QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2022
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.
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 August 5, 2022, there were 348,942,269 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 multi-year growth strategy (“Full Potential plan”), the impacts of the ransomware attack announced on May 31, 2022 and our future financial performance 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 this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended January 1, 2022, 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 (loss) to net cash from operating activities:
Depreciation
36,555
43,565
Amortization of acquisition intangibles
9,487
10,978
Other amortization
5,196
5,814
Impairment of intangible assets and goodwill
—
163,047
(Gain) loss on sale of business and classification of assets held for sale
(10,495)
236,180
Amortization of debt issuance costs
3,756
7,669
Other
6,441
(14,224)
Changes in assets and liabilities:
Accounts receivable
(39,084)
(200,106)
Inventories
(540,015)
(175,149)
Other assets
(49,533)
4,451
Accounts payable
51,763
300,318
Accrued pension and postretirement benefits
(495)
(39,176)
Accrued liabilities and other
(125,453)
3,475
Net cash from operating activities
(441,074)
212,256
Investing activities:
Capital expenditures
(37,946)
(25,331)
Purchase of trademarks
(103,000)
—
Proceeds from sales of assets
222
2,455
Other
(5,640)
6,937
Net cash from investing activities
(146,364)
(15,939)
Financing activities:
Repayments on Term Loan Facilities
(12,500)
(306,250)
Borrowings on Accounts Receivable Securitization Facility
737,789
—
Repayments on Accounts Receivable Securitization Facility
(633,089)
—
Borrowings on Revolving Loan Facilities
727,500
—
Repayments on Revolving Loan Facilities
(369,500)
—
Borrowings on notes payable
21,454
42,638
Repayments on notes payable
(21,713)
(43,066)
Share repurchases
(25,018)
—
Cash dividends paid
(104,621)
(104,719)
Other
(3,996)
(2,524)
Net cash from financing activities
316,306
(413,921)
Effect of changes in foreign exchange rates on cash
(41,575)
(16,780)
Change in cash, cash equivalents and restricted cash
(312,707)
(234,384)
Cash, cash equivalents and restricted cash at beginning of year
560,629
910,603
Cash, cash equivalents and restricted cash at end of period
$
247,922
$
676,219
Balances included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
247,922
$
667,298
Cash and cash equivalents included in current assets held for sale
—
8,921
Cash and cash equivalents at end of period
$
247,922
$
676,219
(1)The cash flows related to discontinued operations have not been segregated and remain included in the major classes of assets and liabilities in the periods prior the sale of the European Innerwear business on March 5, 2022. Accordingly, the Condensed Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.
Capital expenditures included in accounts payable at July 2, 2022 and January 1, 2022 were $36,836 and $24,164, respectively. For the six months ended July 2, 2022 and July 3, 2021, right-of-use assets obtained in exchange for lease obligations were $41,638 and $37,725, 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 1, 2022. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Key Business Strategies
In the first quarter of 2021, the Company announced that it reached the decision to exit its European Innerwear business as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. 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. On November 4, 2021, the Company announced that it reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. Unless otherwise noted, discussion within these notes to the condensed consolidated interim financial statements relates to continuing operations. See Note “Assets and Liabilities Held for Sale” for additional information.
In addition, in the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at July 2, 2022 and January 1, 2022. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale within the next 12 months. See Note “Assets and Liabilities Held for Sale” for additional information.
In June of 2022, the Company purchased the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC (“KEDS”) for $102,500. The trademark was recorded in “Trademarks and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheets and has an indefinite life. The Company previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two parties and is another step forward in the Company’s Full Potential plan of growing the global Champion brand.
Ransomware Attack
On May 24, 2022, the Company identified that it had become subject to a ransomware attack and activated its incident response and business continuity plans designed to contain the incident. As part of the Company’s forensic investigation and assessment of the impact, the Company determined that certain of its information technology systems were affected by the ransomware attack.
Upon discovering the incident, the Company took a series of measures to further safeguard the integrity of its information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. The Company notified appropriate law enforcement authorities as well as certain data protection regulators, and will continue to evaluate and provide breach notifications or regulatory filings as may be required by applicable law as the Company continues its review of the scope and impact of the incident. At this time, the Company believes the incident has been contained. The Company has restored substantially all of its critical information technology systems, and manufacturing, retail and other internal operations continue. There is no ongoing operational impact on the Company’s ability to provide its products and services. The Company maintains insurance, including coverage for cyber-attacks, subject to certain deductibles and policy limitations, in an amount that the Company believes appropriate.
During the quarter and six months ended July 2, 2022, the Company incurred costs of $15,509, net of expected insurance recoveries, related to the ransomware attack. The costs included $14,168 related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $1,341, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income in the quarter and six months ended July 2, 2022. The Company continues to assess the security event and cannot determine, at this time, the full extent of the impact from such event on its business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
(2) Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The new accounting rules 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 and does not currently intend to early adopt the new rules.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The new accounting rules require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The new accounting rules will be effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted. The adoption impact of the new accounting rules will depend on the magnitude of future acquisitions.
Derivatives and Hedging
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” The new accounting rules allow entities to expand the use of the portfolio layer method to all financial assets and designate multiple hedged layers within a single closed portfolio. The new accounting rules also clarify guidance related to hedge basis adjustments and the related disclosures for these adjustments. The new accounting rules will be effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted. 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.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(3) Assets and Liabilities Held for Sale
Assets and liabilities classified as held for sale in the Condensed Consolidated Balance Sheets as of July 2, 2022, January 1, 2022 and July 3, 2021 consist of the following:
July 2, 2022
January 1, 2022
July 3, 2021
U.S. Sheer Hosiery business - continuing operations
$
12,094
$
5,426
$
—
European Innerwear business - discontinued operations
—
321,731
301,986
Total current assets held for sale
$
12,094
$
327,157
$
301,986
U.S. Sheer Hosiery business - continuing operations
$
12,094
$
5,426
$
—
European Innerwear business - discontinued operations
—
311,476
289,751
Total current liabilities held for sale
$
12,094
$
316,902
$
289,751
U.S. Sheer Hosiery Business - Continuing Operations
In the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at July 2, 2022 and January 1, 2022. The Company recorded a non-cash charge of $38,364 in the fourth quarter of 2021, 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 Company recorded non-cash gains of $4,340 and $10,868 to adjust the valuation allowance resulting from a decrease in carrying value due to changes in working capital in the quarter and six months ended July 2, 2022, respectively. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale within the next 12 months.
European Innerwear Business - Discontinued Operations
In the first quarter of 2021, the Company announced that it reached the decision to exit its European Innerwear business as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. 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. On November 4, 2021, the Company announced that it had reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. Under the agreement, the purchaser received all the assets and operating liabilities of the European Innerwear business. The operations of the European Innerwear business were previously reported primarily in the International segment.
Upon meeting the criteria for held-for-sale classification in the first quarter of 2021 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 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 six months ended July 3, 2021. In addition, the Company recorded 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, resulting in non-cash charges of $9,828 and $236,180 for the quarter and six months ended July 3, 2021, respectively, as "(Gain) loss on sale of business and classification of assets held for sale" in the summarized discontinued operations financial information. In the quarter and six months ended July 2, 2022, the Company recorded the final loss on the sale of the European Innerwear business of $560 and $373, respectively, primarily resulting from changes in working capital balances and foreign exchange rates.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Additionally, the Company recorded an impairment charge of $7,302 in continuing operations on an indefinite-lived trademark for the six months ended July 3, 2021 which is reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. This charge 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 was not marketed for sale.
The Company has continued certain sales from its supply chain to the European Innerwear business on a transitional basis after the sale of the business. Under the terms of the Manufacturing and Supply Agreement that was signed as part of closing the transaction, the Company will provide these services for periods up to 34 months from the closing date of the transaction. Additionally, the Company entered into a Transitional Services Agreement pursuant to which the Company will provide transitional services including information technology, human resources, facilities management, and limited finance and accounting services for periods up to 12 months from the closing date of the transaction. The 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 for the period when the European Innerwear business was owned by the Company. The related receivables from the European Innerwear business are included in “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. Discontinued operations does not include any allocation of corporate overhead expense or interest expense. The key components from discontinued operations related to the European Innerwear business are as follows:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Net sales
$
—
$
117,506
$
101,314
$
253,351
Cost of sales
—
63,137
60,415
138,660
Gross profit
—
54,369
40,899
114,691
Selling, general and administrative expenses
—
61,134
54,689
144,526
Impairment of intangible assets and goodwill
—
—
—
155,745
Loss on sale of business and classification of assets held for sale
560
9,828
373
236,180
Operating loss
(560)
(16,593)
(14,163)
(421,760)
Other expenses
—
280
283
614
Interest expense, net
—
69
10
159
Loss from discontinued operations before income tax expense
(560)
(16,942)
(14,456)
(422,533)
Income tax expense (benefit)
—
2,245
(18,421)
(11,680)
Net income (loss) from discontinued operations, net of tax
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 July 2, 2022, January 1, 2022 and July 3, 2021 consist of the following:
July 2, 2022
January 1, 2022
July 3, 2021
Cash and cash equivalents
$
—
$
24,352
$
8,921
Trade accounts receivable, net
—
87,353
70,432
Inventories
—
141,653
119,627
Other current assets
—
21,926
15,114
Property, net
—
62,659
63,222
Right-of-use assets
—
32,603
34,051
Trademarks and other identifiable intangibles, net
—
205,204
211,534
Deferred tax assets
—
4,174
10,376
Other noncurrent assets
—
4,127
4,421
Allowance to adjust assets to estimated fair value, less costs of disposal
—
(262,320)
(235,712)
Total assets of discontinued operations
$
—
$
321,731
$
301,986
Accounts payable
$
—
$
84,327
$
70,185
Accrued liabilities
—
122,620
111,321
Lease liabilities
—
6,562
8,693
Notes payable
—
329
377
Lease liabilities - noncurrent
—
27,426
26,766
Pension and postretirement benefits
—
38,325
44,328
Other noncurrent liabilities
—
31,887
28,081
Total liabilities of discontinued operations
$
—
$
311,476
$
289,751
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
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Depreciation
$
—
$
—
$
—
$
2,608
Amortization
$
—
$
—
$
—
$
1,460
Capital expenditures
$
—
$
735
$
715
$
4,070
Impairment of intangible assets and goodwill
$
—
$
—
$
—
$
155,745
Loss on sale of business and classification of assets held for sale
$
560
$
9,828
$
373
$
236,180
Capital expenditures included in accounts payable at end of period
$
—
$
1,580
$
—
$
3,374
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
The following table presents the Company’s revenues disaggregated by the customer’s method of purchase:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Third-party brick-and-mortar wholesale
$
1,029,645
$
1,233,531
$
2,155,911
$
2,258,270
Consumer-directed
483,822
517,780
933,712
1,001,070
Total net sales
$
1,513,467
$
1,751,311
$
3,089,623
$
3,259,340
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. Third-party brick-and-mortar wholesale revenue also includes 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.
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:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Basic weighted average shares outstanding
349,772
350,987
350,012
350,995
Effect of potentially dilutive securities:
Stock options
—
24
4
16
Restricted stock units
523
1,039
856
855
Employee stock purchase plan and other
8
2
6
3
Diluted weighted average shares outstanding
350,303
352,052
350,878
351,869
The following securities were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Stock options
250
83
250
167
Restricted stock units
1,448
45
1,211
44
On August 10, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share of the Company’s outstanding common stock to be paid on September 14, 2022 to stockholders of record at the close of business on August 24, 2022.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
On February 2, 2022, the Company’s Board of Directors approved a new share repurchase program for up to $600,000 of shares to be repurchased in open market transactions or privately negotiated transactions, subject to market conditions, legal requirements and other factors. Additionally, management has been granted authority to establish a trading plan under Rule 10b5-1 of the Exchange Act in connection with share repurchases, which will allow 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. The new program replaced the Company’s previous share repurchase program for up to 40,000 shares that was originally approved on February 6, 2020. For the quarter ended July 2, 2022, the Company did not enter into any transactions to repurchase shares under the new program. For the six months ended July 2, 2022, the Company entered into transactions to repurchase 1,577 shares at a weighted average repurchase price of $15.84 per share under the new program. The shares were repurchased at a total cost of $25,018 including broker’s commissions of $31. The Company did not repurchase any shares under the previous share repurchase program during 2022 through the expiration of the program on February 2, 2022 or during the quarter or six months ended July 3, 2021. At July 2, 2022, the remaining repurchase authorization under the current share repurchase program totaled $575,013.
(6) Inventories
Inventories consisted of the following:
July 2, 2022
January 1, 2022
July 3, 2021
Raw materials
$
103,315
$
68,683
$
72,436
Work in process
123,842
110,246
101,862
Finished goods
1,863,554
1,405,086
1,356,324
$
2,090,711
$
1,584,015
$
1,530,622
(7) Debt
Debt consisted of the following:
Interest Rate as of July 2, 2022
Principal Amount
Maturity Date
July 2, 2022
January 1, 2022
Senior Secured Credit Facility:
Revolving Loan Facility
2.75%
$
358,000
$
—
November 2026
Term Loan A
2.31%
987,500
1,000,000
November 2026
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%
521,376
568,634
June 2024
Accounts Receivable Securitization Facility
1.36%
104,700
—
June 2023
3,771,576
3,368,634
Less long-term debt issuance costs
14,674
17,543
Less current maturities
129,700
25,000
$
3,627,202
$
3,326,091
As of July 2, 2022, the Company had $634,940 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account $358,000 of USD revolver loans and $7,060 of standby and trade letters of credit issued and outstanding under this facility.
The Company’s accounts receivable securitization facility (the “ARS Facility”) entered into in November 2007 was amended in June 2022. The latest amendment increased the fluctuating facility limit to $225,000 (previously $175,000) and extended the maturity date to June 2023. Additionally, the amendment changed the Company’s interest rate option as defined in the ARS Facility from the rate announced from time to time by PNC Bank, N.A. as its prime rate or the London Interbank Offered Rate to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate and increased certain receivables to the pledged collateral pool for the facility. Borrowings under the Company’s ARS Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations,
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
reserves and other deductions, exceeds the outstanding loans and also subject to a quarterly fluctuating facility limit, which is not to exceed $225,000. The Company’s maximum borrowing capacity as per the fluctuating limit under the ARS Facility was $200,000 as of July 2, 2022. The Company had $58,584 of borrowing availability under the ARS Facility at July 2, 2022.
The Company had $23,798 of borrowing availability under other international credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facilities at July 2, 2022.
As of July 2, 2022, 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, each of which is defined in the Senior Secured Credit Facility. The method of calculating all the components used in the covenants is included in the Senior Secured Credit Facility.
(8) Income Taxes
The Company’s effective income tax rate was 17.0% and 14.6% for the quarters ended July 2, 2022 and July 3, 2021, respectively. The Company’s effective income tax rate was 17.0% and 12.6% for the six months ended July 2, 2022 and July 3, 2021, respectively. The higher effective tax rate for the quarter ended July 2, 2022 was primarily due to non-recurring discrete tax charges totaling $4,576 for adjustments related to prior period tax returns and measurement of deferred tax liabilities. The higher effective tax rate for the six months ended July 2, 2022 was primarily due to a non-recurring discrete tax benefit for the release ofreserves for unrecognized tax benefits totaling $7,034, partially offset by a discrete charge for changes in valuation allowances of $3,672 during the six months ended July 3, 2021.
(9) 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 April 2, 2022
$
(106,704)
$
7,629
$
(563,583)
$
145,967
$
(516,691)
Amounts reclassified from accumulated other comprehensive loss
—
17,639
5,203
(4,048)
18,794
Current-period other comprehensive income (loss) activity
(122,122)
(8,925)
227
(1,045)
(131,865)
Total other comprehensive income (loss)
(122,122)
8,714
5,430
(5,093)
(113,071)
Balance at July 2, 2022
$
(228,826)
$
16,343
$
(558,153)
$
140,874
$
(629,762)
Cumulative Translation Adjustment(1)
Cash Flow Hedges
Defined Benefit Plans
Income Taxes
Accumulated Other Comprehensive Loss
Balance at January 1, 2022
$
(134,001)
$
5,244
$
(569,161)
$
146,315
$
(551,603)
Amounts reclassified from accumulated other comprehensive loss
(13,473)
27,428
10,821
(6,826)
17,950
Current-period other comprehensive income (loss) activity
(81,352)
(16,329)
187
1,385
(96,109)
Total other comprehensive income (loss)
(94,825)
11,099
11,008
(5,441)
(78,159)
Balance at July 2, 2022
$
(228,826)
$
16,343
$
(558,153)
$
140,874
$
(629,762)
(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 April 3, 2021
$
(78,021)
$
(12,822)
$
(659,946)
$
173,904
$
(576,885)
Amounts reclassified from accumulated other comprehensive loss
—
4,671
6,022
(2,993)
7,700
Current-period other comprehensive income (loss) activity
(11,231)
(675)
(124)
287
(11,743)
Total other comprehensive income (loss)
(11,231)
3,996
5,898
(2,706)
(4,043)
Balance at July 3, 2021
$
(89,252)
$
(8,826)
$
(654,048)
$
171,198
$
(580,928)
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
—
9,913
13,107
(5,997)
17,023
Current-period other comprehensive income (loss) activity
(36,432)
7,799
1,575
(3,934)
(30,992)
Total other comprehensive income (loss)
(36,432)
17,712
14,682
(9,931)
(13,969)
Balance at July 3, 2021
$
(89,252)
$
(8,826)
$
(654,048)
$
171,198
$
(580,928)
(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)
The Company had the following reclassifications out of AOCI:
Component of AOCI
Location of Reclassification into Income
Amount of Reclassification from AOCI
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Write-off of cumulative translation associated with sale of business
Income (loss) from discontinued operations, net of tax
$
—
$
—
$
13,473
$
—
Gain (loss) on forward foreign exchange contracts designated as cash flow hedges
Cost of sales
$
2,662
$
(5,278)
$
4,274
$
(9,655)
Income tax
(770)
1,444
(1,278)
2,652
Income (loss) from discontinued operations, net of tax
—
(1,278)
(232)
(1,522)
Net of tax
1,892
(5,112)
2,764
(8,525)
Gain (loss) on cross-currency swap contracts designated as cash flow hedges
Selling, general and administrative expenses
(18,621)
3,168
(28,354)
2,611
Interest expense, net
(1,680)
(1,018)
(3,041)
(1,018)
Income tax
3,451
(312)
5,337
(223)
Net of tax
(16,850)
1,838
(26,058)
1,370
Amortization of deferred actuarial loss and prior service cost
Other expenses
(5,203)
(6,081)
(10,406)
(13,788)
Income tax
1,367
1,596
2,737
3,342
Income (loss) from discontinued operations, net of tax
—
59
—
578
Pension activity associated with sale of business
Income (loss) from discontinued operations, net of tax
—
—
(460)
—
Net of tax
(3,836)
(4,426)
(8,129)
(9,868)
Total reclassifications
$
(18,794)
$
(7,700)
$
(17,950)
$
(17,023)
(10) 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 its European subsidiaries.
Hedge Type
July 2, 2022
January 1, 2022
U.S. dollar equivalent notional amount of derivative instruments:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Values of Derivative Instruments
The fair values of derivative 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
July 2, 2022
January 1, 2022
Derivatives designated as hedging instruments:
Forward foreign exchange contracts
Other current assets
$
6,970
$
2,898
Cross-currency swap contracts
Other current assets
1,082
974
Forward foreign exchange contracts
Other noncurrent assets
419
83
Cross-currency swap contracts
Other noncurrent assets
23,661
1,979
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts
Other current assets
12,570
5,439
Total derivative assets
44,702
11,373
Derivatives designated as hedging instruments:
Forward foreign exchange contracts
Accrued liabilities
(222)
(349)
Cross-currency swap contracts
Accrued liabilities
(283)
(222)
Forward foreign exchange contracts
Other noncurrent liabilities
—
(14)
Cross-currency swap contracts
Other noncurrent liabilities
(34,168)
(11,387)
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts
Accrued liabilities
(496)
(331)
Total derivative liabilities
(35,169)
(12,303)
Net derivative asset/(liability)
$
9,533
$
(930)
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 July 2, 2022. 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 gain from AOCI of approximately $3,373. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next 15 months and for long-term debt over the next 24 months.
The effect of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Income and AOCI is as follows:
Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Forward foreign exchange contracts(1)
Cost of sales
$
2,662
$
(5,278)
$
4,274
$
(9,655)
Forward foreign exchange contracts(1)
Income (loss) from discontinued operations, net of tax
—
(1,543)
(307)
(1,851)
Cross-currency swap contracts(1)
Selling, general and administrative expenses
(18,621)
3,168
(28,354)
2,611
Cross-currency swap contracts(1)
Interest expense, net
(1,680)
(1,018)
(3,041)
(1,018)
Total
$
(17,639)
$
(4,671)
$
(27,428)
$
(9,913)
(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.
The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Cost of sales
$
941,366
$
1,069,682
$
1,933,344
$
1,975,030
Selling, general and administrative expenses
$
424,847
$
464,235
$
838,513
$
876,794
Interest expense, net
$
33,724
$
42,440
$
65,687
$
86,900
Income (loss) from discontinued operations, net of tax
$
(560)
$
(19,187)
$
3,965
$
(410,853)
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 its 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 July 2, 2022 and January 1, 2022, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $208,501 and $227,454, 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 are as follows:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The effect of derivative and non-derivative instruments designated as net investment hedges on the Condensed Consolidated Statements of Income are as follows:
Location of Gain (Loss) Reclassified from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into Income
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Euro-denominated long-term debt
Income (loss) from discontinued operations, net of tax
$
—
$
—
$
(13,348)
$
—
Cross-currency swap contracts
Income (loss) from discontinued operations, net of tax
—
—
$
(2,505)
—
Cross-currency swap contracts (amounts excluded from effectiveness testing)
Interest expense, net
2,228
1,715
4,240
3,614
Total
$
2,228
$
1,715
$
(11,613)
$
3,614
The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of net investment hedges are recorded:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Income (loss) from discontinued operations, net of tax
(560)
(19,187)
$
3,965
(410,853)
Interest expense, net (amounts excluded from effectiveness testing)
33,724
42,440
65,687
86,900
Mark to Market Hedges
Derivatives used in mark to market hedges are not designated as hedges under the accounting standards. 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. 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 instruments 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
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Forward foreign exchange contracts
Cost of sales
$
6,841
$
5,629
$
2,639
$
18,624
Forward foreign exchange contracts
Selling, general and administrative expenses
(478)
880
(186)
3,091
Forward foreign exchange contracts
Income (loss) from discontinued operations, net of tax
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(11) Fair Value of Assets and Liabilities
As of July 2, 2022 and January 1, 2022, 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 plan liabilities 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 or disclosed on a quarterly recurring basis.
There were no changes during the quarter and the six months ended July 2, 2022 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 the six months ended July 2, 2022, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring basis or non-recurring basis.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.
Assets (Liabilities) at Fair Value as of July 2, 2022
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
$
19,959
$
—
$
19,959
$
—
Cross-currency swap contracts - assets
24,743
—
24,743
—
Forward foreign exchange contracts - liabilities
(718)
—
(718)
—
Cross-currency swap contracts - liabilities
(34,451)
—
(34,451)
—
Total derivative contracts
9,533
—
9,533
—
Deferred compensation plan liability
(15,979)
—
(15,979)
—
Total
$
(6,446)
$
—
$
(6,446)
$
—
Assets (Liabilities) at Fair Value as of January 1, 2022
Total
Quoted Prices In Active Markets for Identical Assets (Level 1)
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximated fair value as of July 2, 2022 and January 1, 2022. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $65,534 and $61,948 as of July 2, 2022 and January 1, 2022, respectively. The fair value of debt, which is classified as a Level 2 liability, was $3,576,798 and $3,504,412 as of July 2, 2022 and January 1, 2022, respectively. Debt had a carrying value of $3,771,576 and $3,368,634 as of July 2, 2022 and January 1, 2022, 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.
(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. Sheer Hosiery business and certain sales from its supply chain and transitional services with the European Innerwear business which was sold on March 5, 2022. In the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan. See Note “Assets and Liabilities Held for Sale” for additional information.
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.
•Activewear includes sales in the United States of branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel.
•International primarily includes sales of the Company’s innerwear and activewear products outside the United States, primarily in Australasia, Europe, Asia, Latin America and Canada.
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 1, 2022.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Segment operating profit:
Innerwear
$
141,659
$
186,169
$
243,805
$
313,586
Activewear
22,857
41,047
71,841
101,641
International
55,953
61,900
145,391
149,080
Other
5,333
9,220
4,662
11,106
Total segment operating profit
225,802
298,336
465,699
575,413
Items not included in segment operating profit:
General corporate expenses
(64,840)
(54,685)
(122,068)
(114,508)
Restructuring and other action-related charges
(6,380)
(18,664)
(11,182)
(38,057)
Amortization of intangibles
(7,328)
(7,593)
(14,683)
(15,332)
Total operating profit
147,254
217,394
317,766
407,516
Other expenses
(1,889)
(1,855)
(2,876)
(4,416)
Interest expense, net
(33,724)
(42,440)
(65,687)
(86,900)
Income from continuing operations before income tax expense
$
111,641
$
173,099
$
249,203
$
316,200
The Company incurred restructuring and other action-related charges that were reported in the following lines in the Condensed Consolidated Statements of Income:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Cost of sales
$
532
$
1,900
$
1,031
$
4,707
Selling, general and administrative expenses
5,848
16,764
10,151
33,350
Total included in operating profit
6,380
18,664
11,182
38,057
Income tax expense
1,085
1,903
1,901
13,205
Total restructuring and other action-related charges
$
5,295
$
16,761
$
9,281
$
24,852
The components of restructuring and other action-related charges were as follows:
Quarters Ended
Six Months Ended
July 2, 2022
July 3, 2021
July 2, 2022
July 3, 2021
Full Potential Plan:
Professional services
$
7,086
$
13,804
$
14,994
$
25,510
Gain on classification of assets held for sale
(4,340)
—
(10,868)
—
Operating model
825
—
(1,094)
—
Supply chain segmentation
269
—
1,289
—
Technology
1,971
—
6,430
—
Impairment of intangible assets
—
—
—
7,302
Other
569
4,860
431
5,245
Total included in operating profit
6,380
18,664
11,182
38,057
Discrete tax benefits
—
—
—
7,295
Tax benefit effect on actions
1,085
1,903
1,901
5,910
Total benefit included in income tax expense
1,085
1,903
1,901
13,205
Total restructuring and other action-related charges
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Restructuring and other action-related charges within operating profit included $6,380 and $18,664 of charges related to the implementation of the Company’s Full Potential plan in the quarters ended July 2, 2022 and July 3, 2021, respectively. Full Potential plan charges in the quarter ended July 2, 2022 included a non-cash gain of $4,340, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from a decrease in carrying value due to changes in working capital.
Restructuring and other action-related charges within operating profit included $11,182 and $38,057 of charges related to the implementation of the Company’s Full Potential plan in the six months ended July 2, 2022 and July 3, 2021, respectively. Full Potential plan charges in the six months ended July 2, 2022 included a non-cash gain of $10,868, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from a decrease in carrying value due to changes in working capital. Full Potential plan charges in the six months ended July 3, 2021 included impairment charges of $7,302, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, 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 was not marketed for sale.
In the third quarter of 2021, the Company recorded a charge for an action to resize its U.S. corporate office workforce through a voluntary retirement program which was included in restructuring and other action-related charges. At January 1, 2022, the accrual for employee termination and other benefits related to the Company’s 2021 voluntary retirement program was $15,688. The Company made benefit payments and other accrual adjustments of $7,869 during the six months ended July 2, 2022, resulting in an ending accrual of $7,819 which is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheets at July 2, 2022.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated interim financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 1, 2022, 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 1, 2022. In particular, statements with respect to trends associated with our business, our multi-year growth strategy (“Full Potential plan”), the impacts of the ransomware attack announced on May 31, 2022 and our future financial performance 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, Australasia, Europe and Asia under some of the world’s strongest apparel brands, including Hanes, Champion, Bonds, Bali, Maidenform, Playtex, Bras N Things, JMS/Just My Size, Alternative, Berlei, Wonderbra, Gear for Sports and Comfortwash. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, shapewear, underwear, socks 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, U.S. Sheer Hosiery business and certain sales from our supply chain to the European Innerwear business which was sold on March 5, 2022.
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. Our Full Potential plan focuses on four pillars to drive growth and enhance long-term profitability and identifies the 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, build e-commerce excellence across channels 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 first quarter of 2021, we announced that we reached the decision to exit our European Innerwear business as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. 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. On November 4, 2021, we announced that we reached an agreement to sell our European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In addition, in the fourth quarter of 2021, we reached the decision to divest our U.S. Sheer Hosiery business, including the L’eggs brand, as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at July 2, 2022 and January 1, 2022. The operations of our U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. We are currently exploring potential purchasers for this business and expect to complete the sale within the next 12 months. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In June of 2022, we purchased the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC (“KEDS”) for $103 million. The trademark was recorded in “Trademarks and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheets and has an indefinite life. We previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two parties and is another step forward in our Full Potential plan of growing the global Champion brand.
Ransomware Attack
On May 24, 2022, we identified that we had become subject to a ransomware attack and activated our incident response and business continuity plans designed to contain the incident. As part of our forensic investigation and assessment of the impact, we determined that certain of our information technology systems were affected by the ransomware attack.
Upon discovering the incident, we took a series of measures to further safeguard the integrity of our information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. We notified appropriate law enforcement authorities as well as certain data protection regulators, and will continue to evaluate and provide breach notifications or regulatory filings as may be required by applicable law as we continue our review of the scope and impact of the incident. At this time, we believe the incident has been contained. We have restored substantially all of our critical information technology systems, and manufacturing, retail and other internal operations continue. There is no ongoing operational impact on our ability to provide our products and services. We maintain insurance, including coverage for cyber-attacks, subject to certain deductibles and policy limitations, in an amount that we believe appropriate.
During the quarter and six months ended July 2, 2022, we incurred costs of approximately $15 million, net of expected insurance recoveries, related to the ransomware attack. The costs included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $1 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income in the quarter and six months ended July 2, 2022. The ransomware attack also negatively impacted our ability to order materials, make and ship orders, and process payments during the second quarter and six months ended July 2, 2022, resulting in estimated lost sales of approximately $100 million. We continue to assess the security event and cannot determine, at this time, the full extent of the impact from such event on our business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
Impact of COVID-19 on Our Business
As the global impact of COVID-19 continues, our priority has been to protect the health and safety of our employees and customers around the world. To help mitigate the spread of the COVID-19 virus and in response to health advisories and governmental actions and regulations, we have modified our business practices and have implemented health and safety measures that are designed to protect employees in our corporate, retail, distribution and manufacturing facilities around the world.
The COVID-19 pandemic has impacted our business operations and financial results, as described in more detail under “Condensed Consolidated Results of Operations - Second Quarter Ended July 2, 2022 Compared with Second Quarter Ended July 3, 2021” and “Condensed Consolidated Results of Operations - Six Months Ended July 2, 2022 Compared with Six Months Ended July 3, 2021” below, primarily through reduced traffic and closures of Company-operated and third-party retail locations for portions of the second quarter and six months of 2021 in certain markets and global supply chain disruptions and inflation in all periods due to factory disruptions, port congestion, transportation delays as well as labor and container shortages which resulted in higher operating costs and higher levels of inflation. These global supply chain disruptions have delayed and are expected to continue to delay inventory orders and, in turn, deliveries to our wholesale customers and availability in our Company-operated stores and e-commerce sites. Supply chain disruptions resulted in the inability to fulfill certain customer orders which negatively impacted our net revenues. We anticipate these supply chain disruptions could impact our sales volumes in future periods. We have also incurred higher distribution costs including freight and labor costs to mitigate these
delays. We continue to monitor these delays and other potential disruptions in our supply chain and will implement mitigation plans as needed. The future impact of the COVID-19 pandemic, supply chain disruptions and inflation remain 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 2022
We estimate our 2022 guidance as follows:
•Net sales of approximately $6.45 billion to $6.55 billion, net of approximately $165 million of unfavorable foreign currency exchange impact;
•Operating profit of approximately $570 million to $620 million, net of approximately $22 million of unfavorable foreign currency exchange impact;
•Full Potential plan-related charges of approximately $60 million included in operating profit;
•Interest expense and other expenses of approximately $161 million combined;
•An effective tax rate from continuing operations of approximately 17%;
•Diluted earnings per share from continuing operations of approximately $0.97 to $1.09;
•Cash flow from operating activities to be essentially breakeven; and
•Capital expenditures of approximately $150 million to $175 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. Our diverse range of product offerings, however, typically mitigates some of the impact of seasonal changes in demand for certain items. 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.
Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, including cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Disruptions to the global supply chain due to factory closures, port congestion, transportation delays as well as labor and container shortages may negatively impact product availability, revenue growth and gross margins. We will work to mitigate the impact of the global supply chain disruptions through a combination of cost savings and operating efficiencies, as well as pricing actions, which could have an adverse impact on demand. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on spending.
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.
Key Financial Results from the Second Quarter Ended July 2, 2022
Key financial results are as follows:
•Total net sales in the second quarter of 2022 were $1.51 billion, compared with $1.75 billion in the same period of 2021, representing a 14% decrease.
•Operating profit decreased 32% to $147 million in the second quarter of 2022, compared with $217 million in the same period of 2021. As a percentage of sales, operating profit was 9.7% in the second quarter of 2022 compared to 12.4% in the same period of 2021.
•Diluted earnings per share from continuing operations was $0.26 and $0.42 in the second quarters of 2022 and 2021, respectively.
Condensed Consolidated Results of Operations — Second Quarter Ended July 2, 2022 Compared with Second Quarter Ended July 3, 2021
Quarters Ended
July 2, 2022
July 3, 2021
Higher (Lower)
Percent Change
(dollars in thousands)
Net sales
$
1,513,467
$
1,751,311
$
(237,844)
(13.6)
%
Cost of sales
941,366
1,069,682
(128,316)
(12.0)
Gross profit
572,101
681,629
(109,528)
(16.1)
Selling, general and administrative expenses
424,847
464,235
(39,388)
(8.5)
Operating profit
147,254
217,394
(70,140)
(32.3)
Other expenses
1,889
1,855
34
1.8
Interest expense, net
33,724
42,440
(8,716)
(20.5)
Income from continuing operations before income tax expense
111,641
173,099
(61,458)
(35.5)
Income tax expense
18,980
25,236
(6,256)
(24.8)
Income from continuing operations
92,661
147,863
(55,202)
(37.3)
Loss from discontinued operations, net of tax
(560)
(19,187)
18,627
(97.1)
Net income
$
92,101
$
128,676
$
(36,575)
(28.4)
%
Net Sales
Net sales decreased 14% during the second quarter of 2022 versus the second quarter of 2021 primarily due to the following:
•The impact of the ransomware attack to the business;
•Softer point-of-sale trends;
•Global supply chain disruptions resulting in product delays;
•Ongoing COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $38 million.
Partially offset by:
•Pricing actions taken in the first quarter of 2022 in Innerwear.
Operating profit as a percentage of net sales was 9.7% during the second quarter of 2022, representing a decrease from 12.4% in the prior year. Operating margin decreased as a result of lower sales volume, input cost inflation and the impact from the ransomware attack partially offset by favorable business mix, first quarter price increases in Innerwear, savings in freight, and other cost savings. Included in operating profit in the second quarter of 2022 and 2021 were charges of $6 million and $19 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses increased slightly in the second quarter of 2022 compared to the second quarter of 2021 due to higher funding fees for sales of accounts receivable to financial institutions in 2022 offset by lower pension expense in 2022.
Interest Expense – Interest expense was lower by $9 million in the second quarter of 2022 compared to the second quarter of 2021 primarily due to lower weighted average outstanding debt balances and a lower weighted average interest rate on our borrowings during the second quarter of 2022 compared to the second quarter of 2021. Our weighted average interest rate on our outstanding debt was 3.63% for the second quarter of 2022 compared to 4.17% for the second quarter of 2021.
Income Tax Expense – Our effective income tax rate was 17.0% and 14.6% for the second quarters of 2022 and 2021, respectively. The higher effective tax rate for the second quarter of 2022 was primarily due to non-recurring discrete tax charges totaling $5 million for adjustments related to prior period tax returns and measurement of deferred tax liabilities.
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. On March 5, 2022, we completed the sale of the European Innerwear business. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — Second Quarter Ended July 2, 2022 Compared with Second Quarter Ended July 3, 2021
Net Sales
Quarters Ended
July 2, 2022
July 3, 2021
Higher (Lower)
Percent Change
(dollars in thousands)
Innerwear
$
685,778
$
780,650
$
(94,872)
(12.2)
%
Activewear
330,400
404,189
(73,789)
(18.3)
International
424,189
478,923
(54,734)
(11.4)
Other
73,100
87,549
(14,449)
(16.5)
Total
$
1,513,467
$
1,751,311
$
(237,844)
(13.6)
%
Operating Profit and Margin
Quarters Ended
July 2, 2022
July 3, 2021
Higher (Lower)
Percent Change
(dollars in thousands)
Innerwear
$
141,659
20.7
%
$
186,169
23.8
%
$
(44,510)
(23.9)
%
Activewear
22,857
6.9
41,047
10.2
(18,190)
(44.3)
International
55,953
13.2
61,900
12.9
(5,947)
(9.6)
Other
5,333
7.3
9,220
10.5
(3,887)
(42.2)
Corporate
(78,548)
NM
(80,942)
NM
2,394
(3.0)
Total
$
147,254
9.7
%
$
217,394
12.4
%
$
(70,140)
(32.3)
%
Innerwear
Innerwear net sales decreased 12% compared to the second quarter of 2021 primarily due to business disruption as a result of the ransomware attack, softer point-of-sale trends, retail inventory reductions and last year’s one-time sales benefits from retailer restocking and government stimulus spending partially offset by pricing actions taken in the first quarter of 2022.
Innerwear operating margin was 20.7%, a decrease from 23.8% in the same period a year ago. The operating margin decline resulted from lower sales volume, unfavorable product mix and inflationary pressures partially offset by pricing actions and cost reductions.
Activewear
Activewear net sales decreased 18% compared to the second quarter of 2021 primarily due to softer point-of-sale trends, retailer inventory levels and business disruption as a result of the ransomware attack. The net sales decrease was partially offset by growth in the collegiate bookstore channel.
Activewear operating margin was 6.9%, a decrease from 10.2% in the same period a year ago. The operating margin decline resulted from lower sales volume, higher levels of inflation and increased brand marketing investments partially offset by cost reductions.
International
Net sales in the International segment decreased 11% due to unfavorable foreign currency exchange rates, operational challenges experienced from the ransomware attack during the quarter, lower consumer demand in Australia and ongoing COVID-related pressures on consumer traffic in certain markets in Asia. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $38 million in the second quarter of 2022. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, decreased 3%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results.
International operating margin was 13.2%, an increase from 12.9% in the same period a year ago. The increase in operating margin primarily resulted from disciplined expense management during the quarter.
Other
Other net sales decreased primarily as a result of decreased traffic at our retail outlets in the second quarter of 2022 compared to the second quarter of 2021. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
We have continued certain sales from our supply chain to the European Innerwear business on a transitional basis after the sale of the business. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Corporate expenses were lower in the second quarter of 2022 compared to the second quarter of 2021 primarily due to lower restructuring and other action-related charges and lower variable compensation costs partially offset by increased expenses, net of expected insurance recoveries, related to the ransomware attack. During the quarter ended July 2, 2022, we incurred costs of approximately $15 million, net of expected insurance recoveries related to the ransomware attack which included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $1 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. Included in restructuring and other action-related charges within operating profit in the second quarter of 2022 and 2021 were $6 million and $19 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the second quarter of 2022 included a non-cash gain of $4 million to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from a decrease in carrying value due to changes in working capital.
Quarters Ended
July 2, 2022
July 3, 2021
(dollars in thousands)
Restructuring and other action-related charges:
Full Potential Plan:
Professional services
$
7,086
$
13,804
Gain on classification of assets held for sale
(4,340)
—
Operating model
825
—
Supply chain segmentation
269
—
Technology
1,971
—
Other
569
4,860
Total included in operating profit
6,380
18,664
Tax benefit effect on actions
1,085
1,903
Total restructuring and other action-related charges
$
5,295
$
16,761
Condensed Consolidated Results of Operations — Six Months Ended July 2, 2022 Compared with Six Months Ended July 3, 2021
Six Months Ended
July 2, 2022
July 3, 2021
Higher (Lower)
Percent Change
(dollars in thousands)
Net sales
$
3,089,623
$
3,259,340
$
(169,717)
(5.2)
%
Cost of sales
1,933,344
1,975,030
(41,686)
(2.1)
Gross profit
1,156,279
1,284,310
(128,031)
(10.0)
Selling, general and administrative expenses
838,513
876,794
(38,281)
(4.4)
Operating profit
317,766
407,516
(89,750)
(22.0)
Other expenses
2,876
4,416
(1,540)
(34.9)
Interest expense, net
65,687
86,900
(21,213)
(24.4)
Income from continuing operations before income tax expense
249,203
316,200
(66,997)
(21.2)
Income tax expense
42,365
39,933
2,432
6.1
Income from continuing operations
206,838
276,267
(69,429)
(25.1)
Income (loss) from discontinued operations, net of tax
3,965
(410,853)
414,818
(101.0)
Net income (loss)
$
210,803
$
(134,586)
$
345,389
(256.6)
%
Net Sales
Net sales decreased 5% during the six months of 2022 versus the six months of 2021 primarily due to the following:
•The impact of the ransomware attack to the business;
•Softer point-of-sale trends;
•Global supply chain disruptions resulting in product delays;
•Ongoing COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $68 million.
Partially offset by:
•Pricing actions taken in the first quarter of 2022 in Innerwear; and
•Strong consumer demand in Europe and the Americas.
Operating Profit
Operating profit as a percentage of net sales was 10.3% for the six months of 2022, representing a decrease from 12.5% in the prior year. Operating margin decreased as a result of lower sales volume, input cost inflation, impact from the ransomware attack, higher transportation and distribution costs and increased Full Potential-related investments in brand marketing and technology partially offset by favorable business mix, first quarter price increases in Innerwear and cost savings. Included in operating profit in the six months of 2022 and 2021 were charges of $11 million and $38 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses decreased $2 million in the six months of 2022 compared to the same period in 2021 due to lower pension expense partially offset by higher funding fees for sales of accounts receivable to financial institutions in 2022.
Interest Expense – Interest expense was lower by $21 million in the six months of 2022 compared to the same period in 2021, primarily due to lower weighted average outstanding debt balances and a lower weighted average interest rate on our borrowings during the six months of 2022. Our weighted average interest rate on our outstanding debt was 3.14% for the six months of 2022, compared to 4.12% for the six months of 2021.
Income Tax Expense – Our effective income tax rate was 17.0% and 12.6% for the six months of 2022 and 2021, respectively. The higher effective tax rate for the six months of 2022 was primarily due to a non-recurring discrete tax benefit for the release of reserves for unrecognized tax benefits totaling $7 million, partially offset by a discrete charge for changes in valuation allowances of $4 million during the six months of 2021.
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. On March 5, 2022, we completed the sale of the European Innerwear business. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — Six Months Ended July 2, 2022 Compared with Six Months Ended July 3, 2021
Innerwear net sales decreased 6% compared to the six months of 2021 primarily due to business disruption as a result of the ransomware attack, softer point-of-sale trends, retail inventory reductions and last year’s one-time sales benefits from retailer restocking and government-stimulus spending partially offset by pricing actions taken in the first quarter of 2022.
Innerwear operating margin was 19.3%, a decrease from 23.2% in the same period a year ago. The operating margin decline resulted from lower sales volume, unfavorable product and channel mix, inflationary pressures and increased distribution costs resulting from expedited freight to service new retail space gains partially offset by pricing actions and cost reductions.
Activewear
Activewear net sales decreased 7% compared to the six months of 2021 primarily due to softer point-of-sale trends, retailer inventory levels and business disruption as a result of the ransomware attack. The net sales decrease was partially offset by growth in the collegiate bookstore channel.
Activewear operating margin was 10.0%, a decrease from 13.2% in the same period a year ago. The operating margin decline resulted from lower sales volume, higher levels of inflation, unfavorable product mix and increased brand marketing investments partially offset by cost reductions.
International
Net sales in the International segment decreased 5% compared to the six months of 2021 due to unfavorable foreign currency exchange rates, operational challenges experienced from the ransomware attack during the second quarter, global supply chain disruptions resulting in product delays in Australia and ongoing COVID-related pressures on consumer traffic in certain markets in Asia partially offset by growth in Europe and the Americas. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $68 million in the six months of 2022. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increased 2%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results.
International operating margin was 15.6%, an increase from 15.1% in the same period a year ago. Operating margin improved primarily resulting from favorable sales mix and disciplined expense management.
Other
Other net sales increased primarily due to increased sales from our supply chain to the European Innerwear business partially offset by lower sales at our retail outlets during the six months of 2022 compared to the six months of 2021. We have continued certain sales from our supply chain to the European Innerwear business on a transitional basis after the sale of the business. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
Corporate
Corporate expenses were lower in the six months of 2022 compared to the six months of 2021 primarily due to lower restructuring and other action-related charges and lower variable compensation costs partially offset by increased expenses, net of expected insurance recoveries, related to the ransomware attack which occurred during the second quarter of 2022. During the six months ended July 2, 2022, we incurred costs of approximately $15 million, net of expected insurance recoveries, related to the ransomware attack which included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $1 million, net of expected insurance
recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. Included in restructuring and other action-related charges within operating profit in the six months of 2022 and 2021 were $11 million and $38 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the six months of 2022 included a non-cash gain of $11 million to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from a decrease in carrying value due to changes in working capital. Full Potential plan charges in the six months of 2021 included 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.
Six Months Ended
July 2, 2022
July 3, 2021
(dollars in thousands)
Restructuring and other action-related charges:
Full Potential Plan:
Professional services
$
14,994
$
25,510
Gain on classification of assets held for sale
(10,868)
—
Operating model
(1,094)
—
Supply chain segmentation
1,289
—
Technology
6,430
—
Impairment of intangible assets
—
7,302
Other
431
5,245
Total included in operating profit
11,182
38,057
Discrete tax benefits
—
7,295
Tax benefit effect on actions
1,901
5,910
Total benefit included in income tax expense
1,901
13,205
Total restructuring and other action-related charges
$
9,281
$
24,852
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, repurchases of our stock, 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 to support our operations and key business strategies for at least one year from the issuance of these financial statements based on our current expectations and forecasts.
Our sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our accounts receivable securitization facility (the “ARS Facility”) and our other international credit facilities.
We had the following borrowing capacity and available liquidity under our credit facilities as of July 2, 2022:
As of July 2, 2022
Borrowing Capacity
Available Liquidity
(dollars in thousands)
Senior Secured Credit Facility:
Revolving Loan Facility(1)
$
1,000,000
$
634,940
Accounts Receivable Securitization Facility(2)
163,284
58,584
Other international credit facilities
49,786
23,798
Total liquidity from credit facilities
$
1,213,070
$
717,322
Cash and cash equivalents
247,922
Total liquidity
$
965,244
(1)A portion of the Revolving Loan Facility is available to be borrowed in Euros or Australian dollars.
(2)Borrowing availability under the ARS Facility is subject to a quarterly fluctuating facility limit, not to exceed $225 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans.
The following have impacted or may impact our liquidity:
•The COVID-19 pandemic which resulted in supply chain disruptions and inflationary pressures has had, and may continue to have, a negative impact on our business.
•For the six months ended July 2, 2022, we entered into transactions to repurchase approximately 1.6 million shares of our common stock at a total cost of $25 million including broker’s commissions. At July 2, 2022, the remaining repurchase authorization under our current share repurchase program announced on February 2, 2022 totaled approximately $575 million.
•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.
•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 $150 million to $175 million in 2022.
•In the future, we may pursue strategic business acquisitions or divestitures.
•We expect to have no required cash contributions to our U.S. pension plan in 2022 based on a preliminary calculation by our actuary but we may elect to make 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. We have not changed our reinvestment strategy from the prior year with regards to our unremitted foreign earnings and intend to remit foreign earnings totaling $579 million.
The information presented below regarding the sources and uses of our cash flows for the six months ended July 2, 2022 and July 3, 2021 was derived from our condensed consolidated interim financial statements.
Six Months Ended
July 2, 2022
July 3, 2021
(dollars in thousands)
Operating activities
$
(441,074)
$
212,256
Investing activities
(146,364)
(15,939)
Financing activities
316,306
(413,921)
Effect of changes in foreign exchange rates on cash
(41,575)
(16,780)
Change in cash, cash equivalents and restricted cash
(312,707)
(234,384)
Cash, cash equivalents and restricted cash at beginning of year
560,629
910,603
Cash, cash equivalents and restricted cash at end of period
$
247,922
$
676,219
Balances included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
247,922
$
667,298
Cash and cash equivalents included in current assets held for sale
—
8,921
Cash and cash equivalents at end of period
$
247,922
$
676,219
Operating Activities
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 used by operating activities was due to changes in working capital primarily inventory due to business disruption as a result of the ransomware attack, softer point-of-sale trends, supply chain disruptions and inflationary increases partially offset by improvement in accounts receivable and lower pension plan contributions in the six months of 2022. Net cash from operating activities includes a $40 million contribution to our U.S. pension plan made in the first quarter of 2021.
Investing Activities
The increase in cash used by investing activities in the six months of 2022 compared to the six months of 2021 was primarily the result of the purchase of the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC for $103 million, the sale of the European Innerwear business which resulted in an $11 million cash outflow and an increase in capital investments into our business.
Financing Activities
Net cash from financing activities increased in the six months of 2022 primarily as a result of increased borrowings on our ARS Facility and our Revolving Loan Facility coupled with the repayment of the outstanding balance of Term Loan B in the six months of 2021, which consisted of a required excess cash flow prepayment of $239 million and a voluntary prepayment of $61 million. Net cash from financing activities in the six months of 2022 also included shares repurchased at a total cost of $25 million and Term Loan A scheduled payments of $13 million.
Financing Arrangements
In June 2022, we amended the ARS Facility. This amendment primarily increased the fluctuating facility limit to $225 million (previously $175 million) and extended the maturity date to June 2023. Additionally, the amendment changed our interest rate option as defined in the ARS Facility from the rate announced from time to time by PNC Bank, N.A. as its prime rate or the London Interbank Offered Rate to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate and increased certain receivables to the pledged collateral pool for the facility.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of July 2, 2022, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. 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 total debt to EBITDA (earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility), or leverage ratio, each of which is defined in the Senior Secured Credit Facility. The method of calculating all of the components used in the covenants is included in the Senior Secured Credit Facility. We expect to maintain compliance with our covenants for at least one year from the issuance 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 1, 2022 and in this Quarterly Report on Form 10-Q or other SEC filings could cause noncompliance.
For further details regarding our liquidity from our available cash balances and credit facilities see “Cash Requirements and Trends and Uncertainties Affecting Liquidity” above.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to 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 consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1, 2022.
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 consolidated 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 1, 2022. 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 1, 2022.
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 1, 2022.
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 July 2, 2022.
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.
However, on May 24, 2022, we identified that we had become subject to a ransomware attack impacting certain of our information technology systems and activated our incident response and business continuity plans designed to contain the incident. See Note “Basis of Presentation – Ransomware Attack” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. As a result of the ransomware attack, we performed additional tests of controls and manual compensating controls.
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 information presented below supplements the risk factors set forth in our Annual Report on Form 10-K for the year ended January 1, 2022 (the “Form 10-K”). In addition to the risk factors set forth below, refer to Part I, Item 1A., Risk Factors, in the Form 10-K for information regarding other factors that could affect our results of operations, financial condition and liquidity. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, or results of operations.
Any inadequacy, interruption, integration failure or security breach with respect to our information technology could harm our ability to effectively operate our business and have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our ability to effectively manage and operate our business depends significantly on information technology systems. The failure of these systems to operate effectively and support global growth and expansion, problems with integrating various data sources, challenges in transitioning to upgraded or replacement systems, difficulty in integrating new systems or systems of acquired businesses, or a breach in security of these systems could adversely impact the operations of our business.
Despite our policies, procedures and programs designed to ensure the integrity of our information technology systems, we may not be effective in identifying and mitigating every risk to which we are exposed. Furthermore, from time to time we rely on information technology systems which may be managed, hosted, provided and/or accessed by third parties or their vendors to assist in conducting our business. Such relationships and access may create difficulties in anticipating and implementing adequate preventative measures or fully mitigating harms after a breach.
Hackers and data thieves are increasingly sophisticated and operate large-scale and complex attacks that may include computer viruses or other malicious codes, ransomware, unauthorized access attempts, denial of service attacks and large-scale automated attacks, phishing, social engineering, hacking and other cyber-attacks. For example, on May 24, 2022, we identified that we had become subject to a ransomware attack and activated our incident response and business continuity plans designed to contain the incident. We notified appropriate law enforcement authorities as well as certain data protection regulators, and will continue to evaluate and provide breach notifications or regulatory filings as may be required by applicable law as we continue our review of the scope and impact of the incident. During the quarter and six months ended July 2, 2022, we incurred costs of approximately $15 million, net of expected insurance recoveries, related to the ransomware attack. The costs included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $1 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The ransomware attack also negatively impacted our ability to order materials, make and ship orders, and process payments during the second quarter and six months ended July 2, 2022, resulting in estimated lost sales of approximately $100 million. We continue to assess the security event and cannot determine, at this time, the full extent of the impact from such event on our business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
This ransomware attack, as well as any other breach of our network or databases, or those of our third-party providers, may result in the loss of valuable business data, misappropriation of our consumers’ or employees’ personal information, or a disruption of our business, which could give rise to unwanted media attention, impair our ability to order materials, make and ship orders, and process payments, materially damage our customer relationships and reputation, and result in lost sales, significant costs, increased insurance premiums, fines or lawsuits.
Moreover, there are numerous laws and regulations regarding privacy and the storage, sharing, use, processing, transfer, disclosure and protection of personal data, the scope of which is changing, subject to differing interpretations, and may be inconsistent between states within a country or between countries. Globally, new and emerging laws, such as the General Data Protection Regulation (“GDPR”) and the Network and Information Systems Directive (“NISD”) in Europe, the United Kingdom General Data Protection Regulation (“UK-GDPR”) in the United Kingdom, state laws in the U.S. on privacy, data and related technologies, such as the California Consumer Privacy Act and the recently passed California Privacy Rights Act create new compliance obligations and expand the scope of potential liability, either jointly or severally with our customers and suppliers. Non-compliance with these laws could result in penalties or significant legal liability. Although we take reasonable efforts to comply with all applicable laws and regulations, there can be no assurance that we will not be subject to regulatory action, including fines, in the event of a data security incident. We or our third-party service providers could be adversely affected if legislation or regulations are expanded to require changes in our or our third-party service providers’ business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our or our third-party service providers’ business, results of operations or financial condition. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings, and potentially significant monetary penalties, against us by governmental entities or others, damage to our reputation and credibility, and could have a negative impact on revenues and profits.
Our inability to successfully recover should we experience a disaster or other business continuity problem could cause material financial loss, loss of human capital, regulatory actions, reputational harm, or legal liability.
We have a complex global supply chain and distribution network that supports our ability to consistently provide our products to our customers. Should we experience a local or regional disaster or other business continuity problem, such as an earthquake, tsunami, terrorist attack, pandemic, other natural or man-made disaster or cybersecurity incident (including the ransomware attack announced May 31, 2022), our continued success will depend, in part, on the safety and availability of our personnel, our office facilities, and the proper functioning of our computer, telecommunication and other systems and operations. Climate change serves as a risk multiplier increasing both the frequency and severity of natural disasters that may affect our worldwide business operations. Therefore, forecasting disruptive events and building additional resiliency into our operations accordingly will become an increasing business imperative.
We may experience operational challenges in the event of any such disaster, in particular depending upon how a local or regional event may affect our human capital across our operations or with regard to particular aspects of our operations, such as key executive officers or personnel in our technology group. If we cannot respond to disruptions in our operations, for example, by finding alternative suppliers or replacing capacity at key manufacturing or distribution locations, or cannot quickly repair damage to our information, production or supply systems, we may be late in delivering, or be unable to deliver, products to our customers. These events could result in, among other negative impacts, reputational damage, significant costs increased insurance premiums, lost sales, cancellation charges or excessive markdowns.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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*
Management contract or compensatory plans or arrangements.
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)
