e424b5
The
information in this preliminary prospectus supplement is not
complete and may be changed. This preliminary prospectus
supplement and the accompanying prospectus are part of an
effective registration statement filed with the Securities and
Exchange Commission. The preliminary prospectus supplement and
the accompanying prospectus are not an offer to sell these
securities nor a solicitation of an offer to buy these
securities in any jurisdiction where the offer and sale is not
permitted.
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Filed Pursuant to Rule 424(b)(5)
Registration No. 333-152733
Subject to
completion, dated November 30, 2009
Preliminary prospectus supplement
(To prospectus dated August 1, 2008)
$500,000,000
% Senior
Notes due 2016
We are offering $500,000,000 of
our % Senior Notes due 2016,
which we refer to as the notes. The notes will mature
on ,
2016. We will pay interest on the notes on
each
and ,
beginning
on ,
2010.
We may redeem some or all of the notes at any time on or
after ,
2013 at the redemption prices set forth under Description
of notesOptional redemption and prior to such date
at a make-whole redemption price. We may also redeem
up to 35% of the notes prior to 2012 with cash proceeds we
receive from certain equity offerings. If we sell certain assets
and do not reinvest the proceeds or repay senior indebtedness or
if we experience specific kinds of changes of control, we must
offer to repurchase the notes.
The notes will be our senior unsecured obligations and will rank
equally in right of payment with all of our existing and future
senior unsecured indebtedness and senior in right of payment to
all of our future subordinated indebtedness. The notes will be
effectively subordinated to any of our existing and future
secured debt to the extent of the value of the collateral
securing such indebtedness, including all borrowings under our
new senior secured credit facilities. The notes will be
structurally subordinated to all liabilities of any of our
subsidiaries that do not issue guarantees of the notes.
The obligations under the notes will be fully and
unconditionally guaranteed by substantially all of our current
domestic subsidiaries and by certain of our future restricted
subsidiaries. The guarantee of any subsidiary will be released
when such entity is no longer a subsidiary of ours (including as
a result of a sale of a majority of the capital stock of such
entity) if such entity no longer guarantees certain specified
indebtedness, or when such entity is designated an unrestricted
subsidiary under the terms of the indenture. The guarantees will
rank equally in right of payment with the existing and future
senior unsecured indebtedness of the guarantors and will rank
senior to any future subordinated indebtedness of the
guarantors. The guarantees will be effectively subordinated to
all existing and future secured indebtedness of the guarantors,
including guarantees of our borrowings under our new senior
secured credit facilities to the extent of the value of the
collateral securing such indebtedness.
Investing in the notes involves risk. See Risk
factors beginning on
page S-11
of this prospectus supplement.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Underwriting
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Proceeds, before
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Price to
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discounts
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expenses, to
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public1
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and commissions
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Hanesbrands Inc.
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Per note
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%
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%
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%
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Total
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$
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$
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$
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(1)
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Plus accrued interest, if any,
from ,
2009.
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The notes will not be listed on a securities exchange.
Currently, there is no public market for the notes.
The underwriters expect to deliver the notes on or
about ,
2009 in book-entry form through The Depository
Trust Company for the account of its participants,
including Clearstream Banking société anonyme and
Euroclear Bank S.A./N.V.
Joint book-running managers
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J.P.
Morgan |
BofA Merrill Lynch |
HSBC |
Goldman, Sachs & Co. |
Co-managers
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Barclays
Capital |
BB&T Capital Markets |
RBC Capital Markets |
,
2009
Table of
contents
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S-ii
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S-ii
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S-iii
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S-1
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S-11
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S-34
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S-34
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S-35
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S-36
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S-38
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S-98
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S-114
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S-117
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S-123
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S-177
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S-182
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S-187
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S-189
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S-191
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S-191
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S-i
About this
prospectus supplement
This document is in two parts. The first part is the prospectus
supplement and the documents incorporated herein, which
describes the specific terms of this offering of the notes. The
second part is the accompanying prospectus, which gives more
general information, some of which may not apply to the notes or
this offering. If the information relating to the offering
varies between the prospectus supplement and the accompanying
prospectus, you should rely on the information in this
prospectus supplement.
You should rely only on the information contained in or
incorporated by reference into this prospectus supplement, the
accompanying prospectus and any related free writing prospectus
filed by us with the Securities and Exchange Commission
(SEC). We have not, and the underwriters have not,
authorized any dealer, salesman or other person to provide you
with additional or different information. If anyone provides you
with different or inconsistent information, you should not rely
on it. This prospectus supplement and the accompanying
prospectus are not an offer to sell or the solicitation of an
offer to buy any securities other than the securities to which
they relate and are not an offer to sell or a solicitation of an
offer to buy securities in any jurisdiction to any person to
whom it is unlawful to make an offer or solicitation in that
jurisdiction. You should not assume that the information
contained in this prospectus supplement is accurate as of any
date other than the date on the front cover of this prospectus
supplement, or that the information contained in the
accompanying prospectus, any document incorporated by reference
and any such free writing prospectus is accurate as of any date
other than their respective dates, regardless of the time of
delivery of this prospectus supplement or any sale of a
security. Our business, financial condition, results of
operations and prospects may have changed since those dates.
Unless otherwise indicated or the context otherwise requires,
all references in this prospectus supplement to we,
our, us, the Company or
Hanesbrands are to Hanesbrands Inc., a Maryland
corporation, and its subsidiaries.
Where you can
find more information
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You can inspect, read and
copy these reports, proxy statements and other information at
the SECs Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. You can obtain information
regarding the operation of the SECs Public Reference Room
by calling the SEC at
1-800-SEC-0330.
The SEC also maintains a Web site at www.sec.gov that makes
available reports, proxy statements and other information
regarding issuers that file electronically.
We make available free of charge at www.hanesbrands.com (in the
Investors section) copies of materials we file with,
or furnish to, the SEC. By referring to our website and the
SECs website, we do not incorporate such websites or their
contents into this prospectus.
The SEC allows us to incorporate by reference
information that we file with them, which means that we can
disclose important information to you by referring you to
documents previously filed with the SEC. The information
incorporated by reference is an important part of this
prospectus supplement, and the information that we later file
with the SEC will automatically update and supersede this
information. This prospectus incorporates by reference the
documents and reports listed below (other than portions of these
documents deemed to be furnished or not deemed to be
filed, including the portions of these documents
that are
S-ii
either (1) described in paragraphs (d)(1), (d)(2), (d)(3)
or (e)(5) of Item 407 of
Regulation S-K
promulgated by the SEC or (2) furnished under
Item 2.02 or Item 7.01 of a Current Report on
Form 8-K,
including any exhibits included with such Items):
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our Annual Report on
Form 10-K
for the fiscal year ended January 3, 2009;
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our Quarterly Report on
Form 10-Q
for the fiscal quarters ended April 4, 2009, July 4,
2009 and October 3, 2009;
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our Current Reports on
Form 8-K
filed on March 16, 2009, April 27, 2009, July 30,
2009, September 21, 2009 and October 28, 2009; and
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our Proxy Statement on Schedule 14A filed on March 12,
2009.
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We also incorporate by reference the information contained in
all other documents we file with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 (the Exchange Act) (other than
portions of these documents deemed to be furnished
or not deemed to be filed, including the portions of
these documents that are either (1) described in paragraphs
(d)(1), (d)(2), (d)(3) or (e)(5) of Item 407 of
Regulation S-K
promulgated by the SEC or (2) furnished under
Item 2.02 or Item 7.01 of a Current Report on
Form 8-K,
including any exhibits included with such Items, unless
otherwise specifically indicated therein) after the date of this
prospectus supplement and prior to the termination of this
offering. The information contained in any such document will be
considered part of this prospectus supplement from the date the
document is filed with the SEC.
Any statement contained in this prospectus supplement or in a
document incorporated or deemed to be incorporated by reference
in this prospectus supplement will be deemed to be modified or
superseded to the extent that a statement contained herein or in
any other subsequently filed document which also is or is deemed
to be incorporated by reference in this prospectus supplement
modifies or supersedes that statement. Any statement so modified
or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus supplement.
We undertake to provide without charge to any person, including
any beneficial owner, to whom a copy of this prospectus is
delivered, upon oral or written request of such person, a copy
of any or all of the documents that have been incorporated by
reference in this prospectus supplement, other than exhibits to
such other documents (unless such exhibits are specifically
incorporated by reference therein). We will furnish any exhibit
not specifically incorporated by reference upon the payment of a
specified reasonable fee, which fee will be limited to our
reasonable expenses in furnishing such exhibit. All requests for
such copies should be directed to Corporate Secretary,
Hanesbrands Inc., 1000 East Hanes Mill Road, Winston-Salem,
North Carolina 27105.
Cautionary
statement regarding forward-looking statements
This prospectus supplement, the accompanying prospectus, any
related free writing prospectus and the documents incorporated
by reference therein include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933
(the Securities Act) and Section 21E of the
Exchange Act. Forward-looking statements include all statements
that do not
S-iii
relate solely to historical or current facts, and can generally
be identified by the use of words such as may,
believe, will, expect,
project, estimate, intend,
anticipate, plan, continue
or similar expressions. In particular, information appearing
under Description of our business, Risk
factors and Managements discussion and
analysis of financial condition and results of operations
includes forward-looking statements. Forward-looking statements
inherently involve many risks and uncertainties that could cause
actual results to differ materially from those projected in
these statements. Where, in any forward-looking statement, we
express an expectation or belief as to future results or events,
such expectation or belief is based on the current plans and
expectations of our management and expressed in good faith and
believed to have a reasonable basis, but there can be no
assurance that the expectation or belief will result or be
achieved or accomplished. The following include some but not all
of the factors that could cause actual results or events to
differ materially from those anticipated:
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our ability to execute our consolidation and globalization
strategy, including migrating our production and manufacturing
operations to lower-cost locations around the world;
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our ability to successfully manage social, political, economic,
legal and other conditions affecting our foreign operations and
supply chain sources, such as disruption of markets, changes in
import and export laws, currency restrictions and currency
exchange rate fluctuations;
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current economic conditions;
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consumer spending levels;
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the risk of inflation or deflation;
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financial difficulties experienced by, or loss of or reduction
in sales to, any of our top customers or groups of customers;
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gains and losses in the shelf space that our customers devote to
our products;
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our debt and debt service requirements that restrict our
operating and financial flexibility and impose interest and
financing costs;
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the financial ratios that our debt instruments require us to
maintain;
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future financial performance, including availability, terms and
deployment of capital;
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failure to protect against dramatic changes in the volatile
market price of cotton;
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the impact of increases in prices of other materials used in our
products and increases in other costs;
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the impact of increases in prices of oil-related materials and
other costs such as energy and utility costs;
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our ability to effectively manage our inventory and reduce
inventory reserves;
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retailer consolidation and other changes in the apparel
essentials industry;
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the highly competitive and evolving nature of the industry in
which we compete;
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our ability to keep pace with changing consumer preferences;
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S-iv
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our ability to continue to effectively distribute our products
through our distribution network as we continue to consolidate
our distribution network;
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our ability to comply with environmental and occupational health
and safety laws and regulations;
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costs and adverse publicity from violations of labor or
environmental laws by us or our suppliers;
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our ability to attract and retain key personnel;
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new litigation or developments in existing litigation; and
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possible terrorist attacks and ongoing military action in the
Middle East and other parts of the world.
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There may be other factors that may cause our actual results to
differ materially from the forward-looking statements. Our
actual results, performance or achievements could differ
materially from those expressed in, or implied by, the
forward-looking statements. We can give no assurances that any
of the events anticipated by the forward-looking statements will
occur or, if any of them does, what impact they will have on our
results of operations and financial condition. You should
carefully read the factors described in the Risk
factors section of this prospectus supplement for a
description of certain risks that could, among other things,
cause our actual results to differ from these forward-looking
statements.
All forward-looking statements speak only as of the date of this
prospectus supplement and are expressly qualified in their
entirety by the cautionary statements included in this
prospectus supplement. We undertake no obligation to update or
revise forward-looking statements that may be made to reflect
events or circumstances that arise after the date made or to
reflect the occurrence of unanticipated events, other than as
required by law.
S-v
Summary
This summary highlights selected information contained
elsewhere in this prospectus supplement, the accompanying
prospectus and the documents we incorporate by reference. It
does not contain all of the information you should consider
before making an investment decision. You should read the entire
prospectus supplement, the accompanying prospectus, the
documents incorporated by reference and the other documents to
which we refer for a more complete understanding of our business
and this offering. Please read the section entitled Risk
factors and additional information contained in our Annual
Report on
Form 10-K
for the year ended January 3, 2009 and our Quarterly
Reports on
Form 10-Q
for the quarters ended October 3, 2009, July 4, 2009
and April 4, 2009 incorporated by reference in this
prospectus supplement for more information about important
factors you should consider before investing in the notes in
this offering.
Our
company
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, C9
by Champion, Playtex, Bali,
Leggs, Just My Size, barely there,
Wonderbra, Stedman, Outer Banks,
Zorba, Rinbros and Duofold. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, casualwear, activewear, socks and hosiery.
The apparel essentials sector of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. We focus on the core attributes
of comfort, fit and value, while remaining current with regard
to consumer trends. The majority of our core styles continue
from year to year, with variations only in color, fabric or
design details. Some products, however, such as intimate
apparel, activewear and sheer hosiery, do have an emphasis on
style and innovation. We continue to invest in our largest and
strongest brands to achieve our long-term growth goals. In
addition to designing and marketing apparel essentials, we have
a long history of operating a global supply chain that
incorporates a mix of self-manufacturing, third-party
contractors and third-party sourcing.
Our products are sold through multiple distribution channels.
During the year ended January 3, 2009, approximately 44% of
our net sales were to mass merchants, 18% were to national
chains and department stores, 9% were direct to consumers, 11%
were in our International segment and 18% were to other retail
channels such as embellishers, specialty retailers, warehouse
clubs and sporting goods stores. We have strong, long-term
relationships with our top customers, including relationships of
more than ten years with each of our top ten customers as of
January 3, 2009. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of product
orders. We have organized multifunctional customer management
teams, which has allowed us to form strategic long-term
relationships with these customers and efficiently focus
resources on category, product and service expertise. We also
have customer-specific programs such as the C9 by Champion
products marketed and sold through Target stores.
S-1
Our
brands
Our brands have a strong heritage in the apparel essentials
industry. According to The NPD Group/Consumer Tracking Service,
or NPD, our brands hold either the number one or
number two U.S. market position by sales value in most
product categories in which we compete, for the 12 month
period ended November 30, 2008. In 2008, Hanes was
number one for the fifth consecutive year on the Womens
Wear Daily Top 100 Brands Survey for apparel and
accessory brands that women know best and was number one for the
fifth consecutive year as the most preferred mens,
womens and childrens apparel brand of consumers in
Retailing Today magazines Top Brands Study.
Additionally, we had five of the top ten intimate apparel brands
preferred by consumers in the Retailing Today
studyHanes, Playtex, Bali, Just My
Size and Leggs.
Our competitive
strengths
Strong brands with leading market
positions. According to NPD, our brands hold either the
number one or number two U.S. market position by sales
value in most product categories in which we compete, for the
12 month period ended November 30, 2008. According to
NPD, our largest brand, Hanes, is the top-selling apparel
brand in the United States by units sold, for the 12 month
period ended November 30, 2008.
High-volume, core essentials focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. We believe that our status
as a high-volume seller of core apparel essentials creates a
more stable and predictable revenue base and reduces our
exposure to dramatic fashion shifts often observed in the
general apparel industry.
Significant scale of operations. According to NPD,
we are the largest seller of apparel essentials in the United
States as measured by sales value for the 12 month period
ended November 30, 2008. Most of our products are sold to
large retailers that have high-volume demands. We believe that
we are able to leverage our significant scale of operations to
provide us with greater manufacturing efficiencies, purchasing
power and product design, marketing and customer management
resources than our smaller competitors.
Strong customer relationships. We sell our products
primarily through large, high-volume retailers, including mass
merchants, department stores and national chains. We have
strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers as of January 3, 2009. We have aligned
significant parts of our organization with corresponding parts
of our customers organizations. We also have entered into
customer-specific programs such as the C9 by Champion
products marketed and sold through Target stores.
Key business
strategies
Sell more, spend less and generate cash are our broad strategies
to build our brands, reduce our costs and generate cash.
S-2
Sell more. Through our sell more
strategy, we seek to drive profitable growth by consistently
offering consumers brands they love and trust and products with
unsurpassed value. Key initiatives we are employing to implement
this strategy include:
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Build big, strong brands in big core categories with innovative
key items. Our ability to react to changing customer needs and
industry trends is key to our success. Our design, research and
product development teams, in partnership with our marketing
teams, drive our efforts to bring innovations to market. We seek
to leverage our insights into consumer demand in the apparel
essentials industry to develop new products within our existing
lines and to modify our existing core products in ways that make
them more appealing, addressing changing customer needs and
industry trends. We also support our key brands with targeted,
effective advertising and marketing campaigns.
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Foster strategic partnerships with key retailers via team
selling. We foster relationships with key retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships.
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Use Kanban concepts to have the right products available in the
right quantities at the right time. Through Kanban, a
multi-initiative effort that determines production quantities,
and in doing so, facilitates
just-in-time
production and ordering systems, we seek to ensure that products
are available to meet customer demands while effectively
managing inventory levels.
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Spend less. Through our spend less
strategy, we seek to become an integrated organization that
leverages its size and global reach to reduce costs, improve
flexibility and provide a high level of service. Key initiatives
we are employing to implement this strategy include:
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Globalizing our supply chain by balancing across hemispheres
into economic clusters with fewer, larger
facilities. As a provider of high-volume products, we are
continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. Through
our consolidation and globalization strategy, which is discussed
in more detail below, we will continue to transition additional
parts of our supply chain to lower-cost locations in Asia,
Central America and the Caribbean Basin in an effort to optimize
our cost structure. As part of this process, we are using Kanban
concepts to optimize the way we manage demand, to increase
manufacturing flexibility to better respond to demand
variability and to simplify our finished goods and the raw
materials we use to produce them. We expect that these changes
in our supply chain will result in significant cost efficiencies
and increased asset utilization.
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Leverage our global purchasing and manufacturing scale.
Historically, we have had a decentralized operating structure
with many distinct operating units. We are in the process of
consolidating purchasing, manufacturing and sourcing across all
of our product categories in the United States. We believe that
these initiatives will streamline our operations, improve our
inventory management, reduce costs and standardize processes.
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Generate cash. Through our generate cash
strategy, we seek to effectively generate and invest cash at or
above our weighted average cost of capital to provide superior
returns for both
S-3
our equity and debt investors. Key initiatives we are employing
to implement this strategy include:
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Optimizing our capital structure to take advantage of our
business models strong and consistent cash flows.
Maintaining appropriate debt leverage and utilizing excess cash
to, for example, pay down debt, invest in our own stock and
selectively pursue strategic acquisitions are keys to building a
stronger business and generating additional value for investors.
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Continuing to improve turns for accounts receivables, inventory,
accounts payable and fixed assets. Our ability to generate cash
is enhanced through more efficient management of accounts
receivables, inventory, accounts payable and fixed assets.
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Our ability to react to changing customer needs and industry
trends will continue to be key to our success. Our design,
research and product development teams, in partnership with our
marketing teams, drive our efforts to bring innovations to
market. We seek to leverage our insights into consumer demand in
the apparel essentials industry to develop new products within
our existing lines and to modify our existing core products in
ways that make them more appealing, addressing changing customer
needs and industry trends. Examples of our recent innovations
include:
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Hanes no ride up panties, specially designed for a better
fit that helps women stay wedgie-free (2008).
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Hanes Lay Flat Collar Undershirts and Hanes No Ride Up
Boxer briefs, the brands latest innovation in product
comfort and fit (2008).
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Bali Concealers bras, the first and only bra with
revolutionary concealing petals for complete modesty (2008).
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Hanes Comfort Soft T-shirt (2007).
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Bali Passion for Comfort bra, designed to be the ultimate
comfort bra, features a silky smooth lining for a luxurious feel
against the body (2007).
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Hanes All-Over Comfort Bra, which features stay-put
straps that dont slip, cushioned wires that dont
poke and a tag-free back (2006).
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One of our key initiatives is to globalize our supply chain by
balancing across hemispheres into economic clusters
with fewer, larger facilities. We expect to continue our
restructuring efforts through the end of 2009 as we continue to
execute our consolidation and globalization strategy. We have
closed plant locations, reduced our workforce, and relocated
some of our manufacturing capacity to lower cost locations in
Asia, Central America and the Caribbean Basin. We have
restructured our supply chain over the past three years to
create more efficient production clusters that utilize fewer,
larger facilities and to balance our production capability
between the Western Hemisphere and Asia. With our global supply
chain restructured, we are now focused on optimizing our supply
chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the
working capital needs of our supply chain through several
initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership relationships.
S-4
Company
information
We were incorporated in Maryland on September 30, 2005 and
became an independent public company following our spin off from
Sara Lee Corporation (Sara Lee) on September 5,
2006. Our principal executive offices are located at 1000 East
Hanes Mill Road, Winston-Salem, North Carolina 27105. Our main
telephone number is
(336) 519-8080.
The
transactions
As used in this prospectus supplement, the term
Transactions refers to the financing transactions
described below.
We will use the proceeds from this offering, together with the
borrowings under the term loan and revolving loan facilities
under our existing senior secured first lien credit facility
(the Senior Secured Credit Facilities) that will be
amended and restated concurrently with the consummation of this
offering (as amended and restated, the New Senior Secured
Credit Facilities), including borrowings under the
revolving credit facility of the New Senior Secured Credit
Facilities, to (i) refinance all borrowings outstanding
under the Senior Secured Credit Facilities, (ii) repay all
borrowings outstanding under our existing senior secured second
lien credit facility (the Second Lien Credit
Facility and, together with the Senior Secured Credit
Facilities, the Existing Credit Facilities)
and (iii) to pay the fees and expenses related to the
Transactions. The Second Lien Credit Facility will be paid in
full and terminated concurrently with the closing of this
offering. See Use of proceeds.
S-5
The
offering
The following summary contains basic information about the
notes and is not intended to be complete. For a more complete
understanding of the notes, please refer to the section in this
prospectus supplement entitled Description of notes
and the section in the accompanying prospectus entitled
Description of debt securities.
|
|
|
Issuer |
|
Hanesbrands Inc. |
|
The notes |
|
$500,000,000 aggregate principal amount
of % Senior Notes due 2016. |
|
Maturity |
|
, 2016. |
|
Interest payment dates |
|
Interest is payable on the notes
on
and of
each year, beginning
on ,
2010. |
|
Optional redemption |
|
We may, at our option, redeem all or part of the notes at any
time prior
to ,
2013 at a make-whole price, and at any time on or
after ,
2013 at fixed redemption prices, plus accrued and unpaid
interest, if any, to the date of redemption, as described under
Description of notesOptional redemption. In
addition, prior
to ,
2012, we may, at our option, redeem up to 35% of the notes with
the proceeds of certain equity offerings. |
|
Guarantees |
|
The payment of the principal, premium and interest on the notes
will be fully and unconditionally guaranteed on a senior
unsecured basis by substantially all of our existing domestic
subsidiaries and by certain of our future restricted
subsidiaries. In the future, the guarantees may be released or
terminated under certain circumstances. See Description of
notesGuarantees. |
|
Ranking |
|
The notes and the guarantees will be our and the
guarantors senior unsecured obligations and will: |
|
|
|
rank equally in right of payment with all our and
the guarantors existing and future senior unsecured
indebtedness;
|
|
|
|
rank senior in right of payment to all our and the
guarantors future senior subordinated and subordinated
indebtedness;
|
|
|
|
be effectively subordinated in right of payment to
all our and the guarantors existing and future secured
indebtedness to the extent of the value of the collateral
securing such indebtedness (including all of our borrowings and
the guarantors guarantees under our New Senior Secured
Credit Facilities); and
|
|
|
|
be structurally subordinated in right of payment to
all existing and future indebtedness and other liabilities of
any of our subsidiaries that is not also a guarantor of the
notes.
|
S-6
|
|
|
|
|
As of October 3, 2009, after giving effect to the
Transactions and the application of the estimated net proceeds
therefrom as set forth under Use of proceeds, we
would have had total consolidated indebtedness of
$2,087.7 million, consisting of $845.0 million of
secured indebtedness outstanding under our New Senior Secured
Credit Facilities, $500.0 million of the notes offered
hereby, $493.7 million of our floating rate senior notes
and $249.0 million outstanding under accounts receivable
securitization facility that we entered into on November 27,
2007 (the Accounts Receivable Securitization
Facility). The subsidiary guarantors would have guaranteed
total indebtedness of $1,838.7 million, consisting of
$845.0 million of secured guarantees under our New Senior
Secured Credit Facilities, $500.0 million of unsecured
guarantees of the notes offered hereby and $493.7 million
of unsecured guarantees of our floating rate senior notes,
excluding intercompany indebtedness, and we would have been able
to incur an additional $305.0 million of secured
indebtedness under our New Senior Secured Credit Facilities. Our
non-guarantor subsidiaries would have had $249.0 million of
total indebtedness, consisting of the amounts outstanding under
the Accounts Receivable Securitization Facility. For further
discussion, see Description of other indebtedness. |
|
Covenants |
|
The indenture governing the notes will contain covenants that,
among other things, limit our ability and the ability of our
restricted subsidiaries to: |
|
|
|
incur additional debt;
|
|
|
|
make certain investments or pay dividends or
distributions on our capital stock or purchase, redeem or retire
capital stock (restricted payments);
|
|
|
|
sell assets, including capital stock of our
restricted subsidiaries;
|
|
|
|
restrict dividends or other payments by restricted
subsidiaries;
|
|
|
|
create liens that secure debt;
|
|
|
|
enter into transactions with affiliates; and
|
|
|
|
merge or consolidate with another company.
|
|
|
|
These covenants are subject to a number of important limitations
and exceptions, including a provision allowing us to make
restricted payments in an amount calculated pursuant to a
formula based upon 50% of our adjusted consolidated net income
(as defined in the indenture) since October 1, 2006. As of
October 3, 2009, after giving effect to the Transactions,
we would have had approximately $391.9 million of available
restricted payment capacity pursuant to that provision, in
addition to the restricted payment capacity available under
other exceptions. See Description of
notesCovenants. |
S-7
|
|
|
|
|
In addition, most of the covenants will be suspended if both
Standard & Poors Ratings Services and Moodys
Investors Service, Inc., assign the notes an investment grade
rating and no default exists with respect to the notes. |
|
Change of control offer |
|
If we experience certain kinds of changes of control, we must
give the holders of the notes the opportunity to sell us their
notes at 101% of their principal amount, plus accrued and unpaid
interest, if any, to the repurchase date. |
|
No public market |
|
The notes are a series of securities for which there is
currently no established trading market. The underwriters have
advised us that they presently intend to make a market in the
notes. However, you should be aware that they are not obligated
to make a market in the notes and may discontinue their
market-making activities at any time without notice. As a
result, a liquid market for the notes may not be available if
you try to sell your notes. We do not intend to apply for a
listing of the notes on any securities exchange or any automated
dealer quotation system. |
|
Use of proceeds |
|
We will use the estimated net proceeds from this offering of
approximately $485.2 million to repay or refinance a
portion of the borrowings under our Existing Credit Facilities.
See Use of proceeds. |
|
Form |
|
The notes will be represented by one or more registered global
securities registered in the name of Cede & Co., the
nominee of the depositary, The Depository Trust Company.
Beneficial interests in the notes will be shown on, and
transfers of beneficial interests will be effected through,
records maintained by The Depository Trust Company and its
participants. |
|
Original issue discount |
|
The notes may be issued with original issue discount, or OID,
for U.S. federal income tax purposes, in which case, U.S.
holders generally will be required to include the OID in gross
income for U.S. federal income tax purposes in advance of the
receipt of cash attributable to that income regardless of the
holders method of tax accounting. See U.S. federal
income tax consequencesUnited States holdersOriginal
issue discount. |
Risk
factors
Investing in the notes involves substantial risk. You should
carefully consider the risk factors set forth in the section
entitled Risk factors and the other information
contained in this prospectus supplement and the accompanying
prospectus and the documents incorporated by reference therein,
prior to making an investment in the notes. See Risk
factors beginning on
page S-11.
S-8
Summary financial
data
Set forth below is our summary consolidated historical financial
data for the periods indicated. The historical financial data
for the periods ended January 3, 2009 and December 29,
2007 and the balance sheet data as of January 3, 2009 and
December 29, 2007 have been derived from our audited
financial statements incorporated by reference in this
prospectus supplement. Our historical financial data as of
October 3, 2009 and September 27, 2008 and for the
nine months ended October 3, 2009 and September 27,
2008 are derived from our unaudited financial statements. You
should read the following summary financial data in conjunction
with Managements discussion and analysis of
financial condition and results of operations and our
historical financial statements and related notes thereto
incorporated by reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Years ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
January 3,
|
|
|
December 29,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2007
|
|
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,902,536
|
|
|
$
|
3,213,653
|
|
|
$
|
4,248,770
|
|
|
$
|
4,474,537
|
|
Cost of sales
|
|
|
1,960,589
|
|
|
|
2,145,949
|
|
|
|
2,871,420
|
|
|
|
3,033,627
|
|
|
|
|
|
|
|
Gross profit
|
|
|
941,947
|
|
|
|
1,067,704
|
|
|
|
1,377,350
|
|
|
|
1,440,910
|
|
Selling, general and administrative expenses
|
|
|
702,204
|
|
|
|
776,267
|
|
|
|
1,009,607
|
|
|
|
1,040,754
|
|
Gain on curtailment of postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,144
|
)
|
Restructuring
|
|
|
46,319
|
|
|
|
32,355
|
|
|
|
50,263
|
|
|
|
43,731
|
|
|
|
|
|
|
|
Operating profit
|
|
|
193,424
|
|
|
|
259,082
|
|
|
|
317,480
|
|
|
|
388,569
|
|
Other (income) expense
|
|
|
6,537
|
|
|
|
|
|
|
|
(634
|
)
|
|
|
5,235
|
|
Interest expense, net
|
|
|
124,548
|
|
|
|
115,282
|
|
|
|
155,077
|
|
|
|
199,208
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
62,339
|
|
|
|
143,800
|
|
|
|
163,037
|
|
|
|
184,126
|
|
Income tax expense (benefit)
|
|
|
9,974
|
|
|
|
34,512
|
|
|
|
35,868
|
|
|
|
57,999
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,365
|
|
|
$
|
109,288
|
|
|
$
|
127,169
|
|
|
$
|
126,127
|
|
|
|
S-9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
January 3,
|
|
|
December 29,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2007
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,617
|
|
|
$
|
86,212
|
|
|
$
|
67,342
|
|
|
$
|
174,236
|
|
Total assets
|
|
|
3,491,913
|
|
|
|
3,627,638
|
|
|
|
3,534,049
|
|
|
|
3,439,483
|
|
Accounts Receivable Securitization Facility
|
|
|
249,043
|
|
|
|
|
|
|
|
45,640
|
|
|
|
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,793,680
|
|
|
|
2,315,250
|
|
|
|
2,130,907
|
|
|
|
2,315,250
|
|
Other noncurrent liabilities
|
|
|
481,425
|
|
|
|
159,870
|
|
|
|
469,703
|
|
|
|
146,347
|
|
Total noncurrent liabilities
|
|
|
2,275,105
|
|
|
|
2,475,120
|
|
|
|
2,600,610
|
|
|
|
2,461,597
|
|
Total stockholders equity
|
|
|
293,184
|
|
|
|
380,934
|
|
|
|
185,155
|
|
|
|
288,904
|
|
|
S-10
Risk
factors
An investment in the notes involves risk. In addition to the
risks described below, you should also carefully read all of the
other information included in this prospectus supplement, the
accompanying prospectus and the documents we have incorporated
by reference into this prospectus supplement in evaluating an
investment in the notes. If any of the described risks actually
were to occur, our business, financial condition or results of
operations could be affected materially and adversely. In that
case, our ability to fulfill our obligations under the notes
could be materially affected and you could lose all or part of
your investment.
The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we
currently deem immaterial individually or in the aggregate may
also impair our business operations.
This prospectus supplement and documents incorporated by
reference also contain forward-looking statements that involve
risks and uncertainties, some of which are described in the
documents incorporated by reference in this prospectus
supplement and the accompanying prospectus. Our actual results
could differ materially from those anticipated in these
forward-looking statements as a result of various factors,
including the risks and uncertainties faced by us described
below or incorporated by reference in this prospectus supplement
and the accompanying prospectus.
Risks related to
our business
We are continuing
to execute our consolidation and globalization strategy and this
process involves significant costs and the risk of operational
interruption.
Since becoming an independent company, we have undertaken a
variety of restructuring efforts in connection with our
consolidation and globalization strategy designed to improve
operating efficiencies and lower costs. As a result of this
strategy, we expected to incur approximately $250 million
in restructuring and related charges over the three year period
following the spin off from Sara Lee on September 5, 2006,
of which approximately half was expected to be noncash. As of
October 3, 2009, we have recognized approximately
$262 million and announced approximately $253 million
in restructuring and related charges related to this strategy
since September 5, 2006, approximately half of which have
been noncash. This process may also result in operational
interruptions, which may have an adverse effect on our business,
results of operations, financial condition and cash flows.
Our supply chain
relies on an extensive network of foreign operations and any
disruption to or adverse impact on such operations may adversely
affect our business, results of operations, financial condition
and cash flows.
We have an extensive global supply chain in which a significant
portion of our products are manufactured in or sourced from
locations in Asia, Central America, the Caribbean Basin and
Mexico and we are continuing to add new manufacturing capacity
in Asia, Central America and the Caribbean Basin. Potential
events that may disrupt our foreign operations include:
|
|
|
political instability and acts of war or terrorism or other
international events resulting in the disruption of trade;
|
|
|
other security risks;
|
S-11
|
|
|
disruptions in shipping and freight forwarding services;
|
|
|
increases in oil prices, which would increase the cost of
shipping;
|
|
|
interruptions in the availability of basic services and
infrastructure, including power shortages;
|
|
|
fluctuations in foreign currency exchange rates resulting in
uncertainty as to future asset and liability values, cost of
goods and results of operations that are denominated in foreign
currencies;
|
|
|
extraordinary weather conditions or natural disasters, such as
hurricanes, earthquakes, tsunamis, floods or fires; and
|
|
|
the occurrence of an epidemic, the spread of which may impact
our ability to obtain products on a timely basis.
|
Disruptions in our foreign supply chain could negatively impact
our business by interrupting production in facilities outside
the United States, increasing our cost of sales, disrupting
merchandise deliveries, delaying receipt of the products into
the United States or preventing us from sourcing our products at
all. Depending on timing, these events could also result in lost
sales, cancellation charges or excessive markdowns. All of the
foregoing can have an adverse effect on our business, results of
operations, financial condition and cash flows.
Current economic
conditions may adversely impact demand for our products, reduce
access to credit and cause our customers and others with which
we do business to suffer financial hardship, all of which could
adversely impact our business, results of operations, financial
condition and cash flows.
Worldwide economic conditions have recently deteriorated
significantly in many countries and regions, including the
United States, and may remain depressed for the foreseeable
future. Although the majority of our products are replenishment
in nature and tend to be purchased by consumers on a planned,
rather than on an impulse, basis, our sales are impacted by
discretionary spending by our customers. Discretionary spending
is affected by many factors, including, among others, general
business conditions, interest rates, inflation, consumer debt
levels, the availability of consumer credit, currency exchange
rates, taxation, electricity power rates, gasoline prices,
unemployment trends and other matters that influence consumer
confidence and spending. Many of these factors are outside of
our control. Our customers purchases of discretionary
items, including our products, could decline during periods when
disposable income is lower, when prices increase in response to
rising costs, or in periods of actual or perceived unfavorable
economic conditions. For example, we experienced a spike in oil
related commodity prices during the summer of 2008. Increases in
our product costs may not be offset by comparable rises in the
income of consumers of our products. These consumers may choose
to purchase fewer of our products or lower-priced products of
our competitors in response to higher prices for our products,
or may choose not to purchase our products at prices that
reflect our domestic price increases that become effective from
time to time. If any of these events occur, or if unfavorable
economic conditions continue to challenge the consumer
environment, our business, results of operations, financial
condition and cash flows could be adversely affected.
In addition, economic conditions, including decreased access to
credit, may result in financial difficulties leading to
restructurings, bankruptcies, liquidations and other unfavorable
events for our customers, suppliers of raw materials and
finished goods, logistics and other service
S-12
providers and financial institutions which are counterparties to
our credit facilities and derivatives transactions. In addition,
the inability of these third parties to overcome these
difficulties may increase. For example, one of our customers,
Mervyns, a regional retailer in California and the
Southwest that originally filed for reorganization under
Chapter 11 in July 2008, announced in October 2008 its
intention to wind down its business and conduct
going-out-of-business sales at remaining store locations. If
third parties on which we rely for raw materials, finished goods
or services are unable to overcome difficulties resulting from
the deterioration in worldwide economic conditions and provide
us with the materials and services we need, or if counterparties
to our credit facilities or derivatives transactions do not
perform their obligations, our business, results of operations,
financial condition and cash flows could be adversely affected.
Our customers
generally purchase our products on credit, and as a result, our
results of operations, financial condition and cash flows may be
adversely affected if our customers experience financial
difficulties.
During the past several years, various retailers, including some
of our largest customers, have experienced significant
difficulties, including restructurings, bankruptcies and
liquidations, and the inability of retailers to overcome these
difficulties may increase due to the recent deterioration of
worldwide economic conditions. This could adversely affect us
because our customers generally pay us after goods are
delivered. Adverse changes in a customers financial
position could cause us to limit or discontinue business with
that customer, require us to assume more credit risk relating to
that customers future purchases or limit our ability to
collect accounts receivable relating to previous purchases by
that customer. Any of these occurrences could have a material
adverse effect on our business, results of operations, financial
condition and cash flows.
Our substantial
indebtedness subjects us to various restrictions and could
decrease our profitability and otherwise adversely affect our
business.
We have, and following the consummation of this offering
continue to have, a substantial amount of indebtedness. As
described in Managements discussion and analysis of
financial condition and results of operationsLiquidity and
capital resources, our indebtedness includes the
$2.1 billion existing Senior Secured Credit Facilities, the
$450 million existing Second Lien Credit Facility, our
$500 million Floating Rate Senior Notes due 2014 (the
Floating Rate Senior Notes) and the
$250 million Accounts Receivable Securitization Facility.
Simultaneous with the closing of this offering, we expect to
refinance the Senior Secured Credit Facilities and to repay and
terminate the Second Lien Credit Facility. As of October 3,
2009, after giving effect to the Transactions, our total debt
would have been $2,087.7 million, excluding
$305.0 million of unused commitments under the revolving
loan facility of the New Senior Secured Credit Facilities. See
Use of proceeds. The Existing Credit Facilities and
the indenture governing the Floating Rate Senior Notes contain,
and the New Senior Secured Credit Facilities and the indenture
governing the notes offered hereby will contain, restrictions
that affect, and in some cases significantly limit or prohibit,
among other things, our ability to borrow funds, pay dividends
or make other distributions, make investments, engage in
transactions with affiliates, or create liens on our assets.
Our leverage also could put us at a competitive disadvantage
compared to our competitors that are less leveraged. These
competitors could have greater financial flexibility to pursue
strategic
S-13
acquisitions, secure additional financing for their operations
by incurring additional debt, expend capital to expand their
manufacturing and production operations to lower-cost areas and
apply pricing pressure on us. In addition, because many of our
customers rely on us to fulfill a substantial portion of their
apparel essentials demand, any concern these customers may have
regarding our financial condition may cause them to reduce the
amount of products they purchase from us. Our leverage could
also impede our ability to withstand downturns in our industry
or the economy.
If we are unable
to maintain financial ratios associated with our indebtedness,
such failure could cause the acceleration of the maturity of
such indebtedness which would adversely affect our
business.
Covenants in the Existing Credit Facilities and the Accounts
Receivable Securitization Facility require us to maintain a
minimum interest coverage ratio and a maximum total debt to
EBITDA (earnings before income taxes, depreciation expense and
amortization), or leverage ratio. The recent deterioration of
worldwide economic conditions could impact our ability to
maintain the financial ratios contained in these agreements. If
we fail to maintain these financial ratios, that failure could
result in a default that accelerates the maturity of the
indebtedness under such facilities, which could require that we
repay such indebtedness in full, together with accrued and
unpaid interest, unless we are able to negotiate new financial
ratios or waivers of our current ratios with our lenders. Even
if we are able to negotiate new financial ratios or waivers of
our current financial ratios, we may be required to pay fees or
make other concessions that may adversely impact our business.
Any one of these options could result in significantly higher
interest expense in 2009 and beyond. In addition, these options
could require modification of our interest rate derivative
portfolio, which could require us to make a cash payment in the
event of terminating a derivative instrument or impact the
effectiveness of our interest rate hedging instruments and
require us to take non-cash charges. For information regarding
our compliance with these covenants, see Managements
discussion and analysis of financial condition and results of
operationsLiquidity and capital resourcesTrends and
uncertainties affecting liquidity. We expect that the New
Senior Secured Credit Facilities will contain similar
restrictions. See Description of other
indebtednessNew senior secured credit facilities.
If we fail to
meet our payment or other obligations, the lenders could
foreclose on, and acquire control of, substantially all of our
assets.
In connection with our incurrence of indebtedness under the
Existing Credit Facilities, the lenders under those facilities
have received a pledge of substantially all of our existing and
future direct and indirect subsidiaries, with certain customary
or
agreed-upon
exceptions for foreign subsidiaries and certain other
subsidiaries. Additionally, these lenders generally have a lien
on substantially all of our assets and the assets of our
subsidiaries, with certain exceptions. The financial
institutions that are party to the Accounts Receivable
Securization Facility have a lien on certain of our domestic
accounts receivables. As a result of these pledges and liens, if
we fail to meet our payment or other obligations under the
Existing Credit Facilities, the New Senior Secured Credit
Facilities or the Accounts Receivable Securization Facility, the
lenders under those facilities will be entitled to foreclose on
substantially all of our assets and, at their option, liquidate
these assets.
S-14
Our indebtedness
restricts our ability to obtain additional capital in the
future.
The restrictions contained in the Existing Credit Facilities,
the New Senior Secured Credit Facilities and in the indentures
governing the Floating Rate Senior Notes and the notes offered
hereby could limit our ability to obtain additional capital in
the future to fund capital expenditures or acquisitions, meet
our debt payment obligations and capital commitments, fund any
operating losses or future development of our business
affiliates, obtain lower borrowing costs that are available from
secured lenders or engage in advantageous transactions that
monetize our assets, or conduct other necessary or prudent
corporate activities.
If we need to incur additional debt or issue equity in order to
fund working capital and capital expenditures or to make
acquisitions and other investments, debt or equity financing may
not be available to us on acceptable terms or at all. If we are
not able to obtain sufficient financing, we may be unable to
maintain or expand our business. If we raise funds through the
issuance of debt or equity, any debt securities or preferred
stock issued will have rights, preferences and privileges senior
to those of holders of our common stock in the event of a
liquidation, and the terms of the debt securities may impose
restrictions on our operations. If we raise funds through the
issuance of equity, the issuance would dilute the ownership
interest of our stockholders.
To service our
debt obligations, we may need to increase the portion of the
income of our foreign subsidiaries that is expected to be
remitted to the United States, which could increase our income
tax expense.
The amount of the income of our foreign subsidiaries that we
expect to remit to the United States may significantly
impact our U.S. federal income tax expense. We pay
U.S. federal income taxes on that portion of the income of
our foreign subsidiaries that is expected to be remitted to the
United States and be taxable. In order to service our debt
obligations, we may need to increase the portion of the income
of our foreign subsidiaries that we expect to remit to the
United States, which may significantly increase our income tax
expense. Consequently, our income tax expense has been, and will
continue to be, impacted by our strategic initiative to make
substantial capital investments outside the United States.
Significant
fluctuations and volatility in the price of cotton and other raw
materials we purchase may have a material adverse effect on our
business, results of operations, financial condition and cash
flows.
Cotton is the primary raw material used in the manufacturing of
many of our products. Our costs for cotton yarn and cotton-based
textiles vary based upon the fluctuating cost of cotton, which
is affected by weather, consumer demand, speculation on the
commodities market, the relative valuations and fluctuations of
the currencies of producer versus consumer countries and other
factors that are generally unpredictable and beyond our control.
While we attempt to protect our business from the volatility of
the market price of cotton through short-term supply agreements
and hedges from time to time, our business can be adversely
affected by dramatic movements in cotton prices. The cotton
prices reflected in our results were 58 cents per pound for the
nine months ended October 3, 2009 and 62 cents per pound
for the nine months ended September 27, 2008. After taking
into consideration the cotton costs currently included in
inventory, we expect our cost of cotton to average 55 cents per
pound for the full year of 2009 compared to 65 cents per pound
for 2008. The ultimate effect of these pricing levels on our
earnings cannot be quantified, as the effect of movements in
cotton prices on industry selling
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prices are uncertain, but any dramatic increase in the price of
cotton could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
We are not always successful in our efforts to protect our
business from the volatility of the market price of cotton
through short-term supply agreements and hedges, and our
business can be adversely affected by dramatic movements in
cotton prices. For example, we estimate that a change of $0.01
per pound in cotton prices would affect our annual raw material
costs by $3 million, at levels of production as of January
3, 2009. The ultimate effect of this change on our earnings
cannot be quantified, as the effect of movements in cotton
prices on industry selling prices are uncertain, but any
dramatic increase in the price of cotton would have a material
adverse effect on our business, results of operations, financial
condition and cash flows.
In addition, during the summer of 2008 we experienced a spike in
oil related commodity prices and other raw materials used in our
products, such as dyes and chemicals, and increases in other
costs, such as fuel, energy and utility costs. These costs may
fluctuate due to a number of factors outside our control,
including government policy and regulation and weather
conditions.
Current market
returns have had a negative impact on the return on plan assets
for our pension and other postemployment plans, which may
require significant funding.
As widely reported, financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in
recent months. As a result of this disruption in the domestic
and international equity and bond markets, our pension plans and
other postemployment plans had a decrease in asset values of
approximately 32% during the year ended January 3, 2009. We
are unable to predict the severity or the duration of the
current disruptions in the financial markets and the adverse
economic conditions in the United States, Europe and Asia. The
funded status of these plans, and the related cost reflected in
our financial statements, are affected by various factors that
are subject to an inherent degree of uncertainty, particularly
in the current economic environment. Under the Pension
Protection Act of 2006 (the Pension Protection Act),
continued losses of asset values may necessitate increased
funding of the plans in the future to meet minimum federal
government requirements. The continued downward pressure on the
asset values of these plans may require us to fund obligations
earlier than we had originally planned, which would have a
negative impact on cash flows from operations.
The loss of one
or more of our suppliers of finished goods or raw materials may
interrupt our supplies and materially harm our
business.
As of January 3, 2009, we purchase all of the raw materials used
in our products and approximately 34% of the apparel designed by
us from a limited number of third-party suppliers and
manufacturers. Our ability to meet our customers needs
depends on our ability to maintain an uninterrupted supply of
raw materials and finished products from our third-party
suppliers and manufacturers. Our business, financial condition
or results of operations could be adversely affected if any of
our principal third-party suppliers or manufacturers experience
financial difficulties that they are not able to overcome
resulting from the deterioration in worldwide economic
conditions, reproduction problems, lack of capacity or
transportation disruptions. The magnitude of this risk depends
upon the timing of any interruptions, the materials or products
that the third-party manufacturers provide and the volume of
production.
Our dependence on third parties for raw materials and finished
products subjects us to the risk of supplier failure and
customer dissatisfaction with the quality of our products.
Quality failures
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by our third-party manufacturers or changes in their financial
or business condition that affect their production could disrupt
our ability to supply quality products to our customers and
thereby materially harm our business.
If we fail to
manage our inventory effectively, we may be required to
establish additional inventory reserves or we may not carry
enough inventory to meet customer demands, causing us to suffer
lower margins or losses.
We are faced with the constant challenge of balancing our
inventory with our ability to meet marketplace needs. We
continually monitor our inventory levels to best balance current
supply and demand with potential future demand that typically
surges when consumers no longer postpone purchases in our
product categories. Inventory reserves can result from the
complexity of our supply chain, a long manufacturing process and
the seasonal nature of certain products. Increases in inventory
levels may also be needed to service our business as we continue
to execute our consolidation and globalization strategy. As a
result, we could be subject to high levels of obsolescence and
excess stock. Based on discussions with our customers and
internally generated projections, we produce, purchase
and/or store
raw material and finished goods inventory to meet our expected
demand for delivery. However, we sell a large number of our
products to a small number of customers, and these customers
generally are not required by contract to purchase our goods.
If, after producing and storing inventory in anticipation of
deliveries, demand is lower than expected, we may have to hold
inventory for extended periods or sell excess inventory at
reduced prices, in some cases below our cost. There are inherent
uncertainties related to the recoverability of inventory, and it
is possible that market factors and other conditions underlying
the valuation of inventory may change in the future and result
in further reserve requirements. Excess inventory charges can
reduce gross margins or result in operating losses, lowered
plant and equipment utilization and lowered fixed operating cost
absorption, all of which could have a material adverse effect on
our business, results of operations, financial condition or cash
flows.
Conversely, we also are exposed to lost business opportunities
if we underestimate market demand and produce too little
inventory for any particular period. Because sales of our
products are generally not made under contract, if we do not
carry enough inventory to satisfy our customers demands
for our products within an acceptable time frame, they may seek
to fulfill their demands from one or several of our competitors
and may reduce the amount of business they do with us. Any such
action could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
We rely on a
relatively small number of customers for a significant portion
of our sales, and the loss of or material reduction in sales to
any of our top customers would have a material adverse effect on
our business, results of operations, financial condition and
cash flows.
During the year ended January 3, 2009, our top ten
customers accounted for 65% of our net sales and our top
customers, Wal-Mart and Target, accounted for 27% and 16% of our
net sales, respectively. We expect that these customers will
continue to represent a significant portion of our net sales in
the future. In addition, our top customers are the largest
market participants in our primary distribution channels across
all of our product lines. Any loss of or material reduction in
sales to any of our top ten customers, especially Wal-Mart and
Target, would be difficult to recapture, and would have a
material adverse effect on our business, results of operations,
financial condition and cash flows.
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We generally do
not sell our products under contracts, and, as a result, our
customers are generally not contractually obligated to purchase
our products, which causes some uncertainty as to future sales
and inventory levels.
We generally do not enter into purchase agreements that obligate
our customers to purchase our products, and as a result, most of
our sales are made on a purchase order basis. If any of our
customers experiences a significant downturn in its business, or
fails to remain committed to our products or brands, the
customer is generally under no contractual obligation to
purchase our products and, consequently, may reduce or
discontinue purchases from us. In the past, such actions have
resulted in a decrease in sales and an increase in our inventory
and have had an adverse effect on our business, results of
operations, financial condition and cash flows. If such actions
occur again in the future, our business, results of operations
and financial condition will likely be similarly affected.
Our existing
customers may require products on an exclusive basis, forms of
economic support and other changes that could be harmful to our
business.
Customers increasingly may require us to provide them with some
of our products on an exclusive basis, which could cause an
increase in the number of stock keeping units, or
SKUs, we must carry and, consequently, increase our
inventory levels and working capital requirements. Moreover, our
customers may increasingly seek markdown allowances, incentives
and other forms of economic support which reduce our gross
margins and affect our profitability. Our financial performance
is negatively affected by these pricing pressures when we are
forced to reduce our prices without being able to
correspondingly reduce our production costs.
We operate in a
highly competitive and rapidly evolving market, and our market
share and results of operations could be adversely affected if
we fail to compete effectively in the future.
The apparel essentials market is highly competitive and evolving
rapidly. Competition is generally based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. Our businesses face competition today from other
large corporations and foreign manufacturers. These competitors
include Berkshire Hathaway Inc. through its subsidiary Fruit of
the Loom, Inc., Warnaco Group Inc., Maidenform Brands, Inc. and
Gildan Activewear, Inc. in our Innerwear business segment and
Gildan Activewear, Inc., Berkshire Hathaway Inc. through its
subsidiaries Russell Corporation and Fruit of the Loom, Inc.,
Nike, Inc., adidas AG through its adidas and Reebok brands and
Under Armour Inc. in our Outerwear business segment. We also
compete with many small manufacturers across all of our business
segments, including our International segment. Additionally,
department stores, specialty stores and other retailers,
including many of our customers, market and sell apparel
essentials products under private labels that compete directly
with our brands. These customers may buy goods that are
manufactured by others, which represents a lost business
opportunity for us, or they may sell private label products
manufactured by us, which have significantly lower gross margins
than our branded products. We also face intense competition from
specialty stores that sell private label apparel not
manufactured by us, such as Victorias Secret, Old Navy and
The Gap. Increased competition may result in a loss of or a
reduction in shelf space and promotional support and reduced
prices, in each case decreasing our cash flows, operating
margins and profitability. Our ability to remain competitive in
the areas of price, quality, brand recognition, research and
product development, manufacturing and distribution will, in
large part, determine our future
S-18
success. If we fail to compete successfully, our market share,
results of operations and financial condition will be materially
and adversely affected.
Sales of and
demand for our products may decrease if we fail to keep pace
with evolving consumer preferences and trends, which could have
an adverse effect on net sales and profitability.
Our success depends on our ability to anticipate and respond
effectively to evolving consumer preferences and trends and to
translate these preferences and trends into marketable product
offerings. If we are unable to successfully anticipate, identify
or react to changing styles or trends or misjudge the market for
our products, our sales may be lower than expected and we may be
faced with a significant amount of unsold finished goods
inventory. In response, we may be forced to increase our
marketing promotions, provide markdown allowances to our
customers or liquidate excess merchandise, any of which could
have a material adverse effect on our net sales and
profitability. Our brand image may also suffer if customers
believe that we are no longer able to offer innovative products,
respond to consumer preferences or maintain the quality of our
products.
We are prohibited
from selling our Wonderbra and Playtex intimate
apparel products in the EU, as well as certain other countries
in Europe and South Africa, and therefore are unable to take
advantage of business opportunities that may arise in such
countries.
In February 2006, Sara Lee sold its European branded apparel
business to an affiliate of Sun Capital Partners, Inc.
(Sun Capital). In connection with the sale, Sun
Capital received an exclusive, perpetual, royalty-free license
to manufacture, sell and distribute apparel products under the
Wonderbra and Playtex trademarks in the member states of
the European Union (EU), as well as Russia,
South Africa, Switzerland and certain other nations in Europe.
Due to the exclusive license, we are not permitted to sell
Wonderbra and Playtex branded products in these
nations and Sun Capital is not permitted to sell Wonderbra
and Playtex branded products outside of these
nations. Consequently, we will not be able to take advantage of
business opportunities that may arise relating to the sale of
Wonderbra and Playtex products in these nations.
For more information on these sales restrictions see
Description of our businessIntellectual
property.
Our business
could be harmed if we are unable to deliver our products to the
market due to problems with our distribution network.
We distribute our products from facilities that we operate as
well as facilities that are operated by third-party logistics
providers. These facilities include a combination of owned,
leased and contracted distribution centers. We are in the
process of consolidating our distribution network to fewer
larger facilities, including the recent opening of a
1.3 million square foot facility in Perris, California.
This consolidation of our distribution network will involve
significant change, including movement of product during the
transitional period, implementation of new warehouse management
systems and technology, and opening of new distribution centers
and new third-party logistics providers to replace parts of our
legacy distribution network. Because substantially all of our
products are distributed from a relatively small number of
locations, our operations could also be interrupted by
extraordinary weather conditions or natural disasters, such as
hurricanes, earthquakes, tsunamis, floods or fires near our
distribution centers. We maintain business interruption
insurance, but it may not adequately protect us from the adverse
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effects that could be caused by significant disruptions to our
distribution network. In addition, our distribution network is
dependent on the timely performance of services by third
parties, including the transportation of product to and from our
distribution facilities. If we are unable to successfully
operate our distribution network, our business, results of
operations, financial condition and cash flows could be
adversely affected.
Any inadequacy,
interruption, integration failure or security failure with
respect to our information technology could harm our ability to
effectively operate our business.
Our ability to effectively manage and operate our business
depends significantly on our information technology systems. As
part of our efforts to consolidate our operations, we also
expect to continue to incur costs associated with the
integration of our information technology systems across our
company over the next several years. This process involves the
consolidation or possible replacement of technology platforms so
that our business functions are served by fewer platforms, and
has resulted in operational inefficiencies and in some cases
increased our costs. We are subject to the risk that we will not
be able to absorb the level of systems change, commit the
necessary resources or focus the management attention necessary
for the implementation to succeed. Many key strategic
initiatives of major business functions, such as our supply
chain and our finance operations, depend on advanced
capabilities enabled by the new systems and if we fail to
properly execute or if we miss critical deadlines in the
implementation of this initiative, we could experience serious
disruption and harm to our business. The failure of these
systems to operate effectively, problems with transitioning to
upgraded or replacement systems, difficulty in integrating new
systems or systems of acquired businesses or a breach in
security of these systems could adversely impact the operations
of our business.
If we experience
a data security breach and confidential customer information is
disclosed, we may be subject to penalties and experience
negative publicity, which could affect our customer
relationships and have a material adverse effect on our
business.
We and our customers could suffer harm if customer information
were accessed by third parties due to a security failure in our
systems. The collection of data and processing of transactions
through our
direct-to-consumer
internet and catalog operations require us to receive and store
a large amount of personally identifiable data. This type of
data is subject to legislation and regulation in various
jurisdictions. Recently, data security breaches suffered by
well-known companies and institutions have attracted a
substantial amount of media attention, prompting state and
federal legislative proposals addressing data privacy and
security. If some of the current proposals are adopted, we may
be subject to more extensive requirements to protect the
customer information that we process in connection with the
purchases of our products. We may become exposed to potential
liabilities with respect to the data that we collect, manage and
process, and may incur legal costs if our information security
policies and procedures are not effective or if we are required
to defend our methods of collection, processing and storage of
personal data. Future investigations, lawsuits or adverse
publicity relating to our methods of handling personal data
could adversely affect our business, results of operations,
financial condition and cash flows due to the costs and negative
market reaction relating to such developments.
S-20
Compliance with
environmental and other regulations could require significant
expenditures.
We are subject to various federal, state, local and foreign laws
and regulations that govern our activities, operations and
products that may have adverse environmental, health and safety
effects, including laws and regulations relating to generating
emissions, water discharges, waste, product and packaging
content and workplace safety. Noncompliance with these laws and
regulations may result in substantial monetary penalties and
criminal sanctions. Future events that could give rise to
manufacturing interruptions or environmental remediation include
changes in existing laws and regulations, the enactment of new
laws and regulations, a release of hazardous substances on or
from our properties or any associated offsite disposal location,
or the discovery of contamination from current or prior
activities at any of our properties. While we are not aware of
any proposed regulations or remedial obligations that could
trigger significant costs or capital expenditures in order to
comply, any such regulations or obligations could adversely
affect our business, results of operations, financial condition
and cash flows.
International
trade regulations may increase our costs or limit the amount of
products that we can import from suppliers in a particular
country, which could have an adverse effect on our
business.
Because a significant amount of our manufacturing and production
operations are located, or our products are sourced from,
outside the United States, we are subject to international trade
regulations. The international trade regulations to which we are
subject or may become subject include tariffs, safeguards or
quotas. These regulations could limit the countries in which we
produce or from which we source our products or significantly
increase the cost of operating in or obtaining materials
originating from certain countries. Restrictions imposed by
international trade regulations can have a particular impact on
our business when, after we have moved our operations to a
particular location, new unfavorable regulations are enacted in
that area or favorable regulations currently in effect are
changed. The countries in which our products are manufactured or
into which they are imported may from time to time impose
additional new regulations, or modify existing regulations,
including:
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additional duties, taxes, tariffs and other charges on imports,
including retaliatory duties or other trade sanctions, which may
or may not be based on World Trade Organization
(WTO) rules, and which would increase the cost of
products produced in such countries;
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limitations on the quantity of goods which may be imported into
the United States from a particular country, including the
imposition of further safeguard mechanisms by the
U.S. government or governments in other jurisdictions,
limiting our ability to import goods from particular countries,
such as China;
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changes in the classification of products that could result in
higher duty rates than we have historically paid;
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modification of the trading status of certain countries;
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requirements as to where products are manufactured;
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creation of export licensing requirements, imposition of
restrictions on export quantities or specification of minimum
export pricing; or
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creation of other restrictions on imports.
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S-21
Adverse international trade regulations, including those listed
above, would have a material adverse effect on our business,
results of operations, financial condition and cash flows.
Due to the
extensive nature of our foreign operations, fluctuations in
foreign currency exchange rates could negatively impact our
results of operations.
We sell a majority of our products in transactions denominated
in U.S. dollars; however, we purchase many of our raw
materials, including cotton, our primary raw material, pay a
portion of our wages and make other payments in our supply chain
in foreign currencies. As a result, when the U.S. dollar
weakens against any of these currencies, our cost of sales could
increase substantially. Outside the United States, we may pay
for materials or finished products in U.S. dollars, and in
some cases a strengthening of the U.S. dollar could
effectively increase our costs where we use foreign currency to
purchase the U.S. dollars we need to make such payments. We
use foreign exchange forward and option contracts to hedge
material exposure to adverse changes in foreign exchange rates.
We are also exposed to gains and losses resulting from the
effect that fluctuations in foreign currency exchange rates have
on the reported results in our financial statements due to the
translation of operating results and financial position of our
foreign subsidiaries.
We had
approximately 45,200 employees worldwide as of
January 3, 2009, and our business operations and financial
performance could be adversely affected by changes in our
relationship with our employees or changes to U.S. or foreign
employment regulations.
We had approximately 45,200 employees worldwide as of
January 3, 2009. This means we have a significant exposure
to changes in domestic and foreign laws governing our
relationships with our employees, including wage and hour laws
and regulations, fair labor standards, minimum wage
requirements, overtime pay, unemployment tax rates,
workers compensation rates, citizenship requirements and
payroll taxes, which likely would have a direct impact on our
operating costs. Approximately 35,000 of those employees were
outside of the United States. A significant increase in minimum
wage or overtime rates in countries where we have employees
could have a significant impact on our operating costs and may
require that we relocate those operations or take other steps to
mitigate such increases, all of which may cause us to incur
additional costs, expend resources responding to such increases
and lower our margins.
In addition, some of our employees are members of labor
organizations or are covered by collective bargaining
agreements. If there were a significant increase in the number
of our employees who are members of labor organizations or
become parties to collective bargaining agreements, we would
become vulnerable to a strike, work stoppage or other labor
action by these employees that could have an adverse effect on
our business.
We may suffer
negative publicity if we or our third-party manufacturers
violate labor laws or engage in practices that are viewed as
unethical or illegal, which could cause a loss of
business.
We cannot fully control the business and labor practices of our
third-party manufacturers, the majority of whom are located in
Asia, Central America and the Caribbean Basin. If one of our own
manufacturing operations or one of our third-party manufacturers
violates or is accused of violating local or international labor
laws or other applicable regulations, or engages in labor or
other practices that would be viewed in any market in which our
products are sold as unethical, we could suffer negative
publicity, which could tarnish our brands image or result
in a loss of
S-22
sales. In addition, if such negative publicity affected one of
our customers, it could result in a loss of business for us.
Our business
depends on our senior management team and other key
personnel.
Our success depends upon the continued contributions of our
senior management team and other key personnel, some of whom
have unique talents and experience and would be difficult to
replace. The loss or interruption of the services of a member of
our senior management team or other key personnel could have a
material adverse effect on our business during the transitional
period that would be required for a successor to assume the
responsibilities of the position. Our future success will also
depend on our ability to attract and retain key managers, sales
people and others. We may not be able to attract or retain these
employees, which could adversely affect our business.
The success of
our business is tied to the strength and reputation of our
brands, including brands that we license to other parties. If
other parties take actions that weaken, harm the reputation of
or cause confusion with our brands, our business, and
consequently our sales, results of operations and cash flows,
may be adversely affected.
We license some of our important trademarks to third parties.
For example, we license Champion to third parties for
athletic-oriented accessories. Although we make concerted
efforts to protect our brands through quality control mechanisms
and contractual obligations imposed on our licensees, there is a
risk that some licensees may not be in full compliance with
those mechanisms and obligations. In that event, or if a
licensee engages in behavior with respect to the licensed marks
that would cause us reputational harm, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations. Similarly, any
misuse of the Wonderbra or Playtex brands by Sun
Capital could result in negative publicity and a loss of sales
for our products under these brands, any of which may have a
material adverse effect on our business, results of operations,
financial condition or cash flows.
We design,
manufacture, source and sell products under trademarks that are
licensed from third parties. If any licensor takes actions
related to their trademarks that would cause their brands or our
company reputational harm, our business may be adversely
affected.
We design, manufacture, source and sell a number of our products
under trademarks that are licensed from third parties such as
our Polo Ralph Lauren mens underwear. Because we do
not control the brands licensed to us, our licensors could make
changes to their brands or business models that could result in
a significant downturn in a brands business, adversely
affecting our sales and results of operations. If any licensor
engages in behavior with respect to the licensed marks that
would cause us reputational harm, or if any of the brands
licensed to us violates the trademark rights of another or are
deemed to be invalid or unenforceable, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations, and we may be
required to expend significant amounts on public relations,
advertising and, possibly, legal fees.
S-23
Businesses that
we may acquire may fail to perform to expectations, and we may
be unable to successfully integrate acquired businesses with our
existing business.
From time to time, we may evaluate potential acquisition
opportunities to support and strengthen our business. We may not
be able to realize all or a substantial portion of the
anticipated benefits of acquisitions that we may consummate.
Newly acquired businesses may not achieve expected results of
operations, including expected levels of revenues, and may
require unanticipated costs and expenditures. Acquired
businesses may also subject us to liabilities that we were
unable to discover in the course of our due diligence, and our
rights to indemnification from the sellers of such businesses,
even if obtained, may not be sufficient to offset the relevant
liabilities. In addition, the integration of newly acquired
businesses may be expensive and time-consuming and may not be
entirely successful. Integration of the acquired businesses may
also place additional pressures on our systems of internal
control over financial reporting. If we are unable to
successfully integrate newly acquired businesses or if acquired
businesses fail to produce targeted results, it could have an
adverse effect on our results of operations or financial
condition.
Our historical
financial information and operations for periods prior to the
spin off are not necessarily indicative of our results as a
separate company and therefore may not be reliable as an
indicator of our future financial results.
Our historical financial statements for periods prior to the
spin off on September 5, 2006 were created from Sara
Lees financial statements using our historical results of
operations and historical bases of assets and liabilities as
part of Sara Lee. Accordingly, historical financial information
for periods prior to the spin off is not necessarily indicative
of what our financial position, results of operations and cash
flows would have been if we had been a separate, stand alone
entity during those periods. Our historical financial
information for periods prior to the spin off is also not
necessarily indicative of what our results of operations,
financial position and cash flows will be in the future and, for
periods prior to the spin off, does not reflect many significant
changes in our capital structure, funding and operations
resulting from the spin off. While our results of operations for
periods prior to the spin off include all costs of Sara
Lees branded apparel business, these costs and expenses do
not include all of the costs that would have been incurred by us
had we been an independent company during those periods. In
addition, we have not made adjustments to our historical
financial information to reflect changes, many of which are
significant, that occurred in our cost structure, financing and
operations as a result of the spin off, including the
substantial debt we incurred and pension liabilities we assumed
in connection with the spin off. In addition, our effective
income tax rate as reflected in our historical financial
information for periods prior to the spin off has not been and
may not be indicative of our future effective income tax rate.
If the Internal
Revenue Service determines that our spin off from Sara Lee does
not qualify as a tax-free distribution or a
tax-free reorganization, we may be subject to
substantial liability.
Sara Lee has received a private letter ruling from the Internal
Revenue Service, or the IRS, to the effect that,
among other things, the spin off qualifies as a tax-free
distribution for U.S. federal income tax purposes under
Section 355 of the Internal Revenue Code of 1986, as
amended, or the Code, and as part of a tax-free
reorganization under Section 368(a)(1)(D) of the Code, and
the transfer to us of assets and the assumption by us of
liabilities in connection
S-24
with the spin off will not result in the recognition of any gain
or loss for U.S. federal income tax purposes to Sara Lee.
Although the private letter ruling relating to the qualification
of the spin off under Sections 355 and 368(a)(1)(D) of the
Code generally is binding on the IRS, the continuing validity of
the ruling is subject to the accuracy of factual representations
and assumptions made in connection with obtaining such private
letter ruling. Also, as part of the IRSs general policy
with respect to rulings on spin off transactions under
Section 355 of the Code, the private letter ruling obtained
by Sara Lee is based upon representations by Sara Lee that
certain conditions which are necessary to obtain tax-free
treatment under Section 355 and Section 368(a)(1)(D)
of the Code have been satisfied, rather than a determination by
the IRS that these conditions have been satisfied. Any
inaccuracy in these representations could invalidate the ruling.
If the spin off does not qualify for tax-free treatment for
U.S. federal income tax purposes, then, in general, Sara
Lee would be subject to tax as if it has sold the common stock
of our company in a taxable sale for its fair market value. Sara
Lees stockholders would be subject to tax as if they had
received a taxable distribution equal to the fair market value
of our common stock that was distributed to them, taxed as a
dividend (without reduction for any portion of a Sara Lees
stockholders basis in its shares of Sara Lee common stock)
for U.S. federal income tax purposes and possibly for
purposes of state and local tax law, to the extent of a Sara
Lees stockholders pro rata share of Sara Lees
current and accumulated earnings and profits (including any
arising from the taxable gain to Sara Lee with respect to the
spin off). It is expected that the amount of any such taxes to
Sara Lees stockholders and to Sara Lee would be
substantial.
Pursuant to a tax sharing agreement we entered into with Sara
Lee in connection with the spin off, we agreed to indemnify Sara
Lee and its affiliates for any liability for taxes of Sara Lee
resulting from: (1) any action or failure to act by us or
any of our affiliates following the completion of the spin off
that would be inconsistent with or prohibit the spin off from
qualifying as a tax-free transaction to Sara Lee and to Sara
Lees stockholders under Sections 355 and 368(a)(1)(D)
of the Code, or (2) any action or failure to act by us or
any of our affiliates following the completion of the spin off
that would be inconsistent with or cause to be untrue any
material, information, covenant or representation made in
connection with the private letter ruling obtained by Sara Lee
from the IRS relating to, among other things, the qualification
of the spin off as a tax-free transaction described under
Sections 355 and 368(a)(1)(D) of the Code. Our
indemnification obligations to Sara Lee and its affiliates are
not limited in amount or subject to any cap. We expect that the
amount of any such taxes to Sara Lee would be substantial.
Anti-takeover
provisions of our charter and bylaws, as well as Maryland law
and our stockholder rights agreement, may reduce the likelihood
of any potential change of control or unsolicited acquisition
proposal that our investors might consider favorable.
Our charter permits our Board of Directors, without stockholder
approval, to amend the charter to increase or decrease the
aggregate number of shares of stock or the number of shares of
stock of any class or series that we have the authority to
issue. In addition, our Board of Directors may classify or
reclassify any unissued shares of common stock or preferred
stock and may set the preferences, conversion or other rights,
voting powers and other terms of the classified or reclassified
shares. Our Board of Directors could establish a series of
preferred stock that could have the effect of delaying,
deferring or preventing a transaction or a change in
S-25
control that might involve a premium price for our common stock
or otherwise be in the best interest of our stockholders. Our
Board of Directors also is permitted, without stockholder
approval, to implement a classified board structure at any time.
Our bylaws, which only can be amended by our Board of Directors,
provide that nominations of persons for election to our Board of
Directors and the proposal of business to be considered at a
stockholders meeting may be made only in the notice of the
meeting, by our Board of Directors or by a stockholder who is
entitled to vote at the meeting and has complied with the
advance notice procedures of our bylaws. Also, under Maryland
law, business combinations between us and an interested
stockholder or an affiliate of an interested stockholder,
including mergers, consolidations, share exchanges or, in
circumstances specified in the statute, asset transfers or
issuances or reclassifications of equity securities, are
prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. An
interested stockholder includes any person who beneficially owns
10% or more of the voting power of our shares or any affiliate
or associate of ours who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our stock. A person is not an
interested stockholder under the statute if our Board of
Directors approved in advance the transaction by which he
otherwise would have become an interested stockholder. However,
in approving a transaction, our Board of Directors may provide
that its approval is subject to compliance, at or after the time
of approval, with any terms and conditions determined by our
board. After the five-year prohibition, any business combination
between us and an interested stockholder generally must be
recommended by our Board of Directors and approved by two
supermajority votes or our common stockholders must receive a
minimum price, as defined under Maryland law, for their shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by our Board
of Directors prior to the time that the interested stockholder
becomes an interested stockholder.
In addition, we have adopted a stockholder rights agreement
which provides that in the event of an acquisition of or tender
offer for 15% of our outstanding common stock, our stockholders,
other than the acquiror, shall be granted rights to purchase our
common stock at a certain price. The stockholder rights
agreement could make it more difficult for a third-party to
acquire our common stock without the approval of our Board of
Directors.
These and other provisions of Maryland law or our charter and
bylaws could have the effect of delaying, deferring or
preventing a transaction or a change in control that might
involve a premium price for our common stock or otherwise be
considered favorably by our investors.
Risks relating to
the notes
We and the
guarantors have significant indebtedness and may incur
substantial additional indebtedness in the future, including
indebtedness ranking equal to the notes and the
guarantees.
At October 3, 2009, after giving effect to the Transactions
and the application of the estimated net proceeds therefrom as
set forth under Use of proceeds, we would have had
total consolidated indebtedness of $2,087.7 million,
(including $845.0 million of secured indebtedness and
guarantees under our New Senior Secured Credit Facilities) and
we would have been able to incur an additional
$305.0 million of secured indebtedness under our New Senior
Secured Credit Facilities. For further discussion, see
Description of other indebtednessNew senior secured
credit facilities.
S-26
Subject to the restrictions in the indenture governing the notes
and in other instruments governing our other outstanding
indebtedness (including our New Senior Secured Credit
Facilities), we and our subsidiaries may incur substantial
additional indebtedness (including secured indebtedness) in the
future. Although the indenture governing the notes and the
instruments governing certain of our other outstanding
indebtedness contain restrictions on the incurrence of
additional indebtedness, these restrictions are subject to
waiver and a number of significant qualifications and
exceptions, and indebtedness incurred in compliance with these
restrictions could be substantial.
If we or any subsidiary guarantor incurs any additional
indebtedness that ranks equally with the notes (or with the
guarantee thereof), including trade payables, the holders of
that indebtedness will be entitled to share ratably with
noteholders in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other
winding-up
of us or such subsidiary guarantor. This may have the effect of
reducing the amount of proceeds paid to noteholders in
connection with such a distribution and we may not be able to
meet some or all of our debt obligations, including repayment of
notes.
Any increase in our level of indebtedness will have several
important effects on our future operations, including, without
limitation:
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we will have additional cash requirements in order to support
the payment of interest on our outstanding indebtedness;
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increases in our outstanding indebtedness and leverage will
increase our vulnerability to adverse changes in general
economic and industry conditions, as well as to competitive
pressure; and
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depending on the levels of our outstanding indebtedness, our
ability to obtain additional financing for working capital,
capital expenditures, general corporate and other purposes may
be limited.
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Our debt
instruments have restrictive covenants that could limit our
financial flexibility.
The indentures related to the notes offered hereby and to our
existing Floating Rate Senior Notes and the Existing Credit
Facilities and the New Senior Secured Credit Facilities contain
or will contain restrictive covenants that limit our ability to
engage in activities that may be in our long-term best
interests. Our ability to borrow under these credit facilities
is subject to compliance with certain financial covenants,
including total leverage and interest coverage ratios. The
Existing Credit Facilities and the New Senior Secured Credit
Facilities also include or will include other restrictions that,
among other things, limit our ability to incur certain
additional indebtedness and certain types of liens, to effect
mergers and sales or transfer of assets and to pay cash
dividends.
The indenture governing the notes will contain covenants that,
among other things, limit our ability and the ability of our
restricted subsidiaries to:
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incur additional debt;
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make certain investments or pay dividends or distributions on
our capital stock or purchase, redeem or retire capital stock;
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sell assets, including capital stock of our restricted
subsidiaries;
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restrict dividends or other payments by restricted subsidiaries;
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create liens that secure debt;
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enter into transactions with affiliates; and
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merge or consolidate with another company.
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These restrictions could, among other things, limit our ability
to finance our future operations or capital needs, make
acquisitions or pursue available business opportunities.
These covenants are subject to a number of important limitations
and exceptions, including a provision allowing us to make
restricted payments in an amount calculated pursuant to a
formula based upon 50% of our adjusted consolidated net income
(as defined in the indenture) since October 1, 2006. As of
October 3, 2009, after giving effect to the Transactions, we
would have had approximately $391.9 million of available
restricted payment capacity pursuant to that provision, in
addition to the restricted payment capacity available under
other exceptions. See Description of
notesCovenants.
In addition, most of the covenants will be suspended if both
Standard & Poors Ratings Services and Moodys
Investors Service, Inc., assign the notes an investment grade
rating and no default exists with respect to the notes.
See Description of other indebtedness and
Description of notes. Our failure to comply with
these covenants could result in an event of default that, if not
cured or waived, could result in the acceleration of all of our
indebtedness. We do not have sufficient working capital to
satisfy our debt obligations in the event of an acceleration of
all or a significant portion of our outstanding indebtedness.
We may not be
able to generate sufficient cash to service all of our
indebtedness, including the notes, and may be forced to take
other actions to satisfy our obligations under our indebtedness,
which may not be successful.
Our ability to make scheduled payments on or to refinance our
debt obligations depends on our financial condition and
operating performance, which is subject to prevailing economic
and competitive conditions and to certain financial, business
and other factors beyond our control. We may not be able to
maintain a level of cash flows from operating activities
sufficient to permit us to pay the principal, premium, if any,
and interest on our indebtedness, including the notes.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or
delay planned investments and capital expenditures, or to sell
assets, seek additional financing in the debt or equity markets
or restructure or refinance our indebtedness, including the
notes. Our ability to restructure or refinance our debt will
depend on the condition of the capital markets and our financial
condition at such time. Any refinancing of our debt could be at
higher interest rates and may require us to comply with more
onerous covenants, which could further restrict our business
operations. The terms of existing or future debt instruments and
the indenture governing the notes may restrict us from adopting
some of these alternatives. In addition, any failure to make
payments of interest and principal on our outstanding
indebtedness on a timely basis would likely result in a
reduction of our credit rating, which could harm our ability to
incur additional indebtedness. We could also face substantial
liquidity problems and might be required to dispose of material
assets or operations
S-28
to meet our debt service and other obligations. Our credit
facilities and the indentures governing the notes offered hereby
and our existing Floating Rate Senior Notes restrict our ability
to dispose of assets and use the proceeds from the disposition.
We may not be able to consummate those dispositions or to obtain
the proceeds that we could have realized from them and any
proceeds may not be adequate to meet any debt service
obligations then due. These alternative measures may not be
successful and may not permit us to meet our debt service
obligations.
An increase in
interest rates would increase the cost of servicing our debt and
could reduce our profitability.
Our debt under our New Senior Secured Credit Facilities will
bear and our existing Floating Rate Senior Notes bear interest
at variable rates. We may also incur indebtedness with variable
interest rates in the future. As a result, an increase in market
interest rates could increase the cost of servicing our debt and
could materially reduce our profitability and cash flows.
Your right to
receive payments on the notes is effectively subordinated to the
right of lenders who have a security interest in our assets to
the extent of the value of those assets.
Our obligations under the notes and the guarantors
obligations under their guarantees of the notes will be
unsecured, but our obligations under our New Senior Secured
Credit Facilities and each guarantors obligations under
its guarantee of our New Senior Secured Credit Facilities will
be secured by a security interest in substantially all of our
assets and the ownership interests of all of our subsidiaries.
If we are declared bankrupt or insolvent, or if we default under
our New Senior Secured Credit Facilities the funds borrowed
thereunder, together with accrued interest, could become
immediately due and payable. If we were unable to repay such
indebtedness, the lenders under our New Senior Secured Credit
Facilities could foreclose on the pledged assets to the
exclusion of holders of the notes, even if an event of default
exists under the indenture governing the notes at such time.
Furthermore, if the lenders foreclose and sell the pledged
equity interests in any guarantor in a transaction permitted
under the terms of the indenture governing the notes, then such
guarantor will be released from its guarantee of the notes
automatically and immediately upon such sale. In any such event,
because the notes are not secured by any of such assets or by
the equity interests in any such guarantor, it is possible that
there would be no assets from which your claims could be
satisfied or, if any assets existed, they might be insufficient
to satisfy your claims in full.
As of October 3, 2009, after giving effect to the
Transactions and the application of the estimated net proceeds
therefrom as set forth under Use of proceeds, we
would have had total consolidated indebtedness of
$2,087.7 million, consisting of $845.0 million of
secured indebtedness outstanding under the New Senior Secured
Credit Facilities, $500.0 million of the notes offered
hereby, $493.7 million of the Floating Rate Senior Notes
and $249.0 million outstanding under our Accounts
Receivable Securitization Facility. The subsidiary guarantors
would have guaranteed total indebtedness of
$1,838.7 million, consisting of $845.0 million of
secured guarantees under our New Senior Secured Credit
Facilities $500.0 million of guarantees of the notes
offered hereby and $493.7 million of guarantees of the
Floating Rate Senior Notes, excluding intercompany indebtedness,
and we would have been able to incur an additional
$305.0 million of secured indebtedness under our New Senior
Secured Credit Facilities. For further discussion, see
Description of other indebtedness.
S-29
Our ability to
repay our debt, including the notes, is affected by the cash
flow generated by our subsidiaries.
Our subsidiaries own a portion of our assets and conduct a
portion of our operations. Accordingly, repayment of our
indebtedness, including the notes, will be dependent on the
generation of cash flow by our subsidiaries and their ability to
make such cash available to us, by dividend, debt repayment or
otherwise. Substantially all of our existing domestic
subsidiaries on the date of completion of this offering will
guarantee our obligations under the notes. Unless they guarantee
the notes, any of our future subsidiaries will not have any
obligation to pay amounts due on the notes or to make funds
available for that purpose. Our subsidiaries may not be able to,
or may not be permitted to, make distributions to enable us to
make payments in respect of our indebtedness, including the
notes. Each subsidiary is a distinct legal entity and, under
certain circumstances, legal and contractual restrictions may
limit our ability to obtain cash from our subsidiaries. While
the indenture governing the notes limits the ability of our
subsidiaries to incur consensual encumbrances or restrictions on
their ability to pay dividends or make other intercompany
payments to us, these limitations are subject to waiver and
certain qualifications and exceptions. In the event that we do
not receive distributions from our subsidiaries, we may be
unable to make required principal, premium, if any, and interest
payments on our indebtedness, including the notes. If we are
unable to obtain sufficient funds from our subsidiaries, we may
have to undertake alternative financing plans, such as
refinancing or restructuring our debt, selling assets, reducing
or delaying capital investments or seeking to raise additional
capital. We cannot guarantee that such alternative financing
would be possible or successful. Our inability to generate
sufficient cash flow to satisfy our debt obligations, or to
refinance our obligations on commercially reasonable terms would
have an adverse effect on our business, financial condition,
results of operations and cash flow as well as on our ability to
pay interest or principal on the notes when due, or redeem the
notes upon a change of control.
Claims of
noteholders will be structurally subordinated to claims of
creditors of any of our future subsidiaries that do not
guarantee the notes.
We conduct a portion of our operations through our subsidiaries.
Subject to certain limitations, the indenture governing the
notes permits us to form or acquire certain subsidiaries that
are not guarantors of the notes and to permit such non-guarantor
subsidiaries to acquire assets and incur indebtedness, and
noteholders would not have any claim as a creditor against any
of our non-guarantor subsidiaries to the assets and earnings of
those subsidiaries. The claims of the creditors of those
subsidiaries, including their trade creditors, banks and other
lenders, would have priority over any of our claims or those of
our other subsidiaries as equity holders of the non-guarantor
subsidiaries. Consequently, in any insolvency, liquidation,
reorganization, dissolution or other
winding-up
of any of the non-guarantor subsidiaries, creditors of those
subsidiaries would be paid before any amounts would be
distributed to us or to any of the guarantors as equity, and
thus be available to satisfy our obligations under the notes and
other claims against us or the guarantors.
If we default on
our obligations to pay our other indebtedness, we may not be
able to make payments on the notes.
Any default under the agreements governing our indebtedness,
including a default under our New Senior Secured Credit
Facilities and the indentures governing our existing Floating
Rate Senior Notes and the notes offered hereby, that is not
waived, and the remedies sought by the
S-30
holders of such indebtedness, could prevent us from paying
principal, premium, if any, and interest on the notes and
substantially decrease the market value of the notes. If we are
unable to generate sufficient cash flow and are otherwise unable
to obtain funds necessary to meet required payments of
principal, premium, if any, and interest on our indebtedness, or
if we otherwise fail to comply with the various covenants in the
instruments governing our indebtedness, including covenants in
our New Senior Secured Credit Facilities and the indentures
governing the notes offered hereby and our existing Floating
Rate Senior Notes, we could be in default under the terms of the
agreements governing such indebtedness, including our New Senior
Secured Credit Facilities and the indentures governing the notes
offered hereby and our existing Floating Rate Senior Notes. In
the event of such default:
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the holders of such indebtedness could elect to declare all the
funds borrowed thereunder to be due and payable, together with
accrued and unpaid interest;
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the lenders under our New Senior Secured Credit Facilities could
elect to terminate their commitments thereunder, cease making
further loans and institute foreclosure proceedings against our
assets; and
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we could be forced into bankruptcy or liquidation.
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If our operating performance declines, we may in the future need
to obtain waivers under our New Senior Secured Credit Facilities
to avoid being in default. If we breach our covenants under our
New Senior Secured Credit Facilities and seek a waiver, we may
not be able to obtain a waiver from the required lenders. If
this occurs, we would be in default under our New Senior Secured
Credit Facilities, the lenders could exercise their rights, as
described above, and we could be forced into bankruptcy or
liquidation.
We may not be
able to repurchase the notes upon a change of control.
Upon the occurrence of specific kinds of change of control
events, we may be required to offer to repurchase all
outstanding notes offered hereby and our existing Floating Rate
Senior Notes at 101% of their principal amount plus accrued and
unpaid interest, if any. The source of funds for any such
purchase of such notes will be our available cash or cash
generated from the operations of our subsidiaries or other
sources, including borrowings, sales of assets or sales of
equity or debt securities. We may not be able to repurchase such
notes upon a change of control because we may not have
sufficient financial resources to purchase all of the notes that
are tendered upon a change of control. Our failure to repurchase
the notes offered hereby and our existing Floating Rate Senior
Notes upon a change of control could cause a default under the
indentures governing the notes offered hereby and our existing
Floating Rate Senior Notes and could lead to a cross default
under our New Senior Secured Credit Facilities.
The change of
control put right might not be enforceable.
In a recent decision, the Chancery Court of Delaware raised the
possibility that a change of control put right occurring as a
result of a failure to have continuing directors
comprising a majority of a board of directors might be
unenforceable on public policy grounds.
S-31
Federal
bankruptcy and state fraudulent transfer laws and other
limitations may preclude the recovery of payments under the
guarantees.
Initially, substantially all of our domestic subsidiaries will
guarantee the notes. Federal bankruptcy and state fraudulent
transfer laws permit a court, if it makes certain findings, to
avoid all or a portion of the obligations of the guarantors
pursuant to their guarantees of the notes, or to subordinate any
such guarantors obligations under such guarantee to claims
of its other creditors, reducing or eliminating the
noteholders ability to recover under such guarantees.
Although laws differ among these jurisdictions, in general,
under applicable fraudulent transfer or conveyance laws, a
guarantee could be voided as a fraudulent transfer or conveyance
if (1) the guarantee was incurred with the intent of
hindering, delaying or defrauding creditors; or (2) the
guarantor received less than reasonably equivalent value or fair
consideration in return for incurring the guarantee and, in the
case of (2) only, one of the following is also true:
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the guarantor was insolvent or rendered insolvent by reason of
the incurrence of the guarantee or subsequently become insolvent
for other reasons;
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the incurrence of the guarantee left the guarantor with an
unreasonably small amount of capital to carry on the
business; or
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the guarantor intended to, or believed that it would, incur
debts beyond its ability to pay such debts as they mature.
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A court would likely find that a guarantor did not receive
reasonably equivalent value or fair consideration for its
guarantee if the guarantor did not substantially benefit
directly or indirectly from the issuance of the notes. If a
court were to void a guarantee, you would no longer have a claim
against the guarantor. Sufficient funds to repay the notes may
not be available from other sources, including the remaining
guarantors, if any. In addition, the court might direct you to
repay any amounts that you already received from the guarantor.
The measures of insolvency for purposes of fraudulent transfer
laws vary depending upon the governing law. Generally, a
guarantor would be considered insolvent if:
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the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all its assets;
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the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
became absolute and mature; or
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it could not pay its debts as they became due.
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Each guarantee will contain a provision intended to limit the
guarantors liability to the maximum amount that it could
incur without causing the incurrence of obligations under its
guarantee to be a fraudulent transfer. This provision may not be
effective to protect the guarantees from being voided under
fraudulent transfer law.
An active trading
market for the notes may not develop.
There is no existing market for the notes. The notes will not be
listed on any securities exchange. There can be no assurance
that a trading market for the notes will ever develop or will be
maintained. Further, there can be no assurance as to the
liquidity of any market that may develop for the notes, your
ability to sell your notes or the price at which you will be
able to sell your
S-32
notes. Future trading prices of the notes will depend on many
factors, including prevailing interest rates, our financial
condition and results of operations, the then-current ratings
assigned to the notes and the market for similar securities. Any
trading market that develops would be affected by many factors
independent of and in addition to the foregoing, including the:
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time remaining to the maturity of the notes;
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outstanding amount of the notes;
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terms related to optional redemption of the notes; and
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level, direction and volatility of market interest rates
generally.
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If an active market does not develop or is not maintained, the
market price and liquidity of the notes may be adversely
affected.
The notes may be
issued with OID for U.S. federal income tax purposes.
The notes may be issued with OID for U.S. federal income
tax purposes. If this is the case and if you are a
U.S. holder, you generally will be required to accrue OID
on a current basis as ordinary income and pay tax accordingly,
even before you receive cash attributable to that income and
regardless of your method of tax accounting. For further
discussion of the computation and reporting of OID, see
U.S. federal income tax consequencesUnited
States holdersOriginal issue discount.
If a bankruptcy petition were filed by or against us, holders
of the notes may receive a lesser amount for their claim than
they would have been entitled to receive under the indenture
governing the notes.
If a bankruptcy petition were filed by or against us under the
U.S. Bankruptcy Code after the issuance of the notes, the
claim by any holder of the notes for the principal amount of the
notes may be limited to an amount equal to the sum of:
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the original issue price for the notes; and
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that portion of any OID that does not constitute unmatured
interest for purposes of the U.S. Bankruptcy Code.
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Any OID that was not amortized as of the date of the bankruptcy
filing would constitute unmatured interest. Accordingly, holders
of the notes under these circumstances may receive a lesser
amount than they would be entitled to receive under the terms of
the indenture governing the notes, even if sufficient funds are
available.
Many of the
covenants contained in the indenture will be suspended if the
notes are rated investment grade by both of Standard &
Poors Ratings Services and Moodys Investors Service,
Inc.
Many of the covenants in the indenture governing the notes will
be suspended if the notes are rated investment grade by both of
Standard & Poors Ratings Service and
Moodys Investors Service, Inc., provided at such time no
default under the indenture has occurred and is continuing.
These covenants restrict, among other things, our ability to pay
dividends, to incur debt and to enter into certain other
transactions. There can be no assurance that the notes will ever
be rated investment grade, or that if they are rated investment
grade, that the notes will maintain such ratings. However,
suspension of these covenants would allow us to engage in
certain transactions that would not be permitted while these
covenants were in force. Please see Description of
notesCovenantsChanges in covenants when notes rated
investment grade.
S-33
Ratio of earnings
to fixed charges
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Nine months
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ended
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Years ended
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Six months ended
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Years ended
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October 3,
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January 3,
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December 29,
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December 30,
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July 1,
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July 2,
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July 3,
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2009
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2009
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2007
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2006
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2006
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2005
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2004
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Ratio of earnings to fixed
charges(1)
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1.35
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1.91
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1.83
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2.24
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10.37
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7.64
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8.71
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(1)
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The Ratio of Earnings to Fixed
Charges should be read in conjunction with our financial
statements and Managements Discussion and Analysis of
Financial Condition and Results of Operations included or
incorporated by reference in this prospectus supplement. The
interest expense included in the fixed charges calculation above
excludes interest expense relating to the Companys
uncertain tax positions. The percentage of rent included in the
calculation is a reasonable approximation of the interest factor.
|
Use of
proceeds
We expect the net proceeds of this offering to be approximately
$485.2 million, after deducting underwriting discounts and
estimated expenses payable by us (assuming no discount relating
to the notes).
We intend to use the net proceeds from this offering, together
with the proceeds from the borrowings under our New Senior
Secured Credit Facilities to refinance the borrowings under our
existing Senior Secured Credit Facilities, to repay the
borrowings under our existing Second Lien Credit Facility and to
pay fees and expenses relating to the Transactions. Our Second
Lien Credit Facility will be terminated concurrently with the
closing of this offering. In connection with the Transactions,
we expect to recognize cash and non-cash expenses relating to
the unamortized portion of the deferred financing fees relating
to our Existing Credit Facilities and expenses related to this
offering and our New Senior Credit Facilities. We also expect to
recognize an expense of approximately $30.0 million
relating to the termination of a portion of the hedging
arrangements relating to our Existing Credit Facilities. The
expense related to the termination of the hedging arrangements
could change based on changes in interest rates and overall
market conditions.
The revolving credit facility under our Senior Secured Credit
Facilities matures on September 5, 2011 and the term A loan
facility and the term B loan facility under our Senior Secured
Credit Facilities mature on September 5, 2012 and
September 5, 2013, respectively. The Second Lien Credit
Facility matures on March 5, 2014.
As of October 3, 2009, borrowings under the revolving
credit facility of our Senior Secured Credit Facilities would
bear interest at 6.75% and borrowings under the term A loan
facility and the term B loan facility of our Senior Secured
Credit Facilities bore interest at 5.00% and 5.25%,
respectively. Borrowings under the Second Lien Credit Facility
bore interest at 4.25%. See Description of other
indebtednessSenior Secured Credit Facilities and
Description of other indebtednessSecond Lien Credit
Facility, for additional information.
We used borrowings under our Existing Credit Facilities for
payments to Sara Lee in connection with our spin off and for
general corporate purposes.
S-34
Capitalization
The following table sets forth our cash and cash equivalents and
capitalization on a historical basis as of October 3, 2009,
on an actual basis and as adjusted to give effect to the
Transactions. This table should be read in conjunction with
Use of proceeds, Selected historical financial
data, Managements discussion and analysis of
financial condition and results of operations, and our
financial statements and corresponding notes incorporated by
reference in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2009
|
|
(in thousands)
|
|
Actual
|
|
|
As
adjusted(6)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,617
|
|
|
$
|
38,617
|
|
|
|
|
|
|
|
Debt, including current and long-term
Senior Secured Credit
Facilities:(1)
|
|
|
|
|
|
|
|
|
Term A loan facility
|
|
|
139,000
|
|
|
|
|
|
Term B loan facility
|
|
|
711,000
|
|
|
|
|
|
Revolving credit
facility(2)
|
|
|
|
|
|
|
|
|
Second Lien Credit
Facility(3)
|
|
|
450,000
|
|
|
|
|
|
New Senior Secured Credit
Facilities:(4)
|
|
|
|
|
|
|
|
|
Term loan facility
|
|
|
|
|
|
|
750,000
|
|
Revolving credit facility
|
|
|
|
|
|
|
95,000
|
|
Notes offered
hereby(5)
|
|
|
|
|
|
|
500,000
|
|
Floating Rate Senior Notes
|
|
|
493,680
|
|
|
|
493,680
|
|
Accounts Receivable Securitization Facility
|
|
|
249,043
|
|
|
|
249,043
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
2,042,723
|
|
|
$
|
2,087,723
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
293,184
|
|
|
$
|
293,184
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
2,335,907
|
|
|
$
|
2,380,907
|
|
|
|
|
|
|
(1)
|
|
The Senior Secured Credit
Facilities consist of a term loan A facility, a term loan B
facility and a revolving credit facility and provide for
aggregate borrowings of up to $2.15 billion. As of
October 3, 2009, we had $139.0 million outstanding
under the term loan A facility, $711.0 million outstanding
under the term loan B facility and no amounts outstanding under
the revolving credit facility. See Description of other
indebtedness for additional information.
|
|
(2)
|
|
As of November 27, 2009, we
had approximately $30.0 million outstanding under the
revolving credit facility, excluding approximately
$26.0 million in letters of credit outstanding.
|
|
(3)
|
|
The Second Lien Credit Facility
provides for aggregate borrowings of $450.0 million by our
wholly-owned subsidiary, HBI Branded Apparel Limited, Inc. As of
October 3, 2009, we had $450.0 million outstanding
under the Second Lien Credit Facility. See Description of
other indebtedness for additional information.
|
|
(4)
|
|
The New Senior Secured Credit
Facilities will consist of a term loan facility and a revolving
credit facility, provide for aggregate borrowings of up to
$1.15 billion, subject to certain conditions, and will have
a six-year maturity for the term loan facility and a four-year
maturity for the revolving credit facility. See
Description of other indebtednessNew senior secured
credit facilities.
|
|
(5)
|
|
Represents the aggregate principal
amount of the notes. The fees and expenses and any discount
related to this offering will accrete over the life of the notes
and will be amortized into interest expense.
|
|
(6)
|
|
Actual amounts may vary from
estimated amounts depending on several factors, including the
actual size of this offering, any discounts to the stated
principal amount of the notes in connection with this offering,
fluctuations in cash on hand between October 3, 2009 and
the actual closing date of the Transactions, payments of accrued
interest subsequent to October 3, 2009 and differences from
our estimated fees and expenses. Any changes in these amounts
may affect the amount of cash required for the Transactions.
|
S-35
Selected
historical financial data
The following table presents our selected historical financial
data. The statement of income data for the years ended
January 3, 2009 and December 29, 2007, the six-month
period ended December 30, 2006 and the years ended
July 1, 2006, July 2, 2005 and July 3, 2004, and
the balance sheet data as of January 3, 2009,
December 29, 2007, December 30, 2006, July 1,
2006, July 2, 2005 and July 3, 2004 have been derived
from our audited Consolidated Financial Statements. The
statement of income data for the nine months ended
October 3, 2009 and September 27, 2008 and the balance
sheet data as of October 3, 2009 and September 27,
2008 have been derived from our unaudited Condensed Consolidated
Financial Statements and, in our opinion, have been prepared on
a basis consistent with our audited financial statements. The
results for any interim period are not necessarily indicative of
the results that may be expected for a full fiscal year.
In October 2006, our Board of Directors approved a change in our
fiscal year end from the Saturday closest to June 30 to the
Saturday closest to December 31. As a result of this
change, our financial statements include presentation of the
transition period beginning on July 2, 2006 and ending on
December 30, 2006.
Our historical financial data for periods prior to our spin off
from Sara Lee on September 5, 2006 is not necessarily
indicative of our future performance or what our financial
position and results of operations would have been if we had
operated as a separate, stand alone entity during all of the
periods shown. The data should be read in conjunction with our
historical financial statements and Managements
discussion and analysis of financial condition and results of
operations included elsewhere or incorporated by reference
in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
Years ended
|
|
|
ended
|
|
|
Years ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,902,536
|
|
|
$
|
3,213,653
|
|
|
$
|
4,248,770
|
|
|
$
|
4,474,537
|
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
Cost of sales
|
|
|
1,960,589
|
|
|
|
2,145,949
|
|
|
|
2,871,420
|
|
|
|
3,033,627
|
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
|
|
|
|
Gross profit
|
|
|
941,947
|
|
|
|
1,067,704
|
|
|
|
1,377,350
|
|
|
|
1,440,910
|
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
Selling, general and administrative expenses
|
|
|
702,204
|
|
|
|
776,267
|
|
|
|
1,009,607
|
|
|
|
1,040,754
|
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
Gain on curtailment of postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,144
|
)
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
46,319
|
|
|
|
32,355
|
|
|
|
50,263
|
|
|
|
43,731
|
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
|
|
|
|
Operating profit
|
|
|
193,424
|
|
|
|
259,082
|
|
|
|
317,480
|
|
|
|
388,569
|
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
Other (income) expense
|
|
|
6,537
|
|
|
|
|
|
|
|
(634
|
)
|
|
|
5,235
|
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
124,548
|
|
|
|
115,282
|
|
|
|
155,077
|
|
|
|
199,208
|
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
|
|
|
|
Income before income tax expense (benefit)
|
|
|
62,339
|
|
|
|
143,800
|
|
|
|
163,037
|
|
|
|
184,126
|
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
|
Income tax expense (benefit)
|
|
|
9,974
|
|
|
|
34,512
|
|
|
|
35,868
|
|
|
|
57,999
|
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
Net income
|
|
$
|
52,365
|
|
|
$
|
109,288
|
|
|
$
|
127,169
|
|
|
$
|
126,127
|
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
|
S-36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,617
|
|
|
$
|
86,212
|
|
|
$
|
67,342
|
|
|
$
|
174,236
|
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
Total assets
|
|
|
3,491,913
|
|
|
|
3,627,638
|
|
|
|
3,534,049
|
|
|
|
3,439,483
|
|
|
|
3,435,620
|
|
|
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
4,402,758
|
|
Accounts Receivable Securitization Facility
|
|
|
249,043
|
|
|
|
|
|
|
|
45,640
|
|
|
|
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,793,680
|
|
|
|
2,315,250
|
|
|
|
2,130,907
|
|
|
|
2,315,250
|
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
481,425
|
|
|
|
159,870
|
|
|
|
469,703
|
|
|
|
146,347
|
|
|
|
271,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total noncurrent liabilities
|
|
|
2,275,105
|
|
|
|
2,475,120
|
|
|
|
2,600,610
|
|
|
|
2,461,597
|
|
|
|
2,755,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total stockholders or parent companies equity
|
|
|
293,184
|
|
|
|
380,934
|
|
|
|
185,155
|
|
|
|
288,904
|
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
2,797,370
|
|
|
|
S-37
Managements
discussion and analysis of
financial condition and results of operations
This managements discussion and analysis of financial
condition and results of operations, or MD&A, contains
forward-looking statements that involve risks and uncertainties.
Please see Cautionary statement regarding forward-looking
statements and Risk factors in this prospectus
supplement 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 prospectus supplement. On
October 26, 2006, our Board of Directors approved a change
in our fiscal year end from the Saturday closest to June 30 to
the Saturday closest to December 31. We refer to the
resulting transition period from July 2, 2006 to
December 30, 2006 in this prospectus supplement as the six
months ended December 30, 2006. The results of operations
for the periods reflected herein are not necessarily indicative
of results that may be expected for future periods, and our
actual results may differ materially from those discussed in the
forward-looking statements as a result of various factors,
including but not limited to those listed under Risk
factors in this prospectus supplement and included
elsewhere in this prospectus supplement.
MD&A is a supplement to our financial statements and notes
thereto incorporated by reference in this prospectus supplement,
and is provided to enhance your understanding of our results of
operations and financial condition. Our MD&A is organized
as follows:
|
|
|
Overview. This section provides a general
description of our company and operating segments, business and
industry trends, our key business strategies, our consolidation
and globalization strategy, and background information on other
matters discussed in this MD&A.
|
|
|
Components of net sales and expense. This section
provides an overview of the components of our net sales and
expense that are key to an understanding of our results of
operations.
|
|
|
Highlights from the year ended January 3,
2009. This section discusses some of the highlights of
our performance and activities during 2008.
|
|
|
Consolidated results of operations and operating results by
business segment. These sections provide our analysis
and outlook for the significant line items on our statements of
income, as well as other information that we deem meaningful to
an understanding of our results of operations on both a
consolidated basis and a business segment basis.
|
|
|
Liquidity and capital resources. This section
provides an analysis of trends and uncertainties affecting
liquidity, cash requirements for our business, sources and uses
of our cash and our financing arrangements.
|
|
|
Critical accounting policies and estimates. This
section discusses the accounting policies that we consider
important to the evaluation and reporting of our financial
condition and results of operations, and whose application
requires significant judgments or a complex estimation process.
|
|
|
Recently issued accounting pronouncements. This
section provides a summary of the most recent authoritative
accounting pronouncements and guidance that we will be required
to adopt in a future period.
|
S-38
Overview
Our
company
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, C9
by Champion, Playtex, Bali,
Leggs, Just My Size, barely there,
Wonderbra, Stedman, Outer Banks,
Zorba, Rinbros and Duofold. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, casualwear, activewear, socks and hosiery.
According to NPD, our brands hold either the number one or
number two U.S. market position by sales value in most
product categories in which we compete, for the 12 month
period ended November 30, 2008. In 2008, Hanes was
number one for the fifth consecutive year on the Womens
Wear Daily Top 100 Brands Survey for apparel and
accessory brands that women know best and was number one for the
fifth consecutive year as the most preferred mens,
womens and childrens apparel brand of consumers in
Retailing Today magazines Top Brands Study.
Additionally, the company had five of the top ten intimate
apparel brands preferred by consumers in the Retailing Today
studyHanes, Playtex, Bali, Just My Size and
Leggs.
Our distribution channels include direct-to-consumer sales at
our outlet stores, national chains and department stores and
warehouse clubs, mass-merchandise outlets and international
sales. For the year ended January 3, 2009, approximately
44% of our net sales were to mass merchants, 18% were to
national chains and department stores, 9% were direct to
consumers, 11% were in our International segment and 18% were to
other retail channels such as embellishers, specialty retailers,
warehouse clubs and sporting goods stores.
Our
segments
Our operations are managed in five operating segments, each of
which is a reportable segment for financial reporting purposes:
Innerwear, Outerwear, Hosiery, International and Other. These
segments are organized principally by product category and
geographic location. Management of each segment is responsible
for the operations of these segments businesses but share
a common supply chain and media and marketing platforms.
|
|
|
Innerwear. The Innerwear segment focuses on core
apparel essentials, and consists of products such as
womens intimate apparel, mens underwear, kids
underwear, socks and thermals, marketed under well-known brands
that are trusted by consumers. We are an intimate apparel
category leader in the United States with our Hanes, Playtex,
Bali, barely there, Just My Size and Wonderbra
brands. We are also a leading manufacturer and marketer of
mens underwear and kids underwear under the
Hanes, Champion, C9 by Champion and Polo
Ralph Lauren brand names. Our
direct-to-consumer
retail operations are included within the Innerwear segment. The
retail operations include our value-based (outlet)
stores, internet operations and catalogs which sell products
from our portfolio of leading brands. As of October 3, 2009
and January 3, 2009, we had 228 and 213 outlet stores,
respectively. Net sales for the nine months ended
October 3, 2009 from our Innerwear segment were
$1.71 billion, representing approximately 58% of total
segment net sales. Net sales for the year ended January 3,
2009 from our Innerwear segment were $2.4 billion,
representing approximately 56% of total segment net sales.
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Outerwear. We are a leader in the casualwear and
activewear markets through our Hanes, Champion and
Just My Size brands, where we offer products such as
t-shirts and fleece. Our
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casualwear lines offer a range of quality, comfortable clothing
for men, women and children marketed under the Hanes and
Just My Size brands. The Just My Size brand offers
casual apparel designed exclusively to meet the needs of
plus-size women. In addition to activewear for men and women,
Champion provides uniforms for athletic programs and
includes an apparel program, C9 by Champion, at Target
stores. We also license our Champion name for collegiate
apparel and footwear. We also supply our t-shirts, sportshirts
and fleece products, including brands such as Hanes,
Champion, Outer Banks and Hanes Beefy-T, to
customers, primarily wholesalers, who then resell to screen
printers and embellishers. Net sales for the nine months ended
October 3, 2009 from our Outerwear segment were
$776 million, representing approximately 26% of total
segment net sales. Net sales for the year ended January 3,
2009 from our Outerwear segment were $1.2 billion,
representing approximately 28% of total segment net sales.
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Hosiery. We are the leading marketer of womens
sheer hosiery in the United States. We compete in the hosiery
market by striving to offer superior values and executing
integrated marketing activities, as well as focusing on the
style of our hosiery products. We market hosiery products under
our Leggs, Hanes and Just My Size brands.
Net sales for the nine months ended October 3, 2009 from
our Hosiery segment were $139 million, representing
approximately 5% of total segment net sales. Net sales for the
year ended January 3, 2009 from our Hosiery segment were
$228 million, representing approximately 5% of total
segment net sales. We expect the trend of declining hosiery
sales to continue consistent with the overall decline in the
industry and with shifts in consumer preferences.
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International. International includes products that
span across the Innerwear, Outerwear and Hosiery reportable
segments and are primarily marketed under the Hanes,
Wonderbra, Champion, Stedman, Playtex, Zorba, Rinbros, Kendall,
Sol y Oro, Ritmo and Bali brands. Net sales for the
nine months ended October 3, 2009 from our International
segment were $295 million, representing approximately 10%
of total segment net sales. Net sales for the year ended
January 3, 2009 from our International segment were
$460 million, representing approximately 11% of total
segment net sales and included sales in Latin America, Asia,
Canada and Europe. Canada, Europe, Japan and Mexico are our
largest international markets, and we also have sales offices in
India and China.
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Other. Our Other segment primarily consists of sales
of yarn to third parties in the United States and Latin
America that maintain asset utilization at certain manufacturing
facilities and are intended to generate approximate break even
margins. Net sales for the nine months ended October 3,
2009 in our Other segment were $12 million, representing
less than 1% of total segment net sales. Net sales for the year
ended January 3, 2009 in our Other segment were
$22 million, representing less than 1% of total segment net
sales. Net sales from our Other segment are expected to continue
to decline and to ultimately become insignificant to us as we
complete the implementation of our consolidation and
globalization efforts. In September 2009, we announced that we
will cease making our own yarn and that we will source all of
our yarn requirements from large-scale yarn suppliers, which is
expected to further reduce net sales of our Other segment.
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Business and
industry trends
We are operating in an uncertain and volatile economic
environment, which could have unanticipated adverse effects on
our business. The current retail environment has been impacted
by recent volatility in the financial markets, including
declines in stock prices, and by uncertain
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economic conditions. Increases in food and fuel prices, changes
in the credit and housing markets leading to the current
financial and credit crisis, actual and potential job losses
among many sectors of the economy, significant declines in the
stock market resulting in large losses to consumer retirement
and investment accounts, and uncertainty regarding future
federal tax and economic policies have all added to declines in
consumer confidence and curtailed retail spending.
The apparel essentials market is highly competitive and evolving
rapidly. Competition is generally based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. The majority of our core styles continue from year
to year, with variations only in color, fabric or design
details. Some products, however, such as intimate apparel,
activewear and sheer hosiery, do have an emphasis on style and
innovation. Our businesses face competition today from other
large corporations and foreign manufacturers, as well as smaller
companies, department stores, specialty stores and other
retailers that market and sell apparel essentials products under
private labels that compete directly with our brands.
Our top ten customers accounted for 65% of our net sales and our
top customer, Wal-Mart, accounted for over $1.1 billion of
our sales for the year ended January 3, 2009. Our largest
customers in the year ended January 3, 2009 were Wal-Mart,
Target and Kohls, which accounted for 27%, 16% and 6% of
total sales, respectively. The growth in retailers can create
pricing pressures as our customers grow larger and seek to have
greater concessions in their purchase of our products, while
they can be increasingly demanding that we provide them with
some of our products on an exclusive basis. To counteract these
effects, it has become increasingly important to leverage our
national brands through investment in our largest and strongest
brands as our customers strive to maximize their performance
especially in todays challenging economic environment. In
addition, during the past several years, various retailers,
including some of our largest customers, have experienced
significant difficulties, including restructurings, bankruptcies
and liquidations, and the ability of retailers to overcome these
difficulties may increase due to the recent deterioration of
worldwide economic conditions.
Anticipating changes in and managing our operations in response
to consumer preferences remains an important element of our
business. In recent years, we have experienced changes in our
net sales, revenues and cash flows in accordance with changes in
consumer preferences and trends. For example, we expect the
trend of declining hosiery sales to continue consistent with the
overall decline in the industry and with shifts in consumer
preferences. The Hosiery segment only comprised 5% of our net
sales in the year ended January 3, 2009 however, and as a
result, the decline in the Hosiery segment has not had a
significant impact on our net sales, revenues or cash flows.
Generally, we manage the Hosiery segment for cash, placing an
emphasis on reducing our cost structure and managing cash
efficiently.
Our key business
strategies
Sell more, spend less and generate cash are our broad strategies
to build our brands, reduce our costs and generate cash.
S-41
Sell
more
Through our sell more strategy, we seek to drive
profitable growth by consistently offering consumers brands they
love and trust and products with unsurpassed value. Key
initiatives we are employing to implement this strategy include:
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Build big, strong brands in big core categories with innovative
key items. Our ability to react to changing customer needs and
industry trends is key to our success. Our design, research and
product development teams, in partnership with our marketing
teams, drive our efforts to bring innovations to market. We seek
to leverage our insights into consumer demand in the apparel
essentials industry to develop new products within our existing
lines and to modify our existing core products in ways that make
them more appealing, addressing changing customer needs and
industry trends. We also support our key brands with targeted,
effective advertising and marketing campaigns.
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Foster strategic partnerships with key retailers via team
selling. We foster relationships with key retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships.
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Use Kanban concepts to have the right products available in the
right quantities at the right time. Through Kanban, a
multi-initiative effort that determines production quantities,
and in doing so, facilitates
just-in-time
production and ordering systems, we seek to ensure that products
are available to meet customer demands while effectively
managing inventory levels.
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Spend
less
Through our spend less strategy, we seek to become
an integrated organization that leverages its size and global
reach to reduce costs, improve flexibility and provide a high
level of service. Key initiatives we are employing to implement
this strategy include:
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Globalizing our supply chain by balancing across hemispheres
into economic clusters with fewer, larger
facilities. As a provider of high-volume products, we are
continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. Through
our consolidation and globalization strategy, which is discussed
in more detail below, we will continue to transition additional
parts of our supply chain to lower-cost locations in Asia,
Central America and the Caribbean Basin in an effort to optimize
our cost structure. As part of this process, we are using Kanban
concepts to optimize the way we manage demand, to increase
manufacturing flexibility to better respond to demand
variability and to simplify our finished goods and the raw
materials we use to produce them. We expect that these changes
in our supply chain will result in significant cost efficiencies
and increased asset utilization.
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Leverage our global purchasing and manufacturing scale.
Historically, we have had a decentralized operating structure
with many distinct operating units. We are in the process of
consolidating purchasing, manufacturing and sourcing across all
of our product categories in the United States. We believe that
these initiatives will streamline our operations, improve our
inventory management, reduce costs and standardize processes.
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Generate
cash
Through our generate cash strategy, we seek to
effectively generate and invest cash at or above our weighted
average cost of capital to provide superior returns for both our
equity and debt investors. Key initiatives we are employing to
implement this strategy include:
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Optimizing our capital structure to take advantage of our
business models strong and consistent cash flows.
Maintaining appropriate debt leverage and utilizing excess cash
to, for example, pay down debt, invest in our own stock and
selectively pursue strategic acquisitions are keys to building a
stronger business and generating additional value for investors.
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Continuing to improve turns for accounts receivables, inventory,
accounts payable and fixed assets. Our ability to generate cash
is enhanced through more efficient management of accounts
receivables, inventory, accounts payable and fixed assets.
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Consolidation and
globalization strategy
We expect to continue our restructuring efforts through the end
of 2009 as we continue to execute our consolidation and
globalization strategy. We have closed plant locations, reduced
our workforce, and relocated some of our manufacturing capacity
to lower cost locations in Asia, Central America and the
Caribbean Basin.
During the nine months of 2009, we announced that we will cease
making our own yarn and that we will source all of our yarn
requirements from large-scale yarn suppliers. We entered into an
agreement with Parkdale America, LLC (Parkdale
America) under which we agreed to sell or lease assets
related to operations at our four yarn manufacturing facilities
to Parkdale America. The transaction closed in October 2009 and
resulted in Parkdale America operating three of the four
facilities. We approved an action to close the fourth yarn
manufacturing facility, as well as a yarn warehouse and a cotton
warehouse, all located in the United States, which will result
in the elimination of approximately 175 positions. We also
entered into a yarn purchase agreement with Parkdale America and
Parkdale Mills, LLC (together with Parkdale America,
Parkdale). Under this agreement, which has an
initial term of six years, Parkdale will produce and sell to us
a substantial amount of our Western Hemisphere yarn
requirements. During the first two years of the term, Parkdale
will also produce and sell to us a substantial amount of the
yarn requirements of our Nanjing, China textile facility.
We have restructured our supply chain over the past three years
to create more efficient production clusters that utilize fewer,
larger facilities and to balance our production capability
between the Western Hemisphere and Asia. With our global supply
chain restructured, we are now focused on optimizing our supply
chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the
working capital needs of our supply chain through several
initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership relationships.
In addition to the actions discussed above relating to our yarn
operations, during the nine months ended October 3, 2009,
in furtherance of our consolidation and globalization strategy,
we approved actions to close four manufacturing facilities and
two distribution centers in the Dominican Republic, the United
States, Honduras, Puerto Rico and Canada, and eliminate an
aggregate of approximately 2,925 positions in those countries
and El Salvador. In addition, approximately 300 management and
administrative positions were eliminated, with the majority of
these positions based in the United States. We also have
recognized accelerated depreciation
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with respect to owned or leased assets associated with
manufacturing facilities and distribution centers which closed
during 2009 or we anticipate closing in the next year as part of
our consolidation and globalization strategy.
During the year ended January 3, 2009, in furtherance of
our consolidation and globalization strategy, we approved
actions to close 11 manufacturing facilities and three
distribution centers and eliminate approximately 6,800 positions
in Mexico, the United States, Costa Rica, Honduras and El
Salvador. In addition, approximately 200 management and
administrative positions were eliminated, with the majority of
these positions based in the United States. We also have
recognized accelerated depreciation with respect to owned or
leased assets associated with manufacturing facilities and
distribution centers which closed during 2008 or we anticipate
closing in the next several years as part of our consolidation
and globalization strategy.
While we believe that this strategy has had and will continue to
have a beneficial impact on our operational efficiency and cost
structure, we have incurred significant costs to implement these
initiatives. In particular, we have recorded charges for
severance and other employment-related obligations relating to
workforce reductions, as well as payments in connection with
lease and other contract terminations. In addition, we incurred
charges for one-time write-offs of stranded raw materials and
work in process inventory determined not to be salvageable or
cost-effective to relocate related to the closure of
manufacturing facilities. These amounts are included in the
Cost of sales, Restructuring and
Selling, general and administrative expenses lines
of our statements of income.
Our significant supply chain capital spending and acquisition
actions during 2008 include:
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During the second quarter of 2008, we added three company-owned
sewing plants in Southeast Asiatwo in Vietnam and one in
Thailandgiving us four sewing plants in Asia.
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In October 2008, we acquired a 370-employee embroidery facility
in Honduras. For the past eight years, these operations have
produced embroidered and screen-printed apparel for us. This
acquisition better positions us for long-term growth in these
segments.
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During the fourth quarter of 2008, we commenced production at
our 500,000 square foot socks manufacturing facility in El
Salvador. This facility, co-located with textile manufacturing
operations that we acquired in 2007, provides a manufacturing
base in Central America from which to leverage our production
scale at a lower cost location.
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We continued construction of a textile production plant in
Nanjing, China, which is our first company-owned textile
production facility in Asia. We commenced production in the
fourth quarter of 2009. The Nanjing textile facility will enable
us to expand and leverage our production scale in Asia as we
balance our supply chain across hemispheres.
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We have made significant progress in our multiyear goal of
generating gross savings that could approach or exceed
$200 million. As a result of the restructuring actions
taken since our spin off from Sara Lee on September 5,
2006, our cost structure was reduced and efficiencies improved,
generating savings of $62 million during the nine months
ended October 3, 2009 and during the year ended
January 3, 2009. In addition to the savings generated from
restructuring actions, we benefited from $21 million in
savings related to other cost reduction initiatives during the
nine months ended October 3, 2009, and we benefited from
$14 million in savings related to other cost reduction
initiatives during the year ended January 3, 2009. Of the
seven manufacturing facilities and distribution centers approved
for closure in 2006, two were closed in 2006 and five were
closed in 2007. Of the 19 manufacturing facilities and
distribution centers approved
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for closure in 2007, 10 were closed in 2007 and nine were closed
in 2008. Of the 14 manufacturing facilities and distribution
centers approved for closure in 2008, nine were closed in 2008
and five are expected to close in 2009. For more information
about our restructuring actions, see Note 5, titled
Restructuring to our Consolidated Financial
Statements for the year ended January 3, 2009 and
Note 4 to our Condensed Consolidated Financial Statements
for the period ended October 3, 2009 incorporated by
reference in this prospectus supplement.
The continued implementation of our globalization and
consolidation strategy, which is designed to improve operating
efficiencies and lower costs, has resulted and is likely to
continue to result in significant costs in the short-term and
generate savings as well as higher inventory levels for the next
12 to 15 months. As further plans are developed and
approved, we expect to recognize additional restructuring costs
as we eliminate duplicative functions within the organization
and transition a significant portion of our manufacturing
capacity to lower-cost locations. As a result of this strategy,
we expect to incur approximately $250 million in
restructuring and related charges over the three year period
following the spin off from Sara Lee on September 5, 2006,
of which approximately half is expected to be noncash. As of
January 3, 2009, we have recognized approximately
$209 million and announced approximately $219 million
in restructuring and related charges related to these efforts
since September 5, 2006. Of these charges, approximately
$84 million relates to accelerated depreciation of
buildings and equipment for facilities that have been or will be
closed, approximately $79 million relates to employee
termination and other benefits, approximately $19 million
relates to write-offs of stranded raw materials and work in
process inventory determined not to be salvageable or
cost-effective to relocate, approximately $17 million
relates to lease termination and other costs and approximately
$10 million related to impairments of fixed assets.
Seasonality and
other factors
Our operating results are subject to some variability.
Generally, our diverse range of product offerings helps mitigate
the impact of seasonal changes in demand for certain items.
Sales are typically higher in the last two quarters (July to
December) of each fiscal year. Socks, hosiery and fleece
products generally have higher sales during this period as a
result of cooler weather,
back-to-school
shopping and holidays. Sales levels in any period are also
impacted by customers decisions to increase or decrease
their inventory levels in response to anticipated consumer
demand. Our customers may cancel orders, change delivery
schedules or change the mix of products ordered with minimal
notice to us. For example, we have experienced a shift in timing
by our largest retail customers of
back-to-school
programs between June and July the last two years. Our results
of operations are also impacted by fluctuations and volatility
in the price of cotton and oil-related materials and the timing
of actual spending for our media, advertising and promotion
expenses. Media, advertising and promotion expenses may vary
from period to period during a fiscal year depending on the
timing of our advertising campaigns for retail selling seasons
and product introductions.
Although the majority of our products are replenishment in
nature and tend to be purchased by consumers on a planned,
rather than on an impulse, basis, our sales are impacted by
discretionary spending by our customers. Discretionary spending
is affected by many factors, including, among others, general
business conditions, interest rates, inflation, consumer debt
levels, the availability of consumer credit, currency exchange
rates, taxation, electricity power rates, gasoline prices,
unemployment trends and other matters that influence consumer
confidence and spending. Many of these factors are outside of
our control. Our customers purchases of discretionary
items, including our products, could decline during periods when
disposable
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income is lower, when prices increase in response to rising
costs, or in periods of actual or perceived unfavorable economic
conditions. These consumers may choose to purchase fewer of our
products or to purchase lower-priced products of our competitors
in response to higher prices for our products, or may choose not
to purchase our products at prices that reflect our price
increases that become effective from time to time.
Inflation and
changing prices
Inflation can have a long-term impact on us because increasing
costs of materials and labor may impact our ability to maintain
satisfactory margins. For example, a significant portion of our
products are manufactured in other countries and declines in the
value of the U.S. dollar may result in higher manufacturing
costs. Similarly, the cost of the materials that are used in our
manufacturing process, such as oil related commodity prices,
rose during the summer of 2008 as a result of inflation and
other factors. In addition, inflation often is accompanied by
higher interest rates, which could have a negative impact on
spending, in which case our margins could decrease. Moreover,
increases in inflation may not be matched by rises in income,
which also could have a negative impact on spending. If we incur
increased costs that we are unable to recoup, or if consumer
spending continues to decrease generally, our business, results
of operations, financial condition and cash flows may be
adversely affected. In an effort to mitigate the impact of these
incremental costs on our operating results, we raised domestic
prices effective February 2009. We implemented an average gross
price increase of four percent in our domestic product
categories. The range of price increases varies by individual
product category.
Our costs for cotton yarn and cotton-based textiles vary based
upon the fluctuating cost of cotton, which is affected by
weather, consumer demand, speculation on the commodities market,
the relative valuations and fluctuations of the currencies of
producer versus consumer countries and other factors that are
generally unpredictable and beyond our control. While we do
enter into short-term supply agreements and hedges from time to
time in an attempt to protect our business from the volatility
of the market price of cotton, our business can be affected by
dramatic movements in cotton prices, although cotton
historically represents only 8% of our cost of sales. The cotton
prices reflected in our results were 58 cents per pound for the
nine months ended October 3, 2009, 62 cents per pound for
the nine months ended September 27, 2008, 65 cents per
pound for the year ended January 3, 2009 and 56 cents per
pound for the year ended December 29, 2007. After taking
into consideration the cotton costs currently included in
inventory, we expect our cost of cotton to average 55 cents per
pound for the full year of 2009 compared to 65 cents per pound
for 2008. In addition, during the summer of 2008 we experienced
a spike in oil-related commodity prices and other raw materials
used in our products, such as dyes and chemicals, and increases
in other costs, such as fuel, energy and utility costs. Costs
incurred for materials and labor are capitalized into inventory
and impact our results as the inventory is sold. Our results in
the nine months of 2009 were impacted by higher costs for cotton
and oil-related materials, however we started to benefit in the
second quarter of 2009 from lower cotton costs and in the third
quarter of 2009 from lower oil-related material costs and other
manufacturing costs.
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Components of net
sales and expense
Net
sales
We generate net sales by selling apparel essentials such as
t-shirts, bras, panties, mens underwear, kids
underwear, socks, hosiery, casualwear and activewear. Our net
sales are recognized net of discounts, coupons, rebates,
volume-based incentives and cooperative advertising costs. We
recognize revenue when (i) there is persuasive evidence of
an arrangement, (ii) the sales price is fixed or
determinable, (iii) title and the risks of ownership have
been transferred to the customer and (iv) collection of the
receivable is reasonably assured, which occurs primarily upon
shipment. Net sales include an estimate for returns and
allowances based upon historical return experience. We also
offer a variety of sales incentives to resellers and consumers
that are recorded as reductions to net sales.
Cost of
sales
Our cost of sales includes the cost of manufacturing finished
goods, which consists of labor, raw materials such as cotton and
petroleum-based products and overhead costs such as depreciation
on owned facilities and equipment. Our cost of sales also
includes finished goods sourced from third-party manufacturers
that supply us with products based on our designs as well as
charges for slow moving or obsolete inventories. Rebates,
discounts and other cash consideration received from a vendor
related to inventory purchases are reflected in cost of sales
when the related inventory item is sold. Our costs of sales do
not include shipping costs, comprised of payments to third party
shippers, or handling costs, comprised of warehousing costs in
our distribution facilities, and thus our gross margins may not
be comparable to those of other entities that include such costs
in cost of sales.
Selling, general
and administrative expenses
Our selling, general and administrative expenses include
selling, advertising, costs of shipping, handling and
distribution to our customers, research and development, rent on
leased facilities, depreciation on owned facilities and
equipment and other general and administrative expenses. Also
included for periods presented prior to the spin off on
September 5, 2006 are allocations of corporate expenses
that consist of expenses for business insurance, medical
insurance, employee benefit plan amounts and, because we were
part of Sara Lee those periods, allocations from Sara Lee for
certain centralized administration costs for treasury, real
estate, accounting, auditing, tax, risk management, human
resources and benefits administration. These allocations of
centralized administration costs were determined on bases that
we and Sara Lee considered to be reasonable and take into
consideration and include relevant operating profit, fixed
assets, sales and payroll. Selling, general and administrative
expenses also include management payroll, benefits, travel,
information systems, accounting, insurance and legal expenses.
Restructuring
We have from time to time closed facilities and reduced
headcount, including in connection with previously announced
restructuring and business transformation plans. We refer to
these activities as restructuring actions. When we decide to
close facilities or reduce headcount, we take estimated charges
for such restructuring, including charges for exited
non-cancelable leases and other contractual obligations, as well
as severance and benefits. If the actual charge is
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different from the original estimate, an adjustment is
recognized in the period such change in estimate is identified.
Other (income)
expenses
Our other (income) expenses include charges such as losses on
early extinguishment of debt and certain other non-operating
items.
Interest expense,
net
As part of the spin off from Sara Lee on September 5, 2006,
we incurred $2.6 billion of debt. Since the spin off, we
have made changes in our financing structuring and have repaid
some of our debt. In December 2006, we issued $500 million
of Floating Rate Senior Notes and the proceeds were used to
repay a portion of the debt incurred at the spin off. In
November 2007, we entered into the Accounts Receivable
Securitization Facility which provides for up to
$250 million in funding accounted for as a secured
borrowing, all of which we borrowed and used to repay a portion
of the Senior Secured Credit Facilities. In addition, we have
amended the terms of our Senior Secured Credit Facilities and
Second Lien Credit Facility to provide more flexibility to
change our financial structure in the future.
Our interest expense is net of interest income. Interest income
is the return we earned on our cash and cash equivalents and,
historically, on money we loaned to Sara Lee as part of its
corporate cash management practices. Our cash and cash
equivalents are invested in highly liquid investments with
original maturities of three months or less.
Income tax
expense (benefit)
Our effective income tax rate fluctuates from period to period
and can be materially impacted by, among other things:
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changes in the mix of our earnings from the various
jurisdictions in which we operate;
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the tax characteristics of our earnings;
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the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States, which may increase our
tax expense and taxes paid; and
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the timing and results of any reviews of our income tax filing
positions in the jurisdictions in which we transact business.
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Highlights from
the third quarter and nine months ended October 3,
2009
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Total net sales in the third quarter of 2009 were
$1.06 billion, compared with $1.15 billion in the same
quarter of 2008. Total net sales in the nine-month period in
2009 were $2.90 billion, compared with $3.21 billion
in the same nine-month period of 2008.
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Operating profit was $93 million in the third quarter of
2009, compared with $58 million in the same quarter of
2008. Operating profit was $193 million in the nine-month
period in 2009, compared with $259 million in the same
nine-month period of 2008.
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Diluted earnings per share were $0.43 in the third quarter of
2009, compared with $0.17 in the same quarter of 2008. Diluted
earnings per share were $0.55 in the nine-month period in 2009,
compared with $1.14 in the same nine-month period of 2008.
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During the first nine months of 2009, we approved actions to
close five manufacturing facilities, two distribution centers
and two warehouses in the Dominican Republic, the
United States, Honduras, Puerto Rico and Canada, and
eliminate an aggregate of approximately 3,100 positions in those
countries and El Salvador. In addition, approximately 300
management and administrative positions were eliminated, with
the majority of these positions based in the United States. In
addition, we completed several such actions in 2009 that were
approved in 2008.
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We announced that we will cease making our own yarn and that we
will source all of our yarn requirements from large-scale yarn
suppliers. We entered into an agreement with Parkdale America
under which we agreed to sell or lease assets related to
operations at our four yarn manufacturing facilities to Parkdale
America. The transaction closed in October 2009 and resulted in
Parkdale America operating three of the four facilities. We also
entered into a yarn purchase agreement with Parkdale. Under this
agreement, which has an initial term of six years, Parkdale will
produce and sell to us a substantial amount of our Western
Hemisphere yarn requirements. During the first two years of the
term, Parkdale will also produce and sell to us a substantial
amount of the yarn requirements of our Nanjing, China textile
facility.
|
|
|
Gross capital expenditures were $100 million during the
first nine months of 2009 as we continued to build out our
textile and sewing network in Asia, Central America and the
Caribbean Basin and were lower by $24 million compared to
the nine months of 2008.
|
|
|
In September 2009, we made a prepayment of $140 million of
principal on the Senior Secured Credit Facilities.
|
|
|
We ended the third quarter of 2009 with $474 million of
borrowing availability under our existing $500 million
revolving loan facility (the Revolving Loan
Facility), $39 million in cash and cash equivalents
and $71 million of borrowing availability under our
international loan facilities.
|
|
|
In March 2009, we amended our Senior Secured Credit Facilities
and Accounts Receivable Securitization Facility to provide for
additional cushion for the leverage ratio and interest coverage
ratio covenant requirements.
|
Highlights from
the year ended January 3, 2009
|
|
|
Diluted earnings per share were $1.34 in the year ended
January 3, 2009, compared with $1.30 in the year ended
December 29, 2007.
|
|
|
Operating profit was $317 million in the year ended
January 3, 2009, compared with $389 million in the
year ended December 29, 2007.
|
|
|
Total net sales in the year ended January 3, 2009 was
$4.25 billion, compared with $4.47 billion in the year
ended December 29, 2007.
|
|
|
During the year ended January 3, 2009, we approved actions
to close 11 manufacturing facilities and three distribution
centers in Mexico, the United States, Costa Rica, Honduras and
El Salvador. The production capacity represented by the
manufacturing facilities has been relocated to lower cost
locations in Asia, Central America and the Caribbean Basin. The
|
S-49
|
|
|
distribution capacity has been relocated to our West Coast
distribution facility in California in order to expand capacity
for goods we source from Asia. In addition, we completed several
such actions in the year ended January 3, 2009 that were
approved in 2008.
|
|
|
|
Gross capital expenditures were $187 million during the
year ended January 3, 2009 as we continued to build out our
textile and sewing network in Asia, Central America and the
Caribbean Basin.
|
|
|
During the second quarter of 2008, we added three company-owned
sewing plants in Southeast Asiatwo in Vietnam and one in
Thailandgiving us four sewing plants in Asia. In addition,
during the fourth quarter of 2008, we acquired an embroidery
facility in Honduras.
|
|
|
We repurchased $30 million of company stock during the year
ended January 3, 2009.
|
|
|
We ended 2008 with $463 million of borrowing availability
under our $500 million Revolving Loan Facility,
$67 million in cash and cash equivalents and
$67 million of borrowing availability under our
international loan facilities, compared to $430 million,
$174 million and $89 million, respectively, at the end
of 2007.
|
Condensed
consolidated results of operationsNine months ended
October 3, 2009 compared with nine months ended
September 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
2,902,536
|
|
|
$
|
3,213,653
|
|
|
$
|
(311,117
|
)
|
|
|
(9.7%
|
)
|
Cost of sales
|
|
|
1,960,589
|
|
|
|
2,145,949
|
|
|
|
(185,360
|
)
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
941,947
|
|
|
|
1,067,704
|
|
|
|
(125,757
|
)
|
|
|
(11.8
|
)
|
Selling, general and administrative expenses
|
|
|
702,204
|
|
|
|
776,267
|
|
|
|
(74,063
|
)
|
|
|
(9.5
|
)
|
Restructuring
|
|
|
46,319
|
|
|
|
32,355
|
|
|
|
13,964
|
|
|
|
43.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
193,424
|
|
|
|
259,082
|
|
|
|
(65,658
|
)
|
|
|
(25.3
|
)
|
Other expenses
|
|
|
6,537
|
|
|
|
|
|
|
|
6,537
|
|
|
|
NM
|
|
Interest expense, net
|
|
|
124,548
|
|
|
|
115,282
|
|
|
|
9,266
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
62,339
|
|
|
|
143,800
|
|
|
|
(81,461
|
)
|
|
|
(56.6
|
)
|
Income tax expense
|
|
|
9,974
|
|
|
|
34,512
|
|
|
|
(24,538
|
)
|
|
|
(71.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
52,365
|
|
|
$
|
109,288
|
|
|
$
|
(56,923
|
)
|
|
|
(52.1%
|
)
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
2,902,536
|
|
|
$
|
3,213,653
|
|
|
$
|
(311,117
|
)
|
|
|
(9.7%
|
)
|
|
|
S-50
Consolidated net sales were lower by $311 million or 10% in
the nine months of 2009 compared to 2008. The net sales decline
in the nine months of 2009 was primarily attributed to the
recessionary environment that continued into the first nine
months of 2009. Overall retail sales for apparel continued to
decline during 2009 at most of our larger customers as the
continuing recession constrained consumer spending. Our sales
incentives were higher in the nine months of 2009 compared to
2008 as we made significant investments, especially in
back-to-school
programs and promotions, in this recessionary environment to
support retailers and position ourselves for future sales
opportunities. Excluding the cost of these investments, our net
sales would have declined by 9%.
Innerwear, Outerwear, Hosiery and International segment net
sales were lower by $120 million (7%), $105 million
(12%), $27 million (16%) and $57 million (16%),
respectively, in the nine months of 2009 compared to 2008. Our
Other segment net sales were lower, as expected, by
$8 million in the nine months of 2009 compared to 2008.
Innerwear segment net sales were lower (7%) in the nine months
of 2009 compared to 2008, primarily due to lower net sales of
intimate apparel (13%) and socks (12%) primarily due to weak
sales at retail in this difficult economic environment,
partially offset by stronger net sales (2%) in our male
underwear product category.
Outerwear segment net sales were lower (12%) in the nine months
of 2009 compared to 2008, primarily due to the lower casualwear
net sales in both the retail (27%) and wholesale (21%) channels.
The wholesale channel has been highly price competitive
especially in this recessionary environment. The lower
casualwear net sales in the retail and wholesale channels were
partially offset by higher net sales (8%) of our Champion
brand activewear. The results for the first half of 2009
were negatively impacted by losses of seasonal programs in the
retail casualwear channel that are not impacting our results in
the second half of 2009.
Hosiery segment net sales were lower (16%) in the nine months of
2009 compared to 2008. The net sales decline rate over the most
recent two consecutive quarters has improved compared to the net
sales decline rate for the second half of 2008 and the first
quarter of 2009 in each of which net sales declined by more than
20%. Hosiery products in all channels continue to be more
adversely impacted than other apparel categories by reduced
consumer discretionary spending.
International segment net sales were lower (16%) in the nine
months of 2009 compared to 2008, primarily attributable to an
unfavorable impact of $31 million related to foreign
currency exchange rates and weak demand globally primarily in
Europe, Japan and Canada which are experiencing recessionary
environments similar to that in the United States. Excluding the
impact of foreign exchange rates on currency, International
segment net sales declined by 8% in the nine months of 2009
compared to 2008.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Gross profit
|
|
$
|
941,947
|
|
|
$
|
1,067,704
|
|
|
$
|
(125,757
|
)
|
|
|
(11.8%
|
)
|
|
|
S-51
Our gross profit was lower by $126 million in the nine
months of 2009 compared to 2008. As a percent of net sales, our
gross profit was 32.5% in the nine months of 2009 compared to
33.2% in 2008, declining as a result of the items described
below.
Gross profit was lower due to lower sales volume of
$139 million, unfavorable product sales mix of
$53 million and higher sales incentives of
$31 million. Our sales incentives were higher as we made
significant investments, especially in
back-to-school
programs and promotions, in this recessionary environment to
support retailers and position ourselves for future sales
opportunities. Other factors contributing to lower gross profit
were higher production costs of $21 million related to
higher energy and oil-related costs, including freight costs,
higher other manufacturing costs of $16 million primarily
related to lower volume partially offset by cost reductions at
our manufacturing facilities, other vendor price increases of
$13 million, higher cost of finished goods sourced from
third party manufacturers of $12 million primarily
resulting from foreign exchange transaction losses, an
$11 million unfavorable impact related to foreign currency
exchange rates and $3 million of higher
start-up and
shutdown costs associated with the consolidation and
globalization of our supply chain. The unfavorable impact of
foreign currency exchange rates in our International segment was
primarily due to the strengthening of the U.S. dollar
compared to the Mexican peso, Canadian dollar, Brazilian real
and Euro partially offset by the strengthening of the Japanese
yen compared to the U.S. dollar during the nine months of
2009 compared to 2008.
Our gross profit was positively impacted by higher product
pricing of $91 million before increased sales incentives,
savings from our prior restructuring actions of
$38 million, lower on-going excess and obsolete inventory
costs of $18 million and lower cotton costs of
$8 million. The higher product pricing was due to the
implementation of an average gross price increase of four
percent in our domestic product categories in February 2009. The
range of price increases varies by individual product category.
The lower excess and obsolete inventory costs in the first nine
months of 2009 are attributable to both our continuous
evaluation of inventory levels and simplification of our product
category offerings. We realized these benefits by driving down
obsolete inventory levels through aggressive management and
promotions.
The cotton prices reflected in our results were 58 cents per
pound in the nine months of 2009 as compared to 62 cents per
pound in 2008. After taking into consideration the cotton costs
currently included in inventory, we expect our cost of cotton to
average 55 cents per pound for the full year of 2009 compared to
65 cents per pound for 2008. Energy and oil-related costs were
higher due to a spike in oil-related commodity prices during the
summer of 2008. Our results in the nine months of 2009 were
impacted by higher costs for cotton and oil-related materials,
however we started to benefit in the second quarter of 2009 from
lower cotton costs and in the third quarter of 2009 from lower
oil-related material costs and other manufacturing costs.
We incurred lower one-time restructuring related write-offs of
$11 million in the nine months of 2009 compared to 2008 for
stranded raw materials and work in process inventory determined
not to be salvageable or cost-effective to relocate. Accelerated
depreciation was lower by $9 million in the nine months of
2009 compared to 2008.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
702,204
|
|
|
$
|
776,267
|
|
|
$
|
(74,063
|
)
|
|
|
(9.5%
|
)
|
|
|
S-52
Our selling, general and administrative expenses were
$74 million lower in the nine months of 2009 compared to
2008. Our continued focus on cost reductions resulted in lower
expenses in the nine months of 2009 compared to 2008 related to
savings of $24 million from our prior restructuring actions
for compensation and related benefits, lower technology expenses
of $21 million, lower bad debt expense of $7 million
primarily due to a customer bankruptcy in 2008, lower selling
and other marketing related expenses of $5 million, lower
consulting related expenses of $3 million and lower
non-media related media, advertising and promotion
(MAP) expenses of $1 million. In addition, our
distribution expenses were lower by $12 million in the nine
months of 2009 compared to 2008, which was primarily
attributable to lower sales volume that reduced our labor,
postage and freight expenses and lower rework expenses in our
distribution centers.
Our media related MAP expenses were $34 million lower in
the nine months of 2009 compared to 2008 as we chose to reduce
our spending. MAP expenses may vary from period to period during
a fiscal year depending on the timing of our advertising
campaigns for retail selling seasons and product introductions.
Our pension and stock compensation expenses, which are noncash,
were higher by $24 million and $5 million,
respectively, in the nine months of 2009 compared to 2008. The
higher pension expense is primarily due to the lower funded
status of our pension plans at the end of 2008, which resulted
from a decline in the fair value of plan assets due to the stock
markets performance during 2008 and a higher discount rate
at the end of 2008.
We also incurred higher expenses of $4 million in the nine
months of 2009 compared to 2008 as a result of opening retail
stores. We opened 17 retail stores during the nine months of
2009. In addition, we incurred higher other expenses of
$2 million related to amending the terms of all outstanding
stock options granted under the Hanesbrands Inc. Omnibus
Incentive Plan of 2006 (the Omnibus Incentive Plan)
that had an original term of five or seven years to the tenth
anniversary of the original grant date. Changes due to foreign
currency exchange rates, which are included in the impact of the
changes discussed above, resulted in lower selling, general and
administrative expenses of $9 million in the nine months of
2009 compared to 2008.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Restructuring
|
|
$
|
46,319
|
|
|
$
|
32,355
|
|
|
$
|
13,964
|
|
|
$
|
43.2%
|
|
|
|
During the nine months of 2009, we announced that we will cease
making our own yarn and that we will source all of our yarn
requirements from large-scale yarn suppliers. We entered into an
agreement with Parkdale America under which we agreed to sell or
lease assets related to operations at our four yarn
manufacturing facilities to Parkdale America. The transaction
closed in October 2009 and resulted in Parkdale America
operating three of the four facilities. We approved an action to
close the fourth yarn manufacturing facility, as well as a yarn
warehouse and a cotton warehouse, all located in the United
States, which will result in the elimination of approximately
175 positions. We also entered into a yarn purchase agreement
with Parkdale. Under this agreement, which has an initial term
of six years, Parkdale will produce and sell to us a substantial
amount of our Western Hemisphere yarn requirements. During the
first two years of the term, Parkdale will also produce and sell
to us a substantial amount of the yarn requirements of our
Nanjing, China textile facility.
S-53
In addition to the actions discussed above, during the nine
months of 2009 we approved actions to close four manufacturing
facilities and two distribution centers in the Dominican
Republic, the United States, Honduras, Puerto Rico and Canada
which will result in the elimination of an aggregate of
approximately 2,925 positions in those countries and El
Salvador. The production capacity represented by the
manufacturing facilities will be relocated to lower cost
locations in Asia, Central America and the Caribbean Basin. The
distribution capacity has been relocated to our West Coast
distribution facility in California in order to expand capacity
for goods we source from Asia. In addition, approximately 300
management and administrative positions were eliminated, with
the majority of these positions based in the United States.
During the nine months of 2009, we recorded charges related to
employee termination and other benefits of $21 million
recognized in accordance with benefit plans previously
communicated to the affected employee group, charges related to
contract obligations of $12 million, other exit costs of
$7 million related to moving equipment and inventory from
closed facilities and fixed asset impairment charges of
$6 million.
In the nine months of 2009, we recorded one-time write-offs of
$4 million of stranded raw materials and work in process
inventory related to the closure of manufacturing facilities and
recorded in the Cost of sales line. The raw
materials and work in process inventory was determined not to be
salvageable or cost-effective to relocate. In addition, in
connection with our consolidation and globalization strategy, we
recognized noncash charges of $2 million and
$11 million in nine months of 2009 and the nine months of
2008, respectively, in the Cost of sales line and a
noncash charge of $1 million and a noncash credit of
$1 million in the Selling, general and administrative
expenses line in the nine months of 2009 and nine months
of 2008, respectively, related to accelerated depreciation of
buildings and equipment for facilities that have been closed or
will be closed.
These actions, which are a continuation of our consolidation and
globalization strategy, are expected to result in benefits of
moving production to lower-cost manufacturing facilities,
leveraging our large scale in high-volume products and
consolidating production capacity.
During the nine months of 2008, we incurred $32 million in
restructuring charges which primarily related to employee
termination and other benefits and charges related to exiting
supply contracts associated with plant closures approved during
that period.
Operating
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Operating profit
|
|
$
|
193,424
|
|
|
$
|
259,082
|
|
|
$
|
(65,658
|
)
|
|
|
(25.3%
|
)
|
|
|
Operating profit was lower in the nine months of 2009 compared
to 2008 as a result of lower gross profit of $126 million
and higher restructuring and related charges of
$14 million, partially offset by lower selling, general and
administrative expenses of $74 million. Changes in foreign
currency exchange rates had an unfavorable impact on operating
profit of $2 million in the nine months of 2009 compared to
2008.
S-54
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Other expenses
|
|
$
|
6,537
|
|
|
$
|
|
|
|
$
|
6,537
|
|
|
|
NM
|
|
|
|
During the nine months of 2009, we incurred costs of
$4 million to amend the Senior Secured Credit Facilities
and the Accounts Receivable Securitization Facility. In March
2009, we amended these credit facilities to provide for
additional cushion in our financial covenant requirements. These
amendments delay the most restrictive debt-leverage ratio
requirements from the fourth quarter of 2009 to the third
quarter of 2011. In April 2009, we amended the Accounts
Receivable Securitization Facility to generally increase over
time the amount of funding that will be available under the
facility as compared to the amount that would be available
pursuant to the amendment to that facility that we entered into
in March 2009. In addition, during the nine months of 2009 we
incurred a $2 million loss on early extinguishment of debt
related to unamortized debt issuance costs resulting from the
prepayment of $140 million of principal in September 2009.
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Interest expense, net
|
|
$
|
124,548
|
|
|
$
|
115,282
|
|
|
$
|
9,266
|
|
|
|
8.0%
|
|
|
|
Interest expense, net was higher by $9 million in the nine
months of 2009 compared to 2008. The amendments of our Senior
Secured Credit Facilities and Accounts Receivable Securitization
Facility, which increased our interest-rate margin by
300 basis points and 325 basis points, respectively,
increased interest expense in the nine months of 2009 compared
to 2008 by $24 million, which was partially offset by a
lower London Interbank Offered Rate (LIBOR) and
lower outstanding debt balances that reduced interest expense by
$15 million. Our weighted average interest rate on our
outstanding debt was 6.84% during the nine months of 2009
compared to 6.17% in 2008.
At October 3, 2009, we had outstanding interest rate
hedging arrangements whereby we have capped the LIBOR interest
rate component on $400 million of our floating rate debt at
3.50% and have fixed the LIBOR interest rate component on
$1.4 billion of our floating rate debt at approximately
4.16%. Approximately 88% of our total debt outstanding at
October 3, 2009 was at a fixed or capped LIBOR rate.
Income tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Income tax expense
|
|
$
|
9,974
|
|
|
$
|
34,512
|
|
|
$
|
(24,538
|
)
|
|
|
(71.1%
|
)
|
|
|
S-55
Our estimated annual effective income tax rate was 16% in the
nine months of 2009 compared to 24% in 2008. The lower effective
income tax rate is attributable primarily to a higher proportion
of our earnings attributed to foreign subsidiaries which are
taxed at rates lower than the U.S. statutory rate. Our
estimated annual effective tax rate reflects our strategic
initiative to make substantial capital investments outside the
United States in our global supply chain in 2009.
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net income
|
|
$
|
52,365
|
|
|
$
|
109,288
|
|
|
$
|
(56,923
|
)
|
|
|
(52.1%
|
)
|
|
|
Net income for the nine months of 2009 was lower than 2008
primarily due to lower operating profit of $66 million,
higher interest expense of $9 million and higher other
expenses of $7 million, partially offset by lower income
tax expense of $25 million.
S-56
Operating results
by business segmentNine months ended October 3, 2009
compared with nine months ended September 27,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
1,710,920
|
|
|
$
|
1,830,437
|
|
|
$
|
(119,517
|
)
|
|
|
(6.5%
|
)
|
Outerwear
|
|
|
776,282
|
|
|
|
880,809
|
|
|
|
(104,527
|
)
|
|
|
(11.9
|
)
|
Hosiery
|
|
|
139,300
|
|
|
|
166,672
|
|
|
|
(27,372
|
)
|
|
|
(16.4
|
)
|
International
|
|
|
294,674
|
|
|
|
352,120
|
|
|
|
(57,446
|
)
|
|
|
(16.3
|
)
|
Other
|
|
|
12,022
|
|
|
|
20,064
|
|
|
|
(8,042
|
)
|
|
|
(40.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
2,933,198
|
|
|
|
3,250,102
|
|
|
|
(316,904
|
)
|
|
|
(9.8
|
)
|
Intersegment
|
|
|
(30,662
|
)
|
|
|
(36,449
|
)
|
|
|
(5,787
|
)
|
|
|
(15.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,902,536
|
|
|
$
|
3,213,653
|
|
|
$
|
(311,117
|
)
|
|
|
(9.7%
|
)
|
Segment operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
210,443
|
|
|
$
|
204,714
|
|
|
$
|
5,729
|
|
|
|
2.8%
|
|
Outerwear
|
|
|
23,269
|
|
|
|
55,587
|
|
|
|
(32,318
|
)
|
|
|
(58.1
|
)
|
Hosiery
|
|
|
42,678
|
|
|
|
52,944
|
|
|
|
(10,266
|
)
|
|
|
(19.4
|
)
|
International
|
|
|
28,089
|
|
|
|
47,662
|
|
|
|
(19,573
|
)
|
|
|
(41.1
|
)
|
Other
|
|
|
(4,395
|
)
|
|
|
304
|
|
|
|
(4,699
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
300,084
|
|
|
|
361,211
|
|
|
|
(61,127
|
)
|
|
|
(16.9
|
)
|
Items not included in segment operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(44,602
|
)
|
|
|
(37,128
|
)
|
|
|
7,474
|
|
|
|
20.1
|
|
Amortization of trademarks and other intangibles
|
|
|
(9,293
|
)
|
|
|
(8,683
|
)
|
|
|
610
|
|
|
|
7.0
|
|
Restructuring
|
|
|
(46,319
|
)
|
|
|
(32,355
|
)
|
|
|
13,964
|
|
|
|
43.2
|
|
Inventory write-off included in cost of sales
|
|
|
(3,516
|
)
|
|
|
(14,027
|
)
|
|
|
(10,511
|
)
|
|
|
(74.9
|
)
|
Accelerated depreciation included in cost of sales
|
|
|
(2,392
|
)
|
|
|
(11,202
|
)
|
|
|
(8,810
|
)
|
|
|
(78.6
|
)
|
Accelerated depreciation included in selling, general and
administrative expenses
|
|
|
(538
|
)
|
|
|
1,266
|
|
|
|
1,804
|
|
|
|
142.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
193,424
|
|
|
|
259,082
|
|
|
|
(65,658
|
)
|
|
|
(25.3
|
)
|
Other expenses
|
|
|
(6,537
|
)
|
|
|
|
|
|
|
6,537
|
|
|
|
NM
|
|
Interest expense, net
|
|
|
(124,548
|
)
|
|
|
(115,282
|
)
|
|
|
9,266
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
$
|
62,339
|
|
|
$
|
143,800
|
|
|
$
|
(81,461
|
)
|
|
|
(56.6%
|
)
|
|
|
S-57
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
1,710,920
|
|
|
$
|
1,830,437
|
|
|
$
|
(119,517
|
)
|
|
|
(6.5%
|
)
|
Segment operating profit
|
|
|
210,443
|
|
|
|
204,714
|
|
|
|
5,729
|
|
|
|
2.8
|
|
|
|
Overall net sales in the Innerwear segment were lower by
$120 million or 7% in the nine months of 2009 compared to
2008 as we continued to be negatively impacted by weak consumer
demand related to the recessionary environment. Total intimate
apparel net sales were $96 million lower in the nine months
of 2009 compared to 2008 and represents 80% of the total segment
net sales decline. We believe our lower net sales in our
Hanes brand of $34 million, our smaller brands
(barely there, Just My Size and Wonderbra)
of $29 million and our Playtex brand of
$28 million were primarily attributable to weaker sales at
retail. Our Bali brand intimate apparel net sales in the
nine months of 2009 were flat compared to 2008.
Total male underwear net sales were $13 million higher in
the nine months of 2009 compared to 2008 which reflect higher
net sales in our Hanes brand of $19 million,
partially offset by lower net sales of our Champion brand
of $6 million. The higher Hanes brand male underwear
sales reflect growth in key segments of this category such as
crewneck and V-neck T-shirts and boxer briefs and product
innovations like the Comfort Fit waistbands. Lower net sales in
our socks product category of $28 million in the nine
months of 2009 compared to 2008 reflect a decline in Hanes
and Champion brand net sales in our mens and
kids product category. Net sales in our thermals business
were lower by $2 million in the nine months of 2009
compared to 2008. Net sales in our
direct-to-consumer
retail business were flat due to higher sales at our outlet
stores resulting from the addition of recently opened retail
stores offset by lower internet sales.
The Innerwear segment gross profit was lower by $39 million
in the nine months of 2009 compared to 2008. The lower gross
profit was due to lower sales volume of $74 million, higher
sales incentives of $19 million due to investments made
with retailers, unfavorable product sales mix of
$18 million, higher production costs of $12 million
related to higher energy and oil-related costs, including
freight costs, other vendor price increases of $9 million
and higher other manufacturing costs of $3 million. Higher
costs were partially offset by higher product pricing of
$64 million before increased sales incentives, savings from
our prior restructuring actions of $19 million, lower
on-going excess and obsolete inventory costs of $11 million
and lower cotton costs of $2 million.
As a percent of segment net sales, gross profit in the Innerwear
segment was 37.4% in the nine months of 2009 compared to 37.1%
in 2008, increasing as a result of the items described above.
The higher Innerwear segment operating profit in the nine months
of 2009 compared to 2008 was primarily attributable to lower
media related MAP expenses of $31 million, savings of
$14 million from prior restructuring actions primarily for
compensation and related benefits, lower technology expenses of
$11 million, lower distribution expenses of $5 million
and lower bad debt expense of $4 million primarily due to a
customer bankruptcy in 2008, partially offset by lower gross
profit, higher pension expense of $14 million, higher
expenses of $4 million as a result of opening retail stores
and higher other non-media related MAP expenses of
$2 million.
S-58
A significant portion of the selling, general and administrative
expenses in each segment is an allocation of our consolidated
selling, general and administrative expenses, however certain
expenses that are specifically identifiable to a segment are
charged directly to such segment. The allocation methodology for
the consolidated selling, general and administrative expenses
for the nine months of 2009 is consistent with 2008. Our
consolidated selling, general and administrative expenses before
segment allocations was $74 million lower in the nine
months of 2009 compared to 2008.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
776,282
|
|
|
$
|
880,809
|
|
|
$
|
(104,527
|
)
|
|
|
(11.9%
|
)
|
Segment operating profit
|
|
|
23,269
|
|
|
|
55,587
|
|
|
|
(32,318
|
)
|
|
|
(58.1
|
)
|
|
|
Net sales in the Outerwear segment were lower by
$105 million or 12% in the nine months of 2009 compared to
2008, primarily as a result of lower casualwear net sales in our
retail and wholesale channels of $66 million and
$65 million, respectively. The lower retail casualwear net
sales reflect an $89 million impact due to the losses of
seasonal programs not renewed for 2009 that only impacted the
first half of 2009, partially offset by additional sales
resulting from an exclusive long-term agreement entered into
with Wal-Mart in April 2009 that significantly expanded the
presence of our Just My Size brand in all Wal-Mart
stores. The wholesale channel has been highly price competitive
especially in this recessionary environment. These decreases
were partially offset by higher net sales of our Champion
brand activewear of $25 million. Our Champion
brand sales continue to benefit from our marketing investment in
the brand.
The Outerwear segment gross profit was lower by $48 million
in the nine months of 2009 compared to 2008. The lower gross
profit is due to unfavorable product sales mix of
$30 million, lower sales volume of $28 million, higher
sales incentives of $13 million due to investments made
with retailers, higher production costs of $9 million
related to higher energy and oil-related costs, including
freight costs, higher other manufacturing costs of
$8 million and other vendor price increases of
$4 million. Higher costs were partially offset by savings
of $19 million from our prior restructuring actions, higher
product pricing of $12 million before increased sales
incentives, lower on-going excess and obsolete inventory costs
of $7 million and lower cotton costs of $6 million.
As a percent of segment net sales, gross profit in the Outerwear
segment was 20.0% in the nine months of 2009 compared to 23.1%
in 2008, declining as a result of the items described above.
The lower Outerwear segment operating profit in the nine months
of 2009 compared to 2008 was primarily attributable to lower
gross profit and higher pension expense of $6 million,
partially offset by savings of $7 million from our prior
restructuring actions, lower technology expenses of
$6 million, lower non-media related MAP expenses of
$3 million, lower distribution expenses of $3 million
and lower bad debt expense of $2 million primarily due to a
customer bankruptcy in 2008.
A significant portion of the selling, general and administrative
expenses in each segment is an allocation of our consolidated
selling, general and administrative expenses, however certain
expenses that are specifically identifiable to a segment are
charged directly to such segment.
S-59
The allocation methodology for the consolidated selling, general
and administrative expenses for the nine months of 2009 is
consistent with 2008. Our consolidated selling, general and
administrative expenses before segment allocations was
$74 million lower in the nine months of 2009 compared to
2008.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
139,300
|
|
|
$
|
166,672
|
|
|
$
|
(27,372
|
)
|
|
|
(16.4%
|
)
|
Segment operating profit
|
|
|
42,678
|
|
|
|
52,944
|
|
|
|
(10,266
|
)
|
|
|
(19.4
|
)
|
|
|
Net sales in the Hosiery segment declined by $27 million or
16%, which was primarily due to lower sales of our
Leggs brand to mass retailers and food and drug
stores and our Hanes brand to national chains and
department stores. Hosiery products continue to be more
adversely impacted than other apparel categories by reduced
consumer discretionary spending, which contributes to weaker
retail sales and lowering of inventory levels by retailers. We
expect the trend of declining hosiery sales to continue
consistent with the overall decline in the industry and with
shifts in consumer preferences. Generally, we manage the Hosiery
segment for cash, placing an emphasis on reducing our cost
structure and managing cash efficiently.
The Hosiery segment gross profit was lower by $17 million
in the nine months of 2009 compared to 2008. The lower gross
profit for the nine months of 2009 compared to 2008 was the
result of lower sales volume of $19 million and higher
other manufacturing costs of $4 million, partially offset
by higher product pricing of $8 million.
As a percent of segment net sales, gross profit in the Hosiery
segment was 46.1% in the nine months of 2009 compared to 48.6%
in 2008, declining as a result of the items described above.
The lower Hosiery segment operating profit in the nine months of
2009 compared to 2008 is primarily attributable to lower gross
profit, partially offset by lower distribution expenses of
$3 million, savings of $2 million from our prior
restructuring actions and lower technology expenses of
$2 million.
A significant portion of the selling, general and administrative
expenses in each segment is an allocation of our consolidated
selling, general and administrative expenses, however certain
expenses that are specifically identifiable to a segment are
charged directly to such segment. The allocation methodology for
the consolidated selling, general and administrative expenses
for the nine months of 2009 is consistent with 2008. Our
consolidated selling, general and administrative expenses before
segment allocations was $74 million lower in the nine
months of 2009 compared to 2008.
S-60
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
294,674
|
|
|
$
|
352,120
|
|
|
$
|
(57,446
|
)
|
|
|
(16.3%
|
)
|
Segment operating profit
|
|
|
28,089
|
|
|
|
47,662
|
|
|
|
(19,573
|
)
|
|
|
(41.1
|
)
|
|
|
Overall net sales in the International segment were lower by
$57 million or 16% in the nine months of 2009 compared to
2008 primarily attributable to an unfavorable impact of
$31 million related to foreign currency exchange rates and
weak demand globally primarily in Europe, Japan and Canada,
which are experiencing recessionary environments similar to that
in the United States. Excluding the impact of foreign exchange
rates on currency, International segment net sales declined by
8% in the nine months of 2009 compared to 2008. The unfavorable
impact of foreign currency exchange rates in our International
segment was primarily due to the strengthening of the
U.S. dollar compared to the Mexican peso, Canadian dollar,
Brazilian real and Euro partially offset by the strengthening of
the Japanese yen compared to the U.S. dollar during the
nine months of 2009 compared to 2008. During the nine months of
2009, we experienced lower net sales, in each case excluding the
impact of foreign currency exchange rates, in our casualwear
business in Europe of $21 million, in our casualwear
business in Puerto Rico of $7 million resulting from moving
the distribution capacity to the United States, in our male
underwear and activewear businesses in Japan of $6 million
and in our intimate apparel business in Canada of
$3 million. Lower segment net sales were partially offset
by higher sales in our intimate apparel and male underwear
businesses in Mexico of $6 million and in our male
underwear business in Brazil of $2 million.
The International segment gross profit was lower by
$32 million in the nine months of 2009 compared to 2008.
The lower gross profit was a result of lower sales volume of
$13 million, higher cost of finished goods sourced from
third party manufacturers of $12 million primarily
resulting from foreign exchange transaction losses, an
unfavorable impact related to foreign currency exchange rates of
$11 million and an unfavorable product sales mix of
$6 million. Higher costs were partially offset by higher
product pricing of $8 million.
As a percent of segment net sales, gross profit in the
International segment was 37.9% in the nine months of 2009
compared to 2008 at 40.9%, declining as a result of the items
described above.
The lower International segment operating profit in the nine
months of 2009 compared to 2008 is primarily attributable to the
lower gross profit, partially offset by lower selling and other
marketing related expenses of $5 million, lower media
related MAP expenses of $2 million, lower distribution
expenses of $1 million, lower non-media related MAP of
$1 million and savings of $1 million from our prior
restructuring actions. The changes in foreign currency exchange
rates, which are included in the impact on gross profit above,
had an unfavorable impact on segment operating profit of
$2 million in the nine months of 2009 compared to 2008.
S-61
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
12,022
|
|
|
$
|
20,064
|
|
|
$
|
(8,042
|
)
|
|
|
(40.1%
|
)
|
Segment operating profit
|
|
|
(4,395
|
)
|
|
|
304
|
|
|
|
(4,699
|
)
|
|
|
NM
|
|
|
|
Sales in our Other segment primarily consist of sales of yarn to
third parties which are intended to maintain asset utilization
at certain manufacturing facilities and generate approximate
break even margins. We expect sales of our Other segment to
continue to be insignificant to us as we complete the
implementation of our consolidation and globalization efforts.
In September 2009, we announced that we will cease making our
own yarn and that we will source all of our yarn requirements
from large-scale yarn suppliers, which is expected to further
reduce net sales of our Other segment.
General
corporate expenses
General corporate expenses were $7 million higher in the
nine months of 2009 compared to 2008 primarily due to higher
start-up and
shut-down costs of $5 million associated with our
consolidation and globalization of our supply chain,
$3 million of higher foreign exchange transaction losses
and higher other expenses of $2 million related to amending
the terms of all outstanding stock options granted under the
Hanesbrands Inc. Omnibus Incentive Plan of 2006 that had an
original term of five or seven years to the tenth anniversary of
the original grant date, partially offset by $3 million of
higher gains on sales of assets.
S-62
Consolidated
results of operationsyear ended January 3, 2009
(2008) compared with year ended December 29,
2007 (2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
4,248,770
|
|
|
$
|
4,474,537
|
|
|
$
|
(225,767
|
)
|
|
|
(5.0%
|
)
|
Cost of sales
|
|
|
2,871,420
|
|
|
|
3,033,627
|
|
|
|
(162,207
|
)
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,377,350
|
|
|
|
1,440,910
|
|
|
|
(63,560
|
)
|
|
|
(4.4
|
)
|
Selling, general and administrative expenses
|
|
|
1,009,607
|
|
|
|
1,040,754
|
|
|
|
(31,147
|
)
|
|
|
(3.0
|
)
|
Gain on curtailment of postretirement benefits
|
|
|
|
|
|
|
(32,144
|
)
|
|
|
(32,144
|
)
|
|
|
NM
|
|
Restructuring
|
|
|
50,263
|
|
|
|
43,731
|
|
|
|
6,532
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
317,480
|
|
|
|
388,569
|
|
|
|
(71,089
|
)
|
|
|
(18.3
|
)
|
Other (income) expense
|
|
|
(634
|
)
|
|
|
5,235
|
|
|
|
(5,869
|
)
|
|
|
(112.1
|
)
|
Interest expense, net
|
|
|
155,077
|
|
|
|
199,208
|
|
|
|
(44,131
|
)
|
|
|
(22.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
163,037
|
|
|
|
184,126
|
|
|
|
(21,089
|
)
|
|
|
(11.5
|
)
|
Income tax expense
|
|
|
35,868
|
|
|
|
57,999
|
|
|
|
(22,131
|
)
|
|
|
(38.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
127,169
|
|
|
$
|
126,127
|
|
|
$
|
1,042
|
|
|
|
0.8%
|
|
|
|
Net
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
4,248,770
|
|
|
$
|
4,474,537
|
|
|
$
|
(225,767
|
)
|
|
|
(5.0%
|
)
|
|
|
Consolidated net sales were lower by $226 million or 5% in
2008 compared to 2007 primarily due to weak sales at retail,
which reflect a difficult economic and retail environment in
which the ultimate consumers of our products have been
significantly limiting their discretionary spending and visiting
retail stores less frequently. The economic recession continued
to impact consumer spending, resulting in one of the worst
holiday shopping seasons in 40 years as retail sales fell
for the sixth straight month in December. Our Innerwear,
Outerwear, Hosiery and Other segment net sales were lower by
$154 million (6%), $41 million (3%), $38 million
(14%) and $35 million (62%), respectively, and were
partially offset by higher net sales in our International
segment of $38 million (9%). Although the majority of our
products are replenishment in nature and tend to be purchased by
consumers on a planned, rather than on an impulse, basis,
weakness in the retail environment can impact our results in the
short-term, as it did in 2008. The total impact of the
53rd week in 2008, which is included in the amounts above,
was a $54 million increase in sales.
The lower net sales in our Innerwear segment were primarily due
to a decline in the intimate apparel, socks, thermals and
sleepwear product categories. Total intimate apparel net sales
were $102 million lower in 2008 compared to 2007. We
experienced lower intimate apparel sales in
S-63
our smaller brands (barely there, Just My Size and
Wonderbra) of $49 million, our Hanes brand of
$42 million and our private label brands of
$10 million which we believe was primarily attributable to
weaker sales at retail as noted above. In 2008 compared to 2007,
our Playtex brand intimate apparel net sales were higher
by $10 million and our Bali brand intimate apparel
net sales were lower by $11 million. Net sales in our male
underwear product category were $8 million lower, which
includes the impact of exiting a license arrangement for a
boys character underwear program in early 2008 that
lowered sales by $15 million. In addition, net sales of
socks, thermals and sleepwear product categories were lower in
2008 compared to 2007 by $32 million, $10 million and
$4 million, respectively.
In our Outerwear segment, net sales of our Champion brand
activewear were $34 million higher in 2008 compared to
2007, and were offset by lower net sales of our casualwear
product categories of $79 million. Net sales in our Hosiery
segment declined substantially more than the long-term trend
primarily due to lower sales of the Hanes brand to
national chains and department stores and our Leggs
brand to mass retailers and food and drug stores in 2008
compared to 2007. We expect the trend of declining hosiery sales
to continue consistent with the overall decline in the industry
and with shifts in consumer preferences.
The overall lower net sales were partially offset by higher net
sales in our International segment that were driven by a
favorable impact of $22 million related to foreign currency
exchange rates and by the growth in our casualwear businesses in
Europe and Asia. The favorable impact of foreign currency
exchange rates was primarily due to the strengthening of the
Japanese yen, Euro and Brazilian real.
The decline in net sales for our Other segment is primarily due
to the continued vertical integration of a yarn and fabric
operation acquisition from 2006 with less focus on sales of
nonfinished fabric and yarn to third parties. We expect this
decline to continue and sales for this segment to ultimately
become insignificant to us as we complete the implementation of
our consolidation and globalization efforts.
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Gross profit
|
|
$
|
1,377,350
|
|
|
$
|
1,440,910
|
|
|
$
|
(63,560
|
)
|
|
|
(4.4%
|
)
|
|
|
As a percent of net sales, our gross profit percentage was 32.4%
in 2008 compared to 32.2% in 2007. While the gross profit
percentage was higher, gross profit dollars were lower due to
lower sales volume of $85 million, unfavorable product
sales mix of $35 million, higher cotton costs of
$30 million, higher production costs of $20 million
related to higher energy and oil related costs including freight
costs and other vendor price increases of $12 million. The
cotton prices reflected in our results were 65 cents per pound
in 2008 as compared to 56 cents per pound in 2007. Energy and
oil related costs were higher due to a spike in oil related
commodity prices during the summer of 2008. Our results will
continue to reflect higher costs for cotton and oil related
materials until these costs cease to be reflected on our balance
sheet in the first half of 2009 and we will start to benefit in
the second half of 2009 from lower commodity costs. In addition,
in connection with the consolidation and globalization of our
supply chain, we incurred one-time restructuring related
write-offs of stranded raw materials and work in process
S-64
inventory determined not to be salvageable or cost-effective to
relocate of $19 million in 2008, which were offset by lower
accelerated depreciation of $13 million.
These higher expenses were primarily offset by savings from our
cost reduction initiatives and prior restructuring actions of
$41 million, lower other manufacturing overhead costs of
$24 million primarily related to better volumes earlier in
the year, lower on-going excess and obsolete inventory costs of
$14 million, lower sales incentives of $11 million,
$10 million of lower duty costs primarily related to higher
refunds of $9 million, a $9 million favorable impact
related to foreign currency exchange rates, $8 million of
favorable one-time out of period cost recognition related to the
capitalization of certain inventory supplies to be on a
consistent basis across all business lines, $4 million of
lower
start-up and
shut down costs associated with our consolidation and
globalization of our supply chain and higher product sales
pricing of $3 million. Our duty refunds were higher in 2008
primarily due to the final passage of the Dominican
Republic-Central
America-United
States Free Trade Agreement in Costa Rica as a result of which
we can, on a one-time basis, recover duties paid since
January 1, 2004 totaling approximately $15 million.
The lower excess and obsolete inventory costs in 2008 are
attributable to both our continuous evaluation of inventory
levels and simplification of our product category offerings
since the spin off. We realized the benefits of driving down
obsolete inventory levels through aggressive management and
promotions and realized the benefits from decreases in style
counts ranging from 7% to 30% in our various product category
offerings. The quality of our inventory remained good with
obsolete inventory down 23% from last year. The favorable
foreign currency exchange rate impact in our International
segment was primarily due to the strengthening of the Japanese
yen, Euro and Brazilian real.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
1,009,607
|
|
|
$
|
1,040,754
|
|
|
$
|
(31,147
|
)
|
|
|
(3.0%
|
)
|
|
|
Our selling, general and administrative expenses were
$31 million lower in 2008 compared to 2007. Our cost
reduction efforts resulted in lower expenses in 2008 compared to
2007 related to savings of $21 million from our prior
restructuring actions for compensation and related benefits,
lower consulting expenses related to various areas of
$5 million, lower non-media related MAP expenses of
$3 million, lower accelerated depreciation of
$3 million, lower postretirement healthcare and life
insurance expense of $2 million and lower stock
compensation expense of $2 million.
Our media related MAP expenses were $11 million lower in
2008 as compared to 2007. While our spending for media related
MAP was down in 2008, it was the second highest spending level
in our history. We supported our key brands with targeted,
effective advertising and marketing campaigns such as the launch
of Hanes No Ride Up Panties and marketing initiatives for
Champion and Playtex in the first half of 2008 and
significantly lowered our overall spending during the second
half of 2008. In contrast, in 2007, our media related MAP
spending was spread across multiple product categories and
brands. MAP expenses may vary from period to period during a
fiscal year depending on the timing of our advertising campaigns
for retail selling seasons and product introductions.
S-65
In addition, spin off and related charges of $3 million
recognized in 2007 did not recur in 2008. Our pension income of
$12 million was higher by $9 million, which included
an adjustment that reduced pension expense in 2007 related to
the final separation of our pension assets and liabilities from
those of Sara Lee.
We experienced higher bad debt expense of $7 million
primarily related to the Mervyns bankruptcy, higher
computer software amortization costs of $5 million, higher
technology consulting and related expenses of $4 million
and higher distribution expenses of $4 million in 2008
compared to 2007. The higher technology consulting and computer
software amortization costs are related to our efforts to
integrate our information technology systems across our company
which involves reducing the number of information technology
platforms serving our business functions. The higher
distribution expenses in 2008 compared to 2007 were primarily
related to higher volumes in our international business, higher
postage and freight costs and higher rework expenses in our
distribution centers. We also incurred higher expenses of
$3 million in 2008 compared to 2007 as a result of opening
10 retail stores over the last 12 months. In addition, we
incurred $7 million in amortization of gain on curtailment
of postretirement benefits in 2007 which did not recur in 2008.
Gain on
curtailment of postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Gain on curtailment of postretirement benefits
|
|
$
|
|
|
|
$
|
(32,144
|
)
|
|
$
|
(32,144
|
)
|
|
|
NM
|
|
|
|
In December 2006, we notified retirees and employees of the
phase out of premium subsidies for early retiree medical
coverage and move to an access-only plan for early retirees by
the end of 2007. In December 2007, in connection with the
termination of the postretirement medical plan, we recognized a
final gain on curtailment of plan benefits of $32 million.
Concurrently with the termination of the existing plan, we
established a new access only plan that is fully paid by the
participants.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Restructuring
|
|
$
|
50,263
|
|
|
$
|
43,731
|
|
|
$
|
6,532
|
|
|
|
14.9%
|
|
|
|
During 2008, we approved actions to close 11 manufacturing
facilities and three distribution centers and eliminate
approximately 6,800 positions in Mexico, the United States,
Costa Rica, Honduras and El Salvador. The production capacity
represented by the manufacturing facilities has been relocated
to lower cost locations in Asia, Central America and the
Caribbean Basin. The distribution capacity has been relocated to
our West Coast distribution facility in California in order to
expand capacity for goods we source from Asia. In addition,
approximately 200 management and administrative positions were
eliminated, with the majority of these positions based in the
United States. We recorded a charge of $34 million related
to employee termination and other benefits recognized in
accordance with benefit plans previously communicated
S-66
to the affected employee group, fixed asset impairment charges
of $9 million and charges related to exiting supply
contracts of $11 million, which was partially offset by
$4 million of favorable settlements of contract obligations
for lower amounts than previously estimated.
In 2008, we recorded $19 million in one-time write-offs of
stranded raw materials and work in process inventory determined
not to be salvageable or cost-effective to relocate related to
the closure of manufacturing facilities in the Cost of
sales line. In addition, in connection with our
consolidation and globalization strategy, in 2008 and 2007, we
recognized non-cash charges of $24 million and
$37 million, respectively, in the Cost of sales
line and a non-cash charge of $3 million in the
Selling, general and administrative expenses line in
2007 related to accelerated depreciation of buildings and
equipment for facilities that have been closed or will be closed.
These actions, which are a continuation of our consolidation and
globalization strategy, are expected to result in benefits of
moving production to lower-cost manufacturing facilities,
leveraging our large scale in high-volume products and
consolidating production capacity.
During 2007, we incurred $44 million in restructuring
charges which primarily related to a charge of $32 million
related to employee termination and other benefits associated
with plant closures approved during that period and the
elimination of certain management and administrative positions,
a $10 million charge for estimated lease termination costs
associated with facility closures and a $2 million
impairment charge associated with facility closures.
Operating
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Operating profit
|
|
$
|
317,480
|
|
|
$
|
388,569
|
|
|
$
|
(71,089
|
)
|
|
|
(18.3%
|
)
|
|
|
Operating profit was lower in 2008 compared to 2007 as a result
of lower gross profit of $64 million, a $32 million
gain on curtailment of postretirement benefits recognized in
2007 which did not recur in 2008 and higher restructuring and
related charges for facility closures of $7 million
partially offset by lower selling, general and administrative
expenses of $31 million. The lower gross profit was
primarily the result of lower sales volume, unfavorable product
sales mix and increases in manufacturing input costs for cotton
and energy and other oil related costs, all of which exceeded
our savings from executing our consolidation and globalization
strategy during 2008. The total impact of the 53rd week in
2008, which is included in the amounts above, was a
$6 million increase in operating profit.
Other (income)
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Other (income) expense
|
|
$
|
(634
|
)
|
|
$
|
5,235
|
|
|
$
|
(5,869
|
)
|
|
|
(112.1%
|
)
|
|
|
During 2008, we recognized a gain of $2 million related to
the repurchase of $6 million of our Floating Rate Senior
Notes for $4 million. This gain was partially offset by a
$1 million loss on early extinguishment of debt related to
unamortized debt issuance costs on the Senior Secured
S-67
Credit Facilities for the prepayment of $125 million of
principal in December 2008. During 2007, we recognized losses on
early extinguishment of debt related to unamortized debt
issuance costs on the Senior Secured Credit Facilities for
prepayments of $428 million of principal in 2007, including
a prepayment of $250 million that was made in connection
with funding from the Accounts Receivable Securitization
Facility we entered into in November 2007.
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Interest expense, net
|
|
$
|
155,077
|
|
|
$
|
199,208
|
|
|
$
|
(44,131
|
)
|
|
|
(22.2%
|
)
|
|
|
Interest expense, net was lower by $44 million in 2008
compared to 2007. The lower interest expense is primarily
attributable to a lower weighted average interest rate,
$32 million of which resulted from a lower LIBOR and
$4 million of which resulted from reduced interest rates
achieved through changes in our financing structure such as the
February 2007 amendment to our Senior Secured Credit Facilities
and the Accounts Receivable Securitization Facility that we
entered into in November 2007. In addition, interest expense was
reduced by $8 million as a result of our net prepayments of
long-term debt during 2007 and 2008 of $303 million. Our
weighted average interest rate on our outstanding debt was 6.09%
during 2008 compared to 7.74% in 2007.
At January 3, 2009, we had outstanding interest rate
hedging arrangements whereby we have capped the interest rate on
$400 million of our floating rate debt at 3.50% and had
fixed the interest rate on $1.4 billion of our floating
rate debt at 4.16%. Approximately 82% of our total debt
outstanding at January 3, 2009 was at a fixed or capped
LIBOR rate.
Income tax
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Income tax expense
|
|
$
|
35,868
|
|
|
$
|
57,999
|
|
|
$
|
(22,131
|
)
|
|
|
(38.2%
|
)
|
|
|
Our annual effective income tax rate was 22.0% in 2008 compared
to 31.5% in 2007. The lower income tax expense is attributable
primarily to lower pre-tax income and a lower effective income
tax rate. The lower effective income tax rate is primarily due
to higher unremitted earnings from foreign subsidiaries in 2008
taxed at rates less than the U.S. statutory rate. Our
annual effective tax rate reflects our strategic initiative to
make substantial capital investments outside the United States
in our global supply chain in 2008.
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net income
|
|
$
|
127,169
|
|
|
$
|
126,127
|
|
|
$
|
1,042
|
|
|
|
0.8%
|
|
|
|
S-68
Net income for 2008 was higher than 2007 primarily due to lower
interest expense, lower selling, general and administrative
expenses and a lower effective income tax rate offset by lower
gross profit resulting from lower sales volume and higher
manufacturing input costs, a gain on curtailment of
postretirement benefits recognized in 2007 which did not recur
in 2008 and higher restructuring charges. The total impact of
the 53rd week in 2008 was a $3 million increase in net
income.
Operating results
by business segmentyear ended January 3, 2009
(2008) compared with year ended December 29,
2007 (2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
2,402,831
|
|
|
$
|
2,556,906
|
|
|
$
|
(154,075
|
)
|
|
|
(6.0%
|
)
|
Outerwear
|
|
|
1,180,747
|
|
|
|
1,221,845
|
|
|
|
(41,098
|
)
|
|
|
(3.4
|
)
|
Hosiery
|
|
|
227,924
|
|
|
|
266,198
|
|
|
|
(38,274
|
)
|
|
|
(14.4
|
)
|
International
|
|
|
460,085
|
|
|
|
421,898
|
|
|
|
38,187
|
|
|
|
9.1
|
|
Other
|
|
|
21,724
|
|
|
|
56,920
|
|
|
|
(35,196
|
)
|
|
|
(61.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
4,293,311
|
|
|
|
4,523,767
|
|
|
|
(230,456
|
)
|
|
|
(5.1
|
)
|
Intersegment
|
|
|
(44,541
|
)
|
|
|
(49,230
|
)
|
|
|
(4,689
|
)
|
|
|
(9.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
4,248,770
|
|
|
$
|
4,474,537
|
|
|
$
|
(225,767
|
)
|
|
|
(5.0
|
)
|
Segment operating profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
277,486
|
|
|
$
|
305,959
|
|
|
$
|
(28,473
|
)
|
|
|
(9.3
|
)
|
Outerwear
|
|
|
68,769
|
|
|
|
71,364
|
|
|
|
(2,595
|
)
|
|
|
(3.6
|
)
|
Hosiery
|
|
|
71,596
|
|
|
|
76,917
|
|
|
|
(5,321
|
)
|
|
|
(6.9
|
)
|
International
|
|
|
57,070
|
|
|
|
53,147
|
|
|
|
3,923
|
|
|
|
7.4
|
|
Other
|
|
|
(472
|
)
|
|
|
(1,361
|
)
|
|
|
889
|
|
|
|
65.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
474,449
|
|
|
|
506,026
|
|
|
|
(31,577
|
)
|
|
|
(6.2
|
)
|
Items not included in segment operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(52,143
|
)
|
|
|
(60,213
|
)
|
|
|
(8,070
|
)
|
|
|
(13.4
|
)
|
Amortization of trademarks and other intangibles
|
|
|
(12,019
|
)
|
|
|
(6,205
|
)
|
|
|
5,814
|
|
|
|
93.7
|
|
Gain on curtailment of postretirement benefits
|
|
|
|
|
|
|
32,144
|
|
|
|
(32,144
|
)
|
|
|
NM
|
|
Restructuring
|
|
|
(50,263
|
)
|
|
|
(43,731
|
)
|
|
|
6,532
|
|
|
|
14.9
|
|
Inventory write-off included in cost of sales
|
|
|
(18,696
|
)
|
|
|
|
|
|
|
18,696
|
|
|
|
NM
|
|
Accelerated depreciation included in cost of sales
|
|
|
(23,862
|
)
|
|
|
(36,912
|
)
|
|
|
(13,050
|
)
|
|
|
(35.4
|
)
|
Accelerated depreciation included in selling, general and
administrative expenses
|
|
|
14
|
|
|
|
(2,540
|
)
|
|
|
(2,554
|
)
|
|
|
(100.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
317,480
|
|
|
|
388,569
|
|
|
|
(71,089
|
)
|
|
|
(18.3
|
)
|
Other income (expense)
|
|
|
634
|
|
|
|
(5,235
|
)
|
|
|
5,869
|
|
|
|
112.1
|
|
Interest expense, net
|
|
|
(155,077
|
)
|
|
|
(199,208
|
)
|
|
|
(44,131
|
)
|
|
|
(22.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
$
|
163,037
|
|
|
$
|
184,126
|
|
|
$
|
(21,089
|
)
|
|
|
(11.5%
|
)
|
|
|
S-69
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
2,402,831
|
|
|
$
|
2,556,906
|
|
|
$
|
(154,075
|
)
|
|
|
(6.0%
|
)
|
Segment operating profit
|
|
|
277,486
|
|
|
|
305,959
|
|
|
|
(28,473
|
)
|
|
|
(9.3
|
)
|
|
|
Overall net sales in the Innerwear segment were lower by
$154 million or 6% in 2008 compared to 2007. The difficult
economic and retail environment significantly impacted
consumers discretionary spending which resulted in lower
sales in our intimate apparel, socks, thermals and sleepwear
product categories. Total intimate apparel net sales were
$102 million lower in 2008 compared to 2007. We experienced
lower intimate apparel sales in our smaller brands (barely
there, Just My Size and Wonderbra) of
$49 million, our Hanes brand of $42 million and
our private label brands of $10 million which we believe
was primarily attributable to weaker sales at retail. In 2008
compared to 2007, our Playtex brand intimate apparel net
sales were higher by $10 million and our Bali brand
intimate apparel net sales were lower by $11 million. The
growth in our Playtex brand sales was supported by
successful marketing initiatives in the first half of 2008. Net
sales in our male underwear product category were
$8 million lower, which includes the impact of exiting a
license arrangement for a boys character underwear program
in early 2008 that lowered sales by $15 million. The lower
net sales in our socks product category reflects a decline in
kids and mens Hanes brand net sales of
$19 million and Champion brand net sales of
$11 million primarily related to the loss of a mens
program for one of our customers. In addition, net sales of
thermals and sleepwear product categories were lower in 2008
compared to 2007 by $10 million and $4 million,
respectively. The total impact of the 53rd week in 2008,
which is included in the amounts above, was a $34 million
increase in sales for the Innerwear segment.
As a percent of segment net sales, gross profit percentage in
the Innerwear segment was 36.9% in 2008 compared to 36.8% in
2007. While the gross profit percentage was higher, gross profit
dollars were lower due to lower sales volume of
$67 million, unfavorable product sales mix of
$28 million, higher cotton costs of $12 million,
higher production costs of $10 million related to higher
energy and oil related costs including freight costs, other
vendor price increases of $7 million and lower product
sales pricing of $4 million. These higher costs were offset
by savings from our cost reduction initiatives and prior
restructuring actions of $27 million, lower sales
incentives of $21 million, $11 million of lower duty
costs primarily related to higher refunds and $8 million of
favorable one-time out of period cost recognition related to the
capitalization of certain inventory supplies to be on a
consistent basis across all business lines. In addition, we
incurred lower on-going excess and obsolete inventory costs of
$8 million arising from realizing the benefits of driving
down obsolete inventory levels through aggressive management and
promotions and simplifying our product category offerings which
reduced our style counts ranging from 7% to 30% in our various
product category offerings.
The lower Innerwear segment operating profit in 2008 compared to
2007 is primarily attributable to lower gross profit and higher
bad debt expense of $4 million primarily related to the
Mervyns bankruptcy. We also incurred higher expenses of
$3 million in 2008 compared to 2007 as a result of opening
10 retail stores over the last 12 months. These higher
costs were partially offset by savings of $15 million from
prior restructuring actions primarily for compensation and
related benefits, lower media related MAP expenses of
$8 million and lower non-media related
S-70
MAP expenses of $7 million. A significant portion of the
selling, general and administrative expenses in each segment is
an allocation of our consolidated selling, general and
administrative expenses, however certain expenses that are
specifically identifiable to a segment are charged directly to
each segment. The allocation methodology for the consolidated
selling, general and administrative expenses for 2008 is
consistent with 2007. Our consolidated selling, general and
administrative expenses before segment allocations was
$31 million lower in 2008 compared to 2007.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
1,180,747
|
|
|
$
|
1,221,845
|
|
|
$
|
(41,098
|
)
|
|
|
(3.4%
|
)
|
Segment operating profit
|
|
|
68,769
|
|
|
|
71,364
|
|
|
|
(2,595
|
)
|
|
|
(3.6
|
)
|
|
|
Net sales in the Outerwear segment were lower by
$41 million or 3% in 2008 compared to 2007, primarily as a
result of higher net sales of Champion brand activewear
of $34 million offset by lower net sales of retail
casualwear of $55 million and lower net sales through our
embellishment channel of $24 million, primarily in
promotional t-shirts and sportshirts. Our Champion brand
sales continued to benefit from our investment in the brand
through our marketing initiatives. Our How You Play
marketing campaign has received a very positive response from
consumers. The lower retail casualwear net sales of
$55 million reflect a $6 million impact related to the
loss of seasonal programs continuing into the first half of
2009. We expect the impact on 2009 net sales of losing
these programs, which consist of recurring seasonal programs
that were renewed in prior years but were not renewed for 2009,
to occur primarily in the first half of 2009; losses may be
offset by any new seasonal programs we may add. The total impact
of the 53rd week in 2008, which is included in the amounts
above, was a $14 million increase in sales for the
Outerwear segment.
As a percent of segment net sales, gross profit percentage in
the Outerwear segment was 22.1% in 2008 compared to 21.6% in
2007. While the gross profit percentage was higher, gross profit
dollars were lower due to higher cotton costs of
$18 million, higher production costs of $10 million
related to higher energy and oil related costs including freight
costs, lower sales volume of $9 million, higher sales
incentives of $8 million and other vendor price increases
of $3 million. These higher costs were partially offset by
lower other manufacturing overhead costs of $23 million,
savings of $11 million from our cost reduction initiatives
and prior restructuring actions, higher product sales pricing of
$7 million, lower on-going excess and obsolete inventory
costs of $2 million and favorable product sales mix of
$2 million.
The lower Outerwear segment operating profit in 2008 compared to
2007 is primarily attributable to lower gross profit, higher
distribution expenses of $5 million, higher technology
consulting and related expenses of $3 million, higher
non-media related MAP expenses of $3 million and higher bad
debt expense of $2 million primarily related to the
Mervyns bankruptcy. These higher costs were partially
offset by savings of $6 million from our cost reduction
initiatives and prior restructuring actions and lower
media-related MAP expenses of $5 million. A significant
portion of the selling, general and administrative expenses in
each segment is an allocation of our consolidated selling,
general and administrative expenses, however certain expenses
that are specifically identifiable to a segment are charged
directly to
S-71
each segment. The allocation methodology for the consolidated
selling, general and administrative expenses for 2008 is
consistent with 2007. Our consolidated selling, general and
administrative expenses before segment allocations was
$31 million lower in 2008 compared to 2007.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
227,924
|
|
|
$
|
266,198
|
|
|
$
|
(38,274
|
)
|
|
|
(14.4%
|
)
|
Segment operating profit
|
|
|
71,596
|
|
|
|
76,917
|
|
|
|
(5,321
|
)
|
|
|
(6.9
|
)
|
|
|
Net sales in the Hosiery segment declined by $38 million or
14%, which was substantially more than the long-term trend
primarily due to lower sales of the Hanes brand to
national chains and department stores and the Leggs
brand to mass retailers and food and drug stores. In
addition, we experienced lower sales of $4 million related
the Donna Karan and DKNY license agreement and lower sales of
our Just My Size brand of $3 million. We expect the
trend of declining hosiery sales to continue consistent with the
overall decline in the industry and with shifts in consumer
preferences. Generally, we manage the Hosiery segment for cash,
placing an emphasis on reducing our cost structure and managing
cash efficiently. The total impact of the 53rd week in
2008, which is included in the amounts above, was a
$4 million increase in sales for the Hosiery segment.
As a percent of segment net sales, gross profit percentage was
47.1% in 2008 compared to 47.2% in 2007. The lower gross profit
percentage for 2008 compared to 2007 is the result of
unfavorable product sales mix of $17 million and lower
sales volume of $10 million, offset by savings of
$4 million from our cost reduction initiatives and prior
restructuring actions, lower sales incentives of $4 million
and lower other manufacturing overhead costs of $2 million.
The lower Hosiery segment operating profit in 2008 compared to
2007 is primarily attributable to lower gross profit partially
offset by lower distribution expenses of $5 million,
savings of $2 million from our cost reduction initiatives
and prior restructuring actions, lower non-media related MAP
expenses of $2 million and lower spending of
$3 million in numerous areas. A significant portion of the
selling, general and administrative expenses in each segment is
an allocation of our consolidated selling, general and
administrative expenses, however certain expenses that are
specifically identifiable to a segment are charged directly to
each segment. The allocation methodology for the consolidated
selling, general and administrative expenses for 2008 is
consistent with 2007. Our consolidated selling, general and
administrative expenses before segment allocations was
$31 million lower in 2008 compared to 2007.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
460,085
|
|
|
$
|
421,898
|
|
|
$
|
38,187
|
|
|
|
9.1%
|
|
Segment operating profit
|
|
|
57,070
|
|
|
|
53,147
|
|
|
|
3,923
|
|
|
|
7.4
|
|
|
|
S-72
Overall net sales in the International segment were higher by
$38 million or 9% in 2008 compared to 2007. During 2008, we
experienced higher net sales, in each case including the impact
of foreign currency and the 53rd week, in Europe of
$20 million, Asia of $18 million and Canada of
$2 million. The growth in our European casualwear business
was driven by the strength of the Stedman brand that is
sold in the embellishment channel. Higher sales in our
Champion brand casualwear business in Asia and our
Champion and Hanes brands male underwear business
in Canada also contributed to the sales growth. Changes in
foreign currency exchange rates had a favorable impact on net
sales of $22 million in 2008 compared to 2007. The
favorable impact was primarily due to the strengthening of the
Japanese yen, Euro and Brazilian real. The total impact of the
53rd week in 2008 was a $2 million increase in sales
for the International segment.
As a percent of segment net sales, gross profit percentage was
40.8% in 2008 compared to 2007 at 41.3%. While the gross profit
percentage was lower, gross profit dollars were higher for 2008
compared to 2007 as a result of a favorable impact related to
foreign currency exchange rates of $9 million, favorable
product sales mix of $7 million and lower on-going excess
and obsolete inventory costs of $3 million partially offset
by higher sales incentives of $6 million.
The higher International segment operating profit in 2008
compared to 2007 is primarily attributable to the higher gross
profit partially offset by higher distribution expenses of
$3 million, higher media-related MAP expenses of
$2 million and higher non-media related MAP expenses of
$2 million. Changes in foreign currency exchange rates,
which are included in the impact on gross profit above, had a
favorable impact on segment operating profit of $4 million
in 2008 compared to 2007.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
Higher
|
|
|
Percent
|
|
(dollars in thousands)
|
|
2009
|
|
|
2007
|
|
|
(lower)
|
|
|
change
|
|
|
|
|
Net sales
|
|
$
|
21,724
|
|
|
$
|
56,920
|
|
|
$
|
(35,196
|
)
|
|
|
(61.8%
|
)
|
Segment operating profit
|
|
|
(472
|
)
|
|
|
(1,361
|
)
|
|
|
889
|
|
|
|
65.3
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The decline in net sales in our Other segment is primarily due
to the continued vertical integration of a yarn and fabric
operation acquisition from 2006 with less focus on sales of
nonfinished fabric and yarn to third parties. We expect this
decline to continue and sales for this segment to ultimately
become insignificant to us as we complete the implementation of
our consolidation and globalization efforts. Net sales in this
segment are generated for the purpose of maintaining asset
utilization at certain manufacturing facilities and generating
break even margins.
General
corporate expenses
General corporate expenses were lower in 2008 compared to 2007
primarily due to $11 million of higher foreign exchange
transaction gains, $6 million of higher gains on sales of
assets, $3 million of lower
start-up and
shut-down costs associated with our consolidation and
globalization of our supply chain and $3 million of spin
off and related charges recognized in 2007 which did not recur
in 2008. These lower expenses were partially offset by
$7 million in amortization of gain on curtailment of
postretirement benefits in 2007 which did not recur in
S-73
2008, $7 million in losses from foreign currency
derivatives and a $3 million adjustment that reduced
pension expense in 2007 related to the final separation of our
pension assets and liabilities from those of Sara Lee.
Liquidity and
capital resources
Trends and
uncertainties affecting liquidity
Our primary sources of liquidity are cash generated by
operations and availability under our Revolving Loan Facility
and our international loan facilities. At October 3, 2009,
we had $474 million of borrowing availability under our
$500 million Revolving Loan Facility (after taking into
account outstanding letters of credit), $39 million in cash
and cash equivalents and $71 million of borrowing
availability under our international loan facilities. As of
October 3, 2009, after giving effect to the Transactions
and the application of the estimated net proceeds therefrom as
set forth under Use of proceeds, we would have had
total consolidated indebtedness of $2,087.7 million,
consisting of $845.0 million of secured indebtedness
outstanding under the New Senior Secured Credit Facilities,
$500.0 million of the notes offered hereby,
$493.7 million of the Floating Rate Senior Notes and
$249.0 million outstanding under our Accounts Receivable
Securitization Facility. We currently believe that our existing
cash balances and cash generated by operations, together with
our available credit capacity, will enable us to comply with the
terms of our indebtedness and meet foreseeable liquidity
requirements.
The following has or is expected to impact liquidity:
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we have principal and interest obligations under our long-term
debt;
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we expect to continue to invest in efforts to improve operating
efficiencies and lower costs;
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we expect to continue to add new lower-cost manufacturing
capacity in Asia, Central America and the Caribbean Basin;
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we could increase or decrease the portion of the income of our
foreign subsidiaries that is expected to be remitted to the
United States, which could significantly impact our effective
income tax rate; and
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our Board of Directors has authorized the repurchase of up to
10 million shares of our stock in the open market over the
next few years (2.8 million of which we have repurchased as
of October 3, 2009 at a cost of $75 million), although
we may choose not to repurchase any stock and instead focus on
the repayment of our debt in the next 12 months in light of
the current economic recession.
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We have restructured our supply chain over the past three years
to create more efficient production clusters that utilize fewer,
larger facilities and to balance our production capability
between the Western Hemisphere and Asia. With our global supply
chain restructured, we are now focused on optimizing our supply
chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the
working capital needs of our supply chain through several
initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership relationships.
We are operating in an uncertain and volatile economic
environment, which could have unanticipated adverse effects on
our business. The retail environment has been impacted by recent
volatility in the financial markets, including stock prices, and
by uncertain economic
S-74
conditions. Increases in food and fuel prices, changes in the
credit and housing markets leading to the current financial and
credit crisis, actual and potential job losses among many
sectors of the economy, significant declines in the stock market
resulting in large losses to consumer retirement and investment
accounts, and uncertainty regarding future federal tax and
economic policies have all added to declines in consumer
confidence and curtailed retail spending.
In the third quarter of 2009, we have not seen a sustained
consistent rebound in consumer spending but rather mixed
results. We expect the weak retail environment to continue and
do not expect macroeconomic conditions to be conducive to growth
in 2009. We also expect substantial pressure on profitability
due to the economic climate, increased pension costs and
increased costs associated with implementing our price increase
which became effective in February 2009, including repackaging
costs. Our results in the first nine months of 2009 were
impacted by higher costs for cotton and oil-related materials
incurred in 2008, however we started to benefit in the second
quarter of 2009 from lower cotton costs and in the third quarter
of 2009 from lower oil-related material costs and other
manufacturing costs. In addition, hosiery products continue to
be more adversely impacted than other apparel categories by
reduced consumer discretionary spending, which contributes to
weaker sales and lowering of inventory levels by retailers. The
Hosiery segment comprised only 5% of our net sales in the first
nine months of 2009; therefore the decline in the Hosiery
segment has not had a significant impact on our net sales or
cash flows. Generally, we manage the Hosiery segment for cash,
placing an emphasis on reducing our cost structure and managing
cash efficiently.
We expect to be able to manage our working capital levels and
capital expenditure amounts to maintain sufficient levels of
liquidity. Factors that could help us in these efforts include
the domestic gross price increase of 4% which became effective
in February 2009, lower commodity costs in the remainder of
2009, the ability to execute previously discussed discretionary
spending cuts and the realization of additional cost benefits
from previous restructuring and related actions. Depending on
conditions in the capital markets and other factors, we will
from time to time consider other financing transactions, the
proceeds of which could be used to refinance current
indebtedness or for other purposes. We continue to monitor the
impact, if any, of the current conditions in the credit markets
on our operations. Our access to financing at reasonable
interest rates could become influenced by the economic and
credit market environment.
Cash
requirements for our business
We rely on our cash flows generated from operations and the
borrowing capacity under our Revolving Loan Facility and
international loan facilities to meet the cash requirements of
our business. The primary cash requirements of our business are
payments to vendors in the normal course of business,
restructuring costs, capital expenditures, maturities of debt
and related interest payments, contributions to our pension
plans and repurchases of our stock. We believe we have
sufficient cash and available borrowings for our liquidity
needs. In light of the current economic environment and our
outlook for 2009, we expect to use excess cash flows to pay down
long-term debt of approximately $300 million rather than to
repurchase our stock or make discretionary contributions to our
pension plans. In September 2009, we made a prepayment of
$140 million of principal on the Senior Secured Credit
Facilities.
The implementation of our consolidation and globalization
strategy, which is designed to improve operating efficiencies
and lower costs, has resulted and is likely to continue to
result in significant costs in the short-term and generate
savings in future years. As further plans are developed and
approved, we expect to recognize additional restructuring costs
as we eliminate
S-75
duplicative functions within the organization and transition a
significant portion of our manufacturing capacity to lower-cost
locations. We expect that restructuring charges related to our
consolidation and globalization strategy will be completed by
the end of 2009. During the nine months of 2009 we recognized
$53 million in restructuring and related charges for our
restructuring actions.
Capital spending has varied significantly from year to year as
we have executed our supply chain consolidation and
globalization strategy and completed the integration and
consolidation of our technology systems. We spent
$100 million on gross capital expenditures during the nine
months of 2009 which represents approximately 80% of planned
expenditures for the full year in 2009. We will place emphasis
in the near term on careful management of our capital
expenditures for the rest of 2009 as we complete our supply
chain consolidation and globalization strategy. During 2010, we
expect our annual gross capital spending to be relatively
comparable to our annual depreciation and amortization expense.
Pension
plans
Since the spin off, we have voluntarily contributed
$98 million to our pension plans as of January 3,
2009. Additionally, during 2007 we completed the separation of
our pension plan assets and liabilities from those of Sara Lee
in accordance with governmental regulations, which resulted in a
higher total amount of pension plan assets of approximately
$74 million being transferred to us than originally was
estimated prior to the spin off. Prior to spin off, the fair
value of plan assets included in the annual valuations
represented a best estimate based upon a percentage allocation
of total assets of the Sara Lee trust.
As widely reported, financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in
recent months. As a result of this disruption in the domestic
and international equity and bond markets, our pension plans had
a decrease in asset values of approximately 32% during the year
ended January 3, 2009.
In March 2009, the IRS published guidance regarding pension
funding requirements for 2009, which allowed for the selection
of a monthly discount rate from any month within a five-month
lookback period prior to the pension plan year-end as compared
to the use of the December 2008 monthly discount rate in
the valuation of liabilities. Applying the October
2008 monthly discount rate in accordance with this new IRS
guidance, the funded status of our U.S. qualified pension
plans as of January 3, 2009, the date as of which pension
contributions are determined for 2009, was 86% rather than 75%
as calculated under the previous guidance and previously
reported. In connection with closing a manufacturing facility in
early 2009, we, as required, notified the Pension Benefit
Guaranty Corporation (the PBGC) of the closing and
requested a liability determination under section 4062(e)
of the Employee Retirement Income Security Act of 1974 with
respect to the National Textiles, L.L.C. Pension Plan. In
September 2009, we entered an agreement with the PBGC under
which we contributed $7 million to the plan in September
2009 and agreed to contribute an additional $7 million to
the plan by September 2010. In addition, in September 2009 we
made a voluntary contribution of $2 million to the plan to
maintain a funding level sufficient to avoid certain benefit
payment restrictions under the Pension Protection Act. We do not
expect to make any more contributions to our plan in 2009.
Share
repurchase program
On February 1, 2007, we announced that our Board of
Directors granted authority for the repurchase of up to
10 million shares of our common stock. Share repurchases
are made periodically
S-76
in open-market transactions, and are subject to market
conditions, legal requirements and other factors. Additionally,
management has been granted authority to establish a trading
plan under
Rule 10b5-1
of the Exchange Act in connection with share repurchases, which
will allow us to repurchase shares in the open market during
periods in which the stock trading window is otherwise closed
for our company and certain of our officers and employees
pursuant to our insider trading policy. During 2008, we
purchased 1.2 million shares of our common stock at a cost
of $30 million (average price of $24.71). Since inception
of the program, we have purchased 2.8 million shares of our
common stock at a cost of $75 million (average price of
$26.33). The primary objective of our share repurchase program
is to reduce the impact of dilution caused by the exercise of
options and vesting of stock unit awards. In light of the
current economic recession, we may choose not to repurchase any
stock and focus more on the repayment of our debt in the next
twelve months.
Off-balance
sheet arrangements
We do not have any off-balance sheet arrangements within the
meaning of Item 303(a)(4) of SEC
Regulation S-K.
Future
contractual obligations and commitments
The following table contains information on our contractual
obligations and commitments as of January 3, 2009, and
their expected timing on future cash flows and liquidity, in
each case, without giving effect to the Transactions.
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Payments due by period
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At January 3,
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Less than
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(in thousands)
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2009
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1 year
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1-3 years
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3-5 years
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Thereafter
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Long-term debt
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$
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2,176,547
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$
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45,640
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$
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276,602
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$
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910,625
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$
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943,680
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Notes payable
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61,734
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61,734
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Interest on debt
obligations(1)
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575,778
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121,479
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224,966
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200,063
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29,270
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Operating lease obligations
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226,633
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43,488
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71,840
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41,639
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69,666
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Purchase
obligations(2)
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626,919
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507,373
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41,149
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27,076
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51,321
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Other long-term
obligations(3)
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76,856
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29,460
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19,712
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14,334
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13,350
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Total
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$
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3,744,467
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$
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809,174
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$
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634,269
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$
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1,193,737
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$
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1,107,287
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(1)
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Interest obligations on floating
rate debt instruments are calculated for future periods using
interest rates in effect at January 3, 2009.
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(2)
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Purchase obligations,
as disclosed in the table, are obligations to purchase goods and
services in the ordinary course of business for production and
inventory needs (such as raw materials, supplies, packaging, and
manufacturing arrangements), capital expenditures, marketing
services, royalty-bearing license agreement payments and other
professional services. This table only includes purchase
obligations for which we have agreed upon a fixed or minimum
quantity to purchase, a fixed, minimum or variable pricing
arrangement, and an approximate delivery date. Actual cash
expenditures relating to these obligations may vary from the
amounts shown in the table above. We enter into purchase
obligations when terms or conditions are favorable or when a
long-term commitment is necessary. Many of these arrangements
are cancelable after a notice period without a significant
penalty. This table omits purchase obligations that did not
exist as of January 3, 2009, as well as obligations for
accounts payable and accrued liabilities recorded on the
Consolidated Balance Sheet at January 3, 2009.
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(3)
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Represents the projected payment
for long-term liabilities recorded on the Consolidated Balance
Sheet at January 3, 2009 for deferred compensation,
severance, certain employee benefit claims, capital leases and
unrecognized tax benefits.
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S-77
Sources and
uses of our cash
The information presented below regarding the sources and uses
of our cash flows for the nine months ended October 3, 2009
and September 27, 2008 and for the years ended
January 3, 2009 and December 29, 2007 was derived from
our financial statements.
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Nine months ended
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Years ended
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October 3,
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September 27,
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January 3,
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December 29,
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(dollars in thousands)
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2009
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2008
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2009
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2007
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Operating activities
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$
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210,807
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$
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(18,621
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)
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$
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177,397
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$
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359,040
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Investing activities
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(83,885
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)
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(109,644
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)
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(177,248
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)
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(101,085
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)
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Financing activities
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(155,935
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)
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40,776
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(104,738
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)
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(243,379
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)
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Effect of changes in foreign currency exchange rates on cash
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288
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(535
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)
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(2,305
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)
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3,687
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Increase (decrease) in cash and cash equivalents
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$
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(28,725
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)
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$
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(88,024
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)
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$
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(106,894
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)
|
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$
|
18,263
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Cash and cash equivalents at beginning of year
|
|
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67,342
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|
|
|
174,236
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|
|
|
174,236
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|
|
|
155,973
|
|
|
|
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Cash and cash equivalents at end of period
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|
$
|
38,617
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|
|
$
|
86,212
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|
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$
|
67,342
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|
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$
|
174,236
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|
|
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Operating
activities
Net cash provided by operating activities was $211 million
in the nine months of 2009 compared to net cash used in
operating activities of $19 million in the nine months of
2008. The net increase in cash from operating activities of
$230 million for the nine months of 2009 compared to the
nine months of 2008 is primarily attributable to significantly
lower uses of our working capital of $272 million,
partially offset by lower net income of $57 million.
Net inventory decreased $159 million from January 3,
2009 primarily due to decreases in levels as we complete the
execution of our supply chain consolidation and globalization
strategy, lower input costs such as cotton, oil and freight and
lower excess and obsolete inventory levels. We continually
monitor our inventory levels to best balance current supply and
demand with potential future demand that typically surges when
consumers no longer postpone purchases in our product
categories. The lower excess and obsolete inventory levels are
attributable to both our continuous evaluation of inventory
levels and simplification of our product category offerings. We
realized these benefits by driving down obsolete inventory
levels through aggressive management and promotions.
Accounts receivable increased $129 million from
January 3, 2009 primarily due to higher sales in the third
quarter of 2009 compared to the fourth quarter of 2008 and a
longer collection cycle reflecting a more challenging retail
environment.
With our global supply chain restructured, we are now focused on
optimizing our supply chain to further enhance efficiency,
improve working capital and asset turns and reduce costs. We are
focused on optimizing the working capital needs of our supply
chain through several initiatives, such as supplier-managed
inventory for raw materials and sourced goods ownership
relationships. In September 2009, we announced that we will
cease making our own yarn and that we
S-78
will source all of our yarn requirements from large-scale yarn
suppliers. We entered into an agreement with Parkdale America
under which we agreed to sell or lease assets related to
operations at our four yarn manufacturing facilities to Parkdale
America. We also entered into a yarn purchase agreement with
Parkdale. Under this agreement, which has an initial term of six
years, Parkdale will produce and sell to us a substantial amount
of our Western Hemisphere yarn requirements. Exiting yarn
production and entering into a supply agreement is expected to
generate a $100 million of working capital improvements
from reduced raw material requirements, reduced inventory, and
sale proceeds. During the first two years of the term, Parkdale
will also produce and sell to us a substantial amount of the
yarn requirements of our Nanjing, China textile facility.
Net cash provided by operating activities was $177 million
in 2008 compared to $359 million in 2007. The net change in
cash from operating activities of $182 million for 2008
compared to 2007 is attributable to the higher uses of our
working capital, primarily driven by changes in inventory.
Inventory grew $183 million from December 29, 2007
primarily due to increases in levels needed to service our
business as we continued to execute our consolidation and
globalization strategy which had an impact of approximately
$112 million. In addition, cost increases for inputs such
as cotton, oil and freight were approximately $53 million
and other factors such as reserves had an impact of
approximately $18 million. We continually monitor our
inventory levels to best balance current supply and demand with
potential future demand that typically surges when consumers no
longer postpone purchases in our product categories. Accounts
receivable was lower in 2008 compared to 2007 primarily as a
result of lower sales volume in the fourth quarter of 2008.
Investing
activities
Net cash used in investing activities was $84 million in
the nine months of 2009 compared to $110 million in the
nine months of 2008. The lower net cash used in investing
activities of $26 million for the nine months of 2009
compared to the nine months of 2008 was primarily the result of
lower net spending on capital expenditures in the nine months of
2009 compared to the nine months of 2008 and an acquisition of a
sewing operation in Thailand for $10 million in the nine
months of 2008. During the nine months of 2009, gross capital
expenditures were $100 million as we continued to build out
our textile and sewing network in Asia, Central America and the
Caribbean Basin and approximated 80% of our planned spending for
all of 2009.
Net cash used in investing activities was $177 million in
2008 compared to $101 million in 2007. The higher net cash
used in investing activities of $76 million for 2008
compared to 2007 was primarily the result of higher capital
expenditures. During 2008 gross capital expenditures were
$187 million as we continued to build out our textile and
sewing network in Asia, Central America and the Caribbean Basin
and invest in our technology strategic initiatives which were
offset by cash proceeds from sales of assets of
$25 million, primarily from dispositions of plant and
equipment associated with our restructuring initiatives. In
addition, we acquired a sewing operation in Thailand and an
embroidery operation in Honduras for an aggregate cost of
$15 million during 2008.
Financing
activities
Net cash used in financing activities was $156 million in
the nine months of 2009 compared to cash provided by financing
activities of $41 million in the nine months of 2008. The
lower net
S-79
cash from financing activities of $197 million for the nine
months of 2009 compared to the nine months of 2008 was primarily
the result of the prepayment of $140 million of principal
in September 2009 and payments of $22 million for debt
amendment fees associated with the amendments of the Senior
Secured Credit Facilities and the Accounts Receivable
Securitization Facility in 2009. Lower net borrowings on notes
payable of $51 million partially offset by higher net
borrowings of $6 million on the Accounts Receivable
Securitization Facility also contributed to the higher net cash
used in financing activities in the nine months of 2009 compared
to the nine months of 2008. In addition, we received
$18 million in cash from Sara Lee in the nine months of
2008 which was offset by stock repurchases of $30 million
in the nine months of 2008.
Net cash used in financing activities was $105 million in
2008 compared to $243 million in 2007. The lower net cash
used in financing activities of $138 million for 2008
compared to 2007 was primarily the result of lower repayments of
$303 million under the Senior Secured Credit Facilities,
higher net borrowings on notes payable of $65 million, the
receipt from Sara Lee of $18 million in cash in 2008 and
lower stock repurchases of $14 million, partially offset by
borrowings of $250 million of principal under the Accounts
Receivable Securitization Facility in 2007, repayments of
$7 million under the Accounts Receivable Securitization
Facility in 2008 and cash paid to repurchase $4 million of
Floating Rate Senior Notes in 2008.
Cash and cash
equivalents
As of October 3, 2009 and January 3, 2009, cash and
cash equivalents were $39 million and $67 million,
respectively. The lower cash and cash equivalents as of
October 3, 2009 was primarily the result of cash provided
by operating activities of $211 million, partially offset
by net cash used in financing activities of $156 million
and net cash used in investing activities of $84 million
As of January 3, 2009 and December 29, 2007, cash and
cash equivalents were $67 million and $174 million,
respectively. The lower cash and cash equivalents as of
January 3, 2009 was primarily the result of net capital
expenditures of $162 million, net principal payments on
debt of $139 million, $30 million of stock
repurchases, the acquisitions of a sewing operation in Thailand
and an embroidery operation in Honduras for an aggregate cost of
$15 million partially offset by $178 million related
to other uses of working capital, $43 million of net
borrowings on notes payable and the receipt from Sara Lee of
$18 million in cash.
Material
financing arrangements
We believe our financing structure provides a secure base to
support our ongoing operations and key business strategies.
Depending on conditions in the capital markets and other
factors, we will from time to time consider other financing
transactions, the proceeds of which could be used to refinance
current indebtedness or for other purposes. We continue to
monitor the impact, if any, of the current conditions in the
credit markets on our operations. Our access to financing at
reasonable interest rates could become influenced by the
economic and credit market environment. Deterioration in the
capital markets, which has caused many financial institutions to
seek additional capital, merge with larger and stronger
financial institutions and, in some cases, fail, has led to
concerns about the stability of financial institutions. We
currently hold interest rate cap and swap derivative instruments
to mitigate a portion of our interest rate risk and hold foreign
exchange rate derivative instruments to mitigate the potential
impact of currency fluctuations. Credit risk is the exposure to
nonperformance of another party to these
S-80
arrangements. We mitigate credit risk by dealing with highly
rated bank counterparties. We believe that our exposures are
appropriately diversified across counterparties and that these
counterparties are creditworthy financial institutions.
Moodys Investors Services (Moodys)
corporate credit rating for our company is Ba3 and
Standard & Poors Ratings Services
(Standard & Poors) corporate credit
rating for us is BB-. In November 2009, Moodys changed our
rating outlook to stable from negative
and affirmed certain of our ratings, including the Ba3 corporate
credit and probability of default ratings and the speculative
grade liquidity rating of SGL-2. Moodys also upgraded its
ratings on some of the Senior Secured Credit Facilities and the
Second Lien Credit Facility. Moodys indicated that the
outlook revision reflects the progress we have made toward
deleveraging our balance sheet. In September 2009,
Standard & Poors changed our current outlook to
negative and placed our corporate credit rating and
all issue-level ratings for us on Creditwatch with
negative implications. Standard & Poors
cited its concern that our operating performance and credit
metrics had weakened materially through the second quarter of
2009.
In connection with the spin off, on September 5, 2006, we
entered into the $2.15 billion Senior Secured Credit
Facilities (which include the $500 million Revolving Loan
Facility that was undrawn at the time of the spin off), the
$450 million Second Lien Credit Facility and the
$500 million Bridge Loan Facility. We paid
$2.4 billion of the proceeds of these borrowings to Sara
Lee in connection with the consummation of the spin off. The
Bridge Loan Facility was paid off in full through the issuance
of the $500 million of Floating Rate Senior Notes issued in
December 2006. On November 27, 2007, we entered into the
Accounts Receivable Securitization Facility which provides for
up to $250 million in funding accounted for as a secured
borrowing, limited to the availability of eligible receivables,
and is secured by certain domestic trade receivables. The
proceeds from the Accounts Receivable Securitization Facility
were used to pay off a portion of the Senior Secured Credit
Facilities.
As of October 3, 2009, we were in compliance with all
covenants under our credit facilities. We continue to monitor
our debt covenant compliance carefully in this difficult
economic environment. We expect to maintain compliance in the
fourth quarter of 2009 with all of our covenant ratios.
Maintaining future compliance with our leverage ratio covenant,
which was amended earlier in 2009, requires generating
sufficient EBITDA and reducing debt. As previously stated, it is
our goal to reduce debt by approximately $300 million by
the end of fiscal year 2009.
We intend to use a portion of the net proceeds from the
Transactions to refinance outstanding borrowings under the
Senior Secured Credit Facilities and to repay outstanding
borrowings under the Second Lien Credit Facility. We will
terminate the Second Lien Credit Facility concurrently with the
closing of this offering. See Use of proceeds.
Senior secured
credit facilities
The Senior Secured Credit Facilities initially provided for
aggregate borrowings of $2.15 billion, consisting of:
(i) a $250.0 million Term A loan facility (the
Term A Loan Facility); (ii) a $1.4 billion
Term B loan facility (the Term B Loan Facility); and
(iii) the $500 million Revolving Loan Facility that
was undrawn as of January 3, 2009. Issuances of letters of
credit reduce the amount available under the Revolving Loan
Facility.
The Senior Secured Credit Facilities are guaranteed by
substantially all of our existing and future direct and indirect
U.S. subsidiaries, with certain customary or
agreed-upon
exceptions for certain subsidiaries.
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The Term A Loan Facility matures on September 5, 2012. The
Term B Loan Facility matures on September 5, 2013. The
Revolving Loan Facility matures on September 5, 2011. All
borrowings under the Revolving Loan Facility must be repaid in
full upon maturity. Outstanding borrowings under the Senior
Secured Credit Facilities are prepayable without penalty.
We intend to use a portion of the net proceeds from the
Transactions to refinance outstanding borrowings under the
Senior Secured Credit Facilities. We will amend and restate the
Senior Secured Credit Facilities concurrently with the closing
of this offering. See Use of proceeds and
New senior secured credit facilities.
Second lien
credit facility
The Second Lien Credit Facility provides for aggregate
borrowings of $450 million by Hanesbrands
wholly-owned subsidiary, HBI Branded Apparel Limited, Inc. The
Second Lien Credit Facility is unconditionally guaranteed by
Hanesbrands and each entity guaranteeing the Senior Secured
Credit Facilities, subject to the same exceptions and exclusions
provided in the Senior Secured Credit Facilities. The Second
Lien Credit Facility and the guarantees in respect thereof are
secured on a second-priority basis (subordinate only to the
Senior Secured Credit Facilities and any permitted additions
thereto or refinancings thereof) by substantially all of the
assets that secure the Senior Secured Credit Facilities (subject
to the same exceptions).
The Second Lien Credit Facility matures on March 5, 2014,
and includes premiums for prepayment of the loan prior to
September 5, 2009 based on the timing of the prepayment.
The Second Lien Credit Facility will not amortize and will be
repaid in full on its maturity date.
We intend to use a portion of the net proceeds from the
Transactions to repay outstanding borrowings under the Second
Lien Credit Facility and to terminate the Second Lien Credit
Facility concurrently with the closing of this offering. See
Use of proceeds.
New senior
secured credit facilities
Simultaneously with the closing of this offering, we expect to
amend and restate our Senior Secured Credit Facilities to
provide for the $1.15 billion New Senior Secured Credit
Facilities. We intend to use a portion of the net proceeds from
this offering and the New Senior Secured Credit Facilities to
refinance outstanding borrowings under the Senior Secured Credit
Facilities and repay the outstanding borrowings under the Second
Lien Credit Facility. See Use of proceeds.
The New Senior Secured Credit Facilities initially provides for
aggregate borrowings of $1.15 billion, consisting of:
(i) a $750.0 million term loan facility (the New
Term Loan Facility) and (ii) a $400 million
revolving loan facility (the New Revolving Loan
Facility). A portion of the New Revolving Loan Facility is
available for the issuances of letters of credit and the making
of swingline loans, and any such issuance of letters of credit
or making of a swingline loan will reduce the amount available
under the New Revolving Loan Facility. At our option, at any
time after the effective date of the New Senior Secured Credit
Facilities, we may add one or more term loan facilities or
increase the commitments under the New Revolving Loan Facility
in an aggregate amount of up to $300 million so long as
certain conditions are satisfied, including, among others, that
no default or event of default is in existence and that we are
in pro forma compliance with the financial covenants set forth
below.
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The proceeds of the New Term Loan Facility will be used to
refinance all of the loans outstanding under the existing Term A
Loan Facility and Term B Loan Facility. The proceeds of the New
Revolving Loan Facility will be used to pay fees and expenses in
connection with the transaction, for general corporate purposes
and working capital needs.
The New Senior Secured Credit Facilities are guaranteed by
substantially all of our existing and future direct and indirect
U.S. subsidiaries, with certain customary or
agreed-upon
exceptions for certain subsidiaries. We and each of the
guarantors under the New Senior Secured Credit Facilities have
granted the lenders under the New Senior Secured Credit
Facilities a valid and perfected first priority (subject to
certain customary exceptions) lien and security interest in the
following:
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the equity interests of substantially all of our direct and
indirect U.S. subsidiaries and 65% of the voting securities
of certain first tier foreign subsidiaries; and
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substantially all present and future property and assets, real
and personal, tangible and intangible, of Hanesbrands and each
guarantor, except for certain enumerated interests, and all
proceeds and products of such property and assets.
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The New Term Loan Facility matures in December 2015. The New
Term Loan Facility will be repaid in equal quarterly
installments in an amount equal to 1% per annum, with the
balance due on the maturity date. The New Revolving Loan
Facility matures in December 2013. All borrowings under the New
Revolving Loan Facility must be repaid in full upon maturity.
Outstanding borrowings under the New Senior Secured Credit
Facilities are prepayable without penalty. There are mandatory
prepayments of principal in connection with (i) the
incurrence of certain indebtedness, (ii) non-ordinary
course asset sales or other dispositions (including as a result
of casualty or condemnation) that exceed certain thresholds in
any period of twelve-consecutive months, with customary
reinvestment provisions, and (iii) excess cash flow, which
percentage will be based upon our leverage ratio during the
relevant fiscal period.
At our option, borrowings under the New Senior Secured Credit
Facilities may be maintained from time to time as (a) Base
Rate loans, which shall bear interest at the highest of
(i) 1/2 of 1% in excess of the federal funds rate,
(ii) the rate publicly announced by JPMorgan Chase Bank as
its prime rate at its principal office in New York
City and (iii) the LIBO Rate (as defined in the New Senior
Secured Credit Facilities and adjusted for maximum reserves) for
LIBOR-based loans with a one-month interest period plus 1.0%, in
each case in effect from time to time, plus the applicable
margin (which is 2.50% for the New Term Loan Facility and 3.50%
for the New Revolving Loan Facility), or (b) LIBOR-based
loans, which shall bear interest at the LIBO Rate, as determined
by reference to the rate for deposits in dollars appearing on
the Reuters Screen LIBOR01 Page for the respective interest
period plus the applicable margin in effect from time to time
(which is 3.50% for the New Term Loan Facility and 4.50% for the
New Revolving Loan Facility).
The New Senior Secured Credit Facilities requires us to comply
with customary affirmative, negative and financial covenants.
The New Senior Secured Credit Facilities requires that we
maintain a minimum interest coverage ratio and a maximum total
debt to EBITDA (earnings before income taxes, depreciation
expense and amortization), or leverage ratio. The interest
coverage ratio covenant requires that the ratio of our EBITDA
for the preceding four fiscal quarters to our consolidated total
interest expense for such period shall not be less than a
specified ratio for each fiscal quarter beginning with the
fourth fiscal quarter of 2009. This ratio is 2.50 to 1 for the
fourth fiscal quarter of 2009 and will increase over time until
it reaches 3.25 to 1 for the third fiscal quarter of 2011 and
thereafter. The leverage ratio covenant requires that
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the ratio of our total debt to our EBITDA for the preceding four
fiscal quarters will not be more than a specified ratio for each
fiscal quarter beginning with the fourth fiscal quarter of 2009.
This ratio is 4.50 to 1 for the fourth fiscal quarter of 2009
and will decline over time until it reaches 3.75 to 1 for the
second fiscal quarter of 2011 and thereafter. The method of
calculating all of the components used in the covenants is
included in the New Senior Secured Credit Facilities.
The New Senior Secured Credit Facilities contains customary
events of default, including nonpayment of principal when due;
nonpayment of interest after stated grace period, fees or other
amounts after stated grace period; material inaccuracy of
representations and warranties; violations of covenants; certain
bankruptcies and liquidations; any cross-default to material
indebtedness; certain material judgments; certain events related
to the Employee Retirement Income Security Act of 1974, as
amended, or ERISA, actual or asserted invalidity of
any guarantee, security document or subordination provision or
non-perfection of security interest, and a change in control (as
defined in the New Senior Secured Credit Facilities).
Notes offered
hereby
The indenture governing the notes offered hereby, among other
restrictions, will limits our ability and the ability of our
restricted subsidiaries to:
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incur additional indebtedness;
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pay dividends or make other distributions or repurchase or
redeem our capital stock;
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make loans and investments;
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transfer or sell assets;
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incur certain liens;
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enter into transactions with affiliates;
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alter the businesses we conduct;
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enter into agreements restricting our subsidiaries ability
to pay dividends;
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consolidate, merge or sell all or substantially all of our
assets; and
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enter into sale and leaseback transactions.
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These covenants are subject to a number of important limitations
and exceptions, including a provision allowing us to make
restricted payments in an amount calculated pursuant to a
formula based upon 50% of our adjusted consolidated net income
(as defined in the indenture) since October 1, 2006. As of
October 3, 2009, after giving effect to the Transactions,
we would have had approximately $391.9 million of available
restricted payment capacity pursuant to that provision, in
addition to the restricted payment capacity available under
other exceptions. See Description of
notesCovenants.
In addition, most of the covenants will be suspended if both
Standard & Poors Ratings Services and
Moodys Investors Service, Inc., assign the notes an
investment grade rating and no default exists with respect to
the notes.
Subject to certain exceptions, the indenture governing the notes
offered hereby will also permit us and our restricted
subsidiaries to incur additional indebtedness, including senior
indebtedness and secured indebtedness. For more details, see
Description of notes and Description of other
indebtedness.
S-84
Floating rate
senior notes
On December 14, 2006, we issued $500 million aggregate
principal amount of the Floating Rate Senior Notes. The Floating
Rate Senior Notes are senior unsecured obligations that rank
equal in right of payment with all of our existing and future
unsubordinated indebtedness. The Floating Rate Senior Notes bear
interest at an annual rate, reset semi-annually, equal to LIBOR
plus 3.375%. Interest is payable on the Floating Rate Senior
Notes on June 15 and December 15 of each year. The Floating Rate
Senior Notes will mature on December 15, 2014. The net
proceeds from the sale of the Floating Rate Senior Notes were
approximately $492 million. As noted above, these proceeds,
together with our working capital, were used to repay in full
the $500 million outstanding under the Bridge Loan
Facility. The Floating Rate Senior Notes are guaranteed by
substantially all of our domestic subsidiaries.
We may redeem some or all of the Floating Rate Senior Notes at
any time on or after December 15, 2008 at a redemption
price equal to the principal amount of the Floating Rate Senior
Notes plus a premium of 2% if redeemed during the
12-month
period commencing on December 15, 2008, 1% if redeemed
during the
12-month
period commencing on December 15, 2009 and no premium if
redeemed after December 15, 2010, as well as any accrued
and unpaid interest as of the redemption date. We repurchased
$6 million of the Floating Rate Senior Notes for
$4 million resulting in a gain of $2 million during
the year ended January 3, 2009.
Accounts
receivable securitization facility
On November 27, 2007, we entered into the Accounts
Receivable Securitization Facility, which provides for up to
$250 million in funding accounted for as a secured
borrowing, limited to the availability of eligible receivables,
and is secured by certain domestic trade receivables. The
Accounts Receivable Securitization Facility will terminate on
November 27, 2010. Under the terms of the Accounts
Receivable Securitization Facility, the company sells, on a
revolving basis, certain domestic trade receivables to HBI
Receivables LLC (Receivables LLC), a wholly-owned
bankruptcy-remote subsidiary that in turn uses the trade
receivables to secure the borrowings, which are funded through
conduits that issue commercial paper in the short-term market
and are not affiliated with us or through committed bank
purchasers if the conduits fail to fund. The assets and
liabilities of Receivables LLC are fully reflected on our
balance sheet, and the securitization is treated as a secured
borrowing for accounting purposes. The borrowings under the
Accounts Receivable Securitization Facility remain outstanding
throughout the term of the agreement subject to our maintaining
sufficient eligible receivables by continuing to sell trade
receivables to Receivables LLC unless an event of default
occurs. Availability of funding under the facility depends
primarily upon the eligible outstanding receivables balance. As
of January 3, 2009, we had $243 million outstanding
under the Accounts Receivable Securitization Facility. The
outstanding balance under the Accounts Receivable Securitization
Facility is reported on our balance sheet in long-term debt
based on the three-year term of the agreement and the fact that
remittances on the receivables do not automatically reduce the
outstanding borrowings. The Accounts Receivable Securitization
Facility contains customary events of default.
We used all $250 million of the proceeds from the Accounts
Receivable Securitization Facility to make a prepayment of
principal under the Senior Secured Credit Facilities. Unless the
conduits fail to fund, the yield on the commercial paper is the
conduits cost to issue the commercial paper plus certain
dealer fees, is considered a financing cost and is included in
interest expense on the Consolidated Statement of Income. If the
conduits fail to fund, the Accounts Receivable Securitization
Facility would be funded through committed bank purchasers, and
the interest
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rate payable at our option at the rate announced from time to
time by JPMorgan as its prime rate or at the LIBO Rate (as
defined in the Accounts Receivable Securitization Facility) plus
the applicable margin in effect from time to time. The average
blended interest rate for the year ended January 3, 2009
was 3.50%.
On March 16, 2009, we and Receivables LLC entered into
Amendment No. 1 (the First Amendment) to the
Accounts Receivable Securitization Facility dated as of
November 27, 2007. The Accounts Receivable Securitization
Facility contains the same leverage ratio and interest coverage
ratio provisions as the Senior Secured Credit Facilities. The
First Amendment effects the same changes to the leverage ratio
and the interest coverage ratio that are effected by the Third
Amendment described above. Pursuant to the First Amendment, the
rate that would be payable to the conduit purchasers or the
committed purchasers party to the Accounts Receivable
Securitization Facility in the event of certain defaults is
increased from 1% over the prime rate to 3% over the greatest of
(i) the one-month LIBO rate plus 1%, (ii) the weighted
average rates on federal funds transactions plus 0.5%, or
(iii) the prime rate. Also pursuant to the First Amendment,
several of the factors that contribute to the overall
availability of funding have been amended in a manner that would
be expected to generally reduce the amount of funding that will
be available under the Accounts Receivable Securitization
Facility. The First Amendment also provides for certain other
amendments to the Accounts Receivable Securitization Facility,
including changing the termination date for the Accounts
Receivable Securitization Facility from November 27, 2010
to March 15, 2010, and requiring that Receivables LLC make
certain payments to a conduit purchaser, a committed purchaser,
or certain entities that provide funding to or are affiliated
with them, in the event that assets and liabilities of a conduit
purchaser are consolidated for financial
and/or
regulatory accounting purposes with certain other entities.
On April 13, 2009, we and Receivables LLC entered into
Amendment No. 2 (the Second Amendment) to the
Accounts Receivable Securitization Facility. Pursuant to the
Second Amendment, several of the factors that contribute to the
overall availability of funding have been amended in a manner
that is expected to generally increase over time the amount of
funding that will be available under the Accounts Receivable
Securitization Facility as compared to the amount that would be
available pursuant to the First Amendment. The Second Amendment
also provides for certain other amendments to the Accounts
Receivable Securitization Facility, including changing the
termination date for the Accounts Receivable Securitization
Facility from March 15, 2010 to April 12, 2010. In
addition, HSBC Securities (USA) Inc. replaced JPMorgan Chase
Bank, N.A. as agent under the Accounts Receivable Securitization
Facility, PNC Bank, N.A. replaced JPMorgan Chase Bank, N.A. as a
managing agent, and PNC Bank, N.A. and an affiliate of PNC Bank,
N.A. replaced affiliates of JPMorgan Chase Bank, N.A. as a
committed purchaser and a conduit purchaser, respectively. On
August 17, 2009, we and Receivables LLC entered into
Amendment No. 3 to the to the Accounts Receivable
Securitization Facility, pursuant to which certain definitions
were amended to clarify the calculation of certain ratios that
impact reporting under the Accounts Receivable Securitization
Facility.
Notes
payable
Notes payable were $62 million at January 3, 2009 and
$20 million at December 29, 2007.
We have a short-term revolving facility arrangement with a
Salvadoran branch of a U.S. bank amounting to
$45 million of which $29 million was outstanding at
January 3, 2009 which
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accrues interest at 7.38%. We were in compliance with the
covenants contained in this facility at January 3, 2009.
We have a short-term revolving facility arrangement with a Thai
branch of a U.S. bank amounting to THB 600 million
($17 million) of which $15 million was outstanding at
January 3, 2009 which accrues interest at 4.35%. We were in
compliance with the covenants contained in this facility at
January 3, 2009.
We have a short-term revolving facility arrangement with a
Chinese branch of a U.S. bank amounting to RMB
56 million ($8 million) of which $8 million was
outstanding at January 3, 2009 which accrues interest at
5.36%. Borrowings under the facility accrue interest at the
prevailing base lending rates published by the Peoples
Bank of China from time to time less 10%. We were in compliance
with the covenants contained in this facility at January 3,
2009.
We have a short-term revolving facility arrangement with an
Indian branch of a U.S. bank amounting to INR
260 million ($5 million) of which $5 million was
outstanding at January 3, 2009 which accrues interest at
16.50%. We were in compliance with the covenants contained in
this facility at January 3, 2009.
We have other short-term obligations amounting to $4,029 which
consisted of a short-term revolving facility arrangement with a
Japanese branch of a U.S. bank amounting to JPY
1,100 million ($12 million) of which $2 million
was outstanding at January 3, 2009 which accrues interest
at 2.42%, and a short-term revolving facility arrangement with a
Vietnamese branch of a U.S. bank amounting to
$14 million of which $2 million was outstanding at
January 3, 2009 which accrues interest at 12.14%. We were
in compliance with the covenants contained in the facilities at
January 3, 2009.
In addition, we have short-term revolving credit facilities in
various other locations that can be drawn on from time to time
amounting to $27 million of which $0 was outstanding at
January 3, 2009.
Derivatives
Given the recent turmoil in the financial and credit markets, we
expanded our interest rate hedging portfolio at what we believe
to be advantageous rates that are expected to minimize our
overall interest rate risk. In addition, until September 5,
2009, we were required under the Senior Secured Credit
Facilities and the Second Lien Credit Facility to hedge a
portion of our floating rate debt to reduce interest rate risk
caused by floating rate debt issuance. At October 3, 2009,
we have outstanding hedging arrangements whereby we capped the
LIBOR interest rate component on $400 million of our
floating rate debt at 3.50%. We also entered into interest rate
swaps tied to the
3-month and
6-month
LIBOR rates whereby we fixed the LIBOR interest rate component
on an aggregate of $1.4 billion of our floating rate debt
at a blended rate of approximately 4.16%. Approximately 88% of
our total debt outstanding at October 3, 2009 is at
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a fixed or capped LIBOR rate. The table below summarizes our
interest rate derivative portfolio with respect to our long-term
debt as of October 3, 2009.
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Interest
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Hedge
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rate
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expiration
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Amount
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LIBOR
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spreads
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dates
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Debt covered by interest rate caps:
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Senior Secured and Second Lien Credit Facilities
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$
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400,000
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3.50%
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3.75% to 4.75%
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October 2009
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Debt covered by interest rate swaps:
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Floating Rate Notes
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493,680
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4.26%
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3.38%
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December 2012
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Senior Secured and Second Lien Credit Facilities
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500,000
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5.14% to 5.18%
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3.75% to 4.75%
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October 2009
October 2011
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Senior Secured and Second Lien Credit Facilities
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400,000
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2.80%
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3.75% to 4.75%
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October 2010
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Unhedged debt:
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Accounts Receivable Securitization Facility
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249,043
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Not applicable
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Not applicable
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Not applicable
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$
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2,042,723
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We use forward exchange and option contracts to reduce the
effect of fluctuating foreign currencies for a portion of our
anticipated short-term foreign currency-denominated transactions.
Cotton is the primary raw material we use to manufacture many of
our products. We generally purchase our raw materials at market
prices. We use commodity financial instruments, options and
forward contracts to hedge the price of cotton, for which there
is a high correlation between the hedged item and the hedged
instrument. We generally do not use commodity financial
instruments to hedge other raw material commodity prices.
Critical
accounting policies and estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position in conformity with accounting
principles generally accepted in the United States. We apply
these accounting policies in a consistent manner. Our
significant accounting policies are discussed in Note 2,
titled Summary of Significant Accounting Policies,
to our Consolidated Financial Statements for the year ended
January 3, 2009.
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
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to be reasonable under the circumstances. We evaluate these
estimates and assumptions on an ongoing basis and may retain
outside consultants to assist in our evaluation. If actual
results ultimately differ from previous estimates, the revisions
are included in results of operations in the period in which the
actual amounts become known. The critical accounting policies
that involve the most significant management judgments and
estimates used in preparation of our financial statements, or
are the most sensitive to change from outside factors, are the
following:
Sales
recognition and incentives
We recognize revenue when (i) there is persuasive evidence
of an arrangement, (ii) the sales price is fixed or
determinable, (iii) title and the risks of ownership have
been transferred to the customer and (iv) collection of the
receivable is reasonably assured, which occurs primarily upon
shipment. We record provisions for any uncollectible amounts
based upon our historical collection statistics and current
customer information. Our management reviews these estimates
each quarter and makes adjustments based upon actual experience.
Note 2(d), titled Summary of Significant Accounting
PoliciesSales Recognition and Incentives, to our
Consolidated Financial Statements for the year ended
January 3, 2009 describes a variety of sales incentives
that we offer to resellers and consumers of our products.
Measuring the cost of these incentives requires, in many cases,
estimating future customer utilization and redemption rates. We
use historical data for similar transactions to estimate the
cost of current incentive programs. Our management reviews these
estimates each quarter and makes adjustments based upon actual
experience and other available information. We classify the
costs associated with cooperative advertising as a reduction of
Net sales in our statements of income.
Accounts
receivable valuation
Accounts receivable consist primarily of amounts due from
customers. We carry our accounts receivable at their net
realizable value. We record provisions for any uncollectible
amounts based upon our best estimate of probable losses inherent
in the accounts receivable portfolio determined on the basis of
historical experience, specific allowances for known troubled
accounts and other currently available information. Charges to
the allowance for doubtful accounts are reflected in the
Selling, general and administrative expenses line
and charges to the allowance for customer chargebacks and other
customer deductions are primarily reflected as a reduction in
the Net sales line of our statements of income. Our
management reviews these estimates each quarter and makes
adjustments based upon actual experience. Because we cannot
predict future changes in the financial stability of our
customers, actual future losses from uncollectible accounts may
differ from our estimates. If the financial condition of our
customers were to deteriorate, resulting in their inability to
make payments, a large reserve might be required. The amount of
actual historical losses has not varied materially from our
estimates for bad debts.
Catalog
expenses
We incur expenses for printing catalogs for our products to aid
in our sales efforts. We initially record these expenses as a
prepaid item and charge it against selling, general and
administrative expenses over time as the catalog is used.
Expenses are recognized at a rate that approximates our
historical experience with regard to the timing and amount of
sales attributable to a catalog distribution.
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Inventory
valuation
We carry inventory on our balance sheet at the estimated lower
of cost or market. Cost is determined by the
first-in,
first-out, or FIFO, method for our inventories. We
carry obsolete, damaged, and excess inventory at the net
realizable value, which we determine by assessing historical
recovery rates, current market conditions and our future
marketing and sales plans. Because our assessment of net
realizable value is made at a point in time, there are inherent
uncertainties related to our value determination. Market factors
and other conditions underlying the net realizable value may
change, resulting in further reserve requirements. A reduction
in the carrying amount of an inventory item from cost to market
value creates a new cost basis for the item that cannot be
reversed at a later period. While we believe that adequate
write-downs for inventory obsolescence have been provided in the
financial statements, consumer tastes and preferences will
continue to change and we could experience additional inventory
write-downs in the future.
Rebates, discounts and other cash consideration received from a
vendor related to inventory purchases are reflected as
reductions in the cost of the related inventory item, and are
therefore reflected in cost of sales when the related inventory
item is sold.
Income
taxes
Deferred taxes are recognized for the future tax effects of
temporary differences between financial and income tax reporting
using tax rates in effect for the years in which the differences
are expected to reverse. We have recorded deferred taxes related
to operating losses and capital loss carryforwards. Realization
of deferred tax assets is dependent on future taxable income in
specific jurisdictions, the amount and timing of which are
uncertain, possible changes in tax laws and tax planning
strategies. If in our judgment it appears that we will not be
able to generate sufficient taxable income or capital gains to
offset losses during the carryforward periods, we have recorded
valuation allowances to reduce those deferred tax assets to
amounts expected to be ultimately realized. An adjustment to
income tax expense would be required in a future period if we
determine that the amount of deferred tax assets to be realized
differs from the net recorded amount. Prior to spin off on
September 5, 2006, all income taxes were computed and
reported on a separate return basis as if we were not part of
Sara Lee.
Federal income taxes are provided on that portion of our income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable, reflecting the historical
decisions made by Sara Lee with regards to earnings permanently
reinvested in foreign jurisdictions. In periods after the spin
off, we may make different decisions as to the amount of
earnings permanently reinvested in foreign jurisdictions, due to
anticipated cash flow or other business requirements, which may
impact our federal income tax provision and effective tax rate.
We periodically estimate the probable tax obligations using
historical experience in tax jurisdictions and our informed
judgment. There are inherent uncertainties related to the
interpretation of tax regulations in the jurisdictions in which
we transact business. The judgments and estimates made at a
point in time may change based on the outcome of tax audits, as
well as changes to, or further interpretations of, regulations.
Income tax expense is adjusted in the period in which these
events occur, and these adjustments are included in our
statements of income. If such changes take place, there is a
risk that our effective tax rate may increase or decrease in any
period. A company must recognize the tax benefit from an
uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination
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by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial
statements from such a position are measured based on the
largest benefit that has a greater than fifty percent likelihood
of being realized upon ultimate resolution.
In conjunction with the spin off, we and Sara Lee entered into a
tax sharing agreement, which allocates responsibilities between
us and Sara Lee for taxes and certain other tax matters. Under
the tax sharing agreement, Sara Lee generally is liable for all
U.S. federal, state, local and foreign income taxes
attributable to us with respect to taxable periods ending on or
before September 5, 2006. Sara Lee also is liable for
income taxes attributable to us with respect to taxable periods
beginning before September 5, 2006 and ending after
September 5, 2006, but only to the extent those taxes are
allocable to the portion of the taxable period ending on
September 5, 2006. We are generally liable for all other
taxes attributable to us. Changes in the amounts payable or
receivable by us under the stipulations of this agreement may
impact our tax provision in any period.
Under the tax sharing agreement, within 180 days after Sara
Lee filed its final consolidated tax return for the period that
included September 5, 2006, Sara Lee was required to
deliver to us a computation of the amount of deferred taxes
attributable to our United States and Canadian operations that
would be included on our opening balance sheet as of
September 6, 2006 (as finally determined) which
has been done. We have the right to participate in the
computation of the amount of deferred taxes. Under the tax
sharing agreement, if substituting the amount of deferred taxes
as finally determined for the amount of estimated deferred taxes
that were included on that balance sheet at the time of the spin
off causes a decrease in the net book value reflected on that
balance sheet, then Sara Lee will be required to pay us the
amount of such decrease. If such substitution causes an increase
in the net book value reflected on that balance sheet, then we
will be required to pay Sara Lee the amount of such increase.
For purposes of this computation, our deferred taxes are the
amount of deferred tax benefits (including deferred tax
consequences attributable to deductible temporary differences
and carryforwards) that would be recognized as assets on the
Companys balance sheet computed in accordance with GAAP,
but without regard to valuation allowances, less the amount of
deferred tax liabilities (including deferred tax consequences
attributable to deductible temporary differences) that would be
recognized as liabilities on our opening balance sheet computed
in accordance with GAAP, but without regard to valuation
allowances. Neither we nor Sara Lee will be required to make any
other payments to the other with respect to deferred taxes.
Our computation of the final amount of deferred taxes for our
opening balance sheet as of September 6, 2006 is as follows:
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Estimated deferred taxes subject to the tax sharing agreement
included in opening balance sheet on September 6, 2006
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$
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450,683
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Final calculation of deferred taxes subject to the tax sharing
agreement
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360,460
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Decrease in deferred taxes as of opening balance sheet on
September 6, 2006
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90,223
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Preliminary cash installment received from Sara Lee
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18,000
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Amount due from Sara Lee
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$
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72,223
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The amount that is expected to be collected from Sara Lee based
on our computation of $72 million is included as a
receivable in Other Current Assets in the Consolidated Balance
Sheet
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as of January 3, 2009 and in Deferred Tax Assets and Other
Current Assets in the Condensed Consolidated Balance Sheet as of
October 3, 2009.
Stock
compensation
We established the Omnibus Incentive Plan to award stock
options, stock appreciation rights, restricted stock, restricted
stock units, deferred stock units, performance shares and cash
to our employees, non-employee directors and employees of our
subsidiaries to promote the interest of our company and incent
performance and retention of employees. Stock-Based compensation
is estimated at the grant date based on the awards fair
value and is recognized as expense over the requisite service
period. Estimation of stock-based compensation for stock options
granted, utilizing the Black-Scholes option-pricing model,
requires various highly subjective assumptions including
volatility and expected option life. We use a combination of the
volatility of our company and the volatility of peer companies
for a period of time that is comparable to the expected life of
the option to determine volatility assumptions. We have utilized
the simplified method outlined in SEC accounting guidance to
estimate expected lives of options granted during the period.
The simplified method is used for valuing stock option grants to
eligible public companies that do not have sufficient historical
exercise patterns on options granted to employees. We estimate
forfeitures for stock-based awards granted, which are not
expected to vest. If any of these inputs or assumptions changes
significantly, our stock-based compensation expense could be
materially different in the future.
Defined
benefit pension plans
For a discussion of our net periodic benefit cost, plan
obligations, plan assets, and how we measure the amount of these
costs, see Note 16 titled Defined Benefit Pension
Plans to our Consolidated Financial Statements for the
year ended January 3, 2009.
In conjunction with the spin off from Sara Lee which occurred on
September 5, 2006, we established the Hanesbrands Inc.
Pension and Retirement Plan, which assumed the portion of the
underfunded liabilities and the portion of the assets of pension
plans sponsored by Sara Lee that relate to our employees. In
addition, we assumed sponsorship of certain other Sara Lee plans
and continued sponsorship of the Playtex Apparel Inc. Pension
Plan and the National Textiles, L.L.C. Pension Plan. As of
January 1, 2006, the benefits under these plans were
frozen. Since the spin off, we have voluntarily contributed
$98 million to our pension plans. Additionally, during 2007
we completed the separation of our pension plan assets and
liabilities from those of Sara Lee in accordance with
governmental regulations, which resulted in a higher total
amount of pension plan assets of approximately $74 million
being transferred to us than originally was estimated prior to
the spin off. As a result, our U.S. qualified pension plans
were approximately 75% funded as of January 3, 2009. We may
elect to make voluntary contributions to obtain an 80% funded
level which will avoid certain benefit payment restrictions
under the Pension Protection Act. The funded status as of
January 3, 2009 reflects a significant decrease in the fair
value of plan assets due to the stock markets performance
during 2008.
In September 2006, the Financial Accounting Standards Board
(FASB) issued new accounting guidance which requires
that the funded status of defined benefit postretirement plans
be recognized on a companys balance sheet, and changes in
the funded status be reflected in comprehensive income,
effective fiscal years ending after December 15, 2006,
which we adopted as of and for the six months ended
December 30, 2006. The impact of adopting the funded status
provisions was an increase in assets of $1 million, an
increase in liabilities of $26 million
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and a pretax increase in the accumulated other comprehensive
loss of $32 million. The guidance also requires companies
to measure the funded status of the plan as of the date of its
fiscal year end, effective for fiscal years ending after
December 15, 2008. We adopted the measurement date
provision during the year ended December 29, 2007, which
had an immaterial impact on beginning retained earnings,
accumulated other comprehensive income and pension liabilities.
The net periodic cost of the pension plans is determined using
projections and actuarial assumptions, the most significant of
which are the discount rate and the long-term rate of asset
return. The net periodic pension income or expense is recognized
in the year incurred. Gains and losses, which occur when actual
experience differs from actuarial assumptions, are amortized
over the average future expected life of participants.
Our policies regarding the establishment of pension assumptions
are as follows:
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In determining the discount rate, we utilized the Citigroup
Pension Discount Curve (rounded to the nearest 10 basis
points) in order to determine a unique interest rate for each
plan and match the expected cash flows for each plan.
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Salary increase assumptions were based on historical experience
and anticipated future management actions. The salary increase
assumption applies to the Canadian plans and portions of the
Hanesbrands nonqualified retirement plans, as benefits under
these plans are not frozen.
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In determining the long-term rate of return on plan assets we
applied a proportionally weighted blend between assuming the
historical long-term compound growth rate of the plan portfolio
would predict the future returns of similar investments, and the
utilization of forward looking assumptions.
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Retirement rates were based primarily on actual experience while
standard actuarial tables were used to estimate mortality.
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Trademarks and
other identifiable intangibles
Trademarks and computer software are our primary identifiable
intangible assets. We amortize identifiable intangibles with
finite lives, and we do not amortize identifiable intangibles
with indefinite lives. We base the estimated useful life of an
identifiable intangible asset upon a number of factors,
including the effects of demand, competition, expected changes
in distribution channels and the level of maintenance
expenditures required to obtain future cash flows. As of
January 3, 2009, the net book value of trademarks and other
identifiable intangible assets was $147 million, of which
we are amortizing the entire balance. We anticipate that our
amortization expense for 2009 will be $12 million.
We evaluate identifiable intangible assets subject to
amortization for impairment using a process similar to that used
to evaluate asset amortization described below under
Depreciation and impairment of property, plant and
equipment. We assess identifiable intangible assets not
subject to amortization for impairment at least annually and
more often as triggering events occur. In order to determine the
impairment of identifiable intangible assets not subject to
amortization, we compare the fair value of the intangible asset
to its carrying amount. We recognize an impairment loss for the
amount by which an identifiable intangible assets carrying
value exceeds its fair value.
We measure a trademarks fair value using the royalty saved
method. We determine the royalty saved method by evaluating
various factors to discount anticipated future cash flows,
including
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operating results, business plans, and present value techniques.
The rates we use to discount cash flows are based on interest
rates and the cost of capital at a point in time. Because there
are inherent uncertainties related to these factors and our
judgment in applying them, the assumptions underlying the
impairment analysis may change in such a manner that impairment
in value may occur in the future. Such impairment will be
recognized in the period in which it becomes known.
Goodwill
As of January 3, 2009, we had $322 million of
goodwill. We do not amortize goodwill, but we assess for
impairment at least annually and more often as triggering events
occur. The timing of our annual goodwill impairment testing is
the first day of the third fiscal quarter.
In evaluating the recoverability of goodwill, we estimate the
fair value of our reporting units. We have determined that our
reporting units are at the operating segment level. We rely on a
number of factors to determine the fair value of our reporting
units and evaluate various factors to discount anticipated
future cash flows, including operating results, business plans,
and present value techniques. As discussed above under
Trademarks and other identifiable intangibles,
there are inherent uncertainties related to these factors, and
our judgment in applying them and the assumptions underlying the
impairment analysis may change in such a manner that impairment
in value may occur in the future. Such impairment will be
recognized in the period in which it becomes known.
We evaluate the recoverability of goodwill using a two-step
process based on an evaluation of reporting units. The first
step involves a comparison of a reporting units fair value
to its carrying value. In the second step, if the reporting
units carrying value exceeds its fair value, we compare
the goodwills implied fair value and its carrying value.
If the goodwills carrying value exceeds its implied fair
value, we recognize an impairment loss in an amount equal to
such excess.
Depreciation
and impairment of property, plant and equipment
We state property, plant and equipment at its historical cost,
and we compute depreciation using the straight-line method over
the assets life. We estimate an assets life based on
historical experience, manufacturers estimates,
engineering or appraisal evaluations, our future business plans
and the period over which the asset will economically benefit
us, which may be the same as or shorter than its physical life.
Our policies require that we periodically review our
assets remaining depreciable lives based upon actual
experience and expected future utilization. A change in the
depreciable life is treated as a change in accounting estimate
and the accelerated depreciation is accounted for in the period
of change and future periods. Based upon current levels of
depreciation, the average remaining depreciable life of our net
property other than land is five years.
We test an asset for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be
recoverable. Such events include significant adverse changes in
business climate, several periods of operating or cash flow
losses, forecasted continuing losses or a current expectation
that an asset or asset group will be disposed of before the end
of its useful life. We evaluate an assets recoverability
by comparing the asset or asset groups net carrying amount
to the future net undiscounted cash flows we expect such asset
or asset group
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will generate. If we determine that an asset is not recoverable,
we recognize an impairment loss in the amount by which the
assets carrying amount exceeds its estimated fair value.
When we recognize an impairment loss for an asset held for use,
we depreciate the assets adjusted carrying amount over its
remaining useful life. We do not restore previously recognized
impairment losses if circumstances change.
Insurance
reserves
We maintain insurance coverage for property, workers
compensation and other casualty programs. We are responsible for
losses up to certain limits and are required to estimate a
liability that represents the ultimate exposure for aggregate
losses below those limits. This liability is based on
managements estimates of the ultimate costs to be incurred
to settle known claims and claims not reported as of the balance
sheet date. The estimated liability is not discounted and is
based on a number of assumptions and factors, including
historical trends, actuarial assumptions and economic
conditions. If actual trends differ from the estimates, the
financial results could be impacted. Actual trends have not
differed materially from the estimates.
Assets and
liabilities acquired in business combinations
We account for business acquisitions using the purchase method,
which requires us to allocate the cost of an acquired business
to the acquired assets and liabilities based on their estimated
fair values at the acquisition date. We recognize the excess of
an acquired businesss cost over the fair value of acquired
assets and liabilities as goodwill as discussed below under
Goodwill. We use a variety of information sources to
determine the fair value of acquired assets and liabilities. We
generally use third-party appraisers to determine the fair value
and lives of property and identifiable intangibles, consulting
actuaries to determine the fair value of obligations associated
with defined benefit pension plans, and legal counsel to assess
obligations associated with legal and environmental claims.
Recently issued
accounting pronouncements
Employers
disclosures about postretirement benefit plan
assets
In December 2008, the FASB issued guidance on the disclosure of
postretirement benefit plan assets. The guidance expands the
disclosure requirements to include more detailed disclosures
about an employers plan assets, including employers
investment strategies, major categories of plan assets,
concentrations of risk within plan assets, and valuation
techniques used to measure the fair value of plan assets. The
guidance is effective for fiscal years ending after
December 15, 2009. Since the guidance only requires
additional disclosures, adoption of the guidance is not expected
to have a material impact on our financial condition, results of
operations or cash flows.
Accounting for
transfers of financial assets
In June 2009, the FASB issued new accounting guidance for
transfers of financial assets. The new guidance requires greater
transparency and additional disclosures for transfers of
financial assets and the entitys continuing involvement
with them and changes the requirements for derecognizing
financial assets. The new accounting guidance is effective for
financial asset transfers
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occurring after the beginning of our first fiscal year that
begins after November 15, 2009. We are evaluating the
impact of adoption of this new guidance on our financial
condition, results of operations and cash flows.
Consolidationvariable
interest entities
In June 2009, the FASB issued new accounting guidance related to
the accounting and disclosure requirements for the consolidation
of variable interest entities. The new accounting guidance is
effective for our first fiscal year that begins after
November 15, 2009. We are evaluating the impact of adoption
of this guidance on our financial condition, results of
operations and cash flows.
Quantitative and
qualitative disclosures about market risk
We are exposed to market risk from changes in foreign exchange
rates, interest rates and commodity prices. Our risk management
control system uses analytical techniques including market
value, sensitivity analysis and value at risk estimations.
Foreign
exchange risk
We sell the majority of our products in transactions denominated
in U.S. dollars; however, we purchase some raw materials,
pay a portion of our wages and make other payments in our supply
chain in foreign currencies. Our exposure to foreign exchange
rates exists primarily with respect to the Canadian dollar,
European euro, Mexican peso and Japanese yen against the
U.S. dollar. We use foreign exchange forward and option
contracts to hedge material exposure to adverse changes in
foreign exchange rates. A sensitivity analysis technique has
been used to evaluate the effect that changes in the market
value of foreign exchange currencies will have on our forward
and option contracts. At January 3, 2009, the potential
change in fair value of foreign currency derivative instruments,
assuming a 10% adverse change in the underlying currency price,
was $4.5 million.
Interest
rates
Given the recent turmoil in the financial and credit markets, we
expanded our interest rate hedging portfolio at what we believe
to be advantageous rates that are expected to minimize our
overall interest rate risk. In addition, until September 5,
2009, we were required under the Senior Secured Credit
Facilities and the Second Lien Credit Facility to hedge a
portion of our floating rate debt to reduce interest rate risk
caused by floating rate debt issuance. At October 3, 2009,
we have outstanding hedging arrangements whereby we capped the
LIBOR interest rate component on $400 million of our
floating rate debt at 3.50%. We also entered into interest rate
swaps tied to the
3-month and
6-month
LIBOR rates whereby we fixed the LIBOR interest rate component
on an aggregate of $1.4 billion of our floating rate debt
at a blended rate of approximately 4.16%. Approximately 88% of
our total debt outstanding at October 3, 2009 is at a fixed
or capped LIBOR rate. Due to the recent changes in the credit
markets, the fair values of our interest rate hedging
instruments have increased approximately $18 million during
the nine months ended October 3, 2009. As these derivative
instruments are accounted for as hedges, the change in fair
value has been deferred into Accumulated Other Comprehensive
Loss in our balance sheets until the hedged transactions impact
our earnings.
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Commodities
Cotton is the primary raw material we use to manufacture many of
our products. While we attempt to protect our business from the
volatility of the market price of cotton through short-term
supply agreements and hedges from time to time, our business can
be adversely affected by dramatic movements in cotton prices.
The cotton prices reflected in our results were 58 cents per
pound for the nine months ended October 3, 2009. After
taking into consideration the cotton costs currently included in
our inventory, we expect our cost of cotton to average 55 cents
per pound for the full year of 2009 compared to 65 cents per
pound for 2008. The ultimate effect of these pricing levels on
our earnings cannot be quantified, as the effect of movements in
cotton prices on industry selling prices are uncertain, but any
dramatic increase in the price of cotton could have a material
adverse effect on our business, results of operations, financial
condition and cash flows.
In addition, fluctuations in crude oil or petroleum prices may
influence the prices of other raw materials we use to
manufacture our products, such as chemicals, dyestuffs,
polyester yarn and foam. We generally purchase our raw materials
at market prices. We use commodity financial instruments to
hedge the price of cotton, for which there is a high correlation
between costs and the financial instrument. We generally do not
use commodity financial instruments to hedge other raw material
commodity prices. As of January 3, 2009, we did not have
any cotton commodity derivatives outstanding.
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Description of
our business
General
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, C9
by Champion, Playtex, Bali,
Leggs, Just My Size, barely there,
Wonderbra, Stedman, Outer Banks,
Zorba, Rinbros and Duofold. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, casualwear, activewear, socks and hosiery.
The apparel essentials sector of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. We focus on the core attributes
of comfort, fit and value, while remaining current with regard
to consumer trends. The majority of our core styles continue
from year to year, with variations only in color, fabric or
design details. Some products, however, such as intimate
apparel, activewear and sheer hosiery, do have an emphasis on
style and innovation. We continue to invest in our largest and
strongest brands to achieve our long-term growth goals. In
addition to designing and marketing apparel essentials, we have
a long history of operating a global supply chain that
incorporates a mix of self-manufacturing, third-party
contractors and third-party sourcing.
Our fiscal year ends on the Saturday closest to December 31 and,
until it was changed during 2006, ended on the Saturday closest
to June 30. We refer to the fiscal year ended
January 3, 2009 as the year ended January 3, 2009. A
reference to a year ended on another date is to the fiscal year
ended on that date.
Our operations are managed and reported in five operating
segments: Innerwear, Outerwear, Hosiery, International and
Other. The following table summarizes our operating segments by
category:
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Segment
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Primary product(s)
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Primary brand(s)
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Innerwear
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Intimate apparel, such as bras, panties and bodywear
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Hanes, Playtex, Bali, barely there, Just My Size, Wonderbra,
Duofold
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Mens underwear and kids underwear
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Hanes, Champion, C9 by Champion, Polo Ralph Lauren*
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Socks
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Hanes, Champion, C9 by Champion
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Outerwear
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Activewear, such as performance
t-shirts and
shorts and fleece
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Champion, C9 by Champion
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Casualwear, such as t-shirts, fleece and sport shirts
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Hanes, Just My Size, Outer Banks, Champion, Hanes Beefy-T
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Hosiery
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Hosiery
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Leggs, Hanes, Donna Karan*, DKNY*, Just My Size
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International
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Activewear, mens underwear, kids underwear, intimate
apparel, socks, hosiery and casualwear
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Hanes, Wonderbra**, Champion, Stedman, Playtex**, Zorba,
Rinbros, Kendall*,Sol y Oro, Ritmo, Bali
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Other
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Nonfinished products, primarily yarn
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Not applicable
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*
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Brand used under a license
agreement.
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**
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As a result of the February 2006
sale of the European branded apparel business of Sara Lee, we
are not permitted to sell this brand in the member states of
EU several other European countries and South Africa.
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Our competitive
strengths
Our brands have a strong heritage in the apparel essentials
industry. According to The NPD Group/Consumer Tracking Service,
or NPD, our brands hold either the number one or
number two U.S. market position by sales value in most
product categories in which we compete, for the 12 month
period ended November 30, 2008. In 2008, Hanes was
number one for the fifth consecutive year on the Womens
Wear Daily Top 100 Brands Survey for apparel and
accessory brands that women know best and was number one for the
fifth consecutive year as the most preferred mens,
womens and childrens apparel brand of consumers in
Retailing Today magazines Top Brands Study.
Additionally, we had five of the top ten intimate apparel brands
preferred by consumers in the Retailing Today
studyHanes, Playtex, Bali, Just My
Size and Leggs.
Our products are sold through multiple distribution channels.
During the year ended January 3, 2009, approximately 44% of
our net sales were to mass merchants, 18% were to national
chains and department stores, 9% were direct to consumers, 11%
were in our International segment and 18% were to other retail
channels such as embellishers, specialty retailers, warehouse
clubs and sporting goods stores. We have strong, long-term
relationships with our top customers, including relationships of
more than ten years with each of our top ten customers as of
January 3, 2009. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of product
orders. We have organized multifunctional customer management
teams, which has allowed us to form strategic long-term
relationships with these customers and efficiently focus
resources on category, product and service expertise. We also
have customer-specific programs such as the C9 by Champion
products marketed and sold through Target stores.
Our ability to react to changing customer needs and industry
trends is key to our success. Our design, research and product
development teams, in partnership with our marketing teams,
drive our efforts to bring innovations to market. We seek to
leverage our insights into consumer demand in the apparel
essentials industry to develop new products within our existing
lines and to modify our existing core products in ways that make
them more appealing, addressing changing customer needs and
industry trends. Examples of our recent innovations include:
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Hanes no ride up panties, specially designed for a better
fit that helps women stay wedgie-free (2008).
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Hanes Lay Flat Collar Undershirts and Hanes No Ride Up
Boxer briefs, the brands latest innovation in product
comfort and fit (2008).
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Bali Concealers bras, the first and only bra with
revolutionary concealing petals for complete modesty (2008).
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Hanes Comfort Soft T-shirt (2007).
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Bali Passion for Comfort bra, designed to be the ultimate
comfort bra, features a silky smooth lining for a luxurious feel
against the body (2007).
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Hanes All-Over Comfort Bra, which features stay-put
straps that dont slip, cushioned wires that dont
poke and a tag-free back (2006).
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One of our key initiatives is to globalize our supply chain by
balancing across hemispheres into economic clusters
with fewer, larger facilities. We expect to continue our
restructuring efforts through the end of 2009 as we continue to
execute our consolidation and globalization strategy. We have
closed plant locations, reduced our workforce, and relocated
some of our manufacturing capacity to lower cost locations in
Asia, Central America and the Caribbean Basin. We have
restructured our supply chain over the past three years to
create more efficient production clusters that utilize fewer,
larger facilities and to balance our production capability
between the Western Hemisphere and Asia. With our global supply
chain restructured, we are now focused on optimizing our supply
chain to further enhance efficiency, improve working capital and
asset turns and reduce costs. We are focused on optimizing the
working capital needs of our supply chain through several
initiatives, such as supplier-managed inventory for raw
materials and sourced goods ownership relationships. While we
believe that this strategy has had and will continue to have a
beneficial impact on our operational efficiency and cost
structure, we have incurred significant costs to implement these
initiatives. In particular, we have recorded charges for
severance and other employment-related obligations relating to
workforce reductions, as well as payments in connection with
lease and other contract terminations. In addition, we incurred
charges for one-time write-offs of stranded raw materials and
work in process inventory determined not to be salvageable or
cost-effective to relocate related to the closure of
manufacturing facilities.
We were spun off from Sara Lee on September 5, 2006. In
connection with the spin off, Sara Lee contributed its branded
apparel Americas and Asia business to us and distributed all of
the outstanding shares of our common stock to its stockholders
on a pro rata basis. References in this prospectus supplement to
our assets, liabilities, products, businesses or activities of
our business for periods including or prior to the spin off are
generally intended to refer to the historical assets,
liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Our
brands
Our portfolio of leading brands is designed to address the needs
and wants of various consumer segments across a broad range of
apparel essentials products. Each of our brands has a particular
consumer positioning that distinguishes it from its competitors
and guides its advertising and product development. We discuss
some of our most important brands in more detail below.
Hanes is the largest and most widely recognized brand in
our portfolio. In 2008, Hanes was number one for the
fifth consecutive year on the Womens Wear Daily Top
100 Brands Survey for apparel and accessory brands that
women know best and was number one for the fifth consecutive
year as the most preferred mens, womens and
childrens apparel brand of consumers in Retailing Today
magazines Top Brands Study. The Hanes
brand covers all of our product categories, including
mens underwear, kids underwear, bras, panties,
socks, t-shirts, fleece and sheer hosiery. Hanes stands
for outstanding comfort, style and value. According to Millward
Brown Market Research, Hanes is found in over 85% of the
United States households that have purchased mens or
womens casual clothing or underwear in the
12-month
period ended December 31, 2008.
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Champion is our second-largest brand. Specializing in
athletic and other performance apparel, the Champion
brand is designed for everyday athletes. We believe that
Champions combination of comfort, fit and style
provides athletes with mobility, durability and up-to-date
styles, all product qualities that are important in the sale of
athletic products. We also distribute products under the C9
by Champion brand exclusively through Target stores.
Playtex, the third-largest brand within our portfolio,
offers a line of bras, panties and shapewear, including products
that offer solutions for hard to fit figures. Bali is the
fourth-largest brand within our portfolio. Bali offers a
range of bras, panties and shapewear sold in the department
store channel. Our brand portfolio also includes the following
well-known brands: Leggs, Just My Size,
barely there, Wonderbra, Outer Banks and
Duofold. These brands serve to round out our product
offerings, allowing us to give consumers a variety of options to
meet their diverse needs.
Design, research
and product development
At the core of our design, research and product development
capabilities is a team of more than 300 professionals as of
January 3, 2009. We have combined our design, research and
development teams into an integrated group for all of our
product categories. A facility located in Winston-Salem,
North Carolina, is the center of our research, technical
design and product development efforts. We also employ creative
design and product development personnel in our design center in
New York City. During the years ended January 3, 2009 and
December 29, 2007, the six months ended December 30,
2006 and the year ended July 1, 2006, we spent
approximately $46 million, $45 million,
$23 million and $55 million, respectively, on design,
research and product development.
Customers
In the year ended January 3, 2009, approximately 88% of our
net sales were to customers in the United States and
approximately 12% were to customers outside the United States.
Domestically, almost 83% of our net sales were wholesale sales
to retailers, 9% were direct to consumers and 8% were wholesale
sales to third-party embellishers. We have well-established
relationships with some of the largest apparel retailers in the
world. Our largest customers are Wal-Mart Stores, Inc., or
Wal-Mart, Target Corporation, or Target,
and Kohls Corporation, or Kohls,
accounting for 27%, 16% and 6%, respectively, of our total sales
in the year ended January 3, 2009. As is common in the
apparel essentials industry, we generally do not have purchase
agreements that obligate our customers to purchase our products.
However, all of our key customer relationships have been in
place for ten years or more. Wal-Mart and Target are our only
customers with sales that exceed 10% of any individual
segments sales. In our Innerwear segment, Wal-Mart
accounted for 32% of sales and Target accounted for 13% of sales
during the year ended January 3, 2009. In our Outerwear
segment, Target accounted for 30% of sales and Wal-Mart
accounted for 21% of sales during the year ended January 3,
2009.
Due to their size and operational scale, high-volume retailers
such as Wal-Mart require extensive category and product
knowledge and specialized services regarding the quantity,
quality and timing of product orders. We have organized
multifunctional customer management teams, which has allowed us
to form strategic long-term relationships with these customers
and efficiently focus resources on category, product and service
expertise.
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Smaller regional customers attracted to our leading brands and
quality products also represent an important component of our
distribution. Our organizational model provides for an efficient
use of resources that delivers a high level of category and
channel expertise and services to these customers.
Sales to the mass merchant channel accounted for approximately
44% of our net sales in the year ended January 3, 2009. We
sell all of our product categories in this channel primarily
under our Hanes, Just My Size, Playtex and
C9 by Champion brands. Mass merchants feature
high-volume, low-cost sales of basic apparel items along with a
diverse variety of consumer goods products, such as grocery and
drug products and other hard lines, and are characterized by
large retailers, such as Wal-Mart. Wal-Mart, which accounted for
approximately 27% of our net sales during the year ended
January 3, 2009, is our largest mass merchant customer.
Sales to the national chains and department stores channel
accounted for approximately 18% of our net sales during the year
ended January 3, 2009. These retailers target a
higher-income consumer than mass merchants, focus more of their
sales on apparel items rather than other consumer goods such as
grocery and drug products, and are characterized by large
retailers such as Kohls, JC Penney Company, Inc. and Sears
Holdings Corporation. We sell all of our product categories in
this channel. Traditional department stores target higher-income
consumers and carry more high-end, fashion conscious products
than national chains or mass merchants and tend to operate in
higher-income areas and commercial centers. Traditional
department stores are characterized by large retailers such as
Macys and Dillards, Inc. We sell products in our
intimate apparel, hosiery and underwear categories through
department stores.
Sales to the direct to consumer channel, which are included
within the Innerwear segment, accounted for approximately 9% of
our net sales in the year ended January 3, 2009. We sell
our branded products directly to consumers through our 228
outlet stores, as well as our catalogs and our web sites
operating under the Hanes, OneHanesPlace, Just My Size
and Champion names. Our outlet stores are
value-based, offering the consumer a savings of 25% to 40% off
suggested retail prices, and sell first-quality, excess,
post-season, obsolete and slightly imperfect products. Our
catalogs and web sites address the growing direct to consumer
channel that operates in todays 24/7 retail environment,
and as of January 3, 2009 we had an active database of
approximately three million consumers receiving our catalogs and
emails. Our web sites have experienced significant growth and we
expect this trend to continue as more consumers embrace this
retail shopping channel.
Sales in our International segment represented approximately 11%
of our net sales during the year ended January 3, 2009, and
included sales in Latin America, Asia, Canada and Europe.
Canada, Europe, Japan and Mexico are our largest international
markets, and we also have sales offices in India and China. We
operate in several locations in Latin America including Mexico,
Argentina, Brazil and Central America. From an export business
perspective, we use distributors to service customers in the
Middle East and Asia, and have a limited presence in Latin
America. The brands that are the primary focus of the export
business include Hanes underwear and Bali,
Playtex, Wonderbra and barely there
intimate apparel. As discussed below under
Intellectual Property, we are not permitted to sell
Wonderbra and Playtex branded products in the
member states of the EU, several other European countries, and
South Africa.
Sales in other channels represented approximately 18% of our net
sales during the year ended January 3, 2009. We sell
t-shirts, golf and sport shirts and fleece sweatshirts to
third-party embellishers primarily under our Hanes,
Hanes Beefy-T and Outer Banks brands. Sales to
third-party embellishers accounted for approximately 8% of our
net sales during the year ended
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January 3, 2009. We also sell a significant range of our
underwear, activewear and socks products under the Champion
brand to wholesale clubs, such as Costco, and sporting goods
stores, such as The Sports Authority, Inc. We sell primarily
legwear and underwear products under the Hanes and
Leggs brands to food, drug and variety stores. We
sell products that span across our Innerwear, Outerwear and
Hosiery segments to the U.S. military for sale to
servicemen and servicewomen.
Inventory
Effective inventory management is a key component of our future
success. Because our customers do not purchase our products
under long-term supply contracts, but rather on a purchase order
basis, effective inventory management requires close
coordination with the customer base. Through Kanban sales and
production planning, inventory management, product scheduling,
demand prioritization and related initiatives that facilitate
just-in-time
production and ordering systems, we seek to ensure that products
are available to meet customer demands while effectively
managing inventory levels. We also employ various other types of
inventory management techniques that include collaborative
forecasting and planning, vendor-managed inventory, key event
management and various forms of replenishment management
processes. We have demand management planners in our customer
management group who work closely with customers to develop
demand forecasts that are passed to the supply chain. We also
have professionals within the customer management group who
coordinate daily with our larger customers to help ensure that
our customers planned inventory levels are in fact
available at their individual retail outlets. Additionally,
within our supply chain organization we have dedicated
professionals who translate the demand forecast into our
inventory strategy and specific production plans. These
individuals work closely with our customer management team to
balance inventory investment/exposure with customer service
targets.
Seasonality and
other factors
Our operating results are subject to some variability.
Generally, our diverse range of product offerings helps mitigate
the impact of seasonal changes in demand for certain items.
Sales are typically higher in the last two quarters (July to
December) of each fiscal year. Socks, hosiery and fleece
products generally have higher sales during this period as a
result of cooler weather, back-to-school shopping and holidays.
Sales levels in any period are also impacted by customers
decisions to increase or decrease their inventory levels in
response to anticipated consumer demand. Our customers may
cancel orders, change delivery schedules or change the mix of
products ordered with minimal notice to us. For example, we have
experienced a shift in timing by our largest retail customers of
back-to-school programs between June and July the last two
years. Our results of operations are also impacted by
fluctuations and volatility in the price of cotton and
oil-related materials and the timing of actual spending for our
media, advertising and promotion expenses. Media, advertising
and promotion expenses may vary from period to period during a
fiscal year depending on the timing of our advertising campaigns
for retail selling seasons and product introductions.
Marketing
Our strategy is to bring consumer-driven innovation to market in
a compelling way. Our approach is to build targeted, effective
multimedia advertising and marketing campaigns to increase
awareness of our key brands. Driving growth platforms across
categories is a major
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