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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended October 3, 2009
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 001-32891
 
Hanesbrands Inc.
(Exact name of registrant as specified in its charter)
 
     
Maryland
(State of incorporation)
  20-3552316
(I.R.S. employer identification no.)
     
1000 East Hanes Mill Road
Winston-Salem, North Carolina
(Address of principal executive office)
  27105
(Zip code)
 
(336) 519-8080
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
As of November 2, 2009, there were 95,149,727 shares of the registrant’s common stock outstanding.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
    1  
Where You Can Find More Information     1  
 
PART I
      Financial Statements (unaudited):        
        Condensed Consolidated Statements of Income for the quarters and nine months ended October 3, 2009 and September 27, 2008     2  
        Condensed Consolidated Balance Sheets at October 3, 2009 and January 3, 2009     3  
        Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2009 and September 27, 2008     4  
        Notes to Condensed Consolidated Financial Statements     5  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     31  
      Quantitative and Qualitative Disclosures about Market Risk     59  
      Controls and Procedures     60  
      Controls and Procedures     60  
 
PART II
      Legal Proceedings     60  
      Risk Factors     60  
      Unregistered Sales of Equity Securities and Use of Proceeds     60  
      Defaults Upon Senior Securities     60  
      Submission of Matters to a Vote of Security Holders     60  
      Other Information     60  
      Exhibits     60  
Signatures     61  
    E-1  
 EX-10.1
 EX-10.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 
Trademarks, Trade Names and Service Marks
 
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Quarterly Report on Form 10-Q include the Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just My Size, barely there, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofold marks, which may be registered in the United States and other jurisdictions. We do not own any trademark, trade name or service mark of any other company appearing in this Quarterly Report on Form 10-Q.


Table of Contents

 
FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements.
 
Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including our Annual Report on Form 10-K for the year ended January 3, 2009, particularly under the caption “Risk Factors.”
 
All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q or our Annual Report on Form 10-K for the year ended January 3, 2009, particularly under the caption “Risk Factors.” We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We file annual, quarterly and special reports, proxy statements and other information with the SEC. You can inspect, read and copy these reports, proxy statements and other information at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You can obtain information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site at www.sec.gov that makes available reports, proxy statements and other information regarding issuers that file electronically.
 
We make available free of charge at www.hanesbrands.com (in the “Investors” section) copies of materials we file with, or furnish to, the SEC. By referring to our Web site, www.hanesbrands.com, we do not incorporate our Web site or its contents into this Quarterly Report on Form 10-Q.


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Table of Contents

 
PART I
 
Item 1.   Financial Statements
 
HANESBRANDS INC.
 
(in thousands, except per share amounts)
(unaudited)
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Net sales
  $ 1,058,673     $ 1,153,635     $ 2,902,536     $ 3,213,653  
Cost of sales
    701,993       811,851       1,960,589       2,145,949  
                                 
Gross profit
    356,680       341,784       941,947       1,067,704  
Selling, general and administrative expenses
    248,267       255,228       702,204       776,267  
Restructuring
    15,104       28,355       46,319       32,355  
                                 
Operating profit
    93,309       58,201       193,424       259,082  
Other expenses
    2,423             6,537        
Interest expense, net
    42,941       37,253       124,548       115,282  
                                 
Income before income tax expense
    47,945       20,948       62,339       143,800  
Income tax expense
    6,807       5,028       9,974       34,512  
                                 
Net income
  $ 41,138     $ 15,920     $ 52,365     $ 109,288  
                                 
Earnings per share:
                               
Basic
  $ 0.43     $ 0.17     $ 0.55     $ 1.16  
Diluted
  $ 0.43     $ 0.17     $ 0.55     $ 1.14  
Weighted average shares outstanding:
                               
Basic
    95,247       93,992       94,880       94,283  
Diluted
    96,422       95,018       95,469       95,483  
 
See accompanying notes to Condensed Consolidated Financial Statements.


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HANESBRANDS INC.
 
(in thousands, except share and per share amounts)
(unaudited)
 
                 
    October 3,
    January 3,
 
    2009     2009  
 
Assets
               
Cash and cash equivalents
  $ 38,617     $ 67,342  
Trade accounts receivable less allowances of $25,392 at October 3, 2009 and $21,897 at January 3, 2009
    538,540       404,930  
Inventories
    1,137,077       1,290,530  
Deferred tax assets and other current assets
    324,352       347,523  
                 
Total current assets
    2,038,586       2,110,325  
                 
Property, net
    612,911       588,189  
Trademarks and other identifiable intangibles, net
    138,891       147,443  
Goodwill
    322,002       322,002  
Deferred tax assets and other noncurrent assets
    379,523       366,090  
                 
Total assets
  $ 3,491,913     $ 3,534,049  
                 
Liabilities and Stockholders’ Equity
               
Accounts payable
  $ 292,843     $ 325,518  
Accrued liabilities
    319,580       315,392  
Notes payable
    62,158       61,734  
Accounts Receivable Securitization Facility
    249,043       45,640  
                 
Total current liabilities
    923,624       748,284  
                 
Long-term debt
    1,793,680       2,130,907  
Other noncurrent liabilities
    481,425       469,703  
                 
Total liabilities
    3,198,729       3,348,894  
                 
Stockholders’ equity:
               
Preferred stock (50,000,000 authorized shares; $.01 par value)
               
Issued and outstanding — None
           
Common stock (500,000,000 authorized shares; $.01 par value)
               
Issued and outstanding — 95,141,595 at October 3, 2009 and 93,520,132 at January 3, 2009
    951       935  
Additional paid-in capital
    282,794       248,167  
Retained earnings
    269,887       217,522  
Accumulated other comprehensive loss
    (260,448 )     (281,469 )
                 
Total stockholders’ equity
    293,184       185,155  
                 
Total liabilities and stockholders’ equity
  $ 3,491,913     $ 3,534,049  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements.


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HANESBRANDS INC.
 
(in thousands)
(unaudited)
 
                 
    Nine Months Ended  
    October 3,
    September 27,
 
    2009     2008  
 
Operating activities:
               
Net income
  $ 52,365     $ 109,288  
Adjustments to reconcile net income to net cash
               
provided by (used in) operating activities:
               
Depreciation
    57,476       68,930  
Amortization of intangibles
    9,293       8,683  
Restructuring
    6,978       (5,591 )
Loss on early extinguishment of debt
    2,423        
Charges incurred for amendments of credit facilities
    4,114        
Amortization of debt issuance costs
    7,951       4,523  
Stock compensation expense
    27,637       23,052  
Deferred taxes and other
    (8,422 )     (6,329 )
Changes in assets and liabilities:
               
Accounts receivable
    (128,636 )     11,565  
Inventories
    159,432       (242,711 )
Other assets
    21,380       (17,068 )
Accounts payable
    (33,863 )     32,808  
Accrued liabilities and other
    32,679       (5,771 )
                 
Net cash provided by (used in) operating activities
    210,807       (18,621 )
                 
Investing activities:
               
Purchases of property, plant and equipment
    (99,709 )     (123,319 )
Acquisition of business
          (10,011 )
Proceeds from sales of assets
    15,814       24,329  
Other
    10       (643 )
                 
Net cash used in investing activities
    (83,885 )     (109,644 )
                 
Financing activities:
               
Borrowings on notes payable
    1,169,301       316,958  
Repayments on notes payable
    (1,168,799 )     (265,195 )
Payments to amend credit facilities
    (22,165 )     (69 )
Borrowings on revolving loan facility
    1,353,525       524,000  
Repayments on revolving loan facility
    (1,353,525 )     (524,000 )
Repayment of debt under credit facility
    (140,250 )      
Borrowings on Accounts Receivable Securitization Facility
    176,616       20,944  
Repayments on Accounts Receivable Securitization Facility
    (170,190 )     (20,944 )
Proceeds from stock options exercised
    376       2,200  
Stock repurchases
          (30,275 )
Transaction with Sara Lee Corporation
          18,000  
Other
    (824 )     (843 )
                 
Net cash provided by (used in) financing activities
    (155,935 )     40,776  
                 
Effect of changes in foreign exchange rates on cash
    288       (535 )
                 
Decrease in cash and cash equivalents
    (28,725 )     (88,024 )
Cash and cash equivalents at beginning of year
    67,342       174,236  
                 
Cash and cash equivalents at end of period
  $ 38,617     $ 86,212  
                 
 
See accompanying notes to Condensed Consolidated Financial Statements


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HANESBRANDS INC.
 
(dollars and shares in thousands, except per share data)
(unaudited)
 
(1)   Basis of Presentation
 
These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, in accordance with those rules and regulations, do not include all information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Management believes that the disclosures made are adequate for a fair statement of the results of operations, financial condition and cash flows of Hanesbrands Inc., a Maryland corporation, and its consolidated subsidiaries (the “Company” or “Hanesbrands”). In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the results of operations, financial condition and cash flows for the interim periods presented herein. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts and disclosures. Actual results may vary from these estimates. The Company has also evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through November 5, 2009, the day the financial statements were issued.
 
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
 
(2)   Recent Accounting Pronouncements
 
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification”). The Codification is the single source for all authoritative GAAP recognized by the FASB to be applied in the preparation of financial statements of nongovernmental entities issued for periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The Codification does not change GAAP and did not have a material impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures.
 
Fair Value Measurements
 
In September 2006, the FASB issued new accounting guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. In February 2008, the FASB approved a one-year deferral of the adoption of the guidance as it relates to certain non-financial assets and liabilities. The Company adopted the provisions for its financial assets and liabilities effective December 30, 2007 and adopted the provisions for its non-financial assets and liabilities effective January 4, 2009. Neither the adoption in the first quarter ended March 29, 2008 for financial assets and liabilities nor the adoption in the first quarter ended April 4, 2009 for non-financial assets and liabilities had a material impact on the financial condition, results of operations or cash flows of the Company, but both adoptions resulted in certain additional disclosures reflected in Note 9.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007, the FASB issued new accounting guidance on business combinations and noncontrolling interests in consolidated financial statements. The new guidance improves the relevance,


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
comparability and transparency of the financial information that a company provides in its consolidated financial statements. The new guidance requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires that the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; that changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, that any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. The Company adopted the new accounting guidance in the first quarter ended April 4, 2009. The adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows.
 
Disclosures About Derivative Instruments and Hedging Activities
 
In March 2008, the FASB issued new accounting guidance which expands the disclosure requirements about an entity’s derivative instruments and hedging activities. The Company adopted the new accounting guidance in the first quarter ended April 4, 2009. The adoption did not have a material impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 8.
 
Interim Disclosures about Fair Value of Financial Instruments
 
In April 2009, the FASB issued new accounting guidance for financial instruments. The new accounting guidance requires disclosures about fair value of financial instruments in interim financial statements. These disclosures were previously only required in annual financial statements. The guidance is effective for interim and annual periods ending after June 15, 2009. Since the new guidance only requires additional disclosures, the adoption of the guidance had no material impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 9.
 
Subsequent Events
 
In May 2009, the FASB issued guidance for subsequent events which provides direction on the Company’s assessment and disclosure of subsequent events, and clarifies that the Company must evaluate, as of each reporting period, events or transactions that occur after the balance sheet date through the date that the financial statements are issued or are available to be issued for both interim and annual financial reporting periods. The guidance is effective prospectively for the Company’s interim and annual periods ending after June 15, 2009. The adoption of the guidance did not have an impact on the Company’s financial condition, results of operations or cash flows but resulted in certain additional disclosures reflected in Note 1.
 
Employers’ Disclosures about Postretirement Benefit Plan Assets
 
In December 2008, the FASB issued guidance on the disclosure of postretirement benefit plan assets. The guidance expands the disclosure requirements to include more detailed disclosures about an employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and valuation techniques used to measure the fair value of plan assets. The guidance is effective for fiscal years ending after December 15, 2009. Since the guidance only requires additional disclosures, adoption of the guidance is not expected to have a material impact on the Company’s financial condition, results of operations or cash flows.


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Accounting for Transfers of Financial Assets
 
In June 2009, the FASB issued new accounting guidance for transfers of financial assets. The new guidance requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. The new accounting guidance is effective for financial asset transfers occurring after the beginning of the Company’s first fiscal year that begins after November 15, 2009. The Company is evaluating the impact of adoption of this new guidance on the financial condition, results of operations and cash flows of the Company.
 
Consolidation — Variable Interest Entities
 
In June 2009, the FASB issued new accounting guidance related to the accounting and disclosure requirements for the consolidation of variable interest entities. The new accounting guidance is effective for the Company’s first fiscal year that begins after November 15, 2009. The Company is evaluating the impact of adoption of this guidance on the financial condition, results of operations and cash flows of the Company.
 
(3)   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 quarters and nine months ended October 3, 2009 and September 27, 2008. Diluted EPS was calculated to give effect to all potentially dilutive shares of common stock using the treasury stock method. The reconciliation of basic to diluted weighted average shares for the quarters and nine months ended October 3, 2009 and September 27, 2008 is as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Basic weighted average shares
    95,247       93,992       94,880       94,283  
Effect of potentially dilutive securities:
                               
Stock options
    205       151             383  
Restricted stock units
    970       871       589       812  
Employee stock purchase plan and other
          4             5  
                                 
Diluted weighted average shares
    96,422       95,018       95,469       95,483  
                                 
 
Options to purchase 4,612 and 2,454 shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarters ended October 3, 2009 and September 27, 2008, respectively. Options to purchase 5,871 and 1,458 shares of common stock and 43 and 0 restricted stock units were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the nine months ended October 3, 2009 and September 27, 2008, respectively.
 
(4)   Restructuring
 
Since becoming an independent company, the Company has undertaken a variety of restructuring efforts in connection with its consolidation and globalization strategy designed to improve operating efficiencies and lower costs. As a result of this strategy, the Company expected to incur approximately $250,000 in restructuring and related charges over the three year period following the spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006, of which approximately half was expected to be noncash. As of October 3, 2009, the Company has recognized approximately $262,000 and announced approximately $253,000 in restructuring and related charges related to this strategy since September 5, 2006, of which approximately half


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
have been noncash. Of the amounts recognized, approximately $100,000 relates to employee termination and other benefits, approximately $87,000 relates to accelerated depreciation of buildings and equipment for facilities that have been or will be closed, approximately $27,000 relates to noncancelable lease and other contractual obligations, approximately $22,000 relates to write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate, approximately $16,000 relates to impairments of fixed assets and approximately $10,000 relates to other exit costs such as equipment moving costs. Accelerated depreciation related to the Company’s manufacturing facilities and distribution centers that have been or will be closed is reflected in the “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statements of Income. The write-offs of stranded raw materials and work in process inventory are reflected in the “Cost of sales” line of the Condensed Consolidated Statements of Income.
 
The reported results for the quarters and nine months ended October 3, 2009 and September 27, 2008 reflect amounts recognized for restructuring actions, including the impact of certain actions that were completed for amounts more favorable than previously estimated. The impact of restructuring efforts on income before income tax expense is summarized as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Restructuring programs:
                               
Year ending January 2, 2010 restructuring actions
  $ 12,278     $     $ 31,522     $  
Year ended January 3, 2009 restructuring actions
    2,116       46,633       15,991       52,069  
Year ended December 29, 2007 restructuring actions
    800       691       4,441       7,719  
Six months ended December 30, 2006 and
                               
prior restructuring actions
    480       (3,418 )     811       (3,470 )
                                 
    $ 15,674     $ 43,906     $ 52,765     $ 56,318  
                                 
 
The following table illustrates where the costs associated with these actions are recognized in the Condensed Consolidated Statements of Income:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Cost of sales
  $ 387     $ 18,038     $ 5,908     $ 25,229  
Selling, general and administrative expenses
    183       (2,487 )     538       (1,266 )
Restructuring
    15,104       28,355       46,319       32,355  
                                 
    $ 15,674     $ 43,906     $ 52,765     $ 56,318  
                                 


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Components of the restructuring actions are as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Accelerated depreciation
  $ 301     $ 1,524     $ 2,930     $ 9,936  
Inventory write-offs
    269       14,027       3,516       14,027  
Fixed asset impairments
    5,482             6,448        
Employee termination and other benefits
    5,649       21,283       20,859       25,203  
Noncancelable lease and other contractual
                               
obligations and other
    3,973       7,072       19,012       7,152  
                                 
    $ 15,674     $ 43,906     $ 52,765     $ 56,318  
                                 
 
Rollforward of accrued restructuring is as follows:
 
         
    Nine Months Ended
 
    October 3,
 
    2009  
 
Beginning accrual
  $ 21,793  
Restructuring expenses
    39,355  
Cash payments
    (36,242 )
Adjustments to restructuring expenses
    (2,611 )
         
Ending accrual
  $ 22,295  
         
 
The accrual balance as of October 3, 2009 is comprised of $18,606 in current accrued liabilities and $3,689 in other noncurrent liabilities. The $18,606 in current accrued liabilities consists of $11,530 for employee termination and other benefits and $7,076 for noncancelable lease and other contractual obligations. The $3,689 in other noncurrent liabilities primarily consists of noncancelable lease and other contractual obligations.
 
Adjustments to previous estimates resulted from actual costs to settle obligations being lower than expected. The adjustments were reflected in the “Restructuring” line of the Condensed Consolidated Statements of Income.
 
Year Ending January 2, 2010 Actions
 
During the nine months ended October 3, 2009, the Company approved actions to close five manufacturing facilities, two distribution centers, a yarn warehouse and a cotton warehouse in the Dominican Republic, the United States, Honduras, Puerto Rico and Canada, and eliminate an aggregate of approximately 3,100 positions in those countries and El Salvador. The production capacity represented by the manufacturing facilities has been primarily relocated to lower cost locations in Asia, Central America and the Caribbean Basin. The distribution capacity has been relocated to the Company’s West Coast distribution center in California in order to expand capacity for goods the Company sources from Asia. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. The Company recorded charges of $12,278 and $31,522 in the quarter and nine months ended October 3, 2009, respectively, related to these actions. In the quarter and nine months ended October 3, 2009, the Company recognized $5,639 and $21,881, respectively, for employee termination and other benefits recognized in accordance with benefit plans previously communicated to the affected employee group, $2,615


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
and $3,983, respectively, for noncancelable lease and other contractual obligations related to the closure of certain manufacturing facilities, $3,461 in both periods for fixed asset impairments related to the closure of certain manufacturing facilities, $254 and $1,112, respectively, for write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of certain manufacturing facilities, $86 and $663, respectively, for other exit costs and $223 and $422, respectively, for accelerated depreciation of buildings and equipment. These charges are reflected in the “Restructuring,” “Cost of sales” and “Selling, general and administrative expenses” lines of the Condensed Consolidated Statements of Income. All actions are expected to be completed within a 12-month period.
 
In September 2009, the Company announced that it will cease making its own yarn and that it will source all of its yarn requirements from large-scale yarn suppliers. The Company entered into an agreement with Parkdale America, LLC (“Parkdale America”) under which the Company agreed to sell or lease assets related to operations at the Company’s four yarn manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America operating three of the four facilities. As reflected above, the Company approved an action to close the fourth yarn manufacturing facility, as well as a yarn warehouse and a cotton warehouse. The Company also entered into a yarn purchase agreement with Parkdale America and Parkdale Mills, LLC (together with Parkdale America, “Parkdale”). Under this agreement, which has an initial term of six years, Parkdale will produce and sell to the Company a substantial amount of the Company’s Western Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce and sell to the Company a substantial amount of the yarn requirements of the Company’s Nanjing, China textile facility.
 
Year Ended January 3, 2009 Actions
 
During the nine months ended October 3, 2009, the Company recognized additional charges, as well as credits for certain actions which were completed for amounts more favorable than previously estimated, associated with facility closures announced in the year ended January 3, 2009, resulting in a decrease of $2,116 and $15,991 to income before income tax expense for the quarter and nine months ended October 3, 2009, respectively. In the quarter and nine months ended October 3, 2009, the Company recognized charges of $321 and $7,578, respectively, for noncancelable lease and other contractual obligations associated with plant closures announced in the year ended January 3, 2009, charges of $278 and $4,264, respectively, for other exit costs, charges of $15 and $2,404, respectively, for write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of certain manufacturing facilities and charges of $1,502 and $1,745, respectively, for fixed asset impairments related to the closure of certain manufacturing facilities. These charges are reflected in the “Restructuring” and “Cost of sales” lines of the Condensed Consolidated Statements of Income.
 
(5)   Inventories
 
Inventories consisted of the following:
 
                 
    October 3,
    January 3,
 
    2009     2009  
 
Raw materials
  $ 157,742     $ 172,494  
Work in process
    103,942       116,800  
Finished goods
    875,393       1,001,236  
                 
    $ 1,137,077     $ 1,290,530  
                 


10


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(6)   Allowances for Trade Accounts Receivable
 
The changes in the Company’s allowance for doubtful accounts and allowance for chargebacks and other deductions for the quarter and nine months ended October 3, 2009 are as follows:
 
                         
          Allowance for
       
    Allowance for
    Chargebacks
       
    Doubtful
    and Other
       
    Accounts     Deductions     Total  
 
Balance at January 3, 2009
  $ 12,555     $ 9,342     $ 21,897  
Charged to expenses
    1,301       (481 )     820  
Deductions and write-offs
    (634 )     (822 )     (1,456 )
                         
Balance at April 4, 2009
    13,222       8,039       21,261  
                         
Charged to expenses
    594       2,669       3,263  
Deductions and write-offs
    33       (908 )     (875 )
                         
Balance at July 4, 2009
    13,849       9,800       23,649  
                         
Charged to expenses
    393       2,887       3,280  
Deductions and write-offs
    (10 )     (1,527 )     (1,537 )
                         
Balance at October 3, 2009
  $ 14,232     $ 11,160     $ 25,392  
                         
 
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 Condensed Consolidated Statements of Income. Deductions and write-offs, which do not increase or decrease income, represent write-offs of previously reserved accounts receivables and allowed customer chargebacks and deductions against gross accounts receivable.
 
(7)   Debt
 
The Company had the following debt at October 3, 2009 and January 3, 2009:
 
                             
    Interest
                 
    Rate as of
    Principal Amount      
    October 3,
    October 3,
    January 3,
     
    2009     2009     2009     Maturity Date
 
Senior Secured Credit Facility:
                           
Term A
    5.00 %   $ 139,000     $ 139,000     September 2012
Term B
    5.25 %     711,000       851,250     September 2013
Revolving Loan Facility
    6.75 %               September 2011
Second Lien Credit Facility
    4.25 %     450,000       450,000     March 2014
Floating Rate Senior Notes
    4.59 %     493,680       493,680     December 2014
Accounts Receivable Securitization Facility
    4.15 %     249,043       242,617     April 2010
                             
              2,042,723       2,176,547      
Less current maturities
            249,043       45,640      
                             
            $ 1,793,680     $ 2,130,907      
                             


11


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
As of October 3, 2009, the Company had $0 outstanding under the Senior Secured Credit Facility’s $500,000 Revolving Loan Facility and $26,104 of standby and trade letters of credit issued and outstanding under this facility.
 
Availability of funding under the Accounts Receivable Securitization Facility depends primarily upon the eligible outstanding receivables balance. The total amount of receivables used as collateral for the Accounts Receivable Securitization Facility was $458,248 and $331,470 at October 3, 2009 and January 3, 2009, respectively, and is reported on the Company’s Condensed Consolidated Balance Sheets in “Trade accounts receivable, less allowances.”
 
On March 10, 2009, the Company entered into a Third Amendment (the “Third Amendment”) to the Senior Secured Credit Facility dated as of September 5, 2006. Pursuant to the Third Amendment, the ratio of debt to EBITDA (earnings before interest, taxes, depreciation expense and amortization) for the preceding four quarters, or leverage ratio, was increased from 3.75 to 1 in the first quarter of 2009 to 4.25 to 1, from 3.5 to 1 in the second quarter of 2009 to 4.2 to 1, from 3.25 to 1 in the third quarter of 2009 to 3.95 to 1, and from 3.0 to 1 in the fourth quarter of 2009 to 3.6 to 1. After 2009, the leverage ratio will decrease from 3.6 to 1 until it reaches 3.0 to 1 in the third quarter of 2011. In addition, pursuant to the Third Amendment, the ratio of EBITDA for the preceding four quarters to consolidated interest expense for such period, or interest coverage ratio, was decreased from 3.0 to 1 in the second and third quarters of 2009 to 2.5 to 1 and from 3.25 to 1 in the fourth quarter of 2009 to 2.5 to 1. After 2009, the interest coverage ratio will increase from 2.5 to 1 until it reaches 3.25 to 1 in the third quarter of 2011.
 
At the Company’s option, borrowings under the Senior Secured Credit Facility may be maintained from time to time as (a) “Base Rate” loans, which bear interest at the higher of (i) 1/2 of 1% in excess of the federal funds rate and (ii) the rate published in the Wall Street Journal as the “prime rate” (or equivalent), in each case in effect from time to time, plus the applicable margin in effect from time to time, or (b) LIBOR-based loans, which bear interest at the “LIBO Rate” (as defined in the Senior Secured Credit Facility and adjusted for maximum reserves), for the respective interest period plus the applicable margin in effect from time to time. Pursuant to the Third Amendment, the applicable margins for the Senior Secured Credit Facility were increased by 300 basis points.
 
The Third Amendment also provides for certain other amendments to the Senior Secured Credit Facility, including increasing the percentage of “Excess Cash Flow” as calculated pursuant to the Senior Secured Credit Facility, which is used to determine whether, and the extent to which, the Company is required in certain circumstances to make certain mandatory prepayments. The Company paid $20,570 in debt amendment fees in connection with entering into the Third Amendment of which $16,792 will be amortized over the term of the Senior Secured Credit Facility.
 
On March 16, 2009, the Company and HBI Receivables LLC (“HBI Receivables”), a wholly-owned bankruptcy-remote subsidiary of Hanesbrands, entered into Amendment No. 1 (the “First Amendment”) to the Accounts Receivable Securitization Facility dated as of November 27, 2007. The Accounts Receivable Securitization Facility contains the same leverage ratio and interest coverage ratio provisions as the Senior Secured Credit Facility. The First Amendment effects the same changes to the leverage ratio and the interest coverage ratio that are effected by the Third Amendment described above. Pursuant to the First Amendment, the rate that would be payable to the conduit purchasers or the committed purchasers party to the Accounts Receivable Securitization Facility in the event of certain defaults is increased from 1% over the prime rate to 3% over the greatest of (i) the one-month LIBO rate plus 1%, (ii) the weighted average rates on federal funds transactions plus 0.5%, or (iii) the prime rate. Also pursuant to the First Amendment, several of the factors that contribute to the overall availability of funding have been amended in a manner that would be expected to generally reduce the amount of funding that will be available under the Accounts Receivable Securitization


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Facility. The First Amendment also provides for certain other amendments to the Accounts Receivable Securitization Facility, including changing the termination date for the Accounts Receivable Securitization Facility from November 27, 2010 to March 15, 2010, and requiring that HBI Receivables 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 Company paid $145 in debt amendment fees in connection with entering into the First Amendment, which will be amortized over the term of the Accounts Receivable Securitization Facility, and wrote off $168 of unamortized debt issuance costs.
 
On April 13, 2009, the Company and HBI Receivables entered into Amendment No. 2 (the “Second Amendment”) to the Accounts Receivable Securitization Facility. Pursuant to the Second Amendment, several of the factors that contribute to the overall availability of funding have been amended in a manner that is expected to generally increase over time the amount of funding that will be available under the Accounts Receivable Securitization Facility as compared to the amount that would be available pursuant to the First Amendment. The Second Amendment also provides for certain other amendments to the Accounts Receivable Securitization Facility, including changing the termination date for the Accounts Receivable Securitization Facility from March 15, 2010 to April 12, 2010. In addition, HSBC Securities (USA) Inc. replaced JPMorgan Chase Bank, N.A. as agent under the Accounts Receivable Securitization Facility, PNC Bank, N.A. replaced JPMorgan Chase Bank, N.A. as a managing agent, and PNC Bank, N.A. and an affiliate of PNC Bank, N.A. replaced affiliates of JPMorgan Chase Bank, N.A. as a committed purchaser and a conduit purchaser, respectively. The Company paid $1,450 in debt amendment fees in connection with entering into the Second Amendment, which will be amortized over the term of the Accounts Receivable Securitization Facility, and wrote off $168 of unamortized debt issuance costs. On August 17, 2009, the Company and HBI Receivables entered into Amendment No. 3 to the to the Accounts Receivable Securitization Facility, pursuant to which certain definitions were amended to clarify the calculation of certain ratios that impact reporting under the Accounts Receivable Securitization Facility.
 
As of October 3, 2009, the Company was in compliance with all covenants under its credit facilities.
 
During the quarter and nine months ended October 3, 2009, the Company recognized $2,423 of loss on early extinguishment of debt related to unamortized debt issuance costs on the Senior Secured Credit Facility as a result of the prepayment of $140,250 of principal in September 2009. This loss is reflected in the “Other expenses” line of the Condensed Consolidated Statements of Income.
 
During the quarter and nine months ended October 3, 2009, the Company recognized charges of $0 and $4,114, respectively, in the “Other expenses” line of the Condensed Consolidated Statements of Income, which represent certain costs related to the amendments of the Senior Secured Credit Facility and the Accounts Receivable Securitization Facility.
 
(8)   Financial Instruments and Risk Management
 
The Company uses financial instruments to manage its exposures to movements in interest rates, foreign exchange rates and commodity prices. 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. The Company does not use derivatives for trading purposes and is not a party to leveraged derivative contracts.
 
The Company recognizes all derivative instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets. The fair value is based upon either market quotes for actively traded instruments or independent bids for nonexchange traded instruments. The Company formally documents its hedge relationships, including identifying the hedging instruments and the hedged items, as well as its risk


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
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 to the hedged risk. On the date the derivative is entered into, the Company designates the derivative as a fair value hedge, cash flow hedge, net investment hedge or a mark to market hedge, and accounts for the derivative in accordance with its designation. The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives are highly effective in offsetting changes in either the fair value or 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 respective measurement period. The Company currently does not have any fair value or net investment hedge instruments.
 
Each of the Company’s derivative contracts is governed by the International Swaps and Derivatives Association master agreement. If the Company were to default on or be unable to perform its responsibilities with respect to a counterparty under this agreement, the counterparty could request immediate payment on any derivative instruments in net liability positions. As of October 3, 2009, all of the counterparties to the Company’s derivative instruments in net liability positions are lenders under the Senior Secured Credit Facility. Consistent with the terms of the Senior Secured Credit Facility, derivative instruments with a counterparty that is also a lender under the Senior Secured Credit Facility are secured by the same collateral that secures the Company’s obligations under the Senior Secured Credit Facility.
 
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.
 
Mark to Market Hedges
 
A derivative used as a hedging instrument whose change in fair value is recognized to act as an economic hedge against changes in the values of the hedged item is designated a mark to market hedge.
 
Mark to Market Hedges — Intercompany Foreign Exchange Transactions
 
The Company uses foreign exchange derivative contracts to reduce the impact of foreign exchange fluctuations on anticipated intercompany purchase and lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. Mark to market hedge derivatives relating to intercompany foreign exchange contracts are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities. As of October 3, 2009, the U.S. dollar equivalent of commitments to purchase and sell foreign currencies in our foreign currency mark to market hedge derivative portfolio is $53,888 and $28,915, respectively, using the exchange rate at the reporting date.
 
Cash Flow Hedges
 
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability is designated as a cash flow hedge. 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 Condensed Consolidated Balance Sheets. When the impact of the hedged item is recognized in the income statement, the gain or loss included in accumulated other comprehensive income (loss) is reported on the same line in the Condensed Consolidated Statements of Income as the hedged item.


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Cash Flow Hedges — Interest Rate Derivatives
 
The Company has executed certain interest rate cash flow hedges in the form of swaps and caps in order to mitigate the Company’s exposure to variability in cash flows for the future interest payments on a designated portion of borrowings. Given the recent turmoil in the financial and credit markets, the Company expanded its interest rate hedging portfolio at what the Company believes to be advantageous rates that are expected to minimize the Company’s overall interest rate risk. In addition, until September 5, 2009, the Company was required under the Senior Secured Credit Facility and the Second Lien Credit Facility to hedge a portion of its floating rate debt to reduce interest rate risk caused by floating rate debt issuance. The effective portion of interest rate hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying debt interest payments are recognized. Interest rate cash flow hedge derivatives are reported as a component of interest expense and therefore are reported as cash flow from operating activities similar to the manner in which cash interest payments are reported in the Condensed Consolidated Statements of Cash Flows.
 
At October 3, 2009 and January 3, 2009, the Company had outstanding interest rate hedging arrangements whereby it has capped the LIBOR interest rate component on $400,000 of its floating rate debt at 3.50% and has fixed the LIBOR interest rate component on $1,393,680 of its floating rate debt at a weighted average rate of 4.16%. Approximately 88% and 82% of the Company’s total debt outstanding at October 3, 2009 and January 3, 2009, respectively, was at a fixed or capped LIBOR rate. There have been no changes in the Company’s interest rate derivative portfolio during the quarter and nine months ended October 3, 2009.
 
Cash Flow Hedges — Foreign Currency Derivatives
 
The Company uses forward exchange and option 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 effective portion of foreign exchange hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of foreign exchange hedge derivative contracts related to the purchase of inventory or other hedged items are reported in the Condensed Consolidated Statements of Cash Flows as cash flow from operating activities.
 
Historically, the principal currencies hedged by the Company include the Euro, Mexican peso, Canadian dollar and Japanese yen. Forward exchange contracts mature on the anticipated cash requirement date of the hedged transaction, generally within one year. As of October 3, 2009, the U.S. dollar equivalent of commitments to sell foreign currencies in the Company’s foreign currency cash flow hedge derivative portfolio was $7,910, using the exchange rate at the reporting date.
 
Cash Flow Hedges — Commodity Derivatives
 
Cotton is the primary raw material the Company uses to manufacture many of its products and is purchased at market prices. From time to time, the Company uses commodity financial instruments to hedge the price of cotton, for which there is a high correlation between the hedged item and the hedge instrument. Gains and losses on these contracts are intended to offset losses and gains on the hedged transactions in an effort to reduce the earnings volatility resulting from fluctuating commodity prices. The effective portion of commodity hedge gains and losses deferred in “Accumulated other comprehensive loss” is reclassified into earnings as the underlying inventory is sold, using historical inventory turnover rates. The settlement of commodity hedge derivative contracts related to the purchase of inventory is reported in the Condensed


15


Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Consolidated Statements of Cash Flows as cash flow from operating activities. There were no amounts outstanding under cotton futures or cotton option contracts at October 3, 2009 and January 3, 2009.
 
Fair Values of Derivative Instruments
 
The fair values of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:
 
                     
        Fair Value  
        October 3,
    January 3,
 
    Balance Sheet Location   2009     2009  
 
Derivative assets — hedges
                   
Interest rate contracts
  Other current assets   $     $ 46  
Foreign exchange contracts
  Other current assets     43       1,209  
                     
Total derivative assets — hedges
        43       1,255  
                     
Derivative assets — non-hedges
                   
Foreign exchange contracts
  Other current assets     2,690       3,286  
                     
Total derivative assets
      $ 2,733     $ 4,541  
                     
Derivative liabilities — hedges
                   
Interest rate contracts
  Accrued liabilities   $ (571 )   $ (6,084 )
Interest rate contracts
  Other noncurrent liabilities     (64,696 )     (76,927 )
Foreign exchange contracts
  Accrued liabilities     (252 )     (1,347 )
                     
Total derivative liabilities — hedges
        (65,519 )     (84,358 )
                     
Derivative liabilities — non-hedges
                   
Foreign exchange contracts
  Accrued liabilities     (1,774 )     (533 )
                     
Total derivative liabilities
      $ (67,293 )   $ (84,891 )
                     
Net derivative liability
      $ (64,560 )   $ (80,350 )
                     


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Table of Contents

 
HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
Net Derivative Gain or Loss
 
The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and Accumulated Other Comprehensive Loss is as follows:
 
                                     
                    Amount of
 
    Amount of
        Gain (Loss)
 
    Gain (Loss)
        Reclassified from
 
    Recognized in
    Location of
  Accumulated
 
    Accumulated Other
    Gain (Loss)
  Other Comprehensive
 
    Comprehensive Loss
    Reclassified from
  Loss into Income
 
    (Effective Portion)     Accumulated Other
  (Effective Portion)  
    Quarter Ended     Comprehensive
  Quarter Ended  
    October 3,
    September 27,
    Loss into Income
  October 3,
    September 27,
 
    2009     2008     (Effective Portion)   2009     2008  
 
Interest rate contracts
  $ (541 )   $ (5,821 )   Interest expense, net   $ 219     $ 946  
Foreign exchange contracts
    (898 )     1,003     Cost of sales     (127 )     652  
Commodity contracts
              Cost of sales           (115 )
                                     
Total
  $ (1,439 )   $ (4,818 )       $ 92     $ 1,483  
                                     
 
                                     
                    Amount of
 
    Amount of
        Gain (Loss)
 
    Gain (Loss)
        Reclassified from
 
    Recognized in
    Location of
  Accumulated
 
    Accumulated Other
    Gain (Loss)
  Other Comprehensive
 
    Comprehensive Loss
    Reclassified from
  Loss into Income
 
    (Effective Portion)     Accumulated Other
  (Effective Portion)  
    Nine Months Ended     Comprehensive
  Nine Months Ended  
    October 3,
    September 27,
    Loss into Income
  October 3,
    September 27,
 
    2009     2008     (Effective Portion)   2009     2008  
 
Interest rate contracts
  $ 17,471     $ (6,269 )   Interest expense, net   $ 348     $ 1,317  
Foreign exchange contracts
    (1,768 )     (196 )   Cost of sales     (1,240 )     2,225  
Commodity contracts
          (208 )   Cost of sales     96       (579 )
                                     
Total
  $ 15,703     $ (6,673 )       $ (796 )   $ 2,963  
                                     
 
The Company expects to reclassify into earnings during the next 12 months a net loss from Accumulated Other Comprehensive Loss of approximately $2,099.
 
The changes in fair value of derivatives excluded from the Company’s effectiveness assessments and the ineffective portion of the changes in the fair value of derivatives used as cash flow hedges are reported in the “Selling, general and administrative expenses” line in the Condensed Consolidated Statements of Income. The Company recognized gains related to ineffectiveness of hedging relationships for the quarter ended October 3, 2009 of $102, consisting of $75 for interest rate contracts and $27 for foreign exchange contracts. The Company recognized gains (losses) related to ineffectiveness of hedging relationships for the quarter ended September 27, 2008 of $9, consisting of $9 for foreign exchange contracts. The Company recognized gains related to ineffectiveness of hedging relationships for the nine months ended October 3, 2009 of $246, consisting of $227 for interest rate contracts and $19 for foreign exchange contracts. The Company recognized losses related to ineffectiveness of hedging relationships for the nine months ended September 27, 2008 of $178, consisting of $12 for interest rate contracts and $166 for foreign exchange contracts.


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
The effect of mark to market hedge derivative instruments on the Condensed Consolidated Statements of Income is as follows:
 
                                     
        Amount of Gain (Loss) Recognized in Income  
    Location of Gain (Loss)
  Quarter Ended     Nine Months Ended  
    Recognized in Income on
  October 3,
    September 27,
    October 3,
    September 27,
 
    Derivative   2009     2008     2009     2008  
 
Foreign exchange contracts
  Selling, general and administrative expenses   $ 4,365     $ (2,062 )   $ 3,189     $ (1,706 )
                                     
Total
      $ 4,365     $ (2,062 )   $ 3,189     $ (1,706 )
                                     
 
(9)   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 the income approach for interest rate and foreign currency derivatives for recurring fair value 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.
 
Assets and Liabilities Measured on a Recurring Basis
 
As of October 3, 2009, 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 interest rates and foreign exchange rates. The fair values of cotton derivatives are determined based on quoted prices in public markets and are categorized as Level 1. The fair values of interest rate and foreign exchange rate derivatives are determined based on inputs that are readily available in public markets or can be derived


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
from information available in publicly quoted markets and are categorized as Level 2. The Company does not have any financial assets or liabilities measured at fair value on a recurring basis categorized as Level 3, and there were no transfers in or out of Level 3 during the quarter and nine months ended October 3, 2009. There were no changes during the quarter and nine months ended October 3, 2009 to the Company’s valuation techniques used to measure asset and liability fair values on a recurring basis. As of October 3, 2009, the Company did not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.
 
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities accounted for at fair value on a recurring basis.
 
                         
    Assets (Liabilities) at Fair Value as of
 
    October 3, 2009  
    Quoted Prices
             
    In Active
    Significant
       
    Markets for
    Other
    Significant
 
    Identical
    Observable
    Unobservable
 
    Assets
    Inputs
    Inputs
 
    (Level 1)     (Level 2)     (Level 3)  
 
Derivative contracts, net
  $     $ (64,560 )   $  
                         
Total
  $     $ (64,560 )   $  
                         
                         
 
                         
    Assets (Liabilities) at Fair Value as of
 
    January 3, 2009  
    Quoted Prices
             
    In Active
    Significant
       
    Markets for
    Other
    Significant
 
    Identical
    Observable
    Unobservable
 
    Assets
    Inputs
    Inputs
 
    (Level 1)     (Level 2)     (Level 3)  
 
Derivative contracts, net
  $     $ (80,350 )   $  
                         
Total
  $     $ (80,350 )   $  
                         
 
Fair Value of Financial Instruments
 
The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable and accounts payable approximated fair value as of October 3, 2009 and January 3, 2009. The fair value of debt was $1,970,286 and $1,753,885 as of October 3, 2009 and January 3, 2009 and had a carrying value of $2,042,723 and $2,176,547, respectively. 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 approximated fair value as of October 3, 2009 and January 3, 2009, primarily due to the short-term nature of these instruments.


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(10)   Comprehensive Income
 
The Company’s comprehensive income is as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Net income
  $ 41,138     $ 15,920     $ 52,365     $ 109,288  
Translation adjustments
    8,047       (8,196 )     16,303       (5,506 )
Net unrealized gain (loss) on qualifying cash flow hedges, net of tax expense (benefit) of $(524), $(1,297), $5,800 and $(1,443), respectively
    (823 )     (2,038 )     9,108       (2,267 )
Recognition of loss from pension plan curtailment, net of tax benefit of $(547)
          859             859  
Recognition of loss from pension plan settlement, net of tax benefit of $(1,227)
    1,928             1,928        
Amounts amortized into net periodic cost:
                               
Prior service cost, net of tax $(3), $(4), $(9) and $(12), respectively
    4       6       12       18  
Actuarial loss, net of tax of $(888), $(15), $(2,508) and $(45), respectively
    1,396       24       3,938       72  
                                 
Comprehensive income
  $ 51,690     $ 6,575     $ 83,654     $ 102,464  
                                 
 
(11)   Income Taxes
 
The difference in the effective income tax rates of 14% and 16% for the quarter and nine months ended October 3, 2009, respectively, and 24% for the quarter and nine months ended September 27, 2008 and the U.S. statutory rate of 35% is primarily attributable to unremitted earnings of foreign subsidiaries taxed at rates lower than the U.S. statutory rate. The Company’s estimated annual effective tax rate reflects its strategic initiative to make substantial capital investments outside the United States in its global supply chain in 2009.
 
The Company and Sara Lee entered into a tax sharing agreement in connection with the spin off of the Company from Sara Lee on September 5, 2006. Under the tax sharing agreement, within 180 days after Sara Lee filed its final consolidated tax return for the period that included September 5, 2006, Sara Lee was required to deliver to the Company a computation of the amount of deferred taxes attributable to the Company’s United States and Canadian operations that would be included on the Company’s opening balance sheet as of September 6, 2006 (“as finally determined”) which has been done. The Company has the right to participate in the computation of the amount of deferred taxes. Under the tax sharing agreement, if substituting the amount of deferred taxes as finally determined for the amount of estimated deferred taxes that were included on that balance sheet at the time of the spin off causes a decrease in the net book value reflected on that balance sheet, then Sara Lee will be required to pay the Company the amount of such decrease. If such substitution causes an increase in the net book value reflected on that balance sheet, then the Company will be required to pay Sara Lee the amount of such increase. For purposes of this computation, the Company’s deferred taxes are the amount of deferred tax benefits (including deferred tax consequences attributable to deductible temporary differences and carryforwards) that would be recognized as assets on the Company’s balance sheet computed in accordance with GAAP, but without regard to valuation allowances, less the amount of deferred tax liabilities (including deferred tax consequences attributable to taxable temporary differences)


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
that would be recognized as liabilities on the Company’s opening balance sheet computed in accordance with GAAP, but without regard to valuation allowances. Neither the Company nor Sara Lee will be required to make any other payments to the other with respect to deferred taxes.
 
The Company’s computation of the final amount of deferred taxes for the Company’s opening balance sheet as of September 6, 2006 is as follows:
 
         
Estimated deferred taxes subject to the tax sharing agreement included in opening balance sheet on September 6, 2006
  $ 450,683  
Final calculation of deferred taxes subject to the tax sharing agreement
    360,460  
         
Decrease in deferred taxes as of opening balance sheet on September 6, 2006
    90,223  
Preliminary cash installment received from Sara Lee
    18,000  
         
Amount due from Sara Lee
  $ 72,223  
         
 
The amount that is expected to be collected from Sara Lee based on the Company’s computation of $72,223 is included as a receivable in “Deferred tax assets and other current assets” in the Condensed Consolidated Balance Sheet as of October 3, 2009. The Company and Sara Lee have exchanged information in connection with this matter, but Sara Lee has disagreed with the Company’s computation. In accordance with the dispute resolution provisions of the tax sharing agreement, on August 3, 2009, the Company submitted the dispute to binding arbitration. The arbitration process is ongoing, and the Company will continue to prosecute its claim. The Company does not believe that the resolution of this dispute will have a material impact on the Company’s financial position, results of operations or cash flows.
 
(12)   Business Segment Information
 
The Company’s operations are managed and reported in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these segments’ businesses but shares a common supply chain and media and marketing platforms.
 
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 women’s intimate apparel, men’s underwear, kids’ underwear, socks and thermals. The Company’s direct-to-consumer retail operations are included within the Innerwear segment.
 
  •  Outerwear sells basic branded products that are seasonal in nature under the product categories of casualwear and activewear.
 
  •  Hosiery sells products in categories such as pantyhose and knee highs.
 
  •  International relates to the Latin America, Asia, Canada and Europe geographic locations which sell products that span across the Innerwear, Outerwear and Hosiery reportable segments.
 
  •  Other is primarily comprised of sales of yarn to third parties in the United States and Latin America in order to maintain asset utilization at certain manufacturing facilities and are intended to generate approximate break even margins.


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
The Company evaluates the operating performance of its segments based upon segment operating profit, which is defined as operating profit before general corporate expenses, amortization of trademarks and other identifiable intangibles and restructuring and related accelerated depreciation charges and inventory write-offs. The accounting policies of the segments are consistent with those described in Note 2 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended January 3, 2009.
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Net sales:
                               
Innerwear
  $ 585,327     $ 650,372     $ 1,710,920     $ 1,830,437  
Outerwear
    329,721       348,467       776,282       880,809  
Hosiery
    43,944       50,197       139,300       166,672  
International
    107,399       116,581       294,674       352,120  
Other
    3,745       4,769       12,022       20,064  
                                 
Total segment net sales(1)
    1,070,136       1,170,386       2,933,198       3,250,102  
Intersegment(2)
    (11,463 )     (16,751 )     (30,662 )     (36,449 )
                                 
Total net sales
  $ 1,058,673     $ 1,153,635     $ 2,902,536     $ 3,213,653  
                                 
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Segment operating profit (loss):
                               
Innerwear
  $     69,325     $     71,097     $   210,443     $   204,714  
Outerwear
    35,369       19,243       23,269       55,587  
Hosiery
    13,834       13,081       42,678       52,944  
International
    9,217       14,010       28,089       47,662  
Other
    (1,712 )     314       (4,395 )     304  
                                 
Total segment operating profit
    126,033       117,745       300,084       361,211  
Items not included in segment operating profit:
                               
General corporate expenses
    (13,938 )     (12,593 )     (44,602 )     (37,128 )
Amortization of trademarks and other identifiable intangibles
    (3,112 )     (3,045 )     (9,293 )     (8,683 )
Restructuring
    (15,104 )     (28,355 )     (46,319 )     (32,355 )
Inventory write-offs included in cost of sales
    (269 )     (14,027 )     (3,516 )     (14,027 )
Accelerated depreciation included in cost of sales
    (118 )     (4,011 )     (2,392 )     (11,202 )
Accelerated depreciation included in selling, general and administrative expenses
    (183 )     2,487       (538 )     1,266  
                                 
Total operating profit
    93,309       58,201       193,424       259,082  
Other expenses
    (2,423 )           (6,537 )      
Interest expense, net
    (42,941 )     (37,253 )     (124,548 )     (115,282 )
                                 
Income before income tax expense
  $ 47,945     $ 20,948     $ 62,339     $ 143,800  
                                 
 


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Depreciation and amortization expense:
                               
Innerwear
  $ 9,879     $ 10,610     $ 31,101     $ 32,642  
Outerwear
    5,602       5,652       16,655       18,461  
Hosiery
    930       1,441       3,141       4,626  
International
    519       583       1,505       1,755  
Other
    59       198       190       793  
                                 
      16,989       18,484       52,592       58,277  
Corporate
    4,151       4,169       14,177       19,336  
                                 
Total depreciation and amortization expense
  $ 21,140     $ 22,653     $ 66,769     $  77,613  
                                 
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Additions to long-lived assets:
                               
Innerwear
  $ 9,879     $ 25,377     $ 43,495     $ 51,880  
Outerwear
    9,857       21,217       49,634       53,357  
Hosiery
    137       9       539       327  
International
    380       724       905       1,866  
Other
          16       28       30  
                                 
      20,253       47,343       94,601       107,460  
Corporate
    1,640       2,426       5,108       15,859  
                                 
Total additions to long-lived assets
  $ 21,893     $ 49,769     $ 99,709     $ 123,319  
                                 
 
 
(1) Includes sales between segments. Such sales are at transfer prices that are at cost plus markup or at prices equivalent to market value.
 
(2) Intersegment sales included in the segments’ net sales are as follows:
 
                                 
    Quarter Ended     Nine Months Ended  
    October 3,
    September 27,
    October 3,
    September 27,
 
    2009     2008     2009     2008  
 
Innerwear
  $ 1,290     $ 4,270     $ 3,156     $ 6,468  
Outerwear
    6,612       8,538       17,407       19,303  
Hosiery
    3,169       3,603       9,256       9,293  
International
    392       340       843       1,385  
Other
                       
                                 
Total
  $ 11,463     $ 16,751     $ 30,662     $ 36,449  
                                 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
 
(13)   Consolidating Financial Information
 
In accordance with the indenture governing the Company’s $500,000 Floating Rate Senior Notes issued on December 14, 2006, certain of the Company’s subsidiaries have guaranteed the Company’s obligations under the Floating Rate Senior Notes. The following presents the condensed consolidating financial information separately for:
 
(i) Parent Company, the issuer of the guaranteed obligations. Parent Company includes Hanesbrands Inc. and its 100% owned operating divisions which are not legal entities, and excludes its subsidiaries which are legal entities;
 
(ii) Guarantor subsidiaries, on a combined basis, as specified in the indenture governing the Floating Rate Senior Notes;
 
(iii) Non-guarantor subsidiaries, on a combined basis;
 
(iv) Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent Company, the guarantor subsidiaries and the non-guarantor subsidiaries, (b) eliminate intercompany profit in inventory, (c) eliminate the investments in our subsidiaries and (d) record consolidating entries; and
 
(v) Parent Company, on a consolidated basis.
 
The Floating Rate Senior Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary, each of which is wholly owned, directly or indirectly, by Hanesbrands Inc. Each entity in the consolidating financial information follows the same accounting policies as described in the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended January 3, 2009, except for the use by the Parent Company and guarantor subsidiaries of the equity method of accounting to reflect ownership interests in subsidiaries which are eliminated upon consolidation.
 


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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended October 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,054,178     $ 115,094     $ 675,167     $ (785,766 )   $ 1,058,673  
Cost of sales
    857,175       42,714       592,759       (790,655 )     701,993  
                                         
Gross profit
    197,003       72,380       82,408       4,889       356,680  
Selling, general and administrative expenses
    194,025       23,060       30,374       808       248,267  
Restructuring
    14,236             868             15,104  
                                         
Operating profit (loss)
    (11,258 )     49,320       51,166       4,081       93,309  
Equity in earnings (loss) of subsidiaries
    88,536       7,515             (96,051 )      
Other expenses
    2,423                         2,423  
Interest expense, net
    32,145       5,285       5,523       (12 )     42,941  
                                         
Income (loss) before income tax expense
    42,710       51,550       45,643       (91,958 )     47,945  
Income tax expense
    1,572       461       4,774             6,807  
                                         
Net income (loss)
  $ 41,138     $ 51,089     $ 40,869     $ (91,958 )   $ 41,138  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Quarter Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 1,253,006     $ 112,281     $ 770,153     $ (981,805 )   $ 1,153,635  
Cost of sales
    953,856       42,439       683,669       (868,113 )     811,851  
                                         
Gross profit
    299,150       69,842       86,484       (113,692 )     341,784  
Selling, general and administrative expenses
    205,633       17,566       32,146       (117 )     255,228  
Restructuring
    24,036       139       4,180             28,355  
                                         
Operating profit (loss)
    69,481       52,137       50,158       (113,575 )     58,201  
Equity in earnings (loss) of subsidiaries
    (32,753 )     45,678             (12,925 )      
Interest expense, net
    24,964       7,733       4,543       13       37,253  
                                         
Income (loss) before income tax expense (benefit)
    11,764       90,082       45,615       (126,513 )     20,948  
Income tax expense (benefit)
    (4,156 )     3,938       5,246             5,028  
                                         
Net income (loss)
  $ 15,920     $ 86,144     $ 40,369     $ (126,513 )   $ 15,920  
                                         
 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Income
 
    Nine Months Ended October 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 2,986,315     $ 317,083     $ 2,061,233     $ (2,462,095 )   $ 2,902,536  
Cost of sales
    2,469,249       115,549       1,827,681       (2,451,890 )     1,960,589  
                                         
Gross profit
    517,066       201,534       233,552       (10,205 )     941,947  
Selling, general and administrative expenses
    558,119       67,120       75,403       1,562       702,204  
Restructuring
    42,260             4,059             46,319  
                                         
Operating profit (loss)
    (83,313 )     134,414       154,090       (11,767 )     193,424  
Equity in earnings (loss) of subsidiaries
    231,881       81,693             (313,574 )      
Other expenses
    6,537                         6,537  
Interest expense, net
    93,824       17,523       13,202       (1 )     124,548  
                                         
Income (loss) before income tax expense (benefit)
    48,207       198,584       140,888       (325,340 )     62,339  
Income tax expense (benefit)
    (4,158 )     3,320       10,812             9,974  
                                         
Net income (loss)
  $ 52,365     $ 195,264     $ 130,076     $ (325,340 )   $ 52,365  
                                         
 
                                         
    Condensed Consolidating Statement of Income
 
    Nine Months Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net sales
  $ 3,362,897     $ 321,419     $ 2,176,844     $ (2,647,507 )   $ 3,213,653  
Cost of sales
    2,626,383       125,794       1,910,886       (2,517,114 )     2,145,949  
                                         
Gross profit
    736,514       195,625       265,958       (130,393 )     1,067,704  
Selling, general and administrative expenses
    651,345       56,566       67,911       445       776,267  
Restructuring
    23,942       266       8,147             32,355  
                                         
Operating profit (loss)
    61,227       138,793       189,900       (130,838 )     259,082  
Equity in earnings (loss) of subsidiaries
    132,451       125,829             (258,280 )      
Interest expense, net
    76,750       24,595       13,931       6       115,282  
                                         
Income (loss) before income tax expense
    116,928       240,027       175,969       (389,124 )     143,800  
Income tax expense
    7,640       9,453       17,419             34,512  
                                         
Net income (loss)
  $ 109,288     $ 230,574     $ 158,550     $ (389,124 )   $ 109,288  
                                         
 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    October 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 5,338     $ 1,531     $ 31,748     $     $ 38,617  
Trade accounts receivable less allowances
    (5,809 )     6,501       539,339       (1,491 )     538,540  
Inventories
    858,982       61,939       340,930       (124,774 )     1,137,077  
Deferred tax assets and other current assets
    272,269       11,858       41,917       (1,692 )     324,352  
                                         
Total current assets
    1,130,780       81,829       953,934       (127,957 )     2,038,586  
                                         
Property, net
    176,396       18,232       418,283             612,911  
Trademarks and other identifiable intangibles, net
    22,187       111,066       5,638             138,891  
Goodwill
    232,882       16,935       72,185             322,002  
Investments in subsidiaries
    873,805       775,249             (1,649,054 )      
Deferred tax assets and other noncurrent assets
    (4,826 )     546,937       (55,532 )     (107,056 )     379,523  
                                         
Total assets
  $ 2,431,224     $ 1,550,248     $ 1,394,508     $ (1,884,067 )   $ 3,491,913  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 110,553     $ 4,325     $ 92,317     $ 85,648     $ 292,843  
Accrued liabilities
    229,441       26,267       63,872             319,580  
Notes payable
                62,158             62,158  
Accounts Receivable Securitization Facility
                249,043             249,043  
                                         
Total current liabilities
    339,994       30,592       467,390       85,648       923,624  
                                         
Long-term debt
    1,343,680       450,000                   1,793,680  
Other noncurrent liabilities
    454,366       3,648       18,649       4,762       481,425  
                                         
Total liabilities
    2,138,040       484,240       486,039       90,410       3,198,729  
Stockholders’ equity
    293,184       1,066,008       908,469       (1,974,477 )     293,184  
                                         
Total liabilities and stockholders’ equity
  $ 2,431,224     $ 1,550,248     $ 1,394,508     $ (1,884,067 )   $ 3,491,913  
                                         
 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Balance Sheet
 
    January 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Assets
                                       
Cash and cash equivalents
  $ 16,210     $ 2,355     $ 48,777     $     $ 67,342  
Trade accounts receivable less allowances
    (4,956 )     6,096       406,305       (2,515 )     404,930  
Inventories
    1,078,048       49,581       295,946       (133,045 )     1,290,530  
Deferred tax assets and other current assets
    288,208       10,158       49,734       (577 )     347,523  
                                         
Total current assets
    1,377,510       68,190       800,762       (136,137 )     2,110,325  
                                         
Property, net
    208,844       13,914       365,431             588,189  
Trademarks and other identifiable intangibles, net
    27,199       114,630       5,614             147,443  
Goodwill
    232,882       16,934       72,186             322,002  
Investments in subsidiaries
    545,866       649,513             (1,195,379 )      
Deferred tax assets and other noncurrent assets
    91,401       397,802       (37,980 )     (85,133 )     366,090  
                                         
Total assets
  $ 2,483,702     $ 1,260,983     $ 1,206,013     $ (1,416,649 )   $ 3,534,049  
                                         
Liabilities and Stockholders’ Equity
                                       
Accounts payable
  $ 161,734     $ 3,980     $ 74,157     $ 85,647     $ 325,518  
Accrued liabilities
    229,631       30,875       57,555       (2,669 )     315,392  
Notes payable
                61,734             61,734  
Accounts Receivable Securitization Facility
                45,640             45,640  
                                         
Total current liabilities
    391,365       34,855       239,086       82,978       748,284  
                                         
Long-term debt
    1,483,930       450,000       196,977             2,130,907  
Other noncurrent liabilities
    423,252       7,344       34,968       4,139       469,703  
                                         
Total liabilities
    2,298,547       492,199       471,031       87,117       3,348,894  
Stockholders’ equity
    185,155       768,784       734,982       (1,503,766 )     185,155  
                                         
Total liabilities and stockholders’ equity
  $ 2,483,702     $ 1,260,983     $ 1,206,013     $ (1,416,649 )   $ 3,534,049  
                                         
 

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Nine Months Ended October 3, 2009  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ 557,032     $ 27,338     $ (64,672 )   $ (308,891 )   $ 210,807  
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (15,010 )     (7,344 )     (77,355 )           (99,709 )
Proceeds from sales of assets
    11,896             3,918             15,814  
Other
    (601 )     10             601       10  
                                         
Net cash provided by (used in) investing activities
    (3,715 )     (7,334 )     (73,437 )     601       (83,885 )
                                         
Financing activities:
                                       
Borrowings on notes payable
                1,169,301             1,169,301  
Repayments on notes payable
                (1,168,799 )           (1,168,799 )
Payments to amend credit facilities
    (20,570 )           (1,595 )           (22,165 )
Borrowings on revolving loan facility
    1,353,525                         1,353,525  
Repayments on revolving loan facility
    (1,353,525 )                       (1,353,525 )
Repayment of debt under credit facility
    (140,250 )                       (140,250 )
Borrowings on Accounts Receivable Securitization Facility
                176,616             176,616  
Repayments on Accounts Receivable Securitization Facility
                (170,190 )           (170,190 )
Proceeds from stock options exercised
    376                         376  
Other
    (800 )           (24 )           (824 )
Net transactions with related entities
    (402,945 )     (20,828 )     115,483       308,290        
                                         
Net cash provided by (used in) financing activities
    (564,189 )     (20,828 )     120,792       308,290       (155,935 )
                                         
Effect of changes in foreign exchange rates on cash
                288             288  
                                         
Decrease in cash and cash equivalents
    (10,872 )     (824 )     (17,029 )           (28,725 )
Cash and cash equivalents at beginning of year
    16,210       2,355       48,777             67,342  
                                         
Cash and cash equivalents at end of period
  $ 5,338     $ 1,531     $ 31,748     $     $ 38,617  
                                         

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HANESBRANDS INC.

Notes to Condensed Consolidated Financial Statements — (Continued)
(dollars and shares in thousands, except per share data)
(unaudited)
 
                                         
    Condensed Consolidating Statement of Cash Flows
 
    Nine Months Ended September 27, 2008  
                      Consolidating
       
    Parent
    Guarantor
    Non-Guarantor
    Entries and
       
    Company     Subsidiaries     Subsidiaries     Eliminations     Consolidated  
 
Net cash provided by (used in) operating activities
  $ (28,878 )   $ 133,333     $ 136,650     $ (259,726 )   $ (18,621 )
                                         
Investing activities:
                                       
Purchases of property, plant and equipment
    (25,211 )     (8,852 )     (89,256 )           (123,319 )
Acquisition of business
                (10,011 )           (10,011 )
Proceeds from sales of assets
    20,059       38       4,232             24,329  
Other
    (89 )                 (554 )     (643 )
                                         
Net cash used in investing activities
    (5,241 )     (8,814 )     (95,035 )     (554 )     (109,644 )
                                         
Financing activities:
                                       
Borrowings on notes payable
                316,958             316,958  
Repayments on notes payable
                (265,195 )           (265,195 )
Payments to amend credit facilities
    (48 )     (10 )     (11 )           (69 )
Borrowings on revolving loan facility
    524,000                         524,000  
Repayments on revolving loan facility
    (524,000 )                       (524,000 )
Borrowings on Accounts Receivable Securitization Facility
                20,944             20,944  
Repayments on Accounts Receivable Securitization Facility
                (20,944 )           (20,944 )
Proceeds from stock options exercised
    2,200                         2,200  
Stock repurchases
    (30,275 )                       (30,275 )
Transaction with Sara Lee Corporation
    18,000                         18,000  
Other
    (836 )           (7 )           (843 )
Net transactions with related entities
    (4,438 )     (129,118 )     (126,724 )     260,280        
                                         
Net cash provided by (used in) financing activities
    (15,397 )     (129,128 )     (74,979 )     260,280       40,776  
                                         
Effect of changes in foreign exchange rates on cash
                (535 )           (535 )
                                         
Decrease in cash and cash equivalents
    (49,516 )     (4,609 )     (33,899 )           (88,024 )
Cash and cash equivalents at beginning of year
    84,476       6,329       83,431             174,236  
                                         
Cash and cash equivalents at end of period
  $ 34,960     $ 1,720     $ 49,532     $     $ 86,212  
                                         


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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year ended January 3, 2009, which were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K.
 
Overview
 
We are a consumer goods company with a portfolio of leading apparel brands, including Hanes, Champion, C9 by Champion, Playtex, Bali, L’eggs, Just My Size, barely there, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofold. We design, manufacture, source and sell a broad range of apparel essentials such as t-shirts, bras, panties, men’s underwear, kids’ underwear, casualwear, activewear, socks and hosiery.
 
Our operations are managed in five operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Outerwear, Hosiery, International and Other. These segments are organized principally by product category and geographic location. Management of each segment is responsible for the operations of these segments’ businesses but shares a common supply chain and media and marketing platforms.
 
  •  Innerwear.  The Innerwear segment focuses on core apparel essentials, and consists of products such as women’s intimate apparel, men’s underwear, kids’ underwear, socks and thermals, marketed under well-known brands that are trusted by consumers. We are an intimate apparel category leader in the United States with our Hanes, Playtex, Bali, barely there, Just My Size and Wonderbra brands. We are also a leading manufacturer and marketer of men’s underwear and kids’ underwear under the Hanes, Champion, C9 by Champion and Polo Ralph Lauren brand names. Our direct-to-consumer retail operations are included within the Innerwear segment. The retail operations include our value-based (“outlet”) stores, internet operations and catalogs which sell products from our portfolio of leading brands. As of October 3, 2009 and January 3, 2009, we had 228 and 213 outlet stores, respectively. Net sales for the nine months ended October 3, 2009 from our Innerwear segment were $1.71 billion, representing approximately 58% of total segment net sales.
 
  •  Outerwear.  We are a leader in the casualwear and activewear markets through our Hanes, Champion and Just My Size brands, where we offer products such as t-shirts and fleece. Our casualwear lines offer a range of quality, comfortable clothing for men, women and children marketed under the Hanes and Just My Size brands. The Just My Size brand offers casual apparel designed exclusively to meet the needs of plus-size women. In addition to activewear for men and women, Champion provides uniforms for athletic programs and includes an apparel program, C9 by Champion, at Target stores. We also license our Champion name for collegiate apparel and footwear. We also supply our t-shirts, sportshirts and fleece products, including brands such as Hanes, Champion, Outer Banks and Hanes Beefy-T, to customers, primarily wholesalers, who then resell to screen printers and embellishers. Net sales for the nine months ended October 3, 2009 from our Outerwear segment were $776 million, representing approximately 26% of total segment net sales.
 
  •  Hosiery.  We are the leading marketer of women’s sheer hosiery in the United States. We compete in the hosiery market by striving to offer superior values and executing integrated marketing activities, as well as focusing on the style of our hosiery products. We market hosiery products under our L’eggs,


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Table of Contents

  Hanes and Just My Size brands. Net sales for the nine months ended October 3, 2009 from our Hosiery segment were $139 million, representing approximately 5% of total segment net sales. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences.
 
  •  International.  International includes products that span across the Innerwear, Outerwear and Hosiery reportable segments and are primarily marketed under the Hanes, Wonderbra, Champion, Stedman, Playtex, Zorba, Rinbros, Kendall, Sol y Oro, Ritmo and Bali brands. Net sales for the nine months ended October 3, 2009 from our International segment were $295 million, representing approximately 10% of total segment net sales and included sales in Latin America, Asia, Canada and Europe. Canada, Europe, Japan and Mexico are our largest international markets, and we also have sales offices in India and China.
 
  •  Other.  Our Other segment primarily consists of sales of yarn to third parties in the United States and Latin America that maintain asset utilization at certain manufacturing facilities and are intended to generate approximate break even margins. Net sales for the nine months ended October 3, 2009 in our Other segment were $12 million, representing less than 1% of total segment net sales. Net sales from our Other segment are expected to continue to be insignificant to us as we complete the implementation of our consolidation and globalization efforts. In September 2009, we announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers, which is expected to further reduce net sales of our Other segment.
 
Consolidation and Globalization Strategy
 
We expect to continue our restructuring efforts through the end of 2009 as we continue to execute our consolidation and globalization strategy. We have closed plant locations, reduced our workforce and relocated some of our manufacturing capacity to lower cost locations in Asia, Central America and the Caribbean Basin.
 
During the nine months of 2009, we announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers. We entered into an agreement with Parkdale America, LLC (“Parkdale America”) under which we agreed to sell or lease assets related to operations at our four yarn manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America operating three of the four facilities. We approved an action to close the fourth yarn manufacturing facility, as well as a yarn warehouse and a cotton warehouse, all located in the United States, which will result in the elimination of approximately 175 positions. We also entered into a yarn purchase agreement with Parkdale America and Parkdale Mills, LLC (together with Parkdale America, “Parkdale”). Under this agreement, which has an initial term of six years, Parkdale will produce and sell to us a substantial amount of our Western Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce and sell to us a substantial amount of the yarn requirements of our Nanjing, China textile facility.
 
We have restructured our supply chain over the past three years to create more efficient production clusters that utilize fewer, larger facilities and to balance our production capability between the Western Hemisphere and Asia. With our global supply chain restructured, we are now focused on optimizing our supply chain to further enhance efficiency, improve working capital and asset turns and reduce costs. We are focused on optimizing the working capital needs of our supply chain through several initiatives, such as supplier-managed inventory for raw materials and sourced goods ownership relationships.
 
In addition to the actions discussed above relating to our yarn operations, during the nine months ended October 3, 2009, in furtherance of our consolidation and globalization strategy, we approved actions to close four manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras, Puerto Rico and Canada, and eliminate an aggregate of approximately 2,925 positions in those countries and El Salvador. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. We also have recognized accelerated depreciation with respect to owned or leased assets associated with manufacturing facilities and distribution centers which closed during 2009 or we anticipate closing in the next year as part of our


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consolidation and globalization strategy. While we believe that this strategy has had and will continue to have a beneficial impact on our operational efficiency and cost structure, we have incurred significant costs to implement these initiatives. In particular, we have recorded charges for severance and other employment-related obligations relating to workforce reductions, as well as payments in connection with lease and other contract terminations. In addition, we incurred charges for one-time write-offs of stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate related to the closure of manufacturing facilities. These amounts are included in the “Cost of sales,” “Restructuring” and “Selling, general and administrative expenses” lines of our statements of income.
 
We have made significant progress in our multiyear goal of generating gross savings that could approach or exceed $200 million. As a result of the restructuring actions taken since our spin off from Sara Lee Corporation (“Sara Lee”) on September 5, 2006, our cost structure has been reduced and efficiencies improved, generating savings of $62 million during the nine months ended October 3, 2009. In addition to the savings generated from restructuring actions, we benefited from $21 million in savings related to other cost reduction initiatives during the nine months ended October 3, 2009.
 
Seasonality and Other Factors
 
Our operating results are subject to some variability. Generally, our diverse range of product offerings helps mitigate the impact of seasonal changes in demand for certain items. Sales are typically higher in the last two quarters (July to December) of each fiscal year. Socks, hosiery and fleece products generally have higher sales during this period as a result of cooler weather, back-to-school shopping and holidays. Sales levels in 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. For example, we have experienced a shift in timing by our largest retail customers of back-to-school programs between June and July the last two years. Our results of operations are also impacted by fluctuations and volatility in the price of cotton and oil-related materials and the timing of actual spending for our media, advertising and promotion expenses. 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 our customers. Discretionary spending is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, electricity power rates, gasoline prices, unemployment trends and other matters that influence consumer confidence and spending. Many of these factors are outside of our control. Our customers’ 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.
 
Inflation and Changing Prices
 
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, a significant portion of our products are manufactured in other countries and declines in the value of the U.S. dollar may result in higher manufacturing costs. Similarly, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices, rose during the summer of 2008 as a result of inflation and other factors. In addition, inflation often is accompanied by higher interest rates, which could have a negative impact on spending, in which case our margins could decrease. Moreover, increases in inflation may not be matched by rises in income, which also could have a negative impact on spending. If we incur increased costs that we are unable to recoup, or if consumer spending continues to decrease generally, our business, results of operations, financial condition and cash flows may be adversely affected. In an effort to mitigate the impact of these incremental costs on our


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operating results, we raised domestic prices effective February 2009. We implemented an average gross price increase of four percent in our domestic product categories. The range of price increases varies by individual product category.
 
Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. While we do enter into short-term supply agreements and hedges from time to time in an attempt to protect our business from the volatility of the market price of cotton, our business can be affected by dramatic movements in cotton prices, although cotton historically represents only 8% of our cost of sales. The cotton prices reflected in our results were 58 cents per pound for the nine months ended October 3, 2009 and 62 cents per pound for the nine months ended September 27, 2008. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008. In addition, during the summer of 2008 we experienced a spike in oil-related commodity prices and other raw materials used in our products, such as dyes and chemicals, and increases in other costs, such as fuel, energy and utility costs. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. Our results in the nine months of 2009 were impacted by higher costs for cotton and oil-related materials, however we started to benefit in the second quarter of 2009 from lower cotton costs and in the third quarter of 2009 from lower oil-related material costs and other manufacturing costs.
 
Highlights from the Third Quarter and Nine Months Ended October 3, 2009
 
  •  Total net sales in the third quarter of 2009 were $1.06 billion, compared with $1.15 billion in the same quarter of 2008. Total net sales in the nine-month period in 2009 were $2.90 billion, compared with $3.21 billion in the same nine-month period of 2008.
 
  •  Operating profit was $93 million in the third quarter of 2009, compared with $58 million in the same quarter of 2008. Operating profit was $193 million in the nine-month period in 2009, compared with $259 million in the same nine-month period of 2008.
 
  •  Diluted earnings per share were $0.43 in the third quarter of 2009, compared with $0.17 in the same quarter of 2008. Diluted earnings per share were $0.55 in the nine-month period in 2009, compared with $1.14 in the same nine-month period of 2008.
 
  •  During the first nine months of 2009, we approved actions to close five manufacturing facilities, two distribution centers and two warehouses in the Dominican Republic, the United States, Honduras, Puerto Rico and Canada, and eliminate an aggregate of approximately 3,100 positions in those countries and El Salvador. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States. In addition, we completed several such actions in 2009 that were approved in 2008.
 
  •  We announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers. We entered into an agreement with Parkdale America under which we agreed to sell or lease assets related to operations at our four yarn manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America operating three of the four facilities. We also entered into a yarn purchase agreement with Parkdale. Under this agreement, which has an initial term of six years, Parkdale will produce and sell to us a substantial amount of our Western Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce and sell to us a substantial amount of the yarn requirements of our Nanjing, China textile facility.
 
  •  Gross capital expenditures were $100 million during the first nine months of 2009 as we continued to build out our textile and sewing network in Asia, Central America and the Caribbean Basin and were lower by $24 million compared to the nine months of 2008.


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  •  In September 2009, we made a prepayment of $140 million of principal on the Senior Secured Credit Facility.
 
  •  We ended the third quarter of 2009 with $474 million of borrowing availability under our $500 million revolving loan facility (the “Revolving Loan Facility”), $39 million in cash and cash equivalents and $71 million of borrowing availability under our international loan facilities.
 
  •  In March 2009, we amended our Senior Secured Credit Facility and Accounts Receivable Securitization Facility to provide for additional cushion for the leverage ratio and interest coverage ratio covenant requirements.
 
Condensed Consolidated Results of Operations — Third Quarter Ended October 3, 2009 Compared with Third Quarter Ended September 27, 2008
 
                                 
    Quarter Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,058,673     $ 1,153,635     $ (94,962 )     (8.2 )%
Cost of sales
    701,993       811,851       (109,858 )     (13.5 )
                                 
Gross profit
    356,680       341,784       14,896       4.4  
Selling, general and administrative expenses
    248,267       255,228       (6,961 )     (2.7 )
Restructuring
    15,104       28,355       (13,251 )     (46.7 )
                                 
Operating profit
    93,309       58,201       35,108       60.3  
Other expenses
    2,423             2,423       NM  
Interest expense, net
    42,941       37,253       5,688       15.3  
                                 
Income before income tax expense
    47,945       20,948       26,997       128.9  
Income tax expense
    6,807       5,028       1,779       35.4  
                                 
Net income
  $ 41,138     $ 15,920     $ 25,218       158.4 %
                                 
                                 
Net Sales
                               
                                 
                                 
    Quarter Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 1,058,673     $ 1,153,635     $  (94,962 )       (8.2 )%
 
Consolidated net sales were lower by $95 million or 8% in the third quarter of 2009 compared to the third quarter of 2008 which reflects the second consecutive quarter of improved sales declines compared to double-digit sales decline rates in the previous two consecutive quarters. Overall retail sales for apparel continued to decline quarter over quarter at most of our larger customers as the continuing recession constrained consumer spending. Our sales incentives were higher in the third quarter of 2009 compared to the third quarter of 2008 as we made significant investments, especially in back-to-school programs and promotions, in this recessionary environment to support retailers and position ourselves for future sales opportunities. Excluding the cost of these investments, our net sales would have declined by 6%. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
Innerwear, Outerwear, Hosiery and International segment net sales were lower by $65 million (10%), $19 million (5%), $6 million (12%) and $9 million (8%), respectively, in the third quarter of 2009 compared to the third quarter of 2008.
 
Innerwear segment net sales were lower (10%) in the third quarter of 2009 compared to the third quarter of 2008, primarily due to lower net sales of intimate apparel (16%), socks (15%), thermals (68%) and male underwear (1%) primarily due to weak sales at retail in this difficult economic environment.


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Outerwear segment net sales were lower (5%) in the third quarter of 2009 compared to the third quarter of 2008, primarily due to the lower casualwear net sales (31%) in the wholesale channel which has been highly price competitive especially in this recessionary environment. The lower net sales in the wholesale channel were partially offset by higher Champion brand activewear net sales (7%) and higher casualwear net sales (7%) in the retail channel.
 
Hosiery segment net sales were lower (12%) in the third quarter of 2009 compared to the third quarter of 2008. The third quarter decline rate was similar to the decline rate in our second quarter of 2009 and an improvement over the previous three consecutive quarters in each of which net sales declined by more than 20%. Hosiery products in all channels continue to be more adversely impacted than other apparel categories by reduced consumer discretionary spending.
 
International segment net sales were lower (8%) in the third quarter of 2009 compared to the third quarter of 2008, primarily attributable to an unfavorable impact of $7 million related to foreign currency exchange rates and weak demand globally primarily in Europe and Japan which are experiencing recessionary environments similar to that in the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 2% in the third quarter of 2009 compared to the third quarter of 2008.
 
Gross Profit
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 356,680     $ 341,784     $ 14,896       4.4 %
 
As a percent of net sales, our gross profit was 33.7% in the third quarter of 2009 compared to 29.6% in the third quarter of 2008, increasing as a result of the items described below. Our results in the third quarter of 2009 benefited from lower costs for cotton and oil-related materials and lower other manufacturing costs.
 
Our gross profit was higher by $15 million in the third quarter of 2009 compared to the third quarter of 2008. Gross profit was higher due to higher product pricing of $28 million before increased sales incentives, lower other manufacturing costs of $17 million, primarily related to cost reductions, partially offset by lower volume at our manufacturing facilities, lower cotton costs of $14 million, savings from our prior restructuring actions of $13 million, lower on-going excess and obsolete inventory costs of $7 million and lower production costs of $2 million related to lower energy and oil-related costs, including freight costs. Accelerated depreciation was lower by $4 million in the third quarter of 2009 compared to the third quarter of 2008.
 
The higher product pricing is due to the implementation of an average gross price increase of four percent in our domestic product categories in February 2009. The range of price increases varies by individual product category. The lower excess and obsolete inventory costs in the third quarter of 2009 are attributable to both our continuous evaluation of inventory levels and simplification of our product category offerings. We realized these benefits by driving down obsolete inventory levels through aggressive management and promotions.
 
The cotton prices reflected in our results were 49 cents per pound in the third quarter of 2009 as compared to 69 cents per pound in the third quarter of 2008. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008.
 
Our gross profit was negatively impacted by lower sales volume of $41 million, higher sales incentives of $23 million, an unfavorable product sales mix of $16 million, higher cost of finished goods sourced from third party manufacturers of $4 million primarily resulting from foreign exchange transaction losses and a $2 million unfavorable impact related to foreign currency exchange rates. Our sales incentives were higher as we made significant investments, especially in back-to-school programs and promotions, in this recessionary environment to support retailers and position ourselves for future sales opportunities. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar and Brazilian real partially offset by the


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strengthening of the Japanese yen compared to the U.S. dollar during the third quarter of 2009 compared to the third quarter of 2008.
 
We incurred lower one-time restructuring related write-offs of $14 million in the third quarter of 2009 compared to the third quarter of 2008 for stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate.
 
Selling, General and Administrative Expenses
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 248,267     $ 255,228     $ (6,961 )     (2.7 )%
 
Our selling, general and administrative expenses were $7 million lower in the third quarter of 2009 compared to the third quarter of 2008. Our continued focus on cost reductions resulted in lower expenses in the third quarter of 2009 compared to the third quarter of 2008 related to savings of $10 million from our prior restructuring actions for compensation and related benefits, lower bad debt expense of $7 million primarily due to a customer bankruptcy in the third quarter of 2008 and lower technology expenses of $2 million. In addition, our distribution expenses were lower by $4 million in the third quarter of 2009 compared to 2008, which was primarily attributable to lower sales volume that reduced our labor, postage and freight expenses and lower rework expenses in our distribution centers.
 
These lower expenses were partially offset by higher accelerated depreciation of $3 million due to a noncash credit impacting the third quarter of 2008 which did not reoccur in 2009, higher non-media related media, advertising and promotion (“MAP”) expenses of $2 million. In addition, we incurred higher other expenses of $2 million related to amending the terms of all outstanding stock options granted under the Hanesbrands Inc. Omnibus Incentive Plan of 2006 that had an original term of five or seven years to the tenth anniversary of the original grant date.
 
Our media related MAP expenses were flat in the third quarter of 2009 compared to the third quarter of 2008. MAP 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.
 
Our pension expense, which is noncash, was higher by $8 million in the third quarter of 2009 compared to the third quarter of 2008. The higher pension expense is primarily due to the lower funded status of our pension plans at the end of 2008, which resulted from a decline in the fair value of plan assets due to the stock market’s performance during 2008 and a higher discount rate at the end of 2008.
 
We also incurred higher expenses of $1 million in the third quarter of 2009 compared to the third quarter of 2008 as a result of opening retail stores. We opened two retail stores during the third quarter of 2009. Changes due to foreign currency exchange rates, which are included in the impact of the changes discussed above, resulted in lower selling, general and administrative expenses of $2 million in the third quarter of 2009 compared to the third quarter of 2008.
 
Restructuring
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Restructuring
  $ 15,104     $ 28,355     $ (13,251 )     (46.7 )%
 
During the third quarter of 2009, we announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers. We entered into an agreement with Parkdale America under which we agreed to sell or lease assets related to operations at our four yarn manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America operating three of the four facilities. We approved an action to close the fourth yarn manufacturing


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facility, as well as a yarn warehouse and a cotton warehouse, all located in the United States, which will result in the elimination of approximately 175 positions. We also entered into a yarn purchase agreement with Parkdale. Under this agreement, which has an initial term of six years, Parkdale will produce and sell to us a substantial amount of our Western Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce and sell to us a substantial amount of the yarn requirements of our Nanjing, China textile facility.
 
During the third quarter of 2009, we also approved an action to close a manufacturing facility in Puerto Rico which will result in the elimination of approximately 125 positions.
 
During the third quarter of 2009, we recorded charges related to employee termination and other benefits of $6 million recognized in accordance with benefit plans previously communicated to the affected employee group, fixed asset impairment charges of $5 million, charges related to contract obligations of $3 million and other exit costs of $1 million primarily related to moving equipment and inventory from closed facilities. These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the third quarter of 2008, we incurred $28 million in restructuring charges which primarily related to employee termination and other benefits and charges related to exiting supply contracts associated with plant closures approved during that period.
 
Operating Profit
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 93,309     $ 58,201     $ 35,108       60.3 %
 
Operating profit was higher in the third quarter of 2009 compared to the third quarter of 2008 as a result of higher gross profit of $15 million, lower restructuring and related charges of $13 million and lower selling, general and administrative expenses of $7 million.
 
Other Expenses
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Other expenses
  $  2,423     $     —     $  2,423       NM  
 
During the third quarter of 2009, we incurred a $2 million loss on early extinguishment of debt related to unamortized debt issuance costs resulting from the prepayment of $140 million of principal in September 2009.
 
Interest Expense, Net
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 42,941     $ 37,253     $  5,688       15.3 %
 
Interest expense, net was higher by $6 million in the third quarter of 2009 compared to the third quarter of 2008. The amendments of our Senior Secured Credit Facility and Accounts Receivable Securitization Facility in March 2009, which increased our interest-rate margin by 300 basis points and 325 basis points, respectively, increased interest expense in the third quarter of 2009 compared to the third quarter of 2008 by $10 million, which was partially offset by a lower London Interbank Offered Rate, or “LIBOR,” and lower


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outstanding debt balances that reduced interest expense by $4 million. Our weighted average interest rate on our outstanding debt was 6.94% during the third quarter of 2009 compared to 5.80% in the third quarter of 2008.
 
At October 3, 2009, we had outstanding interest rate hedging arrangements whereby we have capped the LIBOR interest rate component on $400 million of our floating rate debt at 3.50% and have fixed the LIBOR interest rate component on $1.4 billion of our floating rate debt at approximately 4.16%. Approximately 88% of our total debt outstanding at October 3, 2009 was at a fixed or capped LIBOR rate.
 
Income Tax Expense
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $  6,807     $  5,028     $  1,779        35.4 %
 
Our effective income tax rate was 14% in the third quarter of 2009 compared to 24% in the third quarter of 2008. The lower effective income tax rate is attributable primarily to a higher proportion of our earnings attributed to foreign subsidiaries which are taxed at rates lower than the U.S. statutory rate. Our effective tax rate reflects our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2009.
 
Net Income
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net income
  $ 41,138     $ 15,920     $ 25,218       158.4 %
 
Net income for the third quarter of 2009 was higher than the third quarter of 2008 primarily due to higher operating profit of $35 million partially offset by higher interest expense of $6 million, higher other expenses of $2 million and higher income tax expense of $2 million.


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Operating Results by Business Segment — Third Quarter Ended October 3, 2009 Compared with Third Quarter Ended September 27, 2008
 
                                 
    Quarter Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 585,327     $ 650,372     $ (65,045 )     (10.0 )%
Outerwear
    329,721       348,467       (18,746 )     (5.4 )
Hosiery
    43,944       50,197       (6,253 )     (12.5 )
International
    107,399       116,581       (9,182 )     (7.9 )
Other
    3,745       4,769       (1,024 )     (21.5 )
                                 
Total segment net sales
    1,070,136       1,170,386       (100,250 )     (8.6 )
Intersegment
    (11,463 )     (16,751 )     (5,288 )     (31.6 )
                                 
Total net sales
  $ 1,058,673     $ 1,153,635     $ (94,962 )     (8.2 )%
Segment operating profit (loss):
                               
Innerwear
  $ 69,325     $ 71,097     $ (1,772 )     (2.5 )%
Outerwear
    35,369       19,243       16,126       83.8  
Hosiery
    13,834       13,081       753       5.8  
International
    9,217       14,010       (4,793 )     (34.2 )
Other
    (1,712 )     314       (2,026 )     (645.2 )
                                 
Total segment operating profit:
    126,033       117,745       8,288       7.0  
Items not included in segment operating profit:
                               
General corporate expenses
    (13,938 )     (12,593 )     1,345       10.7  
Amortization of trademarks and other
                               
intangibles
    (3,112 )     (3,045 )     67       2.2  
Restructuring
    (15,104 )     (28,355 )     (13,251 )     (46.7 )
Inventory write-off included in cost of sales
    (269 )     (14,027 )     (13,758 )     (98.1 )
Accelerated depreciation included in cost of sales
    (118 )     (4,011 )     (3,893 )     (97.1 )
Accelerated depreciation included in selling,
                               
general and administrative expenses
    (183 )     2,487       2,670       107.4  
                                 
Total operating profit
    93,309       58,201       35,108       60.3  
Other expenses
    (2,423 )           2,423       NM  
Interest expense, net
    (42,941 )     (37,253 )     5,688       15.3  
                                 
Income before income tax expense
  $ 47,945     $ 20,948     $ 26,997       128.9 %
                                 
                                 
Innerwear
                               
    Quarter Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $   585,327     $   650,372     $  (65,045 )      (10.0 )%
Segment operating profit
    69,325       71,097       (1,772 )     (2.5 )
 
Overall net sales in the Innerwear segment were lower by $65 million or 10% in the third quarter of 2009 compared to the third quarter of 2008 as we continued to be negatively impacted by weak consumer demand related to the recessionary environment. Total intimate apparel net sales were $40 million lower in the third


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quarter of 2009 compared to the third quarter of 2008 and represents 62% of the total segment net sales decline. We believe the lower net sales in our Hanes brand of $13 million, our smaller brands (barely there, Just My Size and Wonderbra) of $13 million, our Playtex brand of $11 million and our Bali brand of $2 million were primarily attributable to weaker sales at retail as a result of the recessionary environment.
 
Net sales in our male underwear product category declined $3 million in the third quarter of 2009 compared to the third quarter of 2008. Lower net sales in our socks product category reflect a decline in Hanes brand net sales of $7 million and Champion brand net sales of $5 million in the third quarter of 2009 compared to the third quarter of 2008. Net sales in our thermals business were lower by $6 million in the third quarter of 2009 compared to the third quarter of 2008. Net sales in our direct-to-consumer retail business were slightly higher due to the addition of recently opened retail stores. Net sales were also impacted by a shift of approximately $5 million in our back-to-school shipments from July to June in 2009 as compared to 2008.
 
The Innerwear segment gross profit was lower by $5 million in the third quarter of 2009 compared to the third quarter of 2008. The lower gross profit was due to lower sales volume of $34 million, higher sales incentives of $11 million due to investments made with retailers and an unfavorable product sales mix of $6 million. Higher costs were partially offset by higher product pricing of $24 million before increased sales incentives, lower other manufacturing costs of $8 million primarily related to cost reductions at our manufacturing facilities, savings from our prior restructuring actions of $6 million, lower cotton costs of $5 million and lower on-going excess and obsolete inventory costs of $3 million.
 
As a percent of segment net sales, gross profit in the Innerwear segment was 37.5% in the third quarter of 2009 compared to 34.4% in the third quarter of 2008, increasing as a result of the items described above.
 
The lower Innerwear segment operating profit in the third quarter of 2009 compared to the third quarter of 2008 was primarily attributable to lower gross profit, higher pension expense of $5 million, higher other non-media related MAP expenses of $3 million and higher expenses of $1 million as a result of opening retail stores, partially offset by savings of $6 million from prior restructuring actions primarily for compensation and related benefits, lower bad debt expense of $4 million primarily due to a customer bankruptcy in the third quarter of 2008 and lower distribution expenses of $3 million.
 
A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2009 is consistent with the third quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $7 million lower in the third quarter of 2009 compared to the third quarter of 2008.
 
Outerwear
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 329,721     $ 348,467     $ (18,746 )     (5.4 )%
Segment operating profit
    35,369       19,243       16,126       83.8  
 
Net sales in the Outerwear segment were lower by $19 million or 5% in the third quarter of 2009 compared to the third quarter of 2008, primarily as a result of lower casualwear net sales of $32 million in our wholesale channel which has been highly price competitive especially in this recessionary environment. These lower net sales were partially offset by higher net sales of our Champion brand activewear of $8 million and higher casualwear net sales in our retail channel of $8 million. Our Champion brand sales continue to benefit from our marketing investment in the brand. The higher casualwear net sales in our retail channel were primarily attributed to additional sales in the third quarter of 2009 resulting from an exclusive long-term agreement entered into with Wal-Mart in April 2009 that significantly expanded the presence of our Just My Size brand in all Wal-Mart stores.


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The Outerwear segment gross profit was higher by $12 million in the third quarter of 2009 compared to the third quarter of 2008. The higher gross profit was due to lower cotton costs of $9 million, lower other manufacturing costs of $8 million primarily related to cost reductions at our manufacturing facilities, savings of $7 million from our prior restructuring actions and lower on-going excess and obsolete inventory costs of $5 million. Lower costs were partially offset by higher sales incentives of $8 million due to investments made with retailers, unfavorable product sales mix of $7 million and lower sales volume of $4 million.
 
As a percent of segment net sales, gross profit in the Outerwear segment was 25.9% in the third quarter of 2009 compared to 21.1% in the third quarter of 2008, increasing as a result of the items described above.
 
The higher Outerwear segment operating profit in the third quarter of 2009 compared to the third quarter of 2008 was primarily attributable to higher gross profit, savings of $3 million from our prior restructuring actions and lower bad debt expense of $2 million primarily due to a customer bankruptcy in the third quarter of 2008. Lower expenses were partially offset by higher pension expense of $2 million.
 
A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2009 is consistent with the third quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $7 million lower in the third quarter of 2009 compared to the third quarter of 2008.
 
Hosiery
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 43,944     $ 50,197     $ (6,253 )      (12.5 )%
Segment operating profit
    13,834       13,081       753       5.8  
 
Net sales in the Hosiery segment declined by $6 million or 12%, which was primarily due to lower sales of our L’eggs brand to mass retailers and food and drug stores and our Hanes brand to national chains and department stores. The third quarter decline rate was similar to the decline rate in our second quarter of 2009 and an improvement over the previous three consecutive quarters in each of which net sales declined by more than 20%. Hosiery products continue to be more adversely impacted than other apparel categories by reduced consumer discretionary spending, which contributes to weaker retail sales and lowering of inventory levels by retailers. We expect the trend of declining hosiery sales to continue consistent with the overall decline in the industry and with shifts in consumer preferences. Generally, we manage the Hosiery segment for cash, placing an emphasis on reducing our cost structure and managing cash efficiently.
 
The Hosiery segment gross profit was lower by $1 million in the third quarter of 2009 compared to the third quarter of 2008. The lower gross profit for the third quarter of 2009 compared to the third quarter of 2008 was the result of lower sales volume of $3 million and higher sales incentives of $2 million due to investments made with retailers but partially offset by lower other manufacturing costs of $2 million and higher product pricing of $2 million.
 
As a percent of segment net sales, gross profit in the Hosiery segment was 45.8% in the third quarter of 2009 compared to 42.4% in the third quarter of 2008, increasing as a result of the items described above.
 
The higher Hosiery segment operating profit in the third quarter of 2009 compared to the third quarter of 2008 is primarily attributable to lower distribution expenses of $1 million and savings of $1 million from our prior restructuring actions, partially offset by lower gross profit.
 
A significant portion of the selling, general and administrative expenses in each segment is an allocation of our consolidated selling, general and administrative expenses, however certain expenses that are specifically identifiable to a segment are charged directly to such segment. The allocation methodology for the consolidated selling, general and administrative expenses for the third quarter of 2009 is consistent with the


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third quarter of 2008. Our consolidated selling, general and administrative expenses before segment allocations was $7 million lower in the third quarter of 2009 compared to the third quarter of 2008.
 
International
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 107,399     $  116,581     $ (9,182 )     (7.9 )%
Segment operating profit
    9,217       14,010       (4,793 )     (34.2 )
 
Overall net sales in the International segment were lower by $9 million or 8% in the third quarter of 2009 compared to the third quarter of 2008 primarily attributable to an unfavorable impact of $7 million related to foreign currency exchange rates and weak demand globally primarily in Europe and Japan which are experiencing recessionary environments similar to that in the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 2% in the third quarter of 2009 compared to the third quarter of 2008. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar and Brazilian real partially offset by the strengthening of the Japanese yen compared to the U.S. dollar during the third quarter of 2009 compared to the third quarter of 2008. During the third quarter of 2009, we experienced lower net sales, in each case excluding the impact of foreign currency exchange rates, in our casualwear business in Europe of $7 million and in our male underwear and activewear businesses in Japan of $3 million, partially offset by higher net sales in our intimate apparel business in Mexico of $3 million and in our intimate apparel and male underwear businesses in Canada of $2 million.
 
The International segment gross profit was lower by $8 million in the third quarter of 2009 compared to the third quarter of 2008. The lower gross profit was a result of higher cost of finished goods sourced from third party manufacturers of $4 million primarily resulting from foreign exchange transaction losses, higher sales incentives of $2 million, an unfavorable impact related to foreign currency exchange rates of $2 million, an unfavorable product sales mix of $2 million and lower sales volume of $1 million. Higher costs were partially offset by higher product pricing of $3 million.
 
As a percent of segment net sales, gross profit in the International segment was 36.1% in the third quarter of 2009 compared to the third quarter of 2008 at 40.1%, declining as a result of the items described above.
 
The lower International segment operating profit in the third quarter of 2009 compared to the third quarter of 2008 is primarily attributable to the lower gross profit, partially offset by lower media related MAP expenses of $2 million. The changes in foreign currency exchange rates, which are included in the impact on gross profit above, had a similar impact on segment operating profit in the third quarter of 2009 and the third quarter of 2008.
 
Other
 
                                 
    Quarter Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net sales
  $ 3,745     $  4,769     $ (1,024 )     (21.5 )%
Segment operating profit (loss)
    (1,712 )     314       (2,026 )     (645.2 )
 
Sales in our Other segment primarily consist of sales of yarn to third parties which are intended to maintain asset utilization at certain manufacturing facilities and generate approximate break even margins. We expect sales of our Other segment to continue to be insignificant to us as we complete the implementation of our consolidation and globalization efforts. In September 2009, we announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers, which is expected to further reduce net sales of our Other segment.


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General Corporate Expenses
 
General corporate expenses were higher in the third quarter of 2009 compared to the third quarter of 2008 primarily due to higher other expenses of $2 million related to amending the terms of all outstanding stock options granted under the Hanesbrands Inc. Omnibus Incentive Plan of 2006 that had an original term of five or seven years to the tenth anniversary of the original grant date.
 
Condensed Consolidated Results of Operations — Nine Months Ended October 3, 2009 Compared with Nine Months Ended September 27, 2008
 
                                 
    Nine Months Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 2,902,536     $ 3,213,653     $ (311,117 )     (9.7 )%
Cost of sales
    1,960,589       2,145,949       (185,360 )     (8.6 )
                                 
Gross profit
    941,947       1,067,704       (125,757 )     (11.8 )
Selling, general and administrative expenses
    702,204       776,267       (74,063 )     (9.5 )
Restructuring
    46,319       32,355       13,964       43.2  
                                 
Operating profit
    193,424       259,082       (65,658 )     (25.3 )
Other expenses
    6,537             6,537       NM  
Interest expense, net
    124,548       115,282       9,266       8.0  
                                 
Income before income tax expense
    62,339       143,800       (81,461 )     (56.6 )
Income tax expense
    9,974       34,512       (24,538 )     (71.1 )
                                 
Net income
  $ 52,365     $ 109,288     $ (56,923 )     (52.1 )%
                                 
                                 
Net Sales
                               
    Nine Months Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales
  $ 2,902,536     $ 3,213,653     $ (311,117 )     (9.7 )%
 
Consolidated net sales were lower by $311 million or 10% in the nine months of 2009 compared to 2008. The net sales decline in the nine months of 2009 was primarily attributed to the recessionary environment that continued into the first nine months of 2009. Overall retail sales for apparel continued to decline during 2009 at most of our larger customers as the continuing recession constrained consumer spending. Our sales incentives were higher in the nine months of 2009 compared to 2008 as we made significant investments, especially in back-to-school programs and promotions, in this recessionary environment to support retailers and position ourselves for future sales opportunities. Excluding the cost of these investments, our net sales would have declined by 9%.
 
Innerwear, Outerwear, Hosiery and International segment net sales were lower by $120 million (7%), $105 million (12%), $27 million (16%) and $57 million (16%), respectively, in the nine months of 2009 compared to 2008. Our Other segment net sales were lower, as expected, by $8 million in the nine months of 2009 compared to 2008.
 
Innerwear segment net sales were lower (7%) in the nine months of 2009 compared to 2008, primarily due to lower net sales of intimate apparel (13%) and socks (12%) primarily due to weak sales at retail in this difficult economic environment, partially offset by stronger net sales (2%) in our male underwear product category.
 
Outerwear segment net sales were lower (12%) in the nine months of 2009 compared to 2008, primarily due to the lower casualwear net sales in both the retail (27%) and wholesale (21%) channels. The wholesale


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channel has been highly price competitive especially in this recessionary environment. The lower casualwear net sales in the retail and wholesale channels were partially offset by higher net sales (8%) of our Champion brand activewear. The results for the first half of 2009 were negatively impacted by losses of seasonal programs in the retail casualwear channel that are not impacting our results in the second half of 2009.
 
Hosiery segment net sales were lower (16%) in the nine months of 2009 compared to 2008. The net sales decline rate over the most recent two consecutive quarters has improved compared to the net sales decline rate for the second half of 2008 and the first quarter of 2009 in each of which net sales declined by more than 20%. Hosiery products in all channels continue to be more adversely impacted than other apparel categories by reduced consumer discretionary spending.
 
International segment net sales were lower (16%) in the nine months of 2009 compared to 2008, primarily attributable to an unfavorable impact of $31 million related to foreign currency exchange rates and weak demand globally primarily in Europe, Japan and Canada which are experiencing recessionary environments similar to that in the United States. Excluding the impact of foreign exchange rates on currency, International segment net sales declined by 8% in the nine months of 2009 compared to 2008.
 
Gross Profit
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Gross profit
  $ 941,947     $ 1,067,704     $ (125,757 )     (11.8 )%
 
Our gross profit was lower by $126 million in the nine months of 2009 compared to 2008. As a percent of net sales, our gross profit was 32.5% in the nine months of 2009 compared to 33.2% in 2008, declining as a result of the items described below.
 
Gross profit was lower due to lower sales volume of $139 million, unfavorable product sales mix of $53 million and higher sales incentives of $31 million. Our sales incentives were higher as we made significant investments, especially in back-to-school programs and promotions, in this recessionary environment to support retailers and position ourselves for future sales opportunities. Other factors contributing to lower gross profit were higher production costs of $21 million related to higher energy and oil-related costs, including freight costs, higher other manufacturing costs of $16 million primarily related to lower volume partially offset by cost reductions at our manufacturing facilities, other vendor price increases of $13 million, higher cost of finished goods sourced from third party manufacturers of $12 million primarily resulting from foreign exchange transaction losses, an $11 million unfavorable impact related to foreign currency exchange rates and $3 million of higher start-up and shutdown costs associated with the consolidation and globalization of our supply chain. The unfavorable impact of foreign currency exchange rates in our International segment was primarily due to the strengthening of the U.S. dollar compared to the Mexican peso, Canadian dollar, Brazilian real and Euro partially offset by the strengthening of the Japanese yen compared to the U.S. dollar during the nine months of 2009 compared to 2008.
 
Our gross profit was positively impacted by higher product pricing of $91 million before increased sales incentives, savings from our prior restructuring actions of $38 million, lower on-going excess and obsolete inventory costs of $18 million and lower cotton costs of $8 million. The higher product pricing was due to the implementation of an average gross price increase of four percent in our domestic product categories in February 2009. The range of price increases varies by individual product category. The lower excess and obsolete inventory costs in the first nine months of 2009 are attributable to both our continuous evaluation of inventory levels and simplification of our product category offerings. We realized these benefits by driving down obsolete inventory levels through aggressive management and promotions.
 
The cotton prices reflected in our results were 58 cents per pound in the nine months of 2009 as compared to 62 cents per pound in 2008. After taking into consideration the cotton costs currently included in inventory, we expect our cost of cotton to average 55 cents per pound for the full year of 2009 compared to 65 cents per pound for 2008. Energy and oil-related costs were higher due to a spike in oil-related commodity


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prices during the summer of 2008. Our results in the nine months of 2009 were impacted by higher costs for cotton and oil-related materials, however we started to benefit in the second quarter of 2009 from lower cotton costs and in the third quarter of 2009 from lower oil-related material costs and other manufacturing costs.
 
We incurred lower one-time restructuring related write-offs of $11 million in the nine months of 2009 compared to 2008 for stranded raw materials and work in process inventory determined not to be salvageable or cost-effective to relocate. Accelerated depreciation was lower by $9 million in the nine months of 2009 compared to 2008.
 
Selling, General and Administrative Expenses
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Selling, general and administrative expenses
  $ 702,204     $ 776,267     $ (74,063 )     (9.5 )%
 
Our selling, general and administrative expenses were $74 million lower in the nine months of 2009 compared to 2008. Our continued focus on cost reductions resulted in lower expenses in the nine months of 2009 compared to 2008 related to savings of $24 million from our prior restructuring actions for compensation and related benefits, lower technology expenses of $21 million, lower bad debt expense of $7 million primarily due to a customer bankruptcy in 2008, lower selling and other marketing related expenses of $5 million, lower consulting related expenses of $3 million and lower non-media related MAP expenses of $1 million. In addition, our distribution expenses were lower by $12 million in the nine months of 2009 compared to 2008, which was primarily attributable to lower sales volume that reduced our labor, postage and freight expenses and lower rework expenses in our distribution centers.
 
Our media related MAP expenses were $34 million lower in the nine months of 2009 compared to 2008 as we chose to reduce our spending. MAP 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.
 
Our pension and stock compensation expenses, which are noncash, were higher by $24 million and $5 million, respectively, in the nine months of 2009 compared to 2008. The higher pension expense is primarily due to the lower funded status of our pension plans at the end of 2008, which resulted from a decline in the fair value of plan assets due to the stock market’s performance during 2008 and a higher discount rate at the end of 2008.
 
We also incurred higher expenses of $4 million in the nine months of 2009 compared to 2008 as a result of opening retail stores. We opened 17 retail stores during the nine months of 2009. In addition, we incurred higher other expenses of $2 million related to amending the terms of all outstanding stock options granted under the Hanesbrands Inc. Omnibus Incentive Plan of 2006 that had an original term of five or seven years to the tenth anniversary of the original grant date. Changes due to foreign currency exchange rates, which are included in the impact of the changes discussed above, resulted in lower selling, general and administrative expenses of $9 million in the nine months of 2009 compared to 2008.
 
Restructuring
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
        (dollars in thousands)    
 
Restructuring
  $ 46,319     $ 32,355     $  13,964       43.2 %
 
During the nine months of 2009, we announced that we will cease making our own yarn and that we will source all of our yarn requirements from large-scale yarn suppliers. We entered into an agreement with Parkdale America under which we agreed to sell or lease assets related to operations at our four yarn manufacturing facilities to Parkdale America. The transaction closed in October 2009 and resulted in Parkdale America operating three of the four facilities. We approved an action to close the fourth yarn manufacturing facility, as well as a yarn warehouse and a cotton warehouse, all located in the United States, which will result in the


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elimination of approximately 175 positions. We also entered into a yarn purchase agreement with Parkdale. Under this agreement, which has an initial term of six years, Parkdale will produce and sell to us a substantial amount of our Western Hemisphere yarn requirements. During the first two years of the term, Parkdale will also produce and sell to us a substantial amount of the yarn requirements of our Nanjing, China textile facility.
 
In addition to the actions discussed above, during the nine months of 2009 we approved actions to close four manufacturing facilities and two distribution centers in the Dominican Republic, the United States, Honduras, Puerto Rico and Canada which will result in the elimination of an aggregate of approximately 2,925 positions in those countries and El Salvador. The production capacity represented by the manufacturing facilities will be relocated to lower cost locations in Asia, Central America and the Caribbean Basin. The distribution capacity has been relocated to our West Coast distribution facility in California in order to expand capacity for goods we source from Asia. In addition, approximately 300 management and administrative positions were eliminated, with the majority of these positions based in the United States.
 
During the nine months of 2009, we recorded charges related to employee termination and other benefits of $21 million recognized in accordance with benefit plans previously communicated to the affected employee group, charges related to contract obligations of $12 million, other exit costs of $7 million related to moving equipment and inventory from closed facilities and fixed asset impairment charges of $6 million.
 
In the nine months of 2009, we recorded one-time write-offs of $4 million of stranded raw materials and work in process inventory related to the closure of manufacturing facilities and recorded in the “Cost of sales” line. The raw materials and work in process inventory was determined not to be salvageable or cost-effective to relocate. In addition, in connection with our consolidation and globalization strategy, we recognized noncash charges of $2 million and $11 million in nine months of 2009 and the nine months of 2008, respectively, in the “Cost of sales” line and a noncash charge of $1 million and a noncash credit of $1 million in the “Selling, general and administrative expenses” line in the nine months of 2009 and nine months of 2008, respectively, related to accelerated depreciation of buildings and equipment for facilities that have been closed or will be closed.
 
These actions, which are a continuation of our consolidation and globalization strategy, are expected to result in benefits of moving production to lower-cost manufacturing facilities, leveraging our large scale in high-volume products and consolidating production capacity.
 
During the nine months of 2008, we incurred $32 million in restructuring charges which primarily related to employee termination and other benefits and charges related to exiting supply contracts associated with plant closures approved during that period.
 
Operating Profit
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Operating profit
  $ 193,424     $ 259,082     $ (65,658 )     (25.3 )%
 
Operating profit was lower in the nine months of 2009 compared to 2008 as a result of lower gross profit of $126 million and higher restructuring and related charges of $14 million, partially offset by lower selling, general and administrative expenses of $74 million. Changes in foreign currency exchange rates had an unfavorable impact on operating profit of $2 million in the nine months of 2009 compared to 2008.
 
Other Expenses
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)    
 
Other expenses
  $   6,537     $       —     $   6,537       NM  


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During the nine months of 2009, we incurred costs of $4 million to amend the Senior Secured Credit Facility and the Accounts Receivable Securitization Facility. In March 2009, we amended these credit facilities to provide for additional cushion in our financial covenant requirements. These amendments delay the most restrictive debt-leverage ratio requirements from the fourth quarter of 2009 to the third quarter of 2011. In April 2009, we amended the Accounts Receivable Securitization Facility to generally increase over time the amount of funding that will be available under the facility as compared to the amount that would be available pursuant to the amendment to that facility that we entered into in March 2009. In addition, during the nine months of 2009 we incurred a $2 million loss on early extinguishment of debt related to unamortized debt issuance costs resulting from the prepayment of $140 million of principal in September 2009.
 
Interest Expense, Net
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Interest expense, net
  $ 124,548     $ 115,282     $   9,266         8.0 %
 
Interest expense, net was higher by $9 million in the nine months of 2009 compared to 2008. The amendments of our Senior Secured Credit Facility and Accounts Receivable Securitization Facility, which increased our interest-rate margin by 300 basis points and 325 basis points, respectively, increased interest expense in the nine months of 2009 compared to 2008 by $24 million, which was partially offset by a lower LIBOR and lower outstanding debt balances that reduced interest expense by $15 million. Our weighted average interest rate on our outstanding debt was 6.84% during the nine months of 2009 compared to 6.17% in 2008.
 
At October 3, 2009, we had outstanding interest rate hedging arrangements whereby we have capped the LIBOR interest rate component on $400 million of our floating rate debt at 3.50% and have fixed the LIBOR interest rate component on $1.4 billion of our floating rate debt at approximately 4.16%. Approximately 88% of our total debt outstanding at October 3, 2009 was at a fixed or capped LIBOR rate.
 
Income Tax Expense
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Income tax expense
  $   9,974     $  34,512     $ (24,538 )     (71.1 )%
 
Our estimated annual effective income tax rate was 16% in the nine months of 2009 compared to 24% in 2008. The lower effective income tax rate is attributable primarily to a higher proportion of our earnings attributed to foreign subsidiaries which are taxed at rates lower than the U.S. statutory rate. Our estimated annual effective tax rate reflects our strategic initiative to make substantial capital investments outside the United States in our global supply chain in 2009.
 
Net Income
 
                                 
    Nine Months Ended        
    October 3,
  September 27,
  Higher
  Percent
    2009   2008   (Lower)   Change
    (dollars in thousands)
 
Net income
  $  52,365     $ 109,288     $ (56,923 )     (52.1 )%
 
Net income for the nine months of 2009 was lower than 2008 primarily due to lower operating profit of $66 million, higher interest expense of $9 million and higher other expenses of $7 million, partially offset by lower income tax expense of $25 million.


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Table of Contents

Operating Results by Business Segment — Nine Months Ended October 3, 2009 Compared with Nine Months Ended September 27, 2008
 
                                 
    Nine Months Ended              
    October 3,
    September 27,
    Higher
    Percent
 
    2009     2008     (Lower)     Change  
    (dollars in thousands)  
 
Net sales:
                               
Innerwear
  $ 1,710,920     $ 1,830,437     $ (119,517 )     (6.5 )%
Outerwear
    776,282       880,809       (104,527 )     (11.9 )
Hosiery
    139,300       166,672       (27,372 )     (16.4 )
International
    294,674       352,120       (57,446 )     (16.3 )
Other
    12,022       20,064       (8,042 )     (40.1 )
                                 
Total segment net sales
    2,933,198       3,250,102       (316,904 )     (9.8 )
Intersegment
    (30,662 )     (36,449 )     (5,787 )     (15.9 )
                                 
Total net sales
  $ 2,902,536     $ 3,213,653     $ (311,117 )     (9.7 )%
Segment operating profit (loss):
                               
Innerwear
  $ 210,443   &nbs