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(Exact name of registrant as specified in its charter)
iMaryland
i20-3552316
(State
of incorporation)
(I.R.S. employer identification no.)
i1000 East Hanes Mill Road
iWinston-Salem,
iNorth
Carolina
i27105
(Address of principal executive office)
(Zip code)
(i336) i519-8080
(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
iCommon
Stock, Par Value $0.01
iHBI
iNew 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. iYes☒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). iYes☒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.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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). Yesi☐No☒
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 COVID-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 May 31, 2022), 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 Annual Report on Form 10-K for the year ended 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.
Adjustments
to reconcile net income (loss) to net cash from operating activities:
Depreciation
i17,360
i18,931
Amortization
of acquisition intangibles
i4,186
i4,847
Other
amortization
i2,805
i2,508
Loss
on extinguishment of debt
i8,466
i—
Gain
on sale of business and classification of assets held for sale
(i2,139)
(i6,715)
Amortization
of debt issuance costs and debt discount
i1,973
i1,887
Other
i5,202
i6,940
Changes
in assets and liabilities:
Accounts receivable
i51,643
(i6,090)
Inventories
i7,861
(i247,567)
Other
assets
(i10,761)
(i489)
Accounts
payable
i43,171
(i310)
Accrued
pension and postretirement benefits
i1,479
i24
Accrued
liabilities and other
(i52,305)
(i123,857)
Net
cash from operating activities
i44,537
(i231,189)
Investing
activities:
Capital expenditures
(i24,244)
(i19,337)
Proceeds
from sales of assets
i3
i19
Other
i18,941
(i10,272)
Net
cash from investing activities
(i5,300)
(i29,590)
Financing
activities:
Borrowings on Term Loan Facilities
i891,000
i—
Repayments
on Term Loan Facilities
(i6,250)
(i6,250)
Borrowings
on Accounts Receivable Securitization Facility
i588,000
i290,000
Repayments
on Accounts Receivable Securitization Facility
(i631,500)
(i154,500)
Borrowings
on Revolving Loan Facilities
i421,500
i129,000
Repayments
on Revolving Loan Facilities
(i461,000)
(i109,000)
Borrowings
on Senior Notes
i600,000
i—
Repayments
on Senior Notes
(i1,436,884)
i—
Borrowings
on notes payable
i—
i21,454
Repayments
on notes payable
i—
(i21,713)
Share
repurchases
i—
(i25,018)
Cash
dividends paid
i—
(i52,297)
Payments
to amend and refinance credit facilities
(i27,371)
(i228)
Other
(i1,675)
(i3,881)
Net
cash from financing activities
(i64,180)
i67,567
Effect
of changes in foreign exchange rates on cash
(i261)
i1,793
Change
in cash and cash equivalents
(i25,204)
(i191,419)
Cash
and cash equivalents at beginning of year
i238,413
i560,629
Cash
and cash equivalents at end of period
$
i213,209
$
i369,210
(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 April 1, 2023 and December 31, 2022 were $i6,709
and $i10,549, respectively. For the quarters ended April 1, 2023 and April 2, 2022, right-of-use assets obtained in exchange for lease obligations were $i71,776
and $i16,035, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share data)
(unaudited)
(1) iBasis
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 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 or any future period.
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 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. In addition to the Company’s public announcements of the incident, the
Company provided breach notifications and regulatory filings as required by applicable law starting in August 2022, and that notification process is 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 its previously disclosed ransomware incident. On October 7, 2022, a putative class action, entitled Roman v. Hanes Brands [sic], Inc., 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. On October
13, 2022, another putative class action, entitled Toussaint v. HanesBrands,[sic] Inc., was filed in the United States District Court for the Middle District of 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 pending lawsuits seek, among other things, monetary and injunctive relief. The lawsuits have been consolidated in the United States District Court for the Middle District of North Carolina, and 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 the 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
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 ended April 1, 2023, the Company incurred no net costs related to the ransomware attack. Minimal legal fees and the offsetting expected insurance recoveries are reflected in the “Selling, general and administrative expenses”
line of the Condensed Consolidated Statements of Income. The Company cannot determine, at this time, the full extent of any proceedings or additional costs or expenses related to the security event or whether such impact will ultimately have a material adverse effect.
(2) iRecent
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 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 were effective for the Company in the first quarter of 2023. The adoption of the new accounting rules did not have any impact on the Company’s financial condition,
results of 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 were effective for the Company in the first quarter of 2023. As the Company does not currently have any fair value hedging programs that leverage the portfolio layer method,
the adoption of the new accounting rules did not have any impact on the 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 were effective for the Company in the first quarter of 2023. While the new accounting rules did not have an impact on the Company’s financial condition, results of operations or cash flows, adoption of the new accounting rules did result in additional disclosures beginning in the first quarter of 2023 which are included below.
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 $i254,509 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) iAssets and Liabilities Held for Sale
i
Total
current assets and current liabilities classified as held for sale in the Condensed Consolidated Balance Sheets as of April 1, 2023, December 31, 2022 and April 2, 2022 consist of the following:
Total current assets held for sale - U.S. Sheer Hosiery business
$
i4,986
$
i13,327
$
i7,959
Total
current liabilities held for sale - U.S. Sheer Hosiery business
$
i4,986
$
i13,327
$
i7,959
/
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 April 1, 2023, December 31, 2022 and April 2, 2022. The Company recorded a non-cash charge 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. In the quarters ended April 1, 2023 and April 2, 2022, the Company recognized non-cash gains of $i2,139 and $i6,528,
respectively, to adjust the valuation allowance resulting primarily 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 expects to complete the sale of this business within the next 12 months.
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 which resulted in a non-cash charge to impair certain indefinite-lived trademarks and license agreements as well as the full goodwill balance attributable to the European Innerwear business. 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 charge in the first quarter of 2021. In the quarter ended April 2, 2022, the Company recorded a gain on the sale of the European Innerwear business of $i187
as "Gain on sale of business and classification of assets held for sale" in the summarized discontinued operations financial information below primarily resulting from changes in working capital balances and foreign exchange rates.
The Company 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 provided transitional services including information technology, human resources, facilities management, and limited finance and accounting services which expired in March of 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.
i
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:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
There were no assets and liabilities of discontinued operations classified as held for sale in the Condensed Consolidated Balance Sheets as of April 1, 2023, December 31, 2022 and April 2, 2022.
i
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:
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) iStockholders’
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.
i
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
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 $i600,000
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 allows 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 i40,000 shares that was originally approved on February 6, 2020. For the quarter ended April 1, 2023, the Company did not enter into any transactions to repurchase shares under the new program. For the quarter ended April 2,
2022, the Company entered into transactions to repurchase i1,577 shares at a weighted average repurchase price of $i15.84
per share under the new program. The shares were repurchased at a total cost of $i25,018 including broker’s commissions of $i31. 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. At April 1, 2023, the remaining repurchase authorization under the current share repurchase program totaled $i575,013.
Less
long-term debt issuance costs and debt discount
i40,055
i13,198
Less
current maturities
i218,750
i247,000
$
i3,588,945
$
i3,612,077
/
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 $i900,000 due in 2030 (the “Term Loan B”), issuing
$i600,000 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 $i8,466. The charges, which are recorded in the “Other expenses” line in the Condensed Consolidated Statements of Income, included a payment of $i4,632
for a required make-whole premium related to the redemption of the 3.5% Senior Notes, a non-cash charge of $i1,654 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 $i2,180
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 $i9,000 related to the Term Loan B and total capitalized debt issuance costs of $i22,417
which included $i11,715 related to the Term Loan B and $i10,702 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 $i9,000
and debt issuance costs of $i11,715, of approximately $i879,285. 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
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 $i10,702, of approximately $i589,298.
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 i5.25 to 1.00 for the quarter ended December 31, 2022, i6.75 to 1.00 for the quarter ending April
1, 2023, i7.25 to 1.00 for the quarter ending July 1, 2023, i6.75 to 1.00 for the quarter ending September 30, 2023, i5.25
to 1.00 for the quarter ending December 30, 2023, and i5.00 to 1.00 for the quarter ending March 30, 2024, and reverting back to iii4.50//
to 1.00 for each quarter after the Covenant Relief Period has ended; (b) a reduction of the minimum interest coverage ratio from i3.00 to 1.00 to ii2.60/
to 1.00 for the quarter ended December 31, 2022 and the quarter ending April 1, 2023, iii2.00//
to 1.00 for the quarters ending July 1, 2023, September 30, 2023 and December 30, 2023, and i2.50 to 1.00 for the quarter ending March 30, 2024, with an increase to iii2.75//
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 $iii75,000//,
which will revert back to the greater of (x) $iii350,000//
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 $iii1,750,000//,
subject to compliance with the financial covenants.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Other Debt Related Activity
As of April 1, 2023, the Company had $i682,360
of borrowing availability under the $i1,000,000 Revolving Loan Facility after taking into account $i313,000 of USD revolver loans and $i4,640
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 $i225,000 (previously $i175,000)
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 LIBOR to the rate announced from time to time by PNC Bank, N.A. as its prime rate or SOFR and increased certain receivables to the pledged collateral pool for the facility. Borrowings under the Company’s ARS Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans and also subject to a quarterly fluctuating facility limit, which is not to exceed $i200,000
for quarter ended April 1, 2023. The Company’s maximum borrowing capacity under the ARS Facility was $i169,406 as of April 1, 2023. The Company had $i3,406
of borrowing availability under the ARS Facility at April 1, 2023.
The Company had $i44,383 of borrowing availability under other international credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facilities at April 1, 2023.
As
of April 1, 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.
(8) iIncome
Taxes
In the quarter ended April 1, 2023, income tax expense was $i18,500 resulting in an effective income tax rate of (i116.3)%.
and in the quarter ended April 2, 2022, income tax expense was $i23,385 resulting in an effective income tax rate of i17.0%.
The Company's effective tax rate for the quarter ended April 1, 2023 primarily differs from the U.S. statutory rate due to valuation allowances against certain net deferred tax assets. Additionally, the Company had unfavorable discrete items of $i7,544 and $i1,874
for the quarters ended April 1, 2023 and April 2, 2022, respectively.
The Organization for Economic Co-operation and Development (the “OECD”), an international association of 38 countries including the U.S., has proposed changes to numerous long-standing tax principles, including a global minimum tax initiative. On December 12, 2022, the European Union member states agreed to implement the OECD’s Pillar 2 global corporate minimum tax rate of 15% on companies with revenues of at least $790,000, which would go into effect in 2024. Currently, South Korea and Japan are the only countries to enact legislation consistent with the rules, while other countries including the United Kingdom, Switzerland, Canada and Australia are also actively considering changes to their tax laws
to adopt certain parts of the OECD’s proposals. The Company will continue to monitor the 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.
(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.
(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.
Write-off of cumulative translation associated with sale of business
Income from discontinued operations, net of tax
$
i—
$
i13,473
Gain
(loss) on forward foreign exchange contracts designated as cash flow hedges
Cost of sales
i3,410
i1,612
Income
tax
(i1,123)
(i508)
Income
from discontinued operations, net of tax
i—
(i232)
Net
of tax
i2,287
i872
Gain
on interest rate contracts designated as cash flow hedges
Interest expense, net
i10
i—
Income
tax
i—
i—
Net
of tax
i10
i—
Gain
(loss) on cross-currency swap contracts designated as cash flow hedges
Selling, general and administrative expenses
i973
(i9,733)
Interest
expense, net
i581
(i1,361)
Income
tax
i—
i1,886
Net
of tax
i1,554
(i9,208)
Amortization
of deferred actuarial loss and prior service cost
Other expenses
(i4,077)
(i5,203)
Income
tax
(i120)
i1,370
Pension
activity associated with sale of business
Income from discontinued operations, net of tax
i—
(i460)
Net
of tax
(i4,197)
(i4,293)
Total
reclassifications
$
(i346)
$
i844
/
(10) iFinancial
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, Canadian dollar and Mexican 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.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Values of Derivative Instruments
i
The fair values of derivative instruments related to forward foreign exchange
contracts, cross-currency swap contracts and interest rate contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
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 i3.5% Senior Notes designated in the European net investment hedge discussed below, the Company entered into ithree
pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €i300,000. 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 i3.5% Senior Notes. These cross-currency swap contracts, swapped Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €i300,000
of the Company’s €i500,000 fixed-rate i3.5% Senior Notes to a fixed-rate i4.7945%
USD-denominated obligation. In February 2023, in connection with the redemption of the i3.5% Senior Notes, the Company unwound these cross-currency swap contracts, which had an original maturity date of June 15, 2024. The Company paid $i30,935
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 $i1,254 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 $i900,000, which amortizes down to $i600,000
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 $i4,312. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next i11
months and the variability in future interest payments on debt over the next i36 months.
(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:
In July 2019, the Company entered into itwo pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €i300,000
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 had an original maturity date of May 15, 2024, swapped U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate i4.625%
Senior Notes to a fixed-rate i2.3215% Euro-denominated obligation.
In July 2019, the Company also designated the full amount of its i3.5%
Senior Notes with a carrying value of €i500,000, which was 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 i3.5%
Senior Notes designated in the European net investment hedge from €i500,000 to €i200,000. As of 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 $i214,110. In February 2023, in connection with the redemption of the i3.5%
Senior Notes, the Company de-designated the remainder of the i3.5% Senior Notes in the European net investment hedge and unwound these cross-currency swap contracts. The Company received $i18,942
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 $i5,525 from the designated portion of the i3.5%
Senior
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Notes and a cumulative gain of $i19,001
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.
i
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:
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
Cross-currency
swap contracts (amounts excluded from effectiveness testing)
Interest expense, net
i960
i2,012
Total
$
i960
$
(i13,841)
The
following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of net investment hedges are recorded:
Interest
expense, net (amounts excluded from effectiveness testing)
$
i58,452
$
i31,963
/
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.
As of April 1, 2023 and 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 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 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 ended April 1, 2023 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of and during the quarter ended April 1, 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.
i
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 April 1, 2023
Total
Quoted Prices In Active
Markets for Identical Assets (Level 1)
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximated fair value as of April 1, 2023 and December 31, 2022. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $i54,149 and $i52,023
as of April 1, 2023 and December 31, 2022, respectively. The fair value of debt, which is classified as a Level 2 liability, was $i3,792,033 and $i3,697,856
as of April 1, 2023 and December 31, 2022, respectively. Debt had a carrying value of $i3,847,750 and $i3,872,275
as of April 1, 2023 and 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) iBusiness
Segment Information
The Company’s operations are managed and reported in ithree 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 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 Australia, Europe, Asia, Latin America and Canada.
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 December 31, 2022.
Income
(loss) from continuing operations before income tax expense
$
(i15,904)
$
i137,562
/
i
The
Company incurred restructuring and other action-related charges that were reported in the following lines in the Condensed Consolidated Statements of Income:
Loss
on extinguishment of debt included in other expenses
i8,466
i—
Gain
on final settlement of cross currency swap contracts included in other expenses
(i116)
i—
Gain
on final settlement of cross currency swap contracts included in interest expense, net
(i1,254)
i—
Total
included in income (loss) from continuing operations before income tax expense
i13,217
i4,802
Tax
effect on actions included in income tax expense
i—
i816
Total
restructuring and other action-related charges
$
i13,217
$
i3,986
Restructuring
and other action-related charges within operating profit included $i6,121 and $i4,802 of charges related to the implementation of the
Company’s Full Potential plan in the quarters ended April 1, 2023 and April 2, 2022, respectively. Full Potential plan charges in the quarters ended April 1, 2023 and April 2, 2022 included non-cash gains of $i2,139 and $i6,528,
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. These 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 $i8,466
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 $i4,632 for a required make-whole premium related to the redemption of the 3.5% Senior Notes and a non-cash charge of $i3,834
for the write-off of unamortized debt issuance costs related to the redemption of the 4.625% Senior Notes and the 3.5% Senior Notes. See Note “Debt” for additional information. Additionally, in connection with the redemption of the 3.5% Senior Notes, the Company unwound the related cross-currency swap contracts previously designated as cash flow hedges and the remaining gain in AOCI of $i1,254
was released into earnings at the time of settlement which is recorded in the “Interest expense, net” line in the Condensed Consolidated Statements of Income. See Note “Financial Instruments” for additional information.
At December 31, 2022, the Company had an accrual of $i16,170 for expected benefit payments related to actions taken in prior years. During the
quarter ended April 1, 2023, the Company approved actions to align the Company’s manufacturing network and support with its Full Potential plan initiatives and incurred charges of $i1,600 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 chain segmentation” line in the restructuring and other action-related charges table above. During the quarter ended April 1, 2023, the Company made benefit payments and other adjustments of $i4,135, resulting in an ending accrual of $i13,635
which is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheets at April 1, 2023.
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 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 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 COVID-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 May 31, 2022), 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, Bras N Things, Playtex, JMS/Just My Size, Gear for Sports, Wonderbra, Berlei, Comfortwash and Alternative. 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 April 1, 2023, December 31, 2022 and 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 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.
We 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 all our free cash flow (cash from operations less capital expenditures) on reducing debt and bringing 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 action-related costs and stock compensation expense. Net debt is defined as total debt less cash and 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 provided breach notifications and regulatory filings as required by applicable law starting in August 2022, and that notification process is 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 our previously disclosed ransomware incident. On October 7, 2022, a putative class action, entitled, Roman v. Hanes Brands [sic], Inc., 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. On October 13, 2022, another putative class action, entitled, Toussaint v. HanesBrands,[sic] Inc., was filed in the United States District Court for the Middle District of 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 pending lawsuits seek, among other things, monetary and injunctive relief. The lawsuits have been consolidated in the United States District Court for the Middle District of North Carolina, and 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 the remaining pending matters and believe 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 ended April 1, 2023, we incurred no net costs related to the ransomware
attack. Minimal legal fees and the offsetting expected insurance recoveries are reflected in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income. We cannot determine, at this time, the full extent of any proceedings or additional costs or expenses related to the security event or whether such impact will ultimately have a material adverse effect.
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 the Macroeconomic Pressures on Our Business
The macroeconomic pressures caused
by the lingering effects from the COVID-19 pandemic continue to impact our business operations and financial results, as described in more detail under “Condensed Consolidated Results of Operations - First Quarter Ended April 1, 2023 Compared with First Quarter Ended April 2, 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 causing pressure on our gross and operating profit. At the height of the global supply chain disruptions in 2022, we experienced delayed inventory orders which, in turn, 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 and increased net inventory levels. We took aggressive measures in 2022 to focus on reducing inventory units, including manufacturing time-out costs which reduced our inventory units by 6% at the end of 2022 compared to 2021. We expect gross and operating margin pressure to continue in the first half of fiscal 2023 as we sell through the remainder of our higher-cost inventory. We expect 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 related to our inventory reduction initiatives in 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 2023
We estimate our 2023 guidance as follows:
•Net sales of approximately $6.05 billion to $6.20 billion, net of approximately $40 million of unfavorable foreign currency exchange impact;
•Operating profit of approximately $446 million to $496 million, net of approximately $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 $54 million included in operating profit and refinancing charges of $7 million included
in interest and other expenses;
•Interest expense and other expenses of approximately $307 million combined;
•Tax expense from continuing operations of approximately $90 million to $100 million;
•Diluted earnings per share from continuing operations of approximately $0.14 to $0.25;
•Cash flow from operating activities of approximately $500 million; and
•Capital investments of approximately $150 million, including capital expenditures of $70 million within investing cash flow activities and cloud computing arrangements of $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 would 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 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 First Quarter Ended
April 1, 2023
Key financial results are as follows:
•Total net sales in the first quarter of 2023 were $1.39 billion, compared with $1.58 billion in the same period of 2022, representing a 12% decrease.
•Operating profit decreased 66% to $57 million in the first quarter of 2023, compared with $171 million in the same period of 2022. As a percentage of sales, operating profit was 4.1% in the first quarter of 2023 compared to 10.8% in the same period of 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 of $0.32 in the first quarter of 2022.
Income
(loss) from continuing operations before income tax expense
(15,904)
137,562
(153,466)
(111.6)
Income tax expense
18,500
23,385
(4,885)
(20.9)
Income
(loss) from continuing operations
(34,404)
114,177
(148,581)
(130.1)
Income from discontinued operations, net of tax
—
4,525
(4,525)
(100.0)
Net
income (loss)
$
(34,404)
$
118,702
$
(153,106)
(129.0)
%
Net Sales
Net sales decreased 12% during the first quarter of 2023 compared to the first quarter of 2022 primarily due to the macro-driven slowdown in consumer spending in the U.S. and Australia, higher inventory levels at retail and the unfavorable impact from foreign currency exchange rates in our International
business of approximately $31 million.
Operating Profit
Operating profit as a percentage of net sales was 4.1% during the first quarter of 2023, representing a decrease from 10.8% in the prior year. Operating margin decreased as a result of input cost inflation and unfavorable sales mix partially offset by pricing actions taken in mid-first quarter 2022 and cost reduction actions. Included in operating profit in the first quarter of 2023 and 2022 were charges of $6 million and $5 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses increased $14 million in the first quarter of 2023 compared to the first quarter of 2022 primarily 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 redemption of the 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 and higher pension expense in 2023.
Interest Expense – Interest expense was higher by $26 million in the first quarter of 2023 compared to the first quarter of 2022 primarily due to higher weighted average outstanding debt balances and a higher weighted average interest rate on our borrowings during the first quarter of 2023 compared
to the first quarter of 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 5.78% for the first quarter of 2023 compared to 3.53% for the first quarter of 2022.
Income Tax Expense – In the first quarter of 2023, income tax expense was $19 million,
resulting in an effective income tax rate of (116.3)% and in the first quarter of 2022, income tax expense was $23 million, resulting in an effective income tax rate of 17.0%. Our effective tax rate for the first quarter of 2023 primarily differs from the U.S. statutory rate due to valuation allowances against certain net deferred tax assets. Additionally, we had unfavorable discrete items of $8 million and $2 million in the first quarter of 2023 and 2022, respectively.
DiscontinuedOperations – The results of our discontinued operations include
the operations of our European Innerwear business which was sold in connection with our Full Potential plan 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.
Operating Results by Business Segment — First Quarter Ended April 1, 2023 Compared with First Quarter Ended April 2, 2022
Innerwear
net sales decreased 4% compared to the first quarter of 2022 primarily due to softer point-of-sale trends stemming from the macroeconomic pressures partially offset by pricing actions taken mid-quarter of 2022.
Innerwear operating margin was 13.1%, a decrease from 17.6% in the same period a year ago. The operating margin decline resulted from input cost inflation, lower sales volume and unfavorable product and channel mix partially offset by pricing actions taken mid-quarter of 2022 and cost reduction actions.
Activewear
Activewear net sales decreased 19% compared to the first quarter of 2022 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 well as strategic channel clean-up work within Champion
in the U.S. The net sales decrease was partially offset by growth in the collegiate channel.
Activewear operating margin was 3.2%, a decrease from 12.7% in the same period a year ago. The operating margin decline resulted from lower sales volume, input cost inflation, unfavorable product mix and higher reserves as compared to last year due to higher inventory levels at retail partially offset by pricing actions taken during 2022 and cost reduction actions.
International
Net sales in the International segment decreased 9% compared to the first quarter of 2022 due to unfavorable foreign currency exchange rates, higher inventory levels at retail in Asia and macroeconomic pressures impacting consumer sentiment in Australia. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $31 million in the first quarter
of 2023. International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, decreased 3%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results.
International operating margin was 11.1%, a decrease from 17.5% in the same period a year ago. The decrease in operating margin primarily resulted from input costs inflation, transactional impact from foreign exchange rates and unfavorable business mix.
Other
Other net sales decreased primarily
as a result of decreased sales from our supply chain to the European Innerwear business in the first quarter of 2023 compared to the first quarter of 2022. Operating margin decreased due to the deleverage of selling, general and administrative expenses due to the decline in sales volume.
We 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.
Corporate
Corporate expenses were higher in the first quarter of 2023 compared to the first quarter of 2022 primarily due to increased information technology costs and higher restructuring and other action-related charges partially offset by lower variable compensation costs. Included in restructuring and other action-related charges within operating profit in the first quarter of 2023 and 2022 were $6 million and $5 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the quarters ended April 1, 2023 and April 2, 2022 included non-cash gains of $2 million and $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.
Loss on extinguishment of debt included in other expenses
8,466
—
Gain on final settlement of cross currency swap contracts included in other expenses
(i116)
i—
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
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. We recently shifted our capital allocation strategy to utilize our cash from operations for payments to our employees and vendors in the normal course
of business and to reinvest in our business through capital expenditures. We then plan to utilize our free cash flow (cash from operations less capital expenditures) 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.
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 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.
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:
(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 following 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.
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.
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), or leverage ratio, each of
which
is defined in the Senior Secured Credit Facility. The method of calculating all of the components used in the covenants is included in the Senior Secured Credit Facility.
We expect to maintain compliance with our covenants, as amended, 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 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.
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 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 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 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 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 April 1, 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.
No 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. 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.
Item 1A.
Risk
Factors
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 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
Inline XBRL Instance Document - The instance document does
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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.
