Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-32891
 
 
 
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
 
20-3552316
(State of incorporation)
 
(I.R.S. employer
identification no.)
 
 
1000 East Hanes Mill Road
Winston-Salem, North Carolina
 
27105
(Address of principal executive office)
 
(Zip code)
(336) 519-8080
(Registrant’s telephone number including area code)
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of October 21, 2016, there were 377,945,180 shares of the registrant’s common stock outstanding.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Table of Contents

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, statements under the heading “Outlook” and other information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” include forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management, expressed in good faith and believed to have a reasonable basis. However, there can be no assurance that the expectation or belief will result or will be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended January 2, 2016, under the caption “Risk Factors,” and available on the “Investors” section of our corporate website, www.Hanes.com/investors.
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended January 2, 2016, particularly under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

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


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Table of Contents

PART I

Item 1.
Financial Statements

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

 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Net sales
$
1,761,019

 
$
1,591,038

 
$
4,452,890

 
$
4,321,992

Cost of sales
1,111,653

 
1,010,288

 
2,788,977

 
2,726,786

Gross profit
649,366

 
580,750

 
1,663,913

 
1,595,206

Selling, general and administrative expenses
421,014

 
372,422

 
1,091,946

 
1,158,014

Operating profit
228,352

 
208,328

 
571,967

 
437,192

Other expenses
1,559

 
718

 
50,533

 
1,930

Interest expense, net
43,433

 
31,356

 
111,539

 
87,263

Income from continuing operations before income tax expense
183,360

 
176,254

 
409,895

 
347,999

Income tax expense
10,570

 
14,100

 
28,693

 
38,307

Income from continuing operations
172,790

 
162,154

 
381,202

 
309,692

Income from discontinued operations, net of tax
1,068

 

 
1,068

 

Net income
$
173,858

 
$
162,154

 
$
382,270

 
$
309,692

 
 
 
 
 
 
 
 
Earnings per share — basic:
 
 
 
 
 
 
 
Continuing operations
$
0.46

 
$
0.41

 
$
1.00

 
$
0.77

Discontinued operations

 

 

 

Net income
$
0.46

 
$
0.41

 
$
1.00

 
$
0.77

 
 
 
 
 
 
 
 
Earnings per share — diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.40

 
$
0.99

 
$
0.76

Discontinued operations

 

 

 

Net income
$
0.45

 
$
0.40

 
$
0.99

 
$
0.76



See accompanying notes to Condensed Consolidated Financial Statements.
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HANESBRANDS INC.
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)

 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Net income
$
173,858

 
$
162,154

 
$
382,270

 
$
309,692

Other comprehensive income (loss), net of tax of ($247), ($1,589), ($701) and ($5,323), respectively
(2,713
)
 
(15,130
)
 
13,691

 
(10,793
)
Comprehensive income
$
171,145

 
$
147,024

 
$
395,961

 
$
298,899



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

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

 
October 1,
2016
 
January 2,
2016
Assets
 
 
 
Cash and cash equivalents
$
450,213

 
$
319,169

Trade accounts receivable, net
961,659

 
680,417

Inventories
2,004,997

 
1,814,602

Other current assets
120,792

 
103,679

Current assets of discontinued operations
24,466

 

Total current assets
3,562,127

 
2,917,867

 
 
 
 
Property, net
718,999

 
650,462

Trademarks and other identifiable intangibles, net
1,347,536

 
700,515

Goodwill
1,142,523

 
834,315

Deferred tax assets
471,010

 
445,179

Other noncurrent assets
62,139

 
49,252

Total assets
$
7,304,334

 
$
5,597,590

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Accounts payable
$
757,720

 
$
672,972

Accrued liabilities
662,673

 
460,333

Notes payable
60,646

 
117,785

Accounts Receivable Securitization Facility
244,074

 
195,163

Current portion of long-term debt
139,362

 
57,656

Current liabilities of discontinued operations
8,405

 

Total current liabilities
1,872,880

 
1,503,909

Long-term debt
3,684,408

 
2,232,712

Pension and postretirement benefits
317,351

 
362,266

Other noncurrent liabilities
243,170

 
222,812

Total liabilities
6,117,809

 
4,321,699

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

 

Common stock (2,000,000,000 authorized shares; $.01 par value)
 
 
 
Issued and outstanding — 377,928,168 and 391,652,810, respectively
3,779

 
3,917

Additional paid-in capital
282,932

 
277,569

Retained earnings
1,281,056

 
1,389,338

Accumulated other comprehensive loss
(381,242
)
 
(394,933
)
Total stockholders’ equity
1,186,525

 
1,275,891

Total liabilities and stockholders’ equity
$
7,304,334

 
$
5,597,590



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

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

 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
Operating activities:
 
 
 
Net income
$
382,270

 
$
309,692

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Depreciation and amortization of long-lived assets
73,715

 
75,750

Write-off on early extinguishment of debt
12,667

 

Charges incurred for amendments of credit facilities
34,624

 

Amortization of debt issuance costs
6,401

 
5,222

Stock compensation expense
16,292

 
9,831

Deferred taxes and other
(18,938
)
 
(4,316
)
Changes in assets and liabilities, net of acquisition of businesses:
 
 
 
Accounts receivable
(200,961
)
 
(185,159
)
Inventories
4,557

 
(280,970
)
Other assets
(6,167
)
 
32,661

Accounts payable
(80,589
)
 
35,716

Accrued pension and postretirement benefits
(34,419
)
 
(97,330
)
Accrued liabilities and other
18,839

 
11,749

Net cash from operating activities
208,291

 
(87,154
)
Investing activities:
 
 
 
Purchases of property, plant and equipment
(65,439
)
 
(73,771
)
Proceeds from sales of assets
68,701

 
15,250

Acquisition of businesses, net of cash acquired
(963,127
)
 
(192,829
)
Net cash from investing activities
(959,865
)
 
(251,350
)
Financing activities:
 
 
 
Borrowings on notes payable
854,915

 
817,141

Repayments on notes payable
(943,893
)
 
(833,822
)
Borrowings on Accounts Receivable Securitization Facility
194,549

 
209,041

Repayments on Accounts Receivable Securitization Facility
(145,638
)
 
(161,740
)
Borrowings on Revolving Loan Facilities
2,995,442

 
4,056,000

Repayments on Revolving Loan Facilities
(2,992,000
)
 
(4,079,500
)
Borrowings on Senior Notes
2,359,347

 

Repayments on Senior Notes
(1,000,000
)
 

Borrowings on Term Loan Facilities
301,272

 
850,000

Repayments on Term Loan Facilities
(154,670
)
 
(15,772
)
Borrowings on International Debt
8,368

 
10,853

Repayments on International Debt
(11,186
)
 
(14,354
)
Cash dividends paid
(125,798
)
 
(121,713
)
Payments to amend and refinance credit facilities
(79,492
)
 

Share repurchases
(379,901
)
 
(306,094
)
Taxes paid related to net shares settlement of equity awards
(2,919
)
 
(53,108
)
Excess tax benefit from stock-based compensation

 
38,298

Other
1,529

 
(8,826
)
   Net cash from financing activities
879,925

 
386,404

Effect of changes in foreign exchange rates on cash
2,693

 
(3,160
)
Change in cash and cash equivalents
131,044

 
44,740

Cash and cash equivalents at beginning of year
319,169

 
239,855

Cash and cash equivalents at end of period
$
450,213

 
$
284,595


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



(1)
Basis of Presentation
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. Three subsidiaries of the Company close on the calendar month-end, which is less than a week earlier than the Company’s consolidated quarter end. The difference in reporting of financial information for these subsidiaries did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Certain prior year amounts in the notes to condensed consolidated financial statements, none of which are material, have been reclassified to conform with the current year presentation. These reclassifications had no impact on the Company’s results of operations.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
(2)
Recent Accounting Pronouncements
Consolidation
In February 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU 2015-02, “Consolidation (Topic 810)”, an update to their existing consolidation model, which changes the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new rules were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have an impact on the Company’s financial condition, results of operations or cash flows.
Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-03, “Interest - Imputation of Interest”, which require debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The new rules were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Cloud Computing
In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. The guidance provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting for other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The new rules were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Fair Value Measurement
In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820)”, which removes the requirement to

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

categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and requires separate disclosure of those investments instead. These disclosures were effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Measurement Period Adjustments
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)”, which simplify the accounting for measurement period adjustments by eliminating the requirements to restate prior period financial statements for these adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new standard, which should be applied prospectively to measurement period adjustments that occur after the effective date, was effective for the Company in the first quarter of 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which requires all excess tax benefits and deficiencies to be recognized in income as they occur. The new guidance also changes the cash flow presentation of excess tax benefits, classifying them as operating inflows or outflows. The new rules are effective for the Company in the first quarter of 2017. The Company elected to early adopt in the second quarter of 2016, with a retrospective effective date of January 3, 2016. Periods prior to 2016 were not restated for the adoption of this accounting standard as the Company has adopted this standard on a prospective basis beginning January 3, 2016. The adoption of the new accounting rules did not have a material impact on the Company’s financial condition, results of operations or cash flows.
Inventory
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory”, which require inventory to be recorded at the lower of cost or net realizable value. The new standard will be effective for the Company in the first quarter of 2017. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations or cash flows.
Revenue from Contracts with Customers
In July 2015, the FASB decided to delay effective dates for the new accounting rules related to revenue recognition for contracts with customers by one year. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Principal versus Agent Considerations)”, which clarifies revenue recognition when an agent, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Identifying Performance Obligations and Licensing)”, which clarifies the principle for determining whether a good or service is “separately identifiable” and, therefore, should be accounted for separately. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Narrow-Scope Improvements and Practical Expedients)”, which clarifies the objective of the collectability criterion. A separate update issued in May 2016 clarifies the accounting for shipping and handling fees and costs as well as accounting for consideration given by a vendor to a customer. The new standard will be effective for the Company in the first quarter of 2018 with retrospective application required. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations or cash flows.
Hedge Accounting
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, which clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the dedesignation of a hedging relationship. The new standard, which can be adopted prospectively or on a modified retrospective basis, is effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows. Also in March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”, which clarify the requirements for assessing whether contingent call

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

(put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The new standard, which should be applied on a modified prospective basis, is effective for the Company in the first quarter of 2017. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows.
Lease Accounting
In February 2016, the FASB issued ASU 2016-02, “Leases”, which will require lessees to recognize a right-of-use asset and a lease liability for all leases that are not short-term in nature. The new rules will be effective for the Company in the first quarter of 2019. The Company is currently in the process of evaluating the impact of adoption of the new rules on the Company’s financial condition, results of operations and cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. Issues addressed in the new guidance that are relevant to the Company include debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and beneficial interests in securitization transactions. The new rules will be effective for the Company in the first quarter of 2018. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s cash flows.
(3)
Acquisitions
Pacific Brands
On July 14, 2016, the Company acquired 100% of the outstanding shares of Pacific Brands Limited (“Pacific Brands”) for a total purchase price of AUD$1,049,360 ($800,871). US dollar equivalents are based on acquisition date exchange rates. The Company funded the acquisition through a combination of cash on hand, a portion of the net proceeds from the 3.5% Senior Notes issued in June 2016 and borrowings under the Australian Term A-1 Loan Facility and the Australian Term A-2 Loan Facility.
Pacific Brands contributed net revenues from continuing operations of $111,292 and pretax earnings of $6,993 (excluding acquisition and integration related charges included in general corporate expenses of approximately $19,575) since the date of acquisition. The results of Pacific Brands have been included in the Company’s consolidated financial statements since the date of acquisition and are reported as part of the International segment.
Pacific Brands is a leading underwear and intimate apparel company in Australia with a portfolio of strong brands including Bonds, Australia’s top brand of underwear, babywear and socks, and Berlei, a leading sports bra brand and leading seller of premium bras in department stores. The Company believes the acquisition will create growth opportunities by adding to the Company’s portfolio of leading innerwear brands supported by the Company’s global low-cost supply chain and manufacturing network. Factors that contribute to the amount of goodwill recognized for the acquisition include the value of the existing work force and expected cost savings by utilizing the Company’s low-cost supply chain and expected synergies with existing Company functions. Goodwill associated with the acquisition is not tax deductible.
The Bonds, Sheridan, Explorer, Razza, Hestia and Voodoo trademarks and brand names, which management believes to have indefinite lives, have been valued at $410,602. The perpetual license agreement associated with the Berlei brand has been valued at $38,160. Amortizable intangible assets have been assigned values of $58,003 for distributor relationships, $3,167 for loyalty programs and customer lists and $3,762 for net unfavorable leases and an unfavorable license agreement. Distributor relationships are being amortized over 10 years. Loyalty programs, customer lists and net unfavorable leases are being amortized over 3 years.

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

The allocation of purchase price is preliminary and subject to change. The primary areas of the purchase price allocation that are not yet finalized are related to assets and liabilities of discontinued operations, income taxes and residual goodwill. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances, which existed at the acquisition date. The acquired assets and assumed liabilities at the date of acquisition (July 14, 2016) include the following:
Cash and cash equivalents
$
54,294

Accounts receivable, net
36,019

Inventories
104,806

Other current assets
16,588

Current assets of discontinued operations
28,970

Property, net
41,221

Trademarks and other identifiable intangibles
506,170

Deferred tax assets and other noncurrent assets
11,472

   Total assets acquired
799,540

Accounts payable
89,309

Accrued liabilities and other
22,838

Current liabilities of discontinued operations
14,564

Long-term debt
41,976

Deferred tax liabilities and other noncurrent liabilities
16,130

   Total liabilities assumed
184,817

Net assets acquired
614,723

Goodwill
186,148

Purchase price
$
800,871

 
 
 
 
 
 
 
 
Champion Europe
On June 30, 2016, the Company acquired 100% of Champion Europe S.p.A. (“Champion Europe”), which owns the trademark for the Champion brand in Europe, the Middle East and Africa, from certain individual shareholders in an all-cash transaction valued at €220,293 ($245,069) enterprise value less working capital adjustments as defined in the purchase agreement, which includes €40,700 ($45,277) in estimated contingent consideration. US dollar equivalents are based on acquisition date exchange rates. The contingent consideration is included in the “Accrued liabilities” line in the accompanying Condensed Consolidated Balance Sheet and is based on 10 times Champion Europe’s expected earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the calendar year 2016 and is payable in 2017. The Company funded the acquisition through a combination of cash on hand and borrowings under the 3.5% Senior Notes issued in June 2016.
Champion Europe contributed net revenues of $62,127 and pretax earnings of $8,423 (excluding acquisition and integration related charges included in general corporate expenses of approximately $7,550) since the date of acquisition. The results of Champion Europe have been included in the Company’s consolidated financial statements since the date of acquisition and are reported as part of the International segment.
The Company believes combining the Champion business will create a unified platform to benefit from the global consumer growth trend for active apparel. Factors that contribute to the amount of goodwill recognized for the acquisition include the value of the existing work force and expected cost savings by utilizing the Company’s low-cost supply chain and expected synergies with existing Company functions. Goodwill associated with the acquisition is not tax deductible.
The Champion trademark, which management believes to have an indefinite life, has been valued at $119,146. Amortizable intangible assets have been assigned values of $15,463 for distributor relationships, $2,225 for license agreements and $1,557 for unfavorable leases. Distributor relationships are being amortized over 10 years. License agreements and unfavorable leases are being amortized over 3 years.

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

The allocation of purchase price is preliminary and subject to change. The primary areas of the purchase price allocation that are not yet finalized are related to certain income taxes and residual goodwill. Accordingly, adjustments may be made to the values of the assets acquired and liabilities assumed as additional information is obtained about the facts and circumstances, which existed at the acquisition date. The contingent consideration will be revalued each reporting period until paid in 2017. At October 1, 2016, the value of the contingent consideration remains the same as at the acquisition date. The acquired assets, contingent consideration and assumed liabilities at the date of acquisition (June 30, 2016) include the following:
Cash and cash equivalents
$
14,581

Trade accounts receivable, net
27,926

Inventories
53,816

Other current assets
5,976

Property, net
24,605

Trademarks and other identifiable intangibles
135,277

Deferred tax assets and other noncurrent assets
3,777

Total assets acquired
265,958

Accounts payable
66,594

Accrued liabilities and other (including contingent consideration)
60,298

Notes payable
27,748

Deferred tax liabilities and other noncurrent liabilities
20,282

Total liabilities assumed and contingent consideration
174,922

Net assets acquired
91,036

Goodwill
108,756

Initial consideration paid
199,792

Estimated contingent consideration
45,277

Total purchase price
$
245,069

Since June 30, 2016, goodwill increased by $591 as a result of measurement period adjustments primarily to working capital.

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

Combined Consolidated Pro Forma Results
Consolidated unaudited pro forma results of operations for the Company are presented below assuming that the 2016 acquisition of Pacific Brands and Champion Europe had occurred on January 4, 2015. Pro forma operating results for the quarter and nine months ended October 3, 2015 include a benefit totaling $389 and include expenses totaling $7,969, respectively, for acquisition-related adjustments primarily related to inventory and stock compensation.
 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Net sales
$
1,780,530

 
$
1,774,558

 
$
4,859,619

 
$
4,884,041

Net income from continuing operations
172,040

 
171,592

 
448,589

 
312,519

Earnings per share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.43

 
$
1.17

 
$
0.78

Diluted
0.45

 
0.43

 
1.16

 
0.78

Knights Apparel
 
 
Unaudited pro forma results of operations for the Company are presented below assuming that the 2015 acquisition of Knights Apparel had occurred on December 29, 2013. Pro forma operating results for the quarter and nine months ending October 3, 2015 include a benefit totaling $1,158 and $7,786, respectively, for acquisition-related charges.
 
Quarter Ended
 
Nine Months Ended
 
October 3,
2015
 
October 3,
2015
Net sales
$
1,591,038

 
$
4,344,149

Net income from continuing operations
163,327

 
313,919

Earnings per share from continuing operations:
 
 
 
Basic
$
0.41

 
$
0.78

Diluted
0.41

 
0.77

Other Acquisitions
In September 2016, the Company completed two immaterial acquisitions of It’s Greek to Me, Inc. and GTM Retail, Inc. (“GTM”) and Universo Sport S.p.A (“Universo”). The acquisitions will extend the Company’s domestic presence in the custom decorated teamwear and fanwear apparel space into the high school channel and expand the Company’s retail platform in Italy, respectively. Total consideration paid for both acquisitions totaled $24,441. The Company funded the acquisitions with cash on hand and short term borrowing under the Revolving Loan Facility. In connection with these acquisitions, the Company recorded net working capital of $12,169, goodwill of $4,519 and other net assets of $7,753. Due to the immaterial nature of these acquisitions, the Company has not provided additional disclosures herein.
(4)
Discontinued Operations
As part of the Company’s acquisition of Pacific Brands, the Company acquired Pacific Brands legacy Tontine Pillow business and Dunlop Flooring business. The Company has concluded that these businesses are not a strategic fit; therefore, the Company has decided not to retain them, and is marketing the businesses to prospective buyers. These two businesses have been classified as assets held for sale and qualify for discontinued operation upon the acquisition date. The Company expects to complete the sale of these businesses within one year of the Pacific Brands acquisition date. Therefore, the operating results and related assets and liabilities have been classified as discontinued operations in the Company’s condensed consolidated financial statements. Discontinued operations does not include any allocation of corporate overhead expense or interest expense.

11

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

The operating results of these discontinued operations only reflect revenues and expenses that are directly attributable to these businesses that will be eliminated from ongoing operations. The key components from discontinued operations related to the Tontine Pillow and Dunlop Flooring businesses were as follows:
 
Quarter and Nine Months Ended
 
October 1,
2016
Net sales
$
15,587

Cost of sales
9,996

Gross profit
5,591

Selling, general and administrative expenses
3,570

Operating profit
2,021

Other expenses
495

Income from discontinued operations before income tax expense
1,526

Income tax expense
458

Net income from discontinued operations, net of tax
$
1,068

Preliminary assets and liabilities of discontinued operations classified as held for sale in the condensed consolidated balance sheet as of October 1, 2016 consist of the following:
Trade accounts receivable, net
$
9,511

Inventories
11,155

Property, net
3,913

Trademarks and other identifiable intangibles, net
5,189

Accounts payable and accrued liabilities
(7,134
)
Net other assets and liabilities
(6,573
)
Net assets of discontinued operations
$
16,061

For the quarter and nine months ended October 1, 2016, there were no material amounts of depreciation, amortization, capital expenditures, or significant operating or investing non-cash items related to discontinued operations.
(5)
Stockholders’ Equity
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock using the treasury stock method.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Basic weighted average shares outstanding
379,368

 
399,445

 
382,235

 
402,011

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
1,890

 
1,943

 
2,016

 
3,035

Restricted stock units
1,293

 
1,587

 
1,210

 
1,298

Employee stock purchase plan and other
7

 
4

 
17

 
19

Diluted weighted average shares outstanding
382,558

 
402,979

 
385,478

 
406,363

For the quarter and nine months ended October 1, 2016, 42 restricted stock units were excluded from the diluted earnings per share calculation, and for the quarter and nine months ended October 3, 2015, no restricted stock units were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive. For the quarter and nine months ended

12

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

October 1, 2016 and October 3, 2015, no options were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive.
For the quarters ended October 1, 2016 and October 3, 2015, the Company declared cash dividends of $0.11 and $0.10 per share, respectively. For the nine months ended October 1, 2016 and October 3, 2015, the Company declared cash dividends of $0.33 and $0.30 per share, respectively.
On October 25, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.11 per share on outstanding common stock to be paid on December 6, 2016 to stockholders of record at the close of business on November 15, 2016.
On April 27, 2016, the Company’s Board of Directors approved a new share repurchase program for up to 40,000 shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. The new program replaces the Company’s previous share repurchase program for up to 40,000 shares that was originally approved in 2007. The Company did not repurchase any shares during the quarter ended October 1, 2016. For the nine months ended October 1, 2016, the Company entered into transactions to repurchase 14,243 shares under the previous program at a weighted average repurchase price of $26.65 per share. The shares were repurchased at a total cost of $379,901. For the quarter and nine months ended October 3, 2015, the Company repurchased 10,665 shares under the previous share repurchase program at a weighted average purchase price of $29.15 per share. The shares were repurchased at a total cost of $311,103. At October 1, 2016, the remaining repurchase authorization totaled 40,000 shares. The program does not obligate the Company to acquire any particular amount of common stock and may be suspended or discontinued at any time at the Company’s discretion.
(6)
Inventories
Inventories consisted of the following: 
 
October 1,
2016
 
January 2,
2016
Raw materials
$
147,274

 
$
173,336

Work in process
200,067

 
200,836

Finished goods
1,657,656

 
1,440,430

 
$
2,004,997

 
$
1,814,602


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

(7)
Debt
Debt consisted of the following: 
 
Interest
Rate as of
October 1,
2016
 
Principal Amount
 
Maturity Date
 
October 1,
2016
 
January 2,
2016
 
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Loan Facility
—%
 
$

 
$
63,500

 
April 2020
Euro Term Loan
3.50%
 

 
113,098

 
August 2021
Term Loan A
2.20%
 
669,062

 
705,313

 
April 2020
Term Loan B
3.25%
 
418,625

 
421,813

 
April 2022
Australian Term A-1
3.52%
 
153,846

 

 
July 2019
Australian Term A-2
3.82%
 
153,846

 

 
July 2021
Australian Revolving Loan Facility
—%
 

 

 
July 2021
4.875% Senior Notes
4.88%
 
900,000

 

 
May 2026
4.625% Senior Notes
4.63%
 
900,000

 

 
May 2024
3.5% Senior Notes
3.50%
 
560,852

 

 
June 2024
6.375% Senior Notes
6.38%
 

 
1,000,000

 
December 2020
European Revolving Loan Facility
1.50%
 
67,302

 

 
September 2017
Accounts Receivable Securitization Facility
1.39%
 
244,074

 
195,163

 
March 2017
Other International Debt
Various
 
48,653

 
8,094

 
Various
 
 
 
4,116,260

 
2,506,981

 
 
Less long-term debt issuance cost
 
 
48,416

 
21,450

 
 
Less current maturities
 
 
383,436

 
252,819

 
 
 
 
 
$
3,684,408

 
$
2,232,712

 
 
Senior Notes Refinancing
During the quarter ended July 2, 2016, the Company refinanced its debt structure to reduce interest rates, increase borrowing capacity, shift to more fixed rate debt and to help fund the acquisitions of Champion Europe and Pacific Brands. The refinancing consisted of: (i) issuing $900,000 aggregate principal amount of the 4.875% Senior Notes due 2026, $900,000 aggregate principal amount of the 4.625% Senior Notes due 2024, and €500,000 aggregate principal amount of the 3.5% Senior Notes due 2024; (ii) redeeming in full the Company’s 6.375% Senior Notes due 2020; and (iii) repaying a portion of the indebtedness outstanding under the Revolving Loan Facility.
The refinancing activity resulted in incurrence of $40,049 in capitalized debt issuance costs for the new Senior Notes. Debt issuance costs are amortized to interest expense over the respective lives of the debt instruments, which range from eight to 10 years.
The Company recognizes charges in the “Other expenses” line of the Consolidated Statements of Income for fees incurred in financing transactions such as refinancing and amendments and for write-offs incurred in the early extinguishment of debt. In the second quarter of 2016 the Company recognized charges of $47,291 for the call premium and write-off of unamortized debt costs related to the redemption of the 6.375% Senior Notes.
4.875% Senior Notes and 4.625% Senior Notes
On May 6, 2016, the Company issued $900,000 aggregate principal amount of 4.875% Senior Notes and $900,000 aggregate principal amount of 4.625% Senior Notes (collectively, the “USD Senior Notes”), with interest payable on May 15 and November 15 of each year. The 4.875% Senior Notes will mature on May 15, 2026 and the 4.625% Senior Notes will mature on May 15, 2024, respectively. The sale of the USD Senior Notes resulted in collective net proceeds from the sale of approximately $1,773,000, which were used to repay all outstanding borrowings under the 6.375% Senior Notes and reduce the outstanding borrowings under the Revolving Loan Facility.

14

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

On or after February 15, 2026, in the case of the 4.875% Senior Notes, and February 15, 2024, in the case of the 4.625% Senior Notes, the Company may redeem all or a portion of such notes at a price equal to 100% of the principal amount, plus any accrued and unpaid interest.
The USD Senior Notes are the senior unsecured obligations of the Company and are fully and unconditionally guaranteed, subject to certain exceptions, by substantially all of the Company’s current domestic subsidiaries. The indenture governing the USD Senior Notes limits the ability of the Company and its subsidiaries to incur liens, enter into certain sale and leaseback transactions and consolidate, merge or sell all or substantially all of their assets. The indenture also contains customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest; breach of other agreements in such indenture; failure to pay certain other indebtedness; failure to pay certain final judgments; failure of certain guarantees to be enforceable; and certain events of bankruptcy or insolvency.
The USD Senior Notes were issued in a transaction exempt from registration under the Securities Act and do not require disclosure of separate financial information for the guarantor subsidiaries.
3.5% Senior Notes
On June 3, 2016, the Company issued €500,000 aggregate principal amount of 3.5% Senior Notes, with interest payable on June 15 and December 15 of each year. The Notes will mature on June 15, 2024. The sale of the notes resulted in net proceeds of approximately €492,500, which were used to help fund the acquisition of Champion Europe and Pacific Brands.
On or after March 15, 2024, the Company may redeem all or a portion of the 3.5% Senior Notes at a price equal to 100% of the principal amount, plus any accrued and unpaid interest. The Company may also redeem all, but not less than all, of the notes upon the occurrence of certain changes in applicable tax law.
The 3.5% Senior Notes are the senior unsecured obligations of the Company and are fully and unconditionally guaranteed, subject to certain exceptions, by the Company and certain of its subsidiaries that guarantee the Company’s existing Euro Term Loan facility under the Company’s Senior Secured Credit Facility. The indenture governing the 3.5% Senior Notes limits the ability of the Company and each of the guarantors of the Notes (including the Company) to incur certain liens, enter into certain sale and leaseback transactions and consolidate, merge or sell all or substantially all of their assets. The indenture also contains customary events of default which include (subject in certain cases to customary grace and cure periods), among others, nonpayment of principal or interest; breach of other agreements in the indenture; failure to pay certain other indebtedness; certain events of bankruptcy, insolvency or reorganization; failure to pay certain final judgments; and failure of certain guarantees to be enforceable.
The 3.5% Senior Notes were issued in a transaction exempt from registration under the Securities Act and do not require disclosure of separate financial information for the guarantor subsidiaries.
Australia Term A-1, Australia Term A-2, and Australian Revolver
On July 4, 2016, the Company established a floating rate AUD$200,000 Australian Term A-1 Loan Facility (the “Australian Term A-1”) with interest payable every three or six months. At October 1, 2016, the effective interest rate on the Australian Term A-1 was 3.52%. The Australian Term A-1 matures on July 11, 2019. In addition, on July 11, 2016 the Company established a floating rate AUD$200,000 Australian Term A-2 Loan Facility (the “Australian Term A-2”) with interest payable every three or six months. At October 1, 2016, the effective interest rate on the Australian Term A-2 was 3.82%. The Australian Term A-2 matures on July 11, 2021. On July 15, 2016 the Company established the Australian Revolving Facility (the “Australian Revolver”) in the amount of AUD$65,000 with interest payable at a variable rate. The Australian Revolver will mature on July 15, 2021. The Australian Term A-1, Australian Term A-2 and Australian Revolver interest rates are based on the Bank Bill Swap Bid Rate (“BBSY”) plus an applicable margin which is driven by the Company’s debt rating.
The Australia Term A-1 and the Australian Term A-2 were issued to help fund the Pacific Brands acquisition while the Revolver will be utilized for future working capital requirements. The Australian Term A-1, Australian Term A-2, and Australian Revolver were established under the Company’s Syndicated Facility, a joinder to the Company’s Senior Secured Credit Facility.

15

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

The Syndicated Facility Agreement requires the Company to prepay any outstanding Term Loans in connection with (i) the incurrence of certain indebtedness and (ii) non-ordinary course asset sales or other dispositions (including as a result of casualty or condemnation) that exceed certain thresholds in any period of twelve-consecutive months, with customary reinvestment provisions. The Syndicated Facility Agreement also requires the Company, and certain of its subsidiary guarantors, as applicable, to prepay any outstanding Term Loans in connection with excess cash flow, which amount will be based upon the Company’s leverage ratio during the relevant fiscal period. All such prepayments will be made on a pro rata basis under each of the applicable Term Loan Facilities that are subject to such prepayments.
Under the terms of the Syndicated Facility Agreement, the Company must maintain at least a 4:1 total debt to EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio, provided that, following an acquisition of over $200,000, the maximum leverage multiple shall be increased to 4.5:1 for each quarter in the following 12-month period, and a minimum 3:1 EBITDA to interest expense ratio.
European Revolving Loan Facility
On September 9, 2016, the Company established a €100,000 European Revolving Loan Facility. As of October 1, 2016, the Company had an outstanding balance of $67,302 under the European Revolving Loan Facility. Proceeds from the European Revolving Loan Facility were used to refinance existing debt for Hanes Europe Innerwear and will be used for future working capital requirements. The maturity date of the European Revolving Loan Facility is September 9, 2017.
The Company may from time to time voluntarily prepay the European Revolving Loan Facility in whole or in part without a premium or penalty provided that among other items, principal payments be made in amounts of €5,000 or in whole multiple of €1,000 in excess thereof. Any prepayment of principal shall be accompanied by all accrued interest on the amount prepaid.
Interest under the European Revolving Credit Facility is calculated using LIBOR for Euro with a zero floor plus a 150 basis point margin. Interest is based on the outstanding principal amount for each interest period from the applicable borrowing date at a rate per annum equal to the Eurocurrency Rate for such interest period plus the applicable rate.
Other Debt Related Activity
As of October 1, 2016, the Company had $907,854 of borrowing availability under the $1,000,000 Revolving Loan Facility after taking into account outstanding borrowings and $92,146 of standby and trade letters of credit issued and outstanding under this facility.
In March 2016, the Company amended the accounts receivable securitization facility that it entered into in November 2007 (the “Accounts Receivable Securitization Facility”). This amendment primarily extended the termination date to March 2017 and changed the borrowing capacity from a fixed capacity to a varying limit throughout the year, in order to minimize fees for the Company’s unused portion of the facility.
As of October 1, 2016, the Company was in compliance with all financial covenants under its credit facilities.
(8)
Accumulated Other Comprehensive Loss
The components of Accumulated other comprehensive loss (“AOCI”) are as follows:
 
Cumulative Translation Adjustment
 
Hedges
 
Defined Benefit Plans
 
Income Taxes
 
Accumulated Other Comprehensive Loss
 
 
 
 
Balance at January 2, 2016
$
(57,675
)
 
$
6,743

 
$
(563,759
)
 
$
219,758

 
$
(394,933
)
Amounts reclassified from accumulated other comprehensive loss

 
(4,424
)
 
12,843

 
(3,275
)
 
5,144

Current-period other comprehensive income (loss) activity
13,104

 
(7,131
)
 

 
2,574

 
8,547

 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
$
(44,571
)
 
$
(4,812
)
 
$
(550,916
)
 
$
219,057

 
$
(381,242
)

16

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

The Company had the following reclassifications out of AOCI:
Component of AOCI
 
Location of Reclassification into Income
 
Amount of Reclassification
from AOCI
 
Amount of Reclassification
from AOCI
 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Gain on foreign exchange contracts
 
Cost of sales
 
$
715

 
$
3,956

 
$
4,424

 
$
8,614


 
Income tax
 
(278
)
 
(1,780
)
 
(1,721
)
 
(3,434
)

 
Net of tax
 
437

 
2,176

 
2,703

 
5,180

Amortization of deferred actuarial loss and prior service cost
 
Selling, general and administrative
expenses
 
(4,307
)
 
(5,101
)
 
(12,843
)
 
(9,987
)

 
Income tax
 
1,675

 
1,852

 
4,996

 
4,648


 
Net of tax
 
(2,632
)
 
(3,249
)
 
(7,847
)
 
(5,339
)
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications
 
 
 
$
(2,195
)
 
$
(1,073
)
 
$
(5,144
)
 
$
(159
)
(9)
Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of October 1, 2016, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company’s derivative portfolio was $627,139 and $191, respectively, primarily consisting of contracts hedging exposures to the Australian dollar, Euro, Canadian dollar, Mexican peso, South African rand, Japanese yen and Brazilian real.
Fair Values of Derivative Instruments
The fair values of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
 
Balance Sheet Location
 
Fair Value
 
October 1,
2016
 
January 2,
2016
Hedges
Other current assets
 
$
733

 
$
3,700

Non-hedges
Other current assets
 
300

 
1,514

Total derivative assets
 
 
1,033

 
5,214

 
 
 
 
 
 
Hedges
Accrued liabilities
 
(5,587
)
 
(330
)
Non-hedges
Accrued liabilities
 
(1,272
)
 
(775
)
Total derivative liabilities
 
 
(6,859
)
 
(1,105
)
 
 
 
 
 
 
Net derivative asset (liability)
 
 
$
(5,826
)
 
$
4,109

Cash Flow Hedges
The Company uses forward foreign exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.
The Company expects to reclassify into earnings during the next 12 months a net loss from AOCI of approximately $3,821.
The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income.

17

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

The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:
 
Amount of Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Amount of Gain (Loss)
Recognized in AOCI
(Effective Portion)
 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Foreign exchange contracts
$
(3,594
)
 
$
1,801

 
$
(7,131
)
 
$
13,454

 
 
Location of
Gain Reclassified from AOCI into Income
(Effective Portion)
 
Amount of Gain
Reclassified from AOCI
into Income
(Effective Portion)
 
Amount of Gain
Reclassified from AOCI
into Income
(Effective Portion)
 
 
Quarter Ended
 
Nine Months Ended
 
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Foreign exchange contracts
Cost of sales
 
$
715

 
$
3,956

 
$
4,424

 
$
8,614

Derivative Contracts Not Designated As Hedges
The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheet. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:
 
Location of Gain (Loss)
Recognized in Income on
Derivative
 
Amount of Gain (Loss)
Recognized in Income
 
Amount of Gain (Loss)
Recognized in Income
 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Foreign exchange contracts
Selling, general and administrative expenses
 
$
7,694

 
$
(3,901
)
 
$
7,970

 
$
(5,477
)
(10)
Fair Value of Assets and Liabilities
As of October 1, 2016, the Company held certain financial assets and liabilities that are required to be measured at fair value on a recurring basis. These consisted of the Company’s derivative instruments related to foreign exchange rates, deferred compensation plan liabilities and contingent consideration resulting from the Champion Europe acquisition. The fair values of foreign currency derivatives are determined using the cash flows of the foreign exchange contract, discount rates to account for the passage of time and current foreign exchange market data and are categorized as Level 2. The fair value of deferred compensation plans is based on readily available current market data and is categorized as Level 2. The fair value of the contingent consideration obligation is determined by applying an option pricing model using Champion Europe’s expected EBITDA for calendar year 2016, as further described in Note 3 to the Company’s consolidated financial statements, and is categorized as Level 3. The contingent consideration obligation will be revalued each reporting period until the related contingencies are resolved, with any adjustments to the fair value recognized in earnings. The Company’s defined benefit pension plan investments are not required to be measured at fair value on a recurring basis.
There were no changes during the quarter ended October 1, 2016 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. There were no transfers into or out of Level 1, Level 2 or Level 3 during the

18

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

quarter ended October 1, 2016. As of and during the quarter and nine months ended October 1, 2016, the Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.
The following tables set forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.
 
Assets (Liabilities) at Fair Value as of
October 1, 2016
 
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Foreign exchange derivative contracts
$

 
$
1,033

 
$

Foreign exchange derivative contracts

 
(6,859
)
 

 

 
(5,826
)
 

Champion Europe contingent consideration

 

 
(45,277
)
Deferred compensation plan liability

 
(35,375
)
 

Total
$

 
$
(41,201
)
 
$
(45,277
)
 
 
Assets (Liabilities) at Fair Value as of
January 2, 2016
 
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Foreign exchange derivative contracts
$

 
$
5,214

 
$

Foreign exchange derivative contracts

 
(1,105
)
 

 

 
4,109

 

Deferred compensation plan liability

 
(36,257
)
 

Total
$

 
$
(32,148
)
 
$

Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of October 1, 2016 and January 2, 2016. The carrying amount of trade accounts receivable included allowance for doubtful accounts, chargebacks and other deductions of $35,831 and $13,100 as of October 1, 2016 and January 2, 2016, respectively. The fair value of debt, which is classified as a Level 2 liability, was $4,277,195 and $2,537,640 as of October 1, 2016 and January 2, 2016, respectively. Debt had a carrying value of $4,116,260 and $2,506,981 as of October 1, 2016 and January 2, 2016, respectively. In the first quarter of 2016, the Company adopted new accounting rules, which require debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. The carrying value of debt reflected on the face of the balance sheet reflects the adoption of the new accounting rules. However, the carrying value of debt reflected in this footnote disclosure reflects the gross amount owed to creditors. The fair values were estimated using quoted market prices as provided in secondary markets, which consider the Company’s credit risk and market related conditions. The carrying amounts of the Company’s notes payable, which is classified as a Level 2 liability, approximated fair value as of October 1, 2016 and January 2, 2016, primarily due to the short-term nature of these instruments.
(11)
Income Taxes
The Company’s effective income tax rate for continuing operations was 6% and 8% for the quarters ended October 1, 2016 and October 3, 2015, respectively. The Company’s effective income tax rate for continuing operations was 7% and 11% for the nine months ended October 1, 2016 and October 3, 2015, respectively. The lower effective income tax rate for the quarter and nine months ended October 1, 2016 compared to the quarter and nine months ended October 3, 2015 was primarily due to a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries.

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

(12)
Business Segment Information
The Company’s operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. As a result of a shift in management responsibilities, the Company decided in the first quarter of 2016 to move its wholesale e-commerce business, which sells products directly to retailers, from its Direct to Consumer segment into the respective Innerwear and Activewear segments. Prior year segment sales and operating profit results have been revised to conform to the current year presentation.
The types of products and services from which each reportable segment derives its revenues are as follows:
Innerwear sells basic branded products that are replenishment in nature under the product categories of men’s underwear, panties, children’s underwear, socks, hosiery and intimate apparel, which includes bras and shapewear.
Activewear sells basic branded products that are primarily seasonal in nature under the product categories of branded printwear and retail activewear, as well as licensed logo apparel in collegiate bookstores, mass retail and other channels.
Direct to Consumer includes the Company’s value-based (“outlet”) stores and retail Internet operations that sell products from the Company’s portfolio of leading brands directly to consumers.
International primarily relates to the Europe, Asia, Latin America, Canada and Australia geographic locations that sell products that span across the Innerwear and Activewear reportable segments. 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses and amortization of intangibles. The Company decided in the first quarter of 2016 to revise the manner in which the Company allocates certain selling, general and administrative expenses. Certain prior year segment operating profit disclosures have been revised to conform to current year presentation. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 2, 2016.
 
Quarter Ended
 
Nine Months Ended
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Net sales:
 
 
 
 
 
 
 
Innerwear
$
688,343

 
$
674,854

 
$
1,998,293

 
$
2,014,858

Activewear
510,588

 
521,461

 
1,187,507

 
1,203,558

Direct to Consumer
83,966

 
94,323

 
240,219

 
255,294

International
478,122

 
300,400

 
1,026,871

 
848,282

Total net sales
$
1,761,019

 
$
1,591,038

 
$
4,452,890

 
$
4,321,992



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

 
Quarter Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
Segment operating profit:
 
 
 
 
 
 
 
Innerwear
$
151,147

 
$
142,196

 
$
450,566

 
$
460,295

Activewear
74,575

 
95,980

 
162,960

 
187,183

Direct to Consumer
4,341

 
9,052

 
9,618

 
13,378

International
61,312

 
34,200

 
109,184

 
76,079

Total segment operating profit
291,375

 
281,428

 
732,328

 
736,935

Items not included in segment operating profit:
 
 
 
 
 
 
 
General corporate expenses
(14,776
)
 
(24,072
)
 
(54,798
)
 
(69,850
)
Acquisition, integration and other action related charges
(42,587
)
 
(42,787
)
 
(91,651
)
 
(211,981
)
Amortization of intangibles
(5,660
)
 
(6,241
)
 
(13,912
)
 
(17,912
)
Total operating profit
228,352

 
208,328

 
571,967

 
437,192

Other expenses
(1,559
)
 
(718
)
 
(50,533
)
 
(1,930
)
Interest expense, net
(43,433
)
 
(31,356
)
 
(111,539
)
 
(87,263
)
Income from continuing operations before income tax expense
$
183,360

 
$
176,254

 
$
409,895

 
$
347,999

For the quarter ended October 1, 2016, the Company incurred acquisition, integration and other action related charges of $42,587, of which $13,563 is reported in the “Cost of sales” line and $29,024 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income. For the quarter ended October 3, 2015, the Company incurred acquisition, integration and other action related charges of $42,787, of which $7,720 is reported in the “Cost of sales” line and $35,067 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
For the nine months ended October 1, 2016, the Company incurred acquisition, integration and other action related charges of $138,942, of which $27,732 is reported in the “Cost of sales” line, $63,919 is reported in the “Selling, general and administrative expenses” line and $47,291 is reported in the “Other expenses” line in the Condensed Consolidated Statement of Income. For the nine months ended October 3, 2015, the Company incurred acquisition, integration and other action related charges of $211,981, of which $47,939 is reported in the “Cost of sales” line and $164,042 is reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statement of Income.
As part of the Hanes Europe Innerwear acquisition strategy, the Company has identified management and administrative positions that are considered non-essential and/or duplicative that will be eliminated. As of January 2, 2016, the Company had accrued approximately $54,000 for employee termination and other benefits recognized in accordance with expected benefit payments for affected employees. The charges were reflected in the “Cost of sales” and “Selling, general and administrative expenses” lines of the Consolidated Statements of Income. As of October 1, 2016, approximately $14,041 of benefit payments had been made, resulting in an accrual of $39,959, of which, $25,635 and $14,324, is included in the “Accrued liabilities” and “Other noncurrent liabilities” lines of the Condensed Consolidated Balance Sheet, respectively.

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Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 2, 2016, which were included in our Annual Report on Form 10-K filed with the SEC. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended January 2, 2016.
Overview
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Maidenform, DIM, Playtex, Bali, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Flexees, Lilyette, Gear for Sports, Bonds, Berlei, Shock Absorber, Abanderado, Rinbros and Zorba. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, children’s underwear, activewear, socks and hosiery.
Our operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. These segments are organized principally by product category, geographic location and distribution channel. Each segment has its own management that is responsible for the operations of the segment’s businesses, but the segments share a common supply chain and media and marketing platforms. As a result of a shift in management responsibilities, we decided in the first quarter of 2016 to move our wholesale e-commerce business, which sells products directly to retailers, from our Direct to Consumer segment to the respective Innerwear and Activewear segments. In addition, we decided in the first quarter of 2016 to revise the manner in which we allocate certain selling, general and administrative expenses. Prior year segment sales and operating profit results have been revised to conform to the current year presentation.
Highlights from the Quarter Ended October 1, 2016
Key financial highlights are as follows:
Total net sales in the third quarter of 2016 were $1.8 billion, compared with $1.6 billion in the same period of 2015, representing an 11% increase.
Operating profit increased 10% to $228 million in the third quarter of 2016, compared with $208 million in the same period of 2015. As a percentage of sales, operating profit was 13.0% in the third quarter of 2016 compared to 13.1% in the same period of 2015. Included within operating profit for both the third quarter of 2016 and 2015 were acquisition, integration and other action related charges of $43 million.
Diluted earnings per share from continuing operations increased 13% to $0.45 in the third quarter of 2016, compared with $0.40 in the same period of 2015.
We acquired Pacific Brands Limited (“Pacific Brands”) on July 14, 2016 in an all-cash transaction valued at $801 million. Pacific Brands is a leading underwear and intimate apparel company in Australia with a portfolio of strong brands including Bonds, Australia’s top brand of underwear, babywear and socks, and Berlei, a leading sports bra brand and leading seller of premium bras in department stores. The acquisition was funded through a combination of cash on hand, a portion of the proceeds of our new 3.5% Senior Notes issued in June 2016 and borrowings under our Australian Term A-1 Loan Facility and Australian Term A-2 Loan Facility. We believe this acquisition will create growth opportunities by adding to our portfolio of leading innerwear brands supported by our global low-cost supply chain and manufacturing network.
As part of our acquisition of Pacific Brands, we acquired the Tontine Pillow and the Dunlop Flooring businesses. These businesses are not a strategic fit and therefore, we have decided not to retain them and are marketing the businesses to prospective buyers. The aforementioned businesses are classified as assets held for sale and presented as discontinued operations.

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Table of Contents

Outlook
We expect our 2016 full year net sales to be approximately $6.15 billion to $6.18 billion.
Interest expense and other expenses are expected to be approximately $158 million combined.
We estimate our full year effective income tax rate to be in the high single-digits.
We expect net cash flow from operations to be in the range of $750 million to $800 million. Capital expenditures are expected to be approximately $90 million.
Pretax charges related to debt refinancing and acquisition and integration related charges are expected to be approximately $180 million. The guidance noted herein reflects the expected contributions from our acquisitions of Champion Europe, which closed on June 30, 2016 and Pacific Brands, which closed on July 14, 2016.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. We generally have higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel or change delivery schedules, manage on-hand inventory levels, or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse basis, our sales are impacted by discretionary spending by consumers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, gasoline prices, weather, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to customers’ preferences and discretionary spending.

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Table of Contents

Condensed Consolidated Results of Operations — Third Quarter Ended October 1, 2016 Compared with Third Quarter Ended October 3, 2015
 
 
Quarter Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,761,019

 
$
1,591,038

 
$
169,981

 
10.7
 %
Cost of sales
1,111,653

 
1,010,288

 
101,365

 
10.0

Gross profit
649,366

 
580,750

 
68,616

 
11.8

Selling, general and administrative expenses
421,014

 
372,422

 
48,592

 
13.0

Operating profit
228,352

 
208,328

 
20,024

 
9.6

Other expenses
1,559

 
718

 
841

 
117.1

Interest expense, net
43,433

 
31,356

 
12,077

 
38.5

Income from continuing operations before income tax expense
183,360

 
176,254

 
7,106

 
4.0

Income tax expense
10,570

 
14,100

 
(3,530
)
 
(25.0
)
Income from continuing operations
172,790

 
162,154

 
10,636

 
6.6

Income from discontinued operations, net of tax
1,068

 

 
1,068

 
NM

Net income
$
173,858

 
$
162,154

 
$
11,704

 
7.2
 %
Net Sales
Net sales increased 11% during the third quarter of 2016 primarily due to the following:
Acquisition of Pacific Brands in July 2016, Champion Europe in June 2016 and Champion Japan licensee in January 2016, which added incremental net sales of approximately $180 million in 2016;
Higher net sales in our Innerwear segment primarily driven by our basics business as we focus on our core product with the introduction of our FreshIQ odor control technology;
Continued growth in our college bookstore business and Champion sales within the mass merchant channel; and
Higher net sales in our International segment, excluding the aforementioned acquisitions, primarily in the Asian market.
Partially offset by:
Decreased sales in the intimates business and continued declines in Hosiery sales;
Lower net sales in the sporting goods and mid-tier department store channels within our Activewear segment, primarily driven by bankruptcies of certain sporting goods retailers; and
Lower sales in our Direct to Consumer segment due to slower traffic at our outlet stores and planned exit from our legacy catalog business and non-core product offerings to a more focused branded store and Internet strategy.
Gross Profit
The increase in gross profit was attributable to higher sales volume primarily from acquisitions, supply chain efficiencies and synergies recognized from the integration of our acquisitions, offset partially by unfavorable product sales mix within the Activewear segment and increased acquisition, integration and other action related costs. Included in gross profit in the third quarters of 2016 and 2015 are charges of approximately $14 million and $8 million, respectively, related to acquisition, integration and other action related costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 23.9% for the third quarter of 2016 compared to 23.4% in the same period of 2015. Included in selling, general and administrative expenses were charges of $29 million and $35 million of acquisition, integration and other action related costs for the third quarters of 2016 and 2015, respectively. Selling, general and administrative expenses, as a percentage of net sales, increased due to the higher proportion of selling, general and administrative expenses for the recently acquired entities, Pacific Brands and Champion Europe, offset by synergy benefits from the integration of prior acquisitions, planned reduction of our catalog distribution costs and continued cost control.

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Table of Contents

Other Highlights
Interest Expense – higher by $12 million in the third quarter of 2016 compared to the third quarter of 2015 primarily due to higher debt balances to help fund acquisitions, share repurchases in 2016 and normal seasonal working capital build. Our weighted average interest rate on our outstanding debt was 3.69% during the third quarter of 2016 and in the third quarter of 2015.
Income Tax Expense – our effective income tax rate was 6% and 8% for the third quarter of 2016 and 2015, respectively.  The lower tax rate in 2016 compared to the same period in 2015 is primarily due to a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries.
Discontinued Operations – the results of our discontinued operations include the operations of two businesses, Tontine Pillow and Dunlop Flooring, purchased in the Pacific Brands acquisition.
Operating Results by Business Segment — Third Quarter Ended October 1, 2016 Compared with Third Quarter Ended October 3, 2015
 
 
Net Sales
 
Operating Profit
 
Quarter Ended
 
Quarter Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(dollars in thousands)
Innerwear
$
688,343

 
$
674,854

 
$
151,147

 
$
142,196

Activewear
510,588

 
521,461

 
74,575

 
95,980

Direct to Consumer
83,966

 
94,323

 
4,341

 
9,052

International
478,122

 
300,400

 
61,312

 
34,200

Corporate

 

 
(63,023
)
 
(73,100
)
Total
$
1,761,019

 
$
1,591,038

 
$
228,352

 
$
208,328

Innerwear 
 
Quarter Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
688,343

 
$
674,854

 
$
13,489

 
2.0
%
Segment operating profit
151,147

 
142,196

 
8,951

 
6.3

Innerwear net sales increased due to higher net sales in our basics business, particularly in men’s underwear and women’s panties, as we focus on our core product with the introduction of our FreshIQ odor control technology, offset, in part, with sales declines in our intimate apparel business driven by the anniversary of large, one-time shipments from increased space gains in Hanes, general softness in shapewear and continued declines in Hosiery.
Increased operating profit was driven largely by higher sales volume with higher margin core products, our focus on inventory controls and lower selling, general and administrative expenses from continued cost control.
Activewear 
 
Quarter Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
510,588

 
$
521,461

 
$
(10,873
)
 
(2.1
)%
Segment operating profit
74,575

 
95,980

 
(21,405
)
 
(22.3
)
Activewear net sales decreased due to challenges in the sporting goods and mid-tier department store channels, primarily driven by bankruptcies of certain sporting goods retailers, partially offset by continued growth in our college bookstore business and Champion sales in the mass merchant channel.
Operating profit decreased primarily as a result of unfavorable product sales mix and decreased sales volume.

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Table of Contents

Direct to Consumer
 
Quarter Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
83,966

 
$
94,323

 
$
(10,357
)
 
(11.0
)%
Segment operating profit
4,341

 
9,052

 
(4,711
)
 
(52.0
)
Direct to Consumer segment net sales were lower as a result of slower traffic at our outlet stores and the planned exit of our legacy catalog business and non-core product offerings to a more focused branded store and Internet strategy. Operating profit decreased as a result of lower sales volume, partially offset by decreased catalog distribution costs.
International
 
Quarter Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
478,122

 
$
300,400

 
$
177,722

 
59.2
%
Segment operating profit
61,312

 
34,200

 
27,112

 
79.3

Net sales in the International segment were higher as a result of the following:
The acquisitions of Pacific Brands, Champion Europe and Champion Japan licensee;
Continued space gains in Asia within our Activewear product category; and
Favorable impact of foreign currency exchange rates.
Partially offset by:
Lower sales volume in Hanes Innerwear Europe, with the planned exit of small, low performing brands in Europe and as certain markets in Europe have been impacted by a slowing economy.
Operating profit increased primarily due to the acquisitions of Pacific Brands, Champion Europe and Champion Japan, higher sales volume in Asia and cost synergies in our Hanes Europe Innerwear business.
Corporate
Corporate expenses included certain administrative costs and acquisition, integration and other action related charges totaling $43 million in both the third quarter of 2016 and 2015. Acquisition and integration costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, infrastructure (including information technology), and similar charges. Acquisition related currency transactions represent the foreign exchange gain from financing activities related to the Champion Europe and Pacific Brands acquisitions. Foundational costs are expenses associated with building infrastructure to support and integrate current and future acquisitions, primarily consisting of information technology spend. Other costs relate to other items not included in the aforementioned categories, primarily consisting of non-cash items related to the exit of the commercial sales organization in the China market in 2015. Maidenform acquisition and integration costs and Foundational costs were completed in 2015.

26

Table of Contents

 
Quarter Ended
 
October 1,
2016
 
October 3,
2015
 
(dollars in thousands)
Acquisition and integration costs:

 
 
Pacific Brands
$
19,575

 
$

Hanes Europe Innerwear
18,673

 
13,725

Champion Europe
6,032

 

Knights Apparel
5,588

 
4,185

Champion Japan licensee transaction
184

 

Other acquisitions
365

 

Maidenform

 
13,318

Acquisition related currency transactions
(7,830
)
 

Total acquisition and integration costs
42,587

 
31,228

Foundational costs

 
8,979

Other costs

 
2,580

 
$
42,587

 
$
42,787

Condensed Consolidated Results of Operations — Nine Months Ended October 1, 2016 Compared with Nine Months Ended October 3, 2015
 
 
Nine Months Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
4,452,890

 
$
4,321,992

 
$
130,898

 
3.0
 %
Cost of sales
2,788,977

 
2,726,786

 
62,191

 
2.3

Gross profit
1,663,913

 
1,595,206

 
68,707

 
4.3

Selling, general and administrative expenses
1,091,946

 
1,158,014

 
(66,068
)
 
(5.7
)
Operating profit
571,967

 
437,192

 
134,775

 
30.8

Other expenses
50,533

 
1,930

 
48,603

 
              NM

Interest expense, net
111,539

 
87,263

 
24,276

 
27.8

Income from continuing operations before income tax expense
409,895

 
347,999

 
61,896

 
17.8

Income tax expense
28,693

 
38,307

 
(9,614
)
 
(25.1
)
Income from continuing operations
381,202

 
309,692

 
71,510

 
23.1

Income from discontinued operations, net of tax
1,068

 

 
1,068

 
NM

Net income
$
382,270

 
$
309,692

 
$
72,578

 
23.4
 %
Net Sales
Net sales increased 3% in the nine months of 2016 compared to the same period of 2015 as a result of the following:
Acquisition of Pacific Brands in July 2016, Champion Europe in June 2016 and Champion Japan licensee in January 2016, which added incremental net sales of approximately $190 million in 2016;
Acquisition of Knights Apparel in April 2015, which added an incremental $21 million of net sales in 2016;
Increased sales in our basics business as we focus on core products with the introduction of our FreshIQ odor control technology; and
Continued growth in the Activewear segment within our college bookstore business and Champion sales within the mass merchant channel.
Partially offset by:
Lower sales in the intimates business and continued declines in Hosiery sales;
Lower net sales in our Activewear segment in the sporting goods and mid-tier department store channels, primarily due to certain sporting goods retailer bankruptcies;
Lower net sales in our Direct to Consumer segment due to slower traffic at our outlet stores and the planned exit of our legacy catalog business and removal of non-core product offerings to a more focused branded store and Internet strategy; and

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Unfavorable foreign currency exchange rates.
Gross Profit
Gross profit increased in the nine months of 2016 compared to the same period in 2015 due to the Pacific Brands and Champion Europe acquisitions in 2016, as well as supply chain efficiencies, reduced acquisition, integration and other action related costs, and synergies recognized from the integration of our acquisitions, partially offset by costs associated with our inventory management related efforts and unfavorable product sales mix within the Activewear segment. Included in gross profit in the nine months of 2016 and 2015 are charges of approximately $28 million and $48 million, respectively, related to acquisition, integration and other action related costs.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 24.5% for the nine months of 2016 compared to 26.8% in the same period of 2015. Included in selling, general and administrative expenses were charges of $64 million and $164 million of acquisition, integration and other action related costs for the nine months of 2016 and 2015, respectively. The lower selling, general and administrative expenses, as a percentage of net sales, resulted from the decrease in acquisition, integration and other action related costs, synergy benefits from the integration of prior acquisitions, planned reduction of our catalog distribution and continued cost control, partially offset by the higher proportion of selling, general and administrative expenses for the recently acquired entities, Pacific Brands and Champion Europe.
Other Highlights
Other Expense higher by $49 million in the nine months of 2016 compared to 2015, primarily due to costs associated with the redemption of our 6.375% Senior Notes, which included a call premium and write-off of unamortized debt issuance costs.
Interest Expense – higher by $24 million for the nine months of 2016 compared to the nine months of 2015 primarily due to higher debt balances to help fund acquisitions, share repurchases, and normal seasonal working capital build, partially offset by a lower average interest rate. Our weighted average interest rate on our outstanding debt was 3.65% during the nine months of 2016 whereas the similar rate for the nine months of 2015 was 3.80%.
Income Tax Expense – our effective income tax rate was 7% and 11% for the nine months of 2016 and 2015, respectively. The lower effective income tax rate for the nine months ended October 1, 2016 compared to the nine months ended October 3, 2015 was primarily due to a lower proportion of earnings attributed to domestic subsidiaries, which are taxed at rates higher than foreign subsidiaries. Income tax expense also benefited from the adoption of new accounting rules related to accounting for stock compensation, which requires excess tax benefits and deficiencies to be recognized in income as they occur.
Discontinued Operations – the results of our discontinued operations include the operations of two businesses, Tontine Pillow and Dunlop Flooring, purchased in the Pacific Brands acquisition.
Operating Results by Business Segment — Nine Months Ended October 1, 2016 Compared with Nine Months Ended October 3, 2015
 
Net Sales
 
Operating Profit
 
Nine Months Ended
 
Nine Months Ended
 
October 1,
2016
 
October 3,
2015
 
October 1,
2016
 
October 3,
2015
 
(dollars in thousands)
Innerwear
$
1,998,293

 
$
2,014,858

 
$
450,566

 
$
460,295

Activewear
1,187,507

 
1,203,558

 
162,960

 
187,183

Direct to Consumer
240,219

 
255,294

 
9,618

 
13,378

International
1,026,871

 
848,282

 
109,184

 
76,079

Corporate

 

 
(160,361
)
 
(299,743
)
Total net sales
$
4,452,890

 
$
4,321,992

 
$
571,967

 
$
437,192


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Innerwear
 
Nine Months Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,998,293

 
$
2,014,858

 
$
(16,565
)
 
(0.8
)%
Segment operating profit
450,566

 
460,295

 
(9,729
)
 
(2.1
)

The lower net sales in our Innerwear segment primarily resulted from a slower than expected retail environment, higher sales in the same period of 2015 due to larger X-Temp pipes from space gains and continued declines in Hosiery sales, offset, in part, by higher sales in the basics business as we focus on core products with the introduction of our FreshIQ odor control technology.
Decreased operating profit was driven by sales volume and costs associated with our inventory management related efforts, offset by continued cost control.
Activewear 
 
Nine Months Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,187,507

 
$
1,203,558

 
$
(16,051
)
 
(1.3
)%
Segment operating profit
162,960

 
187,183

 
(24,223
)
 
(12.9
)
Activewear net sales decreased due to the following:
Hanes Activewear space shifts at a large mass merchant retailer due to an expected loss of certain seasonal programs;
Lower sales in the sporting goods and mid-tier department store channels primarily due to certain retailer bankruptcies; and
Higher Champion sales in 2015 from larger pipes resulting from space gains.
Partially offset by:
The acquisition of Knights Apparel in April 2015, which added an incremental $21 million of net sales in 2016; and
Continued growth in our college bookstore business.
Operating profit decreased primarily as a result of unfavorable product sales mix and lower sales volume.
Direct to Consumer
 
Nine Months Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
240,219

 
$
255,294

 
$
(15,075
)
 
(5.9
)%
Segment operating profit
9,618

 
13,378

 
(3,760
)
 
(28.1
)
Direct to Consumer segment net sales were lower as a result of slower traffic at our outlet stores and the planned exit of our legacy catalog business and non-core product offerings to a more focused branded store and Internet strategy. Operating profit decreased as a result of lower sales volume, partially offset by a reduction of reserves from the elimination of our customer rewards program and decreased catalog distribution costs.

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International
 
Nine Months Ended
 
 
 
 
 
October 1,
2016
 
October 3,
2015
 
Higher
(Lower)
 
Percent
Change
 
(dollars in thousands)
Net sales
$
1,026,871

 
$
848,282

 
$
178,589

 
21.1
%
Segment operating profit
109,184

 
76,079

 
33,105

 
43.5

Net sales in the International segment were higher as a result of the following:
Acquisitions of Pacific Brands, Champion Europe and Champion Japan licensee; and
Continued space gains in Asia within our Activewear product category.
Partially offset by:
Unfavorable impact of foreign currency exchange rates; and
The planned exit of small, low performing brands in Hanes Europe Innerwear.
Operating profit increased primarily due to the current year acquisitions, higher sales volume in Asia and cost synergies in our Hanes Europe Innerwear business, partially offset by foreign currency exchange rates.
Corporate
Corporate expenses included certain administrative costs and acquisition, integration and other action related charges totaling $92 million for the nine months ended October 1, 2016 as compared to $212 million for the same period in 2015. Acquisition and integration costs are expenses related directly to an acquisition and its integration into the organization. These costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, infrastructure (including information technology), and similar charges. Acquisition related currency transactions represent the foreign exchange gain from financing activities related to the Champion Europe and Pacific Brands acquisitions. Foundational costs are expenses associated with building infrastructure to support and integrate current and future acquisitions; primarily consisting of information technology spend. Other costs relate to other items not included in the aforementioned categories such as charges incurred related to the Target exit from Canada in the first quarter of 2015 and its related bankruptcy and other international realignment and the configuration activities. Maidenform acquisition and integration costs and Foundational costs were completed in 2015.
 
Nine Months Ended
 
October 1, 2016
 
October 3, 2015
 
(dollars in thousands)
Acquisition and integration costs:
 
 
 
Hanes Europe Innerwear
$
59,919

 
$
111,522

Pacific Brands
20,732

 

Knights Apparel
15,623

 
11,988

Champion Europe
7,550

 

Champion Japan licensee transaction
3,102

 

Other acquisitions
364

 

Maidenform

 
28,175

Acquisition related currency transactions
(15,639
)
 

Total acquisition and integration costs
91,651

 
151,685

Foundational costs

 
28,616

Other costs
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