FORM 10-Q
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017July 3, 2021
or
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32891
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
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Maryland | | 20-3552316 |
(State of incorporation) | | (I.R.S. employer identification no.) |
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Maryland | | 20-3552316 |
(State of incorporation) | | (I.R.S. employer
identification no.)
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1000 East Hanes Mill Road Winston-Salem, North Carolina
| | 27105 |
Winston-Salem, | North Carolina | | 27105 |
(Address of principal executive office) | | (Zip code) |
(336) 519-8080
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, Par Value $0.01 | HBI | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx☒No¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx☒No¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | x☒ | | Accelerated filer | | ¨☐ | | | | |
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Non-accelerated filer | | ¨(Do not check if a smaller reporting company) ☐ | | Smaller reporting company | | ¨☐ | | Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨☐Nox☒
As of October 27, 2017,July 30, 2021, there were 364,584,181349,151,707 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statementscontains information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements regarding our intent, belief and current expectations about our strategic direction, prospects and future results are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. In particular, statements underwith respect to trends associated with our business, our Full Potential plan, our future financial performance and the heading “Outlook” and other informationpotential effects of the ongoing global novel coronavirus (“COVID-19”) pandemic included in this Quarterly Report on Form 10-Q specifically appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking statements. 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, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will result or will be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016,January 2, 2021, under the caption “Risk Factors,” and available on the “Investors” section of our corporate website, www.Hanes.com/investors.
All forward-looking statements speak only as The contents of the date of this Quarterly Report on Form 10-Q andour corporate website are expressly qualified in their entiretynot incorporated by the cautionary statements includedreference in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 31, 2016, particularly under the caption “Risk Factors.” 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 occurrence10-Q.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings over the Internet at the SEC’s website at www.sec.gov. To receive copies of public records not posted to the SEC’s web site at prescribed rates, you may complete an online form at www.sec.gov, send a fax to (202) 772-9337 or submit a written request to the SEC, Office of FOIA/PA Operations, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information.
We make available free of charge at www.Hanes.com/investors (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.Hanes.com/corporate, or any of our other websites, we do not incorporate any such website or its contents into this Quarterly Report on Form 10-Q.
PART I
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Item 1. | Financial Statements |
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)data)
(unaudited)
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| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Net sales | $ | 1,751,311 | | | $ | 1,543,083 | | | $ | 3,259,340 | | | $ | 2,746,153 | |
Cost of sales | 1,069,682 | | | 1,029,221 | | | 1,975,030 | | | 1,814,123 | |
Gross profit | 681,629 | | | 513,862 | | | 1,284,310 | | | 932,030 | |
Selling, general and administrative expenses | 464,235 | | | 311,729 | | | 876,794 | | | 681,944 | |
Operating profit | 217,394 | | | 202,133 | | | 407,516 | | | 250,086 | |
Other expenses | 1,855 | | | 4,653 | | | 4,416 | | | 10,754 | |
Interest expense, net | 42,440 | | | 41,075 | | | 86,900 | | | 77,102 | |
Income from continuing operations before income tax expense | 173,099 | | | 156,405 | | | 316,200 | | | 162,230 | |
Income tax expense | 25,236 | | | 19,837 | | | 39,933 | | | 20,544 | |
Income from continuing operations | 147,863 | | | 136,568 | | | 276,267 | | | 141,686 | |
Income (loss) from discontinued operations, net of tax | (19,187) | | | 24,613 | | | (410,853) | | | 11,621 | |
Net income (loss) | $ | 128,676 | | | $ | 161,181 | | | $ | (134,586) | | | $ | 153,307 | |
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Earnings (loss) per share - basic: | | | | | | | |
Continuing operations | $ | 0.42 | | | $ | 0.39 | | | $ | 0.79 | | | $ | 0.40 | |
Discontinued operations | (0.05) | | | 0.07 | | | (1.17) | | | 0.03 | |
Net income (loss) | $ | 0.37 | | | $ | 0.46 | | | $ | (0.38) | | | $ | 0.43 | |
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Earnings (loss) per share - diluted: | | | | | | | |
Continuing operations | $ | 0.42 | | | $ | 0.39 | | | $ | 0.79 | | | $ | 0.40 | |
Discontinued operations | (0.05) | | | 0.07 | | | (1.17) | | | 0.03 | |
Net income (loss) | $ | 0.37 | | | $ | 0.46 | | | $ | (0.38) | | | $ | 0.43 | |
See accompanying notes to Condensed Consolidated Financial Statements.
2
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| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales | $ | 1,799,270 |
| | $ | 1,761,019 |
| | $ | 4,826,235 |
| | $ | 4,452,890 |
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Cost of sales | 1,120,813 |
| | 1,111,653 |
| | 2,962,345 |
| | 2,788,977 |
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Gross profit | 678,457 |
| | 649,366 |
| | 1,863,890 |
| | 1,663,913 |
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Selling, general and administrative expenses | 425,153 |
| | 421,014 |
| | 1,260,641 |
| | 1,091,946 |
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Operating profit | 253,304 |
| | 228,352 |
| | 603,249 |
| | 571,967 |
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Other expenses | 1,881 |
| | 1,559 |
| | 4,659 |
| | 50,533 |
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Interest expense, net | 43,917 |
| | 43,433 |
| | 130,184 |
| | 111,539 |
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Income from continuing operations before income tax expense | 207,506 |
| | 183,360 |
| | 468,406 |
| | 409,895 |
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Income tax expense | 4,150 |
| | 10,570 |
| | 19,804 |
| | 28,693 |
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Income from continuing operations | 203,356 |
| | 172,790 |
| | 448,602 |
| | 381,202 |
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Income (loss) from discontinued operations, net of tax | — |
| | 1,068 |
| | (2,097 | ) | | 1,068 |
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Net income | $ | 203,356 |
| | $ | 173,858 |
| | $ | 446,505 |
| | $ | 382,270 |
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Earnings per share — basic: | | | | | | | |
Continuing operations | $ | 0.56 |
| | $ | 0.46 |
| | $ | 1.22 |
| | $ | 1.00 |
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Discontinued operations | — |
| | — |
| | (0.01 | ) | | — |
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Net income | $ | 0.56 |
| | $ | 0.46 |
| | $ | 1.21 |
| | $ | 1.00 |
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Earnings per share — diluted: | | | | | | | |
Continuing operations | $ | 0.55 |
| | $ | 0.45 |
| | $ | 1.21 |
| | $ | 0.99 |
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Discontinued operations | — |
| | — |
| | (0.01 | ) | | — |
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Net income | $ | 0.55 |
| | $ | 0.45 |
| | $ | 1.20 |
| | $ | 0.99 |
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HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
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| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Net income (loss) | $ | 128,676 | | | $ | 161,181 | | | $ | (134,586) | | | $ | 153,307 | |
Other comprehensive income (loss): | | | | | | | |
Translation adjustments | (11,231) | | | 95,033 | | | (36,432) | | | (22,121) | |
Unrealized gain (loss) on qualifying cash flow hedges, net of tax of $(1,140), $4,031, $(6,316) and $(3,249), respectively | 2,856 | | | (6,177) | | | 11,396 | | | 1,606 | |
Unrecognized income from pension and postretirement plans, net of tax of $(1,566), $(1,794), $(3,615) and $(3,066), respectively | 4,332 | | | 3,560 | | | 11,067 | | | 7,154 | |
Total other comprehensive income (loss) | (4,043) | | | 92,416 | | | (13,969) | | | (13,361) | |
Comprehensive income (loss) | $ | 124,633 | | | $ | 253,597 | | | $ | (148,555) | | | $ | 139,946 | |
See accompanying notes to Condensed Consolidated Financial Statements.
3
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| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net income | $ | 203,356 |
| | $ | 173,858 |
| | $ | 446,505 |
| | $ | 382,270 |
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Other comprehensive income (loss), net of tax of $1,427, ($247), $7,870 and ($701), respectively | 5,051 |
| | (2,713 | ) | | 9,349 |
| | 13,691 |
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Comprehensive income | $ | 208,407 |
| | $ | 171,145 |
| | $ | 455,854 |
| | $ | 395,961 |
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HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)data)
(unaudited)
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| July 3, 2021 | | January 2, 2021 | | June 27, 2020 |
Assets | | | | | |
Cash and cash equivalents | $ | 667,298 | | | $ | 900,615 | | | $ | 556,099 | |
Trade accounts receivable, net | 960,993 | | | 768,221 | | | 1,139,130 | |
Inventories | 1,530,622 | | | 1,367,758 | | | 1,774,139 | |
Other current assets | 159,715 | | | 158,700 | | | 171,435 | |
Current assets of discontinued operations | 301,986 | | | 234,086 | | | 401,347 | |
Total current assets | 3,620,614 | | | 3,429,380 | | | 4,042,150 | |
Property, net | 446,356 | | | 477,821 | | | 496,933 | |
Right-of-use assets | 398,526 | | | 432,631 | | | 438,683 | |
Trademarks and other identifiable intangibles, net | 1,258,783 | | | 1,293,847 | | | 1,196,359 | |
Goodwill | 1,148,021 | | | 1,158,938 | | | 1,144,739 | |
Deferred tax assets | 351,309 | | | 367,976 | | | 193,100 | |
Other noncurrent assets | 54,380 | | | 64,773 | | | 118,296 | |
Noncurrent assets of discontinued operations | 0 | | | 494,501 | | | 493,045 | |
Total assets | $ | 7,277,989 | | | $ | 7,719,867 | | | $ | 8,123,305 | |
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Liabilities and Stockholders’ Equity | | | | | |
Accounts payable | $ | 1,171,645 | | | $ | 891,868 | | | $ | 1,101,438 | |
Accrued liabilities | 628,007 | | | 609,864 | | | 452,763 | |
Lease liabilities | 129,053 | | | 136,510 | | | 147,406 | |
Notes payable | 0 | | | 0 | | | 13 | |
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Current portion of long-term debt | 37,500 | | | 263,936 | | | 0 | |
Current liabilities of discontinued operations | 289,751 | | | 222,183 | | | 310,972 | |
Total current liabilities | 2,255,956 | | | 2,124,361 | | | 2,012,592 | |
Long-term debt | 3,647,482 | | | 3,739,434 | | | 3,985,631 | |
Lease liabilities - noncurrent | 299,380 | | | 331,577 | | | 330,599 | |
Pension and postretirement benefits | 327,597 | | | 381,457 | | | 328,647 | |
Other noncurrent liabilities | 185,384 | | | 216,091 | | | 270,152 | |
Noncurrent liabilities of discontinued operations | 0 | | | 112,989 | | | 116,364 | |
Total liabilities | 6,715,799 | | | 6,905,909 | | | 7,043,985 | |
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Stockholders’ equity: | | | | | |
Preferred stock (50,000,000 authorized shares; $.01 par value) | | | | | |
Issued and outstanding — None | 0 | | | 0 | | | 0 | |
Common stock (2,000,000,000 authorized shares; $.01 par value) | | | | | |
Issued and outstanding — 349,115,441, 348,802,220 and 348,092,986, respectively | 3,491 | | | 3,488 | | | 3,481 | |
Additional paid-in capital | 310,148 | | | 307,883 | | | 302,522 | |
Retained earnings | 829,479 | | | 1,069,546 | | | 1,404,326 | |
Accumulated other comprehensive loss | (580,928) | | | (566,959) | | | (631,009) | |
Total stockholders’ equity | 562,190 | | | 813,958 | | | 1,079,320 | |
Total liabilities and stockholders’ equity | $ | 7,277,989 | | | $ | 7,719,867 | | | $ | 8,123,305 | |
See accompanying notes to Condensed Consolidated Financial Statements.
4
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| September 30, 2017 | | December 31, 2016 |
Assets | | | |
Cash and cash equivalents | $ | 400,045 |
| | $ | 460,245 |
|
Trade accounts receivable, net | 1,009,188 |
| | 836,924 |
|
Inventories | 1,953,918 |
| | 1,840,565 |
|
Other current assets | 196,875 |
| | 137,535 |
|
Current assets of discontinued operations | — |
| | 45,897 |
|
Total current assets | 3,560,026 |
| | 3,321,166 |
|
Property, net | 624,602 |
| | 692,464 |
|
Trademarks and other identifiable intangibles, net | 1,371,007 |
| | 1,285,458 |
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Goodwill | 1,141,942 |
| | 1,098,540 |
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Deferred tax assets | 504,059 |
| | 464,872 |
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Other noncurrent assets | 79,087 |
| | 67,980 |
|
Total assets | $ | 7,280,723 |
| | $ | 6,930,480 |
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Liabilities and Stockholders’ Equity | | | |
Accounts payable | $ | 852,671 |
| | $ | 761,647 |
|
Accrued liabilities | 614,599 |
| | 619,795 |
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Notes payable | 23,969 |
| | 56,396 |
|
Accounts Receivable Securitization Facility | 250,995 |
| | 44,521 |
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Current portion of long-term debt | 154,395 |
| | 133,843 |
|
Current liabilities of discontinued operations | — |
| | 9,466 |
|
Total current liabilities | 1,896,629 |
| | 1,625,668 |
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Long-term debt | 3,566,547 |
| | 3,507,685 |
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Pension and postretirement benefits | 378,573 |
| | 371,612 |
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Other noncurrent liabilities | 207,807 |
| | 201,601 |
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Total liabilities | 6,049,556 |
| | 5,706,566 |
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Stockholders’ equity: | | | |
Preferred stock (50,000,000 authorized shares; $.01 par value) | | | |
Issued and outstanding — None | — |
| | — |
|
Common stock (2,000,000,000 authorized shares; $.01 par value) | | | |
Issued and outstanding — 364,571,559 and 378,687,052, respectively | 3,646 |
| | 3,787 |
|
Additional paid-in capital | 267,675 |
| | 260,002 |
|
Retained earnings | 1,386,488 |
| | 1,396,116 |
|
Accumulated other comprehensive loss | (426,642 | ) | | (435,991 | ) |
Total stockholders’ equity | 1,231,167 |
| | 1,223,914 |
|
Total liabilities and stockholders’ equity | $ | 7,280,723 |
| | $ | 6,930,480 |
|
HANESBRANDS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
|
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| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
Operating activities: | | | |
Net income | $ | 446,505 |
| | $ | 382,270 |
|
Adjustments to reconcile net income to net cash from operating activities: | | | |
Depreciation and amortization of long-lived assets | 89,762 |
| | 73,715 |
|
Write-off on early extinguishment of debt | 2,153 |
| | 12,667 |
|
Charges incurred for amendments of credit facilities | — |
| | 34,624 |
|
Amortization of debt issuance costs | 7,943 |
| | 6,401 |
|
Stock compensation expense | 6,351 |
| | 16,292 |
|
Deferred taxes and other | (12,744 | ) | | (18,938 | ) |
Changes in assets and liabilities, net of acquisition of businesses:
| | | |
Accounts receivable | (147,933 | ) | | (198,217 | ) |
Inventories | (74,945 | ) | | 4,557 |
|
Other assets | (42,664 | ) | | (6,167 | ) |
Accounts payable | 71,264 |
| | (80,589 | ) |
Accrued pension and postretirement benefits | 15,021 |
| | (34,419 | ) |
Accrued liabilities and other | (29,623 | ) | | 16,095 |
|
Net cash from operating activities | 331,090 |
| | 208,291 |
|
Investing activities: | | | |
Purchases of property, plant and equipment | (60,418 | ) | | (65,439 | ) |
Proceeds from sales of assets | 4,398 |
| | 68,701 |
|
Acquisition of businesses, net of cash acquired | (524 | ) | | (963,127 | ) |
Disposition of businesses | 40,285 |
| | — |
|
Net cash from investing activities | (16,259 | ) | | (959,865 | ) |
Financing activities: | | | |
Borrowings on notes payable | 212,804 |
| | 854,915 |
|
Repayments on notes payable | (249,708 | ) | | (943,893 | ) |
Borrowings on Accounts Receivable Securitization Facility | 342,315 |
| | 194,549 |
|
Repayments on Accounts Receivable Securitization Facility | (135,841 | ) | | (145,638 | ) |
Borrowings on Revolving Loan Facilities | 2,957,799 |
| | 2,995,442 |
|
Repayments on Revolving Loan Facilities | (2,738,000 | ) | | (2,992,000 | ) |
Borrowings on Senior Notes | — |
| | 2,359,347 |
|
Repayments on Senior Notes | — |
| | (1,000,000 | ) |
Borrowings on Term Loan Facilities | — |
| | 301,272 |
|
Repayments on Term Loan Facilities | (201,281 | ) | | (154,670 | ) |
Borrowings on International Debt | — |
| | 8,368 |
|
Repayments on International Debt | (44,073 | ) | | (11,186 | ) |
Share repurchases | (299,919 | ) | | (379,901 | ) |
Cash dividends paid | (165,211 | ) | | (125,798 | ) |
Payments to amend and refinance credit facilities | (559 | ) | | (79,492 | ) |
Payment of contingent consideration | (41,250 | ) | | — |
|
Taxes paid related to net shares settlement of equity awards | (8,075 | ) | | (2,919 | ) |
Other | 3,401 |
| | 1,529 |
|
Net cash from financing activities | (367,598 | ) | | 879,925 |
|
Effect of changes in foreign exchange rates on cash | (7,433 | ) | | 2,693 |
|
Change in cash and cash equivalents | (60,200 | ) | | 131,044 |
|
Cash and cash equivalents at beginning of year | 460,245 |
| | 319,169 |
|
Cash and cash equivalents at end of period | $ | 400,045 |
| | $ | 450,213 |
|
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at April 3, 2021 | 349,090 | | | $ | 3,491 | | | $ | 304,090 | | | $ | 753,785 | | | $ | (576,885) | | | $ | 484,481 | |
Net income | — | | | — | | | — | | | 128,676 | | | — | | | 128,676 | |
Dividends ($0.15 per common share) | — | | | — | | | — | | | (52,982) | | | — | | | (52,982) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (4,043) | | | (4,043) | |
Stock-based compensation | — | | | — | | | 5,342 | | | — | | | — | | | 5,342 | |
Net exercise of stock options, vesting of restricted stock units and other | 25 | | | 0 | | | 716 | | | — | | | — | | | 716 | |
Balances at July 3, 2021 | 349,115 | | | $ | 3,491 | | | $ | 310,148 | | | $ | 829,479 | | | $ | (580,928) | | | $ | 562,190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at January 2, 2021 | 348,802 | | | $ | 3,488 | | | $ | 307,883 | | | $ | 1,069,546 | | | $ | (566,959) | | | $ | 813,958 | |
Net loss | — | | | — | | | — | | | (134,586) | | | — | | | (134,586) | |
Dividends ($0.30 per common share) | — | | | — | | | — | | | (105,481) | | | — | | | (105,481) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (13,969) | | | (13,969) | |
Stock-based compensation | — | | | — | | | 3,808 | | | — | | | — | | | 3,808 | |
Net exercise of stock options, vesting of restricted stock units and other | 313 | | | 3 | | | (1,543) | | | — | | | — | | | (1,540) | |
Balances at July 3, 2021 | 349,115 | | | $ | 3,491 | | | $ | 310,148 | | | $ | 829,479 | | | $ | (580,928) | | | $ | 562,190 | |
See accompanying notes to Condensed Consolidated Financial Statements.
5
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity (Continued)
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at March 28, 2020 | 348,035 | | | $ | 3,480 | | | $ | 297,456 | | | $ | 1,296,060 | | | $ | (723,425) | | | $ | 873,571 | |
Net income | — | | | — | | | — | | | 161,181 | | | — | | | 161,181 | |
Dividends ($0.15 per common share) | — | | | — | | | — | | | (52,915) | | | — | | | (52,915) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 92,416 | | | 92,416 | |
Stock-based compensation | — | | | — | | | 4,393 | | | — | | | — | | | 4,393 | |
Net exercise of stock options, vesting of restricted stock units and other | 58 | | | 1 | | | 673 | | | — | | | — | | | 674 | |
Balances at June 27, 2020 | 348,093 | | | $ | 3,481 | | | $ | 302,522 | | | $ | 1,404,326 | | | $ | (631,009) | | | $ | 1,079,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at December 28, 2019 | 362,449 | | | $ | 3,624 | | | $ | 304,395 | | | $ | 1,546,224 | | | $ | (617,648) | | | $ | 1,236,595 | |
Net income | — | | | — | | | — | | | 153,307 | | | — | | | 153,307 | |
Dividends ($0.30 per common share) | — | | | — | | | — | | | (107,336) | | | — | | | (107,336) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (13,361) | | | (13,361) | |
Stock-based compensation | — | | | — | | | 9,034 | | | — | | | — | | | 9,034 | |
Net exercise of stock options, vesting of restricted stock units and other | 108 | | | 2 | | | 1,348 | | | — | | | — | | | 1,350 | |
Share repurchases | (14,464) | | | (145) | | | (12,255) | | | (187,869) | | | — | | | (200,269) | |
Balances at June 27, 2020 | 348,093 | | | $ | 3,481 | | | $ | 302,522 | | | $ | 1,404,326 | | | $ | (631,009) | | | $ | 1,079,320 | |
See accompanying notes to Condensed Consolidated Financial Statements.
6
HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | | | | | | | | | |
| Six Months Ended |
| July 3, 2021(1) | | June 27, 2020(1) |
Operating activities: | | | |
Net income (loss) | $ | (134,586) | | | $ | 153,307 | |
Adjustments to reconcile net income (loss) to net cash from operating activities: | | | |
Depreciation | 43,565 | | | 45,399 | |
Amortization of acquisition intangibles | 10,978 | | | 12,199 | |
Other amortization | 5,814 | | | 5,107 | |
Impairment of intangible assets and goodwill | 163,047 | | | 20,319 | |
Loss on classification of assets held for sale | 236,180 | | | 0 | |
Amortization of debt issuance costs | 7,669 | | | 5,119 | |
Other | (14,224) | | | 16,247 | |
Changes in assets and liabilities: | | | |
Accounts receivable | (200,106) | | | (392,134) | |
Inventories | (175,149) | | | (61,409) | |
Other assets | 4,451 | | | (31,570) | |
Accounts payable | 300,318 | | | 210,338 | |
Accrued pension and postretirement benefits | (39,176) | | | (19,318) | |
Accrued liabilities and other | 3,475 | | | 18,603 | |
Net cash from operating activities | 212,256 | | | (17,793) | |
Investing activities: | | | |
Capital expenditures | (25,331) | | | (46,512) | |
Proceeds from sales of assets | 2,455 | | | 66 | |
| | | |
Other | 6,937 | | | 5,823 | |
Net cash from investing activities | (15,939) | | | (40,623) | |
Financing activities: | | | |
Repayments on Term Loan Facilities | (306,250) | | | 0 | |
Borrowings on Accounts Receivable Securitization Facility | 0 | | | 227,061 | |
Repayments on Accounts Receivable Securitization Facility | 0 | | | (227,061) | |
Borrowings on Revolving Loan Facilities | 0 | | | 1,638,000 | |
Repayments on Revolving Loan Facilities | 0 | | | (1,638,000) | |
Borrowings on Senior Notes | 0 | | | 700,000 | |
Borrowings on International Debt | 0 | | | 31,222 | |
| | | |
Borrowings on notes payable | 42,638 | | | 116,669 | |
Repayments on notes payable | (43,066) | | | (112,373) | |
Share repurchases | 0 | | | (200,269) | |
Cash dividends paid | (104,719) | | | (105,896) | |
| | | |
| | | |
Other | (2,524) | | | (14,035) | |
Net cash from financing activities | (413,921) | | | 415,318 | |
Effect of changes in foreign exchange rates on cash | (16,780) | | | (2,669) | |
Change in cash, cash equivalents and restricted cash | (234,384) | | | 354,233 | |
Cash, cash equivalents and restricted cash at beginning of year | 910,603 | | | 329,923 | |
Cash, cash equivalents and restricted cash at end of period | 676,219 | | | 684,156 | |
Less restricted cash at end of period | 0 | | | 1,042 | |
Cash and cash equivalents at end of period | $ | 676,219 | | | $ | 683,114 | |
| | | |
Balances included in the Condensed Consolidated Balance Sheets: | | | |
Cash and cash equivalents | $ | 667,298 | | | $ | 556,099 | |
Cash and cash equivalents included in current assets of discontinued operations | 8,921 | | | 127,015 | |
Cash and cash equivalents at end of period | $ | 676,219 | | | $ | 683,114 | |
(1)The cash flows related to discontinued operations have not been segregated and remain included in the major classes of assets and liabilities. Accordingly, the Condensed Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.
Capital expenditures included in accounts payable at July 3, 2021 and January 2, 2021 were $11,477 and $17,931, respectively. For the six months ended July 3, 2021 and June 27, 2020, right-of-use assets obtained in exchange for lease obligations were $37,725 and $23,769, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
7
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
(1) Basis of Presentation These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated interim financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. Three subsidiaries of the Company close on the calendar month-end, which is less than a week different than the Company’s consolidated quarter end. The difference in reporting of financial information for these subsidiaries did not have a material impact on the Company’s financial condition, results of operations or cash flows.
As a result of further policy harmonization related to acquired businesses, certain prior year amounts in the condensed consolidated financial statements, none of which are material, have been reclassified to conform with the current year presentation. The reclassification on the Condensed Consolidated Balance Sheet is between the “Trade accounts receivable, net” line and the “Accrued liabilities” line of $22,746 as of December 31, 2016. The reclassification on the Condensed Consolidated Statement of Cash Flow is between the “Accounts Receivable” and the “Accrued liabilities and other” line of $2,744 for the nine months ended October 1, 2016. This reclassification had no impact on the Company’s results of operations.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.10-K for the year ended January 2, 2021. The year endyear-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
In the first quarter of 2021, the Company announced that as part of its strategic plan, it was exploring alternatives for its European Innerwear business and subsequently reached the decision to exit this business. The Company determined that its European Innerwear business met held-for-sale and discontinued operations accounting criteria at the end of the first quarter of 2021. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. These changes have been applied to all periods presented. Unless otherwise noted, discussion within these notes to the condensed consolidated interim financial statements relates to continuing operations. See note “Discontinued Operations” for additional information. | |
(2) | Recent Accounting Pronouncements |
Inventory
(2) Recent Accounting Pronouncements
Income Taxes
In July 2015,December 2019, the FASB issued ASU 2015-11, “Inventory:2019-12, “Income Taxes (Topic 740): Simplifying the Measurement of Inventory”, which requires inventory to be recorded at the lower of cost or net realizable value.Accounting for Income Taxes.” The new standard wasaccounting rules reduce complexity by removing specific exceptions to general principles related to intraperiod tax allocations, ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. The new accounting rules also simplify accounting for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. The new accounting rules were effective for the Company in the first quarter of 2017.2021. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations, cash flows or cash flows.disclosures.
Hedge AccountingReference Rate Reform
In March 2016,2020, the FASB issued ASU 2016-05, “Derivatives and Hedging2020-04, “Reference Rate Reform (Topic 815)848): EffectFacilitation of Derivative Contract Novationsthe Effects of Reference Rate Reform on Existing Hedge Accounting Relationships”, which clarifiesFinancial Reporting.” In January 2021, the FASB clarified the scope of that a change inguidance with the counterparty to a derivative contract, in andissuance of itself, does not require the dedesignation of a hedging relationship.ASU 2021-01, “Reference Rate Reform: Scope.” The new accounting rules provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this standard which can be adopted prospectively or on a modified retrospective basis, was effective forany time before the Company in the firstfourth quarter of 2017. Also in March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”, which clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The new standard was effective for the Company in the first quarter of 2017. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations and cash flows.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, a new accounting standard on revenue recognition that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. The new standard will be effective for the Company in the first quarter of 2018 and can be applied using a modified retrospective or full retrospective method. The Company has established an implementation team consisting of finance, accounting and front-end business partners to analyze the impact of the guidance across all of its revenue sources. The Company has evaluated the new standard against its existing accounting policies and practices, including reviewing standard purchase orders, invoices, shipping terms, conducting questionnaires with our global team and reviewing contracts with customers. The Company has not identified any information that would indicate that the new guidance will have a material impact on the Company’s financial statements. The Company expects to have enhanced disclosures related to disaggregation of revenue sources and accounting policies. The Company expects to adopt the new standard in the first quarter of 2018 using the modified retrospective transition method.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. Issues addressed in the new guidance that are relevant to the Company include debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and beneficial interests in securitization transactions. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s cash flows.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. The new rules eliminate the exception for an intra-entity transfer of an asset other than inventory, which aligns the recognition of income tax consequences for such transfers. The new rules require the recognition of current and deferred income taxes resulting from these transfers when the transfer occurs rather than when it is sold to an external party. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows.
Definition of a Business
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The new rules provide for the application of a screen test to consider whether substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If the screen test determines this to be true, the set is not a business. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows.
Compensation Retirement Benefits
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the presentation of net periodic pension cost and net periodic postretirement benefit cost”. The new rules require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The new rules will be effective for the Company in the first quarter of 2018. Early adoption is permitted. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows.
Stock Compensation
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”. The new rules provide guidance about which changes to the terms or conditions of a share-based payment award
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
require an entity to apply modification accounting. Under the new rules, an entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the original award is modified. The new rules will be effective for the Company in the first quarter of 2018. Early adoption is permitted. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases”, which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. The new rules will be effective for the Company in the first quarter of 2019.2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and cash flows.disclosures.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Codification Improvements
In August 2017,October 2020, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities”.2020-10, “Codification Improvements.” The new accounting rules expandimprove the hedging strategies that qualify for hedge accounting, including contractually-specified price components of a commodity purchase or sale, hedgesconsistency of the benchmark rate componentCodification by including all disclosure guidance in the appropriate Disclosure Section (Section 50) that had only been included in the Other Presentation Matters Section (Section 45) of the contractual coupon cash flows of fixed-rate assets and liabilities, hedges ofCodification. Additionally, the portion of a closed portfolio of prepayable assets and partial-term hedges of fixed-rate assets and liabilities. The new rules also allow additional time to complete hedge effectiveness testingclarify guidance across various topics including defined benefit plans, foreign currency transactions, and allow qualitative assessments subsequent to initial quantitative tests if there is a supportable expectation that the hedge will remain highly effective.interest expense. The new accounting rules will bewere effective for the Company in the first quarter of 2019, with early adoption permitted.2021. The Company does not expect the adoption of the new accounting rules todid not have a material impact on the Company’s financial condition, results of operations, and cash flows.flows or disclosures.
Goodwill Impairment
(3) Discontinued Operations
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The new rules simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair valuefirst quarter of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for2021, the Company announced that as part of its strategic plan, it was exploring alternatives for its European Innerwear business and subsequently reached the decision to exit this business. The Company determined that its European Innerwear business met held-for-sale and discontinued operations accounting criteria at the end of the first quarter of 2021. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. These changes have been applied to all periods presented. The Company is actively marketing the business to prospective buyers and expects to complete the sale of this business before the end of the first quarter of 2022.
The operations of the European Innerwear business were previously reported primarily in the International segment. Certain expenses related to its operations were included in general corporate expenses, restructuring and other action-related charges and amortization of intangibles which were previously excluded from segment operating profit and have been reclassified to discontinued operations for all periods presented. Discontinued operations does not include any allocation of corporate overhead expense or interest expense.
Upon meeting the criteria for held for sale classification which qualified as a triggering event, the Company performed a full impairment analysis of the disposal group's indefinite-lived intangible assets and goodwill. As a result of the strategic decision to exit the European Innerwear business, a strategic review was completed in the first quarter of 2020.2021 with revised forecasts to include updated market conditions and the removal of strategic operating decisions that would no longer occur under the Company's ownership. The revised forecasts indicated impairment charges of certain indefinite-lived trademarks and license agreements as well as the full goodwill balance. A non-cash charge of $155,745 was recorded as "Impairment of intangible assets and goodwill" in the summarized discontinued operations financial information for the six months ended July 3, 2021. In addition, the Company does not expectrecorded non-cash charges of $9,828 and $236,180 as "Loss on classification of assets held for sale" in the adoptionsummarized discontinued operations financial information for the quarter and the six months ended July 3, 2021, respectively, to record a valuation allowance against the net assets held for sale to write down the carrying value of the new accounting rulesdisposal group to have a material impact on the Company’s financial condition, resultsestimated fair value less costs of operationsdisposal. The non-cash charge recorded in the quarter ended July 3, 2021 resulted from changes in working capital balances and cash flows.
Hanes Australasia
On July 14, 2016, the Company acquired 100% of the outstanding shares of Pacific Brands Limited (“Hanes Australasia”) for a total purchase price of AUD$1,049,360 ($800,871). US dollar equivalents are based on acquisition dateforeign exchange rates. The Company fundedwill continue to assess the acquisition throughvaluation allowance in each interim period until the European Innerwear business is sold. Additionally, the Company recorded an impairment charge of $7,302 in continuing operations on an indefinite-lived trademark for the six months ended July 3, 2021 which is reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. This charge relates to the full impairment of an indefinite-lived trademark related to a combination of cash on hand, a portionspecific brand within the European Innerwear business that was excluded from the disposal group as it is not being marketed for sale. The Company intends to exit this brand subsequent to the sale of the net proceedsEuropean Innerwear business.
During the second quarter of 2020, the Company completed a quantitative impairment analysis for certain indefinite-lived intangible assets as a result of the significant impact of the COVID-19 pandemic on their performance. Based on this analysis, the Company recorded impairment charges of $20,319 on certain indefinite-lived trademarks and other intangible assets within the European Innerwear business which are reflected in the “Impairment of intangible assets and goodwill” line in the summarized discontinued operations financial information for the quarter and six months ended June 27, 2020.
The Company expects to continue certain sales from its supply chain to the European Innerwear business after the sale of the business. Those sales and the related profit are included in continuing operations in the Condensed Consolidated Statements of Income and in “Other” in note “Business Segment Information” in all periods presented and have not been eliminated as intercompany transactions in consolidation. The related receivables from the 3.5% Senior Notes issuedEuropean Innerwear business have been reclassified to “Trade accounts receivable, net” in June 2016 and borrowings under the Australian Term A-1 Loan Facility and the Australian Term A-2 Loan Facility.
Condensed Consolidated Balance Sheets for all periods presented.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
The acquired assetsoperating results of the discontinued operations only reflect revenues and assumedexpenses that are directly attributable to the European Innerwear business that will be eliminated from continuing operations. The key components from discontinued operations related to the European Innerwear business are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Net sales | $ | 117,506 | | | $ | 205,591 | | | $ | 253,351 | | | $ | 333,262 | |
Cost of sales | 63,137 | | | 86,441 | | | 138,660 | | | 158,548 | |
Gross profit | 54,369 | | | 119,150 | | | 114,691 | | | 174,714 | |
Selling, general and administrative expenses | 61,134 | | | 59,428 | | | 144,526 | | | 128,815 | |
Impairment of intangible assets and goodwill | 0 | | | 20,319 | | | 155,745 | | | 20,319 | |
Loss on classification of assets held for sale | 9,828 | | | 0 | | | 236,180 | | | 0 | |
Operating income (loss) | (16,593) | | | 39,403 | | | (421,760) | | | 25,580 | |
Other expenses | 280 | | | 397 | | | 614 | | | 786 | |
Interest expense, net | 69 | | | 584 | | | 159 | | | 1,406 | |
Income (loss) from discontinued operations before income tax expense | (16,942) | | | 38,422 | | | (422,533) | | | 23,388 | |
Income tax expense (benefit) | 2,245 | | | 13,809 | | | (11,680) | | | 11,767 | |
Net income (loss) from discontinued operations, net of tax | $ | (19,187) | | | $ | 24,613 | | | $ | (410,853) | | | $ | 11,621 | |
Assets and liabilities atof discontinued operations classified as held for sale in the dateCondensed Consolidated Balance Sheets as of acquisition (July 14, 2016) includeJuly 3, 2021, January 2, 2021 and June 27, 2020 consist of the following:
|
| | | |
Cash and cash equivalents | $ | 54,294 |
|
Accounts receivable, net | 36,019 |
|
Inventories | 104,806 |
|
Other current assets | 16,588 |
|
Current assets of discontinued operations | 50,839 |
|
Property, net | 34,835 |
|
Trademarks and other identifiable intangibles | 506,170 |
|
Deferred tax assets and other noncurrent assets | 23,687 |
|
Total assets acquired | 827,238 |
|
Accounts payable | 89,309 |
|
Accrued liabilities and other | 24,912 |
|
Current liabilities of discontinued operations | 14,564 |
|
Long-term debt | 41,976 |
|
Deferred tax liabilities and other noncurrent liabilities | 16,320 |
|
Total liabilities assumed | 187,081 |
|
Net assets acquired | 640,157 |
|
Goodwill | 160,714 |
|
Purchase price | $ | 800,871 |
|
Since July 14, 2016, goodwill decreased by $25,434 as a result of measurement period adjustments, primarily related to the valuation adjustments for the Dunlop Flooring and Tontine Pillow businesses and completion of deferred tax balances. The purchase price allocation was finalized in the third quarter of 2017.
| | | | | | | | | | | | | | | | | |
| July 3, 2021 | | January 2, 2021(1) | | June 27, 2020(1) |
Cash and cash equivalents | $ | 8,921 | | | $ | 8,822 | | | $ | 127,015 | |
Trade accounts receivable, net | 70,432 | | | 84,632 | | | 68,041 | |
Inventories | 119,627 | | | 123,337 | | | 184,304 | |
Other current assets | 15,114 | | | 17,295 | | | 21,987 | |
Property, net | 63,222 | | | 67,950 | | | 68,916 | |
Right-of-use assets | 34,051 | | | 34,637 | | | 40,994 | |
Trademarks and other identifiable intangibles, net | 211,534 | | | 284,170 | | | 282,362 | |
Goodwill | 0 | | | 96,692 | | | 88,445 | |
Deferred tax assets | 10,376 | | | 5,438 | | | 6,947 | |
Other noncurrent assets | 4,421 | | | 5,614 | | | 5,381 | |
Allowance to adjust assets to estimated fair value, less costs of disposal | (235,712) | | | 0 | | | 0 | |
Total assets of discontinued operations | $ | 301,986 | | | $ | 728,587 | | | $ | 894,392 | |
| | | | | |
Accounts payable | $ | 70,185 | | | $ | 77,636 | | | $ | 61,179 | |
Accrued liabilities | 111,321 | | | 133,431 | | | 115,465 | |
Lease liabilities | 8,693 | | | 10,332 | | | 13,026 | |
Notes payable | 377 | | | 784 | | | 8,790 | |
Current portion of long-term debt | 0 | | | 0 | | | 112,512 | |
Lease liabilities - noncurrent | 26,766 | | | 28,775 | | | 31,971 | |
Pension and postretirement benefits | 44,328 | | | 46,569 | | | 45,405 | |
Other noncurrent liabilities | 28,081 | | | 37,645 | | | 38,988 | |
Total liabilities of discontinued operations | $ | 289,751 | | | $ | 335,172 | | | $ | 427,336 | |
Champion Europe
On(1)Amounts at January 2, 2021 and June 30, 2016, the Company acquired 100% of Champion Europe S.p.A. (“Champion Europe”), which owns the trademark for the Champion brand in Europe, the Middle East27, 2020 have been classified as current and Africa, from certain individual shareholders in an all-cash transaction valued at €220,751 ($245,554) on an enterprise value basis, less working capital adjustments as definedlong-term in the purchase agreement, which included €40,700 ($45,277) in estimated contingent consideration. US dollar equivalents are based on acquisition date exchange rates. The Company funded the acquisition through a combination of cash on hand and a portion of the net proceeds from the 3.5% Senior Notes issued in June 2016.
The estimated contingent consideration is included in the “Accrued liabilities” line in the accompanying Condensed Consolidated Balance Sheet and is based on 10 times Champion Europe’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) in excess of €18,600, calculated as defined by the purchase agreement, for the calendar year 2016 and is payable in 2017. The contingent consideration is required to be revalued each reporting period until paid. At September 30, 2017, the contingent consideration payment was pending finalization of Champion Europe’s calendar year 2016 EBITDA calculation in accordance with the purchase agreement. On April 28, 2017, an initial payment of €37,820 ($41,250) was made to the sellers towards the contingent consideration liability, which represents the mutually agreed portion of the contingent consideration. Management continues to evaluate and discuss the proposed adjustments to the EBITDA calculation with the sellers and believes the remaining accrual is consistent with management’s expectations for any additional amount that will be due in connection with the contingent consideration. In addition to the initial payment, additional contingent consideration payments could total up to approximately €46,600.
Sheets.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
The cash flows related to discontinued operations have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows. The following table presents cash flow and non-cash information related to discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Depreciation | $ | 0 | | | $ | 2,682 | | | $ | 2,608 | | | $ | 5,347 | |
Amortization | 0 | | | 1,262 | | | 1,460 | | | 2,544 | |
Capital expenditures | 735 | | | 1,862 | | | 4,070 | | | 5,400 | |
Impairment of intangible assets and goodwill | 0 | | | 20,319 | | | 155,745 | | | 20,319 | |
Loss on classification of assets held for sale | 9,828 | | | 0 | | | 236,180 | | | 0 | |
Other investing activities | 1,580 | | | 615 | | | 3,374 | | | 1,831 | |
Capital expenditures included in accounts payable at end of period | 486 | | | 264 | | | 486 | | | 264 | |
Right-of-use assets obtained in exchange for lease obligations | 1,642 | | | 0 | | | 3,137 | | | 201 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(4) Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which occurs at a point in time, upon either shipment or delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates for variable consideration. Variable consideration includes trade discounts, rebates, volume-based incentives, cooperative advertising and product returns, which are offered within contracts between the Company and its customers, employing the practical expedient for contract costs. Incidental items that are immaterial to the context of the contract are recognized as expense at the transaction date.
The acquired assets, contingent consideration and assumed liabilities atfollowing table presents the dateCompany’s revenues disaggregated by the customer’s method of acquisition (June 30, 2016) includepurchase:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Third-party brick-and-mortar wholesale | $ | 1,233,531 | | | $ | 1,164,078 | | | $ | 2,258,270 | | | $ | 2,050,613 | |
Consumer-directed | 517,780 | | | 379,005 | | | 1,001,070 | | | 695,540 | |
Total net sales | $ | 1,751,311 | | | $ | 1,543,083 | | | $ | 3,259,340 | | | $ | 2,746,153 | |
Revenue Sources
Third-Party Brick-and-Mortar Wholesale Revenue
Third-party brick-and-mortar wholesale revenue is primarily generated by sales of the following:
|
| | | |
Cash and cash equivalents | $ | 14,581 |
|
Trade accounts receivable, net | 27,926 |
|
Inventories | 53,816 |
|
Other current assets | 5,976 |
|
Property, net | 24,605 |
|
Trademarks and other identifiable intangibles | 135,277 |
|
Deferred tax assets and other noncurrent assets | 3,777 |
|
Total assets acquired | 265,958 |
|
Accounts payable | 66,594 |
|
Accrued liabilities and other (including contingent consideration) | 60,887 |
|
Notes payable | 27,748 |
|
Deferred tax liabilities and other noncurrent liabilities | 20,282 |
|
Total liabilities assumed and contingent consideration | 175,511 |
|
Net assets acquired | 90,447 |
|
Goodwill | 109,830 |
|
Initial consideration paid | 200,277 |
|
Estimated contingent consideration | 45,277 |
|
Total purchase price | $ | 245,554 |
|
Since June 30, 2016, goodwill increased by $1,665 as a resultCompany’s products to retailers to support their brick-and-mortar operations. Also included within third-party brick-and-mortar wholesale revenue is royalty revenue from licensing agreements. The Company earns royalties through license agreements with manufacturers of measurement period adjustments primarily to working capital.other consumer products that incorporate certain of the Company’s brands. The purchase price allocation was finalizedCompany accrues revenue earned under these contracts based upon reported sales from the licensees. Additionally, in the second quarter of 2017.
Consolidated Pro Forma Results
Consolidated unaudited pro forma results of operations for the Company are presented below assuming that the 2016 acquisitions of Hanes Australasia and Champion Europe had occurred on January 4, 2015. Pro forma operating results for the quarter and ninesix months ended October 1, 2016 exclude expenses totaling $751June 27, 2020, third-party brick-and-mortar wholesale revenue included $514,256 of revenue from contracts with governments generated from the sale of both cloth face coverings and $6,187 respectively,gowns for acquisition-related adjustmentsuse during the COVID-19 pandemic. Receivables from government contracts of $484,162 were included in “Trade accounts receivable, net” in the Company’s Condensed Consolidated Balance Sheet at June 27, 2020.
Consumer-Directed Revenue
Consumer-directed revenue is primarily
related to inventory and stock compensation. |
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales | $ | 1,799,270 |
| | $ | 1,780,530 |
| | $ | 4,826,235 |
| | $ | 4,859,619 |
|
Net income from continuing operations | 203,356 |
| | 172,040 |
| | 448,602 |
| | 448,589 |
|
Earnings per share from continuing operations: | | | | | | | |
Basic | $ | 0.56 |
| | $ | 0.45 |
| | $ | 1.22 |
| | $ | 1.17 |
|
Diluted | 0.55 |
| | 0.45 |
| | 1.21 |
| | 1.16 |
|
Subsequent Event
On October 13, 2017, the Company acquired 100% of Alternative Apparel, Inc. (“Alternative Apparel”) from Rosewood Capital V, L.P. and certain individual shareholders in an all-cash transaction valued at approximately $60,000 on an enterprise value basis. Alternative Apparel sells the Alternative brand better basics T-shirts, fleece and other tops and bottoms. Alternative is a lifestyle brand known for its comfort, style and social responsibility. The Company funded the acquisition with cash on hand and short term borrowing under the Revolving Loan Facility. The Company believes this acquisition will create growth opportunities by supporting its Activewear growth strategy by expanding its market and channel penetration, including online, supportedgenerated through sales driven directly by the consumer through company-operated stores and e-commerce platforms, which include both owned sites and the sites of the Company’s global low-cost supply chain and manufacturing network. Due to the immaterial nature of this acquisition, the Company has not provided additional disclosures herein.
retail customers.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
(5) Stockholders’ Equity
| |
(4) | Discontinued Operations |
As part of the Company’s acquisition of Hanes Australasia, the Company acquired Hanes Australasia’s legacy Dunlop Flooring and Tontine Pillow businesses. The Company concluded that these businesses were not a strategic fit; therefore, the decision was made to divest of the businesses.
In February 2017, the Company sold its Dunlop Flooring business for AUD$34,564 ($26,219) in net cash proceeds at the time of sale, with an additional AUD$1,334 ($1,012) of proceeds received in April 2017 related to a working capital adjustment, resulting in a pre-tax loss of AUD$2,715 ($2,083). US dollar equivalents are based on exchange rates on the date of the sale transaction. The Dunlop Flooring business was reported as part of discontinued operations since the date of acquisition.
In March 2017, the Company sold its Tontine Pillow business for AUD$13,500 ($10,363) in net cash proceeds at the time of sale. A working capital adjustment of AUD$966 ($742) was paid to the buyer in April 2017, resulting in a net pre-tax gain of AUD$2,415 ($1,856). US dollar equivalents are based on exchange rates on the date of the sale transaction. The Tontine Pillow business was reported as part of discontinued operations since the date of acquisition.
The operating results of these discontinued operations only reflect revenues and expenses that are directly attributable to these businesses that were eliminated from ongoing operations. The key components from discontinued operations related to the Dunlop Flooring and Tontine Pillow businesses were as follows:
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales | $ | — |
| | $ | 15,587 |
| | $ | 6,865 |
| | $ | 15,587 |
|
Cost of sales | — |
| | 9,996 |
| | 4,507 |
| | 9,996 |
|
Gross profit | — |
| | 5,591 |
| | 2,358 |
| | 5,591 |
|
Selling, general and administrative expenses | — |
| | 3,570 |
| | 3,729 |
| | 3,570 |
|
Operating profit (loss) | — |
| | 2,021 |
| | (1,371 | ) | | 2,021 |
|
Other expenses | — |
| | 495 |
| | 303 |
| | 495 |
|
Net loss on disposal of businesses | — |
| | — |
| | 242 |
| | — |
|
Income (loss) from discontinued operations before income tax expense | — |
| | 1,526 |
| | (1,916 | ) | | 1,526 |
|
Income tax expense | — |
| | 458 |
| | 181 |
| | 458 |
|
Net income (loss) from discontinued operations, net of tax | $ | — |
| | $ | 1,068 |
| | $ | (2,097 | ) | | $ | 1,068 |
|
Basic earnings per share (“EPS”) was computed by dividing net income (loss) by the number of weighted average shares of common stock outstanding.outstanding during the period. Diluted EPS was calculated to give effect to all potentially issuable dilutive shares of common stock using the treasury stock method.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Basic weighted average shares outstanding | 350,987 | | | 350,538 | | | 350,995 | | | 354,778 | |
Effect of potentially dilutive securities: | | | | | | | |
Stock options | 24 | | | 143 | | | 16 | | | 182 | |
Restricted stock units | 1,039 | | | 143 | | | 855 | | | 165 | |
Employee stock purchase plan and other | 2 | | | 5 | | | 3 | | | 8 | |
Diluted weighted average shares outstanding | 352,052 | | | 350,829 | | | 351,869 | | | 355,133 | |
|
| | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Basic weighted average shares outstanding | 366,083 |
| | 379,368 |
| | 368,885 |
| | 382,235 |
|
Effect of potentially dilutive securities: | | | | | | | |
Stock options | 1,541 |
| | 1,890 |
| | 1,591 |
| | 2,016 |
|
Restricted stock units | 535 |
| | 1,293 |
| | 470 |
| | 1,210 |
|
Employee stock purchase plan and other | 1 |
| | 7 |
| | 1 |
| | 17 |
|
Diluted weighted average shares outstanding | 368,160 |
| | 382,558 |
| | 370,947 |
| | 385,478 |
|
There were 28 and 58 restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarter and nine months ended September 30, 2017, respectively. For the quarter and nine months
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
ended October 1, 2016, there were 42 restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the quarters and nine months ended September 30, 2017 and October 1, 2016, no optionsThe following securities were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.anti-dilutive:
For the quarters ended September 30, 2017 and October 1, 2016, the Company declared cash dividends of $0.15 and $0.11 per share, respectively. For the nine months ended September 30, 2017 and October 1, 2016, the Company declared cash dividends of $0.45 and $0.33 per share, respectively. | | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Stock options | 83 | | | 0 | | | 167 | | | 0 | |
Restricted stock units | 45 | | | 1,599 | | | 44 | | | 1,330 | |
On October 24, 2017,July 27, 2021, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding shares of common stock to be paid on December 5, 2017August 31, 2021 to stockholders of record at the close of business on November 14, 2017.August 10, 2021.
On April 27, 2016,February 6, 2020, the Company’s Board of Directors approved a new share repurchase program for up to 40,000 shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. Additionally, management has been granted authority to establish one or more trading plans under Rule 10b5-1 of the Exchange Act in connection with share repurchases, which will allow the Company to repurchase shares in the open market during periods in which the stock trading window is otherwise closed for the Company and certain of the Company’s officers and employees pursuant to the Company’s insider trading policy. Unless terminated earlier by the Company’s Board of Directors, the new program will expire when the Company has repurchased all shares authorized for repurchase under the new program. The new program replaced the Company’s previous share repurchase program for up to 40,000 shares that was originally approved in 2016. For the quarters ended July 3, 2021 and June 27, 2020 and the six months ended July 3, 2021, the Company did not enter into any transactions to repurchase any shares duringunder the quarters ended September 30, 2017 and October 1, 2016.new program. For the ninesix months ended September 30, 2017,June 27, 2020, the Company entered into transactions to repurchase 14,69614,464 shares at a weighted average repurchase price of $20.39$13.83 per share.share under the new program. The shares were repurchased at a total cost of $299,919. For the nine months ended October 1, 2016, the Company repurchased 14,243 shares under the previous share repurchase program at a weighted average purchase price of $26.65 per share. The shares were repurchased at a total cost of $379,901.$200,269. At September 30, 2017,July 3, 2021, the remaining repurchase authorization under the current share repurchase program totaled 25,30425,536 shares. The primary objective of the share repurchase program does not obligateis to utilize excess cash to generate shareholder value. Share repurchases were previously prohibited under the Senior Secured Credit Facility as a result of the amendment signed in April 2020. The Company terminated such amendment when it submitted its April 3, 2021 compliance certificate in order to acquire any particular amount of common stockreduce interest expense and may be suspended or discontinued at any time atincrease flexibility for restricted payments, investments, indebtedness, and permitted acquisitions. See Note “Debt” for additional information on the Company’s discretion.debt facilities.
Inventories consisted of the following:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 130,567 |
| | $ | 131,228 |
|
Work in process | 201,729 |
| | 185,066 |
|
Finished goods | 1,621,622 |
| | 1,524,271 |
|
| $ | 1,953,918 |
| | $ | 1,840,565 |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
(6) Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | | | | |
| July 3, 2021 | | January 2, 2021 | | June 27, 2020 |
Raw materials | $ | 72,436 | | | $ | 67,111 | | | $ | 80,610 | |
Work in process | 101,862 | | | 108,844 | | | 127,924 | |
Finished goods | 1,356,324 | | | 1,191,803 | | | 1,565,605 | |
| $ | 1,530,622 | | | $ | 1,367,758 | | | $ | 1,774,139 | |
(7) Debt
Debt consisted of the following:
| | | Interest Rate as of September 30, 2017 | | Principal Amount | | Maturity Date | | Interest Rate as of July 3, 2021 | | Principal Amount | | Maturity Date |
| September 30, 2017 | | December 31, 2016 | | | July 3, 2021 | | January 2, 2021 | |
Senior Secured Credit Facility: | | | | | | | Senior Secured Credit Facility: | | | | | | | |
Revolving Loan Facility | 2.99% | | $ | 211,000 |
| | $ | — |
| | April 2020 | Revolving Loan Facility | 0 | | $ | 0 | | | $ | 0 | | | December 2022 |
| Term Loan A | 2.95% | | 605,625 |
| | 655,469 |
| | April 2020 | Term Loan A | 1.34% | | 618,750 | | | 625,000 | | | December 2022 |
Term Loan B | 3.74% | | 318,625 |
| | 318,625 |
| | April 2022 | Term Loan B | 0 | | 0 | | | 300,000 | | | December 2024 |
Australian Term A-1 | 3.15% | | 156,974 |
| | 143,544 |
| | July 2019 | |
Australian Term A-2 | —% | | — |
| | 143,544 |
| | July 2021 | |
| Australian Revolving Loan Facility | | Australian Revolving Loan Facility | 0 | | 0 | | | 0 | | | July 2022 |
5.375% Senior Notes | | 5.375% Senior Notes | 5.38% | | 700,000 | | | 700,000 | | | May 2025 |
4.875% Senior Notes | 4.88% | | 900,000 |
| | 900,000 |
| | May 2026 | 4.875% Senior Notes | 4.88% | | 900,000 | | | 900,000 | | | May 2026 |
4.625% Senior Notes | 4.63% | | 900,000 |
| | 900,000 |
| | May 2024 | 4.625% Senior Notes | 4.63% | | 900,000 | | | 900,000 | | | May 2024 |
3.5% Senior Notes | 3.50% | | 587,268 |
| | 520,617 |
| | June 2024 | 3.5% Senior Notes | 3.50% | | 593,261 | | | 610,724 | | | June 2024 |
European Revolving Loan Facility | 1.50% | | 79,868 |
| | 62,474 |
| | September 2018 | |
Accounts Receivable Securitization Facility | 2.12% | | 250,995 |
| | 44,521 |
| | March 2018 | Accounts Receivable Securitization Facility | 0 | | 0 | | | 0 | | | June 2022 |
Other International Debt | Various | | 2,027 |
| | 43,789 |
| | Various | |
| | 4,012,382 |
| | 3,732,583 |
| | |
Less long-term debt issuance cost | | 40,445 |
| | 46,534 |
| | |
Total debt | | Total debt | | 3,712,011 | | | 4,035,724 | | |
Less long-term debt issuance costs | | Less long-term debt issuance costs | | 27,029 | | | 32,354 | | |
Less current maturities | | 405,390 |
| | 178,364 |
| | Less current maturities | | 37,500 | | | 263,936 | | |
| | $ | 3,566,547 |
| | $ | 3,507,685 |
| | |
Total long-term debt | | Total long-term debt | | $ | 3,647,482 | | | $ | 3,739,434 | | |
As of September 30, 2017,July 3, 2021, the Company had $784,117$995,824 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account outstanding borrowings and $4,883$4,176 of standby and trade letters of credit issued and outstanding under this facility. In March 2021, the Company repaid the outstanding balance of Term Loan B which consisted of a required excess cash flow prepayment of $238,936 and a voluntary prepayment of $61,064.
The Company’s accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) entered into in November 2007 was amended in March 2021. The latest amendment decreased the fluctuating facility limit to $175,000 (previously $225,000) and extended the maturity date to June 2022. Additionally, the amendment changed certain ratios and borrowing base calculations, raised pricing and added certain receivables to the pledged collateral pool for the facility. Borrowings under the Accounts Receivable Securitization Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans and also subject to a fluctuating facility limit, not to exceed $175,000. The Company’s maximum borrowing capacity under the Accounts Receivable Securitization Facility was $150,000 as of July 3, 2021. The Company also had $24,005$88,833 of borrowing availability under the Accounts Receivable Securitization Facility $37,586 of borrowing availability under the European Revolving Loan Facility, $51,016at July 3, 2021.
The Company had $44,994 of borrowing availability under the Australian Revolving Loan Facility and $60,648$33,610 of borrowing availability under other international lines of credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facility.
In March 2017, the Company amended the Accounts Receivable Securitizationfacilities at July 3, 2021. The Australian Revolving Loan Facility, that itoriginally entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment primarily extended the maturity date to March 2018.
In September 2017, the CompanyJuly 2016, was amended the European Revolving Loan Facility primarilyin July 2021 to extend the maturity date to September 2018.July 2022 and to reduce the bilateral cash advance limit from A$50,000 to A$46,000 with an offsetting increase in the bank overdraft limit from A$10,000 to A$14,000.
In April 2020, given the rapidly changing business environment and level of uncertainty being created by the COVID-19 pandemic and the associated impact on future earnings, the Company amended its Senior Secured Credit Facility prior to any
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
potential covenant violation in order to modify the financial covenants and to provide operating flexibility during the COVID-19 crisis. The amendment changed certain provisions and covenants under the Senior Secured Credit Facility through the fiscal quarter ended July 3, 2021, after which the covenants were to revert to their original, pre-amendment levels. The Company voluntarily terminated the covenant relief amendment when it submitted its April 3, 2021 compliance certificate in order to reduce interest expense and increase flexibility for restricted payments, investments, indebtedness, and permitted acquisitions. After termination, the covenants reverted to their original, pre-amendment levels for the fiscal quarter ended July 3, 2021.
As of September 30, 2017,July 3, 2021, the Company was in compliance with all financial covenants under its credit facilities.facilities and other outstanding indebtedness. Under the terms of its Senior Secured Credit Facility, among other financial and non-financial covenants, the Company is required to maintain a minimum interest coverage ratio and a maximum leverage ratio. The interest coverage ratio covenant is the ratio of the Company’s EBITDA for the preceding four fiscal quarters to its consolidated total interest expense and the maximum leverage ratio covenant is the ratio of the Company’s net debt to EBITDA for the preceding four fiscal quarters. EBITDA is defined as earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility.
The Company expects to maintain compliance with its covenants for at least one year from the date of these financial statements based on its current expectations and forecasts. If economic conditions caused by the COVID-19 pandemic do not continue to improve or otherwise worsen, including as a result of any new virus variants or vaccine distribution or efficacy, and the Company’s earnings and operating cash flows do not continue to recover as currently estimated by management, this could impact the Company’s ability to maintain compliance with its financial covenants and require the Company to seek additional amendments to its Senior Secured Credit Facility. If the Company is not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, its lenders could require the Company to repay its outstanding debt. In that situation, the Company may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders. | |
(8) | Accumulated Other Comprehensive Loss |
(8) Accumulated Other Comprehensive Loss
The components of Accumulatedaccumulated other comprehensive loss (“AOCI”) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at April 3, 2021 | $ | (78,021) | | | $ | (12,822) | | | $ | (659,946) | | | $ | 173,904 | | | $ | (576,885) | |
Amounts reclassified from accumulated other comprehensive loss | 0 | | | 4,671 | | | 6,022 | | | (2,993) | | | 7,700 | |
Current-period other comprehensive income (loss) activity | (11,231) | | | (675) | | | (124) | | | 287 | | | (11,743) | |
Total other comprehensive income (loss) | (11,231) | | | 3,996 | | | 5,898 | | | (2,706) | | | (4,043) | |
| | | | | | | | | |
Balance at July 3, 2021 | $ | (89,252) | | | $ | (8,826) | | | $ | (654,048) | | | $ | 171,198 | | | $ | (580,928) | |
| | | | | | | | | | | | | | Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
| Cumulative Translation Adjustment | | Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss | |
| | |
Balance at December 31, 2016 | $ | (78,059 | ) | | $ | 13,772 |
| | $ | (606,583 | ) | | $ | 234,879 |
| | $ | (435,991 | ) | |
Balance at January 2, 2021 | | Balance at January 2, 2021 | $ | (52,820) | | | $ | (26,538) | | | $ | (668,730) | | | $ | 181,129 | | | $ | (566,959) | |
Amounts reclassified from accumulated other comprehensive loss | — |
| | (3,348 | ) | | 14,440 |
| | (4,611 | ) | | 6,481 |
| Amounts reclassified from accumulated other comprehensive loss | 0 | | | 9,913 | | | 13,107 | | | (5,997) | | | 17,023 | |
Current-period other comprehensive income (loss) activity | 34,047 |
| | (43,660 | ) | | — |
| | 12,481 |
| | 2,868 |
| Current-period other comprehensive income (loss) activity | (36,432) | | | 7,799 | | | 1,575 | | | (3,934) | | | (30,992) | |
Total other comprehensive income (loss) | | Total other comprehensive income (loss) | (36,432) | | | 17,712 | | | 14,682 | | | (9,931) | | | (13,969) | |
| | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | $ | (44,012 | ) | | $ | (33,236 | ) | | $ | (592,143 | ) | | $ | 242,749 |
| | $ | (426,642 | ) | |
Balance at July 3, 2021 | | Balance at July 3, 2021 | $ | (89,252) | | | $ | (8,826) | | | $ | (654,048) | | | $ | 171,198 | | | $ | (580,928) | |
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note, “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at March 28, 2020 | $ | (274,292) | | | $ | 19,849 | | | $ | (624,494) | | | $ | 155,512 | | | $ | (723,425) | |
Amounts reclassified from accumulated other comprehensive loss | 0 | | | (3,157) | | | 5,423 | | | (416) | | | 1,850 | |
Current-period other comprehensive income (loss) activity | 95,033 | | | (7,051) | | | (69) | | | 2,653 | | | 90,566 | |
Total other comprehensive income (loss) | 95,033 | | | (10,208) | | | 5,354 | | | 2,237 | | | 92,416 | |
| | | | | | | | | |
Balance at June 27, 2020 | $ | (179,259) | | | $ | 9,641 | | | $ | (619,140) | | | $ | 157,749 | | | $ | (631,009) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at December 28, 2019 | $ | (157,138) | | | $ | 4,786 | | | $ | (629,360) | | | $ | 164,064 | | | $ | (617,648) | |
Amounts reclassified from accumulated other comprehensive loss | 0 | | | (8,174) | | | 10,289 | | | (416) | | | 1,699 | |
Current-period other comprehensive income (loss) activity | (22,121) | | | 13,029 | | | (69) | | | (5,899) | | | (15,060) | |
Total other comprehensive income (loss) | (22,121) | | | 4,855 | | | 10,220 | | | (6,315) | | | (13,361) | |
| | | | | | | | | |
Balance at June 27, 2020 | $ | (179,259) | | | $ | 9,641 | | | $ | (619,140) | | | $ | 157,749 | | | $ | (631,009) | |
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note, “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company had the following reclassifications out of AOCI:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification from AOCI |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Gain (loss) on forward foreign exchange contracts designated as cash flow hedges | | Cost of sales | | $ | (5,278) | | | $ | 1,758 | | | $ | (9,655) | | | $ | 4,627 | |
| | Income tax | | 1,444 | | | (483) | | | 2,652 | | | (1,245) | |
| | Income (loss) from discontinued operations, net of tax | | (1,278) | | | 1,080 | | | (1,522) | | | 2,718 | |
| | Net of tax | | (5,112) | | | 2,355 | | | (8,525) | | | 6,100 | |
| | | | | | | | | | |
Gain (loss) on cross-currency swap contracts designated as cash flow hedges | | Selling, general and administrative expenses | | 3,168 | | | 0 | | | 2,611 | | | 0 | |
| | Interest expense, net | | (1,018) | | | 0 | | | (1,018) | | | 0 | |
| | Income tax | | (312) | | | 0 | | | (223) | | | 0 | |
| | Net of tax | | 1,838 | | | 0 | | | 1,370 | | | 0 | |
| | | | | | | | | | |
Amortization of deferred actuarial loss and prior service cost | | Other expenses | | (6,081) | | | (5,466) | | | (13,788) | | | (8,228) | |
| | Income tax | | 1,596 | | | 1,261 | | | 3,342 | | | 2,494 | |
| | Income (loss) from discontinued operations, net of tax | | 59 | | | 0 | | | 578 | | | (2,065) | |
| | Net of tax | | (4,426) | | | (4,205) | | | (9,868) | | | (7,799) | |
| | | | | | | | | | |
Total reclassifications | | | | $ | (7,700) | | | $ | (1,850) | | | $ | (17,023) | | | $ | (1,699) | |
(9) Financial Instruments and Risk Management
|
| | | | | | | | | | | | | | | | | | |
Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification from AOCI | | Amount of Reclassification from AOCI |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Gain on foreign exchange contracts | | Cost of sales | | $ | 414 |
| | $ | 715 |
| | $ | 3,348 |
| | $ | 4,424 |
|
| | Income tax | | 191 |
| | (278 | ) | | (934 | ) | | (1,721 | ) |
| | Net of tax | | 605 |
| | 437 |
| | 2,414 |
| | 2,703 |
|
Amortization of deferred actuarial loss and prior service cost | | Selling, general and administrative expenses | | (4,862 | ) | | (4,307 | ) | | (14,440 | ) | | (12,843 | ) |
| | Income tax | | 1,867 |
| | 1,675 |
| | 5,545 |
| | 4,996 |
|
| | Net of tax | | (2,995 | ) | | (2,632 | ) | | (8,895 | ) | | (7,847 | ) |
| | | | | | | | | | |
Total reclassifications | | | | $ | (2,390 | ) | | $ | (2,195 | ) | | $ | (6,481 | ) | | $ | (5,144 | ) |
| |
(9) | Financial Instruments and Risk Management |
The Company uses forward foreign exchange contracts and cross-currency swap contracts to manage its exposures to movements in foreign exchange rates. Asrates primarily related to the Euro, Australian dollar, Canadian dollar and Mexican peso. The Company also uses a combination of September 30, 2017, the notional U.S. dollar equivalent of commitmentscross-currency swap contracts and long-term debt to sellmanage its exposure to foreign currencies withincurrency risk associated with the Company’s derivative portfolio was $588,866, primarily consistingnet investment in certain European subsidiaries.
| | | | | | | | | | | | | | | | | |
| Hedge Type | | July 3, 2021 | | January 2, 2021 |
U.S. dollar equivalent notional amount of derivative instruments: | | | | | |
Forward foreign exchange contracts | Cash Flow and Mark to Market | | $ | 355,633 | | | $ | 617,912 | |
Cross-currency swap contracts | Cash Flow | | $ | 352,920 | | | $ | 0 | |
Cross-currency swap contracts | Net Investment | | $ | 335,940 | | | $ | 335,940 | |
HANESBRANDS INC.
Notes to the Australian dollar, Euro, Canadian dollar, Mexican peso, and the New Zealand dollar.Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Values of Derivative Instruments
The fair values of derivative financial instruments related to forward foreign exchange contracts and cross-currency swap contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
|
| | | | | | | | | |
| Balance Sheet Location | | Fair Value |
| September 30, 2017 | | December 31, 2016 |
Hedges | Other current assets | | $ | 907 |
| | $ | 16,729 |
|
Non-hedges | Other current assets | | 541 |
| | 4,363 |
|
Total derivative assets | | | 1,448 |
| | 21,092 |
|
| | | | | |
Hedges | Accrued liabilities | | (21,169 | ) | | (207 | ) |
Non-hedges | Accrued liabilities | | (4,503 | ) | | (172 | ) |
Total derivative liabilities | | | (25,672 | ) | | (379 | ) |
| | | | | |
Net derivative (liability) asset | | | $ | (24,224 | ) | | $ | 20,713 |
|
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | Fair Value |
| July 3, 2021 | | January 2, 2021 |
Derivatives designated as hedging instruments: | | | | | |
Forward foreign exchange contracts | Other current assets | | $ | 1,989 | | | $ | 1 | |
Cross-currency swap contracts | Other current assets | | 970 | | | 918 | |
Forward foreign exchange contracts | Current assets of discontinued operations | | 17 | | | 40 | |
Forward foreign exchange contracts | Other noncurrent assets | | 732 | | | 0 | |
Cross-currency swap contracts | Other noncurrent assets | | 1,723 | | | 0 | |
Derivatives not designated as hedging instruments: | | | | | |
Forward foreign exchange contracts | Other current assets | | 1,545 | | | 2,459 | |
Forward foreign exchange contracts | Current assets of discontinued operations | | 24 | | | 198 | |
Total derivative assets | | | 7,000 | | | 3,616 | |
| | | | | |
Derivatives designated as hedging instruments: | | | | | |
Forward foreign exchange contracts | Accrued liabilities | | (2,329) | | | (12,898) | |
Cross-currency swap contracts | Accrued liabilities | | (223) | | | 0 | |
Forward foreign exchange contracts | Current liabilities of discontinued operations | | (321) | | | (4,747) | |
Forward foreign exchange contracts | Other noncurrent liabilities | | 0 | | | (2,190) | |
Cross-currency swap contracts | Other noncurrent liabilities | | (9,300) | | | (16,526) | |
Derivatives not designated as hedging instruments: | | | | | |
Forward foreign exchange contracts | Accrued liabilities | | (4,151) | | | (16,488) | |
Forward foreign exchange contracts | Current liabilities of discontinued operations | | (589) | | | (2,195) | |
Total derivative liabilities | | | (16,913) | | | (55,044) | |
| | | | | |
Net derivative liability | | | $ | (9,913) | | | $ | (51,428) | |
Cash Flow Hedges
The Company uses forward foreign exchange contracts and cross-currency swap contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
On April 1, 2021, in connection with a reduction in the amount of the 3.5% Senior Notes designated in the European net investment hedge discussed below, the Company entered into 3 pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000. The Company designated these cross-currency swap contracts to hedge the undesignated portion of the foreign currency cash flow exposure related to the Company’s 3.5% Senior Notes, which had a carrying amount of €500,000 as of July 3, 2021. These cross-currency swap contracts, which mature on June 15, 2024, swap Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €300,000 of the Company’s €500,000 fixed-rate 3.5% Senior Notes to a fixed-rate 4.7945% USD-denominated obligation.
The Company expects to reclassify into earnings during the next 12 months a net loss from AOCI of approximately $16,432.
$12,581. The changesCompany is hedging exposure to the variability in fair value of derivatives excluded fromfuture foreign currency-denominated cash flows for forecasted transactions over the Company’s effectiveness assessmentsnext 15 months and for long-term debt over the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income.
next 36 months.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and sharesamounts in thousands, except per share data)
(unaudited)
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
| | | | | | | |
Forward foreign exchange contracts | $ | (1,392) | | | $ | (7,051) | | | $ | 7,094 | | | $ | 13,029 | |
Cross-currency swap contracts | 717 | | | 0 | | | 705 | | | 0 | |
| | | | | | | |
Total | $ | (675) | | | $ | (7,051) | | | $ | 7,799 | | | $ | 13,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| | Quarters Ended | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
| | | | | | | | | |
| | | | | | | | | |
Forward foreign exchange contracts(1) | Cost of sales | | $ | (5,278) | | | $ | 1,758 | | | $ | (9,655) | | | $ | 4,627 | |
Forward foreign exchange contracts(1) | Income (loss) from discontinued operations, net of tax | | (1,543) | | | 1,399 | | | $ | (1,851) | | | $ | 3,547 | |
Cross-currency swap contracts(1) | Selling, general and administrative expenses | | 3,168 | | | 0 | | | $ | 2,611 | | | $ | 0 | |
Cross-currency swap contracts(1) | Interest expense, net | | (1,018) | | | 0 | | | $ | (1,018) | | | $ | 0 | |
| | | | | | | | | |
Total | | | $ | (4,671) | | | $ | 3,157 | | | $ | (9,913) | | | $ | 8,174 | |
(1)The Company does not exclude amounts from effectiveness testing for cash flow hedges that would require recognition into earnings based on changes in fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarters Ended | | Six Months Ended |
| | | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Total cost of sales in which the effects of cash flow hedges are recorded | | | $ | 1,069,682 | | | $ | 1,029,221 | | | $ | 1,975,030 | | | $ | 1,814,123 | |
Total selling, general and administrative expenses in which the effects of cash flow hedges are recorded | | | $ | 464,235 | | | $ | 311,729 | | | $ | 876,794 | | | $ | 681,944 | |
Total interest expense, net in which the effects of cash flow hedges are recorded | | | $ | 42,440 | | | $ | 41,075 | | | $ | 86,900 | | | $ | 77,102 | |
Total income (loss) from discontinued operations, net of tax in which the effects of cash flow hedges are recorded | | | $ | (19,187) | | | $ | 24,613 | | | $ | (410,853) | | | $ | 11,621 | |
Net Investment Hedges
In July 2019, the Company entered into 2 pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000 that were designated as hedges of a portion of the beginning balance of the Company’s net investment in certain European subsidiaries. These cross-currency swap contracts, which mature on May 15, 2024, swap U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 4.625% Senior Notes to a fixed-rate 2.3215% Euro-denominated obligation.
In July 2019, the Company also designated the full amount of its 3.5% Senior Notes with a carrying value of €500,000, which is a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment. As of April 1, 2021, the Company reduced the amount of its 3.5% Senior Notes designated in the European net investment hedge from €500,000 to €200,000. As of July 3, 2021 and January 2, 2021, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $237,304 and $610,724, respectively.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Amount of Loss Recognized in AOCI (Effective Portion) | | Amount of Loss Recognized in AOCI (Effective Portion) |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Foreign exchange contracts | $ | (17,379 | ) | | $ | (3,594 | ) | | $ | (43,660 | ) | | $ | (7,131 | ) |
The amount of after-tax gains (losses) included in AOCI in the Condensed Consolidated Balance Sheets related to derivative instruments and nonderivative financial instruments designated as net investment hedges and the amount of gains included in the “Interest expense, net” line in the Condensed Consolidated Statements of Income related to amounts excluded from the assessment of hedge effectiveness for derivative instruments designated as net investment hedges are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in AOCI |
| | | Quarters Ended | | Six Months Ended |
| | | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Euro-denominated long-term debt | | $ | (1,544) | | | $ | (4,196) | | | $ | 17,756 | | | $ | (1,538) | |
Cross-currency swap contracts | | (2,066) | | | (1,004) | | | 5,307 | | | 10,728 | |
Total | | $ | (3,610) | | | $ | (5,200) | | | $ | 23,063 | | | $ | 9,190 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain Recognized in Income | | Amount of Gain Recognized in Income (Amount Excluded from Effectiveness Testing) |
| | Quarters Ended | | Six Months Ended |
| | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Cross-currency swap contracts | Interest expense, net | | $ | 1,715 | | | $ | 2,020 | | | $ | 3,614 | | | $ | 3,967 | |
| | | | | | | | | |
| | | | | | | | | |
| | | Quarters Ended | | Six Months Ended |
| | | July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Total interest expense, net in which the amounts excluded from effectiveness testing for net investment hedges are recorded | | $ | 42,440 | | | $ | 41,075 | | | $ | 86,900 | | | $ | 77,102 | |
|
| | | | | | | | | | | | | | | | | |
| Location of Gain Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain Reclassified from AOCI into Income (Effective Portion) |
| | Quarter Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Foreign exchange contracts | Cost of sales | | $ | 414 |
| | $ | 715 |
| | $ | 3,348 |
| | $ | 4,424 |
|
Derivative Contracts Not Designated AsMark to Market Hedges
A derivative used as a hedging instrument whose change in fair value is recognized to act as a hedge against changes in the values of the hedged item is designated as a mark to market hedge. The Company uses forward foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Forward foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheet.Sheets. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Forward foreign exchange contracts | Cost of sales | | $ | 5,629 | | | $ | (16,081) | | | $ | 18,624 | | | $ | (9,532) | |
Forward foreign exchange contracts | Selling, general and administrative expenses | | 880 | | | 1,962 | | | 3,091 | | | 928 | |
Forward foreign exchange contracts | Income (loss) from discontinued operations, net of tax | | 1,314 | | | (3,026) | | | 3,953 | | | (3,451) | |
Total | | | $ | 7,823 | | | $ | (17,145) | | | $ | 25,668 | | | $ | (12,055) | |
|
| | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain Recognized in Income | | Amount of Gain (Loss) Recognized in Income |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Foreign exchange contracts | Selling, general and administrative expenses | | $ | 3,277 |
| | $ | 7,694 |
| | $ | (1,398 | ) | | $ | 7,970 |
|
| |
(10) | Fair Value of Assets and Liabilities |
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(10) Fair Value of Assets and Liabilities
As of September 30, 2017,July 3, 2021, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to forward foreign exchange rates,derivative contracts, cross-currency swap derivative contracts and deferred compensation plan liabilities and contingent consideration resulting from the Champion Europe acquisition.liabilities. The fair values of forward foreign currency derivativesexchange derivative contracts are determined using the cash flows of the foreign exchange contract,forward contracts, discount rates to account for the passage of time and current foreign exchange market data which are all based on inputs readily available in public markets and are categorized as Level 2. The fair values of cross-currency swap derivative contracts are determined using the cash flows of the swap contracts, discount rates to account for the passage of time, current foreign exchange and interest rate market data and credit risk, which are all based on inputs readily available in public markets and are categorized as Level 2. The fair value of deferred compensation plans is based on readily available current market data and is categorized as Level 2. The fair value of the contingent consideration obligation was determined by applying a multiple of 10 times Champion Europe’s EBITDA for calendar year 2016 in excess of €18,600, as defined per the purchase agreement, as further described in Note 3 to the Company’s condensed consolidated financial statements, and is categorized as Level 3. An initial payment of €37,820 was made on April 28, 2017 to the sellers, which represents the mutually agreed portion of the contingent consideration. The remaining contingent consideration obligation will be revalued each reporting period until the related contingencies are resolved, with any adjustments to the fair value recognized in earnings. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a quarterly recurring basis.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
There were no changes during the quarter and six months ended September 30, 2017July 3, 2021 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers into or out of Level 1, Level 2 or Level 3 during the quarter ended September 30, 2017. As of and during the quarter and ninesix months ended September 30, 2017,July 3, 2021, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities within continuing operations accounted for at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of September 30, 2017 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Foreign exchange derivative contracts | $ | 1,448 |
| | $ | — |
| | $ | 1,448 |
| | $ | — |
|
Foreign exchange derivative contracts | (25,672 | ) | | — |
| | (25,672 | ) | | — |
|
| (24,224 | ) | | — |
| | (24,224 | ) | | — |
|
Champion Europe contingent consideration | (3,383 | ) | | — |
| | — |
| | (3,383 | ) |
Deferred compensation plan liability | (53,237 | ) | | — |
| | (53,237 | ) | | — |
|
Total | $ | (80,844 | ) | | $ | — |
| | $ | (77,461 | ) | | $ | (3,383 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of July 3, 2021 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Forward foreign exchange contracts - assets | $ | 4,266 | | | $ | 0 | | | $ | 4,266 | | | $ | 0 | |
Cross-currency swap contracts - assets | 2,693 | | | 0 | | | 2,693 | | | 0 | |
Forward foreign exchange contracts - liabilities | (6,480) | | | 0 | | | (6,480) | | | 0 | |
Cross-currency swap contracts - liabilities | (9,523) | | | 0 | | | (9,523) | | | 0 | |
| (9,044) | | | 0 | | | (9,044) | | | 0 | |
Deferred compensation plan liability | (19,634) | | | 0 | | | (19,634) | | | 0 | |
Total | $ | (28,678) | | | $ | 0 | | | $ | (28,678) | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of January 2, 2021 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Forward foreign exchange contracts - assets | $ | 2,460 | | | $ | 0 | | | $ | 2,460 | | | $ | 0 | |
Cross-currency swap contracts - assets | 918 | | | 0 | | | 918 | | | 0 | |
Forward foreign exchange contracts - liabilities | (31,576) | | | 0 | | | (31,576) | | | 0 | |
Cross-currency swap contracts - liabilities | (16,526) | | | 0 | | | (16,526) | | | 0 | |
| (44,724) | | | 0 | | | (44,724) | | | 0 | |
Deferred compensation plan liability | (21,878) | | | 0 | | | (21,878) | | | 0 | |
Total | $ | (66,602) | | | $ | 0 | | | $ | (66,602) | | | $ | 0 | |
|
| | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of December 31, 2016 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Foreign exchange derivative contracts | $ | 21,092 |
| | $ | — |
| | $ | 21,092 |
| | $ | — |
|
Foreign exchange derivative contracts | (379 | ) | | — |
| | (379 | ) | | — |
|
| 20,713 |
| | — |
| | 20,713 |
| | — |
|
Champion Europe contingent consideration | (42,378 | ) | | — |
| | — |
| | (42,378 | ) |
Deferred compensation plan liability | (51,868 | ) | | — |
| | (51,868 | ) | | — |
|
Total | $ | (73,533 | ) | | $ | — |
| | $ | (31,155 | ) | | $ | (42,378 | ) |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of September 30, 2017July 3, 2021 and December 31, 2016.January 2, 2021. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $23,998$60,504 and $18,726$48,745 as of September 30, 2017July 3, 2021 and December 31, 2016,January 2, 2021, respectively. The fair value of debt, which is classified as a Level 2 liability, was $4,206,792$3,921,200 and $3,729,270$4,230,985 as of September 30, 2017July 3, 2021 and December 31, 2016,January 2, 2021, respectively. Debt had a carrying value of $4,012,382$3,712,011 and $3,732,583$4,035,724 as of September 30, 2017July 3, 2021 and December 31, 2016,January 2, 2021, respectively. The fair values were estimated using quoted market prices as provided in secondary markets, which consider the Company’s credit risk and market related conditions. The carrying amountsamount of the Company’s notes payable, which is classified as a Level 2 liability, approximated fair value as of September 30, 2017 and December 31, 2016, primarily due to the short-term nature of these instruments.
(11) Income Taxes
The Company’s effective income tax rate for continuing operations was 2%14.6% and 6%12.7% for the quarters ended September 30, 2017July 3, 2021 and October 1, 2016,June 27, 2020, respectively. The Company’s effective income tax rate for continuing operations was 4%12.6% and 7%12.7% for the ninesix months ended September 30, 2017July 3, 2021 and October 1, 2016,June 27, 2020, respectively. The lowerhigher effective income tax rate for the quarter and nine months ended September 30, 2017 compared to the quarter and nine months ended October 1, 2016July 3, 2021 was primarily due to favorable adjustments resulting from the finalizationCOVID-19 related change in jurisdictional mix of income experienced during the quarter ended June 27, 2020.
The Company is subject to examinations in the U.S., various state and foreign jurisdictions and believes that it maintains appropriate accruals for unrecognized tax benefits related to uncertain tax positions, which are evaluated each quarter. During the six months ended July 3, 2021, the Company’s liability for unrecognized tax benefits, including interest and penalties, decreased by $8,060, of which $6,679 was a discrete reduction of the prior year federaleffective income tax return, resulting in the recognitionrate. The decrease was related to expirations of previously unrecognized foreignstatutes of limitations and approvals of certain filings with income tax credits, recognized discretely in the period ending September 30, 2017.authorities.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Additionally, there was a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at higher rates than foreign subsidiaries, for the nine months ending September 30, 2017 as compared to the nine months ending October 1, 2016.
| |
(12) | (12) Business Segment Information |
In the first quarter of 2017, the Company realigned its reporting segments to reflect the new model under which the business will be managed and results will be reviewed by the chief executive officer, who is the Company’s chief operating decision maker. The former Direct to Consumer segment, which consisted of the Company’s U.S. value-based (“outlet”) stores, legacy catalog business and U.S. retail Internet operations, was eliminated. The Company’s U.S. retail Internet operations, which sells products directly to consumers, is now reported in the respective Innerwear and Activewear segments. Other consists of the Company’s U.S. value-based (“outlet”) stores, U.S. hosiery business (previously reported in the Innerwear segment) and legacy catalog operations. Prior year segment sales and operating profit results have been revised to conform to the current year presentation.
The Company’s operations are managed and reported in three3 operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of the Company’s U.S.-based outlet stores, U.S. hosiery business and certain sales from its supply chain to the European Innerwear business.
The types of products and services from which each reportable segment derives its revenues are as follows:
•Innerwear sellsincludes sales in the United States of basic branded apparel products that are replenishment in nature under the product categories of men’s underwear, women’s panties, children’s underwear and socks, and intimate apparel, which includes bras and shapewear. Innerwear also includes sales of personal protective equipment including products such as cloth face coverings and gowns in 2020.
•Activewear sellsincludes sales in the United States of basic branded products that are primarily seasonal in nature under the product categories of branded printwearto both retailers and retail activewear,wholesalers, as well as licensed sports apparel and licensed logo apparel in collegiate bookstores, mass retailretailers and other channels.
•International includes sales of products in all of the Company’s categories outside the United States, primarily in Australasia, Europe, Asia, Canada and Latin America.
International primarily relates21
HANESBRANDS INC.
Notes to the Europe, Australia, Asia, Latin America and Canada geographic locations that sell products that span across the Innerwear and Activewear reportable segments.Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, acquisition-relatedrestructuring and integrationother action-related charges and amortization of intangibles. The accounting policies of the segments are consistent with those described in Note, 2“Summary of Significant Accounting Policies” to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Net sales: | | | | | | | |
Innerwear | $ | 780,650 | | | $ | 1,094,814 | | | $ | 1,351,085 | | | $ | 1,517,216 | |
Activewear | 404,189 | | | 168,379 | | | 768,192 | | | 456,379 | |
International | 478,923 | | | 251,285 | | | 985,184 | | | 679,515 | |
Other | 87,549 | | | 28,605 | | | 154,879 | | | 93,043 | |
Total net sales | $ | 1,751,311 | | | $ | 1,543,083 | | | $ | 3,259,340 | | | $ | 2,746,153 | |
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales: | | | | | | | |
Innerwear | $ | 644,059 |
| | $ | 679,096 |
| | $ | 1,868,255 |
| | $ | 1,953,807 |
|
Activewear | 519,496 |
| | 516,713 |
| | 1,226,595 |
| | 1,207,767 |
|
International | 556,730 |
| | 478,122 |
| | 1,509,370 |
| | 1,026,871 |
|
Other | 78,985 |
| | 87,088 |
| | 222,015 |
| | 264,445 |
|
Total net sales | $ | 1,799,270 |
| | $ | 1,761,019 |
| | $ | 4,826,235 |
| | $ | 4,452,890 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
| July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Segment operating profit: | | | | | | | |
Innerwear | $ | 186,169 | | | $ | 304,524 | | | $ | 313,586 | | | $ | 386,075 | |
Activewear | 41,047 | | | (5,751) | | | 101,641 | | | 2,357 | |
International | 61,900 | | | 5,162 | | | 149,080 | | | 55,907 | |
Other | 9,220 | | | (11,929) | | | 11,106 | | | (15,322) | |
Total segment operating profit | 298,336 | | | 292,006 | | | 575,413 | | | 429,017 | |
Items not included in segment operating profit: | | | | | | | |
General corporate expenses | (54,685) | | | (50,140) | | | (114,508) | | | (107,566) | |
Restructuring and other action-related charges | (18,664) | | | (32,279) | | | (38,057) | | | (56,603) | |
Amortization of intangibles | (7,593) | | | (7,454) | | | (15,332) | | | (14,762) | |
Total operating profit | 217,394 | | | 202,133 | | | 407,516 | | | 250,086 | |
Other expenses | (1,855) | | | (4,653) | | | (4,416) | | | (10,754) | |
Interest expense, net | (42,440) | | | (41,075) | | | (86,900) | | | (77,102) | |
Income from continuing operations before income tax expense | $ | 173,099 | | | $ | 156,405 | | | $ | 316,200 | | | $ | 162,230 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Segment operating profit: | | | | | | | |
Innerwear | $ | 141,002 |
| | $ | 147,902 |
| | $ | 407,982 |
| | $ | 435,660 |
|
Activewear | 79,015 |
| | 72,962 |
| | 162,053 |
| | 160,076 |
|
International | 76,414 |
| | 61,312 |
| | 185,216 |
| | 109,184 |
|
Other | 10,162 |
| | 9,199 |
| | 16,250 |
| | 27,408 |
|
Total segment operating profit | 306,593 |
| | 291,375 |
| | 771,501 |
| | 732,328 |
|
Items not included in segment operating profit: | | | | | | | |
General corporate expenses | (26,136 | ) | | (14,776 | ) | | (63,354 | ) | | (54,798 | ) |
Acquisition-related and integration charges | (16,874 | ) | | (42,587 | ) | | (81,303 | ) | | (91,651 | ) |
Amortization of intangibles | (10,279 | ) | | (5,660 | ) | | (23,595 | ) | | (13,912 | ) |
Total operating profit | 253,304 |
| | 228,352 |
| | 603,249 |
| | 571,967 |
|
Other expenses | (1,881 | ) | | (1,559 | ) | | (4,659 | ) | | (50,533 | ) |
Interest expense, net | (43,917 | ) | | (43,433 | ) | | (130,184 | ) | | (111,539 | ) |
Income from continuing operations before income tax expense | $ | 207,506 |
| | $ | 183,360 |
| | $ | 468,406 |
| | $ | 409,895 |
|
For the quarter ended September 30, 2017, theThe Company incurred acquisition-relatedpre-tax restructuring and integrationother action-related charges of $16,874, of which $2,230 isthat were reported in the “Cost of sales” line and $14,644 is reportedfollowing lines in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the quarter ended October 1, 2016, the Company incurred acquisition-related and integration charges of $42,587, of which $13,563 is reported in the “Cost of sales” line and $29,024 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
For the nine months ended September 30, 2017, the Company incurred acquisition-related and integration charges of $81,303, of which $21,989 is reported in the “Cost of sales” line and $59,314 is reported in the “Selling, general and administrative expenses” line. For the nine months ended October 1, 2016, the Company incurred acquisition-related and integration charges of $138,942, of which $27,732 is reported in the “Cost of sales” line, $63,919 is reported in the “Selling, general and administrative expenses” line and $47,291 is reported in the “Other expenses” line in the Condensed Consolidated Statement of Income.
As part of the Hanes Europe Innerwear acquisition strategy, in 2015 the Company identified management and administrative positions that were considered non-essential and/or duplicative that have or will be eliminated. As of December 31, 2016, the Company had accrued approximately $32,542 for expected benefit payments related to employee termination and other benefits for affected employees. During the nine months ended September 30, 2017, there were approximately $9,836 of benefit payments and foreign currency adjustments, resulting in an accrual of $22,706, of which, $10,905 and $11,801, is included in the “Accrued liabilities” and “Other noncurrent liabilities” lines of the Condensed Consolidated Balance Sheet, respectively.
In the first quarter of 2017, the Company approved an action to resize its U.S. corporate office workforce through separation programs affecting employees primarily in the Innerwear and Activewear segments. As of April 1, 2017, the Company accrued approximately $10,145 for employee termination and other benefits in accordance with expected benefit payments, with the majority of charges reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. During the nine months ended September 30, 2017, there were approximately $8,477 of benefit payments and an additional accrual of $4,653, resulting in an ending accrual of $6,321 included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheet.Income:
The Company closed its Nanjing, China textile plant in the first quarter of 2017 as part of a plan to realign its Asia textile production in order to better support its global commercial footprint, which has evolved over the past 10 years through major acquisitions in the United States, Europe and Australia. As of April 1, 2017, the Company accrued approximately $8,534 for employee termination and other benefits in accordance with expected benefit payments for employees. The charges, along with other facility exit costs of $2,831, were reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income. During the nine months ended September 30, 2017, there were approximately $8,057 of benefit payments and foreign
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Six Months Ended |
July 3, 2021 | | June 27, 2020 | | July 3, 2021 | | June 27, 2020 |
Cost of sales | $ | 1,900 | | | $ | 18,418 | | | $ | 4,707 | | | $ | 40,229 | |
Selling, general and administrative expenses | 16,764 | | | 13,861 | | | 33,350 | | | 16,374 | |
Total | $ | 18,664 | | | $ | 32,279 | | | $ | 38,057 | | | $ | 56,603 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
currency adjustments, resulting in an accrual of $477, which is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheet. As of September 30, 2017, the Nanjing, China textile plant, valued at $65,570, was classified as assets held for sale and reported within the “Other current assets” line of the Condensed Consolidated Balance Sheet.
|
| | | | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed interim consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 31, 2016,January 2, 2021, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021. In particular, statements with respect to trends associated with our business, our Full Potential plan, our future financial performance and the potential effects of the ongoing global novel coronavirus (“COVID-19”) pandemic included in this MD&A include forward-looking statements.
Overview
We areHanesbrands Inc. (collectively with its subsidiaries, “we,” “us,” “our,” or the “Company”) is a consumer goods company with a portfoliosocially responsible leading marketer of leadingeveryday basic innerwear and activewear apparel in the Americas, Australia, Europe and Asia/Pacific under some of the world’s strongest apparel brands, including Hanes,, Champion,, DIM, Bonds, Bali, Maidenform,, Playtex,, Bonds, Bali, JMS/ Bras N Things, JMS/Just My Size,, Nur Die/Nur Der, Wonderbra, Alternative, Berlei, L’eggs, Lovable, Wonderbra, Flexees, Berlei, Lilyette andGear for Sports. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’sshapewear, underwear, children’s underwear,socks, hosiery and activewear socksproduced in our low-cost global supply chain. Our products are marketed to consumers shopping in mass merchants, mid-tier and hosiery.department stores, specialty stores and the consumer-directed channel, which includes our owned retail locations, as well as e-commerce sites. Our brands hold either the number one or number two market position by units sold in many of the product categories and geographies in which we compete.
Our operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of our U.S.-based outlet stores, U.S. hosiery business and certain sales from our supply chain to the European Innerwear business.
Our Key Business Strategies
Our business strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. We operate in the global innerwear and global activewear apparel categories. These are stable, heavily branded categories where we have a strong consumer franchise based on a global portfolio of industry-leading brands that we have built over multiple decades, through hundreds of millions of direct interactions with consumers. In 2020, we undertook a comprehensive global business review focused on building consumer-centric growth. The review resulted in our Full Potential plan, which is our multi-year growth strategy that focuses on four pillars to drive growth and enhance long-term profitability and identifies initiatives to unlock growth. Our four pillars of growth are to grow the Champion brand globally, drive growth in Innerwear with brands and products that appeal to younger consumers, drive consumer-centricity by delivering innovative products and improving awareness through investments in brand marketing and digital capabilities, and streamline our global portfolio. In order to deliver this growth and create a more efficient and productive business model, we have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve the Full Potential plan’s objectives. We remain highly confident that our strong brand portfolio, world-class supply chain and diverse category and geographic footprint will help us unlock our full potential, deliver long-term growth and create stockholder value.
In the fourth quarter of 2020, we began the implementation of our Full Potential plan and as part of our strategy to streamline our portfolio, we determined that our personal protective equipment (“PPE”) business was no longer a growth opportunity for our company and recorded a charge to write down our entire PPE inventory balance to its estimated net realizable value.
In the first quarter of 2017,2021, we realignedannounced that as part of our reporting segmentsstrategic plan, we were exploring alternatives for our European Innerwear business and subsequently reached the decision to reflectexit this business. We determined that our European Innerwear business met held-for-sale and discontinued operations accounting criteria during the new modelfirst quarter of 2021. Accordingly, we began to separately report the results of our European Innerwear business as discontinued operations in our Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed
Consolidated Balance Sheets. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information on discontinued operations.
Impact of COVID-19 on Our Business
The COVID-19 pandemic impacted our business operations and financial results for the second quarter and six months ended 2021 and 2020 as described in more detail under which“Condensed Consolidated Results of Operations - Second Quarter Ended July 3, 2021 Compared with Second Quarter Ended June 27, 2020” and “Condensed Consolidated Results of Operations - Six Months Ended July 3, 2021 Compared with Six Months Ended June 27, 2020” below, primarily through reduced traffic and closures of company-operated and third-party retail locations for portions of each of the periods in certain markets. Global supply chain disruptions have also resulted in higher operating costs and higher levels of inflation. The future impact of the COVID-19 pandemic remains highly uncertain, and our business will be managed and results willof operations, including our net revenues, earnings and cash flows, could continue to be reviewed by the chief executive officer, who isadversely impacted.
Outlook for 2021
We estimate our chief operating decision maker. The former Direct to Consumer segment, which consisted of our U.S. value-based (“outlet”) stores, legacy catalog business and U.S. retail Internet operations, was eliminated. Our U.S. retail Internet operations, which sells products directly to consumers, is now reported in the respective Innerwear and Activewear segments. Other consists of our U.S. value-based (“outlet”) stores, U.S. hosiery business (previously reported in the Innerwear segment) and legacy catalog operations. Prior year segment sales and operating profit results have been revised to conform to the current year presentation.
Highlights from the Third Quarter Ended September 30, 2017
Key financial highlights are2021 guidance as follows:
Total net•Net sales in the third quarter of 2017 were $1.80$6.75 billion compared with $1.76 billion in the same period of 2016, representing a 2% increase.to $6.85 billion;
•Operating profit increased 11%of $795 million to $253 million in the third quarter of 2017, compared with $228 million in the same period of 2016. As a percentage of sales, operating profit was 14.1% in the third quarter of 2017 compared to 13.0% in the same period of 2016. Included within operating profit for both the third quarter of 2017 and 2016 were acquisition-related and integration$825 million;
•Full Potential plan-related charges of $17approximately $85 million reflected in operating profit;
•Interest expense and $43other expenses of approximately $182 million respectively.combined;
•An annual effective tax rate from continuing operations of approximately 13%;
•Diluted earnings per share from continuing operations increased 22%from $1.50 to $0.55 in the third quarter of 2017, compared with $0.45 in the same period of 2016.$1.58;
In 2017, we began executing a multi-year program (“Project Booster”) to drive investment for sales growth, cost reduction and increased cash flow. Under Project Booster, we are investing to accelerate worldwide omnichannel and global Champion growth, while also investing in marketing and brand building for our leading lineup of brands globally. To fund growth initiatives, reduce costs and increase cash flow, we expect to reduce overhead, including headcount, to reflect market trends and needs; drive additional supply chain optimization beyond integration synergies; and focus on inventory turns and other working capital improvements. We intend to use our size and scale to drive supply chain optimization, including by investing in our domestic distribution center network to better serve the online channel, gaining procurement and product development savings, utilizing global fabric platforms and silhouettes, and continuing to internalize production.
The Project Booster initiative is expected to generate approximately $150 million in annualized cost savings. We expect to annually reinvest approximately $50 million of the savings in targeted growth opportunities, which would result in approximately $100 million of annual net cost savings and incremental cash from operations by the end of 2019. In addition to the annual net cost savings, we also plan to drive approximately $200 million of non-recurring working capital improvements which will result in a one-time benefit to cash from operations by the end of 2019.
Outlook
We expect our 2017 full year net sales to be approximately $6.450 billion to $6.475 billion.
Interest and other expenses are expected to be approximately $180 million, combined.
We estimate our full year effective income tax rate to be approximately 5%, assuming no changes to U.S. tax law and policy.
We expect cash•Cash flow from operations to be in the rangeoperating activities of $625 million to $725 million. We expect capitalapproximately $550 million; and
•Capital expenditures of approximately $90$100 million.
Seasonality and Other Factors
OurAbsent the effects of the COVID-19 pandemic, our operating results are typically subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. We generallyFor instance, we have historically generated higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by our customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel ororders, change delivery schedules manage on-hand inventory levels, or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse basis, our sales are impacted by discretionary consumer spending by consumers.trends. Discretionary spending is affected by many factors that are outside our control, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, gasolineenergy prices, weather, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. TheseAs a result, 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.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as seasonal and replenishable activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to customers’consumers’ preferences and discretionary spending.
Condensed Consolidated Results of Operations — ThirdSecond Quarter EndedSeptember 30, 2017 July 3, 2021 Compared with ThirdSecond Quarter EndedOctober 1, 2016 June 27, 2020
| | | Quarter Ended | | | | | | Quarters Ended | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change | | July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) | | (dollars in thousands) |
Net sales | $ | 1,799,270 |
| | $ | 1,761,019 |
| | $ | 38,251 |
| | 2.2 | % | Net sales | $ | 1,751,311 | | | $ | 1,543,083 | | | $ | 208,228 | | | 13.5 | % |
Cost of sales | 1,120,813 |
| | 1,111,653 |
| | 9,160 |
| | 0.8 |
| Cost of sales | 1,069,682 | | | 1,029,221 | | | 40,461 | | | 3.9 | |
Gross profit | 678,457 |
| | 649,366 |
| | 29,091 |
| | 4.5 |
| Gross profit | 681,629 | | | 513,862 | | | 167,767 | | | 32.6 | |
Selling, general and administrative expenses | 425,153 |
| | 421,014 |
| | 4,139 |
| | 1.0 |
| Selling, general and administrative expenses | 464,235 | | | 311,729 | | | 152,506 | | | 48.9 | |
Operating profit | 253,304 |
| | 228,352 |
| | 24,952 |
| | 10.9 |
| Operating profit | 217,394 | | | 202,133 | | | 15,261 | | | 7.5 | |
Other expenses | 1,881 |
| | 1,559 |
| | 322 |
| | 20.7 |
| Other expenses | 1,855 | | | 4,653 | | | (2,798) | | | (60.1) | |
Interest expense, net | 43,917 |
| | 43,433 |
| | 484 |
| | 1.1 |
| Interest expense, net | 42,440 | | | 41,075 | | | 1,365 | | | 3.3 | |
Income from continuing operations before income tax expense | 207,506 |
| | 183,360 |
| | 24,146 |
| | 13.2 |
| Income from continuing operations before income tax expense | 173,099 | | | 156,405 | | | 16,694 | | | 10.7 | |
Income tax expense | 4,150 |
| | 10,570 |
| | (6,420 | ) | | (60.7 | ) | Income tax expense | 25,236 | | | 19,837 | | | 5,399 | | | 27.2 | |
Income from continuing operations | 203,356 |
| | 172,790 |
| | 30,566 |
| | 17.7 |
| Income from continuing operations | 147,863 | | | 136,568 | | | 11,295 | | | 8.3 | |
Income from discontinued operations, net of tax | — |
| | 1,068 |
| | (1,068 | ) | | NM |
| |
Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | (19,187) | | | 24,613 | | | (43,800) | | | (178.0) | |
Net income | $ | 203,356 |
| | $ | 173,858 |
| | $ | 29,498 |
| | 17.0 | % | Net income | $ | 128,676 | | | $ | 161,181 | | | $ | (32,505) | | | (20.2) | % |
Net Sales
Net sales increased 2%13% during the thirdsecond quarter of 20172021 versus the second quarter of 2020 primarily due to the following:
Acquisition•Retailers continuing to replenish inventory levels as well as pent-up consumer demand as stores reopened after temporary closures due to the COVID-19 pandemic in 2020 and incremental sales partially as a result of It’s Greekhigher U.S. government stimulus spending;
•Lower second quarter 2020 sales due to MeCOVID-19 pandemic-related shutdowns; and GTM Retail, Inc. (“GTM”) in 2016, which added incremental net sales of approximately $15 million in the third quarter of 2017;
Increased net sales driven by our global Champion and global online growth initiatives;
Increased net sales in our Hanes Australasia business;
Increased net sales within our sock product category; and
Favorable•The favorable impact offrom foreign exchange rates in our International businesses.business of approximately $51 million.
Partially offset by:
Lower•The exit of the PPE business, which contributed net sales in our remaining U.S. product categories as a result of softer-than-expected back-to-school trends driven by weak traffic at retail and continued declines$614 million in the overall apparel category; andsecond quarter of 2020.
Declines in hosiery sales within the U.S. and certain European markets.
GrossOperating Profit
The increase in grossOperating profit was attributable to supply chain efficiencies and synergies recognized from the integration of our acquisitions and lower acquisition-related and integration charges. Included in gross profit in the third quarters of 2017 and 2016 are charges of approximately $2 million and $14 million, respectively, related to acquisition-related and integration costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 23.6% for the third quarter of 2017 compared to 23.9% in the same period of 2016. Included in selling, general and administrative expenses were charges of $15 million and $29 million of acquisition-related and integration costs for the third quarters of 2017 and 2016, respectively. Selling, general and administrative expenses, as a percentage of net sales decreased slightly duewas 12.4%, representing a decrease from 13.1% in the prior year. Operating margins benefited from fixed cost leverage from higher sales of core apparel and the favorable impact from foreign exchange rates, which was more than offset by higher freight costs and sourcing premiums to lower acquisition-relatedservice demand, higher investments in brand marketing and integration costs for the third quarter of 2017 compared to 2016, offset partially by the higher proportion selling,compensation costs. Selling, general and administrative expenses forin the recently acquired entities, primarily GTM.second quarter of 2020 benefited from temporary cost savings initiatives implemented in response to the COVID-19 pandemic. The second quarter of 2020 included operating profit related to the PPE business that was exited.
Included in operating profit in the second quarter of 2021 were charges of $19 million related to the implementation of our Full Potential plan. Included in operating profit in the second quarter of 2020 were charges of $32 million related to supply chain actions, program exits, asset write-down charges recorded as a result of the effects of the COVID-19 pandemic and other actions.
Other Highlights
Interest Expense Other Expenses – relatively flatOther expenses decreased $3 million in the thirdsecond quarter of 20172021 compared to the thirdsecond quarter of 2016. A2020 primarily due to lower pension expense in 2021.
Interest Expense – Interest expense was higher weighted average interest rateby $1 million in 2017the second quarter of 2021 compared to the same periodsecond quarter of 2016 was nearly offset in full by lower debt balances.2020 due to interest expense on cross-currency swap contracts entered into on April 1, 2021 that are being used to hedge foreign currency cash flows. Our weighted average interest rate on our outstanding debt was 3.84%4.17% for the second quarter of 2021, compared to 3.71% for the second quarter of 2020. The increase in interest expense due to a higher weighted average interest rate during the thirdquarter was offset by lower outstanding debt balances during the second quarter of 2017,2021 compared to 3.69% in thirdthe second quarter of 2016.2020.
Income Tax Expense – ourOur effective income tax rate was 2%14.6% and 6%12.7% for the thirdsecond quarters of 20172021 and 2016,2020, respectively. The lowerhigher effective tax rate in 2017 compared tofor the same periodsecond quarter of 2016 is2021 was primarily driven by favorable adjustments due to the finalizationCOVID-19 related change in jurisdictional mix of income experienced during the quarter ended June 27, 2020.
DiscontinuedOperations – The results of our discontinued operations include the operations of our European Innerwear business which we reached the decision to exit at the end of the prior year federal tax return, resultingfirst quarter of 2021 in connection with our Full Potential plan. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a discussion of a non-cash charge to record a valuation allowance against the recognitionnet assets held for sale to write down the carrying value to the estimated fair value less costs of previously unrecognized foreign tax credits, recognized discretely in the quarter. Additionally, there was a lower proportion of earnings attributed to domestic subsidiaries in the quarter, which are taxed at higher rates than foreign subsidiaries. disposal.
Operating Results by Business Segment — ThirdSecond Quarter EndedSeptember 30, 2017 July 3, 2021 Compared with ThirdSecond Quarter EndedOctober 1, 2016 June 27, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | |
| Quarters Ended | | | | |
| July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Innerwear | $ | 780,650 | | | $ | 1,094,814 | | | $ | (314,164) | | | (28.7) | % |
Activewear | 404,189 | | | 168,379 | | | 235,810 | | | 140.0 | |
International | 478,923 | | | 251,285 | | | 227,638 | | | 90.6 | |
Other | 87,549 | | | 28,605 | | | 58,944 | | | 206.1 | |
Total | $ | 1,751,311 | | | $ | 1,543,083 | | | $ | 208,228 | | | 13.5 | % |
|
| | | | | | | | | | | | | | | |
| Net Sales | | Operating Profit |
| Quarter Ended | | Quarter Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
| (dollars in thousands) |
Innerwear | $ | 644,059 |
| | $ | 679,096 |
| | $ | 141,002 |
| | $ | 147,902 |
|
Activewear | 519,496 |
| | 516,713 |
| | 79,015 |
| | 72,962 |
|
International | 556,730 |
| | 478,122 |
| | 76,414 |
| | 61,312 |
|
Other | 78,985 |
| | 87,088 |
| | 10,162 |
| | 9,199 |
|
Corporate | — |
| | — |
| | (53,289 | ) | | (63,023 | ) |
Total | $ | 1,799,270 |
| | $ | 1,761,019 |
| | $ | 253,304 |
| | $ | 228,352 |
|
Innerwear | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Profit and Margin | | | | |
| Quarters Ended | | | | |
| July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Innerwear | $ | 186,169 | | | 23.8 | % | | $ | 304,524 | | | 27.8 | % | | $ | (118,355) | | | (38.9) | % |
Activewear | 41,047 | | | 10.2 | | | (5,751) | | | (3.4) | | | 46,798 | | | NM |
International | 61,900 | | | 12.9 | | | 5,162 | | | 2.1 | | | 56,738 | | | 1,099.1 | |
Other | 9,220 | | | 10.5 | | | (11,929) | | | (41.7) | | | 21,149 | | | NM |
Corporate | (80,942) | | | NM | | (89,873) | | | NM | | 8,931 | | | (9.9) | |
Total | $ | 217,394 | | | 12.4 | % | | $ | 202,133 | | | 13.1 | % | | $ | 15,261 | | | 7.5 | % |
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 644,059 |
| | $ | 679,096 |
| | $ | (35,037 | ) | | (5.2 | )% |
Segment operating profit | 141,002 |
| | 147,902 |
| | (6,900 | ) | | (4.7 | ) |
InnerwearInnerwear net sales decreased 29% compared to the second quarter of 2020 primarily due to lower net salesour exit of the PPE business in both our basics and intimates apparel businesses. Strength in our sock and licensed intimate apparel businesses was more than offset by declines in other product categories2021 as a result of softer-than-expected back-to-school trends driven by weak traffic at retail and continued declinesthe implementation of our Full Potential plan. Net sales of PPE represented $614 million of the decrease in the overall apparel category. Declines at retail weresecond quarter of 2021 compared to the second quarter of 2020. This decrease was partially offset by strong online growth across all Innerwear product categories.
Decreased operating profit was largely driven by lower sales volume coupled with lower margins from unfavorable product mix, partially offset by lower selling, generala 48% and administrative expenses from continued cost control.
Activewear
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 519,496 |
| | $ | 516,713 |
| | $ | 2,783 |
| | 0.5 | % |
Segment operating profit | 79,015 |
| | 72,962 |
| | 6,053 |
| | 8.3 |
|
Activewear net sales increased with our expansion into the teamwear and fanware space with the acquisition of GTMa 150% increase in 2016, increased net sales in the licensed sportsour basics and intimate apparel business within the college bookstore business and growth in the online channel across Activewear product categories. Sales increases were offset partially by sales declines in our Hanes activewear apparel, primarily in the mass merchant channel.
Operating profit increasedbusinesses, respectively, primarily as a result of lower sales in the second quarter of 2020 due to COVID-19 pandemic-related shutdowns, retailers continuing to replenish inventory levels and pent-up consumer demand as stores reopened after temporary closures due to the COVID-19 pandemic in 2020 and incremental sales partially as a result of higher U.S. government stimulus spending.
Innerwear operating margin was 23.8%, a decrease from 27.8% in the same period a year ago due to fixed cost deleverage from lower sales, higher freight costs and sourcing premiums to service demand, higher investments in brand marketing and higher compensation costs. The second quarter of 2020 included operating profit related to the PPE business that was exited.
Activewear
Activewear net sales increased 140% compared to the second quarter last year driven by lower sales in the second quarter of 2020 due to COVID-19 pandemic-related shutdowns and incremental sales partially as a result of higher U.S. government stimulus spending. We experienced growth in all product mix favoringcategories.
Activewear operating margin was 10.2%, an increase from (3.4)% in the same period a year ago. Operating margin improvement resulted primarily from fixed cost leverage from higher gross margin businesses, sales, volume and continued cost control.which more than offset higher investments in brand marketing.
International
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 556,730 |
| | $ | 478,122 |
| | $ | 78,608 |
| | 16.4 | % |
Segment operating profit | 76,414 |
| | 61,312 |
| | 15,102 |
| | 24.6 |
|
Net sales in the International segment increased 91% as a result of lower sales in the second quarter of 2020 due to the negative impact of the COVID-19 pandemic and the favorable impact of foreign currency exchange rates of approximately $51 million in the second quarter of 2021. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increased 70%. The impact of foreign exchange rates is calculated by applying prior period exchange rates to the current year financial results. Net sales in certain of our international markets continue to be negatively impacted by COVID-19 related shutdowns.
International operating margin was 12.9%, an increase from 2.1% in the same period a year ago. Operating margin improvement resulted primarily from fixed cost leverage from higher sales, sales mix and the favorable impact from foreign exchange rates.
Other
Other net sales increased as a result of increased sales at our retail outlets during the second quarter of 2021 as a result of stores reopening after temporary store closures during the second quarter of 2020 due to the COVID-19 pandemic. Operating margin increased due to the increase in sales volume.
We expect to continue certain sales from our supply chain to the European Innerwear business after the sale of the business. Those sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation.
Corporate
Corporate expenses were higherlower in the second quarter of 2021 compared to the second quarter of 2020 due to lower restructuring and other action-related charges. Included in restructuring and other action-related charges in the second quarter of 2021 were $19 million of charges related to the implementation of our Full Potential plan. Included in restructuring and other action-related charges in the second quarter of 2020 were $24 million of asset write-down charges recorded as a result of the following:
Increased net sales driven by our global effects of the COVID-19 pandemic. Supply chain actions include actions to reduce overhead costs. Program exit charges are costs associated with exiting the C9 Champion sales growth, primarily mass program and the DKNY intimate apparel license at the end of 2019. Other charges in the Europe and Asia markets;second quarter of 2020 include action-related costs such as workforce reductions.
| | | | | | | | | | | |
| Quarters Ended |
| July 3, 2021 | | June 27, 2020 |
| (dollars in thousands) |
Restructuring and other action-related charges included in operating profit: | | | |
Full Potential Plan: | | | |
Professional services | $ | 13,804 | | | $ | — | |
| | | |
| | | |
Other | 4,860 | | | — | |
2020 actions: | | | |
Supply chain actions | — | | | 2,637 | |
Program exit costs | — | | | 1,285 | |
Other | — | | | 4,070 | |
COVID-19 related charges: | | | |
Bad debt | — | | | 9,418 | |
Inventory | — | | | 14,869 | |
Total restructuring and other action-related charges included in operating profit | $ | 18,664 | | | $ | 32,279 | |
Increased innerwear net sales within our Hanes Australasia and Latin America businesses; and
Favorable impactPartially offset by:
Declining hosiery sales and slower traffic at retail in certain European markets.
Operating profit increased primarily due to higher sales volume, coupled with cost synergies realized in our Hanes Europe Innerwear and Hanes Australasia businesses.
Other
|
| | | | | | | | | | | | | | |
| Quarter Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 78,985 |
| | $ | 87,088 |
| | $ | (8,103 | ) | | (9.3 | )% |
Segment operating profit | 10,162 |
| | 9,199 |
| | 963 |
| | 10.5 |
|
Other net sales were lower as a result of continued declines in hosiery sales in the U.S. and slower traffic at our outlet stores and the impact from weather-related store closures. Operating profit increased as a result of continued cost control partially offset by lower sales volume.
Corporate
Corporate expenses included certain administrative costs and acquisition-related and integration charges. Acquisition-related and integration costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, information technology costs and similar charges. Acquisition-related currency transactions represent the foreign exchange gain from financing activities related to the Champion Europe and Hanes Australasia acquisitions.
|
| | | | | | | |
| Quarter Ended |
| September 30, 2017 | | October 1, 2016 |
| (dollars in thousands) |
Acquisition-related and integration costs: |
| | |
Hanes Australasia | $ | 9,383 |
| | $ | 19,575 |
|
Hanes Europe Innerwear | 8,136 |
| | 18,673 |
|
Champion Europe | 2,528 |
| | 6,032 |
|
Knights Apparel | (3,429 | ) | | 5,588 |
|
Other acquisitions | 256 |
| | 549 |
|
Acquisition-related currency transactions | — |
| | (7,830 | ) |
Total acquisition-related and integration costs | $ | 16,874 |
| | $ | 42,587 |
|
Condensed Consolidated Results of Operations — NineSix Months EndedSeptember 30, 2017 July 3, 2021 Compared with NineSix Months EndedOctober 1, 2016 June 27, 2020
| | | Nine Months Ended | | | | | | Six Months Ended | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change | | July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) | | (dollars in thousands) |
Net sales | $ | 4,826,235 |
| | $ | 4,452,890 |
| | $ | 373,345 |
| | 8.4 | % | Net sales | $ | 3,259,340 | | | $ | 2,746,153 | | | $ | 513,187 | | | 18.7 | % |
Cost of sales | 2,962,345 |
| | 2,788,977 |
| | 173,368 |
| | 6.2 |
| Cost of sales | 1,975,030 | | | 1,814,123 | | | 160,907 | | | 8.9 | |
Gross profit | 1,863,890 |
| | 1,663,913 |
| | 199,977 |
| | 12.0 |
| Gross profit | 1,284,310 | | | 932,030 | | | 352,280 | | | 37.8 | |
Selling, general and administrative expenses | 1,260,641 |
| | 1,091,946 |
| | 168,695 |
| | 15.4 |
| Selling, general and administrative expenses | 876,794 | | | 681,944 | | | 194,850 | | | 28.6 | |
Operating profit | 603,249 |
| | 571,967 |
| | 31,282 |
| | 5.5 |
| Operating profit | 407,516 | | | 250,086 | | | 157,430 | | | 63.0 | |
Other expenses | 4,659 |
| | 50,533 |
| | (45,874 | ) | | (90.8 | ) | Other expenses | 4,416 | | | 10,754 | | | (6,338) | | | (58.9) | |
Interest expense, net | 130,184 |
| | 111,539 |
| | 18,645 |
| | 16.7 |
| Interest expense, net | 86,900 | | | 77,102 | | | 9,798 | | | 12.7 | |
Income from continuing operations before income tax expense | 468,406 |
| | 409,895 |
| | 58,511 |
| | 14.3 |
| Income from continuing operations before income tax expense | 316,200 | | | 162,230 | | | 153,970 | | | 94.9 | |
Income tax expense | 19,804 |
| | 28,693 |
| | (8,889 | ) | | (31.0 | ) | Income tax expense | 39,933 | | | 20,544 | | | 19,389 | | | 94.4 | |
Income from continuing operations | 448,602 |
| | 381,202 |
| | 67,400 |
| | 17.7 |
| Income from continuing operations | 276,267 | | | 141,686 | | | 134,581 | | | 95.0 | |
Income from discontinued operations, net of tax | (2,097 | ) | | 1,068 |
| | (3,165 | ) | | NM |
| |
Net income | $ | 446,505 |
| | $ | 382,270 |
| | $ | 64,235 |
| | 16.8 | % | |
Income (loss) from discontinued operations, net of tax | | Income (loss) from discontinued operations, net of tax | (410,853) | | | 11,621 | | | (422,474) | | | (3,635.4) | |
Net income (loss) | | Net income (loss) | $ | (134,586) | | | $ | 153,307 | | | $ | (287,893) | | | (187.8) | % |
|
Net Sales
Net sales increased 8%19% during the six months of 2021 versus the six months of 2020 primarily due to the following:
•Retailers continuing to replenish inventory levels as well as pent-up consumer demand as stores reopened after temporary closures due to the COVID-19 pandemic in 2020 and incremental sales partially as a result of higher U.S. government stimulus spending;
•Lower sales in the ninesix months of 2017 compared2020 due to COVID-19 pandemic-related shutdowns; and
•The favorable impact from foreign exchange rates in our International business of approximately $94 million.
Partially offset by:
•The exit of the PPE business, which contributed net sales of $614 million in the six months of 2020.
Operating Profit
Operating profit as a percentage of net sales was 12.5%, representing an increase from 9.1% in the prior year. Increased operating profit was the result of higher sales and the favorable impact from foreign exchange rates, which more than offset higher freight costs and sourcing premiums to service demand, higher investments in brand marketing, higher distribution and selling expenses related to higher sales volume and higher compensation costs. Selling, general and administrative expenses in the six months of 2020 benefited from temporary cost savings initiatives implemented in response to the same periodCOVID-19 pandemic. The six months of 20162020 included operating profit related to the PPE business that was exited.
Included in operating profit in the six months of 2021 were charges of $38 million related to the implementation of our Full Potential plan. Included in operating profit in the six months of 2021 were charges of $57 million related to supply chain actions, program exits, asset write-down charges recorded as a result of the following:effects of the COVID-19 pandemic and other actions.
Acquisitions of Hanes Australasia, Champion Europe and GTM in 2016, which added incremental net sales of approximately $451Other Highlights
Other Expenses – Other expenses decreased $6 million in the ninesix months of 2017;
Increased net sales driven by our global Champion and global online growth initiatives;
Increased net sales in our sock product category; and
Sales growth in licensed sports apparel in the college bookstore business.
Partially offset by:
Lower net sales in our remaining Innerwear product categories as a result of challenging consumer traffic at retail, cautious inventory management by retailers and store closures within the mid-tier and department store channel;
Lower net sales in our licensed sports apparel business and Hanes activewear apparel within the mass merchant channel; and
Lower net sales in Other driven by continued declines in hosiery, slower traffic at our outlet stores and the planned exit from our legacy catalog business in the third quarter of 2016.
Gross Profit
Gross profit increased in the nine months of 20172021 compared to the same period in 20162020 due to higher sales volume primarily from acquisitions, supply chain efficiencies and synergies recognized from the integration of our acquisitions,lower pension expense and lower acquisition-related and integration charges. Includedfunding fees for sales of accounts receivable to financial institutions in gross profit2021.
Interest Expense – Interest expense was higher by $10 million in the ninesix months of 2017 and 2016 are charges of approximately $22 million and $28 million, respectively, related to acquisition-related and integration costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 26.1% for the nine months of 20172021 compared to 24.5% in the same period of 2016. Included in selling, general and administrative expenses were charges of $59 million and $64 million of acquisition-related and integration costs for the nine months of 2017 and 2016, respectively. The higher selling, general and administrative expenses, as a percentage of net sales, resulted from the higher proportion of selling, general and administrative expenses for our recently acquired businesses, primarily Hanes Australasia, Champion Europe and GTM, and expenses related to our Project Booster initiative including our U.S. corporate office headcount reduction efforts, offset partially2020, driven by synergy benefits from the integration of prior acquisitions, cost savings from the planned reduction of our legacy catalog distribution, lower acquisition-related and integration costs and continued cost control.
Other Highlights
Other Expenses –lower by $46 million in the nine months of 2017 compared to 2016, primarily due to costs associated with the redemption of our 6.375% Senior Notes in 2016, which included a call premium and write-off of unamortized debt issuance costs.
Interest Expense – higher by $19 million for the nine months of 2017 compared to 2016 primarily due to higher debt balances to help fund acquisitions and share repurchases coupled with a higher weighted average interest rate.rate on our borrowings during the six months of 2021 and interest expense on cross-currency swap contracts entered into on April 1, 2021 that are being used to hedge foreign currency cash flows. Our weighted average interest rate on our outstanding debt was 3.78%4.12% for the ninesix months of 2017 and 3.65%2021, compared to 3.81% for the ninesix months of 2016.2020.
Income Tax Expense – ourOur effective income tax rate was 4%12.6% and 7%12.7% for the ninesix months of 20172021 and 2016,2020, respectively. The lower effective income tax rate for the ninesix months ended September 30, 2017 compared toof 2021 is consistent with the nineeffective tax rate for the six months ended October 1, 2016 was primarily due to favorable adjustments related to the finalization of the prior year federal tax return, resulting in the recognition2020.
DiscontinuedOperations– theThe results of our discontinued operations include the operations of two businesses, Dunlop Flooring and Tontine Pillow,our European Innerwear business which were purchased inwe reached the Hanes Australasia acquisition in 2016 and sold duringdecision to exit at the end of the first quarter of 2017.2021 in connection with our Full Potential plan. See note “Discontinued Operations” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for a discussion of non-cash asset impairment charges and non-cash charges to record a valuation allowance against the net assets held for sale to write down the carrying value to the estimated fair value less costs of disposal.
Operating Results by Business Segment — NineSix Months EndedSeptember 30, 2017 July 3, 2021 Compared with NineSix Months EndedOctober 1, 2016 June 27, 2020
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | |
| Six Months Ended | | | | |
| July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Innerwear | $ | 1,351,085 | | | $ | 1,517,216 | | | $ | (166,131) | | | (10.9) | % |
Activewear | 768,192 | | | 456,379 | | | 311,813 | | | 68.3 | |
International | 985,184 | | | 679,515 | | | 305,669 | | | 45.0 | |
Other | 154,879 | | | 93,043 | | | 61,836 | | | 66.5 | |
Total | $ | 3,259,340 | | | $ | 2,746,153 | | | $ | 513,187 | | | 18.7 | % |
| | | Net Sales | | Operating Profit | | Operating Profit and Margin | |
| Nine Months Ended | | Nine Months Ended | | Six Months Ended | |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | July 3, 2021 | | June 27, 2020 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) | | (dollars in thousands) |
Innerwear | $ | 1,868,255 |
| | $ | 1,953,807 |
| | $ | 407,982 |
| | $ | 435,660 |
| Innerwear | $ | 313,586 | | | 23.2 | % | | $ | 386,075 | | | 25.4 | % | | $ | (72,489) | | | (18.8) | % |
Activewear | 1,226,595 |
| | 1,207,767 |
| | 162,053 |
| | 160,076 |
| Activewear | 101,641 | | | 13.2 | | | 2,357 | | | 0.5 | | | 99,284 | | | 4,212.3 | |
International | 1,509,370 |
| | 1,026,871 |
| | 185,216 |
| | 109,184 |
| International | 149,080 | | | 15.1 | | | 55,907 | | | 8.2 | | | 93,173 | | | 166.7 | |
Other | $ | 222,015 |
| | 264,445 |
| | 16,250 |
| | 27,408 |
| Other | 11,106 | | | 7.2 | | | (15,322) | | | (16.5) | | | 26,428 | | | NM |
Corporate | — |
| | — |
| | (168,252 | ) | | (160,361 | ) | Corporate | (167,897) | | | NM | | (178,931) | | | NM | | 11,034 | | | (6.2) | |
Total net sales | $ | 4,826,235 |
| | $ | 4,452,890 |
| | $ | 603,249 |
| | $ | 571,967 |
| |
Total | | Total | $ | 407,516 | | | 12.5 | % | | $ | 250,086 | | | 9.1 | % | | $ | 157,430 | | | 63.0 | % |
Innerwear
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,868,255 |
| | $ | 1,953,807 |
| | $ | (85,552 | ) | | (4.4 | )% |
Segment operating profit | 407,982 |
| | 435,660 |
| | (27,678 | ) | | (6.4 | ) |
Innerwear net sales decreased 11% compared to the six months of 2020 primarily due to our exit of the PPE business in both2021 as a result of the implementation of our Full Potential plan. Net sales of PPE represented $614 million of the decrease in the six months of 2021 compared to the six months of 2020. This decrease was partially offset by a 44% and a 77% increase in net sales in our basics and intimates apparel businesses. Strength in our sock and licensed intimate apparel businesses, respectively, primarily as well as growtha result of lower sales in the online channel was more than offset by declines in other product categoriessix months of 2020 due to challengingCOVID-19 pandemic-related shutdowns, retailers continuing to replenish inventory levels and pent-up consumer traffic at retaildemand as stores reopened after temporary closures due to the COVID-19 pandemic in 2020 and cautious inventory management by retailers. Our intimate apparel business also experiencedincremental sales declines driven by the continued impactpartially as a result of higher U.S. government stimulus spending.
Innerwear operating margin was 23.2%, a decrease from retail store closures25.4% in the mid-tiersame period a year ago due to fixed cost deleverage from lower sales, higher freight costs and department store channel, partially offset by strong performance from our new Maidenform sportsourcing premiums to service demand, higher investments in brand marketing and millennial product offerings.
Decreasedhigher compensation costs. The six months of 2020 included operating profit related to the PPE business that was exited.
Activewear
Activewear net sales increased 68% compared to the six months of 2020 driven largely by lower sales volume coupled within the six months of 2020 due to COVID-19 pandemic-related shutdowns and incremental sales partially as a result of higher U.S. government stimulus spending. We experienced growth in all product categories.
Activewear operating margin was 13.2%, an increase from 0.5% in the same period a year ago. Operating margin improvement resulted primarily from fixed cost leverage from higher sales.
International
Net sales in the International segment increased 45% as a result of lower marginssales in the six months of 2020 due to the negative impact of the COVID-19 pandemic and the favorable impact of foreign currency exchange rates of approximately $94 million in the six months of 2021. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increased 31%. The impact of foreign exchange rates is calculated by applying prior period exchange rates to the current year financial results. Net sales in certain of our international markets continue to be negatively impacted by COVID-19 related shutdowns.
International operating margin was 15.1%, an increase from unfavorable product8.2% in the same period a year ago. Operating margin improvement resulted primarily from fixed cost leverage from higher sales, sales mix as well as expenses related to Project Booster, offset partially by continued cost control.and the favorable impact from foreign exchange rates.
Other
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| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,226,595 |
| | $ | 1,207,767 |
| | $ | 18,828 |
| | 1.6 | % |
Segment operating profit | 162,053 |
| | 160,076 |
| | 1,977 |
| | 1.2 |
|
ActivewearOther net sales increased as a result of increased sales at our expansion intoretail outlets during the teamwear and fanware space with the acquisitionsix months of GTM in 2016, growth in our core Champion brand outside of the mass merchant channel, increased licensed sports apparel sales in the college bookstore business, and growth across Activewear product categories online, partially offset by sales declines in Hanes activewear apparel and licensed sports apparel within the mass merchant channel.
Operating profit increased primarily2021 as a result of stores reopening after temporary store closures during the six months of 2020 due to the COVID-19 pandemic. Operating margin increased due to the increase in sales volumevolume.
We expect to continue certain sales from our supply chain to the European Innerwear business after the sale of the business. Those sales and continued cost control offset,the related profit are included in part, by the impact of retailer bankruptciesOther in all periods presented and higher proportion of selling, general and administrativehave not been eliminated as intercompany transactions in consolidation.
Corporate
Corporate expenses at our recently acquired GTM business.
International
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| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 1,509,370 |
| | $ | 1,026,871 |
| | $ | 482,499 |
| | 47.0 | % |
Segment operating profit | 185,216 |
| | 109,184 |
| | 76,032 |
| | 69.6 |
|
Net sales in the International segmentsix months of 2021 included incremental recurring COVID-19 related costs such as cleaning and health-related supplies to protect our employees and customers, as well as higher compensation expense compared to the six months of 2020. Corporate expenses were higherlower in the six months of 2021 compared to the same period of 2020 due to lower restructuring and other action-related charges and bad debt expense. Included in restructuring and other action-related charges in the six months of 2021 were $38 million of charges related to the implementation of our Full Potential plan including impairment charges of $7 million related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group as it is not being marketed for sale. Included in restructuring and other action-related charges in the six months of 2020 were $24 million of asset write-down charges recorded as a result of the following:
Incremental net sales fromeffects of the acquisitionsCOVID-19 pandemic. Supply chain actions include actions to reduce overhead costs. Program exit charges are costs associated with exiting the C9 Champion mass program and the DKNY intimate apparel license at the end of Hanes Australasia and Champion Europe in 2016; and
Continued growth in Asia within our Activewear product category, primarily driven by Champion and Hanes sales growth.
Partially offset by:
Declining hosiery sales and slower traffic at retail in certain European markets.
Operating profit increased primarily due to higher sales volume, coupled with cost synergies realized in our Hanes Europe Innerwear and Hanes Australasia businesses.
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| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| September 30, 2017 | | October 1, 2016 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 222,015 |
| | $ | 264,445 |
| | $ | (42,430 | ) | | (16.0 | )% |
Segment operating profit | 16,250 |
| | 27,408 |
| | (11,158 | ) | | (40.7 | ) |
2019. Other net sales were lower as a result of continued declines in hosiery salescharges in the U.S., slower traffic at our outlet stores and the planned exit from our legacy catalog business in 2016. Operating profit decreasedsix months of 2020 include action-related costs such as a result of lower sales volume, offset, in part, by continued cost control.workforce reductions.
| | | | | | | | | | | |
| Six Months Ended |
| July 3, 2021 | | June 27, 2020 |
| (dollars in thousands) |
Restructuring and other action-related charges included in operating profit: | | | |
Full Potential Plan: | | | |
Professional services | $ | 25,510 | | | $ | — | |
Impairment of intangible assets | 7,302 | | | — | |
Other | 5,245 | | | — | |
2020 actions: | | | |
Supply chain actions | — | | | 16,702 | |
Program exit costs | — | | | 9,498 | |
Other | — | | | 6,116 | |
COVID-19 related charges: | | | |
Bad debt | — | | | 9,418 | |
Inventory | — | | | 14,869 | |
Total restructuring and other action-related charges included in operating profit | $ | 38,057 | | | $ | 56,603 | |
| | | |
| | | |
| | | |
Corporate
Corporate expenses included certain administrative costs and acquisition-related and integration charges. Acquisition-related and integration costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, infrastructure (including information technology), and similar charges. Acquisition-related currency transactions represent the foreign exchange gain from financing activities related to the Champion Europe and Hanes Australasia acquisitions.
|
| | | | | | | |
| Nine Months Ended |
| September 30, 2017 | | October 1, 2016 |
| (dollars in thousands) |
Acquisition-related and integration costs: | | | |
Hanes Europe Innerwear | $ | 38,528 |
| | $ | 59,919 |
|
Hanes Australasia | 27,361 |
| | 20,732 |
|
Champion Europe | 8,096 |
| | 7,550 |
|
Knights Apparel | 6,885 |
| | 15,623 |
|
Other acquisitions | 433 |
| | 3,466 |
|
Acquisition-related currency transactions | — |
| | (15,639 | ) |
Total acquisition-related and integration costs | $ | 81,303 |
| | $ | 91,651 |
|
Liquidity and Capital Resources
Cash Requirements and Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated by operations and availability under our $1.0 billion revolving credit facility (the “Revolving Loan Facility”), our senior secured credit facility (the “Senior Secured Credit Facility”), our accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) and our international loan facilities.
At September 30, 2017, we had $784 million of borrowing availability under our Revolving Loan Facility (after taking into account outstanding letters of credit), $24 million borrowing availability under our Accounts Receivable Securitization Facility, $149 million of borrowing availability under our international loan facilities, which includes our European Revolving Loan Facility, our Australian Revolving Loan Facility and other international notes payable and debt facilities, and $400 million in cash and cash equivalents. We currently believe that our existing cash balances and cash generated by operations, typically in the second half of the year, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.
The following have impacted or may impact our liquidity:
we have principal and interest obligations under our debt;
we acquired Champion Europe in June 2016 and Hanes Australasia in July 2016 and we may pursue additional strategic business acquisitions in the future;
the amount of contingent consideration we are required to pay in connection with the Champion Europe acquisition may be inconsistent with management’s expectations;
we expect to continue to invest in efforts to improve operating efficiencies and lower costs;
contributions to our pension plans;
we may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could significantly impact our effective income tax rate;
our Board of Directors has authorized a regular quarterly dividend; and
our Board of Directors has authorized share repurchases.
Dividends
In January, April and July of 2017, our Board of Directors declared a regular quarterly dividend of $0.15 per share, which were paid in March, June and September of 2017, respectively. On October 24, 2017, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share to be paid on December 5, 2017 to stockholders of record at the close of business on November 14, 2017.
Share Repurchase Program
In April 2016, our Board of Directors approved a new share repurchase program for up to 40 million shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. For the nine months ended September 30, 2017, we entered into transactions to repurchase approximately 15 million shares at a weighted average repurchase price of $20.39 per share. The shares were repurchased at a total cost of $300 million. For the nine months ended October 1, 2016 we repurchased approximately 14 million shares under the previous share repurchase program at a weighted average purchase price of $26.65. The shares were repurchased at a total cost of $380 million. At September 30, 2017, the remaining repurchase authorization under the current share repurchase program totaled approximately 25 million shares. The program does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time at our discretion.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. TheOur primary cash requirementsuses of our businesscash are payments to our employees and vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, business acquisitions, contributions to our pension plans, repurchases of our stock and regular quarterly dividend payments and income tax payments.
In April 2020, given the rapidly changing business environment and level of uncertainty created by the COVID-19 pandemic and the associated impact on future earnings, we amended our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility during the COVID-19 crisis. The amendment changed certain provisions and covenants under the Senior Secured Credit Facility through the fiscal quarter ended July 3, 2021, after which our covenants were to revert to their original, pre-amendment levels. We voluntarily terminated the covenant relief amendment when we submitted our April 3, 2021 compliance certificate in order to reduce interest expense and increase flexibility for restricted payments, investments, indebtedness, and permitted acquisitions. After termination, the covenants reverted to their original, pre-amendment levels for the fiscal quarter ended July 3, 2021.
We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts. If economic conditions caused by the COVID-19 pandemic do not continue to improve or otherwise worsen, including as a result of any new virus or vaccine distribution or efficacy, and our earnings and operating cash flows do not continue to recover as currently estimated by management, this could impact our ability to maintain compliance with our financial covenants and require us to seek additional amendments to our Senior Secured Credit Facility. If we are not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
Based on our current estimate of future earnings and cash flows, we believe we have sufficient cash and available borrowings for at least one year from the issuance of these financial statements based on our foreseeablecurrent expectations and forecasts.
Our primary sources of liquidity needs.are cash generated from global operations and cash available under our Revolving Loan Facility, our Australian Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international credit facilities.
There have been no significant changesWe had the following borrowing capacity and available liquidity under our credit facilities as of July 3, 2021:
| | | | | | | | | | | |
| As of July 3, 2021 |
Borrowing Capacity | | Available Liquidity |
| (dollars in thousands) |
Senior Secured Credit Facility: | | | |
Revolving Loan Facility | $ | 1,000,000 | | | $ | 995,824 | |
| | | |
| | | |
Australian Revolving Loan Facility | 44,994 | | | 44,994 | |
| | | |
Accounts Receivable Securitization Facility(1) | 88,833 | | | 88,833 | |
Other international credit facilities | 90,315 | | | 33,610 | |
Total liquidity from credit facilities | $ | 1,224,142 | | | $ | 1,163,261 | |
Cash and cash equivalents | | | 667,298 | |
Total liquidity | | | $ | 1,830,559 | |
(1)Borrowing availability under the Accounts Receivable Securitization Facility is subject to a quarterly fluctuating facility limit, not to exceed $175 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans.
The following have impacted or may impact our liquidity:
•The negative impact of the COVID-19 pandemic on our business.
•We have historically paid a regular quarterly dividend. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors.
•We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities. In March 2021, we repaid the outstanding balance of Term Loan B which consisted of a required excess cash requirements forflow prepayment of $239 million and a voluntary prepayment of $61 million.
•We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
•As part of our Full Potential plan, we have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve the Full Potential plan’s objectives.
•We expect capital investments of approximately $185 million per year through 2024 as part of our Full Potential plan.
•In the future, we may pursue strategic business acquisitions.
•We made a contribution of $40 million to our U.S. pension plan in the six months ended July 3, 2021. We may also elect to make additional voluntary contributions.
•We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. Consistent with our investment strategy as it pertains to our historical foreign earnings as of January 2, 2021, we intend to remit foreign earnings totaling $668 million.
•We are obligated to make installment payments over an eight-year period related to our transition tax liability resulting from those describedthe implementation of the Tax Cuts and Jobs Act, which began in 2018, in addition to any estimated income taxes due based on current year taxable income. In the six months ended July 3, 2021, we made an installment payment of $10 million on our Annual Report on Form 10-K for the year ended December 31, 2016.transition tax liability. We currently have a remaining balance due of approximately $42 million to be paid in installment payments through 2025.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the ninesix months ended September 30, 2017July 3, 2021 and October 1, 2016June 27, 2020 was derived from our condensed consolidated interim financial statements.
| | | Nine Months Ended | | Six Months Ended |
| September 30, 2017 | | October 1, 2016 | | July 3, 2021 | | June 27, 2020 |
| (dollars in thousands) | | (dollars in thousands) |
Operating activities | $ | 331,090 |
| | $ | 208,291 |
| Operating activities | $ | 212,256 | | | $ | (17,793) | |
Investing activities | (16,259 | ) | | (959,865 | ) | Investing activities | (15,939) | | | (40,623) | |
Financing activities | (367,598 | ) | | 879,925 |
| Financing activities | (413,921) | | | 415,318 | |
Effect of changes in foreign currency exchange rates on cash | (7,433 | ) | | 2,693 |
| |
Change in cash and cash equivalents | (60,200 | ) | | 131,044 |
| |
Cash and cash equivalents at beginning of year | 460,245 |
| | 319,169 |
| |
Effect of changes in foreign exchange rates on cash | | Effect of changes in foreign exchange rates on cash | (16,780) | | | (2,669) | |
Change in cash, cash equivalents and restricted cash | | Change in cash, cash equivalents and restricted cash | (234,384) | | | 354,233 | |
Cash, cash equivalents and restricted cash at beginning of year | | Cash, cash equivalents and restricted cash at beginning of year | 910,603 | | | 329,923 | |
Cash, cash equivalents and restricted cash at end of period | | Cash, cash equivalents and restricted cash at end of period | 676,219 | | | 684,156 | |
Less restricted cash at end of period | | Less restricted cash at end of period | — | | | 1,042 | |
Cash and cash equivalents at end of period | $ | 400,045 |
| | $ | 450,213 |
| Cash and cash equivalents at end of period | $ | 676,219 | | | $ | 683,114 | |
| Balances included in the Condensed Consolidated Balance Sheets: | | Balances included in the Condensed Consolidated Balance Sheets: | |
Cash and cash equivalents | | Cash and cash equivalents | $ | 667,298 | | | $ | 556,099 | |
Cash and cash equivalents included in current assets of discontinued operations | | Cash and cash equivalents included in current assets of discontinued operations | 8,921 | | | 127,015 | |
Cash and cash equivalents at end of period | | Cash and cash equivalents at end of period | $ | 676,219 | | | $ | 683,114 | |
Operating Activities
Our overall liquidity is primarilyhas historically been driven by our cash flow from operations,provided by operating activities, which is dependent on net income as well asand changes in our working capital. We typically use cash during the first half of the year and generate most of our cash flow in the second half of the year. As compared to the prior year, the higher net cash provided by operating activities iswas due to strongchanges in working capital management, specifically related to increasedprimarily accounts receivable collections, extension ofand payables, partially offset by inventory. Higher profitability also drove improved year over year cash flow. Net cash from operating activities includes a $40 million and a $25 million contribution to our accounts payable terms and no voluntaryU.S. pension contributionplan made in the first nine monthsquarter of 2017 compared to $40 million in the same period of 2016.2021 and 2020, respectively.
Investing Activities
Investing activities in the six months of 2021 and 2020 primarily include capital investments into our business. The lower netdecrease in cash used by investing activities is primarily the result of cash received from our dispositions of the Dunlop Flooring and Tontine Pillow businesses as well as our acquisitions of Champion Europe and Pacific Brands in the first ninesix months of 2016.
Financing Activities
The lower net cash from financing activities2021 compared to 2020 was primarily the result of a decrease in capital investments into our business as we manage our spending on our focused strategic goals.
Financing Activities
Net cash from financing activities decreased primarily as a result of lower borrowings onas compared to the same period of 2020. We increased our loan facilitiesborrowings in the first ninesix months of 20172020 primarily to strengthen our cash position and to provide us with additional financial flexibility to manage our business during the issuanceCOVID-19 pandemic. Additionally, in the six months of our three Senior Notes2021, we repaid the outstanding balance of Term Loan B which consisted of a required excess cash flow prepayment of $239 million and incurrencea voluntary prepayment of debt under our Australia term loan facilities$61 million. We repurchased shares at a total cost of $200 million in 2016 to help fund the acquisitionssix months of Champion Europe and Hanes Australasia.
2020.
Financing Arrangements
In March 2017,2021, we amended the Accounts Receivable Securitization Facility. This amendment primarily decreased the fluctuating facility limit to $175 million (previously $225 million) and extended the maturity date to March 2018.
June 2022. Additionally, the amendment changed certain ratios and borrowing base calculations, raised pricing and added certain receivables to the pledged collateral pool for the facility. In September 2017, we amendedJuly 2021, the EuropeanAustralian Revolving Loan Facility, originally entered into in July 2016, was amended to extend the maturity date to September 2018.July 2022 and to reduce the bilateral cash advance limit from A$50 million to A$46 million with an offsetting increase in the bank overdraft limit from A$10 million to A$14 million.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of September 30, 2017,July 3, 2021, we were in compliance with all financial covenants under our credit facilities.facilities and other outstanding indebtedness. We continue to monitor our covenant compliance carefully. Under the terms of our Senior Secured Credit Facility, we are
required to maintain a minimum interest coverage ratio and a maximum leverage ratio. The interest coverage ratio covenant is the ratio of our EBITDA for the preceding four fiscal quarters to our consolidated total interest expense and the leverage ratio covenant is the ratio of our net debt to EBITDA for the preceding four fiscal quarters. EBITDA is defined as earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility. We expect to maintain compliance with theseour covenants for at least one year from the foreseeable future,date of these financial statements based on our current expectations and forecasts, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016January 2, 2021 or other SEC filings could cause noncompliance.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with U.S. GAAP.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, “Summary of Significant Accounting Policies,” to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021. There have been no material changes in these policies from those described in our Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note, “Recent Accounting Pronouncements” to our condensed consolidated interim financial statements.statements included in this Quarterly Report on Form 10-Q.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.January 2, 2021.
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Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and PrincipalChief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report.Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and PrincipalChief Financial Officer concluded that our disclosure controls and procedures were effective.effective as of July 3, 2021.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and PrincipalChief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Although we are subject to various claims and legal actions that occur from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe could have a material adverse effect on our business, results of operations, financial condition or cash flows.
The risk factors that affect our business and financial results are discussed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There are no material changes to the risk factors previously disclosed, nor have we identified any previously undisclosed risks that could materially adversely affect our business and financial results.January 2, 2021.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
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Item 3. | Defaults Upon Senior Securities |
None.
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Item 4. | Mine Safety Disclosures |
Not applicable.
None.
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Exhibit Number | | Description |
| | |
2.13.1 | | |
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3.1 | | |
| | |
3.2 | | |
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3.3 | | |
| | |
3.4 | | |
| | |
3.5 | | |
| | |
31.110.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS XBRL | | Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
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101.SCH XBRL | | Taxonomy Extension Schema Document |
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101.CAL XBRL | | Taxonomy Extension Calculation Linkbase Document |
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101.LAB XBRL | | Taxonomy Extension Label Linkbase Document |
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101.PRE XBRL | | Taxonomy Extension Presentation Linkbase Document |
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101.DEF XBRL | | Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document) |
* Management contract or compensatory plans or arrangements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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HANESBRANDS INC. |
| |
By: | | /s/ Richard D. MossMichael P. Dastugue |
| | Richard D. Moss
Duly Appointed Officer and PrincipalMichael P. Dastugue Chief Financial Officer
(Duly authorized officer and principal financial officer) |
Date: November 2, 2017
August 6, 2021