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HBI > SEC Filings for HBI > Form 10-K on 6-Feb-2014All Recent SEC Filings

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Form 10-K for HANESBRANDS INC.


6-Feb-2014

Annual Report


Item 7. 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" and "Risk Factors" in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under "Risk Factors" in this Annual Report on Form 10-K and included elsewhere in this Annual Report on Form 10-K.
This MD&A is a supplement to our financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, and is provided to enhance your understanding of our results of operations and financial condition. Our MD&A is organized as follows:
Overview. This section provides a general description of our Company and operating segments, business and industry trends, our key business strategies and background information on other matters discussed in this MD&A.

2013 Highlights. This section discusses some of the highlights of our performance and activities during 2013.

Consolidated Results of Operations and Operating Results by Business Segment. These sections provide our analysis and outlook for the significant line items on our statements of income, as well as other information that we deem meaningful to an understanding of our results of operations on both a consolidated basis and a business segment basis.

Liquidity and Capital Resources. This section provides an analysis of trends and uncertainties affecting liquidity, cash requirements for our business, sources and uses of our cash and our financing arrangements.

Critical Accounting Policies and Estimates. This section discusses the accounting policies that we consider important to the evaluation and reporting of our financial condition and results of operations, and whose application requires significant judgments or a complex estimation process.

Recently Issued Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting pronouncements that we will be required to adopt in a future period.

Overview
Our Company
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Bali, Playtex, Maidenform, JMS/Just My Size, L'eggs, Flexees, barely there, Wonderbra, Gear for Sports, Lilyette, Zorba, Rinbros and Sol y Oro. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men's underwear, children's underwear, activewear, socks and hosiery. Our brands hold either the number one or number two U.S. market position by units sold in most product categories in which we compete.
Maidenform Acquisition
In October 2013, we expanded our portfolio of brands through the acquisition of 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 acquisition is expected to create growth and cost savings opportunities and increased scale to serve retailers. The acquisition was an all cash transaction valued at approximately $581 million. Under the terms of the agreement, Maidenform stockholders received $23.50 in cash for each share of Maidenform common stock. We funded the acquisition with cash on hand and short-term borrowings under our Revolving Loan Facility, which we plan to retire through free cash flow.
We incurred $81 million of charges in the fourth quarter of 2013 related to the Maidenform acquisition, integration and other action related costs. Our current estimate for pretax charges in 2014 for acquisition and other actions is approximately $70 million to $100 million or more, but actual charges could vary significantly.
Our Segments
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


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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. The operating results for Maidenform are included in our Innerwear, Direct to Consumer and International segments based on geographic location and distribution channel. The reportable segments are as follows:
Innerwear sells basic branded products that are replenishment in nature under the product categories of intimate apparel, men's underwear, children's underwear and socks.

Activewear sells basic branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed logo apparel in collegiate bookstores and other channels.

Direct to Consumer includes our Company-operated outlet stores, catalogs and website operations that sell our branded products directly to consumers.

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.

Outlook for 2014
We expect our 2014 full year sales to be slightly less than $5.1 billion, with Maidenform contributing approximately $500 million.
Interest and other related expense is expected to be approximately $85 million, including approximately $10 million from the higher debt balances associated with the Maidenform acquisition.
We estimate our full year tax rate to be in the low teens with slightly higher rates in the first half of the year.
We expect cash flow from operations to be $450 million to $550 million for the full year, which includes approximately $60 million of expected pension contributions. Net capital expenditures are expected to be between $60 million and $70 million while annual dividend payments are estimated to be roughly $120 million.
Business and Industry Trends
Inflation and Changing Prices
Cotton is the primary raw material used in manufacturing many of our products. While we have sold our yarn operations, we are still exposed to fluctuations in the cost of cotton. Increases in the cost of cotton can result in higher costs in the price we pay for yarn from our large-scale yarn suppliers and may result in the need to implement future price increases in order to maintain our margins. Decreases in cotton prices can lead to lower margins for inventory and products produced from cotton we have already purchased, particularly if there is downward price pressure as a result of consumer demand, competition or other factors.
Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by, among other factors, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. We are able to lock in the cost of cotton reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect our business from the volatility of the market price of cotton. Under our agreements with these suppliers, we have the ability to periodically fix the cotton cost component of our yarn purchases. When we elect to fix the cotton cost component under these agreements, interim fluctuations in the price of cotton do not impact the price we pay for the specified volume of yarn. The yarn suppliers bear the risk of cotton fluctuations for the yarn volume specified and it is their responsibility to procure the cotton at the agreed upon pricing through arrangements they make with their cotton suppliers. However, our business can be affected by dramatic movements in cotton prices. The cost of cotton used in goods manufactured by us represented only approximately 7% of our cost of sales in 2013. Costs incurred today for materials and labor, including cotton, typically do not impact our results until the inventory is sold approximately six to nine months later. Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodities and other raw materials, such as dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Costs incurred for materials and labor are capitalized into


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inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by rises in consumer income, which also could have a negative impact on spending. Other Business and Industry Trends
The basic apparel market is highly competitive and evolving rapidly. Competition is generally based upon brand name recognition, price, product quality, selection, service and purchasing convenience. The majority of our core styles continue from year to year, with variations only in color, fabric or design details. Some products, however, such as intimate apparel, activewear and sheer hosiery, do have more of an emphasis on style and innovation. Our businesses face competition from other large corporations and foreign manufacturers, as well as smaller companies, department stores, specialty stores and other retailers that market and sell basic apparel products under private labels that compete directly with our brands.
Our top 10 customers accounted for 65% of our net sales. Our largest customers in 2013 were Wal-Mart, Target and Kohl's, which accounted for 27%, 19% and 6% of total sales, respectively. The increasing bargaining power of retailers can create pricing pressures as our customers grow larger and seek greater concessions in their purchase of our products, while also demanding exclusivity of some of our products. To counteract these effects, it has become increasingly important to leverage our national brands through investment in our largest and strongest brands as our customers strive to maximize their performance especially in today's challenging economic environment. Brands are important in our core categories to drive traffic and project the quality and value our customers demand.
Our Key Business Strategies
Our Innovate-to-Elevate strategy integrates our brand superiority, industry-leading innovation and low-cost supply chain to provide higher valued products while lowering production costs.
The first element of our Innovate-to-Elevate strategy is our brand power. We seek to drive modest sales growth by consistently offering consumers brands they trust and products with unsurpassed value. Our brands have a strong heritage in the basic apparel industry. Our brands hold either the number one or number two U.S. market position by units sold in most product categories in which we compete. Internationally, our commercial markets include Mexico, Canada, Japan, Brazil and China, where a substantial amount of gross domestic product growth outside the United States will be concentrated over the next decade. Our ability to react to changing customer needs and industry trends is key to our success. Our design, research and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We seek to leverage our insights into consumer demand in the basic apparel industry to develop new products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends. We also support our key brands with targeted, effective advertising and marketing campaigns.
The second element of our Innovate-to-Elevate strategy is platform innovation. We are not interested in newness or fashion, but rather focus on identifying the long-term megatrends that will impact our categories over the next five to 10 years. Once we have identified these trends, we utilize a disciplined big-idea process to put more science into the art of apparel. Our approach to innovation is to focus on big platforms. Our Tagless apparel platform, Smart Sizes bra platform and ComfortBlend and X-Temp fabric platforms incorporate big-idea innovation to span brands, product categories, business segments, retailer and distribution channels and geographies. We are focused on driving innovation that is margin accretive and that can leverage our supply chain in order to drive further economies of scale.
The third element of our Innovate-to-Elevate strategy is our low-cost global supply chain. We seek to expand margins through optimizing our low-cost global supply chain and streamlining our operations to reduce costs. We believe that we are able to leverage our significant scale of operations to provide us with greater manufacturing efficiencies, purchasing power and product design, marketing and customer management resources than our smaller competitors. Our global supply chain spans across both the Western and Eastern hemispheres and provides us with a balanced approach to product supply, which relies on a combination of owned, contracted and sourced manufacturing located across different geographic regions, increases the efficiency of our operations, reduces product costs and offers customers a reliable source of supply. Our global supply chain enables us to expand and leverage our production scale as we balance our supply chain across hemispheres, thereby diversifying our production risks. We have generated significant cost savings, margin expansion and contributions to cash flow and will continue to do so as we further optimize our size, scale and production capability. We generated efficiency savings from our supply chain optimization initiatives of approximately $40 million during 2013. We seek to effectively generate strong cash flow through optimizing our capital structure and managing working capital levels. Our strong cash flows have resulted in a flexible long-term capital structure that is able to deliver shareholder value in numerous ways, including debt reduction and our ability to selectively pursue strategic acquisitions.


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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 the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customers' 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 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.

2013 Highlights
Net sales in 2013 were $4.63 billion, compared with $4.53 billion in 2012, representing a 2% increase.

Operating profit was $515 million in 2013 compared with $440 million in 2012, representing a 17% increase. As a percent of sales, operating profit was 11.1% in 2013 compared to 9.7% in 2012.

Diluted earnings per share from continuing operations was $3.25 in 2013, compared with $2.32 in 2012, representing a 40% increase.

Operating cash flows were $591 million in 2013 compared to $554 million in 2012.

We have completed our debt reduction plan by redeeming the remaining $250 million of 8% Senior Notes in the fourth quarter of 2013.

In October 2013, we expanded our portfolio of brands through the acquisition of 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 acquisition is expected to create growth and cost savings opportunities and increased scale to serve retailers. The acquisition was an all cash transaction valued at approximately $581 million. Under the terms of the agreement, Maidenform stockholders received $23.50 in cash for each share of Maidenform common stock. We funded the 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 of Maidenform in October 2013 added an incremental $98 million of net sales for the year.

As part of our cash deployment strategy, in 2013 we initiated three quarterly dividends, in June, September and December, of $0.20 per share.


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Consolidated Results of Operations - Year Ended December 28, 2013 ("2013") Compared with Year Ended December 29, 2012 ("2012")

                                                Years Ended
                                       December 28,      December 29,       Higher        Percent
                                           2013              2012          (Lower)         Change
                                                         (dollars in thousands)
Net sales                            $    4,627,802     $  4,525,721     $  102,081           2.3  %
Cost of sales                             3,016,109        3,105,674        (89,565 )        (2.9 )
Gross profit                              1,611,693        1,420,047        191,646          13.5
Selling, general and administrative
expenses                                  1,096,507          979,932        116,575          11.9
Operating profit                            515,186          440,115         75,071          17.1
Other expenses                               17,501           40,315        (22,814 )       (56.6 )
Interest expense, net                       101,884          136,855        (34,971 )       (25.6 )
Income from continuing operations
before income tax expense                   395,801          262,945        132,856          50.5
Income tax expense                           65,307           30,502         34,805         114.1
Income from continuing operations           330,494          232,443         98,051          42.2
Loss from discontinued operations,
net of tax                                        -          (67,762 )       67,762            NM
Net income                           $      330,494     $    164,681     $  165,813         100.7  %

Net Sales
Net sales were $102 million higher in 2013 compared to 2012 due to our Innovate-to-Elevate strategy which helped drive core-product and new-product success, including share gains in 2013. Excluding the impact of unfavorable foreign exchange rates, net sales increased 3%. The acquisition of Maidenform in October 2013 added an incremental $98 million of net sales for the year. Innerwear segment net sales were 5% higher in 2013 compared to 2012 primarily due to incremental sales from Maidenform brands in the intimate apparel category and stronger net sales in our men's underwear and socks product categories, partially offset by lower net sales in our children's underwear product category.
Activewear net sales declined 1% 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 1% lower compared to 2012 primarily due to unfavorable foreign currency exchange rates. Excluding the unfavorable impact of foreign exchange rates, International segment net sales were 7% higher. Direct to Consumer segment net sales were 2% higher. Gross Profit
Our gross margin increased 340 basis points to 34.8% in 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. Included with gross profit in 2013 are charges of $16 million related to Maidenform acquisition, integration and other action related costs.
Selling, General and Administrative Expenses As a percentage of net sales, our selling, general and administrative expenses were 23.7% in 2013 compared to 21.7% in 2012. The higher selling, general and administrative expenses were primarily attributable to planned higher media spending of $35 million and charges of $65 million related to Maidenform acquisition, integration and other action related costs. Other Highlights
Other Expenses - we incurred charges of approximately $15 million in 2013 and $34 million in 2012 related to premiums and an acceleration of unamortized debt issue cost in connection with a $250 million prepayment of our 8% Senior Notes in December 2013 and a $250 million prepayment of our 8% Senior Notes in December 2012, respectively.


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Interest Expense - lower by $35 million in 2013 compared to 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 5.07% during 2013 compared to 5.81% in 2012.
Income Tax Expense - our effective income tax rate for continuing operations was 16.5% and 11.6% for 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.
We had net discrete tax benefits of approximately $20 million in 2013, 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.
During 2012, we had 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. Discontinued Operations - discontinued operations include the sale of our European imagewear business and the discontinuation of our private-label and Outer Banks domestic imagewear operations that served wholesalers that sell to the screen-print industry.

Operating Results by Business Segment - Year Ended December 28, 2013 ("2013") Compared with Year Ended December 29, 2012 ("2012")

                               Net Sales                       Operating Profit
                              Years Ended                         Years Ended
                    December 28,      December 29,      December 28,      December 29,
                        2013              2012              2013              2012
                                          (dollars in thousands)
Innerwear          $    2,444,935    $    2,334,006    $     467,398     $     407,318
Activewear              1,306,936         1,318,012          170,749            72,820
Direct to Consumer        380,079           372,359           34,737            25,890
International             495,852           501,344           42,850            46,713
Corporate                       -                 -         (200,548 )        (112,626 )
Total              $    4,627,802    $    4,525,721    $     515,186     $     440,115


Innerwear

                                    Years Ended
                          December 28,      December 29,       Higher     Percent
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