Item 1B.
Unresolved Staff Comments
Not applicable.
Item 1C.
Executive Officers of the Registrant
The chart below lists our executive officers and is followed by biographical information about them. Each of our executive officers is elected annually by the Board of Directors to serve until his or her successor is elected and qualifies or until his or her death, resignation or removal. No family relationship exists between any of our directors or executive officers.
Gerald W. Evans, Jr. has served as the Chief Executive Officer of the Company since October 2016. From August 2013 until October 2016, Mr. Evans served as Chief Operating Officer of the Company. From October 2011 until August 2013, Mr. Evans served as Co-Chief Operating Officer of the Company. Prior to his appointment as Co-Chief Operating Officer, Mr. Evans served as our Co-Operating Officer, President International, from November 2010 until October 2011. From February 2009 until November 2010, he was our President, International Business and Global Supply Chain. From February 2008 until February 2009, he served as our President, Global Supply Chain and Asia Business Development. From September 2006 until February 2008, he served as Executive Vice President, Chief Supply Chain Officer. From July 2005 until September 2006, Mr. Evans served as a Vice President of Sara Lee and as Chief Supply Chain Officer of Sara Lee Branded Apparel. Mr. Evans served as President and Chief Executive Officer of Sara Lee Sportswear and Underwear from March 2003 until June 2005 and as President and Chief Executive Officer of Sara Lee Sportswear from March 1999 to February 2003.
Richard D. Moss has served as our Chief Financial Officer since October 2011. Prior to his appointment as Chief Financial Officer, Mr. Moss served as the Company’s Chief Treasury and Tax Officer since December 2010, as a Senior Vice President since September 2006 and as Treasurer since June 2006. From January 2006 until the completion of the Company’s
spin off from Sara Lee, Mr. Moss served as Treasurer of Sara Lee Branded Apparel. From August 2002 to December 2005, Mr. Moss served as Vice President and Chief Financial Officer of Chattem, Inc., a leading marketer and manufacturer of branded over-the-counter health-care products, toiletries and dietary supplements. Mr. Moss currently serves on the Board of Directors of Winnebago Industries, Inc., a leading U.S. recreational vehicle manufacturer.
Joia M. Johnson has served as our Chief Administrative Officer since October 2016 and as our General Counsel and Corporate Secretary since January 2007. Since 2007, Ms. Johnson has also served as our Chief Legal Officer. From May 2000 until January 2007, Ms. Johnson served as Executive Vice President, General Counsel and Corporate Secretary of RARE Hospitality International, Inc., an owner, operator and franchisor of national chain restaurants acquired by Darden Restaurants, Inc. in October 2007. Ms. Johnson currently serves on the Board of Directors of Crawford & Company, the world’s largest independent provider of claims management solutions to the risk management and insurance industry.
W. Howard Upchurch has served as our Group President, Innerwear Americas (a position previously known as President, Innerwear) since January 2011. Prior to his appointment as Group President, Innerwear Americas, Mr. Upchurch served as our Executive Vice President and General Manager, Domestic Innerwear from January 2008 until December 2010 and as our Senior Vice President and General Manager, Intimate Apparel from July 2006 until December 2007. Prior to the completion of the Company’s spin off from Sara Lee, Mr. Upchurch served as President of Sara Lee Intimates and Hosiery.
John T. Marsh has served as our Group President, Global Activewear (a position previously known as President, Activewear) since May 2011. Prior to his appointment as Group President, Global Activewear, Mr. Marsh served as our Activewear Group General Manager during April 2011, as our Senior Vice President and General Manager, Casualwear from January 2008 to March 2011, as our Vice President and General Manager, Casualwear from September 2007 to December 2007 and as our Vice President and General Manager, Imagewear from July 2006 to September 2007. Prior to the completion of the Company’s spin off from Sara Lee, Mr. Marsh served as Vice President of Hanes Printables.
Michael E. Faircloth has served as our President, Chief Global Supply Chain and Information Technology Officer since 2014. From 2010 to 2014, he served as our Chief Global Operations Officer (a position previously known as President, Chief Global Supply Chain Officer). Prior to his appointment as Chief Global Operations Officer, Mr. Faircloth served as our Senior Vice President, Supply Chain Support from October 2009 to November 2010, as our Vice President, Supply Chain Support from March 2009 to September 2009 and as our Vice President of Engineering & Quality from July 2006 to March 2009. Prior to the completion of the Company’s spin off from Sara Lee, Mr. Faircloth served as Vice President, Industrialization of Sara Lee.
Elizabeth L. Burger has served as our Chief Human Resources Officer since July 2013. Prior to joining the Company, Ms. Burger was Vice President, Global Business Operations for Monsanto Company, a global agricultural products company, since 2007. From 2006 to 2007, she was Vice President, Corporate Human Resources, and Chief of Staff to the Executive Vice President of Human Resources of Monsanto Company. She also served as Vice President, Compensation, from 2005 to 2006, and Vice President, Global Manufacturing, from 2002 to 2004, both at Monsanto Company. Ms. Burger held other human resource positions from 1994 to 2002.
M. Scott Lewis has served as the Company’s Chief Accounting Officer and Controller since May 2015. Mr. Lewis joined the Company in 2006 as Director, External Reporting and was promoted in 2011 to Vice President, External Reporting, promoted in 2013 to Vice President, Financial Reporting and Accounting, and promoted in December 2013 to Vice President, Tax. Prior to joining the Company, Mr. Lewis served as senior manager with the accounting, audit and tax consulting firm KPMG.
We own and lease properties supporting our administrative, manufacturing, distribution and direct outlet activities. As of December 31, 2016, we owned and leased properties in 42 countries, including 52 manufacturing facilities and 44 distribution centers, as well as office facilities. The leases for these properties expire between 2017 and 2057, with the exception of some seasonal warehouses that we lease on a month-by-month basis. As of December 31, 2016, we also operated 252 direct outlet stores in the United States and the Commonwealth of Puerto Rico and 460 retail and outlet stores internationally, most of which are leased under five-year, renewable lease agreements and several of which are leased under 10-year agreements. We believe that our facilities, as well as equipment, are in good condition and meet our current business needs.
We own our approximately 470,000 square-foot headquarters located in Winston-Salem, North Carolina, which houses our various sales, marketing and corporate business functions. Research and development as well as certain product-design functions also are located in Winston-Salem, while other design functions are located in a mix of leased and owned facilities in New York City and Lenexa, Kansas.
Our products are manufactured through a combination of facilities we own and operate and facilities owned and operated by third party contractors who perform some of the steps in the manufacturing process for us, such as cutting and/or sewing. We source the remainder of our finished goods from third party manufacturers who supply us with finished products based on our designs. Our most significant manufacturing facilities include an approximately 1.1 million square-foot owned facility located in San Juan Opico, El Salvador, an approximately 1.1 million square-foot owned facility located in Nanjing, China and an approximately 600,000 square-foot owned facility located in Bonao, Dominican Republic. We distribute our products from 44 distribution centers. These facilities include 15 facilities located in the United States and 29 facilities located outside the United States in regions where we manufacture our products. Our most significant distribution facilities include an approximately 1.3 million square-foot leased facility located in Perris, California, an approximately 900,000 square-foot leased facility located in Rural Hall, North Carolina and an approximately 700,000 square-foot owned facility located in Martinsville, Virginia.
The following table summarizes the properties primarily used by our segments as of December 31, 2016:
(1)
Excludes vacant land, facilities under construction, facilities no longer in operation intended for disposal, facilities associated with discontinued operations, sourcing offices not associated with a particular segment, and office buildings housing corporate functions.
Item 3.
Item 3.
Legal Proceedings
Although we are subject to various claims and legal actions that occur from time to time in the ordinary course of our business, we are not party to any pending legal proceedings that we believe could have a material adverse effect on our business, results of operations, financial condition or cash flows.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for our Common Stock
Our common stock currently is traded on the New York Stock Exchange, or the “NYSE,” under the symbol “HBI.” We have not made any unregistered sales of our equity securities.
The following table sets forth the high and low sales prices for our common stock as reported by the NYSE for each quarter during the last two fiscal years. All per share amounts and number of shares presented below reflect the four-for-one stock split that was effected in the first quarter of fiscal 2015.
Holders of Record
On January 27, 2017, there were 17,940 holders of record of our common stock. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to determine the exact number of beneficial stockholders represented by these record holders, but we believe that there were approximately 150,211 beneficial owners of our common stock as of January 27, 2017.
Dividends
In 2014, our Board of Directors authorized regular quarterly cash dividends of $0.075 per share, which were paid in 2014.
In 2015, our Board of Directors increased our regular quarterly dividend rate to $0.10 per share on outstanding common stock, which were paid in 2015. In addition, we effected a four-for-one stock split in the form of a stock dividend to stockholders of record as of the close of business on February 9, 2015.
In January 2016, our Board of Directors increased our regular quarterly dividend rate to $0.11 per share on outstanding common stock. During the fiscal year, regular quarterly cash dividends of $0.11 per share were paid March 8, 2016, June 7, 2016, September 7, 2016 and December 6, 2016.
In January 2017, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding common stock to be paid on March 7, 2017 to stockholders of record at the close of business on February 14, 2017.
We intend to pay regular quarterly dividends on our outstanding common stock. However, there can be no assurance that future dividends will be declared and paid. The declaration and payment of future dividends, the amount of any such dividends, and the establishment of record and payment dates for dividends, if any, are subject to final determination by our Board of Directors after its review of general business conditions, our financial condition and results of operations, our capital requirements, our prospects and such other factors as our Board of Directors may deem relevant.
Issuer Repurchases of Equity Securities
On April 27, 2016, the Company’s Board of Directors approved a new share repurchase program for up to 40 million 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 million shares that was originally approved in 2007. During the year ended December 31, 2016, we repurchased 14.2 million shares under the previous share repurchase program at an average price of $26.65 per share, for a total cost of $380 million (none of which were purchased in the fourth quarter). At December 31, 2016, there remained 40 million shares available for future share repurchases under the new share repurchase program approved in 2016.
Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the comparable cumulative return of the S&P 500 Index and the S&P 1500 Apparel, Accessories & Luxury Goods Index. The graph assumes that $100 was invested in our common stock and each index on December 31, 2011. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
Equity Compensation Plan Information
The following table provides information about our equity compensation plans as of December 31, 2016:
(1)
The amount appearing under “Number of securities remaining available for future issuance under equity compensation plans” includes 10,677 shares available under the Hanesbrands Inc. Omnibus Incentive Plan (As Amended and Restated) and 6,867 shares available under the Hanesbrands Inc. Employee Stock Purchase Plan of 2006.
Item 6.
Item 6.
Selected Financial Data
The following table presents our selected historical financial data. The statement of income data for the years ended December 31, 2016, January 2, 2016 and January 3, 2015 and the balance sheet data as of December 31, 2016 and January 2, 2016 have been derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The statement of income data for the years ended December 28, 2013 and December 29, 2012 and the balance sheet data as of January 3, 2015, December 28, 2013 and December 29, 2012 has been derived from our financial statements not included in this Annual Report on Form 10-K.
The data should be read in conjunction with our historical financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” and “Risk Factors” in this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” in this Annual Report on Form 10-K and included elsewhere in this Annual Report on Form 10-K.
This MD&A is a supplement to our financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, and is provided to enhance your understanding of our results of operations and financial condition. Our MD&A is organized as follows:
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Overview. This section provides a general description of our Company and operating segments, business and industry trends, our key business strategies and background information on other matters discussed in this MD&A.
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2016 Highlights. This section discusses some of the highlights of our performance and activities during 2016.
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Consolidated Results of Operations and Operating Results by Business Segment. These sections provide our analysis and outlook for the significant line items on our statements of income, as well as other information that we deem meaningful to an understanding of our results of operations on both a consolidated basis and a business segment basis.
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Liquidity and Capital Resources. This section provides an analysis of trends and uncertainties affecting liquidity, cash requirements for our business, sources and uses of our cash and our financing arrangements.
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Critical Accounting Policies and Estimates. This section discusses the accounting policies that we consider important to the evaluation and reporting of our financial condition and results of operations, and whose application requires significant judgments or a complex estimation process.
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Recently Issued Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting pronouncements that we will be required to adopt in a future period.
Overview
Our Company
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Flexees, Gear for Sports and Berlei. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, children’s underwear, activewear, socks and hosiery. Our brands hold either the number one or number two market position by units sold in many product categories and geographies in which we compete.
Acquisitions
On June 30, 2016, we acquired 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. The acquisition was an all-cash transaction valued at approximately €221 million on an enterprise value basis less working capital adjustments as defined in the agreement, which includes €41 million in estimated contingent consideration. The contingent consideration is based on 10 times Champion Europe’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the calendar year 2016 and is payable in 2017. We funded the acquisition through a combination of cash on hand and borrowing under the 3.5% Senior Notes issued in June 2016. We believe combining the Champion business will create a unified platform to benefit from the global consumer growth trend for active apparel. The operating results of Champion Europe from the date of acquisition are included in the International segment.
On July 14, 2016, we acquired Pacific Brands Limited (“Hanes Australasia”), 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 departments stores, for a total purchase price of AUD$1,049 million (approximately $801 million based on acquisition date exchange rates). The acquisition was funded 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. We believe the 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. The operating results of Hanes Australasia from the date of acquisition are included in the International segment.
In September 2016, we 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 our domestic presence in the custom decorated teamwear and fanware apparel space into the high school channel and expand our retail platform in Italy, respectively. Total consideration paid for both acquisitions totaled approximately $24 million and was funded with cash on hand and short term borrowings under the Revolving Loan Facility.
We incurred $186 million of charges in 2016 related to acquisition, integration and other action related costs. Our current estimate for pretax charges in 2017 for acquisition, integration and other actions is approximately $80 million to $90 million.
Our Segments
Our operations are managed and reported in four operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear, Direct to Consumer and International. 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 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 reportable segments are as follows:
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Innerwear sells basic branded products that are replenishment in nature under the product categories of intimate apparel, men’s underwear, panties, children’s underwear, socks and hosiery.
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Activewear sells basic branded products that are primarily seasonal in nature to both retailers and wholesalers, as well as licensed sports apparel and licensed logo apparel in collegiate bookstores, mass retailers and other channels.
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Direct to Consumer includes our Company-operated outlet stores and website operations that sell our branded products directly to consumers.
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International primarily relates to the Europe, Australia, Asia, Latin America and Canada geographic locations that sell products that span across the Innerwear and Activewear reportable segments.
Outlook for 2017
We expect 2017 net sales of $6.45 billion to $6.55 billion.
Interest and other expenses are expected to be approximately $175 million, combined.
We estimate our 2017 full-year tax rate to be comparable with 2016, assuming no changes to U.S. tax law and policy.
We expect cash flow from operations to be in the range of $625 million to $725 million. We expect capital expenditures of approximately $90 million to $100 million. We expect share repurchases of approximately $300 million.
Business and Industry Trends
Inflation and Changing Prices
Cotton is the primary raw material used in manufacturing many of our products. While we do not own yarn operations, we are still exposed to fluctuations in the cost of cotton. Increases in the cost of cotton can result in higher costs in the price we pay for yarn from our large-scale yarn suppliers and may result in the need to implement future price increases in order to maintain our margins. Decreases in cotton prices can lead to lower margins for inventory and products produced from cotton we have already purchased, particularly if there is downward price pressure as a result of consumer demand, competition or other factors.
Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by, among other factors, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. We are able to lock in the cost of cotton reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect our business from the volatility of the market price of cotton. Under our agreements with these suppliers, we have the ability to periodically fix the cotton cost component of our yarn purchases. When we elect to fix the cotton cost component under these agreements, interim fluctuations in the price of cotton do not impact the price we pay for the specified volume of yarn. The yarn suppliers bear the risk of cotton fluctuations for the yarn volume specified and it is
their responsibility to procure the cotton at the agreed upon pricing through arrangements they make with their cotton suppliers. However, our business can be affected by dramatic movements in cotton prices. The cost of cotton used in goods manufactured by us represented only approximately 4% of our cost of sales in 2016. Costs incurred today for materials and labor, including cotton, typically do not impact our results until the inventory is sold approximately six to nine months later.
Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodities and other raw materials, such as dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other than the United States and declines in the value of the U.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by rises in consumer income, which also could have a negative impact on spending.
Other Business and Industry Trends
The basic apparel market is highly competitive and evolving rapidly. Competition is generally based upon brand name recognition, price, product quality, selection, service and purchasing convenience. The majority of our core styles continue from year to year, with variations only in color, fabric or design details. Some products, however, such as intimate apparel, activewear and sheer hosiery, do have more of an emphasis on style and innovation. Our businesses face competition from other large corporations and foreign manufacturers, as well as smaller companies, department stores, specialty stores and other retailers that market and sell basic apparel products under private labels that compete directly with our brands.
Our top 10 customers accounted for 52% of our net sales. Our largest customers in 2016 were Wal-Mart and Target, which accounted for 20% and 15% of total sales, respectively. The increasing bargaining power of retailers can create pricing pressures as our customers grow larger and seek greater concessions in their purchase of our products, while also demanding exclusivity of some of our products. To counteract these effects, it has become increasingly important to leverage our national brands through investment in our largest and strongest brands as our customers strive to maximize their performance especially in today’s challenging economic environment. Brands are important in our core categories to drive traffic and project the quality and value our customers demand.
Consumers are increasingly embracing shopping online and through mobile commerce applications. As a result, an increasing portion of our revenue across all channels is being generated online and through mobile commerce applications. We are continuing to develop and expand our omnichannel capabilities to allow a consumer to use more than one channel when making a purchase, including in-store, at one of our retail or outlet stores or those of our retail partners, online or with a mobile device, through one of our branded websites, the website of one of our retail partners, or an online pureplay, such as Amazon. In addition to broadening our assortment of product offerings across all online channels, we are also increasing the proportion of our media budget dedicated to digital marketing.
Foreign Exchange Rates
Changes in exchange rates between the U.S. Dollar and other currencies can impact our financial results in two ways; a translation impact and a transaction impact. The translation impact refers to the impact that changes in exchange rates can have on our published financial results. Similar to many multi-national corporations that publish financial results in U.S. Dollars, our revenue and profit earned in local foreign currencies is translated back into U.S. Dollars using an average exchange rate over the representative period. A period of strengthening in the U.S. Dollar results in a negative impact to our published financial results (because it would take more units of a local currency to convert into a dollar). The opposite is true during a period of weakening in the U.S. Dollar. Our biggest foreign currency exposure is the euro.
The transaction impact on financial results is common for apparel companies that source goods because these goods are purchased in U.S. Dollars. The transaction impact from a strengthening dollar would be negative to our financial results (because the U.S. Dollar-based costs would convert into a higher amount of local currency units, which means a higher local-currency cost of goods, and in turn, a lower local-currency gross profit). The transaction impact from exchange rates is typically recovered over time with price increases. However, during periods of rapid change in exchange rates; pricing is unable to change quickly enough, therefore we hedge against our sourcing costs to minimize our exposure to fluctuating exchange rates.
Our Key Business Strategies
Our Innovate-to-Elevate strategy integrates our brand superiority, industry-leading innovation and low-cost supply chain to provide higher valued products while lowering production costs.
The first element of our Innovate-to-Elevate strategy is our brand power. We seek to drive modest sales growth by consistently offering consumers brands they trust and products with unsurpassed value. Our brands have a strong heritage in the basic apparel industry. Our brands hold either the number one or number two U.S. market position by units sold in most product categories in which we compete. Internationally, our commercial markets include Europe, Australia, Japan, Canada, Mexico and Brazil, where a substantial amount of gross domestic product growth outside the United States will be concentrated over the next decade. Our ability to react to changing customer needs and industry trends is key to our success. Our design, research and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We seek to leverage our insights into consumer demand in the basic apparel industry to develop new products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends. We also support our key brands with targeted, effective advertising and marketing campaigns.
The second element of our Innovate-to-Elevate strategy is platform innovation. We are not interested in newness or fashion, but rather focus on identifying the long-term megatrends that will impact our categories over the next five to 10 years. Once we have identified these trends, we utilize a disciplined big-idea process to put more science into the art of apparel. Our approach to innovation is to focus on big platforms. Our Tagless apparel platform, ComfortFlex Fit bra platform, ComfortBlend fabric platform, temperature-control X-Temp fabric platform and FreshIQ advanced odor protection technology fabric platform incorporate big-idea innovation to span brands, product categories, business segments, retailer and distribution channels and geographies. We are focused on driving innovation that is margin accretive and that can leverage our supply chain in order to drive further economies of scale.
The third element of our Innovate-to-Elevate strategy is our low-cost global supply chain. We seek to expand margins through optimizing our low-cost global supply chain and streamlining our operations to reduce costs. We believe that we are able to leverage our significant scale of operations to provide us with greater manufacturing efficiencies, purchasing power and product design, marketing and customer management resources than our smaller competitors. Our global supply chain spans across both the Western and Eastern hemispheres and provides us with a balanced approach to product supply, which relies on a combination of owned, contracted and sourced manufacturing located across different geographic regions, increases the efficiency of our operations, reduces product costs and offers customers a reliable source of supply. Our global supply chain enables us to expand and leverage our production scale as we balance our supply chain across hemispheres, thereby diversifying our production risks. We have generated significant cost savings, margin expansion and contributions to cash flow and should continue to do so as we further optimize our size, scale and production capability.
We seek to effectively generate strong cash flow through optimizing our capital structure and managing working capital levels. Our capital allocation strategy is to effectively deploy our significant, consistent cash flow to generate the best long-term returns for our shareholders. Our goal is to use our cash flow to fund capital investments and dividends, leverage debt for acquisitions and use excess cash flow for share repurchases.
Seasonality and Other Factors
Our operating results are subject to some variability due to seasonality and other factors. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. We generally have higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions.
Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary spending by consumers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside our control. Consumers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. These consumers may choose to purchase fewer of our products or to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time.
Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men’s underwear, and lower margin products, such as activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time
to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to customers’ preferences and discretionary spending.
Tax Expense
As a global company, we are subject to income taxes and file income tax returns in more than 100 U.S. and foreign jurisdictions each year. Almost every foreign jurisdiction in which we operate has a lower effective income tax rate than the U.S. For the year ended December 31, 2016, a substantial majority of our foreign income was earned by our manufacturing and sourcing operations in El Salvador, Hong Kong, Dominican Republic and Thailand. The relatively lower effective tax rates in these jurisdictions as a result of favorable local tax regimes and various free trade zone agreements significantly reduced our consolidated effective tax rate. While we are not currently aware of any material trends in these jurisdictions that are likely to impact our current or future tax expense, our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower effective tax rates and higher than anticipated in countries where we have higher effective tax rates, or by changes in tax laws or regulations.
In addition, future acquisitions may affect the proportion of our pre-tax income from foreign jurisdictions, both due to external sales and also increased volume in our self-owned supply chain. At the same time, a significant amount of the acquisition and integration costs (such as legal fees, bank fees and consulting fees) associated with these acquisitions is generally incurred in the U.S., which may decrease domestic taxable income. We follow a disciplined acquisition strategy focused on acquisitions that meet strict criteria for strong likely returns with relatively low risk. It is difficult to predict whether or when such acquisitions will occur and whether the acquisition targets will be foreign or domestic. Therefore, it is also difficult to predict the effect of acquisitions on the future distribution of our pre-tax income.
We maintain intercompany transfer pricing agreements governing sales within our self-owned supply chain, which can impact the amount of pre-tax income we recognize in foreign jurisdictions. In compliance with applicable tax laws, we regularly review the terms of these agreements utilizing independent third-party transfer pricing studies to ensure that intercompany pricing is consistent with what a seller would charge an independent, arm’s length customer, or what a buyer would pay an independent, arm’s length supplier. Therefore, changes in intercompany pricing are often driven by market conditions, which are also difficult to predict.
We regularly assess any significant exposure associated with increases in effective tax rates, and adjustments are made as events occur that warrant adjustment to our tax provisions. See “Risk Factors - We have a complex multinational tax structure, and changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could impact our capital deployment strategy and adversely affect our results.”
2016 Highlights
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Net sales in 2016 were $6.0 billion, compared with $5.7 billion in 2015, representing a 5% increase.
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Operating profit was $776 million in 2016 compared with $595 million in 2015, representing a 30% increase. As a percent of sales, operating profit was 12.9% in 2016 compared to 10.4% in 2015. Included within operating profit were acquisition, integration and other action related charges of $139 million and $266 million in 2016 and 2015, respectively.
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Diluted earnings per share was $1.40 in 2016, compared with $1.06 in 2015, representing a 32% increase.
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Operating cash flows were $606 million in 2016 compared to $227 million in 2015.
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Our Board of Directors approved a new share repurchase program which authorizes us to purchase up to 40 million shares of our common stock. The new program replaces the previous share repurchase authorization for up to 40 million that was originally approved in 2007. During 2016, we purchased, as part of our cash deployment strategy, approximately 14.2 million shares of our common stock under the previous program for approximately $380 million at a weighted average cost per share of $26.65.
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We refinanced our debt structure during the second quarter of 2016 by redeeming our $1.0 billion 6.375% Senior Notes and issuing $900 million in each of two series of Senior Notes at 4.625% and 4.875% due in 2024 and 2026, respectively. In addition, we issued €500 million in Senior Notes at 3.5% due in 2024. The refinancing reduced interest rates, increased our borrowing capacity, shifted our capital structure towards more fixed rate debt and helped to fund acquisitions.
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We acquired Champion Europe on June 30, 2016. The acquisition, combined with Champion brand rights previously owned, unites the Champion brand globally and gives us a powerful platform for growth on every continent.
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We acquired Hanes Australasia on July 14, 2016. Hanes Australasia 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.
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As part of our acquisition of Hanes Australasia, we acquired the Dunlop Flooring and Tontine Pillow businesses. These businesses were deemed by management to not be a strategic fit and therefore, the decision was made to divest of the businesses. On December 15, 2016, we entered into two definitive agreements to sell the Dunlop Flooring and Tontine Pillow businesses as planned. On February 1, 2017, we completed the sale of the Dunlop Flooring business. The sale of the Tontine Pillow business is expected to be completed in the first quarter of 2017. The aforementioned businesses are classified as assets held for sale and presented as discontinued operations.
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As part of our cash deployment strategy, we initiated four quarterly dividends, in March, June, September and December, of $0.11 per share.
Consolidated Results of Operations - Year Ended December 31, 2016 (“2016”) Compared with Year Ended January 2, 2016 (“2015”)
Net Sales
Higher net sales primarily due to the following:
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Incremental net sales of approximately $435 million from businesses acquired in 2016, primarily Hanes Australasia and Champion Europe;
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Acquisition of Knights Apparel in April 2015, which added an incremental $21 million of net sales in 2016; and
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Continued growth in the Activewear segment within our college bookstore business and Champion sales within the mass merchant channel.
Partially offset by:
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Lower sales in the Innerwear segment due to a slower than expected retail environment and continued decline in Hosiery sales;
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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; and
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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.
Gross Profit
The increase in gross profit was attributable to results obtained from our recent acquisitions of Hanes Australasia and Champion Europe 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 reduction related efforts and unfavorable product sales mix within the Activewear segment. Included within gross profit are charges of approximately $39 million and $63 million related to acquisition, integration and other action related costs in 2016 and 2015, respectively.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 24.9% in 2016 compared to 26.9% in 2015. Included in selling, general and administrative expenses were charges of $99 million and $203 million of acquisition, integration and other action related costs in 2016 and 2015, respectively. The lower selling, general and administrative expenses, as a percentage of 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 higher proportion of selling, general and administrative expenses for the recently acquired entities, primarily Hanes Australasia and Champion Europe.
Other Highlights
Other Expense - higher by $49 million in 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 costs.
Interest Expense - higher by $35 million in 2016 compared to 2015 primarily due to higher debt balances to help fund acquisitions and share repurchases, partially offset by a lower average interest rate. Our weighted average interest rate on our outstanding debt was 3.64% during 2016, compared to 3.75% during 2015.
Income Tax Expense - our effective income tax rate was 6.0% and 9.5% in 2016 and 2015, respectively. The lower effective income tax rate was primarily attributable 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 required 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, Dunlop Flooring and Tontine Pillow, purchased in the Hanes Australasia acquisition.
Operating Results by Business Segment - Year Ended December 31, 2016 (“2016”) Compared with Year Ended January 2, 2016 (“2015”)
Innerwear
The lower net sales in our Innerwear segment primarily resulted from lower sales volume driven by a soft retail environment, inventory reductions at a large mass retailer and continued declines in Hosiery sales.
Decreased operating profit was driven by sales volume and costs associated with our inventory reduction related efforts, offset by continued cost control.
Activewear
Activewear net sales decreased due to the following:
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Lower sales in the sporting goods and mid-tier department store channels primarily due to certain retailer bankruptcies;
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Lower sales in our Hanes Activewear business due to an expected loss of certain seasonal programs; and
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Lower Champion sales within the mid-tier channel in 2016, due to larger pipes to support space gains in 2015, which were not repeated in 2016.
Offset by:
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The acquisition of Knights Apparel in April 2015, which added an incremental $21 million of net sales in 2016;
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The acquisition of GTM in September 2016, which added an incremental $13 million of net sales;
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Champion growth within the mass retail channel; and
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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
Direct to Consumer segment net sales were lower as a result of slower traffic at our outlet stores and the planned exit from our legacy catalog business and non-core product offerings in both our stores and Internet businesses. 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.
International
Net sales in the International segment were higher as a result of the following:
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Acquisitions of Hanes Australasia, Champion Europe and Champion Japan licensee; and
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Continued space gains in Asia within our Activewear product category.
Partially offset by:
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Unfavorable impact of foreign currency exchange rates of approximately $12 million; and
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The planned exit of small, low performing brands in Hanes Europe Innerwear.
International segment 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 were comprised primarily of certain administrative costs and acquisition, integration and other action related charges. Corporate expenses decreased in 2016 primarily from the reduction of acquisition, integration and other action related charges in 2016 compared to 2015. Acquisition and integration costs are expenses directly related 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, information technology costs and similar charges. Acquisition related currency transactions represent the foreign exchange gain from financing activities related to the Champion Europe and Hanes Australasia acquisitions. Foundational costs are expenses associated with building and realigning our enterprise-wide infrastructure to support global growth and future acquisitions, primarily consisting of technology spending. 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.
Consolidated Results of Operations - Year Ended January 2, 2016 (“2015”) Compared with Year Ended January 3, 2015 (“2014”)
Net Sales
Higher net sales primarily due to the following:
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Incremental net sales of $445 million and $160 million, from our acquisitions of Hanes Europe Innerwear in August 2014 and Knights Apparel in April 2015, respectively;
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Growth in our Gear For Sports business within the college bookstore channel and Champion products in mid-tier, department and sporting goods stores; and
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Price increases and strong performance from our ComfortBlend, X-Temp and ComfortFlex Fit innovative platforms.
Offset by lower net sales resulting from:
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Impact from the 53rd week in 2014;
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The exit of a significant retailer in Canada;
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Lower shipments in our basics products driven by inventory adjustments at a major mass retailer;
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The impact of weather on retail traffic and seasonal product lines;
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The planned exit of certain acquired private label programs; and
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Unfavorable foreign currency exchange rates. Excluding this impact, consolidated net sales and International segment net sales increased 9% and 54%, respectively.
Gross Profit
The increase in gross profit was attributable to results obtained from our acquisitions of Hanes Europe Innerwear and Knights Apparel combined with our supply chain efficiencies, product pricing within our intimates business and favorable product mix within our Activewear segment. Included within gross profit are charges of approximately $63 million and $73 million related to acquisition, integration and other action related costs in 2015 and 2014, respectively.
Selling, General and Administrative Expenses
As a percentage of net sales, our selling, general and administrative expenses were 26.9% in 2015 compared to 25.2% in 2014. The higher selling, general and administrative expenses were attributable to charges of approximately $203 million related to acquisition, integration and other action related costs in 2015, compared to $126 million of acquisition, integration and other action related costs in 2014. Also included in 2015 were incremental selling, general and administrative costs of $190 million and $21 million related to Hanes Europe Innerwear and Knights Apparel, respectively. Exclusive of the impact of higher acquisition, integration and other action related costs and the purchase of Hanes Europe Innerwear and Knights Apparel, selling, general and administrative expenses were lower due to tight cost control and synergies gained from the Maidenform acquisition.
Other Highlights
Interest Expense - higher by $22 million in 2015 compared to 2014 primarily due to higher debt balances related to the acquisition of Knights Apparel and our investment in working capital. Our weighted average interest rate on our outstanding debt was 3.75% during 2015 compared to 4.05% in 2014.
Income Tax Expense - our effective income tax rate was 9.5% and 13.0% for 2015 and 2014, respectively. The lower effective income tax rate was primarily attributable to income tax benefits of approximately $56 million recognized in 2015 resulting from the completion of the Internal Revenue Service audit examination of the 2011 and 2012 tax years and the remeasurement of certain unrecognized tax benefits. Offsetting these tax benefits, we elected to repatriate approximately $124 million of foreign earnings in 2015. In 2014, there were net discrete tax benefits of approximately $10 million primarily related to the realization of unrecognized tax benefits resulting from the lapsing of domestic and foreign statutes of limitations.
Operating Results by Business Segment - Year Ended January 2, 2016 (“2015”) Compared with Year Ended January 3, 2015 (“2014”)
Innerwear
The lower net sales in our Innerwear segment primarily resulted from the following:
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Lower shipments of basics products due to inventory adjustments at a major mass retailer;
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The 53rd week in 2014;
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Impact of weather resulting in weaker holiday traffic at stores; and
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The planned exit of certain acquired private label programs;
Offset by:
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Price increases and strong performance from our ComfortBlend, X-Temp and ComfortFlex Fit innovation platforms.
Margin expansion was driven by product pricing and favorable product mix driven by our innovative platforms. Selling, general and administrative costs were lower in 2015 primarily due to tight cost control and continued synergies gained from the Maidenform acquisition.
Activewear
Activewear sales increased due to the following:
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Growth in our sports apparel business resulting from our acquisition of Knights Apparel in April 2015 and higher net sales by Gear for Sports in the college bookstore channel; and
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Higher net sales in our Champion branded product in the mid-tier and department stores channel and sporting goods stores;
Offset by:
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Lower net sales from the impact of weather on retail traffic and seasonal product lines.
Increase in operating profit was driven by our Knights Apparel acquisition, reduced costs as we insource certain products into our supply chain, favorable product mix and cost control.
Direct to Consumer
Direct to Consumer segment had lower net sales resulting from the 53rd week in 2014 and reduced consumer traffic in our outlet stores.
Direct to Consumer segment operating profit decreased primarily due to lower sales.
International
Sales in the International segment were higher as a result of the following:
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Incremental sales of Hanes Europe Innerwear products as a result of its acquisition in August 2014;
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Higher sales volume in Asia due to net space gains;
Offset by:
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$95 million unfavorable impact of foreign currency exchange rates; and
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The exit of a significant retailer in Canada.
International segment operating margin decreased primarily due to higher selling, general and administrative expenses associated with Hanes Europe Innerwear and unfavorable foreign currency exchange rates.
Corporate
Corporate expenses were comprised primarily of certain administrative costs and acquisition, integration and other action related charges. Corporate expenses increased in 2015, primarily from higher acquisition, integration and other action related charges in 2015 compared to 2014. 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, information technology costs and similar charges. Maidenform acquisition and integration costs were completed in 2015. Foundational costs are expenses associated with building and realigning our enterprise-wide infrastructure to support global growth and future acquisitions, primarily consisting of information technology spending. Foundational costs were completed in 2015. A significant majority of Other costs are non-cash and relate to the exit of our commercial sales organization in the China market. The main factors that drove the decision to exit the China market were primarily related to the fragmented underwear market and business practices for innerwear and activewear in China that were not conducive to our wholesale business model. Exiting China is immaterial to our consolidated financial results and to the International business.
Liquidity and Capital Resources
Trends and Uncertainties Affecting Liquidity
Our primary sources of liquidity are cash generated from global operations and cash available under our $1.0 billion Revolving Loan Facility, our $275 million Accounts Receivable Securitization Facility and our international loan facilities. Because we are a global company with diversified international operations, a significant portion of our revenues are generated by foreign subsidiaries whose associated earnings are expected to be permanently reinvested abroad. As of December 31, 2016, approximately $424 million of cash and cash equivalents on our consolidated balance sheet was held by foreign subsidiaries. Given the substantial nature of our foreign operations, we are able to use these undistributed foreign earnings abroad to fund capital expenditures and debt service costs for our international businesses. We also plan to use these undistributed earnings to fund future foreign acquisitions. Our domestic operations, together with the Revolving Loan Facility and the Accounts Receivable Securitization facility, provide sufficient cash flow to fund our cash needs domestically. Cash residing offshore is generally not needed to fund domestic needs. As of December 31, 2016, we had $994 million of borrowing availability under our Revolving Loan Facility (after taking into account outstanding letters of credit), $230 million of borrowing availability under our Accounts Receivable Securitization Facility, $189 million of borrowing availability under our international loan facilities, which includes our European Revolving Loan Facility, our Australian Revolving Loan Facility and other international notes payable and debt facilities, and $460 million in cash and cash equivalents. We currently believe that our existing cash balances and cash generated by operations, together with our available credit capacity, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements.
The following have impacted or are expected to impact liquidity:
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we have principal and interest obligations under our debt;
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we acquired Knights Apparel in April 2015, Champion Europe in June 2016, Hanes Australasia in July 2016, and we may pursue strategic acquisitions in the future;
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we expect to continue to invest in efforts to improve operating efficiencies and lower costs;
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we made a $100 million contribution to our pension plans in January 2015 and a $40 million contribution in January 2016;
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we may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit to the United States, which could significantly impact our effective income tax rate;
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our Board of Directors has authorized a regular quarterly dividend; and
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our Board of Directors has authorized the repurchase of up to 40 million shares under our newly authorized share repurchase program approved in 2016. Under our former share repurchase program originally approved in 2007, we repurchased 14.2 million shares in 2016 at a cost of $380 million and 12.1 million shares in 2015 for a cost of $352 million.
We typically use cash during the first half of the year and generate most of our cash flow in the second half of the year. We expect our cash deployment strategy in the future will include a mix of dividends, acquisitions and share repurchases.
Cash Requirements for Our Business
We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, business acquisitions, contributions to our pension plans, repurchases of our stock and regular quarterly dividend payments. We believe we have sufficient cash and available borrowings for our foreseeable liquidity needs.
Pension Plans
In January 2016, we made a voluntary contribution of $40 million to our pension plans. As a result of this contribution, our U.S. qualified pension plan is approximately 94% funded as of December 31, 2016 compared to 104% funded as of January 2, 2016, under the Pension Protection Act funding rules. We are not required to make any additional cash contributions to our pension plans in 2017 based on a preliminary calculation by our actuary. We may elect to make additional voluntary contributions during 2017 to maintain certain funded levels. See Note, “Defined Pension Benefit Plans,” to our financial statements for more information on the plan asset and pension expense components.
Share Repurchase Program
In April 2016, our Board of Directors approved a new share repurchase program for up to 40 million shares to be repurchased in open market transactions, subject to market conditions, legal requirements and other factors. The new program replaces our previous share repurchase program for up to 40 million shares that was originally approved in 2007. During 2016, we repurchased 14.2 million shares of our common stock under the previous program at a cost of $380 million (average price of $26.65). During 2015, we purchased 12.1 million shares of our common stock under the previous program at a cost of $352 million (average price of $28.91). At December 31, 2016, the remaining repurchase authorization totaled 40 million shares under the new share repurchase program approved in 2016.
The primary objective of our share repurchase program is to utilize excess cash flow to generate shareholder value. While we may repurchase additional stock under the program, we may choose not to repurchase any stock and focus more on other uses of cash in the next 12 months.
Dividends
In 2014, our Board of Directors declared dividends of $0.075 per share on outstanding common stock which were paid in 2014.
In January 2015, April 2015, July 2015 and October 2015, our Board of Directors declared dividends of $0.10 per share on outstanding common stock which were paid in 2015. In addition, the Board of Directors authorized a four-for-one stock split in the form of a 300% stock dividend, which was implemented on March 3, 2015 to stockholders of record at the close of business on February 9, 2015.
In January 2016, our Board of Directors increased our regular quarterly dividend rate to $0.11 per share on outstanding common stock. During our 2016 fiscal year, regular quarterly cash dividends of $0.11 per share were paid on March 8, 2016, June 7, 2016, September 7, 2016 and December 6, 2016.
In January 2017, our Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding common stock to be paid on March 7, 2017 to stockholders of record at the close of business on February 14, 2017.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.
Future Contractual Obligations and Commitments
The following table contains information on our contractual obligations and commitments as of December 31, 2016, and their expected timing on future cash flows and liquidity.
(1)
Interest obligations on floating rate debt instruments are calculated for future periods using interest rates in effect at December 31, 2016.
(2)
Represents the projected payment for long-term liabilities recorded on the Consolidated Balance Sheet for certain employee benefit claims, royalty-bearing license agreement payments, deferred compensation and uncertain tax positions.
Funding contributions to our defined benefit pension plans are not included in the table above because it is uncertain whether or when further contributions will be required. We are not required to make any additional cash contributions to our pension plans in 2017 based on a preliminary calculation by our actuary. We may elect to make additional voluntary contributions during 2017 to maintain certain funded levels.
Sources and Uses of Our Cash
The information presented below regarding the sources and uses of our cash flows for the years ended December 31, 2016 and January 2, 2016 was derived from our financial statements.
Operating Activities
Our overall liquidity is primarily driven by our strong cash flow provided by operating activities, which is dependent on net income and changes in working capital. As compared to prior year, our operating cash increased in 2016 due to our increased profitability and changes in working capital, specifically related to our inventory reduction efforts and a smaller voluntary pension contribution in 2016 of $40 million compared to $100 million in 2015.
Investing Activities
The higher net cash used for investing activities was primarily the result of our acquisitions of Hanes Australasia and Champion Europe, partially offset by lower capital spending and increased cash proceeds from sale of assets in 2016 compared to 2015, which is primarily the result of cash receipts of $66 million towards an anticipated sale leaseback transaction of one of our manufacturing facilities.
Financing Activities
The higher net cash from financing activities was primarily the result of the issuance of our three Senior Notes in 2016 and incurrence of debt under our Australia term loan facilities, offset by lower net borrowing on our other credit facilities and higher share repurchases in 2016.
Financing Arrangements
We believe our financing structure provides a secure base to support our operations and key business strategies. As of December 31, 2016, we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness discussed below. We continue to monitor our covenant compliance carefully in this difficult economic environment. We expect to maintain compliance with our covenants during 2017, however economic conditions or the occurrence of events discussed above under “Risk Factors” could cause noncompliance.
We have significant liquidity from our available cash balances and credit facilities. We maintain a senior secured credit facility (the “Senior Secured Credit Facility”), which includes a Revolving Loan Facility of $1.0 billion and an AUD$65 million Australian revolving loan facility (the “Australian Revolver”). Our Accounts Receivable Securitization Facility provides additional funding (varying availability throughout the year) accounted for as a secured borrowing, limited to the availability of eligible receivables, and is secured by certain domestic trade receivables. We have also established a €100 million European revolving loan facility (the “European Revolver”). As of December 31, 2016, we had $994 million of borrowing availability under of our Revolving Loan Facility (after taking into account outstanding letters of credit), $230 million of borrowing availability under our Accounts Receivable Securitization Facility, $42 million of borrowing availability under our Australian Revolver, $42 million of borrowing availability under our European Revolver and $25 million of borrowing availability under other international debt facilities. Refer to Note, “Debt”, for a complete overview of our credit facilities.
Notes Payable
Notes payable were $56 million at December 31, 2016 and $118 million at January 2, 2016. At December 31, 2016, we had $80 million of borrowing availability under our international notes payable facilities.
Undistributed Earnings from Foreign Subsidiaries
Our primary sources of liquidity are cash generated from global operations and cash available under our $1.0 billion Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international loan facilities. Because we are a global company with diversified international operations, a significant portion of our revenues are generated by foreign subsidiaries whose associated earnings are expected to be permanently reinvested abroad. As of December 31, 2016, the cumulative amount of undistributed earnings from our foreign subsidiaries was approximately $3.3 billion, of which $410 million of cash and cash equivalents was held by foreign subsidiaries whose undistributed earnings are considered permanently reinvested and $14 million of cash and cash equivalents was held by foreign subsidiaries whose undistributed earnings are not considered permanently reinvested. Given the substantial nature of our foreign operations, we are able to use these undistributed foreign earnings abroad to fund capital expenditures and debt service costs for our international businesses. We also plan to use these undistributed earnings to fund future foreign acquisitions. Our domestic operations, together with the Revolving Loan Facility and the Accounts Receivable Securitization facility, provide sufficient cash flow to fund our cash needs domestically. Cash residing offshore is generally not needed to fund our cash needs domestically. As of December 31, 2016, we had $994 million of borrowing availability under the Revolving Loan Facility, $230 million of borrowing availability under the Accounts Receivable Securitization Facility and $189 million of borrowing availability under our international loan
facilities. We reassess our reinvestment assertions each reporting period and currently believe that we have sufficient other sources of liquidity to support our assertion that such undistributed earnings held by foreign subsidiaries may be considered to be reinvested permanently.
We repatriated $174 million, $124 million and $15 million in 2016, 2015 and 2014, respectively, from earnings generated in such years. The amount of the current year foreign earnings that we have repatriated in the past has been determined, and the amount that we expect to repatriate during 2017 will be determined, based upon a variety of factors including current year earnings of the foreign subsidiaries, foreign investment needs and the cash flow needs we have in the U.S., such as for the repayment of debt and other domestic obligations. The majority of our repatriation of the earnings of foreign subsidiaries has historically occurred at year-end, although we may always repatriate funds earlier in the year based on the needs of our business. When we repatriate funds to the U.S., we are required to pay taxes on these amounts based on applicable U.S. tax rates, net of any foreign tax that would be allowed to be deducted or taken as a credit against U.S. income tax. There was a cost of $56 million, $43 million and $1 million in additional U.S. federal income taxes in 2016, 2015 and 2014, respectively, as a result of repatriation of foreign earnings generated in such years.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with accounting principles generally accepted in the United States. We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note, “Summary of Significant Accounting Policies,” to our financial statements.
The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our financial statements, or are the most sensitive to change from outside factors, are described below:
Sales Recognition and Incentives
We recognize revenue when (i) there is persuasive evidence of an arrangement, (ii) the sales price is fixed or determinable, (iii) title and the risks of ownership have been transferred to the customer and (iv) collection of the receivable is reasonably assured, which occurs primarily upon shipment. We record provisions for any uncollectible amounts based upon our historical collection statistics and current customer information. Our management reviews these estimates each quarter and makes adjustments based upon actual experience.
Note, “Summary of Significant Accounting Policies” (d), “Summary of Significant Accounting Policies - Sales Recognition and Incentives,” to our financial statements describes a variety of sales incentives that we offer to resellers and consumers of our products. Measuring the cost of these incentives requires, in many cases, estimating future customer utilization and redemption rates. We use historical data for similar transactions to estimate the cost of current incentive programs. Our management reviews these estimates each quarter and makes adjustments based upon actual experience and other available information. We classify the costs associated with cooperative advertising as a reduction of “Net sales” in our Consolidated Statements of Income.
Accounts Receivable Valuation
Accounts receivable consist primarily of amounts due from customers. We carry our accounts receivable at their net realizable value. In determining the appropriate allowance for doubtful accounts, we consider a combination of factors, such as the aging of trade receivables, industry trends, and our customers’ financial strength, credit standing and payment and default history. Changes in the aforementioned factors, among others, may lead to adjustments in our allowance for doubtful accounts. The calculation of the required allowance requires judgment by our management as to the impact of these and other factors on the ultimate realization of our trade receivables. Charges to the allowance for doubtful accounts are reflected in the “Selling, general and administrative expenses” line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the “Net sales” line of our Consolidated Statements of Income. Our management reviews these estimates each quarter and makes adjustments based upon actual experience. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a large reserve might be required. The amount of actual historical losses has not varied materially from our estimates for bad debts.
Inventory Valuation
We carry inventory on our balance sheet at the estimated lower of cost or market. Cost is determined by the first-in, first-out, or “FIFO,” method for our inventories. We carry obsolete, damaged and excess inventory at the net realizable value, which we determine by assessing historical recovery rates, current market conditions and our future marketing and sales plans. Because our assessment of net realizable value is made at a point in time, there are inherent uncertainties related to our value determination. Market factors and other conditions underlying the net realizable value may change, resulting in further reserve requirements. A reduction in the carrying amount of an inventory item from cost to market value creates a new cost basis for the item that cannot be reversed at a later period. While we believe that adequate write-downs for inventory obsolescence have been provided in the financial statements, consumer tastes and preferences will continue to change and we could experience additional inventory write-downs in the future.
Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as reductions in the cost of the related inventory item, and are therefore reflected in cost of sales when the related inventory item is sold.
Income Taxes
Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities, as well as for realizable operating loss and tax credit carryforwards, at tax rates in effect for the years in which the differences are expected to reverse. Realization of deferred tax assets is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws and tax planning strategies. If in our judgment it appears that it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such determination is made.
We have not provided federal income taxes on that portion of our foreign subsidiaries’ undistributed earnings that is permanently reinvested in their respective foreign jurisdictions. If we decided to remit those earnings to the U.S. in a future period due to anticipated cash flow or other business requirements, our federal income tax provision and effective tax rate could be impacted.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations. Income tax expense is adjusted in our Consolidated Statements of Income in the period in which these events occur.
Stock Compensation
We established the Hanesbrands Inc. Omnibus Incentive Plan (As Amended and Restated) (the “Omnibus Incentive Plan”) to award stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance shares and cash to our employees, non-employee directors and employees of our subsidiaries to promote the interest of our company and incent performance and retention of employees. Stock-based compensation is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period. We estimate forfeitures for stock-based awards granted that are not expected to vest. If any of these inputs or assumptions changes significantly, our stock-based compensation expense could be materially different in the future.
Defined Benefit Pension Plans
For a discussion of our net periodic benefit cost, plan obligations, plan assets and how we measure the amount of these costs, see Note, “Defined Benefit Pension Plans,” to our consolidated financial statements. The funded status of our defined benefit pension plans are recognized on our balance sheet. Differences between actual results in a given year and the actuarially determined assumed results for that year are deferred as unrecognized actuarial gains or losses in comprehensive income. We measure the funded status of our plans as of the date of our fiscal year end.
The net periodic cost of the pension plans is determined using projections and actuarial assumptions, the most significant of which are the discount rate and the long-term rate of asset return. The net periodic pension income or expense is recognized in the year incurred. Gains and losses, which occur when actual experience differs from actuarial assumptions, are amortized over the average future expected life of participants. As benefits under the Hanesbrands Inc. Pension Plan are frozen, year over
year fluctuations in our pension expense are not expected to be material and not expected to have a material impact on our Consolidated Statements of Income.
Our policies regarding the establishment of pension assumptions are as follows:
•
In determining the discount rate, we utilized the Aon Hewitt AA Above Median Curve (rounded to the nearest 10 basis points) in order to determine a unique interest rate for each plan and match the expected cash flows for each plan. Beginning in 2016, we began utilizing specific spot rates along the full yield curve in our determination of discount rates, for our U.S. defined benefit plans, in order to determine our interest rate and match to the relevant cash flows for the plans. This change improves the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs.
•
Salary increase assumptions were based on historical experience and anticipated future management actions. The salary increase assumption only applies to the Canadian plans, certain Hanes Europe Innerwear plans and portions of the Hanesbrands nonqualified retirement plans, as benefits under these plans are not frozen. The benefits under the Hanesbrands Inc. Pension Plan were frozen as of December 31, 2005.
•
In determining the long-term rate of return on plan assets we applied a proportionally weighted blend between assuming the historical long-term compound growth rate of the plan portfolio would predict the future returns of similar investments, and the utilization of forward-looking assumptions.
•
Retirement rates were based primarily on actual experience while standard actuarial tables were used to estimate mortality. In 2016, the tables used as a basis for the mortality assumption were from the RP-2014 table with Scale MP-2015.
The sensitivity of changes in actuarial assumptions on our annual pension expense and on our plans’ benefit obligations, all other factors being equal, is illustrated by the following:
Trademarks and Other Identifiable Intangibles
Trademarks, license agreements, customer and distributor relationships and computer software are our primary identifiable intangible assets. We amortize identifiable intangibles with finite lives over their estimated useful lives, and we do not amortize identifiable intangibles with indefinite lives. We base the estimated useful life of an identifiable intangible asset upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows. As of December 31, 2016, the net book value of trademarks and other identifiable intangible assets was $1.3 billion, of which we are amortizing a balance of $218 million. We anticipate that our amortization expense for 2017 will be $26 million.
We evaluate identifiable intangible assets subject to amortization for impairment using a process similar to that used to evaluate asset amortization described below under “- Depreciation and Impairment of Property, Plant and Equipment.” We assess identifiable intangible assets not subject to amortization for impairment at least annually, as of the first day of the third fiscal quarter, and more often as triggering events occur. In order to determine the impairment of identifiable intangible assets, we compare the fair value of the intangible asset to its carrying amount. Fair values of intangible assets are primarily based on future cash flows projected to be generated from that asset. We recognize an impairment loss for the amount by which an identifiable intangible asset’s carrying value exceeds its fair value.
Goodwill
As of December 31, 2016, we had $1.1 billion of goodwill. We do not amortize goodwill, but we assess for impairment at least annually and more often as triggering events occur. The timing of our annual goodwill impairment testing is the first day of the third fiscal quarter. The estimated fair values significantly exceeded the carrying values of each of our reporting units as of the first day of the third fiscal quarter, and no impairment of goodwill was identified as a result of the testing conducted in 2016.
In evaluating the recoverability of goodwill in 2016, we estimated the fair value of our reporting units. We relied on a number of factors to determine the fair value of our reporting units and evaluate various factors to discount anticipated future cash flows, including operating results, business plans and present value techniques. As discussed above under “Trademarks and Other Identifiable Intangibles,” there are inherent uncertainties related to these factors, and our judgment in applying them and the assumptions underlying the impairment analysis may change in such a manner that impairment in value may occur in the future. Such impairment will be recognized in the period in which it becomes known.
Assets and Liabilities Acquired in Business Combinations
We account for business combinations using the purchase method, which requires us to allocate the cost of an acquired business to the acquired assets and liabilities based on their estimated fair values at the acquisition date. We recognize the excess of an acquired business’ cost over the fair value of acquired assets and liabilities as goodwill. We use a variety of information sources to determine the fair value of acquired assets and liabilities. We generally use third party appraisers to assist management in determination of the fair value and lives of property and identifiable intangibles, consulting actuaries to assist management in determining the fair value of obligations associated with defined benefit pension plans and legal counsel to assist management in assessing obligations associated with legal and environmental claims.
Depreciation and Impairment of Property, Plant and Equipment
We state property, plant and equipment at its historical cost, and we compute depreciation using the straight-line method over the asset’s life. We estimate an asset’s life based on historical experience, manufacturers’ estimates, engineering or appraisal evaluations, our future business plans and the period over which the asset will economically benefit us, which may be the same as or shorter than its physical life. Our policies require that we periodically review our assets’ remaining depreciable lives based upon actual experience and expected future utilization. A change in the depreciable life is treated as a change in accounting estimate and the accelerated depreciation is accounted for in the period of change and future periods.
We test an asset for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in business climate, several periods of operating or cash flow losses, forecasted continuing losses or a current expectation that an asset or asset group will be disposed of before the end of its useful life. We evaluate an asset’s recoverability by comparing the asset or asset group’s net carrying amount to the future net undiscounted cash flows we expect such asset or asset group will generate. If we determine that an asset is not recoverable, we recognize an impairment loss in the amount by which the asset’s carrying amount exceeds its estimated fair value.
When we recognize an impairment loss for an asset held for use, we depreciate the asset’s adjusted carrying amount over its remaining useful life. We do not restore previously recognized impairment losses if circumstances change.
Recently Issued Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note, “Summary of Significant Accounting Policies” to our financial statements included in this Annual Report on Form 10-K.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices. Our risk management control system uses analytical techniques including market value, sensitivity analysis and value at risk estimations.
Foreign Exchange Risk
We sell the majority of our products in transactions denominated in U.S. dollars; however, we purchase some raw materials, pay a portion of our wages and make other payments in our supply chain in foreign currencies. With our international commercial presence, we also have foreign entities that purchase raw materials and finished goods in U.S. dollars. Our exposure to foreign exchange rates exists primarily with respect to the Euro, Australian dollar, Canadian dollar, Mexican peso and Japanese yen against the U.S. dollar. We use foreign exchange forward contracts to hedge material exposure to adverse changes in foreign exchange rates. A sensitivity analysis technique has been used to evaluate the effect that changes in the market value of foreign exchange currencies will have on our forward and option contracts. At December 31, 2016, the potential change in fair value of foreign currency derivative instruments, assuming a 10% adverse change in the underlying currency price, was $53 million.
Interest Rates
Our debt under the Revolving Loan Facility, Accounts Receivable Securitization Facility, Term Loan A, Term Loan B, Australian Term A-1, Australian Term A-2, Australian Revolver, European Revolver and Other International Debt bears interest at variable rates. As a result, we are exposed to changes in market interest rates that could impact the cost of servicing our debt. Approximately 60% of our total debt outstanding at December 31, 2016 is at a fixed rate. A 25-basis point movement in the annual interest rate charged on the outstanding debt balances as of December 31, 2016 would only result in a change in annual interest expense of approximately $4 million.
Commodities
We are exposed to commodity price fluctuations primarily as a result of the cost of materials that are used in our manufacturing process. Cotton is the primary raw material used in manufacturing many of our products. Under our current agreements with our primary yarn suppliers, we have the ability to periodically fix the cotton cost component of our yarn purchases so that the suppliers bear the risk of cotton price fluctuation for the specified yarn volume and interim fluctuations in the price of cotton do not impact our costs. However, our business can be affected by sustained dramatic movements in cotton prices.
In addition, fluctuations in crude oil or petroleum prices may influence the prices of other raw materials we use to manufacture our products, such as chemicals, dyestuffs, polyester yarn and foam, as well as affect our transportation and utility costs. We generally purchase raw materials at market prices.
Item 8.
Item 8.
Financial Statements and Supplementary Data
Our financial statements required by this item are contained on pages through of this Annual Report on Form 10-K. See Item 15(a)(1) for a listing of financial statements provided.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
As required by Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.
Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management’s annual report on internal control over financial reporting and the report of independent registered public accounting firm are incorporated by reference to pages and of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, including our Chief Executive Officer and Chief Financial Officer, concluded that no changes in our internal control over financial reporting occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We excluded our wholly owned subsidiaries, Hanes Australasia, Champion Europe, GTM and Universo from our assessment of internal control over financial reporting as of December 31, 2016 because our control over the operation of each such subsidiary was acquired in a purchase business combination during 2016.
Item 9B.
Item 9B.
Other Information
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance
Information required by this Item 10 regarding our executive officers is included in Item 1C of this Annual Report on Form 10-K. We will provide other information that is responsive to this Item 10 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report. That information is incorporated in this Item 10 by reference.
We will provide information that is responsive to this Item 11
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
We will provide information that is responsive to this Item 12 in our definitive proxy statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated in this Item 12 by reference.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
We will provide information that is responsive to this Item 13 in our definitive proxy statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated in this Item 13 by reference.
Item 14.
Item 14.
Principal Accounting Fees and Services
We will provide information that is responsive to this Item 14 in our definitive proxy statement or in an amendment to this Annual Report on Form 10-K not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. That information is incorporated in this Item 14 by reference.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The financial statements listed in the accompanying Index to Consolidated Financial Statements on page are filed as part of this Report.
(a)(3) Exhibits
See “Index to Exhibits” beginning on page E-1, which is incorporated by reference herein. The Index to Exhibits lists all exhibits filed with this Report and identifies which of those exhibits are management contracts and compensatory plans or arrangements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 3rd day of February, 2017.
HANESBRANDS INC.
/s/ Gerald W. Evans, Jr.
Gerald W. Evans, Jr.
Chief Executive Officer
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints jointly and severally, Gerald W. Evans, Jr., Richard D. Moss and Joia M. Johnson, and each one of them, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
INDEX TO EXHIBITS
References in this Index to Exhibits to the “Registrant” are to Hanesbrands Inc. The Registrant will furnish you, without charge, a copy of any exhibit, upon written request. Written requests to obtain any exhibit should be sent to Corporate Secretary, Hanesbrands Inc., 1000 East Hanes Mill Road, Winston-Salem, North Carolina 27105.
E-1
E-2
E-3
*
Management contract or compensatory plans or arrangements.
E-4
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HANESBRANDS INC.
Hanesbrands Inc.
Management’s Report on Internal Control Over Financial Reporting
Management of Hanesbrands Inc. (“Hanesbrands”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a - 15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Hanesbrands’ system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Hanesbrands; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of Hanesbrands are being made only in accordance with authorizations of management and directors of Hanesbrands; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Hanesbrands’ assets that could have a material effect on the financial statements.
The Company excluded its wholly owned subsidiaries Pacific Brands Limited (“Hanes Australasia”), Champion Europe S.p.A (“Champion Europe”), It’s Greek to Me, Inc. and GTM Retail, Inc. (“GTM”) and Universo Sport S.p.A. (“Universo”) from its assessment of internal control over financial reporting as of December 31, 2016 because its control over these operations was acquired by the Company in purchase business combinations during 2016. The Company is in the process of integrating the operations of Hanes Australasia, Champion Europe, GTM and Universo into the Company’s overall internal control over financial reporting process. These are wholly-owned subsidiaries whose combined total assets and total revenues represent 5.8% and 7.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016.
Management has evaluated the effectiveness of Hanesbrands’ internal control over financial reporting as of December 31, 2016, based upon criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation, management determined that Hanesbrands’ internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included on the following page.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hanesbrands Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows, present fairly, in all material respects, the financial position of Hanesbrands Inc. (the “Company”) at December 31, 2016 and January 2, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in the Report of Management on Internal Controls over Financial Reporting, management has excluded Hanes Australasia, Champion Europe, GTM and Universo from its assessment of internal controls over financial reporting as of December 31, 2016, because they were acquired by the Company in purchase business combinations during 2016. We have also excluded Hanes Australasia, Champion Europe, GTM and Universo from our audit of internal controls over financial reporting. These are wholly-owned subsidiaries whose combined total assets and total revenues represent 5.8% and 7.3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016.
/s/ PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 3, 2017
HANESBRANDS INC.
Consolidated Statements of Income
(in thousands, except per share amounts)
See accompanying notes to Consolidated Financial Statements.
HANESBRANDS INC.
Consolidated Statements of Comprehensive Income
(in thousands)
See accompanying notes to Consolidated Financial Statements.
HANESBRANDS INC.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
See accompanying notes to Consolidated Financial Statements.
HANESBRANDS INC.
Consolidated Statements of Stockholders’ Equity
(in thousands)
See accompanying notes to Consolidated Financial Statements.
HANESBRANDS INC.
Consolidated Statements of Cash Flows
(in thousands)
See accompanying notes to Consolidated Financial Statements.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(1)
Basis of Presentation
Hanesbrands Inc., a Maryland corporation (the “Company”), is 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. The Company designs, manufactures, sources and sells a broad range of basic apparel such as T-shirts, bras, panties, men’s underwear, children’s underwear, activewear, socks and hosiery.
During the third quarter of 2016, the Company began to separately report the results of its Dunlop Flooring and Tontine Pillow businesses as discontinued operations in its Consolidated Statements of Income, and to present the related assets and liabilities as held for sale in the Consolidated Balance Sheet. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates to continuing operations. See note “Discontinued Operations” for additional information on discontinued operations.
The Company’s fiscal year ends on the Saturday closest to December 31. All references to “2016”, “2015” and “2014” relate to the 52 week fiscal years ended on December 31, 2016 and January 2, 2016 and the 53 week fiscal year ended on January 3, 2015, respectively. Three subsidiaries of the Company close on the calendar month-end. As the Company’s fiscal year end is on December 31, 2016, there is no difference in reporting of financial information for these subsidiaries in the 2016 fiscal year. The difference in reporting of comparative financial information did not have a material impact on the Company’s financial condition, results of operations or cash flows. A significant subsidiary of the Company, Hanes Holdings Lux S.à.r.l. (formerly named DBA Lux Holding S.A.) (“Hanes Europe Innerwear”), had a 53 week fiscal year ended January 2, 2016 as a result of aligning Hanes Europe Innerwear’s year end with the Company in the year after acquisition. The 53rd week of financial information for Hanes Europe Innerwear did not have a material impact on the Company’s financial condition, results of operations or cash flows.
(2)
Summary of Significant Accounting Policies
(a) Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, certain financial statement disclosures at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may vary from these estimates.
(c) Foreign Currency Translation
Foreign currency-denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of accumulated other comprehensive loss (“AOCI”) within stockholders’ equity. The Company translates the results of operations of its foreign operations at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions are included in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income.
(d) Sales Recognition and Incentives
The Company recognizes revenue when (i) there is persuasive evidence of an arrangement, (ii) the sales price is fixed or determinable, (iii) title and the risks of ownership have been transferred to the customer and (iv) collection of the receivable is reasonably assured, which occurs primarily upon shipment. The Company records a sales reduction for returns and allowances based upon historical return experience. The Company earns royalty revenues through license agreements with manufacturers of other consumer products that incorporate certain of the Company’s brands. The Company accrues revenue earned under these contracts based upon reported sales from the licensee. The Company offers a variety of sales incentives to resellers and
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
consumers of its products, and the policies regarding the recognition and display of these incentives within the Consolidated Statements of Income are as follows:
Discounts, Coupons, and Rebates
The Company recognizes the cost of these incentives at the later of the date at which the related sale is recognized or the date at which the incentive is offered. The cost of these incentives is estimated using a number of factors, including historical utilization and redemption rates. All cash incentives of this type are included in the determination of net sales. The Company includes incentives offered in the form of free products in the determination of cost of sales.
Volume-Based Incentives
These incentives typically involve rebates or refunds of cash that are redeemable only if the reseller completes a specified number of sales transactions. Under these incentive programs, the Company estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with the customer. The Company includes these amounts in the determination of net sales.
Cooperative Advertising
Under these arrangements, the Company agrees to reimburse the reseller for a portion of the costs incurred by the reseller to advertise and promote certain of the Company’s products. The Company recognizes the cost of cooperative advertising programs in the period in which the advertising and promotional activity first takes place. The Company includes these amounts in the determination of net sales.
Fixtures and Racks
Store fixtures and racks are periodically used by resellers to display Company products. The Company expenses the cost of these fixtures and racks in the period in which they are delivered to the resellers. The Company includes the costs of fixtures and racks incurred by resellers and charged back to the Company in the determination of net sales. Fixtures and racks purchased by the Company and provided to resellers are included in selling, general and administrative expenses.
(e) Advertising Expense
Advertising costs, which include the development and production of advertising materials and the communication of these materials through various forms of media, are expensed in the period the advertising first takes place. The Company recognized advertising expense in the “Selling, general and administrative expenses” caption in the Consolidated Statements of Income of $168,701, $181,956 and $183,333 in 2016, 2015 and 2014, respectively.
(f) Shipping and Handling Costs
Revenue received for shipping and handling costs is included in net sales and was $19,446, $19,710 and $22,903 in 2016, 2015 and 2014, respectively. Shipping costs, which comprise payments to third party shippers, and handling costs, which consist of warehousing costs in the Company’s various distribution facilities, were $324,845, $332,678 and $295,280 in 2016, 2015 and 2014, respectively. The Company recognizes shipping, handling and distribution costs in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income.
(g) Catalog Expenses
The Company incurs expenses for printing catalogs for products to aid in the Company’s sales efforts. The Company initially records these expenses as a prepaid item and charges it against selling, general and administrative expenses over time as the catalog is used. Expenses are recognized at a rate that approximates historical experience with regard to the timing and amount of sales attributable to a catalog distribution. The Company discontinued its’ catalog business during 2016.
(h) Research and Development
Research and development costs are expensed as incurred and are included in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income. Research and development includes expenditures for new product, technological improvements for existing products and process innovation, which primarily consist of salaries, consulting and
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
supplies attributable to time spent on research and development activities. Additional costs include depreciation and maintenance for research and development equipment and facilities. Research and development expense was $70,096, $62,324 and $63,268 in 2016, 2015 and 2014, respectively.
(i) Defined Contribution Benefit Plans
The Company sponsors 401(k) plans as well as other defined contribution benefit plans. Expense for these plans was $26,434, $21,972 and $22,898 in 2016, 2015 and 2014, respectively.
(j) Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at the time of purchase are considered to be cash equivalents.
(k) Accounts Receivable Valuation
Accounts receivable are stated at their net realizable value. The allowance for doubtful accounts reflects the Company’s best estimate of probable losses inherent in the accounts receivable portfolio determined on the basis of historical experience, aging of trade receivables, specific allowances for known troubled accounts and other currently available information.
(l) Inventory Valuation
Inventories are stated at the estimated lower of cost or market. Cost is determined by the first-in, first-out, or “FIFO,” method for inventories. Obsolete, damaged, and excess inventory is carried at the net realizable value, which is determined by assessing historical recovery rates, current market conditions and future marketing and sales plans. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as reductions in the cost of the related inventory item, and are therefore reflected in cost of sales when the related inventory item is sold.
(m) Property
Property is stated at historical cost and depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Machinery and equipment is depreciated over periods ranging from three to 15 years and buildings and building improvements over periods of up to 40 years. A change in the depreciable life is treated as a change in accounting estimate and the accelerated depreciation is accounted for in the period of change and future periods. Additions and improvements that substantially extend the useful life of a particular asset and interest costs incurred during the construction period of major properties are capitalized. Repairs and maintenance costs are expensed as incurred. Upon sale or disposition of an asset, the cost and related accumulated depreciation are removed from the accounts.
Property is tested for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Such events include significant adverse changes in the business climate, several periods of operating or cash flow losses, forecasted continuing losses or a current expectation that an asset or an asset group will be disposed of before the end of its useful life. Recoverability of property is evaluated by a comparison of the carrying amount of an asset or asset group to future net undiscounted cash flows expected to be generated by the asset or asset group. If these comparisons indicate that an asset is not recoverable, the impairment loss recognized is the amount by which the carrying amount of the asset exceeds the estimated fair value. When an impairment loss is recognized for assets to be held and used, the adjusted carrying amount of those assets is depreciated over its remaining useful life. Restoration of a previously recognized impairment loss is not permitted under U.S. GAAP.
(n) Trademarks and Other Identifiable Intangible Assets
The primary identifiable intangible assets of the Company are trademarks, licensing agreements, customer and distributor relationships and computer software. Identifiable intangible assets with finite lives are amortized and those with indefinite lives are not amortized. The estimated useful life of a finite-lived intangible asset is based upon a number of factors, including the effects of demand, competition, expected changes in distribution channels and the level of maintenance expenditures required to obtain future cash flows. Trademarks with finite lives are being amortized over periods ranging from seven to 20 years, license agreements are being amortized over periods ranging from three to 17 years, customer and distributor relationships are being
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
amortized over periods ranging from two to 15 years and computer software and other intangibles are being amortized over periods ranging from one to seven years.
Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used in evaluating elements of property. Identifiable intangible assets not subject to amortization are assessed for impairment at least annually, as of the first day of the third fiscal quarter, and as triggering events occur. The impairment test for identifiable intangible assets not subject to amortization consists of comparing the fair value of the intangible asset to its carrying amount. If the carrying value exceeds the fair value of the asset, an impairment loss is recognized in an amount equal to such excess. In assessing fair value, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of intangible asset impairment.
The Company capitalizes internal software development costs incurred during the application development stage, which include the actual costs to purchase software from vendors and generally include personnel and related costs for employees who were directly associated with the enhancement and implementation of purchased computer software. Additions to computer software are included in purchases of property, plant and equipment in the Consolidated Statements of Cash Flows.
(o) Goodwill
Goodwill is the amount by which the purchase price exceeds the fair value of the assets acquired and liabilities assumed in a business combination. When a business combination is completed, the assets acquired and liabilities assumed are assigned to the reporting unit or units of the Company given responsibility for managing, controlling and generating returns on these assets and liabilities. In many instances, all of the acquired assets and assumed liabilities are assigned to a single reporting unit and in these cases all of the goodwill is assigned to the same reporting unit. In those situations in which the acquired assets and liabilities are allocated to more than one reporting unit, the goodwill to be assigned to each reporting unit is determined in a manner similar to how the amount of goodwill recognized in a business combination is determined.
Goodwill is not amortized; however, it is assessed for impairment at least annually and as triggering events occur. The Company’s annual measurement date is the first day of the third fiscal quarter. In evaluating the recoverability of goodwill, the Company estimates the fair value of its reporting units and compares it to the carrying value. If the carrying value of the reporting unit exceeds its fair value, the next step of the process involves comparing the implied fair value to the carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to such excess. No impairment of goodwill was identified as a result of the testing conducted in 2016. In estimating the fair values of the reporting units, management relies on a number of factors to discount anticipated future cash flows including operating results, business plans and present value techniques. Rates used to discount cash flows are dependent upon interest rates and the cost of capital at a point in time. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment.
(p) Insurance Reserves
The Company is self-insured for property, workers’ compensation, medical and other casualty programs up to certain stop-loss limits. Undiscounted liabilities for self-insured exposures are accrued at the present value of the expected aggregate losses below those limits and are based on a number of assumptions, including historical trends, actuarial assumptions and economic conditions.
(q) Stock-Based Compensation
The Company established the Hanesbrands Inc. Omnibus Incentive Plan (As Amended and Restated), (the “Omnibus Incentive Plan”) to award stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance shares and cash to its employees, non-employee directors and employees of its subsidiaries to promote the interests of the Company, incent performance and retention of employees. The Company recognizes the cost of employee services received in exchange for awards of equity instruments based upon the grant date fair value of those awards.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(r) Income Taxes
Deferred taxes are recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for the years in which the differences are expected to reverse. Given continuing losses in certain jurisdictions in which the Company operates on a separate return basis, a valuation allowance has been established for the deferred tax assets in these specific locations. The Company periodically estimates the probable tax obligations using historical experience in tax jurisdictions and informed judgment. There are inherent uncertainties related to the interpretation of tax regulations in the jurisdictions in which the Company transacts business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, as well as changes to, or further interpretations of, regulations. Income tax expense is adjusted in the period in which these events occur, and these adjustments are included in the Company’s Consolidated Statements of Income. If such changes take place, there is a risk that the Company’s effective tax rate may increase or decrease in any period. A company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.
(s) Financial Instruments
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. The use of these financial instruments modifies the Company’s exposure to these risks with the goal of reducing the risk or cost to the Company. Depending on the nature of the underlying risk being hedged, these financial instruments are either designated as cash flow hedges or are economic hedges against changes in the value of the hedged item and therefore not designated as hedges for accounting purposes. The Company does not use derivatives for trading purposes and is not a party to leveraged derivative contracts.
On the date the derivative is entered into, the Company determines whether the derivative meets the criteria for cash flow hedge accounting treatment or whether the financial instrument is serving as an economic hedge against changes in the value of the hedged item and therefore is not designated as a hedge for accounting purposes. The accounting for changes in fair value of the derivative instrument depends on whether the derivative has been designated and qualifies as part of a hedging relationship.
The Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer likely to occur, the Company discontinues hedge accounting, and any deferred gains or losses are recorded in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income.
Derivatives are recorded in the Consolidated Balance Sheets at fair value and classified as current or noncurrent based on the derivatives’ maturity dates. The fair value is based upon either market quotes for actively traded instruments or independent bids for nonexchange traded instruments. Cash flows hedges are classified in the same category as the item being hedged, and cash flows from derivative contracts not designated as hedges are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows.
The Company may be exposed to credit losses in the event of nonperformance by individual counterparties or the entire group of counterparties to the Company’s derivative contracts. Risk of nonperformance by counterparties is mitigated by dealing with highly rated counterparties and by diversifying across counterparties.
Cash Flow Hedges
The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in the “Accumulated other comprehensive loss” line of the Consolidated Balance Sheets. When the hedged item affects the income statement, the gain or loss included in AOCI is reported on the same line in the Consolidated Statements of Income as the hedged item. In addition, both the fair value of changes 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 Consolidated Statements of Income.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Derivative Contracts Not Designated as Hedges
For derivative contracts not designated as hedges, changes in fair value are reported in the “Selling, general and administrative expenses” line of the Consolidated Statements of Income. These contracts are recorded at fair value when the hedged item is recorded as an asset or liability and then are revalued each accounting period.
(t) Assets and Liabilities Acquired in Business Combinations
Business combinations are accounted for using the purchase method, which requires the Company to allocate the cost of an acquired business to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The Company recognizes the excess of an acquired business’ cost over the fair value of acquired assets and liabilities as goodwill. Fair values are determined using the income approach based on market participant assumptions focusing on future cash flow projections and accepted industry standards.
(u) Recently Issued Accounting Pronouncements
Going Concern
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40)”, which requires an evaluation every reporting period, including interim periods, of whether there is substantial doubt about an entity’s ability to continue as a going concern and provide certain footnote disclosures depending on the result of such evaluation. The new rule was effective for the Company in the fourth 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.
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 impact of adopting the new accounting guidance on classification of debt issuance costs on the Company’s 2015 Consolidated Balance Sheet is a reduction in noncurrent assets and long-term debt of $21,450. In August 2015, the FASB issued ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30) - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. The guidance clarifies accounting for debt issuance costs related to line-of-credit arrangements. The standard states that the FASB deems deferring debt issuance costs related to line-of-credit arrangements as an asset and amortizing over the term of the agreement to be appropriate, which is consistent with the Company’s existing accounting treatment for these costs.
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 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 an impact on the Company’s financial condition, results of operations or cash flows, however management adopted the related applicable disclosures. Refer to Note, “Fair Value of Assets and Liabilities”.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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.
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 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 August 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 the 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 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.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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 (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.
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. In addition, in November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. The amendment requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. 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.
Income Taxes
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. The update eliminates the exception for an intra-entity transfer of an asset other than inventory, which aligns the recognition of income tax consequences for inter-entity transfers of assets other than inventory by requiring the recognition of current and deferred income taxes resulting from an intra-entity transfer of such an asset when the transfer occurs rather than when it is sold to an external party. 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 financial condition, results of operations and cash flows.
Definition of a Business
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. 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 financial condition, results of operations and cash flows.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2020. 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.
(v) Reclassifications
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Certain prior year amounts in the Consolidated Balance Sheets and notes to the Consolidated Financial Statements, none of which are material, have been reclassified to conform with the current year presentation. These classifications within the statements had no impact on the Company’s results of operations.
(3)
Acquisitions
Hanes Australasia
On July 14, 2016, the Company acquired 100% of the outstanding shares of Pacific Brands Limited (“Hanes Australasia”) 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.
Hanes Australasia contributed net revenues from continuing operations of $281,442 and pretax earnings of $33,146 (excluding acquisition and integration related charges included in general corporate expenses of approximately $30,783) since the date of acquisition. The results of Hanes Australasia have been included in the Company’s consolidated financial statements since the date of acquisition and are reported as part of the International segment.
Hanes Australasia 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 $410,541. 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, $3,206 for loyalty programs and customer lists and $3,740 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.
Acquired assets included in current assets of discontinued operations, which are classified as held for sale, include the Dunlop Flooring trademark, which has been valued at $12,364 and $3,511 for distributor relationships. Refer to Note, “Discontinued Operations” for further discussion on these businesses.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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 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:
Since July 14, 2016, goodwill decreased by $22,644 as a result of measurement period adjustments, primarily related to the valuation adjustments for the Dunlop Flooring and Tontine Pillow businesses.
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 €220,751 ($245,554) 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 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 $103,838 and pretax earnings of $13,895 (excluding acquisition and integration related charges included in general corporate expenses of approximately $10,972) 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.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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 December 31, 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:
Since June 30, 2016, goodwill increased by $1,665 as a result of measurement period adjustments primarily to working capital.
Consolidated Pro Forma Results
Consolidated unaudited pro forma results of operations for the Company are presented below assuming that the 2016 acquisition of Hanes Australasia and Champion Europe had occurred on January 4, 2015. Pro forma operating results for the year ended January 2, 2016 include expenses totaling $9,560, for acquisition-related adjustments primarily related to inventory and stock compensation.
Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisitions had been completed at the dates indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost savings that the Company believes are achievable.
Knights Apparel
In April 2015, the Company completed the acquisition of Knights Holdco, Inc. (“Knights Apparel”), a leading seller of licensed collegiate logo apparel primarily in the mass retail channel, from Merit Capital Partners in an all cash transaction valued at approximately $192,888 on an enterprise value basis. The Company funded the acquisition with cash on hand and short-term borrowings under its Revolving Loan Facility.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Since January 2, 2016, goodwill decreased by $3,551 as a result of measurement period adjustments to the acquired income tax balances. The purchase price allocation was finalized in the first quarter of 2016.
Unaudited pro forma results of operations for the Company are presented below for year-to-date assuming that the 2015 acquisition of Knights Apparel had occurred on December 29, 2013. Pro forma operating results for the year ended January 3, 2015 included expenses totaling $5,652 for acquisition-related charges.
Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisition has been completed at the date indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost savings that the Company believes are achievable.
Hanes Europe Innerwear
In August 2014, MFB International Holdings S.a.r.l. (“MFB International Holdings”), a wholly owned subsidiary of the Company, acquired DBA Lux Holding S.A. (“Hanes Europe Innerwear”) from SLB Brands Holdings, Ltd and certain individual Hanes Europe Innerwear shareholders in an all-cash transaction equal to €400,000 enterprise value less net debt and working capital adjustments as defined in the purchase agreement. Total purchase price at closing was €297,031 (approximately $391,861 based on acquisition date exchange rates). The acquisition was financed through a combination of cash on hand and third party borrowings. The purchase price allocation was finalized in the third quarter of 2015.
Unaudited pro forma results of operations for the Company are presented below assuming that the 2014 acquisition of Hanes Europe Innerwear had occurred on December 30, 2012. Pro forma operating results for the year ended January 3, 2015 included a benefit totaling $25,229 for acquisition-related charges.
Pro forma financial information is not necessarily indicative of the Company’s actual results of operations if the acquisition has been completed at the date indicated, nor is it necessarily an indication of future operating results. Amounts do not include any operating efficiencies or cost savings that the Company believes are achievable.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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 $9,461, goodwill of $7,034 and other net assets of $7,946. 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 Hanes Australasia, the Company acquired Pacific Brand’s legacy Dunlop Flooring and Tontine Pillow businesses. The Company has concluded that these businesses are not a strategic fit, and therefore, the decision was made to divest the businesses. On December 15, 2016, the Company entered into two definitive agreements to sell the Dunlop Flooring business for AUD$34,000 to Victoria PLC and the Tontine Pillow business for AUD$14,000 to John Cotton Group. On February 1, 2017, the Company completed the sale of the Dunlop Flooring business, resulting in an insignificant pre-tax gain. The sale of the Tontine Pillow business is expected to close in the first quarter of 2017, pending customary closing conditions. The Company expects the gain or loss as a result of the Tontine Pillow transaction to be insignificant. As of December 31, 2016, these two businesses have been classified as assets held for sale and qualify for discontinued operations upon the acquisition date. Therefore, the operating results and related assets and liabilities have been classified as discontinued operations in the Company’s consolidated financial statements. Discontinued operations does not include any allocation of corporate overhead expense or interest expense.
The operating results of the 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 Dunlop Flooring and Tontine Pillow businesses were as follows:
Preliminary assets and liabilities of discontinued operations classified as held for sale in the consolidated balance sheet as of December 31, 2016 consist of the following:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
For the year ended December 31, 2016, there were no material amounts of depreciation, amortization, capital expenditures, or significant operating or investing non-cash items related to discontinued operations.
(5)
Earnings Per Share
Basic earnings per share (“EPS”) was computed by dividing net income by the number of weighted average shares of common stock outstanding during the period. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock using the treasury stock method. In 2015, the Company implemented a four-for-one stock split on the Company’s common stock in the form of a 300% stock dividend.
The reconciliation of basic to diluted weighted average shares outstanding is as follows:
Restricted stock units totaling 303, 348 and 376 units were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for 2016, 2015, and 2014, respectively. In 2016, 2015 and 2014, there were no anti-dilutive options to purchase shares of common stock.
(6)
Stock-Based Compensation
The Company established the Omnibus Incentive Plan to award stock options, stock appreciation rights, restricted stock, restricted stock units, deferred stock units, performance shares and cash to its employees, non-employee directors and employees of its subsidiaries to promote the interests of the Company, incent performance and retention of employees.
Stock Options
The exercise price of each stock option equals the closing market price of the Company’s stock on the date of grant. Options granted vest ratably over three years and can be exercised over a term of 10 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. There were no options granted during any of the periods presented.
A summary of the changes in stock options outstanding to the Company’s employees under the Omnibus Incentive Plan is presented below:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
The total intrinsic value of options that were exercised during 2016, 2015 and 2014 was $7,465, $105,899 and $86,843 respectively.
Stock Unit Awards
Restricted stock units (RSUs) of the Company’s stock are granted to certain Company non-employee directors and employees to incent performance and retention over periods of one to four years, respectively. Upon vesting, the RSUs are converted into shares of the Company’s common stock on a one-for-one basis and issued to the grantees. Some RSUs which have been granted under the Omnibus Incentive Plan vest upon continued future service to the Company, while others also have a performanced-based vesting feature. The cost of these awards is determined using the fair value of the shares on the date of grant, and compensation expense is recognized over the period during which the grantees provide the requisite service to the Company. A summary of the changes in the restricted stock unit awards outstanding under the Omnibus Incentive Plan is presented below:
The total fair value of shares vested during 2016, 2015 and 2014 was $29,705, $20,784 and $17,831, respectively. Certain participants elected to defer receipt of shares earned upon vesting.
In addition to granting RSUs that vest solely upon continued future service to the Company, the Company also grants performanced-based restricted stock units where the number of shares of the Company’s common stock that will be received upon vesting range from 0% to 200% of the number of units granted based on the Company’s achievement of certain performance metrics. These performanced-based stock awards, which are included in the table above, represent awards that are earned based on future performance and service. As reported in the above table, the number of performanced-based restricted stock units granted each year represents the initial units granted on the date of grant plus any additional units that were earned based on the final achievement of the respective performance thresholds.
For all share-based payments under the Omnibus Incentive Plan, during 2016, 2015 and 2014, the Company recognized total compensation expense of $30,617, $29,154 and $30,230 and recognized a deferred tax benefit of $11,754, $11,382 and $11,757, respectively.
At December 31, 2016, there was $11,027 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, of which $7,414, $2,678, and $935 is expected to be recognized in 2017, 2018, and 2019, respectively. The Company satisfies the requirement for common shares for share-based payments to employees pursuant to the
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Omnibus Incentive Plan by issuing newly authorized shares. The Omnibus Incentive Plan authorized 63,220 shares for awards of stock options and restricted stock units, of which 10,677 were available for future grants as of December 31, 2016.
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Trade Accounts Receivable
Allowances for Trade Accounts Receivable
The changes in the Company’s allowance for doubtful accounts and allowance for chargebacks and other deductions are as follows:
Charges to the allowance for doubtful accounts are reflected in the “Selling, general and administrative expenses” line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the “Net sales” line of the Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease income, represent write-offs of previously reserved accounts receivable and allowed customer chargebacks and deductions against gross accounts receivable.
Sales of Accounts Receivable
The Company has entered into agreements to sell selected trade accounts receivable to financial institutions. After the sale, the Company does not retain any interests in the receivables and the applicable financial institution services and collects these accounts receivable directly from the customer. Net proceeds of these accounts receivable sale programs are recognized in the Consolidated Statements of Cash Flows as part of operating cash flows. The Company recognized funding fees of $4,497, $2,452 and $2,599 in 2016, 2015 and 2014, respectively, for sales of accounts receivable to financial institutions in the “Other expenses” line in the Consolidated Statements of Income.
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Inventories
Inventories consisted of the following:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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Property, Net
Property is summarized as follows:
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Notes Payable
The Company had short-term revolving facilities in the following locations at December 31, 2016 and January 2, 2016:
As of December 31, 2016 and January 2, 2016, the Company had total borrowing availability of $80,210 and $110,264, respectively, under its international notes payable facilities. Total interest paid on notes payable was $1,103, $716 and $672 in 2016, 2015 and 2014, respectively. The Company was in compliance with the financial covenants contained in each of the facilities at December 31, 2016.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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Debt
The Company had the following debt at December 31, 2016 and January 2, 2016:
The Company’s primary financing arrangements are the senior secured credit facility (the “Senior Secured Credit Facility”), 4.875% senior notes (the “4.875% Senior Notes”), 4.625% senior notes (the “4.625% Senior Notes”), 3.5% senior notes (the “3.5% Senior Notes”), the Accounts Receivable Securitization Facility and the European Revolving Loan Facility. The outstanding balances at December 31, 2016 are reported in the “Current portion of long-term debt”, “Long-term debt” and “Accounts Receivable Securitization Facility” lines of the Consolidated Balance Sheets.
Total cash paid for interest related to debt in 2016, 2015 and 2014 was $130,603, $106,231 and $85,512, respectively.
Senior Notes Refinancing
In 2016, the Company refinanced its debt structure to reduce interest rates, increase borrowing capacity, increase the proportion of fixed rate debt and to help fund the acquisitions of Champion Europe and Hanes Australasia. 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 the incurrence of $39,523 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 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
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
mature on May 15, 2024. 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.
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 Hanes Australasia.
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 Euro Term Loan facility, which was paid in full in August 2016, 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.
Senior Secured Credit Facility
On April 29, 2015, the Company refinanced its senior secured credit facility (the “Senior Secured Credit Facility”) to extend the maturity date of the revolving loan facility (the “Revolving Loan Facility”) to April 2020 and reduce the maximum borrowing capacity from $1,100,000 to $1,000,000, re-price the Revolving Loan Facility at favorable rates, and add an additional $850,000 in term loan borrowings ($425,000 for a new Term Loan A and $425,000 for a new Term Loan B). The Company incurred $10,900 in fees related to this refinancing. The proceeds of the Term Loan A and the Term Loan B were used to refinance existing revolving borrowings under the prior senior secured credit facility, pay fees and expenses in connection with the closing of the Senior Secured Credit Facility and for general corporate purposes. Proceeds of the Revolving Loan Facility are used for general corporate purposes and working capital needs. On October 23, 2015, the Company amended the Senior Secured Credit Facility to increase the principal amount of the Term Loan A by an additional $300,000. The Company incurred $1,603 in fees related to this refinancing.
All borrowings under the Revolving Loan Facility must be repaid in full upon maturity.
Outstanding borrowings under the Term Loan A are repayable in equal quarterly installments in the following annual
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
percentages, with the remainder of the outstanding principal to be repaid at maturity: year one, 5.0%; year two, 7.5%; years three and four, 10.0%; and year five, 15.0%.
Outstanding borrowings under the Term Loan B are repayable in 0.25% quarterly installments, with the remainder of the outstanding principal to be repaid at maturity. If the Term Loan B is repriced or refinanced on or prior to the twelve month anniversary of its funding and as a result of such repricing or refinancing the effective interest rate of the Term Loan B decreases, the Company shall be required to pay a prepayment fee equal to 1.0% of the aggregate principal amount of the Term Loan B subject to such repricing or refinancing.
A portion of the Revolving Loan Facility is available for the issuances of letters of credit and the making of swingline loans, and any such issuance of letters of credit or making of a swingline loan will reduce the amount available under the Revolving Loan Facility. At the Company’s option, it may add one or more term loan facilities or increase the commitments under the Revolving Loan Facility so long as certain conditions are satisfied, including, among others, that no default or event of default is in existence, that the Company is in pro forma compliance with the financial covenants described below and that the Company’s senior secured leverage ratio is less than 3.00 to 1 on a pro forma basis after giving effect to the incurrence of such indebtedness. As of December 31, 2016, the Company had $5,914 of standby and trade letters of credit issued and outstanding under the Revolving Loan Facility and $994,086 of borrowing availability.
The Senior Secured Credit Facility is guaranteed by substantially all of the Company’s existing and future direct and indirect U.S. subsidiaries, with certain customary or agreed-upon exceptions for foreign subsidiaries and certain other subsidiaries. The Company and each of the guarantors under the Senior Secured Credit Facility have granted the lenders under the Senior Secured Credit Facility a valid and perfected first priority (subject to certain customary exceptions) lien and security interest in the following:
•
the equity interests of substantially all of the Company’s direct and indirect U.S. subsidiaries (other than U.S. subsidiaries directly or indirectly owned by foreign subsidiaries) and 65% of the voting securities of certain first tier foreign subsidiaries; and
•
substantially all present and future property and assets, real and personal, tangible and intangible, of the Company and each guarantor, except for certain enumerated interests, and all proceeds and products of such property and assets.
Additionally, the Euro Term Loan was guaranteed by substantially all of the Company’s subsidiary MFB International Holdings S.à r.l.’s (“MFB International Holdings”) existing and future direct and indirect subsidiaries, with certain customary or agreed-upon exceptions for certain subsidiaries and secured by a pledge of 100% of the equity interests of MFB International Holdings and its direct subsidiaries, 100% of the equity interests owned by any subsidiary of MFB International Holdings that is domiciled in Luxembourg and substantially all present and future property and assets, real and personal, tangible and intangible, of each Luxembourg domiciled guarantor, except for certain enumerated interests, and all proceeds and products of such property and assets.
The Term Loan A, the Term Loan B and the Company’s former Euro Term Loan require the Company and its subsidiary MFB International Holdings, as applicable, 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 Term Loan B and the former Euro Term Loan also require the Company and MFB International Holdings, as applicable, to prepay any outstanding Term Loans under the Term Loan B and the former Euro Term Loan in connection with excess cash flow, which percentage 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 Loans that are subject to such prepayments.
At the Company’s option, borrowings under the Revolving Loan Facility, the Term Loan A and the Term Loan B bear interest based on the LIBOR rate or the “base rate” plus, in each case, an applicable margin. The applicable margin for the Revolving Loan Facility and the Term Loan A is determined by reference to a leverage-based pricing grid set forth in the Senior Secured Credit Facility, ranging from a maximum of 2.00% in the case of LIBOR-based loans and 1.00% in the case of Base Rate loans if the Company’s leverage ratio is greater than or equal to 4.00 to 1.00, and will step down in 0.25% increments to a minimum of 1.25% in the case of LIBOR-based loans and 0.25% in the case of Base Rate loans if the Company’s leverage ratio is less than 2.50 to 1.00. The applicable margin under the Term Loan B is 2.50% in the case of LIBOR-based loans and 1.50% in the case of Base Rate loans.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
The Senior Secured Credit Facility requires the Company to comply with customary affirmative, negative and financial covenants. The Senior Secured Credit Facility requires that the Company maintain a minimum interest coverage ratio and a maximum total debt to EBITDA (earnings before income interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility), or leverage ratio. The interest coverage ratio covenant requires that the ratio of the Company’s EBITDA for the preceding four fiscal quarters to its consolidated total interest expense for such period shall not be less than 3.00 to 1.00 for each fiscal quarter. The leverage ratio covenant requires that the ratio of the Company’s total debt to EBITDA for the preceding four fiscal quarters will not be more than 4.00 to 1.00 for each fiscal quarter provided that, following a permitted acquisition in which the consideration is at least $200,000, such maximum leverage ratio covenant shall be increased to 4.50 to 1.00 for each fiscal quarter ending in the succeeding 12-month period following such permitted acquisition. The method of calculating all of the components used in the covenants is included in the Senior Secured Credit Facility.
In addition, the commitment fee for the unused portion of revolving loan commitments made by the Lenders is between 25 and 35 basis points based on the applicable commitment fee margin in effect from time to time. When the Leverage Ratio (as defined in the Senior Secured Credit Facility) is greater than or equal to 4.00 to 1.00, the commitment fee margin is 0.350%. When the Leverage Ratio is less than 4.00 to 1.00 but greater than or equal to 3.25 to 1.00, the applicable commitment fee margin is 0.300%. When the Leverage Ratio is less than 3.25 to 1.00, the applicable commitment fee margin is 0.250%.
The Senior Secured Credit Facility contains customary events of default, including nonpayment of principal when due; nonpayment of interest, fees or other amounts after stated grace period; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; any cross-default to material indebtedness; certain material judgments; certain events related to the ERISA, actual or asserted invalidity of any guarantee, security document or subordination provision or non-perfection of security interest, and a change in control (as defined in the Senior Secured Credit Facility). As of December 31, 2016 the Company was in compliance with all financial covenants.
6.375% Senior Notes
On November 9, 2010, the Company issued $1,000,000 aggregate principal amount of the 6.375% Senior Notes. The 6.375% Senior Notes were senior unsecured obligations that ranked equal in right of payment with all of the Company’s existing and future unsubordinated indebtedness. The 6.375% Senior Notes bore interest at an annual rate equal to 6.375%. Interest was payable on the 6.375% Senior Notes on June 15 and December 15 of each year. The 6.375% Senior Notes were scheduled to mature on December 15, 2020. The net proceeds from the sale of the 6.375% Senior Notes were approximately $979,000. The net proceeds were used to repay all outstanding borrowings under another loan facility, reduce the outstanding borrowings under the Revolving Loan Facility and to pay fees and expenses relating to these transactions. The 6.375% Senior Notes were guaranteed by substantially all of the Company’s domestic subsidiaries.
The indenture governing the 6.375% Senior Notes contained customary events of default which included (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.
During 2016, the Company redeemed these notes in full.
Accounts Receivable Securitization Facility
The Accounts Receivable Securitization Facility provides for up to $275,000 in funding accounted for as a secured borrowing, limited to the availability of eligible receivables, and is secured by certain domestic trade receivables. Under the terms of the Accounts Receivable Securitization Facility, the Company and certain of its subsidiaries sell, on a revolving basis, certain domestic trade receivables to HBI Receivables LLC (“Receivables LLC”), a wholly owned bankruptcy-remote subsidiary that in turn uses the trade receivables to secure the borrowings, which are funded through conduits and financial institutions that are not affiliated with the Company. The commitments of any conduits party to the Accounts Receivable Securitization Facility are funded through the issuance of commercial paper in the short-term market or through committed bank purchasers if the conduits fail to fund. The assets and liabilities of Receivables LLC are fully reflected on the Consolidated Balance Sheet, and the securitization is treated as a secured borrowing for accounting purposes, but the assets of Receivables LLC will be used first to satisfy the creditors of Receivables LLC, not the Company’s creditors. The borrowings under the Accounts Receivable Securitization Facility remain outstanding throughout the term of the agreement subject to the
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Company maintaining sufficient eligible receivables, by continuing to sell trade receivables to Receivables LLC, unless an event of default occurs. In March 2016, the Company amended the Accounts Receivable Securitization Facility to extend 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.
Availability of funding under the Accounts Receivable Securitization Facility depends primarily upon the eligible outstanding receivables balance. The outstanding balance under the Accounts Receivable Securitization Facility is reported on the Consolidated Balance Sheet in the line “Accounts Receivable Securitization Facility.” In the case of any creditors party to the Accounts Receivable Securitization Facility that are conduits, unless the conduits fail to fund, the yield on the commercial paper, which is the conduits’ cost to issue the commercial paper plus certain dealer fees, is considered a financing cost and is included in interest expense on the Consolidated Statement of Income. If the conduits fail to fund, the Accounts Receivable Securitization Facility would be funded through committed bank purchasers, and the interest rate would be payable at the Company’s option at the rate announced from time to time by HSBC Bank USA, N.A. as its prime rate or at the LIBO Rate (as defined in the Accounts Receivable Securitization Facility) plus the applicable margin in effect from time to time. In the case of borrowings from any other creditors party to the Accounts Receivable Securitization Facility that are not conduits or their related committed bank purchasers, the interest rate is payable at the LIBO Rate (as defined in the Accounts Receivable Securitization Facility) or, if this rate is unavailable or otherwise does not accurately reflect the costs to these creditors related to the borrowings, the prime rate. These amounts are also considered financing costs and are included in interest expense on the Consolidated Statement of Income. In addition, HBI Receivables LLC is required to make certain payments to a conduit purchaser, a committed purchaser, or certain entities that provide funding to or are affiliated with them, in the event that assets and liabilities of a conduit purchaser are consolidated for financial and/or regulatory accounting purposes with certain other entities.
The Accounts Receivable Securitization Facility contains customary events of default and requires the Company to maintain the same interest coverage ratio and leverage ratio contained from time to time in the Senior Secured Credit Facility, provided that any changes to such covenants will only be applicable for purposes of the Accounts Receivable Securitization Facility if approved by the Managing Agents or their affiliates. As of December 31, 2016, the Company was in compliance with all financial covenants.
The total amount of receivables used as collateral for the credit facility was $353,361 at December 31, 2016 and is reported on the Company’s Consolidated Balance Sheet in “Trade accounts receivable, net.”
Australian Term A-1, Australian 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 December 31, 2016, the effective interest rate on the Australian Term A-1 was 3.28%. The Australian Term A-1 matures on July 7, 2019. In addition, on July 4, 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 December 31, 2016, the effective interest rate on the Australian Term A-2 was 3.58%. The Australian Term A-2 matures on July 7, 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 Australian Term A-1 and the Australian Term A-2 were issued to help fund the Hanes Australasia 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.
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.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Under the terms of the Syndicated Facility Agreement, the Company must maintain at least a 4:1 total debt to EBITDA 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.
There was not a balance on the Australian Revolving Loan Facility at December 31, 2016, however the Company had $5,000 of letters of credit issued and outstanding under the Australian Revolving Loan Facility and $41,652 of borrowing availability.
European Revolving Loan Facility
On September 9, 2016, the Company established a €100,000 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.
Future Principal Payments
Future principal payments for all of the facilities described above are as follows: $178,364 due in 2017, $112,890 due in 2018, $243,231 due in 2019, $415,313 due in 2020, $143,544 due in 2021 and $2,639,241 due in 2022 and thereafter.
Debt Issuance Costs
During 2016, 2015 and 2014, the Company incurred $45,065, $12,793 and $5,560, respectively, in capitalized debt issuance costs in connection with the amendments to the Senior Secured Credit Facility, the Accounts Receivable Securitization Facility, issuance of new Senior Notes, the Australian Revolving Loan Facility, the European Revolving Loan Facility and the Australian Accounts Receivable Securitization Facility. Debt issuance costs are amortized to interest expense over the respective lives of the debt instruments, which range from one to 10 years. As of December 31, 2016, the net carrying value of unamortized debt issuance costs which is included in “Other Noncurrent Assets” for the revolving loan facilities was $9,742 and the net carrying value of unamortized debt issuance costs which is included in “Long-term debt” for the remainder of the Company’s debt was $46,534 in the Consolidated Balance Sheet. The Company’s debt issuance cost amortization was $9,034, $7,077 and $6,011 in 2016, 2015 and 2014, respectively.
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 2016, the Company recognized charges of $873 for acceleration of unamortized debt costs related to the Euro Term Loan, which was paid in full in August 2016. In 2016, the Company recognized charges of $47,291 for the call premium and acceleration of unamortized debt costs related to the redemption of the 6.375% Senior Notes.
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Commitments and Contingencies
The Company is a party to various pending legal proceedings, claims and environmental actions by government agencies. In accordance with the accounting rules for contingencies, the Company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to the particular matter. The recorded liabilities for these items were not material to the consolidated financial statements of the Company in any of the years presented. Although the outcome of such items cannot be determined with certainty, the Company’s legal counsel and management are of the opinion that the final outcome of these matters will not have a material adverse impact on the consolidated financial position, results of operations or liquidity.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Purchase Commitments
In the ordinary course of business, the Company has entered into purchase commitments for raw materials, production and finished goods. These agreements, typically with terms ending within a year, require total payments of $349,565 in 2017 and $2,805 in 2018 and $0 thereafter.
Operating Leases
The Company leases certain buildings and equipment under agreements that are classified as operating leases. Rental expense under operating leases was $132,128, $103,621 and $89,569 in 2016, 2015 and 2014, respectively.
Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) are as follows: $130,971 in 2017, $117,269 in 2018, $93,537 in 2019, $66,570 in 2020, $45,723 in 2021 and $107,618 thereafter.
License Agreements
The Company is party to several royalty-bearing license agreements for the use of third party trademarks in certain of their products. The license agreements typically require a minimum guarantee to be paid either at the commencement of the agreement, by a designated date during the term of the agreement or by the end of the agreement period. When payments are made in advance of when they are due, the Company records a prepayment and amortizes the expense in the “Cost of sales” line of the Consolidated Statements of Income uniformly over the guaranteed period. For guarantees required to be paid at the completion of the agreement, royalties are expensed through “Cost of sales” as the related sales are made. Management has reviewed all license agreements and has concluded that there are no liabilities recorded at inception of the agreements.
During 2016, 2015 and 2014, the Company incurred royalty expense of approximately $95,650, $84,733 and $57,072, respectively.
Minimum amounts due under the license agreements are approximately $29,081 in 2017, $46,733 in 2018, $49,365 in 2019, $44,696 in 2020 and $1,050 in 2021. In addition to the minimum guaranteed amounts under license agreements, the Company is a party to a partnership agreement that includes a minimum fee of $5,645 for each year ending in 2017.
(13)
Intangible Assets and Goodwill
As described in Note, “Acquisitions,” the Company acquired Hanes Australasia in July 2016, Champion Europe in June 2016 and GTM and Universo in September 2016, which resulted in the recognition of certain intangible assets and goodwill. In addition, the Company elected to cease amortization of the Playtex Domestic trademark, shifting it from a useful life of 30 years to an indefinite life in 2016.
(a) Intangible Assets
The primary components of the Company’s intangible assets and the related accumulated amortization are as follows:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
The amortization expense for intangibles subject to amortization was $22,118, $23,737 and $22,225 for 2016, 2015 and 2014, respectively. The estimated amortization expense for the next five years, assuming no change in the estimated useful lives of identifiable intangible assets or changes in foreign exchange rates is as follows: $26,388 in 2017, $26,283 in 2018, $26,505 in 2019, $26,460 in 2020 and $20,825 in 2021.
(b) Goodwill
Goodwill and the changes in those amounts during the period are as follows:
(14)
Accumulated Other Comprehensive Loss
The components of AOCI are as follows:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
The Company had the following reclassifications out of AOCI:
(15)
Financial Instruments and Risk Management
The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of December 31, 2016, the notional U.S. dollar equivalent of commitments to sell foreign currencies within the Company’s derivative portfolio were $451,355, consisting of contracts hedging primarily exposures to the Euro, Australian dollar, Canadian dollar, Mexican peso, New Zealand dollar and Brazilian real. As of December 31, 2016, the Company did not have any commitments to purchase foreign currencies within the Company’s derivative portfolio.
As of January 2, 2016, the notional U.S. dollar equivalent of commitments to sell and purchase foreign currencies within the Company’s derivative portfolio were $265,136 and $6,099 consisting of contracts hedging primarily exposures to the Euro, Canadian dollar, Australian dollar, Mexican peso, Japanese yen, Brazilian real and South African rand.
Fair Values of Derivative Instruments
The fair values of derivative financial instruments related to forward foreign exchange contracts recognized in the Consolidated Balance Sheets of the Company were as follows:
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 gain from AOCI of approximately $15,655.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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 Consolidated Statements of Income.
The effect of cash flow hedge derivative instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Loss is as follows:
Derivative Contracts Not Designated As Hedges
The Company uses foreign exchange derivative contracts as economic hedges against the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.
The effect of derivative contracts not designated as hedges on the Consolidated Statements of Income is as follows:
(16)
Fair Value of Assets and Liabilities
Fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. A three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, is utilized for disclosing the fair value of the Company’s assets and liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
•
Market approach - prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
•
Cost approach - amount that would be required to replace the service capacity of an asset or replacement cost.
•
Income approach - techniques to convert future amounts to a single present amount based on market expectations, including present value techniques, option-pricing and other models.
The Company primarily applies the market approach for commodity derivatives and for all defined benefit plan investment assets and the income approach for interest rate and foreign currency derivatives for recurring fair value
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
measurements and attempts to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The determination of fair values incorporates various factors that include not only the credit standing of the counterparties involved and the impact of credit enhancements, but also the impact of the Company’s nonperformance risk on its liabilities. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
As of December 31, 2016 and January 2, 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, defined benefit pension plan investment assets, deferred compensation plan liabilities and contingent consideration resulting from the Champion Europe acquisition. The fair values of foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets 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, “Acquisitions,” to the Company’s consolidated financial statements, and is categorized as Level 3. The contingent consideration obligation is required to be revalued each reporting period until the related contingencies are resolved, with any adjustments to the fair value recognized in earnings. The fair values of defined benefit pension plan investments include: certain U.S. equity securities, certain foreign equity securities and debt securities that are determined based on quoted prices in public markets categorized as Level 1, certain foreign equity securities, certain U.S. equity securities, debt securities, insurance contracts and commodity investments that are determined based on inputs readily available in public markets or can be derived from information available in publicly quoted markets categorized as Level 2 and investments in hedge funds of funds and real estate investments that are based on unobservable inputs about which little or no market data exists and are measured at a net asset value are not required to be classified within the fair value hierarchy. There were no changes during 2016 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis.
As of December 31, 2016, the Company did not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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.
(1)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
(2) The fair value of the Champion Europe contingent consideration has not changed since the date of acquisition, other than from the foreign exchange translation impact between periods.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(1)
Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy. The fair value amounts presented in the tables above are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheets.
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 December 31, 2016 and January 2, 2016. The fair value of debt, which is classified as a Level 2 liability, was $3,729,270 and $2,537,640 as of December 31, 2016 and January 2, 2016 and had a carrying value of $3,732,583 and $2,506,981, 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 December 31, 2016 and January 2, 2016, primarily due to the short-term nature of these instruments.
(17)
Defined Benefit Pension Plans
At December 31, 2016, the Company’s pension plans consisted of the Hanesbrands Inc. Pension Plan, various nonqualified retirement plans and international plans, which include certain defined benefit plans acquired in connection with the purchases of Hanes Europe Innerwear and Hanes Australasia. Benefits under the Hanesbrands Inc. Pension Plan were frozen effective December 31, 2005.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
The components of net periodic benefit cost and other amounts recognized in other comprehensive income of the Company’s noncontributory defined benefit pension plans were as follows:
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost in 2017 are $19,028 and $9, respectively.
The funded status of the Company’s defined benefit pension plans at the respective year ends was as follows:
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
As most of the Company’s pension plans are frozen, the accumulated benefit obligation (“ABO”) approximates the benefit obligation. The total benefit obligation and the benefit obligation and fair value of plan assets for the Company’s pension plans with benefit obligations in excess of plan assets are as follows:
Amounts recognized in the Company’s Consolidated Balance Sheets consist of:
Amounts recognized in accumulated other comprehensive loss consist of:
Accrued benefit costs related to the Company’s defined benefit pension plans are reported in the “Accrued liabilities - Payroll and employee benefits” and “Pension and postretirement benefits” lines of the Consolidated Balance Sheets.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(a) Measurement Date and Assumptions
A December 31 measurement date is used to value plan assets and obligations for the pension plans. In determining the discount rate in the prior years, the Company utilized, as a general benchmark, the single discount rate equivalent to discount the expected cash flows from each plan using the yields at each duration from a published yield curve as of the measurement date. Beginning in 2016, the Company changed the method utilized to estimate primarily the interest cost component of net periodic benefit costs for the Company’s U.S. defined benefit plans from using a single discount rate as discussed above. The Company elected to use a full yield curve approach in the estimation of the interest component of benefit costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligations to the relevant projected cash flows. The Company made this change to improve the correlation between projected benefit cash flows and the corresponding yield curve spot rates and to provide a more precise measurement of interest costs. This change will not affect the measurement of the total benefit obligations as the change in interest costs is completely offset by the actuarial gain or loss reported. The expected long-term rate of return on plan assets was based on the Company’s investment policy target allocation of the asset portfolio between various asset classes and the expected real returns of each asset class over various periods of time. The weighted average actuarial assumptions used in measuring the net periodic benefit cost and plan obligations for the periods presented were as follows:
(1)
The compensation increase assumption applies to the international plans and portions of the nonqualified retirement plans, as benefits under these plans were not frozen at December 31, 2016, January 2, 2016 and January 3, 2015.
(b) Plan Assets, Expected Benefit Payments, and Funding
The allocation of pension plan assets as of the respective period end measurement dates is as follows:
The Company’s asset strategy and primary investment objective are to maximize the principal value of the plan assets to meet current and future benefit obligations to plan participants and their beneficiaries. To accomplish this goal, the assets of the plan are broadly diversified to protect against large investment losses and to reduce the likelihood of excessive volatility of returns. Diversification of assets is achieved through strategic allocations to various asset classes, as well as various investment styles within these asset classes, and by retaining multiple, third party investment management firms with complementary investment styles and philosophies to implement these allocations. The Company has established a target asset allocation based upon analysis of risk/return tradeoffs and correlations of asset mixes given long-term historical data, prospective capital market returns and forecasted liabilities of the plans. The target asset allocation approximates the actual asset allocation as of
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
December 31, 2016. In addition to volatility protection, diversification enables the assets of the plan the best opportunity to provide adequate returns in order to meet the Company’s investment return objectives. These objectives include, over a rolling 5-year period, to achieve a total return that exceeds the required actuarial rate of return for the plan and to outperform a passive portfolio, consisting of a similar asset allocation.
The Company utilizes market data or assumptions that market participants would use in pricing the pension plan assets. At December 31, 2016, the Company had $232,575 classified as Level 1 assets, $225,427 classified as Level 2 assets and no assets classified as Level 3. At January 2, 2016, the Company had $167,069 classified as Level 1 assets, $260,323 classified as Level 2 assets and no assets classified as Level 3. The Level 1 assets consisted primarily of certain U.S. equity securities, certain debt securities, certain foreign equity securities and cash and cash equivalents, Level 2 assets consisted primarily of certain debt securities, certain U.S. equity securities, commodity investments, insurance contracts and certain foreign equity securities. Investments in hedge funds of funds and real estate investments that are based on unobservable inputs about which little or no market data exists and are measured at a net asset value per share (or its equivalent) as a practical expedient shall not be categorized within the fair value hierarchy. Refer to Note, “Fair Value of Assets and Liabilities,” for the Company’s complete disclosure of the fair value of pension plan assets.
Expected benefit payments are as follows: $59,735 in 2017, $61,466 in 2018, $65,172 in 2019, $66,020 in 2020, $71,575 in 2021 and $363,085 thereafter.
(c) Nonretirement Postemployment Benefit Plans
Certain of the international plans, specifically those acquired in connection with the purchases of Hanes Europe Innerwear and Champion Europe, are in substance nonretirement postemployment benefit plans, which are future liabilities funded through future operational results of the Company. However, for purposes of consolidation, the Company is including these plans within the defined benefit reporting. At December 31, 2016 and January 2, 2016, the total amounts accrued for these plans were $48,330 and $49,646, respectively and the total gain for the year ended December 31, 2016 was $1,824, while the total expense at January 2, 2016 was $499.
(18)
Income Taxes
The provision for income tax computed by applying the U.S. statutory rate to income before taxes as reconciled to the actual provisions were:
The Company has been granted income tax rates lower than statutory rates in two foreign jurisdictions through 2019. These lower rates, when compared with the countries’ statutory rates, resulted in an income tax reduction of approximately $1,300 (negligible impact per diluted share) in 2016, $2,200 ($0.01 per diluted share) in 2015 and $5,000 ($0.01 per diluted share) in 2014.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Current and deferred tax provisions (benefits) were:
Cash payments above represent cash tax payments made by the Company primarily in foreign jurisdictions.
The deferred tax assets and liabilities at the respective year-ends were as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances.
The changes in the Company’s valuation allowance for deferred tax assets are as follows:
(1) Charges to other accounts include the effects of foreign currency translation and purchase accounting adjustments.
As of December 31, 2016, the valuation allowance for deferred tax assets was $67,451, made up of $45,350 for foreign loss carryforwards, $6,466 for other foreign deferred tax assets, $15,635 for federal and state operating loss carryforwards and other federal deferred tax assets. The net change in the total valuation allowance for 2016 was $6,093 related to an increase of $3,069 for foreign loss carryforwards and other foreign deferred tax assets and $3,024 for federal and state operating loss carryforwards and other domestic deferred tax assets.
At December 31, 2016, the Company has total net operating loss carryforwards of approximately $292,708 for foreign jurisdictions, which will expire as follows:
At December 31, 2016, the Company had tax credit carryforwards totaling $22,567, which expire beginning after 2020.
At December 31, 2016, the Company had federal and state net operating loss carryforwards of approximately $10,769 and $673,488, respectively, which expire beginning after 2018.
At December 31, 2016, applicable U.S. federal income taxes and foreign withholding taxes have not been provided on the accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. If these earnings had not been permanently reinvested, deferred taxes of approximately $929,000 would have been recognized in the Consolidated Financial Statements.
In 2016 and 2015, the Company recognized a benefit related to the realization of unrecognized tax benefits resulting from the expiration of statutes of limitations of $4,146 and $3,587, respectively. Although it is not reasonably possible to estimate the amount by which unrecognized tax benefits may increase or decrease within the next 12 months due to uncertainties regarding the timing of examinations and the amount of settlements that may be paid, if any, to tax authorities, the Company currently expects a reduction of approximately $8,081 for unrecognized tax benefits accrued at December 31, 2016 within the next 12 months.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
At December 31, 2016, the balance of the Company’s unrecognized tax benefits, which would, if recognized, affect the Company’s annual effective tax rate was $19,696. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company recognized $549 in 2016 for interest and penalties classified as income tax expense and $3,669 and $636, respectively in 2015 and 2014, for interest and penalties classified as income tax benefit in the Consolidated Statement of Income. At December 31, 2016 and January 2, 2016, the Company had a total of $3,251 and $2,702, respectively, of interest and penalties accrued related to unrecognized tax benefits.
The Company files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous state and foreign jurisdictions. In the United States, the Internal Revenue Service (“IRS”) began an examination of the Company’s 2011 tax year during the fourth quarter of 2013 and of the Company’s 2012 tax year during the third quarter of 2014, both of which were completed during the third quarter of 2015. As a result in 2015, the Company recorded an income tax benefit of $56,427 due to the remeasurement of certain unrecognized tax benefits. The Company is also subject to examination by various state and international tax authorities. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of both ongoing and future examinations for the current or prior years to ensure the Company’s provision for income taxes is sufficient. The Company recognizes liabilities based on estimates of whether additional taxes will be due and believes its reserves are adequate in relation to any potential assessments. The outcome of any one examination, some of which may conclude during the next 12 months, is not expected to have a material impact on the Company’s financial position or results of operations.
(19)
Stockholders’ Equity
The Company is authorized to issue up to 2,000,000 shares of common stock, par value $0.01 per share, and up to 50,000 shares of preferred stock, par value $0.01 per share, and the Company’s Board of Directors may, without stockholder approval, increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Company is authorized to issue. At December 31, 2016 and January 2, 2016, 378,687 and 391,653 shares, respectively, of common stock were issued and outstanding and no shares of preferred stock were issued or outstanding.
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 replaced the Company’s previous share repurchase program for up to 40,000 shares that was originally approved in 2007. Additionally, management has been granted authority to establish a trading plan under Rule 10b5-1 of the Exchange Act in connection with share repurchases, which will allow the Company to repurchase shares in the open market during periods in which the stock trading window is otherwise closed for the Company and certain of the Company’s officers and employees pursuant to the Company’s insider trading policy. During 2016, under the previous repurchase program, the Company purchased 14,243 shares of the Company’s common stock at a cost of $379,901 (average price of $26.65). During 2015, under the previous repurchase program, the Company purchased 12,148 shares of the Company’s common stock at a cost of $351,495 (average price of $28.91). The Company has not purchased any shares of the Company’s common stock under the new share repurchase program approved in 2016. The primary objective of the share repurchase program is to utilize excess cash to generate shareholder value.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
Preferred Stock Purchase Rights
On October 27, 2015, the Company entered into a Second Amendment to Rights Agreement (the “Second Amendment”) to the original Rights Agreement dated as of September 1, 2006 and previously amended on March 26, 2015 (the “Rights Agreement”) between the Company and Computershare Trust Company, N.A., as Rights Agent, one preferred stock purchase right (a “Right”) was distributed with and attached to each share of the Company’s common stock. Each Right entitled its holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of the Company’s Junior Participating Preferred Stock, Series A (the “Series A Preferred Stock”). The Second Amendment accelerated the expiration of the Rights from September 1, 2016 to November 10, 2015 and had the effect of terminating the Rights Agreement on November 10, 2015. At the time of the termination of the Rights Agreement, all of the Rights distributed to holders of the Company’s common stock pursuant to the Rights Agreement expired. In connection with the termination of the Rights Agreement, on November 10, 2015, the Company eliminated the Series A Preferred Stock issuable upon exercise of the Rights and reclassified the Series A Preferred Stock as authorized but undesignated shares of the Company’s preferred stock.
Dividends
In 2014, the Company’s Board of Directors authorized regular quarterly dividends of $0.075 per share, which were paid in 2014.
In 2015, the Company’s Board of Directors authorized regular quarterly dividends of $0.10 per share, which were paid in 2015. On March 3, 2015, the Company effected a four-for-one stock split in the form of a 300% stock dividend to stockholders of record as of the close of business on February 9, 2015.
In January 2016, the Company’s Board of Directors increased the regular quarterly dividend rate to $0.11 per share on outstanding common stock. During the Company’s 2016 fiscal year, regular quarterly cash dividends of $0.11 per share were paid on March 8, 2016, June 7, 2016, September 7, 2016 and December 6, 2016.
In January 2017, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.15 per share on outstanding common stock to be paid on March 7, 2017 to stockholders of record at the close of business on February 14, 2017.
(20)
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, women’s 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, Australia, Asia, Latin America and Canada geographic locations that sell products that primarily 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
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
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, “Summary of Significant Accounting Policies.”
For the year ended December 31, 2016, the Company incurred acquisition, integration and other action related charges of $185,810, of which $39,379 is reported in the “Cost of sales” line, and $99,140 is reported in the “Selling, general and administrative expenses” line and $47,291 is reported in the “Other” line in the Consolidated Statement of Income. For the year ended January 2, 2016, the Company incurred acquisition, integration and other action related charges of $266,060, of which $62,859 is reported in the “Cost of sales” line and $203,201 is reported in the “Selling, general and administrative expenses” line in the Consolidated Statement of Income. For the year ended January 3, 2015, the Company incurred acquisition, integration and other action related charges of $198,933, of which $73,125 is reported in the “Cost of sales” line and $125,808 is reported in the “Selling, general and administrative expenses” line in the 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 accrued $53,866 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 December 31, 2016, $21,324 of benefit payments had been made, resulting in an ending accrual of $32,542, of which, $19,196 and $13,346, respectively, is included in the “Accrued liabilities and other - other” and “Other noncurrent liabilities” line of the Consolidated Balance Sheet.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(1)
Principally cash and equivalents, certain fixed assets, net deferred tax assets, goodwill, trademarks and other identifiable intangibles, and certain other noncurrent assets. Prior year corporate assets have been recast to reflect the adoption of ASU 2015-03 and the applicable reclassification of debt issuance costs.
Sales to Wal-Mart and Target were substantially in the Innerwear and Activewear segments and represented 20% and 15% of total sales in 2016, respectively. Sales to Wal-Mart and Target represented 23% and 15% of total net sales in 2015, respectively. Sales to Wal-Mart and Target represented 24% and 17% of total net sales in 2014, respectively.
Worldwide sales by product category for Innerwear and Activewear were $4,112,598 and $1,915,601, respectively, in 2016. Worldwide sales by product category for Innerwear and Activewear were $3,973,645 and $1,757,904, respectively, in 2015. Worldwide sales by product category for Innerwear and Activewear were $3,734,188 and $1,590,558, respectively, in 2014.
HANESBRANDS INC.
Notes to Consolidated Financial Statements - (Continued)
Years ended December 31, 2016, January 2, 2016 and January 3, 2015
(amounts in thousands, except per share data)
(21)
Geographic Area Information
The net sales by geographic region are attributed by customer location.
(22)
Quarterly Financial Data (Unaudited)