UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q |
| |
x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 201829, 2019
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
(Exact name of registrant as specified in its charter)
|
| | | |
| Maryland | | 20-3552316 |
| (State of incorporation) | | (I.R.S. employer identification no.) |
| | | |
1000 East Hanes Mill Road | |
|
| Winston-Salem, | North Carolina | | 27105 |
| (Address of principal executive office) | | (Zip code) |
(336) (336) 519-8080
(Registrant’s telephone number including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x☒ 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 | | ¨ | ☐ | | | | |
| | | | | | | | | |
| Non-accelerated filer | | ¨☐ | | Smaller reporting company | | ¨☐ | | Emerging growth company | | ¨ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
Securities registered pursuant to Section 12(b) of the Act: |
| | |
| Title of each class | Trading Symbol | Name of each exchange on which registered |
| Common Stock, Par Value $0.01 | HBI | New York Stock Exchange |
As of July 27, 2018,26, 2019, there were 360,507,281361,543,268 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 under the heading “Outlook” and other information 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 30, 201729, 2018, 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 30, 2017, 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 occurrence of unanticipated events, other than as required by law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the 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
|
| |
| Item 1. | Financial Statements |
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)
| | | | Quarter Ended | | Six Months Ended | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 3,186,947 |
| | $ | 3,026,965 |
| $ | 1,760,927 |
| | $ | 1,715,443 |
| | $ | 3,348,951 |
| | $ | 3,186,947 |
|
| Cost of sales | 1,055,487 |
| | 1,000,708 |
| | 1,948,070 |
| | 1,841,532 |
| 1,086,248 |
| | 1,055,487 |
| | 2,053,396 |
| | 1,948,070 |
|
| Gross profit | 659,956 |
| | 645,902 |
| | 1,238,877 |
| | 1,185,433 |
| 674,679 |
| | 659,956 |
| | 1,295,555 |
| | 1,238,877 |
|
| Selling, general and administrative expenses | 439,893 |
| | 412,197 |
| | 872,756 |
| | 825,299 |
| 440,662 |
| | 439,893 |
| | 913,500 |
| | 872,756 |
|
| Operating profit | 220,063 |
| | 233,705 |
| | 366,121 |
| | 360,134 |
| 234,017 |
| | 220,063 |
| | 382,055 |
| | 366,121 |
|
| Other expenses | 6,570 |
| | 6,422 |
| | 12,331 |
| | 12,967 |
| 8,249 |
| | 6,570 |
| | 15,700 |
| | 12,331 |
|
| Interest expense, net | 48,430 |
| | 44,130 |
| | 94,193 |
| | 86,267 |
| 46,522 |
| | 48,430 |
| | 94,581 |
| | 94,193 |
|
| Income from continuing operations before income tax expense | 165,063 |
| | 183,153 |
| | 259,597 |
| | 260,900 |
| |
| Income before income tax expense | | 179,246 |
| | 165,063 |
| | 271,774 |
| | 259,597 |
|
| Income tax expense | 24,430 |
| | 10,989 |
| | 39,555 |
| | 15,654 |
| 25,274 |
| | 24,430 |
| | 38,320 |
| | 39,555 |
|
| Income from continuing operations | 140,633 |
| | 172,164 |
| | 220,042 |
| | 245,246 |
| |
| Income (loss) from discontinued operations, net of tax | — |
| | 368 |
| | — |
| | (2,097 | ) | |
| Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | 220,042 |
| | $ | 243,149 |
| $ | 153,972 |
| | $ | 140,633 |
| | $ | 233,454 |
| | $ | 220,042 |
|
| | | | | | | | | | | | | | | |
| Earnings (loss) per share — basic: | | | | | | | | |
| Continuing operations | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
| |
| Discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) | |
| Net income | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
| |
| | | | | | | | | |
| Earnings (loss) per share — diluted: | | | | | | | | |
| Continuing operations | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.66 |
| |
| Discontinued operations | — |
| | — |
| | — |
| | (0.01 | ) | |
| Net income | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.61 |
| | $ | 0.65 |
| |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 0.42 |
| | $ | 0.39 |
| | $ | 0.64 |
| | $ | 0.61 |
|
| Diluted | | $ | 0.42 |
| | $ | 0.39 |
| | $ | 0.64 |
| | $ | 0.61 |
|
HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
| | | | Quarter Ended | | Six Months Ended | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | 220,042 |
| | $ | 243,149 |
| $ | 153,972 |
| | $ | 140,633 |
| | $ | 233,454 |
| | $ | 220,042 |
|
| Other comprehensive income (loss), net of tax of ($9,982), $2,351, ($11,079) and $6,443, respectively | (21,855 | ) | | (11,928 | ) | | (33,348 | ) | | 4,298 |
| |
| Other comprehensive income (loss), net of tax: | | | | | | | | |
| Translation adjustments | | (3,202 | ) | | (49,447 | ) | | 11,259 |
| | (62,777 | ) |
| Net unrealized gain (loss) on qualifying cash flow hedges | | (5,158 | ) | | 23,710 |
| | (9,077 | ) | | 23,658 |
|
| Net unrecognized income from pension and postretirement plans | | 3,553 |
| | 3,882 |
| | 6,950 |
| | 5,771 |
|
| Total other comprehensive income (loss), net of tax of $504, ($9,982), $957 and ($11,079), respectively | | (4,807 | ) | | (21,855 | ) | | 9,132 |
| | (33,348 | ) |
| Comprehensive income | $ | 118,778 |
| | $ | 160,604 |
| | $ | 186,694 |
| | $ | 247,447 |
| $ | 149,165 |
| | $ | 118,778 |
| | $ | 242,586 |
| | $ | 186,694 |
|
HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
| | | | June 30,
2018 | | December 30,
2017 | June 29,
2019 | | December 29,
2018 | | June 30,
2018 |
| Assets | | | | | | | | |
| Cash and cash equivalents | $ | 397,971 |
| | $ | 421,566 |
| $ | 257,941 |
| | $ | 433,022 |
| | $ | 397,971 |
|
| Trade accounts receivable, net | 973,807 |
| | 903,318 |
| 1,011,816 |
| | 870,878 |
| | 973,807 |
|
| Inventories | 2,112,211 |
| | 1,874,990 |
| 2,233,760 |
| | 2,054,458 |
| | 2,112,211 |
|
| Other current assets | 132,757 |
| | 186,496 |
| 152,925 |
| | 159,231 |
| | 132,757 |
|
| Total current assets | 3,616,746 |
| | 3,386,370 |
| 3,656,442 |
| | 3,517,589 |
| | 3,616,746 |
|
| Property, net | 617,302 |
| | 623,991 |
| 597,444 |
| | 607,688 |
| | 617,302 |
|
| Right-of-use assets | | 484,168 |
| | — |
| | — |
|
| Trademarks and other identifiable intangibles, net | 1,610,567 |
| | 1,402,857 |
| 1,541,306 |
| | 1,555,381 |
| | 1,610,567 |
|
| Goodwill | 1,259,010 |
| | 1,167,007 |
| 1,240,853 |
| | 1,241,727 |
| | 1,259,010 |
|
| Deferred tax assets | 218,269 |
| | 234,932 |
| 264,592 |
| | 249,693 |
| | 218,269 |
|
| Other noncurrent assets | 105,992 |
| | 79,618 |
| 92,087 |
| | 83,880 |
| | 105,992 |
|
| Total assets | $ | 7,427,886 |
| | $ | 6,894,775 |
| $ | 7,876,892 |
| | $ | 7,255,958 |
| | $ | 7,427,886 |
|
| | | | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | | | |
| Accounts payable | $ | 935,176 |
| | $ | 867,649 |
| $ | 1,026,863 |
| | $ | 1,029,933 |
| | $ | 935,176 |
|
| Accrued liabilities | 506,360 |
| | 649,634 |
| 547,306 |
| | 553,901 |
| | 506,360 |
|
| Lease liabilities | | 144,453 |
| | — |
| | — |
|
| Notes payable | 14,540 |
| | 11,873 |
| 4,695 |
| | 5,824 |
| | 14,540 |
|
| Accounts Receivable Securitization Facility | 153,386 |
| | 125,209 |
| 190,311 |
| | 161,608 |
| | 153,386 |
|
| Current portion of long-term debt | 181,349 |
| | 124,380 |
| 156,189 |
| | 278,976 |
| | 181,349 |
|
| Total current liabilities | 1,790,811 |
| | 1,778,745 |
| 2,069,817 |
| | 2,030,242 |
| | 1,790,811 |
|
| Long-term debt | 4,149,201 |
| | 3,702,054 |
| 3,671,066 |
| | 3,534,183 |
| | 4,149,201 |
|
| Lease liabilities - noncurrent | | 371,964 |
| | — |
| | — |
|
| Pension and postretirement benefits | 388,256 |
| | 405,238 |
| 351,453 |
| | 378,972 |
| | 388,256 |
|
| Other noncurrent liabilities | 332,427 |
| | 322,536 |
| 277,742 |
| | 342,278 |
| | 332,427 |
|
| Total liabilities | 6,660,695 |
| | 6,208,573 |
| 6,742,042 |
| | 6,285,675 |
| | 6,660,695 |
|
| | | | | | | | | |
| 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 — 360,503,574 and 360,125,894, respectively | 3,605 |
| | 3,601 |
| |
| Issued and outstanding — 361,530,648, 361,330,128 and 360,503,574, respectively | | 3,615 |
| | 3,613 |
| | 3,605 |
|
| Additional paid-in capital | 275,120 |
| | 271,462 |
| 308,555 |
| | 284,877 |
| | 275,120 |
|
| Retained earnings | 961,020 |
| | 850,345 |
| 1,395,306 |
| | 1,184,735 |
| | 961,020 |
|
| Accumulated other comprehensive loss | (472,554 | ) | | (439,206 | ) | (572,626 | ) | | (502,942 | ) | | (472,554 | ) |
| Total stockholders’ equity | 767,191 |
| | 686,202 |
| 1,134,850 |
| | 970,283 |
| | 767,191 |
|
| Total liabilities and stockholders’ equity | $ | 7,427,886 |
| | $ | 6,894,775 |
| $ | 7,876,892 |
| | $ | 7,255,958 |
| | $ | 7,427,886 |
|
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity
(dollars and shares 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 30, 2019 | 361,471 |
| | $ | 3,615 |
| | $ | 306,084 |
| | $ | 1,296,158 |
| | $ | (567,819 | ) | | $ | 1,038,038 |
|
| Net income | — |
| | — |
| | — |
| | 153,972 |
| | — |
| | 153,972 |
|
| Dividends ($0.15 per common share) | — |
| | — |
| | — |
| | (54,824 | ) | | — |
| | (54,824 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (4,807 | ) | | (4,807 | ) |
| Stock-based compensation | — |
| | — |
| | 1,982 |
| | — |
| | — |
| | 1,982 |
|
| Net exercise of stock options, vesting of restricted stock units and other | 60 |
| | — |
| | 489 |
| | — |
| | — |
| | 489 |
|
| Balances at June 29, 2019 | 361,531 |
| | $ | 3,615 |
| | $ | 308,555 |
| | $ | 1,395,306 |
| | $ | (572,626 | ) | | $ | 1,134,850 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Total |
| | Shares | | Amount | |
| Balances at December 29, 2018 | 361,330 |
| | $ | 3,613 |
| | $ | 284,877 |
| | $ | 1,184,735 |
| | $ | (502,942 | ) | | $ | 970,283 |
|
| Net income | — |
| | — |
| | — |
| | 233,454 |
| | — |
| | 233,454 |
|
| Dividends ($0.30 per common share) | — |
| | — |
| | — |
| | (109,676 | ) | | — |
| | (109,676 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 9,132 |
| | 9,132 |
|
| Stock-based compensation | — |
| | — |
| | 7,039 |
| | — |
| | — |
| | 7,039 |
|
| Net exercise of stock options, vesting of restricted stock units and other | 201 |
| | 2 |
| | 2,265 |
| | — |
| | — |
| | 2,267 |
|
| Modification of deferred compensation plans | — |
| | — |
| | 14,374 |
| | — |
| | — |
| | 14,374 |
|
| Cumulative effect of change in adoption of leases standard | — |
| | — |
| | — |
| | 7,977 |
| | — |
| | 7,977 |
|
| Stranded tax related to U.S. pension plan | — |
| | — |
| | — |
| | 78,816 |
| | (78,816 | ) | | — |
|
| Balances at June 29, 2019 | 361,531 |
| | $ | 3,615 |
| | $ | 308,555 |
| | $ | 1,395,306 |
| | $ | (572,626 | ) | | $ | 1,134,850 |
|
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity — (Continued)
(dollars and shares 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 31, 2018 | 360,364 |
| | $ | 3,604 |
| | $ | 277,755 |
| | $ | 875,035 |
| | $ | (450,699 | ) | | $ | 705,695 |
|
| Net income | — |
| | — |
| | — |
| | 140,633 |
| | — |
| | 140,633 |
|
| Dividends ($0.15 per common share) | — |
| | — |
| | — |
| | (54,648 | ) | | — |
| | (54,648 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (21,855 | ) | | (21,855 | ) |
| Stock-based compensation | — |
| | — |
| | (1,874 | ) | | — |
| | — |
| | (1,874 | ) |
| Net exercise of stock options, vesting of restricted stock units and other | 140 |
| | 1 |
| | (761 | ) | | — |
| | — |
| | (760 | ) |
| Balances at June 30, 2018 | 360,504 |
| | $ | 3,605 |
| | $ | 275,120 |
| | $ | 961,020 |
| | $ | (472,554 | ) | | $ | 767,191 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Total |
| | Shares | | Amount | |
| Balances at December 30, 2017 | 360,126 |
| | $ | 3,601 |
| | $ | 271,462 |
| | $ | 850,345 |
| | $ | (439,206 | ) | | $ | 686,202 |
|
| Net income | — |
| | — |
| | — |
| | 220,042 |
| | — |
| | 220,042 |
|
| Dividends ($0.30 per common share) | — |
| | — |
| | — |
| | (109,367 | ) | | — |
| | (109,367 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (33,348 | ) | | (33,348 | ) |
| Stock-based compensation | — |
| | — |
| | 2,869 |
| | — |
| | — |
| | 2,869 |
|
| Net exercise of stock options, vesting of restricted stock units and other | 378 |
| | 4 |
| | 789 |
| | — |
| | — |
| | 793 |
|
| Balances at June 30, 2018 | 360,504 |
| | $ | 3,605 |
| | $ | 275,120 |
| | $ | 961,020 |
| | $ | (472,554 | ) | | $ | 767,191 |
|
HANESBRANDS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
| HANESBRANDS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
| HANESBRANDS INC. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited)
|
| | | Six Months Ended | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | June 29,
2019 | | June 30,
2018 |
| Operating activities: | | | | | | |
| Net income | $ | 220,042 |
| | $ | 243,149 |
| $ | 233,454 |
| | $ | 220,042 |
|
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | |
| Depreciation and amortization of long-lived assets | 65,493 |
| | 58,095 |
| 64,489 |
| | 65,493 |
|
| Write-off on early extinguishment of debt | — |
| | 1,559 |
| |
| Amortization of debt issuance costs | 4,627 |
| | 5,437 |
| 4,758 |
| | 4,627 |
|
| Stock compensation expense | 3,033 |
| | 4,388 |
| 7,247 |
| | 3,033 |
|
| Deferred taxes and other | (6,709 | ) | | 6,543 |
| 9,968 |
| | (6,709 | ) |
| Changes in assets and liabilities, net of acquisition of business: | | | | | | |
| Accounts receivable | (81,512 | ) | | (79,429 | ) | (137,445 | ) | | (81,512 | ) |
| Inventories | (244,743 | ) | | (130,554 | ) | (178,453 | ) | | (244,743 | ) |
| Other assets | (6,193 | ) | | (48,901 | ) | (27,354 | ) | | (6,193 | ) |
| Accounts payable | 68,777 |
| | 9,019 |
| 7,699 |
| | 68,777 |
|
| Accrued pension and postretirement benefits | (7,438 | ) | | 11,025 |
| (18,321 | ) | | (7,438 | ) |
| Accrued liabilities and other | (79,775 | ) | | (46,081 | ) | (23,405 | ) | | (79,775 | ) |
| Net cash from operating activities | (64,398 | ) | | 34,250 |
| (57,363 | ) | | (64,398 | ) |
| Investing activities: | | | | | | |
| Purchases of property, plant and equipment | (40,640 | ) | | (30,838 | ) | |
| Capital expenditures | | (58,285 | ) | | (40,640 | ) |
| Proceeds from sales of assets | 1,840 |
| | 4,378 |
| 518 |
| | 1,840 |
|
| Acquisition of business, net of cash acquired | (334,916 | ) | | (524 | ) | — |
| | (334,916 | ) |
| Disposition of businesses | — |
| | 40,285 |
| |
| Net cash from investing activities | (373,716 | ) | | 13,301 |
| (57,767 | ) | | (373,716 | ) |
| Financing activities: | | | | | | |
| Borrowings on notes payable | 153,901 |
| | 141,384 |
| 162,592 |
| | 153,901 |
|
| Repayments on notes payable | (153,772 | ) | | (128,987 | ) | (163,703 | ) | | (153,772 | ) |
| Borrowings on Accounts Receivable Securitization Facility | 114,477 |
| | 262,216 |
| 123,812 |
| | 114,477 |
|
| Repayments on Accounts Receivable Securitization Facility | (86,300 | ) | | (103,128 | ) | (95,110 | ) | | (86,300 | ) |
| Borrowings on Revolving Loan Facilities | 2,025,860 |
| | 2,147,299 |
| 1,602,500 |
| | 2,025,860 |
|
| Repayments on Revolving Loan Facilities | (1,498,000 | ) | | (1,747,500 | ) | (1,422,500 | ) | | (1,498,000 | ) |
| Repayments on Term Loan Facilities | (21,250 | ) | | (128,215 | ) | (141,623 | ) | | (21,250 | ) |
| Borrowings on International Debt | | 7,141 |
| | — |
|
| Repayments on International Debt | (1,105 | ) | | (43,141 | ) | (27,941 | ) | | (1,105 | ) |
| Share repurchases | — |
| | (299,919 | ) | |
| Cash dividends paid | (108,115 | ) | | (110,529 | ) | (108,449 | ) | | (108,115 | ) |
| Payment of contingent consideration | (3,540 | ) | | (41,250 | ) | — |
| | (3,540 | ) |
| Taxes paid related to net shares settlement of equity awards | (4,185 | ) | | (6,228 | ) | (1,157 | ) | | (4,185 | ) |
| Other | (88 | ) | | 2,787 |
| 217 |
| | (88 | ) |
| Net cash from financing activities | 417,883 |
| | (55,211 | ) | (64,221 | ) | | 417,883 |
|
| Effect of changes in foreign exchange rates on cash | 20,176 |
| | (3,170 | ) | 4,282 |
| | 20,176 |
|
| Change in cash, cash equivalents and restricted cash | (55 | ) | | (10,830 | ) | (175,069 | ) | | (55 | ) |
| Cash and cash equivalents at beginning of year | 421,566 |
| | 460,245 |
| |
| Cash, cash equivalents and restricted cash at beginning of year | | 455,732 |
| | 421,566 |
|
| Cash, cash equivalents and restricted cash at end of period | 421,511 |
| | 449,415 |
| 280,663 |
| | 421,511 |
|
| Less restricted cash at end of period | 23,540 |
| | — |
| 22,722 |
| | 23,540 |
|
| Cash and cash equivalents per balance sheet at end of period | $ | 397,971 |
| | $ | 449,415 |
| $ | 257,941 |
| | $ | 397,971 |
|
Capital expenditures included in accounts payable at June 29, 2019 and December 29, 2018, were $7,053 and $20,275, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
57
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc. and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated 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. FourTwo subsidiaries of the Company close on aone day which is less than a week different thanafter 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.
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 recent2018 Annual Report on Form 10-K. 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.
| |
| (2) | Recent Accounting Pronouncements |
Revenue from Contracts with CustomersLease Accounting
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with CustomersAccounting Standards Update (“ASU”) 2016-02, “Leases (Topic 606)”842), 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 was effective for the Company in the first quarter of 2018 and applied using a modified retrospective method. The Company has included enhanced disclosures related to disaggregation of revenue sources and accounting policies. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows, but did result in additional disclosures. Refer to Note, “Revenue Recognition.”
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.” The new guidance addresses the classification of debt prepayment and extinguishment costs and contingent consideration payments made after a business combination. The new standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This standard requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company adopted the provisions of ASU 2016-18 in the first quarter of 2018 using the retrospective transition method. The Company did not have restricted cash in prior periods, therefore the adoption of the new guidance did not have an impact to previously reported cash flows. The Condensed Consolidated Statement of Cash Flow for the six months ended June 30, 2018 includes restricted cash of $23,540.
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
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
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 standard was effective for the Company in the first quarter of 2018 and applied with retrospective treatment. Accordingly, the Company reclassified $5,028 and $10,189 from the “Selling, general and administrative expenses” line to the “Other expenses” line within the Condensed Consolidated Statements of Income for the quarter and six months ended July 1, 2017, respectively. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or 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 standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740).” The new rules amended the SEC Staff Accounting Bulletin No. 118 (“SAB 118”) to incorporate the impact of the Tax Cuts and Jobs Act. The new standard was effective for the Company in the first quarter of 2018 and will be considered in the Company’s tax related disclosures throughout the year.
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 standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or 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 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 standard was effective for the Company in the first quarter of 2018. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Financial Instruments
In February 2018, the FASB issued ASU 2018-03, “Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10).” The new rules clarify previously issued guidance regarding determination of the fair value of financial instruments. The new standard will be effective for the Company in the third quarter of 2018. The Company does not expect the adoption of the new accounting standard 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 requirerequires lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. The standard will also resultresulted in enhanced quantitative and qualitative disclosures surrounding leases. The FASB subsequently issued updates to provide clarification on specific topics, including adoption guidance, practical expedients and interim transition disclosure requirements. The new rules will bewere effective for the Company in the first quarter of 2019. The Company has established a cross-functional implementation team to analyze the impact and implementadopted the new standard. The
HANESBRANDS INC.
Notesthe period of adoption. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which among other things, allowed the Company to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Company has collected relevant data in order to evaluatecarry forward the historical lease arrangements, assess potential embedded leases and evaluate accounting policy elections.classification. The Company is also evaluating its processes and internal controlsdid not elect the hindsight practical expedient to identify any changes necessary as a resultdetermine the lease term for existing leases. Adoption of the new rules. To assiststandard resulted in the implementation and enable the preparationrecording of the required financial disclosures, the Company has identified a global lease management and accounting software. While the Company is still evaluating the impact of the new rules, the Company expects that this adoption will result in material increases in assets and lease liabilities in its consolidated balance sheetof $507,669 and enhanced disclosures and has not identified any information that would indicate that the new guidance will have a material impact on the Company’s results$535,054, respectively as of operations or cash flows.December 30, 2018.
Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The new rules expand the hedging strategies that qualify for hedge accounting, including contractually-specified price components of a commodity purchase or sale, hedges of the benchmark rate component of the contractual coupon cash flows of fixed-rate assets and liabilities, hedges of 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 testing and allow qualitative assessments subsequent to initial quantitative tests if there is a supportable expectation that the hedge will remain highly effective. The new rules will bestandard was effective for the Company in the first quarter of 2019, with early adoption permitted.2019. 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 andor cash flows.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” The new rules allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The new rules will bewere effective for the Company in the first quarter of 2019. The Company reclassified $78,816 from accumulated other comprehensive loss to retained earnings for stranded tax effects related to the Company’s U.S. pension plan.
The Company uses a portfolio approach to release the income tax effects in accumulated other comprehensive loss related to pension and postretirement benefits. Under this approach, the income tax effects are released from accumulated other comprehensive loss based on the pre-tax adjustments to pension liabilities or assets recognized within other comprehensive income. Any tax effects remaining in accumulated other comprehensive loss are released only when the entire portfolio of the pension and postretirement benefits is liquidated, sold or extinguished.
Codification Improvements
In July 2018, the FASB issued ASU 2018-09, “Codification Improvements.” The new rules clarify guidance around several subtopics by adopting enhanced verbiage to the following subtopics: reporting comprehensive income, debt modifications and extinguishments, distinguishing liabilities from equity, stock compensation, business combinations, derivatives and hedging, fair value measurement and defined contribution pension plans. The standard was effective for the Company in the processfirst quarter of assessing the impact2019. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Statements of Stockholders’ Equity
In August 2018, the SEC amended Rule 3-04 of Regulation S-X to extend the annual disclosure requirement for changes in stockholders’ equity and the amount of dividends per share for each class of shares to interim periods. The disclosures can be included either in a note to the financial statements or in a separate financial statement. The disclosures require both year to date information and subtotals for each interim period. The amendment was effective for the Company in the first quarter of 2019. The Company has elected to include condensed consolidated statements of stockholders’ equity, which include disclosure of the dividends per share in each period, as a separate statement in its interim financial statements within all applicable SEC filings.
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. The new rules eliminate the probable initial recognition threshold and, instead, reflect an entity’s current estimate of all expected credit losses. The new rules will be effective for the Company in the first quarter of 2020. The Company expects the new rules to apply to its trade receivables, but does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
Goodwill Impairment
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 value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2020. 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 andor cash flows.
Fair Value
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820),” which modifies the disclosure requirements on fair value measurements. The new rules will be effective for the Company in the first quarter of 2020. 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 or cash flows, however its disclosures will be impacted.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Retirement Benefits
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20).” The new rule expands disclosure requirements for employer sponsored defined benefit pension and other retirement plans. The new rules will be effective for the Company in the first quarter of 2020. The Company does not expect the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows; however, expanded disclosures will be required.
Internal-Use Software
In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 340-40),” which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new rules will be effective for the Company in the first quarter of 2020. 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 or cash flows.
Revenue from Contracts with Customers Recognized as an Assumed Liability in a Business Combination
In February 2019, the FASB issued a proposed Accounting Standards Update, “Business Combinations (Topic 805): Revenue from Contracts with Customers - Recognizing an Assumed Liability.” The proposed rules clarify that a liability from a contract with a customer should be recognized by an acquirer in a business combination if the liability represents an unsatisfied performance obligation, and the acquiree has received consideration (or the amount is due) from the customer. The Company does not expect the proposed rules to have a material impact on the Company’s financial condition, results of operations or cash flows because the rules will apply prospectively to business combinations occurring on or after the effective date.
Income Taxes
In March 2019, the FASB issued a revision to a proposed Accounting Standards Update, “Income Taxes (Topic 740): Disclosure Framework - Changes to the Disclosure Requirements for Income Taxes,” which was originally issued in July 2016. The revision reflects the impact of the Tax Cuts and Jobs Act passed in December 2017, which substantially changed how U.S. businesses are taxed. The proposed rules are intended to improve the relevance of current income tax disclosure requirements to financial statement users by removing disclosures that no longer are considered cost beneficial or relevant and adding disclosure requirements identified as relevant to financial statement users. The Company does not expect the proposed rules to have a material impact on the Company’s financial condition, results of operations or cash flows because the rules address only income tax disclosure requirements and will be applied prospectively.
On December 31, 2017, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“Topic 606”) using the modified retrospective method applied to contracts which were pending as of December 31, 2017. Financial results included in the Company’s Condensed Consolidated Statement of Income for the quarter and six months ended June 30, 2018 are presented under Topic 606, while prior year amounts have not been restated and continue to be reported in accordance with ASC 605, “Revenue Recognition” (“Topic 605”). As a result of adopting Topic 606, the Company did not adjust opening retained earnings.
Revenue is recognized when obligations under the terms of a contract with a customer are satisfied, which occurs at a point in time, upon either shipment or delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimates for variable consideration. Variable consideration includes trade discounts, rebates, volume-based incentives, cooperative advertising and product returns, which are offered within contracts between the Company and its customers, employing the practical expedient for contract costs. Incidental items that are immaterial to the context of the contract are recognized as expense at the transaction date.
The following table presents the Company’s revenues disaggregated by the customer’s method of purchase:
8 |
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Third-party brick-and-mortar wholesale | $ | 1,360,994 |
| | $ | 1,345,992 |
| | $ | 2,592,417 |
| | $ | 2,510,300 |
|
| Consumer-directed | 399,933 |
| | 369,451 |
| | 756,534 |
| | 676,647 |
|
| Total net sales | $ | 1,760,927 |
| | $ | 1,715,443 |
| | $ | 3,348,951 |
| | $ | 3,186,947 |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
The following table presents the Company’s revenues disaggregated by method of purchase:
|
| | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | June 30,
2018 |
| Third-party brick-and-mortar wholesale | $ | 1,345,992 |
| | $ | 2,510,300 |
|
| Consumer-directed | 369,451 |
| | 676,647 |
|
| Total net sales | $ | 1,715,443 |
| | $ | 3,186,947 |
|
Revenue Sources
Third-Party Brick-and-Mortar Wholesale Revenue
Third-party brick-and-mortar wholesale revenue is primarily generated throughby sales of the Company’s products to retailers to support their brick-and-mortar operations. Also included within third-party brick-and-mortar wholesale revenuesrevenue is royalty revenue from royaltylicensing agreements. The Company earns royalties through license agreements with manufacturers of other consumer products that incorporate certain of the Company’s brands. The Company accrues revenue earned under these contracts based upon reported sales from the licensees.
Consumer-Directed Revenue
Consumer-directed revenue is primarily generated through sales driven directly by the consumer through company-operated stores and e-commerce platforms, which include both owned sites and the sites of the Company’s retail customers.
Variable Consideration
Trade discounts and rebates
The Company provides customers with discounts and rebates that are explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the product revenue is recognized. The cost of these incentives is estimated using a number of factors, including historical utilization and redemption rates. The Company includes incentives offered in the form of free products in the determination of cost of sales.
Volume based incentives
Volume-basedincentives involve rebates or refunds of cash that are redeemable only if the customer completes a specified number of sales transactions. Under these incentive programs, the Company estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with the customer.
Cooperative advertising
Under cooperative advertising arrangements, the Company agrees to reimburse the retailer for a portion of the costs incurred by the retailer to advertise and promote certain of the Company’s products. The Company recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity takes place.
Product returns
The Company generally offers customers a limited right of return for a purchased product. The Company estimates the amount of its product sales that may be returned by its customers and records this as a reduction of revenue in the period the related product revenue is recognized.
For all variable consideration, where appropriate, the Company estimates the amount using the expected value, which takes into consideration historical experience, current contractual requirements, specific known market events and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which the customer is entitled based on the terms of the contracts.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Bras N Things
On February 12, 2018, the Company acquired 100% of the outstanding equity of BNT Holdco Pty Limited (“Bras N Things”) for a total purchase price of A$498,236 (US$(U.S.$391,572). During 2018, due to the final working capital adjustment, the purchase consideration was reduced by A$3,012 (U.S.$2,367), ultimately resulting in a revised purchase price of A$495,224 (U.S.$389,205), which included a cash payment of A$428,956 (US$(U.S.$337,123), an indemnification escrow of A$31,988 (US$(U.S.$25,140) and debt assumed of A$34,280 (US$(U.S.$26,942). During the quarter ended June 30, 2018, the purchase consideration was reduced by A$3,012 (US$2,367) associated with the final working capital adjustment, resulting in a revised purchase price of A$495,224 (US$389,205).
U.S. dollar equivalents are based on acquisition date exchange rates.
The Company funded the acquisition with a combination of short-term borrowings under its Revolvingexisting revolving loan facility (the “Revolving Loan FacilityFacility”) and cash on hand. The A$31,988 indemnification escrow is held in a retention account for a period of 18 months after the date of the acquisition to secure indemnification claims or other obligations of the sellers under the purchase agreement. The remaining balance of the indemnification escrow, including interest earned, if any, will be paid to the sellers at the end of the 18 month period. The indemnification escrow, held in one of the Company’s bank accounts, is recognized and classified as restricted cash, andwith the balance as of June 29, 2019 included in the “Other noncurrentcurrent assets” line of the Condensed Consolidated Balance Sheet.
Bras N Things contributed net revenues of $47,587 and pretax earnings of $8,970 (excluding acquisition and integration related charges of approximately $3,276) since the date of acquisition. The results of Bras N Things have been included in the Company’s condensed consolidated financial statements since the date of acquisition and are reported as part of the International segment.
Bras N Things is a leading intimate apparel retailer and e-commerce business in Australia, New Zealand and South Africa. Bras N Things sells proprietary bras, panties and lingerie sets through a retail network of approximately 170 stores and an e-commerce platform. The Company believes this acquisition will create opportunities for expansion of the Bras N Things’ consumer-directed sales model. Factors that contribute to the amount of goodwill recognized for the acquisition include the value of entry into the outlet store sector, expansion of online presence, including the third-party marketplace, and expected synergies with existing Company functions. Goodwill associated with the acquisition is not tax deductible.
The Bras N Things trademark and brand name, which management believes to have an indefinite life, has been valued at $275,071. Amortizable intangible assets have been assigned values of $2,358 for noncompete agreements and $785 for customer lists. Noncompete agreements and the customer list are being amortized over three years.
The allocation of purchase price is preliminary and subject to change. The primary areas of the purchase price allocation that are not yet finalized are related to income taxes and residual goodwill. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances, which existed at the acquisition date. The acquired assets and liabilities as of the date of acquisition (February 12, 2018) include the following: |
| | | |
| Cash and cash equivalents | $ | 2,765 |
|
| Accounts receivable, net | 197 |
|
| Inventories | 9,610 |
|
| Other current assets | 1,637 |
|
| Property, net | 11,764 |
|
| Trademarks and other identifiable intangibles | 278,214 |
|
| Deferred tax assets and other noncurrent assets | 2,318 |
|
| Total assets acquired | 306,505 |
|
| Accounts payable | 4,929 |
|
| Accrued liabilities and other | 16,339 |
|
| Deferred tax liabilities and other noncurrent liabilities | 7,864 |
|
| Total liabilities assumed | 29,132 |
|
| Net assets acquired | 277,373 |
|
| Goodwill | 111,832 |
|
| Total purchase price | $ | 389,205 |
|
|
| | | |
| Cash and cash equivalents | $ | 2,765 |
|
| Accounts receivable, net | 197 |
|
| Inventories | 9,610 |
|
| Other current assets | 1,637 |
|
| Property, net | 12,013 |
|
| Trademarks and other identifiable intangibles | 278,214 |
|
| Deferred tax assets and other noncurrent assets | 2,539 |
|
| Total assets acquired | 306,975 |
|
| Accounts payable | 4,929 |
|
| Accrued liabilities and other | 16,339 |
|
| Deferred tax liabilities and other noncurrent liabilities | 7,663 |
|
| Total liabilities assumed | 28,931 |
|
| Net assets acquired | 278,044 |
|
| Goodwill | 111,161 |
|
| Total purchase price | $ | 389,205 |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
Total purchase price of the Bras N Things acquisition consisted of the following components:
|
| | | |
| Cash consideration paid | $ | 337,123 |
|
| Indemnification escrow asset | 25,140 |
|
| Debt assumed | 26,942 |
|
| Total purchase price | $ | 389,205 |
|
|
| | | |
| Cash consideration paid | $ | 337,123 |
|
| Indemnification escrow asset | 25,140 |
|
| Debt assumed | 26,942 |
|
| Total purchase price | $ | 389,205 |
|
Since February 12, 2018, goodwill related to the Bras N Things acquisition decreased by $1,463$792 as a result of measurement period adjustments, primarily related to working capital adjustments. The purchase price allocation was finalized in the first quarter of 2019.
Unaudited pro forma results of operations for the Company are presented below for the quarter and six months ended June 30, 2018, assuming that the 2018 acquisition of Bras N Things had occurred on January 1, 2017. Pro forma
|
| | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | June 30,
2018 |
| Net sales | $ | 1,715,443 |
| | $ | 3,205,007 |
|
| Net income | 141,395 |
| | 223,586 |
|
| Earnings per share: | | | |
| Basic | $ | 0.39 |
| | $ | 0.62 |
|
| Diluted | 0.39 |
| | 0.62 |
|
The Company determines whether an arrangement is a lease at inception. The Company has operating resultsleases for real estate (primarily retail stores and operating facilities) and certain equipment. The Company’s finance leases are not material. Leases with a term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into after adoption of Topic 842, the Company combines lease and nonlease components as a single component for all asset classes.
The Company’s leases have remaining lease terms of one to 38 years, some of which include options to extend the leases for up to 15 years, and some of which include options to terminate the leases within one year. The exercise of lease renewal options is at the Company’s sole discretion. In general, for leased retail real estate, the Company will not include renewal options in the underlying lease term. However, if a situation arises where the lessor has control over the option periods, then the Company will include these periods within the lease term. The depreciable life of assets and leasehold improvements are limited by the expected lease term.
Certain of the Company’s lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Total operating lease costs, which includes short-term leases and variable cost, were $61,203 and $115,761 for the quarter and six months ended July 1, 2017 include expenses totaling $307June 29, 2019, respectively. For the quarter and $1,436 respectively,six months ended June 29, 2019, variable costs of $16,650 and $29,302 were included in total operating lease costs, respectively. Short-term lease costs were immaterial for acquisition-related adjustments primarilythe quarter and six months ended June 29, 2019.
The following table presents supplemental cash flow and non-cash information related to inventoryleases: |
| | | |
| | Six Months Ended |
| | June 29,
2019 |
| Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from leases | $ | 76,721 |
|
| Right-of-use assets obtained in exchange for lease obligations - non-cash activity | $ | 38,840 |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and intangible assets.shares in thousands, except per share data)
(unaudited)
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. For operating leases that commenced prior to December 30, 2018, the Company used the incremental borrowing rate on December 27, 2018.
The following table presents supplemental information related to leases at June 29, 2019:
|
| | |
| Weighted average remaining lease term | 5.2 years |
|
| Weighted average discount rate | 5.12 | % |
The following table presents future minimum rental commitments under noncancelable operating leases as of December 29, 2018:
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Net sales | $ | 1,715,443 |
| | $ | 1,673,533 |
| | $ | 3,205,007 |
| | $ | 3,080,706 |
|
| Net income from continuing operations | 141,395 |
| | 172,226 |
| | 223,586 |
| | 248,300 |
|
| Earnings per share from continuing operations: | | | | | | | |
| Basic | $ | 0.39 |
| | $ | 0.47 |
| | $ | 0.62 |
| | $ | 0.67 |
|
| Diluted | 0.39 |
| | 0.47 |
| | 0.62 |
| | 0.67 |
|
|
| | | |
| 2019 | $ | 148,218 |
|
| 2020 | 129,660 |
|
| 2021 | 110,185 |
|
| 2022 | 91,411 |
|
| 2023 | 66,753 |
|
| Thereafter | 115,941 |
|
| | $ | 662,168 |
|
Champion EuropeThe following table presents maturities of operating lease liabilities as of June 29, 2019:
In 2016, |
| | | |
| 2019 | $ | 75,184 |
|
| 2020 | 148,759 |
|
| 2021 | 110,450 |
|
| 2022 | 79,457 |
|
| 2023 | 62,878 |
|
| Thereafter | 116,899 |
|
| Total lease payments | 593,627 |
|
| Less interest | 77,210 |
|
| | $ | 516,417 |
|
As of June 29, 2019, the Company acquired 100% of Champion Europe S.p.A. (“Champion Europe”), in an all-cash transaction valued at €220,751 (US$245,554) on an enterprise value basis, less working capital adjustments as defined in the purchase agreement, which included an estimated contingent consideration of €40,700 (US$45,277). The final contingent consideration for the Champion Europe acquisition was determined to be €64,250 (US$73,738), of which €37,820 (US$41,250) was paid in April 2017 and €26,430 (US$32,488) was paid in February 2018. U.S. dollar equivalentsCompany’s additional operating lease contracts that have not yet commenced are based on acquisition date or payment date exchange rates, as applicable.immaterial.
| |
(5)(6) | Stockholders’ Equity |
Basic earnings per share (“EPS”) was computed by dividing net income 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:
|
| | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Basic weighted average shares outstanding | 364,637 |
| | 362,011 |
| | 364,603 |
| | 361,944 |
|
| Effect of potentially dilutive securities: | | | | | | | |
| Stock options | 480 |
| | 876 |
| | 475 |
| | 968 |
|
| Restricted stock units | 415 |
| | 367 |
| | 335 |
| | 333 |
|
| Employee stock purchase plan and other | 5 |
| | — |
| | 5 |
| | — |
|
| Diluted weighted average shares outstanding | 365,537 |
| | 363,254 |
| | 365,418 |
| | 363,245 |
|
|
| | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Basic weighted average shares outstanding | 362,011 |
| | 365,911 |
| | 361,944 |
| | 370,075 |
|
| Effect of potentially dilutive securities: | | | | | | | |
| Stock options | 876 |
| | 1,565 |
| | 968 |
| | 1,605 |
|
| Restricted stock units | 367 |
| | 515 |
| | 333 |
| | 466 |
|
| Employee stock purchase plan and other | — |
| | 1 |
| | — |
| | 1 |
|
| Diluted weighted average shares outstanding | 363,254 |
| | 367,992 |
| | 363,245 |
| | 372,147 |
|
There were 14 restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarter and six months ended June 30, 2018. For the quarter and six months ended July 1, 2017,June 29, 2019, there were no anti-dilutive restricted stock units. For the quarter ended June 30, 2018, there were 14 restricted stock units excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the quarters and six months ended June 29, 2019 and June 30, 2018, and July 1, 2017, there were no anti-dilutive options to purchase shares of common stock.2 and 14 restricted stock units excluded
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
from the diluted earnings per share calculation, respectively, because their effect would be anti-dilutive. For the quarters ended June 30, 2018 and July 1, 2017, the Company declared cash dividends of $0.15 per share. For the six months ended June 29, 2019 and June 30, 2018, and July 1, 2017, the Company declared cash dividendsthere were no anti-dilutive stock options to purchase shares of $0.30 per share.common stock.
On July 24, 2018,23, 2019, 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 September 5, 20184, 2019 to stockholders of record at the close of business on August 14, 2018.13, 2019.
On April 27, 2016, the Company’s Board of Directors approved the current 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. The Company did not repurchase any shares during the quarterquarters and six months ended June 29, 2019 and June 30, 2018 and quarter ended July 1, 2017. For the six months ended July 1, 2017, the Company entered into transactions to repurchase 14,696 shares at a weighted average purchase price of $20.39 per share. The shares were repurchased at a total cost of $299,919.2018. At June 30, 2018,29, 2019, the remaining repurchase authorization totaled 20,360 shares. The program does not obligate the Company to acquire any particular amount of common stock and may be suspended or discontinued at any time at the Company’s discretion.
Inventories consistedprimary objective of the following:
|
| | | | | | | |
| | June 30,
2018 | | December 30,
2017 |
| Raw materials | $ | 137,205 |
| | $ | 129,287 |
|
| Work in process | 214,679 |
| | 226,659 |
|
| Finished goods | 1,760,327 |
| | 1,519,044 |
|
| | $ | 2,112,211 |
| | $ | 1,874,990 |
|
DebtInventories consisted of the following:
|
| | | | | | | | | | | |
| | June 29,
2019 | | December 29,
2018 | | June 30,
2018 |
| Raw materials | $ | 107,561 |
| | $ | 107,300 |
| | $ | 137,205 |
|
| Work in process | 169,509 |
| | 182,966 |
| | 214,679 |
|
| Finished goods | 1,956,690 |
| | 1,764,192 |
| | 1,760,327 |
|
| | $ | 2,233,760 |
| | $ | 2,054,458 |
| | $ | 2,112,211 |
|
| |
| (8) | Debt and Notes Payable |
Debt and notes payable consisted of the following:
|
| | | | | | | | | | | |
| | Interest
Rate as of
June 29,
2019 | | Principal Amount | | Maturity Date |
| | June 29,
2019 | | December 29,
2018 | |
| Senior Secured Credit Facility: | | | | | | | |
| Revolving Loan Facility | 3.88% | | $ | 180,000 |
| | $ | — |
| | December 2022 |
| Term Loan A | 3.86% | | 703,125 |
| | 721,875 |
| | December 2022 |
| Term Loan B | 4.19% | | 493,750 |
| | 496,250 |
| | December 2024 |
| Australian Term A-1 | — | | — |
| | 122,968 |
| | — |
| Australian Revolving Loan Facility | 2.62% | | — |
| | 21,118 |
| | July 2021 |
| 4.875% Senior Notes | 4.88% | | 900,000 |
| | 900,000 |
| | May 2026 |
| 4.625% Senior Notes | 4.63% | | 900,000 |
| | 900,000 |
| | May 2024 |
| 3.5% Senior Notes | 3.50% | | 568,505 |
| | 572,213 |
| | June 2024 |
| European Revolving Loan Facility | 1.50% | | 113,701 |
| | 113,520 |
| | September 2019 |
| Accounts Receivable Securitization Facility | 3.15% | | 190,311 |
| | 161,608 |
| | March 2020 |
| Other International Debt | Various | | — |
| | 1 |
| | Various |
| Total debt | | | 4,049,392 |
| | 4,009,553 |
| | |
| Notes payable | | | 4,695 |
| | 5,824 |
| | |
| Total debt and notes payable | | | 4,054,087 |
| | 4,015,377 |
| | |
| Less long-term debt issuance costs | | | 31,814 |
| | 34,774 |
| | |
| Less notes payable | | | 4,695 |
| | 5,824 |
| | |
Less current maturities(1) | | | 346,512 |
| | 440,596 |
| | |
| Total long-term debt | | | $ | 3,671,066 |
| | $ | 3,534,183 |
| | |
|
| | | | | | | | | | | |
| | Interest
Rate as of
June 30,
2018 | | Principal Amount | | Maturity Date |
| | June 30,
2018 | | December 30,
2017 | |
| Senior Secured Credit Facility: | | | | | | | |
| Revolving Loan Facility | 3.60% | | $ | 488,000 |
| | $ | — |
| | December 2022 |
| Term Loan A | 3.48% | | 731,250 |
| | 750,000 |
| | December 2022 |
| Term Loan B | 3.84% | | 497,500 |
| | 500,000 |
| | December 2024 |
| Australian Term A-1 | 3.47% | | 128,860 |
| | 135,826 |
| | July 2019 |
| 4.875% Senior Notes | 4.88% | | 900,000 |
| | 900,000 |
| | May 2026 |
| 4.625% Senior Notes | 4.63% | | 900,000 |
| | 900,000 |
| | May 2024 |
| 3.5% Senior Notes | 3.50% | | 584,249 |
| | 599,649 |
| | June 2024 |
| European Revolving Loan Facility | 1.50% | | 116,850 |
| | 81,539 |
| | September 2018 |
| Accounts Receivable Securitization Facility | 2.81% | | 153,386 |
| | 125,209 |
| | March 2019 |
| Other International Debt | Various | | 22,103 |
| | 1,044 |
| | Various |
| | | | 4,522,198 |
| | 3,993,267 |
| | |
| Less long-term debt issuance cost | | | 38,262 |
| | 41,624 |
| | |
| Less current maturities | | | 334,735 |
| | 249,589 |
| | |
| | | | $ | 4,149,201 |
| | $ | 3,702,054 |
| | |
| |
| (1) | Current maturities excludes $12 of short-term debt issuance costs at June 29, 2019 and December 29, 2018. |
As of June 30, 2018, the Company had $507,915 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account outstanding borrowings and $4,085 of standby and trade letters of credit issued and outstanding under this facility. The Company’s maximum borrowing capacity under the Accounts Receivable Securitization Facility was $200,000 as of June 30, 2018, however based on the outstanding borrowings and net eligible receivables balance within the collateral pool, the Accounts Receivable Securitization Facility was fully utilized as of June 30, 2018. Borrowings under the Accounts
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
As of June 29, 2019, the Company had $815,665 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account outstanding borrowings and $4,335 of standby and trade letters of credit issued and outstanding under this facility.
The Company entered into an accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) in November 2007. The Company’s maximum borrowing capacity under the Accounts Receivable Securitization Facility was $225,000 as of June 29, 2019. 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 $225,000. $300,000.
The Company had $47,710$41,911 of borrowing availability under the Australian Revolving Loan Facility, no borrowing availability under the European Revolving Loan Facility and $120,726$96,609 of borrowing availability under other international lines of credit after taking into account outstanding borrowings and letters of credit outstanding under the applicable facility.
In March 2018,2019, the Company amended the Accounts Receivable Securitization Facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”).Facility. This amendment primarily increased the fluctuating facility limit to $300,000 (previously $225,000) and extended the maturity date to March 2019. 2020.
In June 2018,2019, the Company amendedpaid the Accounts Receivable Securitizationoutstanding balance and terminated the Australian Term A-1 loan which was to mature in July 2019.
In July 2019, the Company refinanced the European Revolving Loan Facility primarily to remove certain receivables from being pledged as collateral forextend the facility and reduce the maximum availabilitymaturity date to $225,000.September 2020.
As of June 30, 2018,29, 2019, the Company was in compliance with all financial covenants under its credit facilities.
| |
(8)(9) | Accumulated Other Comprehensive Loss |
The components of accumulated other comprehensive loss (“AOCI”) are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Cumulative Translation Adjustment | | Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
| Balance at December 29, 2018 | $ | (157,060 | ) | | $ | 21,814 |
| | $ | (595,307 | ) | | $ | 227,611 |
| | $ | (502,942 | ) |
| Amounts reclassified from accumulated other comprehensive loss | — |
| | (14,364 | ) | | 9,566 |
| | 792 |
| | (4,006 | ) |
| Current-period other comprehensive income activity | 11,259 |
| | 1,714 |
| | — |
| | 165 |
| | 13,138 |
|
| Total other comprehensive income | 11,259 |
| | (12,650 | ) | | 9,566 |
| | 957 |
| | 9,132 |
|
| Reclassification of stranded tax related to U.S. pension plan to retained earnings | — |
| | — |
| | — |
| | (78,816 | ) | | (78,816 | ) |
| | | | | | | | | | |
| Balance at June 29, 2019 | $ | (145,801 | ) | | $ | 9,164 |
| | $ | (585,741 | ) | | $ | 149,752 |
| | $ | (572,626 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Cumulative Translation Adjustment | | Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
| Balance at December 30, 2017 | $ | (43,505 | ) | | $ | (25,461 | ) | | $ | (614,000 | ) | | $ | 243,760 |
| | $ | (439,206 | ) |
| Amounts reclassified from accumulated other comprehensive loss | — |
| | 7,219 |
| | 8,015 |
| | (3,659 | ) | | 11,575 |
|
| Current-period other comprehensive income (loss) activity | (62,777 | ) | | 25,274 |
| | — |
| | (7,420 | ) | | (44,923 | ) |
| | | | | | | | | | |
| Balance at June 30, 2018 | $ | (106,282 | ) | | $ | 7,032 |
| | $ | (605,985 | ) | | $ | 232,681 |
| | $ | (472,554 | ) |
The Company had the following reclassifications out of AOCI:
|
| | | | | | | | | | | | | | | | | | |
| Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification
from AOCI | | Amount of Reclassification
from AOCI |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Gain (loss) on foreign exchange contracts | | Cost of sales | | $ | (5,554 | ) | | $ | 2,636 |
| | $ | (7,219 | ) | | $ | 2,934 |
|
| | Income tax | | 1,113 |
| | (1,012 | ) | | 1,415 |
| | (1,125 | ) |
| | Net of tax | | (4,441 | ) | | 1,624 |
| | (5,804 | ) | | 1,809 |
|
| Amortization of deferred actuarial loss and prior service cost | | Other expenses | | (4,948 | ) | | (4,768 | ) | | (8,015 | ) | | (9,578 | ) |
| | Income tax | | 1,066 |
| | 1,831 |
| | 2,244 |
| | 3,678 |
|
| | Net of tax | | (3,882 | ) | | (2,937 | ) | | (5,771 | ) | | (5,900 | ) |
| | | | | | | | | | | |
| Total reclassifications | | | | $ | (8,323 | ) | | $ | (1,313 | ) | | $ | (11,575 | ) | | $ | (4,091 | ) |
| |
(9) | Financial Instruments and Risk Management |
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of June 30, 2018, the notional U.S. dollar equivalent of the Company’s derivative portfolio was $581,464, primarily consisting of contracts hedging exposures to the Euro, Australian dollar, Canadian dollar and Mexican peso.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares 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 | | Amount of Reclassification
from AOCI |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Gain (loss) on foreign exchange contracts | | Cost of sales | | $ | 8,347 |
| | $ | (5,554 | ) | | $ | 14,364 |
| | $ | (7,219 | ) |
| | Income tax | | (1,887 | ) | | 1,113 |
| | (3,408 | ) | | 1,415 |
|
| | Net of tax | | 6,460 |
| | (4,441 | ) | | 10,956 |
| | (5,804 | ) |
| Amortization of deferred actuarial loss and prior service cost | | Selling, general, and administrative expenses | | (4,964 | ) | | (4,948 | ) | | (9,566 | ) | | (8,015 | ) |
| | Income tax | | 1,411 |
| | 1,066 |
| | 2,616 |
| | 2,244 |
|
| | Net of tax | | (3,553 | ) | | (3,882 | ) | | (6,950 | ) | | (5,771 | ) |
| | | | | | | | | | | |
| Total reclassifications | | | | $ | 2,907 |
| | $ | (8,323 | ) | | $ | 4,006 |
| | $ | (11,575 | ) |
| |
| (10) | Financial Instruments and Risk Management |
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of June 29, 2019, the notional U.S. dollar equivalent of the Company’s derivative portfolio was $531,767, consisting of contracts hedging exposures primarily related to the Euro, Australian dollar, Canadian dollar and Mexican peso.
Fair Values of Derivative Instruments
The fair values of derivative financial instruments related to forward foreign exchange contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
|
| | | | | | | | | |
| | Balance Sheet Location | | Fair Value |
| | June 29,
2019 | | December 29,
2018 |
| Hedges | Other current assets | | $ | 5,733 |
| | $ | 18,381 |
|
| Non-hedges | Other current assets | | 8,667 |
| | 12,410 |
|
| Total derivative assets | | | 14,400 |
| | 30,791 |
|
| | | | | | |
| Hedges | Accrued liabilities | | (1,058 | ) | | (286 | ) |
| Non-hedges | Accrued liabilities | | (988 | ) | | (114 | ) |
| Total derivative liabilities | | | (2,046 | ) | | (400 | ) |
| | | | | | |
| Net derivative asset | | | $ | 12,354 |
| | $ | 30,391 |
|
|
| | | | | | | | | |
| | Balance Sheet Location | | Fair Value |
| | June 30,
2018 | | December 30,
2017 |
| Hedges | Other current assets | | $ | 18,325 |
| | $ | 1,464 |
|
| Non-hedges | Other current assets | | 4,122 |
| | 136 |
|
| Total derivative assets | | | 22,447 |
| | 1,600 |
|
| | | | | | |
| Hedges | Accrued liabilities | | (732 | ) | | (14,750 | ) |
| Non-hedges | Accrued liabilities | | (703 | ) | | (7,818 | ) |
| Total derivative liabilities | | | (1,435 | ) | | (22,568 | ) |
| | | | | | |
| Net derivative asset (liability) | | | $ | 21,012 |
| | $ | (20,968 | ) |
Cash Flow Hedges
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. The Company uses forward foreign exchange 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.
The Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately $7,987.
approximately$15,291. The ineffective portion ofCompany is hedging exposure to the changesvariability in future cash flows for forecasted transactions over the fair value of derivatives used as cash flow hedges are reported in the “Cost of sales” line in the Condensed Consolidated Statements of Income.next 18 months.
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
|
| | | | | | | | | | | | | | | |
| | Amount of Gain (Loss)
Recognized in AOCI
(Effective Portion) | | Amount of Gain (Loss)
Recognized in AOCI
(Effective Portion) |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Foreign exchange contracts | $ | 26,982 |
| | $ | (8,167 | ) | | $ | 25,274 |
| | $ | (26,281 | ) |
|
| | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss)
Reclassified from AOCI
into Income
(Effective Portion) | | Amount of Gain (Loss)
Reclassified from AOCI
into Income
(Effective Portion) | | Amount of Gain (Loss)
Reclassified from AOCI
into Income
(Effective Portion) |
| | | Quarter Ended | | Six Months Ended |
| | | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Foreign exchange contracts | Cost of sales | | $ | (5,554 | ) | | $ | 2,636 |
| | $ | (7,219 | ) | | $ | 2,934 |
|
Mark to Market Hedges
A derivative used as a hedging instrument whose change in fair value is recognized to act as an economic hedge against changes in the values of the hedged item is designated a mark to market hedge. The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Amount of Gain
Recognized in AOCI
on Derivative Instruments | | Amount of Gain
Recognized in AOCI
on Derivative Instruments |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Foreign exchange contracts | $ | 1,274 |
| | $ | 26,982 |
| | $ | 1,714 |
| | $ | 25,274 |
|
|
| | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss)
Reclassified from AOCI
into Income | | Amount of Gain (Loss)
Reclassified from AOCI
into Income | | Amount of Gain (Loss)
Reclassified from AOCI
into Income |
| | | Quarter Ended | | Six Months Ended |
| | | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
Foreign exchange contracts (1) | Cost of sales | | $ | 8,347 |
| | $ | (5,554 | ) | | $ | 14,364 |
| | $ | (7,219 | ) |
| |
| (1) | The Company does not exclude amounts from effectiveness testing that would require recognition into earnings based on changes in fair value. |
|
| | | | | | | | | | | | | | | |
| Quarter Ended | | Six Months Ended |
| June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Total cost of sales in which the effects of cash flow hedges are recorded | $ | 1,086,248 |
| | $ | 1,055,487 |
| | $ | 2,053,396 |
| | $ | 1,948,070 |
|
Cross-Currency Swaps
In July 2019, the Company entered into two cross-currency swaps with a total notional amount of €300,000 in order to hedge the currency fluctuation impact of the Company’s net investment in its European businesses. The swaps are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. These instruments will mature in 2024. The execution of the swaps had no impact on the financial statements for the quarter ended June 29, 2019. As part of the ongoing accounting for these derivative instruments, the Company will determine the fair value and record this amount as an asset or liability each reporting period. The Company has elected to utilize hedge accounting, which will result in the change in fair value of the derivatives to be recorded as an adjustment to equity.
Mark to Market Hedges
A derivative used as a hedging instrument whose change in fair value is recognized to act as a hedge against changes in the values of the hedged item is designated as a mark to market hedge. The Company uses foreign exchange derivative contracts as hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheets. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
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 | | Amount of Gain (Loss)
Recognized in Income |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Foreign exchange contracts | Cost of sales | | $ | (9,361 | ) | | $ | 10,011 |
| | $ | (18,758 | ) | | $ | 19,111 |
|
| Foreign exchange contracts | Selling, general and administrative expenses | | (262 | ) | | 472 |
| | (921 | ) | | 775 |
|
| Total | | | $ | (9,623 | ) | | $ | 10,483 |
| | $ | (19,679 | ) | | $ | 19,886 |
|
|
| | | | | | | | | | | | | | | | | |
| | Location of Gain (Loss)
Recognized in Income
on Derivatives | | Amount of Gain (Loss)
Recognized in Income | | Amount of Gain (Loss)
Recognized in Income |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Foreign exchange contracts | Cost of sales | | $ | 10,011 |
| | $ | — |
| | $ | 19,111 |
| | $ | — |
|
| Foreign exchange contracts | Selling, general and administrative expenses | | 472 |
| | (411 | ) | | 775 |
| | (4,675 | ) |
| Total | | | $ | 10,483 |
| | $ | (411 | ) | | $ | 19,886 |
| | $ | (4,675 | ) |
| |
(10)(11) | Fair Value of Assets and Liabilities |
As of June 30, 2018,29, 2019, 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 foreign exchange rates and deferred compensation plan liabilities. The fair values of foreign exchange rate derivatives are determined using the cash flows of the foreign exchange contract, 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 value of deferred compensation plans is based on readily available current market data and is categorized as Level 2. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a quarterly recurring basis.
There were no changes during the quarter and six months ended June 30, 201829, 2019 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 and six months ended June 30, 2018.29, 2019. As of and during the quarter and six months ended June 30, 2018,29, 2019, 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 accounted for at fair value on a recurring basis.
| | | | Assets (Liabilities) at Fair Value as of
June 30, 2018 | Assets (Liabilities) at Fair Value as of
June 29, 2019 |
| | Total | | Quoted Prices In
Active Markets
for Identical
Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | 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 - assets | $ | 22,447 |
| | $ | — |
| | $ | 22,447 |
| | $ | — |
| $ | 14,400 |
| | $ | — |
| | $ | 14,400 |
| | $ | — |
|
| Foreign exchange derivative contracts - liabilities | (1,435 | ) | | — |
| | (1,435 | ) | | — |
| (2,046 | ) | | — |
| | (2,046 | ) | | — |
|
| | 21,012 |
| | — |
| | 21,012 |
| | — |
| 12,354 |
| | — |
| | 12,354 |
| | — |
|
| Deferred compensation plan liability | (49,329 | ) | | — |
| | (49,329 | ) | | — |
| (29,906 | ) | | — |
| | (29,906 | ) | | — |
|
| Total | $ | (28,317 | ) | | $ | — |
| | $ | (28,317 | ) | | $ | — |
| $ | (17,552 | ) | | $ | — |
| | $ | (17,552 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Assets (Liabilities) at Fair Value as of
December 29, 2018 |
| | 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 - assets | $ | 30,791 |
| | $ | — |
| | $ | 30,791 |
| | $ | — |
|
| Foreign exchange derivative contracts - liabilities | (400 | ) | | — |
| | (400 | ) | | — |
|
| | 30,391 |
| | — |
| | 30,391 |
| | — |
|
| Deferred compensation plan liability | (39,542 | ) | | — |
| | (39,542 | ) | | — |
|
| Total | $ | (9,151 | ) | | $ | — |
| | $ | (9,151 | ) | | $ | — |
|
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| | Assets (Liabilities) at Fair Value as of
December 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 - assets | $ | 1,600 |
| | $ | — |
| | $ | 1,600 |
| | $ | — |
|
| Foreign exchange derivative contracts - liabilities | (22,568 | ) | | — |
| | (22,568 | ) | | — |
|
| | (20,968 | ) | | — |
| | (20,968 | ) | | — |
|
| Deferred compensation plan liability | (52,758 | ) | | — |
| | (52,758 | ) | | — |
|
| Total | $ | (73,726 | ) | | $ | — |
| | $ | (73,726 | ) | | $ | — |
|
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 June 30, 201829, 2019 and December 30, 2017.29, 2018. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $28,489$39,223 and $26,096$32,604 as of June 30,29, 2019 and December 29, 2018, and December 30, 2017, respectively. The fair value of debt, which is classified as a Level 2 liability, was $4,495,967$4,163,448 and $4,093,229$3,863,299 as of June 30, 201829, 2019 and December 30, 2017,29, 2018, respectively. Debt had a carrying value of $4,522,198$4,049,392 and $3,993,267$4,009,553 as of June 30, 201829, 2019 and December 30, 2017,29, 2018, 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 amounts of the Company’s notes payable, which is classified as a Level 2 liability, approximated fair value as of June 30,29, 2019 and December 29, 2018, and December 30, 2017, primarily due to the short-term nature of these instruments.
The Company’s effective income tax rate for continuing operations was 14.8%14.1% and 6.0%14.8% for the quarters ended June 30, 201829, 2019 and July 1, 2017, respectively. The Company’s effective income tax rate for continuing operations was 15.2% and 6.0% for the six months ended June 30, 2018, and July 1, 2017, respectively. The higherlower effective income tax rate for the quarter and six monthsended June 29, 2019 compared to the quarter ended June 30, 2018 compared to the quarter and six months ended July 1, 2017 was primarily due to certain provisionsa charge recorded in the second quarter of 2018 related to the change in the Company’s assertion with respect to the repatriation of foreign earnings as a result of the implementation of the Tax Cuts and Jobs Act (the “Tax Act”), specifically the base-broadening provision which imposed a new minimum tax on global intangible low-tax income (“GILTI”).
The recently enacted Tax Act significantly revised U.S. corporate income tax law by, among other things, reducing the federalCompany’s effective income tax rate to 21%was 14.1% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In response to the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, or in circumstances where estimates cannot be made, to disclose and recognize at a later date. For the year ended December 30, 2017, the Company included in its financial statements provisional charges15.2% for the revaluation of the Company’s net domestic deferred tax assets, the transition tax, as well as other less material provisions of the Tax Act.
As ofsix months ended June 29, 2019 and June 30, 2018, respectively. The lower effective income tax rate for the Company is in the process of evaluating the impact of the Tax Act on being partially reinvested with respect to prior year undistributed earnings. A provisional charge of $4,659 was recognized in the quartersix months ended June 30, 2018 for actual and planned permanent repatriations; however, the Company is continuing to evaluate the overall impact of its partial permanent reinvestment assertion. Furthermore, a provisional benefit of $4,022 was recognized related29, 2019 compared to the refinement of the Company’s transition tax. There are no additional changes at this time to the provisional amounts recorded as of the year ended December 30, 2017. The accounting is expected to be completed and disclosed within the one-year measurement period as allowed by SAB 118.
During the first quarter ended March 31, 2018, the Company finalized its accounting policy decision with respect to the new GILTI tax rules, and has concluded that GILTI will be treated as a periodic charge in the year in which it arises, and will not record deferred taxes for the basis associated with GILTI earnings.
For the quarter ended March 31, 2018 and six months ended June 30, 2018 was primarily due to a charge recorded in the Company recorded a liability for an unrecognized tax benefitsecond quarter of $17,643,2018 related to the acquisitionchange in the Company’s assertion with respect to the repatriation of Bras N Things,foreign earnings as parta result of purchase accounting.the implementation of the Tax Act, as well as a discrete charge in 2018 as a result of a tax law change in a foreign jurisdiction.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollarsThe Company files a consolidated U.S. federal income tax return, as well as separate and sharescombined income tax returns in thousands, except per share data)
(unaudited)
| |
(12) | Discontinued Operations |
As partnumerous state and foreign jurisdictions. In the United States, the IRS began an examination of the Company’s acquisition of Hanes Australasia in2015 and 2016 the Company acquired Hanes Australasia’s legacy Dunlop Flooringtax years during 2017 and Tontine Pillow businesses.2018, respectively. The Company concluded that these businesses were not a strategic fit; therefore,is also subject to examination by various state and foreign tax authorities. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the decision was madeoutcomes of both ongoing and future examinations for the current or prior years to divestensure the businesses.
In February 2017, theCompany’s provision for income taxes is sufficient. The Company sold its Dunlop Flooring business for A$34,564 (US$26,219) in net cash proceeds at the time of sale, with an additional A$1,334 (US$1,012) of proceeds received in April 2017 related to a working capital adjustment, resulting in a pre-tax loss of A$2,715 (US$2,083). U.S. dollar equivalents arerecognizes liabilities based on exchange ratesestimates of whether additional taxes will be due and believes its reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next 12 months, is not expected to have a material impact 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 A$13,500 (US$10,363) in net cash proceeds at the time of sale. A working capital adjustment of A$966 (US$742) was paid to the buyer in April 2017, resulting in a net pre-tax gain of A$2,415 (US$1,856). U.S. 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 operatingCompany’s financial position or 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 | | Six Months Ended |
| | July 1,
2017 | | July 1,
2017 |
| Net sales | $ | — |
| | $ | 6,865 |
|
| Cost of sales | — |
| | 4,507 |
|
| Gross profit | — |
| | 2,358 |
|
| Selling, general and administrative expenses | (2 | ) | | 3,729 |
|
| Operating profit (loss) | 2 |
| | (1,371 | ) |
| Other expenses | — |
| | 303 |
|
| Net (gain) loss on disposal of businesses | (524 | ) | | 242 |
|
| Income (loss) from discontinued operations before income tax expense | 526 |
| | (1,916 | ) |
| Income tax expense | 158 |
| | 181 |
|
| Net income (loss) from discontinued operations, net of tax | $ | 368 |
| | $ | (2,097 | ) |
| |
| (13) | Business Segment Information |
The Company’s operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of the Company’s U.S. value-based (“outlet”) stores and U.S. hosiery business.
The types of products and services from which each reportable segment derives its revenues are as follows:
Innerwear sellsincludes sales of basic branded apparel products that are replenishment in nature under the product categories of men’s underwear, women’s panties, children’s underwear and socks, and intimate apparel, which includes bras and shapewear.
Activewear sellsincludes sales 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 primarily relates to the Europe, Australia, Asia, Latin America and Canada geographic locations that sell products that span across the Innerwear and Activewear reportable segments.
| |
| • | International includes sales of products in all of the Company’s categories outside the United States, primarily in Europe, Australia, Asia, Latin America and Canada. |
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, acquisition,acquisition-related and integration and other action-related charges and amortization of
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
of intangibles. In the first quarter of 2018, the Company eliminated the allocation of certain corporate overhead selling, general and administrative expenses related to the legal, human resources, information technology, finance and real estate departments to the segments, in order to reflect the manner in which the business is managed and results are reviewed by the chief executive officer, who is the Company’s chief operating decision maker. Prior year segment operating profit disclosures have been revised to conform to the current year presentation. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 30, 2017.29, 2018.
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Net sales: | | | | | | | |
| Innerwear | $ | 678,604 |
| | $ | 694,694 |
| | $ | 1,154,549 |
| | $ | 1,185,772 |
|
| Activewear | 448,277 |
| | 405,785 |
| | 853,617 |
| | 751,910 |
|
| International | 568,863 |
| | 545,862 |
| | 1,215,043 |
| | 1,115,749 |
|
| Other | 65,183 |
| | 69,102 |
| | 125,742 |
| | 133,516 |
|
| Total net sales | $ | 1,760,927 |
| | $ | 1,715,443 |
| | $ | 3,348,951 |
| | $ | 3,186,947 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Net sales: | | | | | | | |
| Innerwear | $ | 694,694 |
| | $ | 719,006 |
| | $ | 1,185,772 |
| | $ | 1,224,196 |
|
| Activewear | 405,785 |
| | 379,756 |
| | 751,910 |
| | 707,099 |
|
| International | 545,862 |
| | 475,242 |
| | 1,115,749 |
| | 952,640 |
|
| Other | 69,102 |
| | 72,606 |
| | 133,516 |
| | 143,030 |
|
| Total net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 3,186,947 |
| | $ | 3,026,965 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 29,
2019 | | June 30,
2018 | | June 29,
2019 | | June 30,
2018 |
| Segment operating profit: | | | | | | | |
| Innerwear | $ | 149,530 |
| | $ | 159,129 |
| | $ | 254,156 |
| | $ | 260,548 |
|
| Activewear | 68,779 |
| | 57,508 |
| | 112,372 |
| | 95,795 |
|
| International | 81,078 |
| | 76,558 |
| | 173,776 |
| | 153,619 |
|
| Other | 6,032 |
| | 7,160 |
| | 6,786 |
| | 9,787 |
|
| Total segment operating profit | 305,419 |
| | 300,355 |
| | 547,090 |
| | 519,749 |
|
| Items not included in segment operating profit: | | | | | | | |
| General corporate expenses | (50,573 | ) | | (46,002 | ) | | (113,453 | ) | | (90,533 | ) |
| Acquisition, integration and other action-related charges | (12,609 | ) | | (25,165 | ) | | (33,982 | ) | | (44,782 | ) |
| Amortization of intangibles | (8,220 | ) | | (9,125 | ) | | (17,600 | ) | | (18,313 | ) |
| Total operating profit | 234,017 |
| | 220,063 |
| | 382,055 |
| | 366,121 |
|
| Other expenses | (8,249 | ) | | (6,570 | ) | | (15,700 | ) | | (12,331 | ) |
| Interest expense, net | (46,522 | ) | | (48,430 | ) | | (94,581 | ) | | (94,193 | ) |
| Income before income tax expense | $ | 179,246 |
| | $ | 165,063 |
| | $ | 271,774 |
| | $ | 259,597 |
|
|
| | | | | | | | | | | | | | | |
| | Quarter Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| Segment operating profit: | | | | | | | |
| Innerwear | $ | 159,129 |
| | $ | 177,628 |
| | $ | 260,548 |
| | $ | 294,250 |
|
| Activewear | 57,508 |
| | 58,972 |
| | 95,795 |
| | 102,322 |
|
| International | 76,558 |
| | 60,147 |
| | 153,619 |
| | 112,809 |
|
| Other | 7,160 |
| | 7,716 |
| | 9,787 |
| | 10,344 |
|
| Total segment operating profit | 300,355 |
| | 304,463 |
| | 519,749 |
| | 519,725 |
|
| Items not included in segment operating profit: | | | | | | | |
| General corporate expenses | (46,002 | ) | | (38,565 | ) | | (90,533 | ) | | (81,846 | ) |
| Acquisition, integration and other action-related charges | (25,165 | ) | | (26,062 | ) | | (44,782 | ) | | (64,429 | ) |
| Amortization of intangibles | (9,125 | ) | | (6,131 | ) | | (18,313 | ) | | (13,316 | ) |
| Total operating profit | 220,063 |
| | 233,705 |
| | 366,121 |
| | 360,134 |
|
| Other expenses | (6,570 | ) | | (6,422 | ) | | (12,331 | ) | | (12,967 | ) |
| Interest expense, net | (48,430 | ) | | (44,130 | ) | | (94,193 | ) | | (86,267 | ) |
| Income from continuing operations before income tax expense | $ | 165,063 |
| | $ | 183,153 |
| | $ | 259,597 |
| | $ | 260,900 |
|
For the quarter ended June 29, 2019, the Company incurred pre-tax acquisition, integration and other action-related charges of $12,609, of which $12,598 is reported in the “Cost of sales” line and $11 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the quarter ended June 30, 2018, the Company incurred $25,165 ofpre-tax acquisition, integration and other action-related charges that impact operating profit,of $25,165, of which $11,083 is reported in the “Cost of sales” line and $14,082 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
For the quartersix months ended July 1, 2017,June 29, 2019, the Company incurred $26,062 of acquisition-relatedpre-tax acquisition, integration and integrationother action-related charges of $33,982, of which $4,284$30,290 is reported in the “Cost of sales” line and $21,778$3,692 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
For the six months ended June 30, 2018, the Company incurred acquisition,pre-tax acquisition-related, integration and other action-related charges that impact operating profit of $44,782, of which $21,836 is reported in the “Cost of sales” line and $22,946 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For
As of December 29, 2018, the Company had an accrual of $10,806 for expected benefit payments related to actions taken in prior years. During the six months ended July 1, 2017,June 29, 2019, the Company incurred acquisition-relatedapproved actions to close certain supply chain facilities and integrationreduce overhead costs and incurred charges of $64,429,$11,092 for employee termination and other benefits for employees affected by separation programs, with $8,420 and $2,672 of which $19,759 is reportedcharges reflected in the “Cost of sales” line and $44,670 is reported in the “Selling, general and administrative expenses” linelines, respectively, 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 30, 2017, the Company had accrued $22,302 for expected benefit payments related to employee termination and
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
other benefits for affected employees. During the six months ended June 30, 2018, there were $4,577 of29, 2019, benefit payments, other accrual adjustments and foreign currency adjustments of $5,659 have been made, resulting in an ending accrual of $17,725,$16,239, of which $9,535$12,955 and $8,190$3,284 is included in the “Accrued liabilities” and “Other noncurrent liabilities” lines of the Condensed Consolidated Balance Sheet, respectively.
|
| |
| 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 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 30, 2017,29, 2018, 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 30, 201729, 2018.
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, Europe, Australia and Asia/Pacific under some of the world’s strongest apparel brands, including Hanes, Champion, Bonds,, Maidenform, DIM, Bali, Playtex, Bras N Things, Nur Die/Nur Der, Alternative, L’eggs, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei and Gear for Sports, Bras N Things and Alternative.Sports. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, children’s underwear, activewear, socks and hosiery. 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. In the first quarterOther consists of 2018, we eliminated the allocationour U.S. value-based (“outlet”) stores and U.S. hosiery business.
Outlook for 2019
We estimate our 2019 guidance as follows:
Net sales of certain corporate overhead selling, general and administrative expenses related$6.885 billion to the legal, human resources, information technology, finance and real estate departments to the segments, in order to reflect the manner in which the business is managed and results are reviewed by the chief executive officer, who is our chief operating decision maker. Prior year segment$6.985 billion, operating profit disclosures have been revisedof $900 million to conform$930 million, and net income of $583 to the current year presentation.$610 million;
Highlights from the Second Quarter Ended June 30, 2018
Key financial highlights are as follows:
Total net sales in the second quarter of 2018 were $1.72 billion, compared with $1.65 billion in the same period of 2017, representing a 4% increase.
Operating profit decreased 6% to $220 million in the second quarter of 2018, compared with $234 million in the same period of 2017. As a percentage of sales, operating profit was 12.8% in the second quarter of 2018 compared to 14.2% in the same period of 2017. Included within operating profit for both the second quarter of 2018 and 2017 werePre-tax acquisition, integration and other action-related chargescosts of $25approximately $55 million and $26 million, respectively.
Diluted earnings per share from continuing operations decreased 17% to $0.39reflected in the second quarter of 2018, compared with $0.47 in the same period of 2017.
Outlook
We expect 2018 net sales of $6.72 billion to $6.82 billion.operating profit;
Interest expense and other expenses are expected to beof approximately $207$224 million combined.combined;
We expect the 2018 full-yearAn annual effective tax rate to beof approximately 16%.14%;
We expect cashCash flow from operations to be in the range of $675$700 million to $750 million. We expect capital expenditures$800 million; and
Capital expenditure investment of approximately $90 million to $100 million.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. WeFor instance, we generally have 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 customers’customer 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 spending by consumers. 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. These consumers may choose to purchase fewer of our products, to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
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 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.
Highlights from the Second Quarter Ended June 29, 2019
Key financial highlights are as follows:
Total net sales in the second quarter of 2019 were $1.76 billion, compared with $1.72 billion in the same period of 2018, representing a 3% increase.
Operating profit increased 6% to $234 million in the second quarter of 2019, compared with $220 million in the same period of 2018. As a percentage of sales, operating profit was 13.3% in the second quarter of 2019 compared to 12.8% in the same period of 2018. Included within operating profit were acquisition, integration and other action-related charges of $13 million and $25 million for the quarters ended June 29, 2019 and June 30, 2018, respectively.
Diluted earnings per share was $0.42 and $0.39 in the second quarters of 2019 and 2018, respectively.
Condensed Consolidated Results of Operations — Second Quarter EndedJune 29, 2019 Compared with Second Quarter EndedJune 30, 2018 Compared with Second Quarter EndedJuly 1, 2017
| | | | Quarter Ended | | | | | Quarter Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change | June 29,
2019 | | June 30,
2018 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) | (dollars in thousands) |
| Net sales | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 68,833 |
| | 4.2 | % | $ | 1,760,927 |
| | $ | 1,715,443 |
| | $ | 45,484 |
| | 2.7 | % |
| Cost of sales | 1,055,487 |
| | 1,000,708 |
| | 54,779 |
| | 5.5 |
| 1,086,248 |
| | 1,055,487 |
| | 30,761 |
| | 2.9 |
|
| Gross profit | 659,956 |
| | 645,902 |
| | 14,054 |
| | 2.2 |
| 674,679 |
| | 659,956 |
| | 14,723 |
| | 2.2 |
|
| Selling, general and administrative expenses | 439,893 |
| | 412,197 |
| | 27,696 |
| | 6.7 |
| 440,662 |
| | 439,893 |
| | 769 |
| | 0.2 |
|
| Operating profit | 220,063 |
| | 233,705 |
| | (13,642 | ) | | (5.8 | ) | 234,017 |
| | 220,063 |
| | 13,954 |
| | 6.3 |
|
| Other expenses | 6,570 |
| | 6,422 |
| | 148 |
| | 2.3 |
| 8,249 |
| | 6,570 |
| | 1,679 |
| | 25.6 |
|
| Interest expense, net | 48,430 |
| | 44,130 |
| | 4,300 |
| | 9.7 |
| 46,522 |
| | 48,430 |
| | (1,908 | ) | | (3.9 | ) |
| Income from continuing operations before income tax expense | 165,063 |
| | 183,153 |
| | (18,090 | ) | | (9.9 | ) | |
| Income before income tax expense | | 179,246 |
| | 165,063 |
| | 14,183 |
| | 8.6 |
|
| Income tax expense | 24,430 |
| | 10,989 |
| | 13,441 |
| | 122.3 |
| 25,274 |
| | 24,430 |
| | 844 |
| | 3.5 |
|
| Income from continuing operations | 140,633 |
| | 172,164 |
| | (31,531 | ) | | (18.3 | ) | |
| Income from discontinued operations, net of tax | — |
| | 368 |
| | (368 | ) | | NM |
| |
| Net income | $ | 140,633 |
| | $ | 172,532 |
| | $ | (31,899 | ) | | (18.5 | )% | |
| Net Income | | $ | 153,972 |
| | $ | 140,633 |
| | $ | 13,339 |
| | 9.5 | % |
Net Sales
Net sales increased 4%3% during the second quarter of 2019 primarily due to the following:
| |
| • | Sales on a constant currency basis, defined as sales excluding the impact of foreign exchange rates, increased 5% in the quarter, as a result of sales growth in our Activewear and International segments driven primarily by strong sales growth in our global Champion brand as well as innerwear growth in Europe and Australia. |
Partially offset by:
Unfavorable impact from foreign exchange rates in our International businesses of approximately $34 million.
Operating Profit
Operating profit as a percentage of sales was 13.3%, an increase from prior year of approximately 50 basis points. Increased operating profit from price increases taken in the first quarter of 2019 and higher margin product sales mix were partially offset by increased materials costs, planned investments to support our brands and future growth initiatives as well as
an unfavorable impact from foreign exchange rates. Included in operating profit in the second quarter of 2019 and 2018 were charges of $13 million and $25 million, respectively, related to acquisition, integration and other action-related costs.
Other Highlights
Other Expenses – Other expenses were higher by $2 million in the second quarter of 2019 compared to the second quarter of 2018 primarily due to the following:
Acquisition of Bras N Things in 2018higher pension expense and Alternative Apparel in 2017, which added incremental nethigher funding fees for sales of $52accounts receivable to financial institutions in 2019.
Interest Expense – Interest expense was lower by $2 million in the second quarter of 2018;2019 compared to the second quarter of 2018 driven by lower debt balances partially offset by a higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 4.13% for the second quarter of 2019, compared to 3.87% for the second quarter of 2018.
Income Tax Expense – Our effective income tax rate was 14.1% and 14.8% for the second quarters of 2019 and 2018, respectively. The lower effective income tax rate for the quarter ended June 29, 2019 compared to the quarter ended June 30, 2018 was primarily due to a charge recorded in the second quarter of 2018 related to the change in our assertion with respect to the repatriation of foreign earnings as a result of the implementation of the Tax Act.
Operating Results by Business Segment — Second Quarter EndedJune 29, 2019 Compared with Second Quarter EndedJune 30, 2018
|
| | | | | | | | | | | | | | |
| | Net Sales | | | | |
| | Quarter Ended | | | | |
| | June 29,
2019 | | June 30,
2018 | | Higher
(Lower) | | Percent
Change |
| | (dollars in thousands) |
| Innerwear | $ | 678,604 |
| | $ | 694,694 |
| | $ | (16,090 | ) | | (2.3 | )% |
| Activewear | 448,277 |
| | 405,785 |
| | 42,492 |
| | 10.5 |
|
| International | 568,863 |
| | 545,862 |
| | 23,001 |
| | 4.2 |
|
| Other | 65,183 |
| | 69,102 |
| | (3,919 | ) | | (5.7 | ) |
| Total | $ | 1,760,927 |
| | $ | 1,715,443 |
| | $ | 45,484 |
| | 2.7 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Operating Profit and Margin | | | | |
| | Quarter Ended | | | | |
| | June 29,
2019 | | June 30,
2018 | | Higher
(Lower) | | Percent
Change |
| | (dollars in thousands) |
| Innerwear | $ | 149,530 |
| | 22.0 | % | | $ | 159,129 |
| | 22.9 | % | | $ | (9,599 | ) | | (6.0 | )% |
| Activewear | 68,779 |
| | 15.3 |
| | 57,508 |
| | 14.2 |
| | 11,271 |
| | 19.6 |
|
| International | 81,078 |
| | 14.3 |
| | 76,558 |
| | 14.0 |
| | 4,520 |
| | 5.9 |
|
| Other | 6,032 |
| | 9.3 |
| | 7,160 |
| | 10.4 |
| | (1,128 | ) | | (15.8 | ) |
| Corporate | (71,402 | ) | | NM |
| | (80,292 | ) | | NM |
| | 8,890 |
| | 11.1 |
|
| Total | $ | 234,017 |
| | 13.3 | % | | $ | 220,063 |
| | 12.8 | % | | $ | 13,954 |
| | 6.3 | % |
Innerwear
Innerwear net sales decreased 2% driven by a 3% and 2% decline in our intimate apparel and basics businesses, respectively. Net sales in our intimate apparel business decreased as a result of declines in our bras product category which continues to be impacted by door closings and the challenging retail landscape within the mid-tier and department store channel. The decline in the bras product category was partially offset by growth in our shapewear product category.
Innerwear operating margin was 22.0%, representing a decrease from 22.9% in the same period a year ago as a result of lower volume, higher materials costs and planned increases in investments to support our brands partially offset by price increases implemented in the first quarter of 2019.
Activewear
Activewear net sales increased 10%. Core Champion sales within the Activewear segment, which we define as Champion sales outside of the mass retail channel, were up more than 50% in the quarter, driven by strong consumer demand, space gains at existing accounts, new distribution and growth in the consumer-directed, bookstore and distributor channels. Growth in Champion sales more than offset the anticipated decline in sales in the remainder of our activewear business as we previously
exited commodity programs within the mass retail channel and focused on remixing parts of our activewear business to branded products, which drives higher margins.
Activewear operating margin was 15.3%, representing an increase from 14.2% in the same period a year ago as a result of improved Champion profitability, higher margin product sales mix from our remixing activity and pricing, partially offset by higher selling, general and administrative expenses reflecting an increase in investments to support our growth initiatives.
International
Net sales in the International segment increased 4% as a result of the following:
Sales on a constant currency basis, defined as sales excluding the impact of foreign currency, increased 10% driven by growth in both our innerwear and activewear businesses in Europe, Asia and Australia.
Partially offset by:
Unfavorable impact of foreign currency exchange rates of approximately $34 million.
International operating margin was 14.3%, an increase from 14.0% in the same period a year ago, primarily due to increased efficiencies of scale and the continued realization of acquisition synergies.
Other
Other net sales were lower as a result of continued declines in hosiery sales in the United States. Operating margin decreased due to the decrease in sales volume.
Corporate
Corporate expenses included certain administrative costs, including acquisition, integration and other action-related charges. Corporate expenses were lower in the second quarter of 2019 compared to the second quarter of 2018 due to lower acquisition, integration and other action-related charges. Supply chain actions include the reduction of overhead costs, principally within our Western Hemisphere network. Acquisition and integration costs are expenses related directly to an acquisition and its integration into the organization. Other acquisitions and other action-related costs include acquisition and integration charges for smaller acquisitions such as Bras N Things, as well as other action-related costs including corporate workforce reductions.
|
| | | | | | | |
| | Quarter Ended |
| | June 29,
2019 | | June 30,
2018 |
| | (dollars in thousands) |
| Acquisition, integration and other action-related costs included in operating profit: |
| | |
| Supply chain actions | $ | 12,598 |
| | $ | — |
|
| Hanes Europe Innerwear | — |
| | 8,455 |
|
| Hanes Australasia | — |
| | 6,647 |
|
| Other acquisitions and other action-related costs | 11 |
| | 10,063 |
|
| Total acquisition, integration and other action-related costs included in operating profit | $ | 12,609 |
| | $ | 25,165 |
|
Condensed Consolidated Results of Operations — Six Months EndedJune 29, 2019 Compared with Six Months EndedJune 30, 2018
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 29,
2019 | | June 30,
2018 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 3,348,951 |
| | $ | 3,186,947 |
| | $ | 162,004 |
| | 5.1 | % |
| Cost of sales | 2,053,396 |
| | 1,948,070 |
| | 105,326 |
| | 5.4 |
|
| Gross profit | 1,295,555 |
| | 1,238,877 |
| | 56,678 |
| | 4.6 |
|
| Selling, general and administrative expenses | 913,500 |
| | 872,756 |
| | 40,744 |
| | 4.7 |
|
| Operating profit | 382,055 |
| | 366,121 |
| | 15,934 |
| | 4.4 |
|
| Other expenses | 15,700 |
| | 12,331 |
| | 3,369 |
| | 27.3 |
|
| Interest expense, net | 94,581 |
| | 94,193 |
| | 388 |
| | 0.4 |
|
| Income before income tax expense | 271,774 |
| | 259,597 |
| | 12,177 |
| | 4.7 |
|
| Income tax expense | 38,320 |
| | 39,555 |
| | (1,235 | ) | | (3.1 | ) |
| Net income | $ | 233,454 |
| | $ | 220,042 |
| | $ | 13,412 |
| | 6.1 | % |
Net Sales
Net sales increased 5% during the six months of 2019 primarily due to the following:
Our acquisition of Bras N Things in February 2018, which contributed non-organic net sales of $18 million in the six months of 2019;
| |
| • | Organic sales on a constant currency basis, defined as sales excluding the impact of foreign exchange rates and businesses acquired within 12 months, increased 7% in the six months of 2019, as a result of sales growth in Europe, Asia, Australia and the Americas driven primarily by strong sales growth in our global Champion brand. |
Partially offset by:
Unfavorable impact from foreign exchange rates in our International businesses of approximately $80 million.
Operating Profit
Operating profit as a percentage of sales was 11.4%, a decrease from the same period a year ago of approximately 10 basis points. Price increases taken in the six months of 2019 and higher margin product sales mix were offset by increased materials costs, planned investments to support our brands and future growth initiatives, unfavorable impact from foreign exchange rates, higher variable compensation accruals and higher bad debt expense. Included in operating profit in the six months of 2019 and 2018 were charges of $34 million and $45 million, respectively, related to acquisition, integration and other action-related costs.
Other Highlights
Other Expenses – Other expenses were higher by $3 million in the six months of 2019 compared to the same period in 2018 primarily due to higher pension expense and higher funding fees for sales of accounts receivable to financial institutions in 2019.
Interest Expense – Interest expense was slightly higher in the six months of 2019 compared to 2018, driven by a higher weighted average interest rate offset by lower debt balances. Our weighted average interest rate on our outstanding debt was 4.15% for the six months of 2019, compared to 3.81% for the six months of 2018.
Income Tax Expense – Our effective income tax rate was 14.1% and 15.2% for the six months of 2019 and 2018, respectively. The lower effective income tax rate for the six months of 2019 compared to same period in 2018 was primarily due to a charge recorded in the second quarter of 2018 related to the change in our assertion with respect to the repatriation of foreign earnings as a result of the implementation of the Tax Act, as well as a discrete charge in 2018 as a result of a tax law change in a foreign jurisdiction.
Operating Results by Business Segment — Six Months EndedJune 29, 2019 Compared with Six Months EndedJune 30, 2018
|
| | | | | | | | | | | | | | |
| | Net Sales | | | | |
| | Six Months Ended | | | | |
| | June 29,
2019 | | June 30,
2018 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Innerwear | $ | 1,154,549 |
| | $ | 1,185,772 |
| | $ | (31,223 | ) | | (2.6 | )% |
| Activewear | 853,617 |
| | 751,910 |
| | 101,707 |
| | 13.5 |
|
| International | 1,215,043 |
| | 1,115,749 |
| | 99,294 |
| | 8.9 |
|
| Other | 125,742 |
| | 133,516 |
| | (7,774 | ) | | (5.8 | ) |
| Total | $ | 3,348,951 |
| | $ | 3,186,947 |
| | $ | 162,004 |
| | 5.1 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Operating Profit and Margin | | | | |
| | Six Months Ended | | | | |
| | June 29,
2019 | | June 30,
2018 | | Higher
(Lower) | | Percent
Change |
| | (dollars in thousands) |
| Innerwear | $ | 254,156 |
| | 22.0 | % | | $ | 260,548 |
| | 22.0 | % | | $ | (6,392 | ) | | (2.5 | )% |
| Activewear | 112,372 |
| | 13.2 |
| | 95,795 |
| | 12.7 |
| | 16,577 |
| | 17.3 |
|
| International | 173,776 |
| | 14.3 |
| | 153,619 |
| | 13.8 |
| | 20,157 |
| | 13.1 |
|
| Other | 6,786 |
| | 5.4 |
| | 9,787 |
| | 7.3 |
| | (3,001 | ) | | (30.7 | ) |
| Corporate | (165,035 | ) | | NM |
| | (153,628 | ) | | NM |
| | (11,407 | ) | | (7.4 | ) |
| Total | $ | 382,055 |
| | 11.4 | % | | $ | 366,121 |
| | 11.5 | % | | $ | 15,934 |
| | 4.4 | % |
Innerwear
Innerwear net sales decreased 3% driven primarily by a 7% decline in net sales in our intimate apparel business. Net sales in our intimate apparel business decreased as a result of declines in our bras product category, which continues to be impacted by door closings and the challenging retail landscape within the mid-tier and department store channel. The decline in the bras product category was partially offset by growth in our shapewear product category.
Innerwear operating margin was 22.0%, flat to the prior year period. Price increases implemented in the first quarter of 2019 offset the decrease in volume, the increase in materials costs and the planned increases in investments to support our brands.
Activewear
Activewear net sales increased 14%. Core Champion sales within the Activewear segment, which we define as Champion sales outside of the mass retail channel, were up approximately 65% in the six months of 2019, driven by strong consumer demand, space gains at existing accounts, new distribution and growth in the consumer-directed, bookstore and distributor channels. Growth in Champion sales more than offset the anticipated decline in sales in the remainder of our activewear business as we previously exited commodity programs within the mass retail channel and focused on remixing parts of our activewear business to branded products, which drives higher margins.
Activewear operating margin was 13.2%, representing an increase from 12.7% in the prior year as a result of improved Champion profitability, higher margin product sales mix from our remixing activity and pricing, partially offset by higher selling, general and administrative expenses, reflecting an increase in investments to support our brands and growth initiatives.
International
Net sales in the International segment increased 8.9% as a result of the following:
Our acquisition of Bras N Things in the first quarter of 2018, which contributed non-organic net sales of $18 million;
Organic sales on a constant currency basis, defined as sales excluding the impact of foreign currency and businesses acquired within 12 months, increased slightly in the quarter14.5%, driven by performance of our key growth initiatives. Strong growth in our global Champion brandEurope, Asia, Australia and online sales was offset in part by declines in our intimate apparel and Hanes activewear businesses; and
Favorable impact from foreign exchange rates in our International businesses of approximately $16 million.
Gross Profit
Gross profit as a percentage of sales was 38.5%, a decrease from prior year of approximately 70 basis points. Gross margin decreased as expansion in our international gross margin and continued realization of acquisition synergies were morethe Americas.
thanPartially offset by higher input costs, product mix within our Innerwear segment and higher acquisition-related and integration charges. Included in gross profit in the second quarters of 2018 and 2017 are charges of $11 million and $4 million, respectively, related to acquisition, integration and other action-related costs.by:
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 25.6% for the second quarter of 2018 compared to 25.0% in the same period of 2017. Included in selling, general and administrative expenses were charges of $14 million and $22 million of acquisition, integration and other action-related costs for the second quarters of 2018 and 2017, respectively. Selling, general and administrative expenses, as a percentage of net sales, increased slightly due to planned investments to support our brands and growth strategies, higher distribution expenses from short term labor inefficiencies and higher proportion of selling, general and administrative costs at our recently acquired businesses, partially offset by continued realization of acquisition synergies and lower acquisition, integration and other action-related costs for the second quarter of 2018 compared to the second quarter of 2017.
Other Highlights
Interest Expense – higher by $4 million in the second quarter of 2018 compared to the second quarter of 2017 driven by higher debt balances and higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 3.87% during the second quarter of 2018, compared to 3.76% in the second quarter of 2017.
Income Tax Expense – our effective income tax rate was 14.8% and 6.0% for the second quarters of 2018 and 2017, respectively. The higher tax rate in 2018 compared to the same period of 2017 is primarily due to certain provisions of the Tax Act, specifically the base-broadening provision which imposed a new minimum tax on global intangible low-tax income (“GILTI”).
Operating Results by Business Segment — Second Quarter EndedJune 30, 2018 Compared with Second Quarter EndedJuly 1, 2017
|
| | | | | | | | | | | | | | | |
| | Net Sales | | Operating Profit |
| | Quarter Ended | | Quarter Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| | (dollars in thousands) |
| Innerwear | $ | 694,694 |
| | $ | 719,006 |
| | $ | 159,129 |
| | $ | 177,628 |
|
| Activewear | 405,785 |
| | 379,756 |
| | 57,508 |
| | 58,972 |
|
| International | 545,862 |
| | 475,242 |
| | 76,558 |
| | 60,147 |
|
| Other | 69,102 |
| | 72,606 |
| | 7,160 |
| | 7,716 |
|
| Corporate | — |
| | — |
| | (80,292 | ) | | (70,758 | ) |
| Total | $ | 1,715,443 |
| | $ | 1,646,610 |
| | $ | 220,063 |
| | $ | 233,705 |
|
Innerwear
|
| | | | | | | | | | | | | | |
| | Quarter Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 694,694 |
| | $ | 719,006 |
| | $ | (24,312 | ) | | (3.4 | )% |
| Segment operating profit | 159,129 |
| | 177,628 |
| | (18,499 | ) | | (10.4 | ) |
| Segment operating margin | 22.9 | % | | 24.7 | % | | | | |
Innerwear net sales decreased as strength in our basics business was more than offset by declines in our intimate apparel business. Net sales in our basic apparel increased approximately 50 basis points compared to the same period a year ago driven by improving point-of-sale trends and strength in men’s underwear and women’s panties, which more than offset the expected short-term pressure from door closures. In addition, we are seeing a strong reception to our latest innovation, Comfort Flex Fit. Net sales across our intimate apparel business decreased, primarily driven by declines in the off-price retail and mass merchant channels.
Innerwear operating margin was 22.9%, representing a decline from the same period a year ago due to the impact from higher raw material costs and product mix, which was partially offset by lower selling, general and administrative expenses as a result of our prior year’s corporate headcount reduction efforts.
Activewear
|
| | | | | | | | | | | | | | |
| | Quarter Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 405,785 |
| | $ | 379,756 |
| | $ | 26,029 |
| | 6.9 | % |
| Segment operating profit | 57,508 |
| | 58,972 |
| | (1,464 | ) | | (2.5 | ) |
| Segment operating margin | 14.2 | % | | 15.5 | % | | | | |
Activewear net sales increased as a result of our acquisition of Alternative Apparel in 2017, which contributed incremental net sales of $20 million, as well as approximately 1.5% increase in net sales among our Champion and licensed sports apparel businesses. Core Champion sales, which we define as Champion sales outside of the mass retail channel, were up nearly 73% in the quarter driven by strong consumer demand, space gains in the sports specialty channels and growth in the online channel. Growth in core Champion sales and licensed sports apparel in the mass channel more than offset the decline in the Champion mass business, which we believe is mature, and the decline in our Hanes activewear business, within the mass retail channel, due to space reductions.
Activewear operating margin was 14.2%, representing a decline from prior year as favorable product mix and cost savings associated with prior year’s corporate headcount reduction efforts were offset by higher raw material costs, start-up manufacturing inefficiencies and higher distribution costs.
International
|
| | | | | | | | | | | | | | |
| | Quarter Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 545,862 |
| | $ | 475,242 |
| | $ | 70,620 |
| | 14.9 | % |
| Segment operating profit | 76,558 |
| | 60,147 |
| | 16,411 |
| | 27.3 |
|
| Segment operating margin | 14.0 | % | | 12.7 | % | | | | |
Net sales in the International segment were higher as a result of the following:
Our acquisition of Bras N Things in the first quarter of 2018, which contributed incremental net sales of nearly $32 million;
Increased net sales driven by our global Champion sales growth, primarily in the Europe and Asia markets; and
FavorableUnfavorable impact of foreign currency exchange rates of approximately $16$80 million.
International operating margin was 14.0%14.3%, an increase from prior year period of 13.8%, primarily due to scaleincreased efficiencies and continued realization of acquisition synergies coupled with high margin contributions from the recently acquired Bras N Things business.
Other
|
| | | | | | | | | | | | | | |
| | Quarter Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 69,102 |
| | $ | 72,606 |
| | $ | (3,504 | ) | | (4.8 | )% |
| Segment operating profit | 7,160 |
| | 7,716 |
| | (556 | ) | | (7.2 | ) |
| Segment operating margin | 10.4 | % | | 10.6 | % | | | | |
Other net sales were lower as a result of slower traffic at our outlet stores. Operating margin decreased slightly due to decrease in sales volume offset partially by continued cost savings efforts.
Corporate
Corporate expenses included certain administrative costs and acquisition, integration and other action-related charges. Acquisition, integration and other action-related 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. Smaller acquisitions and other action-
related costs include acquisition and integration charges for our smaller acquisitions such as Alternative Apparel, as well as other action-related costs related to supply chain network changes.
|
| | | | | | | |
| | Quarter Ended |
| | June 30,
2018 | | July 1,
2017 |
| | (dollars in thousands) |
| Acquisition, integration and other action-related costs: |
| | |
| Hanes Europe Innerwear | $ | 8,455 |
| | $ | 10,514 |
|
| Hanes Australasia | 6,647 |
| | 5,970 |
|
| Bras N Things | 2,031 |
| | — |
|
| Champion Europe | 1,078 |
| | 4,399 |
|
| Smaller acquisitions and other action-related costs | 6,954 |
| | 5,179 |
|
| Total acquisition, integration and other action-related costs | $ | 25,165 |
| | $ | 26,062 |
|
Condensed Consolidated Results of Operations — Six Months EndedJune 30, 2018 Compared with Six Months EndedJuly 1, 2017
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 3,186,947 |
| | $ | 3,026,965 |
| | $ | 159,982 |
| | 5.3 | % |
| Cost of sales | 1,948,070 |
| | 1,841,532 |
| | 106,538 |
| | 5.8 |
|
| Gross profit | 1,238,877 |
| | 1,185,433 |
| | 53,444 |
| | 4.5 |
|
| Selling, general and administrative expenses | 872,756 |
| | 825,299 |
| | 47,457 |
| | 5.8 |
|
| Operating profit | 366,121 |
| | 360,134 |
| | 5,987 |
| | 1.7 |
|
| Other expenses | 12,331 |
| | 12,967 |
| | (636 | ) | | (4.9 | ) |
| Interest expense, net | 94,193 |
| | 86,267 |
| | 7,926 |
| | 9.2 |
|
| Income from continuing operations before income tax expense | 259,597 |
| | 260,900 |
| | (1,303 | ) | | (0.5 | ) |
| Income tax expense | 39,555 |
| | 15,654 |
| | 23,901 |
| | 152.7 |
|
| Income from continuing operations | 220,042 |
| | 245,246 |
| | (25,204 | ) | | (10.3 | ) |
| Loss from discontinued operations, net of tax | — |
| | (2,097 | ) | | 2,097 |
| | NM |
|
| Net income | $ | 220,042 |
| | $ | 243,149 |
| | $ | (23,107 | ) | | (9.5 | )% |
Net Sales
Net sales increased 5% in the six months of 2018 compared to the same period of 2017 as a result of the following:
Acquisitions of Bras N Things in 2018 and Alternative Apparel in 2017, which added incremental net sales of $84 million in the six months of 2018;
Organic sales on a constant currency basis, defined as sales excluding the impact of foreign currency and businesses acquired within 12 months, increased approximately 50 basis points in the six months of 2018 driven by strong growth in our global Champion and online sales, offset in part by declines in our intimate apparel and Hanes activewear businesses; and
Favorable impact from foreign exchange rates in our International businesses of approximately $60 million.
Gross Profit
Gross profit as a percentage of sales for the six months of 2018 was 38.9%, a decrease from the same period of the prior year of approximately 30 basis points. The gross margin decreased as expansion in our international gross margin and continued realization of acquisition synergies were more than offset by higher input costs and higher acquisition, integration and other action-related charges. Included in gross profit in the six months of 2018 and 2017 are charges of $22 million and $20 million, respectively, related to acquisition, integration and other action-related costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 27.4% for the six months of 2018 compared to 27.3% in the same period of 2017. Included in selling, general and administrative expenses were charges of $23
million and $45 million of acquisition, integration and other action-related costs for the six months of 2018 and 2017, respectively. Selling, general and administrative expenses, as a percentage of net sales, increased slightly due to higher distribution expenses from short term labor inefficiencies and higher proportion of selling, general and administrative costs at our recently acquired businesses, offset partially by continued realization of acquisition synergies, lower acquisition, integration and other action-related costs for the six months of 2018 compared to 2017 and cost savings realized from the corporate headcount reduction efforts in 2017.
Other Highlights
Interest Expense – higher by $8 million for the six months of 2018 compared to 2017 primarily due to higher debt balances and higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 3.81% for the six months of 2018 and 3.75% for the six months of 2017.
Income Tax Expense – our effective income tax rate was 15.2% and 6.0% for the six months of 2018 and 2017, respectively. The higher effective income tax rate for the six months of 2018 compared to 2017 was primarily due to certain provisions of the Tax Act, specifically the base-broadening provision which imposed a new minimum tax on GILTI.
Discontinued Operations – the results of our discontinued operations include the operations of two businesses, Dunlop Flooring and Tontine Pillow, which were purchased in the Hanes Australasia acquisition in 2016 and sold during the first quarter of 2017.
Operating Results by Business Segment — Six Months EndedJune 30, 2018 Compared with Six Months EndedJuly 1, 2017
|
| | | | | | | | | | | | | | | |
| | Net Sales | | Operating Profit |
| | Six Months Ended | | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | | June 30,
2018 | | July 1,
2017 |
| | (dollars in thousands) |
| Innerwear | $ | 1,185,772 |
| | $ | 1,224,196 |
| | $ | 260,548 |
| | $ | 294,250 |
|
| Activewear | 751,910 |
| | 707,099 |
| | 95,795 |
| | 102,322 |
|
| International | 1,115,749 |
| | 952,640 |
| | 153,619 |
| | 112,809 |
|
| Other | $ | 133,516 |
| | 143,030 |
| | 9,787 |
| | 10,344 |
|
| Corporate | — |
| | — |
| | (153,628 | ) | | (159,591 | ) |
| Total | $ | 3,186,947 |
| | $ | 3,026,965 |
| | $ | 366,121 |
| | $ | 360,134 |
|
Innerwear
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 1,185,772 |
| | $ | 1,224,196 |
| | $ | (38,424 | ) | | (3.1 | )% |
| Segment operating profit | 260,548 |
| | 294,250 |
| | (33,702 | ) | | (11.5 | ) |
| Segment operating margin | 22.0 | % | | 24.0 | % | | | | |
Innerwear net sales decreased due to softness in our intimate apparel business. Net sales in our basic apparel business remained flat to slightly up compared to the same period a year ago driven by strength in our men’s underwear and women’s panties businesses. Net sales across our intimate apparel businesses declined primarily driven by decreased sales within the off-price retail and mass merchant channels and continued impact from mid-tier and department store door closures.
Innerwear operating margin was 22.0%, representing a reduction from the same period a year ago due to the impact from higher raw material costs and product mix, which was partially offset by lower selling, general and administrative expenses as a result of our prior year’s corporate headcount reduction efforts.
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 751,910 |
| | $ | 707,099 |
| | $ | 44,811 |
| | 6.3 | % |
| Segment operating profit | 95,795 |
| | 102,322 |
| | (6,527 | ) | | (6.4 | ) |
| Segment operating margin | 12.7 | % | | 14.5 | % | | | | |
Activewear net sales increased as a result of our acquisition of Alternative Apparel in 2017, which contributed incremental net sales in 2018 of $36 million, as well as approximately 1% increase in net sales among our other activewear businesses. Core Champion sales, which we define as Champion sales outside of the mass retail channel, were up in excess of 60% in the six months driven by strong consumer demand, space gains in the sports specialty channels and growth in the online channel. Growth in core Champion sales more than offset declines in the Champion at mass business, which we believe is mature, and the decline in our Hanes activewear business, within the mass retail channel, due to space reductions.
Activewear operating margin was 12.7%, representing a decline from prior year as favorable product mix and cost savings associated with prior year’s corporate headcount reduction efforts were more than offset by higher raw material costs, higher distribution costs driven by labor inefficiencies and higher proportion of selling, general and administrative expenses from our recently acquired businesses.
International
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 1,115,749 |
| | $ | 952,640 |
| | $ | 163,109 |
| | 17.1 | % |
| Segment operating profit | 153,619 |
| | 112,809 |
| | 40,810 |
| | 36.2 |
|
| Segment operating margin | 13.8 | % | | 11.8 | % | | | | |
Net sales in the International segment were higher as a result of the following:
Our acquisition of Bras N Things in the first quarter of 2018, which contributed incremental net sales of $48 million;
Increased net sales driven by our global Champion sales growth, primarily in the Europe and Asia markets; and
Favorable impact of foreign currency exchange rates of approximately $60 million.
International operating margin was 13.8%, an increase from prior year primarily due to scale efficiencies, favorable mix and the continued realization of acquisition synergies, coupled with high margin contributions from the recently acquired Bras N Things business.
|
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30,
2018 | | July 1,
2017 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) |
| Net sales | $ | 133,516 |
| | $ | 143,030 |
| | $ | (9,514 | ) | | (6.7 | )% |
| Segment operating profit | 9,787 |
| | 10,344 |
| | (557 | ) | | (5.4 | ) |
| Segment operating margin | 7.3 | % | | 7.2 | % | | | | |
Other net sales were lower as a result of continued declines in hosiery sales in the U.S.United States and slower traffic at our outlet stores. Operating margin increased slightly as a result of our continued cost control more than offsettingdecreased due to the lowerdecrease in sales volume.
Corporate
Corporate expenses were higher in the six months of 2019 compared to the same period in 2018 primarily due to higher variable compensation accruals and higher bad debt expense. Corporate expenses included certain administrative costs, andincluding acquisition, integration and other action-related charges. Supply chain actions include the reduction of overhead costs, principally within our Western Hemisphere network. Acquisition integration and other action-relatedintegration 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. SmallerOther acquisitions and other action-related costs include acquisition and integration charges for our smaller acquisitions such as Alternative Apparel,Bras N Things, as well as other action-related costs related to supply chain network changes.including corporate workforce reductions.
| | | | Six Months Ended | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | June 29,
2019 | | June 30,
2018 |
| | (dollars in thousands) | (dollars in thousands) |
| Acquisition, integration and other action-related costs: | | | | | | |
| Supply chain actions | | $ | 30,290 |
| | $ | — |
|
| Hanes Europe Innerwear | $ | 17,031 |
| | $ | 30,392 |
| — |
| | 17,031 |
|
| Hanes Australasia | 12,739 |
| | 17,978 |
| — |
| | 12,739 |
|
| Bras N Things | 3,276 |
| | — |
| |
| Champion Europe | 2,958 |
| | 5,567 |
| |
| Smaller acquisitions and other action-related costs | 8,778 |
| | 10,492 |
| |
| Other acquisitions and other action-related costs | | 3,692 |
| | 15,012 |
|
| Total acquisition, integration and other action-related costs | $ | 44,782 |
| | $ | 64,429 |
| $ | 33,982 |
| | $ | 44,782 |
|
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 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.
We had the following borrowing capacity and availability under our credit facilities as of June 30, 2018:
|
| | | | | | | |
| | As of June 30, 2018 |
Borrowing Capacity | | Borrowing Availability |
| | (dollars in thousands) |
| Senior Secured Credit Facility: | | | |
| Revolving Loan Facility | $ | 1,000,000 |
| | $ | 507,915 |
|
| Australian Revolving Loan Facility | 47,710 |
| | 47,710 |
|
| European Revolving Loan Facility | 116,850 |
| | — |
|
Accounts Receivable Securitization Facility1 | 200,000 |
| | — |
|
| Other international credit facilities | 179,443 |
| | 120,726 |
|
| Total liquidity from credit facilities | $ | 1,544,003 |
| | $ | 676,351 |
|
1Borrowing availability under the Accounts Receivable Securitization Facility is subject to a quarterly fluctuating facility limit, not to exceed $225 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable reserves and other deductions, exceeds the outstanding loans.
At June 30, 2018, we had $398 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 Bras N Things in February 2018 and Alternative Apparel in October 2017 and we may pursue additional strategic business acquisitions in the future;
we expect to continue to invest in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building;
contributions to our pension plans;
our Board of Directors has authorized a regular quarterly dividend; and
our Board of Directors has authorized share repurchases.
Dividends
In January and April 2018, our Board of Directors declared a regular quarterly dividend of $0.15 per share, which were paid in March and June 2018. On July 24, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding shares of common stock to be paid on September 5, 2018 to stockholders of record at the close of business on August 14, 2018.
Share Repurchase Program
In April 2016, our Board of Directors approved the current 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. We did not repurchase any shares during the six months ended June 30, 2018. For the six months ended July 1, 2017 we repurchased approximately 15 million shares at a weighted average purchase price of $20.39. The shares were repurchased at a total cost of $300 million. At June 30, 2018, the remaining repurchase authorization totaled approximately 20 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. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, business acquisitions, contributions to our pension plans, repurchases of our stock, and regular quarterly dividend payments and income tax payments. We believe we have sufficient cash and available borrowings for our foreseeable liquidity needs.
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. We expect our top priorities of our cash deployment strategy in the future to include organic growth (via capital expenditures), debt prepayments and dividends. After funding those priorities, to the extent there is remaining cash or borrowing capacity available, we generally intend to invest in strategic acquisitions and share repurchases.
There have been no significant changes in the cash requirements for our business from those described in our Annual Report on Form 10-K for the year ended December 29, 2018.
Our primary sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international loan facilities, including our Australian Revolving Loan Facility and our European Revolving Loan Facility.
We had the following borrowing capacity and availability under our credit facilities as of June 29, 2019:
|
| | | | | | | |
| | As of June 29, 2019 |
Borrowing Capacity | | Borrowing Availability |
| | (dollars in thousands) |
| Senior Secured Credit Facility: | | | |
| Revolving Loan Facility | $ | 1,000,000 |
| | $ | 815,665 |
|
| Australian Revolving Loan Facility | 41,911 |
| | 41,911 |
|
| European Revolving Loan Facility | 113,701 |
| | — |
|
Accounts Receivable Securitization Facility(1) | 190,311 |
| | — |
|
| Other international credit facilities | 127,025 |
| | 96,609 |
|
| Total liquidity from credit facilities | $ | 1,472,948 |
| | $ | 954,185 |
|
| |
| (1) | Borrowing availability under the Accounts Receivable Securitization Facility is subject to a quarterly fluctuating facility limit, not to exceed $300 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. |
We currently believe that our existing cash balances and cash generated by operations (typically in the second half of the year), together with our borrowing availability, 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 may pursue strategic business acquisitions in the future.
We expect to continue to invest in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
We expect to continue to invest in efforts to improve operating efficiencies and lower costs.
We made a contribution of $26 million to our U.S. pension plan in the six months ended June 29, 2019.
We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. We have also reevaluated our reinvestment strategy with regards to our historic earnings which were taxed as part of the Tax Cuts and Jobs Act and intend to remit foreign earnings totaling $1.5 billion.
We are obligated to make installment payments over an eight-year period related to our transition tax liability resulting from the implementation of the Tax Cuts and Jobs Act, which began in 2018, in addition to any estimated income taxes due based on current year taxable income. In the six months ended June 29, 2019 and June 30, 2017.2018, we made installment payments of $7 million and $13 million, respectively, on our transition tax liability and have a remaining balance due of approximately $100 million to be paid in installment payments through 2025.
Our Board of Directors has authorized a regular quarterly dividend.
We may repurchase shares of the Company’s common stock under the current share repurchase program, which has been previously approved by our Board of Directors. We did not repurchase any shares of common stock during the six months ended June 29, 2019 and June 30, 2018. At June 29, 2019, the remaining repurchase authorization totaled approximately 20 million shares.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the six months ended June 29, 2019 and June 30, 2018 and July 1, 2017 was derived from our condensed consolidated financial statements.
| | | | Six Months Ended | Six Months Ended |
| | June 30,
2018 | | July 1,
2017 | June 29,
2019 | | June 30,
2018 |
| | (dollars in thousands) | (dollars in thousands) |
| Operating activities | $ | (64,398 | ) | | $ | 34,250 |
| $ | (57,363 | ) | | $ | (64,398 | ) |
| Investing activities | (373,716 | ) | | 13,301 |
| (57,767 | ) | | (373,716 | ) |
| Financing activities | 417,883 |
| | (55,211 | ) | (64,221 | ) | | 417,883 |
|
| Effect of changes in foreign currency exchange rates on cash | 20,176 |
| | (3,170 | ) | 4,282 |
| | 20,176 |
|
| Change in cash, cash equivalents and restricted cash | (55 | ) | | (10,830 | ) | (175,069 | ) | | (55 | ) |
| Cash and cash equivalents at beginning of year | 421,566 |
| | 460,245 |
| |
| Cash, cash equivalents and restricted cash at beginning of year | | 455,732 |
| | 421,566 |
|
| Cash, cash equivalents and restricted cash at end of period | 421,511 |
| | 449,415 |
| 280,663 |
| | 421,511 |
|
| Less restricted cash at end of period | 23,540 |
| | — |
| 22,722 |
| | 23,540 |
|
| Cash and cash equivalents per balance sheet at end of period | $ | 397,971 |
| | $ | 449,415 |
| $ | 257,941 |
| | $ | 397,971 |
|
Operating Activities
Our overall liquidity is primarily driven by our strong 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 higherlower net cash used by operating activities iswas due to higher profitability partially offset by working capital changes. Cash used by operating activities included a $26 million pension contribution made in the first quarter of 2019. Cash used by operating in the six months ended June 30, 2018 included the final Champion Europe contingent consideration payment of $32 million made in the first quarter of 2018 theand a $15 million pension contribution in the second quarter of 2018 and increased inventory levels to support our second half sales projections, offset partially by improved payable terms.2018.
Investing Activities
The increased netdecrease in cash used by investing activities iswas primarily the result of the acquisition of Bras N Things in the first quarter of 2018 and an2018. We increased capital investmentinvestments into our business to support our global growth. Cash received from investing activities in 2017 was driven bygrowth compared to the dispositions of the Dunlop Flooring and Tontine Pillow businesses which were acquired in conjunction with the Hanes Australasia acquisition.
prior year.
Financing Activities
The increased netNet cash from financing activities wasdecreased primarily theas a result of less cash outflows for share repurchases and higherlower borrowings on our loan facilities in 20182019 as compared to the same period of 2017.2018 and our payment of the outstanding balance and termination of the Australian Term A-1 loan in the second quarter of 2019.
Financing Arrangements
In March 2018,2019, we amended the Accounts Receivable Securitization Facility. This amendment primarily increased the fluctuating facility limit to $300 million (previously $225 million) and extended the maturity date to March 2019. In June 2018, the Company amended the Accounts Receivable Securitization Facility2020.
We believe our financing structure provides a secure base to remove certain receivables from being pledged as collateral for the facility.
support our operations and key business strategies. As of June 30, 2018,29, 2019, 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. We expect to maintain compliance with theseour covenants for the foreseeable future, 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 30, 201729, 2018 or other SEC filings could cause noncompliance.
In July 2019, we entered into two cross-currency swaps with a total notional amount of €300 million in order to hedge the currency fluctuation impact of our net investment in our European businesses. The swaps are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. These instruments will mature in 2024. The execution of the swaps had no impact on the financial statements for the quarter ended June 29, 2019. As part of the ongoing accounting for these derivative instruments, we will determine the fair value and record this amount as an asset or liability each reporting period. We have elected to utilize hedge accounting, which will result in the change in fair value of the derivatives to be recorded as an adjustment to equity. We anticipate lower interest expense in the second half of 2019 due to lower interest rates as a result of entering into the cross-currency swaps.
In July 2019, we refinanced the European Revolving Loan Facility primarily to extend the maturity date to September 2020.
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 30, 2017.29, 2018.
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 30, 2017.29, 2018. 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 30, 2017.29, 2018.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note 2, “Recent Accounting Pronouncements” to our 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 30, 2017.29, 2018.
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| Item 4. | Controls and Procedures |
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report.Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
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 30, 2017.29, 2018. 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.
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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 |
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2.1 | | |
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| 3.1 | | |
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| 3.2 | | |
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| 3.3 | | |
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| 3.4 | | |
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| 3.5 | | |
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10.1 | | |
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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 |
* 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. |
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| By: | | /s/ Barry A. Hytinen |
| | | Barry A. Hytinen Chief Financial Officer (Duly authorized officer and principal financial officer) |
Date: August 1, 20182, 2019