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 1, 2011
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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)
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20-3552316
(I.R.S. employer identification no.) |
1000 East Hanes Mill Road
Winston-Salem, North Carolina
(Address of principal executive office)
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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 þ
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, 2010, the aggregate market value of the registrants common stock held by
non-affiliates was approximately $2,307,420,788 (based on the closing price of the common stock of
$24.30 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 14, 2011, there were 96,367,197 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 2011 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 may 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, Duofold and Gear for Sports 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, operational
disruptions, changes in import and export laws, currency restrictions and currency exchange
rate fluctuations; |
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the impact of significant fluctuations and volatility in the price of various input
costs, such as cotton and oil-related materials, utilities, freight and wages; |
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the impact of natural disasters; |
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the impact of the loss of one or more of our suppliers of finished goods or raw
materials; |
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our ability to effectively manage our inventory and reduce inventory reserves; |
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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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our ability to continue to effectively distribute our products through our distribution
network; |
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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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the impact of any inadequacy, interruption or failure with respect to our information
technology or any data security breach; |
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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 do, 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 website 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
corporate website, www.hanesbrands.com, or any of our other websites
we do not incorporate any such website or its contents into this Annual Report on Form 10-K.
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PART I
General
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, Duofold and Gear for Sports. We design, manufacture, source and sell a broad range
of basic apparel such as T-shirts, bras, panties, mens underwear, kids underwear, casualwear,
activewear, socks and hosiery.
The basic apparel 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 basic apparel 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 more of 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 basic apparel, 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. On November 1, 2010, we completed our acquisition of GearCo,
Inc., known as Gear for Sports, a leading seller of licensed logo apparel in collegiate bookstores
and other channels.
Our fiscal year ends on the Saturday closest to December 31. All references to 2010, 2009
and 2008 relate to the 52 week fiscal years ended on January 1, 2011 and January 2, 2010 and the
53 week fiscal year ended on January 3, 2009, respectively.
Our operations are managed and reported in five operating segments, each of which is a
reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to
Consumer and International. These segments are organized principally by product category,
geographic location and distribution channel. Each segment has its own management that is
responsible for the operations of the segments businesses but the segments share a common supply
chain and media and marketing platforms. In October 2009, we completed the sale of our yarn
operations and, as a result, we no longer have net sales in the Other segment, which was primarily
comprised of sales of yarn to third parties. The following table summarizes our operating segments
by category:
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Segment |
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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
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Hanes, Playtex, Bali, barely
there, Just My Size, Wonderbra |
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Mens underwear and kids underwear
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Hanes, Polo Ralph Lauren* |
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Socks
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Hanes, Champion |
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Outerwear
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Activewear, such as performance
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Champion, Duofold, Gear for Sports |
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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 |
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Hosiery
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Hosiery
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Leggs, Hanes, Donna Karan,*
DKNY,*
Just My Size |
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Segment |
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Primary Products |
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Primary Brands |
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 |
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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 |
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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 basic apparel industry. According to The NPD
Group/Consumer Tracking Service, or NPD, our brands held either the number one or number two U.S.
market position by units sold in most product categories in which we compete, for the 12-month
period ended December 31, 2010.
Our products are sold through multiple distribution channels. During 2010, approximately 44%
of our net sales were to mass merchants in the United States, 15% were to national chains and
department stores in the United States, 12% were in our International segment, 9% were in our
Direct to Consumer segment in the United States, and 20% were to other retail channels in the
United States such as embellishers, specialty retailers, wholesale clubs 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 our Just My Size program at Wal-Mart stores.
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 basic apparel 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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Barely There Smart Sizes, a new bra sizing system that simplifies and streamlines the
traditional bra sizing configuration from 16 sizes to just five sizes with innovative, shape
to fit technology (2010). |
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Wonderbra Secret Agent No Slip Fit Collection includes bras that feature shaping stay-in-place back and no slip straps
that secretly work together to ensure everything stays comfortably in place all day (2010). |
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Bali Comfort-U Bra with a feature that ensures that the straps and back stay in place,
delivering the ultimate fit and comfort in a place most women dont think to lookthe back
(2010). |
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Hanes Comfort Flex Underwear feature a softer, more stretchable waistband that
comfortably shifts without pinching or binding (2010). |
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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, an
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). |
We have restructured our supply chain over the past four 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 in place, we are focused long-term
on optimizing our supply chain to further enhance efficiency, improve working capital and asset
turns and reduce costs through several initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership arrangements. We commenced production at our textile
production plant in Nanjing, China, which is our first company-owned textile facility in Asia, in
the fourth quarter of 2009 and we ramped up production in 2010 to support our growth, with the
expectation of ramping up to full capacity by the end of 2011. 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. We consolidated our distribution network by implementing new warehouse
management systems and technology and adding new distribution centers and new third-party
logistics providers to replace parts of our legacy distribution network, including relocating
distribution capacity to our West Coast distribution facility in California in order to expand
capacity for goods we source from Asia.
Our Brands
Our portfolio of leading brands is designed to address the needs and wants of various consumer
segments across a broad range of basic apparel 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. The Hanes brand covers all of our product categories, including mens underwear,
kids underwear, bras, panties, socks, T-shirts, fleece and sheer hosiery. Hanes stands for
outstanding comfort, style and value. According to Millward Brown Market Research, Hanes is found
in 88% of the U.S. households that have purchased mens or womens casual clothing or underwear in
the five-month period ended December 31, 2010.
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, offering 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,
Duofold and Gear for
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Sports. We entered into an agreement with Wal-Mart in 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
Our operations are managed and reported in five operating segments, each of which is a
reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to
Consumer and International. These segments are organized principally by product category,
geographic location and distribution channel. Each segment has its own management that is
responsible for the operations of the segments businesses but the segments share a common supply
chain and media and marketing platforms. In October 2009, we completed the sale of our yarn
operations and, as a result, we no longer have net sales in the Other segment, which was primarily
comprised of sales of yarn to third parties. For more information about our segments, see Note 18
to our financial statements included in this Annual Report on Form 10-K.
Innerwear
The Innerwear segment focuses on core apparel 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 2010, net sales from our Innerwear segment were $2.0 billion, representing
approximately 46% 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. On November 1, 2010, we completed our acquisition of
Gear for Sports, a leading seller of licensed logo apparel in collegiate bookstores and other
channels, which significantly strengthens our strategy of creating stronger branded and defensible
businesses in our Outerwear segment. The operating results of Gear for Sports are included in the
Outerwear segment. During 2010, net sales from our Outerwear segment were $1.3 billion,
representing approximately 29% 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 2010, net sales from our Hosiery segment were $167
million, representing approximately 4% 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 websites operating under the Hanes, One Hanes Place, Just My
Size and Champion
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names. Our Internet operations are supported by our catalogs. As of January 1,
2011 and January 2, 2010, we had 224 and 228 outlet stores, respectively. During 2010, net sales
from our Direct to Consumer segment were $378 million, representing approximately 9% of total net
sales.
International
Our International segment 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 2010, net
sales from our International segment were $509 million, representing approximately 12% 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.
Design, Research and Product Development
At the core of our design, research and product development capabilities is an integrated team of over 325
professionals. 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
and design personnel at the Gear for Sports facility in Lenexa, Kansas. In 2010,
2009 and 2008, we spent approximately $47 million, $46 million and $46 million, respectively, on
design, research and product development, including the development of new and improved products.
Customers
In 2010, approximately 88% of our net sales were to customers in the United States and
approximately 12% were to customers outside the United States. Domestically, almost 81% of our net
sales were wholesale sales to retailers, 10% were direct to consumers and 9% were wholesale sales
to wholesalers and 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
26%, 17% and 6%, respectively, of our total sales in 2010. As is common in the basic apparel
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, Kohls and CVS Caremark, CVS, are our only customers with sales that exceed 10%
of any individual segments sales. In our Innerwear segment, Wal-Mart accounted for 38% of sales,
Target accounted for 16% of sales and Kohls accounted for 11% of sales during 2010. In our
Outerwear segment, Target accounted for 31% of sales and Wal-Mart accounted for 20% of sales during
2010. In our Hosiery segment, Wal-Mart accounted for 25% of sales, Target accounted
for 12% of sales and CVS accounted for 11% of sales during 2010.
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 44% of our
net sales in 2010. 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 26% of our net sales in 2010, is our largest mass
merchant customer.
Sales to the national chains and department stores channel in the United States accounted for
approximately 15% of our net sales in 2010. These retailers target a higher-income consumer than
mass merchants, focus more of
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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, socks, activewear and underwear categories through department stores.
Sales in our Direct to Consumer segment in the United States accounted for approximately 9% of
our net sales in 2010. We sell our branded products directly to consumers through our 224 outlet
stores, as well as our websites 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 websites, 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 websites received over 20 million unique visitors in 2010.
Sales in our International segment represented approximately 12% of our net sales in 2010, 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 19 to our financial statements.
Sales in other channels in the United States represented approximately 20% of our net sales in
2010. We sell T-shirts, golf and sport shirts and fleece sweatshirts to wholesalers and
third-party embellishers primarily under our Hanes, Hanes Beefy-T and Outer Banks brands. Sales to
wholesalers and third-party embellishers accounted for approximately 8% of our net sales in 2010.
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.
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.
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Seasonality
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. Media, advertising and
promotion (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.
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 2010, we launched a number of new advertising and marketing initiatives:
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Hanes launched a new mens underwear marketing campaign starring Michael Jordan in a new
television commercial that shows Hanes Lay Flat Collar undershirts will never suffer from
wavy bacon necks like other shirts. |
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Hanes announced a new national environmental advertising campaign, titled For Future
Generations. The ad, which began airing in the Spring of 2010, takes a lighthearted
approach to the brands environmental responsibility efforts, including eco-friendly
products. Hanes also debuted a new consumer website (www.hanesgreen.com) where
visitors can learn more about the brands environmental responsibility effort and watch the
Future Generations ad. |
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Champion introduced a sports bra blog designed to spur online dialogue around all things
related to breast health and sports bras. The blog features comments and questions by
women of all fitness levels from industry experts to first-time exercisers as well as the
latest on emerging product innovations and style choices. |
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Playtex began airing a series of web videos featuring 10 women who won a Playtex bra
makeover trip to New York with style expert Allison Deyette. |
We also continued some of our existing advertising and marketing initiatives:
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We continued our television advertising campaign in support of Hanes Comfort Fit socks
for the family. |
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Champion continued its Whats Your Everest marketing campaign and online community to
support people in reaching their personal aspirations and goals, as accomplished
international mountaineer and motivational speaker Jamie Clarke led Expedition Hanesbrands
to the top of Mount Everest, driving brand
awareness for Champion and Duofold brands and showcasing our research and development innovation
and textile science leadership. |
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Hanes continued its role as 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 website,
www.hanespink.com, that features interactive content to inspire people to make a difference
in the breast cancer support community. |
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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 How You Play national advertising campaign for Champion. 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. The print, television
and online advertising campaign features Bali bras, panties and shapewear. |
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We continued our innovative and expressive advertising and marketing campaign called
Girl Talk, 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 1, 2011, we distributed our products from a total of 31 distribution centers.
These facilities include 15 facilities located in the United States and 16 facilities located
outside the United States in regions where we manufacture our products. We internally manage and
operate 18 of these facilities, and we use third-party logistics providers who operate the other 13
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
we became an independent public company to 31 as of January 1, 2011. We consolidated our
distribution network by implementing new warehouse management systems and technology and adding
new distribution centers and new third-party logistics providers to replace parts of our legacy
distribution network, including relocating distribution capacity to our West Coast distribution
facility in California in order to expand capacity for goods we source from Asia.
Manufacturing and Sourcing
During 2010, approximately 63% 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, 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 are able to lock in the cost of cotton
reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect us
from severe market fluctuations in the wholesale prices
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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 43
manufacturing facilities, down from 70 at the time we became an independent public company. 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. We commenced production at our
textile production plant in Nanjing, China, which is our first company-owned textile facility in
Asia, in the fourth quarter of 2009 and we ramped up production in 2010 to support our growth, with
the expectation of ramping up to full capacity by the end of 2011. 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.
Finished Goods That Are Manufactured by Third Parties
In addition to our manufacturing capabilities, we also source finished goods we design from
third-party 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.
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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.
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.
Competition
The basic apparel market is highly competitive and rapidly evolving. Competition generally is
based upon brand name recognition, price, 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 basic apparel 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 products 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 held either
the number one or number two U.S. market position by units sold in most product categories
in which we compete, for the 12-month period ended December 31, 2010. According to NPD,
our largest brand, Hanes, was the top-selling apparel brand in the United States by units
sold, for the 12-month period ended December 31, 2010. |
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High-volume, core products. We sell high-volume, frequently replenished basic apparel
products. 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 basic apparel products 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 basic
apparel in the United States as measured by units sold for the 12-month period ended
December 31, 2010. Most of our products |
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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 four 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 in place, we are focused long-term on optimizing our supply
chain to further enhance efficiency, improve working capital and asset turns and reduce
costs through several initiatives, such as supplier-managed inventory for raw materials and
sourced goods ownership arrangements. |
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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 our Just My Size program at Wal-Mart. |
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, Duofold and Gear for Sports. 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 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. Generally, 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 as needed. 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
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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, Croatia,
Macedonia, Moldova, Morocco, Norway, 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.
Corporate Social Responsibility
We have a formal corporate social responsibility (CSR) program that consists of five core
initiatives: a global 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 (the FLA) and recently completed its
two-year accreditation process of our internal global social compliance program. We are now a
fully accredited member of the FLA. The FLA 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 FLA 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 FLA 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. In November 2010, As You Sow, a San Francisco-based shareholder advocacy
organization, issued a report on apparel supply chain compliance programs and rated Hanesbrands
program with the third-highest grade of companies studied.
We are committed to reducing our greenhouse gas footprint, and 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. Currently, over 30% of our total worldwide energy use comes from
renewable resources. We have reduced our CO2 emissions per unit manufactured by over
12% since 2007. We have also worked 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. Hanesbrands earned the U.S. EPA
Energy Star partner of the year award in 2010 for energy efficiency progress. In October 2010,
Newsweek magazine issued its annual list of the 500 greenest companies in America. Hanesbrands
ranks No. 91.
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 have
earned the U.S. Green Building Councils sustainability certification for our Bentonville,
Arkansas, and Minneapolis, Minnesota, sales offices and our Perris, California distribution center.
Sustainable features of the Perris facility include reduction of
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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. We are also currently
working on LEED certification of manufacturing facilities in El Salvador, Vietnam and China, as
well as one of our corporate headquarters buildings in Winston-Salem, North Carolina.
Our corporate philanthropic efforts are focused on meeting the fundamental needs of the
communities in which we live and work. In 2010, we were again the largest corporate giver to our
local United Way in Forsyth County, North Carolina, with our corporate and employee gifts totaling
over $2 million. In Central America and the Caribbean Basin, we have instituted a unique Green For
Good program (Viviendo Verde), in which we use the proceeds from recycling waste materials in our
manufacturing operations for community improvement projects, such as school and health-clinic
renovations. For more detail on the full range of our CSR efforts, including our commitment to and
work in our communities, go to www.hanesbrandsCSR.com.
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 wastewater 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
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.
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Employees
As of January 1, 2011, we had approximately 55,500 employees, approximately 8,400 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 1, 2011, 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.
Any disruption to our supply chain or adverse impact on its extensive network of 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 various locations. 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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other security risks; |
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operational disruptions; |
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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.
In addition, as we have restructured our supply chain over the past four years to create more
efficient production clusters that utilize fewer, larger facilities, such an event at a particular
facility could have a larger impact on us. All of the foregoing can have an adverse effect on our
business, results of operations, financial condition and cash flows.
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Significant fluctuations and volatility in the price of various input costs, such as cotton and
oil-related materials, utilities, freight and wages, may have a material adverse effect on our
business, results of operations, financial condition and cash flows.
The economic environment in which we are operating continues to be uncertain and volatile,
which could have unanticipated adverse effects on our business during 2011 and beyond. We are
seeing a sustained increase in various input costs, such as cotton and oil-related materials,
utilities, freight and wages. Rising demand for cotton resulting from the economic recovery,
weather-related supply disruptions, significant declines in U.S.
inventory and a sharp rise in the futures market for cotton caused cotton
prices to surge upward during 2010 and early 2011. 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, 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.
Similarly, 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. Increases in inflation
may not be matched by rises in income, which also could have a negative impact on spending.
Although we have sold our yarn operations and nearly 40% of our business, such as bras, sheer
hosiery and portions of our activewear categories, is not cotton-based, we are still exposed to
fluctuations in the cost of cotton. During 2010, cotton prices hit their highest levels in 140
years. 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,
among other things, 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. We are able to lock in the cost of cotton that is
reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect our business from the volatility of
the market price of cotton. However, our business can be affected by dramatic movements in cotton
prices. Although the cost of cotton used in goods manufactured by us
has historically represented only 6% of our cost of sales, it has risen to
around 10% primarily as a result of the cost of inflation. Costs incurred for materials and labor
are capitalized into inventory and impact our results as the inventory is sold. After taking into
consideration the cotton costs currently in our finished goods inventory and cotton prices we have locked in
through October, we expect an average for cotton of at least $1.00 per
pound in 2011 for purchases of cotton used in goods manufactured by us, which
would have a negative impact ranging from $100 to $125 million when compared to 2010. The first and
second quarters of 2011 should reflect an average cost of 83 cents per pound, the third quarter of
2011 should reflect an average cost of 89 cents per pound and the
fourth quarter is not locked in at this time. These estimates do not
include the cotton impact on the cost of sourced goods.
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 at current
levels of production would affect our annual cost of sales by $4 million related to finished goods
manufactured internally in our manufacturing facilities and $1 million related to finished goods
sourced from third parties. 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 that a change of $10.00 per barrel in
the price of oil would affect our freight costs by approximately $5 million, at current levels of
usage.
In response to the cost increases described above, particularly for cotton, energy and labor, we expect to take
price increases as warranted by cost inflation, including multiple increases already put in place through late summer
of 2011. The timing and frequency of price increases will vary by product category, channel of trade, and country,
with some increases as frequently as quarterly. The magnitude of price increases will also vary by product category. If, however, we incur increased costs for materials, including cotton,
and labor that we are unable to recoup through price increases or improved efficiencies, or if consumer spending
declines, our business, results of operations, financial condition and cash flows may be adversely affected.
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 37% 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
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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 worldwide economic
conditions, production problems, difficulties in sourcing raw materials, lack of capacity or
transportation disruptions, or if for these or other reasons they raise the prices of the raw
materials or finished products we purchase from them. 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.
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.
Although the majority of our products are replenishment in nature and tend to be purchased by
consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary
spending by consumers. Discretionary spending is affected by many factors, including, among
others, general business conditions, interest rates, inflation, consumer debt levels, 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 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
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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 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 in the last few years. If third
parties on which we rely for raw materials, finished goods or services
are unable to overcome financial difficulties 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.
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 four 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 consolidated our distribution network by implementing
new warehouse management systems and technology and adding new distribution centers and new
third-party logistics providers to replace parts of our legacy distribution network. With our
global supply chain infrastructure in place, we are focused long-term on optimizing our supply
chain to further enhance efficiency, improve working capital and asset turns and reduce costs
through several initiatives, such as supplier-managed inventory for raw materials and sourced goods
ownership arrangements. 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.
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 we became an independent public company to 31 as of
January 1, 2011. We consolidated our distribution network by implementing new warehouse management
systems and technology and adding new distribution centers and new third-party logistics providers
to replace parts of our legacy distribution network, including relocating distribution capacity to
our West Coast distribution facility in California in order to expand capacity for goods we source
from Asia. In 2009, we began shipping products from this new 1.3 million square foot distribution
center in Perris, California. 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.
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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 2010, our top ten customers accounted for 65% of our net sales and our top customers,
Wal-Mart and Target, accounted for 26% 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.
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.
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.
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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 basic apparel market is highly competitive and evolving rapidly. Competition is generally
based upon brand name recognition, price, 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 basic apparel 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 brand recognition, price, quality, 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.
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.
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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.
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 $600 million revolving credit facility (the Revolving Loan Facility)
under our senior secured credit facility that we entered into in 2006 and amended and
restated in December 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), our $1 billion 6.375% Senior Notes
due 2020 (the 6.375% Senior Notes) and the $150 million accounts receivable securitization facility
that we entered into in November 2007 (the Accounts Receivable
Securitization Facility). The 2009 Senior Secured Credit Facility and the indentures governing the
Floating Rate Senior Notes, the 8% Senior Notes and the 6.375% Senior Notes contain restrictions
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 basic apparel 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. 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 2011
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.
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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, the 8% Senior Notes and the 6.375% 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.
Market returns could have a negative impact on the return on plan assets for our pension and other
postemployment plans, which may require significant funding.
The plan assets of our pension plans and other postemployment plans, which had increases in
values of approximately 4% and 8% during 2010 and 2009, respectively, are invested in domestic and
international equity and bond markets. We are unable to predict the variations in asset values or
the severity or duration of any disruptions in the financial markets or 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. 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.
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), after considering
whether the acquired business will be operated as a separate business unit or integrated into an
existing business unit.
As of January 1, 2011, we had approximately $179 million of trademarks and other identifiable
intangibles and
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$430 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 16% 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 2010. 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 economy 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.
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 strategic initiative to enhance our global supply
chain by optimizing lower-cost manufacturing capacity and to
support our commercial operations outside the United States may
result in capital investments outside the United States that impact
our income tax expense.
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.
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 1, 2011, we had approximately $469 million of net deferred tax assets on our
balance sheet, which represents 12% 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.
25
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 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 or from 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 and/or valuation 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 55,500 employees worldwide as of January 1, 2011, 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 55,500 employees worldwide as of January 1, 2011. 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 47,100 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.
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 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 cancellation 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.
29
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 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.
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Item 1B. |
|
Unresolved Staff Comments |
Not applicable.
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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.
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|
Name |
|
Age |
|
Positions |
Richard A. Noll
|
|
|
53 |
|
|
Chairman of the Board of Directors and Chief Executive Officer |
Gerald W. Evans Jr.
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|
|
51 |
|
|
Co-operating Officer, President International |
William J. Nictakis
|
|
|
50 |
|
|
Co-operating Officer, President U.S. |
Joia M. Johnson
|
|
|
51 |
|
|
Chief Legal Officer, General Counsel and Corporate Secretary |
Kevin W. Oliver
|
|
|
53 |
|
|
Chief Human Resources Officer |
E. Lee Wyatt Jr.
|
|
|
58 |
|
|
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 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
30
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.
Gerald W. Evans Jr. has served as our Co-operating Officer, President International, since
November 2010. From February 2009 until November 2010, he was our President, International
Business and Global Supply Chain. From February 2008 until February 2009, he served as our
President, Global Supply Chain and Asia Business Development. From September 2006 until February
2008, he served as Executive Vice President, Chief Supply Chain Officer. From July 2005 until
September 2006, 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 Co-operating Officer, President U.S., since November
2010. From November 2007 until November 2010, he was our President, Chief Commercial Officer.
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 Chief Legal Officer, General Counsel and Corporate Secretary
since January 2007, a position previously known as Executive Vice President, General Counsel and
Corporate Secretary. 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. Ms. Johnson currently serves on the board
of Crawford & Company, the worlds largest independent provider of claims management solutions to
the risk management and insurance industry.
Kevin W. Oliver has served as our Chief Human Resources Officer since September 2006, a
position previously known as Executive Vice President, Human Resources. From January 2006 until
September 2006, 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 Chief Financial Officer since September 2006, a position
previously known as Executive Vice President, Chief Financial Officer. From September 2005 until
September 2006, 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 and Lenexa, Kansas.
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 1, 2011, we owned and leased properties in 23 countries, including 43
manufacturing facilities and 31 distribution centers, as well as office facilities. The leases for
these properties expire between 2011 and
2022, with the exception of some seasonal warehouses that we lease on a month-by-month basis.
31
As of January 1, 2011, we also operated 224 direct outlet stores in 40 states, most of which
are leased under five-year, renewable lease agreements and several of which are leased under ten
year agreements. We believe that our facilities, as well as equipment, are in good condition and
meet our current business needs.
The following table summarizes our properties by country as of January 1, 2011:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
Leased |
|
|
|
|
Properties by Country (1) |
|
Square Feet |
|
|
Square Feet |
|
|
Total |
|
United States |
|
|
3,171,576 |
|
|
|
7,666,324 |
|
|
|
10,837,900 |
|
Non-U.S. facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
El Salvador |
|
|
1,426,866 |
|
|
|
307,327 |
|
|
|
1,734,193 |
|
Honduras |
|
|
356,279 |
|
|
|
916,520 |
|
|
|
1,272,799 |
|
China |
|
|
1,070,912 |
|
|
|
47,734 |
|
|
|
1,118,646 |
|
Dominican Republic |
|
|
835,240 |
|
|
|
178,033 |
|
|
|
1,013,273 |
|
Mexico |
|
|
75,255 |
|
|
|
341,974 |
|
|
|
417,229 |
|
Canada |
|
|
289,480 |
|
|
|
105,675 |
|
|
|
395,155 |
|
Vietnam |
|
|
251,337 |
|
|
|
240,365 |
|
|
|
491,702 |
|
Costa Rica |
|
|
168,282 |
|
|
|
|
|
|
|
168,282 |
|
Thailand |
|
|
277,733 |
|
|
|
14,142 |
|
|
|
291,875 |
|
Belgium |
|
|
|
|
|
|
165,398 |
|
|
|
165,398 |
|
Brazil |
|
|
|
|
|
|
164,548 |
|
|
|
164,548 |
|
Argentina |
|
|
125,289 |
|
|
|
|
|
|
|
125,289 |
|
10 other countries |
|
|
|
|
|
|
77,428 |
|
|
|
77,428 |
|
|
|
|
|
|
|
|
|
|
|
Total non-U.S. facilities |
|
|
4,876,673 |
|
|
|
2,559,144 |
|
|
|
7,435,817 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
8,048,249 |
|
|
|
10,225,468 |
|
|
|
18,273,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes vacant land. |
The following table summarizes the properties primarily used by our segments as of January 1,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
Leased |
|
|
|
|
Properties by Segment (1) |
|
Square Feet |
|
|
Square Feet |
|
|
Total |
|
Innerwear |
|
|
3,319,699 |
|
|
|
4,019,584 |
|
|
|
7,339,283 |
|
Outerwear |
|
|
2,294,310 |
|
|
|
2,655,156 |
|
|
|
4,949,466 |
|
Hosiery |
|
|
303,445 |
|
|
|
39,000 |
|
|
|
342,445 |
|
Direct to Consumer |
|
|
|
|
|
|
1,840,969 |
|
|
|
1,840,969 |
|
International |
|
|
481,273 |
|
|
|
818,903 |
|
|
|
1,300,176 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
6,398,727 |
|
|
|
9,373,612 |
|
|
|
15,772,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
32
|
|
|
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.
|
|
|
Item 4. (Removed and Reserved) |
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 |
|
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 |
|
2010 |
|
|
|
|
|
|
|
|
Quarter ended April 3, 2010 |
|
$ |
28.40 |
|
|
$ |
20.95 |
|
Quarter ended July 3, 2010 |
|
$ |
31.45 |
|
|
$ |
23.44 |
|
Quarter ended October 2, 2010 |
|
$ |
27.88 |
|
|
$ |
23.28 |
|
Quarter ended January 1, 2011 |
|
$ |
28.42 |
|
|
$ |
23.94 |
|
Holders of Record
On February 14, 2011, there were 40,861 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 73,300 beneficial owners of our common stock
as of February 1, 2011.
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
33
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.
Issuer Purchases of Equity Securities
There were no purchases by Hanesbrands during the quarter or year ended January 1, 2011 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 1,
2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
7,751,336 |
|
|
$ |
22.34 |
|
|
|
3,945,486 |
|
Equity
compensation
plans not
approved by
security
holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
7,751,336 |
|
|
$ |
22.34 |
|
|
|
3,945,486 |
|
|
|
|
(1) |
|
The amount appearing under Number of securities remaining available for future issuance
under equity compensation plans includes 1,945,335 shares available under the Hanesbrands
Inc. Omnibus Incentive Plan of 2006 and 2,000,151 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 1, 2011, January 2, 2010 and January 3, 2009 and the balance sheet
data as of January 1, 2011 and January 2, 2010 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 year ended December 29, 2007, the six-month period ended December 30, 2006 and the
year ended July 1, 2006 and the balance sheet data as of January 3, 2009, December 29, 2007,
December 30, 2006 and July 1, 2006 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 |
|
|
Year Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
December 30, |
|
|
July 1, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
(amounts in thousands, except per share data) |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
4,326,713 |
|
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
|
$ |
4,474,537 |
|
|
$ |
2,250,473 |
|
|
$ |
4,472,832 |
|
Cost of sales |
|
|
2,911,944 |
|
|
|
2,626,001 |
|
|
|
2,871,420 |
|
|
|
3,033,627 |
|
|
|
1,530,119 |
|
|
|
2,987,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,414,769 |
|
|
|
1,265,274 |
|
|
|
1,377,350 |
|
|
|
1,440,910 |
|
|
|
720,354 |
|
|
|
1,485,332 |
|
Selling, general and
administrative expenses |
|
|
1,010,581 |
|
|
|
940,530 |
|
|
|
1,009,607 |
|
|
|
1,040,754 |
|
|
|
547,469 |
|
|
|
1,051,833 |
|
Gain on curtailment of
postretirement benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,144 |
) |
|
|
(28,467 |
) |
|
|
|
|
Restructuring |
|
|
|
|
|
|
53,888 |
|
|
|
50,263 |
|
|
|
43,731 |
|
|
|
11,278 |
|
|
|
(101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
404,188 |
|
|
|
270,856 |
|
|
|
317,480 |
|
|
|
388,569 |
|
|
|
190,074 |
|
|
|
433,600 |
|
Other expense (income) |
|
|
20,221 |
|
|
|
49,301 |
|
|
|
(634 |
) |
|
|
5,235 |
|
|
|
7,401 |
|
|
|
|
|
Interest expense, net |
|
|
150,236 |
|
|
|
163,279 |
|
|
|
155,077 |
|
|
|
199,208 |
|
|
|
70,753 |
|
|
|
17,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
expense |
|
|
233,731 |
|
|
|
58,276 |
|
|
|
163,037 |
|
|
|
184,126 |
|
|
|
111,920 |
|
|
|
416,320 |
|
Income tax expense |
|
|
22,438 |
|
|
|
6,993 |
|
|
|
35,868 |
|
|
|
57,999 |
|
|
|
37,781 |
|
|
|
93,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
211,293 |
|
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
$ |
126,127 |
|
|
$ |
74,139 |
|
|
$ |
322,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic(1) |
|
$ |
2.19 |
|
|
$ |
0.54 |
|
|
$ |
1.35 |
|
|
$ |
1.31 |
|
|
$ |
0.77 |
|
|
$ |
3.35 |
|
Earnings per share diluted(2) |
|
$ |
2.16 |
|
|
$ |
0.54 |
|
|
$ |
1.34 |
|
|
$ |
1.30 |
|
|
$ |
0.77 |
|
|
$ |
3.35 |
|
Weighted average shares basic(1) |
|
|
96,500 |
|
|
|
95,158 |
|
|
|
94,171 |
|
|
|
95,936 |
|
|
|
96,309 |
|
|
|
96,306 |
|
Weighted average shares
diluted(2) |
|
|
97,774 |
|
|
|
95,668 |
|
|
|
95,164 |
|
|
|
96,741 |
|
|
|
96,620 |
|
|
|
96,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
December 30, |
|
|
July 1, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
|
(in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
43,671 |
|
|
$ |
38,943 |
|
|
$ |
67,342 |
|
|
$ |
174,236 |
|
|
$ |
155,973 |
|
|
$ |
298,252 |
|
Total assets |
|
|
3,790,002 |
|
|
|
3,326,564 |
|
|
|
3,534,049 |
|
|
|
3,439,483 |
|
|
|
3,435,620 |
|
|
|
4,903,886 |
|
Noncurrent liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,990,735 |
|
|
|
1,727,547 |
|
|
|
2,130,907 |
|
|
|
2,315,250 |
|
|
|
2,484,000 |
|
|
|
|
|
Other noncurrent liabilities |
|
|
407,243 |
|
|
|
385,323 |
|
|
|
469,703 |
|
|
|
146,347 |
|
|
|
271,168 |
|
|
|
49,987 |
|
Total noncurrent liabilities |
|
|
2,397,978 |
|
|
|
2,112,870 |
|
|
|
2,600,610 |
|
|
|
2,461,597 |
|
|
|
2,755,168 |
|
|
|
49,987 |
|
Total stockholders or parent
companies equity |
|
|
562,674 |
|
|
|
334,719 |
|
|
|
185,155 |
|
|
|
288,904 |
|
|
|
69,271 |
|
|
|
3,229,134 |
|
|
|
|
(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 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 expenses that are key to an understanding of our results of
operations. |
|
|
|
2010 Highlights. This section discusses some of the highlights of our performance and
activities during 2010. |
|
|
|
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, Duofold and Gear for Sports. We design, manufacture, source and sell a broad range
of basic apparel such as T-shirts, bras, panties, mens underwear, kids underwear, casualwear,
activewear, socks and hosiery. According to NPD, our brands held either the number one or number
two U.S. market position by units sold in most product categories in which we compete, for the 12
month period ended December 31, 2010.
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 2010, approximately 44% of our net sales were to mass merchants in the United States, 15%
were to national chains and department stores in the United States, 12% were in our International
segment, 9% were in our Direct to Consumer segment in the United States, and 20% were to other
retail channels in the United States such as embellishers, specialty retailers, wholesale clubs,
sporting goods stores and collegiate bookstores.
37
Our Segments
Our operations are managed and reported in five operating segments, each of which is a
reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, Direct to
Consumer and International. These segments are organized principally by product category,
geographic location and distribution channel. Each segment has its own management that is
responsible for the operations of the segments businesses but the segments share a common supply
chain and media and marketing platforms. In October 2009, we completed the sale of our yarn
operations and, as a result, we no longer have net sales in the Other segment, which was primarily
comprised of sales of yarn to third parties.
|
|
|
Innerwear. The Innerwear segment focuses on core basic apparel, 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
2010, net sales from our Innerwear segment were $2.0 billion, representing approximately
46% of total net sales. |
|
|
|
Outerwear. We are a leader in the casualwear and activewear markets through our Hanes,
Champion, Just My Size, Duofold and Gear for Sports 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. On November 1, 2010, we
completed our acquisition of Gear for Sports, a leading seller of licensed logo apparel in
collegiate bookstores and other channels, which significantly strengthens our strategy of
creating stronger branded and defensible businesses in our Outerwear segment. The
operating results of Gear for Sports are included in the Outerwear segment. During 2010,
net sales from our Outerwear segment were $1.3 billion, representing approximately 29% 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 2010, net sales
from our Hosiery segment were $167 million, representing approximately 4% 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 websites operating under the Hanes, One Hanes Place, Just My Size and Champion
names. Our Internet operations are supported by our catalogs. As of January 1, 2011 and
January 2, 2010, we had 224 and 228 outlet stores, respectively. During 2010, net sales
from our Direct to Consumer segment were $378 million, representing approximately 9% 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 2010, net sales from our International segment were $509 million,
representing approximately 12% 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
Outlook for 2011
After a strong performance in 2010 in an uncertain and volatile economic environment, we
expect continued double-digit growth in 2011 with projected net sales of approximately $4.85
billion to $5.0 billion compared to $4.33 billion in 2010. The primary drivers of this growth are
expected to be price increases, partially offset by demand elasticity, a full year of the Gear for
Sports acquisition contributing approximately five points of growth, and net shelf-space gains and
increases in consumer spending each contributing another one to two points of growth in net sales.
Because of expected systemic cost inflation in 2011 as described below, particularly for
cotton, energy and labor, we expect to take price increases throughout the year as warranted by
cost inflation, including multiple increases already put in place through late summer. The timing
and frequency of price increases will vary by product category, channel of trade, and country, with
some increases as frequently as quarterly. The magnitude of price
increases also will vary by product category. Demand
elasticity effects, which could be significant for higher double-digit price increases implemented
later in 2011, should be manageable and will have a muted impact in 2011.
For the first three quarters of 2011, we believe we know the majority of our costs, with
cotton prices locked in through October. Our current 2011 earnings expectations assume we will
continue to realize efficiency savings from our supply chain optimization of approximately $40 million and
eliminate the majority of excess 2010 costs to service the strong sales growth of $25 to $30 million; continued
investment in trade and media spending consistent with our historical rate of $90 to $100
million; stable interest expense; and a higher full-year tax rate that could range from a
percentage in the teens to the low 20s.
As a result of the cost inflation and higher product pricing, we expect higher
working capital, in particular higher accounts receivable and inventories, partially offset by
higher inventory turns which will negatively impact our cash flow. We typically use cash
for the first half of the year and generate most of our cash flow in the second half of the year.
Business and Industry Trends
Inflation and Changing Prices
The economic environment in which we are operating continues to be uncertain and volatile,
which could have unanticipated adverse effects on our business during 2011 and beyond. We are
seeing a sustained increase in various input costs, such as cotton and oil-related materials,
utilities, freight and wages, which impacted our results in 2010 and will continue to do so
throughout 2011. The estimated impact of cost inflation could be in
the range of $250 to $300
million higher in 2011 over 2010. Rising demand for cotton resulting from the economic recovery,
weather-related supply disruptions, significant declines in U.S. inventory and a sharp rise in the futures market for cotton caused cotton
prices to surge upward during 2010 and early 2011. After taking into consideration the cotton
costs currently in our finished goods inventory and cotton prices we have locked in through October, we expect an
average for cotton of at least $1.00 per pound in 2011 for purchases of cotton used in goods manufactured by us, which would have a negative impact of
ranging from $100 to $125 million when compared to 2010. The first and second quarters of 2011 should
reflect an average cost of 83 cents per pound, the third quarter of 2011 should reflect an average
cost of 89 cents per pound and the fourth quarter is not locked in at
this time. These estimates do not include the cotton impact on the
cost of sourced goods.
Although we have sold our yarn operations and nearly 40% of our business, such as bras, sheer
hosiery and portions of our activewear categories, is not cotton-based, we are still exposed to
fluctuations in the cost of cotton. During 2010, cotton prices hit their highest levels in 140
years. 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, among other factors, 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. We are able to lock in the cost of cotton reflected in the price we pay for yarn from
our primary yarn suppliers in an attempt to protect our business from the volatility of the market
price of cotton. However, our business can be affected by dramatic movements in cotton prices.
Although the cost of cotton used in goods manufactured by us has historically represented only 6% of our cost of sales, it has risen to around
10%
39
primarily as a result of cost inflation. Costs incurred for materials and labor are
capitalized into inventory and impact our results as the inventory is sold.
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, the cost of the materials
that are used in our manufacturing process, such as oil-related commodities 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. Similarly, 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. 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 for materials, including cotton, and labor that we are unable to
recoup through price increases or improved efficiencies, or if consumer spending declines, our
business, results of operations, financial condition and cash flows may be adversely affected.
Given the systemic cost inflation that the apparel industry is
currently experiencing, most apparel retailers and manufacturers have
announced they will be implementing price increases in 2011 in order
to maintain satisfactory margins. Higher raw material costs,
including cotton, and higher labor costs overseas are the
primary reasons that price increases are needed to manage the
inflated costs.
Other Business and Industry Trends
The basic apparel market is highly competitive and evolving rapidly. Competition is generally
based upon brand name recognition, price, 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 more of 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 basic apparel 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 2010. Our largest customers in 2010 were Wal-Mart,
Target and Kohls, which accounted for 26%, 17% and 6% 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
worldwide economic conditions. Brands are important in our core
categories to drive traffic and project required quality and value.
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. The Hosiery segment only comprised
4% of our net sales in 2010 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.
Growth Platform
We have built a powerful three-plank growth platform designed to use big brands to increase
sales domestically and internationally, use a low-cost worldwide supply chain to expand margins,
and use strong cash flow to support multiple strategies to create value.
The first plank of our growth platform is the size and power of our brands. We have made
significant investment in our consumer insights capability, innovative product development, and
marketing. We have very large U.S. share positions, with the No. 1 share in all our innerwear
categories and strong positions in outerwear categories, but we have ample opportunities to further
build share. Internationally, our commercial markets include Mexico, Canada, Japan, India, Brazil
and China, where a substantial amount of gross domestic product growth
outside the United States will be concentrated over the next decade.
40
The second plank of our growth platform is the low-cost global supply chain that
we have just built. Our low-cost, high-scale supply chain spans both the Western and Eastern
hemispheres and creates a competitive advantage for us around the globe. Our supply chain has
generated significant cost savings, margin expansion and contributions to cash flow and will
continue to do so as we further optimize our size, scale and production capability. To support our
growth, we have increased our production capacity such as in our Nanjing textile facility, which we
expect will ramp up to full capacity by the end of 2011.
The third plank of our growth platform is our ability to consistently generate strong cash
flow. We have the potential to increase cash flow, and our flexible long-term capital structure
allows us to use cash in executing multiple strategies for earnings growth, including debt
reduction and selective tactical acquisitions.
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 basic apparel 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 our Just My Size program
at Wal-Mart. 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. |
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 four 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 in place, we are focused long-term on optimizing our supply chain to further
enhance efficiency, improve working capital and asset turns and reduce costs through
several initiatives, such as supplier-managed inventory for raw materials and sourced goods
ownership arrangements. We commenced production at our textile production plant in Nanjing,
China, which is our first company-owned textile facility in Asia, in the fourth quarter of
2009 and we ramped up
production in 2010 to support our growth, with the expectation of ramping up to full
capacity by the end of 2011. 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 |
41
|
|
|
hemispheres to support our production capacity.
We consolidated our distribution network by implementing new warehouse management systems
and technology and adding new distribution centers and new third-party logistics providers
to replace parts of our legacy distribution network, including relocating distribution
capacity to our West Coast distribution facility in California in order to expand capacity
for goods we source from Asia. |
|
|
|
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 November 2010, we completed a $1.0 billion senior notes offering and debt
refinancing that strengthened and added flexibility to our capital structure by fixing a
significant percentage of our debt at favorable interest rates at longer maturities. |
|
|
|
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
arrangements and other efforts. |
Global Supply Chain
We have restructured our supply chain over the past four 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 in place, we are focused long-term
on optimizing our supply chain to further enhance efficiency, improve working capital and asset
turns and reduce costs through several initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership arrangements. We commenced production at our textile
production plant in Nanjing, China, which is our first company-owned textile facility in Asia, in
the fourth quarter of 2009 and we ramped up production in 2010 to support our growth, with the
expectation of ramping up to full capacity by the end of 2011. 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. We consolidated our distribution network by implementing new warehouse
management systems and technology and adding new distribution centers and new third-party
logistics providers to replace parts of our legacy distribution network, including relocating
distribution capacity to our West Coast distribution facility in California in order to expand
capacity for goods we source from Asia.
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. Media, advertising and
promotion expenses may vary from
42
period to period during a fiscal year depending on the timing of
our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by
consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary
spending by consumers. Discretionary spending is affected by many factors, including, among
others, general business conditions, interest rates, inflation, consumer debt levels, the
availability of consumer credit, 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 our control. Consumers purchases of
discretionary items, including our products, could decline during periods when disposable income is
lower, when prices increase in response to rising costs, or in periods of actual or perceived
unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to
purchase lower-priced products of our competitors in response to higher prices for our products, or
may choose not to purchase our products at prices that reflect our price increases that become
effective from time to time.
Components of Net Sales and Expenses
Net sales
We generate net sales by selling basic apparel products 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.
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.
43
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, fees associated with sales of certain trade
accounts receivable to financial institutions, 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. |
Highlights from the year ended January 1, 2011
|
|
|
Total net sales in 2010 were $4.33 billion, compared with $3.89 billion in 2009,
representing an 11% increase. |
|
|
|
Operating profit was $404 million in 2010 compared with $271 million in 2009,
representing a 49% increase. As a percent of sales, operating profit was 9.3% in 2010
compared to 7.0% in 2009. |
|
|
|
Diluted earnings per share were $2.16 in 2010, compared with $0.54 in 2009. |
|
|
|
Gross capital expenditures were $106 million in 2010, compared to $127 million in 2009.
Proceeds from sales of assets were $46 million in 2010 and
$38 million in 2009. |
|
|
|
In November 2010, we completed the acquisition of GearCo, Inc., known as Gear for
Sports, a leading seller of licensed logo apparel in collegiate bookstores. Gear for
Sports, which sells embellished licensed apparel under several brand names, including our
Champion label, had sales of approximately $225 million and an operating profit margin of
more than 11% of sales in its fiscal year ended in June 2010. The Gear for Sports
acquisition supports our strategy of creating stronger branded and defensible businesses in
our Outerwear segment, which has included building our Champion activewear brand and
increasing sales of higher-margin graphic apparel. We have significant growth synergies in
both the collegiate bookstore channel and our existing retail channels and opportunities to
take advantage of our low-cost global supply chain. After giving effect to the acquisition,
graphic apparel sales constitute approximately 20% to 25% of the Outerwear Segment net
sales. The purchase price was $55 million in cash for shareholders equity plus payment at
closing of approximately $172 million of debt of the privately held company. |
|
|
|
In November 2010, we completed a senior notes offering and debt refinancing that
strengthened and added flexibility to our capital structure by fixing a significant
percentage of our debt at favorable interest rates at longer maturities. The refinancing
consisted of the sale of $1.0 billion 6.375% Senior Notes with a 10-year maturity. The
proceeds from the sale of the 6.375% Senior Notes were used to retire
early the entire $691
million outstanding under the $750 million floating-rate term loan facility (the Term Loan Facility) under the 2009 Senior Secured Credit Facility and reduce the outstanding borrowings under the Revolving Loan Facility, and to pay fees and expenses related to the transaction. |
44
Consolidated Results of Operations Year Ended January 1, 2011 (2010) Compared with Year Ended
January 2, 2010 (2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
4,326,713 |
|
|
$ |
3,891,275 |
|
|
$ |
435,438 |
|
|
|
11.2 |
% |
Cost of sales |
|
|
2,911,944 |
|
|
|
2,626,001 |
|
|
|
285,943 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,414,769 |
|
|
|
1,265,274 |
|
|
|
149,495 |
|
|
|
11.8 |
|
Selling, general and administrative expenses |
|
|
1,010,581 |
|
|
|
940,530 |
|
|
|
70,051 |
|
|
|
7.4 |
|
Restructuring |
|
|
|
|
|
|
53,888 |
|
|
|
(53,888 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
404,188 |
|
|
|
270,856 |
|
|
|
133,332 |
|
|
|
49.2 |
|
Other expenses |
|
|
20,221 |
|
|
|
49,301 |
|
|
|
(29,080 |
) |
|
|
(59.0 |
) |
Interest expense, net |
|
|
150,236 |
|
|
|
163,279 |
|
|
|
(13,043 |
) |
|
|
(8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
233,731 |
|
|
|
58,276 |
|
|
|
175,455 |
|
|
|
301.1 |
|
Income tax expense |
|
|
22,438 |
|
|
|
6,993 |
|
|
|
15,445 |
|
|
|
220.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
211,293 |
|
|
$ |
51,283 |
|
|
$ |
160,010 |
|
|
|
312.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
4,326,713 |
|
|
$ |
3,891,275 |
|
|
$ |
435,438 |
|
|
|
11.2 |
% |
Consolidated net sales were higher by $435 million or 11% in 2010 compared to 2009, reflecting
significant space and distribution gains at retailers, positive retail sell-through and inventory
restocking at retail. Our significant space and distribution gains at retailers contributed
approximately 6% of sales growth, while approximately 4% of growth was driven by increased retail
sell-through, retailer inventory restocking and foreign currency exchange rates. Early in the
fourth quarter of 2010 we completed the acquisition of Gear for Sports which accounted for 1% of
our higher net sales. All three of our largest segments delivered double digit sales
growth in 2010, with the Outerwear segment achieving 20% sales growth.
Innerwear, Outerwear and International segment net sales were higher by $179 million
(10%), $208 million (20%) and $71 million (16%), respectively, in 2010 compared to 2009. Direct to
Consumer segment net sales were higher by $8 million (2%), while Hosiery and Other segment net
sales were lower by $19 million (10%) and $13 million, respectively, in 2010 compared to 2009.
Outerwears segment net sales include the acquisition of Gear for Sports during the fourth
quarter of 2010 which contributed 4% of the segments growth for the year.
International segment net sales were higher by 16% in 2010 compared to 2009, which
reflected a favorable impact of $22 million related to foreign currency exchange rates due to the
strengthening of the Canadian dollar, Japanese yen, Brazilian real and Mexican peso compared to the
U.S. dollar, partially offset by the strengthening of the U.S. dollar compared to the Euro.
International segment net sales were higher by 11% in 2010 compared to 2009 after excluding the
impact of foreign exchange rates on currency.
45
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Gross profit |
|
$ |
1,414,769 |
|
|
$ |
1,265,274 |
|
|
$ |
149,495 |
|
|
|
11.8 |
% |
As a percent of net sales, our gross profit was 32.7% in 2010 compared to 32.5% in 2009,
increasing as a result of the items described below. Our results in 2010 primarily benefited from
higher sales volumes and savings from cost reduction initiatives and were negatively impacted by
higher cotton costs and higher service costs.
Our gross profit was higher by $149 million in 2010 compared to 2009 due primarily to
higher sales volume of $203 million, savings from our prior restructuring actions of $29 million,
vendor price reductions of $27 million, lower start-up and shut-down costs of $16 million
associated with the consolidation and globalization of our supply chain, a $10 million favorable
impact related to foreign currency exchange rates and lower accelerated depreciation of $5 million. The favorable impact of foreign currency exchange
rates in our International segment was primarily due to the strengthening of the Canadian dollar,
Japanese yen, Brazilian real and Mexican peso compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
Our gross profit was negatively impacted by an unfavorable product sales mix of $54
million, higher sales incentives of $34 million, higher cotton
costs of $33 million, lower product pricing of $12 million,
primarily in the first half of 2010, higher other manufacturing costs
of $6 million and higher production costs of $4 million. The higher
production costs were primarily attributable to $25 million of
incremental costs to service higher demand, partially offset by lower
energy and oil-related costs of $21 million.
Our 2010 sales incentives were higher due to higher sales volumes and, as a
percentage of sales, sales incentives were flat compared to 2009.
We incurred one-time restructuring related write-offs of $4 million in 2009 for stranded
raw materials and work in process inventory determined not to be salvageable or cost-effective to
relocate, which did not recur in 2010.
The cotton prices reflected in our results were 69 cents per pound in 2010 compared to 55
cents per pound in 2009. We continue to see higher prices for cotton and oil-related materials in
the market.
Selling, General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Selling, general and administrative expenses |
|
$ |
1,010,581 |
|
|
$ |
940,530 |
|
|
$ |
70,051 |
|
|
|
7.4 |
% |
Our selling, general and administrative expenses were $70 million higher in 2010 compared to
2009. As a percent of net sales our selling, general and administrative expenses were 23.4% in 2010
compared to 24.2% in 2009.
Our non-media related MAP expenses and media related MAP expenses were higher by $12
million and $5 million, respectively, during 2010 compared to 2009 when we reduced spending due to
the recession. 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. For example, during the second quarter
of 2010 we launched new television advertising featuring new Hanes mens underwear products Comfort
Flex waistband and Lay Flat Collar T-shirts, we introduced new advertising supporting Playtex 18
Hour cooling products and we launched new advertising supporting the new barely there Smart sizes
bra sizing system.
46
We also incurred higher distribution expenses of $28 million, higher selling and other
marketing expenses of $17 million and higher consulting expenses of $7 million. The higher
distribution expenses were primarily due to higher sales volumes and
$10 million of incremental costs to
service higher demand such as overtime and rework expenses in our distribution centers while the
higher selling and other marketing expenses were primarily due to higher sales volumes. In
addition, we recognized an $8 million gain related to the sale of our yarn operations to Parkdale
America, LLC (Parkdale America) in 2009 that did not recur in 2010.
We also incurred higher expenses of $7 million in 2010 compared to 2009 as a result of
opening new retail stores or expanding existing stores. We opened five retail stores during 2010.
These higher expenses were partially offset by lower pension expense of $7 million,
savings of $4 million from our prior restructuring actions, lower accelerated depreciation of $3
million and lower stock compensation and certain other benefit expenses of $2 million in 2010
compared to 2009.
Changes due to foreign currency exchange rates, which are included in the impact of the
changes discussed above, resulted in higher selling, general and administrative expenses of $7
million in 2010 compared to 2009.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Restructuring |
|
$ |
|
|
|
$ |
53,888 |
|
|
$ |
(53,888 |
) |
|
|
(100.0 |
)% |
During 2009, we incurred $54 million in restructuring charges, which primarily related to
employee termination and other benefits, charges related to contract obligations, other exit costs
associated with facility closures approved during that period and fixed asset impairment charges
that did not recur in 2010.
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Operating profit |
|
$ |
404,188 |
|
|
$ |
270,856 |
|
|
$ |
133,332 |
|
|
|
49.2 |
% |
Operating profit was higher in 2010 compared to 2009 as a result of higher gross profit of
$149 million and lower restructuring charges of $54 million, partially offset by higher selling,
general and administrative expenses of $70 million. Changes in foreign currency exchange rates had
a favorable impact on operating profit of $3 million in 2010 compared to 2009.
Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Other expenses |
|
$ |
20,221 |
|
|
$ |
49,301 |
|
|
$ |
(29,080 |
) |
|
|
(59.0 |
)% |
In November 2010, we completed the sale of our 6.375% Senior Notes. The proceeds from the sale
of the 6.375% Senior Notes were used to retire early the entire
$691 million outstanding under the floating-rate Term Loan Facility and reduce the outstanding borrowings under the Revolving Loan
Facility, and to pay fees and expenses related to the transaction. In connection with this
transaction, we recognized a loss on early extinguishment of debt of $14 million related to
unamortized debt issuance costs and the associated fees and expenses.
47
In addition, during 2010 we wrote off unamortized debt issuance costs and incurred charges for
funding fees associated with the sales of certain trade accounts receivable to financial
institutions, which combined totaled $6 million. The write-off related to unamortized debt issuance
costs resulted from the repayment of $57 million of principal under the 2009 Senior Secured Credit
Facility and from a reduction in borrowing capacity available under the Accounts Receivable
Securitization Facility from $250 million to $150 million that we effected in recognition of our
lower trade accounts receivable balance resulting from the sales of certain trade accounts
receivable to a financial institution outside the Accounts Receivable Securitization Facility.
During 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. As a result of the
refinancing of our outstanding borrowings under the 2006 Senior Secured Credit Facility and
repayment of the outstanding borrowings under our $450 million second lien credit facility that we
entered into in 2006 (the Second Lien Credit Facility), we recognized a loss of $26 million in
2009 related to termination of certain interest rate hedging arrangements. In addition, in 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 and we incurred costs of $4 million to amend the 2006 Senior Secured Credit
Facility and the Accounts Receivable Securitization Facility.
Interest Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Interest expense, net |
|
$ |
150,236 |
|
|
$ |
163,279 |
|
|
$ |
(13,043 |
) |
|
|
(8.0 |
)% |
Interest expense, net was lower by $13 million in 2010 compared to 2009. The lower
interest expense was primarily attributable to lower outstanding debt balances that reduced
interest expense by $12 million. In addition, the refinancing of our debt structure in December
2009, which included the amendment and restatement of the 2006 Senior Secured Credit Facility into
the 2009 Senior Secured Credit Facility, the issuance of the 8% Senior Notes and the settlement of
certain outstanding interest rate hedging instruments, and the refinancing of our debt structure in
November 2010, which included the sale of our 6.375% Senior
Notes, combined with a lower London Interbank Offered Rate, or
LIBOR, and
federal funds rate, caused a net decrease in interest expense in 2010 compared to 2009 of $1
million.
Our weighted average interest rate on our outstanding debt was 5.91% during 2010 compared
to 6.86% in 2009.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Income tax expense |
|
$ |
22,438 |
|
|
$ |
6,993 |
|
|
$ |
15,445 |
|
|
|
220.9 |
% |
Our effective income tax rate was 10% in 2010 compared to 12% in 2009. The effective income
tax rate of 10% for 2010 was primarily attributable to a discrete, non-recurring income tax benefit
of approximately $20 million. The income tax benefit resulted from a change in estimate associated
with the remeasurement of unrecognized tax benefit accruals and the determination that certain tax
positions had been effectively settled following the finalization of tax reviews and audits for
amounts that were less than originally anticipated. This non-recurring income tax benefit was
partially offset by a lower proportion of our earnings attributed to foreign subsidiaries than in
2009 which are taxed at rates lower than the U.S. statutory rate.
Our strategic initiative to enhance our global supply chain by
optimizing lower-cost manufacturing capacity and to support our
commercial operations outside the United States resulted in capital
investments outside the United States in 2009 and 2010 that
impacted our effective tax rate.
48
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net income |
|
$ |
211,293 |
|
|
$ |
51,283 |
|
|
$ |
160,010 |
|
|
|
312.0 |
% |
Net income for 2010 was higher than 2009 primarily due to higher operating profit of $133
million, lower other expenses of $29 million and lower interest expense of $13 million, which was
partially offset by higher income tax expense of $15 million.
49
Operating Results by Business Segment Year Ended January 1, 2011 (2010) Compared with Year
Ended January 2, 2010 (2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
2,012,922 |
|
|
$ |
1,833,616 |
|
|
$ |
179,306 |
|
|
|
9.8 |
% |
Outerwear |
|
|
1,259,935 |
|
|
|
1,051,735 |
|
|
|
208,200 |
|
|
|
19.8 |
|
Hosiery |
|
|
166,780 |
|
|
|
185,710 |
|
|
|
(18,930 |
) |
|
|
(10.2 |
) |
Direct to Consumer |
|
|
377,847 |
|
|
|
369,739 |
|
|
|
8,108 |
|
|
|
2.2 |
|
International |
|
|
509,229 |
|
|
|
437,804 |
|
|
|
71,425 |
|
|
|
16.3 |
|
Other |
|
|
|
|
|
|
12,671 |
|
|
|
(12,671 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
4,326,713 |
|
|
$ |
3,891,275 |
|
|
$ |
435,438 |
|
|
|
11.2 |
% |
|
Segment operating profit (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear |
|
$ |
263,368 |
|
|
$ |
234,352 |
|
|
$ |
29,016 |
|
|
|
12.4 |
% |
Outerwear |
|
|
77,656 |
|
|
|
53,050 |
|
|
|
24,606 |
|
|
|
46.4 |
|
Hosiery |
|
|
53,583 |
|
|
|
61,070 |
|
|
|
(7,487 |
) |
|
|
(12.3 |
) |
Direct to Consumer |
|
|
25,880 |
|
|
|
37,178 |
|
|
|
(11,298 |
) |
|
|
(30.4 |
) |
International |
|
|
59,368 |
|
|
|
44,688 |
|
|
|
14,680 |
|
|
|
32.8 |
|
Other |
|
|
|
|
|
|
(2,164 |
) |
|
|
2,164 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
|
479,855 |
|
|
|
428,174 |
|
|
|
51,681 |
|
|
|
12.1 |
|
Items not included in segment operating
profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses |
|
|
(63,158 |
) |
|
|
(75,127 |
) |
|
|
(11,969 |
) |
|
|
(15.9 |
) |
Amortization of trademarks and other
intangibles |
|
|
(12,509 |
) |
|
|
(12,443 |
) |
|
|
66 |
|
|
|
0.5 |
|
Restructuring |
|
|
|
|
|
|
(53,888 |
) |
|
|
(53,888 |
) |
|
|
(100.0 |
) |
Inventory write-off included in cost of sales |
|
|
|
|
|
|
(4,135 |
) |
|
|
(4,135 |
) |
|
|
(100.0 |
) |
Accelerated depreciation included in cost of
sales |
|
|
|
|
|
|
(8,641 |
) |
|
|
(8,641 |
) |
|
|
(100.0 |
) |
Accelerated depreciation included in selling,
general and administrative expenses |
|
|
|
|
|
|
(3,084 |
) |
|
|
(3,084 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit |
|
|
404,188 |
|
|
|
270,856 |
|
|
|
133,332 |
|
|
|
49.2 |
|
Other expenses |
|
|
(20,221 |
) |
|
|
(49,301 |
) |
|
|
(29,080 |
) |
|
|
(59.0 |
) |
Interest expense, net |
|
|
(150,236 |
) |
|
|
(163,279 |
) |
|
|
(13,043 |
) |
|
|
(8.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
$ |
233,731 |
|
|
$ |
58,276 |
|
|
$ |
175,455 |
|
|
|
301.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2010
is consistent with 2009. Our consolidated selling, general and administrative expenses before
segment allocations were $70 million higher in 2010 compared to 2009.
50
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
2,012,922 |
|
|
$ |
1,833,616 |
|
|
$ |
179,306 |
|
|
|
9.8 |
% |
Segment operating profit |
|
|
263,368 |
|
|
|
234,352 |
|
|
|
29,016 |
|
|
|
12.4 |
|
Overall net sales in the Innerwear segment were higher by $179 million or 10% in 2010 compared
to 2009, primarily due to space and distribution gains, stronger sales at retail and retailer
inventory restocking. We have achieved space and distributions gains by leveraging our scale and
consumer insight. Our strong brands across all distribution channels and our innovation processes
allow us to take advantage of long-term consumer trends.
Net sales in our male underwear product category were 19% or $146 million higher in 2010
compared to 2009, which reflect higher net sales in our Hanes brand of $135 million primarily due
to distribution gains related to a new customer in the discount retail channel, space gains in the
mass merchant and department store channels and increased retail sell through. Our male underwear
product category continues to benefit from the increased media support for our Hanes brand and from
our identification of key long-term megatrends such as comfort and dyed and color products. We have
developed innovations to capitalize on these trends such as the Hanes Lay Flat Collar T-shirts and
Hanes Comfortsoft waist band briefs and boxers.
Intimate apparel net sales were $22 million higher in 2010 compared to 2009. Our bra
category net sales were $13 million higher in the average figure sizes driven primarily by space
and distribution gains. Our panties category net sales were higher by $9 million primarily due to
distribution gains related to a new customer in the discount retail channel. From a brand
perspective, our net sales were higher in our smaller brands (barely there, Just My Size and
Wonderbra) by $21 million, in our Hanes brand by $8 million and in our Bali brand by $3 million,
partially offset by lower net sales in our Playtex brand of $6 million and lower private label net
sales of $4 million.
Higher net sales of $12 million in our socks product category reflect higher Hanes brand
net sales of $26 million, partially offset by lower Champion brand net sales of $14 million in 2010
compared to 2009. The higher Hanes brand net sales were primarily due to space gains in the mass
merchant channel and increased retail sell through and the lower Champion brand net sales were
primarily due to lower net sales in the wholesale club channel.
Innerwear segment gross profit was higher by $45 million in 2010 compared to 2009. The
higher gross profit was primarily due to higher sales volume of $101 million, savings from our
prior restructuring actions of $21 million, vendor price
reductions of $15 million and higher product pricing of $3 million before increased sales
incentives. These lower costs were partially offset by higher sales incentives of $43 million due
to higher sales volumes and investments made with retailers, unfavorable product sales mix of $22
million, higher cotton costs of $13 million, higher production costs of $11 million and higher other
manufacturing costs of $5 million. The higher production costs were
due to incremental costs to service higher demand, partially offset
by lower energy and oil-related costs.
As a percent of segment net sales, gross profit in the Innerwear segment was 31.6% in
2010 compared to 32.3% in 2009.
Innerwear segment operating profit was higher in 2010 compared to 2009 primarily as a
result of higher gross profit and savings of $2 million from prior restructuring actions primarily
for compensation and related benefits, partially offset by higher media related MAP expenses of $7
million, higher distribution expenses of $7 million and higher non-media related MAP expenses of $4
million.
51
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
1,259,935 |
|
|
$ |
1,051,735 |
|
|
$ |
208,200 |
|
|
|
19.8 |
% |
Segment operating profit |
|
|
77,656 |
|
|
|
53,050 |
|
|
|
24,606 |
|
|
|
46.4 |
|
Outerwear segment net sales, which benefited from space and distribution gains and stronger
sales at retail, were higher by $208 million or 20% in 2010 compared to 2009. Our casualwear
category net sales were higher in both the wholesale and retail channels by $64 million and $59
million, respectively. The higher net sales in the wholesale casualwear channel of 22% were
primarily due to stronger sales at retail and replenishment timing of inventory levels by
third-party embellishers and wholesalers. The higher net sales in the retail casualwear channel of
21% reflect space gains primarily 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. This integrated
program with Wal-Mart develops, sources, and merchandises a line of womens clothing designed to
meet the needs of plus size women.
Our Champion brand activewear net sales, which continue to be positively impacted by our
marketing investment in the brand, were higher by $49 million or 10% due to stronger sales at
retail and space gains in the sporting goods channel. Our Champion brand has achieved consistent
growth by focusing on the fast growing active demographic with a unique moderate price positioning.
The acquisition of Gear for Sports in early November 2010 added an incremental $36 million of
net sales for the year. The Gear for Sports business includes sales of licensed logo apparel in
collegiate bookstores and other channels.
Outerwear segment gross profit was higher by $48 million in 2010 compared to 2009. The
higher gross profit was primarily due to higher sales volume of $70 million, lower sales incentives
of $15 million, savings of $7 million from our cost reduction initiatives and prior restructuring
actions, lower production costs of $5 million related to lower energy and oil-related costs, vendor
price reductions of $5 million, lower other manufacturing costs of $3 million and lower on-going
excess and obsolete inventory costs of $2 million. These lower costs were partially offset by lower
product pricing of $22 million primarily in the first half of 2010, higher cotton costs of $20
million and unfavorable product sales mix of $15 million.
As a percent of segment net sales, gross profit in the Outerwear segment was 22.1% in
2010 compared to 21.9% in 2009, increasing as a result of the items described above.
Outerwear segment operating profit was higher in 2010 compared to 2009 primarily as a
result of higher gross profit and lower media related MAP expenses of $3 million, partially offset
by higher distribution expenses of $15 million, higher selling and other marketing expenses of $7
million and higher non-media related MAP expenses of $4 million.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
166,780 |
|
|
$ |
185,710 |
|
|
$ |
(18,930 |
) |
|
|
(10.2 |
)% |
Segment operating profit |
|
|
53,583 |
|
|
|
61,070 |
|
|
|
(7,487 |
) |
|
|
(12.3 |
) |
Net sales in the Hosiery segment declined by $19 million or 10%, which was primarily due
to lower net sales of
our Leggs brand to mass retailers and food and drug stores and our Hanes brand to national
chains and department stores. The hosiery category has been in a state of consistent decline for
the past decade, as the trend toward casual dress reduced demand for sheer hosiery. Generally, we
manage the Hosiery segment for cash, placing an emphasis on reducing our cost structure and
managing cash efficiently.
52
Hosiery segment gross profit was lower by $9 million in 2010 compared to 2009. The lower
gross profit for 2010 compared to 2009 was primarily the result of lower sales volume of $11
million and higher on-going excess and obsolete inventory costs of $2 million, partially offset by
lower production costs of $2 million and vendor price reductions of $1 million.
As a percent of segment net sales, gross profit in the Hosiery segment was 50.2% in 2010
compared to 49.8% in 2009.
Hosiery segment operating profit was lower in 2010 compared to 2009 primarily as a result
of lower gross profit and higher media related MAP expenses of $2 million, partially offset by
lower distribution expenses of $2 million.
Direct to Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
377,847 |
|
|
$ |
369,739 |
|
|
$ |
8,108 |
|
|
|
2.2 |
% |
Segment operating profit |
|
|
25,880 |
|
|
|
37,178 |
|
|
|
(11,298 |
) |
|
|
(30.4 |
) |
Direct to Consumer segment net sales were $8 million or 2% higher in 2010 compared to
2009 primarily due to higher net sales in our outlet stores attributable to new stores opened after
2009 and higher net sales related to our Internet operations. Comparable store sales in 2010 were
flat compared to 2009.
Direct to Consumer segment gross profit was slightly higher in 2010 compared to 2009. The
higher gross profit was primarily due to higher sales volume of $4 million and higher product
pricing of $2 million which was offset by higher other product costs of $5 million.
As a percent of segment net sales, gross profit in the Direct to Consumer segment was 61.1% in
2010 compared to 62.4% in 2009.
Direct to Consumer segment operating profit was lower in 2010 compared to 2009 primarily as a
result of higher expenses of $7 million as a result of opening new retail stores or expanding
existing stores and higher non-media related MAP expenses of $3 million.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
509,229 |
|
|
$ |
437,804 |
|
|
$ |
71,425 |
|
|
|
16.3 |
% |
Segment operating profit |
|
|
59,368 |
|
|
|
44,688 |
|
|
|
14,680 |
|
|
|
32.8 |
|
Overall net sales in the International segment were higher by $71 million or 16% in 2010
compared to 2009, primarily as a result of stronger net sales in Canada, Europe, Mexico, Brazil,
China, India and Argentina, which reflects space and distribution gains and stronger sales at
retail, and a favorable impact of $22 million related to
foreign currency exchange rates, partially offset by lower sales in Japan.
Excluding the impact of foreign exchange rates on currency, International segment net
sales increased by 11% in 2010 compared to 2009. The favorable impact of foreign currency exchange
rates in our International segment was primarily due to the strengthening of the Canadian dollar,
Japanese yen, Brazilian real, and Mexican peso compared to the U.S. dollar, partially offset by the
strengthening of the U.S. dollar compared to the Euro.
During 2010, we experienced higher net sales, in each case excluding the impact of
foreign currency exchange rates, in our activewear, intimate apparel and male underwear businesses
in Canada of $11 million, in our
53
casualwear business in Europe of $11 million, in our intimate
apparel business in Mexico of $7 million, in our male underwear and hosiery businesses in Brazil
of $7 million, in our thermals and male underwear businesses in China of $5 million, in our male
underwear business in India of $3 million, in our intimate apparel business in Argentina of $3
million and higher net sales of $6 million in all other regions, partially offset by lower net
sales in our activewear and male underwear businesses in Japan of $4 million. Our innerwear
businesses in Canada and Mexico have continued to produce strong sales growth as we hold leading
positions with strong market shares in intimate apparel and male underwear product categories. In
certain international markets we are focusing on adopting global designs for some product
categories to quickly launch new styles to expand our market position. The higher net sales reflect
our successful efforts to improve our strong positions.
International segment gross profit was higher by $37 million in 2010 compared to 2009.
The higher gross profit was primarily a result of higher sales volume of $22 million, a favorable
impact related to foreign currency exchange rates of $10 million, vendor price reductions of $6
million and higher product pricing of $5 million, partially offset by higher sales incentives of $6
million.
As a percent of segment net sales, gross profit in the International segment was 38.8% in
2010 compared to 36.7% in 2009, increasing as a result of the items described above.
International segment operating profit was higher in 2010 compared to 2009 primarily
as a result of the higher gross profit, partially offset by higher selling and other marketing
expenses of $9 million, higher distribution expenses of $7 million, higher non-media related MAP
expenses of $3 million and higher consulting expenses of $2 million.
The changes in foreign currency exchange rates, which are included in the impact on gross
profit above, had a favorable impact on operating profit of $3 million in 2010 compared to 2009.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
Higher |
|
|
Percent |
|
|
|
2011 |
|
|
2010 |
|
|
(Lower) |
|
|
Change |
|
|
|
(dollars in thousands) |
|
Net sales |
|
$ |
|
|
|
$ |
12,671 |
|
|
$ |
(12,671 |
) |
|
|
(100.0 |
)% |
Segment operating profit (loss) |
|
|
|
|
|
|
(2,164 |
) |
|
|
2,164 |
|
|
|
100.0 |
|
Sales in our Other segment primarily consisted of sales of yarn to third parties, which were
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 no longer have net sales in our
Other segment.
General Corporate Expenses
General corporate expenses were $12 million lower in 2010 compared to 2009 primarily due to
lower start-up and shut-down costs of $16 million associated with the consolidation and
globalization of our supply chain, lower pension expense of $7 million and lower stock compensation
and certain other benefits of $5 million, partially offset by lower gains on sales of assets of $12
million and higher other expenses of $4 million.
54
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 the 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.
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 the 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 the 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.
Hosiery segment net sales were lower (15%) in 2009 compared to 2008. The net sales decline
rate steadily
55
improved over three consecutive quarters ending with the fourth quarter of 2009.
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
experienced 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 management and promotions.
56
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 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 was 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 of 2006
(the Omnibus Incentive Plan) 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.
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
57
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 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 resulted 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 was 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 in 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
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.
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.
58
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 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.
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 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.
59
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 was 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 strategic initiative to enhance our global supply chain by optimizing lower-cost manufacturing capacity and to support our commercial operations outside the United States resulted in capital investments outside the United States in 2009 that impacted our effective tax rate.
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.
60
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 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 |
|
61
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 partially offset by an
increase of $5 million in 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.
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 by our customers in this channel and highly price competitive especially in
the 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.
62
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.
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 improved over three
consecutive quarters ending with the fourth quarter of 2009. 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.
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
63
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.
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
experienced 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
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
64
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 consisted
of sales of yarn to third parties
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 no longer have net sales in our
Other segment.
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.
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 international loan
facilities. At January 1, 2011, we had $588 million of borrowing availability under our $600
million Revolving Loan Facility (after taking into account outstanding letters of credit), $49
million of borrowing availability under our Accounts Receivable Securitization Facility, $44
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 and optimize 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 |
65
|
|
|
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 1, 2011 at a cost of $75 million), although we may choose not to repurchase any
stock and instead focus on other uses of cash such as the repayment of our debt. |
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. We have restructured our supply chain over the past four years to create more
efficient production clusters that utilize fewer, larger facilities and to balance production
capability between the Western Hemisphere and Asia. As a result of sales growth in 2010 and the
expectation of continued sales growth in 2011, we have secured additional capacity with outside
contractors to support sales growth.
Our working capital increased during 2010, primarily in the form of inventory, to support our
higher sales growth. The inventory increase is the result of both higher input costs and higher
unit growth, including unit growth resulting from the Gear for Sports
acquisition. Given cost
inflation and higher product pricing, we expect higher working capital in 2011, in
particular higher accounts receivable and inventories somewhat offset by increased inventory
turns. With our global supply chain infrastructure in place, we are focused long-term on optimizing
our supply chain to further enhance efficiency, improve working capital and asset turns and reduce
costs through several initiatives, such as supplier-managed inventory for raw materials and sourced
goods ownership arrangements.
We are operating in an uncertain and volatile economic environment, which could have
unanticipated adverse effects on our business. During 2010, while there was a modest rebound in
consumer spending, we also experienced substantial pressure on profitability due to the economic
climate, such as higher cotton, energy and labor costs. Rising demand for cotton resulting from the
economic recovery, weather-related supply disruptions, significant declines in U.S. inventory and a sharp rise in the futures market for
cotton have caused cotton prices to surge upward during 2010. Because of systemic cost inflation,
particularly for cotton, energy and labor, we expect to take price increases throughout 2011 as
warranted by cost inflation, including multiple increases already put in place through late summer.
The timing and frequency of price increases will vary by product category, channel of trade, and
country, with some increases as frequently as quarterly. The magnitude of price increases also will
vary by product category.
Demand elasticity effects, which could be significant for higher double-digit price increases
implemented later in the year, should be manageable and will have a muted impact in 2011.
The hosiery category has been in a state of consistent decline for the past decade, as the
trend toward casual dress reduced demand for sheer hosiery. The Hosiery segment comprised only 4%
of our net sales in 2010, 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.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our
Revolving Loan Facility, Accounts Receivable Securitization Facility and international loan
facilities to meet the cash requirements of our business. The primary cash requirements of our
business are payments to vendors in the normal course of business, capital expenditures, maturities
of debt and related interest payments, contributions to our pension plans and repurchases of our
stock. We believe we have sufficient cash and available borrowings for our liquidity needs. In
November 2010, we completed a $1.0 billion senior notes offering and debt refinancing that
strengthened and added flexibility to our capital structure by fixing a significant percentage of
our debt at favorable interest rates at longer maturities.
Our working capital was higher in 2010 compared to 2009, primarily in the form of
inventory, to support our higher sales growth. Year-end 2010 inventory was $274 million higher than
year-end 2009 due to unit growth and after giving effect to the Gear for Sports acquisition. In
addition, our inventory was higher due to rising input costs such as cotton and oil-related
materials and the Asia supply chain transition and production ramp-up. In 2011 we expect working
capital to be higher than 2010 to support the continued double-digit sales growth, price increases
and cost inflation.
66
Capital spending has varied significantly from year to year as we executed our supply
chain consolidation and globalization strategy and the integration and consolidation of our
technology systems. We spent $106 million on gross capital expenditures during 2010, which were
offset by cash proceeds of $46 million from sales of exited supply chain facilities and
sale-leaseback transactions. We expect to continue to invest in our infrastructure during 2011 with
net capital expenditures approximating $100 million.
During 2009 and 2010, we entered into agreements to sell selected trade accounts
receivable to financial institutions 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.
Pension Plans
Our U.S. qualified pension plan is approximately 74% funded as of January 1, 2011 compared to
80% funded as of January 2, 2010. 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
2010. Because we have elected not to make a voluntary cash contribution in 2011 sufficient to
achieve a funded status of 80%, beginning April 1, 2011 we are required under the Pension
Protection Act to implement restrictions on certain accelerated forms of benefit payments for
future retirees . We performed a thorough review of the impact of making a voluntary cash
contribution to the plan in order to maintain a funded level of 80%. Based on our review, and
given that these restrictions are expected to impact only a limited number of plan participants, will not
impact the total benefits received by plan participants and will not have a material impact on our
future cash flows, we determined not to make such a contribution to the plan. We expect to make
required cash contributions of $7 million to $9 million to the U.S. qualified pension plan in 2011
based on a preliminary calculation by our actuary. We expect pension expense in 2011 of
approximately $11 million compared to $15 million in 2010. See Note 15 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 agreed to contribute $14 million to the
plan, $7 million of which we contributed in each of September 2009 and September 2010.
In June 2010, the U.S. Congress passed legislation that provides for pension funding relief
for companies with defined benefit pension plans by allowing those companies to choose between two
alternative funding schedules: amortizing funding shortfalls over 15 years for any two plan years
between 2008 and 2011, or paying interest on a funding shortfall for only two plan years of the
employers choosing after which a seven-year amortization would apply. We expect either funding
relief option could benefit us with improved cash flow starting in 2011 due to expected lower
pension contributions; however neither option will improve total cash flow. We are working with our
actuaries to quantify the magnitude of the short-term impact on us.
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.
While we may repurchase additional stock under the program, we may choose not to repurchase any
stock and focus more on other uses of cash in the next twelve months.
67
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 1, 2011, and their expected timing on future cash flows and liquidity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
At January 1, |
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
1 Year |
|
|
1 - 3 Years |
|
|
3 - 5 Years |
|
|
Thereafter |
|
|
|
|
|
|
|
(in thousands) |
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory purchase
obligations |
|
$ |
466,642 |
|
|
$ |
466,642 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Marketing and advertising
obligations |
|
|
26,427 |
|
|
|
18,624 |
|
|
|
3,783 |
|
|
|
3,269 |
|
|
|
751 |
|
Uncertain tax positions |
|
|
34,424 |
|
|
|
587 |
|
|
|
14,809 |
|
|
|
7,009 |
|
|
|
12,019 |
|
Deferred compensation |
|
|
12,273 |
|
|
|
1,939 |
|
|
|
5,477 |
|
|
|
2,338 |
|
|
|
2,519 |
|
Interest on debt
obligations (1) |
|
|
953,024 |
|
|
|
122,898 |
|
|
|
245,074 |
|
|
|
226,302 |
|
|
|
358,750 |
|
Operating lease obligations |
|
|
268,898 |
|
|
|
52,220 |
|
|
|
78,041 |
|
|
|
56,699 |
|
|
|
81,938 |
|
Defined benefit plan
minimum contributions |
|
|
8,000 |
|
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other
restructuring payments |
|
|
6,042 |
|
|
|
6,036 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Other long-term
obligations (2) |
|
|
92,050 |
|
|
|
10,109 |
|
|
|
30,678 |
|
|
|
29,463 |
|
|
|
21,800 |
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
3,895 |
|
|
|
3,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt |
|
|
2,080,735 |
|
|
|
90,000 |
|
|
|
|
|
|
|
490,735 |
|
|
|
1,500,000 |
|
Notes payable |
|
|
50,678 |
|
|
|
50,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,003,088 |
|
|
$ |
831,628 |
|
|
$ |
377,868 |
|
|
$ |
815,815 |
|
|
$ |
1,977,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest obligations on floating rate debt instruments are calculated for future periods using
interest rates in effect at January 1, 2011. |
|
(2) |
|
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. |
68
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the years
ended January 1, 2011 and January 2, 2010 was derived from our financial statements.
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(dollars in thousands) |
|
|
Operating activities |
|
$ |
133,054 |
|
|
$ |
414,504 |
|
Investing activities |
|
|
(283,995 |
) |
|
|
(88,844 |
) |
Financing activities |
|
|
155,685 |
|
|
|
(354,174 |
) |
Effect of changes in foreign currency exchange rates
on cash |
|
|
(16 |
) |
|
|
115 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
4,728 |
|
|
|
(28,399 |
) |
Cash and cash equivalents at beginning of year |
|
|
38,943 |
|
|
|
67,342 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
43,671 |
|
|
$ |
38,943 |
|
|
|
|
|
|
|
|
Operating Activities
Net cash provided by operating activities was $133 million in 2010 compared to $415
million in 2009. The lower cash from operating activities of $282 million for 2010 compared to 2009
is primarily attributable to higher uses of our working capital of $441 million, partially offset
by higher net income of $160 million.
Net inventory increased $274 million from January 2, 2010 resulting from both higher
input costs and higher unit growth, including unit growth resulting from the Gear for Sports
acquisition. In addition, our inventory was higher due to rising input costs such as cotton and
oil-related materials and the Asia supply chain transition and production ramp-up. We will carry
additional inventory into 2011 to support continuing sales momentum and will secure additional
production capacity with outside contractors as needed.
Accounts receivable was $53 million higher compared to January 2, 2010 primarily due to
higher sales volumes and the acquisition of Gear for Sports, partially offset by the sale of
selected trade accounts receivable to financial institutions and timing of collections.
With our global supply chain infrastructure in place, we are focused long-term on
optimizing our supply chain to further enhance efficiency, improve working capital and asset turns
and reduce costs through several initiatives, such as supplier-managed inventory for raw materials
and sourced goods ownership arrangements. 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.
Investing Activities
Net cash used in investing activities was $284 million in 2010 compared to $89 million in
2009. The higher net cash used in investing activities of $195 million for 2010 compared to 2009
was primarily the result of the net cash used for the acquisition of Gear for Sports in November
2010 of $223 million, partially offset by lower gross capital expenditures of $21 million and
higher proceeds from sales of assets of $8 million. During 2010, proceeds from sales of assets were
$46 million, primarily resulting from sale-leaseback transactions involving four distribution
centers.
Financing Activities
Net cash provided by financing activities was $156 million in 2010 compared to net cash
used in financing activities of $354 million in 2009. The higher net cash from financing activities
of $510 million in 2010 compared to 2009 was primarily the result of higher net borrowings of $443
million under the senior secured credit facilities and senior notes. The higher net borrowings
reflect the acquisition of Gear for Sports in November 2010. In addition, we had higher net
borrowings of $133 million on the Accounts Receivable Securitization Facility and lower debt
69
fees
associated with the issuance of our 6.375% Senior Notes of $51 million.
We had higher net repayments on the Revolving Loan Facility of $103 million and higher net
repayments on notes payable of $21 million in 2010. In addition, the higher net cash from
financing activities was due to higher proceeds from stock options exercised of $5 million in 2010.
Cash and Cash Equivalents
As of January 1, 2011 and January 2, 2010, cash and cash equivalents were $44 million and
$39 million, respectively. The higher cash and cash equivalents as of January 1, 2011 was primarily
the result of net cash provided by financing activities of $156 million and net cash provided by
operating activities of $133 million, offset by net cash used in investing activities of $284
million.
Financing Arrangements
We believe our financing structure provides a secure base to support our ongoing operations
and key business strategies. In November 2010, we completed the sale of $1 billion in aggregate
principal amount of the 6.375% Senior Notes. We used the net proceeds from the offering of the
6.375% Senior Notes to repay all outstanding borrowings under the Term Loan Facility
and to reduce the outstanding borrowings under the Revolving Loan Facility. 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-. Moodys
rating outlook for us is stable and its rating of the Floating Rate Senior Notes and 8% Senior
Notes is B1. In November 2010, Moodys assigned a rating of B1 on the 6.375% Senior Notes and
changed the rating of the 2009 Senior Secured Credit Facility to Baa3. In November 2010, Standard &
Poors changed our current outlook to stable from negative, changed the rating of the Floating
Rate Senior Notes and the 8% Senior Notes to BB- and assigned a rating of BB- to the 6.375% Senior
Notes.
After considering the Revolving Credit Facilitys new investment grade rating, we launched an
amendment process in February 2011 that is intended to provide greater flexibility in managing our
debt capital structure and greater flexibility under our financial covenants. The amendment would
also extend the maturity and lower the interest rate for those lenders agreeing to it.
As of January 1, 2011, we were in compliance with all financial covenants under our credit
facilities. The
maximum leverage ratio permitted under the 2009 Senior Secured Credit Facility and the
Accounts Receivable Securitization Facility was 4.00 to 1 for the quarter ended January 1, 2011 and
declines to 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 2011, however economic conditions or the occurrence of events
discussed above under Risk Factors could cause noncompliance.
70
2009 Senior Secured Credit Facility
The 2009 Senior Secured Credit Facility initially provided for aggregate borrowings of $1.15
billion, consisting of the $750 million Term Loan Facility and the $400
million Revolving Loan Facility. 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 are used for general corporate purposes and working capital needs.
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. In order to support our working
capital needs and fund the acquisition of Gear for Sports, in September 2010, we increased the
commitments under the Revolving Loan Facility from $400 million to $600 million. In November 2010,
we used proceeds from the issuance of the 6.375% Senior Notes to repay all outstanding borrowings
under the Term Loan Facility and to reduce the outstanding borrowings under the Revolving Loan
Facility. As of January 1, 2011, we had $0 outstanding under the Revolving Loan Facility, $12
million of standby and trade letters of credit issued and outstanding under this facility and $588
million of borrowing availability. At January 1, 2011, the interest rate on the Revolving Loan
Facility was 6.75%.
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:
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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 |
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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 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.
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 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 is determined by reference to a leverage-based
pricing grid set forth in the 2009 Senior Secured Credit Facility. The applicable margin ranges
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.
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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
increases 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 declines 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 contains customary events of default, including
nonpayment of principal when due; nonpayment of interest, 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).
6.375% Senior Notes
On November 9, 2010, we issued $1 billion aggregate principal amount of the 6.375% Senior
Notes. The 6.375% Senior Notes are senior unsecured obligations that rank equal in right of payment
with all of our existing and future unsubordinated indebtedness. The 6.375% Senior Notes bear
interest at an annual rate equal to 6.375%. Interest is payable on the 6.375% Senior Notes on June
15 and December 15 of each year. The 6.375% Senior Notes will mature on December 15, 2020. The net
proceeds from the sale of the 6.375% Senior Notes were approximately $979 million. As noted above,
these proceeds were used to repay all outstanding borrowings under the Term Loan Facility and reduce the outstanding borrowings under the Revolving Loan Facility and to pay fees and expenses relating to these transactions. The 6.375% Senior
Notes are guaranteed by substantially all of our domestic subsidiaries.
We may redeem some or all of the notes prior to December 15, 2015 at a redemption price equal
to 100% of the principal amount of 6.375% Senior Notes redeemed plus an applicable premium. We may
redeem some or all of the 6.375% Senior Notes at any time on or after December 15, 2015 at a
redemption price equal to the principal amount of the 6.375% Senior Notes plus a premium of 3.188%
if redeemed during the 12-month period commencing on December 15, 2015, 2.125% if redeemed during
the 12-month period commencing on December 15, 2016, 1.062% if redeemed during the 12-month period
commencing on December 15, 2017 and no premium if redeemed after December 15, 2018, as well as any
accrued and unpaid interest as of the redemption date. In addition, at any time prior to December
15, 2013, we may redeem up to 35% of the aggregate principal amount of the 6.375% Senior Notes at a
redemption price of 106.375% of the principal amount of the 6.375% Senior Notes redeemed with the
net cash proceeds of certain equity offerings.
The indenture governing the 6.375% 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.
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 15,
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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, 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 8% Senior Notes at a
redemption price of 108% of the principal amount of the 8% Senior 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
we subsequently amended several times. The description of the Accounts Receivable Securitization
Facility below gives effect to all amendments to date. The Accounts Receivable Securitization
Facility 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. Effective February 2010, we elected to reduce the amount of funding available under
the Accounts Receivable Securitization Facility from $250 million to $150 million. Under the terms
of the Accounts Receivable Securitization Facility, we and certain of our subsidiaries sell, on a
revolving
basis, certain domestic trade receivables to HBI Receivables LLC (Receivables LLC), a
wholly-owned
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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. Unless the term is
extended, the Accounts Receivable Securitization Facility will terminate on March 31, 2011.
Availability of funding under the Accounts Receivable Securitization Facility depends
primarily upon the eligible outstanding receivables balance. As of January 1, 2011, we had $90
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 HSBC Bank USA, N.A. 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. In addition, Receivables LLC is required to make certain payments to a
conduit purchaser, a committed purchaser, or certain entities that provide funding to or are
affiliated with them, in the event that assets and liabilities of a conduit purchaser are
consolidated for financial and/or regulatory accounting purposes with certain other entities. The
average blended interest rate for the outstanding balance as of January 1, 2011 was 2.81%.
The Accounts Receivable Securitization Facility contains customary events of default and
requires us to maintain the same interest coverage ratio and leverage ratio contained from time to
time in the 2009 Senior Secured Credit Facility, provided that any changes to such covenants will
only be applicable for purposes of the Accounts Receivable Securitization Facility if approved by
the Managing Agents or their affiliates. As of January 1, 2011, we were in compliance with all
financial covenants.
Notes Payable
Notes payable were $51 million at January 1, 2011 and $67 million at January 2, 2010.
We have a short-term revolving facility arrangement with a Salvadoran branch of a Canadian
bank amounting to $30 million of which $29.7 million was outstanding at January 1, 2011 which
accrues interest at 4.20%.
We have a short-term revolving facility arrangement with a Chinese branch of a U.S. bank
amounting to RMB 155 million ($23.5 million) of which $12.9 million was outstanding at January 1,
2011 which accrues interest at 7.65%. Borrowings under the facility accrue interest at the
prevailing base lending rates published by the Peoples Bank of China from time to time plus 50%.
We have a short-term revolving facility arrangement with a Vietnamese branch of a U.S. bank
amounting to $14 million of which $3.4 million was outstanding at January 1, 2011 which accrues
interest at 5.05%.
We have a short-term revolving facility arrangement with a Japanese branch of a U.S. bank
amounting to JPY 800 million ($9.8 million) of which $2.5 million was outstanding at January 1,
2011 which accrues interest at 4.61%.
We have a short-term revolving facility arrangement with an Indian branch of a U.S. bank
amounting to INR 100 million ($2.2 million) of which $1.8 million was outstanding at January 1,
2011 which accrues interest at 12.80%.
We have a short-term revolving facility arrangement with a Brazilian bank amounting to BRL 2
million ($1.2 million) of which $0.4 million was outstanding at January 1, 2011 which accrues
interest at 13.56%.
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In addition, we have short-term revolving credit facilities in various other locations
that can be drawn on from time to time amounting to $4.6 million of which $0 was outstanding at
January 1, 2011.
We were in compliance with the financial covenants contained in each of these facilities at
January 1, 2011.
Derivatives
Our debt under the Revolving Loan Facility, Floating Rate Senior Notes and Accounts Receivable
Securitization Facility bears 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 were 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%. In addition, in November 2010, we completed a $1.0 billion senior notes offering and debt
refinancing that strengthened and added flexibility to our capital structure by fixing a
significant percentage of our debt at favorable interest rates at longer maturities. As a result,
approximately 96% of our total debt outstanding at January 1, 2011 is now at a fixed or capped
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 1, 2011 would result in a change in
annual interest expense of $2 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.
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.
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 described below.
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.
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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.
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. Decisions we make as to the amount of earnings permanently reinvested in foreign
jurisdictions, due to anticipated cash flow or other business
requirements, 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
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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.
We recognized a change in our estimate of unrecognized tax benefit accruals of $20 million in
2010. This change in estimate resulted from the circumstances described above in Consolidated
Results of Operations Year Ended January 1, 2011 Compared with Year Ended January 2, 2010, and
was not a result of any change in the application of our accounting policies.
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 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 Generally Accepted Accounting Principles
(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 million, is included as a receivable in Other Current Assets in the Consolidated Balance Sheets
as of January 1, 2011 and January 2, 2010. We exchanged information with Sara Lee in
connection with this matter, but Sara Lee disagreed with our computation. In accordance with
the dispute resolution provisions of the tax sharing agreement, in August 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
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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-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 15 titled Defined Benefit Pension Plans to our
consolidated financial statements.
Our U.S. qualified pension plan is approximately 74% funded as of January 1, 2011 compared to 80% funded as of January 2, 2010. 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 2010. Because we have elected
not to make a voluntary cash contribution in 2011 sufficient to achieve a funded status
of 80%, beginning April 1, 2011 we are required under the Pension Protection Act to implement
restrictions on certain accelerated forms of benefit payments for future retirees. We performed
a thorough review of the impact of making a voluntary cash contribution to the plan in order to
maintain a funded level of 80%. Based on our review, and given that these restrictions are
expected to impact only a limited number of plan participants, will not impact the total benefits
received by plan participants and will not have a material impact on our future cash flows, we
determined not to make such a contribution to the plan. We expect to make required cash
contributions of $7 million to $9 million to the U.S. qualified pension plan in 2011 based on a
preliminary calculation by our actuary. See Note 15 to our financial statements for more information on the plan asset components. 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 2011 of approximately $11 million compared to $15 million in 2010.
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:
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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
December 31, 2005. |
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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. |
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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:
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Pension Expense |
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Obligation |
|
1% decrease in discount rate |
|
$ |
1 |
|
|
$ |
124 |
|
1% increase in discount rate |
|
|
(1 |
) |
|
|
(102 |
) |
1% decrease in expected investment return |
|
|
6 |
|
|
|
|
|
1% increase in expected investment return |
|
|
(6 |
) |
|
|
|
|
Trademarks and Other Identifiable Intangibles
Trademarks, license agreements, customer and distributor relationships 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 1, 2011, the net book value of
trademarks and other identifiable intangible assets was $179 million, of which we are amortizing
the entire balance. We anticipate that our amortization expense for 2011 will be $14 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 1, 2011, we had $430 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. The estimated
fair values significantly exceeded the carrying values of each of our reporting units as of the
first day of the third fiscal quarter, and no impairment of goodwill was identified as a result of
the testing conducted in 2010.
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.
79
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.
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. 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
Fair Value Disclosures
In January 2010, the Financial Accounting Standards Board issued new accounting rules
related to the disclosure requirements for fair value measurements. The new accounting rules
require new disclosures regarding
80
significant transfers between Levels 1 and 2 of the fair value
hierarchy and the activity within Level 3 of the fair value hierarchy. The new accounting rules also clarify existing
disclosures regarding the level of disaggregation of assets or liabilities and the valuation
techniques and inputs used to measure fair value. The new accounting rules were effective for us in
the first quarter of 2010, except for the disclosures about purchases, sales, issuances and
settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. The adoption of the disclosures effective for our first quarter of 2010 did not
have a material impact on our financial condition, results of operations or cash flows but resulted
in certain additional disclosures reflected in Note 14 to the consolidated financial statements.
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 1, 2011, the potential change in fair value of foreign currency derivative
instruments, assuming a 10% adverse change in the underlying currency price, was $13 million.
Interest Rates
Our debt under the Revolving Loan Facility, Floating Rate Senior Notes and Accounts Receivable
Securitization Facility bears 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 were 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%. In addition, in November 2010, we completed a $1.0 billion senior notes offering and debt
refinancing that strengthened and added flexibility to our capital structure by fixing a
significant percentage of our debt at favorable interest rates at longer maturities. As a result,
approximately 96% of our total debt outstanding at January 1, 2011 is now at a fixed or capped
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 1, 2011 would result in a change in
annual interest expense of $2 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. During
2010, cotton prices hit their highest levels in 140 years. 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, among other things, 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. We are able to lock in the cost of
cotton reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to
protect our business from the volatility of the market price of cotton. However, our business can
be affected by dramatic movements in cotton prices. Although the cost
of cotton used in goods manufactured by us has
81
historically represented only
6% of our cost of sales, it has risen to around 10% primarily as a result of cost inflation.
The cotton prices reflected in our results were 69 cents per pound in 2010 and 55 cents per
pound in 2009. Costs incurred for materials and labor are capitalized into inventory and impact our
results as the inventory is sold. For example, we estimate that a change of $0.01 per pound in
cotton prices at current levels of production would affect our annual cost of sales by $4 million
related to finished goods manufactured internally in our manufacturing facilities and $1 million
related to finished goods sourced from third parties. 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 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 $5 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-59 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.
82
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.
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.
83
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.
84
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 15th day of February, 2011.
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HANESBRANDS INC. |
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/s/ Richard A. Noll
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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Capacity |
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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 15, 2011 |
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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Chief Financial Officer |
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February 15, 2011 |
E. Lee Wyatt Jr.
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(principal financial officer)
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/s/ Dale W. Boyles |
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Chief Accounting Officer and
Controller |
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February 15, 2011 |
Dale W. Boyles
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(principal accounting
officer)
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85
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Signature |
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/s/ Lee A. Chaden |
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Director
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February 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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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 15, 2011 |
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Ann E. Ziegler
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86
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). |
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). |
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). |
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). |
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). |
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). |
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). |
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). |
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). |
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). |
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). |
3.12
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Amended and Restated Certificate of Incorporation of
CC Products, Inc. (incorporated by reference from
Exhibit 3.50 to the Registrants Registration
Statement on Form S-4 (Commission file number
333-171114) filed with the Securities and Exchange
Commission on December 10, 2010). |
E-1
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Exhibit |
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Number |
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Description |
3.13
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Amended and Restated Bylaws of CC Products, Inc.
(incorporated by reference from Exhibit 3.51 to the
Registrants Registration Statement on Form S-4 (Commission
file number 333-171114) filed with the Securities and
Exchange Commission on December 10, 2010). |
3.14
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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). |
3.15
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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). |
3.16
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Articles of Incorporation of Event 1, Inc. (incorporated by
reference from Exhibit 3.52 to the Registrants Registration
Statement on Form S-4 (Commission file number 333-171114)
filed with the Securities and Exchange Commission on December
10, 2010). |
3.17
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Amended and Restated Bylaws of Event 1, Inc. (incorporated by
reference from Exhibit 3.53 to the Registrants Registration
Statement on Form S-4 (Commission file number 333-171114)
filed with the Securities and Exchange Commission on December
10, 2010). |
3.18
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Amended and Restated Certificate of Incorporation of GearCo,
Inc. (incorporated by reference from Exhibit 3.44 to the
Registrants Registration Statement on Form S-4 (Commission
file number 333-171114) filed with the Securities and
Exchange Commission on December 10, 2010). |
3.19
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Amended and Restated Bylaws of GearCo, Inc. (incorporated by
reference from Exhibit 3.45 to the Registrants Registration
Statement on Form S-4 (Commission file number 333-171114)
filed with the Securities and Exchange Commission on December
10, 2010). |
3.20
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Third Amended and Restated Certificate of Incorporation of
GFSI Holdings, Inc. (incorporated by reference from Exhibit
3.46 to the Registrants Registration Statement on Form S-4
(Commission file number 333-171114) filed with the Securities
and Exchange Commission on December 10, 2010). |
3.21
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Amended and Restated Bylaws of GFSI Holdings, Inc.
(incorporated by reference from Exhibit 3.47 to the
Registrants Registration Statement on Form S-4 (Commission
file number 333-171114) filed with the Securities and
Exchange Commission on December 10, 2010). |
3.22
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Amended and Restated Certificate of Incorporation of GFSI,
Inc. (incorporated by reference from Exhibit 3.48 to the
Registrants Registration Statement on Form S-4 (Commission
file number 333-171114) filed with the Securities and
Exchange Commission on December 10, 2010). |
3.23
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Amended and Restated Bylaws of GFSI, Inc. (incorporated by
reference from Exhibit 3.49 to the Registrants Registration
Statement on Form S-4 (Commission file number 333-171114)
filed with the Securities and Exchange Commission on December
10, 2010). |
3.24
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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). |
3.25
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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). |
E-2
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Exhibit |
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Number |
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Description |
3.26
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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). |
3.27
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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). |
3.28
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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). |
3.29
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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). |
3.30
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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). |
3.31
|
|
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). |
3.32
|
|
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). |
3.33
|
|
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). |
3.34
|
|
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). |
3.35
|
|
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). |
3.36
|
|
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). |
3.37
|
|
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). |
3.38
|
|
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). |
E-3
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.39
|
|
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). |
3.40
|
|
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). |
3.41
|
|
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). |
3.42
|
|
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). |
3.43
|
|
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). |
3.44
|
|
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). |
3.45
|
|
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). |
3.46
|
|
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). |
3.47
|
|
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). |
3.48
|
|
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). |
3.49
|
|
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). |
3.50
|
|
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). |
3.51
|
|
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). |
E-4
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.52
|
|
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). |
3.53
|
|
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). |
4.1
|
|
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). |
4.2
|
|
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). |
4.3
|
|
Placement Agreement dated December 11, 2006 among the Registrant,
certain subsidiaries of the Registrant and 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).
|
4.4
|
|
Indenture dated as of December 14, 2006
(the 2006 Indenture), among the Registrant, certain subsidiaries of the Registrant
and Branch Banking and Trust Company (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). |
4.5
|
|
First Supplemental Indenture
(the the 2006 Indenture) dated August 13, 2010 among the Registrant,
certain subsidiaries of the Registrant and Branch Banking and Trust
Company (incorporated by reference from Exhibit 10.50 to the Registrants
Registration Statement on Form S-4 (Commission file number 333-171114)
filed with the Securities and Exchange Commission on December 10, 2010). |
4.6
|
|
Second Supplemental Indenture
(to the 2006 Indenture) dated November 1, 2010 among the Registrant,
certain subsidiaries of the Registrant and Branch Banking and Trust
Company (incorporated by reference from Exhibit 4.5 to the
Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 10, 2010). |
4.7
|
|
Registration Rights Agreement dated as of
December 14, 2006 among the Registrant, certain subsidiaries of the Registrant,
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). |
4.8
|
|
Indenture, dated as of August 1, 2008
(the 2008 Indenture) among the Registrant, certain subsidiaries of the
Registrant, and Branch Banking and Trust Company (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). |
4.9
|
|
Underwriting Agreement
dated December 3, 2009 between the Registrant, certain subsidiaries
of the Registrant 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). |
E-5
|
|
|
Exhibit |
|
|
Number |
|
Description |
4.10
|
|
First Supplemental Indenture (to the 2008 Indenture) dated
December 10, 2009 among the Registrant, certain subsidiaries of the Registrant 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). |
4.11
|
|
Second Supplemental Indenture
(to the 2008 Indenture) dated August 13, 2010 among the Registrant,
certain subsidiaries of the Registrant and Branch Banking and Trust
Company (incorporated by reference from Exhibit 10.49 to the Registrants
Registration Statement on Form S-4
(Commission file number 333-171114) filed with the Securities and Exchange Commission on December 10, 2010). |
4.12
|
|
Third Supplemental Indenture
(to the 2008 Indenture) dated November 1, 2010 among the Registrant,
certain subsidiaries of the Registrant and Branch Banking and Trust
Company (incorporated by reference from Exhibit 4.4 to the Registrants
Current Report on Form 8-K filed with the Securities and
Exchange Commission on November 10, 2010). |
4.13
|
|
Purchase Agreement dated November 4, 2010
among the Registrant, certain subsidiaries of the Registrant and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., HSBC Securities
(USA) Inc., J.P. Morgan Securities LLC and Goldman, Sachs & Co.
(incorporated by reference from Exhibit 1.1 to the Registrants Current
Report on Form 8-K filed with the Securities and
Exchange Commission on November 10, 2010). |
4.14
|
|
Fourth Supplemental Indenture
(to the 2008 Indenture) dated November 9, 2010 among the Registrant,
certain subsidiaries of the Registrant 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 November 10, 2010). |
4.15
|
|
Registration Rights Agreement
dated November 9, 2010 among the Registrant, certain subsidiaries
of the Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Barclays Capital Inc., HSBC Securities (USA) Inc.,
J.P. Morgan Securities LLC and Goldman, Sachs & Co. (incorporated
by reference from Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 10, 2010). |
10.1
|
|
Hanesbrands Inc. Omnibus Incentive
Plan of 2006, as amended (incorporated by reference from Exhibit 10.1 to
the Registrants Registration Statement on Form S-4
(Commission file number 333-171114) filed with the Securities and
Exchange Commission on December 10, 2010).* |
10.2
|
|
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).* |
10.3
|
|
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).* |
10.4
|
|
Form of Performance Cash Award 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 9, 2010).* |
10.5
|
|
Form of Performance Stock and Cash Award Stock Component
Grant Notice and Agreement under the 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 December
10, 2010).* |
E-6
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.6
|
|
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). * |
10.7
|
|
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).* |
10.8
|
|
Hanesbrands Inc. Retirement Savings Plan, as amended.* |
10.9
|
|
Hanesbrands Inc. Supplemental Employee Retirement Plan
(incorporated by reference from Exhibit 10.8 to the
Registrants Annual Report on Form 10-K filed with the
Securities and Exchange Commission on February 9, 2010).* |
10.10
|
|
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).* |
10.11
|
|
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).* |
10.12
|
|
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).* |
10.13
|
|
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).* |
10.14
|
|
Hanesbrands Inc. Employee Stock Purchase Plan of 2006, as
amended (incorporated by reference from Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on April 29, 2010).* |
10.15
|
|
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).* |
10.16
|
|
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).* |
10.17
|
|
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).* |
10.18
|
|
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).* |
10.19
|
|
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).* |
E-7
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.20
|
|
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).* |
10.21
|
|
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).* |
10.22
|
|
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). |
10.23
|
|
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). |
10.24
|
|
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). |
10.25
|
|
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). |
10.26
|
|
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). |
10.27
|
|
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). |
10.28
|
|
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). |
10.29
|
|
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). |
10.30
|
|
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). |
10.31
|
|
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). |
10.32
|
|
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-8
|
|
|
Exhibit |
|
|
Number |
|
Description |
10.33
|
|
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 (incorporated by reference from Exhibit 10.32 to the
Registrants Annual Report on Form 10-K filed with the Securities and
Exchange Commission on February 9, 2010). |
10.34
|
|
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). |
10.35
|
|
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). |
10.36
|
|
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). |
10.37
|
|
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). |
10.38
|
|
Amendment No. 2 dated as of April 13, 2009 to the Accounts Receivables
Securitization Facility (incorporated by reference from Exhibit 10.3 to
the Registrants Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on May 11, 2009). |
10.39
|
|
Amendment No. 3 dated as of August 17, 2009 to the Accounts Receivables
Securitization Facility (incorporated by reference from Exhibit 10.1 to
the Registrants Quarterly Report on Form 10-Q filed with the
Securities and Exchange Commission on November 5, 2009). |
10.40
|
|
Amendment No. 4 dated as of December 10, 2009 to the Accounts
Receivables Securitization Facility (incorporated by reference from
Exhibit 10.39 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 9, 2010). |
10.41
|
|
Amendment No. 5 dated as of December 21, 2009 to the Accounts
Receivables Securitization Facility (incorporated by reference from
Exhibit 10.40 to the Registrants Annual Report on Form 10-K filed with
the Securities and Exchange Commission on February 9, 2010). |
10.42
|
|
Amendment No. 6 dated as of December 18, 2010 to the Accounts
Receivables Securitization Facility. |
10.43
|
|
Amendment No. 7 dated as of January 31, 2011 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. |
E-9
|
|
|
Exhibit |
|
|
Number |
|
Description |
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. |
101.INS XBRL
|
|
Instance Document** |
101.SCH XBRL
|
|
Taxonomy Extension Schema Document** |
101.CAL XBRL
|
|
Taxonomy Extension Calculation Linkbase Document** |
101.LAB XBRL
|
|
Taxonomy Extension Labels Linkbase Document** |
101.PRE XBRL
|
|
Taxonomy Extension Presentation Linkbase Document** |
101.DEF XBRL
|
|
Taxonomy Extension Definition Linkbase Document** |
|
|
|
* |
|
Agreement relates to executive compensation. |
|
** |
|
Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or
part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as
amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as
amended, and otherwise are not subject to liability under those sections.
|
|
|
|
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-10
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 13a15(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 1, 2011, 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
1, 2011.
The effectiveness of our internal control over financial reporting as of January 1, 2011 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 1, 2011 and January 2, 2010, and the results of its operations and its cash flows for each
of the three years in the period ended January 1, 2011 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 1,
2011, 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 15, 2011
F-3
HANESBRANDS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net sales |
|
$ |
4,326,713 |
|
|
$ |
3,891,275 |
|
|
$ |
4,248,770 |
|
Cost of sales |
|
|
2,911,944 |
|
|
|
2,626,001 |
|
|
|
2,871,420 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,414,769 |
|
|
|
1,265,274 |
|
|
|
1,377,350 |
|
Selling, general and administrative expenses |
|
|
1,010,581 |
|
|
|
940,530 |
|
|
|
1,009,607 |
|
Restructuring |
|
|
|
|
|
|
53,888 |
|
|
|
50,263 |
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
|
404,188 |
|
|
|
270,856 |
|
|
|
317,480 |
|
Other expense (income) |
|
|
20,221 |
|
|
|
49,301 |
|
|
|
(634 |
) |
Interest expense, net |
|
|
150,236 |
|
|
|
163,279 |
|
|
|
155,077 |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
233,731 |
|
|
|
58,276 |
|
|
|
163,037 |
|
Income tax expense |
|
|
22,438 |
|
|
|
6,993 |
|
|
|
35,868 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
211,293 |
|
|
$ |
51,283 |
|
|
$ |
127,169 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.19 |
|
|
$ |
0.54 |
|
|
$ |
1.35 |
|
Diluted |
|
$ |
2.16 |
|
|
$ |
0.54 |
|
|
$ |
1.34 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
96,500 |
|
|
|
95,158 |
|
|
|
94,171 |
|
Diluted |
|
|
97,774 |
|
|
|
95,668 |
|
|
|
95,164 |
|
See accompanying notes to Consolidated Financial Statements.
F-4
HANESBRANDS INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
Cash and cash equivalents |
|
$ |
43,671 |
|
|
$ |
38,943 |
|
Trade accounts receivable less allowances of $19,192 at January
1, 2011
and $25,776 at January 2, 2010 |
|
|
503,243 |
|
|
|
450,541 |
|
Inventories |
|
|
1,322,719 |
|
|
|
1,049,204 |
|
Deferred tax assets |
|
|
149,431 |
|
|
|
139,836 |
|
Other current assets |
|
|
128,607 |
|
|
|
144,033 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,147,671 |
|
|
|
1,822,557 |
|
|
|
|
|
|
|
|
Property, net |
|
|
631,254 |
|
|
|
602,826 |
|
Trademarks and other identifiable intangibles, net |
|
|
178,622 |
|
|
|
136,214 |
|
Goodwill |
|
|
430,144 |
|
|
|
322,002 |
|
Deferred tax assets |
|
|
319,798 |
|
|
|
357,103 |
|
Other noncurrent assets |
|
|
82,513 |
|
|
|
85,862 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,790,002 |
|
|
$ |
3,326,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Accounts payable |
|
$ |
412,369 |
|
|
$ |
351,971 |
|
Accrued liabilities and other: |
|
|
|
|
|
|
|
|
Payroll and employee benefits |
|
|
89,303 |
|
|
|
76,315 |
|
Advertising and promotion |
|
|
87,384 |
|
|
|
85,069 |
|
Restructuring |
|
|
6,036 |
|
|
|
18,244 |
|
Other |
|
|
93,580 |
|
|
|
116,007 |
|
Notes payable |
|
|
50,678 |
|
|
|
66,681 |
|
Current portion of debt |
|
|
90,000 |
|
|
|
164,688 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
829,350 |
|
|
|
878,975 |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,990,735 |
|
|
|
1,727,547 |
|
Pension and postretirement benefits |
|
|
301,889 |
|
|
|
290,030 |
|
Other noncurrent liabilities |
|
|
105,354 |
|
|
|
95,293 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,227,328 |
|
|
|
2,991,845 |
|
|
|
|
|
|
|
|
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 96,207,025 at January 1, 2011 and
95,396,967 at January 2, 2010 |
|
|
962 |
|
|
|
954 |
|
Additional paid-in capital |
|
|
294,829 |
|
|
|
287,955 |
|
Retained earnings |
|
|
480,098 |
|
|
|
268,805 |
|
Accumulated other comprehensive loss |
|
|
(213,215 |
) |
|
|
(222,995 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
562,674 |
|
|
|
334,719 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
3,790,002 |
|
|
$ |
3,326,564 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-5
HANESBRANDS INC.
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Total |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211,293 |
|
|
|
|
|
|
|
211,293 |
|
Translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,661 |
|
|
|
3,661 |
|
Net unrealized gain on qualifying
cash
flow hedges, net of tax of $6,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,189 |
|
|
|
10,189 |
|
Net unrecognized loss from pension
and postretirement plans,
net of tax of $2,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,070 |
) |
|
|
(4,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,073 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
19,226 |
|
|
|
|
|
|
|
|
|
|
|
19,226 |
|
Exercise of stock options, vesting of
restricted stock units and other |
|
|
810 |
|
|
|
8 |
|
|
|
3,317 |
|
|
|
|
|
|
|
|
|
|
|
3,325 |
|
Net transactions related to spin off |
|
|
|
|
|
|
|
|
|
|
(15,669 |
) |
|
|
|
|
|
|
|
|
|
|
(15,669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2011 |
|
|
96,207 |
|
|
$ |
962 |
|
|
$ |
294,829 |
|
|
$ |
480,098 |
|
|
$ |
(213,215 |
) |
|
$ |
562,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-6
HANESBRANDS INC.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
211,293 |
|
|
$ |
51,283 |
|
|
$ |
127,169 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
74,103 |
|
|
|
84,312 |
|
|
|
103,126 |
|
Amortization of intangibles |
|
|
12,509 |
|
|
|
12,443 |
|
|
|
12,019 |
|
Restructuring |
|
|
|
|
|
|
8,207 |
|
|
|
5,133 |
|
Write-off on early extinguishment of debt |
|
|
16,526 |
|
|
|
2,423 |
|
|
|
1,332 |
|
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 |
|
|
12,739 |
|
|
|
10,967 |
|
|
|
6,032 |
|
Amortization of loss on interest rate hedge |
|
|
17,774 |
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
19,534 |
|
|
|
37,697 |
|
|
|
31,449 |
|
Deferred taxes |
|
|
15,794 |
|
|
|
(9,152 |
) |
|
|
(1,445 |
) |
Other |
|
|
(3,432 |
) |
|
|
(10,252 |
) |
|
|
(1,616 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(329 |
) |
|
|
(39,805 |
) |
|
|
163,687 |
|
Inventories |
|
|
(231,845 |
) |
|
|
248,820 |
|
|
|
(182,971 |
) |
Other assets |
|
|
11,597 |
|
|
|
22,210 |
|
|
|
(49,256 |
) |
Accounts payable |
|
|
29,934 |
|
|
|
3,522 |
|
|
|
34,046 |
|
Accrued liabilities and other |
|
|
(53,143 |
) |
|
|
(54,677 |
) |
|
|
(69,342 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
133,054 |
|
|
|
414,504 |
|
|
|
177,397 |
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(106,240 |
) |
|
|
(126,825 |
) |
|
|
(186,957 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(222,878 |
) |
|
|
|
|
|
|
(14,655 |
) |
Proceeds from sales of assets |
|
|
45,642 |
|
|
|
37,965 |
|
|
|
25,008 |
|
Other |
|
|
(519 |
) |
|
|
16 |
|
|
|
(644 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(283,995 |
) |
|
|
(88,844 |
) |
|
|
(177,248 |
) |
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on notes payable |
|
|
1,394,782 |
|
|
|
1,628,764 |
|
|
|
602,627 |
|
Repayments on notes payable |
|
|
(1,411,295 |
) |
|
|
(1,624,139 |
) |
|
|
(560,066 |
) |
Payments to amend and refinance credit facilities |
|
|
(23,833 |
) |
|
|
(74,976 |
) |
|
|
(69 |
) |
Borrowings on revolving loan facility |
|
|
2,228,500 |
|
|
|
2,034,026 |
|
|
|
791,000 |
|
Repayments on revolving loan facility |
|
|
(2,280,000 |
) |
|
|
(1,982,526 |
) |
|
|
(791,000 |
) |
Incurrence of debt under the 2009 Senior Secured Credit
Facility |
|
|
|
|
|
|
750,000 |
|
|
|
|
|
Repayments of debt under 2009 Senior Secured Credit Facility |
|
|
(750,000 |
) |
|
|
|
|
|
|
|
|
Repayments of debt under 2006 Senior Secured Credit Facility |
|
|
|
|
|
|
(1,440,250 |
) |
|
|
(125,000 |
) |
Issuance of 6.375% Senior Notes |
|
|
1,000,000 |
|
|
|
|
|
|
|
|
|
Issuance of 8% Senior Notes |
|
|
|
|
|
|
500,000 |
|
|
|
|
|
Repurchase of Floating Rate Senior Notes |
|
|
|
|
|
|
(2,788 |
) |
|
|
(4,354 |
) |
Borrowings on Accounts Receivable Securitization Facility |
|
|
207,290 |
|
|
|
183,451 |
|
|
|
20,944 |
|
Repayments on Accounts Receivable Securitization Facility |
|
|
(217,290 |
) |
|
|
(326,068 |
) |
|
|
(28,327 |
) |
Proceeds from stock options exercised |
|
|
5,938 |
|
|
|
1,179 |
|
|
|
2,191 |
|
Stock repurchases |
|
|
|
|
|
|
|
|
|
|
(30,275 |
) |
Transaction with Sara Lee Corporation |
|
|
|
|
|
|
|
|
|
|
18,000 |
|
Other |
|
|
1,593 |
|
|
|
(847 |
) |
|
|
(409 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
155,685 |
|
|
|
(354,174 |
) |
|
|
(104,738 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of changes in foreign exchange rates on cash |
|
|
(16 |
) |
|
|
115 |
|
|
|
(2,305 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
4,728 |
|
|
|
(28,399 |
) |
|
|
(106,894 |
) |
Cash and cash equivalents at beginning of year |
|
|
38,943 |
|
|
|
67,342 |
|
|
|
174,236 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
43,671 |
|
|
$ |
38,943 |
|
|
$ |
67,342 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
F-7
HANESBRANDS INC.
Notes to Consolidated Financial Statements
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(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, Duofold and Gear for Sports.
The Company designs, manufactures, sources and sells a broad range of basic apparel 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
2010, 2009 and 2008 relate to the 52 week fiscal years ended on January 1, 2011 and January
2, 2010, and the 53 week fiscal year ended on January 3, 2009, respectively.
(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 (GAAP) 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 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:
F-8
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
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.
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 $185,488, $166,467
and $187,034 in 2010, 2009, and 2008, respectively.
(f) Shipping and Handling Costs
Revenue received for shipping and handling costs is included in net sales and was $22,054,
$22,434, and $24,244 in 2010, 2009 and 2008, 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 $250,029, $222,169 and $238,340 in 2010, 2009 and 2008,
respectively. The Company recognizes shipping, handling and 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.
F-9
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
(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 $47,082, $46,305 and $46,460 in 2010, 2009 and 2008, 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 estimated lower of cost or market. Cost is determined by the
first-in, first-out, or FIFO, method for inventories. 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 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, license agreements,
customer and distributor relationships 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
F-10
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
to obtain future cash flows. Finite-lived trademarks are being amortized over
periods ranging from nine to 30 years, license agreements are being amortized over periods ranging
from six to 15 years, customer and distributor relationships are
being amortized over periods ranging
from three to 10 years and computer software is being amortized over periods ranging from three to
seven 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.
(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
F-11
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
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 to 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 Statements of Income.
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.
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.
F-12
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
(r) 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
changes the requirements for derecognizing financial assets. The new accounting rules were
effective for financial asset transfers occurring in 2010. The adoption of these new rules had no
impact on the financial condition, results of operations or 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 were
effective for the Company in 2010. The adoption of these new rules had no material impact on the
financial condition, results of operations or cash flows of the Company.
Fair Value Disclosures
In January 2010, the FASB issued new accounting rules related to the disclosure requirements
for fair value measurements. The new accounting rules require new disclosures regarding significant
transfers between Levels 1 and 2 of the fair value hierarchy and the activity within Level 3 of the
fair value hierarchy. The new accounting rules also clarify existing disclosures regarding the
level of disaggregation of assets or liabilities and the valuation techniques and inputs used to
measure fair value. The new accounting rules were effective for the Company in the first quarter of
2010, except for the disclosures about purchases, sales, issuances and settlements in the
rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.
The adoption of the disclosures effective for the Companys first quarter of 2010 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.
(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
outstanding for 2010, 2009, and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Basic weighted average shares outstanding |
|
|
96,500 |
|
|
|
95,158 |
|
|
|
94,171 |
|
Effect of potentially dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
783 |
|
|
|
|
|
|
|
100 |
|
Restricted stock units |
|
|
489 |
|
|
|
510 |
|
|
|
882 |
|
Employee stock purchase plan and other |
|
|
2 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding |
|
|
97,774 |
|
|
|
95,668 |
|
|
|
95,164 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 827, 6,273, and 3,735 shares of common stock and 250, 234, and 0
restricted stock units were excluded from the diluted earnings per share calculation because their
effect would be anti-dilutive for 2010, 2009, and 2008, respectively.
F-13
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
(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 granted to date generally vest ratably over two to three years,
although stock options granted to employees after December 1, 2010 will generally not fully vest
over a period of less than 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 2010, 2009, and
2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended |
|
|
|
January 1, |
|
|
January 2, |
|
|
January 3, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Dividend yield |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Risk-free interest rate |
|
|
1.64-1.90 |
% |
|
|
2.49 |
% |
|
|
1.68-2.64 |
% |
Volatility |
|
|
50-54 |
% |
|
|
48 |
% |
|
|
28-37 |
% |
Expected term (years) |
|
|
5.3-6.0 |
|
|
|
6.0 |
|
|
|
3.8-6.0 |
|
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.
F-14
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
A summary of the changes in stock options outstanding to the Companys employees under the
Hanesbrands OIP is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
Average |
|
|
Aggregate |
|
|
Contractual |
|
|
|
|
|
|
|
Exercise |
|
|
Intrinsic |
|
|
Term |
|
|
|
Shares |
|
|
Price |
|
|
Value |
|
|
(Years) |
|
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 |
|
Granted |
|
|
221 |
|
|
|
27.16 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(289 |
) |
|
|
20.51 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1 |
) |
|
|
22.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2011 |
|
|
6,218 |
|
|
$ |
22.35 |
|
|
$ |
19,914 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at January 1, 2011 |
|
|
4,824 |
|
|
$ |
22.46 |
|
|
$ |
14,741 |
|
|
|
6.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2,133, 2,981 and 968 options that vested during 2010, 2009 and 2008, respectively.
The total intrinsic value of options that were exercised during 2010, 2009 and 2008 was $1,923,
$465 and $1,057, respectively. The weighted average fair value of individual options granted during
2010, 2009 and 2008 was $13.32, $11.80 and $6.29, respectively.
Cash received from option exercises under all share-based payment arrangements for 2010, 2009
and 2008 was $5,938, $1,179 and $2,191, respectively. The actual tax benefit realized for the tax
deductions from option exercise of the share-based payment arrangements totaled $1,705, $465 and
$806 for 2010, 2009 and 2008, respectively.
F-15
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(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, although RSUs granted to employees after December 1, 2010 will generally not fully
vest over a period of less than 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. Some RSUs which have
been granted under the Hanesbrands OIP vest upon continued future service to the Company, while
others also have a performance based vesting feature. 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
29, 2007 |
|
|
1,578 |
|
|
$ |
23.47 |
|
|
$ |
43,922 |
|
|
|
1.89 |
|
Granted non-performance based |
|
|
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 non-performance based |
|
|
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 |
|
Granted
non-performance based |
|
|
391 |
|
|
|
27.02 |
|
|
|
|
|
|
|
|
|
Granted
performance based |
|
|
143 |
|
|
|
27.16 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(721 |
) |
|
|
21.28 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(9 |
) |
|
|
19.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested share units outstanding at January 1, 2011 |
|
|
1,330 |
|
|
$ |
23.08 |
|
|
$ |
33,794 |
|
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2010, 2009 and 2008 was $15,346, $24,871 and
$13,560, respectively. Certain participants elected to defer receipt of shares earned upon vesting.
As of January 1, 2011, a total of 203 shares of common stock are issuable in future years for such
deferrals.
For all share-based payments under the Hanesbrands OIP, during 2010, 2009 and 2008, the
Company recognized total compensation expense of $19,226, $37,391 and $31,002 and recognized a
deferred tax benefit of $7,435, $14,464 and $11,585, 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 years to the tenth anniversary of the
original grant date.
At January 1, 2011, there was $10,135 of total unrecognized compensation cost related to
non-vested stock-based compensation arrangements, of which $7,276, $2,237 and $622 is expected to
be recognized in 2011, 2012
F-16
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
and 2013, 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 1,945 were available for future grants as of January 1, 2011.
In 2010, in addition to granting RSUs that vest solely upon continued future service to the
Company, the Company also granted 143 performance-based restricted stock units with a performance
feature that has a target range of 0% to 200% based upon meeting certain performance thresholds.
These performance stock awards, which are included in the table
above, represent unearned awards that are
earned based on future performance and service.
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 2010, 2009 and 2008, 79, 156 and 129 shares, respectively, were
purchased under the ESPP by eligible employees. The Company had 2,000 shares of common stock
available for issuance under the ESPP as of January 1, 2011. The Company recognized $308, $306 and
$447 of stock compensation expense under the ESPP during 2010, 2009 and 2008, respectively.
(5) Trade Accounts Receivable
Allowances for Trade Accounts Receivable
The changes in the Companys allowance for doubtful accounts and allowance for chargebacks and
other deductions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for |
|
|
|
|
|
|
Allowance for |
|
|
Chargebacks |
|
|
|
|
|
|
Doubtful |
|
|
and Other |
|
|
|
|
|
|
Accounts |
|
|
Deductions |
|
|
Total |
|
Balance at December 29, 2007 |
|
$ |
9,328 |
|
|
$ |
22,314 |
|
|
$ |
31,642 |
|
Charged to expenses |
|
|
8,074 |
|
|
|
5,366 |
|
|
|
13,440 |
|
Deductions and write-offs |
|
|
(4,847 |
) |
|
|
(18,338 |
) |
|
|
(23,185 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2009 |
|
|
12,555 |
|
|
|
9,342 |
|
|
|
21,897 |
|
|
|
|
|
|
|
|
|
|
|
Charged to expenses |
|
|
3,647 |
|
|
|
5,724 |
|
|
|
9,371 |
|
Deductions and write-offs |
|
|
(700 |
) |
|
|
(4,792 |
) |
|
|
(5,492 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010 |
|
|
15,502 |
|
|
|
10,274 |
|
|
|
25,776 |
|
|
|
|
|
|
|
|
|
|
|
Charged to expenses |
|
|
(1,116 |
) |
|
|
3,715 |
|
|
|
2,599 |
|
Deductions and write-offs |
|
|
(3,270 |
) |
|
|
(5,913 |
) |
|
|
(9,183 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2011 |
|
$ |
11,116 |
|
|
$ |
8,076 |
|
|
$ |
19,192 |
|
|
|
|
|
|
|
|
|
|
|
Charges to the allowance for doubtful accounts are reflected in the Selling, general and
administrative expenses line and charges to the allowance for customer chargebacks and other
customer deductions are primarily reflected as a reduction in the Net sales line of the
Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease
income, represent write-offs of previously reserved accounts receivable and allowed customer
chargebacks and deductions against gross accounts receivable.
F-17
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
Sales of Accounts Receivable
The Company has entered into agreements to sell selected trade accounts receivable to
financial institutions. After the sale, the Company does not retain any interests in the
receivables and the applicable financial institution services and collects these accounts
receivable directly from the customer. Net proceeds of these accounts receivable sale programs are
recognized in the Consolidated Statements of Cash Flows as part of operating cash flows. The
Company recognized funding fees of $3,464 and $163 in 2010 and 2009, respectively, for sales of
accounts receivable to financial institutions in the Other expenses line in the Consolidated
Statements of Income.
(6) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
Raw materials |
|
$ |
155,744 |
|
|
$ |
106,138 |
|
Work in process |
|
|
109,304 |
|
|
|
100,686 |
|
Finished goods |
|
|
1,057,671 |
|
|
|
842,380 |
|
|
|
|
|
|
|
|
|
|
$ |
1,322,719 |
|
|
$ |
1,049,204 |
|
|
|
|
|
|
|
|
(7) Property, Net
Property is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
January 1, |
|
|
January 2, |
|
|
|
2011 |
|
|
2010 |
|
Land |
|
$ |
26,122 |
|
|
$ |
28,544 |
|
Buildings and improvements |
|
|
467,378 |
|
|
|
478,148 |
|
Machinery and equipment |
|
|
868,995 |
|
|
|
895,336 |
|
Construction in progress |
|
|
31,904 |
|
|
|
28,973 |
|
Capital leases |
|
|
6,988 |
|
|
|
4,018 |
|
|
|
|
|
|
|
|
|
|
|
1,401,387 |
|
|
|
1,435,019 |
|
Less accumulated depreciation |
|
|
770,133 |
|
|
|
832,193 |
|
|
|
|
|
|
|
|
Property, net |
|
$ |
631,254 |
|
|
$ |
602,826 |
|
|
|
|
|
|
|
|
F-18
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
(8) Notes Payable
The Company had the following short-term obligations at January 1, 2011 and January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
|
Interest Rate as of |
|
|
January 1, |
|
|
January 2, |
|
|
|
January 1, 2011 |
|
|
2011 |
|
|
2010 |
|
Short-term revolving facility in El Salvador |
|
|
4.20 |
% |
|
$ |
29,700 |
|
|
$ |
30,000 |
|
Short-term revolving facility in China |
|
|
7.65 |
% |
|
|
12,941 |
|
|
|
7,397 |
|
Short-term revolving facility in Vietnam |
|
|
5.05 |
% |
|
|
3,371 |
|
|
|
|
|
Short-term revolving facility in Japan |
|
|
4.61 |
% |
|
|
2,459 |
|
|
|
|
|
Short-term revolving facility in India |
|
|
12.80 |
% |
|
|
1,846 |
|
|
|
|
|
Short-term revolving facility in Brazil |
|
|
13.56 |
% |
|
|
361 |
|
|
|
|
|
Short-term revolving facility in Luxembourg |
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Short-term revolving facility in Thailand |
|
|
|
|
|
|
|
|
|
|
4,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,678 |
|
|
$ |
66,681 |
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|
|
|
|
|
|
|
|
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|
The Company has a short-term revolving facility arrangement with a Salvadoran branch of a
Canadian bank amounting to $30,000 of which $29,700 was outstanding at January 1, 2011 which
accrues interest at 4.20%.
The Company has a short-term revolving facility arrangement with a Chinese branch of a U.S.
bank amounting to RMB 155 million ($23,460) of which $12,941 was outstanding at January 1, 2011
which accrues interest at 7.65%. Borrowings under the facility accrue interest at the prevailing
base lending rates published by the Peoples Bank of China from time to time plus 50%.
The Company has a short-term revolving facility arrangement with a Vietnamese branch of a U.S.
bank amounting to $14,000 of which $3,371 was outstanding at January 1, 2011 which accrues interest
at 5.05%.
The Company has a short-term revolving facility arrangement with a Japanese branch of a U.S.
bank amounting to JPY 800 million ($9,812) of which $2,459 was outstanding at January 1, 2011 which
accrues interest at 4.61%.
The Company has a short-term revolving facility arrangement with an Indian branch of a U.S.
bank amounting to INR 100 million ($2,224) of which $1,846 was outstanding at January 1, 2011 which
accrues interest at 12.80%.
The Company has a short-term revolving facility arrangement with a Brazilian bank amounting to
BRL 2 million ($1,205) of which $361 was outstanding at January 1, 2011 which accrues interest at
13.56%.
In addition, the Company has short-term revolving credit facilities in various other locations
that can be drawn on from time to time amounting to $4,646 of which $0 was outstanding at January
1, 2011.
As
of January 1, 2011 and January 2, 2010, the Company had total
borrowing availability of $34,669 and $34,935, respectively, under
these international loan facilities.
The Company was in compliance with the financial covenants contained in each of these
facilities at January 1, 2011.
Total interest paid on notes payable was $2,267, $3,974 and $2,208 in 2010, 2009 and 2008,
respectively.
F-19
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
(9) Debt
The Company had the following debt at January 1, 2011 and January 2, 2010:
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Principal Amount |
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Interest Rate as of |
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January 1, |
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January 2, |
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January 1, 2011 |
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2011 |
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2010 |
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Maturity Date |
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2009 Senior Secured Credit Facility: |
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Term Loan Facility |
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$ |
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$ |
750,000 |
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Revolving Loan Facility |
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6.75 |
% |
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51,500 |
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|
December 2013 |
6.375% Senior Notes |
|
|
6.38 |
% |
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|
1,000,000 |
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|
December 2020 |
8% Senior Notes |
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8.00 |
% |
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500,000 |
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500,000 |
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|
December 2016 |
Floating Rate Senior Notes |
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|
3.83 |
% |
|
|
490,735 |
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|
490,735 |
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|
December 2014 |
Accounts Receivable Securitization Facility |
|
|
2.81 |
% |
|
|
90,000 |
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100,000 |
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March 2011 |
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2,080,735 |
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1,892,235 |
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Less current maturities |
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90,000 |
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164,688 |
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$ |
1,990,735 |
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|
$ |
1,727,547 |
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The Companys primary financing arrangements are the senior secured credit facility that it
entered into in 2006 (the 2006 Senior Secured Credit Facility) and amended and restated in
December 2009 to provide for a new senior secured credit facility (the 2009 Senior Secured Credit
Facility), $500,000 in aggregate principle amount of floating rate senior notes (the Floating
Rate Senior Notes) issued in December 2006, $500,000 in aggregate principal amount of 8.000%
senior notes (the 8% Senior Notes) issued in December 2009, $1,000,000 in aggregate principal
amount of 6.375% senior notes (the 6.375% Senior Notes) issued in November 2010 and the Accounts
Receivable Securitization Facility. The outstanding balances at January 1, 2011 are reported in the
Long-term debt and Current portion of debt lines of the Consolidated Balance Sheets.
Total cash paid for interest related to debt in 2010, 2009 and 2008 was $116,492, $161,854 and
$150,898, respectively.
2009 Senior Secured Credit Facility
The 2009 Senior Secured Credit Facility initially provides for aggregate borrowings of
$1,150,000, consisting of a $750,000 term loan facility (the Term Loan Facility) and a $400,000
revolving loan facility (the Revolving Loan Facility). 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 $250,000) and Term B loan facility (in an initial principal amount of
$1,400,000) under the 2006 Senior Secured Credit Facility and to repay all amounts outstanding
under the second lien credit facility that the Company entered into
in 2006 (the Second Lien Credit Facility). Proceeds of the Revolving Loan Facility were used to pay
fees and expenses in connection with these transactions, and are used for general corporate
purposes and working capital needs.
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 the Companys
option, it may add one or more term loan facilities or increase the commitments under the Revolving
Loan Facility in an aggregate amount of up to $300,000 so long as certain conditions are satisfied,
including, among others, that no default or event of default is in existence and that the Company
is in pro forma compliance with the financial covenants described below. In order to support its
working capital needs and fund the acquisition of GearCo, Inc.,
known as Gear for Sports, in September 2010, the Company
increased the commitments under the Revolving Loan Facility from $400,000 to $600,000. In November
2010, the Company used proceeds from the issuance of the 6.375% Senior Notes to repay all
outstanding borrowings under the Term Loan Facility and to reduce the outstanding borrowings under
the Revolving Loan Facility. As of January 1, 2011,
F-20
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
the Company had $0 outstanding under the Revolving Loan Facility, $12,305 of standby and trade
letters of credit issued and outstanding under this facility and $587,695 of borrowing
availability. At January 1, 2011, the interest rate on the Revolving Loan Facility was 6.75%.
The 2009 Senior Secured Credit Facility is guaranteed by substantially all of the Companys
existing and future direct and indirect U.S. subsidiaries, with certain customary or agreed-upon
exceptions for certain subsidiaries. The Company 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:
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the equity interests of substantially all of the Companys direct and indirect U.S.
subsidiaries and 65% of the voting securities of certain first tier foreign subsidiaries;
and |
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substantially all present and future property and assets, real and personal, tangible
and intangible, of the Company and each guarantor, except for certain enumerated interests,
and all proceeds and products of such property and assets. |
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.
At the Companys 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 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
is determined by
reference to a leverage-based pricing grid set forth in the 2009 Senior Secured Credit Facility.
The applicable margin ranges from a maximum of 4.75% in the case of LIBOR-based loans and 3.75%
in the case of Base Rate loans if the Companys 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 the Companys leverage ratio is less than 2.50 to 1.
The 2009 Senior Secured Credit Facility requires the Company to comply with customary
affirmative, negative and financial covenants. The 2009 Senior Secured Credit Facility requires
that the Company 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 the Companys EBITDA for the preceding four fiscal quarters to its
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 increases 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 the
Companys 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 declines 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.
F-21
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
The 2009 Senior Secured Credit Facility contains customary events of default, including
nonpayment of principal when due; nonpayment of interest, 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 the Employee Retirement Income
Security Act of 1974, as amended (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). As of January 1, 2011, the
Company was in compliance with all financial covenants.
6.375% Senior Notes
On November 9, 2010, the Company issued $1,000,000 aggregate principal amount of the 6.375%
Senior Notes. The 6.375% Senior Notes are senior unsecured obligations that rank equal in right of
payment with all of the Companys existing and future unsubordinated indebtedness. The 6.375%
Senior Notes bear interest at an annual rate equal to 6.375%. Interest is payable on the 6.375%
Senior Notes on June 15 and December 15 of each year. The 6.375% Senior Notes will mature on
December 15, 2020. The net proceeds from the sale of the 6.375% Senior Notes were approximately
$979,000. As noted above, these proceeds were used to repay all outstanding borrowings under the
Term Loan Facility and reduce the outstanding borrowings under the Revolving Loan Facility and to pay fees and expenses relating to these
transactions. The 6.375% Senior Notes are guaranteed by substantially all of the Companys
domestic subsidiaries.
The Company may redeem some or all of the notes prior to December 15, 2015 at a redemption
price equal to 100% of the principal amount of the 6.375% Senior Notes redeemed plus an applicable
premium. The Company may redeem some or all of the 6.375% Senior Notes at any time on or after
December 15, 2015 at a redemption price equal to the principal amount of the 6.375% Senior Notes
plus a premium of 3.188% if redeemed during the 12-month period commencing on December 15, 2015,
2.125% if redeemed during the 12-month period commencing on December 15, 2016, 1.062% if redeemed
during the 12-month period commencing on December 15, 2017 and no premium if redeemed after
December 15, 2018, as well as any accrued and unpaid interest as of the redemption date. In
addition, at any time prior to December 15, 2013, the Company may redeem up to 35% of the aggregate
principal amount of the 6.375% Senior Notes at a redemption price of 106.375% of the principal
amount of the 6.375% Senior Notes redeemed with the net cash proceeds of certain equity offerings.
The indenture governing the 6.375% 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.
8% Senior Notes
On December 10, 2009, the Company issued $500,000 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 the Companys 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 15, 2016. The net proceeds
from the sale of the 8% Senior Notes were approximately $480,000. 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 the Companys domestic subsidiaries.
The Company 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.
The Company 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
F-22
HANESBRANDS INC.
Notes to Consolidated Financial Statements (Continued)
Years ended January 1, 2011, January 2, 2010 and January 3, 2009
(amounts in thousands, except per share data)
the principal amount of the 8% Senior Notes plus a premium of 4% if redeemed during the
12-month period commencing on December 15, 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, the Company may redeem up to 35% of the aggregate principal amount of the 8% Senior Notes
at a redemption price of 108% of the principal amount of the 8% Senior 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, the Company issued $500,000 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 the Companys existing and future unsubordinated indebtedness. The
Floating Rate Senior Notes bear interest at an annual rate, reset semi-annually, equal to the
London Interbank Offered Rate, or 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 $492,000. These proceeds, together with working capital, were used to repay in full
the $500,000 outstanding under the Bridge Loan Facility. The Floating Rate Senior Notes are
guaranteed by substantially all of the Companys domestic subsidiaries. The Company 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 cus