Maidenform Brands, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - Maidenform Brands, Inc.	v193289_ex31-1.htm
EX-31.2 - Maidenform Brands, Inc.	v193289_ex31-2.htm
EX-32.1 - Maidenform Brands, Inc.	v193289_ex32-1.htm
EX-32.2 - Maidenform Brands, Inc.	v193289_ex32-2.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended July 3, 2010

		OR

¨		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

		For the transition period from ________________ to ________________

Commission file number: 001-32568

MAIDENFORM BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware		06-1724014
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

485F US Hwy 1 South, Iselin, NJ		08830
(Address of principal executive offices)		(Zip Code)

(732) 621-2500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer x	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if smaller
		reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class		Outstanding at August 6, 2010
Common Stock, $0.01 par value per share		23,080,004 shares

INDEX

	PAGE
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)	2

Condensed Consolidated Balance Sheets at July 3, 2010 and January 2, 2010	2

Condensed Consolidated Statements of Income for the Three and Six Months Ended July 3, 2010 and July 4, 2009	3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 3, 2010 and July 4, 2009	4

Notes to the Condensed Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3. Quantitative and Qualitative Disclosures About Market Risk	21

Item 4. Controls and Procedures	21

PART II - OTHER INFORMATION

Item1. Legal Proceedings	22

Item1A. Risk Factors	22

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 3. Defaults Upon Senior Securities	22

Item 4. (Removed and Reserved)	22

Item 5. Other Information	22

Item 6. Exhibits	22

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

	July 3,			January 2,
	2010			2010
Assets
Current assets
Cash and cash equivalents	$	50,377		$	89,159
Accounts receivable, net		59,522			42,951
Inventories		86,894			77,605
Deferred income taxes		14,790			14,790
Prepaid expenses and other current assets		9,486			7,878
Total current assets		221,069			232,383
Property, plant and equipment, net		23,488			22,228
Goodwill		7,162			7,162
Intangible assets, net		94,203			96,198
Other non-current assets		652			771
Total assets	$	346,574		$	358,742

Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt	$	1,100		$	1,100
Accounts payable		46,782			43,473
Accrued expenses and other current liabilities		29,035			28,366
Total current liabilities		76,917			72,939
Long-term debt		69,600			86,150
Deferred income taxes		24,033			22,934
Other non-current liabilities		9,938			9,888
Total liabilities		180,488			191,911

Commitments and contingencies (Note 10)

Stockholders’ equity
Preferred stock - $0.01 par value; 10,000,000 shares authorized and none issued and outstanding		-			-
Common stock - $0.01 par value; 100,000,000 shares authorized; 24,399,746 shares issued and 22,451,128 outstanding at July 3, 2010 and 23,981,108 shares issued and 23,341,444 outstanding at January 2, 2010		244			240
Additional paid-in capital		72,312			66,574
Retained earnings		134,109			112,419
Accumulated other comprehensive loss		(4,385	)		(3,385	)
Treasury stock, at cost (1,948,618 shares at July 3, 2010 and 639,664 shares at January 2, 2010)		(36,194	)		(9,017	)
Total stockholders’ equity		166,086			166,831
Total liabilities and stockholders’ equity	$	346,574		$	358,742

The accompanying notes are an integral part of these condensed consolidated financial statements.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended				Six Months Ended
	July 3,		July 4,		July 3,		July 4,
	2010		2009		2010		2009

Net sales	$	149,401	$	114,205	$	292,323	$	228,438
Cost of sales		95,355		73,084		186,334		150,795
Gross profit		54,046		41,121		105,989		77,643
Selling, general and administrative expenses		31,195		27,965		62,416		53,933
Operating income		22,851		13,156		43,573		23,710

Interest expense, net		262		632		555		1,300
Income before provision for income taxes		22,589		12,524		43,018		22,410
Income tax expense		8,930		5,246		17,251		9,139
Net income	$	13,659	$	7,278	$	25,767	$	13,271
Basic earnings per common share	$	0.61	$	0.32	$	1.13	$	0.59
Diluted earnings per common share	$	0.59	$	0.31	$	1.10	$	0.57
Basic weighted average number of shares outstanding		22,375,964		22,563,665		22,781,343		22,530,148
Diluted weighted average number of shares outstanding		23,032,878		23,567,315		23,501,688		23,477,929

The accompanying notes are an integral part of these condensed consolidated financial statements.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	July 3,			July 4,
	2010			2009
Cash flows from operating activities
Net income	$	25,767		$	13,271
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		1,622			1,822
Amortization of intangible assets		563			580
Amortization of deferred financing costs		92			92
Stock-based compensation		1,417			1,113
Deferred income taxes		1,216			875
Excess tax benefits related to stock-based compensation		(4,767	)		(377	)
Bad debt expense		45			400
Other non-cash items		1,483			-
Net changes in operating assets and liabilities
Accounts receivable		(17,297	)		(15,961	)
Inventories		(9,645	)		(906	)
Prepaid expenses and other current and non-current assets		(1,243	)		491
Accounts payable		3,344			(2,438	)
Accrued expenses and other current and non-current liabilities		2,489			3,570
Income taxes payable		2,011			1,825
Net cash provided by operating activities		7,097			4,357
Cash flows from investing activities
Capital expenditures		(2,882	)		(1,449	)
Net cash used in investing activities		(2,882	)		(1,449	)
Cash flows from financing activities
Term loan repayments		(16,550	)		(550	)
Proceeds from stock options exercised		1,930			442
Excess tax benefits related to stock-based compensation		4,767			377
Payments of employee withholding taxes related to equity awards		(692	)		(68	)
Purchase of common stock for treasury		(32,352	)		-
Payments of capital lease obligations		(45	)		(100	)
Net cash (used in) provided by financing activities		(42,942	)		101
Effects of exchange rate changes on cash		(55	)		(9	)
Net (decrease) increase in cash		(38,782	)		3,000
Cash and cash equivalents
Beginning of period		89,159			43,463
End of period	$	50,377		$	46,463

Supplementary disclosure of cash flow information
Cash paid during the period
Interest	$	469		$	1,568
Income taxes	$	14,010		$	5,950

Supplemental schedule of non-cash investing and financing activities
Treasury stock issued related to equity award activity	$	5,863		$	2,230

The accompanying notes are an integral part of these condensed consolidated financial statements.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share amounts)

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Maidenform Brands, Inc. and its subsidiaries (the “Company,” “we,” “us” or “our”) design, source and market an extensive range of intimate apparel products, including bras, panties and shapewear. We sell through multiple distribution channels, including department stores and national chain stores, mass merchants (including warehouse clubs), and other (including specialty retailers, off-price retailers, foreign distributors and licensees). In addition, we operated 74 retail outlet stores and 1 shapewear kiosk as of July 3, 2010 and 75 retail outlet stores as of July 4, 2009, and sell products on our websites.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to state fairly our financial position at July 3, 2010, the results of our operations for the three and six-month periods ended July 3, 2010 and July 4, 2009, and cash flows for the six months ended July 3, 2010 and July 4, 2009. These adjustments consist of normal recurring adjustments. Operating results for the three and six-month periods ended July 3, 2010 are not necessarily indicative of the results that may be expected for any other future interim period or for a full fiscal year. The condensed consolidated balance sheet at January 2, 2010 has been derived from our audited consolidated financial statements at that date, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

These condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The financial statements included herein should be read in conjunction with our Annual Report on Form 10-K for the year ended January 2, 2010.

We consider all highly liquid investments that have original maturities of three months or less to be cash equivalents. Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected at fair value because of the short-term maturity of these instruments. The carrying amount of long-term debt at July 3, 2010 and January 2, 2010 approximates fair value as a result of the variable interest rates being accrued and paid on the majority of our debt.

2. DEBT

	July 3,		January 2,
	2010		2010
Long-term debt
Term loan facility	$	70,700	$	87,250
Current maturities of long-term debt		1,100		1,100
Non-current portion of long-term debt	$	69,600	$	86,150

At July 3, 2010, we had $70,700 outstanding under our term loan, and $0 outstanding under our revolving loan with approximately $49,175 available for borrowings, after giving effect to $825 of outstanding letters of credit. We use the letters of credit as collateral for our workers’ compensation insurance programs and bonds issued on our behalf to secure our obligation to pay customs duties. Principal payments on the term loan are payable in quarterly installments of $275 with all remaining amounts due on the maturity date. We are permitted to voluntarily prepay all or part of the principal balance of the term loan with such prepayments applied to scheduled principal payments in inverse order of their maturity. In addition, subject to specified exceptions and limitations and reinvesting options, partial prepayments of outstanding loans may be required with the proceeds of asset sales, sales of equity and debt securities, and with certain insurance and condemnation proceeds.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share amounts)

(unaudited)

Payments due on long-term debt during each of the five years subsequent to July 3, 2010, are as follows:

Balance of fiscal 2010	$	550
In fiscal 2011		1,100
In fiscal 2012		1,100
In fiscal 2013		1,100
In fiscal 2014		66,850
Thereafter		-

3. BENEFIT PLANS AND POSTRETIREMENT PLANS

We sponsor a defined benefit pension plan covering substantially all eligible employees not covered by union plans. We also maintain post-retirement medical benefit plans for certain eligible retirees for which post-retirement benefit expense on a quarterly basis has been insignificant. The defined benefit pension plan was frozen for current participants and closed to new entrants since January 1, 2007.

The components of net periodic benefit cost charged to operations are as follows:

	Three Months Ended						Six Months Ended
	July 3,			July 4,			July 3,			July 4,
	2010			2009			2010			2009

Interest cost	$	291		$	280		$	582		$	560
Expected return on plan assets		(345	)		(286	)		(690	)		(572	)
Amortization of net loss		43			68			86			136
Total	$	(11	)	$	62		$	(22	)	$	124

4. STOCKHOLDERS’ EQUITY

																Accumulated
	Common				Treasury						Additional					Other			Total
	Stock				Stock						Paid-in		Retained			Comprehensive			Stockholders'
	Shares		$		Shares			$			Capital		Earnings			Loss			Equity

Balance at January 2, 2010		23,981,108	$	240		(639,664	)	$	(9,017	)	$	66,574	$	112,419		$	(3,385	)	$	166,831

Stock-based compensation												1,417								1,417
Purchase of common stock for treasury						(1,593,675	)		(32,352	)										(32,352	)
Equity award activity		418,638		4		284,721			5,175			4,321		(4,077	)					5,423
Comprehensive income
Net income														25,767						25,767
Changes during the period																	(1,000	)		(1,000	)
Total comprehensive income																				24,767

Balance at July 3, 2010		24,399,746	$	244		(1,948,618	)	$	(36,194	)	$	72,312	$	134,109		$	(4,385	)	$	166,086

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share amounts)

(unaudited)

5. STOCK REPURCHASE PROGRAM

In February 2010, the Board of Directors increased our stock repurchase program by an additional $37,526, increasing the amount then available under the plan to $50,000. We are authorized to make repurchases from time to time pursuant to existing rules and regulations and other parameters approved by the Board of Directors. On March 16, 2010, we repurchased $32,352 of common stock at an average price per share of $20.30. Our credit facility was amended to permit the increased stock repurchase, subject to certain restrictions and limitations set forth in the amendment to our credit facility.

6. COMPREHENSIVE INCOME

The changes in comprehensive income are as follows:

	Three Months Ended					Six Months Ended
	July 3,			July 4,		July 3,			July 4,
	2010			2009		2010			2009

Net income	$	13,659		$	7,278	$	25,767		$	13,271
Foreign currency translation adjustments (a)		(811	)		402		(1,051	)		155
Interest rate swap, net of tax (b)		-			102		-			210
Pension related assets or liabilities, net of tax (c)		25			-		51			-
Comprehensive income	$	12,873		$	7,782	$	24,767		$	13,636

(a)	No tax benefit has been provided on the foreign currency translation adjustment due to management’s decision to reinvest the earnings of our foreign subsidiaries indefinitely.

(b)	Deferred income tax assets (liabilities) of $0 and ($68) provided for the three-month periods ended July 3, 2010 and July 4, 2009, respectively. Deferred income tax assets (liabilities) of $0 and ($140) provided for the six-month periods ended July 3, 2010 and July 4, 2009, respectively.

(c)	Deferred income tax assets (liabilities) of $17 and $0 provided for the three-month periods ended July 3, 2010 and July 4, 2009, respectively. Deferred income tax assets (liabilities) of $34 and $0 provided for the six-month periods ended July 3, 2010 and July 4, 2009, respectively.

7. INCOME TAXES

We review our annual effective tax rate on a quarterly basis and we make necessary changes if information or events warrant such changes. The annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for deferred tax assets (such changes would be recorded discretely in the quarter in which they occurred); changes to actual or forecasted permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occurred); or impacts from tax law changes (to the extent such changes effect our deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occurred). Our effective income tax rate for the three and six-month periods ended July 3, 2010 was 39.5% and 40.1%, respectively, as compared to an effective income tax rate for the three and six-month periods ended July 4, 2009 of 41.9% and 40.8%, respectively. This decrease in the effective income tax rate was a result of a reduction in taxes on income from foreign operations partially offset by non-deductable expenses in connection with the sale of our common stock by one of our stockholders.

8. SEGMENT INFORMATION

We identified our two reportable segments as ‘‘wholesale’’ and ‘‘retail.’’ Our wholesale sales are to department stores, national chain stores, mass merchants (including warehouse clubs), specialty retailers, off-price retailers, and third party distributors servicing similar customers in foreign countries, while our retail segment reflects our operations from our retail outlet stores, shapewear kiosks and internet operations. Royalty income is also included in our wholesale segment. Within our reportable segments, wholesale includes corporate-related assets. Each segment’s results include the costs directly related to the segment’s net sales and all other costs allocated based on the relationship to consolidated net sales to support each segment’s net sales. Intersegment sales and transfers are recorded at cost and treated as a transfer of inventory.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share amounts)

(unaudited)

Information on segments and reconciliation to income before provision for income taxes, are as follows:

	Three Months Ended				Six Months Ended
	July 3,		July 4,		July 3,		July 4,
	2010		2009		2010		2009

Net sales
Wholesale	$	134,883	$	99,738	$	266,517	$	203,066
Retail		14,518		14,467		25,806		25,372
Total	$	149,401	$	114,205	$	292,323	$	228,438

Operating income
Wholesale	$	21,722	$	11,767	$	43,002	$	23,120
Retail		1,129		1,389		571		590
Operating income		22,851		13,156		43,573		23,710
Interest expense, net		262		632		555		1,300
Income before provision for income taxes	$	22,589	$	12,524	$	43,018	$	22,410

Depreciation and amortization
Wholesale	$	819	$	941	$	1,600	$	1,873
Retail		323		259		585		529
Total	$	1,142	$	1,200	$	2,185	$	2,402

Net sales by geographic area
United States	$	137,590	$	105,741	$	270,150	$	212,939
International (a)		11,811		8,464		22,173		15,499
Total	$	149,401	$	114,205	$	292,323	$	228,438

Intercompany sales from wholesale to retail	$	4,414	$	3,356	$	7,404	$	6,749

	July 3,		January 2,
	2010		2010
Total assets
Wholesale	$	318,247	$	333,096
Retail		28,327		25,646
Total	$	346,574	$	358,742

(a) International net sales are identified as international based on the location of the customer.

At July 3, 2010 and January 2, 2010, our five largest uncollateralized receivables represented approximately 63% and 60%, respectively, of total accounts receivable.

For the three-month periods ended July 3, 2010 and July 4, 2009, we had three customers, Wal-Mart, Kohl’s and Macy’s, that each accounted for more than 10% of our consolidated net sales. For the six-month periods ended July 3, 2010 and July 4, 2009, we had two customers, Wal-Mart and Kohl’s, that each accounted for more than 10% of our consolidated net sales.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share amounts)

(unaudited)

9. EARNINGS PER SHARE

The following is a reconciliation of basic number of common shares outstanding to diluted common and common equivalent shares outstanding:

	Three Months Ended				Six Months Ended
	July 3,		July 4,		July 3,		July 4,
	2010		2009		2010		2009

Net income	$	13,659	$	7,278	$	25,767	$	13,271
Weighted average number of common and common equivalent shares outstanding:
Basic number of common shares outstanding		22,375,964		22,563,665		22,781,343		22,530,148

Impact of dilutive securities		656,914		1,003,650		720,345		947,781

Dilutive number of common and common equivalent shares outstanding		23,032,878		23,567,315		23,501,688		23,477,929

Basic earnings per common share	$	0.61	$	0.32	$	1.13	$	0.59
Diluted earnings per common share	$	0.59	$	0.31	$	1.10	$	0.57

For the three-month periods ended July 3, 2010 and July 4, 2009, approximately 36,000 and 600,000 equity awards, respectively, were not included in the computation of diluted earnings per share because of their anti-dilutive effect. For the six-month periods ended July 3, 2010 and July 4, 2009, approximately 81,000 and 726,000 equity awards, respectively, were not included in the computation of diluted earnings per share because of their anti-dilutive effect.

10. COMMITMENTS AND CONTINGENCIES

Purchase commitments

In the normal course of business, we enter into purchase commitments for both finished goods and raw materials. At July 3, 2010, we had purchase commitments of $109,610 and believe that we have adequate reserves for any expected losses arising from all purchase commitments.

Litigation

We have filed suit against Times Three Clothier, LLC (“Times Three”) in the federal court for the Southern District of New York, seeking a declaratory judgment that our Flexees Fat Free Tank does not infringe U.S. Design Patent No. 606,285 (“the ’285 patent”) and/or that the ’285 patent is invalid. Times Three has filed a counterclaim for infringement of the ’285 patent and related U.S. Design Patent No. 616,627 (“the ’627 patent”). In response, we have filed a counterclaim seeking a declaration of noninfringement and/or invalidity/unenforceability with respect to the ’627 patent. We believe that the ultimate outcome of this pending lawsuit and claim will not have a material adverse affect on our consolidated financial position or results of operations taken as a whole. Due to their inherent uncertainty, however, there can be no assurance of the ultimate outcome of this or future litigation, proceedings, investigations, or claims or their effect.

We are party to various legal actions arising in the ordinary course of business. Based on information presently available to us, we believe that we have adequate legal defenses, reserves or insurance coverage for these actions and that the ultimate outcome of these actions will not have a material adverse effect on our condensed consolidated statements of financial position, results of operations or cash flows.

MAIDENFORM BRANDS, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(in thousands, except share and per share amounts)

(unaudited)

11.	ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

	July 3,		January 2,
	2010		2010

Accrued wages, incentive compensation, payroll taxes and related benefits	$	11,197	$	11,926
Accrued customs duty		3,250		2,276
Accrued other		14,588		14,164
	$	29,035	$	28,366

Other accrued expenses and current liabilities include, among other items, freight, accrued severance, trade promotion, inventory return accrual and professional fees.

12.	RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2010, the Financial Accounting Standards Board (“FASB”) issued an amendment to the guidance on subsequent events to eliminate the requirement for public companies to disclose the date through which subsequent events have been evaluated. We will continue to evaluate subsequent events through the date of the issuance of our financial statements, however, consistent with the guidance, this date will no longer be disclosed. The guidance became effective upon issuance and the adoption had no impact on our condensed consolidated financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy. The adoption of this guidance is effective for interim and annual reporting periods beginning after December 15, 2009. We have adopted this guidance in the financial statements presented herein, which did not impact our consolidated financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This report contains forward-looking statements relating to future events and our future performance within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements regarding our expectations, beliefs, intentions or future strategies that are signified by the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “potential,” “predicts,” “projects” or similar words or phrases, although not all forward-looking statements contain such identifying words. All forward-looking statements included in this report are based on information available to us on the date hereof. It is routine for our internal projections and expectations to change as the year or each quarter in the year progress, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we assume no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise. Actual events or results may differ materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned “PART II – OTHER INFORMATION, Item 1A – Risk Factors.”

Management Overview

We are a global intimate apparel company with a portfolio of established, well-known brands, top-selling products and an iconic heritage. We design, source and market an extensive range of intimate apparel products, including bras, panties and shapewear. We sell through multiple distribution channels, including department stores and national chain stores, mass merchants (including warehouse clubs), other (including specialty retailers, off-price retailers, foreign distributors and licensees), our company-operated outlet stores, shapewear kiosks and our websites.

We sell our products under some of the most recognized brands in the intimate apparel industry. Our Maidenform®, Control It!®, Flexees®, Lilyette® and Luleh® products are sold in department stores and national chain stores. Our Bodymates®, Inspirations®, Self Expressions® and Sweet Nothings® products are distributed through mass merchants. These mass merchant brands leverage our product technology, but are separate brands with distinctly different logos. In addition to our owned brands, we also supply private brands to certain department stores and national chain stores and retailers.

Trends in our business

We operate in two segments, wholesale and retail. Our wholesale segment includes both our domestic and international wholesale markets. Our retail segment includes our company-operated outlet stores, shapewear kiosks and our websites.

We have identified many near-term opportunities for growth and operational improvements, as well as challenges, including general macro-economic conditions that may affect our customers and our business. In particular, management believes that there are many factors influencing the intimate apparel industry, including but not limited to: consistent demand for foundation garments, consumer demand for innovative and leading brands, sourcing and supply chain efficiencies, continued growth of the mass merchant channel, pressure from retailers brought about by the consolidation in the retail industry, increases in the cost of the raw materials used in intimate apparel products and uncertainty surrounding import restrictions.

We believe we are well-positioned to capitalize on or address these trends by, among other things:

·	continuing to launch innovative products;

·	increasing our presence in department stores and national chain stores through the use of Maidenform, Control It!, Flexees, Lilyette, Luleh and private brands;

·	expanding distribution of our Donna Karan® and DKNY® licensed brands;

·	expanding shapewear awareness;

·	increasing our presence in the mass merchant channel through the use of our Bodymates, Inspirations, Self Expressions, Sweet Nothings;

·	expanding our international presence;

·	increasing consumer identification with our brands through further marketing investments;

·	marketing, rather than manufacturing our brands;

·	making selective acquisitions, entering into license agreements, and developing and marketing new products that will complement our existing products or distribution channels; and

·	merchandising, marketing and selling private brand products to selected retailers.

Wholesale segment

The following trends are among the key variables that will affect our wholesale segment:

Department stores and national chain stores. The department stores and national chain stores are where we generally sell the Maidenform, Control It!, Flexees and Lilyette brands. We plan to continue to invest in increasing our net sales with department store customers, which we believe is important to our long-term positioning in the channel. The rate of our future net sales growth with department stores could be moderated by the reduction in both the number of department store customers and the number of doors (distinct locations operated by a particular retailer) operated by these customers. We have grown our market share significantly in the past several years with national chain stores. We have customers located outside the United States that purchase our Maidenform, Flexees and Lilyette brands. The majority of these net sales are included in the department stores and national chain stores channel. In 2009, we have added new customers, such as Bloomingdale’s and Nordstrom, within this channel as a result of our license agreement for the Donna Karan® and DKNY® brands. This agreement grants us the rights to design, source and market a full collection of Donna Karan® and DKNY® women’s intimate apparel products. Customers for the Donna Karan® and DKNY® brands are located in and outside the United States.

Mass merchants. The mass merchant channel includes both mass merchants and warehouse clubs. We intend to improve our penetration with mass merchants through the use of our brands Bodymates, Inspirations, Self Expressions and Sweet Nothings. We have experienced significant growth in this channel over the past several years and expect to achieve additional growth in the future as we are able to increase both the floor space and number of doors in which our products are sold. We expect that both our net sales to this channel, and our net sales to this channel as a percentage of our total net sales, are likely to increase over time. The volume and mix of net sales of our brands and of private label in the mass merchant channel can vary from period to period based upon strategic changes that our customers may implement from time to time. Net sales to customers in the mass merchant channel that are located outside the United States are included in this channel.

Other. Net sales from other channels include sales to specialty retailers, off-price retailers, foreign distributors and royalty income from licensees. We supply private brands to specialty retailers as opportunities present themselves and we continually evaluate this channel for opportunities. The volume and mix of net sales of private label in the other channel can vary significantly from period to period based upon new product introductions and the discontinuation of other products.

We may selectively target strategic acquisitions, licensing opportunities or brand start-ups to grow our consumer base and would utilize the acquired companies and licenses to complement our current products, channels and geographic scope. We believe that acquisitions and licenses can enhance our product offerings to retailers and provide growth opportunities. We believe we can leverage our core competencies such as product development, brand management, logistics and marketing to create significant value from the acquired businesses and licenses. In May 2008, we entered into a women’s intimate apparel license agreement for the Donna Karan® and DKNY® brands and we launched the brand in the first quarter of 2009.

Retail segment

We believe our retail sales volume is driven by our ability to service our existing consumers and obtain new consumers, as well as overall general macro-economic conditions that can affect our consumers and ultimately their levels of overall spending and choice of retail channel for their purchases. Additionally, identifying optimal retail outlet locations, favorable leasing arrangements, and improving our store productivity are factors important to growing our retail segment’s net sales. We also sell our products through our websites, www.maidenform.com and www.maidenform.co.uk. Although we currently do not generate a significant amount of net sales as a percentage of total Company net sales through these sites, we do expect it to continue to grow.

Our objectives in our retail segment are to continue to increase the productivity of our portfolio of stores through effective merchandising and focused advertising, as well as selectively closing less productive locations and potentially opening new stores in more productive locations. Even in those situations where we selectively close less productive outlet stores and do not open a new store in that region, we believe those consumers still purchase many of our Maidenform brands from our other outlet stores, our websites or our wholesale segment customers that carry these brands. Historically, we have primarily sold excess and, to a lesser extent, obsolete inventories through our outlet stores at a higher margin than that achieved through other liquidation alternatives.

Definitions

In reviewing our operating performance, we evaluate both the wholesale and retail segments by focusing on each segment’s operating income, cash flows from operations and inventory turns.

Net sales. Our net sales are derived from two operating segments, wholesale and retail. Net sales from our wholesale segment are recognized when the customer takes possession and are recorded net of cooperative advertising allowances, sales returns, sales discounts, and markdown allowances provided to our customers. Net sales in our retail segment are recognized at the time the customer takes possession of the merchandise at the point-of-sale in our stores and for our internet sales, net sales are recognized when the products are shipped and title passes to the customer.

Cost of sales. We outsource all manufacturing of the products we sell and, therefore, the principal elements of our cost of sales are for finished goods inventories purchased from our sourced vendors. Included in cost of sales and affecting our overall gross margins are freight expenses from the manufacturers to our distribution centers in situations where such expenses are charged separately. Also included in cost of sales is the cost of warehousing, labor and overhead related to receiving and warehousing at our distribution centers, and depreciation of assets related to our receiving and warehousing in our distribution centers. Direct labor, cost of fabrics, as well as raw materials for fabrics, are the primary components driving the overall cost of our sourced finished goods inventories from our sourcing vendors.

Selling, general and administrative expenses (“SG&A”). Our SG&A includes all of our marketing, product development, selling, distribution and general and administrative expenses for both the wholesale and retail segments (which include our retail outlet store payroll and related benefits). General and administrative expenses include management payroll, benefits, travel, information systems, accounting, distribution, rent, insurance and legal costs. Additionally, depreciation related to the shipping function in our distribution centers and our corporate office assets such as furniture, fixtures, and equipment, as well as amortization of intellectual property, are included in SG&A.

Income taxes. We account for income taxes using the liability method, which recognizes the amount of income tax payable or refundable for the current year and recognizes deferred tax liabilities and assets for the future tax consequences of the events that have been recognized in the financial statements or tax returns. For those uncertain tax positions where it is “more likely than not” that a tax benefit will be sustained, we have recorded the tax benefit. For those income tax positions where it is not “more likely than not” that a tax benefit will be sustained, no tax benefit has been recognized. Where applicable, associated interest and penalties are recorded. We routinely evaluate all deferred tax assets to determine the likelihood of their realization and record a valuation allowance if it is “more likely than not” that a deferred tax asset will not be realized. For more information, see notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Net operating loss carryforwards (“NOLs”) enable a company to apply NOLs incurred during a current period against a future period's profits in order to reduce cash tax liabilities in those future periods. In periods when a company is generating operating losses, its NOLs will increase. The tax effect of the NOLs is recorded as a deferred tax asset. If the company does not believe that it is “more likely than not” that it will be able to utilize the NOLs, it records a valuation allowance against the deferred tax asset. Additionally, Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation's ability to utilize its NOLs if it experiences an “ownership change.” In general terms, an ownership change results from transactions increasing the ownership of certain existing stockholders and, or, new stockholders in the stock of a corporation by more than 50 percentage points during a three year testing period. Any unused annual limitation may be carried over to later years, and the amount of the limitation may, under certain circumstances, be increased to reflect both recognized and deemed recognized “built-in gains” that occur during the sixty-month period after the ownership change. Our NOLs are subject to Section 382 limitations. At January 2, 2010, we had approximately $29.0 million of federal and state NOLs available for utilization in the years from 2010 through 2023.

Results of Operations

	Three Months Ended				Six Months Ended
	July 3,		July 4,		July 3,		July 4,
	2010		2009		2010		2009
OPERATING DATA: (in millions)
Wholesale sales	$	134.9	$	99.7	$	266.5	$	203.0
Retail sales		14.5		14.5		25.8		25.4
Net sales		149.4		114.2		292.3		228.4
Cost of sales		95.3		73.1		186.3		150.8
Gross profit		54.1		41.1		106.0		77.6
Selling, general and administrative expenses		31.1		28.0		62.3		53.9
Operating income	$	23.0	$	13.1	$	43.7	$	23.7

	As a Percentage of Net Sales
	Three Months Ended						Six Months Ended
	July 3,			July 4,			July 3,			July 4,
	2010			2009			2010			2009
OPERATING DATA:
Wholesale sales		90.3	%		87.3	%		91.2	%		88.9	%
Retail sales		9.7			12.7			8.8			11.1
Net sales		100.0			100.0			100.0			100.0
Cost of sales		63.8			64.0			63.7			66.0
Gross profit		36.2			36.0			36.3			34.0
Selling, general and administrative expenses		20.8			24.5			21.3			23.6
Operating income		15.4	%		11.5	%		15.0	%		10.4	%

Our net sales are derived from two segments, wholesale and retail. Our net sales within the wholesale segment are grouped by channel, based upon the brands we sell and the customers to whom we sell, as follows: (1) department stores and national chain stores, (2) mass merchants and (3) other.

Our department stores and national chain stores channel primarily consists of sales of our Maidenform, Control It!, Flexees, Lilyette, Luleh and private brands on a worldwide basis to customers within this category. Within the mass merchant channel, we sell brands such as Bodymates, Inspirations, Self Expressions and Sweet Nothings that are primarily dedicated to specific customers. These brands are all sold on a worldwide basis to mass merchants and, to a lesser degree, warehouse clubs. Our remaining sales are grouped within a channel designated as other and include private brand products sold to specialty retailers and all brand sales to off-price retail stores. In addition, we include licensing income as well as sales to foreign distributors in our other channel.

	Three Months Ended									Six Months Ended
	July 3,		July 4,		$		%			July 3,		July 4,		$		%
	2010		2009 (1)		change		change			2010		2009 (1)		change		change
	(in millions)									(in millions)
Department stores and national chain stores	$	65.9	$	56.1	$	9.8		17.5	%	$	123.2	$	99.4	$	23.8		23.9	%
Mass merchants		42.9		26.6		16.3		61.3			88.3		66.1		22.2		33.6
Other		26.1		17.0		9.1		53.5			55.0		37.5		17.5		46.7
Total wholesale		134.9		99.7		35.2		35.3			266.5		203.0		63.5		31.3

Retail		14.5		14.5		-		-			25.8		25.4		0.4		1.6

Total consolidated net sales	$	149.4	$	114.2	$	35.2		30.8	%	$	292.3	$	228.4	$	63.9		28.0	%

(1) Prior period amounts in this table have been reclassified to conform to the current year presentation.

In addition, our mix of products sold worldwide between bras, shapewear, and panties for the three and six-month periods ended July 3, 2010 and July 4, 2009, respectively, is summarized below:

	Three Months Ended						Six Months Ended
	July 3,			July 4,			July 3,			July 4,
	2010			2009			2010			2009
Bras		64	%		64	%		63	%		65	%
Shapewear		31			29			33			29
Panties		5			7			4			6
		100	%		100	%		100	%		100	%

Net sales

Consolidated net sales increased by $35.2 million, or 30.8%, from $114.2 million for the three months ended July 4, 2009 to $149.4 million for the three months ended July 3, 2010. Consolidated net sales increased by $63.9 million, or 28.0%, from $228.4 million for the six months ended July 4, 2009 to $292.3 million for the six months ended July 3, 2010.

Wholesale segment net sales increased by $35.2 million, or 35.3%, from $99.7 million for the three months ended July 4, 2009 to $134.9 million for the three months ended July 3, 2010. Total international net sales, which are included in the wholesale segment, increased by $3.3 million, or 38.8%, from $8.5 million for the three months ended July 4, 2009 to $11.8 million for the three months ended July 3, 2010. International sales benefited from increased sales in most of our international markets, notably Mexico, the United Kingdom and Spain. Our department stores and national chain stores channel net sales increased by $9.8 million, or 17.5%, from $56.1 million for the three months ended July 4, 2009 to $65.9 million for the three months ended July 3, 2010. The increase in this channel was due to the solid performance of our shapewear and bra businesses resulting from replenishment orders to support consumer spending and new product introductions along with continued improvement from our licensed brands Donna Karan® and DKNY®. Our mass merchant channel net sales increased by $16.3 million, or 61.3%, from $26.6 million for the three months ended July 4, 2009 to $42.9 million for the three months ended July 3, 2010. This increase was primarily a result of strong sales growth in our Sweet Nothings brand shapewear and bra categories, and continued sales of shapewear products under our Self Expressions brand which were not in the same period of 2009. Other channel net sales, which include sales to specialty retailers, off-price retailers, foreign distributors and licensing income, increased by $9.1 million, or 53.5%, from $17.0 million for the three months ended July 4, 2009 to $26.1 million for the three months ended July 3, 2010. This increase was due primarily to increased sales with a specialty retailer and increased program business sales with off-price retailers.

Wholesale segment net sales increased by $63.5 million, or 31.3%, from $203.0 million for the six months ended July 4, 2009 to $266.5 million for the six months ended July 3, 2010. Total international net sales increased by $6.7 million, or 43.2%, from $15.5 million for the six months ended July 4, 2009 to $22.2 million for the six months ended July 3, 2010, primarily resulting from the reasons mentioned above, in addition to sales in Canada and Russia, and favorable currency exchange rates. Our department stores and national chain stores channel net sales increased by $23.8 million, or 23.9%, from $99.4 million for the six months ended July 4, 2009 to $123.2 million for the six months ended July 3, 2010. This increase was a result of the solid performance of our shapewear and bra businesses resulting from replenishment orders to support consumer spending and new product introductions. Our mass merchant channel net sales increased by $22.2 million, or 33.6%, from $66.1 million for the six months ended July 4, 2009 to $88.3 million for the six months ended July 3, 2010. This increase was driven by the ongoing expansion of our Sweet Nothings brand in the shapewear and bra categories, continued sales of shapewear products under our Self Expressions brand which were not in the same period of 2009, and ongoing replenishment of our Inspirations brand. Other channel net sales increased by $17.5 million, or 46.7%, from $37.5 million for the six months ended July 4, 2009 to $55.0 million for the six months ended July 3, 2010. This increase was due primarily from increased sales to a specialty retailer.

Net sales in our retail segment were unchanged at $14.5 million for the three months ended July 3, 2010 when compared to the three months ended July 4, 2009. Net sales in our retail segment increased by $0.4 million, or 1.6%, from $25.4 million for the six months ended July 4, 2009 to $25.8 million for the six months ended July 3, 2010. Same store sales, defined as sales from stores open more than one year, for the three and six-month periods ended July 3, 2010, increased 0.8% and 3.1%, respectively. Our internet sales were unchanged at $1.2 million for the three months ended July 3, 2010 when compared to the same period last year and decreased $0.1 million, or 4.0%, from $2.5 million for the six months ended July 4, 2009 to $2.4 million for the six months ended July 3, 2010.

Gross profit

Consolidated gross profit increased by $13.0 million, or 31.6%, from $41.1 million for the three months ended July 4, 2009 to $54.1 million for the three months ended July 3, 2010. As a percentage of net sales, consolidated gross margins increased by 20 basis points from 36.0% for the three months ended July 4, 2009 to 36.2% for the three months ended July 3, 2010. Consolidated gross profit increased by $28.4 million, or 36.6%, from $77.6 million during the six months ended July 4, 2009 to $106.0 million for the six months ended July 3, 2010. As a percentage of net sales, gross profit increased by 230 basis points from 34.0% for the six months ended July 4, 2009 to 36.3% for the six months ended July 3, 2010.

Gross profit as a percentage of net sales for the wholesale segment increased by 80 basis points from 32.6% for the three months ended July 4, 2009 to 33.4% for the three months ended July 3, 2010. This slight increase was a result of product mix and the benefit from product cost reduction efforts, which were partially offset by customer mix, including a higher percentage of net sales from the Company’s lower margin mass merchants and other channels. Gross profit as a percentage of net sales for the wholesale segment was 30.9% for the six months ended July 4, 2009 as compared to 33.9% for the six months ended July 3, 2010. This increase of 300 basis points is mainly a result of the reasons mentioned above and lower overall promotional activity.

Gross profit as a percentage of net sales for the retail segment increased by 280 basis points from 59.3% for the three months ended July 4, 2009 to 62.1% for the three months ended July 3, 2010, and increased 260 basis points from 58.3% for the six months ended July 4, 2009 to 60.9% for the six months ended July 3, 2010.

Selling, general and administrative expenses (“SG&A”)

Consolidated SG&A increased by $3.1 million, or 11.1%, from $28.0 million for the three months ended July 4, 2009 to $31.1 million for the three months ended July 3, 2010. However, as a percentage of net sales, SG&A decreased from 24.5% for the three months ended July 4, 2009 to 20.8% for the three months ended July 3, 2010.

SG&A for our wholesale segment, which includes corporate-related expenses, increased by $2.5 million, or 12.0%, from $20.8 million for the three months ended July 4, 2009 to $23.3 million for the three months ended July 3, 2010. However, as a percentage of net sales, wholesale segment SG&A decreased from 20.9% for the three months ended July 4, 2009 to 17.2% for the three months ended July 3, 2010. The increase of $2.5 million is primarily a result of increased payroll and related benefits associated with new positions added to support our initiatives, incentive compensation, temporary help to support our sales growth and 2010 merit increases, which we did not incur in 2009. Retail SG&A increased by $0.6 million, or 8.3%, from $7.2 million for the three months ended July 4, 2009 to $7.8 million for the three months ended July 3, 2010.

Consolidated SG&A increased by $8.4 million, or 15.6%, from $53.9 million for the six months ended July 4, 2009 to $62.3 million for the six months ended July 3, 2010. However, as a percentage of net sales, SG&A decreased from 23.6% for the six months ended July 4, 2009 to 21.3% for the six months ended July 3, 2010.

SG&A for our wholesale segment increased by $7.5 million, or 18.9%, from $39.7 million for the six months ended July 4, 2009 to $47.2 million for the six months ended July 3, 2010. However, as a percentage of net sales, wholesale segment SG&A decreased from 19.6% for the six months ended July 4, 2009 to 17.7% for the six months ended July 3, 2010. The increase of $7.5 million is a result of the reason mentioned above along with the impairment of an intangible asset for which we determined had no future benefit. Partially offsetting these increases was a reduction in professional fees. Retail SG&A increased by $0.9 million, or 6.3%, from $14.2 million for the six months ended July 4, 2009 to $15.1 million for the six months ended July 3, 2010.

Operating income

Our consolidated operating income increased by $9.9 million, or 75.6%, from $13.1 million for the three months ended July 4, 2009 to $23.0 million for the three months ended July 3, 2010. Our consolidated operating income increased by $20.0 million, or 84.4%, from $23.7 million for the six months ended July 4, 2009 to $43.7 million for the six months ended July 3, 2010.

For the foregoing reasons, operating income for the wholesale segment increased by $10.1 million, or 86.3%, from $11.7 million for the three months ended July 4, 2009 to $21.8 million for the three months ended July 3, 2010. Operating income for the wholesale segment increased by $20.0 million, or 86.6%, from $23.1 million during the six months ended July 4, 2009 to $43.1 million during the six months ended July 3, 2010.

Also, for the reasons discussed above, operating income for the retail segment decreased by $0.2 million, or 14.3%, from $1.4 million for the three months ended July 4, 2009 to $1.2 million for the three months ended July 3, 2010. The retail segment’s operating income remained unchanged at $0.6 million during the six months ended July 3, 2010 when compared to the six months ended July 4, 2009.

Interest expense, net

Interest expense, net, decreased by $0.3 million, or 50.0%, from $0.6 million for the three months ended July 4, 2009 to $0.3 million for the three months ended July 3, 2010 reflecting the benefit of lower average debt outstanding and a lower average interest rate for the current quarter when compared to the same period last year. The average balance of total debt outstanding decreased from $88.2 million for the three months ended July 4, 2009 to $71.0 million for the three months ended July 3, 2010, and the average interest rate during the three months ended July 4, 2009 was 2.5% as compared to an average interest rate of 1.3% during the three months ended July 3, 2010.

Interest expense, net, decreased $0.7 million, or 53.8%, from $1.3 million for the six months ended July 4, 2009 to $0.6 million for the six months ended July 3, 2010. The decrease was a result of the reasons discussed above. The average balance of total debt outstanding decreased from $88.3 million for the six months ended July 4, 2009 to $77.0 million for the six months ended July 3, 2010. The average interest rate during the six months ended July 4, 2009 was 2.7% as compared to an average interest rate of 1.3% during the six months ended July 3, 2010.

Income tax expense

We review our annual effective tax rate on a quarterly basis and we make necessary changes if information or events warrant such changes. The annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes to the valuation allowance for deferred tax assets (such changes would be recorded discretely in the quarter in which they occurred); changes to actual or forecasted permanent book to tax differences; impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occurred); or impacts from tax law changes (to the extent such changes affect our deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occurred). Our effective income tax rate for the three and six-month periods ended July 3, 2010 was 39.5% and 40.1%, respectively, as compared to an effective income tax rate for the three and six-month periods ended July 4, 2009 of 41.9% and 40.8%, respectively. The lower effective income tax rate in the three and six month periods ending July 3, 2010 was largely from a reduction in taxes on income from foreign operations partially offset by non-deductable expenses in connection with the sale of our common stock by one of our stockholders.

Net income

For the foregoing reasons, our net income increased by $6.4 million, or 87.7%, from $7.3 million for the three months ended July 4, 2009 to $13.7 million for the three months ended July 3, 2010. Our net income increased by $12.5 million, or 94.0%, from $13.3 million for the six months ended July 4, 2009 to $25.8 million for the six months ended July 3, 2010.

Liquidity and Capital Resources

Operating activities. Cash flows provided by operating activities were $7.1 million for the six months ended July 3, 2010 compared to cash flows provided by operating activities of $4.4 million for the six months ended July 4, 2009. This change was primarily driven by increased net income partially offset by changes in working capital. The increase in accounts receivable was due to higher sales during the quarter, which were somewhat offset by higher cash collections. The increase in inventory and accounts payable was the result of new product introductions and supply chain management.

Investing activities. Cash flows used in investing activities were $2.9 million for the six months ended July 3, 2010 compared to $1.4 million for the six months ended July 4, 2009. Cash flows used in investing activities for the six months ended July 3, 2010 and July 4, 2009 were for capital expenditures. This increase in capital expenditures was primarily due to information technology upgrades, including the implementation of an enterprise resource planning system and our e-commerce website.

Financing activities. Cash flows used in financing activities were $42.9 million for the six months ended July 3, 2010 compared to cash flows provided by financing activities of $0.1 million for the six months ended July 4, 2009. The increase in cash flows used in financing activities was primarily due to the $32.4 million repurchase of our common stock under our stock repurchase plan and the $16.0 million prepayment on our long-term debt.

In February 2010, the Board of Directors increased our stock repurchase program by an additional $37.5 million, increasing the amount then available under the plan to $50.0 million. We are authorized to make repurchases from time to time as market conditions warrant and pursuant to other parameters set by our Board of Directors. On March 16, 2010, we repurchased $32.4 million of common stock at an average price per share of $20.30. Our credit facility was amended to permit the increased stock repurchase, subject to certain restrictions and limitations set forth in the amendment to our credit facility.

At July 3, 2010 we had $70.7 million outstanding under our term loan, and $0 outstanding under our revolving loan with approximately $49.2 million available for borrowings, after giving effect to $0.8 million of outstanding letters of credit. Principal payments on the term loan are payable in quarterly installments of $0.3 million with all remaining amounts due on the maturity date. We are permitted to voluntarily prepay all or part of the principal balance of the term loan with such prepayments applied to scheduled principal payments in inverse order of their maturity. We were in compliance with all debt covenants at July 3, 2010.

Below is a summary of our actual performance under these financial covenants:

	July 3, 2010 Covenant		January 2, 2010 Covenant

Actual fixed charge coverage ratio 1	1.61 : 1.00		3.16 : 1.00
Minimum ratio required 1	1.25 : 1.00		1.25 : 1.00

Actual fixed charge coverage ratio 2	1.24 : 1.00			N/A
Minimum ratio required 2	0.85 : 1.00			N/A

Actual leverage ratio	0.28 : 1.00		0.00 : 1.00
Maximum ratio permitted	4.00 : 1.00		4.00 : 1.00

Actual consolidated capital expenditures	$	2,882	$	5,894
Maximum permitted	$	14,106	$	15,000

The global economic downturn and the continued volatility in the financial markets could have a material adverse effect on our business. Further deterioration in the financial markets could lead to business disruptions for certain of our suppliers, contract manufacturers or trade customers and consequently, could disrupt our business. However, we believe that our existing cash balances and available borrowings under our revolving loan, along with our future cash flow from operations, will enable us to meet our liquidity needs and capital expenditure requirements for the foreseeable future.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

We have various contractual obligations which are recorded as liabilities in our condensed consolidated financial statements. Other items, such as certain purchase commitments and other executory contracts, are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed. For example, we are contractually committed to make certain minimum lease payments for the use of property under operating lease agreements.

The following table summarizes our significant contractual obligations and commercial commitments at July 3, 2010 and the future periods in which such obligations are expected to be settled in cash. In addition, the table below reflects the timing of principal and interest payments on outstanding borrowings.

	Balance of
	fiscal		In fiscal		In fiscal		In fiscal		In fiscal
(in millions)	2010		2011		2012		2013		2014		Thereafter		Total

Long-term debt	$	0.5	$	1.1	$	1.1	$	1.1	$	66.9	$	-	$	70.7
Interest on long-term debt (1)		0.5		1.0		0.9		0.9		0.4		-		3.7
Obligations under capital lease (2)		0.1		0.1		0.1		-		-		-		0.3
Operating leases (3)		4.1		6.8		5.9		4.3		2.9		4.8		28.8
Total financial obligations		5.2		9.0		8.0		6.3		70.2		4.8		103.5
Other contractual obligations (4)		2.0		3.2		5.2		5.8		8.3		5.0		29.5
Purchase obligations (5)		88.8		20.8		-		-		-		-		109.6
Total financial obligations and commitments	$	96.0	$	33.0	$	13.2	$	12.1	$	78.5	$	9.8	$	242.6

(1) The interest rate assumed for the variable portion of long-term debt was the rate in effect at July 3, 2010.

(2) Includes amounts classified as interest expense and SG&A under capital leases.

(3) The operating leases included in the above table consist of minimum rent payments and do not include contingent rent based upon sales volume, or variable costs such as maintenance, insurance or taxes.

(4) Includes amounts classified as royalties, advertising and marketing obligations.

(5) Unconditional purchase obligations are defined as agreements to purchase goods that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The purchase obligations category above relates to commitments for inventory and raw material purchases. Amounts reflected in our condensed consolidated balance sheets in accounts payable or other current liabilities are excluded from the table above.

In addition to the total contractual obligations and commitments included in the table above, we have pension and post-retirement benefit obligations included in other non-current liabilities of $3.2 million and $0.7 million, respectively at July 3, 2010.

As of July 3, 2010, our total liabilities for unrecognized tax benefits and related interest and penalties amounted to $4.4 million (before federal and, if applicable, state effect). Liabilities for unrecognized tax benefits have not been included in the schedule of cash contractual obligations because we cannot make a reasonable, reliable estimate of the amount and period of related future payments of these liabilities.

Off-Balance Sheet Arrangements. Our most significant off-balance sheet financing arrangements as of July 3, 2010 are non-cancelable operating lease agreements, primarily for our company-operated outlet stores, our company headquarters and our leased distribution centers located in Shannon, Ireland and Fayetteville, North Carolina. We do not participate in any off-balance sheet arrangements involving unconsolidated subsidiaries that provide financing or potentially expose us to unrecorded financial obligations.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A summary of our significant accounting policies and a description of accounting policies that we believe are most critical may be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended January 2, 2010.

Recently Issued Accounting Standards

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk. We do not believe that we have significant foreign currency transactional exposures. For the three and six-month periods ended July 3, 2010, $9.8 million and $18.1 million, respectively, of our total net sales were in currencies other than the U.S. dollar. During the three and six-month periods ended July 3, 2010, our net sales were favorably impacted by $0.1 million and $1.0 million, respectively, due to fluctuations in foreign currency exchange rates. Most of our purchases are denominated in U.S. dollars. The impact of a 10% unfavorable change in the exchange rate of the U.S. dollar against the prevailing market rates of the foreign currencies in which we have transactional exposures would be immaterial.

Interest Rate Risk. From time to time, we manage our interest rate risk through the use of interest rate swaps. Our existing swap contract matured on December 31, 2009. At July 3, 2010, our debt portfolio was composed of variable-rate debt, with no portion hedged. With respect to our variable-rate debt, a 1% change in interest rates would be immaterial.

Commodity Price Risk. We are subject primarily to commodity price risk arising from fluctuations in the market prices of raw materials used in the garments purchased from our sourcing vendors, if they pass along these increased costs. During the past five years, there has been no significant impact from commodity price fluctuations, and we do not currently use derivative instruments in the management of these risks. On a going-forward basis, fluctuations in crude oil prices or petroleum based product prices may also influence the prices of the related items such as chemicals, dyestuffs, man-made fibers and foam, and transportation costs. Raw material price increases could increase our cost of sales and decrease our profitability unless we are able to pass our higher costs on to our customers.

Inflation Risk. We are affected by inflation and changing prices from our suppliers primarily through the cost of raw materials, increased operating costs and expenses, and fluctuations in interest rates. The effects of inflation on our net sales and operations have not been material in recent years. We do not believe that inflation risk is material to our business or our consolidated financial position, results of operations or cash flows. In the future, volatile crude oil and gasoline prices may impact our product and freight costs, consumer confidence and disposable income.

Seasonality. We have not experienced any significant seasonal fluctuations in our net sales or our profitability.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective as of July 3, 2010 to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls over Financial Reporting.

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ending July 3, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are subject to various claims and legal actions arising from time to time in the ordinary course of business.

Item 1A. Risk Factors

Risks that could have a negative impact on our business, results of operations and financial condition include: our growth cannot be assured and any growth may be unprofitable; potential fluctuations in our results of operations or rate of growth; our dependence on a limited number of customers; we have larger competitors with greater resources; retail trends in the intimate apparel industry, including consolidation and continued growth in the development of private brands, resulting in downward pressure on prices, reduced floor space and other harmful changes; failure to anticipate, identify or promptly react to changing trends, styles, or consumer preferences; our leverage could adversely affect our financial condition; external events may disrupt our supply chain, result in increased cost of goods or an inability to deliver our products; events which result in difficulty in procuring or producing products on a cost-effective basis; disputes with third parties for infringement or misappropriation of their proprietary rights; increases in the prices of raw materials; changing international trade regulation, including as it relates to the imposition or elimination of quotas on imports of textiles and apparel; foreign currency exposure; the sufficiency of cash to fund operations and capital expenditures; and the influence of adverse changes in general economic conditions. This list is intended to identify only certain of the principal factors that could have a material and adverse impact on our business, results of operations and financial condition. A more detailed description of each of these and other important risk factors can be found under the caption “Risk Factors” in our most recent Form 10-K, filed with the Securities and Exchange Commission on March 10, 2010.

There are no material changes to the risk factors described in the Form 10-K filed on March 10, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

31.1	Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	MAIDENFORM BRANDS, INC. (Registrant)

Date: August 11, 2010	By:	/s/ Christopher W. Vieth
		Name: Christopher W. Vieth
		Title: Executive Vice President, Chief Operating Officer and Chief Financial Officer (principal financial officer)

EXHIBIT INDEX

31.1	Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Attached files

Maidenform Brands, Inc. Reports

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