and affect our profitability. Our financial
performance is negatively affected by these pricing pressures when we are forced to reduce our
prices without being able to correspondingly reduce our production costs.
We operate in a highly competitive and rapidly evolving market, and our market share and results of
operations could be adversely affected if we fail to compete effectively in the future.
The apparel essentials market is highly competitive and evolving rapidly. Competition is
generally based upon price, brand name recognition, product quality, selection, service and
purchasing convenience. Our businesses face competition today from other large corporations and
foreign manufacturers. Fruit of the Loom, Inc., a subsidiary of Berkshire Hathaway Inc., competes
with us across most of our segments through its own offerings and those of its Russell Corporation
and Vanity Fair Intimates offerings. Other competitors in our
Innerwear segment include Limited Brands, Inc.s Victorias
Secret brand, Jockey International, Inc., Warnaco
Group Inc. and Maidenform Brands, Inc. Other competitors in our Outerwear
segment include various private label and controlled brands sold by
many of our customers,
Gildan Activewear, Inc. and Gap Inc. We also compete with many small manufacturers across all of our business
segments, including our International segment. Additionally, department stores and other retailers,
including many of our customers, market and sell apparel essentials products under private labels
that compete directly with our brands. These customers may buy goods that are manufactured by
others, which represents a lost business opportunity for us, or they may sell private label
products manufactured by us, which have significantly lower gross margins than our branded
products. Increased competition may
result in a loss of or a reduction in shelf space and promotional support and reduced prices, in
each case decreasing our cash flows, operating margins and profitability. Our ability to remain
competitive in the areas of price, quality, brand recognition, research and product development,
manufacturing and distribution will, in large part, determine our future success. If we fail to
compete successfully, our market share, results of operations and financial condition will be
materially and adversely affected.
Sales of and demand for our products may decrease if we fail to keep pace with evolving consumer
preferences and trends, which could have an adverse effect on net sales and profitability.
Our success depends on our ability to anticipate and respond effectively to evolving consumer
preferences and trends and to translate these preferences and trends into marketable product
offerings. If we are unable to successfully anticipate, identify or react to changing styles or
trends or misjudge the market for our products, our sales may be lower than expected and we may be
faced with a significant amount of unsold finished goods inventory. In response, we may be forced
to increase our marketing promotions, provide markdown allowances to our customers or liquidate
excess merchandise, any of which could have a material adverse effect on our net sales and
profitability. Our brand image may also suffer if customers believe that we are no longer able to
offer innovative products, respond to consumer preferences or maintain the quality of our products.
Our substantial indebtedness subjects us to various restrictions and could decrease our
profitability and otherwise adversely affect our business.
We have a substantial amount of indebtedness. As described in Managements Discussion and
Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources, our
indebtedness includes the $750 million term loan and $400 million revolving credit facility (the
Revolving Loan Facility) pursuant to our senior secured credit facility that we entered into in
2006 and amended and restated on December 10, 2009 (as amended and restated, the 2009 Senior
Secured Credit Facility), our $500 million Floating Rate Senior Notes due 2014 (the Floating Rate
Senior Notes), our $500 million 8.000% Senior Notes due 2016 (the 8% Senior Notes) and the $250
million accounts receivable securitization facility that we entered into on November 27, 2007 as
amended in December 2009 (the Accounts Receivable Securitization Facility). The 2009 Senior
Secured Credit Facility and the indentures governing the Floating Rate Senior Notes and the 8%
Senior Notes contain restrictions
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that affect, and in some cases significantly limit or prohibit, among other things, our
ability to borrow funds, pay dividends or make other distributions, make investments, engage in
transactions with affiliates, or create liens on our assets.
Our leverage also could put us at a competitive disadvantage compared to our competitors that
are less leveraged. These competitors could have greater financial flexibility to pursue strategic
acquisitions, secure additional financing for their operations by incurring additional debt, expend
capital to expand their manufacturing and production operations to lower-cost areas and apply
pricing pressure on us. In addition, because many of our customers rely on us to fulfill a
substantial portion of their apparel essentials demand, any concern these customers may have
regarding our financial condition may cause them to reduce the amount of products they purchase
from us. Our leverage could also impede our ability to withstand downturns in our industry or the
economy.
If we are unable to maintain financial ratios associated with our indebtedness, such failure could
cause the acceleration of the maturity of such indebtedness which would adversely affect our
business.
Covenants in the 2009 Senior Secured Credit Facility and the Accounts Receivable
Securitization Facility require us to maintain a minimum interest coverage ratio and a maximum
total debt to EBITDA (earnings before income taxes, depreciation expense and amortization), or
leverage ratio. The recent deterioration of worldwide economic conditions could impact our ability
to maintain the financial ratios contained in these agreements. If we fail to maintain these
financial ratios, that failure could result in a default that accelerates the maturity of the
indebtedness under such facilities, which could require that we repay such indebtedness in full,
together with accrued and unpaid interest, unless we are able to negotiate new financial ratios or
waivers of our current ratios with our lenders. Even if we are able to negotiate new financial
ratios or waivers of our current financial ratios, we may be required to pay fees or make other
concessions that may adversely impact our business. Any one of these options could result in
significantly higher interest expense in 2010 and beyond. For information regarding our compliance
with these covenants, see Managements Discussion and Analysis of Financial Condition and Results
of Operations Liquidity and Capital Resources Trends and Uncertainties Affecting Liquidity.
If we fail to meet our payment or other obligations, the lenders could foreclose on, and acquire
control of, substantially all of our assets.
The lenders under the 2009 Senior Secured Credit Facility have received a pledge of
substantially all of our existing and future direct and indirect subsidiaries, with certain
customary or agreed-upon exceptions for foreign subsidiaries and certain other subsidiaries.
Additionally, these lenders generally have a lien on substantially all of our assets and the assets
of our subsidiaries, with certain exceptions. The financial institutions that are party to the
Accounts Receivable Securitization Facility have a lien on certain of our domestic accounts
receivables. As a result of these pledges and liens, if we fail to meet our payment or other
obligations under the 2009 Senior Secured Credit Facility or the Accounts Receivable Securitization
Facility, the lenders under those facilities will be entitled to foreclose on substantially all of
our assets and, at their option, liquidate these assets.
Our indebtedness restricts our ability to obtain additional capital in the future.
The restrictions contained in the 2009 Senior Secured Credit Facility and in the indentures
governing the Floating Rate Senior Notes and the 8% Senior Notes could limit our ability to obtain
additional capital in the future to fund capital expenditures or acquisitions, meet our debt
payment obligations and capital commitments, fund any operating losses or future development of our
business affiliates, obtain lower borrowing costs that are available from secured lenders or engage
in advantageous transactions that monetize our assets, or conduct other necessary or prudent
corporate activities.
If we need to incur additional debt or issue equity in order to fund working capital and
capital expenditures or to make acquisitions and other investments, debt or equity financing may
not be available to us on acceptable terms or at all. If we are not able to obtain sufficient
financing, we may be unable to maintain or expand our business. If we raise funds through the
issuance of debt or equity, any debt securities or preferred stock issued will have rights,
preferences and privileges senior to those of holders of our common stock in the event of a
liquidation, and the terms of the debt securities may impose restrictions on our operations. If we
raise funds through the issuance of equity, the issuance would dilute the ownership interest of our
stockholders.
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To service our debt obligations, we may need to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United States, which could increase our income
tax expense.
The amount of the income of our foreign subsidiaries that we expect to remit to the United
States may significantly impact our U.S. federal income tax expense. We pay U.S. federal income
taxes on that portion of the income of our foreign subsidiaries that is expected to be remitted to
the United States and be taxable. In order to service our debt obligations, we may need to increase
the portion of the income of our foreign subsidiaries that we expect to remit to the United States,
which may significantly increase our income tax expense. Consequently, our income tax expense has
been, and will continue to be, impacted by our strategic initiative to make substantial capital
investments outside the United States.
Our balance sheet includes a significant amount of intangible assets and goodwill. A decline in the
estimated fair value of an intangible asset or of a business unit could result in an asset
impairment charge, which would be recorded as an operating expense in our Consolidated Statement of
Income.
Under current accounting standards, we estimate the fair value of acquired assets, including
intangible assets, and assumed liabilities arising from a business acquisition. The excess, if any,
of the cost of the acquired business over the fair value of net tangible assets acquired is
goodwill. The goodwill is then assigned to a business unit (reporting unit), are considering
whether the acquired business will be operated as a separate business unit or integrated into an
existing business unit.
As of January 2, 2010, we had approximately $136 million of trademarks and other identifiable
intangibles and $322 million of goodwill on our balance sheet. Our trademarks are subject to
amortization while goodwill is not required to be amortized under current accounting rules. The
combined amounts represent 14% of our total assets.
Goodwill must be tested for impairment at least annually. No impairment was identified as a
result of the testing conducted in 2009. The impairment test requires us to estimate the fair
value of our reporting units, primarily using discounted cash flow methodologies based on
projected revenues and cash flows that will be derived from a reporting unit. Intangible assets
that are being amortized must be tested for impairment whenever events or circumstances indicate
that their carrying value might not be recoverable.
The fair value of a reporting unit could decline if projected revenues or cash flows were to
be lower in the future due to effects of the global recession or other causes. If the carrying
value of intangible assets or of goodwill were to exceed its fair value, the asset would be written
down to its fair value, with the impairment loss recognized as a noncash charge in the Consolidated
Statement of Income. We have not had any impairment charges in the last three years. However,
changes in the future outlook of a reporting unit could result in an impairment loss, which could
have a material adverse effect on our results of operations and financial condition.
Unanticipated changes in our tax rates or exposure to additional income tax liabilities could
increase our income taxes and decrease our net income.
We are subject to income taxes in both the United States and numerous foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes and, in
the ordinary course of business, there are many transactions and calculations for which the
ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by
changes in the mix of earnings in countries with differing statutory tax rates, changes in the
valuation of deferred tax assets and liabilities, the resolution of issues arising from tax audits
with various tax authorities, changes in tax laws, adjustments to income taxes upon finalization of
various tax returns and other factors. Our tax determinations are regularly subject to audit by tax
authorities and developments in those audits could adversely affect our income tax provision.
Although we believe that our tax estimates are reasonable, any significant increase in our future
effective tax rates could adversely impact our net income for future periods.
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Our balance sheet includes a significant amount of deferred tax assets. We must generate
sufficient future taxable income to realize the deferred tax benefits.
As of January 2, 2010, we had approximately $492 million of net deferred tax assets on our balance
sheet which represents 15% of our total assets. Deferred tax assets relate to temporary differences
(differences between the assets and liabilities in the consolidated financial statements and the
assets and liabilities in the calculation of taxable income). The recognition of deferred tax
assets is reduced by a valuation allowance if it is more likely than not that the tax benefits
associated with the deferred tax benefits will not be realized. If we are unable to generate
sufficient future taxable income in certain jurisdictions, or if there is a significant change in
the actual effective tax rates or the time period within which the underlying temporary differences
become taxable or deductible, we could be required to increase the valuation allowances against our
deferred tax assets, which would cause an increase in our effective tax rate. A significant
increase in our effective tax rate could have a material adverse effect on our financial condition
or results of operations.
Any inadequacy, interruption, integration failure or security failure with respect to our
information technology could harm our ability to effectively operate our business.
Our ability to effectively manage and operate our business depends significantly on our
information technology systems. As part of our efforts to consolidate our operations, we also
expect to continue to incur costs associated with the integration of our information technology
systems across our company over the next several years. This process involves the consolidation or
possible replacement of technology platforms so that our business functions are served by fewer
platforms, and has resulted in operational inefficiencies and in some cases increased our costs. We
are subject to the risk that we will not be able to absorb the level of systems change, commit the
necessary resources or focus the management attention necessary for the implementation to succeed.
Many key strategic initiatives of major business functions, such as our supply chain and our
finance operations, depend on advanced capabilities enabled by the new systems and if we fail to
properly execute or if we miss critical deadlines in the implementation of this initiative, we
could experience serious disruption and harm to our business. The failure of these systems to
operate effectively, problems with transitioning to upgraded or replacement systems, difficulty in
integrating new systems or systems of acquired businesses or a breach in security of these systems
could adversely impact the operations of our business.
If we experience a data security breach and confidential customer information is disclosed, we may
be subject to penalties and experience negative publicity, which could affect our customer
relationships and have a material adverse effect on our business.
We and our customers could suffer harm if customer information were accessed by third parties
due to a security failure in our systems. The collection of data and processing of transactions
through our direct to consumer operations require us to receive and store a large amount of
personally identifiable data. This type of data is subject to legislation and regulation in various
jurisdictions. Data security breaches suffered by well-known companies and institutions have
attracted a substantial amount of media attention, prompting state and federal legislative
proposals addressing data privacy and security. If some of the current proposals are adopted, we
may be subject to more extensive requirements to protect the customer information that we process
in connection with the purchases of our products. We may become exposed to potential liabilities
with respect to the data that we collect, manage and process, and may incur legal costs if our
information security policies and procedures are not effective or if we are required to defend our
methods of collection, processing and storage of personal data. Future investigations, lawsuits or
adverse publicity relating to our methods of handling personal data could adversely affect our
business, results of operations, financial condition and cash flows due to the costs and negative
market reaction relating to such developments.
Compliance with environmental and other regulations could require significant expenditures.
We are subject to various federal, state, local and foreign laws and regulations that govern
our activities, operations and products that may have adverse environmental, health and safety
effects, including laws and regulations relating to generating emissions, water discharges, waste,
product and packaging content and workplace safety. Noncompliance with these laws and regulations
may result in substantial monetary penalties and criminal sanctions. Future events that could give
rise to manufacturing interruptions or environmental remediation include changes in existing laws
and regulations, the enactment of new laws and regulations, a release of hazardous
25
substances on or from our properties or any associated offsite disposal location, or the
discovery of contamination from current or prior activities at any of our properties. While we are
not aware of any proposed regulations or remedial obligations that could trigger significant costs
or capital expenditures in order to comply, any such regulations or obligations could adversely
affect our business, results of operations, financial condition and cash flows.
International trade regulations may increase our costs or limit the amount of products that we can
import from suppliers in a particular country, which could have an adverse effect on our business.
Because a significant amount of our manufacturing and production operations are located, or
our products are sourced from, outside the United States, we are subject to international trade
regulations. The international trade regulations to which we are subject or may become subject
include tariffs, safeguards or quotas. These regulations could limit the countries in which we
produce or from which we source our products or significantly increase the cost of operating in or
obtaining materials originating from certain countries. Restrictions imposed by international trade
regulations can have a particular impact on our business when, after we have moved our operations
to a particular location, new unfavorable regulations are enacted in that area or favorable
regulations currently in effect are changed. The countries in which our products are manufactured
or into which they are imported may from time to time impose additional new regulations, or modify
existing regulations, including:
|
|
|
additional duties, taxes, tariffs and other charges on imports, including retaliatory
duties or other trade sanctions, which may or may not be based on WTO rules, and which
would increase the cost of products produced in such countries; |
|
|
|
limitations on the quantity of goods which may be imported into the United States from
a particular country, including the imposition of further safeguard mechanisms by the
U.S. government or governments in other jurisdictions, limiting our ability to import goods
from particular countries, such as China; |
|
|
|
changes in the classification of products that could result in higher duty rates than
we have historically paid; |
|
|
|
modification of the trading status of certain countries; |
|
|
|
requirements as to where products are manufactured; |
|
|
|
creation of export licensing requirements, imposition of restrictions on export
quantities or specification of minimum export pricing; or |
|
|
|
creation of other restrictions on imports. |
Adverse international trade regulations, including those listed above, would have a material
adverse effect on our business, results of operations, financial condition and cash flows.
26
We had approximately 47,400 employees worldwide as of January 2, 2010, and our business operations
and financial performance could be adversely affected by changes in our relationship with our
employees or changes to U.S. or foreign employment regulations.
We had approximately 47,400 employees worldwide as of January 2, 2010. This means we have a
significant exposure to changes in domestic and foreign laws governing our relationships with our
employees, including wage and hour laws and regulations, fair labor standards, minimum wage
requirements, overtime pay, unemployment tax rates, workers compensation rates, citizenship
requirements and payroll taxes, which likely would have a direct impact on our operating costs.
Approximately 39,600 of those employees were outside of the United States. A significant increase
in minimum wage or overtime rates in countries where we have employees could have a significant
impact on our operating costs and may require that we relocate those operations or take other steps
to mitigate such increases, all of which may cause us to incur additional costs, expend resources
responding to such increases and lower our margins.
In addition, some of our employees are members of labor organizations or are covered by
collective bargaining agreements. If there were a significant increase in the number of our
employees who are members of labor organizations or become parties to collective bargaining
agreements, we would become vulnerable to a strike, work stoppage or other labor action by these
employees that could have an adverse effect on our business.
We may suffer negative publicity if we or our third-party manufacturers violate labor laws or
engage in practices that are viewed as unethical or illegal, which could cause a loss of business.
We cannot fully control the business and labor practices of our third-party manufacturers, the
majority of whom are located in Asia, Central America and the Caribbean Basin. If one of our own
manufacturing operations or one of our third-party manufacturers violates or is accused of
violating local or international labor laws or other applicable regulations, or engages in labor or
other practices that would be viewed in any market in which our products are sold as unethical, we
could suffer negative publicity, which could tarnish our brands image or result in a loss of
sales. In addition, if such negative publicity affected one of our customers, it could result in a
loss of business for us.
The success of our business is tied to the strength and reputation of our brands, including brands
that we license to other parties. If other parties take actions that weaken, harm the reputation of
or cause confusion with our brands, our business, and consequently our sales, results of operations
and cash flows, may be adversely affected.
We license some of our important trademarks to third parties. For example, we license Champion
to third parties for athletic-oriented accessories. Although we make concerted efforts to protect
our brands through quality control mechanisms and contractual obligations imposed on our licensees,
there is a risk that some licensees may not be in full compliance with those mechanisms and
obligations. In that event, or if a licensee engages in behavior with respect to the licensed marks
that would cause us reputational harm, we could experience a significant downturn in that brands
business, adversely affecting our sales and results of operations. Similarly, any misuse of the
Wonderbra or Playtex brands by Sun Capital could result in negative publicity and a loss of sales
for our products under these brands, any of which may have a material adverse effect on our
business, results of operations, financial condition or cash flows.
We design, manufacture, source and sell products under trademarks that are licensed from third
parties. If any licensor takes actions related to their trademarks that would cause their brands or
our company reputational harm, our business may be adversely affected.
We design, manufacture, source and sell a number of our products under trademarks that are
licensed from third parties such as our Polo Ralph Lauren mens underwear. Because we do not
control the brands licensed to us, our licensors could make changes to their brands or business
models that could result in a significant downturn in a brands business, adversely affecting our
sales and results of operations. If any licensor engages in behavior with respect to the licensed
marks that would cause us reputational harm, or if any of the brands licensed to us violates the
trademark rights of another or are deemed to be invalid or unenforceable, we could experience a
significant downturn in that brands business, adversely affecting our sales and results of
operations, and we may be required to expend significant amounts on public relations, advertising
and, possibly, legal fees.
27
We are prohibited from selling our Wonderbra and Playtex intimate apparel products in the EU, as
well as certain other countries in Europe and South Africa, and therefore are unable to take
advantage of business opportunities that may arise in such countries.
In February 2006, Sara Lee sold its European branded apparel business to Sun Capital. In
connection with the sale, Sun Capital received an exclusive, perpetual, royalty-free license to
manufacture, sell and distribute apparel products under the Wonderbra and Playtex trademarks in the
member states of the EU, as well as Russia, South Africa, Switzerland and certain other nations in
Europe. Due to the exclusive license, we are not permitted to sell Wonderbra and Playtex branded
products in these nations and Sun Capital is not permitted to sell Wonderbra and Playtex branded
products outside of these nations. Consequently, we will not be able to take advantage of business
opportunities that may arise relating to the sale of Wonderbra and Playtex products in these
nations. For more information on these sales restrictions see Business Intellectual Property.
If we are unable to protect our intellectual property rights, our business may be adversely
affected.
Our trademarks and copyrights are important to our marketing efforts and have substantial
value. We aggressively protect these trademarks and copyrights from infringement and dilution
through appropriate measures, including court actions and administrative proceedings. We are
susceptible to others imitating our products and infringing our intellectual property rights.
Infringement or counterfeiting of our products could diminish the value of our brands or otherwise
adversely affect our business. Actions we have taken to establish and protect our intellectual
property rights may not be adequate to prevent imitation of our products by others or to prevent
others from seeking to invalidate our trademarks or block sales of our products as a violation of
the trademarks and intellectual property rights of others. In addition, unilateral actions in the
United States or other countries, such as changes to or the repeal of laws recognizing trademark or
other intellectual property rights, could have an impact on our ability to enforce those rights.
The value of our intellectual property could diminish if others assert rights in, or ownership
of, our trademarks and other intellectual property rights. We may be unable to successfully resolve
these types of conflicts to our satisfaction. In some cases, there may be trademark owners who have
prior rights to our trademarks because the laws of certain foreign countries may not protect
intellectual property rights to the same extent as do the laws of the United States. In other
cases, there may be holders who have prior rights to similar trademarks. We are from time to time
involved in opposition and cancelation proceedings with respect to some items of our intellectual
property.
Our business depends on our senior management team and other key personnel.
Our success depends upon the continued contributions of our senior management team and other
key personnel, some of whom have unique talents and experience and would be difficult to replace.
The loss or interruption of the services of a member of our senior management team or other key
personnel could have a material adverse effect on our business during the transitional period that
would be required for a successor to assume the responsibilities of the position. Our future
success will also depend on our ability to attract and retain key managers, sales people and
others. We may not be able to attract or retain these employees, which could adversely affect our
business.
Businesses that we may acquire may fail to perform to expectations, and we may be unable to
successfully integrate acquired businesses with our existing business.
From time to time, we may evaluate potential acquisition opportunities to support and
strengthen our business. We may not be able to realize all or a substantial portion of the
anticipated benefits of acquisitions that we may consummate. Newly acquired businesses may not
achieve expected results of operations, including expected levels of revenues, and may require
unanticipated costs and expenditures. Acquired businesses may also subject us to liabilities that
we were unable to discover in the course of our due diligence, and our rights to indemnification
from the sellers of such businesses, even if obtained, may not be sufficient to offset the relevant
liabilities. In addition, the integration of newly acquired businesses may be expensive and
time-consuming and may not be entirely successful. Integration of the acquired businesses may also
place additional pressures on our systems of internal control over financial reporting. If we are
unable to successfully integrate newly acquired businesses or if acquired businesses fail to
produce targeted results, it could have an adverse effect on our results of operations or financial
condition.
28
If the IRS determines that our spin off from Sara Lee does not qualify as a tax-free distribution
or a tax-free reorganization, we may be subject to substantial liability.
Sara Lee has received a private letter ruling from the Internal Revenue Service, or the IRS,
to the effect that, among other things, the spin off qualifies as a tax-free distribution for U.S.
federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended, or
the Internal Revenue Code, and as part of a tax-free reorganization under Section 368(a)(1)(D) of
the Internal Revenue Code, and the transfer to us of assets and the assumption by us of liabilities
in connection with the spin off will not result in the recognition of any gain or loss for U.S.
federal income tax purposes to Sara Lee.
Although the private letter ruling relating to the qualification of the spin off under
Sections 355 and 368(a)(1)(D) of the Internal Revenue Code generally is binding on the IRS, the
continuing validity of the ruling is subject to the accuracy of factual representations and
assumptions made in connection with obtaining such private letter ruling. Also, as part of the
IRSs general policy with respect to rulings on spin off transactions under Section 355 of the
Internal Revenue Code, the private letter ruling obtained by Sara Lee is based upon representations
by Sara Lee that certain conditions which are necessary to obtain tax-free treatment under Section
355 and Section 368(a)(1)(D) of the Internal Revenue Code have been satisfied, rather than a
determination by the IRS that these conditions have been satisfied. Any inaccuracy in these
representations could invalidate the ruling.
If the spin off does not qualify for tax-free treatment for U.S. federal income tax purposes,
then, in general, Sara Lee would be subject to tax as if it has sold the common stock of our
company in a taxable sale for its fair market value. Sara Lees stockholders would be subject to
tax as if they had received a taxable distribution equal to the fair market value of our common
stock that was distributed to them, taxed as a dividend (without reduction for any portion of a
Sara Lees stockholders basis in its shares of Sara Lee common stock) for U.S. federal income tax
purposes and possibly for purposes of state and local tax law, to the extent of a Sara Lees
stockholders pro rata share of Sara Lees current and accumulated earnings and profits (including
any arising from the taxable gain to Sara Lee with respect to the spin off). It is expected that
the amount of any such taxes to Sara Lees stockholders and to Sara Lee would be substantial.
Pursuant to a tax sharing agreement we entered into with Sara Lee in connection with the spin
off, we agreed to indemnify Sara Lee and its affiliates for any liability for taxes of Sara Lee
resulting from: (1) any action or failure to act by us or any of our affiliates following the
completion of the spin off that would be inconsistent with or prohibit the spin off from qualifying
as a tax-free transaction to Sara Lee and to Sara Lees stockholders under Sections 355 and
368(a)(1)(D) of the Internal Revenue Code, or (2) any action or failure to act by us or any of our
affiliates following the completion of the spin off that would be inconsistent with or cause to be
untrue any material, information, covenant or representation made in connection with the private
letter ruling obtained by Sara Lee from the IRS relating to, among other things, the qualification
of the spin off as a tax-free transaction described under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code. Our indemnification obligations to Sara Lee and its affiliates are not
limited in amount or subject to any cap. We expect that the amount of any such taxes to Sara Lee
would be substantial.
Anti-takeover provisions of our charter and bylaws, as well as Maryland law and our stockholder
rights agreement, may reduce the likelihood of any potential change of control or unsolicited
acquisition proposal that you might consider favorable.
Our charter permits our board of directors, without stockholder approval, to amend the charter
to increase or decrease the aggregate number of shares of stock or the number of shares of stock of
any class or series that we have the authority to issue. In addition, our board of directors may
classify or reclassify any unissued shares of common stock or preferred stock and may set the
preferences, conversion or other rights, voting powers and other terms of the classified or
reclassified shares. Our board of directors could establish a series of preferred stock that could
have the effect of delaying, deferring or preventing a transaction or a change in control that
might involve a premium price for our common stock or otherwise be in the best interest of our
stockholders. Under Maryland law, our board of directors also is permitted, without stockholder approval, to implement
a classified board structure at any time.
Our bylaws, which only can be amended by our board of directors, provide that nominations of
persons for election to our board of directors and the proposal of business to be considered at a
stockholders meeting may be
29
made only
in the notice of the meeting, by or at the direction of our board of directors or by
a stockholder who is entitled to vote at the
meeting and has complied with the advance notice procedures of our bylaws. Also, under
Maryland law, business combinations between us and an interested stockholder or an affiliate of an
interested stockholder, including mergers, consolidations, share exchanges or, in circumstances
specified in the statute, asset transfers or issuances or reclassifications of equity securities,
are prohibited for five years after the most recent date on which the interested stockholder
becomes an interested stockholder. An interested stockholder includes any person who beneficially
owns 10% or more of the voting power of our shares or any affiliate or associate of ours who, at
any time within the two-year period prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our stock. A person is not an interested stockholder under the
statute if our board of directors approved in advance the transaction by which he otherwise would
have become an interested stockholder. However, in approving a transaction, our board of directors
may provide that its approval is subject to compliance, at or after the time of approval, with any
terms and conditions determined by our board. After the five-year prohibition, any business
combination between us and an interested stockholder generally must be recommended by our board of
directors and approved by two supermajority votes or our common stockholders must receive a minimum
price, as defined under Maryland law, for their shares. The statute permits various exemptions from
its provisions, including business combinations that are exempted by our board of directors prior
to the time that the interested stockholder becomes an interested stockholder.
In addition, we have adopted a stockholder rights agreement which provides that in the event
of an acquisition of or tender offer for 15% of our outstanding common stock, our stockholders,
other than the acquirer, shall be granted rights to purchase our common stock at a certain price.
The stockholder rights agreement could make it more difficult for a third-party to acquire our
common stock without the approval of our board of directors.
These and other provisions of Maryland law or our charter and bylaws could have the effect of
delaying, deferring or preventing a transaction or a change in control that might involve a premium
price for our common stock or otherwise be considered favorably by our stockholders.
|
|
|
Item 1B. |
|
Unresolved Staff Comments |
Not applicable.
|
|
|
Item 1C. |
|
Executive Officers of the Registrant |
The chart below lists our executive officers and is followed by biographic information about
them. No family relationship exists between any of our directors or executive officers.
|
|
|
|
|
|
|
Name |
|
Age |
|
Positions |
Richard A. Noll
|
|
|
52 |
|
|
Chairman of the Board of Directors and Chief Executive Officer |
Gerald W. Evans Jr.
|
|
|
50 |
|
|
President, International Business and Global Supply Chain |
William J. Nictakis
|
|
|
49 |
|
|
President, Chief Commercial Officer |
Joia M. Johnson
|
|
|
49 |
|
|
Executive Vice President, General Counsel and Corporate Secretary |
Kevin W. Oliver
|
|
|
52 |
|
|
Executive Vice President, Human Resources |
E. Lee Wyatt Jr.
|
|
|
57 |
|
|
Executive Vice President, Chief Financial Officer |
Richard A. Noll has served as Chairman of the Board of Directors since January 2009, as our
Chief Executive Officer since April 2006 and as a director since our formation in September 2005.
From December 2002 until the completion of the spin off in September 2006, he also served as a
Senior Vice President of Sara Lee. From July 2005 to April 2006, Mr. Noll served as President and
Chief Operating Officer of Sara Lee Branded Apparel. Mr. Noll served as Chief Executive Officer of
Sara Lee Bakery Group from July 2003 to July 2005 and as the Chief Operating Officer of Sara Lee
Bakery Group from July 2002 to July 2003. From July 2001 to July 2002, Mr. Noll was Chief Executive
Officer of Sara Lee Legwear, Sara Lee Direct and Sara Lee Mexico. Mr. Noll joined Sara Lee in 1992
and held a number of management positions with increasing responsibilities while employed by Sara
Lee.
30
Gerald W. Evans Jr. has served as our President, International Business and Global Supply
Chain since February 2009. From February 2008 until February 2009, he served as our President,
Global Supply Chain and Asia Business Development. From the completion of the spin off in
September 2006 until February 2008, he served as Executive Vice President, Chief Supply Chain
Officer. From July 2005 until the completion of the spin off, Mr. Evans served as a Vice President
of Sara Lee and as Chief Supply Chain Officer of Sara Lee Branded Apparel. Mr. Evans served as
President and Chief Executive Officer of Sara Lee Sportswear and Underwear from March 2003 until
June 2005 and as President and Chief Executive Officer of Sara Lee Sportswear from March 1999 to
February 2003.
William J. Nictakis has served as our President, Chief Commercial Officer since November 2007.
From June 2003 until November 2007, Mr. Nictakis served as President of the Sara Lee Bakery Group.
From May 1999 through June 2003, Mr. Nictakis was Vice President, Sales, of Frito-Lay, Inc., a
subsidiary of PepsiCo, Inc. that manufactures, markets, sells and distributes branded snacks.
Joia M. Johnson has served as our Executive Vice President, General Counsel and Corporate
Secretary since January 2007. From May 2000 until January 2007, Ms. Johnson served as Executive
Vice President, General Counsel and Secretary of RARE Hospitality International, Inc., an owner,
operator and franchisor of national chain restaurants.
Kevin W. Oliver has served as our Executive Vice President, Human Resources since the
completion of the spin off in September 2006. From January 2006 until the completion of the spin
off, Mr. Oliver served as a Vice President of Sara Lee and as Senior Vice President, Human
Resources of Sara Lee Branded Apparel. From February 2005 to December 2005, Mr. Oliver served as
Senior Vice President, Human Resources for Sara Lee Food and Beverage and from August 2001 to
January 2005 as Vice President, Human Resources for the Sara Lee Bakery Group.
E. Lee Wyatt Jr. has served as our Executive Vice President, Chief Financial Officer since the
completion of the spin off in September 2006. From September 2005 until the completion of the spin
off, Mr. Wyatt served as a Vice President of Sara Lee and as Chief Financial Officer of Sara Lee
Branded Apparel. Prior to joining Sara Lee, Mr. Wyatt was Executive Vice President, Chief Financial
Officer and Treasurer of Sonic Automotive, Inc. from April 2003 to September 2005, and Vice
President of Administration and Chief Financial Officer of Sealy Corporation from September 1998 to
February 2003.
We own and lease properties supporting our administrative, manufacturing, distribution and
direct outlet activities. We own our approximately 470,000 square-foot headquarters located in
Winston-Salem, North Carolina, which houses our various sales, marketing and corporate business
functions. Research and development as well as certain product-design functions also are located in
Winston-Salem, while other design functions are located in New York City. Our products are
manufactured through a combination of facilities we own and operate and facilities owned and
operated by third-party contractors who perform some of the steps in the manufacturing process for
us, such as cutting and/or sewing. We source the remainder of our finished goods from third-party
manufacturers who supply us with finished products based on our designs.
As of January 2, 2010, we owned and leased properties in 23 countries, including 41
manufacturing facilities and 19 distribution centers, as well as office facilities. The leases for
these properties expire between 2010 and 2019, with the exception of some seasonal warehouses that
we lease on a month-by-month basis. For more information about our capital lease obligations, see
Managements Discussion and Analysis of Financial Condition and Results of Operations Future
Contractual Obligations and Commitments.
As of January 2, 2010, we also operated 228 direct outlet stores in 40 states, most of which
are leased under five-year, renewable lease agreements. We believe that our facilities, as well as
equipment, are in good condition and meet our current business needs.
31
The following table summarizes our properties by country as of January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
Leased |
|
|
|
|
Properties by Country (1) |
|
Square Feet |
|
|
Square Feet |
|
|
Total |
|
United States |
|
|
7,552,597 |
|
|
|
5,467,635 |
|
|
|
13,020,232 |
|
Non-U.S. facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
El Salvador |
|
|
1,094,170 |
|
|
|
277,487 |
|
|
|
1,371,657 |
|
Honduras |
|
|
356,279 |
|
|
|
974,376 |
|
|
|
1,330,655 |
|
China |
|
|
1,070,912 |
|
|
|
43,740 |
|
|
|
1,114,652 |
|
Dominican Republic |
|
|
746,484 |
|
|
|
175,661 |
|
|
|
922,145 |
|
Mexico |
|
|
185,152 |
|
|
|
347,730 |
|
|
|
532,882 |
|
Canada |
|
|
289,480 |
|
|
|
126,777 |
|
|
|
416,257 |
|
Vietnam |
|
|
111,385 |
|
|
|
202,361 |
|
|
|
313,746 |
|
Costa Rica |
|
|
303,419 |
|
|
|
|
|
|
|
303,419 |
|
Thailand |
|
|
277,733 |
|
|
|
24,992 |
|
|
|
302,725 |
|
Belgium |
|
|
|
|
|
|
165,428 |
|
|
|
165,428 |
|
Brazil |
|
|
|
|
|
|
164,548 |
|
|
|
164,548 |
|
Argentina |
|
|
87,279 |
|
|
|
7,301 |
|
|
|
94,580 |
|
10 other countries |
|
|
|
|
|
|
77,426 |
|
|
|
77,426 |
|
|
|
|
|
|
|
|
|
|
|
Total non-U.S. facilities |
|
|
4,522,293 |
|
|
|
2,587,827 |
|
|
|
7,110,120 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
12,074,890 |
|
|
|
8,055,462 |
|
|
|
20,130,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes vacant land. |
The following table summarizes the properties primarily used by our segments as of January 2,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
Leased |
|
|
|
|
Properties by Segment (1) |
|
Square Feet |
|
|
Square Feet |
|
|
Total |
|
Innerwear |
|
|
4,627,196 |
|
|
|
3,557,336 |
|
|
|
8,184,532 |
|
Outerwear |
|
|
2,744,663 |
|
|
|
1,398,907 |
|
|
|
4,143,570 |
|
Hosiery |
|
|
1,138,082 |
|
|
|
39,000 |
|
|
|
1,177,082 |
|
Direct to Consumer |
|
|
|
|
|
|
1,727,303 |
|
|
|
1,727,303 |
|
International |
|
|
452,014 |
|
|
|
900,283 |
|
|
|
1,352,297 |
|
Other (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
8,961,955 |
|
|
|
7,622,829 |
|
|
|
16,584,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes vacant land, facilities under construction, facilities no longer in operation
intended for disposal, sourcing offices not associated with a particular segment, and office
buildings housing corporate functions. |
|
(2) |
|
Our Other segment is comprised primarily of sales of yarn to third parties in the United
States and Latin America that maintain asset utilization at certain manufacturing facilities
used by one or more of our other segments. No facilities are used primarily by our Other
segment. |
|
|
|
Item 3. Legal Proceedings |
Although we are subject to various claims and legal actions that occur from time to time in
the ordinary course of our business, we are not party to any pending legal proceedings that we
believe could have a material adverse effect on our business, results of operations, financial
condition or cash flows.
32
|
|
|
Item 4. Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of stockholders during the quarter ended January 2, 2010.
PART II
|
|
|
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
Market for our Common Stock
Our common stock currently is traded on the New York Stock Exchange, or the NYSE, under the
symbol HBI. A when-issued trading market for our common stock on the NYSE began on August 16,
2006, and regular way trading of our common stock began on September 6, 2006. Prior to August 16,
2006, there was no public market for our common stock. Each share of our common stock has attached
to it one preferred stock purchase right. These rights initially will be transferable with and only
with the transfer of the underlying share of common stock. We have not made any unregistered sales
of our equity securities.
The following table sets forth the high and low sales prices for our common stock for the
indicated periods:
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
2008 |
|
|
|
|
|
|
|
|
Quarter ended March 29, 2008 |
|
$ |
30.40 |
|
|
$ |
21.47 |
|
Quarter ended June 28, 2008 |
|
$ |
37.73 |
|
|
$ |
27.45 |
|
Quarter ended September 27, 2008 |
|
$ |
29.00 |
|
|
$ |
21.38 |
|
Quarter ended January 3, 2009 |
|
$ |
22.77 |
|
|
$ |
8.54 |
|
2009 |
|
|
|
|
|
|
|
|
Quarter ended April 4, 2009 |
|
$ |
13.66 |
|
|
$ |
5.14 |
|
Quarter ended July 4, 2009 |
|
$ |
19.07 |
|
|
$ |
10.76 |
|
Quarter ended October 3, 2009 |
|
$ |
22.96 |
|
|
$ |
13.07 |
|
Quarter ended January 2, 2010 |
|
$ |
26.61 |
|
|
$ |
21.02 |
|
Holders of Record
On
February 1, 2010, there were 43,529 holders of record of our common stock. Because
many of the shares of our common stock are held by brokers and other institutions on behalf of
stockholders, we are unable to determine the exact number of beneficial stockholders represented by
these record holders, but we believe that there were approximately
86,000 beneficial owners of our
common stock as of February 1, 2010.
Dividends
We currently do not pay regular dividends on our outstanding stock. The declaration of any
future dividends and, if declared, the amount of any such dividends, will be subject to our actual
future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual
restrictions and to the discretion of our board of directors. Our board of directors may take into
account such matters as general business conditions, our financial condition and results of
operations, our capital requirements, our prospects and such other factors as our board of
directors may deem relevant.
33
Issuer Purchases of Equity Securities
There were no purchases by Hanesbrands during the quarter or year ended January 2, 2010 of
equity securities that are registered under Section 12 of the Exchange Act.
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with
the comparable cumulative return of the S&P MidCap 400 Index and the S&P 1500 Apparel, Accessories
& Luxury Goods Index. The graph assumes that $100 was invested in our common stock and each index
on August 11, 2006, the effective date of the registration of our common stock under Section 12 of
the Exchange Act, although a when-issued trading market for our common stock did not begin until
August 16, 2006, and regular way trading did not begin until September 6, 2006. The stock price
performance on the following graph is not necessarily indicative of future stock price performance.
COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
34
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of January 2,
2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to |
|
|
Weighted Average |
|
|
|
|
|
|
be Issued Upon Exercise |
|
|
Exercise Price of |
|
|
Number of Securities |
|
|
|
of Outstanding Options, |
|
|
Outstanding Options, |
|
|
Remaining Available for |
|
Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Future Issuance (1) |
|
Equity compensation
plans approved by
security holders |
|
|
7,987,847 |
|
|
$ |
21.73 |
|
|
|
4,535,888 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,987,847 |
|
|
$ |
21.73 |
|
|
|
4,535,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount appearing under Number of securities remaining available for future issuance
under equity compensation plans includes 2,456,864 shares available under the Hanesbrands
Inc. Omnibus Incentive Plan of 2006 and 2,079,024 shares available under the Hanesbrands Inc.
Employee Stock Purchase Plan of 2006. |
|
|
|
Item 6. |
|
Selected Financial Data |
The following table presents our selected historical financial data. The statement of income
data for the years ended January 2, 2010, January 3, 2009 and December 29, 2007 and the balance
sheet data as of January 2, 2010 and January 3, 2009 have been derived from our audited
consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The
statement of income data for the six-month period ended December 30, 2006 and the years ended July
1, 2006 and July 2, 2005 and the balance sheet data as of December 29, 2007, December 30, 2006,
July 1, 2006 and July 2, 2005 has been derived from our financial statements not included in this
Annual Report on Form 10-K.
In October 2006, our Board of Directors approved a change in our fiscal year end from the
Saturday closest to June 30 to the Saturday closest to December 31. As a result of this change, the
table below includes presentation of the transition period beginning on July 2, 2006 and ending on
December 30, 2006.
Our historical financial data for periods prior to our spin off from Sara Lee on September 5,
2006 is not necessarily indicative of our future performance or what our financial position and
results of operations would have been if we had operated as a separate, stand alone entity during
all of the periods shown. The data should be read in conjunction with our historical financial
statements and Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K.
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
|
|
|
|
Years Ended |
|
|
Ended |
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
December 30, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
|
(amounts in thousands, except per share data) |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
|
$ |
2,250,473 |
|
|
$ |
4,472,832 |
|
|
$ |
4,683,683 |
|
Cost of sales |
|
|
2,626,001 |
|
|
|
2,871,420 |
|
|
|
3,033,627 |
|
|
|
1,530,119 |
|
|
|
2,987,500 |
|
|
|
3,223,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,265,274 |
|
|
|
1,377,350 |
|
|
|
1,440,910 |
|
|
|
720,354 |
|
|
|
1,485,332 |
|
|
|
1,460,112 |
|
Selling, general and
administrative expenses |
|
|
940,530 |
|
|
|
1,009,607 |
|
|
|
1,040,754 |
|
|
|
547,469 |
|
|
|
1,051,833 |
|
|
|
1,053,654 |
|
Gain on curtailment of
postretirement benefits |
|
|
|
|
|
|
|
|
|
|
(32,144 |
) |
|
|
(28,467 |
) |
|
|
|
|
|
|
|
|
Restructuring |
|
|
53,888 |
|
|
|
50,263 |
|
|
|
43,731 |
|
|
|
11,278 |
|
|
|
(101 |
) |
|
|
46,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
270,856 |
|
|
|
317,480 |
|
|
|
388,569 |
|
|
|
190,074 |
|
|
|
433,600 |
|
|
|
359,480 |
|
Other expense (income) |
|
|
49,301 |
|
|
|
(634 |
) |
|
|
5,235 |
|
|
|
7,401 |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
163,279 |
|
|
|
155,077 |
|
|
|
199,208 |
|
|
|
70,753 |
|
|
|
17,280 |
|
|
|
13,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
expense |
|
|
58,276 |
|
|
|
163,037 |
|
|
|
184,126 |
|
|
|
111,920 |
|
|
|
416,320 |
|
|
|
345,516 |
|
Income tax expense |
|
|
6,993 |
|
|
|
35,868 |
|
|
|
57,999 |
|
|
|
37,781 |
|
|
|
93,827 |
|
|
|
127,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
126,127 |
|
|
$ |
74,139 |
|
|
$ |
322,493 |
|
|
$ |
218,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic(1) |
|
$ |
0.54 |
|
|
$ |
1.35 |
|
|
$ |
1.31 |
|
|
$ |
0.77 |
|
|
$ |
3.35 |
|
|
$ |
2.27 |
|
Earnings per share diluted(2) |
|
$ |
0.54 |
|
|
$ |
1.34 |
|
|
$ |
1.30 |
|
|
$ |
0.77 |
|
|
$ |
3.35 |
|
|
$ |
2.27 |
|
Weighted average shares basic(1) |
|
|
95,158 |
|
|
|
94,171 |
|
|
|
95,936 |
|
|
|
96,309 |
|
|
|
96,306 |
|
|
|
96,306 |
|
Weighted average shares
diluted(2) |
|
|
95,668 |
|
|
|
95,164 |
|
|
|
96,741 |
|
|
|
96,620 |
|
|
|
96,306 |
|
|
|
96,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
December 30, |
|
|
July 1, |
|
|
July 2, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
2005 |
|
|
|
(in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
38,943 |
|
|
$ |
67,342 |
|
|
$ |
174,236 |
|
|
$ |
155,973 |
|
|
$ |
298,252 |
|
|
$ |
1,080,799 |
|
Total assets |
|
|
3,326,564 |
|
|
|
3,534,049 |
|
|
|
3,439,483 |
|
|
|
3,435,620 |
|
|
|
4,903,886 |
|
|
|
4,257,307 |
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,727,547 |
|
|
|
2,130,907 |
|
|
|
2,315,250 |
|
|
|
2,484,000 |
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities |
|
|
385,323 |
|
|
|
469,703 |
|
|
|
146,347 |
|
|
|
271,168 |
|
|
|
49,987 |
|
|
|
53,559 |
|
Total noncurrent liabilities |
|
|
2,112,870 |
|
|
|
2,600,610 |
|
|
|
2,461,597 |
|
|
|
2,755,168 |
|
|
|
49,987 |
|
|
|
53,559 |
|
Total stockholders or parent
companies equity |
|
|
334,719 |
|
|
|
185,155 |
|
|
|
288,904 |
|
|
|
69,271 |
|
|
|
3,229,134 |
|
|
|
2,602,362 |
|
|
|
|
(1) |
|
Prior to the spin off on September 5, 2006, the number of shares used to compute basic and diluted earnings per share is 96,306,
which was the number of shares of our common stock outstanding on September 5, 2006. |
|
(2) |
|
Subsequent to the spin off on September 5, 2006, the number of shares used to compute diluted earnings per share is based on the
number of shares of our common stock outstanding, plus the potential dilution that could occur if restricted stock units and
options granted under our equity-based compensation arrangements were exercised or converted into common stock. |
36
|
|
|
Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations |
This managements 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 and Risk Factors in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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
listed under Risk Factors in this Annual Report on Form 10-K and included elsewhere in this
Annual Report on Form 10-K.
MD&A is a supplement to our financial statements and notes thereto included elsewhere in
this Annual Report on Form 10-K, and is provided to enhance your understanding of our results of
operations and financial condition. Our MD&A is organized as follows:
|
|
|
Overview. This section provides a general description of our company and operating
segments, business and industry trends, our key business strategies, our consolidation and
globalization strategy, and background information on other matters discussed in this MD&A. |
|
|
|
Components of Net Sales and Expenses. This section provides an overview of the
components of our net sales and expense that are key to an understanding of our results of
operations. |
|
|
|
2009 Highlights. This section discusses some of the highlights of our performance and
activities during 2009. |
|
|
|
Consolidated Results of Operations and Operating Results by Business Segment. These
sections provide our analysis and outlook for the significant line items on our statements
of income, as well as other information that we deem meaningful to an understanding of our
results of operations on both a consolidated basis and a business segment basis. |
|
|
|
Liquidity and Capital Resources. This section provides an analysis of trends and
uncertainties affecting liquidity, cash requirements for our business, sources and uses of
our cash and our financing arrangements. |
|
|
|
Critical Accounting Policies and Estimates. This section discusses the accounting
policies that we consider important to the evaluation and reporting of our financial
condition and results of operations, and whose application requires significant judgments
or a complex estimation process. |
|
|
|
Recently Issued Accounting Pronouncements. This section provides a summary of the most
recent authoritative accounting pronouncements that we will be required to adopt in a
future period. |
Overview
Our Company
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes,
Champion, Playtex, Bali, Leggs, 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, mens underwear, kids underwear, casualwear,
activewear, socks and hosiery.
According
to NPD, our brands hold either the number one or number two U.S. market position by
sales value in most product categories in which we compete, for the
12 month period ended December 31, 2009. In 2009, Hanes was number one for the sixth consecutive year as the most preferred mens
apparel brand, womens intimate apparel brand and childrens apparel brand of consumers in
Retailing Today magazines Top Brands Study. Additionally, we had five of the top ten intimate
apparel brands preferred by consumers in the Retailing Today study Hanes, Playtex, Bali, Just My
Size and Leggs. In 2008, the most recent year in which the survey was conducted, Hanes was number
one for the fifth consecutive year on the Womens Wear Daily Top 100 Brands Survey for apparel
and accessory brands that women know best.
37
Our distribution channels include direct to consumer sales at our outlet stores, national
chains and department stores and warehouse clubs, mass-merchandise outlets and international sales.
During 2009, approximately 45% of our net sales were to mass
merchants in the United States, 16% were to national chains
and department stores in the United States, 11% were in our International segment, 10% were in our Direct to Consumer
segment in the United States, and 18% were to other retail channels in the United States such as embellishers, specialty retailers and
sporting goods stores.
During the fourth quarter of 2009, as we sought to drive more outerwear sales through our retail
operations by expanding our Hanes and Champion offerings, we made the decision to change our
internal organizational structure so that our retail operations, previously included in our
Innerwear segment, would be a separate Direct to Consumer segment. As a result, our operations
are managed and reported in six operating segments, each of which is a reportable segment for
financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to Consumer, International and
Other. Certain other insignificant changes between segments have been reflected in the segment
disclosures to conform to the current organizational structure.These segments are organized
principally by product category, geographic location and distribution channel. 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 womens intimate apparel, mens underwear, kids underwear, and socks,
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 mens
underwear and kids underwear under the Hanes and Polo Ralph Lauren brand names. During
2009, net sales from our Innerwear segment were $1.8 billion, representing approximately
47% of total net sales. |
|
|
|
Outerwear. We are a leader in the casualwear and activewear markets through our Hanes,
Champion, Just My Size and Duofold 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 2009,
we entered into a multi-year agreement to provide a womens casualwear program with our
Just My Size brand at Wal-Mart stores. 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, sport shirts and fleece products, including brands
such as Hanes, Champion, Outer Banks and Hanes Beefy-T, to customers, primarily
wholesalers, who then resell to screen printers and embellishers. During 2009, net sales
from our Outerwear segment were $1.1 billion, representing approximately 27% of total net
sales. |
|
|
|
Hosiery. We are the leading marketer of womens 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 Leggs, Hanes and Just My Size brands. During 2009, net sales
from our Hosiery segment were $186 million, representing approximately 5% of total 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. |
|
|
|
Direct to Consumer. Our Direct to Consumer operations include our value-based
(outlet) stores and Internet operations which sell products from our portfolio of leading
brands. We sell our branded products directly to consumers through our outlet stores as
well as our Web sites operating under the Hanes, One Hanes Place, Just My Size and Champion
names. Our Internet operations are supported by our catalogs. As of January 2, 2010 and
January 3, 2009, we had 228 and 213 outlet stores, respectively. During 2009, net sales
from our Direct to Consumer segment were $370 million, representing approximately 10% of
total net sales. |
|
|
|
International. International includes products that span across the Innerwear,
Outerwear and Hosiery reportable segments and are primarily marketed under the Hanes,
Champion, Wonderbra, Playtex, Stedman, Zorba, Rinbros, Kendall, Sol y Oro, Bali and Ritmo
brands. During 2009, net sales from our International segment were $438 million,
representing approximately 11% of total net sales and included sales in Latin America,
Asia, Canada, Europe and South America. Our largest international markets are Canada,
Japan, Mexico, Europe and Brazil, and we also have sales offices in India and China. |
38
|
|
|
Other. Our Other segment primarily consists of sales of yarn to third parties in the
United States and Latin America that maintain asset utilization at certain manufacturing
facilities and are intended to generate approximate break even margins. During 2009, net
sales from our Other segment were $13 million, representing less than 1% of total net
sales. In October 2009, we completed the sale of our yarn operations as a result of which
we ceased making our own yarn and now source all of our yarn requirements from large-scale
yarn suppliers. As a result of the sale of our yarn operations we will no longer have net
sales in our Other segment in the future. |
Business and Industry Trends
We are operating in an uncertain and volatile economic environment, which could have
unanticipated adverse effects on our business. The current retail environment has been impacted by
recent volatility in the financial markets and by uncertain economic conditions. Increases in food
and fuel prices, changes in the credit and housing markets leading to the current financial and
credit crisis, actual and potential job losses among many sectors of the economy, significant
declines in the stock market resulting in large losses to consumer retirement and investment
accounts, and uncertainty regarding future federal tax and economic policies have all added to
declines in consumer confidence and curtailed retail spending.
During 2009, we did not see a sustained rebound in consumer spending but rather mixed results.
We also experienced substantial pressure on profitability due to the economic climate, increased
pension costs and increased costs associated with implementing our price increase which became
effective in February 2009, including repackaging costs.
The apparel essentials market is highly competitive and evolving rapidly. Competition is
generally based upon price, brand name recognition, product quality, selection, service and
purchasing convenience. The majority of our core styles continue from year to year, with variations
only in color, fabric or design details. Some products, however, such as intimate apparel,
activewear and sheer hosiery, do have an emphasis on style and innovation. Our businesses face
competition today from other large corporations and foreign manufacturers, as well as smaller
companies, department stores, specialty stores and other retailers that market and sell apparel
essentials products under private labels that compete directly with our brands.
Our top ten customers accounted for 65% of our net sales and our top customer, Wal-Mart,
accounted for over $1 billion of our sales in 2009. Our largest customers in 2009 were Wal-Mart,
Target and Kohls, which accounted for 27%, 17% and 7% of total sales, respectively. The growth in
retailers can create pricing pressures as our customers grow larger and seek to have greater
concessions in their purchase of our products, while they can be increasingly demanding that we
provide them with some of our products on an exclusive basis. To counteract these effects, it has
become increasingly important to leverage our national brands through investment in our largest and
strongest brands as our customers strive to maximize their performance especially in todays
challenging economic environment. In addition, during the past several years, various retailers,
including some of our largest customers, have experienced significant difficulties, including
restructurings, bankruptcies and liquidations, and the ability of retailers to overcome these
difficulties may increase due to the recent deterioration of worldwide economic conditions.
Anticipating changes in and managing our operations in response to consumer preferences
remains an important element of our business. In recent years, we have experienced changes in our
net sales, revenues and cash flows in accordance with changes in consumer preferences and trends.
For example, we expect the trend of declining hosiery sales to continue consistent with the overall
decline in the industry and with shifts in consumer preferences. Hosiery products continue to be
more adversely impacted than other apparel categories by reduced consumer discretionary spending,
which contributes to weaker sales and lowering of inventory levels by retailers. The Hosiery
segment only comprised 5% of our net sales in 2009 however, and as a result, the decline in the
Hosiery segment has not had a significant impact on our net sales, revenues or cash flows.
Generally, we manage the Hosiery segment for cash, placing an emphasis on reducing our cost
structure and managing cash efficiently.
39
2010 Outlook
We have secured significant shelf-space and distribution gains, starting primarily in 2010.
Program gains significantly outnumber program losses, and we expect the net space gains to generate
approximately 5% incremental sales growth in 2010, independent of a consumer spending rebound. If
consumer spending does rebound, we have potential for additional upside in sales growth. By segment, two-thirds of the increases are expected in our Innerwear segment
and most of the remainder in our Outerwear segment. However, both our Direct to Consumer and
International segments should also see mid-single-digit growth in 2010.
Specifically for our Innerwear segment, the bulk of the gains are in mens underwear and
intimate apparel. The new programs in mens underwear have already begun to ship, with the new
intimate apparel program starting to ship in the second quarter of 2010. The remaining growth in
the Innerwear segment in the back half of the year will be driven by replenishment of these new
programs.
For the Outerwear segment, growth will be driven by the expansion of our Just My Size brand in
the first half as a result of a multi-year agreement we entered into with Wal-Mart in April 2009
that significantly expanded the presence of our Just My Size brand. In the second half of 2010, Champion has confirmed
space and distribution gains in fleece, performance apparel and sports bras across a broad set of
accounts.
Our projected sales growth, combined with our cost savings, should drive greater operating
profit growth in 2010. To support this growth, we have increased our production capacity. Our Nanjing
textile facility started production in the fourth quarter of 2009 and is right on plan. We also
secured additional capacity with outside contractors. The earthquake
in Haiti caused some short-term disruption and incremental costs in
early 2010,
however we do not believe it will have a material impact on net sales.
Our Key Business Strategies
Sell more, spend less and generate cash are our broad strategies to build our brands, reduce
our costs and generate cash.
Sell More
Through our sell more strategy, we seek to drive profitable growth by consistently offering
consumers brands they love and trust and products with unsurpassed value. Key initiatives we are
employing to implement this strategy include:
|
|
|
Build big, strong brands in big core categories with innovative key items. Our ability
to react to changing customer needs and industry trends is key to our success. Our design,
research and product development teams, in partnership with our marketing teams, drive our
efforts to bring innovations to market. We seek to leverage our insights into consumer
demand in the apparel essentials industry to develop new products within our existing lines
and to modify our existing core products in ways that make them more appealing, addressing
changing customer needs and industry trends. We also support our key brands with targeted,
effective advertising and marketing campaigns. |
|
|
|
Foster strategic partnerships with key retailers via team selling. We foster
relationships with key retailers by applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams and developing new
customer-specific programs such as C9 by Champion for Target and the recently expanded
presence at Wal-Mart of our Just My Size brand. Our goal is to strengthen and deepen our
existing strategic relationships with retailers and develop new strategic relationships. |
|
|
|
Use Kanban concepts to have the right products available in the right quantities at the
right time. Through Kanban, a multi-initiative effort that determines production
quantities, and in doing so, facilitates just-in-time production and ordering systems, we
seek to ensure that products are available to meet customer demands while effectively
managing inventory levels. |
40
Spend Less
Through our spend less strategy, we seek to become an integrated organization that leverages
its size and global reach to reduce costs, improve flexibility and provide a high level of service.
Key initiatives we are employing to implement this strategy include:
|
|
|
Optimizing our global supply chain to improve our cost-competitiveness and operating
flexibility. We have restructured our supply chain over the past three years to create more
efficient production clusters that utilize fewer, larger facilities and to balance our
production capability between the Western Hemisphere and Asia. 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. With our global supply
chain infrastructure substantially in place, we are now focused on optimizing our supply
chain to further enhance efficiency, improve working capital and asset turns and reduce
costs. The consolidation of our distribution network is still in process but will not
result in any substantial charges in future periods. The distribution network
consolidation involves the implementation of new warehouse management systems and
technology, and opening of new distribution centers and new third-party logistics providers
to replace parts of our legacy distribution network. |
|
|
|
Leverage our global purchasing and manufacturing scale. Historically, we have had a
decentralized operating structure with many distinct operating units. We are in the process
of consolidating purchasing, manufacturing and sourcing across all of our product
categories in the United States. We believe that these initiatives will streamline our
operations, improve our inventory management, reduce costs and standardize processes. |
Generate Cash
Through our generate cash strategy, we seek to effectively generate and invest cash at or
above our weighted average cost of capital to provide superior returns for both our equity and debt
investors. Key initiatives we are employing to implement this strategy include:
|
|
|
Optimizing our capital structure to take advantage of our business models strong and
consistent cash flows. Maintaining appropriate debt leverage and utilizing excess cash to,
for example, pay down debt, invest in our own stock and selectively pursue strategic
acquisitions are keys to building a stronger business and generating additional value for
investors. In 2009, we completed a growth-focused debt refinancing that enables us to
simultaneously reduce leverage and consider acquisition opportunities. |
|
|
|
Continuing to improve turns for accounts receivables, inventory, accounts payable and
fixed assets. Our ability to generate cash is enhanced through more efficient management of
accounts receivables, inventory, accounts payable and fixed assets through several
initiatives, such as supplier-managed inventory for raw materials, sourced goods ownership
relationships and other efforts. |
Consolidation and Globalization Strategy
We have restructured our supply chain over the past three years to create more efficient
production clusters that utilize fewer, larger facilities and to balance our production capability
between the Western Hemisphere and Asia. 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. With our global supply chain infrastructure substantially in place, we are now
focused on optimizing our supply chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the working capital needs of our supply
chain through several initiatives, such as supplier-managed inventory for raw materials and sourced
goods ownership relationships. We completed the construction of a textile production plant in
Nanjing, China which is our first company-owned textile facility in Asia. Production commenced in
the fourth quarter of 2009 and we expect to ramp up production over
the next 18 months. The Nanjing facility,
along with our other textile facilities and arrangements with outside contractors, enables us to
expand and leverage our production scale as we balance our supply chain across hemispheres to
support our production capacity. The consolidation of our distribution network is still in process
but will not result in any substantial charges in future periods. The distribution network
consolidation involves the
41
implementation of new warehouse management systems and technology, and opening of new
distribution centers and new third-party logistics providers to replace parts of our legacy
distribution network.
During 2009, we ceased making our own yarn and now source all of our yarn requirements from
large-scale yarn suppliers. We entered into an agreement with Parkdale America, LLC (Parkdale
America) under which we agreed to sell or lease assets related to operations at our four yarn
manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted
in Parkdale America operating three of the four facilities. We approved an action to close the
fourth yarn manufacturing facility, as well as a yarn warehouse and a cotton warehouse, all located
in the United States, which will result in the elimination of approximately 175 positions. We also
entered into a yarn purchase agreement with Parkdale America and Parkdale Mills, LLC (together
with Parkdale America, Parkdale). Under this agreement, which has an initial term of six years,
Parkdale will produce and sell to us a substantial amount of our Western Hemisphere yarn
requirements. During the first two years of the term, Parkdale will also produce and sell to us a
substantial amount of the yarn requirements of our Nanjing, China textile facility.
In addition to the actions discussed above, during 2009 we approved actions to close seven
manufacturing facilities and three distribution centers in the Dominican Republic, the United
States, Costa Rica, Honduras, Puerto Rico and Canada which will result in the elimination of an
aggregate of approximately 3,925 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 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 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.
As a result of the restructuring actions taken since our becoming an independent company on
September 5, 2006, our cost structure has been reduced and efficiencies improved, generating
savings of $78 million during 2009. In addition to the savings generated from restructuring
actions, we benefited from $21 million in savings related to other cost reduction initiatives
during 2009.
As a result of our consolidation and globalization strategy, we expected to incur
approximately $250 million in restructuring and related charges over the three year period
following the spin off from Sara Lee on September 5, 2006, of which approximately half was expected
to be noncash. Through this three year period, we have recognized approximately $278 million in
restructuring and related charges related to this strategy, of which approximately half have been
noncash. Of the amounts recognized, approximately $103 million related to employee termination and
other benefits, approximately $96 million related to accelerated depreciation of buildings and
equipment for facilities that have been or will be closed, approximately $30 million related to
noncancelable lease and other contractual obligations, approximately $23 million related to
write-offs of stranded raw materials and work in process inventory determined not to be salvageable
or cost-effective to relocate, approximately $17 million related to impairments of fixed assets and
approximately $9 million related to other exit costs such as equipment moving costs. Accelerated
depreciation related to our 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 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 Consolidated
Statements of Income.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors.
Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in
demand for certain items. 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 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
42
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 and other raw materials, such as dyes
and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate 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
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 varied by individual product category.
Although we have sold our yarn operations, we are still exposed to fluctuations in the cost of
cotton. Increases in the cost of cotton can result in higher costs in the price we pay for yarn
from our large-scale yarn suppliers. 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 employ a dollar cost averaging strategy by entering into hedging
contracts 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 represents only 6% of our cost
of sales. The cotton prices reflected in our results were 55 cents per pound in 2009 and 65 cents
per pound in 2008. Costs incurred for materials and labor are capitalized into inventory and impact
our results as the inventory is sold.
Components of Net Sales and Expenses
Net sales
We generate net sales by selling apparel essentials such as T-shirts, bras, panties, mens
underwear, kids underwear, socks, hosiery, casualwear and activewear. Our net sales are recognized
net of discounts, coupons, rebates, volume-based incentives and cooperative advertising costs. We
recognize revenue when (i) there is persuasive evidence of an arrangement, (ii) the sales price is
fixed or determinable, (iii) title and the risks of ownership have been transferred to the customer
and (iv) collection of the receivable is reasonably assured, which occurs primarily upon shipment.
Net sales include an estimate for returns and allowances based upon historical return experience.
We also offer a variety of sales incentives to resellers and consumers that are recorded as
reductions to net sales. Royalty income from license agreements with manufacturers of other
consumer products that incorporate our brands is also included in net sales.
43
Cost of sales
Our cost of sales includes the cost of manufacturing finished goods, which consists of
labor, raw materials such as cotton and petroleum-based products and overhead costs such as
depreciation on owned facilities and equipment. Our cost of sales also includes finished goods
sourced from third-party manufacturers that supply us with products based on our designs as well as
charges for slow moving or obsolete inventories. Rebates, discounts and other cash consideration
received from a vendor related to inventory purchases are reflected in cost of sales when the
related inventory item is sold. Our costs of sales do not include shipping costs, comprised of
payments to third party shippers, or handling costs, comprised of warehousing costs in our
distribution facilities, and thus our gross margins may not be comparable to those of other
entities that include such costs in cost of sales.
Selling, general and administrative expenses
Our selling, general and administrative expenses include selling, advertising, costs of
shipping, handling and distribution to our customers, research and development, rent on leased
facilities, depreciation on owned facilities and equipment and other general and administrative
expenses. Selling, general and administrative expenses also include management payroll, benefits,
travel, information systems, accounting, insurance and legal expenses.
Restructuring
We have from time to time closed facilities and reduced headcount, including in
connection with previously announced restructuring and business transformation plans. We refer to
these activities as restructuring actions. When we decide to close facilities or reduce headcount,
we take estimated charges for such restructuring, including charges for exited non-cancelable
leases and other contractual obligations, as well as severance and benefits. If the actual charge
is different from the original estimate, an adjustment is recognized in the period such change in
estimate is identified.
Other expense (income)
Our other expense (income) include charges such as losses on early extinguishment of debt,
costs to amend and restate our credit facilities and charges related to the termination of certain
interest rate hedging arrangements.
Interest expense, net
Our interest expense is net of interest income. Interest income is the return we earned
on our cash and cash equivalents. Our cash and cash equivalents are invested in highly liquid
investments with original maturities of three months or less.
Income tax expense
Our effective income tax rate fluctuates from period to period and can be materially impacted
by, among other things:
|
|
|
changes in the mix of our earnings from the various jurisdictions in which we operate; |
|
|
|
the tax characteristics of our earnings; |
|
|
|
the timing and amount of earnings of foreign subsidiaries that we repatriate to the
United States, which may increase our tax expense and taxes paid; and |
|
|
|
the timing and results of any reviews of our income tax filing positions in the
jurisdictions in which we transact business. |
44
Highlights from the year ended January 2, 2010
|
|
|
Total net sales in 2009 were $3.89 billion, compared with $4.25 billion in 2008. |
|
|
|
Operating profit was $271 million in 2009 compared with $317 million in 2008. |
|
|
|
Diluted earnings per share were $0.54 in 2009, compared with $1.34 in 2008. |
|
|
|
During 2009, we approved actions to close eight manufacturing facilities, three
distribution centers and two warehouses in the Dominican Republic, the United States, Costa
Rica, Honduras, Puerto Rico and Canada and eliminate an aggregate of approximately 4,100
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. |
|
|
|
We completed the construction of a textile production plant in Nanjing, China which is
our first company-owned textile facility in Asia. Production commenced in the fourth
quarter of 2009 and we expect to ramp up production over
the next 18 months. The Nanjing facility,
along with our other textile facilities and arrangements with outside contractors, enables
us to expand and leverage our production scale as we balance our supply chain across
hemispheres to support our production capacity. |
|
|
|
In October 2009, we completed the sale of our yarn operations to Parkdale America as a
result of which we ceased making our own yarn and now source all of our yarn requirements
from large-scale yarn suppliers. We also entered into a yarn purchase agreement with
Parkdale. Under this agreement, which has an initial term of six years, Parkdale will
produce and sell to us a substantial amount of our Western Hemisphere yarn requirements.
During the first two years of the term, Parkdale will also produce and sell to us a
substantial amount of the yarn requirements of our Nanjing, China textile facility. |
|
|
|
Gross capital expenditures were $127 million in 2009 as we continued to build out our
textile and sewing network in Asia, Central America and the Caribbean Basin and were lower
by $60 million compared to 2008. |
|
|
|
In December 2009, we completed a growth-focused debt refinancing that enables us to
simultaneously reduce leverage and consider acquisition opportunities. The refinancing
gives us more flexibility in our use of excess cash flow, allows continued debt reduction,
and provides a stable long-term capital structure with extended debt maturities at rates
slightly lower than previous effective rates. The refinancing consisted of the sale of our
$500 million 8% Senior Notes and the concurrent amendment and restatement of our 2006
Senior Secured Credit Facility to provide for the $1.15 billion 2009 Senior Secured Credit
Facility. The proceeds from the sale of the 8% Senior Notes, together with the proceeds
from borrowings under the 2009 Senior Secured Credit Facility, were used to refinance
borrowings under the 2006 Senior Secured Credit Facility, to repay all borrowings under our
existing second lien credit facility and to pay fees and expenses relating to these
transactions. |
|
|
|
During 2009, we reduced debt by $284 million through the use of cash flows generated
from operations which was primarily from the reduction of inventory by $249 million. |
|
|
|
We ended 2009 with $307 million of borrowing availability under our $400 million
Revolving Loan Facility, $91 million of borrowing availability under our Accounts
Receivable Securitization Facility, $39 million in cash and cash equivalents and $35
million of borrowing availability under our international loan facilities. |
45
Consolidated Results of Operations Year Ended January 2, 2010 (2009) Compared with Year Ended
January 3, 2009 (2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
(357,495 |
) |
|
|
(8.4 |
)% |
Cost of sales |
|
|
2,626,001 |
|
|
|
2,871,420 |
|
|
|
(245,419 |
) |
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,265,274 |
|
|
|
1,377,350 |
|
|
|
(112,076 |
) |
|
|
(8.1 |
) |
Selling, general and administrative expenses |
|
|
940,530 |
|
|
|
1,009,607 |
|
|
|
(69,077 |
) |
|
|
(6.8 |
) |
Restructuring |
|
|
53,888 |
|
|
|
50,263 |
|
|
|
3,625 |
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
270,856 |
|
|
|
317,480 |
|
|
|
(46,624 |
) |
|
|
(14.7 |
) |
Other expense (income) |
|
|
49,301 |
|
|
|
(634 |
) |
|
|
49,935 |
|
|
|
NM |
|
Interest expense, net |
|
|
163,279 |
|
|
|
155,077 |
|
|
|
8,202 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
58,276 |
|
|
|
163,037 |
|
|
|
(104,761 |
) |
|
|
(64.3 |
) |
Income tax expense |
|
|
6,993 |
|
|
|
35,868 |
|
|
|
(28,875 |
) |
|
|
(80.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
(75,886 |
) |
|
|
(59.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
(357,495 |
) |
|
|
(8.4 |
)% |
Consolidated net sales were lower by $357 million or 8% in 2009 compared to 2008. Net sales
were lower by $303 million or 7% in 2009 compared to 2008 after excluding the impact of the
53rd week in 2008. In 2009, we did not see a sustained rebound in consumer spending in
our categories but rather mixed results. Overall retail sales for apparel continued to decline
during 2009 at most of our larger customers as the continuing recession constrained consumer
spending. Our sales incentives were higher in 2009 compared to 2008 as we made significant
investments, especially in back-to-school and holiday programs and promotions, in this recessionary
environment to support retailers and position ourselves for future sales opportunities. We also
made significant investments with key retailers to obtain incremental shelf space for 2010 and
beyond.
Innerwear, Outerwear, Hosiery and International segment net sales were lower by $114 million
(6%), $144 million (12%), $32 million (15%) and $58 million (12%), respectively, in 2009 compared
to 2008. Our Direct to Consumer segment sales were flat in 2009 compared to 2008. Our Other
segment net sales were lower, as expected, by $9 million in 2009 compared to 2008. As a result of
the sale of our yarn operations we will no longer have net sales in our Other segment in the
future.
Innerwear segment net sales were lower (6%) in 2009 compared to 2008, primarily due to lower
net sales of intimate apparel (12%) and socks (10%) as a result of continued weak sales at retail
in this difficult economic environment, partially offset by higher net sales of male underwear
(4%). Innerwear segment net sales were lower by $87 million or 5% in 2009 compared to 2008 after
excluding the impact of the 53rd week in 2008.
Outerwear segment net sales were lower (12%) in 2009 compared to 2008, primarily due to the
lower casualwear net sales (24%) in the wholesale channel, which has been highly price competitive
especially in this recessionary environment, and lower casualwear net sales (19%) in the retail
channel. The lower casualwear net sales in both channels were partially offset by higher net sales
(4%) of our Champion brand activewear. The results for the first half of 2009 were negatively
impacted by losses of seasonal programs in the retail casualwear channel. Outerwear segment net
sales were lower by $130 million or 11% in 2009 compared to 2008 after excluding the impact of the
53rd week in 2008.
46
Hosiery segment net sales were lower (15%) in 2009 compared to 2008. The net sales decline
rate has steadily improved over the most recent three consecutive quarters. Hosiery products in
all channels continue to be more adversely impacted than other apparel categories by reduced
consumer discretionary spending. Hosiery segment net sales were lower by $28 million or 13% in 2009
compared to 2008 after excluding the impact of the 53rd week in 2008.
Direct to Consumer segment net sales were flat in 2009 compared to 2008 primarily due to
higher net sales in our outlet stores attributable to new store openings offset by lower comparable
store sales driven by lower traffic. The higher net sales in our outlet stores were partially
offset by lower net sales related to our Internet operations. Direct to Consumer segment net sales
were higher by $7 million or 2% in 2009 compared to 2008 after excluding the impact of the
53rd week in 2008.
International segment net sales were lower (12%) in 2009 compared to 2008, primarily
attributable to an unfavorable impact of $22 million related to foreign currency exchange rates and
weak demand globally primarily in Europe, Japan and Canada, which are experiencing recessionary
environments similar to that in the United States. International segment net sales declined by 7%
in 2009 compared to 2008 after excluding the impact of foreign exchange rates on currency.
International segment net sales were lower by $56 million or 11% in 2009 compared to 2008 after
excluding the impact of the 53rd week in 2008.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Gross profit |
|
$ |
1,265,274 |
|
|
$ |
1,377,350 |
|
|
$ |
(112,076 |
) |
|
|
(8.1 |
)% |
Our gross profit was lower by $112 million in 2009 compared to 2008. Gross profit as a percent
of net sales remained flat at 32.5% in 2009 compared to 32.4% in 2008.
Gross profit was lower due to lower sales volume of $167 million, higher sales incentives of
$52 million and unfavorable product sales mix of $45 million. Our sales incentives were higher as
we made significant investments, especially in back-to-school and holiday programs and promotions,
in this recessionary environment to support retailers and position ourselves for future sales
opportunities. We also made significant investments in the fourth quarter of 2009 of approximately
$13 million with key retailers to obtain incremental shelf space for 2010 and beyond. Other factors
contributing to lower gross profit were higher other manufacturing costs of $33 million primarily
related to lower volume partially offset by cost reductions at our manufacturing facilities, higher
production costs of $14 million related to higher energy and oil-related costs, including freight
costs, higher cost of finished goods sourced from third party manufacturers of $10 million
primarily resulting from foreign exchange transaction losses, other vendor price increases of $9
million and an $8 million unfavorable impact related to foreign currency exchange rates. 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 partially offset by the strengthening of the Japanese yen compared to the U.S.
dollar during 2009 compared to 2008. Duty refunds were lower by $19 million in 2009 compared to
2008 as a result of the final passage of the Dominican Republic-Central America-United States Free
Trade Agreement in Costa Rica which allowed us to recover in 2008 $15 million of duties previously
paid. In addition, we incurred $8 million of favorable cost recognition in 2008 that did not
reoccur in 2009 related to the capitalization of certain inventory supplies.
Our gross profit was positively impacted by higher product pricing of $123 million before
increased sales incentives, savings from our prior restructuring actions of $45 million, lower
on-going excess and obsolete inventory costs of $30 million and lower cotton costs of $26 million.
The higher product pricing was 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 varied by
individual product category. The lower excess and obsolete inventory costs in 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
47
management and promotions.
The cotton prices reflected in our results were 55 cents per pound in 2009 as compared to 65
cents in 2008. Energy and oil-related costs were higher in 2009 due to a spike in oil-related
commodity prices during the summer of 2008 which impacted our cost of sales in 2009.
We incurred lower one-time restructuring related write-offs of $15 million in 2009 compared to
2008 for stranded raw materials and work in process inventory determined not to be salvageable or
cost-effective to relocate. In addition, accelerated depreciation was lower by $15 million in 2009
compared to 2008.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Selling, general and administrative expenses |
|
$ |
940,530 |
|
|
$ |
1,009,607 |
|
|
$ |
(69,077 |
) |
|
|
(6.8 |
)% |
Our selling, general and administrative expenses were $69 million lower in 2009 compared to
2008. Our continued focus on cost reductions resulted in lower expenses related to savings of $33
million from our prior restructuring actions for compensation and related benefits, lower
technology expenses of $21 million, lower distribution expenses of $16 million, lower bad debt
expense of $7 million primarily due to a customer bankruptcy in 2008, lower selling and other
marketing related expenses of $5 million, lower consulting related expenses of $3 million and lower
non-media related media, advertising and promotion (MAP) expenses of $2 million. The lower
distribution expenses were primarily attributable to lower sales volume that reduced our labor,
postage and freight expenses and lower rework expenses in our distribution centers. In addition, in
October 2009, we recognized an $8 million gain related to the sale of our yarn operations to
Parkdale America.
Our media related MAP expenses were $24 million lower in 2009 compared to 2008. While we chose
to reduce our spending earlier in 2009, we made significant investments in the fourth quarter of
2009 to support retailers and position ourselves for future sales opportunities. 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 $33 million and
$6 million, respectively, in 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 markets performance during 2008 and a higher
discount rate at the end of 2008.
We also incurred higher expenses of $4 million in 2009 compared to 2008 as a result of opening
retail stores. We opened 17 retail stores during 2009. In addition, we incurred higher accelerated
depreciation of $3 million and higher other expenses of $2 million related to amending the terms of
all outstanding stock options granted under the Hanesbrands Inc. Omnibus Incentive Plan (the
Omnibus Incentive Plan) of 2006 that had an original term of five or seven years to the tenth
anniversary of the original grant date. Changes due to foreign currency exchange rates, which are
included in the impact of the changes discussed above, resulted in lower selling, general and
administrative expenses of $6 million in 2009 compared to 2008.
48
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Restructuring |
|
$ |
53,888 |
|
|
$ |
50,263 |
|
|
$ |
3,625 |
|
|
|
7.2 |
% |
During 2009, we ceased making our own yarn and now source all of our yarn requirements from
large-scale yarn suppliers. We entered into an agreement with Parkdale America under which we
agreed to sell or lease assets related to operations at our four yarn manufacturing facilities to
Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America
operating three of the four facilities. We approved an action to close the fourth yarn
manufacturing facility, as well as a yarn warehouse and a cotton warehouse, all located in the
United States, which will result in the elimination of approximately 175 positions. We also
entered into a yarn purchase agreement with Parkdale. Under this agreement, which has an initial
term of six years, Parkdale will produce and sell to us a substantial amount of our Western
Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce
and sell to us a substantial amount of the yarn requirements of our Nanjing, China textile
facility.
In addition to the actions discussed above, during 2009 we approved actions to close seven
manufacturing facilities and three distribution centers in the Dominican Republic, the United
States, Costa Rica, Honduras, Puerto Rico and Canada which will result in the elimination of an
aggregate of approximately 3,925 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.
During 2009, we recorded charges related to employee termination and other benefits of $24
million recognized in accordance with benefit plans previously communicated to the affected
employee group, charges related to contract obligations of $14 million, other exit costs of $8
million related to moving equipment and inventory from closed facilities and fixed asset impairment
charges of $8 million.
In 2009 and 2008, we recorded one-time write-offs of $4 million and $19 million, respectively,
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 noncash charges of $9
million and $24 million 2009 and 2008, respectively, in the Cost of sales line and a noncash
charge of $3 million in 2009 in the Selling, general and administrative expenses line related to
accelerated depreciation of buildings and equipment for facilities that have been closed or will be
closed.
These actions were a continuation of our consolidation and globalization strategy, and 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. These
approved actions represent the substantial completion of the consolidation and globalization of our
supply chain.
During 2008, we incurred $50 million in restructuring charges which primarily related to
employee termination and other benefits and charges related to exiting supply contracts associated
with plant closures approved during that period.
49
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Operating profit |
|
$ |
270,856 |
|
|
$ |
317,480 |
|
|
$ |
(46,624 |
) |
|
|
(14.7 |
)% |
Operating profit was lower in 2009 compared to 2008 as a result of lower gross profit of $112
million and higher restructuring and related charges of $4 million, partially offset by lower
selling, general and administrative expenses of $69 million. Changes in foreign currency exchange
rates had an unfavorable impact on operating profit of $1 million in 2009 compared to 2008.
Operating profit was $41 million lower in 2009 compared to 2008 excluding the impact of the
53rd week in 2008.
Other Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Other expense (income) |
|
$ |
49,301 |
|
|
$ |
(634 |
) |
|
$ |
49,935 |
|
|
|
NM |
|
In December 2009, we completed the sale of our 8% Senior Notes and concurrently amended and
restated the 2006 Senior Secured Credit Facility to provide for the 2009 Senior Secured Credit
Facility. The proceeds from the sale of the 8% Senior Notes, together with the proceeds from
borrowings under the 2009 Senior Secured Credit Facility, were used to refinance borrowings under
the 2006 Senior Secured Credit Facility, to repay all borrowings under our $450 million second
lien credit facility that we entered into in 2006 (the Second Lien Credit Facility), and to
pay fees and expenses relating to these transactions.
In connection with these transactions in December 2009, we recognized a loss on early
extinguishment of debt of $17 million related to unamortized debt issuance costs and fees paid in
connection with the execution of the 2009 Senior Secured Credit Facility and the issuance of the 8%
Senior Notes. In addition, in December 2009, we recognized a loss of $26 million related to
certain interest rate hedging arrangements which were terminated as a result of the refinancing of
our outstanding borrowings under the 2006 Senior Secured Credit Facility and repayment of the
outstanding borrowings under the Second Lien Credit Facility.
In September 2009 we incurred a $2 million loss on early extinguishment of debt related to
unamortized debt issuance costs resulting from the prepayment of $140 million of principal under
the 2006 Senior Secured Credit Facility.
In March 2009, we incurred costs of $4 million to amend the 2006 Senior Secured Credit
Facility and the Accounts Receivable Securitization Facility.
During 2008, we recognized a gain of $2 million related to the repurchase of $6 million of the
Floating Rate Senior Notes for $4 million. This gain was partially offset by a $1 million loss on
early extinguishment of debt related to unamortized debt issuance costs on the 2006 Senior Secured
Credit Facility for the prepayment of $125 million of principal in 2008.
50
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Interest expense, net |
|
$ |
163,279 |
|
|
$ |
155,077 |
|
|
$ |
8,202 |
|
|
|
5.3 |
% |
Interest expense, net was higher by $8 million in 2009 compared to 2008. The amendments
of the 2006 Senior Secured Credit Facility and Accounts Receivable Securitization Facility in March
2009 increased our interest-rate margin by 300 basis points and 325 basis points, respectively,
which increased interest expense in 2009 compared to 2008 by $31 million. The execution of the
2009 Senior Secured Credit Facility and the issuance of the 8% Senior Notes in December 2009
increased interest expense in 2009 compared to 2008 by $3 million.
These increases in interest expense were partially offset by a lower London Interbank Offered
Rate, or LIBOR, and lower outstanding debt balances that reduced interest expense by a combined
$23 million. In addition, interest expense, net was lower by $3 million in 2009 due to the impact
of the 53rd week in 2008. Our weighted average interest rate on our outstanding debt
was 6.86% during 2009 compared to 6.09% in 2008.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Income tax expense |
|
$ |
6,993 |
|
|
$ |
35,868 |
|
|
$ |
(28,875 |
) |
|
|
(80.5 |
)% |
Our annual effective income tax rate was 12.0% in 2009 compared to 22.0% in 2008. Our domestic
earnings were lower in 2009 as a result of higher restructuring and related charges and the debt
refinancing costs. The lower effective income tax rate is attributable primarily to a higher
proportion of our earnings attributed to foreign subsidiaries which are taxed at rates lower than
the U.S. statutory rate. Also, we recognized net tax benefits of
$12 million due to updated assessments of previously accrued
amounts. Our annual effective tax rate reflected our strategic initiative to make
substantial capital investments outside the United States in our global supply chain in 2009.
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net income |
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
(75,886 |
) |
|
|
(59.7 |
)% |
Net income for 2009 was lower than 2008 primarily due to higher other expenses of $50 million,
lower operating profit of $47 million and higher interest expense of $8 million, partially offset
by lower income tax expense of $29 million. Net income was $73 million lower in 2009 compared to
2008 after excluding the impact of the 53rd week in 2008.
51
Operating Results by Business Segment Year Ended January 2, 2010 (2009) Compared with Year
Ended January 3, 2009 (2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
1,833,616 |
|
|
$ |
1,947,167 |
|
|
$ |
(113,551 |
) |
|
|
(5.8 |
)% |
Outerwear |
|
|
1,051,735 |
|
|
|
1,196,155 |
|
|
|
(144,420 |
) |
|
|
(12.1 |
) |
Hosiery |
|
|
185,710 |
|
|
|
217,391 |
|
|
|
(31,681 |
) |
|
|
(14.6 |
) |
Direct to Consumer |
|
|
369,739 |
|
|
|
370,163 |
|
|
|
(424 |
) |
|
|
(0.1 |
) |
International |
|
|
437,804 |
|
|
|
496,170 |
|
|
|
(58,366 |
) |
|
|
(11.8 |
) |
Other |
|
|
12,671 |
|
|
|
21,724 |
|
|
|
(9,053 |
) |
|
|
(41.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
(357,495 |
) |
|
|
(8.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
234,352 |
|
|
$ |
223,420 |
|
|
$ |
10,932 |
|
|
|
4.9 |
% |
Outerwear |
|
|
53,050 |
|
|
|
66,149 |
|
|
|
(13,099 |
) |
|
|
(19.8 |
) |
Hosiery |
|
|
61,070 |
|
|
|
68,696 |
|
|
|
(7,626 |
) |
|
|
(11.1 |
) |
Direct to Consumer |
|
|
37,178 |
|
|
|
44,541 |
|
|
|
(7,363 |
) |
|
|
(16.5 |
) |
International |
|
|
44,688 |
|
|
|
64,349 |
|
|
|
(19,661 |
) |
|
|
(30.6 |
) |
Other |
|
|
(2,164 |
) |
|
|
328 |
|
|
|
(2,492 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
|
428,174 |
|
|
|
467,483 |
|
|
|
(39,309 |
) |
|
|
(8.4 |
) |
Items not included in segment operating
profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses |
|
|
(75,127 |
) |
|
|
(45,177 |
) |
|
|
29,950 |
|
|
|
66.3 |
|
Amortization of trademarks and other
intangibles |
|
|
(12,443 |
) |
|
|
(12,019 |
) |
|
|
424 |
|
|
|
3.5 |
|
Restructuring |
|
|
(53,888 |
) |
|
|
(50,263 |
) |
|
|
3,625 |
|
|
|
7.2 |
|
Inventory write-off included in cost of sales |
|
|
(4,135 |
) |
|
|
(18,696 |
) |
|
|
(14,561 |
) |
|
|
(77.9 |
) |
Accelerated depreciation included in cost of
sales |
|
|
(8,641 |
) |
|
|
(23,862 |
) |
|
|
(15,221 |
) |
|
|
(63.8 |
) |
Accelerated depreciation included in selling, general and administrative expenses |
|
|
(3,084 |
) |
|
|
14 |
|
|
|
3,098 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
270,856 |
|
|
|
317,480 |
|
|
|
(46,624 |
) |
|
|
(14.7 |
) |
Other (expense) income |
|
|
(49,301 |
) |
|
|
634 |
|
|
|
49,935 |
|
|
|
NM |
|
Interest expense, net |
|
|
(163,279 |
) |
|
|
(155,077 |
) |
|
|
8,202 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
$ |
58,276 |
|
|
$ |
163,037 |
|
|
$ |
(104,761 |
) |
|
|
(64.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
1,833,616 |
|
|
$ |
1,947,167 |
|
|
$ |
(113,551 |
) |
|
|
(5.8 |
)% |
Segment operating profit |
|
|
234,352 |
|
|
|
223,420 |
|
|
|
10,932 |
|
|
|
4.9 |
|
Overall net sales in the Innerwear segment were lower by $114 million or 6% in 2009 compared
to 2008 as the recessionary environment continued to constrain consumer spending. Total intimate
apparel net sales were $110 million lower in 2009 compared to 2008 and represents 97% of the total
segment net sales decline. We believe our lower net sales in our Hanes brand of $47 million, our
Playtex brand of $34 million and our smaller brands (barely there, Just My Size and Wonderbra) of
$27 million and $6 million lower private label net sales were primarily attributable to weaker
sales at retail as a result of lower consumer spending during the year. These declines were
52
partially offset by an increase of $5 million of our Bali brand intimate apparel net sales in
2009 compared to 2008.
Total male underwear net sales were $27 million higher in 2009 compared to 2008 which reflect
higher net sales in our Hanes brand of $26 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
product category of $28 million in 2009 compared to 2008 reflect a decline in Hanes and Champion
brand net sales in our mens and kids product category. Innerwear segment net sales were lower by
$87 million or 5% in 2009 compared to 2008 after excluding the impact of the 53rd week
in 2008.
The Innerwear segment gross profit was lower by $51 million in 2009 compared to 2008. The
lower gross profit was due to lower sales volume of $62 million, higher sales incentives of $38
million due to investments made with retailers, unfavorable product sales mix of $21 million, lower
duty refunds of $17 million, higher other manufacturing costs of $14 million, higher production
costs of $8 million related to higher energy and oil-related costs, including freight costs and
other vendor price increases of $7 million. Additionally, favorable cost recognition of $8 million
occurred in 2008 that did not reoccur in 2009 related to the capitalization of certain inventory
supplies. These higher costs were partially offset by higher product pricing of $69 million before
increased sales incentives, savings from our prior restructuring actions of $23 million, lower
on-going excess and obsolete inventory costs of $23 million and lower cotton costs of $10 million.
As a percent of segment net sales, gross profit in the Innerwear segment was 32.3% in 2009
compared to 33.0% in 2008, decreasing as a result of the items described above.
The higher Innerwear segment operating profit in 2009 compared to 2008 was primarily
attributable to lower media related MAP expenses of $25 million, savings of $18 million from prior
restructuring actions primarily for compensation and related benefits, lower technology expenses of
$11 million, lower bad debt expense of $5 million primarily due to a customer bankruptcy in 2008
and lower distribution expenses of $2 million, which partially offset 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 2009
is consistent with 2008. Our consolidated selling, general and administrative expenses before
segment allocations was $69 million lower in 2009 compared to 2008.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
1,051,735 |
|
|
$ |
1,196,155 |
|
|
$ |
(144,420 |
) |
|
|
(12.1 |
)% |
Segment operating profit |
|
|
53,050 |
|
|
|
66,149 |
|
|
|
(13,099 |
) |
|
|
(19.8 |
) |
Net sales in the Outerwear segment were lower by $144 million or 12% in 2009 compared to 2008,
primarily as a result of lower casualwear net sales in our wholesale and retail channels of $93
million and $63 million, respectively. The wholesale channel has been significantly impacted by
lower consumer spending with our customers in this channel and highly price competitive especially
in this recessionary environment. The lower retail casualwear net sales reflect an $89 million
impact due to the losses of seasonal programs not renewed for 2009 that only impacted the first
half of 2009 partially offset by additional net sales and royalty income resulting from an
exclusive long-term agreement entered into with Wal-Mart in April 2009 that significantly expanded
the presence of our Just My Size brand in all Wal-Mart stores. In addition, total activewear
product category net sales were $13 million higher. Our Champion brand activewear sales, which
continue to benefit from our marketing investment in the brand, were higher by $18 million.
Outerwear segment net sales were lower by $130 million or 11% in 2009 compared to 2008 after
excluding the impact of the 53rd week in 2008.
53
The Outerwear segment gross profit was lower by $39 million in 2009 compared to 2008. The
lower gross profit is due to lower sales volume of $47 million, unfavorable product sales mix of
$20 million, higher other manufacturing costs of $15 million, higher sales incentives of $8 million
due to investments made with retailers, higher production costs of $6 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 savings of $22 million from our prior
restructuring actions, lower cotton costs of $16 million, higher product pricing of $16 million
before increased sales incentives and lower on-going excess and obsolete inventory costs of $5
million.
As a percent of segment net sales, gross profit in the Outerwear segment was 21.9% in 2009
compared to 22.5% in 2008, declining as a result of the items described above.
The lower Outerwear segment operating profit in 2009 compared to 2008 was primarily
attributable to lower gross profit and higher media related MAP expenses of $5 million partially
offset by lower distribution expenses of $11 million, savings of $10 million from our prior
restructuring actions, lower technology expenses of $7 million, lower non-media related MAP
expenses of $3 million and lower bad debt expense of $2 million primarily due to a customer
bankruptcy in 2008.
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 2009
is consistent with 2008. Our consolidated selling, general and administrative expenses before
segment allocations was $69 million lower in 2009 compared to 2008.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
185,710 |
|
|
$ |
217,391 |
|
|
$ |
(31,681 |
) |
|
|
(14.6 |
)% |
Segment operating profit |
|
|
61,070 |
|
|
|
68,696 |
|
|
|
(7,626 |
) |
|
|
(11.1 |
) |
Net sales in the Hosiery segment declined by $32 million or 15%, which was primarily due
to lower sales of our Leggs brand to mass retailers and food and drug stores and our Hanes brand
to national chains and department stores. The net sales decline rate has improved over the most
recent three consecutive quarters. Hosiery products continue to be more adversely impacted than
other apparel categories by reduced consumer discretionary spending, 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. Hosiery segment net sales were lower by
$28 million or 13% in 2009 compared to 2008 after excluding the impact of the 53rd week
in 2008.
The Hosiery segment gross profit was lower by $16 million in 2009 compared to 2008. The lower
gross profit for 2009 compared to 2008 was the result of lower sales volume of $23 million and
higher other manufacturing costs of $4 million, partially offset by higher product pricing of $12
million. As a percent of segment net sales, gross profit in the Hosiery segment was 49.8% in 2009
and in 2008.
The lower Hosiery segment operating profit in 2009 compared to 2008 is primarily attributable
to lower gross profit, partially offset by lower distribution expenses of $3 million, savings of $2
million from our prior restructuring actions 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 2009
is consistent with 2008. Our consolidated selling, general and administrative expenses before
segment allocations was $69 million lower in 2009 compared to 2008.
54
Direct to Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
369,739 |
|
|
$ |
370,163 |
|
|
$ |
(424 |
) |
|
|
(0.1 |
)% |
Segment operating profit |
|
|
37,178 |
|
|
|
44,541 |
|
|
|
(7,363 |
) |
|
|
(16.5 |
) |
Direct to Consumer segment net sales were flat in 2009 compared to 2008 primarily due to
higher net sales in our outlet stores of $1 million attributable to new store openings offset by
lower comparable store sales (3%) driven by lower traffic. The higher net sales in our outlet
stores were partially offset by lower net sales of $1 million related to our Internet operations.
Direct to Consumer segment net sales were higher by $7 million or 2% in 2009 compared to 2008 after
excluding the impact of the 53rd week in 2008. |
The Direct to Consumer segment gross profit was higher by $5 million in 2009 compared to 2008.
The higher gross profit is due to higher product pricing of $13 million and lower on-going excess
and obsolete inventory costs of $2 million, partially offset by lower sales volume of $7 million
and unfavorable product sales mix of $4 million. |
As a percent of segment net sales, gross profit in the Direct to Consumer segment was 62.4% in
2009 compared to 61.1% in 2008, increasing as a result of the items described above. |
The lower Direct to Consumer segment operating profit in 2009 compared to 2008 was primarily
attributable to higher non-media related MAP expenses of $6 million and higher expenses of $4
million as a result of opening 17 retail stores during 2009, partially offset by higher 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 2009
is consistent with 2008. Our consolidated selling, general and administrative expenses before
segment allocations was $69 million lower in 2009 compared to 2008. |
International |
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
437,804 |
|
|
$ |
496,170 |
|
|
$ |
(58,366 |
) |
|
|
(11.8 |
)% |
Segment operating profit |
|
|
44,688 |
|
|
|
64,349 |
|
|
|
(19,661 |
) |
|
|
(30.6 |
) |
Overall net sales in the International segment were lower by $58 million or 12% in 2009
compared to 2008 primarily attributable to an unfavorable impact of $22 million related to foreign
currency exchange rates and weak demand globally primarily in Europe, Japan and Canada, which are
experiencing recessionary environments similar to that in the United States. International segment
net sales declined by 7% in 2009 compared to 2008 after excluding the impact of foreign exchange
rates on currency. 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 partially offset by the strengthening of the Japanese yen
compared to the U.S. dollar during 2009 compared to 2008.
During 2009, we experienced lower net sales, in each case excluding the impact of foreign
currency exchange rates but including the impact of the 53rd week, in our casualwear
business in Europe of $25 million, in our male underwear and activewear businesses in Japan of $13
million, in our casualwear business in Puerto Rico of $7 million resulting from moving the
distribution capacity to the United States and in our socks and intimate apparel business in Canada
of $11 million. Lower segment net sales were partially offset by higher sales in our intimate
55
apparel and male underwear businesses in Mexico of $12 million and in our male underwear
business in Brazil of $4 million. International segment net sales were lower by $56 million or 11%
in 2009 compared to 2008 after excluding the impact of the 53rd week in 2008.
The International segment gross profit was lower by $38 million in 2009 compared to 2008. The
lower gross profit was a result of lower sales volume of $17 million, higher cost of finished goods
sourced from third party manufacturers of $12 million primarily resulting from foreign exchange
transaction losses, unfavorable product sales mix of $7 million, an unfavorable impact related to foreign currency exchange rates of $8 million
and higher sales incentives of $4 million due to investments made with retailers, partially offset by higher product pricing of $11 million.
As a percent of segment net sales, gross profit in the International segment was 36.7% in 2009
compared to 2008 at 40.1%, declining as a result of the items described above.
The lower International segment operating profit in 2009 compared to 2008 is primarily
attributable to the lower gross profit, partially offset by lower media related MAP expenses of $5
million, lower selling and other marketing related expenses of $5 million, lower non-media related
MAP expenses of $3 million, lower distribution expenses of $2 million and savings of $2 million
from our prior restructuring actions. 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 2009 compared to 2008.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Higher |
|
|
Percent |
|
|
|
2010 |
|
|
2009 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
12,671 |
|
|
$ |
21,724 |
|
|
$ |
(9,053 |
) |
|
|
(41.7 |
)% |
Segment operating profit (loss) |
|
|
(2,164 |
) |
|
|
328 |
|
|
|
(2,492 |
) |
|
|
NM |
|
Sales in our Other segment primarily consist of sales of yarn to third parties which are
intended to maintain asset utilization at certain manufacturing facilities and generate approximate
break even margins. In October 2009, we completed the sale of our yarn operations as a result of
which we ceased making our own yarn and now source all of our yarn requirements from large-scale
yarn suppliers. As a result of the sale of our yarn operations we will no longer have net sales in
our Other segment in the future.
General Corporate Expenses
General corporate expenses were $30 million higher in 2009 compared to 2008 primarily due to
higher pension expense of $33 million, $8 million of higher foreign exchange transaction losses and
higher other expenses of $2 million related to amending the terms of all outstanding stock options
granted under the Omnibus Incentive Plan that had an original term of five or seven years to the
tenth anniversary of the original grant date, partially offset by higher gains on sales of assets
of $2 million. In addition, in October 2009, we recognized an $8 million gain related to the sale
of our yarn operations to Parkdale America.
56
Consolidated Results of Operations Year Ended January 3, 2009 (2008) Compared with Year Ended
December 29, 2007 (2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
|
$ |
(225,767 |
) |
|
|
(5.0 |
)% |
Cost of sales |
|
|
2,871,420 |
|
|
|
3,033,627 |
|
|
|
(162,207 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,377,350 |
|
|
|
1,440,910 |
|
|
|
(63,560 |
) |
|
|
(4.4 |
) |
Selling, general and administrative expenses |
|
|
1,009,607 |
|
|
|
1,040,754 |
|
|
|
(31,147 |
) |
|
|
(3.0 |
) |
Gain on curtailment of postretirement benefits |
|
|
|
|
|
|
(32,144 |
) |
|
|
(32,144 |
) |
|
|
NM |
|
Restructuring |
|
|
50,263 |
|
|
|
43,731 |
|
|
|
6,532 |
|
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
317,480 |
|
|
|
388,569 |
|
|
|
(71,089 |
) |
|
|
(18.3 |
) |
Other expense (income) |
|
|
(634 |
) |
|
|
5,235 |
|
|
|
(5,869 |
) |
|
|
(112.1 |
) |
Interest expense, net |
|
|
155,077 |
|
|
|
199,208 |
|
|
|
(44,131 |
) |
|
|
(22.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
163,037 |
|
|
|
184,126 |
|
|
|
(21,089 |
) |
|
|
(11.5 |
) |
Income tax expense |
|
|
35,868 |
|
|
|
57,999 |
|
|
|
(22,131 |
) |
|
|
(38.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
127,169 |
|
|
$ |
126,127 |
|
|
$ |
1,042 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
|
$ |
(225,767 |
) |
|
|
(5.0 |
)% |
Consolidated net sales were lower by $226 million or 5% in 2008 compared to 2007 primarily due
to weak sales at retail, which reflect a difficult economic and retail environment in which the
ultimate consumers of our products have been significantly limiting their discretionary spending
and visiting retail stores less frequently. The economic recession continued to impact consumer
spending, resulting in one of the worst holiday shopping seasons in 40 years as retail sales fell
for the sixth straight month in December. Our Innerwear, Outerwear, Hosiery and Other segment net
sales were lower by $153 million (7%), $60 million (5%), $34 million (14%) and $35 million (62%),
respectively, and were partially offset by higher net sales in our Direct to Consumer segment and
International segment of $10 million (3%) and $48 million (11%), respectively. 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, weakness in the retail environment can impact our
results in the short-term, as it did in 2008. The total impact of the 53rd week in
2008, which is included in the amounts above, was a $54 million increase in sales.
The lower net sales in our Innerwear segment were primarily due to a decline in the intimate
apparel, socks and male underwear product categories. Total intimate
apparel net sales were $115
million lower in 2008 compared to 2007. We experienced lower intimate apparel sales in our Hanes
brand of $52 million, our smaller brands (barely there, Just My Size and Wonderbra) of $45 million
and our private label brands of $6 million which we believe was primarily attributable to weaker
sales at retail as noted above. In 2008 compared to 2007, our Playtex brand intimate apparel net
sales were higher by $2 million and our Bali brand intimate apparel net sales were lower by $13
million. Net sales in our male underwear product category were $11 million lower, which includes
the impact of exiting a license arrangement for a boys character underwear program in early 2008
that lowered sales by $15 million. In addition, total socks net sales were lower in 2008 compared
to 2007 by $33 million.
57
In our Outerwear segment, net sales of our Champion brand activewear were $26 million higher
in 2008 compared to 2007, and were offset by lower net sales of our casualwear product categories
of $82 million. Net sales in our Hosiery segment declined substantially more than the long-term
trend primarily due to lower sales of the Hanes brand to national chains and department stores and
our Leggs brand to mass retailers and food and drug stores in 2008 compared to 2007. We expect the
trend of declining hosiery sales to continue consistent with the overall decline in the industry
and with shifts in consumer preferences.
The lower net sales discussed above were partially offset by higher net sales in our Direct to
Consumer segment and International segment. The higher net sales in our Direct to Consumer segment
were primarily attributable to higher net sales in our Internet operations. The higher net sales in
our International segment were driven by a favorable impact of $22 million related to foreign
currency exchange rates and by the growth in our casualwear businesses in Europe and Asia. The
favorable impact of foreign currency exchange rates was primarily due to the strengthening of the
Japanese yen, Euro and Brazilian real.
The decline in net sales for our Other segment was primarily due to the continued
vertical integration of a yarn and fabric operation acquisition from 2006 with less focus on sales
of nonfinished fabric and yarn to third parties.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Gross profit |
|
$ |
1,377,350 |
|
|
$ |
1,440,910 |
|
|
$ |
(63,560 |
) |
|
|
(4.4 |
)% |
As a percent of net sales, our gross profit percentage was 32.4% in 2008 compared to 32.2% in
2007. While the gross profit percentage was higher, gross profit dollars were lower due to lower
sales volume of $85 million, unfavorable product sales mix of $35 million, higher cotton costs of
$30 million, higher production costs of $20 million related to higher energy and oil related costs
including freight costs and other vendor price increases of $12 million. The cotton prices
reflected in our results were 65 cents per pound in 2008 as compared to 56 cents per pound in 2007.
Energy and oil related costs were higher due to a spike in oil related commodity prices during the
summer of 2008. In addition,
in connection with the consolidation and globalization of our supply chain, we incurred one-time
restructuring related write-offs of stranded raw materials and work in process inventory determined
not to be salvageable or cost-effective to relocate of $19 million in 2008, which were offset by
lower accelerated depreciation of $13 million.
These higher expenses were primarily offset by savings from our cost reduction initiatives and
prior restructuring actions of $41 million, lower other manufacturing overhead costs of $24 million
primarily related to better volumes earlier in the year, lower on-going excess and obsolete
inventory costs of $14 million, lower sales incentives of $11 million, $10 million of lower duty
costs primarily related to higher refunds of $9 million, a $9 million favorable impact related to
foreign currency exchange rates, $8 million of favorable one-time out of period cost recognition
related to the capitalization of certain inventory supplies to be on a consistent basis across all
business lines, $4 million of lower start-up and shut down costs associated with our consolidation
and globalization of our supply chain and higher product sales pricing of $3 million. Our duty
refunds were higher in 2008 primarily due to the final passage of the Dominican Republic-Central
America-United States Free Trade Agreement in Costa Rica as a result of which we can, on a one-time
basis, recover duties paid since January 1, 2004 totaling approximately $15 million. The lower
excess and obsolete inventory costs in 2008 are attributable to both our continuous evaluation of
inventory levels and simplification of our product category offerings since the spin off. We
realized the benefits of driving down obsolete inventory levels through aggressive management and
promotions and realized the benefits from decreases in style counts ranging from 7% to 30% in our
various product category offerings. The quality of our inventory remained good with obsolete
inventory down 23% from the prior year. The favorable foreign currency exchange rate impact in our
International segment was primarily due to the strengthening of the Japanese yen, Euro and
Brazilian real.
58
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Selling, general and administrative expenses |
|
$ |
1,009,607 |
|
|
$ |
1,040,754 |
|
|
$ |
(31,147 |
) |
|
|
(3.0 |
)% |
Our selling, general and administrative expenses were $31 million lower in 2008 compared to
2007. Our cost reduction efforts resulted in lower expenses in 2008 compared to 2007 related to
savings of $21 million from our prior restructuring actions for compensation and related benefits,
lower consulting expenses related to various areas of $5 million, lower non-media related MAP
expenses of $3 million, lower accelerated depreciation of $3 million, lower postretirement
healthcare and life insurance expense of $2 million and lower stock compensation expense of $2
million. |
Our media related MAP expenses were $11 million lower in 2008 as compared to 2007. While our
spending for media related MAP was down in 2008, it was the second highest spending level in our
history. We supported our key brands with targeted, effective advertising and marketing campaigns
such as the launch of Hanes No Ride Up panties and marketing initiatives for Champion and Playtex
in the first half of 2008 and significantly lowered our overall spending during the second half of
2008. In contrast, in 2007, our media related MAP spending was spread across multiple product
categories and brands. 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. |
In addition, spin off and related charges of $3 million recognized in 2007 did not recur in
2008. Our pension income of $12 million was higher by $9 million, which included an adjustment that
reduced pension expense in 2007 related to the final separation of our pension assets and
liabilities from those of Sara Lee. |
We experienced higher bad debt expense of $7 million primarily related to the Mervyns
bankruptcy, higher computer software amortization costs of $5 million, higher technology consulting
and related expenses of $4 million and higher distribution expenses of $4 million in 2008 compared
to 2007. The higher technology consulting and computer software amortization costs are related to
our efforts to integrate our information technology systems across our company which involves
reducing the number of information technology platforms serving our business functions. The higher
distribution expenses in 2008 compared to 2007 were primarily related to higher volumes in our
international business, higher postage and freight costs and higher rework expenses in our
distribution centers. We also incurred higher expenses of $3 million in 2008 compared to 2007 as a
result of having opened 10 retail stores in 2008. In addition, we incurred $7 million in
amortization of gain on curtailment of postretirement benefits in 2007 which did not recur in 2008. |
Gain on Curtailment of Postretirement Benefits |
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Gain on curtailment of postretirement benefits |
|
$ |
|
|
|
$ |
(32,144 |
) |
|
$ |
(32,144 |
) |
|
|
NM |
|
In December 2006, we notified retirees and employees of the phase out of premium subsidies for
early retiree medical coverage and move to an access-only plan for early retirees by the end of
2007. In December 2007, in connection with the termination of the postretirement medical plan, we
recognized a final gain on curtailment of plan benefits of $32 million. Concurrently with the
termination of the existing plan, we established a new access-only plan that is fully paid by the
participants.
59
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Restructuring |
|
$ |
50,263 |
|
|
$ |
43,731 |
|
|
$ |
6,532 |
|
|
|
14.9 |
% |
During 2008, we approved actions to close 11 manufacturing facilities and three distribution
centers and eliminate approximately 6,800 positions in Mexico, the United States, Costa Rica,
Honduras 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 our West Coast distribution facility in California in
order to expand capacity for goods we source from Asia. In addition, approximately 200 management
and administrative positions were eliminated, with the majority of these positions based in the
United States. We recorded a charge of $34 million related to employee termination and other
benefits recognized in accordance with benefit plans previously communicated to the affected
employee group, fixed asset impairment charges of $9 million and charges related to exiting supply
contracts of $11 million, which was partially offset by $4 million of favorable settlements of
contract obligations for lower amounts than previously estimated.
In 2008, we recorded $19 million in 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 in the Cost of sales line. In addition, in connection with
our consolidation and globalization strategy, in 2008 and 2007, we recognized non-cash charges of
$24 million and $37 million, respectively, in the Cost of sales line and a non-cash charge of $3
million in the Selling, general and administrative expenses line in 2007 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 2007, we incurred $44 million in restructuring charges which primarily related to
a charge of $32 million related to employee termination and other benefits associated with plant
closures approved during that period and the elimination of certain management and administrative
positions, a $10 million charge for estimated lease termination costs associated with facility
closures and a $2 million impairment charge associated with facility closures.
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Operating profit |
|
$ |
317,480 |
|
|
$ |
388,569 |
|
|
$ |
(71,089 |
) |
|
|
(18.3 |
)% |
Operating profit was lower in 2008 compared to 2007 as a result of lower gross profit of $64
million, a $32 million gain on curtailment of postretirement benefits recognized in 2007 which did
not recur in 2008 and higher restructuring and related charges for facility closures of $7 million
partially offset by lower selling, general and administrative expenses of $31 million. The lower
gross profit was primarily the result of lower sales volume, unfavorable product sales mix and
increases in manufacturing input costs for cotton and energy and other oil related costs, all of
which exceeded our savings from executing our consolidation and globalization strategy during 2008.
The total impact of the 53rd week in 2008, which is included in the amounts above, was
a $6 million increase in operating profit.
60
Other Expense (Income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Other expense (income) |
|
$ |
(634 |
) |
|
$ |
5,235 |
|
|
$ |
(5,869 |
) |
|
|
(112.1 |
)% |
During 2008, we recognized a gain of $2 million related to the repurchase of $6 million of our
Floating Rate Senior Notes for $4 million. This gain was partially offset by a $1 million loss on
early extinguishment of debt related to unamortized debt issuance costs on the 2006 Senior Secured
Credit Facility for the prepayment of $125 million of principal in December 2008. During 2007, we
recognized losses on early extinguishment of debt related to unamortized debt issuance costs on the
2006 Senior Secured Credit Facility for prepayments of $428 million of principal in 2007, including
a prepayment of $250 million that was made in connection with funding from the Accounts Receivable
Securitization Facility we entered into in November 2007.
Interest Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Interest expense, net |
|
$ |
155,077 |
|
|
$ |
199,208 |
|
|
$ |
(44,131 |
) |
|
|
(22.2 |
)% |
Interest expense, net was lower by $44 million in 2008 compared to 2007. The lower interest
expense is primarily attributable to a lower weighted average interest rate, $32 million of which
resulted from a lower LIBOR and $4 million of which resulted from reduced interest rates achieved
through changes in our financing structure such as the February 2007 amendment to our 2006 Senior
Secured Credit Facility and the Accounts Receivable Securitization Facility that we entered into in
November 2007. In addition, interest expense was reduced by $8 million as a result of our net
prepayments of long-term debt during 2007 and 2008 of $303 million. Our weighted average interest
rate on our outstanding debt was 6.09% during 2008 compared to 7.74% in 2007.
At January 3, 2009, we had outstanding interest rate hedging arrangements whereby we capped
the interest rate on $400 million of our floating rate debt at 3.50% and fixed the interest rate on
$1.4 billion of our floating rate debt at 4.16%. Approximately 82% of our total debt outstanding at
January 3, 2009 was at a fixed or capped LIBOR rate.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Income tax expense |
|
$ |
35,868 |
|
|
$ |
57,999 |
|
|
$ |
(22,131 |
) |
|
|
(38.2 |
)% |
Our annual effective income tax rate was 22.0% in 2008 compared to 31.5% in 2007. The lower
income tax expense is attributable primarily to lower pre-tax income and a lower effective income
tax rate. The lower effective income tax rate is primarily due to higher unremitted earnings from
foreign subsidiaries in 2008 taxed at rates less than the U.S. statutory rate. Our annual effective
tax rate reflects our strategic initiative to make substantial capital investments outside the
United States in our global supply chain in 2008.
61
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net income |
|
$ |
127,169 |
|
|
$ |
126,127 |
|
|
$ |
1,042 |
|
|
|
0.8 |
% |
Net income for 2008 was higher than 2007 primarily due to lower interest expense, lower
selling, general and administrative expenses and a lower effective income tax rate offset by lower
gross profit resulting from lower sales volume and higher manufacturing input costs, a gain on
curtailment of postretirement benefits recognized in 2007 which did not recur in 2008 and higher
restructuring charges. The total impact of the 53rd week in 2008 was a $3 million
increase in net income.
62
Operating Results by Business Segment Year Ended January 3, 2009 (2008) Compared with Year
Ended December 29, 2007 (2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
1,947,167 |
|
|
$ |
2,100,554 |
|
|
$ |
(153,387 |
) |
|
|
(7.3 |
)% |
Outerwear |
|
|
1,196,155 |
|
|
|
1,256,214 |
|
|
|
(60,059 |
) |
|
|
(4.8 |
) |
Hosiery |
|
|
217,391 |
|
|
|
251,731 |
|
|
|
(34,340 |
) |
|
|
(13.6 |
) |
Direct to Consumer |
|
|
370,163 |
|
|
|
360,500 |
|
|
|
9,663 |
|
|
|
2.7 |
|
International |
|
|
496,170 |
|
|
|
448,618 |
|
|
|
47,552 |
|
|
|
10.6 |
|
Other |
|
|
21,724 |
|
|
|
56,920 |
|
|
|
(35,196 |
) |
|
|
(61.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
|
$ |
(225,767 |
) |
|
|
(5.0 |
)% |
Segment operating profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
223,420 |
|
|
$ |
242,132 |
|
|
$ |
(18,712 |
) |
|
|
(7.7 |
)% |
Outerwear |
|
|
66,149 |
|
|
|
67,340 |
|
|
|
(1,191 |
) |
|
|
(1.8 |
) |
Hosiery |
|
|
68,696 |
|
|
|
74,636 |
|
|
|
(5,940 |
) |
|
|
(8.0 |
) |
Direct to Consumer |
|
|
44,541 |
|
|
|
57,489 |
|
|
|
(12,948 |
) |
|
|
(22.5 |
) |
International |
|
|
64,349 |
|
|
|
57,820 |
|
|
|
6,529 |
|
|
|
11.3 |
|
Other |
|
|
328 |
|
|
|
(1,333 |
) |
|
|
1,661 |
|
|
|
(124.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit: |
|
|
467,483 |
|
|
|
498,084 |
|
|
|
(30,601 |
) |
|
|
(6.1 |
) |
Items not included in segment operating
profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses |
|
|
(45,177 |
) |
|
|
(52,271 |
) |
|
|
(7,094 |
) |
|
|
(13.6 |
) |
Amortization of trademarks and other
intangibles |
|
|
(12,019 |
) |
|
|
(6,205 |
) |
|
|
5,814 |
|
|
|
93.7 |
|
Gain on curtailment of postretirement benefits |
|
|
|
|
|
|
32,144 |
|
|
|
(32,144 |
) |
|
|
NM |
|
Restructuring |
|
|
(50,263 |
) |
|
|
(43,731 |
) |
|
|
6,532 |
|
|
|
14.9 |
|
Inventory write-off included in cost of sales |
|
|
(18,696 |
) |
|
|
|
|
|
|
18,696 |
|
|
|
NM |
|
Accelerated depreciation included in cost of
sales |
|
|
(23,862 |
) |
|
|
(36,912 |
) |
|
|
(13,050 |
) |
|
|
(35.4 |
) |
Accelerated depreciation included in selling,
general and administrative expenses |
|
|
14 |
|
|
|
(2,540 |
) |
|
|
(2,554 |
) |
|
|
(100.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
317,480 |
|
|
|
388,569 |
|
|
|
(71,089 |
) |
|
|
(18.3 |
) |
Other income (expense) |
|
|
634 |
|
|
|
(5,235 |
) |
|
|
5,869 |
|
|
|
112.1 |
|
Interest expense, net |
|
|
(155,077 |
) |
|
|
(199,208 |
) |
|
|
(44,131 |
) |
|
|
(22.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
$ |
163,037 |
|
|
$ |
184,126 |
|
|
$ |
(21,089 |
) |
|
|
(11.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
63
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
1,947,167 |
|
|
$ |
2,100,554 |
|
|
$ |
(153,387 |
) |
|
|
(7.3 |
)% |
Segment operating profit |
|
|
223,420 |
|
|
|
242,132 |
|
|
|
(18,712 |
) |
|
|
(7.7 |
) |
Overall net sales in the Innerwear segment were lower by $153 million or 7% in 2008 compared
to 2007. The difficult economic and retail environment significantly impacted consumers
discretionary spending which resulted in lower sales in our intimate apparel and socks product
categories. Total intimate apparel net sales were $115 million lower in 2008 compared to 2007. We
experienced lower intimate apparel sales in our Hanes brand of $52 million and our smaller brands
(barely there, Just My Size and Wonderbra) of $45 million and our private label brands of $6
million which we believe was primarily attributable to weaker sales at retail. In 2008 compared to
2007, our Playtex brand intimate apparel net sales were higher by $2 million and our Bali brand
intimate apparel net sales were lower by $13 million. The growth in our Playtex brand sales was
supported by successful marketing initiatives in the first half of 2008. Net sales in our male
underwear product category were $11 million lower, which includes the impact of exiting a license
arrangement for a boys character underwear program in early 2008 that lowered sales by $15
million. The lower net sales in our socks product category reflects a decline in kids and mens
Hanes brand net sales of $20 million and Champion brand net sales of $10 million primarily related
to the loss of a mens program for one of our customers. The total impact of the 53rd
week in 2008, which is included in the amounts above, was a $27 million increase in sales for the
Innerwear segment.
As a percent of segment net sales, gross profit percentage in the Innerwear segment was 33.0%
in 2008 compared to 33.3% in 2007. The lower gross profit was due to lower sales volume of $86
million, unfavorable product sales mix of $16 million, higher cotton costs of $12 million, higher
production costs of $10 million related to higher energy and oil related costs including freight
costs, other vendor price increases of $7 million and lower product sales pricing of $4 million.
These higher costs were offset by savings from our cost reduction initiatives and prior
restructuring actions of $26 million, lower sales incentives of $23 million, $11 million of lower
duty costs primarily related to higher refunds, $8 million of favorable one-time out of period cost
recognition related to the capitalization of certain inventory supplies to be on a consistent basis
across all business lines and lower other manufacturing overhead costs of $4 million. In addition,
we incurred lower on-going excess and obsolete inventory costs of $8 million arising from realizing
the benefits of driving down obsolete inventory levels through aggressive management and promotions
and simplifying our product category offerings which reduced our style counts ranging from 7% to
30% in our various product category offerings.
The lower Innerwear segment operating profit in 2008 compared to 2007 is primarily
attributable to lower gross profit and higher bad debt expense of $4 million primarily related to
the Mervyns bankruptcy. These higher costs were partially offset by savings of $17 million from
prior restructuring actions primarily for compensation and related benefits, lower non-media
related MAP expenses of $13 million, lower media related MAP expenses of $8 million and lower
spending of $2 million in numerous other areas. 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 each segment. The allocation methodology for the consolidated selling,
general and administrative expenses for 2008 is consistent with 2007. Our consolidated selling,
general and administrative expenses before segment allocations was $31 million lower in 2008
compared to 2007.
64
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
1,196,155 |
|
|
$ |
1,256,214 |
|
|
$ |
(60,059 |
) |
|
|
(4.8 |
)% |
Segment operating profit |
|
|
66,149 |
|
|
|
67,340 |
|
|
|
(1,191 |
) |
|
|
(1.8 |
) |
Net sales in the Outerwear segment were lower by $60 million or 5% in 2008 compared to 2007,
primarily as a result of higher net sales of Champion brand activewear of $26 million offset by
lower net sales of retail casualwear of $63 million and lower net sales through our wholesale
channel of $19 million, primarily in promotional T-shirts and sport shirts. Our Champion brand
sales continued to benefit from our investment in the brand through our marketing initiatives. Our
How You Play marketing campaign has received a very positive response from consumers. The lower
retail casualwear net sales of $63 million reflect a $6 million impact related to the loss of
seasonal programs continuing into the first half of 2009. The impact on 2009 net sales of losing
these programs, which consisted of recurring seasonal programs that were renewed in prior years but
were not renewed for 2009, occurred primarily in the first half of 2009. The total impact of the
53rd week in 2008, which is included in the amounts above, was a $14 million increase in
sales for the Outerwear segment.
As a percent of segment net sales, gross profit percentage in the Outerwear segment was 22.5%
in 2008 compared to 22.2% in 2007. While the gross profit percentage was higher, gross profit
dollars were lower due to higher cotton costs of $18 million, lower sales volume of $17 million,
higher production costs of $10 million related to higher energy and oil related costs including
freight costs, higher sales incentives of $7 million and other vendor price increases of $3
million. These higher costs were partially offset by lower other manufacturing overhead costs of
$23 million, savings of $11 million from our cost reduction initiatives and prior restructuring
actions, higher product sales pricing of $7 million, favorable product sales mix of $2 million and
lower on-going excess and obsolete inventory costs of $2 million.
The lower Outerwear segment operating profit in 2008 compared to 2007 is primarily
attributable to lower gross profit, higher technology consulting and related expenses of $3 million
and higher bad debt expense of $2 million primarily related to the Mervyns bankruptcy. These
higher costs were partially offset by savings of $5 million from our cost reduction initiatives and
prior restructuring actions and lower media-related MAP expenses of $6 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 each segment. The allocation
methodology for the consolidated selling, general and administrative expenses for 2008 is
consistent with 2007. Our consolidated selling, general and administrative expenses before segment
allocations was $31 million lower in 2008 compared to 2007.
65
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
217,391 |
|
|
$ |
251,731 |
|
|
$ |
(34,340 |
) |
|
|
(13.6 |
)% |
Segment operating profit |
|
|
68,696 |
|
|
|
74,636 |
|
|
|
(5,940 |
) |
|
|
(8.0 |
) |
Net sales in the Hosiery segment declined by $34 million or 14%, which was substantially
more than the long-term trend primarily due to lower sales of the Hanes brand to national chains
and department stores and the Leggs brand to mass retailers and food and drug stores. In
addition, we experienced lower sales of $4 million related to the Donna Karan and DKNY license
agreement and lower sales of our Just My Size brand of $3 million. 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 total impact of the 53rd
week in 2008, which is included in the amounts above, was a $4 million increase in sales for the
Hosiery segment.
As a percent of segment net sales, gross profit percentage was 49.8% in 2008 compared to 49.1%
in 2007. While the gross profit percentage was higher, gross profit dollars were lower due to lower
sales volume of $20 million, unfavorable product sales mix of $2 million and vendor price increases
of $2 million, partially offset by savings of $4 million from our cost reduction initiatives and
prior restructuring actions and lower sales incentives of $4 million.
The lower Hosiery segment operating profit in 2008 compared to 2007 is primarily attributable
to lower gross profit partially offset by lower distribution expenses of $3 million, lower
non-media related MAP expenses of $3 million, savings of $1 million from our cost reduction
initiatives and prior restructuring actions, and lower spending of $2 million in numerous other
areas. 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 each segment. The
allocation methodology for the consolidated selling, general and administrative expenses for 2008
is consistent with 2007. Our consolidated selling, general and administrative expenses before
segment allocations was $31 million lower in 2008 compared to 2007.
Direct to Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
370,163 |
|
|
$ |
360,500 |
|
|
$ |
9,663 |
|
|
|
2.7 |
% |
Segment operating profit |
|
|
44,541 |
|
|
|
57,489 |
|
|
|
(12,948 |
) |
|
|
(22.5 |
) |
Direct to Consumer segment net sales were higher by $10 million or 3% in 2008 compared to 2007
primarily due to higher net sales of $10 million in our Internet operations. Net sales in our
outlet stores were flat overall primarily due to higher net sales attributable to new store
openings offset by lower comparable store sales (2%) driven by lower traffic. We ended 2008 with
213 outlet stores, reflecting 10 store openings during 2008. The total impact of the
53rd week in 2008, which is included in the amounts above, was a $7 million increase in
sales for the Direct to Consumer segment.
As a percent of segment net sales, gross profit in the Direct to Consumer segment was 61.1% in
2008 compared to 61.4% in 2007. While the gross profit percentage was lower, gross profit dollars
were higher due to higher sales
66
volume of $6 million and favorable product sales mix of $4 million, partially offset by higher
other overhead manufacturing costs of $4 million.
The lower Direct to Consumer segment operating profit in 2008 compared to 2007 was primarily
attributable to higher non-media related MAP expenses of $9 million, higher distribution expenses
of $4 million and higher expenses of $3 million as a result of opening 10 retail stores in 2008,
partially offset by higher 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 2008 is consistent with 2007. Our consolidated selling,
general and administrative expenses before segment allocations was $31 million lower 2008 compared
to 2007.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
496,170 |
|
|
$ |
448,618 |
|
|
$ |
47,552 |
|
|
|
10.6 |
% |
Segment operating profit |
|
|
64,349 |
|
|
|
57,820 |
|
|
|
6,529 |
|
|
|
11.3 |
|
Overall net sales in the International segment were higher by $48 million or 11% in 2008
compared to 2007. During 2008, we experienced higher net sales, in each case excluding the impact
of foreign currency exchange rates but including the impact of the 53rd week, in Europe
of $13 million, Canada of $9 million and Asia of $5 million. The growth in our European casualwear
business was driven by the strength of the Stedman brand that is sold in the wholesale channel.
Higher sales in our Champion and Hanes brands activewear and male underwear businesses in Canada
and in our Champion brand casualwear business in Asia also contributed to the sales growth. Changes
in foreign currency exchange rates had a favorable impact on net sales of $22 million in 2008
compared to 2007. The favorable impact was primarily due to the strengthening of the Japanese yen,
Euro and Brazilian real. The total impact of the 53rd week in 2008 was a $2 million
increase in sales for the International segment.
As a percent of segment net sales, gross profit percentage was 40.1% in 2008 compared to 2007
at 40.6%. While the gross profit percentage was lower, gross profit dollars were higher for 2008
compared to 2007 as a result of higher sales volume of $15 million, a favorable impact related to
foreign currency exchange rates of $9 million and lower on-going excess and obsolete inventory
costs of $3 million partially offset by higher sales incentives of $7 million, unfavorable product
sales mix of $2 million and higher spending of $3 million in numerous other areas.
The higher International segment operating profit in 2008 compared to 2007 is primarily
attributable to the higher gross profit partially offset by higher distribution expenses of $3
million, higher non-media related MAP expenses of $3 million and higher media-related MAP expenses
of $2 million. Changes in foreign currency exchange rates, which are included in the impact on
gross profit above, had a favorable impact on segment operating profit of $4 million in 2008
compared to 2007.
67
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Higher |
|
|
Percent |
|
|
|
2009 |
|
|
2007 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
21,724 |
|
|
$ |
56,920 |
|
|
$ |
(35,196 |
) |
|
|
(61.8 |
)% |
Segment operating profit (loss) |
|
|
328 |
|
|
|
(1,333 |
) |
|
|
1,661 |
|
|
|
124.6 |
|
The decline in net sales in our Other segment is primarily due to the continued vertical
integration of a yarn and fabric operation acquisition from 2006 with less focus on sales of
nonfinished fabric and yarn to third parties.
General Corporate Expenses
General
corporate expenses were lower in 2008 compared to 2007 primarily due
to lower pension expense of $8 million, which reflects a
$3 million adjustment that reduced pension expense in 2007
related to the final separation of our pension assets and liabilities
from Sara Lee, $4 million of lower start-up and shut-down costs
associated with our consolidation and globalization of our supply
chain, $3 million of spin off and related charges recognized in 2007 which did not
recur in 2008 and $2 million of higher foreign exchange
transaction gains. These lower expenses were partially offset by $7 million in amortization
of gain on curtailment of postretirement benefits in 2007 which did
not recur in 2008 and higher spending in numerous areas of
$3 million.
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated by operations and availability under our
Revolving Loan Facility, Accounts Receivable Securitization Facility and our international loan
facilities. At January 2, 2010, we had $307 million of borrowing availability under our $400
million Revolving Loan Facility (after taking into account outstanding letters of credit), $91
million of borrowing availability under our Accounts Receivable Securitization Facility, $39
million in cash and cash equivalents and $35 million of borrowing availability under our
international loan facilities. We currently believe that our existing cash balances and cash
generated by operations, together with our available credit capacity, will enable us to comply with
the terms of our indebtedness and meet foreseeable liquidity requirements.
The following have impacted or are expected to impact liquidity:
|
|
|
we have principal and interest obligations under our debt; |
|
|
|
we expect to continue to invest in efforts to improve operating efficiencies and lower
costs; |
|
|
|
we expect to continue to ramp up our lower-cost manufacturing capacity in Asia, Central
America and the Caribbean Basin and enhance efficiency; |
|
|
|
we may selectively pursue strategic acquisitions; |
|
|
|
we could increase or decrease the portion of the income of our foreign subsidiaries that
is expected to be remitted to the United States, which could significantly impact our
effective income tax rate; and |
|
|
|
our board of directors has authorized the repurchase of up to 10 million shares of our
stock in the open market over the next few years (2.8 million of which we have repurchased
as of January 2, 2010 at a cost of $75 million), although we may choose not to repurchase
any stock and instead focus on the repayment of our debt in the next 12 months in light of
the current economic recession. |
68
We have restructured our supply chain over the past three years to create more efficient
production clusters that utilize fewer, larger facilities and to balance our production capability
between the Western Hemisphere and Asia. With our global supply chain infrastructure substantially
in place, we are now focused on optimizing our supply chain to further enhance efficiency, improve
working capital and asset turns and reduce costs. We are focused on optimizing the working capital
needs of our supply chain through several initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership relationships. The consolidation of our distribution network
is still in process but will not result in any substantial charges in future periods. The
distribution network consolidation involves the implementation of new warehouse management systems
and technology, and opening of new distribution centers and new third-party logistics providers to
replace parts of our legacy distribution network.
We are operating in an uncertain and volatile economic environment, which could have
unanticipated adverse effects on our business. The retail environment has been impacted by recent
volatility in the financial markets, including stock prices, and by uncertain economic conditions.
Increases in food and fuel prices, changes in the credit and housing markets leading to the current
financial and credit crisis, actual and potential job losses among many sectors of the economy,
significant declines in the stock market resulting in large losses to consumer retirement and
investment accounts, and uncertainty regarding future federal tax and economic policies have all
added to declines in consumer confidence and curtailed retail spending.
During 2009, we did not see a sustained rebound in consumer spending but rather mixed results.
We also experienced substantial pressure on profitability due to the economic climate, increased
pension costs and increased costs associated with implementing our price increase which became
effective in February 2009, including repackaging costs.
Hosiery products continue to be more adversely impacted than other apparel categories by
reduced consumer discretionary spending, which contributes to weaker sales and lowering of
inventory levels by retailers. The Hosiery segment comprised 5% only of our net sales in 2009
however, and as a result, the decline in the Hosiery segment has not had a significant impact on
our net sales or cash flows. Generally, we manage the Hosiery segment for cash, placing an emphasis
on reducing our cost structure and managing cash efficiently.
We expect to be able to manage our working capital levels and capital expenditure amounts to
maintain sufficient levels of liquidity. Factors that could help us in these efforts include higher
sales volume and the realization of additional cost benefits from previous restructuring and
related actions. During 2009, we reduced our media spending as the continuing recession
constrained consumer spending. In 2010 we anticipate that we will restore our media spending back
to a range of $90 to $100 million in an effort to generate sales growth.
2010 Outlook
We have secured significant shelf-space and distribution gains, starting primarily in 2010.
Program gains significantly outnumber program losses, and we expect the net space gains to generate
approximately 5% incremental sales growth in 2010, independent of a consumer spending rebound. If
consumer spending does rebound, we have potential for additional upside in sales growth. By segment, two-thirds of the increases are expected in our Innerwear segment
and most of the remainder in our Outerwear segment. However, both our Direct to Consumer and
International segments should also see mid-single-digit growth in 2010.
Specifically for our Innerwear segment, the bulk of the gains are in mens underwear and
intimate apparel. The new programs in mens underwear have already begun to ship, with the new
intimate apparel program starting to ship in the second quarter of 2010. The remaining growth in
the Innerwear segment in the back half of the year will be driven by replenishment of these new
programs.
For the Outerwear segment, growth will be driven by the expansion of our Just My Size brand in
the first half as a result of a multi-year agreement we entered into with Wal-Mart in April 2009
that significantly expanded the presence of our Just My Size brand. In the second half of 2010, Champion has confirmed
space and distribution gains in fleece, performance apparel and sports bras across a broad set of
accounts.
69
Our projected sales growth, combined with our cost savings, should drive greater operating
profit growth in 2010. To support this growth, we have increased our production capacity. Our Nanjing
textile facility started production in the fourth quarter of 2009 and is right on plan. We also
secured additional capacity with outside contractors. The earthquake
in Haiti caused some short-term disruption and incremental costs in
early 2010,
however we do not believe it will have a material impact on net sales.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our
Revolving Loan Facility, Accounts Receivable Securitization Facility and international loan
facilities to meet the cash requirements of our business. The primary cash requirements of our
business are payments to vendors in the normal course of business, restructuring costs, capital
expenditures, maturities of debt and related interest payments, contributions to our pension plans
and repurchases of our stock. We believe we have sufficient cash and available borrowings for our
liquidity needs. The flexibility provided by our debt refinancing provides greater opportunity to
pay down debt, repurchase our stock, pursue selected acquisitions or make discretionary
contributions to our pension plans. During 2009, we reduced debt by $284 million through the use
of cash flows from operations generated primarily by the reduction of inventory by $249 million.
The implementation of our consolidation and globalization strategy, which was designed to
improve operating efficiencies and lower costs, has resulted in significant costs and will generate
savings in future years. Restructuring charges related to our consolidation and globalization
strategy were substantially completed by the end of 2009. The consolidation of our distribution
network is still in process but will not result in any substantial charges in future periods. The
distribution network consolidation involves the implementation of new warehouse management systems
and technology, and opening of new distribution centers and new third-party logistics providers to
replace parts of our legacy distribution network. As a result of our consolidation and
globalization strategy, we expected to incur approximately $250 million in restructuring and
related charges over the three year period following the spin off from Sara Lee on September 5,
2006, of which approximately half was expected to be noncash. Through this three year period, we
have recognized approximately $278 million in restructuring and related charges related to this
strategy, of which approximately half have been noncash. These actions represent the substantial
completion of the consolidation and globalization of our supply chain.
In December 2009, we entered into an agreement to sell selected trade accounts receivable to a
financial institution on a nonrecourse basis. After the sale, we do not retain any interests in the
receivables nor are we involved in the servicing or collection of these receivables. As of January
2, 2010, we had sold $71 million of accounts receivable at their stated value less applicable
discount charges and fees.
Capital spending has varied significantly from year to year as we have executed our supply
chain consolidation and globalization strategy and the integration and consolidation of our
technology systems. We spent $127 million on gross capital expenditures during 2009. During 2010,
we expect our annual gross capital spending to be relatively comparable to our annual depreciation
and amortization expense and should represent our last high year of gross capital spending related
to these efforts.
Pension Plans
Our U.S. qualified pension plan is approximately 80% funded as of January 2, 2010 compared to
86% funded as of January 3, 2009. The funded status reflects an increase in the benefit obligation
due to a decrease in the discount rate used in the valuation of the liability, partially offset by
an increase in the fair value of plan assets as a result of the stock markets performance during
2009. We may elect to make voluntary contributions, which are not expected to be significant, to
maintain an 80% funded level which will avoid certain benefit payment restrictions under the
Pension Protection Act. We expect pension expense in 2010 of approximately $17 million compared to
$22 million in 2009. See Note 16 to our financial statements for more information on the plan asset
components.
In connection with closing a manufacturing facility in early 2009, we, as required, notified
the Pension Benefit Guaranty Corporation (the PBGC) of the closing and requested a liability
determination under section 4062(e) of the Employee Retirement Income Security Act of 1974, as
amended (ERISA) with respect to the National Textiles, L.L.C. Pension Plan. In September 2009, we
entered into an agreement with the PBGC under which we contributed $7 million to the plan in
September 2009 and agreed to contribute an additional $7 million to the plan by September 2010. In
addition, in September 2009 we made a voluntary contribution of $2 million to the Hanesbrands Inc.
Pension Plan to maintain a funding level sufficient to avoid certain benefit payment restrictions
under the Pension Protection Act and may elect to do the same again in 2010.
70
Share Repurchase Program
On February 1, 2007, we announced that our Board of Directors granted authority for the
repurchase of up to 10 million shares of our common stock. Share repurchases are made periodically
in open-market transactions, and are subject to market conditions, legal requirements and other
factors. Additionally, management has been granted authority to establish a trading plan under Rule
10b5-1 of the Exchange Act in connection with share repurchases, which will allow us to repurchase
shares in the open market during periods in which the stock trading window is otherwise closed for
our company and certain of our officers and employees pursuant to our insider trading policy. Since
inception of the program, we have purchased 2.8 million shares of our common stock at a cost of $75
million (average price of $26.33). The primary objective of our share repurchase program is to
reduce the impact of dilution caused by the exercise of options and vesting of stock unit awards.
In light of the current economic recession, we may choose not to repurchase any stock and focus
more on other uses of cash in the next twelve months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of
SEC Regulation S-K.
Future Contractual Obligations and Commitments
The following table contains information on our contractual obligations and commitments
as of January 2, 2010, and their expected timing on future cash flows and liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
At January 2, |
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
3 - 5 Years |
|
|
Thereafter |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory purchase obligations |
|
$ |
256,468 |
|
|
$ |
256,468 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other purchase obligations (1) |
|
|
158,285 |
|
|
|
158,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
and advertising obligations |
|
|
18,773 |
|
|
|
16,973 |
|
|
|
1,550 |
|
|
|
250 |
|
|
|
|
|
Uncertain tax positions |
|
|
28,070 |
|
|
|
3,268 |
|
|
|
16,822 |
|
|
|
|
|
|
|
7,980 |
|
Deferred
compensation |
|
|
16,629 |
|
|
|
4,029 |
|
|
|
6,321 |
|
|
|
1,952 |
|
|
|
4,327 |
|
Interest on debt obligations (2) |
|
|
599,463
|
|
|
|
104,896 |
|
|
|
195,228 |
|
|
|
185,477 |
|
|
|
113,862 |
|
Operating lease obligations |
|
|
249,944 |
|
|
|
49,047 |
|
|
|
71,373 |
|
|
|
43,361 |
|
|
|
86,163 |
|
Defined
benefit plan mandatory contributions (3) |
|
|
6,816 |
|
|
|
6,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severence
and other restructuring payments |
|
|
22,399 |
|
|
|
18,244 |
|
|
|
4,155 |
|
|
|
|
|
|
|
|
|
Other long-term obligations (4) |
|
|
67,874 |
|
|
|
16,153 |
|
|
|
17,674 |
|
|
|
13,363 |
|
|
|
20,684 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures |
|
|
13,965 |
|
|
|
12,139 |
|
|
|
1,826 |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
1,892,235 |
|
|
|
164,688 |
|
|
|
13,125 |
|
|
|
557,235 |
|
|
|
1,157,187 |
|
Notes payable |
|
|
66,681 |
|
|
|
66,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,397,602 |
|
|
$ |
877,687 |
|
|
$ |
328,074 |
|
|
$ |
801,638 |
|
|
$ |
1,390,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes other purchase obligations, excluding inventory purchase obligations, for
which we have agreed upon a fixed or minimum quantity to purchase, a fixed, minimum or variable
pricing arrangement, and an approximate delivery date. Actual cash expenditures relating to these
obligations may vary from the amounts shown in the table above. We enter into purchase obligations
when terms or conditions are favorable or when a long-term commitment is necessary. Many of these
arrangements are cancelable after a notice period without a significant penalty. This table omits
purchase obligations that did not exist as of January 2, 2010, as well as obligations for accounts
payable and accrued liabilities recorded on the Consolidated Balance Sheet. |
|
(2) |
|
Interest obligations on floating rate debt instruments are calculated for future periods using
interest rates in effect at January 2, 2010. |
71
|
|
|
(3) |
|
In connection with closing a manufacturing facility in early 2009, we, as required, notified
the PBGC of the closing and requested a liability determination under section 4062(e) of ERISA with
respect to a defined benefit plan. In September 2009, we entered into an agreement with the PBGC
under which we contributed $7 million to the defined contribution plan in September 2009 and agreed
to contribute an additional $7 million to the plan by September 2010. |
|
(4) |
|
Represents the projected payment for long-term liabilities recorded on the Consolidated Balance
Sheet for certain employee benefit claims, royalty-bearing license
agreement payments and capital leases. |
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the years
ended January 2, 2010 and January 3, 2009 was derived from our financial statements.
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
414,504 |
|
|
$ |
177,397 |
|
Investing activities |
|
|
(88,844 |
) |
|
|
(177,248 |
) |
Financing activities |
|
|
(354,174 |
) |
|
|
(104,738 |
) |
Effect of
changes in foreign currency exchange rates on cash |
|
|
115 |
|
|
|
(2,305 |
) |
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(28,399 |
) |
|
|
(106,894 |
) |
Cash and cash equivalents at beginning of year |
|
|
67,342 |
|
|
|
174,236 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
38,943 |
|
|
$ |
67,342 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities was $415 million in 2009 compared to $177
million in 2008. The net increase in cash from operating activities of $237 million for 2009
compared to 2008 is primarily attributable to significantly lower uses of our working capital of
$284 million, partially offset by lower net income.
Accounts receivable increased $40 million from January 3, 2009 primarily due to a longer
collection cycle reflecting a more challenging retail environment, partially offset by the sale of
selected accounts receivable as discussed in the Cash Requirements for Our Business section
above.
Net inventory decreased $249 million from January 3, 2009 primarily due to decreases in levels
as we complete the execution of our supply chain consolidation and globalization strategy, lower
input costs such as cotton, oil and freight and lower excess and obsolete inventory levels. We
continually monitor our inventory levels to best balance current supply and demand with potential
future demand that typically surges when consumers no longer postpone purchases in our product
categories. The lower excess and obsolete inventory levels 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.
With our global supply chain substantially restructured, we are now focused on optimizing our
supply chain to further enhance efficiency, improve working capital and asset turns and reduce
costs. We are focused on optimizing the working capital needs of our supply chain through several
initiatives, such as supplier-managed inventory for raw materials and sourced goods ownership
relationships. The consolidation of our distribution network is still in process but will not
result in any substantial charges in future periods. The distribution network consolidation
involves the implementation of new warehouse management systems and technology, and opening of new
distribution centers and new third-party logistics providers to replace parts of our legacy
distribution network.
In October 2009, we completed the sale of our yarn operations to Parkdale America as a result
of which we ceased making our own yarn and now source all of our yarn requirements from large-scale
yarn suppliers. We also entered into a yarn purchase agreement with Parkdale. Under this
agreement, which has an initial term of six years, Parkdale will produce and sell to us a
substantial amount of our Western Hemisphere yarn requirements. During the first two years of the
term, Parkdale will also produce and sell to us a substantial amount of the yarn requirements of
72
our Nanjing, China textile facility. Exiting yarn production and entering into a supply
agreement is expected to generate $100 million of working capital improvements within six months
after the sale from reduced raw material requirements, reduced inventory, and sale proceeds.
Investing Activities
Net cash used in investing activities was $89 million in 2009 compared to $177 million in
2008. The lower net cash used in investing activities of $88 million for 2009 compared to 2008 was
primarily the result of lower net spending on capital expenditures in 2009 compared to 2008 and
acquisitions of a sewing operation in Thailand and an embroidery and screen print operation in
Honduras for an aggregate cost of $15 million during 2008. During 2009, gross capital expenditures
were $127 million as we continued to build out our textile and sewing network in Asia, Central
America and the Caribbean Basin.
Financing Activities
Net cash used in financing activities was $354 million in 2009 compared to $105 million in
2008. The higher net cash used in financing activities of $249 million for 2009 compared to 2008
was primarily the result of higher repayments of debt of $147 million, fees paid for the amendments
of the 2006 Senior Secured Credit Facility and Accounts Receivable Securitization Facility of $22
million in 2009 and fees paid related to the issuance of the 8% Senior Notes and the execution of
the 2009 Senior Secured Credit Facility of $53 million in 2009. Lower net borrowings on notes
payable of $38 million also contributed to the higher net cash used in financing activities in 2009
compared to 2008. In addition, we received $18 million in cash from Sara Lee in 2008 which was
offset by stock repurchases of $30 million in 2008 that did not recur in 2009.
Cash and Cash Equivalents
As of January 2, 2010 and January 3, 2009, cash and cash equivalents were $39 million and $67
million, respectively. The lower cash and cash equivalents as of January 2, 2010 was primarily the
result of net cash used in financing activities of $354 million and net cash used in investing
activities of $89 million, partially offset by cash provided by operating activities of $415
million.
Financing Arrangements
We believe our financing structure provides a secure base to support our ongoing operations
and key business strategies. In December 2009, we completed a growth-focused debt refinancing that
enables us to simultaneously reduce leverage and consider acquisition opportunities. The
refinancing gives us more flexibility in our use of excess cash flow, allows continued debt
reduction, and provides a stable long-term capital structure with extended debt maturities at rates
slightly lower than previous effective rates. The refinancing consisted of the sale of our $500
million 8% Senior Notes and the concurrent amendment and restatement of our 2006 Senior Secured
Credit Facility to provide for the $1.15 billion 2009 Senior Secured Credit Facility. The proceeds
from the sale of the 8% Senior Notes, together with the proceeds from borrowings under the 2009
Senior Secured Credit Facility, were used to refinance borrowings under the 2006 Senior Secured
Credit Facility, to repay all borrowings under the Second Lien Credit Facility and to pay fees and
expenses relating to these transactions.
Moodys Investors Services (Moodys) corporate credit rating for us is Ba3 and Standard &
Poors Ratings Services (Standard & Poors) corporate credit rating for us is BB-. In November
2009, Moodys changed our rating outlook to stable from negative, affirmed our corporate
rating, probability of default rating and speculative grade liquidity rating, and assigned a rating
of Ba1 to the 2009 Senior Secured Credit Facility. In December 2009, Moodys again affirmed our
corporate rating, probability of default rating and speculative grade liquidity rating, assigned a
rating of B1 to the 8% Senior Notes, and raised the rating on the Floating Rate Notes from B1 to
B2. In September 2009, Standard & Poors changed our current outlook to negative and placed our
corporate credit rating and all issue-level ratings for us on Creditwatch with negative
implications. In December 2009, Standard & Poors affirmed our corporate rating and outlook, and
removed us from Creditwatch with negative implications. Standard & Poors also assigned ratings
of BB+ and B+ to the 2009 Senior Secured Credit Facility and the 8% Senior Notes, respectively, and
raised the rating on the Floating Rate Notes to B+.
73
As of January 2, 2010, we were in compliance with all financial covenants under our credit
facilities. We ended the year with a leverage ratio, as calculated under the 2009 Senior Secured
Credit Facility and the Accounts Receivable Securitization Facility, of 4.11 to 1. The maximum
leverage ratio permitted under the 2009 Senior Secured Credit Facility and the Accounts Receivable
Securitization Facility was 4.50 to 1 for the quarter ended January 2, 2010 and will decline over
time until it reaches 3.75 to 1 beginning with the second fiscal quarter of 2011. We continue to
monitor our covenant compliance carefully in this difficult economic environment. We expect to
maintain compliance with our covenants during 2010, however economic conditions or the occurrence
of events discussed above under Risk Factors could cause noncompliance.
2009 Senior Secured Credit Facility
The 2009 Senior Secured Credit Facility initially provides for aggregate borrowings of $1.15
billion, consisting of a $750 million term loan facility (the Term Loan Facility) and the $400
million Revolving Loan Facility. A portion of the Revolving Loan Facility is available for the
issuances of letters of credit and the making of swingline loans, and any such issuance of letters
of credit or making of a swingline loan will reduce the amount available under the Revolving Loan
Facility. At our option, we may add one or more term loan facilities or increase the commitments
under the Revolving Loan Facility in an aggregate amount of up to $300 million so long as certain
conditions are satisfied, including, among others, that no default or event of default is in
existence and that we are in pro forma compliance with the financial covenants described below. As
of January 2, 2010, we had $52 million outstanding under the Revolving Loan Facility, $41 million
of standby and trade letters of credit issued and outstanding under this facility and $307 million
of borrowing availability. At January 2, 2010, the interest rates on the Term Loan Facility and the
Revolving Loan Facility were 5.25% and 6.75% respectively.
The proceeds of the Term Loan Facility were used to refinance all amounts outstanding under
the Term A loan facility (in an initial principal amount of $250 million) and Term B loan facility
(in an initial principal amount of $1.4 billion) under the 2006 Senior Secured Credit Facility and
to repay all amounts outstanding under the Second Lien Credit Facility. Proceeds of the Revolving
Loan Facility were used to pay fees and expenses in connection with these transactions, and will be
used for general corporate purposes and working capital needs.
The 2009 Senior Secured Credit Facility is guaranteed by substantially all of our existing and
future direct and indirect U.S. subsidiaries, with certain customary or agreed-upon exceptions for
certain subsidiaries. We and each of the guarantors under the 2009 Senior Secured Credit Facility
have granted the lenders under the 2009 Senior Secured Credit Facility a valid and perfected first
priority (subject to certain customary exceptions) lien and security interest in the following:
|
|
|
the equity interests of substantially all of our direct and indirect U.S. subsidiaries
and 65% of the voting securities of certain first tier foreign subsidiaries; and |
|
|
|
substantially all present and future property and assets, real and personal, tangible
and intangible, of us and each guarantor, except for certain enumerated interests, and all
proceeds and products of such property and assets. |
The Term Loan Facility matures on December 10, 2015. The Term Loan Facility will be repaid in
equal quarterly installments in an amount equal to 1% per annum, with the balance due on the
maturity date. The Revolving Loan Facility matures on December 10, 2013. All borrowings under the
Revolving Loan Facility must be repaid in full upon maturity. Outstanding borrowings under the 2009
Senior Secured Credit Facility are prepayable without penalty. There are mandatory prepayments of
principal in connection with (i) the incurrence of certain indebtedness, (ii) non-ordinary course
asset sales or other dispositions (including as a result of casualty or condemnation) that exceed
certain thresholds in any period of 12 consecutive months, with customary reinvestment provisions,
and (iii) excess cash flow, which percentage will be based upon our leverage ratio during the
relevant fiscal period.
At our option, borrowings under the 2009 Senior Secured Credit Facility may be maintained from
time to time as (a) Base Rate loans, which shall bear interest at the highest of (i) 1/2 of 1% in
excess of the federal funds rate, (ii) the rate publicly announced by JPMorgan Chase Bank as its
prime rate at its principal office in New York City, in effect from time to time and (iii) the
LIBO Rate (as defined in the 2009 Senior Secured Credit Facility and
74
adjusted
for maximum reserves) for LIBOR-based loans with a one-month interest period plus 1.0%, in
effect from time to time, in each case plus the applicable margin, or (b) LIBOR-based loans, which
shall bear interest at the higher of (i) LIBO Rate (as defined in the 2009 Senior Secured Credit
Facility and adjusted for maximum reserves), as determined by reference to the rate for deposits in
dollars appearing on the Reuters Screen LIBOR01 Page for the respective interest period or other
commercially available source designated by the administrative agent, and (ii) 2.00%, plus the
applicable margin in effect from time to time. The applicable margin for the Term Loan Facility and
the Revolving Loan Facility will be determined by reference to a leverage-based pricing grid set
forth in the 2009 Senior Secured Credit Facility. In the case of the Term Loan Facility, the
applicable margin will be (a) 3.25% for LIBOR-based loans and 2.25% for Base Rate loans if our
leverage ratio is greater than or equal to 2.50 to 1, and (b) 3.00% for LIBOR-based loans and 2.00%
for Base Rate loans if our leverage ratio is less than 2.50 to 1. In the case of the Revolving Loan
Facility, the applicable margin will range from a maximum of 4.75% in the case of LIBOR-based loans
and 3.75% in the case of Base Rate loans if our leverage ratio is greater than or equal to 4.00 to
1, and will step down in 0.25% increments to a minimum of 4.00% in the case of LIBOR-based loans
and 3.00% in the case of Base Rate loans if our leverage ratio is less than 2.50 to 1. The
applicable margin from the closing date of the 2009 Senior Secured Credit Facility through the
delivery of our financial statements for the second fiscal quarter of 2010 will be (a) in the case
of the Term Loan Facility, 3.25% and 2.25% for LIBOR-based loans and Base Rate loans, respectively,
and (b) in the case of the Revolving Loan Facility, 4.50% and 3.50% for LIBOR-based loans and Base
Rate loans, respectively.
The 2009 Senior Secured Credit Facility requires us to comply with customary affirmative,
negative and financial covenants. The 2009 Senior Secured Credit Facility requires that we maintain
a minimum interest coverage ratio and a maximum total debt to EBITDA (earnings before income taxes,
depreciation expense and amortization, as computed pursuant to the 2009 Senior Secured Credit
Facility), or leverage ratio. The interest coverage ratio covenant requires that the ratio of our
EBITDA for the preceding four fiscal quarters to our consolidated total interest expense for such
period shall not be less than a specified ratio for each fiscal quarter beginning with the fourth
fiscal quarter of 2009. This ratio was 2.50 to 1 for the fourth fiscal quarter of 2009 and will
increase over time until it reaches 3.25 to 1 for the third fiscal quarter of 2011 and thereafter.
The leverage ratio covenant requires that the ratio of our total debt to EBITDA for the preceding
four fiscal quarters will not be more than a specified ratio for each fiscal quarter beginning with
the fourth fiscal quarter of 2009. This ratio was 4.50 to 1 for the fourth fiscal quarter of 2009
and will decline over time until it reaches 3.75 to 1 for the second fiscal quarter of 2011 and
thereafter. The method of calculating all of the components used in the covenants is included in
the 2009 Senior Secured Credit Facility.
The 2009 Senior Secured Credit Facility also requires us to calculate excess cash flow (as computed
pursuant to the 2009 Senior Secured Credit Facility)
as of the end of each fiscal year and we may be required in certain circumstances to make mandatory
prepayments of amounts outstanding under the Term
Loan Facility as a result of such calculation. As a result of the excess cash flow calculation for
2009, we are required to prepay $57.2 million under
the Term Loan Facility during the second quarter of 2010.
The 2009 Senior Secured Credit Facility contains customary events of default, including
nonpayment of principal when due; nonpayment of interest after a stated grace period, fees or other
amounts after stated grace period; material inaccuracy of representations and warranties;
violations of covenants; certain bankruptcies and liquidations; any cross-default to material
indebtedness; certain material judgments; certain events related to ERISA, actual or asserted
invalidity of any guarantee, security document or subordination provision or non-perfection of
security interest, and a change in control (as defined in the 2009 Senior Secured Credit Facility).
8% Senior Notes
On December 10, 2009, we issued $500 million aggregate principal amount of the 8% Senior
Notes. The 8% Senior Notes are senior unsecured obligations that rank equal in right of payment
with all of our existing and future unsubordinated indebtedness. The 8% Senior Notes bear interest
at an annual rate equal to 8%. Interest is payable on the 8% Senior Notes on June 15 and December
15 of each year. The 8% Senior Notes will mature on December 10, 2016. The net proceeds from the
sale of the 8% Senior Notes were approximately $480 million. As noted above, these proceeds,
together with the proceeds from borrowings under the 2009 Senior Secured Credit Facility, were used
to refinance borrowings under the 2006 Senior Secured Credit Facility, to repay all borrowings
under the Second Lien Credit Facility and to pay fees and expenses relating to these transactions.
The 8% Senior Notes are guaranteed by substantially all of our domestic subsidiaries.
We may redeem some or all of the notes prior to December 15, 2013 at a redemption price equal
to 100% of the principal amount of 8% Senior Notes redeemed plus an applicable premium. We may
redeem some or all of the 8% Senior Notes at any time on or after December 15, 2013 at a redemption
price equal to the principal amount of the 8% Senior Notes plus a premium of 4% if redeemed during
the 12-month period commencing on December 15,
75
2013, 2% if redeemed during the 12-month period commencing on December 15, 2014 and no premium
if redeemed after December 15, 2015, as well as any accrued and unpaid interest as of the
redemption date. In addition, at any time prior to December 15, 2012, we may redeem up to 35% of
the aggregate principal amount of the Notes at a redemption price of 108% of the principal amount
of the Notes redeemed with the net cash proceeds of certain equity offerings.
The indenture governing the 8% Senior Notes contains customary events of default which include
(subject in certain cases to customary grace and cure periods), among others, nonpayment of
principal or interest; breach of other agreements in such indenture; failure to pay certain other
indebtedness; failure to pay certain final judgments; failure of certain guarantees to be
enforceable; and certain events of bankruptcy or insolvency.
Floating Rate Senior Notes
On December 14, 2006, we issued $500 million aggregate principal amount of the Floating Rate
Senior Notes. The Floating Rate Senior Notes are senior unsecured obligations that rank equal in
right of payment with all of our existing and future unsubordinated indebtedness. The Floating Rate
Senior Notes bear interest at an annual rate, reset semi-annually, equal to LIBOR plus 3.375%.
Interest is payable on the Floating Rate Senior Notes on June 15 and December 15 of each year. The
Floating Rate Senior Notes will mature on December 15, 2014. The net proceeds from the sale of the
Floating Rate Senior Notes were approximately $492 million. These proceeds, together with our
working capital, were used to repay in full the $500 million outstanding under the bridge loan
facility that we entered into in 2006. The Floating Rate Senior Notes are guaranteed by
substantially all of our domestic subsidiaries.
We may redeem some or all of the Floating Rate Senior Notes at any time on or after December
15, 2008 at a redemption price equal to the principal amount of the Floating Rate Senior Notes plus
a premium of 2% if redeemed during the 12-month period commencing on December 15, 2008, 1% if
redeemed during the 12-month period commencing on December 15, 2009 and no premium if redeemed
after December 15, 2010, as well as any accrued and unpaid interest as of the redemption date.
The indenture governing the Floating Rate Senior Notes contains customary events of default
which include (subject in certain cases to customary grace and cure periods), among others,
nonpayment of principal or interest; breach of other agreements in such indenture; failure to pay
certain other indebtedness; failure to pay certain final judgments; failure of certain guarantees
to be enforceable; and certain events of bankruptcy or insolvency.
We repurchased $3 million of the Floating Rate Senior Notes for $2.8 million resulting in a
gain of $0.2 million in 2009. We repurchased $6 million of the Floating Rate Senior Notes for $4
million resulting in a gain of $2 million in 2008.
Accounts Receivable Securitization
On November 27, 2007, we entered into the Accounts Receivable Securitization Facility, which
initially provided for up to $250 million in funding accounted for as a secured borrowing, limited
to the availability of eligible receivables, and is secured by certain domestic trade receivables.
Under the terms of the Accounts Receivable Securitization Facility, we sell, on a revolving basis,
certain domestic trade receivables to HBI Receivables LLC (Receivables LLC), a wholly-owned
bankruptcy-remote subsidiary that in turn uses the trade receivables to secure the borrowings,
which are funded through conduits that issue commercial paper in the short-term market and are not
affiliated with us or through committed bank purchasers if the conduits fail to fund. The assets
and liabilities of Receivables LLC are fully reflected on the Consolidated Balance Sheet, and the
securitization is treated as a secured borrowing for accounting purposes. The borrowings under the
Accounts Receivable Securitization Facility remain outstanding throughout the term of the agreement
subject to us maintaining sufficient eligible receivables, by continuing to sell trade receivables
to Receivables LLC, unless an event of default occurs. All of the proceeds from the Accounts
Receivable Securitization Facility were used to make a prepayment of principal under the 2006
Senior Secured Credit Facility. On January 29, 2010, Receivables LLC gave notice to the agent and
the managing agents under the Accounts Receivable Securitization Facility that, as permitted by the
terms of the Accounts Receivable Securitization Facility, effective February 11, 2010, the amount
of funding available under the Accounts Receivable Securitization Facility was being reduced from
$250 million to $150 million.
76
Availability of funding under the Accounts Receivable Securitization Facility depends
primarily upon the eligible outstanding receivables balance. As of January 2, 2010, we had $100
million outstanding under the Accounts Receivable Securitization Facility. The outstanding balance
under the Accounts Receivable Securitization Facility is reported on our Consolidated Balance Sheet
in the line Current portion of debt. Unless the conduits fail to fund, the yield on the
commercial paper, which is the conduits cost to issue the commercial paper plus certain dealer
fees, is considered a financing cost and is included in interest expense on the Consolidated
Statement of Income. If the conduits fail to fund, the Accounts Receivable Securitization Facility
would be funded through committed bank purchasers, and the interest rate payable at our option at
the rate announced from time to time by JPMorgan as its prime rate or at the LIBO Rate (as defined
in the Accounts Receivable Securitization Facility) plus the applicable margin in effect from time
to time. The average blended interest rate for the outstanding balance as of January 2, 2010 was
2.80%.
On March 16, 2009, we and Receivables LLC entered into Amendment No. 1 (Amendment No. 1) to
the Accounts Receivable Securitization Facility. Prior to the execution of Amendment No. 1, the
Accounts Receivable Securitization Facility contained the same leverage ratio and interest coverage
ratio provisions as the 2006 Senior Secured Credit Facility, and Amendment No. 1 conformed these
ratios to the ratios provided for in the 2006 Senior Secured Credit Facility as modified by an
amendment to the 2006 Senior Secured Credit Facility that was also entered into in March 2009.
Pursuant to Amendment No.1, 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 was 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 Amendment No. 1, several of the factors that
contribute to the overall availability of funding were amended in a manner that would be expected
to generally reduce the amount of funding that would be available under the Accounts Receivable
Securitization Facility. Amendment No. 1 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
Receivables LLC 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.
On April 13, 2009, we and Receivables LLC entered into Amendment No. 2 (Amendment No. 2) to
the Accounts Receivable Securitization Facility. Pursuant to Amendment No. 2, several of the
factors that contribute to the overall availability of funding were amended in a manner would be
expected to generally increase over time the amount of funding that would be available under the
Accounts Receivable Securitization Facility as compared to the amount that would be available
pursuant to Amendment No. 1. Amendment No. 2 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.
On August 17, 2009, we and HBI Receivables entered into Amendment No. 3 to the Accounts
Receivable Securitization Facility, pursuant to which certain definitions were amended to clarify
the calculation of certain ratios that impact reporting under the Accounts Receivable
Securitization Facility.
On December 10, 2009, we and Receivables LLC entered into Amendment No. 4 (Amendment No. 4)
to the Accounts Receivable Securitization Facility. Prior to the execution of Amendment No. 4, the
Accounts Receivable Securitization Facility contained the same leverage ratio and interest coverage
ratio provisions as the 2006 Senior Secured Credit Facility. Amendment No. 4 conformed these ratios
to the ratios provided for in the 2009 Senior Secured Credit Facility.
On December 21, 2009, we and Receivables LLC entered into Amendment No. 5 (Amendment No. 5)
to the Accounts Receivable Securitization Facility. Pursuant to Amendment No. 5, Receivables LLC
was permitted to sell receivables from certain obligors back to us, and to cease purchasing
receivables of these certain obligors from us in the future. Amendment No. 5 also provides for
certain other amendments to the Accounts Receivable Securitization
77
Facility, including changing the termination date for the Accounts Receivable Securitization
Facility from April 12, 2010 to December 20, 2010. In addition, certain of the factors that
contribute to the overall availability of funding were modified in a manner that, taken together,
could result in a reduction in the amount of funding that will be available under the Accounts
Receivable Securitization Facility. In connection with Amendment No. 5, certain fees were due to
the managing agents and certain fees payable to the committed purchasers and the conduit purchasers
were decreased.
The Accounts Receivable Securitization Facility contains customary events of default and
requires us to maintain the same interest coverage ratio and leverage ratio as required by the 2009
Senior Secured Credit Facility. As of January 2, 2010, we were in compliance with all financial
covenants.
Notes Payable
Notes payable were $67 million at January 2, 2010 and $62 million at January 3, 2009.
We have a short-term revolving facility arrangement with a Salvadoran branch of a Canadian
bank amounting to $30 million of which $30 million was outstanding at January 2, 2010 which accrues
interest at 4.47%. We were in compliance with the financial covenants contained in this facility at
January 2, 2010.
We have a short-term revolving facility arrangement with a U.S. bank amounting to $25.0
million of which $25.0 million was outstanding at January 2, 2010 which accrues interest at 3.23%.
We were in compliance with the financial covenants contained in this facility at January 2, 2010.
We have a short-term revolving facility arrangement with a Hong Kong bank amounting to THB 600
million ($18 million) of which $4.3 million was outstanding at January 2, 2010 which accrues
interest at 5.32%. We were in compliance with the financial covenants contained in this facility at
January 2, 2010.
We have a short-term revolving facility arrangement with a Chinese branch of a U.S. bank
amounting to RMB 56 million ($8.2 million) of which $7.4 million was outstanding at January 2, 2010
which accrues interest at 6.37%. Borrowings under the facility accrue interest at the prevailing
base lending rates published by the Peoples Bank of China from time to time plus 20%. We were in
compliance with the financial covenants contained in this facility at January 2, 2010.
In addition, we have short-term revolving credit facilities in various other locations that
can be drawn on from time to time amounting to $20.4 million of which $0 was outstanding at January
2, 2010.
Derivatives
In connection with the amendment and restatement of the 2006 Senior Secured Credit Facility
and repayment of the Second Lien Credit Facility in December 2009, all outstanding interest rate
hedging instruments which were hedging these underlying debt instruments along with the interest
rate hedge instrument related to the Floating Rate Senior Notes were settled for $62 million, of
which $40 million was paid in December 2009 and the remaining $22 million was included in the
Accounts Payable line of the Consolidated Balance Sheet at January 2, 2010. The amounts deferred
in Accumulated Other Comprehensive Loss associated with the 2006 Senior Secured Credit Facility and
Second Lien Credit Facility were released to earnings as the underlying forecasted interest
payments were no longer probable of occurring, which resulted in recognition of losses totaling $26
million that are included in the Other Expense (Income) line of the Consolidated Statement of
Income. The amounts deferred in Accumulated Other Comprehensive Loss associated with the Floating
Rate Senior Notes interest rate hedge were frozen at the termination date and will be amortized
over the original remaining term of the interest rate hedge instrument.
We are required under the 2009 Senior Secured Credit Facility to hedge a portion of our
floating rate debt to reduce interest rate risk caused by floating rate debt issuance.
To comply with this requirement, in the first quarter of 2010 we entered into a
hedging arrangement whereby we capped the LIBOR interest rate component on $490.7 million of the
floating rate debt under the Floating Rate Senior Notes at 4.262%, as a result of which
approximately 52% of our total debt outstanding at January 2, 2010 is now at a fixed rate.
We use forward exchange and option contracts to reduce the effect of fluctuating foreign
currencies for a portion of our anticipated short-term foreign currency-denominated transactions.
Cotton is the primary raw material used to manufacture many of our products. While we have
sold our yarn operations, we are still exposed to fluctuations in the cost of cotton. Increases in
the cost of cotton can result in higher costs in the price we pay for yarn from our large-scale
yarn suppliers. While we do
78
employ a dollar cost averaging strategy by entering into hedging
contracts 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.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly
report our operating results and financial condition in conformity with accounting principles
generally accepted in the United States. We apply these accounting policies in a consistent manner.
Our significant accounting policies are discussed in Note 2, titled Summary of Significant
Accounting Policies, to our financial statements.
The application of critical accounting policies requires that we make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures. These estimates and assumptions are based on historical and other factors
believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on
an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results
ultimately differ from previous estimates, the revisions are included in results of operations in
the period in which the actual amounts become known. The critical accounting policies that involve
the most significant management judgments and estimates used in preparation of our financial
statements, or are the most sensitive to change from outside factors, are the following:
Sales Recognition and Incentives
We recognize revenue when (i) there is persuasive evidence of an arrangement, (ii) the sales
price is fixed or determinable, (iii) title and the risks of ownership have been transferred to the
customer and (iv) collection of the receivable is reasonably assured, which occurs primarily upon
shipment. We record provisions for any uncollectible amounts based upon our historical collection
statistics and current customer information. Our management reviews these estimates each quarter
and makes adjustments based upon actual experience.
Note 2(d), titled Summary of Significant Accounting Policies Sales Recognition and
Incentives, to our financial statements describes a variety of sales incentives that we offer to
resellers and consumers of our products. Measuring the cost of these incentives requires, in many
cases, estimating future customer utilization and redemption rates. We use historical data for
similar transactions to estimate the cost of current incentive programs. Our management reviews
these estimates each quarter and makes adjustments based upon actual experience and other available
information. We classify the costs associated with cooperative advertising as a reduction of Net
sales in our Consolidated Statements of Income.
Accounts Receivable Valuation
Accounts receivable consist primarily of amounts due from customers. We carry our
accounts receivable at their net realizable value. In determining the appropriate allowance for
doubtful accounts, we consider a combination of factors, such as the aging of trade receivables,
industry trends, and our customers financial strength, credit standing, and payment and default
history. Changes in the aforementioned factors, among others, may lead to adjustments in our
allowance for doubtful accounts. The calculation of the required allowance requires judgment by our
management as to the impact of these and other factors on the ultimate realization of our trade
receivables. 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 our
Consolidated Statements of Income. Our management reviews these estimates each quarter and makes
adjustments based upon actual experience. Because we cannot predict future changes in the
financial stability of our customers, actual future losses from uncollectible accounts may differ
from our estimates. If the financial condition of our customers were to deteriorate, resulting in
their inability to make payments, a large reserve might be required. The amount of actual
historical losses has not varied materially from our estimates for bad debts.
79
Catalog Expenses
We incur expenses for printing catalogs for our products to aid in our sales efforts. We
initially record these expenses as a prepaid item and charge it against selling, general and
administrative expenses over time as the catalog is used. Expenses are recognized at a rate that
approximates our historical experience with regard to the timing and amount of sales attributable
to a catalog distribution.
Inventory Valuation
We carry inventory on our balance sheet at the estimated lower of cost or market. Cost is
determined by the first-in, first-out, or FIFO, method for our inventories. We carry obsolete,
damaged, and excess inventory at the net realizable value, which we determine by assessing
historical recovery rates, current market conditions and our future marketing and sales plans.
Because our assessment of net realizable value is made at a point in time, there are inherent
uncertainties related to our value determination. Market factors and other conditions underlying
the net realizable value may change, resulting in further reserve requirements. A reduction in the
carrying amount of an inventory item from cost to market value creates a new cost basis for the
item that cannot be reversed at a later period. While we believe that adequate write-downs for
inventory obsolescence have been provided in the financial statements, consumer tastes and
preferences will continue to change and we could experience additional inventory write-downs in the
future.
Rebates, discounts and other cash consideration received from a vendor related to inventory
purchases are reflected as reductions in the cost of the related inventory item, and are therefore
reflected in cost of sales when the related inventory item is sold.
Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between
financial and income tax reporting using tax rates in effect for the years in which the differences
are expected to reverse. We have recorded deferred taxes related to operating losses and capital
loss carryforwards. Realization of deferred tax assets is dependent on future taxable income in
specific jurisdictions, the amount and timing of which are uncertain, possible changes in tax laws
and tax planning strategies. If in our judgment it appears that we will not be able to generate
sufficient taxable income or capital gains to offset losses during the carryforward periods, we
have recorded valuation allowances to reduce those deferred tax assets to amounts expected to be
ultimately realized. An adjustment to income tax expense would be required in a future period if
we determine that the amount of deferred tax assets to be realized differs from the net recorded
amount.
Federal income taxes are provided on that portion of our income of foreign subsidiaries that
is expected to be remitted to the United States and be taxable, reflecting the decisions made by us
with regards to earnings permanently reinvested in foreign jurisdictions. In periods after the spin
off, we may make different decisions as to the amount of earnings permanently reinvested in foreign
jurisdictions, due to anticipated cash flow or other business requirements, which may impact our
federal income tax provision and effective tax rate.
We periodically estimate the probable tax obligations using historical experience in tax
jurisdictions and our informed judgment. There are inherent uncertainties related to the
interpretation of tax regulations in the jurisdictions in which we transact business. The judgments
and estimates made at a point in time may change based on the outcome of tax audits, as well as
changes to, or further interpretations of, regulations. Income tax expense is adjusted in the
period in which these events occur, and these adjustments are included in our Consolidated
Statements of Income. If such changes take place, there is a risk that our effective tax rate may
increase or decrease in any period. A company must recognize the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest
benefit that has a greater than fifty percent likelihood of being realized upon ultimate
resolution.
In conjunction with the spin off, we and Sara Lee entered into a tax sharing agreement, which
allocates responsibilities between us and Sara Lee for taxes and certain other tax matters. Under
the tax sharing agreement, Sara Lee generally is liable for all U.S. federal, state, local and
foreign income taxes attributable to us with respect
80
to taxable periods ending on or before September 5, 2006. Sara Lee also is liable for income
taxes attributable to us with respect to taxable periods beginning before September 5, 2006 and
ending after September 5, 2006, but only to the extent those taxes are allocable to the portion of
the taxable period ending on September 5, 2006. We are generally liable for all other taxes
attributable to us. Changes in the amounts payable or receivable by us under the stipulations of
this agreement may impact our tax provision in any period.
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 us a
computation of the amount of deferred taxes attributable to our United States and Canadian
operations that would be included on our opening balance sheet as of September 6, 2006 (as finally
determined) which has been done. We have 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 us the amount of such decrease. If such substitution
causes an increase in the net book value reflected on that balance sheet, then we will be required
to pay Sara Lee the amount of such increase. For purposes of this computation, our 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
Companys 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 our
opening balance sheet computed in accordance with GAAP, but without regard to valuation allowances.
Neither we nor Sara Lee will be required to make any other payments to the other with respect to
deferred taxes.
Based on our computation of the final amount of deferred taxes for
our opening balance sheet as of September 6, 2006, the
amount that is expected to be collected from Sara Lee based on our
computation of $72 million, which reflects a preliminary cash installment
received from Sara Lee of $18,000,
is included as a receivable in Other Current Assets in the Consolidated Balance Sheets as
of January 2, 2010 and January 3, 2009. We have exchanged information with Sara Lee in connection
with this matter, but Sara Lee has disagreed with our computation. In accordance with the dispute
resolution provisions of the tax sharing agreement, on August 3, 2009, we submitted the dispute to
binding arbitration. The arbitration process is ongoing, and we will continue to prosecute our
claim. We do not believe that the resolution of this dispute will have a material impact on our
financial position, results of operations or cash flows.
Stock Compensation
We established the Omnibus Incentive Plan to award stock options, stock appreciation rights,
restricted stock, restricted stock units, deferred stock units, performance shares and cash to our
employees, non-employee directors and employees of our subsidiaries to promote the interest of our
company and incent performance and retention of employees. Stock-based compensation is estimated
at the grant date based on the awards fair value and is recognized as expense over the requisite
service period. Estimation of stock-based compensation for stock options granted, utilizing the
Black-Scholes option-pricing model, requires various highly subjective assumptions including
volatility and expected option life. We use a combination of the volatility of our company and the
volatility of peer companies for a period of time that is comparable to the expected life of the
option to determine volatility assumptions. We utilize the simplified method outlined in SEC
accounting rules to estimate expected lives for options granted. The simplified method is used for
valuing stock option grants by eligible public companies that do not have sufficient historical
exercise patterns on options granted to employees. We estimate forfeitures for stock-
81
based awards granted that are not expected to vest. If any of these inputs or assumptions
changes significantly, our stock-based compensation expense could be materially different in the
future.
Defined Benefit Pension Plans
For a discussion of our net periodic benefit cost, plan obligations, plan assets, and how we
measure the amount of these costs, see Note 16 titled Defined Benefit Pension Plans to our
consolidated financial statements.
Our U.S. qualified pension plan is approximately 80% funded as of January 2, 2010 compared to
86% funded as of January 3, 2009. The funded status reflects an increase in the benefit obligation
due to a decrease in the discount rate used in the valuation of the liability, partially offset by
an increase in the fair value of plan assets as a result of the stock markets performance during
2009. We may elect to make voluntary contributions to maintain an 80% funded level which will
avoid certain benefit payment restrictions under the Pension Protection Act. The funded status of
our defined benefit pension plans are recognized on our balance sheet and changes in the funded
status are reflected in comprehensive income. We measure the funded status of our plans as of the
date of our fiscal year end. We expect pension expense in 2010 of approximately $17 million
compared to $22 million in 2009.
The net periodic cost of the pension plans is determined using projections and actuarial
assumptions, the most significant of which are the discount rate and the long-term rate of asset
return. The net periodic pension income or expense is recognized in the year incurred. Gains and
losses, which occur when actual experience differs from actuarial assumptions, are amortized over
the average future expected life of participants.
Our policies regarding the establishment of pension assumptions are as follows:
|
|
|
In determining the discount rate, we utilized the Citigroup Pension Discount Curve
(rounded to the nearest 10 basis points) in order to determine a unique interest rate for
each plan and match the expected cash flows for each plan. |
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Salary increase assumptions were based on historical experience and anticipated future
management actions. The salary increase assumption only applies to the Canadian plans and
portions of the Hanesbrands nonqualified retirement plans, as benefits under these plans
are not frozen. The benefits under the Hanesbrands Inc. Pension Plan were frozen as of
January 1, 2006. |
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In determining the long-term rate of return on plan assets we applied a proportionally
weighted blend between assuming the historical long-term compound growth rate of the plan
portfolio would predict the future returns of similar investments, and the utilization of
forward looking assumptions. |
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|
Retirement rates were based primarily on actual experience while standard actuarial
tables were used to estimate mortality. |
The sensitivity of changes in actuarial assumptions on our annual pension expense and on our plans
projected benefit obligations, all other factors being equal, is illustrated by the following:
82
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Increase (Decrease) in |
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Projected Benefit |
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Pension Expense |
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Obligation |
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1% decrease in discount rate |
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$ |
1 |
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$ |
114 |
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1% increase in discount rate |
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(1 |
) |
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(94 |
) |
1% decrease in expected investment return |
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6 |
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1% increase in expected investment return |
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(6 |
) |
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Trademarks and Other Identifiable Intangibles
Trademarks and computer software are our primary identifiable intangible assets. We amortize
identifiable intangibles with finite lives, and we do not amortize identifiable intangibles with
indefinite lives. We base the estimated useful life of an identifiable intangible asset upon a
number of factors, including the effects of demand, competition, expected changes in distribution
channels and the level of maintenance expenditures required to obtain future cash flows. As of
January 2, 2010, the net book value of trademarks and other identifiable intangible assets was $136
million, of which we are amortizing the entire balance. We anticipate that our amortization expense
for 2010 will be $12 million.
We evaluate identifiable intangible assets subject to amortization for impairment using a
process similar to that used to evaluate asset amortization described below under Depreciation
and Impairment of Property, Plant and Equipment. We assess identifiable intangible assets not
subject to amortization for impairment at least annually and more often as triggering events occur.
In order to determine the impairment of identifiable intangible assets not subject to amortization,
we compare the fair value of the intangible asset to its carrying amount. We recognize an
impairment loss for the amount by which an identifiable intangible assets carrying value exceeds
its fair value.
We measure a trademarks fair value using the royalty saved method. We determine the royalty
saved method by evaluating various factors to discount anticipated future cash flows, including
operating results, business plans, and present value techniques. The rates we use to discount cash
flows are based on interest rates and the cost of capital at a point in time. Because there are
inherent uncertainties related to these factors and our judgment in applying them, the assumptions
underlying the impairment analysis may change in such a manner that impairment in value may occur
in the future. Such impairment will be recognized in the period in which it becomes known.
Goodwill
As of January 2, 2010, we had $322 million of goodwill. We do not amortize goodwill, but we
assess for impairment at least annually and more often as triggering events occur. The timing of
our annual goodwill impairment testing is the first day of the third fiscal quarter.
In evaluating the recoverability of goodwill, we estimate the fair value of our reporting
units. We rely on a number of factors to determine the fair value of our reporting units and
evaluate various factors to discount anticipated future cash flows, including operating results,
business plans, and present value techniques. As discussed above under Trademarks and Other
Identifiable Intangibles, there are inherent uncertainties related to these factors, and our
judgment in applying them and the assumptions underlying the impairment analysis may change in such
a manner that impairment in value may occur in the future. Such impairment will be recognized in
the period in which it becomes known.
We evaluate the recoverability of goodwill using a two-step process based on an evaluation of
reporting units. The first step involves a comparison of a reporting units fair value to its
carrying value. In the second step, if the reporting units carrying value exceeds its fair value,
we compare the goodwills implied fair value and its carrying value. If the goodwills carrying
value exceeds its implied fair value, we recognize an impairment loss in an amount equal to such
excess.
83
Depreciation and Impairment of Property, Plant and Equipment
We state property, plant and equipment at its historical cost, and we compute depreciation
using the straight-line method over the assets life. We estimate an assets life based on
historical experience, manufacturers estimates, engineering or appraisal evaluations, our future
business plans and the period over which the asset will economically benefit us, which may be the
same as or shorter than its physical life. Our policies require that we periodically review our
assets remaining depreciable lives based upon actual experience and expected future utilization. A
change in the depreciable life is treated as a change in accounting estimate and the accelerated
depreciation is accounted for in the period of change and future periods. Based upon current levels
of depreciation, the average remaining depreciable life of our net property other than land is five
years.
We test an asset for recoverability whenever events or changes in circumstances indicate that
its carrying value may not be recoverable. Such events include significant adverse changes in
business climate, several periods of operating or cash flow losses, forecasted continuing losses or
a current expectation that an asset or asset group will be disposed of before the end of its useful
life. We evaluate an assets recoverability by comparing the asset or asset groups net carrying
amount to the future net undiscounted cash flows we expect such asset or asset group will generate.
If we determine that an asset is not recoverable, we recognize an impairment loss in the amount by
which the assets carrying amount exceeds its estimated fair value.
When we recognize an impairment loss for an asset held for use, we depreciate the assets
adjusted carrying amount over its remaining useful life. We do not restore previously recognized
impairment losses if circumstances change.
Insurance Reserves
We maintain insurance coverage for property, workers compensation and other casualty
programs. We are responsible for losses up to certain limits and are required to estimate a
liability that represents the ultimate exposure for aggregate losses below those limits. This
liability is based on managements estimates of the ultimate costs to be incurred to settle known
claims and claims not reported as of the balance sheet date. The estimated liability is not
discounted and is based on a number of assumptions and factors, including historical trends,
actuarial assumptions and economic conditions. If actual trends differ from the estimates, the
financial results could be impacted. Actual trends have not differed materially from the
estimates.
Assets and Liabilities Acquired in Business Combinations
We account for business acquisitions using the purchase method, which requires us to allocate
the cost of an acquired business to the acquired assets and liabilities based on their estimated
fair values at the acquisition date. We recognize the excess of an acquired businesss cost over
the fair value of acquired assets and liabilities as goodwill as discussed below under Goodwill.
We use a variety of information sources to determine the fair value of acquired assets and
liabilities. We generally use third-party appraisers to determine the fair value and lives of
property and identifiable intangibles, consulting actuaries to determine the fair value of
obligations associated with defined benefit pension plans, and legal counsel to assess obligations
associated with legal and environmental claims.
Recently Issued Accounting Pronouncements
Accounting for Transfers of Financial Assets
In June 2009, the Financial Accounting Standards Board (FASB) issued new accounting rules
for transfers of financial assets. The new rules require greater transparency and additional
disclosures for transfers of financial assets and the entitys continuing involvement with them and
change the requirements for derecognizing financial assets. The new accounting rules are effective
for financial asset transfers occurring after the beginning of our first fiscal year that begins
after November 15, 2009. We are evaluating the impact of adoption of these new rules on our
financial condition, results of operations and cash flows.
84
Consolidation Variable Interest Entities
In June 2009, the FASB issued new accounting rules related to the
accounting and disclosure requirements for the consolidation of variable interest entities. The new accounting rules are
effective for our first fiscal year that begins after November 15, 2009. We are evaluating the
impact of adoption of these rules on our financial condition, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign exchange rates,
interest rates and commodity prices. Our risk management control system uses analytical techniques including market
value, sensitivity analysis and value at risk estimations.
Foreign Exchange Risk
We sell the majority of our products in transactions denominated in
U.S. dollars; however, we purchase some raw materials, pay a portion of our wages and make other payments in our supply chain
in foreign currencies. Our exposure to foreign exchange rates exists primarily with respect to the
Canadian dollar, European euro, Mexican peso and Japanese yen against the U.S. dollar. We use
foreign exchange forward and option contracts to hedge material exposure to adverse changes in
foreign exchange rates. A sensitivity analysis technique has been used to evaluate the effect that
changes in the market value of foreign exchange currencies will have on our forward and option
contracts. At January 2, 2010, the potential change in fair value of foreign currency derivative
instruments, assuming a 10% adverse change in the underlying currency price, was $7 million.
Interest Rates
Our debt under the 2009 Senior Secured Credit Facility, Floating Rate Senior Notes and
Accounts Receivable Securitization Facility bear interest at variable rates. As a result, we are
exposed to changes in market interest rates that could impact the cost of servicing our debt. We
are required under the 2009 Senior Secured Credit Facility to hedge a portion of our floating rate
debt to reduce interest rate risk caused by floating rate debt issuance. To
comply with this requirement, in the first quarter of 2010 we entered into a hedging arrangement
whereby we capped the LIBOR interest rate component on $490.7 million of the floating rate debt
under the Floating Rate Senior Notes at 4.262%, as a result of which approximately 52% of our
total debt outstanding at January 2, 2010 is now at a fixed rate. After giving effect to these arrangements, a 25-basis point movement in the annual interest rate charged
on the outstanding debt balances as of January 2, 2010 would result in a change in annual interest expense of $3.5 million. We may also execute interest rate cash flow
hedges in the form of caps and swaps in the future in order to mitigate our exposure to variability
in cash flows for the future interest payments on a designated portion of borrowings.
Commodities
Cotton is the primary raw material used in manufacturing many of our products. While we
have sold our yarn operations, we are still exposed to fluctuations in the cost of cotton. While
we attempt to protect our business from the volatility of the market price of cotton
through employing a dollar cost
averaging strategy by entering into hedging contracts from time to time, our business can be adversely affected
by dramatic movements in cotton prices. The cotton prices reflected in our results were 55 cents
per pound in 2009. We expect the cost of cotton included in our results to average 68 cents per
pound for the full year of 2010. The ultimate effect of these pricing levels on our earnings cannot
be quantified, as the effect of movements in cotton prices on industry selling prices are
uncertain, but any dramatic increase in the price of cotton could have a material adverse effect on
our business, results of operations, financial condition and cash flows. We estimate that a change
of $0.01 per pound in cotton prices would affect our annual raw material costs by $3 million, at
current levels of production. The ultimate effect of this change on our earnings cannot be
quantified, as the effect of movements in cotton prices on industry selling prices are uncertain,
but any dramatic increase in the price of cotton would have a material adverse effect on our
business, results of operations, financial condition and cash flows.
In addition, fluctuations in crude oil or petroleum prices may influence
the prices of other raw materials we use to manufacture our products, such as chemicals, dyestuffs, polyester yarn and foam. We generally purchase raw
85
materials at market prices. We estimate that a change of $10.00 per barrel in the price of
oil would affect our freight costs by approximately $3 million, at current levels of usage.
Item 8. Financial Statements and Supplementary Data
Our
financial statements required by this item are contained on pages F-1
through F-63 of
this Annual Report on Form 10-K. See Item 15(a)(1) for a listing of financial statements provided.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive
Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Exchange Act Rule 13a-15(f). Managements annual report on
internal control over financial reporting and the report of independent registered public
accounting firm are incorporated by reference to pages F-2 and F-3 of this Annual Report on
Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management,
including our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our
internal control over financial reporting occurred during the period covered by this report that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10 regarding our executive officers is included in Item 1C
of this Annual Report on Form 10-K. We will provide other information that is responsive to this
Item 10 in our definitive proxy statement or in an amendment to this Annual Report not later than
120 days after the end of the fiscal year covered by this Annual Report. That information is
incorporated in this Item 10 by reference.
86
Item 11. Executive Compensation
We will provide information that is responsive to this Item 11 in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated
in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
We will provide information that is responsive to this Item 12 in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated
in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated
in this Item 13 by reference.
Item 14. Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our definitive proxy
statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the
end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated
in this Item 14 by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1)-(2) Financial Statements and Schedules
The financial statements and schedules listed in the accompanying Index to Consolidated
Financial Statements on page F-1 are filed as part of this Report.
(a)(3) Exhibits
See Index to Exhibits beginning on page E-1, which is incorporated by reference herein. The
Index to Exhibits lists all exhibits filed with this Report and identifies which of those exhibits
are management contracts and compensation plans.
87
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 9th day of February, 2010.
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HANESBRANDS INC.
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/s/ Richard A. Noll
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Richard A. Noll |
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Chief Executive Officer |
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POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints jointly and severally, Richard A. Noll, E. Lee Wyatt Jr. and Joia M.
Johnson, and each one of them, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
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Signature |
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Date |
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/s/ Richard A. Noll
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Chief Executive Officer and |
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February 9, 2010 |
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Richard A. Noll
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Chairman of the Board of Directors
(principal executive officer)
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/s/ E. Lee Wyatt Jr.
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Executive Vice President, |
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February 9, 2010 |
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E. Lee Wyatt Jr.
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Chief Financial Officer
(principal financial officer)
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/s/ Dale W. Boyles
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Vice President,
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February 9, 2010 |
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Dale W. Boyles
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Chief Accounting Officer and Controller (principal accounting
officer)
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88
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Signature |
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Date |
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/s/
Lee A. Chaden |
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Director
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February 9, 2010 |
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Lee
A. Chaden
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/s/ Bobby J. Griffin |
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Director
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February 9, 2010 |
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Bobby J. Griffin
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/s/ James C. Johnson |
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Director
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February 9, 2010 |
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James C. Johnson
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/s/ Jessica T. Mathews |
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Director
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February 9, 2010 |
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Jessica T. Mathews
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/s/ J. Patrick Mulcahy |
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Director
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February 9, 2010 |
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J. Patrick Mulcahy
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/s/ Ronald L. Nelson |
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Director |
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February 9, 2010 |
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Ronald L. Nelson
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/s/ Andrew J. Schindler |
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Director
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February 9, 2010 |
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Andrew J. Schindler
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/s/ Ann E. Ziegler |
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Director
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February 9, 2010 |
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Ann E. Ziegler
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89
INDEX TO EXHIBITS
References in this Index to Exhibits to the Registrant are to Hanesbrands Inc. The Registrant
will furnish you, without charge, a copy of any exhibit, upon written request. Written requests to
obtain any exhibit should be sent to Corporate Secretary, Hanesbrands Inc., 1000 East Hanes Mill
Road, Winston-Salem, North Carolina 27105.
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Exhibit |
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Number |
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Description |
3.1
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Articles of Amendment and Restatement of Hanesbrands Inc. (incorporated
by reference from Exhibit 3.1 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006). |
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3.2
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Articles Supplementary (Junior Participating Preferred Stock, Series A)
(incorporated by reference from Exhibit 3.2 to the Registrants Current
Report on Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006). |
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3.3
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Amended and Restated Bylaws of Hanesbrands Inc. (incorporated by
reference from Exhibit 3.1 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
December 15, 2008). |
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3.4
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Certificate of Formation of BA International, L.L.C. (incorporated by
reference from Exhibit 3.4 to the Registrants Registration Statement
on Form S-4 (Commission file number 333-142371) filed with the
Securities and Exchange Commission on April 26, 2007). |
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3.5
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Limited Liability Company Agreement of BA International, L.L.C.
(incorporated by reference from Exhibit 3.5 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.6
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Certificate of Incorporation of Caribesock, Inc., together with
Certificate of Change of Location of Registered Office and Registered
Agent (incorporated by reference from Exhibit 3.6 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.7
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Bylaws of Caribesock, Inc. (incorporated by reference from Exhibit 3.7
to the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.8
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Certificate of Incorporation of Caribetex, Inc., together with
Certificate of Change of Location of Registered Office and Registered
Agent (incorporated by reference from Exhibit 3.8 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.9
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Bylaws of Caribetex, Inc. (incorporated by reference from Exhibit 3.9
to the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.10
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Certificate of Formation of CASA International, LLC (incorporated by
reference from Exhibit 3.10 to the Registrants Registration Statement
on Form S-4 (Commission file number 333-142371) filed with the
Securities and Exchange Commission on April 26, 2007). |
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3.11
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Limited Liability Company Agreement of CASA International, LLC
(incorporated by reference from Exhibit 3.11 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.12
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Certificate of Incorporation of Ceibena Del, Inc., together with
Certificate of Change of Location of Registered Office and Registered
Agent (incorporated by reference from Exhibit 3.12 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.13
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Bylaws of Ceibena Del, Inc. (incorporated by reference from
Exhibit 3.13 to the Registrants Registration Statement on Form S-4
(Commission file number 333-142371) filed with the Securities and
Exchange Commission on April 26, 2007). |
E-1
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Exhibit |
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Number |
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Description |
3.14
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Certificate of Formation of Hanes Menswear, LLC, together with
Certificate of Conversion from a Corporation to a Limited Liability
Company Pursuant to Section 18-214 of the Limited Liability Company Act
and Certificate of Change of Location of Registered Office and
Registered Agent (incorporated by reference from Exhibit 3.14 to the
Registrants Registration Statement on Form S-4 (Commission file number
333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.15
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Limited Liability Company Agreement of Hanes Menswear, LLC
(incorporated by reference from Exhibit 3.15 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.16
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Certificate of Incorporation of HPR, Inc., together with Certificate of
Merger of Hanes Puerto Rico, Inc. into HPR, Inc. (now known as Hanes
Puerto Rico, Inc.) (incorporated by reference from Exhibit 3.16 to the
Registrants Registration Statement on Form S-4 (Commission file number
333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.17
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Bylaws of Hanes Puerto Rico, Inc. (incorporated by reference from
Exhibit 3.17 to the Registrants Registration Statement on Form S-4
(Commission file number 333-142371) filed with the Securities and
Exchange Commission on April 26, 2007). |
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3.18
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Articles of Organization of Sara Lee Direct, LLC, together with
Articles of Amendment reflecting the change of the entitys name to
Hanesbrands Direct, LLC (incorporated by reference from Exhibit 3.18 to
the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.19
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Limited Liability Company Agreement of Sara Lee Direct, LLC (now known
as Hanesbrands Direct, LLC) (incorporated by reference from
Exhibit 3.19 to the Registrants Registration Statement on Form S-4
(Commission file number 333-142371) filed with the Securities and
Exchange Commission on April 26, 2007). |
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3.20
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Certificate of Incorporation of Sara Lee Distribution, Inc., together
with Certificate of Amendment of Certificate of Incorporation of Sara
Lee Distribution, Inc. reflecting the change of the entitys name to
Hanesbrands Distribution, Inc. (incorporated by reference from
Exhibit 3.20 to the Registrants Registration Statement on Form S-4
(Commission file number 333-142371) filed with the Securities and
Exchange Commission on April 26, 2007). |
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3.21
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Bylaws of Sara Lee Distribution, Inc. (now known as Hanesbrands
Distribution, Inc.)(incorporated by reference from Exhibit 3.21 to the
Registrants Registration Statement on Form S-4 (Commission file number
333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.22
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Certificate of Formation of HBI Branded Apparel Enterprises, LLC
(incorporated by reference from Exhibit 3.22 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.23
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Operating Agreement of HBI Branded Apparel Enterprises, LLC
(incorporated by reference from Exhibit 3.23 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.24
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Certificate of Incorporation of HBI Branded Apparel Limited, Inc.
(incorporated by reference from Exhibit 3.24 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.25
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Bylaws of HBI Branded Apparel Limited, Inc. (incorporated by reference
from Exhibit 3.25 to the Registrants Registration Statement on
Form S-4 (Commission file number 333-142371) filed with the Securities
and Exchange Commission on April 26, 2007). |
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3.26
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Certificate of Formation of HbI International, LLC (incorporated by
reference from Exhibit 3.26 to the Registrants Registration Statement
on Form S-4 (Commission file number 333-142371) filed with the
Securities and Exchange Commission on April 26, 2007). |
E-2
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Exhibit |
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Number |
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Description |
3.27
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Limited Liability Company Agreement of HbI International, LLC
(incorporated by reference from Exhibit 3.27 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.28
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Certificate of Formation of SL Sourcing, LLC, together with Certificate
of Amendment to the Certificate of Formation of SL Sourcing, LLC
reflecting the change of the entitys name to HBI Sourcing, LLC
(incorporated by reference from Exhibit 3.28 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.29
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Limited Liability Company Agreement of SL Sourcing, LLC (now known as
HBI Sourcing, LLC) (incorporated by reference from Exhibit 3.29 to the
Registrants Registration Statement on Form S-4 (Commission file number
333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.30
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Certificate of Formation of Inner Self LLC (incorporated by reference
from Exhibit 3.30 to the Registrants Registration Statement on
Form S-4 (Commission file number 333-142371) filed with the Securities
and Exchange Commission on April 26, 2007). |
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3.31
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Limited Liability Company Agreement of Inner Self LLC (incorporated by
reference from Exhibit 3.31 to the Registrants Registration Statement
on Form S-4 (Commission file number 333-142371) filed with the
Securities and Exchange Commission on April 26, 2007). |
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3.32
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Certificate of Formation of Jasper-Costa Rica, L.L.C. (incorporated by
reference from Exhibit 3.32 to the Registrants Registration Statement
on Form S-4 (Commission file number 333-142371) filed with the
Securities and Exchange Commission on April 26, 2007). |
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3.33
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Amended and Restated Limited Liability Company Agreement of
Jasper-Costa Rica, L.L.C. (incorporated by reference from Exhibit 3.33
to the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.34
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Certificate of Formation of Playtex Dorado, LLC, together with
Certificate of Conversion from a Corporation to a Limited Liability
Company Pursuant to Section 18-214 of the Limited Liability Company Act
(incorporated by reference from Exhibit 3.36 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.35
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Amended and Restated Limited Liability Company Agreement of Playtex
Dorado, LLC (incorporated by reference from Exhibit 3.37 to the
Registrants Registration Statement on Form S-4 (Commission file number
333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.36
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Certificate of Incorporation of Playtex Industries, Inc. (incorporated
by reference from Exhibit 3.38 to the Registrants Registration
Statement on Form S-4 (Commission file number 333-142371) filed with
the Securities and Exchange Commission on April 26, 2007). |
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3.37
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Bylaws of Playtex Industries, Inc. (incorporated by reference from
Exhibit 3.39 to the Registrants Registration Statement on Form S-4
(Commission file number 333-142371) filed with the Securities and
Exchange Commission on April 26, 2007). |
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3.38
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Certificate of Formation of Seamless Textiles, LLC, together with
Certificate of Conversion from a Corporation to a Limited Liability
Company Pursuant to Section 18-214 of the Limited Liability Company Act
(incorporated by reference from Exhibit 3.40 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.39
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Limited Liability Company Agreement of Seamless Textiles, LLC
(incorporated by reference from Exhibit 3.41 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.40
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Certificate of Incorporation of UPCR, Inc., together with Certificate
of Change of Location of Registered Office and Registered Agent
(incorporated by reference from Exhibit 3.42 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
E-3
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Exhibit |
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Number |
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Description |
3.41
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Bylaws of UPCR, Inc. (incorporated by reference from Exhibit 3.43 to
the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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3.42
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Certificate of Incorporation of UPEL, Inc., together with Certificate
of Change of Location of Registered Office and Registered Agent
(incorporated by reference from Exhibit 3.44 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-142371)
filed with the Securities and Exchange Commission on April 26, 2007). |
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3.43
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Bylaws of UPEL, Inc. (incorporated by reference from Exhibit 3.45 to
the Registrants Registration Statement on Form S-4 (Commission file
number 333-142371) filed with the Securities and Exchange Commission on
April 26, 2007). |
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4.1
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Rights Agreement between Hanesbrands Inc. and Computershare Trust
Company, N.A., Rights Agent. (incorporated by reference from
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 5, 2006). |
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4.2
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Form of Rights Certificate (incorporated by reference from Exhibit 4.2
to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 5, 2006). |
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4.3
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Placement Agreement, dated December 11, 2006, among Hanesbrands Inc.,
certain subsidiaries of Hanesbrands Inc., Morgan Stanley & Co.
Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated
(incorporated by reference from Exhibit 4.1 to the Registrants Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 15, 2006). |
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4.4
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Indenture, dated as of December 14, 2006, among Hanesbrands Inc.,
certain subsidiaries of Hanesbrands Inc., and Branch Banking and Trust
Company, as Trustee (incorporated by reference from Exhibit 4.1 to the
Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on December 20, 2006). |
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4.5
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Registration Rights Agreement with respect to Floating Rate Senior
Notes due 2014, dated as of December 14, 2006, among Hanesbrands Inc.,
certain subsidiaries of Hanesbrands Inc., and Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, ABN
AMRO Incorporated, Barclays Capital Inc., Citigroup Global Markets
Inc., and HSBC Securities (USA) Inc. (incorporated by reference from
Exhibit 4.2 to the Registrants Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 20, 2006). |
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4.6
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Indenture, dated as of August 1, 2008, among the Registrant, certain
subsidiaries of the Registrant, and Branch Banking and Trust Company,
as Trustee (incorporated by reference from Exhibit 4.3 to the
Registrants Registration Statement on Form S-3 (Commission file number
333-152733) filed with the Securities and Exchange Commission on
August 1, 2008). |
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4.7
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Underwriting Agreement dated December 3, 2009 between the Registrant,
the subsidiary guarantors party thereto and J.P. Morgan Securities Inc.
(incorporated by reference from Exhibit 1.1 to the Registrants Current
Report on Form 8-K filed with the Securities and Exchange Commission on
December 11, 2009). |
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4.8
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First Supplemental Indenture, dated December 10, 2009, among the
Registrant, the subsidiary guarantors and Branch Banking and Trust
Company (incorporated by reference from Exhibit 4.2 to the Registrants
Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 11, 2009). |
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10.1
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Hanesbrands Inc. Omnibus Incentive Plan of 2006 (incorporated by
reference from Exhibit 10.1 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006).* |
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10.2
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Form of Stock Option Grant Notice and Agreement under the Hanesbrands
Inc. Omnibus Incentive Plan of 2006 (incorporated by reference from
Exhibit 10.3 to the Registrants Current Report on Form 8-K filed with
the Securities and Exchange Commission on September 5, 2006).* |
E-4
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Exhibit |
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Number |
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Description |
10.3
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Form of Restricted Stock Unit Grant Notice and Agreement under the
Hanesbrands Inc. Omnibus Incentive Plan of 2006. (incorporated by
reference from Exhibit 10.4 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006).* |
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10.4
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Form of Performance Cash Award Grant Notice and Agreement under the
Hanesbrands Inc. Omnibus Incentive Plan of 2006.* |
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10.5
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Form of Non-Employee Director Restricted Stock Unit Grant Notice and
Agreement under the Hanesbrands Inc. Omnibus Incentive Plan of 2006
(incorporated by reference from Exhibit 10.4 to the Registrants Annual
Report on Form 10-K filed with the Securities and Exchange Commission
on February 11, 2009). * |
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10.6
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Form of Non-Employee Director Stock Option Grant Notice and Agreement
under the Hanesbrands Inc. Omnibus Incentive Plan of 2006 (incorporated
by reference from Exhibit 10.5 to the Registrants Transition Report on
Form 10-K filed with the Securities and Exchange Commission on
February 22, 2007).* |
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10.7
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Hanesbrands Inc. Retirement Savings Plan * |
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10.8
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Hanesbrands Inc. Supplemental Employee Retirement Plan * |
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10.9
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Hanesbrands Inc. Performance-Based Annual Incentive Plan (incorporated
by reference from Exhibit 10.7 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006).* |
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10.10
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Hanesbrands Inc. Executive Deferred Compensation Plan (incorporated by
reference from Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on
October 31, 2008).* |
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10.11
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Hanesbrands Inc. Executive Life Insurance Plan (incorporated by
reference from Exhibit 10.10 to the Registrants Annual Report on
Form 10-K filed with the Securities and Exchange Commission on February
11, 2009).* |
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10.12
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Hanesbrands Inc. Executive Long-Term Disability Plan. (incorporated by
reference from Exhibit 10.11 to the Registrants Annual Report on
Form 10-K filed with the Securities and Exchange Commission on February
11, 2009).* |
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10.13
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Hanesbrands Inc. Employee Stock Purchase Plan of 2006 (incorporated by
reference from Exhibit 10.11 to the Registrants Current Report on
Form 8-K filed with the Securities and Exchange Commission on
September 5, 2006).* |
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10.14
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Hanesbrands Inc. Non-Employee Director Deferred Compensation Plan
(incorporated by reference from Exhibit 10.13 to the Registrants
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on February 11, 2009).* |
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10.15
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Severance/Change in Control Agreement dated December 18, 2008 between
the Registrant and Richard A. Noll. (incorporated by reference from
Exhibit 10.14 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
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10.16
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Severance/Change in Control Agreement dated December 18, 2008 between
the Registrant and Gerald W. Evans Jr. (incorporated by reference from
Exhibit 10.15 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
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10.17
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Severance/Change in Control Agreement dated December 18, 2008 between
the Registrant and E. Lee Wyatt Jr. (incorporated by reference from
Exhibit 10.16 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
E-5
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Exhibit |
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Number |
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Description |
10.18
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|
Severance/Change in Control Agreement dated December 10, 2008 between
the Registrant and Kevin W. Oliver (incorporated by reference from
Exhibit 10.17 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
|
|
|
10.19
|
|
Severance/Change in Control Agreement dated December 17, 2008 between
the Registrant and Joia M. Johnson (incorporated by reference from
Exhibit 10.18 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
|
|
|
10.20
|
|
Severance/Change in Control Agreement dated December 18, 2008 between
the Registrant and William J. Nictakis (incorporated by reference from
Exhibit 10.19 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 11, 2009).* |
|
|
|
10.21
|
|
Master Separation Agreement dated August 31, 2006 between the
Registrant and Sara Lee Corporation (incorporated by reference from
Exhibit 10.21 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.22
|
|
Tax Sharing Agreement dated August 31, 2006 between the Registrant and
Sara Lee Corporation (incorporated by reference from Exhibit 10.22 to
the Registrants Annual Report on Form 10-K filed with the Securities
and Exchange Commission on September 28, 2006). |
|
|
|
10.23
|
|
Employee Matters Agreement dated August 31, 2006 between the Registrant
and Sara Lee Corporation (incorporated by reference from Exhibit 10.23
to the Registrants Annual Report on Form 10-K filed with the
Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.24
|
|
Master Transition Services Agreement dated August 31, 2006 between the
Registrant and Sara Lee Corporation (incorporated by reference from
Exhibit 10.24 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.25
|
|
Real Estate Matters Agreement dated August 31, 2006 between the
Registrant and Sara Lee Corporation (incorporated by reference from
Exhibit 10.25 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.26
|
|
Indemnification and Insurance Matters Agreement dated August 31, 2006
between the Registrant and Sara Lee Corporation (incorporated by
reference from Exhibit 10.26 to the Registrants Annual Report on
Form 10-K filed with the Securities and Exchange Commission on
September 28, 2006). |
|
|
|
10.27
|
|
Intellectual Property Matters Agreement dated August 31, 2006 between
the Registrant and Sara Lee Corporation (incorporated by reference from
Exhibit 10.27 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.28
|
|
First Lien Credit Agreement dated September 5, 2006 (the 2006 Senior
Secured Credit Facility) among the Registrant the various financial
institutions and other persons from time to time party thereto, HSBC
Bank USA, National Association, LaSalle Bank National Association,
Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley Senior Funding, Inc., Citicorp USA, Inc. and Citibank,
N.A. (incorporated by reference from Exhibit 10.28 to the Registrants
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on September 28, 2006). |
|
|
|
10.29
|
|
First Amendment dated February 22, 2007 to the 2006 Senior Secured
Credit Facility (incorporated by reference from Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 28, 2007). |
|
|
|
10.30
|
|
Second Amendment dated August 21, 2008 to the 2006 Senior Secured
Credit Facility (incorporated by reference from Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 27, 2008). |
|
|
|
10.31
|
|
Third Amendment dated March 10, 2009 to the 2006 Senior Secured Credit
Facility (incorporated by reference from Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on March 16, 2009). |
E-6
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.32 |
|
Amended and Restated Credit Agreement dated as of September 5, 2006, as
amended and restated as of December 10, 2009, among the Registrant, the
various financial institutions and other Persons from time to time
party to this Agreement, Barclays Bank PLC and Goldman Sachs Credit
Partners L.P., as the co-documentation agents, Bank of America, N.A.
and HSBC Securities (USA) Inc., as the co-syndication agents, JPMorgan
Chase Bank, N.A., as the administrative agent and the collateral agent,
and J.P. Morgan Securities Inc., Banc of America Securities LLC, HSBC
Securities (USA) Inc. and Barclays Capital, the investment banking
division of Barclays Bank PLC, as the joint lead arrangers and joint
bookrunners. |
|
|
|
10.33 |
|
Second Lien Credit Agreement dated September 5, 2006 (the Second Lien
Credit Agreement) among HBI Branded Apparel Limited, Inc., the
Registrant, the various financial institutions and other persons from
time to time party thereto, HSBC Bank USA, National Association,
LaSalle Bank National Association, Barclays Bank PLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Morgan Stanley Senior Funding,
Inc., Citicorp USA, Inc. and Citibank, N.A. (incorporated by reference
from Exhibit 10.29 to the Registrants Annual Report on Form 10-K filed
with the Securities and Exchange Commission on September 28, 2006). |
|
|
|
10.34 |
|
First Amendment dated August 21, 2008 to the Second Lien Credit
Agreement (incorporated by reference from Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 27, 2008). |
|
|
|
10.35 |
|
Receivables Purchase Agreement dated as of November 27, 2007 (the
Accounts Receivable Securitization Facility) among HBI Receivables
LLC and the Registrant, JPMorgan Chase Bank, N.A., HSBC Bank USA,
National Association, Falcon Asset Securitization Company LLC, Bryant
Park Funding LLC, and HSBC Securities (USA) Inc. (incorporated by
reference from Exhibit 10.34 to the Registrants Annual Report on
Form 10-K filed with the Securities and Exchange Commission on
February 19, 2008). |
|
|
|
10.36 |
|
Amendment No. 1 dated as of March 16, 2009 to the Accounts Receivables
Securitization Facility (incorporated by reference from Exhibit 10.2 to
the Registrants Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 16, 2009). |
|
|
|
10.37 |
|
Amendment No. 2 dated as of April 13, 2009 to the Accounts Receivables
Securitization Facility (incorporated by reference from Exhibit 10.2 to
the Registrants Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 11, 2009). |
|
|
|
10.38 |
|
Amendment No. 3 dated as of August 17, 2009 to the Accounts Receivables
Securitization Facility (incorporated by reference from Exhibit 10.2 to
the Registrants Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 5, 2009). |
|
|
|
10.39 |
|
Amendment No. 4 dated as of December 10, 2009 to the Accounts
Receivables Securitization Facility. |
|
|
|
10.40 |
|
Amendment No. 5 dated as of December 21, 2009 to the Accounts
Receivables Securitization Facility. |
|
|
|
12.1 |
|
Ratio of Earnings to Fixed Charges. |
|
|
|
21.1 |
|
Subsidiaries of the Registrant. |
|
|
|
23.1 |
|
Consent of PricewaterhouseCoopers LLP. |
|
|
|
24.1 |
|
Powers of Attorney (included on the signature pages hereto). |
|
|
|
31.1 |
|
Certification of Richard A. Noll, Chief Executive Officer. |
|
|
|
31.2 |
|
Certification of E. Lee Wyatt Jr., Chief Financial Officer. |
|
|
|
32.1 |
|
Section 1350 Certification of Richard A. Noll, Chief Executive Officer. |
|
|
|
32.2 |
|
Section 1350 Certification of E. Lee Wyatt Jr., Chief Financial Officer. |
|
|
|
* |
|
Agreement relates to executive compensation. |
|
|
|
Portions of this exhibit were redacted pursuant to a confidential treatment request filed
with the Secretary of the Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended. |
E-7
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HANESBRANDS INC.
|
|
|
|
|
Page |
Consolidated Financial Statements:
|
|
|
|
|
F-2 |
|
|
F-3 |
|
|
F-4 |
|
|
F-5 |
|
|
F-6 |
|
|
F-7 |
|
|
F-8 |
F-1
Hanesbrands Inc.
Managements Report on Internal Control Over Financial Reporting
Management of Hanesbrands Inc. (Hanesbrands) is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f) under the
Securities and Exchange Act of 1934. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States. Hanesbrands system of internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of Hanesbrands; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with accounting principles
generally accepted in the United States, and that receipts and expenditures of Hanesbrands are
being made only in accordance with authorizations of management and directors of Hanesbrands; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of Hanesbrands assets that could have a material effect on the
financial statements.
Management has evaluated the effectiveness of Hanesbrands internal control over financial
reporting as of January 2, 2010, based upon criteria for effective internal control over financial
reporting described in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, management
determined that Hanesbrands internal control over financial reporting was effective as of January
2, 2010.
The effectiveness of our internal control over financial reporting as of January 2, 2010 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included in Part II, Item 8 of this Annual Report on Form 10-K.
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Hanesbrands Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Hanesbrands Inc. (the Company) at
January 2, 2010 and January 3, 2009, and the results of its operations and its cash flows for each
of the three years in the period ended January 2, 2010 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of January 2,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management
is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Managements Report on Internal Control over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the Companys internal
control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 9, 2010
F-3
HANESBRANDS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Net sales |
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
Cost of sales |
|
|
2,626,001 |
|
|
|
2,871,420 |
|
|
|
3,033,627 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,265,274 |
|
|
|
1,377,350 |
|
|
|
1,440,910 |
|
Selling, general and administrative expenses |
|
|
940,530 |
|
|
|
1,009,607 |
|
|
|
1,040,754 |
|
Gain on curtailment of postretirement benefits |
|
|
|
|
|
|
|
|
|
|
(32,144 |
) |
Restructuring |
|
|
53,888 |
|
|
|
50,263 |
|
|
|
43,731 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
270,856 |
|
|
|
317,480 |
|
|
|
388,569 |
|
Other expense (income) |
|
|
49,301 |
|
|
|
(634 |
) |
|
|
5,235 |
|
Interest expense, net |
|
|
163,279 |
|
|
|
155,077 |
|
|
|
199,208 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
58,276 |
|
|
|
163,037 |
|
|
|
184,126 |
|
Income tax expense |
|
|
6,993 |
|
|
|
35,868 |
|
|
|
57,999 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
126,127 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.54 |
|
|
$ |
1.35 |
|
|
$ |
1.31 |
|
Diluted |
|
$ |
0.54 |
|
|
$ |
1.34 |
|
|
$ |
1.30 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
95,158 |
|
|
|
94,171 |
|
|
|
95,936 |
|
Diluted |
|
|
95,668 |
|
|
|
95,164 |
|
|
|
96,741 |
|
See accompanying notes to Consolidated Financial Statements.
F-4
HANESBRANDS INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS
|
Cash and cash equivalents |
|
$ |
38,943 |
|
|
$ |
67,342 |
|
Trade accounts receivable less allowances of $25,776 at January
2, 2010
and $21,897 at January 3, 2009 |
|
|
450,541 |
|
|
|
404,930 |
|
Inventories |
|
|
1,049,204 |
|
|
|
1,290,530 |
|
Deferred tax assets |
|
|
139,836 |
|
|
|
181,850 |
|
Other current assets |
|
|
144,033 |
|
|
|
165,673 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,822,557 |
|
|
|
2,110,325 |
|
|
|
|
|
|
|
|
Property, net |
|
|
602,826 |
|
|
|
588,189 |
|
Trademarks and other identifiable intangibles, net |
|
|
136,214 |
|
|
|
147,443 |
|
Goodwill |
|
|
322,002 |
|
|
|
322,002 |
|
Deferred tax assets |
|
|
357,103 |
|
|
|
321,037 |
|
Other noncurrent assets |
|
|
85,862 |
|
|
|
45,053 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,326,564 |
|
|
$ |
3,534,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable |
|
$ |
351,971 |
|
|
$ |
347,153 |
|
Accrued liabilities and other: |
|
|
|
|
|
|
|
|
Payroll and employee benefits |
|
|
76,315 |
|
|
|
82,815 |
|
Advertising and promotion |
|
|
85,069 |
|
|
|
69,102 |
|
Restructuring |
|
|
18,244 |
|
|
|
21,381 |
|
Other |
|
|
116,007 |
|
|
|
120,459 |
|
Notes payable |
|
|
66,681 |
|
|
|
61,734 |
|
Current portion of debt |
|
|
164,688 |
|
|
|
45,640 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
878,975 |
|
|
|
748,284 |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,727,547 |
|
|
|
2,130,907 |
|
Pension and postretirement benefits |
|
|
290,030 |
|
|
|
294,095 |
|
Other noncurrent liabilities |
|
|
95,293 |
|
|
|
175,608 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,991,845 |
|
|
|
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 95,396,967 at January 2, 2010 and
93,520,132 at January 3, 2009 |
|
|
954 |
|
|
|
935 |
|
Additional paid-in capital |
|
|
287,955 |
|
|
|
248,167 |
|
Retained earnings |
|
|
268,805 |
|
|
|
217,522 |
|
Accumulated other comprehensive loss |
|
|
(222,995 |
) |
|
|
(281,469 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
334,719 |
|
|
|
185,155 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,326,564 |
|
|
$ |
3,534,049 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-5
HANESBRANDS INC.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
Balances at December 30, 2006 |
|
|
96,312 |
|
|
$ |
963 |
|
|
$ |
94,852 |
|
|
$ |
33,024 |
|
|
$ |
(59,568 |
) |
|
$ |
69,271 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,127 |
|
|
|
|
|
|
|
126,127 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,114 |
|
|
|
20,114 |
|
Net unrealized loss on qualifying cash
flow hedges, net of tax of $4,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,877 |
) |
|
|
(6,877 |
) |
Recognition of gain from healthcare
plan settlement, net of
tax of $12,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,639 |
) |
|
|
(19,639 |
) |
Net unrecognized gain from pension
and postretirement plans, net of tax
of $23,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,052 |
|
|
|
37,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,777 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
33,185 |
|
|
|
|
|
|
|
|
|
|
|
33,185 |
|
Exercise of stock options, vesting of
restricted stock units and other |
|
|
533 |
|
|
|
7 |
|
|
|
3,428 |
|
|
|
|
|
|
|
|
|
|
|
3,435 |
|
Stock repurchases |
|
|
(1,613 |
) |
|
|
(16 |
) |
|
|
(2,006 |
) |
|
|
(42,451 |
) |
|
|
|
|
|
|
(44,473 |
) |
Final separation of pension plan
assets
and liabilities |
|
|
|
|
|
|
|
|
|
|
74,189 |
|
|
|
|
|
|
|
|
|
|
|
74,189 |
|
Net transactions related to spin off |
|
|
|
|
|
|
|
|
|
|
(4,629 |
) |
|
|
|
|
|
|
|
|
|
|
(4,629 |
) |
Adoption of new pension accounting
rules |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,149 |
|
|
|
|
|
|
|
1,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 29, 2007 |
|
|
95,232 |
|
|
$ |
954 |
|
|
$ |
199,019 |
|
|
$ |
117,849 |
|
|
$ |
(28,918 |
) |
|
$ |
288,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,169 |
|
|
|
|
|
|
|
127,169 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,463 |
) |
|
|
(29,463 |
) |
Net unrealized loss on qualifying cash
flow hedges, net of tax of $24,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,818 |
) |
|
|
(38,818 |
) |
Net unrecognized loss from pension
and postretirement plans,
net of tax of $117,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184,270 |
) |
|
|
(184,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,382 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
31,002 |
|
|
|
|
|
|
|
|
|
|
|
31,002 |
|
Exercise of stock options, vesting of
restricted stock units and other |
|
|
456 |
|
|
|
2 |
|
|
|
10,076 |
|
|
|
|
|
|
|
|
|
|
|
10,078 |
|
Stock repurchases |
|
|
(1,224 |
) |
|
|
(12 |
) |
|
|
(2,767 |
) |
|
|
(27,496 |
) |
|
|
|
|
|
|
(30,275 |
) |
Net transactions related to spin off |
|
|
(944 |
) |
|
|
(9 |
) |
|
|
10,837 |
|
|
|
|
|
|
|
|
|
|
|
10,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 3, 2009 |
|
|
93,520 |
|
|
$ |
935 |
|
|
$ |
248,167 |
|
|
$ |
217,522 |
|
|
$ |
(281,469 |
) |
|
$ |
185,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,283 |
|
|
|
|
|
|
|
51,283 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,966 |
|
|
|
18,966 |
|
Net unrealized gain on qualifying cash
flow hedges, net of tax of $17,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,580 |
|
|
|
28,580 |
|
Net unrecognized gain from pension
and postretirement plans,
net of tax of $1,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,928 |
|
|
|
10,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,757 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
37,391 |
|
|
|
|
|
|
|
|
|
|
|
37,391 |
|
Exercise of stock options, vesting of
restricted stock units and other |
|
|
1,877 |
|
|
|
19 |
|
|
|
2,397 |
|
|
|
|
|
|
|
|
|
|
|
2,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 2, 2010 |
|
|
95,397 |
|
|
$ |
954 |
|
|
$ |
287,955 |
|
|
$ |
268,805 |
|
|
$ |
(222,995 |
) |
|
$ |
334,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-6
HANESBRANDS INC.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
126,127 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
84,312 |
|
|
|
103,126 |
|
|
|
125,471 |
|
Amortization of intangibles |
|
|
12,443 |
|
|
|
12,019 |
|
|
|
6,205 |
|
Restructuring |
|
|
8,207 |
|
|
|
5,133 |
|
|
|
(3,446 |
) |
Gain on curtailment of postretirement benefits |
|
|
|
|
|
|
|
|
|
|
(32,144 |
) |
Losses on early extinguishment of debt |
|
|
2,423 |
|
|
|
1,332 |
|
|
|
5,235 |
|
Gain on repurchase of Floating Rate Senior Notes |
|
|
(157 |
) |
|
|
(1,966 |
) |
|
|
|
|
Charges incurred for amendments of credit facilities |
|
|
20,634 |
|
|
|
|
|
|
|
|
|
Interest rate hedge termination |
|
|
26,029 |
|
|
|
|
|
|
|
|
|
Amortization of debt issuance costs |
|
|
10,967 |
|
|
|
6,032 |
|
|
|
6,475 |
|
Stock compensation expense |
|
|
37,697 |
|
|
|
31,449 |
|
|
|
33,625 |
|
Deferred taxes |
|
|
(9,152 |
) |
|
|
(1,445 |
) |
|
|
28,069 |
|
Other |
|
|
(10,252 |
) |
|
|
(1,616 |
) |
|
|
(75 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(39,805 |
) |
|
|
163,687 |
|
|
|
(81,396 |
) |
Inventories |
|
|
248,820 |
|
|
|
(182,971 |
) |
|
|
96,338 |
|
Other assets |
|
|
22,210 |
|
|
|
(49,256 |
) |
|
|
19,212 |
|
Accounts payable |
|
|
3,522 |
|
|
|
34,046 |
|
|
|
67,038 |
|
Accrued liabilities and other |
|
|
(54,677 |
) |
|
|
(69,342 |
) |
|
|
(37,694 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
414,504 |
|
|
|
177,397 |
|
|
|
359,040 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(126,825 |
) |
|
|
(186,957 |
) |
|
|
(91,626 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
|
|
|
|
(14,655 |
) |
|
|
(20,243 |
) |
Acquisition of trademark |
|
|
|
|
|
|
|
|
|
|
(5,000 |
) |
Proceeds from sales of assets |
|
|
37,965 |
|
|
|
25,008 |
|
|
|
16,573 |
|
Other |
|
|
16 |
|
|
|
(644 |
) |
|
|
(789 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(88,844 |
) |
|
|
(177,248 |
) |
|
|
(101,085 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on notes payable |
|
|
1,628,764 |
|
|
|
602,627 |
|
|
|
66,413 |
|
Repayments on notes payable |
|
|
(1,624,139 |
) |
|
|
(560,066 |
) |
|
|
(88,970 |
) |
Incurrence of debt under the 2009 Senior Secured Credit Facility |
|
|
750,000 |
|
|
|
|
|
|
|
|
|
Payments to amend and refinance credit facilities |
|
|
(74,976 |
) |
|
|
(69 |
) |
|
|
(3,266 |
) |
Borrowings on revolving loan facility |
|
|
2,034,026 |
|
|
|
791,000 |
|
|
|
|
|
Repayments on revolving loan facility |
|
|
(1,982,526 |
) |
|
|
(791,000 |
) |
|
|
|
|
Repayments of debt under 2006 Senior Secured Credit Facility |
|
|
(1,440,250 |
) |
|
|
(125,000 |
) |
|
|
(428,125 |
) |
Issuance of 8% Senior Notes |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
Repurchase of Floating Rate Senior Notes |
|
|
(2,788 |
) |
|
|
(4,354 |
) |
|
|
|
|
Borrowings on Accounts Receivable Securitization Facility |
|
|
183,451 |
|
|
|
20,944 |
|
|
|
250,000 |
|
Repayments on Accounts Receivable Securitization Facility |
|
|
(326,068 |
) |
|
|
(28,327 |
) |
|
|
|
|
Proceeds from stock options exercised |
|
|
1,179 |
|
|
|
2,191 |
|
|
|
6,189 |
|
Stock repurchases |
|
|
|
|
|
|
(30,275 |
) |
|
|
(44,473 |
) |
Transaction with Sara Lee Corporation |
|
|
|
|
|
|
18,000 |
|
|
|
|
|
Other |
|
|
(847 |
) |
|
|
(409 |
) |
|
|
(1,147 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(354,174 |
) |
|
|
(104,738 |
) |
|
|
(243,379 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign exchange rates on cash |
|
|
115 |
|
|
|
(2,305 |
) |
|
|
3,687 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(28,399 |
) |
|
|
(106,894 |
) |
|
|
18,263 |
|
Cash and cash equivalents at beginning of year |
|
|
67,342 |
|
|
|
174,236 |
|
|
|
155,973 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
38,943 |
|
|
$ |
67,342 |
|
|
$ |
174,236 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-7
HANESBRANDS INC.
Notes to Consolidated Financial Statements
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
(1) Background
Hanesbrands Inc., a Maryland corporation (the Company), is a consumer goods company with a
portfolio of leading apparel brands, including Hanes, Champion, Playtex, Bali, Leggs, Just My
Size, barely there, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofold. The Company
designs, manufactures, sources and sells a broad range of apparel essentials such as T-shirts,
bras, panties, mens underwear, kids underwear, casualwear, activewear, socks and hosiery.
The Companys fiscal year ends on the Saturday closest to December 31. All references to
2009, 2008 and 2007 relate to the 52 week fiscal year ended on January 2, 2010, the 53 week
fiscal year ended on January 3, 2009 and the 52 week fiscal year ended on December 29, 2007,
respectively.
The
Company has also evaluated subsequent events and transactions for
potential recognition or disclosure in the financial statements
through February 9, 2010, the day the financial statements were
issued.
(2) Summary of Significant Accounting Policies
(a) Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S. generally
accepted accounting principles requires management to make use of estimates and assumptions that
affect the reported amount of assets and liabilities, certain financial statement disclosures at
the date of the financial statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results may vary from these estimates.
(c) Foreign Currency Translation
Foreign currency-denominated assets and liabilities are translated into U.S. dollars at
exchange rates existing at the respective balance sheet dates. Translation adjustments resulting
from fluctuations in exchange rates are recorded as a separate component of accumulated other
comprehensive loss within stockholders equity. The Company translates the results of operations of
its foreign operations at the average exchange rates during the respective periods. Gains and
losses resulting from foreign currency transactions are included in the Selling, general and
administrative expenses line of the Consolidated Statements of Income.
(d) Sales Recognition and Incentives
The Company recognizes revenue when (i) there is persuasive evidence of an arrangement,
(ii) the sales price is fixed or determinable, (iii) title and the risks of ownership have been
transferred to the customer and (iv) collection
F-8
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
of the receivable is reasonably assured, which occurs primarily upon shipment. The Company
records a sales reduction for returns and allowances based upon historical return experience. The
Company earns royalty revenues through license agreements with manufacturers of other consumer
products that incorporate certain of the Companys brands. The Company accrues revenue earned under
these contracts based upon reported sales from the licensee. The Company offers a variety of sales
incentives to resellers and consumers of its products, and the policies regarding the recognition
and display of these incentives within the Consolidated Statements of Income are as follows:
Discounts, Coupons, and Rebates
The Company recognizes the cost of these incentives at the later of the date at which the
related sale is recognized or the date at which the incentive is offered. The cost of these
incentives is estimated using a number of factors, including historical utilization and redemption
rates. All cash incentives of this type are included in the determination of net sales. The Company
includes incentives offered in the form of free products in the determination of cost of sales.
Volume-Based Incentives
These incentives typically involve rebates or refunds of cash that are redeemable only if the
reseller completes a specified number of sales transactions. Under these incentive programs, the
Company estimates the anticipated rebate to be paid and allocates a portion of the estimated cost
of the rebate to each underlying sales transaction with the customer. The Company includes these
amounts in the determination of net sales.
Cooperative Advertising
Under these arrangements, the Company agrees to reimburse the reseller for a portion of the
costs incurred by the reseller to advertise and promote certain of the Companys products. The
Company recognizes the cost of cooperative advertising programs in the period in which the
advertising and promotional activity first takes place. In 2007, the Company changed the manner in
which it accounted for cooperative advertising, which resulted in a change in the classification
from media, advertising and promotion expenses to a reduction in sales, because the estimated fair
value of the identifiable benefit was no longer obtained beginning in 2007.
Fixtures and Racks
Store fixtures and racks are periodically used by resellers to display Company products. The
Company expenses the cost of these fixtures and racks in the period in which they are delivered to
the resellers. The Company includes the costs of fixtures and racks incurred by resellers and
charged back to the Company in the determination of net sales. Fixtures and racks purchased by the
Company and provided to resellers are included in selling, general and administrative expenses.
(e) Advertising Expense
Advertising costs, which include the development and production of advertising materials and
the communication of these materials through various forms of media, are expensed in the period the
advertising first takes place. The Company recognized advertising expense in the Selling, general
and administrative expenses caption in the Consolidated Statements of Income of $166,467,
$187,034, and $188,327 in 2009, 2008 and 2007, respectively.
(f) Shipping and Handling Costs
Revenue received for shipping and handling costs is included in net sales and was $22,434,
$24,244, and $22,751 in 2009, 2008 and 2007, respectively. Shipping costs, that comprise payments
to third party shippers, and handling costs, which consist of warehousing costs in the Companys
various distribution facilities, were $222,169, $238,340, and $234,070 in the 2009, 2008 and 2007,
respectively. The Company recognizes shipping, handling and
F-9
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
distribution costs in the Selling, general and administrative expenses line of the
Consolidated Statements of Income.
(g) Catalog Expenses
The Company incurs expenses for printing catalogs for products to aid in the Companys sales
efforts. The Company initially records these expenses as a prepaid item and charges it against
selling, general and administrative expenses over time as the catalog is used. Expenses are
recognized at a rate that approximates historical experience with regard to the timing and amount
of sales attributable to a catalog distribution.
(h) Research and Development
Research and development costs are expensed as incurred and are included in the Selling,
general and administrative expenses line of the Consolidated Statements of Income. Research and
development expense was $46,305, $46,460, and $45,409 in 2009, 2008 and 2007, respectively.
(i) Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at the time of purchase
are considered to be cash equivalents.
(j) Accounts Receivable Valuation
Accounts receivable are stated at their net realizable value. The allowance for doubtful
accounts reflects the Companys best estimate of probable losses inherent in the accounts
receivable portfolio determined on the basis of historical experience, aging of trade receivables, specific allowances for
known troubled accounts and other currently available information.
(k) Inventory Valuation
Inventories are stated at the lower of cost or market. Obsolete, damaged, and excess
inventory is carried at the net realizable value, which is determined by assessing historical
recovery rates, current market conditions and future marketing and sales plans. Rebates, discounts
and other cash consideration received from a vendor related to inventory purchases are reflected as
reductions in the cost of the related inventory item, and are therefore reflected in cost of sales
when the related inventory item is sold.
(l) Property
Property is stated at historical cost and depreciation expense is computed using the
straight-line method over the estimated useful lives of the assets. Machinery and equipment is
depreciated over periods ranging from three to 25 years and buildings and building improvements
over periods of up to 40 years. A change in the depreciable life is treated as a change in
accounting estimate and the accelerated depreciation is accounted for in the period of change and
future periods. Additions and improvements that substantially extend the useful life of a
particular asset and interest costs incurred during the construction period of major properties are
capitalized. Repairs and maintenance costs are expensed as incurred. Upon sale or disposition of an
asset, the cost and related accumulated depreciation are removed from the accounts.
Property is tested for recoverability whenever events or changes in circumstances indicate
that its carrying value may not be recoverable. Such events include significant adverse changes in
the business climate, several periods of operating or cash flow losses, forecasted continuing
losses or a current expectation that an asset or an asset group will be disposed of before the end
of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount
of an asset or asset group to future net undiscounted cash flows expected to be generated by the
asset or asset group. If these comparisons indicate that an asset is not recoverable, the
impairment loss recognized is the amount by which the carrying amount of the asset exceeds the
estimated fair value. When an impairment loss is recognized for assets to be held and used, the
adjusted carrying amount of those assets is
F-10
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
depreciated over its remaining useful life. Restoration of a previously recognized impairment
loss is not permitted under U.S. generally accepted accounting principles.
(m) Trademarks and Other Identifiable Intangible Assets
The primary identifiable intangible assets of the Company are trademarks and computer software
all of which have finite lives that are subject to amortization. The estimated useful life of a
finite-lived intangible asset is based upon a number of factors, including the effects of demand,
competition, expected changes in distribution channels and the level of maintenance expenditures
required to obtain future cash flows. Finite-lived trademarks are being amortized over periods
ranging from five to 30 years, while computer software is being amortized over periods ranging from
two to ten years. Identifiable intangible assets that are subject to amortization are evaluated for
impairment using a process similar to that used in evaluating elements of property.
The Company capitalizes internal software development costs, which include the actual costs to
purchase software from vendors and generally include personnel and related costs for employees who
were directly associated with the enhancement and implementation of purchased computer software.
Additions to computer software are included in purchases of property and equipment in the
Consolidated Statements of Cash Flows.
(n) Goodwill
Goodwill is the amount by which the purchase price exceeds the fair value of the assets
acquired and liabilities assumed in a business combination. When a business combination is
completed, the assets acquired and liabilities assumed are assigned to the reporting unit or units
of the Company given responsibility for managing, controlling and generating returns on these
assets and liabilities. In many instances, all of the acquired assets and assumed liabilities are
assigned to a single reporting unit and in these cases all of the goodwill is assigned to the same
reporting unit. In those situations in which the acquired assets and liabilities are allocated to
more than one reporting unit, the goodwill to be assigned to each reporting unit is determined in a
manner similar to how the amount of goodwill recognized in a business combination is determined.
Goodwill is not amortized; however, it is assessed for impairment at least annually and as
triggering events occur. The Companys annual measurement date is the first day of the third
fiscal quarter. The first step involves comparing the fair value of a reporting unit to its
carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step
of the process involves comparing the implied fair value to the carrying value of the goodwill of
that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied
fair value of that goodwill, an impairment loss is recognized in an amount equal to such excess.
In evaluating the recoverability of goodwill, it is necessary to estimate the fair values of
the reporting units. In making this assessment, management relies on a number of factors to
discount anticipated future cash flows including operating results, business plans and present
value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost
of capital at a point in time. There are inherent uncertainties related to these factors and
managements judgment in applying them to the analysis of goodwill impairment.
(o) Stock-Based Compensation
The Company established the Hanesbrands Inc. Omnibus Incentive Plan of 2006, (the Hanesbrands
OIP) to award stock options, stock appreciation rights, restricted stock, restricted stock units,
deferred stock units, performance shares and cash to its employees, non-employee directors and
employees of its subsidiaries to promote the interests of the Company and incent performance and
retention of employees. The Company recognizes the cost of employee services received in exchange
for awards of equity instruments based upon the grant date fair value of those awards.
F-11
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
(p) Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between
financial and income tax reporting using tax rates in effect for the years in which the differences
are expected to reverse. Given continuing losses in certain jurisdictions in which the Company
operates on a separate return basis, a valuation allowance has been established for the deferred
tax assets in these specific locations. The Company periodically estimates the probable tax
obligations using historical experience in tax jurisdictions and informed judgment. There are
inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in
which the Company transacts business. The judgments and estimates made at a point in time may
change based on the outcome of tax audits, as well as changes to, or further interpretations of,
regulations. Income tax expense is adjusted in the period in which these events occur, and these
adjustments are included in the Companys Consolidated Statements of Income. If such changes take
place, there is a risk that the Companys effective tax rate may increase or decrease in any
period. A company must recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial
statements from such a position are measured based on the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate resolution.
(q) Financial Instruments
The Company uses financial instruments, including forward exchange, option and swap contracts,
to manage its exposures to movements in interest rates, foreign exchange rates and commodity
prices. The use of these financial instruments modifies the exposure of these risks with the intent
to reduce 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 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. The Company
also formally assesses, both at inception and at least quarterly thereafter, whether the
derivatives that are used in hedging transactions 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 Selling, general and administrative expenses line of the Consolidated Financial Statements.
Derivatives are recorded in the Consolidated Balance Sheets at fair value in other assets and
other liabilities. The fair value is based upon either market quotes for actively traded
instruments or independent bids for nonexchange traded instruments.
On the date the derivative is entered into, the Company designates the type of 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.
Mark to Market Hedge
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. For derivatives designated as mark to market hedges, changes in fair value are reported in
earnings in the Selling, general and administrative expenses line of the Consolidated Statements
of Income. Forward exchange 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.
F-12
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
Cash Flow Hedge
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 Consolidated Balance Sheets.
When the hedged item affects the income statement, the gain or loss included in accumulated other
comprehensive income (loss) is reported on the same line in the Consolidated Statements of Income
as the hedged item. In addition, both the fair value of changes excluded from the Companys
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 Consolidated Statements of Income.
(r) Recently Issued Accounting Pronouncements
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the Codification). The Codification is the single source for all
authoritative GAAP recognized by the FASB to be applied in the preparation of financial statements
of nongovernmental entities issued for periods ending after September 15, 2009. The Codification
supersedes all existing non-SEC accounting and reporting standards. The Codification did not
change GAAP and did not have a material impact on the Companys financial condition, results of
operations or cash flows but resulted in certain additional disclosures.
Fair Value Measurements
In September 2006, the FASB issued new accounting rules for fair value measurements, which
defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements. In February 2008, the FASB approved a one-year deferral
of the adoption of the rules as it relates to certain non-financial assets and liabilities. The
Company adopted the provisions for its financial assets and liabilities effective December 30, 2007
and adopted the provisions for its non-financial assets and liabilities effective January 4, 2009.
Neither the adoption in the first quarter ended March 29, 2008 for financial assets and liabilities
nor the adoption in the first quarter ended April 4, 2009 for non-financial assets and liabilities
had a material impact on the financial condition, results of operations or cash flows of the
Company, but both adoptions resulted in certain additional disclosures reflected in Note 15.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued new accounting rules on business combinations and
noncontrolling interests in consolidated financial statements. The new rules improve the
relevance, comparability, and transparency of the financial information that a company provides in
its consolidated financial statements. The new rules require 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 companys 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 the new accounting rules in the first quarter ended
April 4, 2009. The adoption did not have a material impact on the Companys financial condition,
results of operations or cash flows.
Disclosures About Derivative Instruments and Hedging Activities
In March 2008, the FASB issued new accounting guidance which expands the disclosure
requirements about an entitys derivative instruments and hedging activities. The Company adopted
the new accounting rules in the first
F-13
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
quarter ended April 4, 2009. The adoption did not have a material impact on the Companys
financial condition, results of operations or cash flows but resulted in certain additional
disclosures reflected in Note 14.
Employers Disclosures about Postretirement Benefit Plan Assets
In December 2008, the FASB issued rules on the disclosure of postretirement benefit plan
assets. The rules expand the disclosure requirements 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. The Company adopted the new accounting rules as of January 2, 2010.
The adoption did not have a material impact on the Companys financial condition, results of
operations or cash flows but resulted in certain additional disclosures reflected in Notes 15, 16
and 17.
Accounting for Transfers of Financial Assets
In June 2009, the FASB issued new accounting rules for transfers of financial assets. The new
rules require greater transparency and additional disclosures for transfers of financial assets and
the entitys continuing involvement with them and changes the requirements for derecognizing
financial assets. The new accounting rules are effective for financial asset transfers occurring
after the beginning of the Companys first fiscal year that begins after November 15, 2009. The
Company is evaluating the impact of adoption of these new rules on the financial condition, results
of operations and cash flows of the Company.
Consolidation Variable Interest Entities
In June 2009, the FASB issued new accounting rules related to the accounting and disclosure
requirements for the consolidation of variable interest entities. The new accounting rules are
effective for the Companys first fiscal year that begins after November 15, 2009. The Company is
evaluating the impact of adoption of these rules on the financial condition, results of operations
and cash flows of the Company.
(s) Reclassifications
A revision to the balance sheet classification was made to the 2008 Consolidated Balance Sheet
for freight expenses payable of $21,635, which had previously been included in accrued liabilities
but has been reclassified into accounts payable. Only amounts related to invoices received from
vendors were reclassified from accrued liabilities into accounts payable. This reclassification
had no impact on the Companys previously reported total assets, total liabilities, shareholders
equity or net income.
(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 period. 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 2009, 2008 and 2007 is as follows:
F-14
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Basic weighted average shares |
|
|
95,158 |
|
|
|
94,171 |
|
|
|
95,936 |
|
Effect of potentially dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
|
|
|
|
100 |
|
|
|
278 |
|
Restricted stock units |
|
|
510 |
|
|
|
882 |
|
|
|
527 |
|
Employee stock purchase plan and other |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
95,668 |
|
|
|
95,164 |
|
|
|
96,741 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 6,273, 3,735 and 1,163 shares of common stock and 234, 0 and 0 restricted
stock units were excluded from the diluted earnings per share calculation because their effect
would be anti-dilutive for 2009, 2008 and 2007, respectively.
(4) Stock-Based Compensation
The Company established the Hanesbrands OIP to award stock options, stock appreciation rights,
restricted stock, restricted stock units, deferred stock units, performance shares and cash to its
employees, non-employee directors and employees of its subsidiaries to promote the interests of the
Company and incent performance and retention of employees.
Stock Options
The exercise price of each stock option equals the closing market price of Hanesbrands stock
on the date of grant. Options generally vest ratably over two to three years and can generally be
exercised over a term of 10 years. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following table illustrates the assumptions
for the Black-Scholes option-pricing model used in determining the fair value of options granted
during 2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Dividend yield |
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate |
|
|
2.49 |
% |
|
|
1.68-2.64 |
% |
|
|
3.24-4.92 |
% |
Volatility |
|
|
48 |
% |
|
|
28-37 |
% |
|
|
26-28 |
% |
Expected term (years) |
|
|
6.0 |
|
|
|
3.8-6.0 |
|
|
|
2.5-4.5 |
|
The dividend yield assumption is based on the Companys current intent not to pay dividends.
The Company uses a combination of the volatility of the Company and the volatility of peer
companies for a period of time that is comparable to the expected life of the option to determine
volatility assumptions due to the limited trading history of the Companys common stock. The
Company utilizes the simplified method outlined in SEC accounting rules to estimate expected lives
for options granted. The simplified method is used for valuing stock option grants by eligible
public companies that do not have sufficient historical exercise patterns on options granted to
employees.
A summary of the changes in stock options outstanding to the Companys employees under the
Hanesbrands OIP is presented below:
F-15
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual |
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
Term |
|
|
|
Shares |
|
|
Price |
|
|
Value |
|
|
(Years) |
|
Options outstanding at December 30, 2006 |
|
|
2,949 |
|
|
$ |
22.37 |
|
|
$ |
3,686 |
|
|
|
5.99 |
|
Granted |
|
|
1,222 |
|
|
|
25.59 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(277 |
) |
|
|
22.37 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(249 |
) |
|
|
22.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 29, 2007 |
|
|
3,645 |
|
|
$ |
23.41 |
|
|
$ |
16,369 |
|
|
|
5.44 |
|
Granted |
|
|
2,624 |
|
|
|
19.81 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(98 |
) |
|
|
22.50 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(142 |
) |
|
|
23.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 3, 2009 |
|
|
6,029 |
|
|
$ |
21.86 |
|
|
$ |
|
|
|
|
5.99 |
|
Granted |
|
|
466 |
|
|
|
24.33 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(66 |
) |
|
|
17.71 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(142 |
) |
|
|
21.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 2, 2010 |
|
|
6,287 |
|
|
$ |
22.10 |
|
|
$ |
15,770 |
|
|
|
7.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 2, 2010 |
|
|
3,754 |
|
|
$ |
22.51 |
|
|
$ |
7,569 |
|
|
|
7.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, after consultation with its compensation consultants, the Compensation Committee
of the Companys Board of Directors (the Compensation Committee) determined to make decisions
regarding 2009 compensation for executive officers at its meeting in December 2008, so that such
decisions could be made prior to the January 1, 2009 effective date for any changes in total
compensation opportunities rather than retroactively, and to approve equity grants simultaneously
with those decisions. Regarding 2008 compensation, the Compensation Committee made decisions and
approved equity grants at its meeting in January 2008. Therefore, two equity awards, including
awards of stock options, were made to executive officers and other employees during 2008.
There were 2,981, 968 and 634 options that vested during 2009, 2008 and 2007, respectively.
The total intrinsic value of options that were exercised during 2009, 2008 and 2007 was $465,
$1,057 and $1,804, respectively. The weighted average fair value of individual options granted
during 2009, 2008 and 2007 was $11.80, $6.29 and $7.83, respectively.
Cash received from option exercises under all share-based payment arrangements for 2009, 2008
and 2007 was $1,179, $2,191 and $6,189, respectively. The actual tax benefit realized for the tax
deductions from option exercise of the share-based payment arrangements totaled $465, $806, and
$1,503 for 2009, 2008 and 2007, respectively.
F-16
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
Stock Unit Awards
Restricted stock units (RSUs) of Hanesbrands stock are granted to certain Company employees
and non-employee directors to incent performance and retention over periods ranging from one to
three years. Upon vesting, the RSUs are converted into shares of the Companys common stock on a
one-for-one basis and issued to the grantees. All RSUs which have been granted under the
Hanesbrands OIP vest solely upon continued future service to the Company. The cost of these awards
is determined using the fair value of the shares on the date of grant, and compensation expense is
recognized over the period during which the grantees provide the requisite service to the Company.
A summary of the changes in the restricted stock unit awards outstanding under the Hanesbrands OIP
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual |
|
|
|
|
|
|
|
Grant Date |
|
|
Intrinsic |
|
|
Term |
|
|
|
Shares |
|
|
Fair Value |
|
|
Value |
|
|
(Years) |
|
Nonvested share units outstanding at
December 30, 2006 |
|
|
1,546 |
|
|
$ |
22.37 |
|
|
$ |
36,516 |
|
|
|
2.41 |
|
Granted |
|
|
615 |
|
|
|
25.38 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(440 |
) |
|
|
22.37 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(143 |
) |
|
|
23.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested share units outstanding at
December 29, 2007 |
|
|
1,578 |
|
|
$ |
23.47 |
|
|
$ |
43,922 |
|
|
|
1.89 |
|
Granted |
|
|
1,512 |
|
|
|
18.19 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(583 |
) |
|
|
23.28 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(105 |
) |
|
|
23.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested share units outstanding at
January 3, 2009 |
|
|
2,402 |
|
|
$ |
20.19 |
|
|
$ |
31,652 |
|
|
|
1.89 |
|
Granted |
|
|
408 |
|
|
|
24.29 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(1,193 |
) |
|
|
20.84 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(91 |
) |
|
|
19.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested share units outstanding at
January 2, 2010 |
|
|
1,526 |
|
|
$ |
20.82 |
|
|
$ |
36,796 |
|
|
|
1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested share units at January 2, 2010 |
|
|
2,216 |
|
|
$ |
21.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008, after consultation with its compensation consultants, the Compensation Committee
determined to make decisions regarding 2009 compensation for executive officers at its meeting in
December 2008, so that such decisions could be made prior to the January 1, 2009 effective date for
any changes in total compensation opportunities rather than retroactively, and to approve equity
grants simultaneously with those decisions. Regarding 2008 compensation, the Compensation
Committee made decisions and approved equity grants at its meeting in January 2008. Therefore, two
equity awards, including awards of restricted stock units, were made to executive officers and
other employees during 2008.
The total fair value of shares vested during 2009, 2008 and 2007 was $24,871, $13,560 and
$9,853, respectively. Certain participants elected to defer receipt of shares earned upon vesting.
As of January 2, 2010, a total of 174 shares of common stock are issuable in future years for such
deferrals.
For all share-based payments under the Hanesbrands OIP, during 2009, 2008 and 2007, the
Company recognized total compensation expense of $37,391, $31,002 and $33,185 and recognized a
deferred tax benefit of $14,464, $11,585 and $12,360, respectively. During 2009, the Company
incurred $1,814 related to amending the terms of all outstanding stock options granted under the
Hanesbrands OIP that had an original term of five or seven
F-17
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
years to the tenth anniversary of the original grant date.
At January 2, 2010, there was $9,529 of total unrecognized compensation cost related to
non-vested stock-based compensation arrangements, of which $7,205, $1,854, and $470 is expected to
be recognized in 2010, 2011 and 2012, respectively. The Company satisfies the requirement for
common shares for share-based payments to employees pursuant to the Hanesbrands OIP by issuing
newly authorized shares. The Hanesbrands OIP authorized 13,105 shares for awards of stock options
and restricted stock units, of which 2,457 were available for future grants as of January 2, 2010.
Employee Stock Purchase Plan
The Company established the Hanesbrands Inc. Employee Stock Purchase Plan of 2006 (the
ESPP), which is qualified under Section 423 of the Internal Revenue Code. An aggregate of up to
2,442 shares of Hanesbrands common stock may be purchased by eligible employees pursuant to the
ESPP. The purchase price for shares under the ESPP is equal to 85% of the stocks fair market value
on the purchase date. During 2009, 2008 and 2007, 156, 129 and 78 shares, respectively, were
purchased under the ESPP by eligible employees. The Company had 2,079 shares of common stock
available for issuance under the ESPP as of January 2, 2010. The Company recognized $306, $447 and
$440 of stock compensation expense under the ESPP during 2009, 2008 and 2007, respectively.
(5) 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 expected 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 was expected to be noncash. As of January 2, 2010, the Company has recognized approximately
$278,000 in restructuring and related charges related to this strategy since September 5, 2006, of
which approximately half have been noncash. Of the amounts recognized, approximately $103,000
related to employee termination and other benefits, approximately $96,000 related to accelerated
depreciation of buildings and equipment for facilities that have been or will be closed,
approximately $30,000 related to noncancelable lease and other contractual obligations,
approximately $23,000 related to write-offs of stranded raw materials and work in process inventory
determined not to be salvageable or cost-effective to relocate, approximately $17,000 related to
impairments of fixed assets and approximately $9,000 related to other exit costs such as equipment
moving costs. The consolidation of the distribution network is still in process but will not
result in any substantial charges in future periods. The distribution network consolidation
involves the implementation of new warehouse management systems and technology, and opening of new
distribution centers and new third-party logistics providers to replace parts of the Companys
legacy distribution network.
Accelerated depreciation related to the Companys 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 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 Consolidated Statements of Income.
The reported results for 2009, 2008 and 2007 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:
F-18
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 2, 2010, January 3, 2009 and December 29, 2007
(amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Restructuring programs: |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended January 2, 2010 restructuring actions |
|
$ |
46,216 |
|
|
$ |
|
|
|
$ |
|
|
Year ended January 3, 2009 restructuring actions |
|
|
17,833 |
|
|
|
87,117 |
|
|
|
|
|
Year ended December 29, 2007 restructuring actions |
|
|
4,631 |
|
|
|
8,661 |
|
|
|
70,050 |
|
Six months ended December 30, 2006 and
prior restructuring actions |
|
|
1,068 |
|
|
|
(2,971 |
) |
|
|
13,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,748 |
|
|
$ |
92,807 |
|
|
$ |
83,183 |
|
|
|
|
|
|
|
|
|
|
|
The following table illustrates where the costs associated with these actions are recognized
in the Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 27, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
Cost of sales |
|
$ |
12,776 |
|
|
$ |
42,558 |
|
|
$ |
36,912 |
|
Selling, general and administrative expenses |
|
|
3,084 |
|
|
|
(14 |
) |
|
|
2,540 |
|
Restructuring |
|
|
53,888 |
|
|
|
50,263 |
|
|
|
43,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,748 |
|
|
$ |
92,807 |
|
|
$ |
83,183 |
|
|
|
|
|
|
|
|
|
|
|
Components of the restructuring actions are as follows: