QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2021
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-32891
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
Maryland
20-3552316
(State of incorporation)
(I.R.S. employer identification no.)
1000 East Hanes Mill Road
Winston-Salem,
North Carolina
27105
(Address of principal executive office)
(Zip code)
(336) 519-8080
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, Par Value $0.01
HBI
New York Stock Exchange
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☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes☐No☒
As of October 29, 2021, there were 349,204,513 shares of the registrant’s common stock outstanding.
This Quarterly Report on Form 10-Q contains information that may constitute “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. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. In particular, statements with respect to trends associated with our business, our Full Potential plan, our future financial performance and the potential effects of the ongoing global coronavirus (“COVID-19”) pandemic included in this Quarterly Report on Form 10-Q specifically appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking statements.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended January 2, 2021, under the caption “Risk Factors,” and available on the “Investors” section of our corporate website, www.Hanes.com/investors. The contents of our corporate website are not incorporated by reference in this Quarterly Report on Form 10-Q.
Adjustments to reconcile net income to net cash from operating activities:
Depreciation
63,183
67,676
Amortization of acquisition intangibles
15,696
18,503
Other amortization
8,610
8,091
Impairment of intangible assets and goodwill
163,047
20,319
Loss on classification of assets held for sale
266,742
—
Amortization of debt issuance costs
10,250
8,303
Other
(1,888)
25,658
Changes in assets and liabilities:
Accounts receivable
(201,925)
(175,879)
Inventories
(292,465)
(259,367)
Other assets
7,042
(43,359)
Accounts payable
391,034
189,566
Accrued pension and postretirement benefits
(40,468)
(18,965)
Accrued liabilities and other
121,327
134,091
Net cash from operating activities
527,376
231,222
Investing activities:
Capital expenditures
(55,320)
(49,033)
Proceeds from sales of assets
2,479
331
Other
8,437
7,618
Net cash from investing activities
(44,404)
(41,084)
Financing activities:
Repayments on Term Loan Facilities
(315,625)
—
Borrowings on Accounts Receivable Securitization Facility
—
227,061
Repayments on Accounts Receivable Securitization Facility
—
(227,061)
Borrowings on Revolving Loan Facilities
—
1,638,000
Repayments on Revolving Loan Facilities
—
(1,756,189)
Borrowings on Senior Notes
—
700,000
Borrowings on International Debt
—
31,222
Repayments on International Debt
—
(36,383)
Borrowings on notes payable
109,397
166,558
Repayments on notes payable
(109,597)
(166,108)
Share repurchases
—
(200,269)
Cash dividends paid
(157,099)
(158,132)
Other
(3,000)
(15,258)
Net cash from financing activities
(475,924)
203,441
Effect of changes in foreign exchange rates on cash
(27,207)
9,052
Change in cash, cash equivalents and restricted cash
(20,159)
402,631
Cash, cash equivalents and restricted cash at beginning of year
910,603
329,923
Cash, cash equivalents and restricted cash at end of period
890,444
732,554
Less restricted cash at end of period
—
1,073
Cash and cash equivalents at end of period
$
890,444
$
731,481
Balances included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
873,628
$
716,921
Cash and cash equivalents included in current assets of discontinued operations
16,816
14,560
Cash and cash equivalents at end of period
$
890,444
$
731,481
(1)The cash flows related to discontinued operations have not been segregated and remain included in the major classes of assets and liabilities. Accordingly, the Condensed Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.
Capital expenditures included in accounts payable at October 2, 2021 and January 2, 2021 were $4,569 and $17,931, respectively. For the nine months ended October 2, 2021 and September 26, 2020, right-of-use assets obtained in exchange for lease obligations were $46,039 and $39,532, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share data)
(unaudited)
(1) Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc. and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated interim financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2021. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
In the first quarter of 2021, the Company announced that as part of its strategic plan, it was exploring alternatives for its European Innerwear business and subsequently reached the decision to exit this business. The Company determined that its European Innerwear business met held-for-sale and discontinued operations accounting criteria at the end of the first quarter of 2021. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. These changes have been applied to all periods presented. Unless otherwise noted, discussion within these notes to the condensed consolidated interim financial statements relates to continuing operations. See note “Discontinued Operations” for additional information.
(2) Recent Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” The new accounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules were effective for the Company in the first quarter of 2021. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations, cash flows or disclosures.
Codification Improvements
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements.” The new accounting rules improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50) that had only been included in the Other Presentation Matters Section (Section 45) of the Codification. Additionally, the new rules also clarify guidance across various topics including defined benefit plans, foreign currency transactions, and interest expense. The new accounting rules were effective for the Company in the first quarter of 2021. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations, cash flows or disclosures.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB clarified the scope of that guidance with the issuance of ASU 2021-01, “Reference Rate Reform: Scope.” The new accounting rules provide optional expedients and
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard can be adopted any time before the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
(3) Discontinued Operations
In the first quarter of 2021, the Company announced that as part of its strategic plan, it was exploring alternatives for its European Innerwear business and subsequently reached the decision to exit this business. The Company determined that its European Innerwear business met held-for-sale and discontinued operations accounting criteria at the end of the first quarter of 2021. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. These changes have been applied to all periods presented. On November 4, 2021, the Company announced that it has reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P., pending the completion of consultation with the European and French works councils representing employees of the European Innerwear business and customary closing conditions. Under the agreement, the purchaser will receive all the assets and operating liabilities of the European Innerwear business. The transaction is expected to close in the first quarter of 2022.
The operations of the European Innerwear business were previously reported primarily in the International segment. Certain expenses related to its operations were included in general corporate expenses, restructuring and other action-related charges and amortization of intangibles which were previously excluded from segment operating profit and have been reclassified to discontinued operations for all periods presented. Discontinued operations does not include any allocation of corporate overhead expense or interest expense.
Upon meeting the criteria for held for sale classification which qualified as a triggering event, the Company performed a full impairment analysis of the disposal group's indefinite-lived intangible assets and goodwill. As a result of the strategic decision to exit the European Innerwear business, forecasts were revised to include updated market conditions and the removal of strategic operating decisions that would no longer occur under the Company's ownership. The revised forecasts indicated impairment charges of certain indefinite-lived trademarks and license agreements as well as the full goodwill balance attributable to the European Innerwear business. As a result of this impairment analysis, a non-cash charge of $155,745 was recorded as "Impairment of intangible assets and goodwill" in the summarized discontinued operations financial information for the nine months ended October 2, 2021. In addition, the Company recorded non-cash charges of $30,562 and $266,742 as "Loss on classification of assets held for sale" in the summarized discontinued operations financial information for the quarter and nine months ended October 2, 2021, respectively, to record a valuation allowance against the net assets held for sale to write down the carrying value of the disposal group to the estimated fair value less costs of disposal. The non-cash charge recorded in the quarter ended October 2, 2021 primarily resulted from changes in working capital balances and foreign exchange rates. The Company will continue to assess the valuation allowance in each interim period until the European Innerwear business is sold. Additionally, the Company recorded an impairment charge of $7,302 in continuing operations on an indefinite-lived trademark for the nine months ended October 2, 2021 which is reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. This charge relates to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group as it is not being marketed for sale. The Company intends to exit this brand subsequent to the sale of the European Innerwear business.
During the second quarter of 2020, the Company completed a quantitative impairment analysis for certain indefinite-lived intangible assets as a result of the significant impact of the COVID-19 pandemic on their performance. Based on this analysis, the Company recorded impairment charges of $20,319 on certain indefinite-lived trademarks and other intangible assets within the European Innerwear business which are reflected in the “Impairment of intangible assets and goodwill” line in the summarized discontinued operations financial information for the nine months ended September 26, 2020.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company expects to continue certain sales from its supply chain to the European Innerwear business on a transitional basis after the sale of the business. Those sales and the related profit are included in continuing operations in the Condensed Consolidated Statements of Income and in “Other” in note “Business Segment Information” in all periods presented and have not been eliminated as intercompany transactions in consolidation. The related receivables from the European Innerwear business have been reclassified to “Trade accounts receivable, net” in the Condensed Consolidated Balance Sheets for all periods presented.
The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the European Innerwear business that will be eliminated from continuing operations. The key components from discontinued operations related to the European Innerwear business are as follows:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Net sales
$
147,529
$
125,913
$
400,880
$
459,175
Cost of sales
75,171
80,671
213,831
239,219
Gross profit
72,358
45,242
187,049
219,956
Selling, general and administrative expenses
64,941
59,758
209,467
188,573
Impairment of intangible assets and goodwill
—
—
155,745
20,319
Loss on classification of assets held for sale
30,562
—
266,742
—
Operating income (loss)
(23,145)
(14,516)
(444,905)
11,064
Other expenses
271
411
885
1,197
Interest expense, net
110
368
269
1,774
Income (loss) from discontinued operations before income tax expense
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Assets and liabilities of discontinued operations classified as held for sale in the Condensed Consolidated Balance Sheets as of October 2, 2021, January 2, 2021 and September 26, 2020 consist of the following:
October 2, 2021
January 2, 2021(1)
September 26, 2020(1)
Cash and cash equivalents
$
16,816
$
8,822
$
14,560
Trade accounts receivable, net
88,684
84,632
71,994
Inventories
127,209
123,337
173,701
Other current assets
16,066
17,295
19,076
Property, net
61,898
67,950
68,809
Right-of-use assets
33,680
34,637
38,574
Trademarks and other identifiable intangibles, net
208,108
284,170
270,404
Goodwill
—
96,692
91,664
Deferred tax assets
7,990
5,438
7,862
Other noncurrent assets
4,360
5,614
5,598
Allowance to adjust assets to estimated fair value, less costs of disposal
(260,687)
—
—
Total assets of discontinued operations
$
304,124
$
728,587
$
762,242
Accounts payable
$
69,122
$
77,636
$
64,492
Accrued liabilities
118,076
133,431
125,812
Lease liabilities
8,544
10,332
12,956
Notes payable
595
784
5,246
Lease liabilities - noncurrent
26,536
28,775
29,770
Pension and postretirement benefits
42,076
46,569
46,647
Other noncurrent liabilities
34,549
37,645
40,020
Total liabilities of discontinued operations
$
299,498
$
335,172
$
324,943
(1)Amounts at January 2, 2021 and September 26, 2020 have been classified as current and long-term in the Condensed Consolidated Balance Sheets.
The cash flows related to discontinued operations have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows. The following table presents cash flow and non-cash information related to discontinued operations:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Depreciation
$
—
$
2,803
$
2,608
$
8,150
Amortization
$
—
$
1,333
$
1,460
$
3,877
Capital expenditures
$
2,085
$
724
$
6,155
$
6,124
Impairment of intangible assets and goodwill
$
—
$
—
$
155,745
$
20,319
Loss on classification of assets held for sale
$
30,562
$
—
$
266,742
$
—
Other investing activities
$
1,501
$
1,795
$
4,875
$
3,626
Capital expenditures included in accounts payable at end of period
$
70
$
35
$
70
$
35
Right-of-use assets obtained in exchange for lease obligations
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(4) Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which occurs at a point in time, upon either shipment or delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates for variable consideration. Variable consideration includes trade discounts, rebates, volume-based incentives, cooperative advertising and product returns, which are offered within contracts between the Company and its customers, employing the practical expedient for contract costs. Incidental items that are immaterial to the context of the contract are recognized as expense at the transaction date.
The following table presents the Company’s revenues disaggregated by the customer’s method of purchase:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Third-party brick-and-mortar wholesale
$
1,312,440
$
1,192,959
$
3,570,710
$
3,243,572
Consumer-directed
477,111
498,904
1,478,181
1,194,444
Total net sales
$
1,789,551
$
1,691,863
$
5,048,891
$
4,438,016
Revenue Sources
Third-Party Brick-and-Mortar Wholesale Revenue
Third-party brick-and-mortar wholesale revenue is primarily generated by sales of the Company’s products to retailers to support their brick-and-mortar operations. Also included within third-party brick-and-mortar wholesale revenue is royalty revenue from licensing agreements. The Company earns royalties through license agreements with manufacturers of other consumer products that incorporate certain of the Company’s brands. The Company accrues revenue earned under these contracts based upon reported sales from the licensees. Additionally, in the quarter and nine months ended September 26, 2020, third-party brick-and-mortar wholesale revenue included $4,053 and $518,309, respectively, of revenue from contracts with governments generated from the sale of both cloth face coverings and gowns for use during the COVID-19 pandemic.
Consumer-Directed Revenue
Consumer-directed revenue is primarily generated through sales driven directly by the consumer through company-operated stores and e-commerce platforms, which include both owned sites and the sites of the Company’s retail customers.
(5) Stockholders’ Equity
Basic earnings per share (“EPS”) was computed by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. Diluted EPS was calculated to give effect to all potentially issuable dilutive shares of common stock using the treasury stock method.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The following securities were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Stock options
83
151
167
50
Restricted stock units
48
—
40
499
On October 26, 2021, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding shares of common stock to be paid on November 30, 2021 to stockholders of record at the close of business on November 9, 2021.
On February 6, 2020, the Company’s Board of Directors approved a new share repurchase program for up to 40,000 shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. Additionally, management has been granted authority to establish one or more trading plans under Rule 10b5-1 of the Exchange Act in connection with share repurchases, which will allow the Company to repurchase shares in the open market during periods in which the stock trading window is otherwise closed for the Company and certain of the Company’s officers and employees pursuant to the Company’s insider trading policy. Unless terminated earlier by the Company’s Board of Directors, the new program will expire when the Company has repurchased all shares authorized for repurchase under the new program. The new program replaced the Company’s previous share repurchase program for up to 40,000 shares that was originally approved in 2016. For the quarters ended October 2, 2021 and September 26, 2020 and the nine months ended October 2, 2021, the Company did not enter into any transactions to repurchase shares under the new program. For the nine months ended September 26, 2020, the Company entered into transactions to repurchase 14,464 shares at a weighted average repurchase price of $13.83 per share under the new program. The shares were repurchased at a total cost of $200,269. At October 2, 2021, the remaining repurchase authorization under the current share repurchase program totaled 25,536 shares. The primary objective of the share repurchase program is to utilize excess cash to generate shareholder value. Share repurchases were previously prohibited under the Senior Secured Credit Facility as a result of the amendment signed in April 2020. The Company terminated such amendment when it submitted its April 3, 2021 compliance certificate which removed the prohibition from that point forward. See Note “Debt” for additional information on the Company’s debt facilities.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(7) Debt
Debt consisted of the following:
Interest Rate as of October 2, 2021
Principal Amount
Maturity Date
October 2, 2021
January 2, 2021
Senior Secured Credit Facility:
Revolving Loan Facility
—
$
—
$
—
December 2022
Term Loan A
1.33%
609,375
625,000
December 2022
Term Loan B
—
—
300,000
December 2024
Australian Revolving Loan Facility
—
—
—
July 2022
5.375% Senior Notes
5.38%
700,000
700,000
May 2025
4.875% Senior Notes
4.88%
900,000
900,000
May 2026
4.625% Senior Notes
4.63%
900,000
900,000
May 2024
3.5% Senior Notes
3.50%
579,643
610,724
June 2024
Accounts Receivable Securitization Facility
—
—
—
June 2022
Total debt
3,689,018
4,035,724
Less long-term debt issuance costs
24,971
32,354
Less current maturities
37,500
263,936
Total long-term debt
$
3,626,547
$
3,739,434
As of October 2, 2021, the Company had $995,824 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account $4,176 of standby and trade letters of credit issued and outstanding under this facility. In March 2021, the Company repaid the outstanding balance of Term Loan B which consisted of a required excess cash flow prepayment of $238,936 and a voluntary prepayment of $61,064.
The Company’s accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) entered into in November 2007 was amended in March 2021. The latest amendment decreased the fluctuating facility limit to $175,000 (previously $225,000) and extended the maturity date to June 2022. Additionally, the amendment changed certain ratios and borrowing base calculations, raised pricing and added certain receivables to the pledged collateral pool for the facility. Borrowings under the Accounts Receivable Securitization Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans and also subject to a fluctuating facility limit, not to exceed $175,000. The Company’s maximum borrowing capacity under the Accounts Receivable Securitization Facility was $175,000 as of October 2, 2021. The Company had $166,214 of borrowing availability under the Accounts Receivable Securitization Facility at October 2, 2021.
The Company had $43,051 of borrowing availability under the Australian Revolving Loan Facility and $13,856 of borrowing availability under other international credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facilities at October 2, 2021. The Australian Revolving Loan Facility, originally entered into in July 2016, was amended in July 2021 to extend the maturity date to July 2022 and to reduce the bilateral cash advance limit from A$50,000 to A$46,000 with an offsetting increase in the bank overdraft limit from A$10,000 to A$14,000.
In April 2020, given the rapidly changing business environment and level of uncertainty being created by the COVID-19 pandemic and the associated impact on future earnings, the Company amended its Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility during the COVID-19 crisis. The amendment changed certain provisions and covenants under the Senior Secured Credit Facility through the fiscal quarter ended July 3, 2021, after which the covenants were to revert to their original, pre-amendment levels. The Company voluntarily terminated the covenant relief amendment when it submitted its April 3, 2021 compliance certificate. After termination, the covenants reverted to their original, pre-amendment levels for the fiscal quarter ended July 3, 2021.
As of October 2, 2021, the Company was in compliance with all financial covenants under its credit facilities and other outstanding indebtedness. Under the terms of its Senior Secured Credit Facility, among other financial and non-financial covenants, the Company is required to maintain a minimum interest coverage ratio and a maximum leverage ratio. The interest coverage ratio covenant is the ratio of the Company’s EBITDA for the preceding four fiscal quarters to its consolidated total interest expense and the maximum leverage ratio covenant is the ratio of the Company’s net debt to EBITDA for the preceding
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
four fiscal quarters. EBITDA is defined as earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility.
The Company expects to maintain compliance with its covenants for at least one year from the date of these financial statements based on its current expectations and forecasts. If economic conditions caused by the COVID-19 pandemic do not continue to improve or otherwise worsen, including as a result of any new virus variants or vaccine distribution or efficacy, and the Company’s earnings and operating cash flows do not continue to recover as currently estimated by management, this could impact the Company’s ability to maintain compliance with its financial covenants and require the Company to seek additional amendments to its Senior Secured Credit Facility. If the Company is not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, its lenders could require the Company to repay its outstanding debt. In that situation, the Company may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
The Company intends to refinance its Senior Secured Credit Facility in the fourth quarter of 2021, subject to market conditions. In conjunction with the refinancing, the Company intends to redeem its 5.375% Senior Notes using proceeds from the transaction and cash on hand. Redemption of the 5.375% Senior Notes will require payment of a make-whole premium, which along with transaction fees is estimated to result in a one-time charge of approximately $45,000 in the fourth quarter of 2021.
(8) Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (“AOCI”) are as follows:
Cumulative Translation Adjustment(1)
Cash Flow Hedges
Defined Benefit Plans
Income Taxes
Accumulated Other Comprehensive Loss
Balance at July 3, 2021
$
(89,252)
$
(8,826)
$
(654,048)
$
171,198
$
(580,928)
Amounts reclassified from accumulated other comprehensive loss
—
14,905
6,179
(3,980)
17,104
Current-period other comprehensive income (loss) activity
(42,330)
(5,144)
274
(304)
(47,504)
Total other comprehensive income (loss)
(42,330)
9,761
6,453
(4,284)
(30,400)
Balance at October 2, 2021
$
(131,582)
$
935
$
(647,595)
$
166,914
$
(611,328)
Cumulative Translation Adjustment(1)
Cash Flow Hedges
Defined Benefit Plans
Income Taxes
Accumulated Other Comprehensive Loss
Balance at January 2, 2021
$
(52,820)
$
(26,538)
$
(668,730)
$
181,129
$
(566,959)
Amounts reclassified from accumulated other comprehensive loss
—
24,818
19,286
(9,977)
34,127
Current-period other comprehensive income (loss) activity
(78,762)
2,655
1,849
(4,238)
(78,496)
Total other comprehensive income (loss)
(78,762)
27,473
21,135
(14,215)
(44,369)
Balance at October 2, 2021
$
(131,582)
$
935
$
(647,595)
$
166,914
$
(611,328)
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note, “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Cumulative Translation Adjustment(1)
Cash Flow Hedges
Defined Benefit Plans
Income Taxes
Accumulated Other Comprehensive Loss
Balance at June 27, 2020
$
(179,259)
$
9,641
$
(619,140)
$
157,749
$
(631,009)
Amounts reclassified from accumulated other comprehensive loss
—
(7,278)
5,428
657
(1,193)
Current-period other comprehensive income (loss) activity
23,678
(7,007)
(234)
982
17,419
Total other comprehensive income (loss)
23,678
(14,285)
5,194
1,639
16,226
Balance at September 26, 2020
$
(155,581)
$
(4,644)
$
(613,946)
$
159,388
$
(614,783)
Cumulative Translation Adjustment(1)
Cash Flow Hedges
Defined Benefit Plans
Income Taxes
Accumulated Other Comprehensive Loss
Balance at December 28, 2019
$
(157,138)
$
4,786
$
(629,360)
$
164,064
$
(617,648)
Amounts reclassified from accumulated other comprehensive loss
—
(15,452)
15,717
241
506
Current-period other comprehensive income (loss) activity
1,557
6,022
(303)
(4,917)
2,359
Total other comprehensive income (loss)
1,557
(9,430)
15,414
(4,676)
2,865
Balance at September 26, 2020
$
(155,581)
$
(4,644)
$
(613,946)
$
159,388
$
(614,783)
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note, “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
The Company had the following reclassifications out of AOCI:
Component of AOCI
Location of Reclassification into Income
Amount of Reclassification from AOCI
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Gain (loss) on forward foreign exchange contracts designated as cash flow hedges
Cost of sales
$
(4,506)
$
5,949
$
(14,161)
$
10,576
Income tax
1,203
(1,757)
3,855
(3,002)
Loss from discontinued operations, net of tax
(876)
1,004
(2,398)
3,722
Net of tax
(4,179)
5,196
(12,704)
11,296
Gain (loss) on cross-currency swap contracts designated as cash flow hedges
Selling, general and administrative expenses
(8,134)
—
(5,523)
—
Interest expense, net
(1,187)
—
(2,205)
—
Income tax
996
—
773
—
Net of tax
(8,325)
—
(6,955)
—
Amortization of deferred actuarial loss and prior service cost
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(9) Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts and cross-currency swap contracts to manage its exposures to movements in foreign exchange rates primarily related to the Australian dollar, Euro, Canadian dollar and Mexican peso. The Company also uses a combination of cross-currency swap contracts and long-term debt to manage its exposure to foreign currency risk associated with the Company’s net investment in certain European subsidiaries.
Hedge Type
October 2, 2021
January 2, 2021
U.S. dollar equivalent notional amount of derivative instruments:
Forward foreign exchange contracts
Cash Flow and Mark to Market
$
362,743
$
617,912
Cross-currency swap contracts
Cash Flow
$
352,920
$
—
Cross-currency swap contracts
Net Investment
$
335,940
$
335,940
Fair Values of Derivative Instruments
The fair values of derivative financial instruments related to forward foreign exchange contracts and cross-currency swap contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
Balance Sheet Location
Fair Value
October 2, 2021
January 2, 2021
Derivatives designated as hedging instruments:
Forward foreign exchange contracts
Other current assets
$
4,588
$
1
Cross-currency swap contracts
Other current assets
2,839
918
Forward foreign exchange contracts
Current assets of discontinued operations
—
40
Forward foreign exchange contracts
Other noncurrent assets
232
—
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts
Other current assets
3,846
2,459
Forward foreign exchange contracts
Current assets of discontinued operations
185
198
Total derivative assets
11,690
3,616
Derivatives designated as hedging instruments:
Forward foreign exchange contracts
Accrued liabilities
(55)
(12,898)
Cross-currency swap contracts
Accrued liabilities
(1,410)
—
Forward foreign exchange contracts
Current liabilities of discontinued operations
(4)
(4,747)
Forward foreign exchange contracts
Other noncurrent liabilities
(1)
(2,190)
Cross-currency swap contracts
Other noncurrent liabilities
(8,741)
(16,526)
Derivatives not designated as hedging instruments:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Cash Flow Hedges
The Company uses forward foreign exchange contracts and cross-currency swap contracts to reduce the effect of fluctuating foreign currencies on foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
On April 1, 2021, in connection with a reduction in the amount of the 3.5% Senior Notes designated in the European net investment hedge discussed below, the Company entered into three pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000. The Company designated these cross-currency swap contracts to hedge the undesignated portion of the foreign currency cash flow exposure related to the Company’s 3.5% Senior Notes, which had a carrying amount of €500,000 as of October 2, 2021. These cross-currency swap contracts, which mature on June 15, 2024, swap Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €300,000 of the Company’s €500,000 fixed-rate 3.5% Senior Notes to a fixed-rate 4.7945% USD-denominated obligation.
The Company expects to reclassify into earnings during the next 12 months a net loss from AOCI of approximately $2,474. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next 17 months and for long-term debt over the next 33 months.
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Forward foreign exchange contracts
$
4,827
$
(7,007)
$
11,921
$
6,022
Cross-currency swap contracts
(9,971)
—
(9,266)
—
Total
$
(5,144)
$
(7,007)
$
2,655
$
6,022
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Forward foreign exchange contracts(1)
Cost of sales
$
(4,506)
$
5,949
$
(14,161)
$
10,576
Forward foreign exchange contracts(1)
Loss from discontinued operations, net of tax
(1,078)
1,329
(2,929)
4,876
Cross-currency swap contracts(1)
Selling, general and administrative expenses
(8,134)
—
(5,523)
—
Cross-currency swap contracts(1)
Interest expense, net
(1,187)
—
(2,205)
—
Total
$
(14,905)
$
7,278
$
(24,818)
$
15,452
(1)The Company does not exclude amounts from effectiveness testing for cash flow hedges that would require recognition into earnings based on changes in fair value.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Total cost of sales in which the effects of cash flow hedges are recorded
$
1,089,890
$
1,120,392
$
3,064,920
$
2,934,515
Total selling, general and administrative expenses in which the effects of cash flow hedges are recorded
$
465,015
$
382,384
$
1,341,809
$
1,064,328
Total interest expense, net in which the effects of cash flow hedges are recorded
$
40,860
$
43,500
$
127,760
$
120,602
Total loss from discontinued operations, net of tax in which the effects of cash flow hedges are recorded
$
(24,970)
$
(14,947)
$
(435,823)
$
(3,326)
Net Investment Hedges
In July 2019, the Company entered into two pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000 that were designated as hedges of a portion of the beginning balance of the Company’s net investment in certain European subsidiaries. These cross-currency swap contracts, which mature on May 15, 2024, swap U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 4.625% Senior Notes to a fixed-rate 2.3215% Euro-denominated obligation.
In July 2019, the Company also designated the full amount of its 3.5% Senior Notes with a carrying value of €500,000, which is a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment. As of April 1, 2021, the Company reduced the amount of its 3.5% Senior Notes designated in the European net investment hedge from €500,000 to €200,000. As of October 2, 2021 and January 2, 2021, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $231,857 and $610,724, respectively.
The amount of after-tax gains (losses) included in AOCI in the Condensed Consolidated Balance Sheets related to derivative instruments and nonderivative financial instruments designated as net investment hedges and the amount of gains included in the “Interest expense, net” line in the Condensed Consolidated Statements of Income related to amounts excluded from the assessment of hedge effectiveness for derivative instruments designated as net investment hedges are as follows:
Amount of Gain (Loss) Recognized in AOCI
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Euro-denominated long-term debt
$
3,966
$
(13,815)
$
21,722
$
(15,353)
Cross-currency swap contracts
5,650
(10,611)
10,957
117
Total
$
9,616
$
(24,426)
$
32,679
$
(15,236)
Location of Gain Recognized in Income
Amount of Gain Recognized in Income (Amount Excluded from Effectiveness Testing)
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Cross-currency swap contracts
Interest expense, net
$
1,870
$
1,805
$
5,484
$
5,772
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Total interest expense, net in which the amounts excluded from effectiveness testing for net investment hedges are recorded
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Mark to Market Hedges
A derivative used as a hedging instrument whose change in fair value is recognized to act as a hedge against changes in the values of the hedged item is designated as a mark to market hedge. The Company uses forward foreign exchange derivative contracts as hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Forward foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheets. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
Location of Gain (Loss) Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Forward foreign exchange contracts
Cost of sales
$
6,087
$
(1,472)
$
24,711
$
(11,004)
Forward foreign exchange contracts
Selling, general and administrative expenses
(597)
3,718
2,494
4,646
Forward foreign exchange contracts
Loss from discontinued operations, net of tax
859
(139)
4,812
(3,590)
Total
$
6,349
$
2,107
$
32,017
$
(9,948)
(10) Fair Value of Assets and Liabilities
As of October 2, 2021, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to forward foreign exchange derivative contracts, cross-currency swap derivative contracts and deferred compensation plan liabilities. The fair values of forward foreign exchange derivative contracts are determined using the cash flows of the forward contracts, discount rates to account for the passage of time and current foreign exchange market data which are all based on inputs readily available in public markets and are categorized as Level 2. The fair values of cross-currency swap derivative contracts are determined using the cash flows of the swap contracts, discount rates to account for the passage of time, current foreign exchange and interest rate market data and credit risk, which are all based on inputs readily available in public markets and are categorized as Level 2. The fair value of deferred compensation plans is based on readily available current market data and is categorized as Level 2. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a quarterly recurring basis.
There were no changes during the quarter and nine months ended October 2, 2021 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of and during the quarter and nine months ended October 2, 2021, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities within continuing operations accounted for at fair value on a recurring basis.
Assets (Liabilities) at Fair Value as of October 2, 2021
Total
Quoted Prices In Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Forward foreign exchange contracts - assets
$
8,666
$
—
$
8,666
$
—
Cross-currency swap contracts - assets
2,839
—
2,839
—
Forward foreign exchange contracts - liabilities
(876)
—
(876)
—
Cross-currency swap contracts - liabilities
(10,151)
—
(10,151)
—
478
—
478
—
Deferred compensation plan liability
(19,916)
—
(19,916)
—
Total
$
(19,438)
$
—
$
(19,438)
$
—
Assets (Liabilities) at Fair Value as of January 2, 2021
Total
Quoted Prices In Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Forward foreign exchange contracts - assets
$
2,460
$
—
$
2,460
$
—
Cross-currency swap contracts - assets
918
—
918
—
Forward foreign exchange contracts - liabilities
(31,576)
—
(31,576)
—
Cross-currency swap contracts - liabilities
(16,526)
—
(16,526)
—
(44,724)
—
(44,724)
—
Deferred compensation plan liability
(21,878)
—
(21,878)
—
Total
$
(66,602)
$
—
$
(66,602)
$
—
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of October 2, 2021 and January 2, 2021. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $63,193 and $48,745 as of October 2, 2021 and January 2, 2021, respectively. The fair value of debt, which is classified as a Level 2 liability, was $3,885,395 and $4,230,985 as of October 2, 2021 and January 2, 2021, respectively. Debt had a carrying value of $3,689,018 and $4,035,724 as of October 2, 2021 and January 2, 2021, respectively. The fair values were estimated using quoted market prices as provided in secondary markets, which consider the Company’s credit risk and market related conditions. The carrying amount of the Company’s notes payable, which is classified as a Level 2 liability, approximated fair value primarily due to the short-term nature of these instruments.
(11) Income Taxes
The Company’s effective income tax rate was 7.9% and 16.0% for the quarters ended October 2, 2021 and September 26, 2020, respectively. The Company’s effective income tax rate was 10.9% and 14.2% for the nine months ended October 2, 2021 and September 26, 2020, respectively. The lower effective tax rate for the quarter and nine months ended October 2, 2021 was primarily due to tax benefits related to the adjustments of prior year tax returns and approval of certain filings by taxing authorities during the quarter ended October 2, 2021 and the change in jurisdictional mix of income.
The Company is or could be subject to examinations in the U.S., various state and foreign jurisdictions and believes that it maintains appropriate accruals for unrecognized tax benefits related to uncertain tax positions, which are evaluated each quarter. During the nine months ended October 2, 2021, the Company’s liability for unrecognized tax benefits, including interest and penalties, decreased by $8,435, of which $8,938 was a discrete reduction of the effective income tax rate. The decrease was related to expirations of statutes of limitations and approvals of certain filings with income tax authorities.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(12) Business Segment Information
The Company’s operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of the Company’s U.S.-based outlet stores, U.S. hosiery business and certain sales from its supply chain to the European Innerwear business.
The types of products and services from which each reportable segment derives its revenues are as follows:
•Innerwear includes sales in the United States of basic branded apparel products that are replenishment in nature under the product categories of men’s underwear, women’s panties, children’s underwear and socks, and intimate apparel, which includes bras and shapewear. Innerwear also includes sales of personal protective equipment including products such as cloth face coverings and gowns in 2020.
•Activewear includes sales in the United States of basic branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel in collegiate bookstores, mass retailers and other channels.
•International includes sales of products in all of the Company’s categories outside the United States, primarily in Australasia, Europe, Asia, Canada and Latin America.
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, restructuring and other action-related charges and amortization of intangibles. The accounting policies of the segments are consistent with those described in Note, “Summary of Significant Accounting Policies” to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 2, 2021.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Segment operating profit:
Innerwear
$
147,651
$
172,000
$
461,237
$
558,075
Activewear
76,172
29,568
177,813
31,925
International
86,371
101,029
235,451
156,936
Other
11,288
3,059
22,394
(12,263)
Total segment operating profit
321,482
305,656
896,895
734,673
Items not included in segment operating profit:
General corporate expenses
(50,226)
(56,357)
(164,734)
(163,923)
Restructuring and other action-related charges
(29,096)
(52,257)
(67,153)
(108,860)
Amortization of intangibles
(7,514)
(7,955)
(22,846)
(22,717)
Total operating profit
234,646
189,087
642,162
439,173
Other expenses
(1,811)
(4,898)
(6,227)
(15,652)
Interest expense, net
(40,860)
(43,500)
(127,760)
(120,602)
Income from continuing operations before income tax expense
$
191,975
$
140,689
$
508,175
$
302,919
The Company incurred pre-tax restructuring and other action-related charges included in operating profit that were reported in the following lines in the Condensed Consolidated Statements of Income:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Cost of sales
$
(108)
$
47,599
$
4,599
$
87,828
Selling, general and administrative expenses
29,204
4,658
62,554
21,032
Total restructuring and other action-related charges included in operating profit
$
29,096
$
52,257
$
67,153
$
108,860
The components of restructuring and other action-related charges included in operating profit were as follows:
Quarters Ended
Nine Months Ended
October 2, 2021
September 26, 2020
October 2, 2021
September 26, 2020
Full Potential Plan:
Professional services
$
11,283
$
—
$
36,793
$
—
Operating model
16,000
—
17,600
—
Impairment of intangible assets
—
—
7,302
—
Other
1,813
—
5,458
—
2020 actions:
Supply chain actions
—
2,098
—
18,800
Program exit costs
—
356
—
9,854
Other
—
1,195
—
7,311
COVID-19 related charges:
Supply chain re-startup
—
48,608
—
48,608
Bad debt
—
—
—
9,418
Inventory
—
—
—
14,869
Total restructuring and other action-related charges included in operating profit
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
In the third quarter of 2021, the Company approved an action to resize its U.S. corporate office workforce through a voluntary retirement program. As of October 2, 2021, the Company accrued $16,000 for employee termination and other benefits in accordance with expected benefit payments, with the charges reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income and in the pre-tax restructuring and other action-related charges table above. As of October 2, 2021, no benefit payments had been made. The accrual is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheet.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed interim consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 2, 2021, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended January 2, 2021. In particular, statements with respect to trends associated with our business, our Full Potential plan, our future financial performance and the potential effects of the ongoing global coronavirus (“COVID-19”) pandemic included in this MD&A include forward-looking statements.
Overview
Hanesbrands Inc. (collectively with its subsidiaries, “we,” “us,” “our,” or the “Company”) is a socially responsible leading marketer of everyday basic innerwear and activewear apparel in the Americas, Australia, Europe and Asia/Pacific under some of the world’s strongest apparel brands, including Hanes, Champion, Bonds, Bali, Maidenform, Playtex, Bras N Things, JMS/Just My Size, Wonderbra, Alternative, Berlei, L’eggs and Gear for Sports. We sell T-shirts, bras, panties, shapewear, underwear, socks, hosiery and activewear produced in our low-cost global supply chain. Our products are marketed to consumers shopping in mass merchants, mid-tier and department stores, specialty stores and the consumer-directed channel, which includes our owned retail locations, as well as e-commerce sites. Our brands hold either the number one or number two market position by units sold in many of the product categories and geographies in which we compete.
Our operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of our U.S.-based outlet stores, our U.S. hosiery business and certain sales from our supply chain to the European Innerwear business.
Our Key Business Strategies
Our business strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. We operate in the global innerwear and global activewear apparel categories. These are stable, heavily branded categories where we have a strong consumer franchise based on a global portfolio of industry-leading brands that we have built over multiple decades, through hundreds of millions of direct interactions with consumers. In 2020, we undertook a comprehensive global business review focused on building consumer-centric growth. The review resulted in our Full Potential plan, which is our multi-year growth strategy that focuses on four pillars to drive growth and enhance long-term profitability and identifies initiatives to unlock growth. Our four pillars of growth are to grow the Champion brand globally, drive growth in Innerwear with brands and products that appeal to younger consumers, drive consumer-centricity by delivering innovative products and improving awareness through investments in brand marketing and digital capabilities, and streamline our global portfolio. In order to deliver this growth and create a more efficient and productive business model, we have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve the Full Potential plan’s objectives. We remain highly confident that our strong brand portfolio, world-class supply chain and diverse category and geographic footprint will help us unlock our full potential, deliver long-term growth and create stockholder value.
In the fourth quarter of 2020, we began the implementation of our Full Potential plan and as part of our strategy to streamline our portfolio, we determined that our personal protective equipment (“PPE”) business was no longer a growth opportunity for us and recorded a charge to write down our entire PPE inventory balance to its estimated net realizable value. Additionally, we commenced an initiative to reduce 20% of our SKUs in inventory in order to streamline product offerings while also implementing a formal lifecycle management process.
In the first quarter of 2021, we announced that as part of our strategic plan, we were exploring alternatives for our European Innerwear business and subsequently reached the decision to exit this business. We determined that our European Innerwear business met held-for-sale and discontinued operations accounting criteria during the first quarter of 2021. Accordingly, we began to separately report the results of our European Innerwear business as discontinued operations in our Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed
Consolidated Balance Sheets. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. On November 4, 2021, we announced that we have reached an agreement to sell our European Innerwear business to an affiliate of Regent, L.P., pending the completion of consultation with the European and French works councils representing employees of the European Innerwear business and customary closing conditions. Under the agreement, the purchaser will receive all the assets and operating liabilities of the European Innerwear business for a purchase price of one Euro, subject to a post-closing adjustment to reflect any deviation at closing from a normalized level of working capital. Under the agreement, there is also a potential earnout due to us based on future performance. The transaction is expected to close in the first quarter of 2022.
Impact of COVID-19 on Our Business
The COVID-19 pandemic impacted our business operations and financial results for the third quarter and nine months ended 2021 and 2020 as described in more detail under “Condensed Consolidated Results of Operations - Third Quarter Ended October 2, 2021 Compared with Third Quarter Ended September 26, 2020” and “Condensed Consolidated Results of Operations - Nine Months Ended October 2, 2021 Compared with Nine Months Ended September 26, 2020” below, primarily through reduced traffic and closures of company-operated and third-party retail locations for portions of each of the periods in certain markets and global supply chain disruptions. Global supply chain disruptions primarily due to port congestion, transportation delays as well as labor and container shortages have resulted in higher operating costs and higher levels of inflation. The future impact of the COVID-19 pandemic remains highly uncertain, and our business and results of operations, including our net revenues, earnings and cash flows, could continue to be adversely impacted.
Outlook for the fourth quarter of 2021
We estimate our fourth quarter 2021 guidance as follows:
•Net sales of approximately $1.71 billion to $1.78 billion;
•Operating profit of approximately $182 million to $202 million;
•Full Potential plan-related charges of approximately $18 million included in operating profit;
•Interest expense and other expenses of approximately $85 million combined, including a one-time charge of $45 million for a make-whole premium and transaction fees related to our anticipated debt refinancing;
•An effective tax rate from continuing operations of approximately 12%;
•Diluted earnings per share from continuing operations of approximately $0.24 to $0.29;
•Cash flow from operating activities of approximately $23 million to $73 million; and
•Capital expenditures of approximately $20 million to $30 million.
Seasonality and Other Factors
Absent the effects of the COVID-19 pandemic, our operating results are typically subject to some variability due to seasonality and other factors. For instance, we have historically generated higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by our customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse basis, our sales are impacted by discretionary consumer spending trends. Discretionary spending is affected by many factors that are outside our control, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, energy prices, unemployment trends and other matters that influence consumer confidence and spending. 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. As a result, consumers may choose to purchase fewer of our products, to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
Disruptions to the global supply chain due to factory closures, port congestion, container shortages, trucking capacity shortages, transportation delays and labor shortages may negatively impact product availability, revenue growth and gross margins. Global supply chain disruptions could also cause our business to be affected by inflation which we would work to mitigate through a combination of cost savings and operating efficiencies, as well as pricing actions, which could have an adverse impact on demand.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as seasonal and replenishable activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to consumers’ preferences and discretionary spending.
Condensed Consolidated Results of Operations — Third Quarter Ended October 2, 2021 Compared with Third Quarter Ended September 26, 2020
Quarters Ended
October 2, 2021
September 26, 2020
Higher (Lower)
Percent Change
(dollars in thousands)
Net sales
$
1,789,551
$
1,691,863
$
97,688
5.8
%
Cost of sales
1,089,890
1,120,392
(30,502)
(2.7)
Gross profit
699,661
571,471
128,190
22.4
Selling, general and administrative expenses
465,015
382,384
82,631
21.6
Operating profit
234,646
189,087
45,559
24.1
Other expenses
1,811
4,898
(3,087)
(63.0)
Interest expense, net
40,860
43,500
(2,640)
(6.1)
Income from continuing operations before income tax expense
191,975
140,689
51,286
36.5
Income tax expense
15,228
22,464
(7,236)
(32.2)
Income from continuing operations
176,747
118,225
58,522
49.5
Loss from discontinued operations, net of tax
(24,970)
(14,947)
(10,023)
67.1
Net income
$
151,777
$
103,278
$
48,499
47.0
%
Net Sales
Net sales increased 6% during the third quarter of 2021 versus the third quarter of 2020 primarily due to the following:
•Strong consumer demand and point-of-sale trends in the U.S., Europe, the Americas, and certain markets in Asia; and
•The favorable impact from foreign exchange rates in our International business of approximately $8 million.
Partially offset by:
•The exit of the PPE business as part of our Full Potential plan, which contributed net sales of $179 million in the third quarter of 2020; and
•Net sales in Australia and Japan were negatively impacted due to extended government COVID-19 related lockdowns in the third quarter of 2021.
Operating profit as a percentage of net sales was 13.1% during the third quarter of 2021, representing an increase from 11.2% in the prior year. Operating margin benefited from fixed cost leverage from higher sales, favorable sales mix and the favorable impact from foreign exchange rates, which more than offset higher transportation costs, increased investments in brand marketing and higher levels of inflation. Selling, general and administrative expenses in the third quarter of 2020 benefited from temporary cost savings initiatives implemented in response to the COVID-19 pandemic. The third quarter of 2020 also included operating profit related to the PPE business that was exited.
Included in operating profit in the third quarter of 2021 were charges of $29 million related to the implementation of our Full Potential plan. Included in operating profit in the third quarter of 2020 were charges of $52 million primarily related to supply chain re-startup charges related to incremental costs incurred, such as freight and sourcing premiums, to expedite product delivery to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic in 2020.
Other Highlights
Other Expenses – Other expenses decreased $3 million in the third quarter of 2021 compared to the third quarter of 2020 primarily due to lower pension expense in 2021.
Interest Expense – Interest expense was lower by $3 million in the third quarter of 2021 compared to the third quarter of 2020 primarily due to lower outstanding debt balances during the third quarter of 2021 compared to the third quarter of 2020. Our weighted average interest rate on our outstanding debt was 4.12% for the third quarter of 2021, compared to 4.07% for the third quarter of 2020.
Income Tax Expense – Our effective income tax rate was 7.9% and 16.0% for the third quarters of 2021 and 2020, respectively. The lower effective tax rate for the third quarter of 2021 was primarily due to tax benefits related to the adjustments of prior year tax returns and approval of certain filings by taxing authorities during the third quarter of 2021 and the change in jurisdictional mix of income.
DiscontinuedOperations – The results of our discontinued operations include the operations of our European Innerwear business which we reached the decision to exit at the end of the first quarter of 2021 in connection with our Full Potential plan. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a discussion of a non-cash charge to record a valuation allowance against the net assets held for sale to write down the carrying value to the estimated fair value less costs of disposal.
Operating Results by Business Segment — Third Quarter Ended October 2, 2021 Compared with Third Quarter Ended September 26, 2020
Innerwear net sales decreased 11% compared to the third quarter of 2020 primarily due to our exit of the PPE business in 2021 as a result of the implementation of our Full Potential plan. Net sales of PPE represented $166 million of the decrease in the third quarter of 2021 compared to the third quarter of 2020. This decrease was partially offset by increases in all of our core apparel categories. Net sales in our Men’s, Kids and Socks businesses increased mid-to-high single digits and net sales in our Women’s business increased approximately 20%, driven by strong point-of-sale growth across channels in the third quarter of 2021.
Innerwear operating margin was 21.0%, a decrease from 21.7% in the same period a year ago due to fixed cost deleverage from lower sales, higher transportation costs, increased investments in brand marketing and higher levels of inflation. The third quarter of 2020 also included operating profit related to the PPE business that was exited.
Activewear
Activewear net sales increased 42% compared to the third quarter last year driven by lower comparable sales in the third quarter of 2020 due to COVID-19 pandemic-related shutdowns. We experienced growth in all product categories, including double-digit growth in both the Champion and Hanes brands. We experienced strong point-of-sale trends across several channels in the third quarter of 2021.
Activewear operating margin was 16.5%, an increase from 9.1% in the same period a year ago. Operating margin improvement primarily resulted from fixed cost leverage from higher sales and favorable sales mix, which more than offset increased investments in brand marketing.
International
Net sales in the International segment increased 6% as a result of lower sales in the third quarter of 2020 due to the negative impact of the COVID-19 pandemic. Net sales grew in the Americas, Europe and certain markets in Asia driven by strong consumer demand for our brands while net sales in Australia and Japan were negatively impacted due to extended government COVID-19 related lockdowns in the third quarter of 2021. The favorable impact of foreign currency exchange rates increased net sales approximately $8 million in the third quarter of 2021. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increased 4%. The impact of foreign exchange rates is calculated by applying prior period exchange rates to the current year financial results. The third quarter of 2020 included net sales of PPE of $13 million.
International operating margin was 16.1%, a decrease from 20.0% in the same period a year ago. The decrease in operating margin primarily resulted from fixed cost deleverage due to COVID-19 related shutdowns in Australia and Japan in the third quarter of 2021 and increased investments in brand marketing partially offset by fixed cost leverage from higher sales in the Americas, Europe and certain markets in Asia and the favorable impact from foreign exchange rates.
Other
Other net sales increased primarily due to increased sales at our retail outlets during the third quarter of 2021 as a result of stores reopening after temporary store closures during the third quarter of 2020 due to the COVID-19 pandemic. Operating margin increased due to the increase in sales volume.
We expect to continue certain sales from our supply chain to the European Innerwear business after the sale of the business. Those sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation.
Corporate
Corporate expenses were lower in the third quarter of 2021 compared to the third quarter of 2020 due to lower restructuring and other action-related charges. Included in restructuring and other action-related charges in the third quarter of 2021 were $29 million of charges related to the implementation of our Full Potential plan including a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program which is expected to be paid within one year and is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. Included in restructuring and other action-related charges in the third quarter of 2020 were $49 million of supply chain re-startup charges primarily related to incremental costs incurred, such as freight and sourcing premiums, to expedite product delivery to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic in 2020. Supply chain actions in the third quarter of 2020 include actions to reduce overhead costs. Program exit charges are costs incurred during the third quarter of 2020 associated with exiting the C9
Champion mass program and the DKNY intimate apparel license at the end of 2019. Other charges in the third quarter of 2020 include action-related costs such as workforce reductions.
Quarters Ended
October 2, 2021
September 26, 2020
(dollars in thousands)
Restructuring and other action-related charges included in operating profit:
Full Potential Plan:
Professional services
$
11,283
$
—
Operating model
16,000
—
Other
1,813
—
2020 actions:
Supply chain actions
—
2,098
Program exit costs
—
356
Other
—
1,195
COVID-19 related charges:
Supply chain re-startup
—
48,608
Total restructuring and other action-related charges included in operating profit
$
29,096
$
52,257
Condensed Consolidated Results of Operations — Nine Months Ended October 2, 2021 Compared with Nine Months Ended September 26, 2020
Nine Months Ended
October 2, 2021
September 26, 2020
Higher (Lower)
Percent Change
(dollars in thousands)
Net sales
$
5,048,891
$
4,438,016
$
610,875
13.8
%
Cost of sales
3,064,920
2,934,515
130,405
4.4
Gross profit
1,983,971
1,503,501
480,470
32.0
Selling, general and administrative expenses
1,341,809
1,064,328
277,481
26.1
Operating profit
642,162
439,173
202,989
46.2
Other expenses
6,227
15,652
(9,425)
(60.2)
Interest expense, net
127,760
120,602
7,158
5.9
Income from continuing operations before income tax expense
508,175
302,919
205,256
67.8
Income tax expense
55,161
43,008
12,153
28.3
Income from continuing operations
453,014
259,911
193,103
74.3
Loss from discontinued operations, net of tax
(435,823)
(3,326)
(432,497)
13,003.5
Net income
$
17,191
$
256,585
$
(239,394)
(93.3)
%
Net Sales
Net sales increased 14% during the nine months of 2021 versus the nine months of 2020 primarily due to the following:
•Retailers continuing to replenish inventory levels as well as strong consumer demand and point-of-sale trends as stores reopened after temporary closures due to the COVID-19 pandemic and incremental sales partially as a result of higher U.S. government stimulus spending;
•A lower sales comparison in the nine months of 2020 due to COVID-19 pandemic-related shutdowns; and
•The favorable impact from foreign exchange rates in our International business of approximately $102 million.
Partially offset by:
•The exit of the PPE business as part of our Full Potential plan, which contributed net sales of $792 million in the nine months of 2020.
Operating Profit
Operating profit as a percentage of net sales was 12.7% for the nine months of 2021, representing an increase from 9.9% in the prior year. Operating margin benefited from fixed cost leverage from higher sales and the favorable impact from foreign exchange rates, which more than offset higher transportation costs, increased investments in brand marketing and higher levels
of inflation. Selling, general and administrative expenses in the nine months of 2020 benefited from temporary cost savings initiatives implemented in response to the COVID-19 pandemic. The nine months of 2020 also included operating profit related to the PPE business that was exited.
Included in operating profit in the nine months of 2021 were charges of $67 million related to the implementation of our Full Potential plan. Included in operating profit in the nine months of 2020 were charges of $109 million primarily related to supply chain actions, program exits, asset write-down charges recorded as a result of the effects of the COVID-19 pandemic and supply chain re-startup charges related to incremental costs incurred, such as freight and sourcing premiums, to expedite product delivery to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic in 2020.
Other Highlights
Other Expenses – Other expenses decreased $9 million in the nine months of 2021 compared to the same period in 2020 due to lower pension expense and lower funding fees for sales of accounts receivable to financial institutions in 2021.
Interest Expense – Interest expense was higher by $7 million in the nine months of 2021 compared to the same period in 2020, driven by a higher weighted average interest rate on our borrowings during the nine months of 2021 and interest expense on cross-currency swap contracts entered into on April 1, 2021 that are being used to hedge foreign currency cash flows. Our weighted average interest rate on our outstanding debt was 4.12% for the nine months of 2021, compared to 3.90% for the nine months of 2020.
Income Tax Expense – Our effective income tax rate was 10.9% and 14.2% for the nine months of 2021 and 2020, respectively. The lower effective tax rate for the nine months of 2021 was primarily due to tax benefits related to the adjustments of prior year tax returns and approval of certain filings by taxing authorities during the nine months of 2021 and the change in jurisdictional mix of income.
DiscontinuedOperations – The results of our discontinued operations include the operations of our European Innerwear business which we reached the decision to exit at the end of the first quarter of 2021 in connection with our Full Potential plan. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a discussion of non-cash asset impairment charges and non-cash charges to record a valuation allowance against the net assets held for sale to write down the carrying value to the estimated fair value less costs of disposal.
Operating Results by Business Segment — Nine Months Ended October 2, 2021 Compared with Nine Months Ended September 26, 2020
Net Sales
Nine Months Ended
October 2, 2021
September 26, 2020
Higher (Lower)
Percent Change
(dollars in thousands)
Innerwear
$
2,053,702
$
2,309,816
$
(256,114)
(11.1)
%
Activewear
1,230,691
781,300
449,391
57.5
International
1,521,667
1,185,718
335,949
28.3
Other
242,831
161,182
81,649
50.7
Total
$
5,048,891
$
4,438,016
$
610,875
13.8
%
Operating Profit and Margin
Nine Months Ended
October 2, 2021
September 26, 2020
Higher (Lower)
Percent Change
(dollars in thousands)
Innerwear
$
461,237
22.5
%
$
558,075
24.2
%
$
(96,838)
(17.4)
%
Activewear
177,813
14.4
31,925
4.1
145,888
457.0
International
235,451
15.5
156,936
13.2
78,515
50.0
Other
22,394
9.2
(12,263)
(7.6)
34,657
NM
Corporate
(254,733)
NM
(295,500)
NM
40,767
(13.8)
Total
$
642,162
12.7
%
$
439,173
9.9
%
$
202,989
46.2
%
Innerwear
Innerwear net sales decreased 11% compared to the nine months of 2020 primarily due to our exit of the PPE business in 2021 as a result of the implementation of our Full Potential plan. Net sales of PPE represented $779 million of the decrease in
the nine months of 2021 compared to the nine months of 2020. This decrease was partially offset by increases in all of our core apparel categories primarily as a result of a lower sales comparison in the nine months of 2020 due to COVID-19 pandemic-related shutdowns, retailers continuing to replenish inventory levels and strong consumer demand and point-of-sale trends as stores reopened after temporary closures due to the COVID-19 pandemic and incremental sales partially as a result of higher U.S. government stimulus spending.
Innerwear operating margin was 22.5%, a decrease from 24.2% in the same period a year ago due to fixed cost deleverage from lower sales, higher transportation costs, increased investments in brand marketing and higher levels of inflation. The nine months of 2020 also included operating profit related to the PPE business that was exited.
Activewear
Activewear net sales increased 58% compared to the nine months of 2020 driven by lower comparable sales in the nine months of 2020 due to COVID-19 pandemic-related shutdowns and incremental sales partially as a result of higher U.S. government stimulus spending in the nine months of 2021. We experienced growth in all product categories.
Activewear operating margin was 14.4%, an increase from 4.1% in the same period a year ago. Operating margin improvement primarily resulted from fixed cost leverage from higher sales and favorable sales mix, which more than offset increased investments in brand marketing.
International
Net sales in the International segment increased 28% as a result of lower sales in the nine months of 2020 due to the negative impact of the COVID-19 pandemic and the favorable impact of foreign currency exchange rates of approximately $102 million in the nine months of 2021. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increased 20%. The impact of foreign exchange rates is calculated by applying prior period exchange rates to the current year financial results. The nine months of 2020 included net sales of PPE of $13 million. Net sales in certain of our international markets continue to be negatively impacted by COVID-19 related shutdowns.
International operating margin was 15.5%, an increase from 13.2% in the same period a year ago. Operating margin improvement primarily resulted from fixed cost leverage from higher sales, favorable sales mix and the favorable impact from foreign exchange rates, which more than offset increased investments in brand marketing.
Other
Other net sales increased primarily due to increased sales at our retail outlets during the nine months of 2021 as a result of stores reopening after temporary store closures during the nine months of 2020 due to the COVID-19 pandemic. Operating margin increased due to the increase in sales volume.
We expect to continue certain sales from our supply chain to the European Innerwear business after the sale of the business. Those sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation.
Corporate
Corporate expenses in the nine months of 2021 included incremental recurring COVID-19 related costs such as cleaning and health-related supplies to protect our employees and customers, as well as higher compensation expense compared to the nine months of 2020. Corporate expenses were lower in the nine months of 2021 compared to the same period of 2020 due to lower restructuring and other action-related charges and bad debt expense. Included in restructuring and other action-related charges in the nine months of 2021 were $67 million of charges related to the implementation of our Full Potential plan including a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program and impairment charges of $7 million related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group as it is not being marketed for sale. Included in restructuring and other action-related charges in the nine months of 2020 were $49 million of supply chain re-startup charges primarily related to incremental costs incurred, such as freight and sourcing premiums, to expedite product delivery to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic in 2020 and $24 million of asset write-down charges recorded as a result of the effects of the COVID-19 pandemic. Supply chain actions in the nine months of 2020 include actions to reduce overhead costs. Program exit charges are costs incurred during the nine months of 2020 associated with exiting the C9 Champion mass program and the DKNY intimate apparel license at the end of 2019. Other charges in the nine months of 2020 include action-related costs such as workforce reductions.
Restructuring and other action-related charges included in operating profit:
Full Potential Plan:
Professional services
$
36,793
$
—
Operating model
17,600
—
Impairment of intangible assets
7,302
—
Other
5,458
—
2020 actions:
Supply chain actions
—
18,800
Program exit costs
—
9,854
Other
—
7,311
COVID-19 related charges:
Supply chain re-startup
—
48,608
Bad debt
—
9,418
Inventory
—
14,869
Total restructuring and other action-related charges included in operating profit
$
67,153
$
108,860
Liquidity and Capital Resources
Cash Requirements and Trends and Uncertainties Affecting Liquidity
We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. Our primary uses of cash are payments to our employees and vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, contributions to our pension plans, regular quarterly dividend payments and income tax payments.
Based on our current estimate of future earnings and cash flows, we believe we have sufficient cash and available borrowings for at least one year from the issuance of these financial statements based on our current expectations and forecasts.
Our primary sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our Australian Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international credit facilities.
We had the following borrowing capacity and available liquidity under our credit facilities as of October 2, 2021:
As of October 2, 2021
Borrowing Capacity
Available Liquidity
(dollars in thousands)
Senior Secured Credit Facility:
Revolving Loan Facility
$
1,000,000
$
995,824
Australian Revolving Loan Facility
43,051
43,051
Accounts Receivable Securitization Facility(1)
166,214
166,214
Other international credit facilities
60,105
13,856
Total liquidity from credit facilities
$
1,269,370
$
1,218,945
Cash and cash equivalents
873,628
Total liquidity
$
2,092,573
(1)Borrowing availability under the Accounts Receivable Securitization Facility is subject to a quarterly fluctuating facility limit, not to exceed $175 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans.
The following have impacted or may impact our liquidity:
•The COVID-19 pandemic has had a negative impact on our business.
•We have historically paid a regular quarterly dividend. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors.
•We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities. In March 2021, we repaid the outstanding balance of Term Loan B which consisted of a required excess cash flow prepayment of $239 million and a voluntary prepayment of $61 million. We intend to refinance our Senior Secured Credit Facility in the fourth quarter of 2021, subject to market conditions, and redeem our 5.375% Senior Notes using proceeds from the transaction and cash on hand.
•We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
•We have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve our Full Potential plan’s objectives.
•We expect capital investments of approximately $185 million per year through 2024 as part of our Full Potential plan.
•In the future, we may pursue strategic business acquisitions or divestitures.
•We made a contribution of $40 million to our U.S. pension plan in the nine months ended October 2, 2021. We may also elect to make additional voluntary contributions.
•We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. Consistent with our investment strategy as it pertains to our historical foreign earnings as of January 2, 2021, we intend to remit foreign earnings totaling $668 million.
•We are obligated to make installment payments over an eight-year period related to our transition tax liability resulting from the implementation of the Tax Cuts and Jobs Act, which began in 2018, in addition to any estimated income taxes due based on current year taxable income. In the nine months ended October 2, 2021, we made an installment payment of $10 million on our transition tax liability. We currently have a remaining balance due of approximately $41 million to be paid in installment payments through 2025.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the nine months ended October 2, 2021 and September 26, 2020 was derived from our condensed consolidated interim financial statements.
Nine Months Ended
October 2, 2021
September 26, 2020
(dollars in thousands)
Operating activities
$
527,376
$
231,222
Investing activities
(44,404)
(41,084)
Financing activities
(475,924)
203,441
Effect of changes in foreign exchange rates on cash
(27,207)
9,052
Change in cash, cash equivalents and restricted cash
(20,159)
402,631
Cash, cash equivalents and restricted cash at beginning of year
910,603
329,923
Cash, cash equivalents and restricted cash at end of period
890,444
732,554
Less restricted cash at end of period
—
1,073
Cash and cash equivalents at end of period
$
890,444
$
731,481
Balances included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
873,628
$
716,921
Cash and cash equivalents included in current assets of discontinued operations
Our overall liquidity has historically been driven by our cash flow provided by operating activities, which is dependent on net income and changes in our working capital. As compared to the prior year, higher net cash provided by operating activities was due to changes in working capital primarily accounts payable, partially offset by accounts receivable and inventory. Higher profitability also drove improved year over year cash flow. Net cash from operating activities includes a $40 million and a $25 million contribution to our U.S. pension plan made in the first quarter of 2021 and 2020, respectively.
Investing Activities
Investing activities in the nine months of 2021 and 2020 primarily include capital investments into our business. The increase in cash used by investing activities in the nine months of 2021 compared to 2020 was primarily the result of an increase in capital investments into our business as we manage our spending on our focused strategic goals.
Financing Activities
Net cash from financing activities decreased primarily as a result of lower borrowings as compared to the same period of 2020. We increased our borrowings in the nine months of 2020 primarily to strengthen our cash position and to provide us with additional financial flexibility to manage our business during the COVID-19 pandemic. In the nine months of 2021, we repaid the outstanding balance of Term Loan B which consisted of a required excess cash flow prepayment of $239 million and a voluntary prepayment of $61 million. We repurchased shares at a total cost of $200 million in the nine months of 2020.
Financing Arrangements
In March 2021, we amended the Accounts Receivable Securitization Facility. This amendment primarily decreased the fluctuating facility limit to $175 million (previously $225 million) and extended the maturity date to June 2022. Additionally, the amendment changed certain ratios and borrowing base calculations, raised pricing and added certain receivables to the pledged collateral pool for the facility. In July 2021, the Australian Revolving Loan Facility, originally entered into in July 2016, was amended to extend the maturity date to July 2022 and to reduce the bilateral cash advance limit from A$50 million to A$46 million with an offsetting increase in the bank overdraft limit from A$10 million to A$14 million.
In April 2020, given the rapidly changing business environment and level of uncertainty created by the COVID-19 pandemic and the associated impact on future earnings, we amended our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility during the COVID-19 crisis. The amendment changed certain provisions and covenants under the Senior Secured Credit Facility through the fiscal quarter ended July 3, 2021, after which our covenants were to revert to their original, pre-amendment levels. We voluntarily terminated the covenant relief amendment when we submitted our April 3, 2021 compliance certificate. After termination, the covenants reverted to their original, pre-amendment levels for the fiscal quarter ended July 3, 2021.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of October 2, 2021, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. We continue to monitor our covenant compliance carefully. Under the terms of our Senior Secured Credit Facility, among other financial and non-financial covenants, we are required to maintain a minimum interest coverage ratio and a maximum leverage ratio. The interest coverage ratio covenant is the ratio of our EBITDA for the preceding four fiscal quarters to our consolidated total interest expense and the maximum leverage ratio covenant is the ratio of our net debt to EBITDA for the preceding four fiscal quarters. EBITDA is defined as earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility.
We expect to maintain compliance with our covenants for at least one year from the date of these financial statements based on our current expectations and forecasts, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 2, 2021 or other SEC filings could cause noncompliance. If economic conditions caused by the COVID-19 pandemic do not continue to improve or otherwise worsen, including as a result of any new virus variants or vaccine distribution or efficacy, and our earnings and operating cash flows do not continue to recover as currently estimated by management, this could impact our ability to maintain compliance with our financial covenants and require us to seek additional amendments to our Senior Secured Credit Facility. If we are not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
We intend to refinance our Senior Secured Credit Facility in the fourth quarter of 2021, subject to market conditions. In conjunction with the refinancing, we intend to redeem our 5.375% Senior Notes using proceeds from the transaction and cash on hand. Redemption of the 5.375% Senior Notes will require payment of a make-whole premium, which along with transaction fees is estimated to result in a one-time charge of approximately $45 million in the fourth quarter of 2021. We
estimate this transaction will result in approximately $35 million of annual savings in interest expense, with approximately $4 million recognized in the fourth quarter of 2021. The expected interest expense savings and one-time charge are reflected in our Outlook for the fourth quarter of 2021.
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.
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, “Summary of Significant Accounting Policies,” to our financial statements included in our Annual Report on Form 10-K for the year ended January 2, 2021.
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 discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended January 2, 2021. There have been no material changes in these policies from those described in our Annual Report on Form 10-K for the year ended January 2, 2021.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note, “Recent Accounting Pronouncements” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended January 2, 2021.
Item 4.
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 Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 2, 2021.
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.
PART II
Item 1.
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.
The risk factors that affect our business and financial results are discussed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 2, 2021.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HANESBRANDS INC.
By:
/s/ Michael P. Dastugue
Michael P. Dastugue Chief Financial Officer (Duly authorized officer and principal financial officer)
