Hanesbrands Inc.
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-142371
PROSPECTUS
EXCHANGE
OFFER FOR
$500,000,000
FLOATING RATE SENIOR NOTES DUE 2014
We are
offering to exchange
up to $500,000,000 of our new Floating Rate Senior Notes due
2014, Series B
for
a like amount of our outstanding Floating Rate Senior Notes due
2014
Material Terms of Exchange Offer
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The terms of the new notes to be issued in the exchange offer,
which we refer to as the Exchange Notes, are substantially
identical to the outstanding Floating Rate Senior Notes due
2014, which we refer to as the Notes, except that the transfer
restrictions and registration rights relating to the Notes will
not apply to the Exchange Notes.
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The Exchange Notes will be guaranteed on a senior basis by
substantially all of our existing and future domestic
subsidiaries.
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See the section of this prospectus entitled Description of
the Exchange Notes that begins on page 130 for more
information about the Exchange Notes.
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There is no existing public market for the Notes or the Exchange
Notes. We do not intend to list the Exchange Notes on any
securities exchange or seek approval for quotation through any
automated trading system.
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You may withdraw your tender of Notes at any time before the
expiration of the exchange offer. We will exchange all of the
Notes that are validly tendered and not withdrawn.
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The exchange offer expires at 5:00 p.m., New York City
time, on June 12, 2007, unless extended.
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The exchange of Notes will not be a taxable event for
U.S. federal income tax purposes.
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The exchange offer is not subject to any condition other than
that it not violate applicable law or any applicable
interpretation of the Staff of the Securities and Exchange
Commission.
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We will not receive any proceeds from the exchange offer.
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For a discussion of certain factors that you
should consider before participating in this exchange offer, see
Risk Factors beginning on page 11 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved the Exchange
Notes to be distributed in the exchange offer, nor have any of
these organizations determined that this prospectus is truthful
or complete. Any representation to the contrary is a criminal
offense.
May 11, 2007
We have not authorized anyone to give any information or
represent anything to you other than the information contained
in this prospectus. You must not rely on any unauthorized
information or representations.
TABLE OF
CONTENTS
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iii
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1
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11
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86
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91
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113
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120
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130
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172
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F-1
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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 appear in this prospectus include the
Hanes, Champion, Playtex, Bali, Just My Size, barely there,
Wonderbra, C9 by Champion, Leggs, Beefy-T and Outer
Banks 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 prospectus.
The Exchange Notes are being offered by Hanesbrands Inc., a
Maryland corporation organized in September 2005 that was spun
off from Sara Lee Corporation (Sara Lee) on
September 5, 2006. In connection with the spin off, Sara
Lee contributed its branded apparel Americas and Asia business
to Hanesbrands Inc. and distributed all of the outstanding
shares of Hanesbrands Inc. common stock to its stockholders on a
pro rata basis. As a result of the spin off, Sara Lee ceased to
own any equity interest in Hanesbrands Inc. and Hanesbrands Inc.
became an independent, separately traded, publicly held company.
Unless the context otherwise requires, (i) references in
this prospectus to Hanesbrands, HBI,
we, our and us mean
Hanesbrands Inc. and its subsidiaries (ii) the term
issuer refers to Hanesbrands Inc. and not to any of
its subsidiaries and (iii) the term guarantors
refers to the direct and indirect subsidiaries of Hanesbrands
Inc. that guarantee Hanesbrands Inc.s obligations under
the Exchange Notes.
i
We describe in this prospectus the businesses contributed to us
by Sara Lee in the spin off as if the contributed businesses
were our business for all historical periods described.
References in this prospectus to our assets, liabilities,
products, businesses or activities of our business for periods
including or prior to the spin off are generally intended to
refer to the historical assets, liabilities, products,
businesses or activities of the contributed businesses as the
businesses were conducted as part of Sara Lee and its
subsidiaries prior to the spin off.
In making an investment decision, you must rely on your own
examination of our business and the terms of this exchange
offer, including the merits and risks involved. The Exchange
Notes have not been recommended by any U.S. or
non-U.S. federal
or state securities commission or regulatory authority.
Furthermore, these authorities have not confirmed the accuracy
or determined the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
ii
MARKET
AND INDUSTRY DATA
Market data and certain industry data and forecasts used
throughout this prospectus were obtained from internal company
surveys, market research, consultant surveys, publicly available
information, reports of governmental agencies and industry
publications and surveys. The NPD Group/Consumer Panel
TrackSM
(NPD), Millward Brown Market Research and
Womens Wear Daily were the primary sources for third-party
industry data and forecasts. Industry surveys, publications,
consultant surveys and forecasts generally state that the
information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness
of such information is not guaranteed. We have not independently
verified any of the data from third-party sources, nor have we
ascertained the underlying economic assumptions relied upon
therein. Similarly, internal surveys, industry forecasts and
market research, which we believe to be reliable based upon our
managements knowledge of the industry, have not been
independently verified. Forecasts are particularly likely to be
inaccurate, especially over long periods of time. For example,
in 1983, the U.S. Department of Energy forecast that oil
would cost $74 per barrel in 1995, however, the price of
oil was actually $17 per barrel. In addition, we do not
know what assumptions regarding general economic growth were
used in preparing the forecasts we cite. We do not make any
representation as to the accuracy of information described in
this paragraph. Statements as to our market position are based
on the most currently available data. While we are not aware of
any misstatements regarding our industry data presented herein,
our estimates involve risks and uncertainties and are subject to
change based on various factors, including those discussed under
the heading Risk Factors in this prospectus. We
cannot guarantee the accuracy or completeness of any such
information contained in this prospectus.
iii
SUMMARY
The following is a summary of material information discussed
in this prospectus or in the documents incorporated by reference
into this prospectus, and is qualified in its entirety by the
more detailed information, including the section entitled
Risk Factors and the financial statements and
related notes, included elsewhere in this prospectus and in the
documents incorporated by reference into this prospectus. This
summary may not contain all the information that may be
important to you. You should read the entire prospectus and the
documents incorporated by reference into this prospectus,
including the financial statements and related notes, before
deciding whether to participate in the exchange offer.
Our
Company
Introduction
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
We were spun off from Sara Lee Corporation, or Sara
Lee, on September 5, 2006. In connection with the
spin off, Sara Lee contributed its branded apparel Americas and
Asia business to us and distributed all of the outstanding
shares of our common stock to its stockholders on a pro rata
basis. As a result of the spin off, Sara Lee ceased to own any
equity interest in our company. In this prospectus, we describe
the businesses contributed to us by Sara Lee in the spin off as
if the contributed businesses were our business for all
historical periods described. References in this prospectus to
our assets, liabilities, products, businesses or activities of
our business for periods including or prior to the spin off are
generally intended to refer to the historical assets,
liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Following the spin off, we changed our fiscal year end from the
Saturday closest to June 30 to the Saturday closest to
December 31. This change created a transition period
beginning on July 2, 2006, the day following the end of our
2006 fiscal year on July 1, 2006, and ending on
December 30, 2006.
In the six month transition period ended December 30, 2006,
we generated $2.3 billion in net sales and
$190.0 million in operating profit. Our products are sold
through multiple distribution channels. During the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores. In addition to designing and marketing
apparel essentials, we have a long history of operating a global
supply chain that incorporates a mix of self-manufacturing,
third-party contractors and third-party sourcing.
The apparel essentials segment of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. Rather, we focus on the core
attributes of comfort, fit and value, while remaining current
with regard to consumer trends.
Our business is subject to risks. For a more detailed
description of these risks, see Risk Factors.
Our
Competitive Strengths
Strong Brands with Leading Market
Positions. Our brands have a strong heritage in
the apparel essentials industry. According to NPD, our brands
hold either the number one or number two U.S. market
position by sales in most product categories in which we
compete, on a rolling year-end basis as of December 2006.
Our brands enjoy high awareness among consumers according to a
2006 brand equity analysis by Millward Brown Market Research.
According to a 2006 survey of consumer brand awareness by
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Womens Wear Daily, Hanes is the most recognized
apparel and accessory brand among women in the United States.
According to Millward Brown Market Research, Hanes is
found in over 85% of the United States households who have
purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006. Our creative, focused
advertising campaigns have been an important element in the
continued success and visibility of our brands. We employ a
multimedia marketing plan involving national television, radio,
Internet, direct mail and in-store advertising, as well as
targeted celebrity endorsements, to communicate the key features
and benefits of our brands to consumers. We believe that these
marketing programs reinforce and enhance our strong brand
awareness across our product categories.
High-Volume, Core Essentials Focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. For example, we believe the
average U.S. consumer makes 3.5 trips to retailers to
purchase mens underwear and 4.5 trips to purchase panties
annually. We believe that our status as a high-volume seller of
core apparel essentials creates a more stable and predictable
revenue base and reduces our exposure to dramatic fashion shifts
often observed in the general apparel industry.
Significant Scale of Operations. According to
NPD, we are the largest seller of apparel essentials in the
United States as measured by sales on a rolling year-end basis
as of December 2006. Most of our products are sold to large
retailers which have high-volume demands. We have met the
demands of our customers by developing vertically integrated
operations and an extensive network of owned facilities and
third-party manufacturers over a broad geographic footprint. 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.
Significant Cash Flow Generation. Due to our
strong brands and market position, our business has historically
generated significant cash flow. In the six months ended
December 30, 2006 and in fiscal 2006, 2005 and 2004, we
generated $113.0, $400.0 million, $446.8 million and
$410.2 million, respectively, of cash from operating
activities net of cash used in investing activities. Our goal is
to maximize cash flow in a manner that gives us the flexibility
to create shareholder value by investing in our business,
reducing debt and returning capital to our shareholders.
Strong Customer Relationships. We sell our
products primarily through large, high-volume retailers,
including mass merchants, department stores and national chains.
We have strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of orders.
In the late 1980s, we undertook a shift in our approach to our
relationships with our largest customers when we sought to align
significant parts of our organization with corresponding parts
of their organizations. For example, we are organized into teams
that sell to and service our customers across a range of
functional areas, such as demand planning, replenishment and
logistics. We also have entered into customer-specific programs
such as the introduction in 2004 of C9 by Champion
products marketed and sold through Target Corporation
(Target) stores. Through these efforts, we have
become the largest apparel essentials supplier to many of our
customers.
Strong Management Team. We have strengthened
our management team through the addition of experienced
executives in key leadership roles. Richard Noll, our Chief
Executive Officer, has extensive management experience in the
apparel and consumer products industries. During his
14-year
tenure at Sara Lee, Mr. Noll led Sara Lees sock
and hosiery businesses, Sara Lee Direct and Sara Lee Mexico (all
of which are now part of our business), as well as the Sara Lee
Bakery Group and Sara Lee Australia. Lee Wyatt, our Executive
Vice President, Chief Financial Officer, has broad experience in
executive financial management, including tenures as Chief
Financial Officer at Sonic Automotive, a publicly traded
automotive aftermarket supplier, and Sealy Corporation. Gerald
Evans, our Executive Vice President, Chief Supply Chain Officer,
Kevin Hall, our Executive Vice President, Chief Marketing
Officer, and Joia Johnson, our Executive Vice President, General
Counsel and Corporate Secretary, also add significant experience
and leadership to our management team. The additions of
Messrs. Noll and Wyatt complement the leadership and
experience
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provided by Lee Chaden, our Executive Chairman, who has
extensive experience within the apparel and consumer products
industries.
Key
Business Strategies
Our core strategies are to build our largest, strongest brands
in core categories by driving innovation in key items, to
continually reduce our costs by consolidating our organization
and globalizing our supply chain and to use our strong,
consistent cash flows to fund business growth, supply-chain
reorganization and debt reduction and to repurchase shares to
offset dilution. Specifically, we intend to focus on the
following strategic initiatives:
Increase the Strength of Our Brands with
Consumers. Our advertising and marketing
campaigns have been an important element in the success and
visibility of our brands. We intend to increase our level of
marketing support behind our key brands with targeted, effective
advertising and marketing campaigns. For example, in fiscal
2005, we launched a comprehensive marketing campaign titled
Look Who Weve Got Our Hanes on Now, which we
believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products.
Our ability to react to changing customer needs and industry
trends will continue to be 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 intend to leverage our insights into consumer demand
in the apparel essentials 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. Examples of our
success to date include:
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Tagless garments where the label is embroidered or
printed directly on the garment instead of attached on a
tag which we first released in t-shirts under our
Hanes brand (2002), and subsequently expanded into other
products such as outerwear tops (2003) and panties (2004).
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Comfort Soft bands in our underwear and bra lines,
which deliver to our consumers a softer, more comfortable feel
with the same durable fit (2004 and 2005).
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New versions of our Double Dry wicking products and Friction
Free running products under our Champion brand (2005).
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The no poke wire which was successfully introduced
to the market in our Bali brand bras (2004).
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Strengthen Our Retail Relationships. We intend
to expand our market share at large, national retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships. Additionally, we plan to expand
distribution by providing manufacturing and production of
apparel essentials products to specialty stores and other
distribution channels, such as direct to consumer through the
Internet.
Develop a Lower-Cost Efficient Supply
Chain. As a provider of high-volume products, we
are continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. In this
regard, we have launched two textile manufacturing projects
outside of the United States an owned textile
manufacturing facility in the Dominican Republic, which began
production in early 2006, and a strategic alliance with a
third-party textile manufacturer in El Salvador, which began
production in 2005. Over the next several years, we will
continue to transition additional parts of our supply chain from
the United States to locations in Central America, the
Caribbean Basin and Asia in an effort to optimize our cost
structure. We intend to continue to self-manufacture core
products where we can protect or gain a significant cost
advantage through scale or in cases where we seek to protect
proprietary processes and technology. We plan to continue to
selectively source product categories that do not meet these
criteria from third-party manufacturers. We expect that in
future years our supply chain will become more balanced across
the Eastern and Western Hemispheres. Our customers require a
high level of service and responsiveness, and we intend to
continue to
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meet these needs through a carefully managed facility migration
process. We expect that these changes in our supply chain will
result in significant cost efficiencies and increased asset
utilization.
Create a More Integrated, Focused
Company. Historically, we have had a
decentralized operating structure, with many distinct operating
units. We are in the process of consolidating functions, such as
purchasing, finance, manufacturing/sourcing, planning, marketing
and product development, across all of our product categories in
the United States. We also are in the process of integrating our
distribution operations and information technology systems. We
believe that these initiatives will streamline our operations,
improve our inventory management, reduce costs, standardize
processes and allow us to distribute our products more
effectively to retailers. We expect that our initiative to
integrate our technology systems also will provide us with more
timely information, increasing our ability to allocate capital
and manage our business more effectively.
Recent
Developments
On March 29, 2007, in furtherance of our efforts to migrate
portions of our manufacturing operations to lower-cost
locations, we announced plans to close a textile manufacturing
facility located in the United States.
On April 26, 2007, we issued a press release announcing our
financial results for the first quarter ended March 31,
2007. Highlights for the quarter include:
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Total net sales increased by $7 million, or 0.7%, to
$1.04 billion, up from $1.03 billion in the quarter
ended April 1, 2006.
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Growth in the outerwear segment resulted from double-digit gains
for Champion activewear and increases for Hanes
casualwear and more than offset generally flat sales in the
innerwear segment and declines in other segments.
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Operating profit, as measured under generally accepted
accounting principles, was $68.9 million, a decrease of
28.4% from $96.2 million a year ago. The profit decline
primarily reflected restructuring and related charges for plant
closures, higher cotton costs and increased investment in
business operations.
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Net income for the quarter was $12.0 million, down from
$74.6 million a year ago, primarily as a result of the
companys new independent structure. The decrease in net
income reflected increased interest expense, reduced operating
profit and a higher effective income tax rate.
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Interest expense increased in the quarter by $48.6 million
to $51.7 million, up from $3.1 million a year ago as a
result of debt incurred in our spin off. The effective income
tax rate for the quarter was 30.0 percent, up from
19.9 percent a year ago as a result of our tax structure as
an independent company.
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Using cash flow from operations, we made a voluntary
$42 million pension contribution in the quarter, reducing
the companys underfunded liability for qualified pension
plans to approximately $131 million. Our qualified pension
plan liability is now 84% funded, which meets our 2007 goal.
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Company
Information
We were incorporated in Maryland on September 30, 2005 and
became an independent public company following our spin off from
Sara Lee on September 5, 2006. Our principal executive
offices are located at 1000 East Hanes Mill Road, Winston-Salem,
North Carolina 27105. Our main telephone number is
(336) 519-4400.
Our website is www.hanesbrands.com. Information on our website
is not a part of this prospectus and is not incorporated into
this prospectus by reference.
4
The
Exchange Offer
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The Initial Offering of Notes |
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We sold the Notes on December 14, 2006 to Morgan
Stanley & Co. Incorporated, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, ABN AMRO Incorporated,
Barclays Capital Inc., Citigroup Global Markets Inc. and HSBC
Securities (USA) Inc. We collectively refer to those parties in
this prospectus as the initial purchasers. The
initial purchasers subsequently resold the Notes: (i) to
qualified institutional buyers pursuant to Rule 144A; or
(ii) outside the United States in compliance with
Regulation S, each as promulgated under the Securities Act of
1933, as amended. |
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Registration Rights Agreement |
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Simultaneously with the initial sale of the Notes, we entered
into a registration rights agreement for the exchange offer. In
the registration rights agreement, we agreed, among other
things, to use our commercially reasonable efforts to file a
registration statement with the SEC and to commence and complete
this exchange offer. The exchange offer is intended to satisfy
your rights under the registration rights agreement. After the
exchange offer is complete, you will no longer be entitled to
any exchange or registration rights with respect to your Notes. |
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The Exchange Offer |
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We are offering to exchange the Exchange Notes, which have been
registered under the Securities Act, for your Notes, which were
issued on December 14, 2006 in the initial offering. In
order to be exchanged, a Note must be properly tendered and
accepted. All Notes that are validly tendered and not validly
withdrawn will be exchanged. We will issue the Exchange Notes
promptly after the expiration of the exchange offer. |
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Resales |
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We believe that the Exchange Notes issued in the exchange offer
may be offered for resale, resold and otherwise transferred by
you without compliance with the registration and prospectus
delivery requirements of the Securities Act provided that: |
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the Exchange Notes are being acquired in the
ordinary course of your business;
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you are not participating, do not intend to
participate, and have no arrangement or understanding with any
person to participate, in the distribution of the Exchange Notes
issued to you in the exchange offer; and
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you are not an affiliate of ours.
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If any of these conditions are not satisfied and you transfer
any Exchange Notes issued to you in the exchange offer without
delivering a prospectus meeting the requirements of the
Securities Act or without an exemption from registration of your
Exchange Notes from these requirements you may incur liability
under the Securities Act. We will not assume, nor will we
indemnify you against, any such liability. |
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Each broker-dealer that is issued Exchange Notes in the exchange
offer for its own account in exchange for Notes that were
acquired by that broker-dealer as a result of market-marking or
other trading activities must acknowledge that it will deliver a
prospectus |
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meeting the requirements of the Securities Act in connection
with any resale of the Exchange Notes. A broker-dealer may use
this prospectus for an offer to resell, resale or other
retransfer of the Exchange Notes issued to it in the exchange
offer. |
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Record Date |
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We mailed this prospectus and the related exchange offer
documents to registered holders of Notes on May 10, 2007. |
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Expiration Date |
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The exchange offer will expire at 5:00 p.m., New York City
time, June 12, 2007, unless we decide to extend the
expiration date. |
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Conditions to the Exchange Offer |
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The exchange offer is not subject to any condition other than
that the exchange offer not violate applicable law or any
applicable interpretation of the staff of the SEC. |
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Procedures for Tendering Outstanding Notes
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If you wish to tender your Notes for exchange in this exchange
offer, you must transmit to the exchange agent on or before the
expiration date either: |
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an original or a facsimile of a properly completed
and duly executed copy of the letter of transmittal, which
accompanies this prospectus, together with your Notes and any
other documentation required by the letter of transmittal, at
the address provided on the cover page of the letter of
transmittal; or
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if the Notes you own are held of record by The
Depository Trust Company, or DTC, in book-entry form
and you are making delivery by book-entry transfer, a
computer-generated message transmitted by means of the Automated
Tender Offer Program System of DTC, or ATOP, in
which you acknowledge and agree to be bound by the terms of the
letter of transmittal and which, when received by the exchange
agent, forms a part of a confirmation of book-entry transfer. As
part of the book-entry transfer, DTC will facilitate the
exchange of your Notes and update your account to reflect the
issuance of the Exchange Notes to you. ATOP allows you to
electronically transmit your acceptance of the exchange offer to
DTC instead of physically completing and delivering a letter of
transmittal to the exchange agent.
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In addition, you must deliver to the exchange agent on or before
the expiration date: |
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a timely confirmation of book-entry transfer of your
Notes into the account of the Notes exchange agent at DTC if you
are effecting delivery of book-entry transfer, or
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if necessary, the documents required for compliance
with the guaranteed delivery procedures.
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Special Procedures for Beneficial Owners
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If you are the beneficial owner of book-entry interests and your
name does not appear on a security position listing of DTC as
the holder of the book-entry interests or if you are a
beneficial owner of Notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee
and you wish to tender the book-entry interest or Notes in the
exchange offer, you |
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should contact the person in whose name your book-entry
interests or Notes are registered promptly and instruct that
person to tender on your behalf. |
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Withdrawal Rights |
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You may withdraw the tender of your Notes at any time prior to
5:00 p.m., New York City time on June 12, 2007. |
|
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Federal Income Tax Considerations |
|
The exchange of Notes will not be a taxable event for
United States federal income tax purposes. |
|
Appraisal and Dissenters Rights |
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Holders of Notes do not have any appraisal or dissenters
rights in connection with the exchange offer. |
|
Exchange Agent |
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Branch Banking & Trust Company is serving as the
exchange agent in connection with the exchange offer. |
The
Exchange Notes
The form and terms of the Exchange Notes are the same as the
form and terms of the Notes, except that the Exchange Notes will
be registered under the Securities Act. As a result, the
Exchange Notes will not bear legends restricting their transfer
and the registration rights relating to the Notes will not apply
to the Exchange Notes. The Exchange Notes represent the same
debt as the Notes. Both the Notes and the Exchange Notes are
governed by the same indenture.
The following is not intended to be complete. You should read
the full text and more specific details contained elsewhere in
this prospectus. For a more detailed description of the Exchange
Notes, see Description of the Exchange Notes.
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Issuer |
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Hanesbrands Inc. |
|
Securities Offered |
|
$500.0 million Floating Rate Senior Notes due 2014,
Series B |
|
Maturity Date |
|
December 15, 2014. |
|
Interest |
|
The Exchange Notes will bear interest at an annual rate equal to
LIBOR plus 3.375%, payable semi-annually in arrears. |
|
Optional Redemption |
|
We may redeem any of the Exchange Notes beginning on
December 15, 2008 at the redemption prices listed under
Description of the Exchange Notes Optional
Redemption, plus accrued interest. |
|
|
|
On or prior to December 15, 2008, we may redeem up to 35%
of the Exchange Notes at a redemption price described in this
prospectus, plus accrued interest, using the net cash proceeds
from sales of certain types of capital stock as described under
Description of the Exchange Notes Optional
Redemption. |
|
|
|
We may also redeem any of the Exchange Notes at any time prior
to December 15, 2008 in cash at the redemption prices
described in this prospectus plus accrued interest to the date
of redemption and a make-whole premium as described under
Description of the Exchange Notes Optional
Redemption. |
|
Change of Control and Asset Sales |
|
Upon the occurrence of certain change of control events
described under Description of the Exchange
Notes Repurchase of Exchange Notes Upon a
Change of Control, you may require us to repurchase some
or all of your Exchange Notes at 101% of their |
7
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|
principal amount plus accrued and unpaid interest to the date of
repurchase. |
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|
In addition, to the extent we or a restricted subsidiary receive
proceeds from the sale of certain assets and do not apply the
proceeds of such asset sale in the manner set forth in the
indenture governing the Exchange Notes within twelve months of
receipt of such proceeds, we will be required to make an offer
to purchase an aggregate amount of the Exchange Notes equal to
the amount of such unapplied proceeds. See Description of
the Exchange Notes Covenants Limitation
on Asset Sales. |
|
Guarantees |
|
Substantially all of our existing and future domestic restricted
subsidiaries (other than immaterial subsidiaries) will fully and
unconditionally guarantee the Exchange Notes on a senior
unsecured basis. We own 100% of the equity interests of each of
our subsidiaries that will guarantee the Exchange Notes as of
the closing of the exchange offer. |
|
Ranking |
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The Exchange Notes and the subsidiary guarantees will be
unsecured senior obligations and will rank: |
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senior in right of payment to all of our and our
subsidiary guarantors existing and future senior
subordinated and subordinated indebtedness;
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equally in right of payment with any of our and our
subsidiary guarantors existing and future senior unsecured
indebtedness;
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effectively junior in right of payment to all our
and our subsidiary guarantors secured indebtedness,
including any indebtedness under our senior secured credit
facility, to the extent of the value of the assets securing such
indebtedness; and
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structurally junior to all of the obligations,
including trade payables, of any subsidiaries that do not
guarantee the Exchange Notes.
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Certain Covenants |
|
The indenture under which the Notes were issued will govern the
Exchange Notes. The indenture contains certain covenants that
limit our ability and the ability of our restricted subsidiaries
to: |
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incur additional debt or issue preferred stock;
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create liens;
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create restrictions on our subsidiaries
ability to make payments to Hanesbrands Inc.;
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pay dividends and make other distributions in
respect of our capital stock;
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redeem or repurchase our capital stock or prepay
subordinated indebtedness;
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make certain investments or certain other restricted
payments;
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guarantee indebtedness;
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designate unrestricted subsidiaries;
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8
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sell certain kinds of assets;
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enter into certain types of transactions with
affiliates;
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engage in certain business activities; or
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effect mergers or consolidations.
|
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At any time after the Exchange Notes are rated Baa3 or better by
Moodys Investors Service, Inc. and BBB- or better by
Standard and Poors Ratings Group and no default has
occurred and is continuing, the foregoing covenants will
thereafter cease to be in effect with the exception of covenants
that contain limitations on liens and on, among other things,
certain consolidations and mergers. If the rating by either
rating agency should subsequently decline to below Baa3 or BBB-,
respectively, the suspended covenants will be reinstated as of
and from the date of such rating decline. |
|
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These covenants are subject to a number of important exceptions
and qualifications. See Description of the Exchange
Notes. |
Risk
Factors
Before making an investment decision, you should carefully
consider all of the information in this prospectus, including
the discussion under the caption Risk Factors
beginning on page 11, for a discussion of risks and
uncertainties relating to us, our subsidiaries, our business and
your participation in the exchange offer.
9
Summary
Financial and Other Data
The following table presents our summary historical financial
data. The statements of income data for each of the fiscal years
in the three fiscal years ended July 1, 2006 and the
six-month period ended December 30, 2006, and the balance
sheet data as of December 30, 2006, July 1, 2006 and
July 2, 2005 have been derived from our audited Combined
and Consolidated Financial Statements included elsewhere in this
prospectus.
Our historical financial data is not necessarily indicative of
our future performance or what our financial position and
results of operations would have been if we had operated as a
separate, stand-alone entity during all of the periods shown.
The data should be read in conjunction with our historical
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
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|
|
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|
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Six Months
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|
|
|
|
|
|
|
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Ended
|
|
|
Years Ended
|
|
|
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December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Statements of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
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Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense, net
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income before income taxes
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
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Income tax expense (benefit)
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income
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$
|
74,139
|
|
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$
|
322,493
|
|
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$
|
218,509
|
|
|
$
|
449,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income per share basic(1)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Net income per share diluted(2)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
Weighted average shares basic(1)
|
|
|
96,309
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
Weighted average shares diluted(2)
|
|
|
96,620
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
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(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
Total assets
|
|
|
3,435,620
|
|
|
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
4,402,758
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
271,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total noncurrent liabilities
|
|
|
2,755,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
Total stockholders or parent
companies equity
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
2,797,370
|
|
|
|
|
(1) |
|
Prior to the spin off on September 5, 2006, the number of
shares used to compute basic and diluted earnings per share is
96,306,232, which was the number of shares of our common stock
outstanding on September 5, 2006. |
|
(2) |
|
Subsequent to the spin off on September 5, 2006, the number
of shares used to compute diluted earnings per share is based on
the number of shares of our common outstanding, plus the
potential dilution that could occur if restricted stock units
and options granted under the equity-based compensation
arrangements were exercised or converted into common stock. |
10
RISK
FACTORS
You should carefully consider the risks described below
before deciding whether to participate in the exchange offer.
The risks described below are not the only ones facing our
company. Additional risks and uncertainties not presently known
to us or that we currently believe to be immaterial may also
materially and adversely affect our business, financial
condition or results of operations. Any of the following risks
could materially and adversely affect our business, results of
operations or financial condition. In such case, you may lose
all or part of your original investment.
Risks
Related to Our Business
A
significant portion of our textile manufacturing operations are
located in higher-cost locations, placing us at a product cost
disadvantage to our competitors who have a higher percentage of
their manufacturing operations in lower-cost, offshore
locations.
Though there has been a general industry-wide migration of
manufacturing operations to lower-cost locations, such as
Central America, the Caribbean Basin and Asia, a significant
portion of our textile manufacturing operations are still
located in higher-cost locations, such as the United States. In
addition, our competitors generally source or produce a greater
portion of their textiles from regions with lower costs than us,
placing us at a cost disadvantage. Our competitors are able to
exert pricing pressure on us by using their manufacturing cost
savings to reduce prices of their products, while maintaining
higher margins than us. To remain competitive, we must, among
other things, react to these pricing pressures by lowering our
prices from time to time. We will continue to experience pricing
pressure and remain at a cost disadvantage to our competitors
unless we are able to successfully migrate a greater portion of
our textile manufacturing operations to lower-cost locations.
However, we cannot guarantee that our migration plans, as
executed, will relieve these pricing pressures and our cost
disadvantage.
We are
in the process of relocating a significant portion of our
textile manufacturing operations to overseas locations and this
process involves significant costs and the risk of operational
interruption.
We currently are relocating and expect to continue to relocate a
significant portion of our textile manufacturing operations to
locations in Central America, the Caribbean Basin and Asia. The
process of relocating significant portions of our textile
manufacturing and production operations has resulted in and will
continue to result in significant costs. As further plans are
developed and approved by management and our board of directors,
we expect to recognize additional restructuring costs to
eliminate duplicative functions within the organization and
transition a significant portion of our manufacturing capacity
to lower-cost locations. As a result of these efforts, we expect
to incur approximately $250 million in restructuring and
related charges over the three year period following the spin
off from Sara Lee of which approximately half is expected to be
noncash. This process also may result in operational
interruptions, which may have an adverse effect on our business,
results of operations and financial condition.
The
integration of our information technology systems is complex,
and any delay or problem with this integration may cause serious
disruption or harm to our business.
As part of our efforts to consolidate our operations, we are in
the process of integrating currently unrelated information
technology systems across our company which has resulted in
operational inefficiencies and in some cases increased our
costs. This process involves the replacement of eight
independent systems environments running on different technology
platforms with a unified enterprise system that will integrate
all of our departments and functions onto common software that
runs off a single database. We are subject to the risk that we
will not be able to absorb the level of systems change, commit
the necessary resources or focus the management attention
necessary for the implementation to succeed. Many key strategic
initiatives of major business functions, such as our supply
chain and our finance operations, depend on advanced
capabilities enabled by the new systems and if we fail to
properly execute or if we miss critical deadlines in the
implementation of this initiative, we could experience serious
disruption and harm to our business.
11
We
operate in a highly competitive and rapidly evolving market, and
our market share and results of operations could be adversely
affected if we fail to compete effectively in the
future.
The apparel essentials market is highly competitive and evolving
rapidly. Competition is generally based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. Our businesses face competition today from other
large corporations and foreign manufacturers. These competitors
include Berskhire Hathaway Inc. through its subsidiary Fruit of
the Loom, Inc., Warnaco Group Inc. and Maidenform Brands, Inc.
in our innerwear business segment and Gildan Activewear, Inc.
and Berkshire Hathaway Inc. through its subsidiaries Russell
Corporation and Fruit of the Loom, Inc. in our outerwear
business segment. We also compete with many small companies
across all of our business segments. Additionally, department
stores and other retailers, including many of our customers,
market and sell apparel essentials products under private labels
that compete directly with our brands. These customers may buy
goods that are manufactured by others, which represents a lost
business opportunity for us, or they may sell private label
products manufactured by us, which have significantly lower
gross margins than our branded products. We also face intense
competition from specialty stores that sell private label
apparel not manufactured by us, such as Victorias Secret,
Old Navy and The Gap. Increased competition may result in a loss
of or a reduction in shelf space and promotional support and
reduced prices, in each case decreasing our cash flows,
operating margins and profitability. Our ability to remain
competitive in the areas of price, quality, brand recognition,
research and product development, manufacturing and distribution
will, in large part, determine our future success. If we fail to
compete successfully, our market share, results of operations
and financial condition will be materially and adversely
affected.
If we
fail to manage our inventory effectively, we may be required to
establish additional inventory reserves or we may not carry
enough inventory to meet customer demands, causing us to suffer
lower margins or losses.
We are faced with the constant challenge of balancing our
inventory with our ability to meet marketplace needs. Excess
inventory reserves can result from the complexity of our supply
chain, a long manufacturing process and the seasonal nature of
certain products. As a result, we are subject to high levels of
obsolescence and excess stock. Based on discussions with our
customers and internally generated projections, we produce,
purchase
and/or store
raw material and finished goods inventory to meet our expected
demand for delivery. However, we sell a large number of our
products to a small number of customers, and these customers
generally are not required by contract to purchase our goods.
If, after producing and storing inventory in anticipation of
deliveries, demand is lower than expected, we may have to hold
inventory for extended periods or sell excess inventory at
reduced prices, in some cases below our cost. There are inherent
uncertainties related to the recoverability of inventory, and it
is possible that market factors and other conditions underlying
the valuation of inventory may change in the future and result
in further reserve requirements. Excess inventory can reduce
gross margins or result in operating losses, lowered plant and
equipment utilization and lowered fixed operating cost
absorption, all of which could have a material adverse effect on
our business, results of operations or financial condition. For
example, while our total inventory reserves were approximately
$99 million at December 30, 2006, $88 million at
July 1, 2006 and $89 million at July 3, 2004, our
total inventory reserves were approximately $116 million at
July 2, 2005, due in part to lower demand for some of our
products than forecasted.
Conversely, we also are exposed to lost business opportunities
if we underestimate market demand and produce too little
inventory for any particular period. Because sales of our
products are generally not made under contract, if we do not
carry enough inventory to satisfy our customers demands
for our products within an acceptable time frame, they may seek
to fulfill their demands from one or several of our competitors
and may reduce the amount of business they do with us. Any such
action could have a material adverse effect on our business,
results of operations and financial condition.
12
Sales
of and demand for our products may decrease if we fail to keep
pace with evolving consumer preferences and trends, which could
have an adverse effect on net sales and
profitability.
Our success depends on our ability to anticipate and respond
effectively to evolving consumer preferences and trends and to
translate these preferences and trends into marketable product
offerings. If we are unable to successfully anticipate, identify
or react to changing styles or trends or misjudge the market for
our products, our sales may be lower than expected and we may be
faced with a significant amount of unsold finished goods
inventory. In response, we may be forced to increase our
marketing promotions, provide markdown allowances to our
customers or liquidate excess merchandise, any of which could
have a material adverse effect on our net sales and
profitability. Our brand image may also suffer if customers
believe that we are no longer able to offer innovative products,
respond to consumer preferences or maintain the quality of our
products.
We
rely on a relatively small number of customers for a significant
portion of our sales, and the loss of or material reduction in
sales to any of our top customers would have a material adverse
effect on our business, results of operations and financial
condition.
During the six months ended December 30, 2006, our top ten
customers accounted for 62% of our net sales and our top
customer, Wal-Mart, accounted for 28% of our net sales. We
expect that these customers will continue to represent a
significant portion of our net sales in the future. In addition,
our top ten customers are the largest market participants in our
primary distribution channels across all of our product lines.
Any loss of or material reduction in sales to any of our top ten
customers, especially Wal-Mart Stores, Inc.
(Wal-Mart),
would be difficult to recapture, and would have a material
adverse effect on our business, results of operations and
financial condition.
We
generally do not sell our products under contracts, and, as a
result, our customers are generally not contractually obligated
to purchase our products, which causes some uncertainty as to
future sales and inventory levels.
We generally do not enter into purchase agreements that obligate
our customers to purchase our products, and as a result, most of
our sales are made on a purchase order basis. For example, we
have no agreements with Wal-Mart that obligate Wal-Mart to
purchase our products. If any of our customers experiences a
significant downturn in its business, or fails to remain
committed to our products or brands, the customer is generally
under no contractual obligation to purchase our products and,
consequently, may reduce or discontinue purchases from us. In
the past, such actions have resulted in a decrease in sales and
an increase in our inventory and have had an adverse effect on
our business, results of operations and financial condition. If
such actions occur again in the future, our business, results of
operations and financial condition will likely be similarly
affected.
Further
consolidation among our customer base and continued growth of
our existing customers could result in increased pricing
pressure, reduced floor space for our products and other changes
that could be harmful to our business.
In recent years there has been a growing trend toward retailer
consolidation. As a result of this consolidation, the number of
retailers to which we sell our products continues to decline
and, as such, larger retailers now are able to exercise greater
negotiating power when purchasing our products. Continued
consolidation in the retail industry could result in further
price and other competition that may damage our business.
Additionally, as our customers grow larger, they increasingly
may require us to provide them with some of our products on an
exclusive basis, which could cause an increase in the number of
stock keeping units, or SKUs, we must carry and,
consequently, increase our inventory levels and working capital
requirements.
Moreover, as our customers consolidate and grow larger they may
increasingly seek markdown allowances, incentives and other
forms of economic support which reduce our gross margins and
affect our profitability. Our financial performance is
negatively affected by these pricing pressures when we are
forced to reduce our prices without being able to
correspondingly reduce our production costs.
13
Our
customers generally purchase our products on credit, and as a
result, our results of operations and financial condition may be
adversely affected if our customers experience financial
difficulties.
During the past several years, various retailers, including some
of our largest customers, have experienced significant
difficulties, including restructurings, bankruptcies and
liquidations. This could adversely affect us because our
customers generally pay us after goods are delivered. Adverse
changes in our customers financial position could cause us
to limit or discontinue business with that customer, require us
to assume more credit risk relating to that customers
future purchases or limit our ability to collect accounts
receivable relating to previous purchases by that customer, all
of which could have a material adverse effect on our business,
results of operations and financial condition.
International
trade regulations may increase our costs or limit the amount of
products that we can import from suppliers in a particular
country, which could have an adverse effect on our
business.
Because a significant amount of our manufacturing and production
operations are in, or our products are sourced from, overseas
locations, we are subject to international trade regulations.
The international trade regulations to which we are subject or
may become subject include tariffs, safeguards or quotas. These
regulations could limit the countries from which we produce or
source our products or significantly increase the cost of
operating in or obtaining materials originating from certain
countries. Restrictions imposed by international trade
regulations can have a particular impact on our business when,
after we have moved our operations to a particular location, new
unfavorable regulations are enacted in that area or favorable
regulations currently in effect are changed. The countries in
which our products are manufactured or into which they are
imported may from time to time impose additional new
regulations, or modify existing regulations, including:
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additional duties, taxes, tariffs and other charges on imports,
including retaliatory duties or other trade sanctions, which may
or may not be based on World Trade Organization, or
WTO, rules, and which would increase the cost of
products purchased from suppliers in such countries;
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quantitative limits that may limit the quantity of goods which
may be imported into the United States from a particular
country, including the imposition of further
safeguard mechanisms by the U.S. government or
governments in other jurisdictions, limiting our ability to
import goods from particular countries, such as China;
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changes in the classification of products that could result in
higher duty rates than we have historically paid;
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modification of the trading status of certain countries;
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requirements as to where products are manufactured;
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creation of export licensing requirements, imposition of
restrictions on export quantities or specification of minimum
export pricing; or
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creation of other restrictions on imports.
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Adverse international trade regulations, including those listed
above, would have a material adverse effect on our business,
results of operations and financial condition.
Significant
fluctuations and volatility in the price of cotton and other raw
materials we purchase may have a material adverse effect on our
business, results of operations and financial
condition.
Cotton is the primary raw material used in the manufacture of
many of our products. Our costs for cotton yarn and cotton-based
textiles vary based upon the fluctuating and often volatile cost
of cotton, which is affected by 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. In addition, fluctuations in crude oil or
petroleum prices may also influence the prices of related items
used in our business, such as chemicals, dyestuffs, polyester
yarn and foam.
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We are not always successful in our efforts to protect our
business from the volatility of the market price of cotton
through short-term supply agreements and hedges, and our
business can be adversely affected by dramatic movements in
cotton prices. For example, we estimate that, excluding the
impact of futures contracts, a change of $0.01 per pound in
cotton prices would affect our annual raw material costs by
$3.3 million, at current levels of production. The ultimate
effect of this change on our earnings cannot be quantified, as
the effect of movements in cotton prices on industry selling
prices are uncertain, but any dramatic increase in the price of
cotton would have a material adverse effect on our business,
results of operations and financial condition.
We
incurred substantial indebtedness in connection with the spin
off, which subjects us to various restrictions and could
decrease our profitability and otherwise adversely affect our
business.
We incurred substantial indebtedness of $2.6 billion in
connection with our spin off from Sara Lee as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. In December 2006, we repaid
$500 million of that indebtedness with the proceeds of the
offering of the Notes. We are subject to significant financial
and operating restrictions contained in the senior secured
credit facility we entered into on September 5, 2006 (the
Senior Secured Credit Facility) and the senior
secured second lien credit facility we entered into on
September 5, 2006 (the Second Lien Credit
Facility and, together with the Senior Secured Credit
Facility, the Credit Facilities) and the indenture
governing the Notes. These restrictions affect, and in some
cases significantly limit or prohibit, among other things, our
ability to:
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borrow funds;
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pay dividends or make other distributions;
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make investments;
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engage in transactions with affiliates; or
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create liens on our assets.
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In addition, the Credit Facilities require us to maintain
financial ratios. If we fail to comply with the covenant
restrictions contained in the Credit Facilities, that failure
could result in a default that accelerates the maturity of the
indebtedness under such facilities.
Our substantial leverage also could put us at a significant
competitive disadvantage compared to our competitors which are
less leveraged. These competitors could have greater financial
flexibility to pursue strategic acquisitions, secure additional
financing for their operations by incurring additional debt,
expend capital to expand their manufacturing and production
operations to lower-cost areas and apply pricing pressure on us.
In addition, because many of our customers rely on us to fulfill
a substantial portion of their apparel essentials demand, any
concern these customers may have regarding our financial
condition may cause them to reduce the amount of products they
purchase from us. Our substantial leverage could also impede our
ability to withstand downturns in our industry or the economy in
general.
As a
result of our substantial indebtedness, we may not have
sufficient funding for our operations and capital
requirements.
We paid $2.4 billion of the proceeds of the borrowings we
incurred in connection with the spin off to Sara Lee and, as a
result, those proceeds are not available for our business needs,
such as funding working capital or the expansion of our
operations. In addition, the restrictions contained in the
Credit Facilities and in the indenture governing the Notes
restrict our ability to obtain additional capital in the future
to:
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fund capital expenditures or acquisitions;
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meet our debt payment obligations and capital commitments;
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fund any operating losses or future development of our business
affiliates;
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obtain lower borrowing costs that are available from secured
lenders or engage in advantageous transactions that monetize our
assets; or
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conduct other necessary or prudent corporate activities.
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We may need to incur additional debt or issue equity in order to
fund working capital and capital expenditures or to make
acquisitions and other investments. We cannot assure you that
debt or equity financing will be available to us on acceptable
terms or at all. If we are not able to obtain sufficient
financing, we may be unable to maintain or expand our business.
It may be more expensive for us to raise funds through the
issuance of additional debt than it was while we were part of
Sara Lee.
If we raise funds through the issuance of debt or equity, any
debt securities or preferred stock issued will have rights,
preferences and privileges senior to those of holders of our
common stock in the event of a liquidation, and the terms of the
debt securities may impose restrictions on our operations. If we
raise funds through the issuance of equity, the issuance would
dilute the ownership interest of our stockholders.
To
service our substantial debt obligations, we may need to
increase the portion of the income of our foreign subsidiaries
that is expected to be remitted to the United States, which
could significantly increase our income tax
expense.
We pay U.S. federal income taxes on that portion of the
income of our foreign subsidiaries that is expected to be
remitted to the United States and be taxable. The amount of the
income of our foreign subsidiaries we remit to the United States
may significantly impact our U.S. federal income tax rate.
In order to service our substantial debt obligations, we may
need to increase the portion of the income of our foreign
subsidiaries that we expect to remit to the United States, which
may significantly increase our income tax expense. Consequently,
we believe that our tax rate in future periods is likely to be
higher, on average, than our historical income tax rates in
periods prior to the spin off on September 5, 2006.
If we
fail to meet our payment or other obligations under some of the
Credit Facilities, the lenders could foreclose on, and acquire
control of, substantially all of our assets.
In connection with our incurrence of indebtedness under the
Credit Facilities, the lenders under those facilities have
received a pledge of substantially all of our existing and
future direct and indirect subsidiaries, with certain customary
or
agreed-upon
exceptions for foreign subsidiaries and certain other
subsidiaries. Additionally, these lenders generally have a lien
on substantially all of our assets and the assets of our
subsidiaries, with certain exceptions. As a result of these
pledges and liens, if we fail to meet our payment or other
obligations under the Senior Secured Credit Facility or the
Second Lien Credit Facility, the lenders under those facilities
will be entitled to foreclose on substantially all of our assets
and, at their option, liquidate these assets.
Our
supply chain relies on an extensive network of foreign
operations and any disruption to or adverse impact on such
operations may adversely affect our business, results of
operations and financial condition.
We have an extensive global supply chain in which a significant
portion of our products are manufactured in or sourced from
locations in Central America, the Caribbean Basin, Mexico and
Asia. Potential events that may disrupt our foreign operations
include:
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political instability and acts of war or terrorism;
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disruptions in shipping and freight forwarding services;
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increases in oil prices, which would increase the cost of
shipping;
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interruptions in the availability of basic services and
infrastructure, including power shortages;
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fluctuations in foreign currency exchange rates resulting in
uncertainty as to future asset and liability values, cost of
goods and results of operations that are denominated in foreign
currencies;
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extraordinary weather conditions or natural disasters, such as
hurricanes, earthquakes or tsunamis; and
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the occurrence of an epidemic, the spread of which may impact
our ability to obtain products on a timely basis.
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Disruptions to our foreign operations have an adverse impact on
our supply chain that can result in production and sourcing
interruptions, increases in our cost of sales and delayed
deliveries of our products to our customers, all of which can
have an adverse affect on our business, results of operations
and financial condition.
The
loss of one or more of our suppliers of finished goods or raw
materials may interrupt our supplies and materially harm our
business.
We purchase all of the raw materials used in our products and
approximately 25% of the apparel designed by us from a limited
number of third-party suppliers and manufacturers. Our ability
to meet our customers needs depends on our ability to
maintain an uninterrupted supply of raw materials and finished
products from our third-party suppliers and manufacturers. Our
business, financial condition or results of operations could be
adversely affected if any of our principal third-party suppliers
or manufacturers experience production problems, lack of
capacity or transportation disruptions. The magnitude of this
risk depends upon the timing of the changes, the materials or
products that the third-party manufacturers provide and the
volume of production.
Our dependence on third parties for raw materials and finished
products subjects us to the risk of supplier failure and
customer dissatisfaction with the quality of our products.
Quality failures by our third-party manufacturers or changes in
their financial or business condition that affect their
production could disrupt our ability to supply quality products
to our customers and thereby materially harm our business.
We may
suffer negative publicity if we or our third-party manufacturers
violate labor laws or engage in practices that are viewed as
unethical or illegal, which could cause a loss of
business.
We cannot fully control the business and labor practices of our
third-party manufacturers, the majority of whom are located in
Central America, the Caribbean Basin and Asia. If one of our own
manufacturing operations or one of our third-party manufacturers
violates or is accused of violating local or international labor
laws or other applicable regulations, or engages in labor or
other practices that would be viewed in any market in which our
products are sold as unethical, we could suffer negative
publicity which could tarnish our brands image or result
in a loss of sales. In addition, if such negative publicity
affected one of our customers, it could result in a loss of
business for us.
We had
approximately 49,000 employees worldwide as of December 30,
2006, and our business operations and financial performance
could be adversely affected by changes in our relationship with
our employees or changes to U.S. or foreign employment
regulations.
We had approximately 49,000 employees worldwide as of
December 30, 2006. This means we have a significant
exposure to changes in domestic and foreign laws governing our
relationships with our employees, including wage and hour laws
and regulations, fair labor standards, minimum wage
requirements, overtime pay, unemployment tax rates,
workers compensation rates, citizenship requirements and
payroll taxes, which likely would have a direct impact on our
operating costs. Approximately 35,700 of those employees were
outside of the United States. A significant increase in minimum
wage or overtime rates in countries where we have employees
could have a significant impact on our operating costs and may
require that we relocate those operations or take other steps to
mitigate such increases, all of which may cause us to incur
additional costs, expend resources responding to such increases
and lower our margins.
In addition, some of our employees are members of labor
organizations or are covered by collective bargaining
agreements. If there were a significant increase in the number
of our employees who are members of labor organizations or
become parties to collective bargaining agreements, we would
become vulnerable to
17
a strike, work stoppage or other labor action by these employees
that could have an adverse effect on our business.
Due to
the extensive nature of our foreign operations, fluctuations in
foreign currency exchange rates could negatively impact our
results of operations.
We sell a majority of our products in transactions denominated
in U.S. dollars; however, we purchase many of our products,
pay a portion of our wages and make other payments in our supply
chain in foreign currencies. As a result, if the
U.S. dollar were to weaken against any of these currencies,
our cost of sales could increase substantially. We are also
exposed to gains and losses resulting from the effect that
fluctuations in foreign currency exchange rates have on the
reported results in our Combined and Consolidated Financial
Statements due to the translation of operating results and
financial position of our foreign subsidiaries. We use foreign
exchange forward and option contracts to hedge material exposure
to adverse changes in foreign exchange rates. In addition,
currency fluctuations can impact the price of cotton, the
primary raw material we use in our business.
We
have significant unfunded employee benefit liabilities; if
assumptions underlying our calculation of these liabilities
prove incorrect, the amount of these liabilities could increase
or we could be required to make contributions to these plans in
excess of our current expectations, both of which could have a
negative impact on our cash flows, liquidity and results of
operations.
We assumed significant unfunded employee benefit liabilities of
$299 million as of September 5, 2006 for pension,
postretirement and other retirement benefit qualified and
nonqualified plans from Sara Lee in connection with the spin
off. Included in these unfunded liabilities are pension
obligations that have not been reflected in our historical
financial statements for periods prior to the six months ended
December 30, 2006 because these obligations have
historically been obligations of Sara Lee. The pension
obligations we assumed were $225 million more than the
corresponding pension assets we acquired, and as a result our
pension plans are underfunded. As a result of provisions of the
Pension Protection Act of 2006, we may be required, commencing
with plan years beginning after 2007, to make larger
contributions to our pension plans than Sara Lee made with
respect to these plans in past years. In addition, we could be
required to make contributions to the pension plans in excess of
our current expectations if financial conditions change or if
the assumptions we have used to calculate our pension costs and
obligations prove to be inaccurate. A significant increase in
our funding obligations could have a negative impact on our cash
flows, liquidity and results of operations.
We are
prohibited from selling our Wonderbra and Playtex intimate
apparel products in the EU, as well as certain other countries
in Europe and South Africa, and therefore are unable to take
advantage of business opportunities that may arise in such
countries.
In February 2006, Sara Lee sold its European branded apparel
business to Sun Capital. In connection with the sale, Sun
Capital received an exclusive, perpetual, royalty-free license
to sell and distribute apparel products under the Wonderbra
and Playtex trademarks in the member states of the
EU, as well as Russia, South Africa, Switzerland and certain
other nations in Europe. Due to the exclusive license, we are
not permitted to sell Wonderbra and Playtex
branded products in these nations and Sun Capital is not
permitted to sell Wonderbra and Playtex branded
products outside of these nations. Consequently, we will not be
able to take advantage of business opportunities that may arise
relating to the sale of Wonderbra and Playtex
products in these nations. For more information on these
sales restrictions see Business Intellectual
Property.
The
success of our business is tied to the strength and reputation
of our brands, including brands that we license to other
parties. If other parties take actions that weaken, harm the
reputation of or cause confusion with our brands, our business,
and consequently our sales and results of operations, may be
adversely affected.
We license some of our important trademarks to third parties.
For example, we license Champion to third parties
for athletic-oriented accessories. Although we make concerted
efforts to protect our brands through quality control mechanisms
and contractual obligations imposed on our licensees, there is a
risk that
18
some licensees may not be in full compliance with those
mechanisms and obligations. In that event, or if a licensee
engages in behavior with respect to the licensed marks that
would cause us reputational harm, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations. Similarly, any
misuse of the Wonderbra and Playtex brands by Sun
Capital could result in negative publicity and a loss of sales
for our products under these brands, any of which may have a
material adverse effect on our business, results of operations
or financial condition.
We
design, manufacture, source and sell products under trademarks
that are licensed from third parties. If any licensor takes
actions related to their trademarks that would cause their
brands or our company reputational harm, our business may be
adversely affected.
We design, manufacture, source and sell a number of our products
under trademarks that are licensed from third parties such as
our Polo Ralph Lauren mens underwear. Because we do
not control the brands licensed to us, our licensors could make
changes to their brands or business models that could result in
a significant downturn in a brands business, adversely
affecting our sales and results of operations. If any licensor
engages in behavior with respect to the licensed marks that
would cause us reputational harm, or if any of the brands
licensed to us violates the trademark rights of another or are
deemed to be invalid or unenforceable, we could experience a
significant downturn in that brands business, adversely
affecting our sales and results of operations, and we may be
required to expend significant amounts on public relations,
advertising and, possibly, legal fees.
Risks
Related to the Exchange Offer
Because
there is no public market for the Exchange Notes, you may not be
able to resell your Exchange Notes.
The Exchange Notes will be registered under the Securities Act,
but will constitute a new issue of securities with no
established trading market, and there can be no assurance as to:
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the liquidity of any trading market that may develop;
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the ability of holders to sell their Exchange Notes; or
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the price at which the holders would be able to sell their
Exchange Notes.
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If a trading market were to develop, the Exchange Notes might
trade at higher or lower prices than their principal amount or
purchase price, depending on many factors, including prevailing
interest rates, the market for similar securities and our
financial performance. There can be no assurance that an active
trading market will exist for the Exchange Notes or that any
trading market that does develop will be liquid.
In addition, any holder of Notes who tenders in the exchange
offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted
securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. For a
description of these requirements, see The Exchange
Offer.
Your
Notes will not be accepted for exchange if you fail to follow
the exchange offer procedures and, as a result, your Notes will
continue to be subject to existing transfer restrictions and you
may not be able to sell your Notes.
We will not accept your Notes for exchange if you do not follow
the exchange offer procedures. We will issue Exchange Notes as
part of this exchange offer only after a timely receipt of your
Notes, a properly completed and duly executed letter of
transmittal and all other required documents. Therefore, if you
want to tender your Notes, please allow sufficient time to
ensure timely delivery. If we do not receive your Notes, letter
of transmittal and other required documents by the expiration
date of the exchange offer, we will not accept your Notes for
exchange. We are under no duty to give notification of defects
or irregularities with respect to the tenders of Notes for
exchange. If there are defects or irregularities with respect to
your tender of Notes, we may not accept your Notes for exchange.
For more information, see The Exchange Offer.
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If you
do not exchange your Notes, your Notes will continue to be
subject to the existing transfer restrictions and you may not be
able to sell your Notes.
We did not register the Notes, nor do we intend to do so
following the exchange offer. Outstanding Notes that are not
tendered will therefore continue to be subject to the existing
transfer restrictions and may be transferred only in limited
circumstances under the securities laws. If you do not exchange
your Notes in the exchange offer, you will lose your right to
have your Notes registered under the federal securities laws. As
a result, if you hold Notes after the exchange offer, you may
not be able to sell your Notes.
Risks
Related to the Exchange Notes
We may
not be able to generate sufficient cash flows to meet our debt
service obligations.
Our ability to make payments on and to refinance our
indebtedness, including the Exchange Notes, and to fund planned
capital expenditures will depend on our ability to generate cash
from our future operations. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. See Risks Related to Our
Business.
Our business may not generate sufficient cash flow from
operations, or future borrowings under our senior secured credit
facilities or from other sources may not be available to us in
an amount sufficient, to enable us to repay our indebtedness,
including the Exchange Notes, or to fund our other liquidity
needs, including capital expenditure requirements. We cannot
guarantee that we will be able to obtain enough capital to
service our debt and fund our planned capital expenditures and
business plan. If we complete an acquisition, our debt service
requirements could also increase. For the six months ended
December 30, 2006, our cash flow from operating activities
was $136.1 million and our cash interest expense was
approximately $68.9 million. A substantial portion of our
indebtedness, including all of our indebtedness under the Credit
Facilities, bears interest at floating rates, and therefore if
interest rates increase, our debt service requirements will
increase with respect to any portion of the indebtedness with
respect to which we have not entered into hedging or other
interest rate protection arrangements. For a discussion of
certain hedging arrangements with respect to our floating rate
debt, see Managements Discussion and Analysis of
Results of Operations and Financial Condition
Liquidity and Capital Resources Derivatives.
We may need to refinance or restructure all or a portion of our
indebtedness, including the Exchange Notes, on or before
maturity. We may not be able to refinance any of our
indebtedness, including the Credit Facilities and the Exchange
Notes, on commercially reasonable terms, or at all. If we cannot
service our indebtedness, we may have to take actions such as
selling assets, seeking additional equity investments or
reducing or delaying capital expenditures, strategic
acquisitions, investments and alliances, any of which could have
a material adverse effect on our operations. Additionally, we
may not be able to effect such actions, if necessary, on
commercially reasonable terms, or at all.
The
Exchange Notes will be structurally subordinated in right of
payment to the indebtedness and other liabilities of those of
our existing and future subsidiaries that do not guarantee the
Exchange Notes, and to the indebtedness and other liabilities of
any guarantor whose guarantee of the Exchange Notes is deemed to
be unenforceable.
All of our subsidiaries that are guarantors under the Senior
Secured Credit Facility will guarantee the Exchange Notes.
Certain of our existing
non-U.S. subsidiaries
will not guarantee the Exchange Notes as of the issue date, and
such
non-U.S. subsidiaries
(and certain future
non-U.S. subsidiaries)
will only be required to guarantee the Exchange Notes in the
future under very limited circumstances. In addition, any future
subsidiary that we properly designate as an unrestricted
subsidiary under the indenture will not provide guarantees of
the Exchange Notes. Moreover, for the reasons described below
under Federal and state statutes allow courts,
under specific circumstances, to void guarantees and require
note holders to return payments received from guarantors,
the guarantees that are given by our subsidiaries may be
unenforceable in whole or in part.
Because a portion of our operations are conducted by
subsidiaries that will not guarantee the Exchange Notes, our
cash flow and our ability to service debt, including our and the
guarantors ability to pay the
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interest on and principal of the Exchange Notes when due, are
dependent to a significant extent on interest payments, cash
dividends and distributions and other transfers of cash from
subsidiaries that will not guarantee the Exchange Notes. In
addition, any payment of interest, dividends, distributions,
loans or advances by subsidiaries that will not guarantee the
Exchange Notes to us and the guarantors, as applicable, could be
subject to taxation or other restrictions on dividends or
repatriation of earnings under applicable local law, monetary
transfer restrictions and foreign currency exchange regulations
in the jurisdiction in which these subsidiaries operate.
Moreover, payments to us and the guarantors by subsidiaries that
will not guarantee the Exchange Notes will be contingent on
these subsidiaries earnings. Our subsidiaries that will
not guarantee the Exchange Notes are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay
any amounts due pursuant to the Exchange Notes, or to make any
funds available therefore, whether by dividends, loans,
distributions or other payments. Any right that we or the
guarantors have to receive any assets of any subsidiaries that
will not guarantee the Exchange Notes upon the liquidation or
reorganization of those subsidiaries, and the consequent rights
of holders of Exchange Notes to realize proceeds from the sale
of any of those subsidiaries assets, will be effectively
subordinated to the claims of that subsidiarys creditors,
including trade creditors and holders of debt and preferred
stock of that subsidiary. Therefore, if there was a dissolution,
bankruptcy, liquidation or reorganization of any such entity,
the holders of the Exchange Notes would not receive any amounts
with respect to the Exchange Notes from the assets of such
entity until after the payment in full of the claims of
creditors (including preferred stockholders) of such entity.
As of December 30, 2006, the total liabilities of our
consolidated subsidiaries that will not be guarantors of the
Exchange Notes was $121 million, after eliminations, all of
which would have been structurally senior to the Exchange Notes.
For the six months ended December 30, 2006, our
subsidiaries that will not guarantee the Exchange Notes
represented approximately 5% of net sales after eliminations.
These non-guarantor subsidiaries held assets of
$566 million, representing 17% of our combined total assets
after eliminations as of December 30, 2006.
Because
the Exchange Notes are unsecured, your right to enforce remedies
is limited by the rights of holders of secured
debt.
Our obligations under the Exchange Notes and the
guarantors obligations under the guarantees will not be
secured by any of our assets, while our obligations and the
obligations of the guarantors under the Credit Facilities are
secured by substantially all of the assets and intercompany
loans made by us and the guarantors, and pledges of the
outstanding shares of capital stock of all of our domestic and
non-U.S. subsidiaries,
except in certain limited circumstances. Therefore, the lenders
under the Credit Facilities, and the holders of any other
secured debt that we or the guarantors may incur in the future,
will have claims with respect to these assets that have priority
over the claims of holders of Exchange Notes. As of
December 30, 2006, we had $2.0 billion of secured
debt, all of which consisted of outstanding borrowings and
related guarantees under the Credit Facilities. As of
December 30, 2006, the initial guarantors of the Exchange
Notes had no secured indebtedness outstanding.
The
Exchange Notes may be redeemed prior to maturity.
We may redeem any of the Exchange Notes beginning on
December 15, 2008, at the redemption prices listed under
Description of the Exchange Notes Optional
Redemption, plus accrued interest. On or prior to
December 15, 2008, we may redeem up to 35% of the Exchange
Notes at the redemption prices described in this prospectus
using the net cash proceeds from sales of certain types of
capital stock as described under Description of the
Exchange Notes Optional Redemption. We may
also redeem any of the Exchange Notes at any time prior to
December 15, 2008 in cash at the redemption prices
described in this prospectus plus accrued interest to the date
of redemption and a make-whole premium as described under
Description of the Exchange Notes Optional
Redemption.
If the Exchange Notes were redeemed, the redemption would be a
taxable event to you. In addition, you might not be able to
reinvest the money you receive upon redemption of the Exchange
Notes at the same rate as the relevant rate of return on the
Exchange Notes.
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Federal
and state statutes allow courts, under specific circumstances,
to void guarantees and require holders of Exchange Notes to
return payments received from guarantors.
The issuance of the guarantees of the Exchange Notes by the
guarantors may be subject to review under state and federal laws
if a bankruptcy, liquidation or reorganization case or a
lawsuit, including in circumstances in which bankruptcy is not
involved, were commenced at some future date by, or on behalf
of, the unpaid creditors of a guarantor. Under the
U.S. bankruptcy law and comparable provisions of state
fraudulent transfer and conveyance laws, any guarantees of the
Exchange Notes could be voided, or claims in respect of a
guarantee could be subordinated to all other existing and future
debts of that guarantor if, among other things, and depending
upon the jurisdiction whose laws are applied, the guarantor, at
the time it incurs the indebtedness evidenced by its guarantee
or, in some jurisdictions, when payments came due under such
guarantee:
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issued the guarantee with the intent of hindering, delaying or
defrauding any present or future creditor; or
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received less than reasonably equivalent value or fair
consideration for the incurrence of such guarantee and
(1) was insolvent or rendered insolvent by reason of such
incurrence, (2) was engaged in a business or transaction
for which the guarantors remaining assets constitute
unreasonably small capital or (3) intended to incur, or
believed or reasonably should have believed that it would incur,
debts beyond its ability to pay such debts as they mature.
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We cannot assure you that a court would find that a guarantor
did receive reasonably equivalent value or fair consideration
for its guarantee.
The measures of insolvency for purposes of these fraudulent
transfer laws will vary depending upon the law applied in any
proceeding to determine whether a fraudulent transfer has
occurred. Generally, however, a guarantor would be considered
insolvent if:
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the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets;
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the present fair saleable value of its assets was less than the
amount that would be required to pay its probable liability on
its existing debts, including contingent liabilities, as they
become absolute and mature; or
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it could not pay its debts as they become due.
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Each guarantee will contain a provision intended to limit the
guarantors liability to the maximum amount that it could
incur without causing the incurrence of obligations under its
guarantee to be a fraudulent transfer. This provision may not be
effective to protect the guarantees from being voided under
fraudulent transfer law, or may reduce the guarantors
obligation to an amount that effectively makes the guarantee
worthless. If a guarantee were legally challenged, such
guarantee could also be subject to the claim that, because the
guarantee was incurred for our benefit, and only indirectly for
the benefit of the guarantor, the obligations of the guarantor
were incurred for less than fair consideration. A court could
thus void the obligations under a guarantee, subordinate it to a
guarantors other debt or take other action detrimental to
the holders of the Exchange Notes.
We cannot be certain as to the standard that a court would use
to determine whether or not a guarantor was solvent upon
issuance of the guarantee or, regardless of the actual standard
applied by the court, that the issuance of the guarantee of the
Exchange Notes would not be voided or subordinated to any
guarantors other debt.
If a court voided a guarantee, you would no longer have a claim
against such guarantor for amounts owed in respect of such
guarantee. In addition, a court might direct you to repay any
amounts already received from such guarantor. If a court were to
void any guarantee, funds may not be available from any other
source to pay our obligations under the Exchange Notes.
22
We may
not have the ability to raise the funds necessary to finance the
change of control offer required by the indenture.
Upon the occurrence of certain specific kinds of change of
control events, we will be required to offer to repurchase all
Exchange Notes at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. However,
it is possible that we will not have sufficient funds at the
time of the change of control to make the required repurchase of
Exchange Notes or that restrictions in the Credit Facilities
will not allow such repurchases. In addition, certain important
corporate events, such as leveraged recapitalizations that would
increase the level of our indebtedness, would not constitute a
Change of Control under the indenture. See
Description of the Exchange Notes Repurchase
of Exchange Notes upon a Change of Control.
Risks
Related to Our Spin Off from Sara Lee
If the
IRS determines that the spin off does not qualify as a
tax-free distribution or a tax-free
reorganization, we may be subject to substantial
liability.
Sara Lee has received a private letter ruling from the Internal
Revenue Service, or the IRS, to the effect that,
among other things, the spin off qualifies as a tax-free
distribution for U.S. federal income tax purposes under
Section 355 of the Internal Revenue Code of 1986, as
amended, or the Internal Revenue Code, and as part
of a tax-free reorganization under Section 368(a)(1)(D) of
the Internal Revenue Code, and the transfer to us of assets and
the assumption by us of liabilities in connection with the spin
off will not result in the recognition of any gain or loss for
U.S. federal income tax purposes to Sara Lee.
Although the private letter ruling relating to the qualification
of the spin off under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code generally is binding on the IRS, the
continuing validity of the ruling is subject to the accuracy of
factual representations and assumptions made in connection with
obtaining such private letter ruling. Also, as part of the
IRSs general policy with respect to rulings on spin off
transactions under Section 355 of the Internal Revenue
Code, the private letter ruling obtained by Sara Lee is based
upon representations by Sara Lee that certain conditions which
are necessary to obtain tax-free treatment under
Section 355 and Section 368(a)(1)(D) of the Internal
Revenue Code have been satisfied, rather than a determination by
the IRS that these conditions have been satisfied. Any
inaccuracy in these representations could invalidate the ruling.
If the spin off does not qualify for tax-free treatment for
U.S. federal income tax purposes, then, in general, Sara
Lee would be subject to tax as if it has sold the common stock
of our company in a taxable sale for its fair market value. Sara
Lees stockholders would be subject to tax as if they had
received a taxable distribution equal to the fair market value
of our common stock that was distributed to them, taxed as a
dividend (without reduction for any portion of a Sara Lees
stockholders basis in its shares of Sara Lee common stock)
for U.S. federal income tax purposes and possibly for
purposes of state and local tax law, to the extent of a Sara
Lees stockholders pro rata share of Sara Lees
current and accumulated earnings and profits (including any
arising from the taxable gain to Sara Lee with respect to the
spin off). It is expected that the amount of any such taxes to
Sara Lees stockholders and to Sara Lee would be
substantial.
Pursuant to a tax sharing agreement we entered into with Sara
Lee in connection with the spin off, we agreed to indemnify Sara
Lee and its affiliates for any liability for taxes of Sara Lee
resulting from: (1) any action or failure to act by us or
any of our affiliates following the completion of the spin off
that would be inconsistent with or prohibit the spin off from
qualifying as a tax-free transaction to Sara Lee and to Sara
Lees stockholders under Sections 355 and 368(a)(1)(D)
of the Internal Revenue Code, or (2) any action or failure
to act by us or any of our affiliates following the completion
of the spin off that would be inconsistent with or cause to be
untrue any material, information, covenant or representation
made in connection with the private letter ruling obtained by
Sara Lee from the IRS relating to, among other things, the
qualification of the spin off as a tax-free transaction
described under Sections 355 and 368(a)(1)(D) of the
Internal Revenue Code. Our indemnification obligations to Sara
Lee and its affiliates are not limited in amount or subject to
any cap. We expect that the amount of any such taxes to Sara Lee
would be substantial. For more information about the tax sharing
agreement, see The Spin Off below.
23
We
have virtually no operating history as an independent company
upon which our performance can be evaluated and, accordingly,
our prospects must be considered in light of the risks that any
newly independent company encounters.
Prior to the consummation of the spin off, we operated as part
of Sara Lee. Accordingly, we have virtually no experience
operating as an independent company and performing various
corporate functions, including human resources, tax
administration, legal (including compliance with the
Sarbanes-Oxley Act of 2002 and with the periodic reporting
obligations of the Securities Exchange Act of 1934, or the
Exchange Act), treasury administration, investor
relations, internal audit, insurance, information technology and
telecommunications services, as well as the accounting for many
items such as equity compensation, income taxes, derivatives,
intangible assets and pensions. Our prospects must be considered
in light of the risks, expenses and difficulties encountered by
companies in the early stages of independent business
operations, particularly companies such as ours in highly
competitive markets with complex supply chain operations.
Our
historical financial information is not necessarily indicative
of our results as a separate company and therefore may not be
reliable as an indicator of our future financial
results.
Much of our historical financial statements have been created
from Sara Lees financial statements using our historical
results of operations and historical bases of assets and
liabilities as part of Sara Lee. For example, we operated as
part of Sara Lee for all periods discussed in this prospectus,
other than the last four months of the six months ended
December 30, 2006. Accordingly, the historical financial
information we have included in this prospectus is not
necessarily indicative of what our financial position, results
of operations and cash flows would have been if we had been a
separate, stand-alone entity during all of the periods presented.
Much of the historical financial information is not necessarily
indicative of what our results of operations, financial position
and cash flows will be in the future and, for periods prior to
the six months ended December 30, 2006, does not reflect
many significant changes in our capital structure, funding and
operations resulting from the spin off. While our historical
results of operations include all costs of Sara Lees
branded apparel business, our historical costs and expenses do
not include all of the costs that would have been or will be
incurred by us as an independent company. In addition, we have
not made adjustments to our historical financial information to
reflect changes, many of which are significant, that occurred in
our cost structure, financing and operations as a result of the
spin off, including the substantial debt we incurred and pension
liabilities we assumed in connection with the spin off. These
changes include potentially increased costs associated with
reduced economies of scale and purchasing power.
Our effective income tax rate as reflected in our historical
financial information for periods prior to the six months ended
December 30, 2006 also may not be indicative of our future
effective income tax rate. Among other things, the rate may be
materially impacted by:
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changes in the mix of our earnings from the various
jurisdictions in which we operate;
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the tax characteristics of our earnings;
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the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States, which may increase our tax
expense and taxes paid;
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the timing and results of any reviews of our income tax filing
positions in the jurisdictions in which we transact
business; and
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the expiration of the tax incentives for manufacturing
operations in Puerto Rico, which are no longer in effect.
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24
We and
Sara Lee provide a number of services to each other pursuant to
a master transition services agreement. When this agreement
terminates, we will be required to replace Sara Lees
services internally or through third parties on terms that may
be less favorable to us.
Under the terms of a master transition services agreement that
we entered into with Sara Lee in connection with the spin off,
we and Sara Lee are providing to each other, for a fee,
specified support services related to human resources and
payroll functions, financial and accounting functions and
information technology for periods of up to 12 months
following the spin off (with some renewal terms available). When
the master transition services agreement terminates, Sara Lee
will no longer be obligated to provide any of these services to
us or pay us for the services we are providing Sara Lee, and we
will be required to either enter into a new agreement with Sara
Lee or another services provider or assume the responsibility
for these functions ourselves. At such time, the economic terms
of the new arrangement may be less favorable than the
arrangement with Sara Lee under the master transition services
agreement, which may have a material adverse effect on our
business, results of operations and financial condition. For
more information about the master transition services agreement,
see The Spin Off below.
We
agreed with Sara Lee to certain restrictions in order to comply
with U.S. federal income tax requirements for a tax-free
spin off and we may not be able to engage in acquisitions and
other strategic transactions that may otherwise be in our best
interests.
Current U.S. federal tax law that applies to spin offs
generally creates a presumption that the spin off would be
taxable to Sara Lee but not to its stockholders if we engage in,
or enter into an agreement to engage in, a plan or series of
related transactions that would result in the acquisition of a
50% or greater interest (by vote or by value) in our stock
ownership during the four-year period beginning on the date that
begins two years before the spin off, unless it is established
that the transaction is not pursuant to a plan related to the
spin off. U.S. Treasury Regulations generally provide that
whether an acquisition of our stock and a spin off are part of a
plan is determined based on all of the facts and circumstances,
including specific factors listed in the regulations. In
addition, the regulations provide certain safe
harbors for acquisitions of our stock that are not
considered to be part of a plan related to the spin off.
There are other restrictions imposed on us under current
U.S. federal tax law for spin offs and with which we will
need to comply in order to preserve the favorable tax treatment
of the distribution, such as continuing to own and manage our
apparel business and limitations on sales or redemptions of our
common stock for cash or other property following the
distribution.
In our tax sharing agreement with Sara Lee, we agreed that,
among other things, we will not take any actions that would
result in any tax being imposed on Sara Lee as a result of the
spin off. Further, for the two-year period following the spin
off, we agreed, among other things, not to: (1) sell or
otherwise issue equity securities or repurchase any of our stock
except in certain circumstances permitted by the IRS guidelines;
(2) voluntarily dissolve or liquidate or engage in any
merger (except certain cash acquisition mergers), consolidation,
or other reorganizations except for certain mergers of our
wholly-owned subsidiaries to the extent not inconsistent with
the tax-free status of the spin off; (3) sell, transfer or
otherwise dispose of more than 50% of our assets, excluding any
sales conducted in the ordinary course of business; or
(4) cease, transfer or dispose of all or any portion of our
socks business.
We are, however, permitted to take certain actions otherwise
prohibited by the tax sharing agreement if we provide Sara Lee
with an unqualified opinion of tax counsel or private letter
ruling from the IRS, acceptable to Sara Lee, to the effect that
these actions will not affect the tax-free nature of the spin
off. These restrictions could substantially limit our strategic
and operational flexibility, including our ability to finance
our operations by issuing equity securities, make acquisitions
using equity securities, repurchase our equity securities, raise
money by selling assets or enter into business combination
transactions. For more information about the tax sharing
agreement, see Certain Relationships and Related
Transactions, and Director Independence below.
25
The
terms of our spin off from Sara Lee, anti-takeover provisions of
our charter and bylaws, as well as Maryland law and our
stockholder rights agreement, may reduce the likelihood of any
potential change of control or unsolicited acquisition proposal
that you might consider favorable.
The terms of our spin off from Sara Lee could delay or prevent a
change of control that our stockholders may favor. An
acquisition or issuance of our common stock could trigger the
application of Section 355(e) of the Internal Revenue Code.
Under the tax sharing agreement that we entered into with Sara
Lee, we are required to indemnify Sara Lee for the resulting tax
in connection with such an acquisition or issuance and this
indemnity obligation might discourage, delay or prevent a change
of control that our stockholders may consider favorable. Our
charter and bylaws and Maryland law contain provisions that
could make it harder for a third-party to acquire us without the
consent of our board of directors. Our charter permits our board
of directors, without stockholder approval, to amend the charter
to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that we
have the authority to issue. In addition, our board of directors
may classify or reclassify any unissued shares of common stock
or preferred stock and may set the preferences, conversion or
other rights, voting powers and other terms of the classified or
reclassified shares. Our board of directors could establish a
series of preferred stock that could have the effect of
delaying, deferring or preventing a transaction or a change in
control that might involve a premium price for our common stock
or otherwise be in the best interest of our stockholders. Our
board of directors also is permitted, without stockholder
approval, to implement a classified board structure at any time.
Our bylaws, which only can be amended by our board of directors,
provide that nominations of persons for election to our board of
directors and the proposal of business to be considered at a
stockholders meeting may be made only in the notice of the
meeting, by our board of directors or by a stockholder who is
entitled to vote at the meeting and has complied with the
advance notice procedures of our bylaws. Also, under Maryland
law, business combinations between us and an interested
stockholder or an affiliate of an interested stockholder,
including mergers, consolidations, share exchanges or, in
circumstances specified in the statute, asset transfers or
issuances or reclassifications of equity securities, are
prohibited for five years after the most recent date on which
the interested stockholder becomes an interested stockholder. An
interested stockholder includes any person who beneficially owns
10% or more of the voting power of our shares or any affiliate
or associate of ours who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10%
or more of the voting power of our stock. A person is not an
interested stockholder under the statute if our board of
directors approved in advance the transaction by which he
otherwise would have become an interested stockholder. However,
in approving a transaction, our board of directors may provide
that its approval is subject to compliance, at or after the time
of approval, with any terms and conditions determined by our
board. After the five-year prohibition, any business combination
between us and an interested stockholder generally must be
recommended by our board of directors and approved by two
supermajority votes or our common stockholders must receive a
minimum price, as defined under Maryland law, for their shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by our board
of directors prior to the time that the interested stockholder
becomes an interested stockholder.
In addition, we have adopted a stockholder rights agreement
which provides that in the event of an acquisition of or tender
offer for 15% of our outstanding common stock, our stockholders
shall be granted rights to purchase our common stock at a
certain price. The stockholder rights agreement could make it
more difficult for a third-party to acquire our common stock
without the approval of our board of directors.
These and other provisions of Maryland law or our charter and
bylaws could have the effect of delaying, deferring or
preventing a transaction or a change in control that might
involve a premium price for our common stock or otherwise be
considered favorably by our stockholders.
26
FORWARD-LOOKING
STATEMENTS
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, information appearing
under Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Description of Our Business
includes 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 and expressed in good faith and
believed to have a reasonable basis, but there can be no
assurance that the expectation or belief will result or be
achieved or accomplished. The following include some but not all
of the factors that could cause actual results or events to
differ materially from those anticipated:
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our ability to migrate our production and manufacturing
operations to lower-cost locations around the world;
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the highly competitive and evolving nature of the industry in
which we compete;
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our ability to effectively manage our inventory and reduce
inventory reserves;
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failure by us to successfully streamline our operations;
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retailer consolidation and other changes in the apparel
essentials industry;
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our ability to keep pace with changing consumer preferences in
intimate apparel;
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loss of or reduction in sales to any of our top customers,
especially Wal-Mart;
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financial difficulties experienced by any of our top customers;
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risks associated with our foreign operations or foreign supply
sources, such as disruption of markets, changes in import and
export laws, currency restrictions and currency exchange rate
fluctuations;
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the impact of economic and business conditions and industry
trends in the countries in which we operate our supply chain;
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failure by us to protect against dramatic changes in the
volatile market price of cotton, the primary material used in
the manufacture of our products;
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costs and adverse publicity arising from violations of labor and
environmental laws by us or any of our third-party manufacturers;
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our ability to attract and retain key personnel;
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our substantial debt and debt service requirements that restrict
our operating and financial flexibility, and impose significant
interest and financing costs;
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the risk of inflation or deflation;
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consumer disposable income and spending levels, including the
availability and amount of individual consumer debt;
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the receipt of licenses and other rights associated with Sara
Lee Corporations branded apparel business;
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rapid technological changes;
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future financial performance, including availability, terms and
deployment of capital;
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the outcome of any pending or threatened litigation;
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our ability to comply with environmental and occupational health
and safety laws and regulations;
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general economic conditions; and
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possible terrorists attacks and ongoing military action in the
Middle East and other parts of the world.
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There may be other factors that may cause our actual results to
differ materially from the forward-looking statements. Our
actual results, performance or achievements could differ
materially from those expressed in, or implied by, the
forward-looking statements. We can give no assurances that any
of the events anticipated by the forward-looking statements will
occur or, if any of them does, what impact they will have on our
results of operations and financial condition. You should
carefully read the factors described in the Risk
Factors section of this prospectus for a description of
certain risks that could, among other things, cause our actual
results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this
prospectus and are expressly qualified in their entirety by the
cautionary statements included in this prospectus. We undertake
no obligation to update or revise forward-looking statements
which 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.
28
USE OF
PROCEEDS
This exchange offer is intended to satisfy certain of our
obligations under the registration rights agreement that we
entered into simultaneously with the initial sale of the Notes.
We will not receive any cash proceeds from the issuance of the
Exchange Notes. In consideration for issuing the Exchange Notes
contemplated by this prospectus, we will receive Notes from you
in like principal amount. The Notes surrendered in exchange for
the Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not
result in any change to our indebtedness.
29
CAPITALIZATION
The following table sets forth our capitalization on a
historical basis as of December 30, 2006. This table should
be read in conjunction with Selected Historical Financial
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
Combined and Consolidated Financial Statements and corresponding
notes included in this prospectus.
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December 30,
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2006
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(in thousands)
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Cash and cash equivalents
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$
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155,973
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Debt, including current and
long-term:
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Senior secured credit facility:
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Term A facility
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246,875
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Term B facility
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1,296,500
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Revolving credit facility
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Second lien credit facility
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450,000
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Notes
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500,000
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Capital lease obligations
including related interest payments
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2,575
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Notes payable to banks
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14,264
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Total debt
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2,510,214
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Total stockholders equity
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69,271
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Total capitalization
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$
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2,579,485
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30
RATIO OF
EARNINGS TO FIXED CHARGES
Set forth below is information concerning our ratio of earnings
to fixed charges. For purposes of determining the ratio of
earnings to fixed charges, earnings consist of the total of
(i) the following (a) pretax income from continuing
operations before adjustment for minority interests in
consolidated subsidiaries or income or loss from equity
investees, (b) fixed charges, (c) amortization of
capitalized interest, and (d) distributed income of equity
investees, minus the total of (ii) the following:
(a) interest capitalized and (b) the minority
interest in pre-tax income of subsidiaries that have not
incurred fixed charges. Fixed charges are defined as the sum of
the following: (a) interest expensed and capitalized,
(b) amortized premiums, discounts and capitalized expenses
related to indebtedness, and (c) an estimate of the
interest within rental expense.
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Six Months Ended
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Years Ended
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December 30,
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July 1,
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July 2,
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July 3,
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June 28,
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June 29,
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2006
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2006
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2005
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2004
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2003
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2002
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Ratio of Earnings to Fixed
Charges(1)
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2.24x
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10.37x
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7.64x
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8.71x
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10.35x
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26.95x
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(1) |
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As part of our historical relationship with Sara Lee, we engaged
in intercompany borrowings. We also have borrowed monies from
third parties under a credit facility and a revolving line of
credit. The interest charged under these facilities was recorded
as interest expense. We are no longer able to borrow from Sara
Lee. As part of the spin off on September 5, 2006, we
incurred $2.6 billion of debt in the form of the Senior
Secured Credit Facility, the Second Lien Credit Facility and a
bridge loan facility (the Bridge
Loan Facility), $2.4 billion of the proceeds of
which was paid to Sara Lee, and subsequent to the spin off, we
repaid all amounts outstanding under the Bridge
Loan Facility with the proceeds from the offering of the
Notes. As a result, our interest expense in periods including
and following the spin off will be substantially higher than in
historical periods. |
31
SELECTED
FINANCIAL DATA
The following table presents our selected historical financial
data. The statements of income data for each of the fiscal years
in the three fiscal years ended July 1, 2006 and the
six-month period ended December 30, 2006, and the balance
sheet data as of December 30, 2006, July 1, 2006 and
July 2, 2005 have been derived from our audited Combined
and Consolidated Financial Statements included elsewhere in this
prospectus. The statements of income data for the years ended
June 28, 2003 and June 29, 2002 and the balance sheet
data as of July 3, 2004, June 28, 2003 and
June 29, 2002 has been derived from our financial
statements not included in this prospectus.
Our historical financial data is not necessarily indicative of
our future performance or what our financial position and
results of operations would have been if we had operated as a
separate, stand-alone entity during all of the periods shown.
The data should be read in conjunction with our historical
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included elsewhere in this prospectus.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Years Ended
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Statements of Income
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
4,669,665
|
|
|
$
|
4,920,840
|
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
3,010,383
|
|
|
|
3,278,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
|
|
1,659,282
|
|
|
|
1,642,334
|
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
|
|
1,126,065
|
|
|
|
1,146,549
|
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
(14,397
|
)
|
|
|
27,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
547,614
|
|
|
|
468,205
|
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
(2,386
|
)
|
|
|
(11,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
400,872
|
|
|
|
550,000
|
|
|
|
479,449
|
|
Income tax expense (benefit)
|
|
|
37,781
|
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
121,560
|
|
|
|
139,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
428,440
|
|
|
$
|
339,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic(1)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
|
$
|
4.45
|
|
|
$
|
3.53
|
|
Net income per share diluted(2)
|
|
$
|
0.77
|
|
|
$
|
3.35
|
|
|
$
|
2.27
|
|
|
$
|
4.67
|
|
|
$
|
4.45
|
|
|
$
|
3.53
|
|
Weighted average shares basic(1)
|
|
|
96,309
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
Weighted average shares diluted(2)
|
|
|
96,620
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
|
|
96,306
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
June 28,
|
|
|
June 29,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
155,973
|
|
|
$
|
298,252
|
|
|
$
|
1,080,799
|
|
|
$
|
674,154
|
|
|
$
|
289,816
|
|
|
$
|
106,250
|
|
Total assets
|
|
|
3,435,620
|
|
|
|
4,903,886
|
|
|
|
4,257,307
|
|
|
|
4,402,758
|
|
|
|
3,915,573
|
|
|
|
4,064,730
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
2,484,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
271,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
|
|
49,251
|
|
|
|
59,971
|
|
Total noncurrent liabilities
|
|
|
2,755,168
|
|
|
|
49,987
|
|
|
|
53,559
|
|
|
|
35,934
|
|
|
|
49,251
|
|
|
|
59,971
|
|
Total stockholders or parent
companies equity
|
|
|
69,271
|
|
|
|
3,229,134
|
|
|
|
2,602,362
|
|
|
|
2,797,370
|
|
|
|
2,237,448
|
|
|
|
1,762,824
|
|
|
|
|
(1) |
|
Prior to the spin off on September 5, 2006, the number of
shares used to compute basic and diluted earnings per share is
96,306,232, which was the number of shares of our common stock
outstanding on September 5, 2006. |
|
(2) |
|
Subsequent to the spin off on September 5, 2006, the number
of shares used to compute diluted earnings per share is based on
the number of shares of our common outstanding, plus the
potential dilution that could occur if restricted stock units
and options granted under the equity-based compensation
arrangements were exercised or converted into common stock. |
33
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This managements 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
prospectus 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 prospectus. On October 26,
2006, our Board of Directors approved a change in our fiscal
year end from the Saturday closest to June 30 to the
Saturday closest to December 31. We refer to the resulting
transition period from July 2, 2006 to December 30,
2006 in this prospectus as the six months ended
December 30, 2006. All references to fiscal years 2006 and
earlier, unless otherwise noted, are references to our 52- or
53-week
fiscal year that ended on the Saturday closest to June 30
of that calendar year. Fiscal years 2006, 2005 and 2004 were
52-, 52- and
53-week
years, respectively. All reported results for fiscal 2004
include the impact of the additional week. 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 prospectus and included
elsewhere in this prospectus.
MD&A is a supplement to our Combined and Consolidated
Financial Statements and notes thereto included elsewhere in
this prospectus, 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.
|
|
|
|
Components of Net Sales and Expense. This
section provides an overview of the components of our net sales
and expense that are key to an understanding of our results of
operations.
|
|
|
|
Combined and 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 combined and consolidated basis and a
business segment basis.
|
|
|
|
Liquidity and Capital Resources. This section
provides an analysis of our liquidity and cash flows, as well as
a discussion of our commitments that existed as of
December 30, 2006.
|
|
|
|
Significant Accounting Policies and Critical
Estimates. This section discusses the accounting
policies that are considered 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 Standards. This
section provides a summary of the most recent authoritative
accounting standards and guidance that the company 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, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
Our brands hold either the number one or number two
U.S. market position by sales in most product categories in
which we compete.
We were spun off from Sara Lee on September 5, 2006. In
connection with the spin off, Sara Lee contributed its branded
apparel Americas and Asia business to us and distributed all of
the outstanding shares of our common stock to its stockholders
on a pro rata basis. As a result of the spin off, Sara Lee
ceased to
34
own any equity interest in our company. In this prospectus, we
describe the businesses contributed to us by Sara Lee in the
spin off as if the contributed businesses were our business for
all historical periods described. References in this prospectus
to our assets, liabilities, products, businesses or activities
of our business for periods including or prior to the spin off
are generally intended to refer to the historical assets,
liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Our
Segments
During the six months ended December 30, 2006, we changed
our internal reporting structure such that operations are
managed and reported in five operating segments, each of which
is a reportable segment: innerwear, outerwear, hosiery,
international and other. These segments are organized
principally by product category and geographic location.
Management of each segment is responsible for the assets and
operations of these businesses. Prior to the six months ended
December 30, 2006, we evaluated segment operating
performance based upon a definition of segment operating profit
that included restructuring and related accelerated depreciation
charges. Beginning in the six months ended December 30,
2006, we began evaluating the operating performance of our
segments based upon a new definition of segment operating
profit, which is defined as operating profit before general
corporate expenses, amortization of trademarks and other
identifiable intangibles and restructuring and related
accelerated depreciation charges. Prior period segment results
have been conformed to the new measurements of segment financial
performance.
|
|
|
|
|
Innerwear. The innerwear segment focuses on
core apparel essentials, and consists of products such as
womens intimate apparel, mens underwear, kids
underwear, socks, thermals and sleepwear, marketed under
well-known brands that are trusted by consumers. We are an
intimate apparel category leader in the United States with our
Hanes, Playtex, Bali, barely there, Just My Size and
Wonderbra brands. We are also a leading manufacturer and
marketer of mens underwear, and kids underwear under
the Hanes and Champion brand names. Our net sales
for the six months ended December 30, 2006 from our
innerwear segment were $1.3 billion, representing
approximately 57% of total segment net sales.
|
|
|
|
Outerwear. We are a leader in the casualwear
and activewear markets through our Hanes, Champion and
Just My Size brands, where we offer products such as
t-shirts and fleece. Our casualwear lines offer a range of
quality, comfortable clothing for men, women and children
marketed under the Hanes and Just My Size brands.
The Just My Size brand offers casual apparel designed
exclusively to meet the needs of plus-size women. In addition to
activewear for men and women, Champion provides uniforms
for athletic programs and in 2004 launched an apparel program at
Target stores, C9 by Champion. We also license our
Champion name for collegiate apparel and footwear. We
also supply our t-shirts, sportshirts and fleece products to
screen printers and embellishers, who imprint or embroider the
product and then resell to specialty retailers and organizations
such as resorts and professional sports clubs. Our net sales for
the six months ended December 30, 2006 from our outerwear
segment were $616 million, representing approximately 27%
of total segment net sales.
|
|
|
|
Hosiery. We are the leading marketer of
womens sheer hosiery in the United States. We compete in
the hosiery market by striving to offer superior values and
executing integrated marketing activities, as well as focusing
on the style of our hosiery products. We market hosiery products
under our Hanes, Leggs and Just My Size
brands. Our net sales for the six months ended
December 30, 2006 from our hosiery segment were
$144 million, representing approximately 6% of total
segment net sales. Consistent with a sustained decline in the
hosiery industry due to changes in consumer preferences, our net
sales from hosiery sales have declined each year since 1995.
|
|
|
|
International. International includes products
that span across the innerwear, outerwear and hosiery reportable
segments. Our net sales for the six months ended
December 30, 2006 in our international segment were
$198 million, representing approximately 9% of total
segment net sales and included sales in Europe, Asia, Canada and
Latin America. Japan, Canada and Mexico are our largest
international markets, and we also have opened sales offices in
India and China.
|
35
|
|
|
|
|
Other. Our net sales for the six months ended
December 30, 2006 in our other segment were
$19 million, representing approximately 1% of total segment
net sales and are comprised of sales of nonfinished products
such as fabric and certain other materials in the United States,
Asia and Latin America in order to maintain asset
utilization at certain manufacturing facilities.
|
Business
and Industry Trends
Our businesses are highly competitive and evolving rapidly.
Competition generally is based upon price, brand name
recognition, product quality, selection, service and purchasing
convenience. While the majority of our core styles continue from
year to year, with variations only in color, fabric or design
details, other products such as intimate apparel and sheer
hosiery have a heavier emphasis on style and innovation. Our
businesses face competition today from other large corporations
and foreign manufacturers, as well as department stores,
specialty stores and other retailers that market and sell
apparel essentials products under private labels that compete
directly with our brands.
Our distribution channels range from direct to consumer sales at
our outlet stores, to national chains and department stores to
warehouse clubs and mass-merchandise outlets. For the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores.
In recent years, there has been a growing trend toward retailer
consolidation, and as result, the number of retailers to which
we sell our products continues to decline. For the six months
ended December 30, 2006, for example, our top ten customers
accounted for 62% of our net sales and our top customer,
Wal-Mart, accounted for over $630 million of our sales. Our
largest customers in the six months ended December 30, 2006
were Wal-Mart, Target and Kohls, which accounted for 28%,
15% and 6% of total sales, respectively. This trend toward
consolidation has had and will continue to have significant
effects on our business. Consolidation creates pricing pressures
as our customers grow larger and increasingly seek to have
greater concessions in their purchase of our products, while
they also are increasingly demanding that we provide them with
some of our products on an exclusive basis. To counteract these
and other effects of consolidation, it has become increasingly
important to increase operational efficiency and lower costs. As
discussed below, for example, we are moving more of our supply
chain from domestic to foreign locations to lower the costs of
our operational structure.
Anticipating changes in and managing our operations in response
to consumer preferences remains an important element of our
business. In recent years, we have experienced changes in our
net sales, revenues and cash flows in accordance with changes in
consumer preferences and trends. For example, since fiscal 1995,
net sales in our hosiery segment have declined in connection
with a larger sustained decline in the hosiery industry. The
hosiery segment only comprised 6% of our net sales in the six
months ended December 30, 2006 however, and as a result,
the decline in the hosiery segment has not had a significant
impact on our net sales, revenues or cash flows. Generally, we
manage the hosiery segment for cash, placing an emphasis on
reducing our cost structure and managing cash efficiently.
Restructuring
and Transformation Plans
Over the past several years, we have undertaken a variety of
restructuring efforts designed to improve operating efficiencies
and lower costs. We have closed plant locations, reduced our
workforce, and relocated some of our domestic manufacturing
capacity to lower cost locations. For example, during the six
months ended December 30, 2006 we announced decisions to
close four textile and sewing plants in the United States,
Puerto Rico and Mexico and consolidate three distribution
centers in the United States. While we believe that these
efforts have had and will continue to have a beneficial impact
on our operational efficiency and cost structure, we have
incurred significant costs to implement these initiatives. In
particular, we have recorded charges for severance and other
employment-related obligations relating to workforce reductions,
as well as payments in connection with lease and other contract
terminations. These amounts are included in the Cost of
sales, Restructuring and Selling,
general and administrative expenses lines of our
statements of income.
36
As a result of the restructuring actions taken since the
beginning of fiscal 2004 through the spin off on
September 5, 2006, our cost structure was reduced and
efficiencies improved, generating savings of $80.2 million
for periods prior to the spin off. Savings from recently
announced restructuring actions are expected to occur in future
periods. For more information about our restructuring actions,
see Note 4, titled Restructuring to our
Combined and Consolidated Financial Statements included in this
prospectus.
As further plans are developed and approved by management and
our board of directors, we expect to recognize additional
restructuring costs to eliminate duplicative functions within
the organization and transition a significant portion of our
manufacturing capacity to lower-cost locations. As a result of
these efforts, we expect to incur approximately
$250 million in restructuring and related charges over the
three year period following the spin off from Sara Lee of which
approximately half is expected to be noncash. As part of our
efforts to consolidate our operations, we also are in the
process of integrating information technology systems across our
company. This process involves the replacement of eight
independent information technology platforms with a unified
enterprise system, which will integrate all of our departments
and functions into common software that runs off a single
database. Once this plan is developed and approved by
management, a number of variables will impact the cost and
timing of installing and transitioning to new information
technology systems over the next several years.
Components
of Net Sales and Expense
Net
sales
We generate net sales by selling apparel essentials such as
t-shirts, bras, panties, mens underwear, kids
underwear, socks, hosiery, casualwear and activewear. Our net
sales are recognized net of discounts, coupons, rebates,
volume-based incentives and cooperative advertising costs. We
recognize net sales when title and risk of loss pass to our
customers. Net sales include an estimate for returns and
allowances based upon historical return experience. We also
offer a variety of sales incentives to resellers and consumers
that are recorded as reductions to net sales.
Cost
of sales
Our cost of sales includes the cost of manufacturing finished
goods, which consists largely of labor and raw materials such as
cotton and petroleum-based products. Our cost of sales also
includes finished goods sourced from third-party manufacturers
that supply us with products based on our designs as well as
charges for slow moving or obsolete inventories. Rebates,
discounts and other cash consideration received from a vendor
related to inventory purchases are reflected in cost of sales
when the related inventory item is sold. Our costs of sales do
not include shipping and handling costs, and thus our gross
margins may not be comparable to those of other entities that
include such costs in costs of sales.
Selling,
general and administrative expenses
Our selling, general and administrative expenses include
selling, advertising, shipping, handling and distribution costs,
research and development, rent on leased facilities,
depreciation on owned facilities and equipment and other general
and administrative expenses. Also included for periods presented
prior to the spin off on September 5, 2006 are allocations
of corporate expenses that consist of expenses for business
insurance, medical insurance, employee benefit plan amounts and,
because we were part of Sara Lee during all periods presented,
allocations from Sara Lee for certain centralized administration
costs for treasury, real estate, accounting, auditing, tax, risk
management, human resources and benefits administration. These
allocations of centralized administration costs were determined
on bases that we and Sara Lee considered to be reasonable and
take into consideration and include relevant operating profit,
fixed assets, sales and payroll. Selling, general and
administrative expenses also include management payroll,
benefits, travel, information systems, accounting, insurance and
legal expenses.
37
Restructuring
We have from time to time closed facilities and reduced
headcount, including in connection with previously announced
restructuring and business transformation plans. We refer to
these activities as restructuring actions. When we decide to
close facilities or reduce headcount, we take estimated charges
for such restructuring, including charges for exited
non-cancelable leases and other contractual obligations, as well
as severance and benefits. If the actual charge is different
from the original estimate, an adjustment is recognized in the
period such change in estimate is identified.
Other
Expenses
Our other expenses include charges such as losses on
extinguishment of debt and certain other non-operating items.
Interest
expense, net
As part of our historical relationship with Sara Lee, we engaged
in intercompany borrowings. We also have borrowed monies from
third parties under a credit facility and a revolving line of
credit. The interest charged under these facilities was recorded
as interest expense. We are no longer able to borrow from Sara
Lee. As part of the spin off on September 5, 2006, we
incurred $2.6 billion of debt in the form of the Senior
Secured Credit Facility, the Second Lien Credit Facility and a
bridge loan facility (the Bridge Loan Facility),
$2.4 billion of the proceeds of which was paid to Sara Lee,
and subsequent to the spin off, we repaid all amounts
outstanding under the Bridge Loan Facility with the
proceeds from the offering of the Notes. As a result, our
interest expense in the current and future periods will be
substantially higher than in historical periods.
Our interest expense is net of interest income. Interest income
is the return we earned on our cash and cash equivalents and,
historically, on money we lent to Sara Lee as part of its
corporate cash management practices. Our cash and cash
equivalents are invested in highly liquid investments with
original maturities of three months or less.
Income
tax expense (benefit)
Our effective income tax rate fluctuates from period to period
and can be materially impacted by, among other things:
|
|
|
|
|
changes in the mix of our earnings from the various
jurisdictions in which we operate;
|
|
|
|
the tax characteristics of our earnings;
|
|
|
|
the timing and amount of earnings of foreign subsidiaries that
we repatriate to the United States, which may increase our tax
expense and taxes paid;
|
|
|
|
the timing and results of any reviews of our income tax filing
positions in the jurisdictions in which we transact business; and
|
|
|
|
the expiration of the tax incentives for manufacturing
operations in Puerto Rico, which are no longer in effect.
|
In particular, to service the substantial amount of debt we
incurred in connection with and subsequent to the spin off and
to meet other general corporate needs, we may have less
flexibility than we have had previously regarding the timing or
amount of future earnings that we repatriate from foreign
subsidiaries. As a result, we believe that our income tax rate
in future periods is likely to be higher, on average, than our
historical effective tax rates in periods prior to the spin off
on September 5, 2006.
Inflation
and Changing Prices
We believe that changes in net sales and in net income that have
resulted from inflation or deflation have not been material
during the periods presented. There is no assurance, however,
that inflation or deflation will
38
not materially affect us in the future. Cotton is the primary
raw material we use to manufacture many of our products and is
subject to fluctuations in prices. Further discussion of the
market sensitivity of cotton is included in Quantitative
and Qualitative Disclosures about Market Risk.
Combined
and Consolidated Results of Operations Six Months
Ended December 30, 2006 Compared with Six Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)%
|
Cost of sales
|
|
|
1,530,119
|
|
|
|
1,556,860
|
|
|
|
26,741
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
720,354
|
|
|
|
762,979
|
|
|
|
(42,625
|
)
|
|
|
(5.6
|
)
|
Selling, general and
administrative expenses
|
|
|
547,469
|
|
|
|
505,866
|
|
|
|
(41,603
|
)
|
|
|
(8.2
|
)
|
Gain on curtailment of
postretirement benefits
|
|
|
(28,467
|
)
|
|
|
|
|
|
|
28,467
|
|
|
|
NM
|
|
Restructuring
|
|
|
11,278
|
|
|
|
(339
|
)
|
|
|
(11,617
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
190,074
|
|
|
|
257,452
|
|
|
|
(67,378
|
)
|
|
|
(26.2
|
)
|
Other expenses
|
|
|
7,401
|
|
|
|
|
|
|
|
(7,401
|
)
|
|
|
NM
|
|
Interest expense, net
|
|
|
70,753
|
|
|
|
8,412
|
|
|
|
(62,341
|
)
|
|
|
(741.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
111,920
|
|
|
|
249,040
|
|
|
|
(137,120
|
)
|
|
|
(55.1
|
)
|
Income tax expense
|
|
|
37,781
|
|
|
|
60,424
|
|
|
|
22,643
|
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
188,616
|
|
|
$
|
(114,477
|
)
|
|
|
(60.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)%
|
Net sales decreased $52 million, $12 million and
$17 million in our innerwear, hosiery and other segments,
respectively. These declines were offset by increases in net
sales of $13 million and $2 million in our outerwear
and international segments, respectively. Overall net sales
decreased due to a $28 million impact from our intentional
discontinuation of low-margin product lines in the outerwear
segment and a $12 million decrease in sheer hosiery sales.
Additionally, the acquisition of National Textiles, L.L.C. in
September 2005 caused a $16 million decrease in our other
segment as sales to this business were included in net sales in
periods prior to the acquisition. Finally, we experienced slower
sell-through of innerwear products in the mass merchandise and
department store retail channels during the latter half of the
six months ended December 30, 2006. We expect the trend of
declining hosiery sales to continue as a result of shifts in
consumer preferences, which is consistent with the long-term
decline in the overall hosiery industry.
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
1,530,119
|
|
|
$
|
1,556,860
|
|
|
$
|
26,741
|
|
|
|
1.7
|
%
|
39
Cost of sales were lower year over year as a result of a
decrease in net sales, favorable spending from the benefits of
manufacturing cost savings initiatives and a favorable impact
from shifting certain production to lower cost locations. These
savings were offset partially by higher cotton costs, unusual
charges primarily to exit certain contracts and low margin
product lines, and accelerated depreciation as a result of our
announced plans to close four textile and sewing plants in the
United States, Puerto Rico and Mexico.
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Gross profit
|
|
$
|
720,354
|
|
|
$
|
762,979
|
|
|
$
|
(42,625
|
)
|
|
|
(5.6
|
)%
|
As a percent of net sales, gross profit percentage decreased to
32.0% for the six months ended December 30, 2006 from 32.9%
for the six months ended December 31, 2005. The decrease in
gross profit percentage was due to $21 million in
accelerated depreciation as a result of our announced plans to
close four textile and sewing plants, higher cotton costs of
$18 million, $15 million of unusual charges primarily
to exit certain contracts and low margin product lines and an
$11 million impact from lower manufacturing volume. The
higher costs were partially offset by $38 million of net
favorable spending from our prior year restructuring actions,
manufacturing cost savings initiatives and a favorable impact of
shifting certain production to lower cost locations. In
addition, the impact on gross profit from lower net sales was
$16 million.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
547,469
|
|
|
$
|
505,866
|
|
|
$
|
(41,603
|
)
|
|
|
(8.2
|
)%
|
Selling, general and administrative expenses increased partially
due to higher non-recurring spin off and related costs of
$17 million and incremental costs associated with being an
independent company of $10 million, excluding the corporate
allocations associated with Sara Lee ownership in the prior year
of $21 million. Media, advertising and promotion costs
increased $12 million primarily due to unusual charges to
exit certain license agreements and additional investments in
our brands. Other unusual charges increasing selling, general
and administrative expenses by $12 million primarily
included certain freight revenue being moved to net sales during
the six months ended December 30, 2006 and a reduction of
estimated allocations to inventory costs. In addition, we
experienced slightly higher spending of approximately
$10 million in numerous areas such as technology
consulting, distribution, severance and market research, which
were partially offset by headcount savings from prior year
restructuring actions and a reduction in pension and
postretirement expenses.
Gain
on Curtailment of Postretirement Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Gain on curtailment of
postretirement benefits
|
|
$
|
(28,467
|
)
|
|
$
|
|
|
|
$
|
28,467
|
|
|
|
NM
|
|
In December 2006, we notified retirees and employees that we
will phase out premium subsidies for early retiree medical
coverage and move to an access-only plan for early retirees by
the end of 2007. We will also eliminate the medical plan for
retirees ages 65 and older as a result of coverage
available under the expansion of Medicare with Part D drug
coverage and eliminate future postretirement life benefits. The
gain on curtailment represents the unrecognized amounts
associated with prior plan amendments that were being amortized
into income over the remaining service period of the
participants prior to the December 2006
40
amendments. We will record postretirement benefit income related
to this plan in 2007, primarily representing the amortization of
negative prior service costs, which is partially offset by
service costs, interest costs on the accumulated benefit
obligation and actuarial gains and losses accumulated in the
plan. We expect to record a final gain on curtailment of plan
benefits in December 2007.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
11,278
|
|
|
$
|
(339
|
)
|
|
$
|
(11,617
|
)
|
|
|
NM
|
|
During the six months ended December 30, 2006, we approved
actions to close four textile and sewing plants in the United
States, Puerto Rico and Mexico and consolidate three
distribution centers in the United States. These actions
resulted in a charge of $11 million, representing costs
associated with the planned termination of 2,989 employees for
employee termination and other benefits in accordance with
benefit plans previously communicated to the affected employee
group. In connection with these restructuring actions, a charge
of $21 million for accelerated depreciation of buildings
and equipment is reflected in the Cost of sales line
of the Combined and Consolidated Statement of Income. These
actions are expected to be completed in early 2007. These
actions, which are a continuation of our long-term global supply
chain globalization strategy, are expected to result in benefits
of moving production to lower-cost manufacturing facilities,
improved alignment of sewing operations with the flow of
textiles, leveraging our large scale in high-volume products and
consolidating production capacity.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
190,074
|
|
|
$
|
257,452
|
|
|
$
|
(67,378
|
)
|
|
|
(26.2
|
)%
|
Operating profit for the six months ended December 30, 2006
decreased as compared to the six months ended December 31,
2005 primarily as a result of facility closures announced in the
current period and restructuring related costs of
$32 million, higher non-recurring spin off and related
charges of $17 million, higher costs associated with being
an independent company of $10 million, unusual charges of
$35 million primarily to exit certain contracts and low
margin product lines, charges to exit certain license agreements
and additional investments in our brands. In addition, we
experienced higher cotton and production related costs of
$29 million, lower gross margin from lower net sales of
$16 million and slightly higher selling, general and
administrative spending of approximately $10 million in
numerous areas such as technology consulting, distribution,
severance and market research. These higher costs were offset
partially by favorable spending from our prior year
restructuring actions, manufacturing cost savings initiatives, a
favorable impact of shifting certain production to lower cost
locations and lower corporate allocations from Sara Lee totaling
$59 million and the gain on curtailment of postretirement
benefits of $28 million.
Other
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Losses on early extinguishment of
debt
|
|
$
|
7,401
|
|
|
$
|
|
|
|
$
|
(7,401
|
)
|
|
|
NM
|
|
In connection with the offering of the Notes as described below
under interest expense, net, we recognized a $6 million
loss on early extinguishment of debt for unamortized debt
issuance costs on the Bridge Loan Facility entered into in
connection with the spin off from Sara Lee. We recognized
approximately
41
$1 million loss on early extinguishment of debt related to
unamortized debt issuance costs on the Senior Secured Credit
Facility for the prepayment of $100 million of principal in
December 2006.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
70,753
|
|
|
$
|
8,412
|
|
|
$
|
(62,341
|
)
|
|
|
(741.1
|
)%
|
In connection with the spin off, we incurred $2.6 billion
of debt pursuant to the Senior Secured Credit Facility, the
Second Lien Credit Facility and the Bridge Loan Facility,
$2.4 billion of the proceeds of which was paid to Sara Lee.
As a result, our net interest expense in the six months ended
December 30, 2006 was substantially higher than in the
comparable period.
Under the Credit Facilities, we are required to hedge a portion
of our floating rate debt to reduce interest rate risk caused by
floating rate debt issuance. During the six months ended
December 30, 2006, we entered into various hedging
arrangements whereby we capped the interest rate on
$1 billion of our floating rate debt at 5.75%. We also
entered into interest rate swaps tied to the
3-month
London Interbank Offered Rate, or LIBOR, whereby we
fixed the interest rate on an aggregate of $500 million of
our floating rate debt at a blended rate of approximately 5.16%.
Approximately 60% of our total debt outstanding at
December 30, 2006 is at a fixed or capped rate. There was
no hedge ineffectiveness during the current period related to
these instruments.
In December 2006, we completed the offering of $500 million
aggregate principal amount of the Notes. The Notes will bear
interest at a per annum rate, reset semiannually, equal to the
six month LIBOR plus a margin of 3.375 percent. The
proceeds from the offering were used to repay all outstanding
borrowings under the Bridge Loan Facility.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense
|
|
$
|
37,781
|
|
|
$
|
60,424
|
|
|
$
|
22,643
|
|
|
|
37.5
|
%
|
Our effective income tax rate increased from 24.3% for the six
months ended December 31, 2005 to 33.8% for the six months
ended December 30, 2006. The increase in our effective tax
rate as an independent company is attributable primarily to the
expiration of tax incentives for manufacturing in Puerto Rico of
$9 million, which were repealed effective for the periods after
July 1, 2006, higher taxes on remittances of foreign earnings
for the period of $9 million and $5 million tax effect of
lower unremitted earnings from foreign subsidiaries in the six
months ended December 30, 2006 taxed at rates less than the
U.S. statutory rate. The tax expense for both periods was
impacted by a number of significant items that are set out in
the reconciliation of our effective tax rate to the
U.S. statutory rate in Note 17 titled Income
Taxes to our Combined and Consolidated Financial
Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
74,139
|
|
|
$
|
188,616
|
|
|
$
|
(114,477
|
)
|
|
|
(60.7
|
)%
|
Net income for the six months ended December 30, 2006 was
lower than for the six months ended December 31, 2005
primarily as a result of reduced operating profit, increased
interest expense, higher incomes taxes as an independent company
and losses on early extinguishment of debt.
42
Operating
Results by Business Segment Six Months Ended
December 30, 2006 Compared with Six Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
1,295,868
|
|
|
$
|
1,347,582
|
|
|
$
|
(51,714
|
)
|
|
|
(3.8
|
)%
|
Outerwear
|
|
|
616,298
|
|
|
|
603,585
|
|
|
|
12,713
|
|
|
|
2.1
|
|
Hosiery
|
|
|
144,066
|
|
|
|
155,897
|
|
|
|
(11,831
|
)
|
|
|
(7.6
|
)
|
International
|
|
|
197,729
|
|
|
|
195,980
|
|
|
|
1,749
|
|
|
|
0.9
|
|
Other
|
|
|
19,381
|
|
|
|
36,096
|
|
|
|
(16,715
|
)
|
|
|
(46.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
2,273,342
|
|
|
|
2,339,140
|
|
|
|
(65,798
|
)
|
|
|
(2.8
|
)
|
Intersegment
|
|
|
(22,869
|
)
|
|
|
(19,301
|
)
|
|
|
(3,568
|
)
|
|
|
(18.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
2,250,473
|
|
|
$
|
2,319,839
|
|
|
$
|
(69,366
|
)
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
172,008
|
|
|
$
|
192,449
|
|
|
$
|
(20,441
|
)
|
|
|
(10.6
|
)
|
Outerwear
|
|
|
21,316
|
|
|
|
49,248
|
|
|
|
(27,932
|
)
|
|
|
(56.7
|
)
|
Hosiery
|
|
|
36,205
|
|
|
|
26,531
|
|
|
|
9,674
|
|
|
|
36.5
|
|
International
|
|
|
15,236
|
|
|
|
16,574
|
|
|
|
(1,338
|
)
|
|
|
(8.1
|
)
|
Other
|
|
|
(288
|
)
|
|
|
1,202
|
|
|
|
(1,490
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
244,477
|
|
|
|
286,004
|
|
|
|
(41,527
|
)
|
|
|
(14.5
|
)
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(46,927
|
)
|
|
|
(24,846
|
)
|
|
|
(22,081
|
)
|
|
|
(88.9
|
)
|
Amortization of trademarks and
other intangibles
|
|
|
(3,466
|
)
|
|
|
(4,045
|
)
|
|
|
579
|
|
|
|
14.3
|
|
Gain on curtailment of
postretirement benefits
|
|
|
28,467
|
|
|
|
|
|
|
|
28,467
|
|
|
|
NM
|
|
Restructuring
|
|
|
(11,278
|
)
|
|
|
339
|
|
|
|
(11,617
|
)
|
|
|
NM
|
|
Accelerated depreciation
|
|
|
(21,199
|
)
|
|
|
|
|
|
|
(21,199
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
190,074
|
|
|
|
257,452
|
|
|
|
(67,378
|
)
|
|
|
(26.2
|
)
|
Other expenses
|
|
|
(7,401
|
)
|
|
|
|
|
|
|
(7,401
|
)
|
|
|
NM
|
|
Interest expense, net
|
|
|
(70,753
|
)
|
|
|
(8,412
|
)
|
|
|
(62,341
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
111,920
|
|
|
$
|
249,040
|
|
|
$
|
(137,120
|
)
|
|
|
(55.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,295,868
|
|
|
$
|
1,347,582
|
|
|
$
|
(51,714
|
)
|
|
|
(3.8
|
)%
|
Segment operating profit
|
|
|
172,008
|
|
|
|
192,449
|
|
|
|
(20,441
|
)
|
|
|
(10.6
|
)
|
Net sales in our innerwear segment decreased primarily due to
lower mens underwear and kids underwear sales of
$36 million and lower thermal sales of $14 million, as
well as additional investments in our brands as compared to the
six months ended December 31, 2005. We experienced lower
sell-through of products in the mass merchandise and department
store retail channels primarily in the latter half of the six
months ended December 30, 2006.
43
As a percent of segment net sales, gross profit percentage in
the innerwear segment increased from 36.5% for the six months
ended December 31, 2005 to 37.0% for the six months ended
December 30, 2006, reflecting a positive impact of
favorable spending of $21 million from our prior year
restructuring actions, cost savings initiatives and savings
associated with moving to lower cost locations. These changes
were partially offset by an unfavorable impact of lower volumes
of $18 million, higher cotton costs of $7 million and
unusual costs of $8 million primarily associated with
exiting certain low margin product lines.
The decrease in segment operating profit is primarily
attributable to the gross profit impact of the items noted above
and higher allocated selling, general and administrative
expenses of $8 million. Media, advertising and promotion
costs were slightly higher due to changes in license agreements,
net of lower media spend on innerwear categories. Our total
selling, general and administrative expenses before segment
allocations increased as a result of unusual charges, higher
stand alone costs as an independent company and higher spending
in numerous areas such as technology consulting, distribution,
severance and market research, which were partially offset by
headcount savings from prior year restructuring actions and a
reduction in pension and postretirement expenses.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
616,298
|
|
|
$
|
603,585
|
|
|
|
12,713
|
|
|
|
2.1
|
%
|
Segment operating profit
|
|
|
21,316
|
|
|
|
49,248
|
|
|
|
(27,932
|
)
|
|
|
(56.7
|
)
|
Net sales in our outerwear segment increased primarily due to
$33 million of increased sales of activewear and
$33 million of increased sales of boys fleece as
compared to the six months ended December 31, 2005. These
changes were partially offset by the $28 million impact of
our intentional exit of certain lower margin fleece product
lines, lower womens and girls fleece sales of
$16 million and $9 million of lower sportshirt, jersey
and other fleece sales.
As a percent of segment net sales, gross profit percentage
declined from 20.7% for the six months ended December 31,
2005 to 19.8% for the six months ended December 30, 2006
primarily as a result of higher cotton costs of
$11 million, $5 million associated with exiting
certain low margin product lines and higher duty, freight and
contractor costs of $6 million, partially offset by
$19 million in cost savings initiatives and a favorable
impact with shifting production to lower cost locations.
The decrease in segment operating profit is primarily
attributable to the gross profit impact of the items noted
above, higher media advertising and promotion expenses directly
attributable to our casualwear products of $15 million and
higher allocated selling, general and administrative expenses of
$10 million. Our total selling, general and administrative
expenses before segment allocations increased as a result of
unusual charges, higher stand-alone costs as an independent
company and higher spending in numerous areas such as technology
consulting, distribution, severance and market research, which
were partially offset by headcount savings from prior year
restructuring actions and a reduction in pension and
postretirement expenses.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
144,066
|
|
|
$
|
155,897
|
|
|
$
|
(11,831
|
)
|
|
|
(7.6
|
)%
|
Segment operating profit
|
|
|
36,205
|
|
|
|
26,531
|
|
|
|
9,674
|
|
|
|
36.5
|
|
Net sales in our hosiery segment decreased primarily due to the
continued decline in U.S. sheer hosiery consumption. As
compared to the six months ended December 31 2005, overall
sales for the hosiery segment declined 8% due to a continued
reduction in sales of Leggs to mass retailers and
food and drug stores and
44
declining sales of Hanes to department stores. Overall,
the hosiery market declined 4.5% for the six months ended
December 30, 2006. We expect the trend of declining hosiery
sales to continue as a result of shifts in consumer preferences,
which is consistent with the long-term decline in the overall
hosiery industry.
Gross profit declined slightly primarily due to the decline in
net sales offset by favorable spending of $3 million from
cost savings initiatives and a reduction in pension and
postretirement expenses.
Segment operating profit increased due primarily to
$10 million of lower allocated selling, general and
administrative expenses.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
197,729
|
|
|
$
|
195,980
|
|
|
$
|
1,749
|
|
|
|
0.9
|
%
|
Segment operating profit
|
|
|
15,236
|
|
|
|
16,574
|
|
|
|
(1,338
|
)
|
|
|
(8.1
|
)
|
Net sales in our international segment increased slightly due to
higher sales of t-shirts in Europe and higher sales in our
emerging markets in China, India and Brazil, partially offset by
softer sales in Mexico and lower sales in Japan due to a shift
in the launch of fall seasonal products. Changes in foreign
currency exchange rates increased net sales by $3 million.
As a percent of segment net sales, gross profit percentage
increased from 39.7% to 40.2% for the six months ended
December 30, 2006. The increase resulted primarily from a
$3 million decrease in overall spending and $1 million
from positive changes in foreign currency exchange rates. These
changes were offset by a $4 million impact from unfavorable
manufacturing efficiencies compared to the prior period.
The decrease in segment operating profit is attributable to the
gross profit impact of the items noted above offset by higher
allocated selling, general and administrative expenses of
$3 million.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
19,381
|
|
|
$
|
36,096
|
|
|
$
|
(16,715
|
)
|
|
|
(46.3
|
)%
|
Segment operating profit
|
|
|
(288
|
)
|
|
|
1,202
|
|
|
|
(1,490
|
)
|
|
|
NM
|
|
Net sales in the other segment decreased primarily due to the
acquisition of National Textiles, L.L.C. in September 2005 which
caused a $16 million decline as sales to this business were
previously included in net sales prior to the acquisition.
As a percent of segment net sales, gross profit percentage
increased from 4.8% for the six months ended December 31,
2005 to 9.9% for the six months ended December 30, 2006
primarily as a result of favorable manufacturing variances.
The decrease in segment operating profit is primarily
attributable to higher allocated selling, general and
administrative expenses in the current period of $2 million
offset by the favorable manufacturing variances noted above. As
sales of this segment are generated for the purpose of
maintaining asset utilization at certain manufacturing
facilities, gross profit and operating profit are lower than
those of our other segments.
General
Corporate Expenses
General corporate expenses increased primarily due to higher
nonrecurring spin off and related costs of $17 million and
higher stand alone costs of $10 million of operating as an
independent company.
45
Combined
and Consolidated Results of Operations Fiscal 2006
Compared with Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)%
|
Cost of sales
|
|
|
2,987,500
|
|
|
|
3,223,571
|
|
|
|
236,071
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,485,332
|
|
|
|
1,460,112
|
|
|
|
25,220
|
|
|
|
1.7
|
|
Selling, general and
administrative expenses
|
|
|
1,051,833
|
|
|
|
1,053,654
|
|
|
|
1,821
|
|
|
|
0.2
|
|
Restructuring
|
|
|
(101
|
)
|
|
|
46,978
|
|
|
|
47,079
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
74,120
|
|
|
|
20.6
|
|
Interest expense, net
|
|
|
17,280
|
|
|
|
13,964
|
|
|
|
(3,316
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
416,320
|
|
|
|
345,516
|
|
|
|
70,804
|
|
|
|
20.5
|
|
Income tax expense
|
|
|
93,827
|
|
|
|
127,007
|
|
|
|
33,180
|
|
|
|
26.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
103,984
|
|
|
|
47.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)%
|
Net sales declined primarily due to the $142 million impact
from the discontinuation of low-margin product lines in the
innerwear, outerwear and international segments and a
$48 million decline in sheer hosiery sales. Other factors
netting to $21 million of this decline include lower
selling prices and changes in product sales mix. Going forward,
we expect the trend of declining hosiery sales to continue as a
result of shifts in consumer preferences.
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
2,987,500
|
|
|
$
|
3,223,571
|
|
|
$
|
236,071
|
|
|
|
7.3
|
%
|
Cost of sales declined year over year primarily as a result of
the decline in net sales. As a percent of net sales, gross
margin increased from 31.2% in fiscal 2005 to 33.2% in fiscal
2006. The increase in gross margin percentage was primarily due
to a $140 million impact from lower cotton costs, and lower
charges for slow moving and obsolete inventories and a
$13 million impact from the benefits of prior year
restructuring actions partially offset by an $84 million
impact of lower selling prices and changes in product sales mix.
Although our fiscal 2006 results benefited from lower cotton
prices, we currently anticipate cotton costs to increase in
future periods.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
1,051,833
|
|
|
$
|
1,053,654
|
|
|
$
|
1,821
|
|
|
|
0.2
|
%
|
Selling, general and administrative expenses declined due to a
$31 million benefit from prior year restructuring actions,
an $11 million reduction in variable distribution costs and
a $7 million reduction in pension plan expense. These
decreases were partially offset by a $47 million decrease
in recovery of bad debts, higher share-based compensation
expense, increased advertising and promotion costs and higher
costs
46
incurred related to the spin off. Measured as a percent of net
sales, selling, general and administrative expenses increased
from 22.5% in fiscal 2005 to 23.5% in fiscal 2006.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
(101
|
)
|
|
$
|
46,978
|
|
|
$
|
47,079
|
|
|
|
NM
|
|
The charge for restructuring in fiscal 2005 is primarily
attributable to costs for severance actions related to the
decision to terminate 1,126 employees, most of whom are located
in the United States. The income from restructuring in fiscal
2006 resulted from the impact of certain restructuring actions
that were completed for amounts more favorable than originally
expected which is partially offset by $4 million of costs
associated with the decision to terminate 449 employees.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
433,600
|
|
|
$
|
359,480
|
|
|
$
|
74,120
|
|
|
|
20.6
|
%
|
Operating profit in fiscal 2006 was higher than in fiscal 2005
as a result of the items discussed above.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
17,280
|
|
|
$
|
13,964
|
|
|
$
|
(3,316
|
)
|
|
|
(23.7
|
)%
|
Interest expense decreased year over year as a result of lower
average balances on borrowings from Sara Lee. Interest
income decreased significantly as a result of lower average cash
balances. As a result of the spin off on September 5, 2006,
our net interest expense will increase substantially as a result
of our increased indebtedness.
Income
Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense
|
|
$
|
93,827
|
|
|
$
|
127,007
|
|
|
$
|
33,180
|
|
|
|
26.1
|
%
|
Our effective income tax rate decreased from 36.8% in fiscal
2005 to 22.5% in fiscal 2006. The decrease in our effective tax
rate is attributable primarily to an $81.6 million charge
in fiscal 2005 related to the repatriation of the earnings of
foreign subsidiaries to the United States. Of this total,
$50.0 million was recognized in connection with the
remittance of current year earnings to the United States, and
$31.6 million related to earnings repatriated under the
provisions of the American Jobs Creation Act of 2004. The tax
expense for both periods was impacted by a number of significant
items which are set out in the reconciliation of our effective
tax rate to the U.S. statutory rate in Note 17 titled
Income Taxes to our Combined and Consolidated
Financial Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
322,493
|
|
|
$
|
218,509
|
|
|
$
|
103,984
|
|
|
|
47.6
|
%
|
Net income in fiscal 2006 was higher than in fiscal 2005 as a
result of the items discussed above.
47
Operating
Results by Business Segment Fiscal 2006 Compared
with Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
2,627,101
|
|
|
$
|
2,703,637
|
|
|
$
|
(76,536
|
)
|
|
|
(2.8
|
)%
|
Outerwear
|
|
|
1,140,703
|
|
|
|
1,198,286
|
|
|
|
(57,583
|
)
|
|
|
(4.8
|
)
|
Hosiery
|
|
|
290,125
|
|
|
|
338,468
|
|
|
|
(48,343
|
)
|
|
|
(14.3
|
)
|
International
|
|
|
398,157
|
|
|
|
399,989
|
|
|
|
(1,832
|
)
|
|
|
(0.5
|
)
|
Other
|
|
|
62,809
|
|
|
|
88,859
|
|
|
|
(26,050
|
)
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
4,518,895
|
|
|
|
4,729,239
|
|
|
|
(210,344
|
)
|
|
|
(4.4
|
)
|
Intersegment
|
|
|
(46,063
|
)
|
|
|
(45,556
|
)
|
|
|
(507
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
4,472,832
|
|
|
$
|
4,683,683
|
|
|
$
|
(210,851
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
344,643
|
|
|
$
|
300,796
|
|
|
$
|
43,847
|
|
|
|
14.6
|
%
|
Outerwear
|
|
|
74,170
|
|
|
|
68,301
|
|
|
|
5,869
|
|
|
|
8.6
|
|
Hosiery
|
|
|
39,069
|
|
|
|
40,776
|
|
|
|
(1,707
|
)
|
|
|
(4.2
|
)
|
International
|
|
|
37,003
|
|
|
|
32,231
|
|
|
|
4,772
|
|
|
|
14.8
|
|
Other
|
|
|
127
|
|
|
|
(174
|
)
|
|
|
301
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
495,012
|
|
|
|
441,930
|
|
|
|
53,082
|
|
|
|
12.0
|
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(52,482
|
)
|
|
|
(21,823
|
)
|
|
|
(30,659
|
)
|
|
|
(140.5
|
)
|
Amortization of trademarks and
other identifiable intangibles
|
|
|
(9,031
|
)
|
|
|
(9,100
|
)
|
|
|
69
|
|
|
|
0.8
|
|
Restructuring
|
|
|
101
|
|
|
|
(46,978
|
)
|
|
|
47,079
|
|
|
|
NM
|
|
Accelerated depreciation
|
|
|
|
|
|
|
(4,549
|
)
|
|
|
4,549
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
433,600
|
|
|
|
359,480
|
|
|
|
74,120
|
|
|
|
20.6
|
|
Interest expense, net
|
|
|
(17,280
|
)
|
|
|
(13,964
|
)
|
|
|
(3,316
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
416,320
|
|
|
$
|
345,516
|
|
|
$
|
70,804
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,627,101
|
|
|
$
|
2,703,637
|
|
|
$
|
(76,536
|
)
|
|
|
(2.8
|
)%
|
Segment operating profit
|
|
|
344,643
|
|
|
|
300,796
|
|
|
|
43,847
|
|
|
|
14.6
|
|
Net sales in the innerwear segment decreased primarily due to a
$65 million impact of our discontinuation of certain
sleepwear, thermal and private label product lines and the
closure of certain retail stores. Net sales were also negatively
impacted by $15 million of lower sock sales due to both
lower shipment volumes and lower pricing.
Gross profit percentage in the innerwear segment increased from
35.1% in fiscal 2005 to 37.2% in fiscal 2006, reflecting a
$78 million impact of lower charges for slow moving and
obsolete inventories, lower cotton costs and benefits from prior
restructuring actions, partially offset by lower gross margins
for socks due to pricing pressure and mix.
The increase in innerwear segment operating profit is primarily
attributable to the increase in gross margin and a
$37 million impact of lower allocated selling expenses and
other selling, general and administrative expenses due to
headcount reductions. This is partially offset by
$21 million related to higher allocated media advertising
and promotion costs.
48
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,140,703
|
|
|
$
|
1,198,286
|
|
|
$
|
(57,583
|
)
|
|
|
(4.8
|
)%
|
Segment operating profit
|
|
|
74,170
|
|
|
|
68,301
|
|
|
|
5,869
|
|
|
|
8.6
|
|
Net sales in the outerwear segment decreased primarily due to
the $64 million impact of our exit of certain lower-margin
fleece product lines and a $33 million impact of lower
sales of casualwear products both in the retail channel and in
the embellishment channel, resulting from lower prices and an
unfavorable sales mix, partially offset by a $44 million
impact from higher sales of activewear products.
Gross profit percentage in the outerwear segment increased from
18.9% in fiscal 2005 to 20.0% in fiscal 2006, reflecting a
$72 million impact of lower charges for slow moving and
obsolete inventories, lower cotton costs, benefits from prior
restructuring actions and the exit of certain lower-margin
fleece product lines, partially offset by pricing pressures and
an unfavorable sales mix of t-shirts sold in the embellishment
channel.
The increase in outerwear segment operating profit is primarily
attributable to a higher gross profit percentage and a
$7 million impact of lower allocated selling, general and
administrative expenses due to the benefits of prior
restructuring actions.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
290,125
|
|
|
$
|
338,468
|
|
|
$
|
(48,343
|
)
|
|
|
(14.3
|
)%
|
Segment operating profit
|
|
|
39,069
|
|
|
|
40,776
|
|
|
|
(1,707
|
)
|
|
|
(4.2
|
)
|
Net sales in the hosiery segment decreased primarily due to the
continued decline in sheer hosiery consumption in the United
States. Outside unit volumes in the hosiery segment decreased by
13% in fiscal 2006, with an 11% decline in Leggs
volume to mass retailers and food and drug stores and a 22%
decline in Hanes volume to department stores. Overall the
hosiery market declined 11%. We expect this trend to continue as
a result of shifts in consumer preferences.
Gross profit percentage in the hosiery segment increased from
38.0% in fiscal 2005 to 40.2% in fiscal 2006. The increase
resulted primarily from improved product sales mix and pricing.
The decrease in hosiery segment operating profit is primarily
attributable to lower sales volume.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
398,157
|
|
|
$
|
399,989
|
|
|
$
|
(1,832
|
)
|
|
|
(0.5
|
)%
|
Segment operating profit
|
|
|
37,003
|
|
|
|
32,231
|
|
|
|
4,772
|
|
|
|
14.8
|
|
Net sales in the international segment decreased primarily as a
result of $4 million in lower sales in Latin America which
were mainly the result of a $13 million impact from our
exit of certain low-margin product lines. Changes in foreign
currency exchange rates increased net sales by $10 million.
Gross profit percentage increased from 39.1% in fiscal 2005 to
40.6% in fiscal 2006. The increase is due to lower allocated
selling, general and administrative expenses and margin
improvements in sales in Canada resulting from greater
purchasing power for contracted goods.
The increase in international segment operating profit is
primarily attributable to a $7 million impact of
improvements in gross profit in Canada.
49
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
62,809
|
|
|
$
|
88,859
|
|
|
$
|
(26,050
|
)
|
|
|
(29.3
|
)%
|
Segment operating profit
|
|
|
127
|
|
|
|
(174
|
)
|
|
|
301
|
|
|
|
NM
|
|
Net sales decreased primarily due to the acquisition of National
Textiles, L.L.C. in September 2005 which caused a
$72 million decline as sales to this business were
previously included in net sales prior to the acquisition. Sales
to National Textiles, L.L.C. subsequent to the acquisition of
this business are eliminated for purposes of segment reporting.
This decrease was partially offset by $40 million in fabric
sales to third parties by National Textiles, L.L.C. subsequent
to the acquisition. An additional offset was related to
increased sales of $7 million due to the acquisition of a
Hong Kong based sourcing business at the end of fiscal 2005.
Gross profit and segment operating profit remained flat as
compared to fiscal 2005. As sales of this segment are generated
for the purpose of maintaining asset utilization at certain
manufacturing facilities, gross profit and operating profit are
lower than those of our other segments.
General
Corporate Expenses
General corporate expenses not allocated to the segments
increased in fiscal 2006 from fiscal 2005 as a result of higher
incurred costs related to the spin off.
Combined
and Consolidated Results of Operations Fiscal 2005
Compared with Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
%
|
Cost of sales
|
|
|
3,223,571
|
|
|
|
3,092,026
|
|
|
|
(131,545
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,460,112
|
|
|
|
1,540,715
|
|
|
|
(80,603
|
)
|
|
|
(5.2
|
)
|
Selling, general and
administrative expenses
|
|
|
1,053,654
|
|
|
|
1,087,964
|
|
|
|
34,310
|
|
|
|
3.2
|
|
Restructuring
|
|
|
46,978
|
|
|
|
27,466
|
|
|
|
(19,512
|
)
|
|
|
(71.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)
|
Interest expense, net
|
|
|
13,964
|
|
|
|
24,413
|
|
|
|
10,449
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
345,516
|
|
|
|
400,872
|
|
|
|
(55,356
|
)
|
|
|
(13.8
|
)
|
Income tax expense (benefit)
|
|
|
127,007
|
|
|
|
(48,680
|
)
|
|
|
(175,687
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
(231,043
|
)
|
|
|
(51.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
%
|
Net sales increased year over year primarily as a result of a
$91 million impact from increases in net sales in the
innerwear and outerwear segments. Approximately
$106 million of this increase was due to increased sales of
our activewear products, primarily due to the introduction of
our C9 by Champion line toward the end of fiscal 2004.
Net sales were adversely affected by a $55 million impact
from declines in the hosiery and international segments. The
total impact of the 53rd week in fiscal 2004 was
$77 million.
50
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Cost of sales
|
|
$
|
3,223,571
|
|
|
$
|
3,092,026
|
|
|
$
|
(131,545
|
)
|
|
|
(4.3
|
)%
|
Cost of sales increased year over year as a result of the
increase in net sales. Also contributing to the increase in cost
of sales was a $94 million impact from higher raw material
costs for cotton and charges for slow moving and obsolete
inventories. Our gross margin declined from 33.3% in fiscal 2004
to 31.2% in fiscal 2005.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
$
|
1,053,654
|
|
|
$
|
1,087,964
|
|
|
$
|
34,310
|
|
|
|
3.2
|
%
|
Selling, general and administrative expenses declined due to a
$36 million impact from lower benefit plan costs, increased
recovery of bad debts and a lower cost structure achieved
through prior restructuring actions, offset in part by increases
in total advertising and promotion costs. Selling, general and
administrative expenses in fiscal 2004 included a
$7.5 million charge related to the discontinuation of the
Lovable U.S. trademark, while selling, general and
administrative expenses in fiscal 2005 included a
$4.5 million charge for accelerated depreciation of
leasehold improvements as a result of exiting certain store
leases. Measured as a percent of net sales, selling, general and
administrative expenses declined from 23.5% in fiscal 2004 to
22.5% in fiscal 2005.
Restructuring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Restructuring
|
|
$
|
46,978
|
|
|
$
|
27,466
|
|
|
$
|
(19,512
|
)
|
|
|
(71.0
|
)%
|
The charge for restructuring in fiscal 2005 is primarily
attributable to costs for severance actions related to the
decision to terminate 1,126 employees, most of whom are located
in the United States. The charge for restructuring in fiscal
2004 is primarily attributable to a charge for severance actions
related to the decision to terminate 4,425 employees, most of
whom are located outside the United States. The increase year
over year is primarily attributable to the relative costs
associated with terminating U.S. employees as compared to
international employees.
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Operating profit
|
|
$
|
359,480
|
|
|
$
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)%
|
Operating profit in fiscal 2005 was lower than in fiscal 2004
primarily due to higher raw material costs for cotton and
charges for slow moving and obsolete inventories.
Interest
Expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Interest expense, net
|
|
$
|
13,964
|
|
|
$
|
24,413
|
|
|
$
|
10,449
|
|
|
|
42.8
|
%
|
Interest expense decreased year over year as a result of lower
average balances on borrowings from Sara Lee. Interest
income increased significantly as a result of higher average
cash balances. As a result of the
51
spin off on September 5, 2006, our net interest expense
will increase substantially as a result of our increased
indebtedness.
Income
Tax Expense (Benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
127,007
|
|
|
$
|
(48,680
|
)
|
|
$
|
(175,687
|
)
|
|
|
NM
|
|
Our effective income tax rate increased from a negative 12.1% in
fiscal 2004 to 36.8% in fiscal 2005. The increase in our
effective tax rate is attributable primarily to an
$81.6 million charge in fiscal 2005 related to the
repatriation of the earnings of foreign subsidiaries to the
United States. Of this total, $50.0 million was recognized
in connection with the remittance of current year earnings to
the United States, and $31.6 million related to earnings
repatriated under the provisions of the American Jobs Creation
Act of 2004. The negative rate in fiscal 2004 is attributable
primarily to an income tax benefit of $128.1 million
resulting from Sara Lees finalization of tax reviews
and audits for amounts that were less than originally
anticipated and recognized in fiscal 2004. The tax expense for
both periods was impacted by a number of significant items which
are set out in the reconciliation of our effective tax rate to
the U.S. statutory rate in Note 17 titled Income
Taxes to our Combined and Consolidated Financial
Statements.
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income
|
|
$
|
218,509
|
|
|
$
|
449,552
|
|
|
$
|
(231,043
|
)
|
|
|
(51.4
|
)%
|
Net income in fiscal 2005 was lower than in fiscal 2004 as a
result of the decline in operating profit and the increase in
income tax expense, as discussed above.
52
Operating
Results by Business Segment Fiscal 2005 Compared
with Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
2,703,637
|
|
|
$
|
2,668,876
|
|
|
$
|
34,761
|
|
|
|
1.3
|
%
|
Outerwear
|
|
|
1,198,286
|
|
|
|
1,141,677
|
|
|
|
56,609
|
|
|
|
5.0
|
|
Hosiery
|
|
|
338,468
|
|
|
|
382,728
|
|
|
|
(44,260
|
)
|
|
|
(11.6
|
)
|
International
|
|
|
399,989
|
|
|
|
410,889
|
|
|
|
(10,900
|
)
|
|
|
(2.7
|
)
|
Other
|
|
|
88,859
|
|
|
|
86,888
|
|
|
|
1,971
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net segment sales
|
|
|
4,729,239
|
|
|
|
4,691,058
|
|
|
|
38,181
|
|
|
|
0.8
|
|
Intersegment
|
|
|
(45,556
|
)
|
|
|
(58,317
|
)
|
|
|
12,761
|
|
|
|
21.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
4,683,683
|
|
|
$
|
4,632,741
|
|
|
$
|
50,942
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
$
|
300,796
|
|
|
$
|
366,988
|
|
|
$
|
(66,192
|
)
|
|
|
(18.0
|
)
|
Outerwear
|
|
|
68,301
|
|
|
|
47,059
|
|
|
|
21,242
|
|
|
|
45.1
|
|
Hosiery
|
|
|
40,776
|
|
|
|
38,113
|
|
|
|
2,663
|
|
|
|
7.0
|
|
International
|
|
|
32,231
|
|
|
|
38,248
|
|
|
|
(6,017
|
)
|
|
|
(15.7
|
)
|
Other
|
|
|
(174
|
)
|
|
|
35
|
|
|
|
(209
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
441,930
|
|
|
|
490,443
|
|
|
|
(48,513
|
)
|
|
|
(9.9
|
)
|
Items not included in segment
operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General corporate expenses
|
|
|
(21,823
|
)
|
|
|
(28,980
|
)
|
|
|
7,157
|
|
|
|
24.7
|
|
Amortization of trademarks and
other identifiable intangibles
|
|
|
(9,100
|
)
|
|
|
(8,712
|
)
|
|
|
(388
|
)
|
|
|
(4.5
|
)
|
Restructuring
|
|
|
(46,978
|
)
|
|
|
(27,466
|
)
|
|
|
(19,512
|
)
|
|
|
(71.0
|
)
|
Accelerated depreciation
|
|
|
(4,549
|
)
|
|
|
|
|
|
|
(4,549
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating profit
|
|
|
359,480
|
|
|
|
425,285
|
|
|
|
(65,805
|
)
|
|
|
(15.5
|
)
|
Interest expense, net
|
|
|
(13,964
|
)
|
|
|
(24,413
|
)
|
|
|
10,449
|
|
|
|
42.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
345,516
|
|
|
$
|
400,872
|
|
|
$
|
(55,356
|
)
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Innerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
2,703,637
|
|
|
$
|
2,668,876
|
|
|
$
|
34,761
|
|
|
|
1.3
|
%
|
Segment operating profit
|
|
|
300,796
|
|
|
|
366,988
|
|
|
|
(66,192
|
)
|
|
|
(18.0
|
)
|
Net sales in the innerwear segment increased primarily due to a
$40 million impact from volume increases in the sales of
mens underwear and socks. Net sales were adversely
affected year over year by a $47 million impact of the
53rd week in fiscal 2004.
Gross profit percentage in the innerwear segment declined from
37.5% in fiscal 2004 to 35.1% in fiscal 2005, reflecting a
$60 million impact of higher raw material costs for cotton
and charges for slow moving and obsolete underwear inventories.
The decrease in innerwear segment operating profit is primarily
attributable to the following factors. First, we increased
inventory reserves by $30 million for slow moving and
obsolete underwear inventories in fiscal 2005 as compared to
fiscal 2004. Second, innerwear operating profit was adversely
affected by a $12 million impact of the 53rd week in
fiscal 2004. The remaining decrease in segment operating profit
was primarily the
53
result of higher unit volume offset in part by higher allocated
distribution and media advertising and promotion costs.
Outerwear
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
1,198,286
|
|
|
$
|
1,141,677
|
|
|
$
|
56,609
|
|
|
|
5.0
|
%
|
Segment operating profit
|
|
|
68,301
|
|
|
|
47,059
|
|
|
|
21,242
|
|
|
|
45.1
|
|
Net sales in the outerwear segment increased primarily due to
$106 million impact from increases in sales of activewear
products, offsetting $45 million in volume declines in
t-shirts sold through our embellishment channel. Net sales were
adversely affected year over year by an $18 million impact
of the 53rd week in fiscal 2004.
Gross profit percentage in the outerwear segment decreased from
21.2% in fiscal 2004 to 18.9% in fiscal 2005, reflecting a
$45 million impact of higher raw material costs for cotton
and additional
start-up
costs associated with new product rollouts. These charges are
partially offset by favorable manufacturing variances as a
result of higher sales volume.
The increase in outerwear segment operating profit is
attributable primarily to higher net sales and lower allocated
selling, general and administrative expenses. Segment operating
profit also was adversely affected year over year by a
$1 million impact of the 53rd week in fiscal 2004.
Hosiery
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
338,468
|
|
|
$
|
382,728
|
|
|
$
|
(44,260
|
)
|
|
|
(11.6
|
)%
|
Segment operating profit
|
|
|
40,776
|
|
|
|
38,113
|
|
|
|
2,663
|
|
|
|
7.0
|
|
Net sales in the hosiery segment decreased primarily due to
$42 million from unit volume decreases and $5 million
from unfavorable product sales mix. Outside unit volumes in the
hosiery segment decreased by 8% in fiscal 2005, with a 7%
decline in Leggs volume to mass retailers and food
and drug stores and a 13% decline in Hanes volume to
department stores. The 8% volume decrease was in line with the
overall hosiery market decline. Net sales also were adversely
affected year over year by a $6 million impact of the
53rd week in fiscal 2004.
Gross profit percentage in the hosiery segment decreased from
38.7% in fiscal 2004 to 38.0% in fiscal 2005. The decrease
resulted primarily from $1 million in unfavorable product
sales mix.
The increase in hosiery segment operating profit is attributable
primarily to a $16 million decrease in allocated media
advertising and promotion costs and allocated selling, general
and administrative expenses partially offset by a decrease in
sales. Hosiery segment operating profit was also adversely
affected year over year by a $2 million impact of the
53rd week in fiscal 2004.
International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
399,989
|
|
|
$
|
410,889
|
|
|
$
|
(10,900
|
)
|
|
|
(2.7
|
)%
|
Segment operating profit
|
|
|
32,231
|
|
|
|
38,248
|
|
|
|
(6,017
|
)
|
|
|
(15.7
|
)
|
Net sales in the international segment decreased primarily as a
result of a $19 million decrease in sales from Latin
America and Asia, partially offset by an $11 million impact
from changes in foreign currency
54
exchange rates during fiscal 2005. Net sales were adversely
affected year over year by a $6 million impact of the
53rd week in fiscal 2004.
Gross profit percentage increased from 36.4% in fiscal 2004 to
39.1% in fiscal 2005. The increase resulted primarily from
margin improvements in Canada and Latin America, partially
offset by declines in Asia.
The decrease in international segment operating profit is
attributable primarily to the decrease in net sales and higher
allocated media advertising and promotion expenditures and
selling, general and administrative expenses in fiscal 2005 as
compared to fiscal 2004. These effects were offset in part by
the improvement in gross profit and $3 million from changes
in foreign currency exchange rates. International segment
operating profit also was affected adversely year over year by a
$2 million impact of the 53rd week in fiscal 2004.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
Percent
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net sales
|
|
$
|
88,859
|
|
|
$
|
86,888
|
|
|
$
|
1,971
|
|
|
|
2.3
|
%
|
Segment operating profit
|
|
|
(174
|
)
|
|
|
35
|
|
|
|
(209
|
)
|
|
|
NM
|
|
Net sales increased due to higher sales of yarn and other
materials to National Textiles, L.L.C. Gross profit and segment
operating profit remained flat as compared to fiscal 2004. As
sales of this segment are generated for the purpose of
maintaining asset utilization at certain manufacturing
facilities, gross profit and operating profit are lower than
those of our other segments.
General
Corporate Expenses
General corporate expenses not allocated to the segments
decreased in fiscal 2005 from fiscal 2004 as a result of lower
allocations of Sara Lee centralized costs and employee benefit
costs, offset in part by expenses incurred for the spin off.
Liquidity
and Capital Resources
Trends
and Uncertainties Affecting Liquidity
Following the spin off that occurred on September 5, 2006,
our capital structure, long-term capital commitments and sources
of liquidity changed significantly from our historical capital
structure, long-term capital commitments and sources of
liquidity. Our primary sources of liquidity are cash provided
from operating activities and availability under the Revolving
Loan Facility (as defined below). The following has or is
expected to negatively impact liquidity:
|
|
|
|
|
we incurred long-term debt in connection with the spin off of
$2.6 billion;
|
|
|
|
we expect to continue to invest in efforts to improve operating
efficiencies and lower costs;
|
|
|
|
we expect to continue to add new manufacturing capacity in
Central America, the Caribbean Basin and Asia;
|
|
|
|
we assumed net pension and other benefit obligations from Sara
Lee of $299 million; and
|
|
|
|
we may need to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United
States, which could significantly increase our income tax
expense.
|
We incurred indebtedness of $2.6 billion in connection with
the spin off as further described below. On September 5,
2006 we paid $2.4 billion of the proceeds from these
borrowings to Sara Lee and, as a result, those proceeds are not
available for our business needs, such as funding working
capital or the expansion of our operations. In addition, in
order to service our substantial debt obligations, we may need
to increase the portion of the income of our foreign
subsidiaries that is expected to be remitted to the United
States, which could significantly increase our income tax
expense. We believe that our cash provided from operating
55
activities, together with our available credit capacity, will
enable us to comply with the terms of our indebtedness and meet
presently foreseeable financial requirements.
We expect to continue the restructuring efforts that we have
undertaken over the last several years. For example, in the six
months ended December 30, 2006 we announced decisions to
close four textile and sewing plants in the United States,
Puerto Rico and Mexico and consolidate three distribution
centers in the United States. The implementation of these
efforts, which are designed to improve operating efficiencies
and lower costs, has resulted and is likely to continue to
result in significant costs. As further plans are developed and
approved by management and our board of directors, we expect to
recognize additional restructuring to eliminate duplicative
functions within the organization and transition a significant
portion of our manufacturing capacity to lower-cost locations.
As a result of these efforts, we expect to incur approximately
$250 million in restructuring and related charges over the
three year period following the spin off from Sara Lee of which
approximately half is expected to be noncash. We also expect to
incur costs associated with the integration of our information
technology systems across our company.
As we continue to add new manufacturing capacity in Central
America, the Caribbean Basin and Asia, our exposure to events
that could disrupt our foreign supply chain, including political
instability, acts of war or terrorism or other international
events resulting in the disruption of trade, disruptions in
shipping and freight forwarding services, increases in oil
prices (which would increase the cost of shipping),
interruptions in the availability of basic services and
infrastructure and fluctuations in foreign currency exchange
rates, is increased. Disruptions in our foreign supply chain
could negatively impact our liquidity by interrupting production
in offshore facilities, increasing our cost of sales, disrupting
merchandise deliveries, delaying receipt of the products into
the United States or preventing us from sourcing our products at
all. Depending on timing, these events could also result in lost
sales, cancellation charges or excessive markdowns.
We assumed $299 million in unfunded employee benefit
liabilities for pension, postretirement and other retirement
benefit qualified and nonqualified plans from Sara Lee in
connection with the spin off that occurred on September 5,
2006. Included in these liabilities are pension obligations that
have not been reflected in our historical financial statements
for periods prior to the spin off, because these obligations
have historically been obligations of Sara Lee. The pension
obligations we assumed are $225 million more than the
corresponding pension assets we acquired. In addition, we could
be required to make contributions to the pension plans in excess
of our current expectations if financial conditions change or if
our actual experience is significantly different than the
assumptions we have used to calculate our pension costs and
obligations. A significant increase in our funding obligations
could have a negative impact on our liquidity.
Net
Cash from Operating Activities
Net cash from operating activities decreased to
$136.1 million in the six months ended December 30,
2006 from $358.9 million in the six months ended
December 31, 2005. The $222.8 million decrease was
primarily the result of lower earnings in the business due to
higher interest expense and income taxes, a pension contribution
of $48.1 million and other changes in the use of working
capital. The net cash from operating activities of
$358.9 million for the six months ended December 31,
2005 was unusually high due to the timing of other working
capital reductions.
Net
Cash Used in Investing Activities
Net cash used in investing activities decreased to
$23.0 million in the six months ended December 30,
2006 from $49.9 million in the six months ended
December 31, 2005. The $26.9 million decrease was
primarily the result of more cash received from sales of
property and equipment, and lower purchases of property and
equipment, partially offset by the acquisition of a sewing
facility in Thailand in November 2006.
Net
Cash Used in Financing Activities
Net cash used in financing activities decreased to
$253.9 million in the six months ended December 30,
2006 from $881.4 million in the six months ended
December 31, 2005. The decrease was primarily the result of
net transactions with parent companies and related entities. In
connection with the spin off on September 5,
56
2006, we incurred indebtedness of $2.6 billion pursuant to
the $2.15 billion Senior Secured Credit Facility, the
$450 million Second Lien Credit Facility and the
$500 million Bridge Loan Facility. We used proceeds
from borrowings under these facilities to distribute a cash
dividend payment to Sara Lee of $1.95 billion and repay a
loan from Sara Lee in the amount of $450 million. In
connection with the incurrence of debt under these credit
facilities and the issuance of the Notes in December 2006, we
paid $50 million in debt issuance costs, which are included
in the accompanying Combined and Consolidated Balance Sheet. The
debt issuance costs are being amortized to interest expense in
the accompanying Combined and Consolidated Statement of Income
over the life of these credit facilities.
In December 2006, we completed an offering of $500 million
aggregate principal amount of the Notes. The proceeds from the
offering were used to repay all outstanding borrowings under the
Bridge Loan Facility, which were $500 million.
Also in December 2006, we elected to prepay $106.6 million
of long-term debt primarily under the Term B Loan Facility
(as defined below), which bears interest at a higher rate than
the Term A Loan Facility (as defined below), to reduce our
overall indebtedness and lower our ongoing interest costs.
Approximately $6.6 million of the amount included in this
prepayment was due in the first quarter of 2007.
Cash
and Cash Equivalents
As of December 30, 2006 and July 1, 2006, cash and
cash equivalents were $156.0 million and
$298.3 million, respectively. The decrease in cash and cash
equivalents as of December 30, 2006 was primarily the
result of transactions associated with the spin off,
$106.6 million prepayment of long-term debt and a voluntary
pension contribution of $48.1 million. The July 1,
2006 balance was also impacted by a $275 million bank
overdraft which was classified as a current liability. As part
of Sara Lee, we participated in Sara Lees cash pooling
arrangements under which positive and negative cash balances are
netted within geographic regions. The recapitalization
undertaken in conjunction with the spin off resulted in a
reduction in cash and cash equivalents. In periods after the
spin off, our primary sources of liquidity are cash provided
from operating activities and availability under the Revolving
Loan Facility.
Credit
Facilities and Notes Payable
In connection with the spin off, on September 5, 2006, we
entered into the $2.15 billion Senior Secured Credit
Facility which includes a $500 million revolving loan
facility, or the Revolving Loan Facility, that
was undrawn at the time of the spin off, the $450 million
Second Lien Credit Facility and the $500 million Bridge
Loan Facility with various financial institution lenders,
including Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Morgan Stanley Senior Funding, Inc., as the
co-syndication agents and the joint lead arrangers and joint
bookrunners. Citicorp USA, Inc. is acting as administrative
agent and Citibank, N.A. is acting as collateral agent for the
Senior Secured Credit Facility and the Second Lien Credit
Facility. Morgan Stanley Senior Funding, Inc. acted as the
administrative agent for the Bridge Loan Facility. As a
result of this debt incurrence, the amount of interest expense
will increase significantly in periods after the spin off. We
paid $2.4 billion of the proceeds of these borrowings to
Sara Lee in connection with the consummation of the spin off. As
noted above, we repaid all amounts outstanding under the Bridge
Loan Facility with the proceeds of the offering of the
Notes in December 2006.
Senior
Secured Credit Facility
The Senior Secured Credit Facility provides for aggregate
borrowings of $2.15 billion, consisting of: (i) a
$250.0 million Term A loan facility (the Term A
Loan Facility); (ii) a $1.4 billion Term B
loan facility (the Term B Loan Facility); and
(iii) the $500.0 million Revolving Loan Facility
that was undrawn as of December 30, 2006. Any issuance of
commercial paper would reduce the amount available under the
Revolving Loan Facility. As of December 30, 2006,
$122.5 million of standby and trade letters of credit were
issued under this facility and $377.5 million was available
for borrowing.
The Senior Secured Credit Facility is guaranteed by
substantially all of our existing and future direct and indirect
U.S. subsidiaries, with certain customary or
agreed-upon
exceptions for certain subsidiaries. We and
57
each of the guarantors under the Senior Secured Credit Facility
have granted the lenders under the Senior Secured Credit
Facility a valid and perfected first priority (subject to
certain customary exceptions) lien and security interest in the
following:
|
|
|
|
|
the equity interests of substantially all of our direct and
indirect U.S. subsidiaries and 65% of the voting securities
of certain foreign subsidiaries; and
|
|
|
|
substantially all present and future property and assets, real
and personal, tangible and intangible, of Hanesbrands and each
guarantor, except for certain enumerated interests, and all
proceeds and products of such property and assets.
|
The final maturity of the Term A Loan Facility is
September 5, 2012. The Term A Loan Facility will
amortize in an amount per annum equal to the following: year
1 5.00%; year 2 10.00%; year
3 15.00%; year 4 20.00%; year
5 25.00%; year 6 25.00%. The final
maturity of the Term B Loan Facility is September 5,
2013. The Term B Loan Facility will be repaid in equal
quarterly installments in an amount equal to 1% per annum,
with the balance due on the maturity date. The final maturity of
the Revolving Loan Facility is September 5, 2011. All
borrowings under the Revolving Loan Facility must be repaid
in full upon maturity. Outstanding borrowings under the Senior
Secured Credit Facility are prepayable without penalty.
At our option, borrowings under the Senior Secured Credit
Facility may be maintained from time to time as (a) Base
Rate loans, which shall bear interest at the higher of
(i) 1/2 of 1% in excess of the federal funds rate and
(ii) the rate published in the Wall Street Journal as the
prime rate (or equivalent), in each case in effect
from time to time, plus the applicable margin in effect from
time to time (which is currently 0.75%), or (b) LIBOR-based
loans, which shall bear interest at the LIBO Rate (as defined in
the Senior Secured Credit Facility and adjusted for maximum
reserves), as determined by the administrative agent for the
respective interest period plus the applicable margin in effect
from time to time (which is currently 1.75%).
In February 2007, we entered into an amendment to the Senior
Secured Credit Facility, pursuant to which the applicable margin
with respect to Term B Loan Facility was reduced from 2.25%
to 1.75% with respect to LIBOR-based loans and from 1.25% to
0.75% with respect to loans maintained as Base Rate loans. The
amendment also provides that in the event that, prior to
February 22, 2008, we: (i) incur a new tranche of
replacement loans constituting obligations under the Senior
Secured Credit Facility having an effective interest rate margin
less than the applicable margin for loans pursuant to the Term B
Loan Facility (Term B Loans), the proceeds of
which are used to repay or return, in whole or in part,
principal of the outstanding Term B Loans, (ii) consummate
any other amendment to the Senior Secured Credit Facility that
reduces the applicable margin for the Term B Loans, or
(iii) incur additional Term B loans having an effective
interest rate margin less than the applicable margin for Term B
Loans, the proceeds of which are used in whole or in part to
prepay or repay outstanding Term B Loans, then in any such case,
we will pay to the Administrative Agent, for the ratable account
of each Lender with outstanding Term B Loans, a fee in an amount
equal to 1.0% of the aggregate principal amount of all Term B
Loans being replaced on such date immediately prior to the
effectiveness of such transaction.
The Senior Secured Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Senior Secured Credit Facility requires that we maintain a
minimum interest coverage ratio and a maximum total debt to
earnings before income taxes, depreciation expense and
amortization, or EBITDA ratio. The interest coverage
covenant requires that the ratio of our EBITDA for the preceding
four fiscal quarters to our consolidated total interest expense
for such period shall not be less than 2 to 1 for each fiscal
quarter ending after December 15, 2006. The interest
coverage ratio will increase over time until it reaches 3.25 to
1 for fiscal quarters ending after October 15, 2009. The
total debt to EBITDA covenant requires that the ratio of our
total debt to our EBITDA for the preceding four fiscal quarters
will not be more than 5.5 to 1 for each fiscal quarter ending
after December 15, 2006. This ratio limit will decline over
time until it reaches 3 to 1 for fiscal quarters after
October 15, 2009. The method of calculating all of the
components used in the covenants is included in the Senior
Secured Credit Facility. As of December 30, 2006, we were
in compliance with all covenants.
58
The Senior Secured Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $50 million; certain judgments
of more than $50 million; certain events related to the
Employee Retirement Income Security Act of 1974, as amended, or
ERISA, and a change in control (as defined in the
Senior Secured Credit Facility).
Second
Lien Credit Facility
The Second Lien Credit Facility provides for aggregate
borrowings of $450 million by Hanesbrands
wholly-owned subsidiary, HBI Branded Apparel Limited, Inc. The
Second Lien Credit Facility is unconditionally guaranteed by
Hanesbrands and each entity guaranteeing the Senior Secured
Credit Facility, subject to the same exceptions and exclusions
provided in the Senior Secured Credit Facility. The Second Lien
Credit Facility and the guarantees in respect thereof are
secured on a second-priority basis (subordinate only to the
Senior Secured Credit Facility and any permitted additions
thereto or refinancings thereof) by substantially all of the
assets that secure the Senior Secured Credit Facility (subject
to the same exceptions).
Loans under the Second Lien Credit Facility will bear interest
in the same manner as those under the Senior Secured Credit
Facility, subject to a margin of 2.75% for Base Rate loans and
3.75% for LIBOR based loans.
The Second Lien Credit Facility requires us to comply with
customary affirmative, negative and financial covenants. The
Second Lien Credit Facility requires that we maintain a minimum
interest coverage ratio and a maximum total debt to EBITDA
ratio. The interest coverage covenant requires that the ratio of
our EBITDA for the preceding four fiscal quarters to our
consolidated total interest expense for such period shall not be
less than 1.5 to 1 for each fiscal quarter ending after
December 15, 2006. The interest coverage ratio will
increase over time until it reaches 2.5 to 1 for fiscal quarters
ending after April 15, 2009. The total debt to EBITDA
covenant requires that the ratio of our total debt to our EBITDA
for the preceding four fiscal quarters will not be more than 6
to 1 for each fiscal quarter ending after December 15,
2006. This ratio will decline over time until it reaches 3.75 to
1 for fiscal quarters ending after October 15, 2009. The
method of calculating all of the components used in the
covenants is included in the Second Lien Credit Facility. As of
December 30, 2006, we were in compliance with all covenants.
The Second Lien Credit Facility contains customary events of
default, including nonpayment of principal when due; nonpayment
of interest, fees or other amounts after stated grace period;
inaccuracy of representations and warranties; violations of
covenants; certain bankruptcies and liquidations; any
cross-default of more than $60 million; certain judgments
of more than $60 million; certain ERISA-related events; and
a change in control (as defined in the Second Lien Credit
Facility).
The Second Lien Credit Facility matures on March 5, 2014,
may not be prepaid prior to September 5, 2007, and includes
premiums for prepayment of the loan prior to September 5,
2009 based on the timing of the prepayment. The Second Lien
Credit Facility will not amortize and will be repaid in full on
its maturity date.
Bridge
Loan Facility
Prior to its repayment in full, the Bridge Loan Facility
provided for a borrowing of $500 million and was
unconditionally guaranteed by each entity guaranteeing the
Senior Secured Credit Facility. The Bridge Loan Facility
was unsecured and was scheduled to mature on September 5,
2007. If the Bridge Loan Facility had not been repaid prior to
or at maturity, the outstanding principal amount of the facility
was to roll over into a rollover loan in the same amount that
was to mature on September 5, 2014. Lenders that extended
rollover loans to us would have been entitled to request that we
issue exchange notes to them in exchange for the
rollover loans, and also to request that we register such notes
upon request.
In December 2006 as discussed below, the proceeds from the
issuance of the Notes were used to repay the entire outstanding
principal of the Bridge Loan Facility. In connection with the
issuance of the Notes, we
59
recognized a $6 million loss on early extinguishment of
debt for unamortized finance fees on the Bridge
Loan Facility.
Notes Payable
Notes payable to banks were $14.3 million at
December 30, 2006, $3.5 million at July 1, 2006
and $83.3 million at July 2, 2005.
During the six months ended December 30, 2006, we amended
our short-term revolving facility arrangement with a Chinese
branch of a U.S. bank. The facility, renewable annually,
was initially in the amount of RMB 30 million and was
increased to RMB 56 million (approximately
$7.2 million) as of December 30, 2006. Borrowings
under the facility accrue interest at the prevailing base
lending rates published by the Peoples Bank of China from
time to time less 10%. As of December 30, 2006,
$6.6 million was outstanding under this facility with
$0.6 million of borrowing available. We were in compliance
with the covenants contained in this facility at
December 30, 2006.
We had other short-term obligations amounting to
$7.7 million which consisted of a short-term revolving
facility arrangement with an Indian branch of a U.S. bank
amounting to INR 220 million (approximately
$5.0 million) of which $3.9 million was outstanding at
December 30, 2006 which accrues interest at 10.5%, and
multiple short-term credit facilities and promissory notes
acquired as part of our acquisition of a sewing facility in
Thailand, totaling THB 241 million (approximately
$6.6 million) of which $3.8 million was outstanding at
December 30, 2006, which accrues interest at an average
rate of 5.9%.
Historically, we maintained a
364-day
short-term non-revolving credit facility under which the Company
could borrow up to 107 million Canadian dollars at a
floating rate of interest that was based upon either the
announced bankers acceptance lending rate plus 0.6% or the
Canadian prime lending rate. Under the agreement, we had the
option to borrow amounts for periods of time less than
364 days. The facility expired at the end of the
364-day
period and the amount of the facility could not be increased
until the next renewal date. During fiscal 2004 and 2005 we and
the bank renewed the facility. At the end of fiscal 2005, we had
borrowings under this facility of $82.0 million at an
interest rate of 3.16%. In 2006, the borrowings under this
agreement were repaid at the end of the year and the facility
was closed.
The
Notes
On December 14, 2006, we issued $500.0 million
aggregate principal amount of the Notes. The Notes are senior
unsecured obligations that rank equal in right of payment with
all of our existing and future unsubordinated indebtedness. The
Notes bear interest at an annual rate, reset semi-annually,
equal to LIBOR plus 3.375%. Interest is payable on the Notes on
June 15 and December 15 of each year beginning on June 15,
2007. The Notes will mature on December 15, 2014. The net
proceeds from the sale of the Notes were approximately
$492.0 million. These proceeds, together with our working
capital, were used to repay in full the $500 million
outstanding under the Bridge Loan Facility. The Notes are
guaranteed by substantially all of our domestic subsidiaries.
We may redeem some or all of the Notes at any time on or after
December 15, 2008 at a redemption price equal to the
principal amount of the Notes plus a premium of 102% if redeemed
during the
12-month
period commencing on December 15, 2008, 101% if redeemed
during the
12-month
period commencing on December 15, 2009 and 100% if redeemed
during the
12-month
period commencing on December 15, 2010, as well as any
accrued and unpaid interest as of the redemption date. At any
time on or prior to December 15, 2008, we may redeem up to
35% of the principal amount of the Notes with the net cash
proceeds of one or more sales of certain types of capital stock
at a redemption price equal to the product of (x) the sum
of (1) 100% and (2) a percentage equal to the per
annum rate of interest on the Notes then applicable on the date
on which the notice of redemption is given, and (y) the
principal amount thereof, plus accrued and unpaid interest to
the redemption date, provided that at least 65% of the aggregate
principal amount of the Notes originally issued remains
outstanding after each such redemption. At any time prior to
December 15, 2008, we may also redeem all or a part of the
Notes upon not less than 30 nor more than 60 days
prior notice, at a
60
redemption price equal to 100% of the principal amount of the
Notes redeemed plus a specified premium as of, and accrued and
unpaid interest and additional interest, if any, to the
redemption date.
The Exchange Notes will bear identical terms to those described
above. See Description of the Exchange Notes for
further information regarding the terms of the Exchange Notes.
Derivatives
We are required under the Credit Facilities entered into in
connection with the spin off to hedge a portion of our floating
rate debt to reduce interest rate risk caused by floating rate
debt issuance. During the six months ended December 30,
2006, we entered into various hedging arrangements whereby we
capped the interest rate on $1 billion of our floating rate
debt at 5.75%. We also entered into interest rate swaps tied to
the 3-month
LIBOR rate whereby we fixed the interest rate on an aggregate of
$500 million of our floating rate debt at a blended rate of
approximately 5.16%. Approximately 60% of our total debt
outstanding at December 30, 2006 is at a fixed or capped
rate. There was no hedge ineffectiveness during the current
period related to these instruments.
Cotton is the primary raw material we use to manufacture many of
our products. We generally purchase our raw materials at market
prices. In fiscal 2006, we started to use commodity financial
instruments, options and forward contracts to hedge the price of
cotton, for which there is a high correlation between the hedged
item and the hedged instrument. We generally do not use
commodity financial instruments to hedge other raw material
commodity prices.
Off-Balance
Sheet Arrangements
We engage in off-balance sheet arrangements that we believe are
reasonably likely to have a current or future effect on our
financial condition and results of operations. These off-balance
sheet arrangements include operating leases for manufacturing
facilities, warehouses, office space, vehicles and machinery and
equipment.
Minimum operating lease obligations are scheduled to be paid as
follows: $32.4 million in 2007, $27.1 million in 2008,
$22.5 million in 2009, $17.6 million in 2010,
$12.6 million in 2011 and $15.1 million thereafter.
Future
Contractual Obligations and Commitments
The following table contains information on our contractual
obligations and commitments as of December 30, 2006.
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Payments Due by Fiscal Period
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At December 30,
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Less Than
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2006
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1 Year
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1 3 Years
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3 5 Years
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Thereafter
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(in thousands)
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Long-term debt
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$
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2,493,375
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$
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9,375
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|
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$
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89,000
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|
|
$
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124,500
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|
|
$
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2,270,500
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|
Notes payable to banks
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14,264
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|
|
|
14,264
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|
|
|
|
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Interest on debt obligations(1)
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|
|
1,371,515
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|
|
|
202,264
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396,688
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|
|
|
379,686
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|
|
|
392,877
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Operating lease obligations
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|
|
127,385
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|
|
|
32,440
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|
|
|
49,652
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|
|
|
30,194
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|
|
|
15,099
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|
Capital lease obligations
including related interest payments
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|
|
2,575
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|
|
|
1,290
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|
|
|
1,285
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|
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|
|
|
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|
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Purchase obligations(2)
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|
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623,784
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|
|
569,821
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|
|
|
47,801
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|
|
|
6,162
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|
|
|
|
|
Other long-term obligations(3)
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|
|
68,317
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|
|
|
52,503
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|
|
|
8,418
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|
|
|
7,396
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Total
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$
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4,701,215
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|
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$
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881,957
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|
$
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592,844
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|
|
$
|
547,938
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|
|
$
|
2,678,476
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(1) |
|
Interest obligations on floating rate debt instruments are
calculated for future periods using interest rates in effect at
December 30, 2006. |
61
|
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|
(2) |
|
Purchase obligations, as disclosed in the table, are
obligations to purchase goods and services in the ordinary
course of business for production and inventory needs (such as
raw materials, supplies, packaging, and manufacturing
arrangements), capital expenditures, marketing services,
royalty-bearing license agreement payments and other
professional services. This table only includes purchase
obligations for which we have agreed upon a fixed or minimum
quantity to purchase, a fixed, minimum or variable pricing
arrangement, and an approximate delivery date. Actual cash
expenditures relating to these obligations may vary from the
amounts shown in the table above. We enter into purchase
obligations when terms or conditions are favorable or when a
long-term commitment is necessary. Many of these arrangements
are cancelable after a notice period without a significant
penalty. This table omits purchase obligations that did not
exist as of December 30, 2006, as well as obligations for
accounts payable and accrued liabilities recorded on the balance
sheet. |
|
(3) |
|
Represents the projected payment for long-term liabilities
recorded on the balance sheet for deferred compensation,
deferred income, and the fiscal 2007 projected minimum pension
contribution of $33 million. We have employee benefit
obligations consisting of pensions and other postretirement
benefits including medical. Other than the fiscal 2007 projected
minimum pension contribution of $33 million, pension and
postretirement obligations have been excluded from the table. A
discussion of our pension and postretirement plans is included
in Notes 15 and 16 to our Combined and Consolidated
Financial Statements. Our obligations for employee health and
property and casualty losses are also excluded from the table. |
Pension
Plans
Prior to the spin off on September 5, 2006, the exact
amount of contributions made to pension plans by us in any year
depended upon a number of factors and included minimum funding
requirements in the jurisdictions in which Sara Lee operated and
Sara Lees policy of charging its operating units for
pension costs. In conjunction with the spin off which occurred
on September 5, 2006, we established the Hanesbrands Inc.
Pension and Retirement Plan, which assumed the portion of the
underfunded liabilities and the portion of the assets of pension
plans sponsored by Sara Lee that relate to our employees. In
addition, we assumed sponsorship of certain other Sara Lee plans
and will continue sponsorship of the Playtex Apparel Inc.
Pension Plan and the National Textiles, L.L.C. Pension Plan. We
are required to make periodic pension contributions to the
assumed plans, the Playtex Apparel Inc. Pension Plan, the
National Textiles, L.L.C. Pension Plan and the Hanesbrands Inc.
Pension and Retirement Plan. Our net unfunded liability for
these qualified pension plans as of December 30, 2006 is
$173.1 million, exclusive of liabilities for our
nonqualified supplemental retirement plans. The levels of
contribution will differ from historical levels of contributions
by Sara Lee due to a number of factors, including the funded
status of the plans as of the completion of the spin off, as
well as our operation as a stand-alone company, regulatory
requirements, financing costs, tax positions and jurisdictional
funding requirements.
During the six months ended December 30, 2006, we were not
required to make any contributions to our pension plans, however
we voluntarily contributed $48 million to our pension plans
based upon minimum funding estimates for fiscal 2007. We
currently expect to contribute, at a minimum, an additional
$33 million to our pension plans during fiscal 2007. We may
make further contributions to our pension plans in fiscal 2007
depending upon changes in the funded status of those plans and
as we gain more clarity with respect to the Pension Protection
Act of 2006, or PPA, that was signed into law on
August 17, 2006. The United States Treasury Department is
in the process of developing implementation guidance for the
PPA, however, it is likely the PPA will accelerate minimum
funding requirements beginning in fiscal 2009. We may choose to
pre-fund some of this anticipated funding.
Share
Repurchase Program
On February 1, 2007, we announced that our Board of
Directors has granted authority for the repurchase of up to
10 million shares of our common stock. Share repurchases
will be made periodically in open-market transactions, and are
subject to market conditions, legal requirements and other
factors. Additionally, management has been granted authority to
establish a trading plan under
Rule 10b5-1
of the Exchange Act in connection with share repurchases, which
will allow use to repurchase shares in the open market during
62
periods in which the stock trading window is otherwise closed
for our company and certain of our officers and employees
pursuant to our insider trading policy.
Significant
Accounting Policies and Critical Estimates
We have chosen accounting policies that we believe are
appropriate to accurately and fairly report our operating
results and financial position 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 Combined and Consolidated Financial Statements.
The application of these 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 accounting policies that involve the most significant
management judgments and estimates used in preparation of our
Combined and Consolidated Financial Statements, or are the most
sensitive to change from outside factors, are the following:
Sales
Recognition and Incentives
We recognize sales when title and risk of loss passes to the
customer. We record provisions for any uncollectible amounts
based upon our historical collection statistics and current
customer information. Our management reviews these estimates
each quarter and makes adjustments based upon actual experience.
Note 2(d), titled Summary of Significant Accounting
Policies Sales Recognition and Incentives, to
our Combined and Consolidated Financial Statements describes a
variety of sales incentives that we offer to resellers and
consumers of our products. Measuring the cost of these
incentives requires, in many cases, estimating future customer
utilization and redemption rates. We use historical data for
similar transactions to estimate the cost of current incentive
programs. Our management reviews these estimates each quarter
and makes adjustments based upon actual experience and other
available information.
Catalog
Expenses
We incur expenses for printing catalogs for our products to aid
in our sales efforts. We initially record these expenses as a
prepaid item and charge it against selling, general and
administrative expenses over time as the catalog is distributed
into the stream of commerce. Expenses are recognized at a rate
that approximates our historical experience with regard to the
timing and amount of sales attributable to a catalog
distribution.
Inventory
Valuation
We carry inventory on our balance sheet at the estimated lower
of cost or market. Cost is determined by the
first-in,
first-out, or FIFO, method for our inventories at
December 30, 2006. We carry obsolete, damaged, and excess
inventory at the net realizable value, which we determine by
assessing historical recovery rates, current market conditions
and our future marketing and sales plans. Because our assessment
of net realizable value is made at a point in time, there are
inherent uncertainties related to our value determination.
Market factors and other conditions underlying the net
realizable value may change, resulting in further reserve
requirements. A reduction in the carrying amount of an inventory
item from cost to market value creates a new cost basis for the
item that cannot be reversed at a later period. During the six
months ended December 30, 2006, we elected to convert all
inventory valued by the
last-in,
first-out, or LIFO, method to the FIFO method. In
accordance with the Statement of Financial Accounting Standards,
or SFAS, No. 154, Accounting Changes and Error
Corrections, or SFAS 154, a change from the
LIFO to FIFO method of inventory valuation constitutes a change
in accounting principle. Historically, inventory valued under
the LIFO method, which was 4% of total inventories, would have
had the same value if measured under the FIFO method. Therefore,
the conversion has no retrospective reporting impact.
63
Rebates, discounts and other cash consideration received from a
vendor related to inventory purchases are reflected as
reductions in the cost of the related inventory item, and are
therefore reflected in cost of sales when the related inventory
item is sold. While we believe that adequate write-downs for
inventory obsolescence have been provided in the Combined and
Consolidated Financial Statements, consumer tastes and
preferences will continue to change and we could experience
additional inventory write-downs in the future.
Depreciation
and Impairment of Property, Plant and Equipment
We state property, plant and equipment at its historical cost,
and we compute depreciation using the straight-line method over
the assets life. We estimate an assets life based on
historical experience, manufacturers estimates,
engineering or appraisal evaluations, our future business plans
and the period over which the asset will economically benefit
us, which may be the same as or shorter than its physical life.
Our policies require that we periodically review our
assets remaining depreciable lives based upon actual
experience and expected future utilization. A change in the
depreciable life is treated as a change in accounting estimate
and the accelerated depreciation is accounted for in the period
of change and future periods. Based upon current levels of
depreciation, the average remaining depreciable life of our net
property other than land is five years.
We test an asset for recoverability whenever events or changes
in circumstances indicate that its carrying value may not be
recoverable. Such events include significant adverse changes in
business climate, several periods of operating or cash flow
losses, forecasted continuing losses or a current expectation
that an asset or asset group will be disposed of before the end
of its useful life. We evaluate an assets recoverability
by comparing the asset or asset groups net carrying amount
to the future net undiscounted cash flows we expect such asset
or asset group will generate. If we determine that an asset is
not recoverable, we recognize an impairment loss in the amount
by which the assets carrying amount exceeds its estimated
fair value.
When we recognize an impairment loss for an asset held for use,
we depreciate the assets adjusted carrying amount over its
remaining useful life. We do not restore previously recognized
impairment losses.
Trademarks
and Other Identifiable Intangibles
Trademarks and computer software are our primary identifiable
intangible assets. We amortize identifiable intangibles with
finite lives, and we do not amortize identifiable intangibles
with indefinite lives. We base the estimated useful life of an
identifiable intangible asset upon a number of factors,
including the effects of demand, competition, expected changes
in distribution channels and the level of maintenance
expenditures required to obtain future cash flows. As of
December 30, 2006, the net book value of trademarks and
other identifiable intangible assets was $137 million, of
which we are amortizing the entire balance. We anticipate that
our amortization expense for the 2007 fiscal year will be
$7.3 million.
We evaluate identifiable intangible assets subject to
amortization for impairment using a process similar to that used
to evaluate asset amortization described above under
Depreciation and Impairment of Property, Plant
and Equipment. We assess identifiable intangible assets
not subject to amortization for impairment at least annually and
more often as triggering events occur. In order to determine the
impairment of identifiable intangible assets not subject to
amortization, we compare the fair value of the intangible asset
to its carrying amount. We recognize an impairment loss for the
amount by which an identifiable intangible assets carrying
value exceeds its fair value.
We measure a trademarks fair value using the royalty saved
method. We determine the royalty saved method by evaluating
various factors to discount anticipated future cash flows,
including operating results, business plans, and present value
techniques. The rates we use to discount cash flows are based on
interest rates and the cost of capital at a point in time.
Because there are inherent uncertainties related to these
factors and our judgment in applying them, the assumptions
underlying the impairment analysis may change in such a manner
that impairment in value may occur in the future. Such
impairment will be recognized in the period in which it becomes
known.
64
Assets
and Liabilities Acquired in Business Combinations
We account for business acquisitions using the purchase method,
which requires us to allocate the cost of an acquired business
to the acquired assets and liabilities based on their estimated
fair values at the acquisition date. We recognize the excess of
an acquired businesss cost over the fair value of acquired
assets and liabilities as goodwill as discussed below under
Goodwill. We use a variety of information sources to
determine the fair value of acquired assets and liabilities. We
generally use third-party appraisers to determine the fair value
and lives of property and identifiable intangibles, consulting
actuaries to determine the fair value of obligations associated
with defined benefit pension plans, and legal counsel to assess
obligations associated with legal and environmental claims.
Goodwill
As of December 30, 2006, we had $281.5 million of
goodwill. We do not amortize goodwill, but we assess for
impairment at least annually and more often as triggering events
occur. Historically, we have performed our annual impairment
review in the second quarter of each year.
In evaluating the recoverability of goodwill, we estimate the
fair value of our reporting units. We have determined that our
reporting units are at the operating segment level. We rely on a
number of factors to determine the fair value of our reporting
units and evaluate various factors to discount anticipated
future cash flows, including operating results, business plans,
and present value techniques. As discussed above under
Trademarks and Other Identifiable Intangibles, there
are inherent uncertainties related to these factors, and our
judgment in applying them and the assumptions underlying the
impairment analysis may change in such a manner that impairment
in value may occur in the future. Such impairment will be
recognized in the period in which it becomes known.
We evaluate the recoverability of goodwill using a two-step
process based on an evaluation of reporting units. The first
step involves a comparison of a reporting units fair value
to its carrying value. In the second step, if the reporting
units carrying value exceeds its fair value, we compare
the goodwills implied fair value and its carrying value.
If the goodwills carrying value exceeds its implied fair
value, we recognize an impairment loss in an amount equal to
such excess.
Insurance
Reserves
Prior to the spin off on September 5, 2006, we were insured
through Sara Lee for property, workers compensation, and
other casualty programs, subject to minimum claims thresholds.
Sara Lee charged an amount to cover premium costs to each
operating unit. Subsequent to the spin off on September 5,
2006, we maintain our own insurance coverage for these programs.
We are responsible for losses up to certain limits and are
required to estimate a liability that represents the ultimate
exposure for aggregate losses below those limits. This liability
is based on managements estimates of the ultimate costs to
be incurred to settle known claims and claims not reported as of
the balance sheet date. The estimated liability is not
discounted and is based on a number of assumptions and factors,
including historical trends, actuarial assumptions and economic
conditions. If actual trends differ from the estimates, the
financial results could be impacted.
Income
Taxes
Prior to spin off on September 5, 2006, all income taxes
were computed and reported on a separate return basis as if we
were not part of Sara Lee. Deferred taxes were recognized for
the future tax effects of temporary differences between
financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. Net
operating loss carryforwards had been determined in our Combined
and Consolidated Financial Statements as if we were separate
from Sara Lee, resulting in a different net operating loss
carryforward amount than reflected by Sara Lee. Given our
continuing losses in certain geographic locations on a separate
return basis, a valuation allowance has been established for the
deferred tax assets relating to these specific locations.
Federal income taxes are provided on that portion of our income
of foreign subsidiaries that is expected to be remitted to the
United States and be taxable, reflecting the historical
decisions made by Sara Lee with regards to earnings permanently
reinvested in foreign jurisdictions. In periods
65
after the spin off, we may make different decisions as to the
amount of earnings permanently reinvested in foreign
jurisdictions, due to anticipated cash flow or other business
requirements, which may impact our federal income tax provision
and effective tax rate.
We periodically estimate the probable tax obligations using
historical experience in tax jurisdictions and our informed
judgment. There are inherent uncertainties related to the
interpretation of tax regulations in the jurisdictions in which
we transact business. The judgments and estimates made at a
point in time may change based on the outcome of tax audits, as
well as changes to, or further interpretations of, regulations.
Income tax expense is adjusted in the period in which these
events occur, and these adjustments are included in our Combined
and Consolidated Statements of Income. If such changes take
place, there is a risk that our effective tax rate may increase
or decrease in any period.
In conjunction with the spin off, we and Sara Lee entered into a
tax sharing agreement, which allocates responsibilities between
us and Sara Lee for taxes and certain other tax matters. Under
the tax sharing agreement, Sara Lee generally is liable for all
U.S. federal, state, local and foreign income taxes
attributable to us with respect to taxable periods ending on or
before September 5, 2006. Sara Lee also is liable for
income taxes attributable to us with respect to taxable periods
beginning before September 5, 2006 and ending after
September 5, 2006, but only to the extent those taxes are
allocable to the portion of the taxable period ending on
September 5, 2006. We are generally liable for all other
taxes attributable to us. Changes in the amounts payable or
receivable by us under the stipulations of this agreement may
impact our tax provision in any period.
Within 180 days after Sara Lee files its final consolidated
tax return for the period that includes September 5, 2006,
Sara Lee is required to deliver to us a computation of the
amount of deferred taxes attributable to our United States and
Canadian operations that would be included on our balance sheet
as of September 6, 2006. If substituting the amount of
deferred taxes as finally determined for the amount of estimated
deferred taxes that were included on that balance sheet at the
time of the spin off causes a decrease in the net book value
reflected on that balance sheet, then Sara Lee will be required
to pay us the amount of such decrease. If such substitution
causes an increase in the net book value reflected on that
balance sheet, then we will be required to pay Sara Lee the
amount of such increase. For purposes of this computation, our
deferred taxes are the amount of deferred tax benefits
(including deferred tax consequences attributable to deductible
temporary differences and carryforwards) that would be
recognized as assets on our balance sheet computed in accordance
with GAAP, but without regard to valuation allowances, less the
amount of deferred tax liabilities (including deferred tax
consequences attributable to deductible temporary differences)
that would be recognized as liabilities on our balance sheet
computed in accordance with GAAP, but without regard to
valuation allowances. Neither we nor Sara Lee will be required
to make any other payments to the other with respect to deferred
taxes.
Stock
Compensation
In connection with the spin off on September 5, 2006, we
established the Hanesbrands Inc. Omnibus Incentive Plan of 2006,
the (Omnibus Incentive Plan) to award stock options,
stock appreciation rights, restricted stock, restricted stock
units, deferred stock units, performance shares and cash to our
employees, non-employee directors and employees of our
subsidiaries to promote the interest of our Company and incent
performance and retention of employees.
On September 26, 2006, a number of awards were made to
employees and non-employee directors under the Omnibus Incentive
Plan. Two categories of these awards are intended to replace
award values that employees would have received under Sara Lee
incentive plans before the spin off. Three other categories of
these awards were to attract and retain certain employees,
including our 2006 annual awards. See Note 3 to the
Combined and Consolidated Financial Statements regarding
stock-based compensation for further information on these
awards. The cost of these equity-based awards is equal to the
fair value of the award at the date of grant, and compensation
expense is recognized for those awards earned over the service
period. We determined the fair value of the stock option awards
using the Black-Scholes option pricing model using the following
weighted average assumptions: weighted average expected
volatility of 30%; weighted average
66
expected term of 3.7 years; expected dividend yield of 0%;
and risk-free interest rate ranging from 4.52% to 4.59%, with a
weighted average of 4.55%. We use the volatility of peer
companies for a period of time that is comparable to the
expected life of the option to determine volatility assumptions.
We have utilized the simplified method outlined in SEC Staff
Bulletin No. 107 to estimate expected lives of options
granted during the period.
Prior to spin off on September 5, 2006, Sara Lee restricted
stock units, or RSUs, and stock options were issued
to our employees in exchange for employee services. See
Note 3 to the Combined and Consolidated Financial
Statements regarding stock-based compensation for further
information on these awards. The cost of RSUs and other
equity-based awards is equal to the fair value of the award at
the date of grant, and compensation expense is recognized for
those awards earned over the service period. Certain of the Sara
Lee RSUs vest based upon the employee achieving certain defined
performance measures. During the service periods prior to spin
off on September 5, 2006, management estimated the number
of awards that will meet the defined performance measures. With
regard to stock options, at the date of grant, we determined the
fair value of the award using the Black-Scholes option pricing
formula. Management estimated the period of time the employee
will hold the option prior to exercise and the expected
volatility of Sara Lees stock, each of which impacts the
fair value of the stock options.
Defined
Benefit Pension and Postretirement Healthcare and Life Insurance
Plans
For a discussion of our net periodic benefit cost, plan
obligations, plan assets, and how we measure the amount of these
costs, see Notes 15 and 16 titled Defined Benefit
Pension Plans and Postretirement Healthcare and Life
Insurance Plans, respectively, to our Combined and
Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans An Amendment of FASB
No. 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 requires that the funded status of defined benefit
postretirement plans be recognized on the companys balance
sheet, and changes in the funded status be reflected in
comprehensive income, effective fiscal years ending after
December 15, 2006, which we adopted as of and for the six
months ended December 30, 2006. SFAS 158 also requires
companies to measure the funded status of the plan as of the
date of its fiscal year end, effective for fiscal years ending
after December 15, 2008. The impact of adopting the funded
status provisions of SFAS 158 was an increase in assets of
$1.4 million, an increase in liabilities of
$25.7 million and a pretax increase in the accumulated
other comprehensive loss of $31.8 million.
Prior to the spin off on September 5, 2006, certain
eligible employees of our company participated in the defined
benefit pension plans and the postretirement healthcare and life
insurance plans of Sara Lee. In connection with the spin off on
September 5, 2006, we assumed $299 million in
obligations under the Sara Lee sponsored pension and
postretirement plans and the Sara Lee Corporation Supplemental
Executive Retirement Plan that related to our current and former
employees. The amount of the net liability actually assumed was
evaluated in a manner specified by ERISA and will be finalized
and certified by plan actuaries several months after the
completion of the spin off. Benefits under the pension and
postretirement benefit plans are generally based on age at
retirement and years of service and for some plans, benefits are
also based on the employees annual earnings. The net
periodic cost of the pension and postretirement plans is
determined using the projections and actuarial assumptions, the
most significant of which are the discount rate, the long-term
rate of asset return, and medical trend (rate of growth for
medical costs). The net periodic pension and postretirement
income or expense is recognized in the year incurred. Gains and
losses, which occur when actual experience differs from
actuarial assumptions, are amortized over the average future
service period of employees.
67
The following assumptions were used to calculate the pension
costs and obligations of the plans in which we participated
prior to the spin off and the assumptions used subsequent to the
spin off as a stand alone company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
July 1,
|
|
|
July 2,
|
|
|
July 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
|
|
5.50
|
%
|
Long-term rate of return on plan
assets
|
|
|
7.57
|
%
|
|
|
7.76
|
%
|
|
|
7.83
|
%
|
|
|
7.75
|
%
|
Rate of compensation increase
|
|
|
3.60
|
%(1)
|
|
|
4.00
|
%(1)
|
|
|
4.50
|
%
|
|
|
5.87
|
%
|
Plan obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.77
|
%
|
|
|
5.80
|
%
|
|
|
5.60
|
%
|
|
|
5.50
|
%
|
Rate of compensation increase
|
|
|
3.60
|
%(1)
|
|
|
4.00
|
%(1)
|
|
|
4.00
|
%
|
|
|
4.50
|
%
|
|
|
|
(1) |
|
The compensation increase assumption applies to the Canadian
plans and portions of the Hanesbrands nonqualified retirement
plans, as benefits under these plans are not frozen at
December 30, 2006 and July 1, 2006. |
Subsequent to the spin off on September 5, 2006, the
Companys policies regarding the establishment of pension
assumptions are as follows:
|
|
|
|
|
In determining the discount rate, we utilized the Citigroup
Pension Discount Curve (rounded to the nearest 10 basis
points) in order to determine a unique interest rate for each
plan and match the expected cash flows for each plan.
|
|
|
|
Salary increase assumptions were based on historical experience
and anticipated future management actions.
|
|
|
|
In determining the long-term rate of return on plan assets we
applied a proportionally weighted blend between assuming the
historical long-term compound growth rate of the plan portfolio
would predict the future returns of similar investments, and the
utilization of forward looking assumptions. The calculated long
term rate of return is reduced by a 1.00% expense load.
|
|
|
|
Retirement rates were based primarily on actual experience while
standard actuarial tables were used to estimate mortality.
|
Prior to the spin off on September 5, 2006, Sara Lees
policies regarding the establishment of pension assumptions and
allocating the cost of participation in its company wide plans
during the periods presented were as follows:
|
|
|
|
|
In determining the discount rate, Sara Lee utilized the yield on
high-quality fixed-income investments that have a AA bond rating
and match the average duration of the pension obligations.
|
|
|
|
Salary increase assumptions were based on historical experience
and anticipated future management actions.
|
|
|
|
In determining the long-term rate of return on plan assets Sara
Lee assumed that the historical long-term compound growth rate
of equity and fixed income securities would predict the future
returns of similar investments in the plan portfolio. Investment
management and other fees paid out of plan assets were factored
into the determination of asset return assumptions.
|
|
|
|
Retirement rates were based primarily on actual experience while
standard actuarial tables were used to estimate mortality.
|
68
|
|
|
|
|
Prior to the spin off on September 5, 2006, operating units
that participated in one of Sara Lees company-wide defined
benefit pension plans were allocated a portion of the total
annual cost of the plan. Consulting actuaries determined the
allocated cost by determining the service cost associated with
the employees of each operating unit. Other elements of the net
periodic benefit cost (interest on the projected benefit
obligation, the estimated return on plan assets, and the
amortization of deferred losses and prior service cost) were
allocated based upon the projected benefit obligation associated
with the current and former employees of the reporting entity as
a percentage of the projected benefit obligation of the entire
defined benefit plan.
|
Recently
Issued Accounting Standards
Accounting
for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes: An Interpretation of
FASB Statement No. 109, or
FIN No. 48. This interpretation clarifies
the accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with
SFAS No. 109. FIN No. 48 prescribes a
recognition threshold and measurement principles for the
financial statement recognition and measurement of tax positions
taken or expected to be taken on a tax return. This
interpretation is effective for fiscal years beginning after
December 15, 2006 and as such, we will adopt
FIN No. 48 in 2007. As a result of the implementation
of FIN No. 48 in 2007, we recognized no adjustment in the
liability for unrecognized income tax benefits.
Fair
Value Measurements
The FASB has issued SFAS 157, Fair Value Measurements, or
SFAS 157, which provides guidance for using
fair value to measure assets and liabilities. The standard also
responds to investors requests for more information about
(1) the extent to which companies measure assets and
liabilities at fair value, (2) the information used to
measure fair value, and (3) the effect that fair-value
measurements have on earnings. SFAS 157 will apply whenever
another standard requires (or permits) assets or liabilities to
be measured at fair value. The standard does not expand the use
of fair value to any new circumstances. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the
impact of SFAS 157 on our results of operations and
financial position.
Pension
and Other Postretirement Benefits
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (an amendment of FASB Statements
No. 87, 88, 106, and 132R), or SFAS 158.
SFAS 158 requires an employer to recognize in its statement
of financial position an asset for a plans over funded
status, or a liability for a plans under funded status,
measure a plans assets and its obligations that determine
its funded status as of the end of the employers fiscal
year (with limited exceptions), and recognize changes in the
funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported
in our comprehensive loss and as a separate component of
stockholders equity. We adopted the provision to recognize
the funded status of a benefit plan and the disclosure
requirements during the six months ended December 30, 2006.
The requirement to measure plan assets and benefit obligations
as of the date of the employers fiscal year-end is
effective for fiscal years ending after December 15, 2008.
We plan to adopt the measurement date provision in 2007.
69
Fair
Value Option for Financial Assets and Financial
Liabilities
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 permits
companies to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value and establishes
presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The
provisions of SFAS 159 become effective for fiscal years
beginning after November 15, 2007. We are currently
evaluating the impact that SFAS 159 will have on our
results of operations and financial position.
Quantitative
and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign exchange
rates, interest rates and commodity prices. Our risk management
control system uses analytical techniques including market
value, sensitivity analysis and value at risk estimations. Prior
to the spin off on September 5, 2006, Sara Lee maintained
risk management control systems on our behalf to monitor the
foreign exchange, interest rate and commodities risks and Sara
Lees offsetting hedge position.
Foreign
Exchange Risk
We sell the majority of our products in transactions in
U.S. dollars; however, we purchase some raw materials, pay
a portion of our wages and make other payments in our supply
chain in foreign currencies. Our exposure to foreign exchange
rates exists primarily with respect to the Canadian dollar,
Mexican peso and Japanese yen against the U.S. dollar. We
use foreign exchange forward and option contracts to hedge
material exposure to adverse changes in foreign exchange rates.
A sensitivity analysis technique has been used to evaluate the
effect that changes in the market value of foreign exchange
currencies will have on our forward and option contracts. In
conjunction with the spin off, all foreign currency hedge
contracts were terminated and all gains and losses on these
contracts were realized at the time of termination.
Interest
Rates
Prior to the spin off on September 5, 2006, our interest
rate exposure primarily related to intercompany loans or other
amounts due to or from Sara Lee, cash balances (positive or
negative) in foreign cash pool accounts which we have maintained
with Sara Lee in the past and cash held in short-term investment
accounts outside of the United States. We have not historically
used financial instruments to address our exposure to interest
rate movements.
Various notes receivable and notes payable between us and Sara
Lee are reflected on the Combined and Consolidated Balance
Sheets. These notes receivable and payable were capitalized by
the parties in connection with the spin off that occurred on
September 5, 2006. In connection with the spin off, we
incurred (i) $1.65 billion of indebtedness funded
under the Senior Secured Credit Facility, which includes the
additional $500.0 million Revolving Loan Facility which was
undrawn at the closing of the spin off and
(ii) $450.0 million of indebtedness under the Second
Lien Credit Facility. We also incurred $500.0 million of
indebtedness under the Bridge Loan Facility, which we
repaid with the proceeds of the offering of the Notes. Each of
these credit facilities bears interests as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources Credit Facilities and
Notes Payable, and there can be no assurance that we
will be able to refinance this indebtedness at the same or
better rates upon maturity. We paid $2.4 billion of the
proceeds of this debt to Sara Lee and used the remainder to pay
debt issuance costs and for working capital.
70
We are required under the Senior Secured Credit Facility and the
Second Lien Credit Facility to hedge a portion of our floating
rate debt to reduce interest rate risk caused by floating rate
debt issuance. During the six months ended December 30,
2006, we entered into various hedging arrangements whereby we
capped the interest payable on $1 billion of our floating
rate debt at 5.75%. We also entered into interest rate swaps
tied to the
3-month
LIBOR rate whereby we fixed the interest payable on an aggregate
of $500 million of our floating rate debt at a blended rate
of approximately 5.16%. Approximately 60% of our total debt
outstanding at December 30, 2006 is at a fixed or capped
rate. After giving effect to these arrangements, a 25-basis
point movement in the annual interest rate charged on the
outstanding debt balances as of December 30, 2006 would
result in a change in annual interest expense of $5 million.
Commodities
Cotton is the primary raw material we use to manufacture many of
our products. In addition, fluctuations in crude oil or
petroleum prices may influence the prices of other raw materials
we use to manufacture our products, such as chemicals,
dyestuffs, polyester yarn and foam. We generally purchase our
raw materials at market prices. In fiscal 2006, we started to
use commodity financial instruments to hedge the price of
cotton, for which there is a high correlation between costs and
the financial instrument. We generally do not use commodity
financial instruments to hedge other raw material commodity
prices. At December 30, 2006, the potential change in fair
value of cotton commodity derivative instruments, assuming a 10%
adverse change in the underlying commodity price, was
$4.2 million.
71
DESCRIPTION
OF OUR BUSINESS
General
We are a consumer goods company with a portfolio of leading
apparel brands, including Hanes, Champion, Playtex, Bali,
Just My Size, barely there and Wonderbra. We design,
manufacture, source and sell a broad range of apparel essentials
such as t-shirts, bras, panties, mens underwear,
kids underwear, socks, hosiery, casualwear and activewear.
We were spun off from Sara Lee on September 5, 2006. In
connection with the spin off, Sara Lee contributed its branded
apparel Americas and Asia business to us and distributed all of
the outstanding shares of our common stock to its stockholders
on a pro rata basis. As a result of the spin off, Sara Lee
ceased to own any equity interest in our company. In this
prospectus, we describe the businesses contributed to us by Sara
Lee in the spin off as if the contributed businesses were our
business for all historical periods described. References in
this prospectus to our assets, liabilities, products, businesses
or activities of our business for periods including or prior to
the spin off are generally intended to refer to the historical
assets, liabilities, products, businesses or activities of the
contributed businesses as the businesses were conducted as part
of Sara Lee and its subsidiaries prior to the spin off.
Following the spin off, we changed our fiscal year end from the
Saturday closest to June 30 to the Saturday closest to
December 31. This change created a transition period
beginning on July 2, 2006, the day following the end of our
2006 fiscal year on July 1, 2006, and ending on
December 30, 2006.
In the six month transition period ended December 30, 2006,
we generated $2.3 billion in net sales and
$190.0 million in operating profit. Our products are sold
through multiple distribution channels. During the six months
ended December 30, 2006, approximately 47% of our net sales
were to mass merchants, 20% were to national chains and
department stores, 9% were direct to consumer, 9% were in our
international segment and 15% were to other retail channels such
as embellishers, specialty retailers, warehouse clubs and
sporting goods stores. In addition to designing and marketing
apparel essentials, we have a long history of operating a global
supply chain that incorporates a mix of self-manufacturing,
third-party contractors and third-party sourcing.
The apparel essentials segment of the apparel industry is
characterized by frequently replenished items, such as t-shirts,
bras, panties, mens underwear, kids underwear, socks
and hosiery. Growth and sales in the apparel essentials industry
are not primarily driven by fashion, in contrast to other areas
of the broader apparel industry. Rather, we focus on the core
attributes of comfort, fit and value, while remaining current
with regard to consumer trends.
Our business is organized into five operating segments. These
segments innerwear, outerwear, hosiery,
international and other are reportable segments for
financial reporting purposes. The following table summarizes our
operating segments by category:
|
|
|
|
|
Segment
|
|
Primary Products
|
|
Primary Brands
|
|
Innerwear
|
|
Intimate apparel, such as bras,
panties and bodywear
|
|
Hanes, Playtex, Bali, barely
there, Just My Size, Wonderbra
|
|
|
Mens underwear and
kids underwear
|
|
Hanes, Champion, Polo Ralph
Lauren*
|
|
|
Socks
|
|
Hanes, Champion
|
Outerwear
|
|
Activewear, such as performance
t-shirts and shorts
|
|
Hanes, Champion, Just My
Size
|
|
|
Casualwear, such as t-shirts,
fleece and sport shirts
|
|
Hanes, Just My Size, Outer
Banks, Hanes Beefy-T
|
Hosiery
|
|
Hosiery
|
|
Leggs, Hanes, Just My
Size
|
International
|
|
Activewear, mens underwear,
kids underwear, intimate apparel, socks, hosiery and
casualwear
|
|
Hanes, Wonderbra**, Playtex**,
Champion, Rinbros, Bali
|
Other
|
|
Nonfinished products, including
fabric and certain other materials
|
|
Not applicable
|
72
|
|
|
* |
|
Brand used under a license agreement. |
|
** |
|
As a result of the February 2006 sale of Sara Lees
European branded apparel business, we are not permitted to sell
this brand in the member states of the European Union, or the
EU, several other European countries and South
Africa. |
Our
Competitive Strengths
Strong Brands with Leading Market
Positions. Our brands have a strong heritage in
the apparel essentials industry. According to NPD, our brands
hold either the number one or number two U.S. market
position by sales in most product categories in which we
compete, on a rolling year-end basis as of December 2006. Our
brands enjoy high awareness among consumers according to a 2006
brand equity analysis by Millward Brown Market Research.
According to a 2006 survey of consumer brand awareness by
Womens Wear Daily, Hanes is the most recognized
apparel and accessory brand among women in the United States.
According to Millward Brown Market Research, Hanes is
found in over 85% of the United States households who have
purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006. Our creative, focused
advertising campaigns have been an important element in the
continued success and visibility of our brands. We employ a
multimedia marketing plan involving national television, radio,
Internet, direct mail and in-store advertising, as well as
targeted celebrity endorsements, to communicate the key features
and benefits of our brands to consumers. We believe that these
marketing programs reinforce and enhance our strong brand
awareness across our product categories.
High-Volume, Core Essentials Focus. We sell
high-volume, frequently replenished apparel essentials. The
majority of our core styles continue from year to year, with
variations only in color, fabric or design details, and are
frequently replenished by consumers. For example, we believe the
average U.S. consumer makes 3.5 trips to retailers to
purchase mens underwear and 4.5 trips to purchase panties
annually. We believe that our status as a high-volume seller of
core apparel essentials creates a more stable and predictable
revenue base and reduces our exposure to dramatic fashion shifts
often observed in the general apparel industry.
Significant Scale of Operations. According to
NPD, we are the largest seller of apparel essentials in the
United States as measured by sales on a rolling year-end basis
as of December 2006. Most of our products are sold to large
retailers which have high-volume demands. We have met the
demands of our customers by developing vertically integrated
operations and an extensive network of owned facilities and
third-party manufacturers over a broad geographic footprint. 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.
Significant Cash Flow Generation. Due to our
strong brands and market position, our business has historically
generated significant cash flow. In the six months ended
December 30, 2006 and in fiscal 2006, 2005 and 2004, we
generated $113.0, $400.0 million, $446.8 million and
$410.2 million, respectively, of cash from operating
activities net of cash used in investing activities. Our goal is
to maximize cash flow in a manner that gives us the flexibility
to create shareholder value by investing in our business,
reducing debt and returning capital to our shareholders.
Strong Customer Relationships. We sell our
products primarily through large, high-volume retailers,
including mass merchants, department stores and national chains.
We have strong, long-term relationships with our top customers,
including relationships of more than ten years with each of our
top ten customers. The size and operational scale of the
high-volume retailers with which we do business require
extensive category and product knowledge and specialized
services regarding the quantity, quality and planning of orders.
In the late 1980s, we undertook a shift in our approach to our
relationships with our largest customers when we sought to align
significant parts of our organization with corresponding parts
of their organizations. For example, we are organized into teams
that sell to and service our customers across a range of
functional areas, such as demand planning, replenishment and
logistics. We also have entered into customer-specific programs
such as the introduction in 2004 of C9 by Champion
products marketed and sold through Target stores. Through
these efforts, we have become the largest apparel essentials
supplier to many of our customers.
73
Strong Management Team. We have strengthened
our management team through the addition of experienced
executives in key leadership roles. Richard Noll, our Chief
Executive Officer, has extensive management experience in the
apparel and consumer products industries. During his
14-year
tenure at Sara Lee, Mr. Noll led Sara Lees sock and
hosiery businesses, Sara Lee Direct and Sara Lee Mexico (all of
which are now part of our business), as well as the Sara Lee
Bakery Group and Sara Lee Australia. Lee Wyatt, our Executive
Vice President, Chief Financial Officer, has broad experience in
executive financial management, including tenures as Chief
Financial Officer at Sonic Automotive, a publicly traded
automotive aftermarket supplier, and Sealy Corporation. Gerald
Evans, our Executive Vice President, Chief Supply Chain Officer,
Kevin Hall, our Executive Vice President, Chief Marketing
Officer, and Joia Johnson, our Executive Vice President, General
Counsel and Corporate Secretary, also add significant experience
and leadership to our management team. The additions of
Messrs. Noll and Wyatt complement the leadership and
experience provided by Lee Chaden, our Executive Chairman, who
has extensive experience within the apparel and consumer
products industries.
Key
Business Strategies
Our core strategies are to build our largest, strongest brands
in core categories by driving innovation in key items, to
continually reduce our costs by consolidating our organization
and globalizing our supply chain and to use our strong,
consistent cash flows to fund business growth, supply-chain
reorganization and debt reduction and to repurchase shares to
offset dilution. Specifically, we intend to focus on the
following strategic initiatives:
Increase the Strength of Our Brands with
Consumers. Our advertising and marketing
campaigns have been an important element in the success and
visibility of our brands. We intend to increase our level of
marketing support behind our key brands with targeted, effective
advertising and marketing campaigns. For example, in fiscal
2005, we launched a comprehensive marketing campaign titled
Look Who Weve Got Our Hanes on Now, which we
believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products.
Our ability to react to changing customer needs and industry
trends will continue to be 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 intend to leverage our insights into consumer demand
in the apparel essentials 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. Examples of our
success to date include:
|
|
|
|
|
Tagless garments where the label is embroidered or
printed directly on the garment instead of attached on a
tag which we first released in t-shirts under our
Hanes brand (2002), and subsequently expanded into other
products such as outerwear tops (2003) and panties (2004).
|
|
|
|
Comfort Soft bands in our underwear and bra lines,
which deliver to our consumers a softer, more comfortable feel
with the same durable fit (2004 and 2005).
|
|
|
|
New versions of our Double Dry wicking products and Friction
Free running products under our Champion brand (2005).
|
|
|
|
The no poke wire which was successfully introduced
to the market in our Bali brand bras (2004).
|
Strengthen Our Retail Relationships. We intend
to expand our market share at large, national retailers by
applying our extensive category and product knowledge,
leveraging our use of multi-functional customer management teams
and developing new customer-specific programs such as C9 by
Champion for Target. Our goal is to strengthen and deepen
our existing strategic relationships with retailers and develop
new strategic relationships. Additionally, we plan to expand
distribution by providing manufacturing and production of
apparel essentials products to specialty stores and other
distribution channels, such as direct to consumer through the
Internet.
74
Develop a Lower-Cost Efficient Supply
Chain. As a provider of high-volume products, we
are continually seeking to improve our cost-competitiveness and
operating flexibility through supply chain initiatives. In this
regard, we have launched two textile manufacturing projects
outside of the United States an owned textile
manufacturing facility in the Dominican Republic, which began
production in early 2006, and a strategic alliance with a
third-party textile manufacturer in El Salvador, which began
production in 2005. Over the next several years, we will
continue to transition additional parts of our supply chain from
the United States to locations in Central America, the Caribbean
Basin and Asia in an effort to optimize our cost structure. We
intend to continue to self-manufacture core products where we
can protect or gain a significant cost advantage through scale
or in cases where we seek to protect proprietary processes and
technology. We plan to continue to selectively source product
categories that do not meet these criteria from third-party
manufacturers. We expect that in future years our supply chain
will become more balanced across the Eastern and Western
Hemispheres. Our customers require a high level of service and
responsiveness, and we intend to continue to meet these needs
through a carefully managed facility migration process. We
expect that these changes in our supply chain will result in
significant cost efficiencies and increased asset utilization.
Create a More Integrated, Focused
Company. Historically, we have had a
decentralized operating structure, with many distinct operating
units. We are in the process of consolidating functions, such as
purchasing, finance, manufacturing/sourcing, planning, marketing
and product development, across all of our product categories in
the United States. We also are in the process of integrating our
distribution operations and information technology systems. We
believe that these initiatives will streamline our operations,
improve our inventory management, reduce costs, standardize
processes and allow us to distribute our products more
effectively to retailers. We expect that our initiative to
integrate our technology systems also will provide us with more
timely information, increasing our ability to allocate capital
and manage our business more effectively.
Our
Industry
The overall U.S. apparel market and the core categories
critical to our future success will continue to be influenced by
a number of broad-based trends:
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the U.S. population is predicted to increase at a rate of
less than 1% annually, with the rate of increase declining
through 2050, with a continued aging of the population and a
shift in the ethnic mix;
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changing attitudes about fashion, the need for versatility, and
continuing preferences for more casual apparel are expected to
support the strength of basic or classic styles of relaxed
apparel;
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the impact of a continued deflationary environment in our
business and the apparel essentials industry;
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continued increases in body size across all age groups and
genders, and especially among children, will drive demand for
plus-sized apparel; and
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intense competition and continued consolidation in the retail
industry, the shifting of formats among major retailers,
convenience and value will continue to be key drivers.
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In addition, we anticipate growth in the apparel essentials
industry will be driven in part by product improvements and
innovations. Improvements in product features, such as stretch
in t-shirts or tagless garment labels, or in increased variety
through new sizes or styles, such as half sizes and boy leg
briefs, are expected to enhance consumer appeal and category
demand. Often the innovations and improvements in our industry
are not trend-driven, but are designed to react to identifiable
consumer needs and demands. As a consequence, the apparel
essentials market is characterized by lower fashion risks
compared to other apparel categories.
Our
Brands
Our portfolio of leading brands is designed to address the needs
and wants of various consumer segments across a broad range of
apparel essentials products. Each of our brands has a particular
consumer positioning that distinguishes it from its competitors
and guides its advertising and product development. We discuss
our brands in more detail below.
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Hanes is the largest and most widely recognized brand in
our portfolio. According to a 2006 survey of consumer brand
awareness by Womens Wear Daily, Hanes is the most
recognized apparel and accessory brand among women in the United
States. The Hanes brand covers all of our product
categories, including mens underwear, kids
underwear, bras, panties, socks, t-shirts, fleece and sheer
hosiery. Hanes stands for outstanding comfort, style and
value. According to Millward Brown Market Research, Hanes
is found in over 85% of the United States households who
have purchased mens or womens casual clothing or
underwear in the
12-month
period ended December 31, 2006.
Champion is our second-largest brand. Specializing in
athletic performance apparel, the Champion brand is
designed for everyday athletes. We believe that
Champions combination of comfort, fit and style
provides athletes with mobility, durability and
up-to-date
styles, all product qualities that are important in the sale of
athletic products. We also distribute products under the C9
by Champion brand exclusively through Target stores.
Playtex, the third-largest brand within our portfolio,
offers a line of bras, panties and shapewear, including products
that offer solutions for hard to fit figures. Bali is the
fourth-largest brand within our portfolio. Bali offers a
range of bras, panties and shapewear sold in the department
store channel. Our brand portfolio also includes the following
well-known brands: Leggs, Just My Size,
barely there, Wonderbra, Outer Banks and
Duofold. These brands serve to round out our product
offerings, allowing us to give consumers a variety of options to
meet their diverse needs.
Our
Segments
We manage and report our operations in five segments, each of
which is a reportable segment: innerwear, outerwear, hosiery,
international and other. These segments are organized
principally by product category and geographic location.
Management of each segment is responsible for the assets and
operations of these businesses. For more information about our
segments, see Note 20 to our Combined and Consolidated
Financial Statements included in this prospectus.
Innerwear
The innerwear segment focuses on core apparel essentials, and
consists of products such as womens intimate apparel,
mens underwear, kids underwear, socks, thermals and
sleepwear, marketed under well-known brands that are trusted by
consumers. We are an intimate apparel category leader in the
United States with our Hanes, Playtex,
Bali, barely there, Just My Size and
Wonderbra brands, offering a full line of bras, panties
and bodywear. We are also a leading manufacturer and marketer of
mens underwear and kids underwear under the Hanes
and Champion brand names. We also produce underwear
products under a licensing agreement with Polo Ralph Lauren. Our
net sales for the six months ended December 30, 2006 from
our innerwear segment were $1.3 billion, representing
approximately 57% of total segment net sales.
Outerwear
We are a leader in the casualwear and activewear markets through
our Hanes, Champion and Just My Size
brands, where we offer products such as t-shirts and fleece.
Our casualwear lines offer a range of quality, comfortable
clothing for men, women and children marketed under the Hanes
and Just My Size brands. The Just My Size
brand offers casual apparel designed exclusively to meet the
needs of plus-size women. In addition to activewear for men and
women, Champion provides uniforms for athletic programs
and in 2004 launched an apparel program at Target stores, C9
by Champion. We also license our Champion name for
collegiate apparel and footwear. We also supply our t-shirts,
sportshirts and fleece products to screen printers and
embellishers, who imprint or embroider the product and then
resell to specialty retailers and organizations such as resorts
and professional sports clubs. We sell our products to screen
printers and embellishers primarily under the Hanes,
Hanes Beefy-T and Outer Banks brands. Our net
sales for the six months ended December 30, 2006 from our
outerwear segment were $616 million, representing
approximately 27% of total segment net sales.
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Hosiery
We are the leading marketer of womens sheer hosiery in the
United States. We compete in the hosiery market by striving to
offer superior values and executing integrated marketing
activities, as well as focusing on the style of our hosiery
products. We market hosiery products under our Hanes,
Leggs and Just My Size brands. Our net sales
for the six months ended December 30, 2006 from our hosiery
segment were $144 million, representing approximately 6% of
total segment net sales. Consistent with a sustained decline in
the hosiery industry due to changes in consumer preferences, our
net sales from hosiery sales have declined each year since 1995.
International
International includes products that span across the innerwear,
outerwear and hosiery reportable segments. Our net sales in this
segment included sales in Europe, Asia, Canada and Latin
America. Japan, Canada and Mexico are our largest international
markets, and we also have opened sales offices in India and
China. Our net sales for the six months ended December 30,
2006 from our international segment were $198 million,
representing approximately 9% of total segment net sales.
Other
Our net sales in this segment are comprised of sales of
nonfinished products such as fabric and certain other materials
in the United States, Asia and Latin America in order to
maintain asset utilization at certain manufacturing facilities.
Our net sales for the six months ended December 30, 2006
from our other segment were $19 million, representing
approximately 1% of total segment net sales.
Design,
Research and Product Development
At the core of our design, research and product development
capabilities is a team of more than 300 professionals. As
part of plan to consolidate our operations, we combined our
design, research and development teams into an integrated group
for all of our product categories. A facility located in
Winston-Salem, North Carolina, is the center of our research,
technical design and product development efforts. We also employ
creative design and product development personnel in our design
center in New York City. During the six months ended
December 30, 2006 and fiscal 2006, 2005 and 2004, we spent
approximately $23 million, $55 million,
$51 million and $53 million, respectively, on design,
research and product development.
Customers
In the six months ended December 30, 2006, approximately
91% of our net sales were to customers in the United States and
approximately 9% were to customers outside the United States.
Domestically, almost 82% of our net sales were wholesale sales
to retailers, 9% were wholesale sales to third-party
embellishers and 9% were direct to consumer. We have
well-established relationships with some of the largest apparel
retailers in the world. Our largest customers are Wal-Mart
Stores, Inc., or Wal-Mart, Target and Kohls
Corporation, or Kohls, accounting for 28%, 15%
and 6%, respectively, of our total sales in the six months ended
December 30, 2006. As is common in the apparel essentials
industry, we generally do not have purchase agreements that
obligate our customers, including Wal-Mart, to purchase our
products. However, all of our key customer relationships have
been in place for ten years or more. Wal-Mart and Target are our
only customers with sales that exceed 10% of any individual
segments sales. In our innerwear segment, Wal-Mart
accounted for 35% of sales and Target accounted for 12% of sales
during the six months ended December 30, 2006. In our
outerwear segment, Wal-Mart accounted for 24% of sales and
Target accounted for 29% of sales during the six months ended
December 30, 2006. In our hosiery and international
segments, Wal-Mart accounted for 22% and 14% of sales,
respectively, during the six months ended December 30, 2006.
Due to their size and operational scale, high-volume retailers
require extensive category and product knowledge and specialized
services regarding the quantity, quality and timing of product
orders. We have organized multifunctional customer management
teams, which has allowed us to form strategic long-term
relationships with these customers and efficiently focus
resources on category, product and service expertise.
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Smaller regional customers attracted to our leading brands and
quality products also represent an important component of our
distribution, and our organizational model provides for an
efficient use of resources that delivers a high level of
category and channel expertise and services to these customers.
Sales to the mass merchant channel accounted for approximately
47% of our net sales in the six months ended December 30,
2006. We sell all of our product categories in this channel
primarily under our Hanes, Just My Size,
Playtex and C9 by Champion brands. Mass merchants
feature high-volume, low-cost sales of basic apparel items along
with a diverse variety of consumer goods products, such as
grocery and drug products and other hard lines, and are
characterized by large retailers, such as Wal-Mart. Wal-Mart,
which accounted for approximately 28% of our net sales during
the six months ended December 30, 2006, is our largest mass
merchant customer.
Sales to the national chains and department stores channel
accounted for approximately 20% of our net sales during the six
months ended December 30, 2006. These retailers target a
higher-income consumer than mass merchants, focus more of their
sales on apparel items rather than other consumer goods such as
grocery and drug products, and are characterized by large
retailers such as Sears, Roebuck and Co., JC Penney Company,
Inc. and Kohls. We sell all of our product categories in
this channel. Traditional department stores target higher-income
consumers and carry more high-end, fashion conscious products
than national chains or mass merchants and tend to operate in
higher-income areas and commercial centers. Traditional
department stores are characterized by large retailers such as
Macys and Dillards, Inc. We sell products in our
intimate apparel, hosiery and underwear categories through these
department stores.
Sales to the direct to consumer channel accounted for
approximately 9% of our net sales in the six months ended
December 30, 2006. We sell our branded products directly to
consumers through our approximately 220 outlet stores, as well
as our catalogs and our web sites operating under the Hanes
name as well as OneHanes Place, Outer Banks,
Just My Size and Champion. Our outlet stores are
value-based, offering the consumer a savings of 25% to 40% off
suggested retail prices, and sell first-quality, excess,
post-season, obsolete and slightly imperfect products. Our
catalogs and web sites address the growing direct to consumer
channel that operates in todays 24/7 retail environment,
and we have an active database of approximately two million
consumers receiving our catalogs and emails. Our web sites have
experienced significant growth and we expect this trend to
continue as more consumers embrace this retail shopping channel.
Sales in our international segment represented approximately 9%
of our net sales during the six months ended December 30,
2006, and included sales in Europe, Asia, Canada and Latin
America. Japan, Canada and Mexico are our largest international
markets, and we also have opened sales offices in India and
China. We operate in several locations in Latin America
including Mexico, Puerto Rico, Argentina, Brazil and Central
America. From an export business perspective, we use
distributors to service customers in the Middle East and Asia,
and have a limited presence in Latin America. The primary focus
of the export business is Hanes underwear and
Bali, Playtex, Wonderbra and barely
there intimate apparel.
Sales in other channels represented approximately 15% of our net
sales during the six months ended December 30, 2006. We
sell t-shirts, golf and sport shirts and fleece sweatshirts to
third-party embellishers primarily under our Hanes,
Hanes Beefy-T and Outer Banks brands. Sales to
third-party embellishers accounted for approximately 9% of our
net sales during the six months ended December 30, 2006. We
also sell a significant range of our underwear, activewear and
sock products under the Champion brand to wholesale
clubs, such as Costco, and sporting goods stores, such as The
Sports Authority, Inc. We sell primarily legwear and underwear
products under the Hanes and Leggs brands to
food, drug and variety stores. We sell our branded apparel
essentials products to the U.S. military for sale to
servicemen and servicewomen.
Inventory
Effective inventory management is a key component of our future
success. Because our customers do not purchase our products
under long-term supply contracts, but rather on a purchase order
basis, effective inventory management requires close
coordination with the customer base. We employ various types of
inventory management techniques that include collaborative
forecasting and planning, vendor-managed inventory, key event
management and various forms of replenishment management
processes. We have demand
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management planners in our customer management group who work
closely with customers to develop demand forecasts that are
passed to the supply chain. We also have professionals within
the customer management group who coordinate daily with our
larger customers to help ensure that our customers planned
inventory levels are in fact available at their individual
retail outlets. Additionally, within our supply chain
organization we have dedicated professionals that translate the
demand forecast into our inventory strategy and specific
production plans. These individuals work closely with our
customer management team to balance inventory
investment/exposure with customer service targets.
Seasonality
Generally, our diverse range of product offerings helps mitigate
the impact of seasonal changes in demand for certain items.
Nevertheless, we are subject to some degree of seasonality.
Sales are typically higher in the two quarters ending in
September and December. Socks, hosiery and fleece products
generally have higher sales during this period as a result of
cooler weather,
back-to-school
shopping and holidays. Sales levels in a period are also
impacted by customers decisions to increase or decrease
their inventory levels in response to anticipated consumer
demand.
Marketing
Our strategy is to bring consumer-driven innovation to market in
a compelling way. Our approach is to build targeted, effective
multimedia advertising and marketing campaigns regarding our
portfolio of key brands. In addition, we will explore new
marketing opportunities through which we can communicate the key
features and benefits of our brands to consumers. For example,
in fiscal 2005, we launched our comprehensive Look Who
Weve Got Our Hanes on Now marketing campaign, which
we believe significantly increased positive consumer attitudes
about the Hanes brand in the areas of stylishness,
distinctiveness and
up-to-date
products. We believe that the strength of our consumer insights,
our distinctive brand propositions and our focus on integrated
marketing give us a competitive advantage in the fragmented
apparel marketplace.
Distribution
We distribute our products for the U.S. market primarily
from
U.S.-based
company-owned and company-operated distribution centers. As of
December 30, 2006, we operated 32 distribution centers and
also performed direct ship services from selected Central
America-, Caribbean Basin- and Mexico-based operations to the
U.S. markets. International distribution operations use a
combination of third-party logistics providers, as well as owned
and operated distribution operations, to distribute goods to our
various international markets. We are currently in the process
of consolidating several of our U.S. distribution centers.
In this process, we intend to centralize our distribution
centers around our Winston-Salem, North Carolina, base, and we
announced the closure of three distribution centers in the
United States during the six months ended December 30,
2006. During the six months ended December 30, 2006, we
opened our first West Coast distribution center in California.
Manufacturing
and Sourcing
During the six months ended December 30, 2006,
approximately 77% of our finished goods sold in the United
States were manufactured through a combination of facilities we
own and operate and facilities owned and operated by third-party
contractors. These contractors perform some of the steps in the
manufacturing process for us, such as cutting
and/or
sewing. We sourced the remainder of our finished goods from
third-party manufacturers who supply us with finished products
based on our designs. We believe that our 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.
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Finished
Goods That Are Manufactured by Hanesbrands
The manufacturing process for finished goods that we manufacture
begins with raw materials we obtain from third parties. The
principal raw materials in our product categories are cotton and
synthetics. Our costs for cotton yarn and cotton-based textiles
vary based upon the fluctuating and often volatile cost of
cotton, which is affected by, among other factors, weather,
consumer demand, speculation on the commodities market and the
relative valuations and fluctuations of the currencies of
producer versus consumer countries. We attempt to mitigate the
effect of fluctuating raw material costs by entering into
short-term supply agreements that set the price we will pay for
cotton yarn and cotton-based textiles in future periods. We also
enter into hedging contracts on cotton designed to protect us
from severe market fluctuations in the wholesale prices of
cotton. In addition to cotton yarn and cotton-based textiles, we
use thread and trim for product identification, buttons,
zippers, snaps and lace.
Fluctuations in crude oil or petroleum prices may also influence
the prices of items used in our business, such as chemicals,
dyestuffs, polyester yarn and foam. Alternate sources of these
materials and services are readily available. After they are
sourced, cotton and synthetic materials are spun into yarn,
which is then knitted into cotton, synthetic and blended
fabrics. We spin a significant portion of the yarn and knit a
significant portion of the fabrics we use in our owned and
operated facilities. To a lesser extent, we purchase fabric from
several domestic and international suppliers in conjunction with
scheduled production. These fabrics are cut and sewn into
finished products, either by us or by third-party contractors.
Most of our cutting and sewing operations are located in Central
America and the Caribbean Basin.
In making decisions about the location of manufacturing
operations and third-party sources of supply, we consider a
number of factors including local labor costs, quality of
production, applicable quotas and duties, and freight costs.
Although, according to a 2005 study, approximately 80% of our
workforce in fiscal 2005 was located outside the United States,
approximately 70% of our labor costs in fiscal 2005 were related
to our domestic workforce. We continue to evaluate actions to
reduce our U.S. workforce over time, which should have the
effect of reducing our total labor costs. Over the past ten
years, we have engaged in a substantial asset relocation
strategy designed to eliminate or relocate portions of our
U.S.-based
manufacturing operations to lower-cost locations in Central
America, the Caribbean Basin and Asia. For example, at an owned
textile manufacturing facility in the Dominican Republic, which
began production in early 2006, and through a strategic alliance
with a third-party textile manufacturer in El Salvador, which
began production in 2005, textiles are knit, dyed, finished and
cut in accordance with our specifications. We expect to achieve
cost efficiencies from our operations at these facilities
primarily as a result of lower labor costs. In addition, because
these manufacturing facilities are located in close proximity to
the sewing operations to which the manufactured textiles must be
transported, we expect to achieve additional efficiencies by
reducing the amount of time needed to produce finished goods. We
also expect to increase asset utilization through the operations
at these facilities. In connection with moving operations from
other facilities, we reduced excess manufacturing capacity. We
closed two of our owned textile facilities in the United States
in connection with these projects.
During the six months ended December 30, 2006, we announced
decisions to close four textile and sewing plants in the United
States, Puerto Rico and Mexico and consolidate three
distribution centers in the United States. As further plans are
developed and approved by management and our board of directors,
we expect to recognize additional restructuring costs to
eliminate duplicative functions within the organization and
transition a significant portion of our manufacturing capacity
to lower-cost locations. As a result of these efforts, we expect
to incur approximately $250 million in restructuring and
related charges over the three year period following the spin
off from Sara Lee of which approximately half is expected to be
noncash.
Finished
Goods That Are Manufactured by Third Parties
In addition to our manufacturing capabilities, we also source
finished goods designed by us from third-party manufacturers,
also referred to as turnkey products. Many of these
turnkey products are sourced from international suppliers by our
strategic sourcing hubs in Hong Kong and other locations in Asia.
All contracted and sourced manufacturing must meet our high
quality standards. Further, all contractors and third-party
manufacturers must be preaudited and adhere to our strict
supplier and business practices guidelines. These requirements
provide strict standards covering hours of work, age of workers,
health and
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safety conditions and conformity with local laws. Each new
supplier must be inspected and agree to comprehensive compliance
terms prior to performance of any production on our behalf. We
audit compliance with these standards and maintain strict
compliance performance records. In addition to our audit
procedures, we require certain of our suppliers to be Worldwide
Responsible Apparel Production, or WRAP, certified.
WRAP is a stringent apparel certification program that
independently monitors and certifies compliance with certain
specified manufacturing standards that are intended to ensure
that a given factory produces sewn goods under lawful, humane,
and ethical conditions. WRAP uses third-party, independent
certification firms and requires
factory-by-factory
certification.
Trade
Regulation
We are exposed to certain risks of doing business outside of the
United States. We import goods from company-owned facilities in
Mexico, Central America and the Caribbean Basin, and from
suppliers in those areas and in Asia, Europe, Africa and the
Middle East. These import transactions had been subject to
constraints imposed by bilateral agreements that imposed quotas
that limi