HanesBrands Reports Third-Quarter 2012 Results

WINSTON-SALEM, N.C.--(BUSINESS WIRE)--HanesBrands (NYSE: HBI), a leading marketer of everyday branded basic apparel, today reported third-quarter net sales increased 3 percent, earnings per diluted share for continuing operations increased 31 percent to $1.11, and free cash flow totaled $287 million.

“We are executing well and had a very good quarter as reflected in our operating margin, free cash flow and EPS, all of which are all-time quarterly records”

Net sales for the quarter ended Sept. 29, 2012, totaled $1.22 billion, up from $1.19 billion a year ago. EPS growth contributors included Innerwear segment performance and across-the-board tight expense control. (Unless noted, all performance measures are for continuing operations. Discontinued operations are discussed later in this press release.)

For 2012 full-year guidance, the company increased the low end of its EPS range by 4 cents to $2.54 to $2.60. It expects net sales of approximately $4.52 billion and free cash flow of approximately $500 million, the high end of its previous range.

“We are executing well and had a very good quarter as reflected in our operating margin, free cash flow and EPS, all of which are all-time quarterly records,” Hanes Chairman and Chief Executive Officer Richard A. Noll said. “Cotton inflation is behind us, and we are generating momentum for continued growth.”

Third-Quarter Business Highlights

• The company’s overall operating profit margin increased 60 basis points to 12.8 percent in the quarter, reflecting continuous sequential improvement since the first quarter. Selling, general and administrative expenses decreased as a percentage of net sales, mitigating the impact of higher cotton costs.
  
  The company generated free cash flow of $287 million in the quarter and has now completed the retirement of approximately $300 million of floating-rate bond debt as planned in 2012.
• Innerwear segment net sales increased 3 percent in the quarter and operating profit increased 10 percent. Excluding sales declines to a mid-tier retail customer that is undergoing a major strategic shift, Innerwear sales would have increased 5 percent in the third quarter versus last year.
  
  Innerwear sales growth has increased for three consecutive quarters in 2012. The 3 percent growth in the third quarter built on 2 percent growth in the second quarter and 1 percent growth in the first quarter. Hanes and Champion underwear combined for double-digit growth and women’s panties growth was in the mid-single digits. New-product innovation contributed to growth, including Hanes ComfortBlend men’s underwear, Hanes Classics slim fit and stretch premium underwear T-shirts, and Bali and Barely There Smart Size seamless bras.

• Outerwear segment net sales increased 5 percent in the quarter, while operating profit declined 4 percent. Sales for Champion activewear and Gear for Sports licensed apparel increased, but higher cotton costs suppressed segment operating profitability.
• International segment net sales declined 3 percent, while increasing 2 percent on a constant currency basis, and operating profit increased 19 percent on a reported basis.
• Net sales for the Direct to Consumer segment increased 2 percent, and operating profit increased 18 percent.

2012 Guidance

Hanes’ revised 2012 full-year guidance for continuing operations is diluted EPS of $2.54 to $2.60, compared with previous guidance of $2.50 to $2.60. Net sales are expected to increase approximately 2 percent to approximately $4.52 billion, compared with previous guidance of $4.52 billion to $4.57 billion. Full-year free cash flow is expected to be approximately $500 million, the high end of the previous range of $400 million to $500 million.

The corresponding guidance for the fourth-quarter is net sales of approximately $1.13 billion to $1.17 billion and EPS of $1.00 to $1.06. The company expects a gross margin percentage in the mid-30s and an operating profit margin of slightly more than 13 percent. Interest expense is expected to be approximately $33 million, and the effective tax rate is expected to be in the midteens.

The company’s guidance for continuing operations is based on the following facts. Product pricing, shelf space, and promotion plans for the remainder of 2012 have been finalized with major retail accounts. All commodity costs have been fixed for the remainder of the year, with the company incurring significantly lower cotton and other inflation impacts for the remainder of the year.

The company will continue to focus its use of free cash flow on debt retirement. In 2012, the company retired all of its approximately $300 million of floating rate notes. For 2013, the company remains committed to prepaying all of its $500 million of 8 percent fixed-rate notes.

The company continues to believe that a reasonable estimate of EPS potential in 2013 is in the low $3 range.

Discontinued Operations

In May 2012, the company announced exiting certain international and domestic imagewear businesses that are all now classified as discontinued operations.

On May 30, Hanes sold its European imagewear business, and the company has substantially completed the discontinuation of its private-label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. In accordance with GAAP requirements, the company reported results for the second and third quarters on a continuing-operations basis and revised prior-period results to reflect continuing operations. The company’s branded printwear operations will continue to operate and serve the branded domestic screen-print market.

For the first nine months, discontinued operations reported a loss per diluted share of $0.70 – a loss of $0.03 in the first quarter, a loss of $0.66 in the second quarter, and a loss of $0.01 in the third quarter.

More information on discontinued operations and financial results for prior-period continuing operations is available in the investors section of the company’s corporate website, http://tiny.cc/HanesBrandsIR, and will be available in the company’s Form 10-Q filing for the third quarter.

Note on Non-GAAP Terms and Definitions

Free cash flow and EBITDA are not generally accepted accounting principle measures.

Free cash flow is defined as net cash from operating activities less net capital expenditures. Free cash flow may not be representative of the amount of residual cash flow that is available to the company for discretionary expenditures since it may not include deductions for mandatory debt-service requirements and other nondiscretionary expenditures. The company believes, however, that free cash flow is a useful measure of the cash-generating ability of the business relative to capital expenditures and financial performance. See Table 4 and its footnotes attached to this press release to reconcile free cash flow for the year to date and third quarter to the GAAP measure of net cash provided by operating activities.

EBITDA is defined as earnings from continuing operations before interest, taxes, depreciation, and amortization. Although the company does not use EBITDA to manage its business, it believes that EBITDA is another way that investors measure financial performance. See Table 2 attached to this press release to reconcile EBITDA to the GAAP measure of net income from continuing operations.

Hanes has chosen to provide these measures to investors to enable additional analyses of past, present and future operating performance and as a supplemental means of evaluating company operations. Non-GAAP information should not be considered a substitute for financial information presented in accordance with GAAP and may be different from non-GAAP or other pro forma measures used by other companies.

Webcast Conference Call

Hanes will host a live Internet webcast of its quarterly investor conference call at 4:30 p.m. EDT today. The broadcast may be accessed on the home page of the HanesBrands corporate website, www.HanesBrands.com. The call is expected to conclude by 5:30 p.m.

An archived replay of the conference call webcast will be available in the investors section of the HanesBrands website. A telephone playback will be available from approximately midnight EDT today through midnight EDT Oct. 30, 2012. The replay will be available by calling toll-free [phone], or by toll call at [phone]. The replay pass code is 40224335.

Cautionary Statement Concerning Forward-Looking Statements

Statements in this press release that are not statements of historical fact are 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, including those regarding our long-term goals and trends associated with our business, as well as guidance as to future performance. Examples of such statements include the statements included in this press release in the section titled 2012 Guidance. These and other forward-looking statements are made only as of the date of this press release and are based on our current intent, beliefs, plans and expectations. They involve risks and uncertainties that could cause actual future results, performance or developments to differ materially from those described in or implied by such forward-looking statements. These risks and uncertainties include the following: current economic conditions, including consumer spending levels and the price elasticity of our products; the impact of significant fluctuations and volatility in various input costs, such as cotton and oil-related materials, utilities, freight and wages; the highly competitive and evolving nature of the industry in which we compete; our ability to successfully manage social, political, economic, legal and other conditions affecting our domestic and foreign operations and supply-chain sources, such as political instability and acts of war or terrorism, natural disasters, disruption of markets, operational disruptions, changes in import and export laws, currency restrictions and currency exchange rate fluctuations; the impact of the loss of one or more of our suppliers of finished goods or raw materials; our ability to effectively manage our inventory and reduce inventory reserves; our ability to optimize our global supply chain; our ability to continue to effectively distribute our products through our distribution network; financial difficulties experienced by, or loss of or reduction in sales to, any of our top customers or groups of customers; gains and losses in the shelf space that our customers devote to our products; our ability to accurately forecast demand for our products; increasing pressure on margins; our ability to keep pace with changing consumer preferences; the impact of any inadequacy, interruption or failure with respect to our information technology or any data security breach; our ability to protect our reputation and brand images; our ability to protect our trademarks, copyrights and patents; our debt and debt service requirements that restrict our operating and financial flexibility and impose interest and financing costs; the financial ratios that our debt instruments require us to maintain; future financial performance, including availability, terms and deployment of capital; our ability to comply with environmental and occupational health and safety laws and regulations; costs and adverse publicity from violations of labor or environmental laws by us or our suppliers; and other risks identified from time to time in our most recent Securities and Exchange Commission reports, including our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, registration statements, press releases and other communications, as well as in the investors section of our corporate website at http://tiny.cc/HanesBrandsIR. Except as required by law, the company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

HanesBrands

HanesBrands is a socially responsible leading marketer of everyday basic apparel under some of the world’s strongest apparel brands, including Hanes, Champion, Playtex, Bali, JMS/Just My Size, barely there, Wonderbra and Gear for Sports. The company sells T-shirts, bras, panties, men’s underwear, children’s underwear, socks, hosiery, casualwear and activewear produced in the company’s low-cost global supply chain. Ranked No. 512 on the Fortune 1000 list, Hanes has approximately 53,300 employees in more than 25 countries and takes pride in its strong reputation for ethical business practices. Hanes is a U.S. Environmental Protection Agency Energy Star 2012 Sustained Excellence Award winner and 2010 and 2011 Partner of the Year. The company ranks No. 141 on Newsweek magazine’s list of Top 500 greenest U.S. companies. More information about the company and its corporate social responsibility initiatives, including environmental, social compliance and community improvement achievements, may be found on the Hanes corporate website at www.hanesbrands.com.

TABLE 1
HANESBRANDS INC.
Condensed Consolidated Statements of Income
(Amounts in thousands, except per-share amounts)
(Unaudited)
	Quarter Ended					Nine Months Ended
	September 29, 2012		October 1, 2011		% Change	September 29, 2012		October 1, 2011		% Change
Net sales	$	1,218,681	$	1,185,304	2.8%	$	3,372,465	$	3,333,340	1.2%
Cost of sales		818,751		771,251			2,350,489		2,168,305
Gross profit		399,930		414,053	-3.4%		1,021,976		1,165,035	-12.3%
As a % of net sales		32.8%		34.9%			30.3%		35.0%
Selling, general and
administrative expenses		243,422		269,109			734,872		792,177
As a % of net sales		20.0%		22.7%			21.8%		23.8%
Operating profit		156,508		144,944	8.0%		287,104		372,858	-23.0%
As a % of net sales		12.8%		12.2%			8.5%		11.2%
Other expenses		3,373		880			4,829		2,295
Interest expense, net		32,897		38,255			106,503		118,483
Income from continuing operations
before income tax expense		120,238		105,809			175,772		252,080
Income tax expense		9,055		20,739			21,544		48,283
Income from continuing operations		111,183		85,070	30.7%		154,228		203,797	-24.3%
Income (loss) from discontinued
operations, net of tax		(1,291)		5,762			(69,935)		21,926
Net income	$	109,892	$	90,832	21.0%	$	84,293	$	225,723	-62.7%
Earnings (loss) per share - basic:
Continuing operations	$	1.13	$	0.87	29.9%	$	1.56	$	2.09	-25.4%
Discontinued operations		(0.01)		0.06	NM		(0.71)		0.22	NM
Net income	$	1.11	$	0.93	19.4%	$	0.85	$	2.31	-63.2%
Earnings (loss) per share - diluted:
Continuing operations	$	1.11	$	0.85	30.6%	$	1.54	$	2.05	-24.9%
Discontinued operations		(0.01)		0.06	NM		(0.70)		0.22	NM
Net income	$	1.09	$	0.91	19.8%	$	0.84	$	2.28	-63.2%
Weighted average shares outstanding:
Basic		98,707		97,925			98,611		97,559
Diluted		100,472		99,535			100,131		99,200

TABLE 2
HANESBRANDS INC.
Supplemental Financial Information
(Dollars in thousands)
(Unaudited)
	Quarter Ended					Nine Months Ended
	September 29, 2012		October 1, 2011		% Change	September 29, 2012		October 1, 2011		% Change
Segment net sales¹:
Innerwear	$	574,278	$	558,422	2.8%	$	1,748,256	$	1,711,802	2.1%
Outerwear		413,033		392,683	5.2%		981,021		970,776	1.1%
Direct to Consumer		99,111		97,565	1.6%		278,396		277,819	0.2%
International		132,259		136,634	-3.2%		364,792		372,943	-2.2%
Total net sales	$	1,218,681	$	1,185,304	2.8%	$	3,372,465	$	3,333,340	1.2%
Segment operating profit¹:
Innerwear	$	96,841	$	88,372	9.6%	$	269,718	$	265,974	1.4%
Outerwear		46,339		48,379	-4.2%		24,118		94,265	-74.4%
Direct to Consumer		14,412		12,268	17.5%		24,773		21,955	12.8%
International		17,574		14,797	18.8%		33,964		43,275	-21.5%
General corporate expenses/other		(18,658)		(18,872)	-1.1%		(65,469)		(52,611)	24.4%
Total operating profit	$	156,508	$	144,944	8.0%	$	287,104	$	372,858	-23.0%
EBITDA²:
Net income from continuing operations	$	111,183	$	85,070		$	154,228	$	203,797
Interest expense, net		32,897		38,255			106,503		118,483
Income tax expense		9,055		20,739			21,544		48,283
Depreciation and amortization		23,047		21,972			69,313		65,185
Total EBITDA	$	176,182	$	166,036	6.1%	$	351,588	$	435,748	-19.3%
¹ As a result of the reduced size of sheer hosiery and changing trends, HanesBrands decided in the first quarter of 2012 to change its external segment reporting to include hosiery operations within the Innerwear segment. Hosiery had previously been reported as a separate segment. Prior-year segment sales and operating profit results, including other minor allocation changes, have been revised to conform to the current-year presentation. In addition, in May 2012, HanesBrands sold its European imagewear business, and the company is completing the discontinuation of its private label and Outer Banks domestic imagewear operations serving wholesalers that sell to the screen-print industry. As a result, the current year and prior-year segment disclosures do not reflect the sales and operating profit results of these discontinued businesses.
² Earnings from continuing operations before interest, taxes, depreciation and amortization is a non-GAAP financial measure.

TABLE 3
HANESBRANDS INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
	September 29, 2012			December 31, 2011
Assets
Cash and cash equivalents	$	182,269		$	35,345
Trade accounts receivable, net		585,490			470,713
Inventories		1,340,776			1,607,555
Other current assets		210,319			217,178
Total current assets		2,318,854			2,330,791
Property, net		606,011			635,406
Intangible assets and goodwill		556,392			603,071
Other noncurrent assets		458,302			465,401
Total assets	$	3,939,559		$	4,034,669
Liabilities
Accounts payable and accrued liabilities	$	688,938		$	703,711
Notes payable		50,778			63,075
Accounts Receivable Securitization Facility		193,975			166,933
Current portion of long-term debt		145,185			-
Total current liabilities		1,078,876			933,719
Long-term debt		1,500,000			1,807,777
Other noncurrent liabilities		583,616			612,112
Total liabilities		3,162,492			3,353,608
Equity		777,067			681,061
Total liabilities and equity	$	3,939,559		$	4,034,669
TABLE 4
HANESBRANDS INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
	Nine Months Ended
	September 29, 2012			October 1, 2011
Operating Activities:
Net income	$	84,293		$	225,723
Depreciation and amortization		70,096			66,568
Impairment of intangibles		37,425			-
Loss on disposition of business		31,811			-
Other noncash items		4,943			25,598
Changes in assets and liabilities, net		80,837			(344,763	)
Net cash provided by (used in) operating activities		309,405			(26,874	)
Investing Activities:
Capital expenditures		(29,162	)		(56,085	)
Acquisition of business		-			(9,154	)
Disposition of business		12,708			-
Net cash used in investing activities		(16,454	)		(65,239	)
Financing Activities:
Net borrowings (repayments) on notes payable, debt and other		(146,189	)		97,492
Effect of changes in foreign currency exchange rates on cash		162			(1,053	)
Increase in cash and cash equivalents		146,924			4,326
Cash and cash equivalents at beginning of year		35,345			43,671
Cash and cash equivalents at end of period	$	182,269		$	47,997
Supplemental cash flow information¹:
Net cash provided by (used in) operating activities	$	309,405		$	(26,874	)
Capital expenditures		(29,162	)		(56,085	)
Free cash flow	$	280,243		$	(82,959	)

¹ Free cash flow is a non-GAAP measure. For the quarter ended September 29, 2012, net cash provided by operating activities (GAAP) was $297 million and net capital expenditures were $10 million, resulting in non-GAAP free cash flow of $287 million. For 2012 guidance, net cash provided by operating activities (GAAP) is expected to be approximately $545 million and net capital expenditures are expected to be approximately $45 million, resulting in expectations for non-GAAP free cash flow of approximately $500 million.

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