This management's discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see "Forward-Looking Statements" in this Quarterly Report on Form 10-Q for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q. The unaudited condensed interim consolidated financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes for the year endedDecember 28, 2019 , which were included in our Annual Report on Form 10-K filed with theSEC . The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included elsewhere in this Quarterly Report on Form 10-Q and those included in the "Risk Factors" section and elsewhere in our Annual Report on Form 10-K for the year endedDecember 28, 2019 and in our Quarterly Report on Form 10-Q for the quarter endedMarch 28, 2020 . In particular, statements with respect to trends associated with our business, our future financial performance and the potential effects of the global COVID-19 pandemic included in this Quarterly Report on Form 10-Q specifically appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations" include forward-looking statements. The unaudited condensed consolidated interim financial statements for the quarter and six months endedJune 29, 2019 have been revised to correct prior period errors as discussed in Note, "Basis of Presentation" and Note, "Revisions of Previously Issued Condensed Consolidated Interim Financial Statements" to our unaudited condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q. Accordingly, this MD&A reflects the impact of those revisions. OverviewHanesbrands Inc. (collectively with its subsidiaries, "we," "us," "our," or the "Company") is a socially responsible leading marketer of everyday basic innerwear and activewear apparel in theAmericas ,Europe ,Australia andAsia/Pacific under some of the world's strongest apparel brands, including Hanes, Champion, Bonds, DIM, Maidenform,Bali , Playtex, Lovable,Bras N Things ,Nur Die /Nur Der , Alternative, L'eggs, JMS/Just My Size, Wonderbra, Berlei and Gear for Sports. We design, manufacture, source and sell a broad range of basic apparel such as T-shirts, bras, panties, shapewear, underwear, socks, hosiery and activewear, produced in our low-cost global supply chain. Our brands hold either the number one or number two market position by units sold in many of the product categories and geographies in which we compete. Our operations are managed and reported in three operating segments, each of which is a reportable segment for financial reporting purposes: Innerwear, Activewear and International. These segments are organized principally by product category and geographic location. Each segment has its own management team that is responsible for the operations of the segment's businesses, but the segments share a common supply chain and media and marketing platforms. Other consists of ourU.S. -based outlet stores andU.S. hosiery business. Impact of COVID-19 on Our Business OnMarch 11, 2020 , theWorld Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation measures have led to adverse impacts on theU.S. and global economies. The COVID-19 pandemic has impacted our business operations and results of operations for the second quarter and six months of 2020 as described in more detail under "Condensed Consolidated Results of Operations - Second Quarter EndedJune 27, 2020 Compared with Second Quarter EndedJune 29, 2019 " and "Condensed Consolidated Results of Operations - Six Months EndedJune 27, 2020 Compared with Six Months EndedJune 29, 2019 " below, due to decreased customer traffic and temporary retail store closures worldwide. The evolving COVID-19 pandemic could continue to have an adverse impact on our results of operations and liquidity; the operations of our suppliers, vendors and customers; and on our employees as a result of quarantines, facility closures, and travel and other restrictions. While the ultimate global and economic impact of the COVID-19 pandemic remains highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will be materially impacted for at least the balance of 2020, as a result of: • decreased customer traffic in our retail stores and retail stores in which our products are sold; • changes in consumer confidence and consumer spending habits, including spending for the merchandise that we sell and negative trends in consumer purchasing patterns due to changes in consumers' disposable income, credit availability and debt levels; • decreased discretionary consumer-directed channel spending independent of store closures; 27
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• decreased wholesale channel sales and increased likelihood of wholesale customer financial distress, including requests for extended payment terms or potential payment defaults; • disruption to our global supply chain including the manufacturing, supply, distribution, transportation and delivery of our products; • decreased productivity due to travel bans, work-from-home policies or shelter-in-place orders; and • a slowdown in theU.S. and global economies, and an uncertain global economic outlook or a potential credit crisis. The extent to which the COVID-19 pandemic impacts our business operations, financial results, and liquidity will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the pandemic; our response to and ability to respond to and adjust our business strategies to mitigate the impact of the pandemic; the negative impact it has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short- and longer-term impact on the levels of consumer confidence; the ability of our suppliers, vendors and customers to successfully address the impacts of the pandemic; actions governments, businesses and individuals take in response to the pandemic; and how quickly economies recover after the COVID-19 pandemic subsides. We expect the negative impact of the COVID-19 pandemic to lead to continued net sales decreases due to decreased traffic at our retail stores and reduced net sales and earnings for our wholesale customers, some of which have experienced or may experience financial distress or declare bankruptcy. Reduced retail sales or additional customer store closures and customer bankruptcies could reduce or eliminate our anticipated income and cash flows, which would negatively affect our results of operations and liquidity. Even if customers do not declare bankruptcy, some have extended payment terms and more may seek to extend payment terms or be unable or unwilling to pay us amounts that we are entitled to on a timely basis or at all, which would adversely affect our earnings and liquidity. In the quarter endedJune 27, 2020 , we recorded$11 million of bad debt charges primarily related to the effects of the COVID-19 pandemic. In the quarter endedJune 27, 2020 , we recorded$20 million of charges to reserve for increased excess and obsolete inventory related primarily to canceled orders of seasonal inventory and$20 million of charges for the impairment of intangible assets primarily as a result of the COVID-19 pandemic. We could be required to record increased excess and obsolete inventory reserves due to continued decreased net sales or additional noncash impairment charges related to our intangible assets or goodwill due to reductions in cash flows that are more than short-term in nature. Additionally, the operations of our retail stores and our manufacturing facilities may not generate sales sufficient to offset fixed operating expenses, which could adversely affect our income and could adversely affect the value of our owned and leased properties, potentially requiring us to recognize significant noncash impairment charges. We have been taking steps to mitigate the potential risks to us posed by the spread and related circumstances and impacts of COVID-19. We are focused on addressing these recent challenges by preserving our liquidity and managing our cash flow with preemptive actions designed to enhance our ability to meet our short-term liquidity needs. Such actions include, but are not limited to, focusing on channels that continue to generate sales, including mass retail and online; selling personal protective equipment ("PPE") such as cloth face coverings and gowns; operating our manufacturing and distribution facilities on a demand-adjusted basis; reducing our discretionary spending such as certain media and marketing expenses; focused working capital management; reducing capital expenditures; suspending our share repurchase program until further notice; reducing payroll costs, through temporary employee furloughs and pay cuts; working globally to maximize our participation in all eligible government or other initiatives available to businesses or employees impacted by the COVID-19 pandemic; engaging with landlords to negotiate rent deferrals or other rent concessions; issuing new debt and amending certain existing debt facilities. These efforts may not be enough to offset anticipated declines in net sales and earnings and we may not be able to access sufficient additional working capital to meet our liquidity needs. Outlook for 2020 We issued first-quarter and full-year 2020 guidance onFebruary 7, 2020 , which excluded any impact from the spread of the COVID-19 pandemic. Due to the uncertainty and rapidly changing environment relating to the pandemic, onMarch 25, 2020 , we withdrew the guidance for the first quarter and full year. We will not provide a quarterly and full-year updated outlook until visibility of the pandemic's effect on global economies improves. However, we have provided that we expect more than$150 million of PPE sales, to generate positive cash flow from operating activities and a tax rate of approximately 17.5% in the second half of 2020. 28
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Seasonality and Other Factors Absent the effects of the COVID-19 pandemic, our operating results are typically subject to some variability due to seasonality and other factors. For instance, we have historically generated higher sales during the back-to-school and holiday shopping seasons and during periods of cooler weather, which benefits certain product categories such as fleece. Sales levels in any period are also impacted by customer decisions to increase or decrease their inventory levels in response to anticipated consumer demand. Our customers may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice to us. Media, advertising and promotion expenses may vary from period to period during a fiscal year depending on the timing of our advertising campaigns for retail selling seasons and product introductions. We expect the duration and scope of the COVID-19 pandemic to alter these patterns at least through the remainder of 2020. Although the majority of our products are replenishment in nature and tend to be purchased by consumers on a planned, rather than on an impulse, basis, our sales are impacted by discretionary consumer spending trends. Discretionary spending is affected by many factors that are outside our control, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, currency exchange rates, taxation, energy prices, unemployment trends and other matters that influence consumer confidence and spending. Consumers' purchases of discretionary items, including our products, could decline during periods when disposable income is lower, when prices increase in response to rising costs, or in periods of actual or perceived unfavorable economic conditions. In addition, the COVID-19 pandemic may continue to result in decreased consumer confidence and lower consumer spending. As a result, consumers may choose to purchase fewer of our products, to purchase lower-priced products of our competitors in response to higher prices for our products, or may choose not to purchase our products at prices that reflect our price increases that become effective from time to time. Changes in product sales mix can impact our gross profit as the percentage of our sales attributable to higher margin products, such as intimate apparel and men's underwear, and lower margin products, such as seasonal and replenishable activewear, fluctuate from time to time. In addition, sales attributable to higher and lower margin products within the same product category fluctuate from time to time. Our customers may change the mix of products ordered with minimal notice to us, which makes trends in product sales mix difficult to predict. However, certain changes in product sales mix are seasonal in nature, as sales of socks, hosiery and fleece products generally have higher sales during the last two quarters (July to December) of each fiscal year as a result of cooler weather, back-to-school shopping and holidays, while other changes in product mix may be attributable to consumers' preferences and discretionary spending. Overview of the Second Quarter EndedJune 27, 2020 The COVID-19 pandemic adversely impacted our business operations and results of operations for the second quarter of 2020. As the COVID-19 virus continued to spread around the world in the second quarter of 2020, net sales and profits across our apparel businesses decreased dramatically. During the second quarter of 2020, we sold PPE globally to governments, large organizations, business-to-business customers and consumers including more than 450 million cloth face coverings and more than 20 million medical gowns for use during the COVID-19 pandemic to theU.S. government. Key financial results are as follows: • Total net sales in the second quarter of 2020 were$1.7 billion , compared with$1.8 billion in the same period of 2019, representing a 1% decrease. • Operating profit increased 5% to$242 million in the second quarter of 2020, compared with$230 million in the same period of 2019. As a percentage of sales, operating profit was 13.9% in the second quarter of 2020 compared to 13.0% in the same period of 2019. Included within operating profit were restructuring and other action-related charges of$63 million and$13 million for the quarters endedJune 27, 2020 andJune 29, 2019 , respectively. • Sales of PPE used to help mitigate the spread of the COVID-19 virus were$752 million in the second quarter of 2020. • InApril 2020 , given the rapidly changing environment and level of uncertainty being created by the COVID-19 pandemic and the associated impact on future earnings, we amended our Senior Secured Credit Facility prior to any potential covenant violation in order to modify the financial covenants and to provide operating flexibility during the COVID-19 crisis. • InMay 2020 , we issued$700 million aggregate principal amount of 5.375% Senior Notes which mature inMay 2025 . The net proceeds from the issuance of$691 million were used to repay all outstanding borrowings under our Revolving Loan Facility, pay related fees and expenses, and for general corporate purposes. 29
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Condensed Consolidated Results of Operations - Second Quarter Ended
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