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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”), the impacts of the ransomware attack announced on May 31, 2022 and our future financial performance included in this Quarterly Report on Form 10-Q specifically appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections.
More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 and our Annual Report on Form 10-K for the year ended January 1, 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 to net cash from operating activities:
Depreciation
i56,140
i63,183
Amortization
of acquisition intangibles
i14,045
i15,696
Other
amortization
i8,121
i8,610
Impairment
of intangible assets and goodwill
i—
i163,047
(Gain)
loss on sale of business and classification of assets held for sale
(i6,185)
i266,742
Amortization
of debt issuance costs
i5,483
i10,250
Other
i11,717
(i1,888)
Changes
in assets and liabilities:
Accounts receivable
(i63,003)
(i201,925)
Inventories
(i612,544)
(i292,465)
Other
assets
(i71,613)
i7,042
Accounts
payable
(i22,289)
i391,034
Accrued
pension and postretirement benefits
(i1,066)
(i40,468)
Accrued
liabilities and other
(i101,392)
i121,327
Net
cash from operating activities
(i491,682)
i527,376
Investing
activities:
Capital expenditures
(i70,955)
(i55,320)
Purchase
of trademarks
(i103,000)
i—
Proceeds
from sales of assets
i259
i2,479
Other
(i5,640)
i8,437
Net
cash from investing activities
(i179,336)
(i44,404)
Financing
activities:
Repayments on Term Loan Facilities
(i18,750)
(i315,625)
Borrowings
on Accounts Receivable Securitization Facility
i1,303,589
i—
Repayments
on Accounts Receivable Securitization Facility
(i1,092,089)
i—
Borrowings
on Revolving Loan Facilities
i1,337,500
i—
Repayments
on Revolving Loan Facilities
(i908,500)
i—
Borrowings
on notes payable
i21,454
i109,397
Repayments
on notes payable
(i21,713)
(i109,597)
Share
repurchases
(i25,018)
i—
Cash
dividends paid
(i156,962)
(i157,099)
Other
(i4,263)
(i3,000)
Net
cash from financing activities
i435,248
(i475,924)
Effect
of changes in foreign exchange rates on cash
(i71,728)
(i27,207)
Change
in cash and cash equivalents
(i307,498)
(i20,159)
Cash
and cash equivalents at beginning of year
i560,629
i910,603
Cash
and cash equivalents at end of period
$
i253,131
$
i890,444
Balances
included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
i253,131
$
i873,628
Cash
and cash equivalents included in current assets held for sale
i—
i16,816
Cash
and cash equivalents at end of period
$
i253,131
$
i890,444
(1)The
cash flows related to discontinued operations have not been segregated and remain included in the major classes of assets and liabilities in the periods prior 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 October 1, 2022 and January 1, 2022 were $i31,895
and $i24,164, respectively. For the nine months ended October 1, 2022 and October 2, 2021, right-of-use assets obtained in exchange for lease obligations were $i67,588
and $i46,039, 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 January 1, 2022. The year-end condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. The results of operations
for any interim period are not necessarily indicative of the results of operations to be expected for the full year. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year or any future period.
Key Business Strategies
In the first quarter of 2021, the Company announced that it reached the decision to exit its European Innerwear business as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. Accordingly, the Company began to separately report the results of its European Innerwear business as discontinued
operations in its Condensed Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. On November 4, 2021, the Company announced that it reached an agreement to sell its European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. Unless otherwise noted, discussion within these notes to the condensed consolidated interim financial statements relates to continuing operations. See Note “Assets and Liabilities Held for Sale” for additional information.
In addition, in the fourth quarter of 2021, the Company reached the decision
to divest its U.S. Sheer Hosiery business, including the L’eggs brand, as part of its strategy to streamline its portfolio under its Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at October 1, 2022 and January 1, 2022. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale within the next 12 months. See Note “Assets and Liabilities Held for Sale” for additional information.
In
June of 2022, the Company purchased the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC (“KEDS”) for $i102,500. The trademark was recorded in “Trademarks and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheets and has an indefinite life. The Company
previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two parties and is another step forward in the Company’s Full Potential plan of growing the global Champion brand.
Ransomware Attack
As previously disclosed, on May 24, 2022, the Company identified that it had become subject to a ransomware attack and activated its incident response and business continuity plans designed to contain the incident. As part of the Company’s
forensic investigation and assessment of the impact, the Company determined that certain of its information technology systems were affected by the ransomware attack.
Upon discovering the incident, the Company took a series of measures to further safeguard the integrity of its information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity
Notes
to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. The Company notified appropriate law enforcement authorities as well as certain data protection regulators, and in, addition to the Company’s public announcements of the incident, the Company began a process to provide breach notifications
and regulatory filings as may be required by applicable law starting in August 2022. While the notification process continues, at this time, 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 lawsuits in connection with the ransomware incident. On October 7, 2022, a putative class action was filed against “Hanes Brands [sic], Inc.” alleging, among other things, negligence, negligence per se, breach of implied contract, unjust enrichment, breach of implied covenant of good faith and fair dealing, unfair business practices under the California Business and Professions Code, and violations of the California Confidentiality of Medical Information Act in connection with the ransomware incident. The litigation is entitled, Ramon v. Hanes Brands, Inc., and is pending in the United States District Court for the Central District
of California. On October 13, 2022, another putative class action was filed against HanesBrands, Inc. alleging, among other things, negligence, negligence per se, breach of implied contract, invasion of privacy, and unjust enrichment in connection with the ransomware incident. The litigation is entitled, Toussaint v. HanesBrands, Inc. and is pending in the United States District Court for the Middle District of North Carolina. The lawsuits seek, among other things, monetary and injunctive relief. The Company is vigorously defending these matters and believes the cases are without merit. However, at this early stage in the proceedings, the Company is not able
to determine the probability of the outcome of these matters or a range of reasonably expected losses, if any.
During the quarter and nine months ended October 1, 2022, the Company incurred costs of $i921 and $i16,430,
net of expected insurance recoveries, respectively, related to the ransomware attack. The costs, net of expected insurance recoveries, incurred during the quarter ended October 1, 2022 related primarily to information technology and legal fees and are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The costs for the nine months ended October 1, 2022 included $i14,168 related primarily to supply chain
disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $i2,262, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The Company continues to assess the security event and cannot determine, at this time, the full extent of the impact
from such event on its business, results of operations or financial condition 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. The new accounting rules must be adopted by the fourth quarter of 2022. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition,
results of operations, cash flows and disclosures.
Business Combinations
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The new accounting rules require entities to apply “Revenue from Contracts with Customers (Topic 606)” to recognize and measure contract assets and contract
liabilities in a business combination. The new accounting rules will be effective for the Company in the first quarter of 2023, including interim periods.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Early adoption is permitted. The adoption impact of the new accounting rules will depend on the
magnitude of future acquisitions.
Derivatives and Hedging
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method.” The new accounting rules allow entities to expand the use of the portfolio layer method to all financial assets and designate multiple hedged layers within a single closed portfolio. The new accounting rules also clarify guidance related to hedge basis adjustments and the related disclosures for these adjustments. The new accounting rules will be effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted. The Company does not currently have any fair value hedging programs
that leverage the portfolio layer method, therefore, the Company does not expect the new accounting rules to have an impact on our near term financial condition, results of operations, cash flows or disclosures.
Supplier Finance Program Obligations
In September 2022, the FASB issued ASU 2022-04, “Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” The new accounting rules create certain disclosure requirements for a buyer in a supplier finance program. The new accounting rules require qualitative and quantitative disclosures including key terms of the program, balance sheet presentation of related amounts, and the obligation amount the buyer has confirmed as valid to the finance provider, including a rollforward of the obligation.
Only the amount of the obligation outstanding is required to be disclosed in interim periods. The accounting rules do not impact the recognition, measurement, or financial statement presentation of supplier finance program obligations. The new accounting rules will be effective for the Company in the first quarter of 2023, including interim periods. Early adoption is permitted. While the new accounting rules will not have an impact on our financial condition, results of operations or cash flows, the Company is currently evaluating the impact the new accounting rules will have on the disclosures included in the notes to the consolidated financial statements beginning with the first quarter of 2023.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(3) iAssets and Liabilities Held for Sale
i
Assets
and liabilities classified as held for sale in the Condensed Consolidated Balance Sheets as of October 1, 2022, January 1, 2022 and October 2, 2021 consist of the following:
U.S. Sheer Hosiery business - continuing operations
$
i14,906
$
i5,426
$
i—
European
Innerwear business - discontinued operations
i—
i321,731
i304,124
Total
current assets held for sale
$
i14,906
$
i327,157
$
i304,124
U.S.
Sheer Hosiery business - continuing operations
$
i14,906
$
i5,426
$
i—
European
Innerwear business - discontinued operations
i—
i311,476
i299,498
Total
current liabilities held for sale
$
i14,906
$
i316,902
$
i299,498
/
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 October 1, 2022 and January 1, 2022. The Company recorded a non-cash charge of $i38,364
in the fourth quarter of 2021, to record a valuation allowance against the net assets held for sale to write down the carrying value of the disposal group to the estimated fair value less costs of disposal. The Company recognized a non-cash loss of $i4,310 to adjust the valuation allowance resulting from an increase in carrying value due to changes in working capital in the quarter ended October 1,
2022. In the nine months ended October 1, 2022, the Company recognized a non-cash gain of $i6,558 to adjust the valuation allowance resulting from a decrease in carrying value due to changes in working capital. The operations of the U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business
Segment Information”. The Company is currently exploring potential purchasers for this business and expects to complete the sale within the next 12 months.
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. As a result of the strategic decision to exit the European Innerwear business, forecasts were revised to include updated market conditions and the removal of strategic operating decisions that would no longer occur under the Company's ownership. The revised forecasts indicated impairment of certain indefinite-lived trademarks and license agreements as well as the full goodwill balance attributable to the European Innerwear business. As a result of this impairment analysis, a non-cash charge of $i155,745
was recorded as "Impairment of intangible assets and goodwill" in the summarized discontinued operations financial information for the nine months ended October 2, 2021. In addition, 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 non-cash charges of $i30,562
and $i266,742 for the quarter and nine months ended October 2, 2021, respectively, as "Loss on sale of business and classification of assets held for sale" in the summarized discontinued operations financial information. In the nine months ended October 1, 2022, the Company recorded the final loss on the
sale of the European Innerwear business of $i373 primarily resulting from changes in working capital balances and foreign exchange rates.
Notes to Condensed
Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Additionally, the Company recorded an impairment charge of $i7,302 in continuing operations on an indefinite-lived trademark for the nine months ended October 2,
2021 which is reflected in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. This charge related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group as it was not marketed for sale.
The Company has continued certain sales from its supply chain to the European Innerwear business on a transitional basis after the sale of the business. Under the terms of the Manufacturing and Supply Agreement that was signed as part of closing the transaction, the Company will provide these services for periods up to 34 months from the closing date of the transaction. Additionally, the
Company entered into a Transitional Services Agreement pursuant to which the Company will provide transitional services including information technology, human resources, facilities management, and limited finance and accounting services for periods up to 12 months from the closing date of the transaction. 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)
Assets and liabilities of discontinued operations classified as held for sale in the Condensed Consolidated Balance Sheets as of October 1, 2022, January 1, 2022 and October 2, 2021 consist of the following:
Trademarks
and other identifiable intangibles, net
i—
i205,204
i208,108
Deferred
tax assets
i—
i4,174
i7,990
Other
noncurrent assets
i—
i4,127
i4,360
Allowance
to adjust assets to estimated fair value, less costs of disposal
i—
(i262,320)
(i260,687)
Total
assets of discontinued operations
$
i—
$
i321,731
$
i304,124
Accounts
payable
$
i—
$
i84,327
$
i69,122
Accrued
liabilities
i—
i122,620
i118,076
Lease
liabilities
i—
i6,562
i8,544
Notes
payable
i—
i329
i595
Lease
liabilities - noncurrent
i—
i27,426
i26,536
Pension
and postretirement benefits
i—
i38,325
i42,076
Other
noncurrent liabilities
i—
i31,887
i34,549
Total
liabilities of discontinued operations
$
i—
$
i311,476
$
i299,498
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:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
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 will allow the Company to repurchase shares in the open market during periods in which the stock trading window is otherwise closed for the Company and certain of the Company’s officers and employees pursuant to the Company’s insider trading policy. 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 October 1, 2022, the Company did not enter into any transactions to repurchase shares under the new program. For the nine months ended October 1,
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 or during the quarter or nine months ended October 2, 2021. At October 1, 2022, the remaining repurchase authorization under the current share repurchase program totaled $i575,013.
As
of October 1, 2022, the Company had $i560,028 of borrowing availability under the $i1,000,000
Revolving Loan Facility after taking into account $i429,000 of USD revolver loans and $i10,972 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 the London Interbank Offered Rate (“LIBOR”) to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate (“SOFR”) and increased certain receivables to the pledged collateral pool for the facility. Borrowings under the
Notes
to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Company’s ARS Facility are permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans and also subject to a quarterly fluctuating facility limit, which is not to exceed $i225,000.
The Company’s maximum borrowing capacity as per the fluctuating limit under the ARS Facility was $i225,000 as of October 1, 2022. The Company had $i13,500
of borrowing availability under the ARS Facility at October 1, 2022.
The Company had $i36,121 of borrowing availability under other international credit facilities after taking into account outstanding borrowings and letters of credit outstanding under the applicable facilities at October 1, 2022.
As
of October 1, 2022, the Company was in compliance with all financial covenants under its credit facilities and other outstanding indebtedness. Under the terms of its Senior Secured Credit Facility, among other financial and non-financial covenants, the Company is required to maintain a minimum interest coverage ratio and a maximum leverage ratio, each of which is defined in the Senior Secured Credit Facility. The method of calculating all the components used in the covenants is included in the Senior Secured Credit Facility.
In November 2022, given the uncertain economic environment and the associated impact on future earnings, the
Company amended the credit agreement governing its Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility. The amendment effects changes to certain provisions and covenants under the Senior Secured Credit Facility during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 30, 2023 (such period of time, the “Covenant Relief Period”), including: (a) an increase in the maximum leverage ratio from i4.50
to 1.00 to i5.25 to 1.00 for the quarter ended December 31, 2022, i5.75 to 1.00 for the quarters ending April 1, 2023 through September
30, 2023 and i5.25 to 1.00 for the quarter ending December 30, 2023 reverting back to i4.50 to 1.00 for each quarter after the Covenant Relief Period; (b) a reduction of the minimum interest coverage ratio from i3.00
to 1.00 to i2.60 to 1.00 for the quarters ending December 31, 2022 through December 30, 2023 with an increase to i2.75 to 1.00 for each quarter after the Covenant Relief Period;
(c) a cap on dividend payments of $i250,000 which will revert back to the current amounts after the Covenant Relief Period; (d) the addition of two new tiers to the top of the pricing grid if the maximum leverage ratio exceeds 5.00 to 1.00 and 5.50 to 1.00; and (e) the 0.50 increase in the maximum leverage ratio resulting from a material permitted acquisition is suspended through the Covenant Relief Period. In conjunction with this amendment, the Company will transition the Senior Secured Credit Facility from LIBOR
to SOFR with a 10 basis points credit spread adjustment already included in the Senior Secured Credit Facility. After obtaining the debt amendment, the Company expects to maintain compliance with its covenants for at least one year from the issuance of these financial statements based on its current expectations and forecasts. If economic conditions worsen and the Company’s earnings and operating cash flows do not start to recover as currently estimated by management, this could impact the Company’s ability to maintain compliance with its amended financial covenants and require the Company to seek additional amendments to its
Senior Secured Credit Facility. If the Company is not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, its lenders could require the Company to repay its outstanding debt. In that situation, the Company may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
(8) iIncome
Taxes
The Company’s effective income tax rate was i17.0% and i7.9%
for the quarters ended October 1, 2022 and October 2, 2021, respectively. The Company’s effective income tax rate was i17.0% and i10.9%
for the nine months ended October 1, 2022 and October 2, 2021, respectively. The higher effective tax rate for the quarter ended October 1, 2022 was primarily due to non-recurring discrete tax charges totaling $i3,174 for adjustments related to prior period tax returns during the third quarter of 2022 versus discrete tax benefits of $i3,814
for the release of uncertain tax benefits and $i4,851 for adjustments related to prior period tax returns and approval of certain filings by taxing authorities during the third quarter of 2021. The higher effective tax rate for the nine months ended October 1, 2022 was primarily due to non-recurring discrete tax charges of $i9,217
for assessments and adjustments for prior period tax returns and measurement of deferred tax liabilities during the nine months of 2022 versus non-recurring discrete tax benefits of $i11,360 for the release ofreserves for unrecognized tax benefits and $i4,392
for adjustments related to prior period tax returns and approval of certain filings by taxing authorities, partially offset by a discrete charge for changes in valuation allowances of $i4,636 during the nine months of 2021.
Notes
to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
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.
(9) iAccumulated Other Comprehensive Loss
i
The
components of accumulated other comprehensive loss (“AOCI”) are as follows:
(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 (loss) from discontinued operations, net of tax
$
i—
$
i—
$
i13,473
$
i—
Gain
(loss) on forward foreign exchange contracts designated as cash flow hedges
Cost of sales
i2,516
(i4,506)
i6,790
(i14,161)
Income
tax
(i730)
i1,203
(i2,008)
i3,855
Income
(loss) from discontinued operations, net of tax
i—
(i876)
(i232)
(i2,398)
Net
of tax
i1,786
(i4,179)
i4,550
(i12,704)
Gain
(loss) on cross-currency swap contracts designated as cash flow hedges
Selling, general and administrative expenses
(i18,764)
(i8,134)
(i47,118)
(i5,523)
Interest
expense, net
(i1,669)
(i1,187)
(i4,710)
(i2,205)
Income
tax
i3,474
i996
i8,811
i773
Net
of tax
(i16,959)
(i8,325)
(i43,017)
(i6,955)
Amortization
of deferred actuarial loss and prior service cost
Other expenses
(i5,202)
(i6,026)
(i15,608)
(i19,814)
Income
tax
i1,365
i1,580
i4,102
i4,922
Income
(loss) from discontinued operations, net of tax
i—
(i154)
i—
i424
Pension
activity associated with sale of business
Income (loss) from discontinued operations, net of tax
i—
i—
(i460)
i—
Net
of tax
(i3,837)
(i4,600)
(i11,966)
(i14,468)
Total
reclassifications
$
(i19,010)
$
(i17,104)
$
(i36,960)
$
(i34,127)
/
(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 Australian dollar, Euro, Canadian dollar and Mexican peso. 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 and cross-currency swap 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 3.5% 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, which had a carrying amount of €i500,000
as of October 1, 2022. These cross-currency swap contracts, which mature on June 15, 2024, swap Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €i300,000 of the Company’s €i500,000
fixed-rate i3.5% Senior Notes to a fixed-rate i4.7945% USD-denominated obligation.
The
Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately $i5,391. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next i12
months and for long-term debt over the next i21 months.
i
The
effect of derivative instruments designated as cash flow hedges on the Condensed Consolidated Statements of Income and AOCI is as follows:
Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments
(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:
Income
(loss) from discontinued operations, net of tax
$
i—
$
(i24,970)
$
i3,965
$
(i435,823)
Net
Investment Hedges
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 mature on May 15, 2024, swap U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 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 3.5% Senior Notes with a carrying value of €i500,000,
which is a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment. As of April 1, 2021, the Company reduced the amount of its 3.5% Senior Notes designated in the European net investment hedge from €i500,000 to €i200,000.
As of October 1, 2022 and January 1, 2022, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $i196,040 and $i227,454,
respectively.
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:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
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
Income (loss) from discontinued operations, net of tax
i—
i—
(i2,505)
i—
Cross-currency
swap contracts (amounts excluded from effectiveness testing)
Interest expense, net
i2,209
i1,870
i6,449
i5,484
Total
$
i2,209
$
i1,870
$
(i9,404)
$
i5,484
The
following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of net investment hedges are recorded:
Income (loss) from discontinued operations, net of tax
$
i—
$
(i24,970)
$
i3,965
$
(i435,823)
Interest
expense, net (amounts excluded from effectiveness testing)
$
i41,721
$
i40,860
$
i107,408
$
i127,760
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.
i
The effect of derivative instruments not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
Location
of Gain (Loss) Recognized in Income on Derivatives
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
(11) iFair Value of Assets and Liabilities
As of October 1, 2022 and January 1,
2022, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to forward foreign exchange derivative contracts, cross-currency swap derivative contracts and deferred compensation plan liabilities. The fair values of forward foreign exchange derivative contracts are determined using the cash flows of the forward contracts,
discount rates to account for the passage of time and current foreign exchange market data which are all based on inputs readily available in public markets and are categorized as Level 2. The fair values of cross-currency swap derivative contracts are determined using the cash flows of the swap contracts, discount rates to account for the passage of time, current foreign exchange and interest rate market data and credit risk, which are all based on inputs readily available in public markets and are categorized as Level 2. The fair value of deferred compensation plan liabilities is based on readily available current market data and is categorized as Level 2. The Company’s defined benefit pension plan
investments are not required to be measured at fair value or disclosed on a quarterly recurring basis.
There were no changes during the quarter and the nine months ended October 1, 2022 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of and during the quarter and the nine months ended October 1, 2022, 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.
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable and accounts payable approximated fair value as of October 1, 2022 and January 1, 2022. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $i68,180
and $i61,948 as of October 1, 2022 and January 1, 2022, respectively. The fair value of debt, which is classified as a Level 2 liability, was $i3,690,064
and $i3,504,412 as of October 1, 2022 and January 1, 2022, respectively. Debt had a carrying value of $i3,911,850
and $i3,368,634 as of October 1, 2022 and January 1, 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.
The types of products and services from which each reportable segment derives its
revenues are as follows:
•Innerwear includes sales in the United States of basic branded apparel products that are replenishment in nature under the product categories of men’s underwear, women’s panties, children’s underwear and socks, and intimate apparel, which includes bras and shapewear.
•Activewear includes sales in the United States of branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel.
•International primarily includes sales of the Company’s innerwear and activewear products outside the United States, primarily in Australasia, Europe, Asia, Latin America and Canada.
The
Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, restructuring and other action-related charges and amortization of intangibles. The accounting policies of the segments are consistent with those described in Note “Summary of Significant Accounting Policies” to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 1, 2022.
Income
from continuing operations before income tax expense
$
i96,511
$
i191,975
$
i345,714
$
i508,175
/
i
The
Company incurred restructuring and other action-related charges that were reported in the following lines in the Condensed Consolidated Statements of Income:
Notes to Condensed Consolidated Financial Statements — (Continued)
(amounts in thousands, except per share data)
(unaudited)
Restructuring and other action-related charges within operating profit included $i26,451 and $i29,096
of charges related to the implementation of the Company’s Full Potential plan in the quarters ended October 1, 2022 and October 2, 2021, respectively. Full Potential plan charges in the quarter ended October 1, 2022 included charges related to supply chain segmentation of $i13,298 to position the
Company’s manufacturing network to align with revenue growth opportunities of its Full Potential plan demand trends which is reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and a non-cash loss of $i4,310, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from an increase
in carrying value due to changes in working capital.
Restructuring and other action-related charges within operating profit included $i37,633 and $i67,153
of charges related to the implementation of the Company’s Full Potential plan in the nine months ended October 1, 2022 and October 2, 2021, respectively. Full Potential plan charges in the nine months ended October 1, 2022 included charges related to supply chain segmentation of $i14,587 to position the
Company’s manufacturing network to align with revenue growth opportunities of its Full Potential plan demand trends which is reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and a non-cash gain of $i6,558, which is reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting
from a decrease in carrying value due to changes in working capital. Additionally, Full Potential plan charges in the nine months ended October 2, 2021 included impairment charges of $i7,302, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income, related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from
the disposal group as it was not marketed for sale.
In the third quarter and nine months of 2021, the Company recorded a Full Potential plan charge of $i16,000 for an action to resize its U.S. corporate office workforce through a voluntary retirement program which was reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income and in the “Operating model”
line of the restructuring and other action-related charges table above. At January 1, 2022, the accrual for employee termination and other benefits related to the Company’s 2021 voluntary retirement program was $i15,688. During the quarter and nine months ended October 1, 2022, the Company
approved actions to position the Company’s manufacturing network to align with revenue growth opportunities of its Full Potential plan demand trends and incurred charges of $i7,170 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 nine months ended October 1,
2022, benefit payments and other adjustments of $i12,070, have been made, resulting in an ending accrual for the actions noted above of $i10,788
which is included in the “Accrued liabilities” line of the Condensed Consolidated Balance Sheets at October 1, 2022.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This
management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated interim financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 1, 2022, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative
of results that may be expected for the full year or future periods, and our actual results may differ materially from those expressed in or implied by the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended January 1, 2022 and in our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022. In particular, statements with respect to trends associated with our business, our multi-year growth strategy (“Full Potential plan”), the impacts of the ransomware attack announced on May 31, 2022 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, Bali, Maidenform, Playtex, Bras N Things, JMS/Just My Size, Alternative, Berlei, Wonderbra, Gear for Sports and Comfortwash. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, shapewear, underwear, socks and activewear produced in our low-cost global supply chain. Our products are marketed to consumers shopping in mass merchants, mid-tier and department stores, specialty stores and the consumer-directed channel,
which includes our owned retail locations, as well as e-commerce sites. Our brands hold either the number one or number two market position by units sold in many of the product categories and geographies in which we compete.
Our operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of our U.S.-based outlet stores, U.S. Sheer Hosiery business and certain sales from our supply chain to the European Innerwear business which was sold on March 5, 2022.
Our
Key Business Strategies
Our business strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. We operate in the global innerwear and global activewear apparel categories. These are stable, heavily branded categories where we have a strong consumer franchise based on a global portfolio of industry-leading brands that we have built over multiple decades, through hundreds of millions of direct interactions with consumers. Our Full Potential plan focuses on four pillars to drive growth and enhance long-term profitability and identifies the initiatives to unlock growth. Our four pillars of growth are to grow the Champion brand globally, drive growth in Innerwear with brands and products that appeal to younger consumers, build e-commerce excellence across channels and streamline
our global portfolio. In order to deliver this growth and create a more efficient and productive business model, we have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve the Full Potential plan’s objectives. We remain highly confident that our strong brand portfolio, world-class supply chain and diverse category and geographic footprint will help us unlock our full potential, deliver long-term growth and create stockholder value.
In the first quarter of 2021, we announced that we reached the decision to exit our European Innerwear business as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale and discontinued operations accounting criteria. Accordingly, we began to separately report the results of our European Innerwear business as discontinued operations in our Condensed Consolidated Statements
of Income, and to present the related assets and liabilities as held for sale in the Condensed Consolidated Balance Sheets. On November 4, 2021, we announced that we reached an agreement to sell our European Innerwear business to an affiliate of Regent, L.P. and completed the sale on March 5, 2022. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In addition, in the fourth quarter of 2021, we reached the decision to divest
our U.S. Sheer Hosiery business, including the L’eggs brand, as part of our strategy to streamline our portfolio under our Full Potential plan and determined that this business met held-for-sale accounting criteria. The related assets and liabilities are presented as held for sale in the Condensed Consolidated Balance Sheets at October 1, 2022 and January 1, 2022. The operations of our U.S. Sheer Hosiery business are reported in “Other” for all periods presented in Note “Business Segment Information” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. We are currently exploring potential purchasers for this business and expect to complete the sale within the next 12 months. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated
interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
In June of 2022, we purchased the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC (“KEDS”) for $103 million. The trademark was recorded in “Trademarks and other identifiable intangibles, net” line in the Condensed Consolidated Balance Sheets and has an indefinite life. We previously licensed the Champion trademark for footwear in these locations. The purchase of the trademark was part of an agreement with KEDS settling litigation between the two parties and is another step forward in our Full Potential plan of growing the global Champion brand.
Ransomware Attack
As previously disclosed,
on May 24, 2022, we identified that we had become subject to a ransomware attack and activated our incident response and business continuity plans designed to contain the incident. As part of our forensic investigation and assessment of the impact, we determined that certain of our information technology systems were affected by the ransomware attack.
Upon discovering the incident, we took a series of measures to further safeguard the integrity of our information technology systems, including working with cybersecurity experts to contain the incident and implementing business continuity plans to restore and support continued operations. These measures also included resecuring data, remediation of the malware across infected machines, rebuilding critical systems, global password reset and enhanced security monitoring. We notified appropriate law enforcement authorities as well
as certain data protection regulators, and in addition to our public announcements of the incident, we began a process to provide breach notifications and regulatory filings as may be required by applicable law starting in August 2022. While the notification process continues, at this time, 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 lawsuits in connection with the ransomware incident. On October 7, 2022, a putative class action was filed against “Hanes Brands [sic], Inc.” alleging,
among other things, negligence, negligence per se, breach of implied contract, unjust enrichment, breach of implied covenant of good faith and fair dealing, unfair business practices under the California Business and Professions Code, and violations of the California Confidentiality of Medical Information Act in connection with the ransomware incident. The litigation is entitled, Ramon v. Hanes Brands, Inc., and is pending in the United States District Court for the Central District of California. On October 13, 2022, another putative class action was filed against HanesBrands, Inc. alleging, among other things, negligence, negligence per se, breach of implied contract, invasion of privacy, and unjust enrichment in connection with the ransomware
incident. The litigation is entitled, Toussaint v. HanesBrands, Inc. and is pending in the United States District Court for the Middle District of North Carolina. The lawsuits seek, among other things, monetary and injunctive relief. We are vigorously defending these matters and believes the cases are without merit. However, at this early stage in the proceedings, we are not able to determine the probability of the outcome of these matters or a range of reasonably expected losses, if any.
During the quarter and nine months ended October 1, 2022, we incurred costs of approximately $1 million and $16 million, net of expected insurance recoveries, respectively, related to the ransomware attack. The costs, net of expected insurance recoveries, incurred during the quarter ended October 1, 2022 related primarily to information technology
and legal fees and are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The costs incurred during the nine months ended October 1, 2022 included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $2 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. The ransomware attack also negatively impacted our ability to order materials, make and ship orders, and process payments during the second quarter ended July 2, 2022, resulting in estimated lost sales of approximately $100 million.
We continue to assess the security event and cannot determine, at this time, the full extent of the impact from such event on our business, results of operations or financial condition or whether such impact will ultimately have a material adverse effect.
As the global impact of COVID-19 continues, our priority has been to protect the health and safety of our employees and customers around the world. To help mitigate the spread of the COVID-19 virus and in response to health advisories and governmental actions and regulations, we have modified our business practices and have
implemented health and safety measures that are designed to protect employees in our corporate, retail, distribution and manufacturing facilities around the world.
The COVID-19 pandemic has impacted our business operations and financial results, as described in more detail under “Condensed Consolidated Results of Operations - Third Quarter Ended October 1, 2022 Compared with Third Quarter Ended October 2, 2021” and “Condensed Consolidated Results of Operations - Nine Months Ended October 1, 2022 Compared with Nine Months Ended October 2, 2021” 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. These global supply chain disruptions have delayed and are expected to continue to delay inventory orders and, in turn, deliveries to our wholesale customers and availability in our Company-operated stores and e-commerce sites. Supply chain disruptions resulted in the inability to fulfill certain customer orders which negatively impacted our net revenues. We anticipate these supply chain disruptions could impact our sales volumes in future periods. We have also incurred higher distribution costs including freight and labor costs to mitigate these delays. We continue to monitor these delays and other potential disruptions in our supply chain and will implement mitigation plans as needed. The future impact of 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 2022
We estimate our 2022 guidance as follows:
•Net sales of approximately $6.16 billion to $6.21 billion, net of approximately $196 million of unfavorable foreign currency exchange impact;
•Operating profit of approximately $512 million to $542 million, net of approximately $26 million of unfavorable foreign currency exchange impact;
•Full Potential plan-related charges of approximately $55 million included in operating profit;
•Interest
expense and other expenses of approximately $167 million combined;
•An effective tax rate from continuing operations of approximately 17%;
•Diluted earnings per share from continuing operations of approximately $0.82 to $0.89;
•Cash flow from operating activities to be a use of approximately $400; and
•Capital investments of approximately $140 million, including capital expenditures of $90 million within investing cash flow activities and cloud computing assets of $50 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 will work to mitigate the impact of the global supply chain disruptions
through a combination of cost savings and operating efficiencies, as well as pricing actions, which could have an adverse impact on demand. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on spending.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as seasonal and replenishable activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the
same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to consumers’ preferences and discretionary spending.
Key Financial Results from the Third Quarter Ended October 1, 2022
Key financial results are as follows:
•Total net sales in the third quarter of 2022 were $1.67 billion, compared with $1.79
billion in the same period of 2021, representing a 7% decrease.
•Operating profit decreased 40% to $141 million in the third quarter of 2022, compared with $235 million in the same period of 2021. As a percentage of sales, operating profit was 8.5% in the third quarter of 2022 compared to 13.1% in the same period of 2021.
•Diluted earnings per share from continuing operations was $0.23 and $0.50 in the third quarters of 2022 and 2021, respectively.
Income from
continuing operations before income tax expense
96,511
191,975
(95,464)
(49.7)
Income tax expense
16,410
15,228
1,182
7.8
Income
from continuing operations
80,101
176,747
(96,646)
(54.7)
Loss from discontinued operations, net of tax
—
(24,970)
24,970
(100.0)
Net
income
$
80,101
$
151,777
$
(71,676)
(47.2)
%
Net Sales
Net sales decreased 7% during the third quarter of 2022 versus the third quarter of 2021 primarily due to the following:
•Softer point-of-sale trends and higher retailer inventory levels as a result of the macroeconomic pressures;
•Ongoing
COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $59 million.
Partially offset by:
•Pricing actions taken throughout 2022.
Operating Profit
Operating profit as a percentage of net sales was 8.5% during the third quarter of 2022, representing a decrease from 13.1% in the prior year. Operating margin decreased as a result of input cost inflation, lower sales volume, manufacturing time-out costs associated with our inventory reduction actions and higher transportation costs partially offset by pricing actions and cost reductions. Included in operating profit in the third quarter
of 2022 and 2021 were charges of $26 million and $29 million, respectively, related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses increased $1 million in the third quarter of 2022 compared to the third quarter of 2021 due to higher funding fees for sales of accounts receivable to financial institutions in 2022 offset by lower pension expense in 2022.
Interest Expense – Interest expense was higher by $1 million in the third quarter of 2022 compared to the third quarter of 2021 primarily due to higher weighted average outstanding debt balances partially offset by a lower weighted average interest rate on our borrowings during the third quarter of 2022 compared to the third quarter of 2021. Our weighted average interest rate on our outstanding
debt was 4.08% for the third quarter of 2022 compared to 4.12% for the third quarter of 2021.
Income Tax Expense – Our effective income tax rate was 17.0% and 7.9% for the third quarters of 2022 and 2021, respectively. The higher effective tax rate for the third quarter of 2022 was primarily due to non-recurring discrete tax charges totaling $3 million for adjustments related to prior period tax returns during the third quarter of 2022 versus discrete tax benefits of $4 million for the release of uncertain tax benefits and $5 million for adjustments related to prior period tax returns and approval of certain filings by taxing authorities during the third quarter of 2021.
In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IR Act”), which, among other things, introduces a 15% minimum tax based on adjusted financial statement income
of certain large corporations with a three year average adjusted financial statement income in excess of $1 billion, a 1% excise tax on the fair market stock repurchases by covered
corporations, and several tax incentives to promote clean energy. We are continuing to evaluate the IR Act and its potential impact on future periods and at this time we do not expect the IR Act to have a material impact on our consolidated financial statements.
DiscontinuedOperations – The results of our discontinued operations include the operations of our European
Innerwear business which we reached the decision to exit at the end of the first quarter of 2021 in connection with our Full Potential plan. On March 5, 2022, we completed the sale of the European Innerwear business. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — Third Quarter Ended October 1, 2022 Compared with Third Quarter Ended October 2, 2021
Innerwear
net sales decreased 11% compared to the third quarter of 2021 primarily due to softer point-of-sale trends and retailer inventory reductions as a result of the macroeconomic pressures partially offset by pricing actions taken and retail space gains in the first quarter of 2022.
Innerwear operating margin was 16.0%, a decrease from 21.0% in the same period a year ago. The operating margin decline resulted from input cost inflation, lower sales volume, manufacturing time-out costs associated with our inventory reduction actions and unfavorable product mix partially offset by pricing actions and cost reductions.
Activewear
Activewear net sales decreased 0.3% compared to the third quarter of 2021 due to softer point-of-sale trends and higher inventory levels at retail as
a result of the macroeconomic pressures primarily related to the Champion brand. The net sales decrease was partially offset by growth in the collegiate and printwear channels and pricing actions primarily taken in the third quarter of 2022.
Activewear operating margin was 11.6%, a decrease from 16.5% in the same period a year ago. The operating margin decline resulted from higher levels of inflation, manufacturing time-out costs associated with our inventory reduction actions and unfavorable product mix partially offset by pricing actions and cost reductions.
International
Net sales in the International segment decreased 6% compared to the third quarter of 2021 due to unfavorable foreign currency exchange rates. The unfavorable impact of foreign currency exchange rates decreased net sales
approximately $59 million in the third quarter of 2022. International net sales on a constant currency basis, defined as net sales excluding the
impact of foreign currency, increased 5%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results. Net sales on a constant currency basis increased as a result of Champion growth in Europe as well as innerwear growth in Australia and the Americas. The increase in net sales was partially offset by Champion declines in certain Asian markets.
International
operating margin was 13.9%, a decrease from 16.1% in the same period a year ago. The decrease in operating margin primarily resulted from higher levels of inflation and input costs, which was partially offset by disciplined expense management during the quarter.
Other
Other net sales decreased primarily as a result of decreased traffic at our retail outlets in the third quarter of 2022 compared to the third quarter of 2021. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
We have continued certain sales from our supply chain to the European Innerwear business on a transitional basis after the sale of the business. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the
European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Corporate
Corporate expenses were slightly lower in the third quarter of 2022 compared to the third quarter of 2021 primarily due to lower variable compensation costs and lower restructuring and other action-related charges partially offset by increased information technology costs. Included in restructuring and other action-related charges within operating profit in the third quarter of 2022 and 2021 were $26 million and $29 million, respectively, of charges related to the implementation of our Full Potential plan. Full Potential plan charges in the third quarter of 2022 included charges related to supply chain segmentation of
$13 million to position our manufacturing network to align with revenue growth opportunities of our Full Potential plan demand trends and a non-cash loss of $4 million to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from an increase in carrying value due to changes in working capital. Full Potential plan charges in the third quarter of 2021 included a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program.
Income
from continuing operations before income tax expense
345,714
508,175
(162,461)
(32.0)
Income tax expense
58,775
55,161
3,614
6.6
Income
from continuing operations
286,939
453,014
(166,075)
(36.7)
Income (loss) from discontinued operations, net of tax
3,965
(435,823)
439,788
(100.9)
Net
income
$
290,904
$
17,191
$
273,713
1,592.2
%
Net
Sales
Net sales decreased 6% during the nine months of 2022 versus the nine months of 2021 primarily due to the following:
•The impact of the ransomware attack to the business;
•Softer point-of-sale trends and higher retailer inventory levels as a result of the macroeconomic pressures;
•Global supply chain disruptions resulting in product delays;
•Ongoing COVID-related pressures on consumer traffic in certain markets in Asia; and
•The unfavorable impact from foreign currency exchange rates in our International business of approximately $127 million.
Partially
offset by:
•Pricing actions taken throughout 2022; and
•Strong consumer demand in the Americas.
Operating Profit
Operating profit as a percentage of net sales was 9.6% for the nine months of 2022, representing a decrease from 12.7% in the prior year. Operating margin decreased as a result of lower sales volume, input cost inflation, impact from the ransomware attack, costs associated with our manufacturing time-out inventory reduction actions, higher transportation and distribution costs and increased Full Potential plan-related investments in brand marketing and technology partially offset by pricing actions and cost reductions. Included in operating profit in the nine months of 2022 and 2021 were charges of $38 million and $67 million, respectively,
related to the implementation of our Full Potential plan.
Other Highlights
Other Expenses – Other expenses decreased slightly in the nine months of 2022 compared to the same period in 2021 due to lower pension expense partially offset by higher funding fees for sales of accounts receivable to financial institutions in 2022.
Interest Expense – Interest expense was lower by $20 million in the nine months of 2022 compared to the same period in 2021, primarily due to a lower weighted average interest rate on our borrowings partially offset by higher weighted average outstanding debt balances during the nine months of 2022. Our weighted average interest rate on our outstanding debt was 3.45% for the nine months of 2022, compared to 4.12% for the nine months of 2021.
Income
Tax Expense – Our effective income tax rate was 17.0% and 10.9% for the nine months of 2022 and 2021, respectively. The higher effective tax rate for the nine months of 2022 was primarily due to non-recurring discrete tax charges of $9 million for assessments and adjustments for prior period tax returns and measurement of deferred tax liabilities during the nine months of 2022 versus non-recurring discrete tax benefits of $11 million for the release of reserves for unrecognized tax
benefits and $4 million for adjustments related to prior period tax returns and approval of certain filings by taxing authorities, partially offset by a
discrete charge for changes in valuation allowances of $5 million during the nine months of 2021.
In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IR Act”), which, among other things, introduces a 15% minimum tax based on adjusted financial statement income of certain large corporations with a three year average adjusted financial statement income in excess of $1 billion, a 1% excise tax on the fair market stock repurchases by covered corporations, and several tax incentives to promote clean energy. We are continuing to evaluate the IR Act and its potential impact on future periods and at this time we do not expect the IR Act to have a material impact on our consolidated financial statements.
DiscontinuedOperations – The results of our discontinued operations include the operations
of our European Innerwear business which we reached the decision to exit at the end of the first quarter of 2021 in connection with our Full Potential plan. On March 5, 2022, we completed the sale of the European Innerwear business. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information.
Operating Results by Business Segment — Nine Months Ended October 1, 2022 Compared with Nine Months Ended October 2, 2021
Innerwear
net sales decreased 8% compared to the nine months of 2021 primarily due to business disruption as a result of the ransomware attack in the second quarter of 2022, softer point-of-sale trends, retailer inventory reductions and last year’s one-time sales benefits from retailer restocking and government-stimulus spending partially offset by pricing actions taken and retail space gains in the first quarter of 2022.
Innerwear operating margin was 18.2%, a decrease from 22.5% in the same period a year ago. The operating margin decline resulted from input cost inflation, lower sales volume, manufacturing time-out costs associated with our inventory reduction actions, unfavorable product and channel mix and increased distribution costs resulting from expedited freight to service new retail space gains partially offset by pricing actions and
cost reductions.
Activewear
Activewear net sales decreased 4% compared to the nine months of 2021 primarily due to softer point-of-sale trends primarily related to the Champion brand, retailer inventory levels and business disruption as a result of the ransomware attack in the second quarter of 2022. The net sales decrease was partially offset by growth in the collegiate and printwear channels and pricing actions primarily taken in the third quarter of 2022.
Activewear operating margin was 10.6%, a decrease from 14.4% in the same period a year ago. The operating margin decline resulted from lower sales volume, manufacturing time-out costs associated with our inventory reduction actions, higher
levels of inflation, unfavorable product mix and increased brand marketing investments partially offset by pricing actions and cost reductions.
International
Net sales in the International segment decreased 6% compared to the nine months of 2021 due to unfavorable foreign currency exchange rates, operational challenges experienced from the ransomware attack during the second quarter of 2022, global supply chain disruptions resulting in product delays in Australia and ongoing COVID-related pressures on consumer traffic in certain markets in Asia partially offset by growth in the Americas. The unfavorable impact of foreign currency exchange rates decreased net sales approximately $127 million in the nine months of 2022. International net sales on a constant currency basis,
defined as net sales excluding the impact of foreign currency, increased 3%. The impact of foreign currency exchange rates is calculated by applying prior period exchange rates to the current year financial results.
International operating margin was 15.0%, a decrease from 15.5% in the same period a year ago. The decrease in operating margin primarily resulted from higher levels of inflation and input costs, which was partially offset by disciplined expense management during the nine months of 2022.
Other
Other net sales increased primarily due to increased sales from our supply chain to the European Innerwear business partially offset by lower sales at our retail outlets during the nine months of 2022 compared to the nine months of 2021. We have continued certain sales from our supply chain to the European Innerwear business on a transitional
basis after the sale of the business in the first quarter of 2022. These sales and the related profit are included in Other in all periods presented and have not been eliminated as intercompany transactions in consolidation for the period when the European Innerwear business was owned by us. See Note “Assets and Liabilities Held for Sale” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. Operating margin decreased due to the decrease in sales volume primarily in our retail outlets.
Corporate
Corporate expenses were lower in the nine months of 2022 compared to the nine months of 2021 primarily due to lower restructuring and other action-related charges and lower variable compensation costs partially offset by increased information technology costs coupled with expenses, net of expected insurance
recoveries, related to the ransomware attack which occurred during the second quarter of 2022. During the nine months ended October 1, 2022, we incurred costs of approximately $16 million, net of expected insurance recoveries, related to the ransomware attack which included $14 million related primarily to supply chain disruptions, which are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income and $2 million, net of expected insurance recoveries, related primarily to information technology, legal and consulting fees, which are reflected in the “Selling, general and administrative expenses” line of the Condensed Consolidated Statements of Income. Included in restructuring and other action-related charges within operating profit in the nine months of 2022 and 2021 were $38 million and $67 million, respectively, of charges related
to the implementation of our Full Potential plan. Full Potential plan charges in the nine months of 2022 included charges related to supply chain segmentation of $15 million to position our manufacturing network to align with revenue growth opportunities of our Full Potential plan demand trends and a non-cash gain of $7 million to adjust the valuation allowance related to the U.S. Sheer Hosiery business resulting from a decrease in carrying value due to changes in working capital. Full Potential plan charges in the nine months of 2021 included a charge of $16 million for an action to resize our U.S. corporate office workforce through a voluntary retirement program and impairment charges of $7 million related to the full impairment of an indefinite-lived trademark related to a specific brand within the European Innerwear business that was excluded from the disposal group.
Total
restructuring and other action-related charges
$
31,239
$
36,015
Liquidity and Capital Resources
Cash Requirements and Trends and Uncertainties
Affecting Liquidity
We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. Our primary uses of cash are payments to our employees and vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, contributions to our pension plans, regular quarterly dividend payments, income tax payments and repurchases of our stock.
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 November 2022, given the uncertain economic environment and the associated impact
on future earnings, we amended the credit agreement governing our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility. The amendment effects changes to certain provisions and covenants under the Senior Secured Credit Facility during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 30, 2023 (such period of time, the “Covenant Relief Period”), including: (a) an increase in the maximum leverage ratio from 4.50 to 1.00 to 5.25 to 1.00 for the quarter ended December 31, 2022, 5.75 to 1.00 for the quarters ending April 1, 2023 through September 30,
2023 and 5.25 to 1.00 for the quarter ending December 30, 2023 reverting back to 4.50 to 1.00 for each quarter after the Covenant Relief Period; (b) a reduction of the minimum interest coverage ratio from 3.00 to 1.00 to 2.60 to 1.00 for the quarters ending December 31, 2022 through December 30, 2023 with an increase to 2.75 to 1.00 for each quarter after the Covenant Relief Period; (c) a cap on dividend payments of $250,000 which will revert back to the current amounts after the Covenant Relief Period; (d) the addition of two new tiers to the top of the pricing grid if the maximum leverage ratio exceeds 5.00 to 1.00 and 5.50 to 1.00; and (e) the 0.50 increase in the maximum leverage ratio resulting from a material permitted acquisition is suspended through the Covenant Relief Period. In conjunction with this amendment,
we will transition the Senior Secured Credit Facility from the London Interbank Offered Rate to the Secured Overnight Financing Rate with a 10 basis points credit spread adjustment already included in the Senior Secured Credit Facility. After obtaining the debt amendment, we expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts. If economic conditions worsen and our earnings and operating cash flows do not start to recover as currently estimated by management, this could impact our ability to maintain compliance with our amended financial covenants and require us to seek additional amendments to our Senior Secured Credit Facility. If we are not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able
to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders.
Our sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our accounts receivable securitization facility (the “ARS Facility”) and our other international credit facilities.
(1)A portion of the Revolving Loan Facility is available to be borrowed in Euros or Australian dollars.
(2)Borrowing availability under the ARS Facility is subject to a
quarterly fluctuating facility limit, not to exceed $225 million, and permitted only to the extent that the face of the receivables in the collateral pool, net of applicable concentrations, reserves and other deductions, exceeds the outstanding loans.
The following have impacted or may impact our liquidity:
•The COVID-19 pandemic which resulted in supply chain disruptions and inflationary pressures has had, and may continue to have, a negative impact on our business.
•For the nine months ended October 1, 2022, we entered into transactions to repurchase approximately 1.6 million shares of our common stock at a total cost of $25 million including broker’s commissions. At October 1, 2022, the remaining
repurchase authorization under our current share repurchase program announced on February 2, 2022 totaled approximately $575 million.
•We have historically paid a regular quarterly dividend. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors.
•We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities.
•We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building.
•We
have launched a multi-year cost savings program intended to self-fund the investments necessary to achieve our Full Potential plan’s objectives.
•We expect capital investments of approximately $140 million in 2022, including capital expenditures of $90 million within investing cash flow activities and cloud computing assets of $50 million within operating cash flow activities. For the nine months ended October 1, 2022, we invested approximately $71 million and $33 million in capital expenditures and cloud computing assets, respectively.
•In the future, we may pursue strategic business acquisitions or divestitures.
•We expect to have no required cash contributions to our U.S. pension plan in 2022 based on a preliminary
calculation by our actuary but we may elect to make voluntary contributions.
•We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could impact our effective income tax rate. We have not changed our reinvestment strategy from the prior year with regards to our unremitted foreign earnings and intend to remit foreign earnings totaling $579 million.
The
information presented below regarding the sources and uses of our cash flows for the nine months ended October 1, 2022 and October 2, 2021 was derived from our condensed consolidated interim financial statements.
Effect
of changes in foreign exchange rates on cash
(71,728)
(27,207)
Change in cash and cash equivalents
(307,498)
(20,159)
Cash and cash equivalents at beginning of year
560,629
910,603
Cash and cash equivalents at end of period
$
253,131
$
890,444
Balances
included in the Condensed Consolidated Balance Sheets:
Cash and cash equivalents
$
253,131
$
873,628
Cash and cash equivalents included in current assets held for sale
—
16,816
Cash and cash equivalents at end of period
$
253,131
$
890,444
Operating
Activities
Our overall liquidity has historically been driven by our cash flow provided by operating activities, which is dependent on net income and changes in our working capital. As compared to the prior year, higher net cash used by operating activities was due to changes in working capital primarily accounts payable, accruals, inventory due to inflationary increases, softer point-of-sale trends and supply chain disruptions, and increased capital investments in our cloud computing assets partially offset by improvement in accounts receivable and lower pension plan contributions in the nine months of 2022. Net cash from operating activities includes a $40 million contribution to our U.S. pension plan made in the first quarter of 2021.
Investing Activities
The increase in cash used by investing activities in the nine months of 2022 compared
to the nine months of 2021 was primarily the result of the purchase of the Champion trademark for footwear in the United States, Puerto Rico and Canada from Keds, LLC for $103 million, the sale of the European Innerwear business which resulted in an $11 million cash outflow and an increase in capital investments into our business.
Financing Activities
Net cash from financing activities increased in the nine months of 2022 primarily as a result of increased borrowings on our ARS Facility and our Revolving Loan Facility coupled with the repayment of the outstanding balance of Term Loan B in the nine months of 2021, which consisted of a required excess cash flow prepayment of $239 million and a voluntary prepayment of $61 million. Net cash from financing activities in the nine months of 2022 also included shares repurchased at a total cost
of $25 million and Term Loan A scheduled payments of $19 million.
Financing Arrangements
In June 2022, we amended the ARS Facility. This amendment primarily increased the fluctuating facility limit to $225 million (previously $175 million) and extended the maturity date to June 2023. Additionally, the amendment changed our interest rate option as defined in the ARS Facility from the rate announced from time to time by PNC Bank, N.A. as its prime rate or the London Interbank Offered Rate to the rate announced from time to time by PNC Bank, N.A. as its prime rate or the Secured Overnight Financing Rate and increased certain receivables to the pledged collateral pool for the facility.
We believe our financing structure provides a secure base to support our operations and key business strategies. As of October 1,
2022, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. Under the terms of our Senior Secured Credit Facility, among other financial and non-financial covenants, we are required to maintain a minimum interest coverage ratio and a maximum total debt to EBITDA (earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility), or leverage ratio, each of which is defined in the Senior Secured Credit Facility. The method of calculating all of the components used in the covenants is included in the Senior Secured Credit Facility. In November 2022, given the uncertain economic environment and the associated impact on future earnings, we amended our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility as described in Note “Debt”
to our
condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended January 1, 2022 and our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022 or other SEC filings could cause noncompliance.
For further details regarding our liquidity from our available cash balances and credit facilities see “Cash Requirements and Trends and Uncertainties Affecting Liquidity” above.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to report our operating results and financial condition in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note “Summary of Significant Accounting Policies” to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended January 1,
2022.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-K for the year ended January 1, 2022. There have been no material changes in these policies from those described in our Annual Report on Form 10-K for the year ended January 1, 2022.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note “Recent Accounting Pronouncements” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q.
Item 3.
Quantitative
and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended January 1, 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 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 Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 1, 2022.
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 Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
As previously disclosed, on May 24, 2022, we identified that we had become subject to a ransomware attack impacting certain of our information technology systems and activated our incident response and business continuity plans designed to contain the incident. See Note “Basis of Presentation – Ransomware Attack” to our condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q for additional information. As a result of the ransomware attack, we performed additional tests of controls and manual compensating controls.
Although we are subject to various claims and legal actions that occur from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe could have a material adverse effect on our business, results of operations, financial condition or cash flows.
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 January 1, 2022 and in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended July 2, 2022. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There are no material changes to the risk factors previously disclosed, nor have we identified any previously undisclosed risks that could materially adversely affect our business and financial results. Additional risks and
uncertainties not presently known to us or that we currently deem to be immaterial also may affect us. The occurrence of any of these known or unknown risks could have a material adverse ultimate impact on our business, financial condition, liquidity or results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults
Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other
Information
As previously disclosed on November 23, 2021, Hanesbrands Inc. (the “Company”), along with each of MFB International Holdings S.à r.l. (the “Lux Borrower”) and HBI Australia Acquisition Co. Pty Ltd (the “Australian Borrower” and, together with the Company and the Lux Borrower, the “Borrowers”), entered into the Fifth Amended and Restated Credit Agreement, dated as of November 19, 2021 (as amended from time to time, the “Credit Agreement”), with the various financial institutions and other persons from time to time party to the Credit Agreement as lenders, JPMorgan Chase Bank, N.A., as the administrative agent and the collateral agent.
On
November 4, 2022, the Company, along with the other Borrowers, entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement. The Second Amendment effects changes to certain provisions and covenants under the Credit Agreement during the period beginning with the fiscal quarter ending December 31, 2022 and continuing through the fiscal quarter ending December 31, 2023 (such period of time, the “Covenant Relief Period”), including: (a) increases in the maximum consolidated net total leverage ratio to (i) 5.25:1.00 through December 31, 2022, (ii) 5.75:1.00 from January 1, 2023 through September
30, 2023, and (iii) 5.25:1.00 from October 1, 2023 through December 31, 2023 and (b) reduction of the minimum consolidated net interest coverage ratio from 3.00 to 1.00 to 2.60 to 1.00. Following the Covenant Relief Period, (i) the maximum consolidated net total leverage ratio will revert to previous levels and (ii) the minimum consolidated net interest coverage ratio will be reduced from 3:00 to 1.00 to 2.75 to 1.00. In addition, during the Covenant Relief Period, the (i) applicable margin calculated based on the consolidated net total leverage ratio will be up to a maximum of (a) 2.25% for term benchmark loans, daily simple Secured Overnight Financing Rate (“SOFR”) loans and Central Bank rate loans and (b) 1.25% for alternative base rate loans; and (ii) the applicable commitment fee margin will be calculated based on consolidated net total leverage ratio will
be up to a maximum of 0.35%. The Second Amendment also contains certain amendments related to the transition of the benchmark rate from London Interbank Offered Rate to SOFR.
From time to time, the financial institutions party to the Credit Agreement or their affiliates have performed, and may in the future perform, various commercial banking, investment banking and other financial advisory services for the Company and its affiliates for which they have received, and will receive, customary fees and expenses. For example, certain lenders under the Credit Agreement and/or their affiliates are parties to the Company’s accounts receivable securitization facility.
The foregoing description of the Second Amendment is only a summary, does not purport to be complete and is qualified in its entirety by reference to the full text of the Second Amendment, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q, and is incorporated herein by reference. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to such terms in the Second Amendment or the Credit Agreement, as applicable.
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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.