HBI-2013.09.28-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-32891
 
 
 
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
 
20-3552316
(State of incorporation)
 
(I.R.S. employer
identification no.)
 
 
1000 East Hanes Mill Road
Winston-Salem, North Carolina
 
27105
(Address of principal executive office)
 
(Zip code)
(336) 519-8080
(Registrant’s telephone number including area code)
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 25, 2013, there were 99,109,326 shares of the registrant’s common stock outstanding.
 

Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Trademarks, Trade Names and Service Marks
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that may appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, C9 by Champion, Bali, Playtex, Just My Size, L’eggs, barely there, Wonderbra, Gear for Sports, Zorba, Sol y Oro and Rinbros marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.

Table of Contents

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes 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. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, statements under the heading “Outlook” and other information appearing under “Management's Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will result or will be achieved or accomplished. Risks and uncertainties that could cause actual results or events to differ materially from those anticipated include risks associated with our ability to realize the benefits anticipated from the Maidenform Brands, Inc. acquisition, as well as the other risks disclosed in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended December 29, 2012, under the caption “Risk Factors,” as well in the “Investors” section of our corporate website, www.Hanes.com/investors.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended December 29, 2012, particularly under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings over the Internet at the SEC’s website at www.sec.gov. To receive copies of public records not posted to the SEC’s web site at prescribed rates, you may complete an online form at www.sec.gov, send a fax to (202) 772-9337 or submit a written request to the SEC, Office of FOIA/PA Operations, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information.
We make available free of charge at www.Hanes.com/investors (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our corporate website, www.Hanes.com/corporate, or any of our other websites, we do not incorporate any such website or its contents into this Quarterly Report on Form 10-Q.


1
Table of Contents

PART I

Item 1.
Financial Statements

HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)

 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net sales
$
1,197,346

 
$
1,218,681

 
$
3,342,012

 
$
3,372,465

Cost of sales
775,666

 
818,751

 
2,157,551

 
2,350,489

Gross profit
421,680

 
399,930

 
1,184,461

 
1,021,976

Selling, general and administrative expenses
244,782

 
243,422

 
740,973

 
734,872

Operating profit
176,898

 
156,508

 
443,488

 
287,104

Other expenses
795

 
3,373

 
2,010

 
4,829

Interest expense, net
25,002

 
32,897

 
75,846

 
106,503

Income from continuing operations before income tax expense
151,101

 
120,238

 
365,632

 
175,772

Income tax expense
25,838

 
9,055

 
67,404

 
21,544

Income from continuing operations
125,263

 
111,183

 
298,228

 
154,228

Loss from discontinued operations, net of tax
—

 
(1,291
)
 
—

 
(69,935
)
Net income
$
125,263

 
$
109,892

 
$
298,228

 
$
84,293

 
 
 
 
 
 
 
 
Earnings per share — basic:
 
 
 
 
 
 
 
Continuing operations
$
1.25

 
$
1.13

 
$
2.99

 
$
1.56

Discontinued operations
—

 
(0.01
)
 
—

 
(0.71
)
Net income
$
1.25

 
$
1.11

 
$
2.99

 
$
0.85

 
 
 
 
 
 
 
 
Earnings per share — diluted:
 
 
 
 
 
 
 
Continuing operations
$
1.23

 
$
1.11

 
$
2.93

 
$
1.54

Discontinued operations
—

 
(0.01
)
 
—

 
(0.70
)
Net income
$
1.23

 
$
1.09

 
$
2.93

 
$
0.84



See accompanying notes to Condensed Consolidated Financial Statements.
2
Table of Contents

HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net income
$
125,263

 
$
109,892

 
$
298,228

 
$
84,293

Other comprehensive income (loss), net of tax of $1,342, $1,581, $5,013 and $4,357, respectively
1,062

 
4,881

 
(842
)
 
8,196

Comprehensive income
$
126,325

 
$
114,773

 
$
297,386

 
$
92,489



See accompanying notes to Condensed Consolidated Financial Statements.
3
Table of Contents

HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)

 
September 28,
2013
 
December 29,
2012
Assets
 
 
 
Cash and cash equivalents
$
132,320

 
$
42,796

Trade accounts receivable, net
585,710

 
506,278

Inventories
1,313,971

 
1,253,136

Deferred tax assets
168,338

 
166,189

Other current assets
56,714

 
59,126

Total current assets
2,257,053

 
2,027,525

 
 
 
 
Property, net
566,776

 
596,158

Trademarks and other identifiable intangibles, net
111,839

 
120,114

Goodwill
432,979

 
433,300

Deferred tax assets
405,135

 
397,529

Other noncurrent assets
61,235

 
57,074

Total assets
$
3,835,017

 
$
3,631,700

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
440,357

 
$
403,644

Accrued liabilities
301,505

 
271,972

Notes payable
5,209

 
26,216

Accounts Receivable Securitization Facility
166,614

 
173,836

Total current liabilities
913,685

 
875,668

Long-term debt
1,250,000

 
1,317,500

Pension and postretirement benefits
404,554

 
446,267

Other noncurrent liabilities
114,674

 
105,399

Total liabilities
2,682,913

 
2,744,834

 
 
 
 
Stockholders’ equity:
 
 
 
Preferred stock (50,000,000 authorized shares; $.01 par value)
 
 
 
Issued and outstanding — None
—

 
—

Common stock (500,000,000 authorized shares; $.01 par value)
 
 
 
Issued and outstanding — 99,109,326 and 98,269,868, respectively
991

 
983

Additional paid-in capital
300,223

 
292,029

Retained earnings
1,169,345

 
911,467

Accumulated other comprehensive loss
(318,455
)
 
(317,613
)
Total stockholders’ equity
1,152,104

 
886,866

Total liabilities and stockholders’ equity
$
3,835,017

 
$
3,631,700



See accompanying notes to Condensed Consolidated Financial Statements.
4
Table of Contents

HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
Operating activities:
 
 
 
Net income
$
298,228

 
$
84,293

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of long-lived assets
67,201

 
70,096

Impairment of intangibles
—

 
37,425

Loss on disposition of business
—

 
31,811

Amortization of debt issuance costs
5,160

 
7,077

Stock compensation expense
7,742

 
6,722

Deferred taxes and other
541

 
(8,856
)
Changes in assets and liabilities, net of disposition of business:
 
 
 
Accounts receivable
(85,145
)
 
(122,929
)
Inventories
(68,389
)
 
230,427

Other assets
(5,626
)
 
12,702

Accounts payable
42,718

 
(18,503
)
Accrued liabilities and other
(5,445
)
 
(20,860
)
Net cash provided by operating activities
256,985

 
309,405

 
 
 
 
Investing activities:
 
 
 
Capital expenditures
(30,721
)
 
(29,475
)
Proceeds from sales of assets
5,896

 
313

Disposition of business
—

 
12,708

Net cash used in investing activities
(24,825
)
 
(16,454
)
 
 
 
 
Financing activities:
 
 
 
Borrowings on notes payable
68,333

 
43,251

Repayments on notes payable
(89,168
)
 
(55,645
)
Borrowings on Accounts Receivable Securitization Facility
100,731

 
156,817

Repayments on Accounts Receivable Securitization Facility
(107,953
)
 
(129,775
)
Borrowings on Revolving Loan Facility
2,629,000

 
2,177,000

Repayments on Revolving Loan Facility
(2,696,500
)
 
(2,191,500
)
Redemption of Floating Rate Senior Notes
—

 
(148,092
)
Cash dividends paid
(39,615
)
 
—

Proceeds from stock options exercised
5,279

 
4,103

Taxes paid related to net shares settlement of equity awards
(24,832
)
 
—

Excess tax benefit from stock-based compensation
18,220

 
491

Other
(4,914
)
 
(2,839
)
Net cash used in financing activities
(141,419
)
 
(146,189
)
Effect of changes in foreign exchange rates on cash
(1,217
)
 
162

Increase in cash and cash equivalents
89,524

 
146,924

Cash and cash equivalents at beginning of year
42,796

 
35,345

Cash and cash equivalents at end of period
$
132,320

 
$
182,269



See accompanying notes to Condensed Consolidated Financial Statements.
5
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands, except per share data)
(unaudited)



(1)
Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated 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 most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
In May 2012, the Company sold its European imagewear business and completed the discontinuation of its private-label and Outer Banks domestic imagewear operations which served wholesalers that sell to the screen-print industry. As a result of these actions, the prior-year disclosures reflect these operations as discontinued operations.
(2)
Recent Accounting Pronouncements
Presentation of Comprehensive Income
In February 2013, the Financial Accounting Standards Board (the “FASB”) issued a final rule related to the reporting of amounts reclassified out of accumulated other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules were effective for the Company in the first quarter of 2013. The adoption of the new accounting rules did not have a material effect on the Company’s financial condition, results of operations or cash flows.
Disclosures About Offsetting Assets and Liabilities
In December 2011, the FASB issued new accounting rules related to new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new rules are effective for the Company in the first quarter of 2014 with retrospective application required. The Company does not expect the adoption of the new accounting rules to have a material effect on the Company’s financial condition, results of operations or cash flows.

6
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

(3)
Earnings Per Share
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock using the treasury stock method. The reconciliation of basic to diluted weighted average shares outstanding is as follows:
 
 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Basic weighted average shares outstanding
100,066

 
98,707

 
99,764

 
98,611

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
1,259

 
1,366

 
1,484

 
1,192

Restricted stock units
661

 
398

 
675

 
327

Employee stock purchase plan and other
1

 
1

 
—

 
1

Diluted weighted average shares outstanding
101,987

 
100,472

 
101,923

 
100,131


For the quarters ended September 28, 2013 and September 29, 2012, 14 and 0 restricted stock units, respectively, were excluded from the diluted earnings per share calculation, and for the nine months ended September 28, 2013 and September 29, 2012, 14 and 11 restricted stock units, respectively, were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the nine months ended September 29, 2012, options to purchase 1 share of common stock was excluded from the diluted earnings per share calculation because its effect would have been anti-dilutive.
(4)
Inventories
Inventories consisted of the following: 
 
September 28,
2013
 
December 29,
2012
Raw materials
$
180,092

 
$
167,883

Work in process
131,549

 
143,713

Finished goods
1,002,330

 
941,540

 
$
1,313,971

 
$
1,253,136

(5)
Debt
Debt consisted of the following: 
 
Interest Rate as of September 28, 2013
 
Principal Amount
 
Maturity Date
 
September 28,
2013
 
December 29,
2012
 
Revolving Loan Facility
—
 
$
—

 
$
67,500

 
July 2018
6.375% Senior Notes
6.38%
 
1,000,000

 
1,000,000

 
December 2020
8% Senior Notes
8.00%
 
250,000

 
250,000

 
December 2016
Accounts Receivable Securitization Facility
1.24%
 
166,614

 
173,836

 
March 2014
 
 
 
1,416,614

 
1,491,336

 
 
Less current maturities
 
 
166,614

 
173,836

 
 
 
 
 
$
1,250,000

 
$
1,317,500

 
 

As of September 28, 2013, the Company had $1,091,547 of borrowing availability under the $1,100,000 revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility after taking into account outstanding borrowings and $8,453 of standby and trade letters of credit issued and outstanding under this facility.

7
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

In July 2013, the Company amended the Revolving Loan Facility to increase the borrowing limit to $1,100,000, decrease borrowing costs by 25 basis points and extend the maturity date to (i) July 2018 or (ii) September 2016 if the Company’s 8% Senior Notes have not been refinanced or repaid or the maturity date thereof has note otherwise been extended beyond July 2018 by September 2016.
In March 2013, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment decreased certain fee rates and extended the termination date to March 2014.
As of September 28, 2013, the Company was in compliance with all financial covenants under its credit facilities.
(6)
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss (“AOCI”) are as follows:
 
 
Cumulative Translation Adjustment
 
Foreign Exchange Contracts
 
Defined Benefit Plans
 
Income Taxes
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
Balance at December 29, 2012
 
$
(8,340
)
 
$
853

 
$
(512,558
)
 
$
202,432

 
$
(317,613
)
Amounts reclassified from accumulated other comprehensive loss
 
—

 
(13
)
 
11,561

 
(4,532
)
 
7,016

Current-period other comprehensive income (loss) activity
 
(8,488
)
 
1,111

 
—

 
(481
)
 
(7,858
)
Balance at September 28, 2013
 
$
(16,828
)
 
$
1,951

 
$
(500,997
)
 
$
197,419

 
$
(318,455
)
The Company had the following reclassifications out of Accumulated other comprehensive loss:
Component of AOCI
 
Location of Reclassification into Income
 
Amount of Reclassification from AOCI
 
Amount of Reclassification from AOCI
 
 
Quarter Ended
 
Nine Months Ended
 
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Gain (loss) on foreign exchange contracts
 

Cost of sales
 
$
8

 
$
41

 
$
13

 
$
(1
)
 
 
Income tax
 
(3
)
 
(16
)
 
(5
)
 
1

 
 
Net of tax
 
$
5

 
$
25

 
$
8

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Amortization of loss on interest rate hedge
 

Interest expense, net
 
$
—

 
$
(1,004
)
 
$
—

 
$
(3,164
)
 
 
Income tax
 
—

 
400

 
—

 
1,262

 
 
Net of tax
 
$
—

 
$
(604
)
 
$
—

 
$
(1,902
)
 
 
 
 
 
 
 
 
 
 
 
Amortization of deferred actuarial loss and prior service cost
 
Selling, general and administrative expenses
 
$
(3,852
)
 
$
(3,989
)
 
$
(11,561
)
 
$
(11,967
)
 
 
Income tax
 
1,512

 
1,590

 
4,537

 
4,770

 
 
Net of tax
 
$
(2,340
)
 
$
(2,399
)
 
$
(7,024
)
 
$
(7,197
)
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
$
(2,335
)
 
$
(2,978
)
 
$
(7,016
)
 
$
(9,099
)




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Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

(7)
Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of September 28, 2013, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company’s derivative portfolio was $81,337 and $8,414 respectively, primarily consisting of contracts hedging exposures to the Mexican peso, Canadian dollar, Australian dollar, Brazilian real and Japanese yen.
Fair Values of Derivative Instruments
The fair values of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
 
Balance Sheet Location
 
Fair Value
 
September 28,
2013
 
December 29,
2012
Hedges
Other current assets
 
$
401

 
$
708

Non-hedges
Other current assets
 
694

 
380

Total derivative assets
 
 
$
1,095

 
$
1,088

 
 
 
 
 
 
Hedges
Accrued liabilities
 
$
(218
)
 
$
(184
)
Non-hedges
Accrued liabilities
 
(216
)
 
(84
)
Total derivative liabilities
 
 
$
(434
)
 
$
(268
)
 
 
 
 
 
 
Net derivative asset
 
 
$
661

 
$
820

Cash Flow Hedges
The Company uses forward foreign exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments, and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
The Company expects to reclassify into earnings during the next 12 months a net loss from Accumulated other comprehensive loss of approximately $1,247.
The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income.
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and Accumulated other comprehensive loss is as follows:
 
Amount of
Gain (Loss)
Recognized in
Accumulated Other
Comprehensive Loss
(Effective Portion)
 
Amount of
Gain  (Loss)
Recognized in
Accumulated Other
Comprehensive Loss
(Effective Portion)
 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Foreign exchange contracts
$
(513
)
 
$
(985
)
 
$
1,111

 
$
(1,250
)


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Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Location of
Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Loss into Income
(Effective Portion)
 
Amount of
Gain (Loss)
Reclassified from
Accumulated
Other Comprehensive Loss
into Income (Effective
Portion)
 
Amount of
Gain (Loss)
Reclassified from
Accumulated
Other Comprehensive
Loss into Income
(Effective Portion)
 
 
Quarter Ended
 
Nine Months Ended
 
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Interest rate contracts
Interest expense, net
 
$
—

 
$
(1,004
)
 
$
—

 
$
(3,164
)
Foreign exchange contracts
Cost of sales
 
8

 
41

 
13

 
(1
)
Total
 
 
$
8

 
$
(963
)
 
$
13

 
$
(3,165
)
Derivative Contracts Not Designated As Hedges
The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
 
Location of Loss
Recognized in Income on
Derivative
 
Amount of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss)
Recognized in Income
 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Foreign exchange contracts
Selling, general and
administrative expenses
 
$
(502
)
 
$
(1,891
)
 
$
61

 
$
(3,952
)
(8)
Fair Value of Assets and Liabilities
Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. A three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is utilized for disclosing the fair value of the Company’s assets and liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of September 28, 2013, the Company held certain financial assets and liabilities related to foreign exchange derivative contracts that are required to be measured at fair value on a recurring basis. The fair values of foreign currency derivatives are determined using the cash flows of the foreign exchange contract, discount rates to account for the passage of time and current foreign exchange market data and are categorized as Level 2. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a recurring basis.
There were no changes during the quarter ended September 28, 2013 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers between the three level categories and there were no Level 3 assets or liabilities measured on a quarterly basis during the quarter ended September 28, 2013. As of and during the quarter and nine months ended September 28, 2013, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis. 

10
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Assets (Liabilities) at Fair Value as of
September 28, 2013
 
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Foreign exchange derivative contracts
$
—

 
$
1,095

 
$
—

Foreign exchange derivative contracts
—

 
(434
)
 
—

Total
$
—

 
$
661

 
$
—

 
 
Assets (Liabilities) at Fair Value as of
December 29, 2012
 
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Foreign exchange derivative contracts
$
—

 
$
1,088

 
$
—

Foreign exchange derivative contracts
—

 
(268
)
 
—

Total
$
—

 
$
820

 
$
—


Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of September 28, 2013 and December 29, 2012. The carrying amount of trade accounts receivable includes allowance for doubtful accounts, chargebacks and other deductions of $14,591 and $14,940 as of September 28, 2013 and December 29, 2012, respectively. The fair value of debt, which is classified as a Level 2 liability, was $1,508,864 and $1,609,114 as of September 28, 2013 and December 29, 2012 and had a carrying value of $1,416,614 and $1,491,336, respectively. The fair values were estimated using quoted market prices as provided in secondary markets which consider the Company’s credit risk and market related conditions. The carrying amounts of the Company’s notes payable, which is classified as a Level 2 liability, approximated fair value as of September 28, 2013 and December 29, 2012, primarily due to the short-term nature of these instruments.
(9)
Income Taxes
The Company’s effective income tax rate was 17% and 18% for the quarter and nine months ended September 28, 2013, and 8% and 12% for the quarter and nine months ended September 29, 2012, respectively. The higher effective income tax rate for the quarter and nine months ended September 28, 2013 compared to the quarter and nine months ended September 29, 2012 was primarily attributable to a higher proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries.
The nine months ended September 28, 2013 included net discrete tax benefits of approximately $20,000, which included an income tax benefit of approximately $6,000 recorded in the first quarter of 2013 related to the retroactive application of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013, approximately $4,000 of tax benefits recorded in the second quarter of 2013 related to the realization of unrecognized tax benefits resulting from the lapsing of statutes of limitations in certain foreign jurisdictions, and approximately $10,000 of tax benefits recorded in the third quarter of 2013 related primarily to the realization of unrecognized tax benefits resulting from the lapsing of domestic and foreign statutes of limitations.
The nine months ended September 29, 2012 included net discrete tax benefits of approximately $13,000, recorded in the third quarter of 2012, which included an income tax benefit of approximately $9,000 related to the realization of unrecognized tax benefits resulting from the expiration of domestic statutes of limitations and an income tax benefit of approximately $4,000 related to an increase in research and development tax credits.

11
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

(10)
Discontinued Operations
European Imagewear
In May 2012, the Company sold its European imagewear business to Smartwares, B.V. for €15,000 (approximately $13,000, net of fees and other transaction related costs) in cash proceeds, resulting in a pre-tax loss of approximately $33,000. The European imagewear business was previously reported within the International segment.
Domestic Imagewear
In 2012, the Company completed the discontinuation of its private-label and Outer Banks domestic imagewear operations that served wholesalers that sell to the screen-print industry. During 2012, the Company incurred pre-tax charges of approximately $63,000, substantially all noncash, for the write-down of intangibles, inventory markdowns and other related items. The private-label and Outer Banks domestic imagewear operations were previously reported within the Activewear segment.
 
The operating results of these discontinued operations only reflect revenues and expenses that are directly attributable to these businesses and that will be eliminated from ongoing operations. The key components from discontinued operations related to the European and domestic imagewear businesses were as follows:
 
Quarter Ended
 
Nine Months Ended
 
September 29,
2012
 
September 29,
2012
Net sales
$
14,915

 
$
88,769

Cost of sales
16,512

 
116,174

Gross profit loss
(1,597
)
 
(27,405
)
Selling, general and administrative expenses
293

 
7,005

Impairment of intangibles
(172
)
 
37,425

Operating loss
(1,718
)
 
(71,835
)
Interest expense, net
—

 
4

Loss on disposal of business
195

 
31,811

Loss from discontinued operations before income tax benefit
(1,913
)
 
(103,650
)
Income tax benefit
(622
)
 
(33,715
)
Loss from discontinued operations, net of tax
$
(1,291
)
 
$
(69,935
)
(11)
Business Segment Information
The Company’s operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. In the first quarter of 2013, the Company renamed the Outerwear segment to Activewear to reflect the trend of this category becoming a part of consumers’ active lifestyles and more aptly describe the competitive space of this business. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms.
The types of products and services from which each reportable segment derives its revenues are as follows:
•
Innerwear sells basic branded products that are replenishment in nature under the product categories of men’s underwear, kids’ underwear, socks and intimates, which includes bras, panties, hosiery and shapewear.
•
Activewear sells basic branded products that are primarily seasonal in nature under the product categories of branded printwear and retail activewear, as well as licensed logo apparel in collegiate bookstores and other channels.
•
Direct to Consumer includes the Company’s value-based (“outlet”) stores and Internet operations which sell products from the Company’s portfolio of leading brands. The Company’s Internet operations are supported by its catalogs.

12
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

•
International primarily relates to the Asia, Latin America, Canada and Australia geographic locations that sell products that span across the Innerwear and Activewear reportable segments. 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses and amortization of intangibles. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 29, 2012. The Company decided in the first quarter of 2013 to revise the manner in which the Company allocates certain selling, general and administrative expenses. Certain prior-year segment operating profit disclosures have been revised to conform to the current-year presentation.
 
Quarter Ended
 
Nine Months Ended
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Net sales:
 
 
 
 
 
 
 
Innerwear
$
560,127

 
$
574,278

 
$
1,744,471

 
$
1,748,256

Activewear
405,091

 
413,033

 
966,508

 
981,021

Direct to Consumer
100,003

 
99,111

 
272,719

 
278,396

International
132,125

 
132,259

 
358,314

 
364,792

Total net sales
$
1,197,346

 
$
1,218,681

 
$
3,342,012

 
$
3,372,465


 
Quarter Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
Segment operating profit:
 
 
 
 
 
 
 
Innerwear
$
99,887

 
$
100,069

 
$
342,331

 
$
277,737

Activewear
68,591

 
49,327

 
127,020

 
32,710

Direct to Consumer
16,245

 
12,573

 
25,441

 
18,781

International
16,648

 
17,739

 
31,662

 
34,525

Total segment operating profit
201,371

 
179,708

 
526,454

 
363,753

Items not included in segment operating profit:
 
 
 
 
 
 
 
General corporate expenses
(21,143
)
 
(19,853
)
 
(72,968
)
 
(66,550
)
Amortization of intangibles
(3,330
)
 
(3,347
)
 
(9,998
)
 
(10,099
)
Total operating profit
176,898

 
156,508

 
443,488

 
287,104

Other expenses
(795
)
 
(3,373
)
 
(2,010
)
 
(4,829
)
Interest expense, net
(25,002
)
 
(32,897
)
 
(75,846
)
 
(106,503
)
Income from continuing operations before income tax expense
$
151,101

 
$
120,238

 
$
365,632

 
$
175,772

(12)
Consolidating Financial Information
In accordance with the indenture governing the Company’s $250,000 8% Senior Notes issued on December 10, 2009 and the indenture governing the Company’s $1,000,000 6.375% Senior Notes issued on November 9, 2010, as supplemented from time to time (together, the “Indentures”), certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the 8% Senior Notes and the 6.375% Senior Notes, respectively. The following presents the condensed consolidating financial information separately for:
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
(ii) Guarantor subsidiaries, on a combined basis, as specified in the Indentures;
(iii) Non-guarantor subsidiaries, on a combined basis;
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate

13
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

intercompany profit in inventory, (c) eliminate the investments in the Company’s subsidiaries and (d) record consolidating entries; and
(v) The Company, on a consolidated basis.
The 8% Senior Notes and the 6.375% Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is 100% owned, directly or indirectly, by Hanesbrands Inc. A guarantor subsidiary’s guarantee can be released in certain customary circumstances. Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 
Condensed Consolidating Statement of Comprehensive Income
Quarter Ended September 28, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
1,006,219

 
$
201,097

 
$
621,751

 
$
(631,721
)
 
$
1,197,346

Cost of sales
788,512

 
100,344

 
493,115

 
(606,305
)
 
775,666

Gross profit
217,707

 
100,753

 
128,636

 
(25,416
)
 
421,680

Selling, general and administrative expenses
184,566

 
34,010

 
27,715

 
(1,509
)
 
244,782

Operating profit
33,141

 
66,743

 
100,921

 
(23,907
)
 
176,898

Equity in earnings of subsidiaries
127,032

 
70,951

 
—

 
(197,983
)
 
—

Other expenses
795

 
—

 
—

 
—

 
795

Interest expense, net
23,049

 
—

 
1,953

 
—

 
25,002

Income from continuing operations before income tax expense
136,329

 
137,694

 
98,968

 
(221,890
)
 
151,101

Income tax expense
11,066

 
7,962

 
6,810

 
—

 
25,838

Income from continuing operations
125,263

 
129,732

 
92,158

 
(221,890
)
 
125,263

Loss from discontinued operations, net of tax
—

 
—

 
—

 
—

 
—

Net income
$
125,263

 
$
129,732

 
$
92,158

 
$
(221,890
)
 
$
125,263

Comprehensive income
$
126,325

 
$
129,732

 
$
91,023

 
$
(220,755
)
 
$
126,325


 
Condensed Consolidating Statement of Comprehensive Income
Quarter Ended September 29, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
1,015,571

 
$
197,538

 
$
632,167

 
$
(626,595
)
 
$
1,218,681

Cost of sales
824,981

 
99,793

 
494,452

 
(600,475
)
 
818,751

Gross profit
190,590

 
97,745

 
137,715

 
(26,120
)
 
399,930

Selling, general and administrative expenses
187,016

 
32,865

 
24,758

 
(1,217
)
 
243,422

Operating profit
3,574

 
64,880

 
112,957

 
(24,903
)
 
156,508

Equity in earnings of subsidiaries
135,794

 
78,342

 
—

 
(214,136
)
 
—

Other expenses
3,373

 
—

 
—

 
—

 
3,373

Interest expense, net
30,214

 
(1
)
 
2,687

 
(3
)
 
32,897

Income from continuing operations before income tax expense (benefit)
105,781

 
143,223

 
110,270

 
(239,036
)
 
120,238

Income tax expense (benefit)
(5,567
)
 
8,926

 
5,696

 
—

 
9,055

Income from continuing operations
111,348

 
134,297

 
104,574

 
(239,036
)
 
111,183

Income (loss) from discontinued operations, net of tax
(1,456
)
 
—

 
165

 
—

 
(1,291
)
Net income
$
109,892

 
$
134,297

 
$
104,739

 
$
(239,036
)
 
$
109,892

Comprehensive income
$
114,773

 
$
134,297

 
$
105,962

 
$
(240,259
)
 
$
114,773


14
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)


 
Condensed Consolidating Statement of Comprehensive Income
Nine Months Ended September 28, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
2,921,292

 
$
502,179

 
$
1,769,432

 
$
(1,850,891
)
 
$
3,342,012

Cost of sales
2,286,074

 
242,603

 
1,395,191

 
(1,766,317
)
 
2,157,551

Gross profit
635,218

 
259,576

 
374,241

 
(84,574
)
 
1,184,461

Selling, general and administrative expenses
547,403

 
108,141

 
89,463

 
(4,034
)
 
740,973

Operating profit
87,815

 
151,435

 
284,778

 
(80,540
)
 
443,488

Equity in earnings of subsidiaries
314,898

 
198,981

 
—

 
(513,879
)
 
—

Other expenses
2,010

 
—

 
—

 
—

 
2,010

Interest expense, net
70,958

 
—

 
4,888

 
—

 
75,846

Income from continuing operations before income tax expense
329,745

 
350,416

 
279,890

 
(594,419
)
 
365,632

Income tax expense
31,517

 
17,091

 
18,796

 
—

 
67,404

Income from continuing operations
298,228

 
333,325

 
261,094

 
(594,419
)
 
298,228

Loss from discontinued operations, net of tax
—

 
—

 
—

 
—

 
—

Net income
$
298,228

 
$
333,325

 
$
261,094

 
$
(594,419
)
 
$
298,228

Comprehensive income
$
297,386

 
$
333,325

 
$
253,660

 
$
(586,985
)
 
$
297,386


 
Condensed Consolidating Statement of Comprehensive Income
Nine Months Ended September 29, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net sales
$
2,909,716

 
$
499,345

 
$
1,727,880

 
$
(1,764,476
)
 
$
3,372,465

Cost of sales
2,399,275

 
239,531

 
1,414,140

 
(1,702,457
)
 
2,350,489

Gross profit
510,441

 
259,814

 
313,740

 
(62,019
)
 
1,021,976

Selling, general and administrative expenses
548,650

 
97,836

 
91,767

 
(3,381
)
 
734,872

Operating profit (loss)
(38,209
)
 
161,978

 
221,973

 
(58,638
)
 
287,104

Equity in earnings of subsidiaries
238,712

 
153,265

 
—

 
(391,977
)
 
—

Other expenses
4,829

 
—

 
—

 
—

 
4,829

Interest expense, net
98,534

 
(8
)
 
7,979

 
(2
)
 
106,503

Income from continuing operations before income tax expense (benefit)
97,140

 
315,251

 
213,994

 
(450,613
)
 
175,772

Income tax expense (benefit)
(14,646
)
 
24,656

 
11,534

 
—

 
21,544

Income from continuing operations
111,786

 
290,595

 
202,460

 
(450,613
)
 
154,228

Loss from discontinued operations, net of tax
(27,493
)
 
(31,791
)
 
(14,636
)
 
3,985

 
(69,935
)
Net income
$
84,293

 
$
258,804

 
$
187,824

 
$
(446,628
)
 
$
84,293

Comprehensive income
$
92,489

 
$
258,804

 
$
187,116

 
$
(445,920
)
 
$
92,489



15
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Condensed Consolidating Balance Sheet
September 28, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,056

 
$
2,682

 
$
115,582

 
$
—

 
$
132,320

Trade accounts receivable, net
48,092

 
54,203

 
485,196

 
(1,781
)
 
585,710

Inventories
996,230

 
110,845

 
415,863

 
(208,967
)
 
1,313,971

Deferred tax assets
164,013

 
1,015

 
3,310

 
—

 
168,338

Other current assets
27,915

 
10,729

 
18,337

 
(267
)
 
56,714

Total current assets
1,250,306

 
179,474

 
1,038,288

 
(211,015
)
 
2,257,053

Property, net
83,852

 
37,391

 
445,533

 
—

 
566,776

Trademarks and other identifiable intangibles, net
8,718

 
88,161

 
14,960

 
—

 
111,839

Goodwill
232,882

 
124,247

 
75,850

 
—

 
432,979

Investments in subsidiaries
2,555,730

 
1,453,875

 
—

 
(4,009,605
)
 
—

Deferred tax assets
233,926

 
154,325

 
16,884

 
—

 
405,135

Receivables from related entities
4,322,565

 
3,442,323

 
2,055,671

 
(9,820,559
)
 
—

Other noncurrent assets
59,290

 
316

 
1,629

 
—

 
61,235

Total assets
$
8,747,269

 
$
5,480,112

 
$
3,648,815

 
$
(14,041,179
)
 
$
3,835,017

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
258,338

 
$
12,179

 
$
169,840

 
$
—

 
$
440,357

Accrued liabilities
171,848

 
53,482

 
76,305

 
(130
)
 
301,505

Notes payable
—

 
—

 
5,209

 
—

 
5,209

Accounts Receivable Securitization Facility
—

 
—

 
166,614

 
—

 
166,614

Total current liabilities
430,186

 
65,661

 
417,968

 
(130
)
 
913,685

Long-term debt
1,250,000

 
—

 
—

 
—

 
1,250,000

Pension and postretirement benefits
393,272

 
—

 
11,282

 
—

 
404,554

Payables to related entities
5,429,729

 
2,686,892

 
1,438,538

 
(9,555,159
)
 
—

Other noncurrent liabilities
91,978

 
11,130

 
11,566

 
—

 
114,674

Total liabilities
7,595,165

 
2,763,683

 
1,879,354

 
(9,555,289
)
 
2,682,913

Stockholders’ equity
1,152,104

 
2,716,429

 
1,769,461

 
(4,485,890
)
 
1,152,104

Total liabilities and stockholders’ equity
$
8,747,269

 
$
5,480,112

 
$
3,648,815

 
$
(14,041,179
)
 
$
3,835,017



16
Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Condensed Consolidating Balance Sheet
December 29, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
5,617

 
$
1,919

 
$
35,260

 
$
—

 
$
42,796

Trade accounts receivable, net
39,379

 
32,199

 
434,825

 
(125
)
 
506,278

Inventories
882,290

 
102,121

 
413,340

 
(144,615
)
 
1,253,136

Deferred tax assets
161,935

 
1,015

 
3,239

 
—

 
166,189

Other current assets
30,692

 
11,917

 
16,563

 
(46
)
 
59,126

Total current assets
1,119,913

 
149,171

 
903,227

 
(144,786
)
 
2,027,525

Property, net
90,820

 
41,326

 
464,012

 
—

 
596,158

Trademarks and other identifiable intangibles, net
10,662

 
93,727

 
15,725

 
—

 
120,114

Goodwill
232,882

 
124,247

 
76,171

 
—

 
433,300

Investments in subsidiaries
2,220,706

 
1,284,516

 
—

 
(3,505,222
)
 
—

Deferred tax assets
224,559

 
154,325

 
18,645

 
—

 
397,529

Receivables from related entities
3,967,079

 
3,198,153

 
1,785,466

 
(8,950,698
)
 
—

Other noncurrent assets
51,686

 
271

 
5,117

 
—

 
57,074

Total assets
$
7,918,307

 
$
5,045,736

 
$
3,268,363

 
$
(12,600,706
)
 
$
3,631,700

 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ 
Equity
 
 
 
 
 
 
 
 
 
Accounts payable
$
217,645

 
$
8,209

 
$
177,790

 
$
—

 
$
403,644

Accrued liabilities
145,962

 
57,375

 
68,666

 
(31
)
 
271,972

Notes payable
—

 
—

 
26,216

 
—

 
26,216

Accounts Receivable Securitization Facility
—

 
—

 
173,836

 
—

 
173,836

Total current liabilities
363,607

 
65,584

 
446,508

 
(31
)
 
875,668

Long-term debt
1,317,500

 
—

 
—

 
—

 
1,317,500

Pension and postretirement benefits
433,490

 
—

 
12,777

 
—

 
446,267

Payables to related entities
4,835,465

 
2,582,287

 
1,281,957

 
(8,699,709
)
 
—

Other noncurrent liabilities
81,379

 
10,977

 
13,043

 
—

 
105,399

Total liabilities
7,031,441

 
2,658,848

 
1,754,285

 
(8,699,740
)
 
2,744,834

Stockholders’ equity
886,866

 
2,386,888

 
1,514,078

 
(3,900,966
)
 
886,866

Total liabilities and stockholders’ equity
$
7,918,307

 
$
5,045,736

 
$
3,268,363

 
$
(12,600,706
)
 
$
3,631,700


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Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 28, 2013
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash provided by operating activities
$
423,624

 
$
177,525

 
$
169,730

 
$
(513,894
)
 
$
256,985

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(13,106
)
 
(3,601
)
 
(14,014
)
 
—

 
(30,721
)
Proceeds from sales of assets
3,402

 
26

 
2,468

 
—

 
5,896

Net cash used in investing activities
(9,704
)
 
(3,575
)
 
(11,546
)
 
—

 
(24,825
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable
—

 
—

 
68,333

 
—

 
68,333

Repayments on notes payable
—

 
—

 
(89,168
)
 
—

 
(89,168
)
Borrowings on Accounts Receivable Securitization Facility
—

 
—

 
100,731

 
—

 
100,731

Repayments on Accounts Receivable Securitization Facility
—

 
—

 
(107,953
)
 
—

 
(107,953
)
Borrowings on Revolving Loan Facility
2,629,000

 
—

 
—

 
—

 
2,629,000

Repayments on Revolving Loan Facility
(2,696,500
)
 
—

 
—

 
—

 
(2,696,500
)
Cash dividends paid
(39,615
)
 
—

 
—

 
—

 
(39,615
)
Proceeds from stock options exercised
5,279

 
—

 
—

 
—

 
5,279

Taxes paid related to net shares settlement of equity awards
(24,832
)
 
—

 
—

 
—

 
(24,832
)
Excess tax benefit from stock-based compensation
18,220

 
—

 
—

 
—

 
18,220

Other
(4,602
)
 
—

 
(309
)
 
(3
)
 
(4,914
)
Net transactions with related entities
(292,431
)
 
(173,187
)
 
(48,279
)
 
513,897

 
—

Net cash used in financing activities
(405,481
)
 
(173,187
)
 
(76,645
)
 
513,894

 
(141,419
)
Effect of changes in foreign exchange rates on cash
—

 
—

 
(1,217
)
 
—

 
(1,217
)
Increase in cash and cash equivalents
8,439

 
763

 
80,322

 
—

 
89,524

Cash and cash equivalents at beginning of year
5,617

 
1,919

 
35,260

 
—

 
42,796

Cash and cash equivalents at end of period
$
14,056

 
$
2,682

 
$
115,582

 
$
—

 
$
132,320



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Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

 
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 29, 2012
 
Parent
Company
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating
Entries and
Eliminations
 
Consolidated
Net cash provided by operating activities
$
531,201

 
$
116,698

 
$
53,477

 
$
(391,971
)
 
$
309,405

Investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
(6,177
)
 
(5,163
)
 
(18,135
)
 
—

 
(29,475
)
Proceeds from sales of assets
70

 
16

 
227

 
—

 
313

Disposition of business
—

 
—

 
12,708

 
—

 
12,708

Net cash used in investing activities
(6,107
)
 
(5,147
)
 
(5,200
)
 
—

 
(16,454
)
Financing activities:
 
 
 
 
 
 
 
 
 
Borrowings on notes payable
—

 
—

 
43,251

 
—

 
43,251

Repayments on notes payable
—

 
—

 
(55,645
)
 
—

 
(55,645
)
Borrowings on Accounts Receivable Securitization Facility
—

 
—

 
156,817

 
—

 
156,817

Repayments on Accounts Receivable Securitization Facility
—

 
—

 
(129,775
)
 
—

 
(129,775
)
Borrowings on Revolving Loan Facility
2,177,000

 
—

 
—

 
—

 
2,177,000

Repayments on Revolving Loan Facility
(2,191,500
)
 
—

 
—

 
—

 
(2,191,500
)
Redemption of Floating Rate Senior Notes
(148,092
)
 
—

 
—

 
—

 
(148,092
)
Proceeds from stock options exercised
4,103

 
—

 
—

 
—

 
4,103

Excess tax benefit from stock-based compensation
491

 
—

 
—

 
—

 
491

Other
(2,542
)
 
—

 
(297
)
 
—

 
(2,839
)
Dividends paid to related entities
—

 
(4,623
)
 
(4,867
)
 
9,490

 
—

Net transactions with related entities
(280,859
)
 
(106,625
)
 
5,003

 
382,481

 
—

Net cash provided by (used in) financing activities
(441,399
)
 
(111,248
)
 
14,487

 
391,971

 
(146,189
)
Effect of changes in foreign exchange rates on cash
1

 
—

 
161

 
—

 
162

Increase in cash and cash equivalents
83,696

 
303

 
62,925

 
—

 
146,924

Cash and cash equivalents at beginning of year
8,330

 
2,726

 
24,289

 
—

 
35,345

Cash and cash equivalents at end of period
$
92,026

 
$
3,029

 
$
87,214

 
$
—

 
$
182,269

(13)
Subsequent Events
Maidenform Brands Acquisition
On July 24, 2013, the Company announced that it entered into a definitive agreement to acquire Maidenform Brands, Inc. (“Maidenform”), a global intimate apparel company. Maidenform is a leading seller of bras, shapewear and panties under brands such as Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, as well as Donna Karan and DKNY intimate apparel under license. The Company closed on the acquisition of Maidenform on October 7, 2013 in an all-cash transaction valued at approximately $583,000. Under the terms of the agreement, Maidenform stockholders received $23.50 in cash for each share of Maidenform common stock. The Company funded the Maidenform acquisition with cash on hand and short-term borrowings under its Revolving Loan Facility, which the Company plans to retire through free cash flow. The acquisition is expected to create growth and cost savings opportunities and increased scale to serve retailers.

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Table of Contents
HANESBRANDS INC.
Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)

As a result of the acquisition of Maidenform, beginning fourth quarter of 2013, the Company’s consolidated results of operations will include the results of Maidenform. Results of Maidenform are not included in the Company’s consolidated results of operations for the third quarter or nine months ended September 28, 2013. The Company has not completed a detailed valuation analysis necessary to determine the fair market values of the Maidenform assets acquired and liabilities assumed or any related income tax effects. The Company expects to finalize the acquisition accounting related to the transaction during the fourth quarter of 2013.
Dividends
As part of the Company’s cash deployment strategy, in October 2013 the Company’s Board of Directors authorized a regular quarterly dividend of $0.20 per share to be paid December 3, 2013 to stockholders of record at the close of business on November 8, 2013.

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Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended December 29, 2012, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to the risks associated with our ability to realize the benefits anticipated from the Maidenform Brands, Inc. (“Maidenform”) acquisition, as well as the risks included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended December 29, 2012.
Overview
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bali, Playtex, Just My Size, L’eggs, barely there, Wonderbra, Gear for Sports, Zorba, Sol y Oro and Rinbros. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, kids’ underwear, casualwear, activewear, socks and hosiery.
Our operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. In the first quarter of 2013, we renamed the Outerwear segment to Activewear to reflect the trend of this category becoming a part of consumers’ active lifestyles and more aptly describe the competitive space of this business. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. In the first quarter of 2013, we decided to revise the manner in which we allocate certain selling, general and administrative expenses. Certain prior-year segment operating profit disclosures have been revised to conform to the current-year presentation.
In May 2012, we sold our European imagewear business and completed the discontinuation of our private-label and Outer Banks domestic imagewear operations which served wholesalers that sell to the screen-print industry. As a result of these actions, the prior-year disclosures reflect these operations as discontinued operations.

Highlights from the Third Quarter and Nine Months Ended September 28, 2013
Key financial highlights during the quarter are as follows:
•
Total net sales in the third quarter of 2013 were $1.20 billion, compared with $1.22 billion in the same quarter of 2012, representing a 2% decrease. Total net sales in the nine months of 2013 were $3.34 billion, compared to $3.37 billion in the same period of 2012.
•
Operating profit was $177 million in the third quarter of 2013, compared with $157 million in the same quarter of 2012. As a percentage of sales, operating profit was 14.8% in the third quarter of 2013 compared to 12.8% in the same quarter of 2012. All four of our business segments earned double-digit operating margins in the third quarter of 2013. Operating profit was $443 million in the nine months of 2013, compared with $287 million in the same period of 2012. As a percentage of sales, operating profit was 13.3% in the nine months of 2013 compared to 8.5% in the same period of 2012.
•
Diluted earnings per share was $1.23 in the third quarter of 2013, compared with diluted earnings per share from continuing operations of $1.11 in the same quarter of 2012. Diluted earnings per share was $2.93 in the nine months of 2013, compared with diluted earnings per share from continuing operations of $1.54 the same period of 2012.
•
On July 24, 2013, we announced that we entered into a definitive agreement to acquire Maidenform Brands, Inc., a global intimate apparel company. Maidenform is a leading seller of bras, shapewear and panties under brands such as Maidenform, Flexees, Lilyette, Self Expressions and Sweet Nothings, as well as Donna Karan and DKNY intimate apparel under license. We closed on the acquisition of Maidenform on October 7, 2013 in an all cash transaction valued at approximately $583 million. Under the terms of the agreement, Maidenform stockholders received $23.50 in cash for each share of Maidenform common stock. We funded the Maidenform acquisition with cash on hand and short-term borrowings under our Revolving Loan Facility, which we plan to retire through free cash flow. The acquisition is expected to create growth and cost savings opportunities and increased scale to serve retailers. Results of

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Table of Contents

Maidenform are not included in our consolidated results of operations for the third quarter or nine months ended September 28, 2013. We expect to finalize the acquisition accounting related to the transaction during the fourth quarter of 2013.
•
As part of our cash deployment strategy, in September 2013 we paid a quarterly dividend of $0.20 per share.
Outlook
We expect net sales of slightly more than $4.6 billion in 2013, including approximately $120 million in the fourth quarter from Maidenform. This guidance assumes flat sales in the fourth quarter excluding the sales contributions by Maidenform. We are taking a conservative view on sales in the fourth quarter considering the soft retail environment and cautious outlook for the year-end holiday season many retailers are taking. We expect to invest approximately $18 million in incremental media spending in the fourth quarter.
We expect to incur acquisition- and integration-related expenses of $120 million to $140 million associated with Maidenform acquisition, with $50 million to $60 million of the charges occurring in the fourth quarter of 2013 and the remainder in 2014. Approximately half of the total charges will be noncash.
We continue to expect to retire all $250 million of our remaining of 8 percent senior notes due 2016 in the fourth quarter of 2013, while also increasing borrowings on our Revolving Credit Facility due to the purchase of Maidenform.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. We generally have higher sales during back-to-school shopping and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customers’ 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 spending by consumers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as casualwear and activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to customers’ preferences and discretionary spending.

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Table of Contents

Condensed Consolidated Results of Operations — Third Quarter Ended September 28, 2013 Compared with Third Quarter Ended September 29, 2012
 
 
Quarter Ended
 
 
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,197,346

 
$
1,218,681

 
$
(21,335
)
 
(1.8
)%
Cost of sales
775,666

 
818,751

 
(43,085
)
 
(5.3
)
Gross profit
421,680

 
399,930

 
21,750

 
5.4

Selling, general and administrative expenses
244,782

 
243,422

 
1,360

 
0.6

Operating profit
176,898

 
156,508

 
20,390

 
13.0

Other expenses
795

 
3,373

 
(2,578
)
 
(76.4
)
Interest expense, net
25,002

 
32,897

 
(7,895
)
 
(24.0
)
Income from continuing operations before income tax expense
151,101

 
120,238

 
30,863

 
25.7

Income tax expense
25,838

 
9,055

 
16,783

 
185.3

Income from continuing operations
125,263

 
111,183

 
14,080

 
12.7

Loss from discontinued operations, net of tax
—

 
(1,291
)
 
1,291

 
NM

Net income
$
125,263

 
$
109,892

 
$
15,371

 
14.0
 %
Net Sales
Net sales decreased 2% during the third quarter as a result of a general retail weakness in the back-to-school selling period. Our Innovate-to-Elevate strategy, which combines brand, supply chain and product innovation initiatives, helped drive core-product and new-product success, including share gains in the quarter. Excluding the impact of unfavorable foreign currency exchange rates, net sales decreased less than 1%.
Innerwear segment net sales decreased (3%) during the quarter primarily resulting from lower sales across most of the segment’s categories with the exception of bras and socks. Net sales were higher for Hanes socks, Bali bras and panties, Polo underwear, and Hanes, Playtex and Just My Size bras.
Activewear net sales declined (2%) primarily due to lower net sales in our retail activewear category and the planned reduction of commodity-oriented branded printwear sales to the screen-print industry.
International segment net sales were approximately flat compared to the third quarter of 2012. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 10% higher. Direct to Consumer segment net sales were higher (1%).
Gross Profit
Our gross margin increased 240 basis points in the third quarter of 2013 with improvements in nearly every segment. Our Innovate-to-Elevate strategy continues to help drive profitable results as we combine our brand and supply chain strengths with product innovation. Our Innovate-to-Elevate strategy leverages our strong brands and drives a higher price per unit for our entire product portfolio with innovative platforms such as Hanes X-Temp underwear and socks, Comfort Blend underwear and Smart Sizes bras. Our supply chain allows us to leverage our scale to lower our cost per unit and improve margins.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses was 20.4% in the third quarter of 2013 compared to 20.0% in the third quarter of 2012. The higher selling, general and administrative expenses were primarily attributable to our planned higher media spending of $8 million, partially offset by lower distribution costs and lower general and administrative expenses.
Other Highlights
Interest Expense - lower by $8 million in the third quarter of 2013 compared to the third quarter of 2012 primarily due to lower outstanding debt balances and a lower weighted average interest rate. Our weighted average interest rate on our outstanding debt was 5.33% during the third quarter of 2013, compared to 5.76% in the third quarter of 2012.

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Table of Contents

Income Tax Expense – our effective income tax rate was 17% and 8% for the third quarter of 2013 and the third quarter of 2012, respectively. The higher effective income tax rate was primarily attributable to a higher proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries. The third quarter of 2013 included $10 million of discrete net tax benefits related primarily to the realization of unrecognized tax benefits resulting from the lapsing of domestic and foreign statutes of limitations. The third quarter of 2012 included discrete net tax benefits of approximately $13 million, which consisted of an income tax benefit of approximately $9 million related to the realization of unrecognized tax benefits resulting from the expiration of domestic statutes of limitations and an income tax benefit of approximately $4 million related to an increase in research and development tax credits.
Operating Results by Business Segment — Third Quarter Ended September 28, 2013 Compared with Third Quarter Ended September 29, 2012
 
 
Net Sales
 
Operating Profit
 
Quarter Ended
 
Quarter Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
(dollars in thousands)
Innerwear
$
560,127

 
$
574,278

 
$
99,887

 
$
100,069

Activewear
405,091

 
413,033

 
68,591

 
49,327

Direct to Consumer
100,003

 
99,111

 
16,245

 
12,573

International
132,125

 
132,259

 
16,648

 
17,739

Corporate
—

 
—

 
(24,473
)
 
(23,200
)
Total
$
1,197,346

 
$
1,218,681

 
$
176,898

 
$
156,508

Innerwear 
 
Quarter Ended
 
 
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
560,127

 
$
574,278

 
$
(14,151
)
 
(2.5
)%
Segment operating profit
99,887

 
100,069

 
(182
)
 
(0.2
)
A general retail weakness in the back-to-school selling period led to lower sales across most of the segment’s categories. The soft retail environment resulted in lower sales volume which was partially offset by a higher price per unit as a result of the success of our Innovate-to-Elevate strategy. Net sales were higher for Hanes socks, Bali bras and panties, Polo underwear, and Hanes, Playtex and Just My Size bras.
Innerwear segment operating margin improved 40 basis points to 17.8% in the third quarter of 2013 which resulted from benefits from our Innovate-to-Elevate strategy that is increasing our price per unit with margin accretive product innovations and reducing our cost per unit through supply chain efficiencies and lower input costs. The operating margin was also impacted by planned higher media spending and lower sales volume.
Activewear 
 
Quarter Ended
 
 
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
405,091

 
$
413,033

 
$
(7,942
)
 
(1.9
)%
Segment operating profit
68,591

 
49,327

 
19,264

 
39.1

The lower net sales of Activewear is primarily attributable to lower sales volume and the planned reduction of commodity-oriented branded printwear sales to the screen-print industry, partially offset by a higher price per unit as a result of the success of our Innovate-to-Elevate strategy.
Activewear segment operating margin improved by 500 basis points to 16.9% in the quarter. This significant improvement was driven by our Innovate-to-Elevate strategy which is increasing our price per unit with margin accretive product innovations and reducing our cost per unit through supply chain efficiencies and lower input costs. The margin improvement was also impacted by the planned reduction of lower margin commodity-oriented branded printwear sales.

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Table of Contents

Direct to Consumer
 
Quarter Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
100,003

 
$
99,111

 
$
892

 
0.9
%
Segment operating profit
16,245

 
12,573

 
3,672

 
29.2

Direct to Consumer segment net sales were higher due to higher net sales related to our Internet operations and higher net sales in our outlet stores. Comparable store sales were 5% higher in the third quarter of 2013 compared to the same period of 2012.
Direct to Consumer segment operating margin improved 350 basis points to 16.2% which was primarily attributable to an adjustment in store pricing strategy.
International
 
Quarter Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
132,125

 
$
132,259

 
$
(134
)
 
(0.1
)%
Segment operating profit
16,648

 
17,739

 
(1,091
)
 
(6.2
)
Sales in the International segment were lower primarily due to the unfavorable impact of foreign exchange rates. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 10% higher, primarily due to high net sales in Canada and Australia.
International segment operating margin declined 80 basis points to 12.6% primarily due to unfavorable impact related to foreign currency exchange rates, higher product costs and an unfavorable product sales mix due to a shift towards lower margin products in certain countries, partially offset by higher sales volume. The International segment’s operating margin was positively impacted by savings from progress made from our regionalization strategy which integrates certain international businesses into our U.S. infrastructure in order to eliminate duplicate support functions.
General Corporate Expenses
General corporate expenses were higher in the third quarter of 2013 compared to the third quarter of 2012 primarily due to costs incurred implementing our regionalization strategy.

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Condensed Consolidated Results of Operations — Nine Months Ended September 28, 2013 Compared with Nine Months Ended September 29, 2012
 
 
Nine Months Ended
 
 
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
3,342,012

 
$
3,372,465

 
$
(30,453
)
 
(0.9
)%
Cost of sales
2,157,551

 
2,350,489

 
(192,938
)
 
(8.2
)
Gross profit
1,184,461

 
1,021,976

 
162,485

 
15.9

Selling, general and administrative expenses
740,973

 
734,872

 
6,101

 
0.8

Operating profit
443,488

 
287,104

 
156,384

 
54.5

Other expenses
2,010

 
4,829

 
(2,819
)
 
(58.4
)
Interest expense, net
75,846

 
106,503

 
(30,657
)
 
(28.8
)
Income from continuing operations before income tax expense
365,632

 
175,772

 
189,860

 
108.0

Income tax expense
67,404

 
21,544

 
45,860

 
212.9

Income from continuing operations
298,228

 
154,228

 
144,000

 
93.4

Loss from discontinued operations, net of tax
—

 
(69,935
)
 
69,935

 
NM

Net income
$
298,228

 
$
84,293

 
$
213,935

 
253.8
 %
Net Sales
Net sales were lower (< 1%), in the nine months of 2013 compared to the same period of 2012 as a result of a general retail weakness in the back-to-school selling period. Our Innovate-to-Elevate strategy helped drive core-product and new-product success, including share gains in 2013.
Innerwear segment net sales were flat compared to the nine months of 2012. Stronger net sales in our men’s underwear and socks product categories were offset by lower net sales in our intimate apparel and kids’ underwear product categories.
Activewear net sales declined (2%) primarily due to the planned reduction of commodity-oriented branded printwear sales, partially offset by higher net sales in our retail activewear category and Gear for Sports licensed apparel.
International segment net sales were 2% lower compared to the third quarter of 2012 primarily due to foreign currency. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 6% higher. Direct to Consumer segment net sales were lower (2%) primarily due to the closure of certain lower profitable stores, partially offset by higher comparable store sales.
Gross Profit
Our gross margin increased 510 basis points to 35.4% in the nine months of 2013 with improvements in nearly every segment. Our Innovate-to-Elevate strategy continues to help drive profitable results as we combine our brand and supply chain strengths with product innovation. Our Innovate-to-Elevate strategy leverages our strong brands and drives a higher price per unit for our entire product portfolio with innovative platforms such as Hanes X-Temp underwear and socks, Comfort Blend underwear and Smart Sizes bras. Our supply chain allows us to leverage our scale to lower our cost per unit and improve margins.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 22.2% in the nine months of 2013 compared to 21.8% in the same period of 2012. The higher selling, general and administrative expenses were primarily attributable to planned higher media spending, partially offset by lower distribution costs and lower general and administrative expenses.
Other Highlights
Interest Expense – lower by $31 million in the nine months of 2013 compared to the same period of 2012 primarily due to lower outstanding debt balances and a lower weighted average interest rate. Our weighted average interest rate on our outstanding debt was 5.36% during the nine months of 2013 compared to 5.74% in the same period of 2012.

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Income Tax Expense – our effective income tax rate was 18% and 12% for the nine months of 2013 and 2012, respectively. The higher effective income tax rate was primarily attributable to a higher proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries.
The nine months ended September 28, 2013 included net discrete tax benefits of approximately $20 million, which included approximately $14 million of tax benefits related primarily to the realization of unrecognized tax benefits resulting from the lapsing of domestic and foreign statutes of limitations and an income tax benefit of approximately $6 million related to the retroactive application of the American Taxpayer Relief Act of 2012 that was signed into law in January 2013.
The nine months ended September 29, 2012 included net discrete tax benefits of approximately $13 million which included an income tax benefit of approximately $9 million related to the realization of unrecognized tax benefits resulting from the expiration of domestic statutes of limitations and an income tax benefit of approximately $4 million related to an increase in research and development tax credits.
Operating Results by Business Segment — Nine Months Ended September 28, 2013 Compared with Nine Months Ended September 29, 2012
 
Net Sales
 
Operating Profit
 
Nine Months Ended
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
September 28,
2013
 
September 29,
2012
 
(dollars in thousands)
Innerwear
$
1,744,471

 
$
1,748,256

 
$
342,331

 
$
277,737

Activewear
966,508

 
981,021

 
127,020

 
32,710

Direct to Consumer
272,719

 
278,396

 
25,441

 
18,781

International
358,314

 
364,792

 
31,662

 
34,525

Corporate
—

 
—

 
(82,966
)
 
(76,649
)
Total net sales
$
3,342,012

 
$
3,372,465

 
$
443,488

 
$
287,104

Innerwear
 
Nine Months Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,744,471

 
$
1,748,256

 
$
(3,785
)
 
(0.2
)%
Segment operating profit
342,331

 
277,737

 
64,594

 
23.3

Innerwear segment net sales were flat compared to the nine months of 2012. A general retail weakness in the back-to-school selling period led to lower sales volume which was offset by a higher price per unit as a result of the success of our Innovate-to-Elevate strategy.
Innerwear segment operating margin improved 370 basis points to 19.6% in the nine months of 2013 which resulted from benefits from our Innovate-to-Elevate strategy that is increasing our price per unit with margin accretive product innovations and reducing our cost per unit through supply chain efficiencies and lower input costs. The operating margin was also impacted by higher planned media spending.

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Table of Contents

Activewear 
 
Nine Months Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
966,508

 
$
981,021

 
$
(14,513
)
 
(1.5
)%
Segment operating profit
127,020

 
32,710

 
94,310

 
288.3

Activewear net sales declined (2%) primarily due to the planned reduction of commodity-oriented branded printwear sales, partially offset by higher net sales in our retail activewear category and Gear for Sports licensed apparel as a result of a higher price per unit as a result of the success of our Innovate-to-Elevate strategy.
Activewear segment operating margin improved by 980 basis points to 13.1% in the nine months of 2013. This significant improvement was primarily driven by our Innovate-to-Elevate strategy which is increasing our price per unit with margin accretive product innovations and reducing our cost per unit through supply chain efficiencies and lower input costs. The margin improvement was also impacted by the planned reduction of lower margin commodity-oriented branded printwear sales.
Direct to Consumer
 
Nine Months Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
272,719

 
$
278,396

 
$
(5,677
)
 
(2.0
)%
Segment operating profit
25,441

 
18,781

 
6,660

 
35.5

Direct to Consumer segment net sales were lower due to lower net sales in our outlet stores resulting from the closure of certain lower profitable stores, partially offset by higher comparable store sales of 1%.
Direct to Consumer segment operating margin improved 260 basis points to 9.3% which was primarily attributable to lower product costs and an adjustment in store pricing strategy, partially offset by lower sales volume.
International
 
Nine Months Ended
 
 
 
September 28,
2013
 
September 29,
2012
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
358,314

 
$
364,792

 
$
(6,478
)
 
(1.8
)%
Segment operating profit
31,662

 
34,525

 
(2,863
)
 
(8.3
)
Overall net sales in the International segment were lower primarily due to the unfavorable impact of foreign exchange rates. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were higher by 6%, primarily due to higher net sales in Canada, Australia and Asia.
International segment operating margin declined 70 basis points to 8.8% primarily due to the unfavorable impact related to foreign currency exchange rates and an unfavorable product sales mix due to a shift towards lower margin products in certain countries. The International segment’s operating margin was positively impacted by savings from progress made from our regionalization strategy which integrates certain international businesses into our U.S. infrastructure in order to eliminate duplicate support functions.
General Corporate Expenses
General corporate expenses were higher in the nine months of 2013 compared to the same period of 2012 primarily due to costs incurred implementing our regionalization strategy.

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Table of Contents

Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated by operations and availability under the $1.1 billion revolving credit facility (the “Revolving Loan Facility”) under the senior secured credit facility (the “Senior Secured Credit Facility”), the accounts receivable securitization facility (the “Accounts Receivable Securitization Facility”) and our international loan facilities.
At September 28, 2013, we had $1.1 billion of borrowing availability under our Revolving Loan Facility (after taking into account outstanding letters of credit), $136 million of borrowing availability under our international loan facilities, $132 million in cash and cash equivalents and no borrowing availability under our Accounts Receivable Securitization Facility. We currently believe that our existing cash balances and cash generated by operations, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.
We typically use cash for the first half of the year and generate most of our cash flow in the second half of the year. In the fourth quarter of 2013, we expect to complete our planned debt reduction with the redemption of the remaining $250 million of 8% Senior Notes. We expect our cash deployment strategy in the future will include a mix of dividends, bolt-on acquisitions and share repurchases. For example, as part of our cash deployment strategy, in April 2013 our Board of Directors authorized a regular quarterly dividend. Our first dividend of $0.20 per share was paid June 3, 2013, our second quarterly dividend was paid on September 3, 2013 and our third quarterly dividend was authorized by our Board of Directors in October 2013 to be paid in December 2013. In addition, as discussed above under “Highlights for the Third Quarter and Nine Months Ended September 28, 2013,” on July 24, 2013 we entered into a definitive agreement to acquire Maidenform, which closed on October 7, 2013. We funded the Maidenform acquisition with cash on hand and short-term borrowings under our Revolving Loan Facility, which we plan to retire through free cash flow.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our Revolving Loan Facility, Accounts Receivable Securitization Facility and international loan facilities to meet the cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, contributions to our pension plans and repurchases of our stock. We believe we have sufficient cash and available borrowings for our foreseeable liquidity needs.
There have been no significant changes in the cash requirements for our business from those described in our Annual Report on Form 10-K for the year ended December 29, 2012.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the nine months ended September 28, 2013 and September 29, 2012 was derived from our condensed consolidated financial statements.
 
Nine Months Ended
 
September 28,
2013
 
September 29,
2012
 
(dollars in thousands)
Operating activities
$
256,985

 
$
309,405

Investing activities
(24,825
)
 
(16,454
)
Financing activities
(141,419
)
 
(146,189
)
Effect of changes in foreign currency exchange rates on cash
(1,217
)
 
162

Increase in cash and cash equivalents
89,524

 
146,924

Cash and cash equivalents at beginning of year
42,796

 
35,345

Cash and cash equivalents at end of period
$
132,320

 
$
182,269


The lower net cash from operating activities is primarily attributable to changes in working capital, primarily inventory compared to prior year, partially offset by higher net income. Inventory decreased 2% compared to September 29, 2012, which was the result of lower input costs and lower units from our continued focus on inventory management.
The higher net cash used in investing activities resulted from proceeds from the sale of the European imagewear business in 2012, partially offset by lower net capital expenditures. The lower net cash used in financing activities resulted from the

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redemption of our Floating Rate Senior Notes in 2012, partially offset by higher net repayments on our loan facilities and cash dividends paid during 2013 of $40 million.
Financing Arrangements
In July 2013, we amended the Revolving Loan Facility to increase the borrowing limit from $600 million to $1.1 billion, decrease borrowing costs by 25 basis points and extend the maturity date to (i) July 2018 or (ii) September 2016 if our 8% Senior Notes have not been refinanced or repaid or the maturity date thereof has not otherwise been extended beyond July 2018 by September 2016.
In March 2013, we amended the Accounts Receivable Securitization Facility. This amendment decreased certain fee rates and extended the termination date to March 2014.
As of September 28, 2013, we were in compliance with all financial covenants under our credit facilities. We expect to maintain compliance with our covenants for the foreseeable future, however economic conditions or the occurrence of events discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 29, 2012 or other SEC filings could cause noncompliance.
In February 2013, Moody’s Investors Service (“Moody’s”) upgraded our corporate credit rating to Ba2 from Ba3. Moody’s also raised the rating on our Revolving Loan Facility to Baa2 from Baa3, the 6.375% Senior Notes to Ba3 from B1 and the 8% Senior Notes to Ba3 from B1. Moody’s indicated that the upgrade reflects our significant debt reduction efforts and our positive trends in operating performance in the second half of 2012 primarily reflecting improved gross margins. In April 2013, Standard & Poor’s Ratings Services (“Standard & Poor’s”) raised our corporate credit rating to BB from BB-, in response to our declining debt levels and modest earnings growth. Standard & Poor’s also raised the rating on the Revolving Loan Facility to BBB- from BB+, the 6.375% Senior Notes to BB from BB- and the 8% Senior Notes to BB from BB-.
There have been no other significant changes in the financing arrangements from those described in our Annual Report on Form 10-K for the year ended December 29, 2012.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note 2, titled “Summary of Significant Accounting Policies,” to our financial statements included in our Annual Report on Form 10-K for the year ended December 29, 2012.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 29, 2012. There have been no material changes in these policies from those described in our Annual Report on Form 10-K for the year ended December 29, 2012.
Recently Issued Accounting Pronouncements
Disclosures About Offsetting Assets and Liabilities
In December 2011, the FASB issued new accounting rules related to new disclosure requirements regarding the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The new rules are effective for us in the first quarter of 2014 with retrospective application required. We do not expect the adoption of the new accounting rules to have a material effect on our financial condition, results of operations or cash flows.


30
Table of Contents

Item 3.
Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in our market risk exposures from those described in Item 7A of our Annual Report on Form 10-K for the year ended December 29, 2012.

Item 4.
Controls and Procedures
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


31
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PART II

Item 1.
Legal Proceedings
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 are discussed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012. The following risk factor includes an update to a previously disclosed risk factor. There are no additional 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.
Businesses that we may acquire may fail to perform to expectations, and we may be unable to successfully integrate acquired businesses with our existing business.
From time to time, we may evaluate potential acquisition opportunities to support and strengthen our business. For example, on October 7, 2013, we acquired Maidenform. The acquisition and integration of businesses such as Maidenform involve a number of risks.
We may not be able to realize all or a substantial portion of the anticipated benefits of the Maidenform acquisition and other future acquisitions that we may consummate. Maidenform and other future acquired businesses may not achieve expected results of operations, including expected levels of revenues, and may require unanticipated costs and expenditures. In addition, we may not be able to maintain the levels of revenue, earnings or operating efficiency that we and Maidenform have achieved or might achieve separately. Maidenform and other acquired businesses may also subject us to liabilities that we were unable to discover in the course of our due diligence, and our rights to indemnification from the sellers of such other businesses, even if obtained, may not be sufficient to offset the relevant liabilities. In addition, the integration of Maidenform and other newly acquired businesses may be expensive and time-consuming and may not be entirely successful. Integration of the acquired businesses may also place additional pressures on our systems of internal control over financial reporting. The process of integrating the operations of Maidenform or those of any other future acquisition could cause an interruption of, or loss of momentum in, the activities of one or more of our combined businesses and the possible loss of key personnel. If we are unable to successfully integrate Maidenform and other newly acquired businesses or if Maidenform or other acquired businesses fail to produce targeted results, it could have an adverse effect on our results of operations or financial condition.

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
None.

Item 6.
Exhibits
The exhibits listed in the accompanying Exhibit Index are filed or furnished as part of this Quarterly Report on Form 10-Q.



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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
HANESBRANDS INC.
 
 
By:
 
/s/ Richard D. Moss
 
 
Richard D. Moss
Chief Financial Officer
(Duly authorized officer and principal financial officer)
Date: October 31, 2013

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Table of Contents

INDEX TO EXHIBITS 
Exhibit
Number
 
Description
 
 
 
3.1
 
Articles of Amendment and Restatement of Hanesbrands Inc. (incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5, 2006).
 
 
 
3.2
 
Articles Supplementary (Junior Participating Preferred Stock, Series A) (incorporated by reference from Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September 5, 2006).
 
 
 
3.3
 
Amended and Restated Bylaws of Hanesbrands Inc. (incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 15, 2008).
 
 
 
4.1
 
Fifth Supplemental Indenture (to the 2008 Indenture) dated July 1, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
4.2
 
Sixth Supplemental Indenture (to the 2008 Indenture) dated July 1, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
4.3
 
Seventh Supplemental Indenture (to the 2008 Indenture) dated September 11, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
4.4
 
Eighth Supplemental Indenture (to the 2008 Indenture) dated September 11, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
4.5
 
Ninth Supplemental Indenture (to the 2008 Indenture) dated October 8, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
4.6
 
Tenth Supplemental Indenture (to the 2008 Indenture) dated October 8, 2013 among the Registrant, certain subsidiaries of the Registrant and Branch Banking and Trust Company.
 
 
 
10.1
 
Form of Severance/Change in Control Agreement entered into by and between Hanesbrands Inc. and certain of its executive officers after December 2010 and schedule of all such agreements with current executive officers*
 
 
 
31.1
 
Certification of Richard A. Noll, Chief Executive Officer.
 
 
 
31.2
 
Certification of Richard D. Moss, Chief Financial Officer.
 
 
 
32.1
 
Section 1350 Certification of Richard A. Noll, Chief Executive Officer.
 
 
 
32.2
 
Section 1350 Certification of Richard D. Moss, Chief Financial Officer.
 
101.INS XBRL
 
Instance Document
 
 
 
101.SCH XBRL
 
Taxonomy Extension Schema Document
 
 
 
101.CAL XBRL
 
Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB XBRL
 
Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE XBRL
 
Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF XBRL
 
Taxonomy Extension Definition Linkbase Document
*
Agreement relates to executive compensation.


E-1