UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended OctoberApril 1, 20222023
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from �� to
Commission file number: 001-32891
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Maryland | | 20-3552316 |
(State of incorporation) | | (I.R.S. employer identification no.) |
| | |
1000 East Hanes Mill Road | | |
Winston-Salem, | North Carolina | | 27105 |
(Address of principal executive office) | | (Zip code) |
(336) 519-8080
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, Par Value $0.01 | HBI | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ | | | | |
| | | | | | | |
Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 4, 2022,April 28, 2023, there were 348,948,690349,530,266 shares of the registrant’s common stock outstanding.
TABLE OF CONTENTS
| | | | | | | | |
| | Page |
| |
| | |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
PART II | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains information that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “could,” “will,” “expect,” “outlook,” “potential,” “project,” “estimate,” “future,” “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, including statements with respect to trends associated with our business, our multi-year growth strategy (“Full Potential plan”), any potential ongoing effects of the impacts ofCOVID-19 pandemic, including on consumer spending, global supply chains and the financial markets, our ability to deleverage on the anticipated time frame or at all, which could negatively impact our ability to satisfy the financial covenants in our Senior Secured Credit Agreement or other contractual arrangements any inadequacy, interruption, integration failure or security failure with respect to our information technology (including the ransomware attack announced on May 31, 20222022), the contemplated sale of our U.S. Sheer Hosiery business and our future financial performance included in this Quarterly Report on Form 10-Q specifically appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. 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.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 and our Annual Report on Form 10-K for the year ended January 1,December 31, 2022, under the caption “Risk Factors,” and available on the “Investors” section of our corporate website, www.Hanes.com/investors. The contents of our corporate website are not incorporated by reference in this Quarterly Report on Form 10-Q.
PART I
| | | | | |
Item 1. | Financial Statements |
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
| | | Quarters Ended | | Nine Months Ended | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 | |
Net sales | Net sales | $ | 1,670,741 | | | $ | 1,789,551 | | | $ | 4,760,364 | | | $ | 5,048,891 | | Net sales | $ | 1,389,410 | | | $ | 1,576,156 | | |
Cost of sales | Cost of sales | 1,107,889 | | | 1,089,890 | | | 3,041,233 | | | 3,064,920 | | Cost of sales | 939,717 | | | 991,978 | | |
Gross profit | Gross profit | 562,852 | | | 699,661 | | | 1,719,131 | | | 1,983,971 | | Gross profit | 449,693 | | | 584,178 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 421,408 | | | 465,015 | | | 1,259,921 | | | 1,341,809 | | Selling, general and administrative expenses | 392,374 | | | 413,666 | | |
Operating profit | Operating profit | 141,444 | | | 234,646 | | | 459,210 | | | 642,162 | | Operating profit | 57,319 | | | 170,512 | | |
Other expenses | Other expenses | 3,212 | | | 1,811 | | | 6,088 | | | 6,227 | | Other expenses | 14,771 | | | 987 | | |
Interest expense, net | Interest expense, net | 41,721 | | | 40,860 | | | 107,408 | | | 127,760 | | Interest expense, net | 58,452 | | | 31,963 | | |
Income from continuing operations before income tax expense | 96,511 | | | 191,975 | | | 345,714 | | | 508,175 | | |
Income (loss) from continuing operations before income tax expense | | Income (loss) from continuing operations before income tax expense | (15,904) | | | 137,562 | | |
Income tax expense | Income tax expense | 16,410 | | | 15,228 | | | 58,775 | | | 55,161 | | Income tax expense | 18,500 | | | 23,385 | | |
Income from continuing operations | 80,101 | | | 176,747 | | | 286,939 | | | 453,014 | | |
Income (loss) from discontinued operations, net of tax | — | | | (24,970) | | | 3,965 | | | (435,823) | | |
Net income | $ | 80,101 | | | $ | 151,777 | | | $ | 290,904 | | | $ | 17,191 | | |
Income (loss) from continuing operations | | Income (loss) from continuing operations | (34,404) | | | 114,177 | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | — | | | 4,525 | | |
Net income (loss) | | Net income (loss) | $ | (34,404) | | | $ | 118,702 | | |
| Earnings (loss) per share - basic: | Earnings (loss) per share - basic: | | Earnings (loss) per share - basic: | | |
Continuing operations | Continuing operations | $ | 0.23 | | | $ | 0.50 | | | $ | 0.82 | | | $ | 1.29 | | Continuing operations | $ | (0.10) | | | $ | 0.33 | | |
Discontinued operations | Discontinued operations | 0.00 | | | (0.07) | | | 0.01 | | | (1.24) | | Discontinued operations | 0.00 | | | 0.01 | | |
Net income | $ | 0.23 | | | $ | 0.43 | | | $ | 0.83 | | | $ | 0.05 | | |
Net income (loss) | | Net income (loss) | $ | (0.10) | | | $ | 0.34 | | |
| Earnings (loss) per share - diluted: | Earnings (loss) per share - diluted: | | Earnings (loss) per share - diluted: | | |
Continuing operations | Continuing operations | $ | 0.23 | | | $ | 0.50 | | | $ | 0.82 | | | $ | 1.29 | | Continuing operations | $ | (0.10) | | | $ | 0.32 | | |
Discontinued operations | Discontinued operations | 0.00 | | | (0.07) | | | 0.01 | | | (1.24) | | Discontinued operations | 0.00 | | | 0.01 | | |
Net income | $ | 0.23 | | | $ | 0.43 | | | $ | 0.83 | | | $ | 0.05 | | |
Net income (loss) | | Net income (loss) | $ | (0.10) | | | $ | 0.34 | | |
See accompanying notes to Condensed Consolidated Financial Statements.
2
HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Net income | $ | 80,101 | | | $ | 151,777 | | | $ | 290,904 | | | $ | 17,191 | |
Other comprehensive income (loss): | | | | | | | |
Translation adjustments | (76,756) | | | (42,330) | | | (171,581) | | | (78,762) | |
Unrealized gain on qualifying cash flow hedges, net of tax of $(1,013), $(2,637), $(3,702) and $(8,953), respectively | 2,573 | | | 7,124 | | | 10,983 | | | 18,520 | |
Unrecognized income from pension and postretirement plans, net of tax of $(1,438), $(1,647), $(4,190) and $(5,262), respectively | 4,022 | | | 4,806 | | | 12,278 | | | 15,873 | |
Total other comprehensive loss | (70,161) | | | (30,400) | | | (148,320) | | | (44,369) | |
Comprehensive income (loss) | $ | 9,940 | | | $ | 121,377 | | | $ | 142,584 | | | $ | (27,178) | |
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Net income (loss) | $ | (34,404) | | | $ | 118,702 | | | | | |
Other comprehensive income (loss): | | | | | | | |
Translation adjustments | (9,056) | | | 27,297 | | | | | |
Unrealized gain (loss) on qualifying cash flow hedges, net of tax of $941 and $969, respectively | (21,644) | | | 3,354 | | | | | |
Unrecognized income from pension and postretirement plans, net of tax of $121 and $(1,317), respectively | 4,186 | | | 4,261 | | | | | |
Total other comprehensive income (loss) | (26,514) | | | 34,912 | | | | | |
Comprehensive income (loss) | $ | (60,918) | | | $ | 153,614 | | | | | |
See accompanying notes to Condensed Consolidated Financial Statements.
3
HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(unaudited)
| | | October 1, 2022 | | January 1, 2022 | | October 2, 2021 | | April 1, 2023 | | December 31, 2022 | | April 2, 2022 |
Assets | Assets | | | | | | Assets | | | | | |
Cash and cash equivalents | Cash and cash equivalents | $ | 253,131 | | | $ | 536,277 | | | $ | 873,628 | | Cash and cash equivalents | $ | 213,209 | | | $ | 238,413 | | | $ | 369,210 | |
Trade accounts receivable, net | Trade accounts receivable, net | 926,666 | | | 894,151 | | | 928,039 | | Trade accounts receivable, net | 681,921 | | | 721,396 | | | 898,420 | |
Inventories | Inventories | 2,136,314 | | | 1,584,015 | | | 1,629,506 | | Inventories | 1,969,133 | | | 1,979,672 | | | 1,819,974 | |
Other current assets | Other current assets | 223,741 | | | 186,503 | | | 172,617 | | Other current assets | 159,724 | | | 178,946 | | | 202,015 | |
Current assets held for sale | Current assets held for sale | 14,906 | | | 327,157 | | | 304,124 | | Current assets held for sale | 4,986 | | | 13,327 | | | 7,959 | |
Total current assets | Total current assets | 3,554,758 | | | 3,528,103 | | | 3,907,914 | | Total current assets | 3,028,973 | | | 3,131,754 | | | 3,297,578 | |
Property, net | Property, net | 443,166 | | | 441,401 | | | 440,804 | | Property, net | 442,315 | | | 442,404 | | | 443,817 | |
Right-of-use assets | Right-of-use assets | 335,473 | | | 363,854 | | | 372,212 | | Right-of-use assets | 454,643 | | | 414,894 | | | 350,174 | |
Trademarks and other identifiable intangibles, net | Trademarks and other identifiable intangibles, net | 1,210,581 | | | 1,220,170 | | | 1,227,457 | | Trademarks and other identifiable intangibles, net | 1,241,624 | | | 1,255,693 | | | 1,235,276 | |
Goodwill | Goodwill | 1,084,581 | | | 1,133,095 | | | 1,136,173 | | Goodwill | 1,106,590 | | | 1,108,907 | | | 1,138,667 | |
Deferred tax assets | Deferred tax assets | 328,778 | | | 327,804 | | | 327,196 | | Deferred tax assets | 21,732 | | | 20,162 | | | 326,677 | |
Other noncurrent assets | Other noncurrent assets | 141,944 | | | 57,009 | | | 51,049 | | Other noncurrent assets | 136,803 | | | 130,062 | | | 67,520 | |
Total assets | Total assets | $ | 7,099,281 | | | $ | 7,071,436 | | | $ | 7,462,805 | | Total assets | $ | 6,432,680 | | | $ | 6,503,876 | | | $ | 6,859,709 | |
| Liabilities and Stockholders’ Equity | Liabilities and Stockholders’ Equity | | Liabilities and Stockholders’ Equity | |
Accounts payable | Accounts payable | $ | 1,130,649 | | | $ | 1,214,847 | | | $ | 1,239,960 | | Accounts payable | $ | 965,630 | | | $ | 917,481 | | | $ | 1,204,196 | |
Accrued liabilities | Accrued liabilities | 594,333 | | | 660,778 | | | 718,545 | | Accrued liabilities | 474,840 | | | 498,028 | | | 575,911 | |
Lease liabilities | Lease liabilities | 99,405 | | | 109,526 | | | 122,545 | | Lease liabilities | 100,266 | | | 114,794 | | | 117,465 | |
| Accounts Receivable Securitization Facility | Accounts Receivable Securitization Facility | 211,500 | | | — | | | — | | Accounts Receivable Securitization Facility | 166,000 | | | 209,500 | | | 135,500 | |
Current portion of long-term debt | Current portion of long-term debt | 31,250 | | | 25,000 | | | 37,500 | | Current portion of long-term debt | 52,750 | | | 37,500 | | | 25,000 | |
Current liabilities held for sale | Current liabilities held for sale | 14,906 | | | 316,902 | | | 299,498 | | Current liabilities held for sale | 4,986 | | | 13,327 | | | 7,959 | |
Total current liabilities | Total current liabilities | 2,082,043 | | | 2,327,053 | | | 2,418,048 | | Total current liabilities | 1,764,472 | | | 1,790,630 | | | 2,066,031 | |
Long-term debt | Long-term debt | 3,655,889 | | | 3,326,091 | | | 3,626,547 | | Long-term debt | 3,588,945 | | | 3,612,077 | | | 3,325,042 | |
Lease liabilities - noncurrent | Lease liabilities - noncurrent | 260,349 | | | 281,852 | | | 276,595 | | Lease liabilities - noncurrent | 379,365 | | | 326,644 | | | 258,663 | |
Pension and postretirement benefits | Pension and postretirement benefits | 230,087 | | | 248,518 | | | 321,323 | | Pension and postretirement benefits | 113,649 | | | 116,167 | | | 242,690 | |
Other noncurrent liabilities | Other noncurrent liabilities | 196,029 | | | 185,429 | | | 183,723 | | Other noncurrent liabilities | 246,723 | | | 260,094 | | | 187,867 | |
Total liabilities | Total liabilities | 6,424,397 | | | 6,368,943 | | | 6,826,236 | | Total liabilities | 6,093,154 | | | 6,105,612 | | | 6,080,293 | |
| Stockholders’ equity: | Stockholders’ equity: | | Stockholders’ equity: | |
Preferred stock (50,000,000 authorized shares; $.01 par value) | Preferred stock (50,000,000 authorized shares; $.01 par value) | | Preferred stock (50,000,000 authorized shares; $.01 par value) | |
Issued and outstanding — None | Issued and outstanding — None | — | | | — | | | — | | Issued and outstanding — None | — | | | — | | | — | |
Common stock (2,000,000,000 authorized shares; $.01 par value) | Common stock (2,000,000,000 authorized shares; $.01 par value) | | Common stock (2,000,000,000 authorized shares; $.01 par value) | |
Issued and outstanding — 348,948,690, 349,903,253 and 349,204,407, respectively | 3,489 | | | 3,499 | | | 3,492 | | |
Issued and outstanding — 349,530,266, 349,009,147 and 348,775,722, respectively | | Issued and outstanding — 349,530,266, 349,009,147 and 348,775,722, respectively | 3,495 | | | 3,490 | | | 3,488 | |
Additional paid-in capital | Additional paid-in capital | 328,072 | | | 315,337 | | | 316,112 | | Additional paid-in capital | 336,851 | | | 334,676 | | | 315,675 | |
Retained earnings | Retained earnings | 1,043,246 | | | 935,260 | | | 928,293 | | Retained earnings | 537,702 | | | 572,106 | | | 976,944 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (699,923) | | | (551,603) | | | (611,328) | | Accumulated other comprehensive loss | (538,522) | | | (512,008) | | | (516,691) | |
Total stockholders’ equity | Total stockholders’ equity | 674,884 | | | 702,493 | | | 636,569 | | Total stockholders’ equity | 339,526 | | | 398,264 | | | 779,416 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 7,099,281 | | | $ | 7,071,436 | | | $ | 7,462,805 | | Total liabilities and stockholders’ equity | $ | 6,432,680 | | | $ | 6,503,876 | | | $ | 6,859,709 | |
See accompanying notes to Condensed Consolidated Financial Statements.
4
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at July 2, 2022 | 348,826 | | | $ | 3,488 | | | $ | 322,305 | | | $ | 1,016,140 | | | $ | (629,762) | | | $ | 712,171 | |
Net income | — | | | — | | | — | | | 80,101 | | | — | | | 80,101 | |
Dividends ($0.15 per common share) | — | | | — | | | — | | | (52,995) | | | — | | | (52,995) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (70,161) | | | (70,161) | |
Stock-based compensation | — | | | — | | | 5,593 | | | — | | | — | | | 5,593 | |
Net exercise of stock options, vesting of restricted stock units and other | 123 | | | 1 | | | 174 | | | — | | | — | | | 175 | |
Balances at October 1, 2022 | 348,949 | | | $ | 3,489 | | | $ | 328,072 | | | $ | 1,043,246 | | | $ | (699,923) | | | $ | 674,884 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at December 31, 2022 | 349,009 | | | $ | 3,490 | | | $ | 334,676 | | | $ | 572,106 | | | $ | (512,008) | | | $ | 398,264 | |
Net loss | — | | | — | | | — | | | (34,404) | | | — | | | (34,404) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (26,514) | | | (26,514) | |
Stock-based compensation | — | | | — | | | 3,700 | | | — | | | — | | | 3,700 | |
Net exercise of stock options, vesting of restricted stock units and other | 521 | | | 5 | | | (1,525) | | | — | | | — | | | (1,520) | |
Balances at April 1, 2023 | 349,530 | | | $ | 3,495 | | | $ | 336,851 | | | $ | 537,702 | | | $ | (538,522) | | | $ | 339,526 | |
| | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | | Shares | | Amount | |
Balances at January 1, 2022 | Balances at January 1, 2022 | 349,903 | | | $ | 3,499 | | | $ | 315,337 | | | $ | 935,260 | | | $ | (551,603) | | | $ | 702,493 | | Balances at January 1, 2022 | 349,903 | | | $ | 3,499 | | | $ | 315,337 | | | $ | 935,260 | | | $ | (551,603) | | | $ | 702,493 | |
Net income | Net income | — | | | — | | | — | | | 290,904 | | | — | | | 290,904 | | Net income | — | | | — | | | — | | | 118,702 | | | — | | | 118,702 | |
Dividends ($0.45 per common share) | — | | | — | | | — | | | (159,343) | | | — | | | (159,343) | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (148,320) | | | (148,320) | | |
Dividends ($0.15 per common share) | | Dividends ($0.15 per common share) | — | | | — | | | — | | | (53,443) | | | — | | | (53,443) | |
Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 34,912 | | | 34,912 | |
Stock-based compensation | Stock-based compensation | — | | | — | | | 16,949 | | | — | | | — | | | 16,949 | | Stock-based compensation | — | | | — | | | 5,329 | | | — | | | — | | | 5,329 | |
Net exercise of stock options, vesting of restricted stock units and other | Net exercise of stock options, vesting of restricted stock units and other | 623 | | | 6 | | | (2,787) | | | — | | | — | | | (2,781) | | Net exercise of stock options, vesting of restricted stock units and other | 450 | | | 5 | | | (3,564) | | | — | | | — | | | (3,559) | |
Share repurchases | Share repurchases | (1,577) | | | (16) | | | (1,427) | | | (23,575) | | | — | | | (25,018) | | Share repurchases | (1,577) | | | (16) | | | (1,427) | | | (23,575) | | | — | | | (25,018) | |
Balances at October 1, 2022 | 348,949 | | | $ | 3,489 | | | $ | 328,072 | | | $ | 1,043,246 | | | $ | (699,923) | | | $ | 674,884 | | |
Balances at April 2, 2022 | | Balances at April 2, 2022 | 348,776 | | | $ | 3,488 | | | $ | 315,675 | | | $ | 976,944 | | | $ | (516,691) | | | $ | 779,416 | |
See accompanying notes to Condensed Consolidated Financial Statements.
5
HANESBRANDS INC.
Condensed Consolidated Statements of Stockholders’ Equity (Continued)
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at July 3, 2021 | 349,115 | | | $ | 3,491 | | | $ | 310,148 | | | $ | 829,479 | | | $ | (580,928) | | | $ | 562,190 | |
Net income | — | | | — | | | — | | | 151,777 | | | — | | | 151,777 | |
Dividends ($0.15 per common share) | — | | | — | | | — | | | (52,963) | | | — | | | (52,963) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (30,400) | | | (30,400) | |
Stock-based compensation | — | | | — | | | 6,079 | | | — | | | — | | | 6,079 | |
Net exercise of stock options, vesting of restricted stock units and other | 89 | | | 1 | | | (115) | | | — | | | — | | | (114) | |
Balances at October 2, 2021 | 349,204 | | | $ | 3,492 | | | $ | 316,112 | | | $ | 928,293 | | | $ | (611,328) | | | $ | 636,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| Shares | | Amount | |
Balances at January 2, 2021 | 348,802 | | | $ | 3,488 | | | $ | 307,883 | | | $ | 1,069,546 | | | $ | (566,959) | | | $ | 813,958 | |
Net income | — | | | — | | | — | | | 17,191 | | | — | | | 17,191 | |
Dividends ($0.45 per common share) | — | | | — | | | — | | | (158,444) | | | — | | | (158,444) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (44,369) | | | (44,369) | |
Stock-based compensation | — | | | — | | | 9,887 | | | — | | | — | | | 9,887 | |
Net exercise of stock options, vesting of restricted stock units and other | 402 | | | 4 | | | (1,658) | | | — | | | — | | | (1,654) | |
Balances at October 2, 2021 | 349,204 | | | $ | 3,492 | | | $ | 316,112 | | | $ | 928,293 | | | $ | (611,328) | | | $ | 636,569 | |
See accompanying notes to Condensed Consolidated Financial Statements.
6
HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| | | Nine Months Ended | | Quarters Ended |
| | October 1, 2022(1) | | October 2, 2021(1) | | April 1, 2023 | | April 2, 2022(1) |
Operating activities: | Operating activities: | | | | Operating activities: | | | |
Net income | $ | 290,904 | | | $ | 17,191 | | |
Adjustments to reconcile net income to net cash from operating activities: | | |
Net income (loss) | | Net income (loss) | $ | (34,404) | | | $ | 118,702 | |
Adjustments to reconcile net income (loss) to net cash from operating activities: | | Adjustments to reconcile net income (loss) to net cash from operating activities: | |
Depreciation | Depreciation | 56,140 | | | 63,183 | | Depreciation | 17,360 | | | 18,931 | |
Amortization of acquisition intangibles | Amortization of acquisition intangibles | 14,045 | | | 15,696 | | Amortization of acquisition intangibles | 4,186 | | | 4,847 | |
Other amortization | Other amortization | 8,121 | | | 8,610 | | Other amortization | 2,805 | | | 2,508 | |
Impairment of intangible assets and goodwill | — | | | 163,047 | | |
(Gain) loss on sale of business and classification of assets held for sale | (6,185) | | | 266,742 | | |
Amortization of debt issuance costs | 5,483 | | | 10,250 | | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | 8,466 | | | — | |
Gain on sale of business and classification of assets held for sale | | Gain on sale of business and classification of assets held for sale | (2,139) | | | (6,715) | |
Amortization of debt issuance costs and debt discount | | Amortization of debt issuance costs and debt discount | 1,973 | | | 1,887 | |
Other | Other | 11,717 | | | (1,888) | | Other | 5,202 | | | 6,940 | |
Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
Accounts receivable | Accounts receivable | (63,003) | | | (201,925) | | Accounts receivable | 51,643 | | | (6,090) | |
Inventories | Inventories | (612,544) | | | (292,465) | | Inventories | 7,861 | | | (247,567) | |
Other assets | Other assets | (71,613) | | | 7,042 | | Other assets | (10,761) | | | (489) | |
Accounts payable | Accounts payable | (22,289) | | | 391,034 | | Accounts payable | 43,171 | | | (310) | |
Accrued pension and postretirement benefits | Accrued pension and postretirement benefits | (1,066) | | | (40,468) | | Accrued pension and postretirement benefits | 1,479 | | | 24 | |
Accrued liabilities and other | Accrued liabilities and other | (101,392) | | | 121,327 | | Accrued liabilities and other | (52,305) | | | (123,857) | |
Net cash from operating activities | Net cash from operating activities | (491,682) | | | 527,376 | | Net cash from operating activities | 44,537 | | | (231,189) | |
Investing activities: | Investing activities: | | | | Investing activities: | | | |
Capital expenditures | Capital expenditures | (70,955) | | | (55,320) | | Capital expenditures | (24,244) | | | (19,337) | |
Purchase of trademarks | (103,000) | | | — | | |
| Proceeds from sales of assets | Proceeds from sales of assets | 259 | | | 2,479 | | Proceeds from sales of assets | 3 | | | 19 | |
| Other | Other | (5,640) | | | 8,437 | | Other | 18,941 | | | (10,272) | |
Net cash from investing activities | Net cash from investing activities | (179,336) | | | (44,404) | | Net cash from investing activities | (5,300) | | | (29,590) | |
Financing activities: | Financing activities: | | | | Financing activities: | | | |
Borrowings on Term Loan Facilities | | Borrowings on Term Loan Facilities | 891,000 | | | — | |
Repayments on Term Loan Facilities | Repayments on Term Loan Facilities | (18,750) | | | (315,625) | | Repayments on Term Loan Facilities | (6,250) | | | (6,250) | |
Borrowings on Accounts Receivable Securitization Facility | Borrowings on Accounts Receivable Securitization Facility | 1,303,589 | | | — | | Borrowings on Accounts Receivable Securitization Facility | 588,000 | | | 290,000 | |
Repayments on Accounts Receivable Securitization Facility | Repayments on Accounts Receivable Securitization Facility | (1,092,089) | | | — | | Repayments on Accounts Receivable Securitization Facility | (631,500) | | | (154,500) | |
Borrowings on Revolving Loan Facilities | Borrowings on Revolving Loan Facilities | 1,337,500 | | | — | | Borrowings on Revolving Loan Facilities | 421,500 | | | 129,000 | |
Repayments on Revolving Loan Facilities | Repayments on Revolving Loan Facilities | (908,500) | | | — | | Repayments on Revolving Loan Facilities | (461,000) | | | (109,000) | |
Borrowings on Senior Notes | | Borrowings on Senior Notes | 600,000 | | | — | |
| Repayments on Senior Notes | | Repayments on Senior Notes | (1,436,884) | | | — | |
Borrowings on notes payable | Borrowings on notes payable | 21,454 | | | 109,397 | | Borrowings on notes payable | — | | | 21,454 | |
Repayments on notes payable | Repayments on notes payable | (21,713) | | | (109,597) | | Repayments on notes payable | — | | | (21,713) | |
Share repurchases | Share repurchases | (25,018) | | | — | | Share repurchases | — | | | (25,018) | |
Cash dividends paid | Cash dividends paid | (156,962) | | | (157,099) | | Cash dividends paid | — | | | (52,297) | |
| Payments to amend and refinance credit facilities | | Payments to amend and refinance credit facilities | (27,371) | | | (228) | |
| Other | Other | (4,263) | | | (3,000) | | Other | (1,675) | | | (3,881) | |
Net cash from financing activities | Net cash from financing activities | 435,248 | | | (475,924) | | Net cash from financing activities | (64,180) | | | 67,567 | |
Effect of changes in foreign exchange rates on cash | Effect of changes in foreign exchange rates on cash | (71,728) | | | (27,207) | | Effect of changes in foreign exchange rates on cash | (261) | | | 1,793 | |
Change in cash and cash equivalents | Change in cash and cash equivalents | (307,498) | | | (20,159) | | Change in cash and cash equivalents | (25,204) | | | (191,419) | |
Cash and cash equivalents at beginning of year | Cash and cash equivalents at beginning of year | 560,629 | | | 910,603 | | Cash and cash equivalents at beginning of year | 238,413 | | | 560,629 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 253,131 | | | $ | 890,444 | | Cash and cash equivalents at end of period | $ | 213,209 | | | $ | 369,210 | |
| | Balances included in the Condensed Consolidated Balance Sheets: | | |
Cash and cash equivalents | $ | 253,131 | | | $ | 873,628 | | |
Cash and cash equivalents included in current assets held for sale | — | | | 16,816 | | |
Cash and cash equivalents at end of period | $ | 253,131 | | | $ | 890,444 | | |
|
(1)The cash flows related to discontinued operations have not been segregated and remain included in the major classes of assets and liabilities in the periods prior to the sale of the European Innerwear business on March 5, 2022. Accordingly, the Condensed Consolidated Statements of Cash Flows include the results of continuing and discontinued operations.
Capital expenditures included in accounts payable at OctoberApril 1, 20222023 and January 1,December 31, 2022 were $31,895$6,709 and $24,164,$10,549, respectively. For the nine monthsquarters ended OctoberApril 1, 20222023 and OctoberApril 2, 2021,2022, right-of-use assets obtained in exchange for lease obligations were $67,588$71,776 and $46,039,$16,035, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
76
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share data)
(unaudited)
(1) Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc. and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated interim financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1,December 31, 2022. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year or any future period.
Key Business Strategies
In the first quarter of 2021, the Company announced that it reached the decision to exit its European Innerwear business as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. On November 4, 2021, the Company announced that it reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. Unless otherwise noted, discussion within these notes to the condensed consolidated interim financial statements relates to continuing operations. See Note “Assets and Liabilities Held for Sale” for additional information.
In addition, in the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at October 1, 2022 and January 1, 2022. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale within the next 12 months. See Note “Assets and Liabilities Held for Sale” for additional information.
In June of 2022, the Company purchased the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC (“KEDS”) for $102,500. The trademark was recorded in “Trademarks and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheets and has an indefinite life. The Company previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two parties and is another step forward in the Company’s Full Potential plan of growing the global Champion brand.
Ransomware Attack
As previously disclosed, on May 24, 2022, the Company identified that it had become subject to a ransomware attack and activated its incident response and business continuity plans designed to contain the incident. As part of the Company’s forensic investigation and assessment of the impact, the Company determined that certain of its information technology systems were affected by the ransomware attack.
Upon discovering the incident, the Company took a series of measures to further safeguard the integrity of its information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. The Company notified appropriate law enforcement authorities as well as certain data protection regulators, and in,regulators. In addition to the Company’s public announcements of the incident, the Company began a process to provideprovided breach notifications and regulatory filings as may be required by applicable law starting in August 2022. While the2022, and that notification process continues, at this time, theis complete. The Company believes the incident has been contained, the Company has restored its critical information technology systems, and manufacturing, retail and other internal operations continue. There is no ongoing operational impact on the Company’s ability to provide its products and services. The Company maintains insurance, including coverage for cyber-attacks, subject to certain deductibles and policy limitations, in an amount that the Company believes appropriate.
The Company is named in two pending lawsuits in connection with theits previously disclosed ransomware incident. On October 7, 2022, a putative class action, was filed against “Hanesentitled Roman v. Hanes Brands [sic], Inc.” alleging,, was filed in the United States District Court for the Central District of California. The lawsuit alleges, among other things, negligence, negligence per se, breach of implied contract, unjust enrichment, breach of implied covenant of good faith and fair dealing, unfair business practices under the California Business and Professions Code, and violations of the California Confidentiality of Medical Information Act in connection with the ransomware incident. The litigation isOn October 13, 2022, another putative class action, entitled RamonToussaint v. Hanes Brands,HanesBrands,[sic] Inc., and is pendingwas filed in the United States District Court for the CentralMiddle District of California. On October 13, 2022, another putative class action was filed against HanesBrands, Inc. alleging,North Carolina. The lawsuit alleges, among other things, negligence, negligence per se, breach of implied contract, invasion of privacy, and unjust enrichment in connection with the ransomware incident. The litigation is entitled, Toussaint v. HanesBrands, Inc.pending lawsuits seek, among other things, monetary and is pendinginjunctive relief. The lawsuits have been consolidated in the United States District Court for the Middle District of North Carolina. The lawsuits seek, among other things, monetaryCarolina, and injunctive relief.Plaintiffs have been granted leave to file a consolidated complaint. Plaintiff Roman also filed a second putative class action with regard to the ransomware incident in the United States District Court for the Middle District of North Carolina on January 16, 2023, entitled Roman v. Hanesbrands,[sic] Inc., which was voluntarily dismissed without prejudice on January 20, 2023. The Company is vigorously defending thesethe remaining pending matters and believes the cases are without merit. The Company does not expect any of these claims, individually or in the aggregate, to have a material adverse effect on its
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
consolidated financial position or results of operations. However, at this early stage in the proceedings, the Company is not able to determine the probability of the outcome of these matters or a range of reasonably expected losses, if any.
During the quarter and nine months ended OctoberApril 1, 2022,2023, the Company incurred costs of $921 and $16,430,no net of expected insurance recoveries, respectively,costs related to the ransomware attack. The costs, net ofMinimal legal fees and the offsetting expected insurance recoveries incurred during the quarter ended October 1, 2022 related primarily to information technology and legal fees and are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The costs for the nine months ended October 1, 2022 included $14,168 related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $2,262, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The Company continues to assess the security event and cannot determine, at this time, the full extent of any proceedings or additional costs or expenses related to the impact from suchsecurity event on its business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
(2) Recent Accounting Pronouncements
Reference Rate Reform
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” In January 2021, the FASB clarified the scope of that guidance with the issuance of ASU 2021-01, “Reference Rate Reform: Scope.” The new accounting rules provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. In December 2022, the FASB deferred the expiration date of Topic 848 with the issuance of ASU 2022-06, “Reference Rate Reform: Deferral of the Sunset Date of Topic 848.” The new accounting rules extend the relief in Topic 848 beyond the cessation date of USD London Interbank Offered Rate (“LIBOR”). The new accounting rules must be adopted by the fourth quarter of 2022.2024. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The new accounting rules require entities to apply “Revenue from Contracts with Customers (Topic 606)” to recognize and measure contract assets and contract liabilities in a business combination. The new accounting rules will bewere effective for the Company in the first quarter of 2023, including interim periods.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Early adoption is permitted.2023. The adoption impact of the new accounting rules will dependdid not have any impact on the magnitudeCompany’s financial condition, results of future acquisitions.operations, cash flows or disclosures.
Derivatives and Hedging
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” The new accounting rules allow entities to expand the use of the portfolio layer method to all financial assets and designate multiple hedged layers within a single closed portfolio. The new accounting rules also clarify guidance related to hedge basis adjustments and the related disclosures for these adjustments. The new accounting rules will bewere effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted. The2023. As the Company does not currently have any fair value hedging programs that leverage the portfolio layer method, therefore, the Company does not expectadoption of the new accounting rules todid not have anany impact on our near termthe Company’s financial condition, results of operations, cash flows or disclosures.
Supplier Finance Program Obligations
In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The new accounting rules create certain disclosure requirements for a buyer in a supplier finance program. The new accounting rules require qualitative and quantitative disclosures including key terms of the program, balance sheet presentation of related amounts, and the obligation amount the buyer has confirmed as valid to the finance provider, including a rollforward of the obligation. Only the amount of the obligation outstanding is required to be disclosed in interim periods. The accounting rules do not impact the recognition, measurement, or financial statement presentation of supplier finance program obligations. The new accounting rules will bewere effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted.2023. While the new accounting rules willdid not have an impact on ourthe Company’s financial condition, results of operations or cash flows, the Company is currently evaluating the impactadoption of the new accounting rules will have on thedid result in additional disclosures includedbeginning in the notes to the consolidated financial statements beginning with the first quarter of 2023.2023 which are included below.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company reviews supplier terms and conditions on an ongoing basis and has negotiated payment term extensions in recent years in connection with its efforts to effectively manage working capital and improve cash flow. Separate from these payment term extension actions noted above, the Company and certain financial institutions facilitate voluntary supplier finance programs that enable participating suppliers the ability to request payment of their invoices from the financial institutions earlier than the terms stated in Company’s payment policy. The Company is not a party to the arrangements between the suppliers and the financial institutions and its obligations to suppliers, including amounts due and scheduled payment dates, are not impacted by the suppliers’ participation in the supplier finance programs. The Company’s payment terms to the financial institutions, including the timing and amount of payments, are based on the original supplier invoices. The Company has no economic interest in a supplier’s decision to participate in the supplier finance programs and has no financial impact in connection with the supplier finance programs. Accordingly, obligations under these programs continue to be trade payables and are not indicative of borrowing arrangements. As of April 1, 2023, the amounts due to suppliers participating in supplier finance programs totaled $254,509 and are included in the “Accounts Payable” line of the Condensed Consolidated Balance Sheets.
Leases
In March 2023, the FASB issued ASU 2023-01, “Leases (Topic 842): Common Control Arrangements.” The new accounting rules require that leasehold improvements associated with common control leases be amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease. These leases should also be accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset. The new accounting rules will be effective for the Company in the first quarter of 2024, including interim periods. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations, cash flows and disclosures.
(3) Assets and Liabilities Held for Sale
AssetsTotal current assets and current liabilities classified as held for sale in the Condensed Consolidated Balance Sheets as of OctoberApril 1, 2022, January 1,2023, December 31, 2022 and OctoberApril 2, 20212022 consist of the following:
| | | | | | | | | | | | | | | | | |
| October 1, 2022 | | January 1, 2022 | | October 2, 2021 |
U.S. Sheer Hosiery business - continuing operations | $ | 14,906 | | | $ | 5,426 | | | $ | — | |
European Innerwear business - discontinued operations | — | | | 321,731 | | | 304,124 | |
Total current assets held for sale | $ | 14,906 | | | $ | 327,157 | | | $ | 304,124 | |
| | | | | |
U.S. Sheer Hosiery business - continuing operations | $ | 14,906 | | | $ | 5,426 | | | $ | — | |
European Innerwear business - discontinued operations | — | | | 311,476 | | | 299,498 | |
Total current liabilities held for sale | $ | 14,906 | | | $ | 316,902 | | | $ | 299,498 | |
| | | | | | | | | | | | | | | | | |
| April 1, 2023 | | December 31, 2022 | | April 2, 2022 |
Total current assets held for sale - U.S. Sheer Hosiery business | $ | 4,986 | | | $ | 13,327 | | | $ | 7,959 | |
| | | | | |
Total current liabilities held for sale - U.S. Sheer Hosiery business | $ | 4,986 | | | $ | 13,327 | | | $ | 7,959 | |
U.S. Sheer Hosiery Business - Continuing Operations
In the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at OctoberApril 1, 2023, December 31, 2022 and January 1,April 2, 2022. The Company recorded a non-cash charge of $38,364 in the fourth quarter of 2021 to record a valuation allowance against the net assets held for sale to write down the carrying value of the disposal group to the estimated fair value less costs of disposal. TheIn the quarters ended April 1, 2023 and April 2, 2022, the Company recognized a non-cash lossgains of $4,310$2,139 and $6,528, respectively, to adjust the valuation allowance resulting from an increase in carrying value due to changes in working capital in the quarter ended October 1, 2022. In the nine months ended October 1, 2022, the Company recognized a non-cash gain of $6,558 to adjust the valuation allowance resultingprimarily from a decrease in carrying value due to changes in working capital. These valuation allowance adjustments are reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale of this business within the next 12 months.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
European Innerwear Business - Discontinued Operations
In the first quarter of 2021, the Company announced that it reached the decision to exit its European Innerwear business as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. On November 4, 2021, the Company announced that it had reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. Under the agreement, the purchaser received all the assets and operating liabilities of the European Innerwear business. The operations of the European Innerwear business were previously reported primarily in the International segment.
Upon meeting the criteria for held-for-sale classification in the first quarter of 2021 which qualified as a triggering event, the Company performed a full impairment analysis of the disposal group's indefinite-lived intangible assets and goodwill. Asgoodwill which resulted in a result of the strategic decisionnon-cash charge to exit the European Innerwear business, forecasts were revised to include updated market conditions and the removal of strategic operating decisions that would no longer occur under the Company's ownership. The revised forecasts indicated impairment ofimpair certain indefinite-lived trademarks and license agreements as well as the full goodwill balance attributable to the European Innerwear business. As a result of this impairment analysis, a non-cash charge of $155,745 was recorded as "Impairment of intangible assets and goodwill" in the summarized discontinued operations financial information for the nine months ended October 2, 2021. In addition,Additionally, the Company recorded a valuation allowance against the net assets held for sale to write down the carrying value of the disposal group to the estimated fair value less costs of disposal, resulting in a non-cash chargescharge in the first quarter of $30,562 and $266,742 for2021. In the quarter and nine months ended OctoberApril 2, 2021, respectively,2022, the Company recorded a gain on the sale of the European Innerwear business of $187 as "Loss"Gain on sale of business and classification of assets held for sale" in the summarized discontinued operations financial information. In the nine months ended October 1, 2022, the Company recorded the final loss on the sale of the European Innerwear business of $373information below primarily resulting from changes in working capital balances and foreign exchange rates.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Additionally, the Company recorded an impairment charge of $7,302 in continuing operations on an indefinite-lived trademark for the nine months ended October 2, 2021 which is reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. This charge related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group as it was not marketed for sale.
The Company has continued certain sales from its supply chain to the European Innerwear business on a transitional basis after the sale of the business. Under the terms of the Manufacturing and Supply Agreement that was signed as part of closing the transaction, the Company will provide these services for periods up to 34 months from the closing date of the transaction. Additionally, the Company entered into a Transitional Services Agreement pursuant to which the Company will provideprovided transitional services including information technology, human resources, facilities management, and limited finance and accounting services for periods up to 12 months from the closing datewhich expired in March of the transaction.2023. The sales and the related profit are included in continuing operations in the Condensed Consolidated Statements of Income and in “Other” in Note “Business Segment Information” in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by the Company. The related receivables from the European Innerwear business are included in “Trade accounts receivable, net” in the Condensed Consolidated Balance Sheets for all periods presented.
The operating results of the discontinued operations only reflect revenues and expenses that are directly attributable to the European Innerwear business. Discontinued operations does not include any allocation of corporate overhead expense or interest expense. The key components from discontinued operations related to the European Innerwear business are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Net sales | $ | — | | | $ | 147,529 | | | $ | 101,314 | | | $ | 400,880 | |
Cost of sales | — | | | 75,171 | | | 60,415 | | | 213,831 | |
Gross profit | — | | | 72,358 | | | 40,899 | | | 187,049 | |
Selling, general and administrative expenses | — | | | 64,941 | | | 54,689 | | | 209,467 | |
Impairment of intangible assets and goodwill | — | | | — | | | — | | | 155,745 | |
Loss on sale of business and classification of assets held for sale | — | | | 30,562 | | | 373 | | | 266,742 | |
Operating loss | — | | | (23,145) | | | (14,163) | | | (444,905) | |
Other expenses | — | | | 271 | | | 283 | | | 885 | |
Interest expense, net | — | | | 110 | | | 10 | | | 269 | |
Loss from discontinued operations before income tax expense (benefit) | — | | | (23,526) | | | (14,456) | | | (446,059) | |
Income tax expense (benefit) | — | | | 1,444 | | | (18,421) | | | (10,236) | |
Net income (loss) from discontinued operations, net of tax | $ | — | | | $ | (24,970) | | | $ | 3,965 | | | $ | (435,823) | |
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Net sales | $ | — | | | $ | 101,314 | | | | | |
Cost of sales | — | | | 60,415 | | | | | |
Gross profit | — | | | 40,899 | | | | | |
Selling, general and administrative expenses | — | | | 54,689 | | | | | |
Gain on sale of business and classification of assets held for sale | — | | | (187) | | | | | |
Operating loss | — | | | (13,603) | | | | | |
Other expenses | — | | | 283 | | | | | |
Interest expense, net | — | | | 10 | | | | | |
Loss from discontinued operations before income tax benefit | — | | | (13,896) | | | | | |
Income tax benefit | — | | | (18,421) | | | | | |
Net income from discontinued operations, net of tax | $ | — | | | $ | 4,525 | | | | | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
AssetsThere were no assets and liabilities of discontinued operations classified as held for sale in the Condensed Consolidated Balance Sheets as of OctoberApril 1, 2022, January 1,2023, December 31, 2022 and OctoberApril 2, 2021 consist of the following:
| | | | | | | | | | | | | | | | | |
| October 1, 2022 | | January 1, 2022 | | October 2, 2021 |
Cash and cash equivalents | $ | — | | | $ | 24,352 | | | $ | 16,816 | |
Trade accounts receivable, net | — | | | 87,353 | | | 88,684 | |
Inventories | — | | | 141,653 | | | 127,209 | |
Other current assets | — | | | 21,926 | | | 16,066 | |
Property, net | — | | | 62,659 | | | 61,898 | |
Right-of-use assets | — | | | 32,603 | | | 33,680 | |
Trademarks and other identifiable intangibles, net | — | | | 205,204 | | | 208,108 | |
Deferred tax assets | — | | | 4,174 | | | 7,990 | |
Other noncurrent assets | — | | | 4,127 | | | 4,360 | |
Allowance to adjust assets to estimated fair value, less costs of disposal | — | | | (262,320) | | | (260,687) | |
Total assets of discontinued operations | $ | — | | | $ | 321,731 | | | $ | 304,124 | |
| | | | | |
Accounts payable | $ | — | | | $ | 84,327 | | | $ | 69,122 | |
Accrued liabilities | — | | | 122,620 | | | 118,076 | |
Lease liabilities | — | | | 6,562 | | | 8,544 | |
Notes payable | — | | | 329 | | | 595 | |
Lease liabilities - noncurrent | — | | | 27,426 | | | 26,536 | |
Pension and postretirement benefits | — | | | 38,325 | | | 42,076 | |
Other noncurrent liabilities | — | | | 31,887 | | | 34,549 | |
Total liabilities of discontinued operations | $ | — | | | $ | 311,476 | | | $ | 299,498 | |
2022.The cash flows related to discontinued operations have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows. The following table presents cash flow and non-cash information related to discontinued operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Depreciation | $ | — | | | $ | — | | | $ | — | | | $ | 2,608 | |
Amortization | $ | — | | | $ | — | | | $ | — | | | $ | 1,460 | |
Capital expenditures | $ | — | | | $ | 2,085 | | | $ | 715 | | | $ | 6,155 | |
Impairment of intangible assets and goodwill | $ | — | | | $ | — | | | $ | — | | | $ | 155,745 | |
Loss on sale of business and classification of assets held for sale | $ | — | | | $ | 30,562 | | | $ | 373 | | | $ | 266,742 | |
Capital expenditures included in accounts payable at end of period | $ | — | | | $ | 70 | | | $ | — | | | $ | 70 | |
Right-of-use assets obtained in exchange for lease obligations | $ | — | | | $ | 1,454 | | | $ | — | | | $ | 4,591 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Capital expenditures | $ | — | | | $ | 715 | | | | | |
| | | | | | | |
Gain on sale of business and classification of assets held for sale | $ | — | | | $ | (187) | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(4) Revenue Recognition
The following table presents the Company’s revenues disaggregated by the customer’s method of purchase:
| | | Quarters Ended | | Nine Months Ended | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 | |
Third-party brick-and-mortar wholesale | Third-party brick-and-mortar wholesale | $ | 1,200,636 | | | $ | 1,312,440 | | | $ | 3,356,547 | | | $ | 3,570,710 | | Third-party brick-and-mortar wholesale | $ | 985,650 | | | $ | 1,126,266 | | |
Consumer-directed | Consumer-directed | 470,105 | | | 477,111 | | | 1,403,817 | | | 1,478,181 | | Consumer-directed | 403,760 | | | 449,890 | | |
Total net sales | Total net sales | $ | 1,670,741 | | | $ | 1,789,551 | | | $ | 4,760,364 | | | $ | 5,048,891 | | Total net sales | $ | 1,389,410 | | | $ | 1,576,156 | | |
Revenue Sources
Third-Party Brick-and-Mortar Wholesale Revenue
Third-party brick-and-mortar wholesale revenue is primarily generated by sales of the Company’s products to retailers to support their brick-and-mortar operations. Third-party brick-and-mortar wholesale revenue also includes royalty revenue from licensing agreements. The Company earns royalties through license agreements with manufacturers of other consumer products that incorporate certain of the Company’s brands. The Company accrues revenue earned under these contracts based upon reported sales from the licensees.
Consumer-Directed Revenue
Consumer-directed revenue is primarily generated through sales driven directly by the consumer through company-operated stores and e-commerce platforms, which include both owned sites and the sites of the Company’s retail customers.
(5) Stockholders’ Equity
Basic earnings per share (“EPS”) was computed by dividing net income (loss) by the number of weighted average shares of common stock outstanding during the period. Diluted EPS was calculated to give effect to all potentially issuable dilutive shares of common stock using the treasury stock method.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Basic weighted average shares outstanding | 349,884 | | | 351,071 | | | 349,969 | | | 351,020 | |
Effect of potentially dilutive securities: | | | | | | | |
Stock options | — | | | 20 | | | 2 | | | 17 | |
Restricted stock units | 420 | | | 1,157 | | | 712 | | | 956 | |
Employee stock purchase plan and other | 12 | | | 3 | | | 8 | | | 3 | |
Diluted weighted average shares outstanding | 350,316 | | | 352,251 | | | 350,691 | | | 351,996 | |
The following securities were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Stock options | 250 | | | 83 | | | 250 | | | 167 | |
Restricted stock units | 1,646 | | | 48 | | | 1,252 | | | 40 | |
On November 8, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share of the Company’s outstanding common stock to be paid on December 13, 2022 to stockholders of record at the close of business on November 22, 2022. | | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Basic weighted average shares outstanding | 350,435 | | | 350,251 | | | | | |
Effect of potentially dilutive securities: | | | | | | | |
Stock options | — | | | 7 | | | | | |
Restricted stock units | — | | | 1,190 | | | | | |
Employee stock purchase plan and other | — | | | 5 | | | | | |
Diluted weighted average shares outstanding | 350,435 | | | 351,453 | | | | | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The following securities were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive:
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Stock options | 250 | | | 167 | | | | | |
Restricted stock units | 4,329 | | | 647 | | | | | |
Employee stock purchase plan and other | 15 | | | — | | | | | |
In the quarter ended April 1, 2023, all potentially dilutive securities were excluded from the diluted earnings per share calculation because the Company incurred a net loss for the quarter and their inclusion would be anti-dilutive.
On February 2, 2022, the Company’s Board of Directors approved a new share repurchase program for up to $600,000 of shares to be repurchased in open market transactions or privately negotiated transactions, subject to market conditions, legal requirements and other factors. Additionally, management has been granted authority to establish a trading plan under Rule 10b5-1 of the Exchange Act in connection with share repurchases, which will allowallows the Company to repurchase shares in the open market during periods in which the stock trading window is otherwise closed for the Company and certain of the Company’s officers and employees pursuant to the Company’s insider trading policy. The new program replaced the Company’s previous share repurchase program for up to 40,000 shares that was originally approved on February 6, 2020. For the quarter ended OctoberApril 1, 2022,2023, the Company did not enter into any transactions to repurchase shares under the new program. For the nine monthsquarter ended October 1,April 2, 2022, the Company entered into transactions to repurchase 1,577 shares at a weighted average repurchase price of $15.84 per share under the new program. The shares were repurchased at a total cost of $25,018 including broker’s commissions of $31. The Company did not repurchase any shares under the previous share repurchase program during 2022 through the expiration of the program on February 2, 2022 or during the quarter or nine months ended October 2, 2021.2022. At OctoberApril 1, 2022,2023, the remaining repurchase authorization under the current share repurchase program totaled $575,013.
(6) Inventories
Inventories consisted of the following:
| | | October 1, 2022 | | January 1, 2022 | | October 2, 2021 | | April 1, 2023 | | December 31, 2022 | | April 2, 2022 |
Raw materials | Raw materials | $ | 90,411 | | | $ | 68,683 | | | $ | 71,893 | | Raw materials | $ | 69,969 | | | $ | 69,279 | | | $ | 84,734 | |
Work in process | Work in process | 118,573 | | | 110,246 | | | 103,927 | | Work in process | 102,837 | | | 107,904 | | | 121,095 | |
Finished goods | Finished goods | 1,927,330 | | | 1,405,086 | | | 1,453,686 | | Finished goods | 1,796,327 | | | 1,802,489 | | | 1,614,145 | |
| | $ | 2,136,314 | | | $ | 1,584,015 | | | $ | 1,629,506 | | | $ | 1,969,133 | | | $ | 1,979,672 | | | $ | 1,819,974 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(7) Debt
Debt consisted of the following:
| | | Interest Rate as of October 1, 2022 | | Principal Amount | | Maturity Date | | Interest Rate as of April 1, 2023 | | Principal Amount | | Maturity Date |
| | October 1, 2022 | | January 1, 2022 | | | April 1, 2023 | | December 31, 2022 | |
Senior Secured Credit Facility: | Senior Secured Credit Facility: | | | | | | | | Senior Secured Credit Facility: | | | | | | | |
Revolving Loan Facility | Revolving Loan Facility | 4.01% | | $ | 429,000 | | | $ | — | | | November 2026 | Revolving Loan Facility | 6.39% | | $ | 313,000 | | | $ | 352,500 | | | November 2026 |
Term Loan A | Term Loan A | 4.38% | | 981,250 | | | 1,000,000 | | | November 2026 | Term Loan A | 6.41% | | 968,750 | | | 975,000 | | | November 2026 |
Term Loan B | | Term Loan B | 8.56% | | 900,000 | | | — | | | March 2030 |
9.000% Senior Notes | | 9.000% Senior Notes | 9.00% | | 600,000 | | | — | | | February 2031 |
4.875% Senior Notes | 4.875% Senior Notes | 4.88% | | 900,000 | | | 900,000 | | | May 2026 | 4.875% Senior Notes | 4.88% | | 900,000 | | | 900,000 | | | May 2026 |
4.625% Senior Notes | 4.625% Senior Notes | 4.63% | | 900,000 | | | 900,000 | | | May 2024 | 4.625% Senior Notes | — | | — | | | 900,000 | | | — |
3.5% Senior Notes | 3.5% Senior Notes | 3.50% | | 490,100 | | | 568,634 | | | June 2024 | 3.5% Senior Notes | — | | — | | | 535,275 | | | — |
Accounts Receivable Securitization Facility | Accounts Receivable Securitization Facility | 3.57% | | 211,500 | | | — | | | June 2023 | Accounts Receivable Securitization Facility | 5.55% | | 166,000 | | | 209,500 | | | June 2023 |
| | 3,911,850 | | | 3,368,634 | | | | 3,847,750 | | | 3,872,275 | | |
Less long-term debt issuance costs | | 13,211 | | | 17,543 | | | |
Less long-term debt issuance costs and debt discount | | Less long-term debt issuance costs and debt discount | | 40,055 | | | 13,198 | | |
Less current maturities | Less current maturities | | 242,750 | | | 25,000 | | | Less current maturities | | 218,750 | | | 247,000 | | |
| | $ | 3,655,889 | | | $ | 3,326,091 | | | | $ | 3,588,945 | | | $ | 3,612,077 | | |
Debt Refinancing and Amendments
In the quarter ended April 1, 2023, the Company refinanced its debt structure to provide greater near-term financial flexibility given the uncertainty within the current macroeconomic environment. The refinancing consisted of entering into a new senior secured term loan B facility in an aggregate principal amount of $900,000 due in 2030 (the “Term Loan B”), issuing $600,000 aggregate principal amount of 9.000% senior unsecured notes due in 2031 (the “9.000% Senior Notes”) and redeeming the Company’s 4.625% senior notes due in May 2024 (the “4.625% Senior Notes”) and 3.5% senior notes due in June 2024 (the “3.5% Senior Notes”).
In the quarter ended April 1, 2023, the Company used the net proceeds from borrowings under the Term Loan B together with the net proceeds from the offering of the 9.000% Senior Notes to redeem all of its outstanding 4.625% Senior Notes and 3.5% Senior Notes and pay the related fees and expenses which resulted in total charges of $8,466. The charges, which are recorded in the “Other expenses” line in the Condensed Consolidated Statements of Income, included a payment of $4,632 for a required make-whole premium related to the redemption of the 3.5% Senior Notes, a non-cash charge of $1,654 for the write-off of unamortized debt issuance costs related to the redemption of the 3.5% Senior Notes and a non-cash charge of $2,180 for the write-off of unamortized debt issuance costs related to the redemption of the 4.625% Senior Notes. The refinancing activities resulted in a debt discount of $9,000 related to the Term Loan B and total capitalized debt issuance costs of $22,417 which included $11,715 related to the Term Loan B and $10,702 related to the 9.000% Senior Notes. The debt discount and debt issuance costs are amortized into interest expense over the respective terms of the debt instruments. The cash payments for the make-whole premium and fees capitalized as debt issuance costs are reported in “Net cash from financing activities” in the Condensed Consolidated Statements of Cash Flows.
Term Loan B
In March 2023, the Company entered into the Term Loan B as an incremental term loan facility under the credit agreement that governs the Company’s existing Senior Secured Credit Facility. The issuance of the Term Loan B resulted in proceeds, net of the debt discount of $9,000 and debt issuance costs of $11,715, of approximately $879,285. The Term Loan B bears interest based on the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin of 3.75%, subject to a floor of 0.50%. The Term Loan B Facility is guaranteed by each domestic subsidiary of the Company which guarantees the other facilities under the Senior Secured Credit Facility (the “U.S. Subsidiary Guarantors”) and is secured by substantially all of the assets of the Company and the U.S. Subsidiary Guarantors, on a pari passu basis with the other facilities under the Senior Secured Credit Facility. Outstanding borrowings under the Term Loan B are repayable in 0.25% quarterly installments, with the remainder of the outstanding principal to be repaid at maturity. If the Term Loan B is repriced or refinanced on or prior to the six month anniversary of its funding and as a result of such repricing or refinancing the effective interest rate of the Term Loan B decreases, the Company shall be required to pay a prepayment fee equal to 1.0% of the aggregate principal amount of the
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Term Loan B subject to such repricing or refinancing. Additionally, the Company is required to prepay any outstanding amounts in connection with (i) the incurrence of certain indebtedness and (ii) non-ordinary course asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds in any period of twelve-consecutive months, with customary reinvestment provisions. The Term Loan B also requires the Company, as applicable, to prepay any outstanding term loans under the Term Loan B in connection with excess cash flow, which percentage will be based upon the Company’s leverage ratio during the relevant fiscal period. All such prepayments will be made on a pro rata basis under each of the applicable term loans that are subject to such prepayments. The Term Loan B matures on March 8, 2030.
9.000% Senior Notes
In February 2023, the Company issued the 9.000% Senior Notes, with interest payable on February 15 and August 15 of each year. The issuance of the 9.000% Senior Notes resulted in proceeds, net of debt issuance costs of $10,702, of approximately $589,298. The 9.000% Senior Notes will mature on February 15, 2031.
Prior to February 15, 2026, the Company has the right to redeem all or of a portion of the 9.000% Senior Notes at a redemption price equal to 100% of the principal amount plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, prior to February 15, 2026, the Company may on any one or more occasions redeem up to 40% of the notes with the net proceeds from certain equity offerings at a redemption price equal to 109.000% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. On and after February 15, 2026, the Company has the right to redeem all or a portion of the 9.000% Senior Notes, at the redemption prices set forth in the indenture governing the 9.000% Senior Notes, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In the event of a change of control of the Company and a rating downgrade, the Company will be required to offer to repurchase all outstanding 9.000% Senior Notes at a purchase price in cash equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The 9.000% Senior Notes are senior unsecured obligations of the Company and are guaranteed by the Company and certain of its domestic subsidiaries that guarantee its credit facilities and certain other material indebtedness. The indenture contains customary covenants and events of default. The 9.000% Senior Notes were issued in a transaction exempt from registration under the Securities Act of 1933 and do not require disclosure of separate financial information for the guarantor subsidiaries.
Senior Secured Credit Facility Amendments
In November 2022 and in February 2023, given the economic conditions and the associated impact on earnings, the Company amended the credit agreement governing its Senior Secured Credit Facility to modify the financial covenants in order to avoid a potential covenant violation and to provide operating flexibility. The amendments effect changes to certain provisions and covenants under the Senior Secured Credit Facility during the period beginning with the fiscal quarter ended December 31, 2022 and continuing through the fiscal quarter ending March 30, 2024 or such earlier date as the Company may elect (such period of time, the “Covenant Relief Period”), including: (a) an increase in the maximum consolidated net total leverage ratio to 5.25 to 1.00 for the quarter ended December 31, 2022, 6.75 to 1.00 for the quarter ending April 1, 2023, 7.25 to 1.00 for the quarter ending July 1, 2023, 6.75 to 1.00 for the quarter ending September 30, 2023, 5.25 to 1.00 for the quarter ending December 30, 2023, and 5.00 to 1.00 for the quarter ending March 30, 2024, and reverting back to 4.50 to 1.00 for each quarter after the Covenant Relief Period has ended; (b) a reduction of the minimum interest coverage ratio from 3.00 to 1.00 to 2.60 to 1.00 for the quarter ended December 31, 2022 and the quarter ending April 1, 2023, 2.00 to 1.00 for the quarters ending July 1, 2023, September 30, 2023 and December 30, 2023, and 2.50 to 1.00 for the quarter ending March 30, 2024, with an increase to 2.75 to 1.00 for each quarter after the Covenant Relief Period has ended; (c) suspension of restricted payments in connection with share repurchases; (d) suspension of restricted payments pursuant to the Company's leverage ratio-based and "Available Amount" restricted payments baskets, (e) a cap on annual dividend payments of $75,000, which will revert back to the greater of (x) $350,000 and (y) 8.0% of Total Tangible Assets after the Covenant Relief Period has ended; (f) suspension of the Company’s “Available Amount” basket for investments in foreign subsidiaries and other investments; (g) suspension of the 0.50 to 1.00 increase in the maximum permitted consolidated net total leverage ratio resulting from a material permitted acquisition; and (h) the addition of two new tiers to the top of the pricing grid if the maximum consolidated net total leverage ratio exceeds 5.00 to 1.00 and 5.50 to 1.00. In conjunction with the Second Amendment, the Company transitioned the Senior Secured Credit Facility from LIBOR to SOFR with a 10 basis points credit spread adjustment already included in the Senior Secured Credit Facility. In addition, the Third Amendment limits the Company's ability to incur incremental secured indebtedness during the Covenant Relief Period to $1,750,000, subject to compliance with the financial covenants.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Other Debt Related Activity
As of OctoberApril 1, 2022,2023, the Company had $560,028$682,360 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account $429,000$313,000 of USD revolver loans and $10,972$4,640 of standby and trade letters of credit issued and outstanding under this facility.
The Company’s accounts receivable securitization facility (the “ARS Facility”) entered into in November 2007 was amended in June 2022. The latest amendment increased the fluctuating facility limit to $225,000 (previously $175,000) and extended the maturity date to June 2023. Additionally, the amendment changed the Company’s interest rate option as defined in the ARS Facility from the rate announced from time to time by PNC Bank, N.A. as its prime rate or the London Interbank Offered Rate (“LIBOR”)LIBOR to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate (“SOFR”)SOFR and increased certain receivables to the pledged collateral pool for the facility. Borrowings under the
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Company’s ARS Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans and also subject to a quarterly fluctuating facility limit, which is not to exceed $225,000.$200,000 for quarter ended April 1, 2023. The Company’s maximum borrowing capacity as per the fluctuating limit under the ARS Facility was $225,000$169,406 as of OctoberApril 1, 2022.2023. The Company had $13,500$3,406 of borrowing availability under the ARS Facility at OctoberApril 1, 2022.2023.
The Company had $36,121$44,383 of borrowing availability under other international credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facilities at OctoberApril 1, 2022.2023.
As of OctoberApril 1, 2022,2023, the Company was in compliance with all financial covenants under its credit facilities and other outstanding indebtedness. Under the terms of its Senior Secured Credit Facility, among other financial and non-financial covenants, the Company is required to maintain a minimum interest coverage ratio and a maximum leverage ratio, each of which is defined in the Senior Secured Credit Facility. The method of calculating all the components used in the covenants is included in the Senior Secured Credit Facility.
In November 2022, given the uncertain economic environment and the associated impact on future earnings, the Company amended the credit agreement governing its Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility. The amendment effects changes to certain provisions and covenants under the Senior Secured Credit Facility during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 30, 2023 (such period of time, the “Covenant Relief Period”), including: (a) an increase in the maximum leverage ratio from 4.50 to 1.00 to 5.25 to 1.00 for the quarter ended December 31, 2022, 5.75 to 1.00 for the quarters ending April 1, 2023 through September 30, 2023 and 5.25 to 1.00 for the quarter ending December 30, 2023 reverting back to 4.50 to 1.00 for each quarter after the Covenant Relief Period; (b) a reduction of the minimum interest coverage ratio from 3.00 to 1.00 to 2.60 to 1.00 for the quarters ending December 31, 2022 through December 30, 2023 with an increase to 2.75 to 1.00 for each quarter after the Covenant Relief Period; (c) a cap on dividend payments of $250,000 which will revert back to the current amounts after the Covenant Relief Period; (d) the addition of two new tiers to the top of the pricing grid if the maximum leverage ratio exceeds 5.00 to 1.00 and 5.50 to 1.00; and (e) the 0.50 increase in the maximum leverage ratio resulting from a material permitted acquisition is suspended through the Covenant Relief Period. In conjunction with this amendment, the Company will transition the Senior Secured Credit Facility from LIBOR to SOFR with a 10 basis points credit spread adjustment already included in the Senior Secured Credit Facility. After obtaining the debt amendment, the Company expects to maintain compliance with its covenants for at least one year from the issuance of these financial statements based on its current expectations and forecasts. If economic conditions worsen and the Company’s earnings and operating cash flows do not start to recover as currently estimated by management, this could impact the Company’s ability to maintain compliance with its amended financial covenants and require the Company to seek additional amendments to its Senior Secured Credit Facility. If the Company is not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, its lenders could require the Company to repay its outstanding debt. In that situation, the Company may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
(8) Income Taxes
The Company’sIn the quarter ended April 1, 2023, income tax expense was $18,500 resulting in an effective income tax rate of (116.3)%. and in the quarter ended April 2, 2022, income tax expense was 17.0% and 7.9% for the quarters ended October 1, 2022 and October 2, 2021, respectively. The Company’s$23,385 resulting in an effective income tax rate wasof 17.0% and 10.9% for the nine months ended October 1, 2022 and October 2, 2021, respectively.. The higherCompany's effective tax rate for the quarter ended OctoberApril 1, 2022 was2023 primarily differs from the U.S. statutory rate due to non-recurringvaluation allowances against certain net deferred tax assets. Additionally, the Company had unfavorable discrete tax charges totaling $3,174 for adjustments related to prior period tax returns during the third quarteritems of 2022 versus discrete tax benefits of $3,814$7,544 and $1,874 for the releasequarters ended April 1, 2023 and April 2, 2022, respectively.
The Organization for Economic Co-operation and Development (the “OECD”), an international association of uncertain38 countries including the U.S., has proposed changes to numerous long-standing tax benefits and $4,851 for adjustments relatedprinciples, including a global minimum tax initiative. On December 12, 2022, the European Union member states agreed to prior period tax returns and approval of certain filings by taxing authorities duringimplement the third quarter of 2021. The higher effectiveOECD’s Pillar 2 global corporate minimum tax rate forof 15% on companies with revenues of at least $790,000, which would go into effect in 2024. Currently, South Korea and Japan are the nine months ended October 1, 2022 was primarily dueonly countries to non-recurring discreteenact legislation consistent with the rules, while other countries including the United Kingdom, Switzerland, Canada and Australia are also actively considering changes to their tax chargeslaws to adopt certain parts of $9,217 for assessments and adjustments for prior period tax returns and measurement of deferred tax liabilities during the nine months of 2022 versus non-recurring discrete tax benefits of $11,360 forOECD’s proposals. The Company will continue to monitor the release ofreserves for unrecognized tax benefits and $4,392 for adjustments related to prior period tax returns and approval of certain filings by taxing authorities, partially offset by a discrete charge for changes in valuation allowances of $4,636 during the nine months of 2021.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
developing laws.In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IR Act”), which, among other things, introduces a 15% minimum tax based on adjusted financial statement income of certain large corporations with a three year average adjusted financial statement income in excess of $1,000,000, a 1% excise tax on the fair market stock repurchases by covered corporations and several tax incentives to promote clean energy. The Company is continuing to evaluate the IR Act and its potential impact on future periods, and at this time the Company does not expect the IR Act to have a material impact on its consolidated financial statements.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(9) Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss (“AOCI”) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at July 2, 2022 | $ | (228,826) | | | $ | 16,343 | | | $ | (558,153) | | | $ | 140,874 | | | $ | (629,762) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 17,917 | | | 5,202 | | | (4,109) | | | 19,010 | |
Current-period other comprehensive income (loss) activity | (76,756) | | | (14,331) | | | 258 | | | 1,658 | | | (89,171) | |
Total other comprehensive income (loss) | (76,756) | | | 3,586 | | | 5,460 | | | (2,451) | | | (70,161) | |
| | | | | | | | | |
Balance at October 1, 2022 | $ | (305,582) | | | $ | 19,929 | | | $ | (552,693) | | | $ | 138,423 | | | $ | (699,923) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at January 1, 2022 | $ | (134,001) | | | $ | 5,244 | | | $ | (569,161) | | | $ | 146,315 | | | $ | (551,603) | |
Amounts reclassified from accumulated other comprehensive loss | (13,473) | | | 45,345 | | | 16,023 | | | (10,935) | | | 36,960 | |
Current-period other comprehensive income (loss) activity | (158,108) | | | (30,660) | | | 445 | | | 3,043 | | | (185,280) | |
Total other comprehensive income (loss) | (171,581) | | | 14,685 | | | 16,468 | | | (7,892) | | | (148,320) | |
| | | | | | | | | |
Balance at October 1, 2022 | $ | (305,582) | | | $ | 19,929 | | | $ | (552,693) | | | $ | 138,423 | | | $ | (699,923) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at December 31, 2022 | $ | (228,803) | | | $ | 8,709 | | | $ | (437,353) | | | $ | 145,439 | | | $ | (512,008) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | (4,974) | | | 4,077 | | | 1,243 | | | 346 | |
Current-period other comprehensive loss activity | (9,056) | | | (17,611) | | | (12) | | | (181) | | | (26,860) | |
Total other comprehensive income (loss) | (9,056) | | | (22,585) | | | 4,065 | | | 1,062 | | | (26,514) | |
| | | | | | | | | |
Balance at April 1, 2023 | $ | (237,859) | | | $ | (13,876) | | | $ | (433,288) | | | $ | 146,501 | | | $ | (538,522) | |
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at July 3, 2021 | $ | (89,252) | | | $ | (8,826) | | | $ | (654,048) | | | $ | 171,198 | | | $ | (580,928) | |
Amounts reclassified from accumulated other comprehensive loss | — | | | 14,905 | | | 6,179 | | | (3,980) | | | 17,104 | |
Current-period other comprehensive income (loss) activity | (42,330) | | | (5,144) | | | 274 | | | (304) | | | (47,504) | |
Total other comprehensive income (loss) | (42,330) | | | 9,761 | | | 6,453 | | | (4,284) | | | (30,400) | |
| | | | | | | | | |
Balance at October 2, 2021 | $ | (131,582) | | | $ | 935 | | | $ | (647,595) | | | $ | 166,914 | | | $ | (611,328) | |
| | | Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss | | Cumulative Translation Adjustment(1) | | Cash Flow Hedges | | Defined Benefit Plans | | Income Taxes | | Accumulated Other Comprehensive Loss |
Balance at January 2, 2021 | $ | (52,820) | | | $ | (26,538) | | | $ | (668,730) | | | $ | 181,129 | | | $ | (566,959) | | |
Balance at January 1, 2022 | | Balance at January 1, 2022 | $ | (134,001) | | | $ | 5,244 | | | $ | (569,161) | | | $ | 146,315 | | | $ | (551,603) | |
Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | — | | | 24,818 | | | 19,286 | | | (9,977) | | | 34,127 | | Amounts reclassified from accumulated other comprehensive loss | (13,473) | | | 9,789 | | | 5,618 | | | (2,778) | | | (844) | |
Current-period other comprehensive income (loss) activity | Current-period other comprehensive income (loss) activity | (78,762) | | | 2,655 | | | 1,849 | | | (4,238) | | | (78,496) | | Current-period other comprehensive income (loss) activity | 40,770 | | | (7,404) | | | (40) | | | 2,430 | | | 35,756 | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | (78,762) | | | 27,473 | | | 21,135 | | | (14,215) | | | (44,369) | | Total other comprehensive income (loss) | 27,297 | | | 2,385 | | | 5,578 | | | (348) | | | 34,912 | |
| Balance at October 2, 2021 | $ | (131,582) | | | $ | 935 | | | $ | (647,595) | | | $ | 166,914 | | | $ | (611,328) | | |
Balance at April 2, 2022 | | Balance at April 2, 2022 | $ | (106,704) | | | $ | 7,629 | | | $ | (563,583) | | | $ | 145,967 | | | $ | (516,691) | |
(1)Cumulative Translation Adjustment includes translation adjustments and net investment hedges. See Note, “Financial Instruments and Risk Management” for additional disclosures about net investment hedges.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company had the following reclassifications out of AOCI:
| Component of AOCI | Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification from AOCI | Component of AOCI | | Location of Reclassification into Income | | Amount of Reclassification from AOCI |
| Quarters Ended | | Nine Months Ended | | Quarters Ended | |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 | |
Write-off of cumulative translation associated with sale of business | Write-off of cumulative translation associated with sale of business | | Income (loss) from discontinued operations, net of tax | | $ | — | | | $ | — | | | $ | 13,473 | | | $ | — | | Write-off of cumulative translation associated with sale of business | | Income from discontinued operations, net of tax | | $ | — | | | $ | 13,473 | | |
| Gain (loss) on forward foreign exchange contracts designated as cash flow hedges | Gain (loss) on forward foreign exchange contracts designated as cash flow hedges | | Cost of sales | | 2,516 | | | (4,506) | | | 6,790 | | | (14,161) | | Gain (loss) on forward foreign exchange contracts designated as cash flow hedges | | Cost of sales | | 3,410 | | | 1,612 | | |
| | Income tax | | (730) | | | 1,203 | | | (2,008) | | | 3,855 | | | Income tax | | (1,123) | | | (508) | | |
| | Income (loss) from discontinued operations, net of tax | | — | | | (876) | | | (232) | | | (2,398) | | | Income from discontinued operations, net of tax | | — | | | (232) | | |
| | Net of tax | | 1,786 | | | (4,179) | | | 4,550 | | | (12,704) | | | Net of tax | | 2,287 | | | 872 | | |
| Gain on interest rate contracts designated as cash flow hedges | | Gain on interest rate contracts designated as cash flow hedges | | Interest expense, net | | 10 | | | — | | |
| | | Income tax | | — | | | — | | |
| | | Net of tax | | 10 | | | — | | |
| Gain (loss) on cross-currency swap contracts designated as cash flow hedges | Gain (loss) on cross-currency swap contracts designated as cash flow hedges | | Selling, general and administrative expenses | | (18,764) | | | (8,134) | | | (47,118) | | | (5,523) | | Gain (loss) on cross-currency swap contracts designated as cash flow hedges | | Selling, general and administrative expenses | | 973 | | | (9,733) | | |
| | Interest expense, net | | (1,669) | | | (1,187) | | | (4,710) | | | (2,205) | | | Interest expense, net | | 581 | | | (1,361) | | |
| | Income tax | | 3,474 | | | 996 | | | 8,811 | | | 773 | | | Income tax | | — | | | 1,886 | | |
| | Net of tax | | (16,959) | | | (8,325) | | | (43,017) | | | (6,955) | | | Net of tax | | 1,554 | | | (9,208) | | |
| Amortization of deferred actuarial loss and prior service cost | Amortization of deferred actuarial loss and prior service cost | | Other expenses | | (5,202) | | | (6,026) | | | (15,608) | | | (19,814) | | Amortization of deferred actuarial loss and prior service cost | | Other expenses | | (4,077) | | | (5,203) | | |
| | Income tax | | 1,365 | | | 1,580 | | | 4,102 | | | 4,922 | | | Income tax | | (120) | | | 1,370 | | |
| Income (loss) from discontinued operations, net of tax | | — | | | (154) | | | — | | | 424 | | |
Pension activity associated with sale of business | Pension activity associated with sale of business | | Income (loss) from discontinued operations, net of tax | | — | | | — | | | (460) | | | — | | Pension activity associated with sale of business | | Income from discontinued operations, net of tax | | — | | | (460) | | |
| | Net of tax | | (3,837) | | | (4,600) | | | (11,966) | | | (14,468) | | | Net of tax | | (4,197) | | | (4,293) | | |
| Total reclassifications | Total reclassifications | | $ | (19,010) | | | $ | (17,104) | | | $ | (36,960) | | | $ | (34,127) | | Total reclassifications | | $ | (346) | | | $ | 844 | | |
(10) Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts and cross-currency swap contracts to manage its exposures to movements in foreign exchange rates primarily related to the Euro, Australian dollar, Euro, Canadian dollar and Mexican peso.peso and interest rate contracts to manage its exposures to movements in interest rates. The Company also uses a combination of cross-currency swap contracts and long-term debt to manage its exposure to foreign currency risk associated with the Company’s net investment in its European subsidiaries.
| | | Hedge Type | | October 1, 2022 | | January 1, 2022 | | Hedge Type | | April 1, 2023 | | December 31, 2022 |
U.S. dollar equivalent notional amount of derivative instruments: | U.S. dollar equivalent notional amount of derivative instruments: | | | | | | U.S. dollar equivalent notional amount of derivative instruments: | | | | | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Cash Flow and Mark to Market | | $ | 256,748 | | | $ | 308,071 | | Forward foreign exchange contracts | Cash Flow and Mark to Market | | $ | 348,595 | | | $ | 397,908 | |
Interest rate contracts | | Interest rate contracts | Cash Flow | | $ | 900,000 | | | $ | — | |
Cross-currency swap contracts | Cross-currency swap contracts | Cash Flow | | $ | 352,920 | | | $ | 352,920 | | Cross-currency swap contracts | Cash Flow | | $ | — | | | $ | 352,920 | |
Cross-currency swap contracts | Cross-currency swap contracts | Net Investment | | $ | 335,940 | | | $ | 335,940 | | Cross-currency swap contracts | Net Investment | | $ | — | | | $ | 335,940 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Values of Derivative Instruments
The fair values of derivative instruments related to forward foreign exchange contracts, and cross-currency swap contracts and interest rate contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
| | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| | October 1, 2022 | | January 1, 2022 | | April 1, 2023 | | December 31, 2022 |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | | | | | Derivatives designated as hedging instruments: | | | | | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Other current assets | | $ | 7,337 | | | $ | 2,898 | | Forward foreign exchange contracts | Other current assets | | $ | 2,575 | | | $ | 1,892 | |
Interest rate contracts | | Interest rate contracts | Other current assets | | 10 | | | — | |
Cross-currency swap contracts | Cross-currency swap contracts | Other current assets | | 3,291 | | | 974 | | Cross-currency swap contracts | Other current assets | | — | | | 1,033 | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Other noncurrent assets | | — | | | 83 | | Forward foreign exchange contracts | Other noncurrent assets | | — | | | 110 | |
Cross-currency swap contracts | Cross-currency swap contracts | Other noncurrent assets | | 41,709 | | | 1,979 | | Cross-currency swap contracts | Other noncurrent assets | | — | | | 16,477 | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Other current assets | | 15,444 | | | 5,439 | | Forward foreign exchange contracts | Other current assets | | 2,707 | | | 5,402 | |
Total derivative assets | Total derivative assets | | 67,781 | | | 11,373 | | Total derivative assets | | 5,292 | | | 24,914 | |
| Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | | Derivatives designated as hedging instruments: | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Accrued liabilities | | (164) | | | (349) | | Forward foreign exchange contracts | Accrued liabilities | | (1,684) | | | (1,263) | |
Cross-currency swap contracts | Cross-currency swap contracts | Accrued liabilities | | (1,952) | | | (222) | | Cross-currency swap contracts | Accrued liabilities | | — | | | (252) | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Other noncurrent liabilities | | — | | | (14) | | Forward foreign exchange contracts | Other noncurrent liabilities | | — | | | (178) | |
Interest rate contracts | | Interest rate contracts | Other noncurrent liabilities | | (14,684) | | | — | |
Cross-currency swap contracts | Cross-currency swap contracts | Other noncurrent liabilities | | (51,658) | | | (11,387) | | Cross-currency swap contracts | Other noncurrent liabilities | | — | | | (27,753) | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | | Derivatives not designated as hedging instruments: | |
Forward foreign exchange contracts | Forward foreign exchange contracts | Accrued liabilities | | (677) | | | (331) | | Forward foreign exchange contracts | Accrued liabilities | | (4,013) | | | (4,841) | |
Total derivative liabilities | Total derivative liabilities | | (54,451) | | | (12,303) | | Total derivative liabilities | | (20,381) | | | (34,287) | |
| Net derivative asset/(liability) | | $ | 13,330 | | | $ | (930) | | |
Net derivative liability | | Net derivative liability | | $ | (15,089) | | | $ | (9,373) | |
Cash Flow Hedges
The Company uses forward foreign exchange contracts and cross-currency swap contracts to reduce the effect of fluctuating foreign currencies on foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
On April 1, 2021, in connection with a reduction in the amount of the 3.5% Senior Notes designated in the European net investment hedge discussed below, the Company entered into three pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000. The Company designated these cross-currency swap contracts to hedge the undesignated portion of the foreign currency cash flow exposure related to the Company’s 3.5% Senior Notes, which had a carrying amount of €500,000 as of October 1, 2022.Notes. These cross-currency swap contracts, which mature on June 15, 2024, swapswapped Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €300,000 of the Company’s €500,000 fixed-rate 3.5% Senior Notes to a fixed-rate 4.7945% USD-denominated obligation. In February 2023, in connection with the redemption of the 3.5% Senior Notes, the Company unwound these cross-currency swap contracts, which had an original maturity date of June 15, 2024. The Company paid $30,935 to settle the cross-currency swap contracts, which was reported in “Net cash from operating activities” in the Condensed Consolidated Statements of Cash Flows. The remaining gain in AOCI of $1,254 was released into earnings at the time of settlement and is recorded in the “Interest expense, net” line in the Condensed Consolidated Statements of Income.
In March 2023, the Company entered into an interest rate contract with a total notional amount of $900,000, which amortizes down to $600,000 on March 31, 2025. The Company designated this interest rate contract, which matures on March 31, 2026, to hedge the variability in contractually specified interest rates above 50 basis points associated with future interest payments on a portion of the Company’s variable-rate term loans to lock in certainty of future cash flows.
The Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately $5,391.$4,312. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next 1211 months and for long-termthe variability in future interest payments on debt over the next 2136 months.
The effect of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Income and AOCI is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| | | | | | | |
Forward foreign exchange contracts | $ | 4,828 | | | $ | 4,827 | | | $ | 14,321 | | | $ | 11,921 | |
Cross-currency swap contracts | (19,159) | | | (9,971) | | | (44,981) | | | (9,266) | |
| | | | | | | |
Total | $ | (14,331) | | | $ | (5,144) | | | $ | (30,660) | | | $ | 2,655 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| | Quarters Ended | | Nine Months Ended |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
| | | | | | | | | |
| | | | | | | | | |
Forward foreign exchange contracts(1) | Cost of sales | | $ | 2,516 | | | $ | (4,506) | | | $ | 6,790 | | | $ | (14,161) | |
Forward foreign exchange contracts(1) | Income (loss) from discontinued operations, net of tax | | — | | | (1,078) | | | (307) | | | (2,929) | |
Cross-currency swap contracts(1) | Selling, general and administrative expenses | | (18,764) | | | (8,134) | | | (47,118) | | | (5,523) | |
Cross-currency swap contracts(1) | Interest expense, net | | (1,669) | | | (1,187) | | | (4,710) | | | (2,205) | |
| | | | | | | | | |
Total | | | $ | (17,917) | | | $ | (14,905) | | | $ | (45,345) | | | $ | (24,818) | |
The effect of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Income and AOCI is as follows: | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments | | |
| Quarters Ended | | | | |
| April 1, 2023 | | April 2, 2022 | | | | | | |
Forward foreign exchange contracts | $ | (72) | | | $ | (3,186) | | | | | | | |
Interest rate contracts | (14,674) | | | — | | | | | | | |
Cross-currency swap contracts | (2,865) | | | (4,218) | | | | | | | |
| | | | | | | | | |
Total | $ | (17,611) | | | $ | (7,404) | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| | Quarters Ended | | |
| | April 1, 2023 | | April 2, 2022 | | | | |
| | | | | | | | | |
| | | | | | | | | |
Forward foreign exchange contracts(1) | Cost of sales | | $ | 3,410 | | | $ | 1,612 | | | | | |
Forward foreign exchange contracts(1) | Income from discontinued operations, net of tax | | — | | | (307) | | | | | |
Interest rate contracts | Interest expense, net | | 10 | | | — | | | | | |
Cross-currency swap contracts(1) | Selling, general and administrative expenses | | 973 | | | (9,733) | | | | | |
Cross-currency swap contracts(1) | Interest expense, net | | 581 | | | (1,361) | | | | | |
| | | | | | | | | |
Total | | | $ | 4,974 | | | $ | (9,789) | | | | | |
(1)The Company does not exclude amounts from effectiveness testing for cash flow hedges that would require recognition into earnings based on changes in fair value.
The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded:
| | | | Quarters Ended | | Nine Months Ended | | | Quarters Ended | |
| | | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | | April 1, 2023 | | April 2, 2022 | |
Cost of sales | Cost of sales | | $ | 1,107,889 | | | $ | 1,089,890 | | | $ | 3,041,233 | | | $ | 3,064,920 | | Cost of sales | | $ | 939,717 | | | $ | 991,978 | | |
Selling, general and administrative expenses | Selling, general and administrative expenses | | $ | 421,408 | | | $ | 465,015 | | | $ | 1,259,921 | | | $ | 1,341,809 | | Selling, general and administrative expenses | | $ | 392,374 | | | $ | 413,666 | | |
Interest expense, net | Interest expense, net | | $ | 41,721 | | | $ | 40,860 | | | $ | 107,408 | | | $ | 127,760 | | Interest expense, net | | $ | 58,452 | | | $ | 31,963 | | |
Income (loss) from discontinued operations, net of tax | | $ | — | | | $ | (24,970) | | | $ | 3,965 | | | $ | (435,823) | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | $ | — | | | $ | 4,525 | | |
Net Investment Hedges
In July 2019, the Company entered into two pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000 that were designated as hedges of a portion of the beginning balance of the Company’s net investment in its European subsidiaries. These cross-currency swap contracts, which mature onhad an original maturity date of May 15, 2024, swapswapped U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 4.625% Senior Notes to a fixed-rate 2.3215% Euro-denominated obligation.
In July 2019, the Company also designated the full amount of its 3.5% Senior Notes with a carrying value of €500,000, which iswas a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment. As of April 1, 2021, the Company reduced the amount of its 3.5% Senior Notes designated in the European net investment hedge from €500,000 to €200,000. As of October 1, 2022 and January 1,December 31, 2022, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $196,040$214,110. In February 2023, in connection with the redemption of the 3.5% Senior Notes, the Company de-designated the remainder of the 3.5% Senior Notes in the European net investment hedge and $227,454, respectively.unwound these cross-currency swap contracts. The Company received $18,942 to settle the cross-currency swap contracts, which was reported in “Net cash from investing activities” in the Condensed Consolidated Statement of Cash Flows. There was a cumulative gain of $5,525 from the designated portion of the 3.5% Senior
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Notes and a cumulative gain of $19,001 from the cross-currency swap contracts that will remain in cumulative translation adjustment, a component of AOCI, until the net investment in the Company’s EUR-functional subsidiaries is sold, liquidated, or substantially liquidated. The Company does not have any derivative or nonderivative financial instruments designated as net investment hedges as of April 1, 2023.
The amount of after-tax gains (losses) included in AOCI in the Condensed Consolidated Balance Sheets related to derivative instruments and nonderivative financial instruments designated as net investment hedges are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in AOCI |
| | | Quarters Ended | | Nine Months Ended |
| | | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Euro-denominated long-term debt | | $ | 9,109 | | | $ | 3,966 | | | $ | 22,872 | | | $ | 21,722 | |
Cross-currency swap contracts | | 13,383 | | | 5,650 | | | 29,460 | | | 10,957 | |
Total | | $ | 22,492 | | | $ | 9,616 | | | $ | 52,332 | | | $ | 32,679 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | |
| | | Amount of Gain (Loss) Recognized in AOCI |
| | | Quarters Ended | | |
| | | April 1, 2023 | | April 2, 2022 | | | | |
Euro-denominated long-term debt | | $ | (469) | | | $ | 4,721 | | | | | |
Cross-currency swap contracts | | 531 | | | 1,932 | | | | | |
Total | | $ | 62 | | | $ | 6,653 | | | | | |
The effect of derivative and non-derivative instruments designated as net investment hedges on the Condensed Consolidated Statements of Income are as follows:
| | | Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income | | Location of Gain (Loss) Reclassified from AOCI into Income | | Amount of Gain (Loss) Reclassified from AOCI into Income |
| | Quarters Ended | | Nine Months Ended | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 | |
Euro-denominated long-term debt | Euro-denominated long-term debt | Income (loss) from discontinued operations, net of tax | | $ | — | | | $ | — | | | $ | (13,348) | | | $ | — | | Euro-denominated long-term debt | Income from discontinued operations, net of tax | | $ | — | | | $ | (13,348) | | |
Cross-currency swap contracts | Cross-currency swap contracts | Income (loss) from discontinued operations, net of tax | | — | | | — | | | (2,505) | | | — | | Cross-currency swap contracts | Income from discontinued operations, net of tax | | — | | | (2,505) | | |
Cross-currency swap contracts (amounts excluded from effectiveness testing) | Cross-currency swap contracts (amounts excluded from effectiveness testing) | Interest expense, net | | 2,209 | | | 1,870 | | | 6,449 | | | 5,484 | | Cross-currency swap contracts (amounts excluded from effectiveness testing) | Interest expense, net | | 960 | | | 2,012 | | |
Total | Total | | $ | 2,209 | | | $ | 1,870 | | | $ | (9,404) | | | $ | 5,484 | | Total | | $ | 960 | | | $ | (13,841) | | |
The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of net investment hedges are recorded:
| | | Quarters Ended | | Nine Months Ended | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 | |
Income (loss) from discontinued operations, net of tax | | $ | — | | | $ | (24,970) | | | $ | 3,965 | | | $ | (435,823) | | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | $ | — | | | $ | 4,525 | | |
Interest expense, net (amounts excluded from effectiveness testing) | Interest expense, net (amounts excluded from effectiveness testing) | | $ | 41,721 | | | $ | 40,860 | | | $ | 107,408 | | | $ | 127,760 | | Interest expense, net (amounts excluded from effectiveness testing) | | $ | 58,452 | | | $ | 31,963 | | |
Mark to Market Hedges
Derivatives used in mark to market hedges are not designated as hedges under the accounting standards. The Company uses forward foreign exchange derivative contracts as hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Forward foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative instruments not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Forward foreign exchange contracts | Cost of sales | | $ | (1,602) | | | $ | 6,087 | | | $ | 1,037 | | | $ | 24,711 | |
Forward foreign exchange contracts | Selling, general and administrative expenses | | 41 | | | (597) | | | (145) | | | 2,494 | |
Forward foreign exchange contracts | Income (loss) from discontinued operations, net of tax | | — | | | 859 | | | — | | | 4,812 | |
Total | | | $ | (1,561) | | | $ | 6,349 | | | $ | 892 | | | $ | 32,017 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The effect of derivative instruments not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| Location of Gain (Loss) Recognized in Income on Derivatives | | Amount of Gain (Loss) Recognized in Income |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Forward foreign exchange contracts | Cost of sales | | $ | (2,260) | | | $ | (4,202) | | | | | |
Forward foreign exchange contracts | Selling, general and administrative expenses | | 848 | | | 292 | | | | | |
Total | | | $ | (1,412) | | | $ | (3,910) | | | | | |
(11) Fair Value of Assets and Liabilities
As of OctoberApril 1, 20222023 and January 1,December 31, 2022, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to forward foreign exchange derivative contracts, cross-currency swap derivative contracts and deferred compensation plan liabilities. The fair values of forward foreign exchange derivative contracts are determined using the cash flows of the forward contracts, discount rates to account for the passage of time and current foreign exchange market data which are all based on inputs readily available in public markets and are categorized as Level 2. The fair values of cross-currency swap and interest rate derivative contracts are determined using the cash flows of the swap contracts, discount rates to account for the passage of time, current foreign exchange and interest rate market data and credit risk, which are all based on inputs readily available in public markets and are categorized as Level 2. The fair value of deferred compensation plan liabilities is based on readily available current market data and is categorized as Level 2. The Company’s defined benefit pension plan investments are not required to be measured at fair value or disclosed on a quarterly recurring basis.
There were no changes during the quarter and the nine months ended OctoberApril 1, 20222023 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of and during the quarter and the nine months ended OctoberApril 1, 2022,2023, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring basis or non-recurring basis.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.
| | | Assets (Liabilities) at Fair Value as of October 1, 2022 | | Assets (Liabilities) at Fair Value as of April 1, 2023 |
| | 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) |
Forward foreign exchange contracts - assets | Forward foreign exchange contracts - assets | $ | 22,781 | | | $ | — | | | $ | 22,781 | | | $ | — | | Forward foreign exchange contracts - assets | $ | 5,282 | | | $ | — | | | $ | 5,282 | | | $ | — | |
Cross-currency swap contracts - assets | 45,000 | | | — | | | 45,000 | | | — | | |
Interest rate contracts - assets | | Interest rate contracts - assets | 10 | | | — | | | 10 | | | — | |
| Forward foreign exchange contracts - liabilities | Forward foreign exchange contracts - liabilities | (841) | | | — | | | (841) | | | — | | Forward foreign exchange contracts - liabilities | (5,697) | | | — | | | (5,697) | | | — | |
Cross-currency swap contracts - liabilities | (53,610) | | | — | | | (53,610) | | | — | | |
Interest rate contracts - liabilities | | Interest rate contracts - liabilities | (14,684) | | | — | | | (14,684) | | | — | |
| Total derivative contracts | Total derivative contracts | 13,330 | | | — | | | 13,330 | | | — | | Total derivative contracts | (15,089) | | | — | | | (15,089) | | | — | |
Deferred compensation plan liability | Deferred compensation plan liability | (15,226) | | | — | | | (15,226) | | | — | | Deferred compensation plan liability | (14,569) | | | — | | | (14,569) | | | — | |
Total | Total | $ | (1,896) | | | $ | — | | | $ | (1,896) | | | $ | — | | Total | $ | (29,658) | | | $ | — | | | $ | (29,658) | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of January 1, 2022 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Forward foreign exchange contracts - assets | $ | 8,420 | | | $ | — | | | $ | 8,420 | | | $ | — | |
Cross-currency swap contracts - assets | 2,953 | | | — | | | 2,953 | | | — | |
Forward foreign exchange contracts - liabilities | (694) | | | — | | | (694) | | | — | |
Cross-currency swap contracts - liabilities | (11,609) | | | — | | | (11,609) | | | — | |
Total derivative contracts | (930) | | | — | | | (930) | | | — | |
Deferred compensation plan liability | (20,916) | | | — | | | (20,916) | | | — | |
Total | $ | (21,846) | | | $ | — | | | $ | (21,846) | | | $ | — | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Assets (Liabilities) at Fair Value as of December 31, 2022 |
| Total | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Forward foreign exchange contracts - assets | $ | 7,404 | | | $ | — | | | $ | 7,404 | | | $ | — | |
| | | | | | | |
Cross-currency swap contracts - assets | 17,510 | | | — | | | 17,510 | | | — | |
Forward foreign exchange contracts - liabilities | (6,282) | | | — | | | (6,282) | | | — | |
| | | | | | | |
Cross-currency swap contracts - liabilities | (28,005) | | | — | | | (28,005) | | | — | |
Total derivative contracts | (9,373) | | | — | | | (9,373) | | | — | |
Deferred compensation plan liability | (16,096) | | | — | | | (16,096) | | | — | |
Total | $ | (25,469) | | | $ | — | | | $ | (25,469) | | | $ | — | |
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximated fair value as of OctoberApril 1, 20222023 and January 1,December 31, 2022. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $68,180$54,149 and $61,948$52,023 as of OctoberApril 1, 20222023 and January 1,December 31, 2022, respectively. The fair value of debt, which is classified as a Level 2 liability, was $3,690,064$3,792,033 and $3,504,412$3,697,856 as of OctoberApril 1, 20222023 and January 1,December 31, 2022, respectively. Debt had a carrying value of $3,911,850$3,847,750 and $3,368,634$3,872,275 as of OctoberApril 1, 20222023 and January 1,December 31, 2022, respectively. The fair values were estimated using quoted market prices as provided in secondary markets, which consider the Company’s credit risk and market related conditions.
(12) Business Segment Information
The Company’s operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of the Company’s U.S.-based outlet stores, U.S. Sheer Hosiery business and certain sales from its supply chain and transitional services with the European Innerwear business which was sold on March 5, 2022. In the fourth quarter of 2021, the Company reached the decision to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan. See Note “Assets and Liabilities Held for Sale” for additional information.information regarding the U.S. Sheer Hosiery business and the sale of the European Innerwear business.
The types of products and services from which each reportable segment derives its revenues are as follows:
•Innerwear includes sales in the United States of basic branded apparel products that are replenishment in nature under the product categories of men’s underwear, women’s panties, children’s underwear and socks, and intimate apparel, which includes bras and shapewear.
•Activewear includes sales in the United States of branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel.
•International primarily includes sales of the Company’s innerwear and activewear products outside the United States, primarily in Australasia,Australia, Europe, Asia, Latin America and Canada.
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, restructuring and other action-related charges and amortization of intangibles. The accounting policies of the segments are consistent with those described in Note “Summary of Significant Accounting Policies” to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 1,December 31, 2022.
| | | Quarters Ended | | Nine Months Ended | | Quarters Ended | |
October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 | April 1, 2023 | | April 2, 2022 | |
Net sales: | Net sales: | | | | | | | | Net sales: | | | | |
Innerwear | Innerwear | $ | 625,082 | | | $ | 702,617 | | | $ | 1,889,807 | | | $ | 2,053,702 | | Innerwear | $ | 553,067 | | | $ | 578,947 | | |
Activewear | Activewear | 461,043 | | | 462,499 | | | 1,178,380 | | | 1,230,691 | | Activewear | 314,945 | | | 386,937 | | |
International | International | 502,066 | | | 536,483 | | | 1,436,384 | | | 1,521,667 | | International | 462,857 | | | 510,129 | | |
Other | Other | 82,550 | | | 87,952 | | | 255,793 | | | 242,831 | | Other | 58,541 | | | 100,143 | | |
Total net sales | Total net sales | $ | 1,670,741 | | | $ | 1,789,551 | | | $ | 4,760,364 | | | $ | 5,048,891 | | Total net sales | $ | 1,389,410 | | | $ | 1,576,156 | | |
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Segment operating profit: | | | | | | | |
Innerwear | $ | 72,608 | | | $ | 102,146 | | | | | |
Activewear | 9,974 | | | 48,984 | | | | | |
International | 51,349 | | | 89,438 | | | | | |
Other | (4,874) | | | (671) | | | | | |
Total segment operating profit | 129,057 | | | 239,897 | | | | | |
Items not included in segment operating profit: | | | | | | | |
General corporate expenses | (58,626) | | | (57,228) | | | | | |
Restructuring and other action-related charges | (6,121) | | | (4,802) | | | | | |
Amortization of intangibles | (6,991) | | | (7,355) | | | | | |
Total operating profit | 57,319 | | | 170,512 | | | | | |
Other expenses | (14,771) | | | (987) | | | | | |
Interest expense, net | (58,452) | | | (31,963) | | | | | |
Income (loss) from continuing operations before income tax expense | $ | (15,904) | | | $ | 137,562 | | | | | |
The Company incurred restructuring and other action-related charges that were reported in the following lines in the Condensed Consolidated Statements of Income:
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
April 1, 2023 | | April 2, 2022 | | | | |
Cost of sales | $ | 4,523 | | | $ | 499 | | | | | |
Selling, general and administrative expenses | 1,598 | | | 4,303 | | | | | |
Total included in operating profit | 6,121 | | | 4,802 | | | | | |
Other expenses | 8,350 | | | — | | | | | |
Interest expense, net | (1,254) | | | — | | | | | |
Total included in income (loss) from continuing operations before income tax expense | 13,217 | | | 4,802 | | | | | |
Income tax expense | — | | | 816 | | | | | |
Total restructuring and other action-related charges | $ | 13,217 | | | $ | 3,986 | | | | | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Segment operating profit: | | | | | | | |
Innerwear | $ | 99,797 | | | $ | 147,651 | | | $ | 343,602 | | | $ | 461,237 | |
Activewear | 53,491 | | | 76,172 | | | 125,332 | | | 177,813 | |
International | 69,890 | | | 86,371 | | | 215,281 | | | 235,451 | |
Other | 4,839 | | | 11,288 | | | 9,501 | | | 22,394 | |
Total segment operating profit | 228,017 | | | 321,482 | | | 693,716 | | | 896,895 | |
Items not included in segment operating profit: | | | | | | | |
General corporate expenses | (52,639) | | | (50,226) | | | (174,707) | | | (164,734) | |
Restructuring and other action-related charges | (26,451) | | | (29,096) | | | (37,633) | | | (67,153) | |
Amortization of intangibles | (7,483) | | | (7,514) | | | (22,166) | | | (22,846) | |
Total operating profit | 141,444 | | | 234,646 | | | 459,210 | | | 642,162 | |
Other expenses | (3,212) | | | (1,811) | | | (6,088) | | | (6,227) | |
Interest expense, net | (41,721) | | | (40,860) | | | (107,408) | | | (127,760) | |
Income from continuing operations before income tax expense | $ | 96,511 | | | $ | 191,975 | | | $ | 345,714 | | | $ | 508,175 | |
The Company incurred restructuring and other action-related charges that were reported in the following lines in the Condensed Consolidated Statements of Income:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Cost of sales | $ | 13,102 | | | $ | (108) | | | $ | 14,133 | | | $ | 4,599 | |
Selling, general and administrative expenses | 13,349 | | | 29,204 | | | 23,500 | | | 62,554 | |
Total included in operating profit | 26,451 | | | 29,096 | | | 37,633 | | | 67,153 | |
Income tax expense | 4,493 | | | 17,933 | | | 6,394 | | | 31,138 | |
Total restructuring and other action-related charges | $ | 21,958 | | | $ | 11,163 | | | $ | 31,239 | | | $ | 36,015 | |
The components of restructuring and other action-related charges were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarters Ended | | Nine Months Ended |
| October 1, 2022 | | October 2, 2021 | | October 1, 2022 | | October 2, 2021 |
Full Potential Plan: | | | | | | | |
Professional services | $ | 6,020 | | | $ | 11,283 | | | $ | 21,014 | | | $ | 36,793 | |
Supply chain segmentation | 13,298 | | | — | | | 14,587 | | | — | |
Technology | 2,622 | | | — | | | 9,052 | | | — | |
Impairment of intangible assets | — | | | — | | | — | | | 7,302 | |
Operating model | (18) | | | 16,000 | | | (1,112) | | | 17,600 | |
(Gain) loss on classification of assets held for sale | 4,310 | | | — | | | (6,558) | | | — | |
Other | 219 | | | 1,813 | | | 650 | | | 5,458 | |
Total included in operating profit | 26,451 | | | 29,096 | | | 37,633 | | | 67,153 | |
Discrete tax benefits | — | | | 11,802 | | | — | | | 19,097 | |
Tax benefit effect on actions | 4,493 | | | 6,131 | | | 6,394 | | | 12,041 | |
Total benefit included in income tax expense | 4,493 | | | 17,933 | | | 6,394 | | | 31,138 | |
Total restructuring and other action-related charges | $ | 21,958 | | | $ | 11,163 | | | $ | 31,239 | | | $ | 36,015 | |
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | |
| Quarters Ended | | |
| April 1, 2023 | | April 2, 2022 | | | | |
Full Potential Plan: | | | | | | | |
Supply chain segmentation | $ | 4,523 | | | $ | 1,020 | | | | | |
Technology | 3,684 | | | 4,459 | | | | | |
Professional services | 40 | | | 7,908 | | | | | |
Operating model | (1,091) | | | (1,919) | | | | | |
Gain on classification of assets held for sale | (2,139) | | | (6,528) | | | | | |
Other | 1,104 | | | (138) | | | | | |
Total included in operating profit | 6,121 | | | 4,802 | | | | | |
Loss on extinguishment of debt included in other expenses | 8,466 | | | — | | | | | |
Gain on final settlement of cross currency swap contracts included in other expenses | (116) | | | — | | | | | |
Gain on final settlement of cross currency swap contracts included in interest expense, net | (1,254) | | | — | | | | | |
Total included in income (loss) from continuing operations before income tax expense | 13,217 | | | 4,802 | | | | | |
Tax effect on actions included in income tax expense | — | | | 816 | | | | | |
Total restructuring and other action-related charges | $ | 13,217 | | | $ | 3,986 | | | | | |
Restructuring and other action-related charges within operating profit included $26,451$6,121 and $29,096$4,802 of charges related to the implementation of the Company’s Full Potential plan in the quarters ended OctoberApril 1, 20222023 and OctoberApril 2, 2021,2022, respectively. Full Potential plan charges in the quarterquarters ended OctoberApril 1, 2023 and April 2, 2022 included charges related to supply chain segmentationnon-cash gains of $13,298 to position the Company’s manufacturing network to align with revenue growth opportunities of its Full Potential plan demand trends which is reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income$2,139 and a non-cash loss of $4,310, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income,$6,528, respectively, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from an increase in carrying value due to changes in working capital.
Restructuring and other action-related charges within operating profit included $37,633 and $67,153 of charges related to the implementation of the Company’s Full Potential plan in the nine months ended October 1, 2022 and October 2, 2021, respectively. Full Potential plan charges in the nine months ended October 1, 2022 included charges related to supply chain segmentation of $14,587 to position the Company’s manufacturing network to align with revenue growth opportunities of its Full Potential plan demand trends which is reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and a non-cash gain of $6,558, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resultingprimarily from a decrease in carrying value due to changes in working capital. Additionally, Full Potential plan charges in the nine months ended October 2, 2021 included impairment charges of $7,302, whichThese valuation allowance adjustments are reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income.
In the quarter ended April 1, 2023, the Company recorded a charge of $8,466 in restructuring and other action-related charges related to the redemption of its 4.625% Senior Notes and 3.5% Senior Notes. The charge, which is recorded in the “Other expenses” line in the Condensed Consolidated Statements of Income, included a payment of $4,632 for a required make-whole premium related to the full impairmentredemption of an indefinite-lived trademarkthe 3.5% Senior Notes and a non-cash charge of $3,834 for the write-off of unamortized debt issuance costs related to a specific brand within the European Innerwear business that was excluded fromredemption of the disposal group as it was not marketed4.625% Senior Notes and the 3.5% Senior Notes. See Note “Debt” for sale.
Inadditional information. Additionally, in connection with the third quarter and nine monthsredemption of 2021,the 3.5% Senior Notes, the Company recorded a Full Potential plan chargeunwound the related cross-currency swap contracts previously designated as cash flow hedges and the remaining gain in AOCI of $16,000 for an action to resize its U.S. corporate office workforce through a voluntary retirement program$1,254 was released into earnings at the time of settlement which was reflectedis recorded in the “Selling, general and administrative expenses”“Interest expense, net” line ofin the Condensed Consolidated Statements of Income and in the “Operating model” line of the restructuring and other action-related charges table above. Income. See Note “Financial Instruments” for additional information.
At January 1,December 31, 2022, the Company had an accrual of $16,170 for employee termination and other benefitsexpected benefit payments related to the Company’s 2021 voluntary retirement program was $15,688.actions taken in prior years. During the quarter and nine months ended OctoberApril 1, 2022,2023, the Company approved actions to positionalign the Company’s manufacturing network to alignand support with revenue growth opportunities of its Full Potential plan demand trendsinitiatives and incurred charges of $7,170$1,600 for employee termination and other benefits for employees affected by the actions which are reflected in the “Cost of sales” line in the Condensed Consolidated Statement of Income and in the Supply“Supply chain segmentationsegmentation” line in the restructuring and other action-related charges table above. During the nine monthsquarter ended OctoberApril 1, 2022,2023, the Company made benefit payments and other adjustments of $12,070, have been made,$4,135, resulting in an ending accrual for the actions noted above of $10,788$13,635 which is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheets at OctoberApril 1, 2022.2023.
| | | | | |
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 interim financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 1,December 31, 2022, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for the full year or future periods, and our actual results may differ materially from those expressed in or implied by the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended January 1, 2022 and in our Quarterly Report on Form 10-Q for the quarter ended July 2,December 31, 2022. In particular, statements with respect to trends associated with our business, our multi-year growth strategy (“Full Potential plan”), any potential ongoing effects of the impacts ofCOVID-19 pandemic, including on consumer spending, global supply chains and the financial markets, our ability to deleverage on the anticipated time frame or at all, which could negatively impact our ability to satisfy the financial covenants in our Senior Secured Credit Agreement or other contractual arrangements any inadequacy, interruption, integration failure or security failure with respect to our information technology (including the ransomware attack announced on May 31, 20222022), the contemplated sale of our U.S. Sheer Hosiery business and our future financial performance included in this MD&A include forward-looking statements.
Overview
Hanesbrands Inc. (collectively with its subsidiaries, “we,” “us,” “our,” or the “Company”) is a socially responsible leading marketer of everyday basic innerwear and activewear apparel in the Americas, Australasia, Europe and Asia under some of the world’s strongest apparel brands, including Hanes, Champion, Bonds, Maidenform, Bali, Maidenform, Playtex, Bras N Things, Playtex, JMS/Just My Size, Alternative, Berlei, Wonderbra, Gear for Sports, Wonderbra, Berlei, Comfortwash and Alternativeand Comfortwash.. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, shapewear, underwear, socks and activewear produced in our low-cost global supply chain. Our products are marketed to consumers shopping in mass merchants, mid-tier and department stores, specialty stores and the consumer-directed channel, which includes our owned retail locations, as well as e-commerce sites. Our brands hold either the number one or number two market position by units sold in many of the product categories and geographies in which we compete.
Our operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of our U.S.-based outlet stores, U.S. Sheer Hosiery business and certain sales from our supply chain to the European Innerwear business which was sold on March 5, 2022.
Our Key Business Strategies
Our business strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. We operate in the global innerwear and global activewear apparel categories. These are stable, heavily branded categories where we have a strong consumer franchise based on a global portfolio of industry-leading brands that we have built over multiple decades, through hundreds of millions of direct interactions with consumers. Our Full Potential plan focuses on four pillars to drive growth and enhance long-term profitability and identifies the initiatives to unlock growth. Our four pillars of growth are to grow the Champion brand globally, drive growth in Innerwear with brands and products that appeal to younger consumers, build e-commerce excellence across channels and streamline our global portfolio. In order to deliver this growth and create a more efficient and productive business model, we have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve the Full Potential plan’s objectives. We remain highly confident that our strong brand portfolio, world-class supply chain and diverse category and geographic footprint will help us unlock our full potential, deliver long-term growth and create stockholder value.
In the first quarter of 2021, we announced that we reached the decision to exit our European Innerwear business as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. Accordingly, we began to separately report the results of our European Innerwear business as discontinued operations in our Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. On November 4, 2021, we announced that we reached an agreement to sell our European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022.
See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In addition, in the fourth quarter of 2021, we reached the decision to divest our U.S. Sheer Hosiery business, including the L’eggs brand, as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at OctoberApril 1, 2023, December 31, 2022 and January 1,April 2, 2022. The operations of our U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. We are currently exploring potential purchasers for this business and expect to complete the sale of this business within the next 12 months. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In JuneWe seek to generate strong cash flow through effectively optimizing our capital structure and managing working capital levels. We recently shifted our capital allocation strategy to focus the use of 2022, we purchased the Champion trademark for footwear in the United States, Puerto Ricoall our free cash flow (cash from operations less capital expenditures) on reducing debt and Canada from Keds, LLC (“KEDS”) for $103 million. The trademark was recorded in “Trademarksbringing our leverage back to a range that is no greater than two to three times on a net debt-to-adjusted EBITDA basis. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization excluding restructuring and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheetsaction-related costs and has an indefinite life. We previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two partiesstock compensation expense. Net debt is defined as total debt less cash and is another step forward in our Full Potential plan of growing the global Champion brand.cash equivalents.
Ransomware Attack
As previously disclosed, on May 24, 2022, we identified that we had become subject to a ransomware attack and activated our incident response and business continuity plans designed to contain the incident. As part of our forensic investigation and assessment of the impact, we determined that certain of our information technology systems were affected by the ransomware attack.
Upon discovering the incident, we took a series of measures to further safeguard the integrity of our information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. We notified appropriate law enforcement authorities as well as certain data protection regulators, and in addition to our public announcements of the incident, we began a process to provideprovided breach notifications and regulatory filings as may be required by applicable law starting in August 2022. While the2022, and that notification process continues, at this time, weis complete. We believe the incident has been contained, we have restored our critical information technology systems, and manufacturing, retail and other internal operations continue. There is no ongoing operational impact on our ability to provide our products and services. We maintain insurance, including coverage for cyber-attacks, subject to certain deductibles and policy limitations, in an amount that we believe appropriate.
We are named in two pending lawsuits in connection with theour previously disclosed ransomware incident. On October 7, 2022, a putative class action, was filed against “Hanesentitled, Roman v. Hanes Brands [sic], Inc.” alleging,, was filed in the United States District Court for the Central District of California. The lawsuit alleges, among other things, negligence, negligence per se, breach of implied contract, unjust enrichment, breach of implied covenant of good faith and fair dealing, unfair business practices under the California Business and Professions Code, and violations of the California Confidentiality of Medical Information Act in connection with the ransomware incident. The litigation isOn October 13, 2022, another putative class action, entitled, RamonToussaint v. Hanes Brands,HanesBrands,[sic] Inc., and is pendingwas filed in the United States District Court for the CentralMiddle District of California. On October 13, 2022, another putative class action was filed against HanesBrands, Inc. alleging,North Carolina. The lawsuit alleges, among other things, negligence, negligence per se, breach of implied contract, invasion of privacy, and unjust enrichment in connection with the ransomware incident. The litigation is entitled, Toussaint v. HanesBrands, Inc.pending lawsuits seek, among other things, monetary and is pendinginjunctive relief. The lawsuits have been consolidated in the United States District Court for the Middle District of North Carolina. The lawsuits seek, among other things, monetaryCarolina, and injunctive relief.Plaintiffs have been granted leave to file a consolidated complaint. Plaintiff Roman also filed a second putative class action with regard to the ransomware incident in the United States District Court for the Middle District of North Carolina on January 16, 2023, entitled Roman v. Hanesbrands,[sic] Inc., which was voluntarily dismissed without prejudice on January 20, 2023. We are vigorously defending thesethe remaining pending matters and believesbelieve the cases are without merit. We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations. However, at this early stage in the proceedings, we are not able to determine the probability of the outcome of these matters or a range of reasonably expected losses, if any.
During the quarter and nine months ended OctoberApril 1, 2022,2023, we incurred costs of approximately $1 million and $16 million,no net of expected insurance recoveries, respectively,costs related to the ransomware attack. The costs, net ofMinimal legal fees and the offsetting expected insurance recoveries incurred during the quarter ended October 1, 2022 related primarily to information technology and legal fees and are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The costs incurred during the nine months ended October 1, 2022 included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $2 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The ransomware attack also negatively impacted our ability to order materials, make and ship orders, and process payments during the second quarter ended July 2, 2022, resulting in estimated lost sales of approximately $100 million. We continue to assess the security event and cannot determine, at this time, the full extent of any proceedings or additional costs or expenses related to the impact from suchsecurity event on our business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
Financing Arrangements
In the quarter ended April 1, 2023, we entered into a new senior secured term loan B facility in an aggregate principal amount of $900 million due in 2030 (the “Term Loan B”), issued $600 million aggregate principal amount of 9.000% senior unsecured notes due in 2031 (the “9.000% Senior Notes”) and redeemed our 4.625% senior notes due in May 2024 (the “4.625% Senior Notes”) and our 3.5% senior notes due in June 2024 (the “3.5% Senior Notes”). Additionally, in November 2022 and in February 2023, given the economic conditions and the associated impact on earnings, we amended the credit agreement governing our Senior Secured Credit Facility to modify the financial covenants in order to avoid a potential covenant violation and to provide operating flexibility. See Note “Debt” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Impact of COVID-19the Macroeconomic Pressures on Our Business
AsThe macroeconomic pressures caused by the global impact of COVID-19 continues, our priority has been to protect the health and safety of our employees and customers around the world. To help mitigate the spread oflingering effects from the COVID-19 virus and in responsepandemic continue to health advisories and governmental actions and regulations, we have modified our business practices and have implemented health and safety measures that are designed to protect employees in our corporate, retail, distribution and manufacturing facilities around the world.
The COVID-19 pandemic has impactedimpact our business operations and financial results, as described in more detail under “Condensed Consolidated Results of Operations - ThirdFirst Quarter Ended OctoberApril 1, 20222023 Compared with ThirdFirst Quarter Ended OctoberApril 2, 2021” and “Condensed Consolidated Results of Operations - Nine Months Ended October 1, 2022 Compared with Nine Months Ended October 2, 2021”2022” below, primarily through reduced traffic and closures of Company-operated and third-party retail locations in certain markets, global supply chain disruptions and higher levels of inflation due to factory disruptions, port congestion, transportation delays as well as labor and container shortages, which resulted in higher operating costs. Thesecosts causing pressure on our gross and operating profit. At the height of the global supply chain disruptions havein 2022, we experienced delayed and are expected to continue to delay inventory orders and,which, in turn, deliveries to our wholesale customers and availability in our Company-operated stores and e-commerce sites. Supply chain disruptions resulted in the inability to fulfill certain customer orders and decreased product availability in our Company-owned stores and e-commerce sites which negatively impacted our net revenues.revenues and increased net inventory levels. We anticipate these supply chain disruptions could impacttook aggressive measures in 2022 to focus on reducing inventory units, including manufacturing time-out costs which reduced our sales volumesinventory units by 6% at the end of 2022 compared to 2021. We expect gross and operating margin pressure to continue in future periods.the first half of fiscal 2023 as we sell through the remainder of our higher-cost inventory. We have also incurred higher distributionexpect gross and operating margin pressure to ease in the second half of 2023 as lower cost inventory currently being produced is sold and we anniversary the manufacturing time-out costs including freight and labor costsrelated to mitigate these delays. We continue to monitor these delays and other potential disruptionsour inventory reduction initiatives in our supply chain and will implement mitigation plans as needed.2022. The future impact of the macroeconomic pressures, including the COVID-19 pandemic, supply chain disruptions and inflation, remain highly uncertain, and our business and results of operations, including our net revenues, earnings and cash flows, could continue to be adversely impacted.
Outlook for 20222023
We estimate our 20222023 guidance as follows:
•Net sales of approximately $6.16$6.05 billion to $6.21$6.20 billion, net of approximately $196$40 million of unfavorable foreign currency exchange impact;
•Operating profit of approximately $512$446 million to $542$496 million, net of approximately $26$5 million of unfavorable foreign currency exchange impact;
•Restructuring and other action-related charges totaling $61 million including Full Potential plan-related charges of approximately $55$54 million included in operating profit;profit and refinancing charges of $7 million included in interest and other expenses;
•Interest expense and other expenses of approximately $167$307 million combined;
•An effective tax rateTax expense from continuing operations of approximately 17%;$90 million to $100 million;
•Diluted earnings per share from continuing operations of approximately $0.82$0.14 to $0.89;$0.25;
•Cash flow from operating activities to be a use of approximately $400;$500 million; and
•Capital investments of approximately $140$150 million, including capital expenditures of $90$70 million within investing cash flow activities and cloud computing assetsarrangements of $50$80 million within operating cash flow activities.
Seasonality and Other Factors
Absent the effects of the COVID-19 pandemic, our operating results are typically subject to some variability due to seasonality and other factors. For instance, we have historically generated higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Our diverse range of product offerings, however, typically mitigates some of the impact of seasonal changes in demand for certain items. Sales levels in any period are also impacted by our customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse basis, our sales are impacted by discretionary consumer spending trends. Discretionary spending is affected by many factors that are outside our control, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, energy prices, unemployment trends and other matters that influence consumer confidence and spending. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. As a result, consumers may choose to purchase fewer of our products, to purchase lower-priced products of our competitors in response to higher prices for our products or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, including cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Disruptions to the global supply chain due to factory closures, port congestion, transportation delays as well as labor and container shortages may negatively impact product availability, revenue growth and gross margins. We willwould work to mitigate the impact of the global supply chain disruptions through a combination of cost savings and operating efficiencies, as well as pricing actions, which could have an adverse impact on demand. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on spending.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as seasonal and replenishable activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to consumers’ preferences and discretionary spending.
Key Financial Results from the ThirdFirst Quarter Ended OctoberApril 1, 20222023
Key financial results are as follows:
•Total net sales in the thirdfirst quarter of 20222023 were $1.67$1.39 billion, compared with $1.79$1.58 billion in the same period of 2021,2022, representing a 7%12% decrease.
•Operating profit decreased 40%66% to $141$57 million in the thirdfirst quarter of 2022,2023, compared with $235$171 million in the same period of 2021.2022. As a percentage of sales, operating profit was 8.5%4.1% in the thirdfirst quarter of 20222023 compared to 13.1%10.8% in the same period of 2021.2022.
•Diluted loss per share from continuing operations was $0.10 in the first quarter of 2023 compared with diluted earnings per share from continuing operations was $0.23 and $0.50of $0.32 in the third quartersfirst quarter of 2022 and 2021, respectively.2022.
Condensed Consolidated Results of Operations — ThirdFirst Quarter Ended OctoberApril 1, 20222023 Compared with ThirdFirst Quarter Ended OctoberApril 2, 20212022
| | | Quarters Ended | | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change | | April 1, 2023 | | April 2, 2022 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) | | (dollars in thousands) |
Net sales | Net sales | $ | 1,670,741 | | | $ | 1,789,551 | | | $ | (118,810) | | | (6.6) | % | Net sales | $ | 1,389,410 | | | $ | 1,576,156 | | | $ | (186,746) | | | (11.8) | % |
Cost of sales | Cost of sales | 1,107,889 | | | 1,089,890 | | | 17,999 | | | 1.7 | | Cost of sales | 939,717 | | | 991,978 | | | (52,261) | | | (5.3) | |
Gross profit | Gross profit | 562,852 | | | 699,661 | | | (136,809) | | | (19.6) | | Gross profit | 449,693 | | | 584,178 | | | (134,485) | | | (23.0) | |
Selling, general and administrative expenses | Selling, general and administrative expenses | 421,408 | | | 465,015 | | | (43,607) | | | (9.4) | | Selling, general and administrative expenses | 392,374 | | | 413,666 | | | (21,292) | | | (5.1) | |
Operating profit | Operating profit | 141,444 | | | 234,646 | | | (93,202) | | | (39.7) | | Operating profit | 57,319 | | | 170,512 | | | (113,193) | | | (66.4) | |
Other expenses | Other expenses | 3,212 | | | 1,811 | | | 1,401 | | | 77.4 | | Other expenses | 14,771 | | | 987 | | | 13,784 | | | 1,396.6 | |
Interest expense, net | Interest expense, net | 41,721 | | | 40,860 | | | 861 | | | 2.1 | | Interest expense, net | 58,452 | | | 31,963 | | | 26,489 | | | 82.9 | |
Income from continuing operations before income tax expense | 96,511 | | | 191,975 | | | (95,464) | | | (49.7) | | |
Income (loss) from continuing operations before income tax expense | | Income (loss) from continuing operations before income tax expense | (15,904) | | | 137,562 | | | (153,466) | | | (111.6) | |
Income tax expense | Income tax expense | 16,410 | | | 15,228 | | | 1,182 | | | 7.8 | | Income tax expense | 18,500 | | | 23,385 | | | (4,885) | | | (20.9) | |
Income from continuing operations | 80,101 | | | 176,747 | | | (96,646) | | | (54.7) | | |
Loss from discontinued operations, net of tax | — | | | (24,970) | | | 24,970 | | | (100.0) | | |
Net income | $ | 80,101 | | | $ | 151,777 | | | $ | (71,676) | | | (47.2) | % | |
Income (loss) from continuing operations | | Income (loss) from continuing operations | (34,404) | | | 114,177 | | | (148,581) | | | (130.1) | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | — | | | 4,525 | | | (4,525) | | | (100.0) | |
Net income (loss) | | Net income (loss) | $ | (34,404) | | | $ | 118,702 | | | $ | (153,106) | | | (129.0) | % |
Net Sales
Net sales decreased 7%12% during the thirdfirst quarter of 2022 versus2023 compared to the thirdfirst quarter of 20212022 primarily due to the following:
•Softer point-of-sale trendsmacro-driven slowdown in consumer spending in the U.S. and Australia, higher retailer inventory levels as a result ofat retail and the macroeconomic pressures;
•Ongoing COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $59$31 million.
Partially offset by:
•Pricing actions taken throughout 2022.
Operating Profit
Operating profit as a percentage of net sales was 8.5%4.1% during the thirdfirst quarter of 2022,2023, representing a decrease from 13.1%10.8% in the prior year. Operating margin decreased as a result of input cost inflation lowerand unfavorable sales volume, manufacturing time-out costs associated with our inventory reduction actions and higher transportation costsmix partially offset by pricing actions taken in mid-first quarter 2022 and cost reductions.reduction actions. Included in operating profit in the thirdfirst quarter of 20222023 and 20212022 were charges of $26$6 million and $29$5 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses increased $1$14 million in the thirdfirst quarter of 2023 compared to the first quarter of 2022 comparedprimarily due to recording charges of nearly $9 million as a result of the redemption of our 4.625% Senior Notes and our 3.5% Senior Notes in the first quarter of 2023. The charges included a payment of $5 million for a required make-whole premium related to the third quarterredemption of 2021 duethe 3.5% Senior Notes and non-cash charges of $4 million for the write-off of unamortized debt issuance costs. See Note “Debt” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Other expenses also included higher funding fees for sales of accounts receivable to financial institutions in 2022 offset by lowerand higher pension expense in 2022.2023.
Interest Expense – Interest expense was higher by $1$26 million in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 20212022 primarily due to higher weighted average outstanding debt balances partially offset byand a lowerhigher weighted average interest rate on our borrowings during the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 2021.2022. Additionally, in conjunction with the redemption of the 3.5% Senior Notes described in “Other Expenses” above, we unwound the related cross-currency swap contracts previously designated as cash flow hedges and the remaining gain in AOCI of $1 million was released into earnings at the time of settlement which partially offset interest expense in the first quarter of 2023. See Note “Financial Instruments” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Our weighted average interest rate on our outstanding debt was 4.08%5.78% for the thirdfirst quarter of 20222023 compared to 4.12%3.53% for the thirdfirst quarter of 2021.2022.
Income Tax Expense – OurIn the first quarter of 2023, income tax expense was $19 million, resulting in an effective income tax rate was 17.0%of (116.3)% and 7.9% forin the third quartersfirst quarter of 2022, and 2021, respectively. The higherincome tax expense was $23 million, resulting in an effective income tax rate of 17.0%. Our effective tax rate for the thirdfirst quarter of 2022 was2023 primarily differs from the U.S. statutory rate due to non-recurringvaluation allowances against certain net deferred tax assets. Additionally, we had unfavorable discrete tax charges totaling $3items of $8 million for adjustments related to prior period tax returns duringand $2 million in the thirdfirst quarter of 2023 and 2022, versus discrete tax benefits of $4 million for the release of uncertain tax benefits and $5 million for adjustments related to prior period tax returns and approval of certain filings by taxing authorities during the third quarter of 2021.respectively.
In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IR Act”), which, among other things, introduces a 15% minimum tax based on adjusted financial statement income of certain large corporations with a three year average adjusted financial statement income in excess of $1 billion, a 1% excise tax on the fair market stock repurchases by covered
corporations, and several tax incentives to promote clean energy. We are continuing to evaluate the IR Act and its potential impact on future periods and at this time we do not expect the IR Act to have a material impact on our consolidated financial statements.
Discontinued Operations – The results of our discontinued operations include the operations of our European Innerwear business which we reached the decision to exit at the end of the first quarter of 2021was sold in connection with our Full Potential plan. Onplan on March 5, 2022, we completed the sale of the European Innerwear business.2022. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — ThirdFirst Quarter Ended OctoberApril 1, 20222023 Compared with ThirdFirst Quarter Ended OctoberApril 2, 20212022
| | | Net Sales | | | Net Sales | |
| | Quarters Ended | | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change | | April 1, 2023 | | April 2, 2022 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) | | (dollars in thousands) |
Innerwear | Innerwear | $ | 625,082 | | | $ | 702,617 | | | $ | (77,535) | | | (11.0) | % | Innerwear | $ | 553,067 | | | $ | 578,947 | | | $ | (25,880) | | | (4.5) | % |
Activewear | Activewear | 461,043 | | | 462,499 | | | (1,456) | | | (0.3) | | Activewear | 314,945 | | | 386,937 | | | (71,992) | | | (18.6) | |
International | International | 502,066 | | | 536,483 | | | (34,417) | | | (6.4) | | International | 462,857 | | | 510,129 | | | (47,272) | | | (9.3) | |
Other | Other | 82,550 | | | 87,952 | | | (5,402) | | | (6.1) | | Other | 58,541 | | | 100,143 | | | (41,602) | | | (41.5) | |
Total | Total | $ | 1,670,741 | | | $ | 1,789,551 | | | $ | (118,810) | | | (6.6) | % | Total | $ | 1,389,410 | | | $ | 1,576,156 | | | $ | (186,746) | | | (11.8) | % |
| | | Operating Profit and Margin | | | Operating Profit and Margin | |
| | Quarters Ended | | | Quarters Ended | |
| | October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change | | April 1, 2023 | | April 2, 2022 | | Higher (Lower) | | Percent Change |
| | (dollars in thousands) | | (dollars in thousands) |
Innerwear | Innerwear | $ | 99,797 | | | 16.0 | % | | $ | 147,651 | | | 21.0 | % | | $ | (47,854) | | | (32.4) | % | Innerwear | $ | 72,608 | | | 13.1 | % | | $ | 102,146 | | | 17.6 | % | | $ | (29,538) | | | (28.9) | % |
Activewear | Activewear | 53,491 | | | 11.6 | | | 76,172 | | | 16.5 | | | (22,681) | | | (29.8) | | Activewear | 9,974 | | | 3.2 | | | 48,984 | | | 12.7 | | | (39,010) | | | (79.6) | |
International | International | 69,890 | | | 13.9 | | | 86,371 | | | 16.1 | | | (16,481) | | | (19.1) | | International | 51,349 | | | 11.1 | | | 89,438 | | | 17.5 | | | (38,089) | | | (42.6) | |
Other | Other | 4,839 | | | 5.9 | | | 11,288 | | | 12.8 | | | (6,449) | | | (57.1) | | Other | (4,874) | | | (8.3) | | | (671) | | | (0.7) | | | (4,203) | | | 626.4 | |
Corporate | Corporate | (86,573) | | | NM | | (86,836) | | | NM | | 263 | | | (0.3) | | Corporate | (71,738) | | | NM | | (69,385) | | | NM | | (2,353) | | | 3.4 | |
Total | Total | $ | 141,444 | | | 8.5 | % | | $ | 234,646 | | | 13.1 | % | | $ | (93,202) | | | (39.7) | % | Total | $ | 57,319 | | | 4.1 | % | | $ | 170,512 | | | 10.8 | % | | $ | (113,193) | | | (66.4) | % |
Innerwear
Innerwear net sales decreased 11%4% compared to the thirdfirst quarter of 20212022 primarily due to softer point-of-sale trends and retailer inventory reductions as a result ofstemming from the macroeconomic pressures partially offset by pricing actions taken and retail space gains in the first quartertaken mid-quarter of 2022.
Innerwear operating margin was 16.0%13.1%, a decrease from 21.0%17.6% in the same period a year ago. The operating margin decline resulted from input cost inflation, lower sales volume manufacturing time-out costs associated with our inventory reduction actions and unfavorable product and channel mix partially offset by pricing actions taken mid-quarter of 2022 and cost reductions.reduction actions.
Activewear
Activewear net sales decreased 0.3%19% compared to the thirdfirst quarter of 2021 due to2022 driven by the slowdown in consumer spending, which resulted in softer point-of-sale trends and higher inventory levels at retail, particularly in the printwear channel, as a result of the macroeconomic pressures primarily related to thewell as strategic channel clean-up work within Champion brand.in the U.S. The net sales decrease was partially offset by growth in the collegiate and printwear channels and pricing actions primarily taken in the third quarter of 2022.channel.
Activewear operating margin was 11.6%3.2%, a decrease from 16.5% in the same period a year ago. The operating margin decline resulted from higher levels of inflation, manufacturing time-out costs associated with our inventory reduction actions and unfavorable product mix partially offset by pricing actions and cost reductions.
International
Net sales in the International segment decreased 6% compared to the third quarter of 2021 due to unfavorable foreign currency exchange rates. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $59 million in the third quarter of 2022. International net sales on a constant currency basis, defined as net sales excluding the
impact of foreign currency, increased 5%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results. Net sales on a constant currency basis increased as a result of Champion growth in Europe as well as innerwear growth in Australia and the Americas. The increase in net sales was partially offset by Champion declines in certain Asian markets.
International operating margin was 13.9%, a decrease from 16.1% in the same period a year ago. The decrease in operating margin primarily resulted from higher levels of inflation and input costs, which was partially offset by disciplined expense management during the quarter.
Other
Other net sales decreased primarily as a result of decreased traffic at our retail outlets in the third quarter of 2022 compared to the third quarter of 2021. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
We have continued certain sales from our supply chain to the European Innerwear business on a transitional basis after the sale of the business. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Corporate
Corporate expenses were slightly lower in the third quarter of 2022 compared to the third quarter of 2021 primarily due to lower variable compensation costs and lower restructuring and other action-related charges partially offset by increased information technology costs. Included in restructuring and other action-related charges within operating profit in the third quarter of 2022 and 2021 were $26 million and $29 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the third quarter of 2022 included charges related to supply chain segmentation of $13 million to position our manufacturing network to align with revenue growth opportunities of our Full Potential plan demand trends and a non-cash loss of $4 million to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from an increase in carrying value due to changes in working capital. Full Potential plan charges in the third quarter of 2021 included a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program.
| | | | | | | | | | | |
| Quarters Ended |
| October 1, 2022 | | October 2, 2021 |
| (dollars in thousands) |
Restructuring and other action-related charges: | | | |
Full Potential Plan: | | | |
Professional services | $ | 6,020 | | | $ | 11,283 | |
Supply chain segmentation | 13,298 | | | — | |
Loss on classification of assets held for sale | 4,310 | | | — | |
Technology | 2,622 | | | — | |
Operating model | (18) | | | 16,000 | |
Other | 219 | | | 1,813 | |
Total included in operating profit | 26,451 | | | 29,096 | |
Discrete tax benefits | — | | | 11,802 | |
Tax benefit effect on actions | 4,493 | | | 6,131 | |
Total benefit included in income tax expense | 4,493 | | | 17,933 | |
Total restructuring and other action-related charges | $ | 21,958 | | | $ | 11,163 | |
Condensed Consolidated Results of Operations — Nine Months Ended October 1, 2022 Compared with Nine Months Ended October 2, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Net sales | $ | 4,760,364 | | | $ | 5,048,891 | | | $ | (288,527) | | | (5.7) | % |
Cost of sales | 3,041,233 | | | 3,064,920 | | | (23,687) | | | (0.8) | |
Gross profit | 1,719,131 | | | 1,983,971 | | | (264,840) | | | (13.3) | |
Selling, general and administrative expenses | 1,259,921 | | | 1,341,809 | | | (81,888) | | | (6.1) | |
Operating profit | 459,210 | | | 642,162 | | | (182,952) | | | (28.5) | |
Other expenses | 6,088 | | | 6,227 | | | (139) | | | (2.2) | |
Interest expense, net | 107,408 | | | 127,760 | | | (20,352) | | | (15.9) | |
Income from continuing operations before income tax expense | 345,714 | | | 508,175 | | | (162,461) | | | (32.0) | |
Income tax expense | 58,775 | | | 55,161 | | | 3,614 | | | 6.6 | |
Income from continuing operations | 286,939 | | | 453,014 | | | (166,075) | | | (36.7) | |
Income (loss) from discontinued operations, net of tax | 3,965 | | | (435,823) | | | 439,788 | | | (100.9) | |
Net income | $ | 290,904 | | | $ | 17,191 | | | $ | 273,713 | | | 1,592.2 | % |
| | | | | | | |
| | | | | | | |
Net Sales
Net sales decreased 6% during the nine months of 2022 versus the nine months of 2021 primarily due to the following:
•The impact of the ransomware attack to the business;
•Softer point-of-sale trends and higher retailer inventory levels as a result of the macroeconomic pressures;
•Global supply chain disruptions resulting in product delays;
•Ongoing COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $127 million.
Partially offset by:
•Pricing actions taken throughout 2022; and
•Strong consumer demand in the Americas.
Operating Profit
Operating profit as a percentage of net sales was 9.6% for the nine months of 2022, representing a decrease from 12.7% in the prior year. Operating margin decreased as a result of lower sales volume, input cost inflation, impact from the ransomware attack, costs associated with our manufacturing time-out inventory reduction actions, higher transportation and distribution costs and increased Full Potential plan-related investments in brand marketing and technology partially offset by pricing actions and cost reductions. Included in operating profit in the nine months of 2022 and 2021 were charges of $38 million and $67 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses decreased slightly in the nine months of 2022 compared to the same period in 2021 due to lower pension expense partially offset by higher funding fees for sales of accounts receivable to financial institutions in 2022.
Interest Expense – Interest expense was lower by $20 million in the nine months of 2022 compared to the same period in 2021, primarily due to a lower weighted average interest rate on our borrowings partially offset by higher weighted average outstanding debt balances during the nine months of 2022. Our weighted average interest rate on our outstanding debt was 3.45% for the nine months of 2022, compared to 4.12% for the nine months of 2021.
Income Tax Expense – Our effective income tax rate was 17.0% and 10.9% for the nine months of 2022 and 2021, respectively. The higher effective tax rate for the nine months of 2022 was primarily due to non-recurring discrete tax charges of $9 million for assessments and adjustments for prior period tax returns and measurement of deferred tax liabilities during the nine months of 2022 versus non-recurring discrete tax benefits of $11 million for the release of reserves for unrecognized tax
benefits and $4 million for adjustments related to prior period tax returns and approval of certain filings by taxing authorities, partially offset by a discrete charge for changes in valuation allowances of $5 million during the nine months of 2021.
In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IR Act”), which, among other things, introduces a 15% minimum tax based on adjusted financial statement income of certain large corporations with a three year average adjusted financial statement income in excess of $1 billion, a 1% excise tax on the fair market stock repurchases by covered corporations, and several tax incentives to promote clean energy. We are continuing to evaluate the IR Act and its potential impact on future periods and at this time we do not expect the IR Act to have a material impact on our consolidated financial statements.
DiscontinuedOperations – The results of our discontinued operations include the operations of our European Innerwear business which we reached the decision to exit at the end of the first quarter of 2021 in connection with our Full Potential plan. On March 5, 2022, we completed the sale of the European Innerwear business. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — Nine Months Ended October 1, 2022 Compared with Nine Months Ended October 2, 2021
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | | | |
| Nine Months Ended | | | | |
| October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Innerwear | $ | 1,889,807 | | | $ | 2,053,702 | | | $ | (163,895) | | | (8.0) | % |
Activewear | 1,178,380 | | | 1,230,691 | | | (52,311) | | | (4.3) | |
International | 1,436,384 | | | 1,521,667 | | | (85,283) | | | (5.6) | |
Other | 255,793 | | | 242,831 | | | 12,962 | | | 5.3 | |
Total | $ | 4,760,364 | | | $ | 5,048,891 | | | $ | (288,527) | | | (5.7) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating Profit and Margin | | | | |
| Nine Months Ended | | | | |
| October 1, 2022 | | October 2, 2021 | | Higher (Lower) | | Percent Change |
| (dollars in thousands) |
Innerwear | $ | 343,602 | | | 18.2 | % | | $ | 461,237 | | | 22.5 | % | | $ | (117,635) | | | (25.5) | % |
Activewear | 125,332 | | | 10.6 | | | 177,813 | | | 14.4 | | | (52,481) | | | (29.5) | |
International | 215,281 | | | 15.0 | | | 235,451 | | | 15.5 | | | (20,170) | | | (8.6) | |
Other | 9,501 | | | 3.7 | | | 22,394 | | | 9.2 | | | (12,893) | | | (57.6) | |
Corporate | (234,506) | | | NM | | (254,733) | | | NM | | 20,227 | | | (7.9) | |
Total | $ | 459,210 | | | 9.6 | % | | $ | 642,162 | | | 12.7 | % | | $ | (182,952) | | | (28.5) | % |
Innerwear
Innerwear net sales decreased 8% compared to the nine months of 2021 primarily due to business disruption as a result of the ransomware attack in the second quarter of 2022, softer point-of-sale trends, retailer inventory reductions and last year’s one-time sales benefits from retailer restocking and government-stimulus spending partially offset by pricing actions taken and retail space gains in the first quarter of 2022.
Innerwear operating margin was 18.2%, a decrease from 22.5% in the same period a year ago. The operating margin decline resulted from input cost inflation, lower sales volume, manufacturing time-out costs associated with our inventory reduction actions, unfavorable product and channel mix and increased distribution costs resulting from expedited freight to service new retail space gains partially offset by pricing actions and cost reductions.
Activewear
Activewear net sales decreased 4% compared to the nine months of 2021 primarily due to softer point-of-sale trends primarily related to the Champion brand, retailer inventory levels and business disruption as a result of the ransomware attack in the second quarter of 2022. The net sales decrease was partially offset by growth in the collegiate and printwear channels and pricing actions primarily taken in the third quarter of 2022.
Activewear operating margin was 10.6%, a decrease from 14.4% in the same period a year ago. The operating margin decline resulted from lower sales volume, manufacturing time-out costs associated with our inventory reduction actions, higher
levels ofinput cost inflation, unfavorable product mix and increased brand marketing investmentshigher reserves as compared to last year due to higher inventory levels at retail partially offset by pricing actions taken during 2022 and cost reductions.reduction actions.
International
Net sales in the International segment decreased 6%9% compared to the nine monthsfirst quarter of 20212022 due to unfavorable foreign currency exchange rates, operational challenges experienced from the ransomware attack during the second quarter of 2022, global supply chain disruptions resulting in product delays in Australia and ongoing COVID-related pressures on consumer traffic in certain marketshigher inventory levels at retail in Asia partially offset by growthand macroeconomic pressures impacting consumer sentiment in the Americas.Australia. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $127$31 million in the nine monthsfirst quarter of 2022.2023. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, increaseddecreased 3%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results.
International operating margin was 15.0%11.1%, a decrease from 15.5%17.5% in the same period a year ago. The decrease in operating margin primarily resulted from higher levels of inflation and input costs which was partially offset by disciplined expense management during the nine months of 2022.inflation, transactional impact from foreign exchange rates and unfavorable business mix.
Other
Other net sales increaseddecreased primarily due to increasedas a result of decreased sales from our supply chain to the European Innerwear business partially offset by lower sales at our retail outlets duringin the nine monthsfirst quarter of 20222023 compared to the nine monthsfirst quarter of 2021. 2022. Operating margin decreased due to the deleverage of selling, general and administrative expenses due to the decline in sales volume.
We have continued certain sales from our supply chain to the European Innerwear business on a transitional basis after the sale of the business in the first quarter of 2022. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
Corporate
Corporate
Corporate expenses were lowerhigher in the nine monthsfirst quarter of 20222023 compared to the nine monthsfirst quarter of 20212022 primarily due to lowerincreased information technology costs and higher restructuring and other action-related charges andpartially offset by lower variable compensation costs partially offset by increased information technology costs coupled with expenses, net of expected insurance recoveries, related to the ransomware attack which occurred during the second quarter of 2022. During the nine months ended October 1, 2022, we incurred costs of approximately $16 million, net of expected insurance recoveries, related to the ransomware attack which included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $2 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. costs. Included in restructuring and other action-related charges within operating profit in the nine monthsfirst quarter of 2023 and 2022 and 2021 were $38$6 million and $67$5 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the nine months ofquarters ended April 1, 2023 and April 2, 2022 included charges related to supply chain segmentationnon-cash gains of $15$2 million to position our manufacturing network to align with revenue growth opportunities of our Full Potential plan demand trends and a non-cash gain of $7 million, respectively, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting primarily from a decrease in carrying value due to changes in working capital. Full Potential plan charges in the nine months of 2021 included a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program and impairment charges of $7 million related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group.
| | | Nine Months Ended | | Quarters Ended |
| | October 1, 2022 | | October 2, 2021 | | April 1, 2023 | | April 2, 2022 |
| | (dollars in thousands) | | (dollars in thousands) |
Restructuring and other action-related charges: | Restructuring and other action-related charges: | | Restructuring and other action-related charges: | |
Full Potential Plan: | Full Potential Plan: | | Full Potential Plan: | |
Professional services | $ | 21,014 | | | $ | 36,793 | | |
Supply chain segmentation | Supply chain segmentation | 14,587 | | | — | | Supply chain segmentation | $ | 4,523 | | | $ | 1,020 | |
Technology | Technology | 9,052 | | | — | | Technology | 3,684 | | | 4,459 | |
Impairment of intangible assets | — | | | 7,302 | | |
Professional services | | Professional services | 40 | | | 7,908 | |
Operating model | Operating model | (1,112) | | | 17,600 | | Operating model | (1,091) | | | (1,919) | |
Gain on classification of assets held for sale | Gain on classification of assets held for sale | (6,558) | | | — | | Gain on classification of assets held for sale | (2,139) | | | (6,528) | |
Other | Other | 650 | | | 5,458 | | Other | 1,104 | | | (138) | |
Total included in operating profit | Total included in operating profit | 37,633 | | | 67,153 | | Total included in operating profit | 6,121 | | | 4,802 | |
Discrete tax benefits | — | | | 19,097 | | |
Tax benefit effect on actions | 6,394 | | | 12,041 | | |
Total benefit included in income tax expense | 6,394 | | | 31,138 | | |
Loss on extinguishment of debt included in other expenses | | Loss on extinguishment of debt included in other expenses | 8,466 | | | — | |
Gain on final settlement of cross currency swap contracts included in other expenses | | Gain on final settlement of cross currency swap contracts included in other expenses | (116) | | | — | |
Gain on final settlement of cross currency swap contracts included in interest expense, net | | Gain on final settlement of cross currency swap contracts included in interest expense, net | (1,254) | | | — | |
Total included in income (loss) from continuing operations before income tax expense | | Total included in income (loss) from continuing operations before income tax expense | 13,217 | | | 4,802 | |
Tax effect on actions included in income tax expense | | Tax effect on actions included in income tax expense | — | | | 816 | |
Total restructuring and other action-related charges | Total restructuring and other action-related charges | $ | 31,239 | | | $ | 36,015 | | Total restructuring and other action-related charges | $ | 13,217 | | | $ | 3,986 | |
|
Liquidity and Capital Resources
Cash Requirements and Trends and Uncertainties Affecting Liquidity
We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. Our primary uses ofWe recently shifted our capital allocation strategy to utilize our cash arefrom operations for payments to our employees and vendors in the normal course of business and to reinvest in our business through capital expenditures, maturities ofexpenditures. We then plan to utilize our free cash flow (cash from operations less capital expenditures) to pay down debt and related interest payments, contributions to bring our pension plans, regular quarterly dividend payments, income tax payments and repurchases of our stock.leverage back to a range that is no greater than two to three times on a net debt-to-adjusted EBITDA basis.
Based on our current estimate of future earnings and cash flows, we believe we have sufficient cash and available borrowings to support our operations and key business strategies for at least one year from the issuance of these financial statements based on our current expectations and forecasts.
In the quarter ended April 1, 2023, we entered into the Term Loan B, the 9.000% Senior Notes and redeemed our 4.625% Senior Notes and our 3.5% Senior Notes. Additionally, in November 2022 and in February 2023, given the uncertain economic environmentconditions and the associated impact on future earnings, we amended the credit agreement governing our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants in order to avoid a potential covenant violation and to provide operating flexibility. See Note “Debt” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Our primary sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our accounts receivable securitization facility (the “ARS Facility”) and our other international credit facilities.
We had the following borrowing capacity and available liquidity under our credit facilities as of April 1, 2023:
| | | | | | | | | | | |
| As of April 1, 2023 |
Borrowing Capacity | | Available Liquidity |
| (dollars in thousands) |
Senior Secured Credit Facility: | | | |
Revolving Loan Facility(1) | $ | 1,000,000 | | | $ | 682,360 | |
Accounts Receivable Securitization Facility(2) | 169,406 | | | 3,406 | |
Other international credit facilities | 75,666 | | | 44,383 | |
Total liquidity from credit facilities | $ | 1,245,072 | | | $ | 730,149 | |
Cash and cash equivalents | | | 213,209 | |
Total liquidity | | | $ | 943,358 | |
(1)A portion of the Revolving Loan Facility is available to be borrowed in Euros or Australian dollars.
(2)Borrowing availability under the ARS Facility is subject to a quarterly fluctuating facility limit ranging from $200 million to $225 million based on the applicable quarter and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans.
The amendment effects changes to certain provisionsfollowing have impacted or may impact our liquidity:
•In the quarter ended April 1, 2023, we entered into the Term Loan B, the 9.000% Senior Notes and redeemed our 4.625% Senior Notes and our 3.5% Senior Notes.
•We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities.
•The macroeconomic pressures including the COVID-19 pandemic, supply chain disruptions and inflationary pressures have had, and may continue to have, a negative impact on our business.
•Although we have historically paid a regular quarterly dividend, the Hanesbrands Board of Directors eliminated our quarterly cash dividend as we recently shifted our capital allocation strategy to pay down debt to bring our leverage back to a range that is no greater than two to three times on a net debt-to-adjusted EBITDA basis. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors.
•We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
•We have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve our Full Potential plan’s objectives.
•We expect capital expenditures of approximately $150 million in 2023, including capital expenditures of $70 million within investing cash flow activities and cloud computing arrangements of $80 million within operating cash flow activities.
•In the future, we may pursue strategic business acquisitions or divestitures.
•We expect to have no required cash contributions to our U.S. pension plans in 2023 based on a preliminary calculation by our actuary but we may also elect to make voluntary contributions.
•We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. We have not changed our reinvestment strategy from the prior year with regards to our unremitted foreign earnings and intend to remit foreign earnings totaling $269 million.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the quarters ended April 1, 2023 and April 2, 2022 was derived from our condensed consolidated interim financial statements.
| | | | | | | | | | | |
| Quarters Ended |
| April 1, 2023 | | April 2, 2022 |
| (dollars in thousands) |
Operating activities | $ | 44,537 | | | $ | (231,189) | |
Investing activities | (5,300) | | | (29,590) | |
Financing activities | (64,180) | | | 67,567 | |
Effect of changes in foreign exchange rates on cash | (261) | | | 1,793 | |
Change in cash and cash equivalents | (25,204) | | | (191,419) | |
Cash and cash equivalents at beginning of year | 238,413 | | | 560,629 | |
Cash and cash equivalents at end of period | $ | 213,209 | | | $ | 369,210 | |
Operating Activities
Our overall liquidity has historically been driven by our cash flow provided by operating activities, which is dependent on net income and changes in our working capital. As compared to the prior year, net cash provided by operating activities resulting from improved working capital management primarily driven by lower inventory production and favorable accounts receivable, accounts payable and accruals activity partially offset by the payment to unwind and settle the cross-currency swap contracts previously designated as cash flow hedges in connection with the redemption of 3.5% Senior Notes and the increase capital investments in our cloud computing assets.
Investing Activities
The decrease in net cash used by investing activities in the first quarter of 2023 compared to the same period of 2022 was primarily the result of the final settlement of the cross currency swap contracts previously designated as net investment hedges in connection with the redemption of 3.5% Senior Notes which resulted in a $19 million cash inflow in the first quarter of 2023 and as a result of the sale of the European Innerwear business which resulted in an $11 million cash outflow in the first quarter of 2022.
Financing Activities
Net cash used for financing activities in the first quarter of 2023 primarily resulted from net payments on our ARS Facility and our Revolving Loan Facility as compared to the same period of 2022 where net cash provided by financing activities resulted from net borrowings on our ARS Facility and our Revolving Loan Facility. Additionally, in the quarter ended April 1, 2023, we refinanced our debt structure to provide greater near-term financial flexibility given the uncertainty within the current macroeconomic environment. The refinancing consisted of entering into the Term Loan B, issuing the 9.000% Senior Notes and redeeming our 4.625% Senior Notes and 3.5% Senior Notes. We paid approximately $27 million to amend and refinance the credit facilities which included a required make-whole premium of $5 million related to the redemption of the 3.5% Senior Notes and total capitalized debt issuance costs of $22 million related to the issuance of Term Loan B and the 9.000% Senior Notes. See Note “Debt” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Net cash from financing activities in the first quarter of 2022 also included a dividend payment of $52 million and shares repurchased at a total cost of $25 million. Additionally, we made scheduled repayments on Term Loan A of $6 million in the first quarter of 2023 and 2022.
Financing Arrangements
In the quarter ended April 1, 2023, we entered into the Term Loan B, issued the 9.000% Senior Notes and redeemed our 4.625% Senior Notes and our 3.5% Senior Notes. Additionally, in November 2022 and in February 2023, given the economic conditions and the associated impact on earnings, we amended the credit agreement governing our Senior Secured Credit Facility to modify the financial covenants in order to avoid a potential covenant violation and to provide operating flexibility. See Note “Debt” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of April 1, 2023, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. Under the terms of our Senior Secured Credit Facility, among other financial and non-financial covenants, we are required to maintain a minimum interest coverage ratio and a maximum total debt to EBITDA (earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 30, 2023 (such period of time, the “Covenant Relief Period”)Facility), including: (a) an increase in the maximumor leverage ratio, from 4.50 to 1.00 to 5.25 to 1.00 for the quarter ended December 31, 2022, 5.75 to 1.00 for the quarters ending April 1, 2023 through September 30, 2023 and 5.25 to 1.00 for the quarter ending December 30, 2023 reverting back to 4.50 to 1.00 for each quarter after the Covenant Relief Period; (b) a reductionof
which will revert back to the current amounts after the Covenant Relief Period; (d) the addition of two new tiers to the top of the pricing grid if the maximum leverage ratio exceeds 5.00 to 1.00 and 5.50 to 1.00; and (e) the 0.50 increaseis defined in the maximum leverage ratio resulting from a material permitted acquisition is suspended through the Covenant Relief Period. In conjunction with this amendment, we will transition the Senior Secured Credit Facility fromFacility. The method of calculating all of the London Interbank Offered Rate tocomponents used in the Secured Overnight Financing Rate with a 10 basis points credit spread adjustment alreadycovenants is included in the Senior Secured Credit Facility. After obtaining the debt amendment, we
We expect to maintain compliance with our covenants, as amended, for at least one year from the issuance of these financial statements based on our current expectations and forecasts.forecasts, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 or other SEC filings could cause noncompliance. If economic conditions worsen and our earnings and operating cash flows do not start to recover as currently estimated by management, this could impact our ability to maintain compliance with our amended financial covenants and require us to seek additional amendments to our Senior Secured Credit Facility. If we are not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
Our sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our accounts receivable securitization facility (the “ARS Facility”) and our other international credit facilities.
We had the following borrowing capacity and available liquidity under our credit facilities as of October 1, 2022:
| | | | | | | | | | | |
| As of October 1, 2022 |
Borrowing Capacity | | Available Liquidity |
| (dollars in thousands) |
Senior Secured Credit Facility: | | | |
Revolving Loan Facility(1) | $ | 1,000,000 | | | $ | 560,028 | |
Accounts Receivable Securitization Facility(2) | 225,000 | | | 13,500 | |
Other international credit facilities | 61,310 | | | 36,121 | |
Total liquidity from credit facilities | $ | 1,286,310 | | | $ | 609,649 | |
Cash and cash equivalents | | | 253,131 | |
Total liquidity | | | $ | 862,780 | |
(1)A portion of the Revolving Loan Facility is available to be borrowed in Euros or Australian dollars.
(2)Borrowing availability under the ARS Facility is subject to a quarterly fluctuating facility limit, not to exceed $225 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans.
The following have impacted or may impact our liquidity:
•The COVID-19 pandemic which resulted in supply chain disruptions and inflationary pressures has had, and may continue to have, a negative impact on our business.
•For the nine months ended October 1, 2022, we entered into transactions to repurchase approximately 1.6 million shares of our common stock at a total cost of $25 million including broker’s commissions. At October 1, 2022, the remaining repurchase authorization under our current share repurchase program announced on February 2, 2022 totaled approximately $575 million.
•We have historically paid a regular quarterly dividend. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors.
•We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities.
•We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
•We have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve our Full Potential plan’s objectives.
•We expect capital investments of approximately $140 million in 2022, including capital expenditures of $90 million within investing cash flow activities and cloud computing assets of $50 million within operating cash flow activities. For the nine months ended October 1, 2022, we invested approximately $71 million and $33 million in capital expenditures and cloud computing assets, respectively.
•In the future, we may pursue strategic business acquisitions or divestitures.
•We expect to have no required cash contributions to our U.S. pension plan in 2022 based on a preliminary calculation by our actuary but we may elect to make voluntary contributions.
•We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. We have not changed our reinvestment strategy from the prior year with regards to our unremitted foreign earnings and intend to remit foreign earnings totaling $579 million.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the nine months ended October 1, 2022 and October 2, 2021 was derived from our condensed consolidated interim financial statements.
| | | | | | | | | | | |
| Nine Months Ended |
| October 1, 2022 | | October 2, 2021 |
| (dollars in thousands) |
Operating activities | $ | (491,682) | | | $ | 527,376 | |
Investing activities | (179,336) | | | (44,404) | |
Financing activities | 435,248 | | | (475,924) | |
Effect of changes in foreign exchange rates on cash | (71,728) | | | (27,207) | |
Change in cash and cash equivalents | (307,498) | | | (20,159) | |
Cash and cash equivalents at beginning of year | 560,629 | | | 910,603 | |
Cash and cash equivalents at end of period | $ | 253,131 | | | $ | 890,444 | |
| | | |
Balances included in the Condensed Consolidated Balance Sheets: | | | |
Cash and cash equivalents | $ | 253,131 | | | $ | 873,628 | |
Cash and cash equivalents included in current assets held for sale | — | | | 16,816 | |
Cash and cash equivalents at end of period | $ | 253,131 | | | $ | 890,444 | |
Operating Activities
Our overall liquidity has historically been driven by our cash flow provided by operating activities, which is dependent on net income and changes in our working capital. As compared to the prior year, higher net cash used by operating activities was due to changes in working capital primarily accounts payable, accruals, inventory due to inflationary increases, softer point-of-sale trends and supply chain disruptions, and increased capital investments in our cloud computing assets partially offset by improvement in accounts receivable and lower pension plan contributions in the nine months of 2022. Net cash from operating activities includes a $40 million contribution to our U.S. pension plan made in the first quarter of 2021.
Investing Activities
The increase in cash used by investing activities in the nine months of 2022 compared to the nine months of 2021 was primarily the result of the purchase of the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC for $103 million, the sale of the European Innerwear business which resulted in an $11 million cash outflow and an increase in capital investments into our business.
Financing Activities
Net cash from financing activities increased in the nine months of 2022 primarily as a result of increased borrowings on our ARS Facility and our Revolving Loan Facility coupled with the repayment of the outstanding balance of Term Loan B in the nine months of 2021, which consisted of a required excess cash flow prepayment of $239 million and a voluntary prepayment of $61 million. Net cash from financing activities in the nine months of 2022 also included shares repurchased at a total cost of $25 million and Term Loan A scheduled payments of $19 million.
Financing Arrangements
In June 2022, we amended the ARS Facility. This amendment primarily increased the fluctuating facility limit to $225 million (previously $175 million) and extended the maturity date to June 2023. Additionally, the amendment changed our interest rate option as defined in the ARS Facility from the rate announced from time to time by PNC Bank, N.A. as its prime rate or the London Interbank Offered Rate to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate and increased certain receivables to the pledged collateral pool for the facility.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of October 1, 2022, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. Under the terms of our Senior Secured Credit Facility, among other financial and non-financial covenants, we are required to maintain a minimum interest coverage ratio and a maximum total debt to EBITDA (earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility), or leverage ratio, each of which is defined in the Senior Secured Credit Facility. The method of calculating all of the components used in the covenants is included in the Senior Secured Credit Facility. In November 2022, given the uncertain economic environment and the associated impact on future earnings, we amended our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility as described in Note “Debt” to our
condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 1, 2022 and our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 or other SEC filings could cause noncompliance.
For further details regarding our liquidity from our available cash balances and credit facilities see “Cash Requirements and Trends and Uncertainties Affecting Liquidity” above.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to report our operating results and financial condition in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022. There have been no material changes in these policies from those described in our Annual Report on Form 10-K for the year ended January 1,December 31, 2022.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note “Recent Accounting Pronouncements” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
| | | | | |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended January 1,December 31, 2022.
| | | | | |
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Interim Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective as of OctoberApril 1, 2022.2023.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and Interim 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.
As previously disclosed, on May 24, 2022, we identified that we had become subject to a ransomware attack impacting certain of our information technology systems and activated our incident response and business continuity plans designed to contain the incident. See Note “Basis of Presentation – Ransomware Attack” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. As a result of the ransomware attack, we performed additional tests of controls and manual compensating controls.
PART II
PART II
Although weNo new legal proceedings became reportable during the quarter ended April 1, 2023 and there have been no material developments during such quarter regarding any previously reported legal proceedings which have not been previously disclosed.
We are also subject to various claims and legal actions that occur from time to time in the ordinary course of our business,business. However, we are not party to any pending legal proceedings, including the pending lawsuits in connection with the previously disclosed ransomware incident, 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 that are discussed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended July 2,December 31, 2022. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. 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. Additional risks and uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, liquidity or results of operations.
| | | | | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| | | | | |
Item 3. | Defaults Upon Senior Securities |
None.
| | | | | |
Item 4. | Mine Safety Disclosures |
Not applicable.
As previously disclosed on November 23, 2021, Hanesbrands Inc. (the “Company”), along with each of MFB International Holdings S.à r.l. (the “Lux Borrower”) and HBI Australia Acquisition Co. Pty Ltd (the “Australian Borrower” and, together with the Company and the Lux Borrower, the “Borrowers”), entered into the Fifth Amended and Restated Credit Agreement, dated as of November 19, 2021 (as amended from time to time, the “Credit Agreement”), with the various financial institutions and other persons from time to time party to the Credit Agreement as lenders, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent.
On November 4, 2022, the Company, along with the other Borrowers, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment effects changes to certain provisions and covenants under the Credit Agreement during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 31, 2023 (such period of time, the “Covenant Relief Period”), including: (a) increases in the maximum consolidated net total leverage ratio to (i) 5.25:1.00 through December 31, 2022, (ii) 5.75:1.00 from January 1, 2023 through September 30, 2023, and (iii) 5.25:1.00 from October 1, 2023 through December 31, 2023 and (b) reduction of the minimum consolidated net interest coverage ratio from 3.00 to 1.00 to 2.60 to 1.00. Following the Covenant Relief Period, (i) the maximum consolidated net total leverage ratio will revert to previous levels and (ii) the minimum consolidated net interest coverage ratio will be reduced from 3:00 to 1.00 to 2.75 to 1.00. In addition, during the Covenant Relief Period, the (i) applicable margin calculated based on the consolidated net total leverage ratio will be up to a maximum of (a) 2.25% for term benchmark loans, daily simple Secured Overnight Financing Rate (“SOFR”) loans and Central Bank rate loans and (b) 1.25% for alternative base rate loans; and (ii) the applicable commitment fee margin will be calculated based on consolidated net total leverage ratio will be up to a maximum of 0.35%. The Second Amendment also contains certain amendments related to the transition of the benchmark rate from London Interbank Offered Rate to SOFR.
From time to time, the financial institutions party to the Credit Agreement or their affiliates have performed, and may in the future perform, various commercial banking, investment banking and other financial advisory services for the Company and its affiliates for which they have received, and will receive, customary fees and expenses. For example, certain lenders under the Credit Agreement and/or their affiliates are parties to the Company’s accounts receivable securitization facility.None.
The foregoing description of the Second Amendment is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Second Amendment, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q, and is incorporated herein by reference. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Second Amendment or the Credit Agreement, as applicable.
| | | | | | | | | | | |
Exhibit Number | | Description | |
| | | |
3.1 | | | |
| | | |
3.2 | | | |
| | | |
3.3 | | | |
| | | |
3.4 | | | |
| | | |
3.5 | | | |
| | | |
4.1 | | | |
| | | |
4.2 | | | |
| | | |
10.1 | | | |
| | | |
10.2 | | SecondFirst Incremental Amendment and Joinder Agreement, dated November 4, 2022,as of March 8, 2023, to the Fifth Amended and Restated Credit Agreement among Hanesbrands Inc., MFB International Holdings S.à r.l., HBI Australia Acquisition Co. Pty Ltd, the lenders party thereto from time to time and JPMorgan Chase Bank N.A., as the administrative agent and the collateral agent.agent (incorporated by reference from Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 13, 2023). | |
| | | |
10.3 | |
| |
31.1 | | | |
| | | |
31.2 | | | |
| | | |
32.1 | | | |
| | | |
32.2 | | | |
| | | |
101.INS XBRL | | Inline 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 | |
| | | |
101.SCH XBRL | | Inline Taxonomy Extension Schema Document | |
| | | |
101.CAL XBRL | | Inline Taxonomy Extension Calculation Linkbase Document | |
| | | |
101.LAB XBRL | | Inline Taxonomy Extension Label Linkbase Document | |
| | | |
101.PRE XBRL | | Inline Taxonomy Extension Presentation Linkbase Document | |
| | | |
101.DEF XBRL | | Inline Taxonomy Extension Definition Linkbase Document | |
| | | |
104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document) | |
| | | | | | | | |
* | Management contract or compensatory plans or arrangements. | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
HANESBRANDS INC. |
| |
By: | | /s/ Michael P. DastugueM. Scott Lewis |
| | Michael P. DastugueM. Scott Lewis Interim Chief Financial Officer (Duly authorized officer and principal financial officer) |
Date: November 9, 2022May 3, 2023