UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 1, 2018
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
Maryland | 001-32891 | 20-3552316 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification No.) | ||
1000 East Hanes Mill Road Winston-Salem, NC | 27105 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (336) 519-8080
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 2.02. Results of Operations and Financial Condition
On August 1, 2018, Hanesbrands Inc. ("HanesBrands") issued a press release announcing its financial results for the second quarter ended June 30, 2018. A copy of the press release is attached as Exhibit 99.1 to this Current Report on Form 8-K. Exhibit 99.1 is being “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), nor shall Exhibit 99.1 be deemed incorporated by reference in any filing under the Securities Act of 1933 (the “Securities Act”) or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 7.01. Regulation FD Disclosure
HanesBrands has made available on the investors section of its corporate website, www.Hanes.com/investors, certain supplemental materials regarding Hanesbrands' financial results and business operations (the “Supplemental Information”). The Supplemental Information is furnished herewith as Exhibit 99.2 and is incorporated by reference. All information in the Supplemental Information is presented as of the particular date or dates referenced therein, and Hanesbrands does not undertake any obligation to, and disclaims any duty to, update any of the information provided.
Exhibits 99.1 and 99.2 to this Current Report on Form 8-K include forward-looking financial information that is expected to be discussed on Hanesbrands' previously announced conference call with investors and analysts to be held at 8:30 a.m., Eastern Daylight time on August 1, 2018. The call may be accessed at www.Hanes.com/investors. Replays of the call will be available at www.Hanes.com/investors and via telephone. The telephone playback will be available from approximately 12:00 p.m., Eastern Daylight time, on August 1, 2018, until midnight, Eastern Daylight time, on August 8, 2018. The replay will be available by calling toll-free (855) 859-2056, or by toll call at (404) 537-3406. The replay pass code is 6296115. Exhibits 99.1 and 99.2 are being “furnished” and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, nor shall they be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
Item 9.01. Financial Statements and Exhibits
(d) Exhibits
Exhibit 99.1 | ||
Exhibit 99.2 | ||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
August 1, 2018 | HANESBRANDS INC. | |||
By: | /s/ Barry A. Hytinen | |||
Barry A. Hytinen | ||||
Chief Financial Officer | ||||
HanesBrands
1000 East Hanes Mill Road
Winston-Salem, NC 27105
(336) 519-8080
 |
news release |
FOR IMMEDIATE RELEASE
News Media, contact: | Matt Hall, (336) 519-3386 |
Analysts and Investors, contact: | T.C. Robillard, (336) 519-2115 |
HANESBRANDS REPORTS SECOND-QUARTER 2018 FINANCIAL RESULTS
• | 2Q financial results, including 4% net sales growth, in line with company guidance |
• | Company reaffirms full-year 2018 financial guidance |
• | Company confirms long-term goal for Champion brand global sales |
WINSTON-SALEM, N.C. (Aug. 1, 2018) - HanesBrands (NYSE: HBI), a leading global marketer of everyday basic apparel under world-class brands, today announced second-quarter 2018 results that achieved the midpoint of company guidance.
For the quarter ended June 30, 2018, the company reported net sales growth of 4 percent to $1.72 billion versus a guidance range of $1.7 billion to $1.725 billion. Organic sales in constant currency, which exclude acquisition contributions, increased slightly.
GAAP operating profit of $220 million and adjusted operating profit excluding actions of $245 million each decreased 6 percent, the midpoint of guidance for each.
GAAP diluted earnings per share for continuing operations was $0.39 compared with guidance of $0.38 to $0.40, and adjusted EPS excluding actions was $0.45, compared with guidance of $0.44 to $0.46. GAAP EPS and adjusted EPS decreased 17 percent and 15 percent, respectively, reflecting lower operating profit, a higher corporate tax rate for 2018 as a result of U.S. tax reform, and higher interest expense.
Hanes has reiterated its full-year guidance and issued net sales, operating profit and EPS guidance for the third-quarter 2018. (See financial guidance section for details. See Note on Adjusted Measures and Reconciliation to GAAP Measures later in this news release for additional discussion and details.)
“Our results for the second-quarter were consistent with our guidance and the year is unfolding as we expected,” said Hanes Chief Executive Officer Gerald W. Evans Jr. “We achieved organic growth for the fourth consecutive quarter with strong International and global Champion sales growth. We continue to address the challenging environment for intimate apparel and expect our turn-around plan to gain additional traction by the end of the year. Our cash flow from operations of $64 million in the second quarter was ahead of our expectations and the outlook is strong. We continue to expect margin expansion in the second half, primarily driven by additional acquisition synergies and organic sales growth.”
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 2
Key Callouts for Second-Quarter 2018 Financial Results
The diversification of Hanes’ global business model continued to support the company’s execution of its Sell More, Spend Less and Generate Cash strategies in the second quarter and is expected to contribute to second-half improvement. Key callouts follow.
Growth Initiatives Drive 4 Percent Net Sales Increase. Contributors to net sales growth in the quarter included acquisition contributions, widespread global Champion strength, and increased consumer-directed sales.
Net sales for Bras N Things, acquired in February 2018, and Alternative Apparel, acquired in October 2017, totaled nearly $52 million in the quarter.
Champion sales increased in all geographies. Global Champion sales increased 18 percent in the quarter and were up 16 percent in constant currency.
Global consumer-directed sales, consisting of company retail and online channel sales, increased 20 percent in the second quarter and represented 22 percent of total sales.
Fourth-Consecutive Quarter of Organic Sales Growth. Constant-currency organic sales, which exclude sales from acquisitions under a year old and the effects of changes in currency exchange rates, increased slightly, beating company projection of a slight decrease. In addition to global Champion growth, organic growth benefited from innerwear increases in U.S. basics, the Americas, and Australia.
The company expects to deliver higher levels of organic growth in the second half as a result of continued execution of strategic growth initiatives, continued product innovation success, back-to-school alignment with key U.S. retailers, and action plans to stabilize the Innerwear segment’s U.S. intimate apparel business.
First-Half Operating Profit Affected by Inflation and Inefficiencies, but Second-Half Margin Expansion Expected. Similar to the first quarter, second-quarter operating profit was affected by input-cost inflation and expected increased expenses for investment in brand building and temporary distribution inefficiencies. Those factors offset benefits from acquisition synergies and strong International segment operating profit growth.
The company expects a return to margin expansion in the second half as a result of additional acquisition synergies and accelerated organic sales growth.
Tax Reform Effect on EPS Comparisons. U.S. tax reform, which resulted in a higher corporate tax rate for Hanes beginning in 2018, affects the year-over-year comparisons for EPS. When applying the 2018 second-quarter tax rate to 2017 second-quarter results on a pro forma basis, GAAP EPS decreased 7 percent and adjusted EPS decreased 6 percent.
Business Segment Summaries
Innerwear Segment’s Mixed Results Consistent with Expectations. U.S. Innerwear segment sales decreased 3 percent, while operating profit decreased 10 percent as a result of raw material inflation and mix of products sold.
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 3
Sales of Innerwear basics increased slightly as point-of-sale trends improved, men’s underwear sales increased, and women’s underwear returned to growth. Innovation continues to work, with strong performance of the newly launched Hanes Comfort Flex Fit men’s boxer briefs.
Innerwear Intimates sales decreased in the quarter, although progress was made on key aspects of the company’s plan to stabilize the business and then return to growth. As the company managed through retailer door closures and market trends, it successfully gained traction with bra space gains in the mass channel and new bra programs in the midtier channel. The company continues to prepare for a relaunch of its shapewear programs late in the third quarter.
Activewear Segment Sales Increase on Acquisition Benefits and Organic Growth. U.S. Activewear segment sales increased 7 percent, including a 1.5 percent increase in organic sales fueled by growth of Champion and the licensed sports apparel business. Segment operating profit decreased 3 percent due to higher raw material costs, start-up manufacturing inefficiencies, and temporary distribution costs.
The acquisition of Alternative Apparel contributed $20 million in sales. Champion sales increased more than 70 percent outside the mass channel. Growth was driven by strong consumer demand, specialty channel space gains, and online penetration.
Strong International Segment Performance Drivers Include Acquisitions, Organic Growth, and Synergies. International segment sales increased 15 percent and operating profit increased 27 percent. In constant currency, sales increased 12 percent and operating profit increased 24 percent.
Constant-currency organic sales increased 5 percent, primarily on the strength of Champion growth in Europe and Asia. The acquisition of Bras N Things in Australia contributed $31 million in sales.
The segment’s operating margin of 14 percent increased nearly 140 basis points over the year-ago quarter, benefitting from organic growth and integration synergies from past acquisitions.
Long-Term Champion Outlook
HanesBrands announced today that the company and Target Corporation will not renew their contract for an exclusive line of C9 by Champion activewear apparel when the current contract expires at the end of January 2020.
“The C9 by Champion program at Target is a mature program after 15 successful years,” Evans said. “Overall, Champion has significant momentum in all geographies globally, and we will continue to focus on growth across our Champion portfolio through expanded geographic penetration, product lines and distribution channels, including online and retail. Our core Champion sales in constant currency increased more than 30 percent globally in the first half of 2018.”
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 4
The C9 program is fully booked for 2018 and the conclusion of the contract is not expected to have a meaningful effect on the company’s outlook for 2019. In the past 12 months, the company generated approximately $380 million in C9 by Champion activewear sales.
With the brand’s forecasted growth rate, the company continues to expect to achieve global Champion sales of more than $2 billion by 2022. The company does not expect the end of the C9 by Champion program at Target to affect that projection.
“Target is a great retail partner, and we look forward to continuing to drive mutual growth with our leading national apparel brands across multiple product categories,” Evans said.
2018 Financial Guidance
Hanes has reiterated full-year financial guidance for 2018, despite a strengthening U.S. dollar, and has issued third-quarter guidance for net sales, operating profit and EPS.
The company continues to expect full-year 2018 net sales of $6.72 billion to $6.82 billion, GAAP operating profit of $870 million to $905 million, adjusted operating profit excluding actions of $950 million to $985 million, GAAP EPS of $1.54 to $1.62, adjusted EPS excluding actions of $1.72 to $1.80, and net cash from operations of $675 million to $750 million.
Compared with the previous outlook for foreign exchange rates in the second half, the company now expects the strengthening dollar to reduce net sales growth by $30 million and operating profit growth by $5 million in the second half. Previously, the company expected a neutral impact on sales and profit from exchange rates in the second half.
With U.S. income tax reform, the company expects the 2018 full-year tax rate to be approximately 16 percent.
Third-Quarter Guidance. The company expects a return to margin expansion in the second half and an increase in the organic growth rate.
Third-quarter net sales are expected to be in the range of $1.85 billion to $1.9 billion, representing approximately 4 percent growth at the midpoint. Constant-currency organic sales are expected to increase approximately 2 percent at the midpoint of guidance.
GAAP operating profit is expected to be $265 million to $280 million, while adjusted operating profit excluding actions is expected to be $285 million to $300 million. GAAP EPS is expected to be $0.49 to $0.52, and adjusted EPS excluding actions is expected to be $0.54 to $0.57.
The company expects pretax charges related to acquisition integration and other actions in the third quarter of approximately $20 million.
Hanes has updated its quarterly frequently-asked-questions document, which is available at www.Hanes.com/faq.
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 5
Note on Adjusted Measures and Reconciliation to GAAP Measures
To supplement financial guidance prepared in accordance with generally accepted accounting principles, the company provides quarterly and full-year results and guidance concerning certain non‐GAAP financial measures, including adjusted EPS, adjusted net income, adjusted operating profit (and margin), adjusted SG&A, adjusted gross profit (and margin), EBITDA and adjusted EBITDA.
Adjusted EPS is defined as diluted EPS from continuing operations excluding actions and the tax effect on actions. Adjusted net income is defined as net income from continuing operations excluding actions and the tax effect on actions. Adjusted operating profit is defined as operating profit excluding actions. Adjusted gross profit is defined as gross profit excluding actions. Adjusted SG&A is defined as selling, general and administrative expenses excluding actions.
Charges for actions taken year to date and for guidance for the full year primarily represent acquisition and integration costs related to Hanes Europe Innerwear, Hanes Australasia, Champion Europe, Alternative Apparel and Bras N Things, and other costs related to supply chain network changes. Acquisition and integration costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write-offs, information technology integration costs and similar charges. While these costs are not operational in nature and are not expected to continue for any singular transaction on an ongoing basis, similar types of costs, expenses and charges have occurred in prior periods and may recur in the future depending upon acquisition activity.
Hanes has chosen to present these non‐GAAP measures to investors to enable additional analyses of past, present and future operating performance and as a supplemental means of evaluating operations absent the effect of acquisitions and other actions. Hanes believes these non-GAAP measures provide management and investors with valuable supplemental information for analyzing the operating performance of the company’s ongoing business during each period presented without giving effect to costs associated with the execution and integration of any of the aforementioned actions taken.
In addition, the company has chosen to present EBITDA and adjusted EBITDA to investors because it considers these measures to be an important supplemental means of evaluating operating performance. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding actions and stock compensation expense. Hanes believes that EBITDA and adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the industry, and management uses EBITDA and adjusted EBITDA for planning purposes in connection with setting its capital allocation strategy. EBITDA and adjusted EBITDA should not, however, be considered as measures of discretionary cash available to invest in the growth of the business.
Hanes is a global company that reports financial information in U.S. dollars in accordance with GAAP. As a supplement to the company’s reported operating results, Hanes also presents constant-currency financial information, which is a non-GAAP financial measure that excludes the impact of translating foreign currencies into U.S. dollars. The company uses constant-currency information to provide a framework to assess how the business performed excluding the effects of changes in the rates used to calculate foreign currency translation.
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 6
Hanes believes this information is useful to management and investors to facilitate comparison of operating results and better identify trends in the company’s businesses.
To calculate foreign currency translation on a constant currency basis, operating results for the current-year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).
Non‐GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as an alternative to, or substitute for, financial results prepared in accordance with GAAP. Further, the non-GAAP measures presented may be different from non-GAAP measures with similar or identical names presented by other companies.
In the first and second quarters of 2018, Hanes incurred $20 million and $25 million, respectively, in pretax charges for acquisition-related and integration actions. In the first and second quarters of 2017, Hanes incurred $38 million and $26 million, respectively, and in charges for acquisition-related and integration actions.
For 2018 guidance, Hanes expects full-year GAAP EPS of $1.54 to $1.62 with anticipated pretax charges for acquisition-related and integration costs and other actions of approximately $80 million, which results in adjusted EPS guidance of $1.72 to $1.80. For the third quarter, the company expects GAAP EPS of $0.49 to $0.52 with anticipated pretax charges for acquisition-related and integration costs and other actions of approximately $20 million, which results in adjusted EPS guidance of $0.54 to $0.57.
Webcast Conference Call
Hanes will host an Internet webcast of its second-quarter investor conference call at 8:30 a.m. EDT today, Aug. 1, 2018. The broadcast, which will consist of prepared remarks followed by a question-and-answer session, may be accessed at www.Hanes.com/investors. The call is expected to conclude by 9:30 a.m.
An archived replay of the conference call webcast will be available in the investors section of the Hanes corporate website. A telephone playback will be available from approximately noon EDT today through midnight EDT Aug. 8, 2018. The replay will be available by calling toll-free (855) 859-2056 or by toll call at (404) 537-3406. The replay ID is 6296115.
Cautionary Statement Concerning Forward-Looking Statements
This press release contains certain forward-looking statements, as defined under U.S. federal securities laws, with respect to our long-term goals and trends associated with our business, as well as guidance as to future performance. In particular, among others, statements following the heading 2018 Financial Guidance, are forward-looking statements. These forward-looking statements are based on our current intent, beliefs, plans and expectations. Readers are cautioned not to place any undue reliance on any forward-looking statements. Forward-looking statements necessarily involve risks and uncertainties, many of which are outside of our control, that could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include such things as: the highly competitive and evolving nature of the industry in which we compete; the rapidly changing retail environment; any inadequacy, interruption,
HanesBrands Reports Second-Quarter 2018 Financial Results - Page 7
integration failure or security failure with respect to our information technology; the impact of significant fluctuations and volatility in various input costs, such as cotton and oil-related materials, utilities, freight and wages; our ability to properly manage strategic projects; significant fluctuations in foreign exchange rates; our ability to attract and retain a senior management team with the core competencies needed to support our growth in global markets; legal, regulatory, political and economic risks related to our international operations; our ability to successfully integrate acquired businesses; our reliance on a relatively small number of customers for a significant portion of our sales; and other risks identified from time to time in our most recent Securities and Exchange Commission reports, including our annual report on Form 10-K and quarterly reports on Form 10-Q. Since it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, the above list should not be considered a complete list. Any forward-looking statement speaks only as of the date on which such statement is made, and HanesBrands undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, other than as required by law.
HanesBrands
HanesBrands, based in Winston-Salem, N.C., is a socially responsible leading marketer of everyday basic innerwear and activewear apparel in the Americas, Europe, Australia and Asia-Pacific. The company sells its products under some of the world’s strongest apparel brands, including Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei, Alternative, Bras N Things, and Gear for Sports. The company sells T-shirts, bras, panties, shapewear, underwear, socks, hosiery, and activewear produced in the company’s low-cost global supply chain. A member of the S&P 500 stock index, Hanes has approximately 68,000 employees in more than 40 countries and is ranked No. 432 on the Fortune 500 list of America’s largest companies by sales. Hanes takes pride in its strong reputation for ethical business practices. Connect with HanesBrands at www.Hanes.com/corporate or via social media (Twitter: @hanesbrands, and Facebook: www.facebook.com/hanesbrandsinc).
# # #
TABLE 1
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(in thousands, except per-share amounts)
(Unaudited)
Quarter Ended | Six Months Ended | ||||||||||||||||||||
June 30, 2018 | July 1, 2017 | % Change | June 30, 2018 | July 1, 2017 | % Change | ||||||||||||||||
Net sales | $ | 1,715,443 | $ | 1,646,610 | 4.2 | % | $ | 3,186,947 | $ | 3,026,965 | 5.3 | % | |||||||||
Cost of sales | 1,055,487 | 1,000,708 | 1,948,070 | 1,841,532 | |||||||||||||||||
Gross profit | 659,956 | 645,902 | 2.2 | % | 1,238,877 | 1,185,433 | 4.5 | % | |||||||||||||
As a % of net sales | 38.5 | % | 39.2 | % | 38.9 | % | 39.2 | % | |||||||||||||
Selling, general and administrative expenses | 439,893 | 412,197 | 872,756 | 825,299 | |||||||||||||||||
As a % of net sales | 25.6 | % | 25.0 | % | 27.4 | % | 27.3 | % | |||||||||||||
Operating profit | 220,063 | 233,705 | (5.8 | )% | 366,121 | 360,134 | 1.7 | % | |||||||||||||
As a % of net sales | 12.8 | % | 14.2 | % | 11.5 | % | 11.9 | % | |||||||||||||
Other expenses | 6,570 | 6,422 | 12,331 | 12,967 | |||||||||||||||||
Interest expense, net | 48,430 | 44,130 | 94,193 | 86,267 | |||||||||||||||||
Income from continuing operations before income tax expense | 165,063 | 183,153 | 259,597 | 260,900 | |||||||||||||||||
Income tax expense | 24,430 | 10,989 | 39,555 | 15,654 | |||||||||||||||||
Income from continuing operations | 140,633 | 172,164 | (18.3 | )% | 220,042 | 245,246 | (10.3 | )% | |||||||||||||
Income (loss) from discontinued operations, net of tax | — | 368 | — | (2,097 | ) | ||||||||||||||||
Net income | $ | 140,633 | $ | 172,532 | (18.5 | )% | $ | 220,042 | $ | 243,149 | (9.5 | )% | |||||||||
Earnings (loss) per share - basic: | |||||||||||||||||||||
Continuing operations | $ | 0.39 | $ | 0.47 | $ | 0.61 | $ | 0.66 | |||||||||||||
Discontinued operations | — | — | — | (0.01 | ) | ||||||||||||||||
Net income | $ | 0.39 | $ | 0.47 | (17.0 | )% | $ | 0.61 | $ | 0.66 | (7.6 | )% | |||||||||
Earnings (loss) per share - diluted: | |||||||||||||||||||||
Continuing operations | $ | 0.39 | $ | 0.47 | $ | 0.61 | $ | 0.66 | |||||||||||||
Discontinued operations | — | — | — | (0.01 | ) | ||||||||||||||||
Net income | $ | 0.39 | $ | 0.47 | (17.0 | )% | $ | 0.61 | $ | 0.65 | (6.2 | )% | |||||||||
Weighted average shares outstanding: | |||||||||||||||||||||
Basic | 362,011 | 365,911 | 361,944 | 370,075 | |||||||||||||||||
Diluted | 363,254 | 367,992 | 363,245 | 372,147 | |||||||||||||||||
TABLE 2
HANESBRANDS INC.
Supplemental Financial Information
(in thousands)
(Unaudited)
Quarter Ended | Six Months Ended | ||||||||||||||||||||
June 30, 2018 | July 1, 2017 | % Change | June 30, 2018 | July 1, 2017 | % Change | ||||||||||||||||
Segment net sales: | |||||||||||||||||||||
Innerwear | $ | 694,694 | $ | 719,006 | (3.4 | )% | $ | 1,185,772 | $ | 1,224,196 | (3.1 | )% | |||||||||
Activewear | 405,785 | 379,756 | 6.9 | 751,910 | 707,099 | 6.3 | |||||||||||||||
International | 545,862 | 475,242 | 14.9 | 1,115,749 | 952,640 | 17.1 | |||||||||||||||
Other | 69,102 | 72,606 | (4.8 | ) | 133,516 | 143,030 | (6.7 | ) | |||||||||||||
Total net sales | $ | 1,715,443 | $ | 1,646,610 | 4.2 | % | $ | 3,186,947 | $ | 3,026,965 | 5.3 | % | |||||||||
Segment operating profit1: | |||||||||||||||||||||
Innerwear | $ | 159,129 | $ | 177,628 | (10.4 | )% | $ | 260,548 | $ | 294,250 | (11.5 | )% | |||||||||
Activewear | 57,508 | 58,972 | (2.5 | ) | 95,795 | 102,322 | (6.4 | ) | |||||||||||||
International | 76,558 | 60,147 | 27.3 | 153,619 | 112,809 | 36.2 | |||||||||||||||
Other | 7,160 | 7,716 | (7.2 | ) | 9,787 | 10,344 | (5.4 | ) | |||||||||||||
General corporate expenses/other | (55,127 | ) | (44,696 | ) | 23.3 | (108,846 | ) | (95,162 | ) | 14.4 | |||||||||||
Acquisition, integration and other action-related charges | (25,165 | ) | (26,062 | ) | (3.4 | ) | (44,782 | ) | (64,429 | ) | (30.5 | ) | |||||||||
Total operating profit | $ | 220,063 | $ | 233,705 | (5.8 | )% | $ | 366,121 | $ | 360,134 | 1.7 | % | |||||||||
¹ | In the first quarter of 2018, HanesBrands eliminated the allocation of certain corporate overhead selling, general and administrative expenses related to the legal, human resources, information technology, finance and real estate departments to the segments, in order to reflect the manner in which the business is managed and results are reviewed by the chief executive officer, who is HanesBrands’ chief operating decision maker. Prior year segment operating profit disclosures have been revised to conform to the current year presentation. |
The following tables present a reconciliation of total reported net sales to organic constant currency net sales for the quarter and six months ended June 30, 2018 and a comparison to prior year: |
Quarter Ended June 30, 2018 | ||||||||||||||||||
Reported Net Sales | Acquisitions1 | Impact from Foreign Currency2 | Organic Constant Currency | % Change | ||||||||||||||
Segment net sales: | ||||||||||||||||||
Innerwear | $ | 694,694 | $ | — | $ | — | $ | 694,694 | (3.4 | )% | ||||||||
Activewear | 405,785 | 20,317 | — | 385,468 | 1.5 | |||||||||||||
International | 545,862 | 31,450 | 15,547 | 498,865 | 5.0 | |||||||||||||
Other | 69,102 | — | — | 69,102 | (4.8 | ) | ||||||||||||
Total | $ | 1,715,443 | $ | 51,767 | $ | 15,547 | $ | 1,648,129 | 0.1 | % | ||||||||
Six Months Ended June 30, 2018 | ||||||||||||||||||
Reported Net Sales | Acquisitions1 | Impact from Foreign Currency2 | Organic Constant Currency | % Change | ||||||||||||||
Segment net sales: | ||||||||||||||||||
Innerwear | $ | 1,185,772 | $ | — | $ | — | $ | 1,185,772 | (3.1 | )% | ||||||||
Activewear | 751,910 | 35,947 | — | 715,963 | 1.3 | |||||||||||||
International | 1,115,749 | 47,587 | 60,406 | 1,007,756 | 5.8 | |||||||||||||
Other | 133,516 | — | — | 133,516 | (6.7 | ) | ||||||||||||
Total | $ | 3,186,947 | $ | 83,534 | $ | 60,406 | $ | 3,043,007 | 0.5 | % | ||||||||
¹ | Net sales derived from businesses acquired within the past twelve months. |
2 | Effect of the change in foreign currency exchange rates year-over-year. Calculated by applying prior period exchange rates to the current year net sales. This calculation excludes entities acquired within the past twelve months. |
TABLE 3
HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
June 30, 2018 | December 30, 2017 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 397,971 | $ | 421,566 | |||
Trade accounts receivable, net | 973,807 | 903,318 | |||||
Inventories | 2,112,211 | 1,874,990 | |||||
Other current assets | 132,757 | 186,496 | |||||
Total current assets | 3,616,746 | 3,386,370 | |||||
Property, net | 617,302 | 623,991 | |||||
Trademarks and other identifiable intangibles, net | 1,610,567 | 1,402,857 | |||||
Goodwill | 1,259,010 | 1,167,007 | |||||
Deferred tax assets | 218,269 | 234,932 | |||||
Other noncurrent assets | 105,992 | 79,618 | |||||
Total assets | $ | 7,427,886 | $ | 6,894,775 | |||
Liabilities | |||||||
Accounts payable and accrued liabilities | $ | 1,441,536 | $ | 1,517,283 | |||
Notes payable | 14,540 | 11,873 | |||||
Accounts Receivable Securitization Facility | 153,386 | 125,209 | |||||
Current portion of long-term debt | 181,349 | 124,380 | |||||
Total current liabilities | 1,790,811 | 1,778,745 | |||||
Long-term debt | 4,149,201 | 3,702,054 | |||||
Pension and postretirement benefits | 388,256 | 405,238 | |||||
Other noncurrent liabilities | 332,427 | 322,536 | |||||
Total liabilities | 6,660,695 | 6,208,573 | |||||
Equity | 767,191 | 686,202 | |||||
Total liabilities and equity | $ | 7,427,886 | $ | 6,894,775 | |||
TABLE 4
HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended | |||||||
June 30, 2018 | July 1, 2017 | ||||||
Operating Activities: | |||||||
Net income | $ | 220,042 | $ | 243,149 | |||
Depreciation and amortization | 65,493 | 58,095 | |||||
Stock compensation expense | 3,033 | 4,388 | |||||
Other noncash items | (2,082 | ) | 13,539 | ||||
Changes in assets and liabilities, net | (350,884 | ) | (284,921 | ) | |||
Net cash from operating activities | (64,398 | ) | 34,250 | ||||
Investing Activities: | |||||||
Purchases/sales of property and equipment, net, and other | (38,800 | ) | (26,460 | ) | |||
Acquisition of business, net of cash acquired | (334,916 | ) | (524 | ) | |||
Disposition of businesses | — | 40,285 | |||||
Net cash from investing activities | (373,716 | ) | 13,301 | ||||
Financing Activities: | |||||||
Cash dividends paid | (108,115 | ) | (110,529 | ) | |||
Share repurchases | — | (299,919 | ) | ||||
Net borrowings on notes payable, debt and other | 525,998 | 355,237 | |||||
Net cash from financing activities | 417,883 | (55,211 | ) | ||||
Effect of changes in foreign currency exchange rates on cash | 20,176 | (3,170 | ) | ||||
Change in cash, cash equivalents and restricted cash | (55 | ) | (10,830 | ) | |||
Cash and cash equivalents at beginning of year | 421,566 | 460,245 | |||||
Cash, cash equivalents and restricted cash at end of period | 421,511 | 449,415 | |||||
Less restricted cash at end of period | 23,540 | — | |||||
Cash and cash equivalents per balance sheet at end of period | $ | 397,971 | $ | 449,415 | |||
TABLE 5
HANESBRANDS INC.
Supplemental Financial Information
Reconciliation of Select GAAP Measures to Non-GAAP Measures
(in thousands, except per-share amounts)
(Unaudited)
Quarter Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | July 1, 2017 | June 30, 2018 | July 1, 2017 | ||||||||||||
Gross profit, as reported under GAAP | $ | 659,956 | $ | 645,902 | $ | 1,238,877 | $ | 1,185,433 | |||||||
Acquisition, integration and other action-related charges | 11,083 | 4,284 | 21,836 | 19,759 | |||||||||||
Gross profit, as adjusted | $ | 671,039 | $ | 650,186 | $ | 1,260,713 | $ | 1,205,192 | |||||||
As a % of net sales | 39.1 | % | 39.5 | % | 39.6 | % | 39.8 | % | |||||||
Selling, general and administrative expenses, as reported under GAAP | $ | 439,893 | $ | 412,197 | $ | 872,756 | $ | 825,299 | |||||||
Acquisition, integration and other action-related charges | (14,082 | ) | (21,778 | ) | (22,946 | ) | (44,670 | ) | |||||||
Selling, general and administrative expenses, as adjusted | $ | 425,811 | $ | 390,419 | $ | 849,810 | $ | 780,629 | |||||||
As a % of net sales | 24.8 | % | 23.7 | % | 26.7 | % | 25.8 | % | |||||||
Operating profit, as reported under GAAP | $ | 220,063 | $ | 233,705 | $ | 366,121 | $ | 360,134 | |||||||
Acquisition, integration and other action-related charges included in gross profit | 11,083 | 4,284 | 21,836 | 19,759 | |||||||||||
Acquisition, integration and other action-related charges included in SG&A | 14,082 | 21,778 | 22,946 | 44,670 | |||||||||||
Operating profit, as adjusted | $ | 245,228 | $ | 259,767 | $ | 410,903 | $ | 424,563 | |||||||
As a % of net sales | 14.3 | % | 15.8 | % | 12.9 | % | 14.0 | % | |||||||
Net income from continuing operations, as reported under GAAP | $ | 140,633 | $ | 172,164 | $ | 220,042 | $ | 245,246 | |||||||
Acquisition, integration and other action-related charges included in gross profit | 11,083 | 4,284 | 21,836 | 19,759 | |||||||||||
Acquisition, integration and other action-related charges included in SG&A | 14,082 | 21,778 | 22,946 | 44,670 | |||||||||||
Debt refinance charges included in other expenses | 14 | — | (36 | ) | — | ||||||||||
Tax effect on actions | (3,726 | ) | (1,564 | ) | (6,857 | ) | (3,866 | ) | |||||||
Net income from continuing operations, as adjusted | $ | 162,086 | $ | 196,662 | $ | 257,931 | $ | 305,809 | |||||||
Diluted earnings per share from continuing operations, as reported under GAAP | $ | 0.39 | $ | 0.47 | $ | 0.61 | $ | 0.66 | |||||||
Acquisition and other related charges | 0.06 | 0.07 | 0.10 | 0.16 | |||||||||||
Diluted earnings per share from continuing operations, as adjusted | $ | 0.45 | $ | 0.53 | $ | 0.71 | $ | 0.82 | |||||||
Quarter Ended | Six Months Ended | ||||||||||||||
June 30, 2018 | July 1, 2017 | June 30, 2018 | July 1, 2017 | ||||||||||||
Action and other related charges by category: | |||||||||||||||
Hanes Europe Innerwear | $ | 8,455 | $ | 10,514 | $ | 17,031 | $ | 30,392 | |||||||
Hanes Australasia | 6,647 | 5,970 | 12,739 | 17,978 | |||||||||||
Champion Europe | 1,078 | 4,399 | 2,958 | 5,567 | |||||||||||
Bras N Things | 2,031 | — | 3,276 | — | |||||||||||
Smaller acquisitions and other action-related costs | 6,954 | 5,179 | 8,778 | 10,492 | |||||||||||
Debt refinance charges | 14 | — | (36 | ) | — | ||||||||||
Tax effect on actions | (3,726 | ) | (1,564 | ) | (6,857 | ) | (3,866 | ) | |||||||
Total action and other related charges | $ | 21,453 | $ | 24,498 | $ | 37,889 | $ | 60,563 | |||||||
Last Twelve Months | |||||||
June 30, 2018 | July 1, 2017 | ||||||
EBITDA1: | |||||||
Net income from continuing operations | $ | 38,787 | $ | 573,761 | |||
Interest expense, net | 182,361 | 170,853 | |||||
Income tax expense | 497,180 | 31,803 | |||||
Depreciation and amortization | 129,885 | 114,443 | |||||
Total EBITDA | 848,213 | 890,860 | |||||
Total action and other related charges (excluding tax effect on actions) | 178,221 | 153,884 | |||||
Stock compensation expense | 22,227 | 28,186 | |||||
Total EBITDA, as adjusted | $ | 1,048,661 | $ | 1,072,930 | |||
Net debt: | |||||||
Debt (current and long term debt and Accounts Receivable Securitization Facility) | $ | 4,483,936 | $ | 4,153,573 | |||
Notes payable | 14,540 | 72,157 | |||||
(Less) Cash and cash equivalents | (397,971 | ) | (449,415 | ) | |||
Net debt | $ | 4,100,505 | $ | 3,776,315 | |||
Net debt/EBITDA, as adjusted | 3.9 | 3.5 | |||||
1 | Earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) is a non-GAAP financial measure. |
TABLE 6
HANESBRANDS INC.
Supplemental Financial Information
Reconciliation of GAAP Outlook to Adjusted Outlook
(in thousands, except per-share amounts)
(Unaudited)
Quarter Ended | Year Ended | ||
September 29, 2018 | December 29, 2018 | ||
Operating profit outlook, as calculated under GAAP | $265,000 to $280,000 | $870,000 to $905,000 | |
Acquisition, integration and other action-related charges | $20,000 | $80,000 | |
Operating profit outlook, as adjusted | $285,000 to $300,000 | $950,000 to $985,000 | |
Diluted earnings per share from continuing operations, as calculated under GAAP | $0.49 to $0.52 | $1.54 to $1.62 | |
Acquisition, integration and other action-related charges | $0.05 | $0.18 | |
Diluted earnings per share from continuing operations, as adjusted | $0.54 to $0.57 | $1.72 to $1.80 | |
Hanesbrands FAQs Updated August 1, 2018 – New or updated information is in red General and Current Period FAQs (Guidance comments as of August 1, 2018) Q: What is factored into your full‐year guidance for 2018? A: Revenue: Our full‐year revenue guidance of $6.72 billion to $6.82 billion, which represents mid‐single‐digit year‐over‐ year growth, includes the following assumptions: (1) approximately $180 million of acquisition contributions, which includes Alternative Apparel (Q1 – Q3) and Bras N Things (from close date through year‐end); (2) F/X tailwind of approximately $30 million; and (3) organic constant currency growth of slightly more than 1% at the midpoint. By segment, we expect U.S. Innerwear revenue to be down slightly for the full‐year. U.S. Activewear is expected to be up mid‐single digit for the year due to the acquisition of Alternative Apparel (closed in October 2017) and low‐single digit organic growth. For the full‐year, International segment, on an organic basis, is expected to be up high‐single digits, and up mid‐single digits on an organic, constant currency basis. Bras N Things revenue is additive to the organic assumptions for the International segment. Operating Profit (GAAP and Adjusted): Our full‐year Adjusted Operating Profit guidance of $950 million to $985 million, which excludes all pretax acquisition, integration, and other charges, includes a higher gross margin year‐ over‐year (at least 100 bps improvement), approximately $30 million of acquisition contributions from Alternative Apparel and Bras N Things, as well as reflects the change in accounting rules regarding pension expense (see pension question below). Our guidance implies an essentially flat operating margin year‐over‐year, which includes our expectation for second‐half margin expansion. Our full‐year GAAP Operating Profit guidance of $870 million to $905 million incorporates our Adjusted Operating Profit guidance as well as our assumption of approximately $80 million in acquisition, integration, and other charges. Interest/Other Expense and Tax Rate: Our guidance assumes approximately $207 million of Interest and Other expense, which includes pension expense that per an accounting rule change moved from SG&A in prior years to Other Expense (see pension expense question), and a tax rate of approximately 16% (see tax rate question). EPS (GAAP and Adjusted): Our full‐year GAAP EPS guidance is $1.54 to $1.62 and our adjusted EPS guidance, which excludes all pretax acquisition, integration, and other charges, is $1.72 to $1.80. To assist with comparability on our 2018 adjusted EPS guidance, our 2017 adjusted EPS, normalized for a roughly 16% tax rate, would have been $1.68, or $0.25 lower than the reported $1.93. At the midpoint, our 2018 adjusted EPS guidance implies a 5% increase over our normalized 2017 adjusted EPS of $1.68. Cash flow from operations: Our full‐year guidance range of $675 million to $750 million implies a roughly $57 million increase at the midpoint and reflects the expected impact from higher cash taxes. Our guidance range also includes a $15 million pension contribution (there was no contribution in 2017) as well as the one‐time approximately $28 million contingent consideration payment for our Champion Europe acquisition (paid in first quarter 2018). 1
Pretax expenses: Our guidance reflects approximately $80 million of pretax acquisition, integration, and other expenses. About a quarter of these charges (approximately $20 million), which we would categorize as ‘other’, are related to a two‐year realignment of our supply chain, with the focus on our network in the Western Hemisphere. As our supply chain has become more efficient and productive over time, we believe there are opportunities to further tighten our network to capture these productivity improvements. The remaining three‐quarters of the charges (approximately $60 million) are related to the integration of existing acquisitions. We have completed the integration of Knights Apparel, we expect to be complete with the Hanes Europe and Champion Europe integrations by the end of 2018, and we expect to finish the Hanes Australasia integration by the end of 2019. Looking to 2019, and excluding any future acquisitions, we expect acquisition and integration‐related charges, inclusive of all current acquisitions, to be $15 million or less, while we expect the 2019 costs associated with supply chain actions to be in line with 2018. Q: What is factored into your guidance for Q3 2018? A: We expect total net sales of $1.85 billion to $1.90 billion, which includes approximately $55 million from acquisitions (Alternative Apparel and Bras N Things) and an approximate $18 million headwind from the effects of foreign exchange rates as compared to last year. Our revenue guidance implies total revenue growth of 2.8% to 5.6%. Constant currency organic growth is estimated to be 2% at the mid‐point, reflecting our expectation for a 1% to 2% decline in U.S. Innerwear (growth in Basics and improving trends in Intimates) as well as organic, constant currency growth in both U.S. Activewear and International segments. Our guidance for GAAP operating profit is $265 million to $280 million and our guidance for adjusted operating profit, which excludes approximately $20 million of pretax acquisition, integration, and other expenses, is $285 million to $300 million. At the midpoint, our guidance implies a 30 basis point increase in adjusted operating margin driven by acquisition synergies, leverage from organic revenue growth, and price increases for certain seasonal programs, which is offsetting expected higher input costs. Our guidance for GAAP EPS is $0.49 to $0.52, and our guidance for adjusted EPS, which excludes pretax acquisition, integration, and other expenses, is $0.54 to $0.57. Q: Are you impacted by the increased tariffs on products coming into the U.S. from China? A: Unlike the vast majority of the apparel industry, our exposure to China is minimal. We do not own any manufacturing operations in China. Of our third‐party sourced units, China represents a very small portion of the units shipped to the U.S. The impact to our costs is immaterial under the current tariffs in place and would be immaterial under any of the additional tariff scenarios currently being considered. Q: Could you provide any insights with respect to the progression from your 2018 cash flow from operations guidance to the long‐term cash flow scenarios you provided at your May 2018 Investor Day? A: At our Investor Day, we highlighted two ‘de‐risked’ scenarios – (a)‘base plan’ and (b) ‘base plan with acquisitions’ – to highlight what we believed our business model could generate in terms of operating profit and cash flow over the next several years. Under the ‘base plan’ scenario, beginning with $713 million (midpoint of our 2018 cash flow from operations guidance), if you add: (1) approximately $30 million from the one‐time contingent consideration payment for Champion Europe; (2) $80 million of pre‐tax acquisition, integration and other charges, which we expect to be complete in 2019; (3) $35 million of pricing actions to recover input cost inflation; (4) net $50 million from acquisition synergies and cost savings initiatives; (5) the wrap from Bras N things; and, (6) contributions from a 1% organic revenue compounded annual growth rate, which was part of the base plan assumption; this would generate well over $900 million of annual cash flow from operations in 2020. Adding the contributions from acquisitions (under the ‘base plan with acquisitions’ scenario) would result in $1 billion in annual cash flow from operations in 2020. 2
Q: What are your capital allocation priorities for 2018? A: As a result of our seasonal cash flow (i.e. cash use in the first‐half of the year) and the timing of our Bras N Things acquisition, our leverage ratio at the end of the second quarter was 3.9 times net debt‐to‐EBITDA. The first priority in our capital allocation strategy is to invest in the business. Capital expenditures are estimated to be $90 million to $100 million in 2018. Our second priority is our dividend. After that, excess free cash flow, which we define as cash from operations less capital expenditures and dividends, is expected to be used to pay down debt. Based on our 2018 guidance, we expect to be approaching 3 times on a net debt‐to‐EBITDA basis by the end of 2018. Looking into 2019, we expect to be back within our target leverage range of 2 to 3 times net debt‐to‐EBITDA. Q: How much did acquisitions contribute to second‐quarter revenue and adjusted operating profit results? A: For the second quarter, acquisitions contributed approximately $52 million in revenue and approximately $8 million in adjusted operating profit, which excludes pretax acquisition, integration, and other charges. Q: Can you provide any insights into your exclusive C9 by Champion program? A: C9 by Champion is an exclusive program with Target that has been in place since 2004. This program is frequently referred to as our Champion at mass business. On August 1, 2018, we announced that Target made the decision not to renew the contract after the current agreement expires on January 31, 2020. C9 program volume is essentially 100% sourced product (i.e. not manufactured in our company‐owned facilities) and is a seasonal commitment business. We are fully booked for 2018 and this is reflected in our 2018 full‐year guidance. We do not expect our C9 business in 2019 to be meaningfully different from 2018. On a trailing 12‐month basis, our C9 revenue was approximately $380 million. While we do not directly discuss specific product level margins due to competitive and contractual reasons, the current operating margins for C9 and Core U.S. Champion are essentially the same. We have seen rapid expansion in Core U.S. Champion margins as this business has scaled with gross margin up several hundred basis points in the last quarter and operating margin up more than gross margin. We expect Core U.S. Champion margins to continue to expand as our expected growth outlook drives further scale leverage. Global Champion sales, in constant currency, have grown at a mid‐to‐high teens rate in each of the past four quarters, with all of the growth coming from outside the U.S. mass channel. Excluding the U.S. mass channel, Global Champion’s constant currency growth has been in the high‐20% to low‐30% range over the last four quarters. Moreover, constant currency growth outside the mass channel continued to accelerate in the quarter, increasing 33% globally, and in the U.S., growth accelerated to over 70%, up from 50% in the first quarter, and 40% in the second half of last year. Q: In light of the C9 by Champion contract expiring on January 31, 2020, do you believe you can achieve your 2022 goal of $2 billion in global Champion revenue? A: Yes. Over the past several years we have driven a brand‐elevation strategy for Champion. We’ve reunited the brand globally, allowing us to coordinate product design around the world. We have significantly increased our investments, including engaging directly with the consumer through digital platforms. We’re expanding our global points of distribution, including our owned branded stores. These elevation efforts have driven strong demand for the brand across geographies, across product categories, and across channels. Looking forward, we believe the strong momentum of our Champion brand‐elevation initiative will continue to drive growth in existing accounts as well as distribution expansion in new accounts, new geographies, and our owned retail stores — positioning us to achieve $2 billion of Champion sales by 2022 outside of the mass channel. Based on second‐half 2018 bookings, we expect Champion’s growth rate, outside of the U.S. mass channel, to continue on its current trend despite growing off of a larger revenue base. Looking into 2019, we are already seeing signs this trend should continue based on the early response from customers to our Spring 2019 programs. 3
Q: Does Target’s decision to not renew the C9 by Champion contract impact the 2018‐2022 scenario assumptions you provided at you May 2018 Investor Day? A: No. At our May 2018 Investor Day, we highlighted a conservative ‘base plan’ scenario to illustrate what we believed our business model could generate in terms of operating profit and cash flow over the next several years. Given the mature nature of the Champion at mass business and the fact the contract renewal had not been secured, we excluded the C9 business from our assumptions. Q: Does Target’s decision to not renew the C9 by Champion contract impact your other business with this retailer? A: This decision does not affect the balance of our ongoing Target business, where we look forward to continuing our long‐standing partnership of driving mutual growth with our leading national brands. Q: How big is the consumer‐direct channel for Hanesbrands? A: We define consumer‐direct in terms of consumer method of purchase, which in our definition includes owned retail locations as well as all online sales (owned websites, online pure play websites, and traditional retailer websites). Our global consumer‐direct sales represented approximately 22% of total company sales in the second quarter of 2018. Specific to online sales, global online sales represented approximately 10% of total company sales in the quarter. Q: Do you expect any impact from the accounting rule change regarding pension expense? A: There is an accounting rule change regarding pension expense that became effective at the beginning of 2018. Our pension expense will shift from SG&A to the Interest/Other expense line. Our 2018 guidance (Operating Profit and Interest/Other Expense) reflect the new rule regarding pension expense. Please see the Supplemental Table at www.hanes.com/investors, which recasts 2016 and 2017. Note, this rule change only impacts where these expenses are reflected in the P&L, prior period pretax income will be unchanged under the new rule. Q: How did the U.S. Tax Cuts and Jobs Act impact your 2018 tax rate? A: For 2018, we estimate our tax rate to be approximately 16%, similar to our rate in the 2009 to 2014 time frame, and below the 21% U.S. corporate rate as we continue to benefit from owning our global supply chain. In terms of cash flow, tax reform should not have a material impact on our strong cash generation and we believe it will actually be beneficial to our capital allocation strategy as cash repatriation is now more cost‐effective. Our 2018 cash flow from operations guidance reflects the impact of higher cash taxes. Q: Do you believe your business model can continue to deliver long‐term double‐digit total shareholder returns? A: Yes. We continue to diversify our business model to be in position to provide more consistent organic revenue growth and optimize our strong cash flow. Over the past several years, we have significantly diversified our business model by investing in our core brands, investing in our online operations, and investing in international expansion to provide us with multiple paths for delivering growth and long‐term shareholder returns. We believe we have diversified in a way that the combination of our organic and acquisition strategies provides us the ability deliver revenue and EPS growth regardless of short‐term challenges. And when you layer on the returns from deploying our significant levels of cash flow, we believe we are well positioned for long‐term double‐digit total shareholder returns. 4
Q: Have your thoughts on capital allocation changed? A: There is no change to our strategy. Our capital allocation strategy is to effectively deploy our significant, consistent cash flow to generate the best long‐term returns for our shareholders. Over time, our goal is for our net debt‐to‐ EBITDA to be in a range of 2 to 3 times. Our strategy is to use our cash flow to fund capital investments and our dividend. When we are within our targeted leverage range, we would use debt for acquisitions and use excess free cash flow, which is defined as cash from operations less capital expenditures and dividends, to repurchase stock. When we are outside of our targeted leverage range, we plan to use excess free cash flow to pay down debt. Q: Will your capital expenditures increase significantly as a result of your acquisition strategy? A: With acquisitions, as the size of our business, profit and cash flows increases, so should the absolute level of our capital spending. Although our spending on capital expenditures has and is expected to continue to fluctuate year to year, we expect our capital expenditures to average around 1.75% of sales going forward, which is in‐line with our historical average, and over time should roughly equal depreciation. Spending at this level should allow our global supply chain to remain competitive while also handling the increased capacity needs for growth and our acquisition strategy. Q: How does a change in currency exchange rates impact your financial results? A: 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. In these situations, it could make sense to hedge the exchange rate exposure in sourcing costs. ***For prior FAQs (i.e. acquisition‐related, Project Booster‐related, etc…), please see our previous documents filed as 8‐K’s with the SEC*** # # # Charges for Actions and Reconciliation to GAAP Measures To supplement our financial guidance prepared in accordance with generally accepted accounting principles, we provide quarterly and full‐year results and guidance concerning certain non‐GAAP financial measures, including adjusted EPS, adjusted net income, adjusted operating profit (and margin), adjusted SG&A, adjusted gross profit (and margin), EBITDA and adjusted EBITDA. Adjusted EPS is defined as diluted EPS excluding actions and the tax effect on actions. Adjusted net income is defined as net income excluding actions and the tax effect on actions. Adjusted operating profit is defined as operating profit excluding actions. Adjusted gross profit is defined as gross profit excluding actions. Adjusted SG&A is defined as selling, general and administrative expenses excluding actions. 5
Charges for actions taken in the second quarter and for guidance for the full year primarily represent acquisition‐related and integration costs related to Hanes Europe Innerwear, Hanes Australasia, Champion Europe, Alternative Apparel and Bras N Things. Acquisition and integration costs include legal fees, consulting fees, bank fees, severance costs, certain purchase accounting items, facility closures, inventory write‐offs, information technology integration costs and similar charges. While these costs are not operational in nature and are not expected to continue for any singular transaction on an ongoing basis, similar types of costs, expenses and charges have occurred in prior periods and may recur in the future depending upon acquisition activity. We have chosen to present these non‐GAAP measures to investors to enable additional analyses of past, present and future operating performance and as a supplemental means of evaluating operations absent the effect of acquisitions and other actions. We believe these non‐GAAP measures provide management and investors with valuable supplemental information for analyzing the operating performance of the company’s ongoing business during each period presented without giving effect to costs associated with the execution and integration of any of the aforementioned actions taken. In addition to these non‐GAAP measures, we have chosen to present EBITDA and adjusted EBITDA to investors because we consider it to be an important supplemental means of evaluating operating performance. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding actions and stock compensation expense. We believe that EBITDA and adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the industry, and management uses EBITDA and adjusted EBITDA for planning purposes in connection with setting our capital allocation strategy. EBITDA and Adjusted EBITDA should not, however, be considered as measures of discretionary cash available to invest in the growth of the business. We are a global company that reports financial information in U.S. dollars in accordance with GAAP. As a supplement to our reported operating results, we also present constant currency financial information, which is a non‐GAAP financial measure that excludes the impact of translating foreign currencies into U.S. dollars. We use constant currency information to provide a framework to assess how the business performed excluding the effects of changes in the rates used to calculate foreign currency translation. We believe this information is useful to management and investors to facilitate comparison of operating results and better identify trends in our businesses. To calculate foreign currency translation on a constant currency basis, operating results for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period). Non‐GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as an alternative to, or substitute for, financial results prepared in accordance with GAAP. Further, the non‐GAAP measures presented may be different from non‐GAAP measures with similar or identical names presented by other companies. See our press release dated August 1, 2018 to reconcile quarterly and full‐year non‐GAAP performance measures to the most directly comparable GAAP measure. A copy of the press release is available at www.Hanes.com/investors. 6
Cautionary Statement Concerning Forward‐Looking Statements These FAQs certain “forward‐looking statements,” as defined under U.S. federal securities laws, with respect to our long‐ term goals and trends associated with our business, as well as guidance as to future performance. In particular, among others, statements regarding 2018 financial guidance, as well as statements about the long‐term outlook for Champion brand globally, and assumptions regarding consumer behavior, foreign exchange rates and U.S. tax law and policy are forward‐looking statements. These forward‐looking statements are based on our current intent, beliefs, plans and expectations. Readers are cautioned not to place any undue reliance on any forward‐looking statements. Forward‐looking statements necessarily involve risks and uncertainties, many of which are outside of our control, that could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include such things as: the highly competitive and evolving nature of the industry in which we compete; the rapidly changing retail environment; any inadequacy, interruption, integration failure or security failure with respect to our information technology; the impact of significant fluctuations and volatility in various input costs, such as cotton and oil‐ related materials, utilities, freight and wages; our ability to properly manage strategic projects; significant fluctuations in foreign exchange rates; our ability to attract and retain a senior management team with the core competencies needed to support our growth in global markets; legal, regulatory, political and economic risks related to our international operations; our ability to successfully integrate acquired businesses; our reliance on a relatively small number of customers for a significant portion of our sales; and other risks identified from time to time in our most recent Securities and Exchange Commission reports, including our annual report on Form 10‐K and quarterly reports on Form 10‐Q. Since it is not possible to predict or identify all of the risks, uncertainties and other factors that may affect future results, the above list should not be considered a complete list. Any forward‐looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update or revise any forward‐looking statement, whether as a result of new information, future events or otherwise, other than as required by law. 7
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