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" and "Risk Factors" in this Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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 listed under "Risk Factors" in this Annual Report on Form 10-K and included elsewhere in this Annual Report on Form 10-K. This MD&A is a supplement to our consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, and is provided to enhance your understanding of our results of operations and financial condition. Our MD&A is organized as follows: • Overview. This section provides a general description of our Company and operating segments, business and industry trends, our key business strategies and background information on other matters discussed in this MD&A. • 2019 Highlights. This section discusses some of the highlights of our performance and activities during 2019.
• Consolidated Results of Operations and Operating Results by Business
Segment. These sections provide our analysis and outlook for the significant line items on our Consolidated Statements of Income, as well as other information that we deem meaningful to an understanding of our
results of operations on both a consolidated basis and a business segment
basis.
• Liquidity and Capital Resources. This section provides an analysis of
trends and uncertainties affecting liquidity, cash requirements for our
business, sources and uses of our cash and our financing arrangements.
• Critical Accounting Policies and Estimates. This section discusses the
accounting policies that we consider important to the evaluation and reporting of our financial condition and results of operations, and whose application requires significant judgments or a complex estimation process. • Recently Issued Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting pronouncements that were adopted during 2019 and that we will be required to adopt in a future period. The consolidated financial statements for the years endedDecember 29, 2018 andDecember 30, 2017 have been revised to correct prior period errors as discussed in Note, "Summary of Significant Accounting Policies" and Note, "Revisions of Previously Issued Consolidated Financial Statements" to our consolidated financial statements included in this Annual Report on Form 10-K. Accordingly, this MD&A reflects the impact of those revisions.
Overview
Our CompanyHanesbrands Inc. 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, men's underwear, children's underwear, activewear, socks and hosiery. 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 Segments 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. value-based ("outlet") stores andU.S. hosiery business. The reportable segments are as follows: • Innerwear includes sales inthe United States of basic branded apparel
products that are replenishment in nature under the product categories of
men's underwear, women's panties, children's underwear and socks, and intimate apparel, which includes bras and shapewear. 25
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• Activewear includes sales in
that are primarily seasonal in nature to both retailers and wholesalers,
as well as licensed sports apparel and licensed logo apparel in collegiate bookstores, mass retailers and other channels.
• International includes sales of products in all of our categories outside
andCanada .
Outlook for 2020
Our 2020 results are expected to be impacted by the exit of our C9 Champion
program at a major mass retailer and the exit of our
million to
• Pre-tax restructuring and other action-related charges of approximately
• Interest expense and other expenses of approximately
• An annual effective tax rate of approximately 14.5%;
• Cash flow from operations of
• Capital expenditure investment of approximately
Business and Industry Trends Inflation and Changing Prices Cotton is the primary raw material used in manufacturing many of our products. While we do not own yarn operations, we are still exposed to fluctuations in the cost of cotton. Increases in the cost of cotton can result in higher costs in the price we pay for yarn from our large-scale yarn suppliers and may result in the need to implement future price increases in order to maintain our margins. Decreases in cotton prices can lead to lower margins for inventory and products produced from cotton we have already purchased, particularly if there is downward price pressure as a result of consumer demand, competition or other factors. Our costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by, among other factors, weather, consumer demand, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable and beyond our control. We are able to lock in the cost of cotton reflected in the price we pay for yarn from our primary yarn suppliers in an attempt to protect our business from the volatility of the market price of cotton. Under our agreements with these suppliers, we have the ability to periodically fix the cotton cost component of our yarn purchases. When we elect to fix the cotton cost component under these agreements, interim fluctuations in the price of cotton do not impact the price we pay for the specified volume of yarn. The yarn suppliers bear the risk of cotton fluctuations for the yarn volume specified and it is their responsibility to procure the cotton at the agreed upon pricing through arrangements they make with their cotton suppliers. However, our business can be affected by dramatic movements in cotton prices. The cost of cotton used in goods manufactured by us represented only approximately 4% of our cost of sales in 2019. Costs incurred today for materials and labor, including cotton, typically do not impact our results until the inventory is sold approximately six to nine months later. Inflation can have a long-term impact on us because increasing costs of materials and labor may impact our ability to maintain satisfactory margins. For example, the cost of the materials that are used in our manufacturing process, such as oil-related commodity prices and other raw materials, including cotton, dyes and chemicals, and other costs, such as fuel, energy and utility costs, can fluctuate as a result of inflation and other factors. Costs incurred for materials and labor are capitalized into inventory and impact our results as the inventory is sold. In addition, a significant portion of our products are manufactured in countries other thanthe United States and declines in the value of theU.S. dollar may result in higher manufacturing costs. Increases in inflation may not be matched by growth in consumer income, which also could have a negative impact on spending. Other Business and Industry Trends The basic apparel market is highly competitive and rapidly evolving. Competition generally is based upon brand, comfort, fit, style and price. The majority of our core styles continue from year to year, with variations only in color, fabric or design details. Some products, however, such as intimate apparel, activewear and sheer hosiery, do have more of an emphasis on style and innovation. Our businesses face competition today from other large domestic and foreign corporations and 26
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manufacturers, as well as smaller companies, department stores, specialty stores and other retailers that market and sell basic apparel products under private labels that compete directly with our brands. Our top 10 customers accounted for 40% of our net sales in 2019. Our largest customers in 2019 wereWal-Mart and Target, which accounted for 14% and 11% of total sales, respectively. The increasing bargaining power of retailers can create pricing pressures as our customers grow larger and seek greater concessions in their purchase of our products, while also demanding exclusivity with respect to some of our products. To counteract these effects, it has become increasingly important to leverage our national brands through investment in our largest and strongest brands as our customers strive to maximize their performance especially in today's challenging retail economic environment. Brands are important in our core categories to drive traffic and project the quality and value our customers demand. Consumers are increasingly embracing shopping online through e-commerce platforms. As a result, an increasing portion of our revenue across all channels is being generated online through e-commerce platforms. We are continuing to develop and expand our omnichannel capabilities to allow a consumer to use more than one channel when making a purchase, including in-store, at one of our retail or outlet stores or those of our retail partners, online or with a mobile device, through one of our branded websites, the website of one of our retail partners, or an online retailer, such as Amazon. In addition to broadening our assortment of product offerings across all online channels, we are also increasing the proportion of our media budget dedicated to digital marketing. Foreign Exchange Rates Changes in exchange rates between theU.S. Dollar and other currencies can impact our financial results in two ways; a translation impact and a transaction impact. The translation impact refers to the impact that changes in exchange rates can have on our published financial results. Similar to many multi-national corporations that publish financial results inU.S. Dollars, our revenue and profit earned in local foreign currencies is translated back intoU.S. Dollars using an average exchange rate over the representative period. A period of strengthening in theU.S. Dollar results in a negative impact to our published financial results (because it would take more units of a local currency to convert into a dollar). The opposite is true during a period of weakening in theU.S. Dollar. Our biggest foreign currency exposures are the Australian dollar and the Euro. We use cross-currency swap contracts and nonderivative financial instruments to minimize material foreign currency translation exposures. The transaction impact on financial results is common for apparel companies that source goods because these goods are purchased inU.S. Dollars. The transaction impact from a strengtheningU.S. Dollar would have a negative impact to our financial results (because theU.S. Dollar-based costs would convert into a higher amount of local currency units, which means a higher local-currency cost of goods, and in turn, a lower local-currency gross profit). The transaction impact from exchange rates is typically recovered over time with price increases. However, during periods of rapid change in exchange rates; pricing is unable to change quickly enough, therefore we use forward foreign exchange contracts to hedge against our sourcing costs to minimize our exposure to fluctuating exchange rates. Our Key Business Strategies Our Innovate-to-Elevate strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. The first element of our Innovate-to-Elevate strategy is our brand power. We seek to drive sales growth by consistently offering consumers brands they trust and products with strong value. Our brands have a strong heritage in the basic apparel industry. 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. Internationally, our commercial markets includeEurope ,Australasia ,Japan ,Canada ,China ,Mexico andSouth Korea , where we expect a substantial amount of gross domestic product growth outsidethe United States will be concentrated over the next decade. Our ability to react to changing customer needs and industry trends is key to our success. Our design, research and product development teams, in partnership with our marketing teams, drive our efforts to bring innovations to market. We seek to leverage our insights into consumer demand in the basic apparel industry to develop new products within our existing lines and to modify our existing core products in ways that make them more appealing, addressing changing customer needs and industry trends. We also support our key brands with targeted, effective advertising and marketing campaigns. The second element of our Innovate-to-Elevate strategy is platform innovation. We focus on identifying the long-term megatrends that will impact our categories over the next five to 10 years. Once we have identified these trends, we utilize a disciplined big-idea process to put more science into the art of apparel. Our approach to innovation is to focus on big platforms. Our Tagless apparel platform, Comfort Flex Fit apparel platform, ComfortBlend fabric platform, temperature-control X-Temp fabric platform, FreshIQ advanced odor protection technology fabric platform, SmoothTec fabric technology, Cool Comfort fabric technology and DreamWire underwire technology incorporate big-idea innovation to span brands, 27
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product categories, business segments, retailer and distribution channels and geographies. We are focused on driving innovation that is margin accretive and that can leverage our supply chain in order to drive further economies of scale. The third element of our Innovate-to-Elevate strategy is our low-cost global supply chain. We seek to expand margins through optimizing our low-cost global supply chain and streamlining our operations to reduce costs. We believe that we are able to leverage our significant scale of operations to provide us with greater manufacturing efficiencies, purchasing power and product design, marketing and customer management resources than our smaller competitors. Our global supply chain spans across both the Western and Eastern hemispheres and provides us with a balanced approach to product supply, which relies on a combination of owned, contracted and sourced manufacturing located across different geographic regions, increases the efficiency of our operations, reduces product costs and offers customers a reliable source of supply. Our global supply chain enables us to expand and leverage our production scale as we balance our supply chain across hemispheres, thereby diversifying our production risks. We have generated significant cost savings, margin expansion and contributions to cash flow and should continue to do so as we further optimize our size, scale and production capability. We seek to generate strong cash flow through effectively optimizing our capital structure and managing working capital levels. Our capital allocation strategy is to deploy our significant, consistent cash flow effectively to generate the best long-term returns for our shareholders. Our goal is for our leverage ratio of net debt-to-adjusted EBTIDA to be in a range of 2 to 3 times. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization excluding restructuring and other action-related costs and stock compensation expense. Net debt is defined as total debt less cash and cash equivalents. Our strategy is to use our cash flow from operations to first fund capital investments and dividends. When we are within our targeted leverage range, we intend to use debt for strategic acquisitions and use excess free cash flow, which is defined as cash flow from operations less capital expenditures and dividends, for share repurchases. When we are outside our targeted leverage range, we plan to use excess free cash flow to pay down debt. Tax Expense As a global company, we are subject to income taxes and file income tax returns in more than 100 United States and foreign jurisdictions each year. For the year endedDecember 28, 2019 , a substantial majority of our foreign income was earned by our manufacturing and sourcing operations inEl Salvador ,Hong Kong ,Dominican Republic ,Honduras ,Vietnam andThailand . The relatively lower effective tax rates in these jurisdictions as a result of favorable local tax regimes and various free trade zone agreements significantly reduced our consolidated effective tax rate. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower effective tax rates and higher than anticipated in countries where we have higher effective tax rates, or by changes in tax laws or regulations. In addition, future acquisitions may affect the proportion of our pre-tax income from foreign jurisdictions, both due to external sales and also increased volume in our self-owned supply chain. We follow a disciplined acquisition strategy focused on acquisitions that meet strict criteria for strong likely returns with relatively low risk. It is difficult to predict whether or when such acquisitions will occur and whether the acquisition targets will be foreign or domestic. Therefore, it is also difficult to predict the effect of acquisitions on the future distribution of our pre-tax income. We maintain intercompany transfer pricing agreements governing sales within our self-owned supply chain, which can impact the amount of pre-tax income we recognize in foreign jurisdictions. In compliance with applicable tax laws, we regularly review the terms of these agreements utilizing independent third-party transfer pricing studies to ensure that intercompany pricing is consistent with what a seller would charge an independent, arm's length customer, or what a buyer would pay an independent, arm's length supplier. Therefore, changes in intercompany pricing are often driven by market conditions, which are also difficult to predict. The Tax Act significantly revisedUnited States corporate income tax law by, among other things, reducing the corporate income tax rate to 21%, imposing a new minimum tax on GILTI and implementing a modified territorial tax system that included a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In response to the Tax Act, theSEC issuedSAB 118 which allowed issuers to recognize provisional estimates of the impact of the Tax Act in their financial statements, during a measurement period not to exceed one year from the date of enactment. We completed our accounting for the enactment of the Tax Act in accordance withSAB 118 in the fourth quarter of 2018. As ofDecember 28, 2019 , we have continued to evaluate the effects of the Tax Act and its inherent interplay with our global capital allocation strategy and its impact on our historical permanent reinvestment assertion with respect to the accumulated earnings of our foreign subsidiaries. As a result of our overall and continuous evaluation, we have not changed our assertion from prior year and we will continue to permanently reinvest a portion of our unremitted foreign earnings. The portion of our unremitted foreign earnings as ofDecember 28, 2019 that we intend to remit tothe United States totals approximately$1 billion . We intend to use these earnings to pay down debt held inthe United States and execute share repurchases. The remaining portion of our unremitted foreign earnings will continue to be permanently reinvested to fund working capital requirements and operations abroad. As ofDecember 28, 2019 , we have accrued for income taxes of$43 28
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million in connection with the$1 billion of unremitted foreign earnings we intend to remit in the future. These income tax effects includeUnited States federal, state, foreign and withholding tax implications in accordance with the planned remittance of such foreign earnings. We regularly assess any significant exposure associated with increases in effective tax rates, and adjustments are made as events occur that warrant adjustment to our tax provisions. See "Risk Factors." - We have a complex multinational tax structure, and changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could impact our capital deployment strategy and adversely affect our results."
2019 Highlights
Key financial highlights are as follows:
• Total net sales in 2019 were
2018, representing a 2% increase.
• Operating profit was
2018, representing a 3% increase. As a percentage of sales, operating
profit was 12.8% in 2019 compared to 12.7% in 2018. Included within
operating profit were restructuring and other action-related charges of
$63 million and$80 million in 2019 and 2018, respectively. • Diluted earnings per share was$1.64 in 2019, compared with$1.48 in 2018, representing a 11% increase.
• Operating cash flows were
in 2018. • As part of our cash deployment strategy, we paid four quarterly
dividends, in March, June, September and December, of
Consolidated Results of Operations - Year Ended
Years Ended December 28, December 29, Higher Percent 2019 2018 (Lower) Change (dollars in thousands) Net sales$ 6,966,923 $ 6,803,955 $ 162,968 2.4 % Cost of sales 4,247,593 4,150,736 96,857 2.3 Gross profit 2,719,330 2,653,219 66,111 2.5 Selling, general and administrative expenses 1,829,600 1,788,568 41,032 2.3 Operating profit 889,730 864,651 25,079 2.9 Other expenses 31,424 26,395 5,029 19.1 Interest expense, net 178,579 194,675 (16,096 ) (8.3 ) Income before income tax expense 679,727 643,581 36,146 5.6 Income tax expense 79,007 103,915 (24,908 ) (24.0 ) Net income$ 600,720 $ 539,666 $ 61,054 11.3 %
• Organic sales on a constant currency basis, defined as sales excluding
the impact of foreign currency and businesses acquired within the past 12
months, increased 4% in 2019, as a result of sales growth in
global Champion brand and our international innerwear business.
Partially offset by: • Unfavorable impact from foreign currency exchange rates in our International businesses of approximately$122 million ; and
• A decrease in
our intimate apparel and basics businesses. 29
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Operating Profit Operating profit as a percentage of net sales was 12.8% in 2019, an increase from the prior year of approximately 10 basis points. Price increases taken in 2019, higher margin product sales mix and lower bad debt charges, primarily related to the Sears Holdings Corporation ("Sears") bankruptcy filing in 2018 were partially offset by increased input costs, planned investments to support our brands and future growth initiatives, unfavorable impact from foreign exchange rates and higher variable compensation accruals. Included in operating profit in 2019 and 2018 were charges of$63 million and$80 million , respectively related to restructuring and other action-related costs. Other Highlights Other Expenses - Other expenses were higher by$5 million in 2019 compared to 2018 primarily due to higher pension expense in 2019. Interest Expense - Interest expense was lower by$16 million in 2019 compared to 2018 driven by lower debt balances and the impact of the cross-currency swap contracts entered into inJuly 2019 partially offset by a higher weighted average interest rate on our borrowings. Our weighted average interest rate on our outstanding debt was 4.08% during 2019, compared to 3.91% during 2018. Income Tax Expense - Our effective income tax rate was 11.6% and 16.1% for 2019 and 2018, respectively. The lower tax rate in 2019 compared to 2018 is primarily due to a discrete tax benefit recorded in 2019.
Operating Results by Business Segment - Year Ended
Net Sales Years Ended December 28, December 29, Higher Percent 2019 2018 (Lower) Change (dollars in thousands) Innerwear$ 2,302,632 $ 2,379,675 $ (77,043 ) (3.2 )% Activewear 1,854,704 1,792,280 62,424 3.5 International 2,529,375 2,344,115 185,260 7.9 Other 280,212 287,885 (7,673 ) (2.7 ) Total$ 6,966,923 $ 6,803,955 $ 162,968 2.4 % Operating Profit and Margin Years Ended December 28, December 29, Higher Percent 2019 2018 (Lower) Change (dollars in thousands) Innerwear$ 515,991 22.4 %$ 526,831 22.1 %$ (10,840 ) (2.1 )% Activewear 281,319 15.2 267,428 14.9 13,891 5.2 International 384,784 15.2 351,769 15.0 33,015 9.4 Other 24,829 8.9 25,348 8.8 (519 ) (2.0 ) Corporate (317,193 ) NM (306,725 ) NM (10,468 ) (3.4 ) Total$ 889,730 12.8 %$ 864,651 12.7 %$ 25,079 2.9 % Innerwear Innerwear net sales decreased 3% compared to 2018 driven by a 2% decline in our basics business and a 6% decline in our intimate apparel business. Net sales in our intimate apparel business decreased as a result of declines in our bras product category in the first nine months of 2019, which was impacted by door closings and the challenging retail landscape within the mid-tier and department store channel. This decline was partially offset by growth in our shapewear product category. Innerwear operating margin was 22.4%, representing an increase from 22.1% in 2018. Price increases implemented in 2019 were partially offset by lower volume and higher materials costs. Activewear Activewear net sales increased 3% in 2019 compared to the prior year. Core Champion sales within the Activewear segment, which we define as Champion sales outside of the mass retail channel, were up 34% in 2019, driven by strong 30
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consumer demand and growth across channels. Sales declined in the remainder of our activewear business due to our previously announced exit from commodity programs within the mass retail channel as we focused on remixing parts of our activewear business to branded products, as well as, softer trends in the printwear channel. Activewear operating margin was 15.2%, representing an increase from 14.9% in the prior year as a result of improved Champion profitability, higher margin sales mix from our remixing activity and pricing, partially offset by higher materials costs and higher selling, general and administrative expenses, reflecting an increase in investments to support our brands and growth initiatives. International Net sales in the International segment increased 8% as a result of the following: • Our acquisition ofBras N Things in the first quarter of 2018, which contributed non-organic net sales of$18 million in 2019;
• Organic sales on a constant currency basis, defined as sales excluding
the impact of foreign currency and businesses acquired within the past 12
months, increased 12% in 2019, driven by growth in both our innerwear and
activewear businesses.
Partially offset by: • Unfavorable impact of foreign currency exchange rates of approximately
International operating margin was 15.2%, an increase from 2018 of 20 basis points, primarily due to increased efficiencies of scale and the continued realization of acquisition synergies, coupled with improved Champion profitability and high margin contributions from the acquiredBras N Things business. Operating profit in 2019 was reduced by a$3 million bad debt charge related to a retailer bankruptcy inAustralia . Other Other net sales were lower as a result of continued declines in hosiery sales inthe United States offset by increased traffic at our retail outlet stores. Operating margin increased primarily due to the increase in sales at our retail outlet stores. Corporate Corporate expenses included certain administrative costs including restructuring and other action-related charges. Corporate expenses increased in 2019 compared to the same period in 2018 primarily due to higher variable compensation accruals partially offset by lower restructuring and other action-related charges and lower bad debt expense as a result of a charge recorded in 2018 related to the Sears bankruptcy filing. Supply chain actions include the reduction of overhead costs, principally within our Western Hemisphere network. Program exit charges are costs associated with exiting the C9 Champion business with Target and theDKNY license. Acquisition and integration costs are expenses directly related to an acquisition and its integration into the organization. Other acquisitions and other action-related costs include acquisition and integration charges for smaller acquisitions such asBras N Things , as well as other action-related costs including corporate workforce reductions. Years Ended December 28, December 29, 2019 2018 (dollars in thousands) Restructuring and other action-related charges included in operating profit: Supply chain actions$ 53,651 $ - Program exit costs 4,616 - Hanes Europe Innerwear - 26,403 Hanes Australasia - 14,266 Other acquisitions and other action-related costs 5,219
39,529
Total restructuring and other action-related charges included in operating profit
$ 63,486 $ 80,198 31
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Consolidated Results of Operations - Year Ended
Years Ended December 29, December 30, Higher Percent 2018 2017 (Lower) Change (dollars in thousands) Net sales$ 6,803,955 $ 6,471,410 $ 332,545 5.1 % Cost of sales 4,150,736 3,981,959 168,777 4.2 Gross profit 2,653,219 2,489,451 163,768 6.6 Selling, general and administrative expenses 1,788,568 1,725,424 63,144 3.7 Change in fair value of contingent consideration - 27,852 (27,852 ) NM Operating profit 864,651 736,175 128,476 17.5 Other expenses 26,395 32,645 (6,250 ) (19.1 ) Interest expense, net 194,675 174,435 20,240 11.6 Income from continuing operations before income tax expense 643,581 529,095 114,486 21.6 Income tax expense 103,915 453,117 (349,202 ) (77.1 ) Income from continuing operations 539,666 75,978 463,688 610.3 Income (loss) from discontinued operations, net of tax - (2,097 ) 2,097 NM Net income$ 539,666 $ 73,881 $ 465,785 630.5 % Net Sales Net sales increased 5% primarily due to the following: • Acquisitions ofBras N Things in 2018 and Alternative Apparel in 2017, which added incremental net sales of$177 million in 2018;
• Organic sales on a constant currency basis, defined as sales excluding
the impact of foreign currency and businesses acquired within the past 12
months, increased 2% in 2018, driven by strong growth in our global
Champion sales, our innerwear businesses in
and online sales offset in part by declines in ourUnited States innerwear business and United States Hanes activewear business; and • Favorable impact from foreign currency exchange rates in our International businesses of approximately$13 million . Operating Profit Operating profit as a percentage of net sales was 12.7% in 2018, an increase from the prior year of approximately 130 basis points, primarily due to the following: • Gross margin expansion of approximately 50 basis points as the increase in International gross profit from acquisition synergies and lower restructuring and other action-related charges was partially offset by higher input costs; and
• Lower selling, general and administrative expenses as a percentage of net
sales of approximately 40 basis points primarily due to lower
restructuring and other action-related charges and cost savings realized
from the corporate headcount reduction efforts in 2017, partially offset
by increased bad debt charges, primarily related to the Sears bankruptcy
filing, increased distribution expenses from investments to support future growth and higher proportion of selling, general and administrative costs at our recently acquired businesses. Included within operating profit are charges of approximately$80 million and$191 million related to restructuring and other action-related costs in 2018 and 2017, respectively. Included within restructuring and other action-related costs in 2017, is$28 million related to the change in fair value of contingent consideration resulting from the final settlement ruling for the contingent consideration liability in connection with the Champion Europe acquisition in 2016. Other Highlights Other Expenses - Other expenses were lower by$6 million in 2018 compared to 2017 primarily due to$4 million of lower pension expense in 2018 and higher costs in 2017 to refinance credit facilities. 32
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Interest Expense - Interest expense was higher by$20 million in 2018 compared to 2017 driven by higher debt balances and a higher weighted average interest rate. Our weighted average interest rate on our outstanding debt was 3.91% during 2018, compared to 3.78% during 2017. Income Tax Expense - Our effective income tax rate was 16.1% and 85.6% for 2018 and 2017, respectively. The lower tax rate in 2018 compared to 2017 is primarily due to the provisional charge recorded in 2017 related to the Tax Act of$437 million , primarily related to a transition tax charge on deemed repatriated earnings of foreign subsidiaries and a charge for the revaluation of our deferred tax assets and liabilities to the lower corporate income tax rate of 21%. Discontinued Operations - The results of our discontinued operations in 2017 included the operations of two businesses, Dunlop Flooring and Tontine Pillow, purchased in theHanes Australasia acquisition and sold in 2017.
Operating Results by Business Segment - Year Ended
Net Sales Years Ended December 30, Higher Percent December 29, 2018 2017 (Lower) Change (dollars in thousands) Innerwear $ 2,379,675$ 2,462,876 $ (83,201 ) (3.4 )% Activewear 1,792,280 1,654,278 138,002 8.3 International 2,344,115 2,054,664 289,451 14.1 Other 287,885 299,592 (11,707 ) (3.9 ) Total $ 6,803,955$ 6,471,410 $ 332,545 5.1 % Operating Profit and Margin Years Ended December 29, December 30, Higher Percent 2018 2017 (Lower) Change (dollars in thousands) Innerwear$ 526,831 22.1 %$ 580,879 23.6 %$ (54,048 ) (9.3 )% Activewear 267,428 14.9 264,975 16.0 2,453 0.9 International 351,769 15.0 268,367 13.1 83,402 31.1 Other 25,348 8.8 31,540 10.5 (6,192 ) (19.6 ) Corporate (306,725 ) NM (409,586 ) NM 102,861 25.1 Total$ 864,651 12.7 %$ 736,175 11.4 %$ 128,476 17.5 % Innerwear Innerwear net sales decreased 3% compared to 2017 driven by a 1% decline in our basics business and a 10% decline in our intimate apparel business. Within our basics business, strength in our men's underwear business was more than offset by declines in our women's panties, children's underwear and sock businesses. Net sales in our intimate apparel business decreased primarily due to declines in our bras product category, which continues to be impacted by door closings and the challenging retail landscape within the mid-tier and department store channel. Innerwear operating margin was 22.1%, representing a reduction from 2017 of approximately 150 basis points due to the impact from lower sales volume, higher raw material costs and product mix, which was partially offset by lower selling, general and administrative expenses as a result of the prior year's corporate headcount reduction efforts. Activewear Activewear net sales increased as a result of our acquisition of Alternative Apparel inOctober 2017 , which contributed incremental net sales in 2018 of$54 million , as well as approximately 5% increase in net sales among our other activewear businesses. Core Champion sales within our Activewear segment, which we define as Champion sales outside of the mass retail channel, were up 48% in 2018, driven by strong consumer demand, space gains in the sports specialty channels and growth in the online channel. Growth in core Champion sales more than offset declines in our Champion and Hanes activewear businesses within the mass retail channel due to space reductions. Activewear operating margin was 14.9%, representing a decline from 2017 of approximately 110 basis points as favorable product mix and cost savings associated with prior year's corporate headcount reduction efforts were more than offset 33
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by higher raw material costs, higher distribution costs primarily driven by investments to support future growth and a higher proportion of selling, general and administrative expenses from our recently acquired businesses. International Net sales in the International segment were higher as a result of the following: • Our acquisition ofBras N Things in the first quarter of 2018, which contributed incremental net sales of nearly$123 million ;
• Organic sales on a constant currency basis, defined as sales excluding
the impact of foreign currency and businesses acquired within the past 12
months, increased in 2018, driven by our global Champion sales growth,
primarily in the
businesses in
• Favorable impact of foreign currency exchange rates of approximately
million.
International operating margin was 15.0%, an increase from 2017 of approximately 190 basis points primarily due to scale efficiencies, favorable mix and the continued realization of acquisition synergies coupled with high margin contributions from the recently acquiredBras N Things business. Other Other net sales were lower as a result of continued declines in hosiery sales inthe United States and slower traffic at our outlet stores. Operating margin decreased slightly as the impact from lower sales volume was only partially offset by continued cost control. Corporate Corporate expenses decreased in 2018 primarily related to lower restructuring and other action-related charges of$111 million , partially offset by increased bad debt charges, primarily related to the Sears bankruptcy filing. Acquisition and integration costs are expenses directly related to an acquisition and its integration into the organization. Other acquisitions and other action-related costs include acquisition and integration charges for smaller acquisitions such asBras N Things , Champion Europe and Alternative Apparel, as well as other action-related costs including corporate workforce reductions. Contingent consideration related to Champion Europe represents the charge recognized in relation to the final contingent consideration settlement in excess of amounts previously accrued, as further described in Note, "Acquisitions" to our consolidated financial statements. Years Ended December 29, December 30, 2018 2017 (dollars in thousands) Restructuring and other action-related charges included in operating profit: Hanes Europe Innerwear$ 26,403 $ 65,995 Hanes Australasia 14,266 40,681 Other acquisitions and other action-related costs 39,529
56,376
Contingent consideration related to Champion Europe -
27,852
Total restructuring and other action-related charges included in operating profit
$ 80,198
Liquidity and Capital Resources Cash Requirements and Trends Affecting Liquidity We rely on our cash flows generated from operations and the borrowing capacity under our credit facilities to meet the cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, business acquisitions, contributions to our pension plans, repurchases of our stock, regular quarterly dividend payments and income tax payments. We believe we have sufficient cash and available borrowings for our foreseeable liquidity needs. We typically use cash during the first half of the year and generate most of our cash flow in the second half of the year. We expect the top priorities of our cash deployment strategy in the future will include capital investments and dividends. When we are within our targeted leverage range, we intend to use debt for strategic acquisitions and use excess free cash flow for share repurchases. When we are outside our targeted leverage range, we plan to use excess free cash flow to pay down debt. 34
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Our primary sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international loan facilities, including our Australian Revolving Loan Facility and our European Revolving Loan Facility. We had the following borrowing capacity and availability under our credit facilities as ofDecember 28, 2019 : As of December 28, 2019 Borrowing Borrowing Capacity Availability (dollars in thousands) Senior Secured Credit Facility: Revolving Loan Facility$ 1,000,000 $
995,565
Australian Revolving Loan Facility 41,497
41,497
European Revolving Loan Facility 110,914
-
Accounts Receivable Securitization Facility(1) 235,743 235,743 Other international credit facilities
130,199
111,033
Total liquidity from credit facilities
(1) Borrowing availability under the Accounts Receivable Securitization Facility
is subject to a quarterly fluctuating facility limit, not to exceed
million and permitted only to the extent that the face of the receivables in
the collateral pool, net of applicable reserves and other deductions, exceeds
the outstanding loans.
As ofDecember 28, 2019 , we had$329 million in cash and cash equivalents. We currently believe that our existing cash balances and cash generated by operations, together with our borrowing availability, will enable us to comply with the terms of our indebtedness and meet foreseeable liquidity requirements. The following have impacted or are expected to impact liquidity: • We may repurchase shares of the Company's common stock under our new
share repurchase program, which was approved by our Board of Directors on
We did not repurchase any shares of common stock during 2019 or 2018. During 2017, we repurchased 19.6 million shares (at a cost of$400 million ) under our prior share repurchase program.
• Our Board of Directors has authorized a regular quarterly dividend.
• We have principal and interest obligations under our outstanding debt.
• We expect to continue to invest in efforts to accelerate worldwide
omnichannel and global growth initiatives, as well as marketing and brand building. • We expect to continue to invest in efforts to improve operating efficiencies and lower costs.
• We acquired
October 2017 and we may pursue strategic acquisitions in the future. • We made contributions of$26 million to ourU.S. pension plan in 2019 and
expect to make required cash contributions of
pension plan in 2020 based on a preliminary calculation by our actuary.
We may also elect to make additional voluntary contributions. Our
qualified pension plan was approximately 91% and 93% funded as of
Protection Act funding rules.
• We may increase or decrease the portion of the current-year income of our
foreign subsidiaries that we remit to
impact our effective income tax rate. We have not changed our
reinvestment strategy from the prior year with regards to our historic
earnings which were taxed as part of the Tax Act and intend to remit foreign earnings totaling$1 billion . • We are obligated to make installment payments over an eight-year period
related to our transition tax liability resulting from the implementation
of the Tax Act, which began in 2018, in addition to any estimated income taxes due based on current year taxable income. In 2019, we made an installment payment on our transition tax liability in the amount of$7 million and have a remaining balance due of$101 million to be paid in installment payments through 2025.
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of SEC Regulation S-K.
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Future Contractual Obligations and Commitments The following table contains information on our contractual obligations and commitments as ofDecember 28, 2019 , and their expected timing on future cash flows and liquidity. Payments Due by Period Fiscal At December 28, Fiscal Fiscal Fiscal 2025 and 2019 2020 2021-2022 2023-2024 Thereafter (dollars in thousands) Operating activities: Interest on debt obligations(1)$ 657,741 $ 136,011 $ 267,263 $ 194,017 $ 60,450 Inventory purchase obligations 493,403 485,968 7,435 - -
Operating lease obligations 595,599 166,833 216,989
118,023 93,754 Marketing and advertising obligations 10,072 9,237 835 - - Defined benefit plan minimum contributions(2) 25,000 25,000 - - - Tax obligations(3) 178,724 33,358 62,778 45,069 37,519 Other long-term obligations(4) 521,220 176,373 137,325 107,274 100,248 Investing activities: Capital expenditures 17,940 17,554 386 - - Financing activities: Debt 3,394,761 110,914 625,000 1,758,847 900,000 Notes payable 4,244 4,244 - - - Total$ 5,898,704 $ 1,165,492 $ 1,318,011
$ 2,223,230 $ 1,191,971
(1) Interest obligations on floating rate debt instruments are calculated for
future periods using interest rates in effect at
(2) Represents only the required minimum pension contributions to our
qualified pension plan in 2020. In addition to the required cash
contributions, we may elect to make voluntary contributions to maintain
certain funded levels. For a discussion of our pension plan obligations, see
Note, "Defined Benefit Pension Plans," to our consolidated financial
statements.
(3) Represents current tax liabilities, uncertain tax positions and transition
tax liabilities resulting from the Tax Act.
(4) Represents the projected payment for long-term liabilities recorded on the
Consolidated Balance Sheet for certain employee benefit claims, royalty-bearing license agreement payments, postemployment benefit obligations and deferred compensation. Sources and Uses of Our Cash The information presented below regarding the sources and uses of our cash flows for the years endedDecember 28, 2019 andDecember 29, 2018 was derived from our consolidated financial statements. Years Ended December 28, December 29, 2019 2018 (dollars in thousands) Operating activities$ 803,432 $ 643,402 Investing activities (109,660 ) (418,651 ) Financing activities (824,010 ) (200,497 ) Effect of changes in foreign exchange rates on cash 4,429 9,912 Change in cash, cash equivalents and restricted cash
(125,809 ) 34,166 Cash, cash equivalents and restricted cash at beginning of year 455,732
421,566 Cash, cash equivalents and restricted cash at end of year 329,923 455,732 Less restricted cash at end of year 1,047 22,710 Cash and cash equivalents at end of year $
328,876
Operating Activities Our overall liquidity is primarily driven by our strong cash flow provided by operating activities, which is dependent on net income and changes in working capital. As compared to the prior year, the higher net cash generated by operating activities was due to higher profitability and improved working capital management, specifically related to the reduction of inventory levels, offset by a$26 million ofU.S. pension contribution made in the first quarter of 2019. Cash generated by operating 36
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activities in 2018 included the final Champion Europe contingent consideration payment of$32 million and$17 million ofU.S. pension contributions. Investing Activities The decrease in cash used by investing activities was primarily the result of the acquisition ofBras N Things in 2018. In 2019, we paid$21 million of the indemnification escrow related to theBras N Things acquisition. Additionally, we increased capital investments into our business to support our global growth compared to the prior year. Financing Activities Cash used by financing activities increased primarily as a result of repayments on our loan facilities in 2019 as compared to the same period of 2018 including our payment of the outstanding balance and termination of the Australian Term A-1 loan in 2019. Financing Arrangements We believe our financing structure provides a secure base to support our operations and key business strategies. As ofDecember 28, 2019 , we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness discussed below. We continue to monitor our covenant compliance carefully. We expect to maintain compliance with our covenants during 2020, however economic conditions or the occurrence of events discussed above under "Risk Factors" could cause noncompliance. For further details regarding our liquidity from our available cash balances and credit facilities see, "Cash Requirements and Trends Affecting Liquidity," above. Critical Accounting Policies and Estimates We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial condition in conformity with accounting principles generally accepted inthe United States . We apply these accounting policies in a consistent manner. Our significant accounting policies are discussed in Note, "Summary of Significant Accounting Policies," to our consolidated financial statements. The application of critical accounting policies requires that we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. We evaluate these estimates and assumptions on an ongoing basis and may retain outside consultants to assist in our evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known. The critical accounting policies that involve the most significant management judgments and estimates used in preparation of our consolidated financial statements, or are the most sensitive to change from outside factors, are described below: Sales Recognition and Incentives We recognize revenue when obligations under the terms of a contract with a customer are satisfied, which occurs at a point in time, upon either shipment or delivery to the customer. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods, which includes estimates for variable consideration. We record provisions for any uncollectible amounts based upon our historical collection statistics and current customer information. Our management reviews these estimates each quarter and makes adjustments based upon actual experience. Note, "Summary of Significant Accounting Policies - (e) Sales Recognition and Incentives," to our consolidated financial statements describes a variety of sales incentives that we offer to resellers and consumers of our products. Measuring the cost of these incentives requires, in many cases, estimating future customer utilization and redemption rates. We use historical data for similar transactions to estimate the cost of current incentive programs. Our management reviews these estimates each quarter and makes adjustments based upon actual experience and other available information. We classify the costs associated with cooperative advertising as a reduction of "Net sales" in our Consolidated Statements of Income. Accounts Receivable Valuation Accounts receivable consist primarily of amounts due from customers. We carry our accounts receivable at their net realizable value. In determining the appropriate allowance for doubtful accounts, we consider a combination of factors, such as the aging of trade receivables, industry trends, and our customers' financial strength, credit standing and payment and default history. Changes in the aforementioned factors, among others, may lead to adjustments in our allowance for doubtful accounts. The calculation of the required allowance requires judgment by our management as to the impact of these and other factors on 37
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the ultimate realization of our trade receivables. Charges to the allowance for doubtful accounts are reflected in the "Selling, general and administrative expenses" line and charges to the allowance for customer chargebacks and other customer deductions are primarily reflected as a reduction in the "Net sales" line of our Consolidated Statements of Income. Our management reviews these estimates each quarter and makes adjustments based upon actual experience. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a large reserve might be required. The amount of actual historical losses has not varied materially from our estimates for bad debts. Inventory Valuation We carry inventory on our balance sheet at the estimated lower of cost or market. Cost is determined by the first-in, first-out, or "FIFO," method for our inventories. We carry obsolete, damaged and excess inventory at the net realizable value, which we determine by assessing historical recovery rates, current market conditions and our future marketing and sales plans. Because our assessment of net realizable value is made at a point in time, there are inherent uncertainties related to our value determination. Market factors and other conditions underlying the net realizable value may change, resulting in further reserve requirements. A reduction in the carrying amount of an inventory item from cost to market value creates a new cost basis for the item that cannot be reversed at a later period. While we believe that adequate write-downs for inventory obsolescence have been provided in the consolidated financial statements, consumer tastes and preferences will continue to change and we could experience additional inventory write-downs in the future. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases are reflected as reductions in the cost of the related inventory item, and are therefore reflected in "Cost of Sales" in our Consolidated Statements of Income when the related inventory item is sold. Income Taxes Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities, as well as for realizable operating loss and tax credit carryforwards, at tax rates in effect for the years in which the differences are expected to reverse. Realization of deferred tax assets is dependent on future taxable income in specific jurisdictions, the amount and timing of which are uncertain, and on possible changes in tax laws and tax planning strategies. If in our judgment it appears that it is more likely than not that all or some portion of the asset will not be realized, valuation allowances are established against our deferred tax assets, which increase income tax expense in the period when such determination is made. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. These assessments of uncertain tax positions contain judgments related to the interpretation of tax regulations in the jurisdictions in which we transact business. The judgments and estimates made at a point in time may change based on the outcome of tax audits, expiration of statutes of limitations, as well as changes to, or further interpretations of, tax laws and regulations. Income tax expense is adjusted in our Consolidated Statements of Income in the period in which these events occur. We completed our accounting for the enactment of the Tax Act in the fourth quarter of 2018. Assets and Liabilities Acquired in Business Combinations We account for business combinations using the purchase method, which requires us to allocate the cost of an acquired business to the acquired assets and assumed liabilities based on their estimated fair values at the acquisition date. We recognize the excess of an acquired business' cost over the fair value of acquired assets and assumed liabilities as goodwill. We use a variety of information sources to determine the fair value of acquired assets and assumed liabilities. We generally use third-party appraisers to assist management in determination of the fair value and lives of property and identifiable intangibles, consulting actuaries to assist management in determining the fair value of obligations associated with defined benefit pension plans and legal counsel to assist management in assessing obligations associated with legal and environmental claims. Trademarks and Other Identifiable Intangibles Trademarks, license agreements, customer and distributor relationships and computer software are our primary identifiable intangible assets. We amortize identifiable intangibles with finite lives over their estimated useful lives, and we do not amortize identifiable intangibles with indefinite lives. As ofDecember 28, 2019 , the net book value of trademarks and other 38
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identifiable intangible assets was$1.5 billion , of which we are amortizing a balance of$188 million . We anticipate that our amortization expense for 2020 will be approximately$33 million . We evaluate identifiable intangible assets subject to amortization for impairment at least annually and as triggering events occur, such as significant adverse changes in business climate, several periods of operating or cash flow losses, forecasted continued losses or a current expectation that an intangible asset's value will be eliminated prior to the end of its useful life. We estimate an intangible asset's useful life based on historical experience, the level of maintenance expenditures required to obtain future cash flows, future business plans and the period over which the asset will be economically useful to us. Our policies require that we periodically review our assets' remaining depreciable lives based upon actual experience and expected future utilization. A change in the depreciable life is treated as a change in accounting estimate and the accelerated amortization is accounted for in the period of change and future periods. We assess identifiable intangible assets not subject to amortization for impairment at least annually, as of the first day of the third fiscal quarter, and more often as triggering events occur. In order to determine the impairment of identifiable intangible assets, we compare the fair value of the intangible asset to its carrying amount. Fair values of intangible assets are primarily based on future cash flows projected to be generated from that asset. We recognize an impairment loss for the amount by which an identifiable intangible asset's carrying value exceeds its fair value. In connection with our annual impairment testing performed in 2019, we performed a quantitative assessment for each indefinite-lived asset. The tests indicate that the indefinite-lived intangible assets have fair values that exceeded their carrying amounts and no impairment of trademarks or other identifiable intangible assets was identified as a result of our testing conducted in 2019.Goodwill As ofDecember 28, 2019 , we had$1.2 billion of goodwill. We do not amortize goodwill, but we assess for impairment at least annually and more often as triggering events occur. The timing of our annual goodwill impairment testing is the first day of the third fiscal quarter. The estimated fair values significantly exceeded the carrying values of each of our reporting units as of the first day of the third fiscal quarter, and no impairment of goodwill was identified as a result of the testing conducted in 2019. In evaluating the recoverability of goodwill in 2019, we estimated the fair value of our reporting units. We relied on a number of factors to determine the fair value of our reporting units and evaluated various factors to discount anticipated future cash flows, including operating results, business plans and present value techniques. As discussed above under "Trademarks and Other Identifiable Intangibles," there are inherent uncertainties related to these factors, and our judgment in applying them and the assumptions underlying the impairment analysis may change in such a manner that impairment in value may occur in the future. Such impairment will be recognized in the period in which it becomes known. Defined Benefit Pension Plans For a discussion of our net periodic benefit cost, plan obligations, plan assets and how we measure the amount of these costs, see Note, "Defined Benefit Pension Plans," to our consolidated financial statements. The funded status of our defined benefit pension plans are recognized on our balance sheet. Differences between actual results in a given year and the actuarially determined assumed results for that year are deferred as unrecognized actuarial gains or losses in comprehensive income. We measure the funded status of our plans as of the date of our fiscal year end. The net periodic benefit cost of the pension plans is determined using projections and actuarial assumptions, the most significant of which are the discount rate and the long-term rate of asset return. The net periodic pension income or expense is recognized in the year incurred. Gains and losses, which occur when actual experience differs from actuarial assumptions, are amortized over the average future expected life of participants. As benefits under theHanesbrands Inc. Pension Plan are frozen, year over year fluctuations in our pension expense are not expected to be material and not expected to have a material impact on our Consolidated Statements of Income. Our policies regarding the establishment of pension assumptions are as follows: • Discount rate assumptions are generally based on yield curves applicable
to each country and the expected cash flows for each plan. For our
defined benefit plans, we use the full series of spot rates along the Aon
Hewitt AA Above Median Yield Curve and expected plan cash flows to
determine liabilities and expense. Single equivalent discount rates are
shown for disclosure purposes.
• Salary increase assumptions, where applicable, are generally based on
historical experience and management expectations. This assumption is not applicable to theU.S. ,Germany , orItaly as benefits under these plans are either 39
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frozen or not tied to pay. The benefits under theHanesbrands Inc. Pension Plan were frozen as ofDecember 31, 2005 . • Long-term rate of return on plan assets assumptions, where applicable,
are generally based on each plan's investment mix and forward-looking
capital market assumptions applicable to each country. Expected returns
also reflect an incremental premium for actively managed investments and
a reduction for trust-paid expenses. This assumption is not applicable to
unfunded plans. • Retirement and turnover assumptions are generally based on actual plan experience while standard actuarial mortality tables applicable to each country are used to estimate life expectancy. For ourU.S. defined benefit plans, the 2019 mortality tables are from the Society of
Actuaries' Private Plan study published in 2019 (Pri-2012) projected
generationally with Scale MP-2019.
The sensitivity of changes in actuarial assumptions on our annual pension expense and on our plans' benefit obligations, all other factors being equal, is illustrated by the following: Increase (Decrease) in Pension Benefit Expense Obligation (in millions) 1% decrease in discount rate$ (2 ) $ 161 1% increase in discount rate 1 (131 ) 1% decrease in expected investment return 8 N/A 1% increase in expected investment return (8 ) N/A Recently Issued Accounting Pronouncements For a summary of recently issued accounting pronouncements, see Note, "Summary of Significant Accounting Policies" to our consolidated financial statements included in this Annual Report on Form 10-K.
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