HANESBRANDS INC. 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 generally discusses the results of fiscal years 2020 and 2019 and year-to-year comparisons between fiscal years 2020 and 2019. Discussions of fiscal year 2018 results and year-to-year comparisons between fiscal years 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . 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. •Consolidated Results of Operations and Operating Results by Business Segment. These sections provide our analysis and outlook for the significant line items in 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 2020 and that we will be required to adopt in a future period.
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,Bali , Maidenform, Playtex,Bras N Things ,Nur Die /Nur Der , JMS/Just My Size, Wonderbra, Lovable, Alternative, Berlei, L'eggs, 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 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. In 2020, Innerwear also includes sales inthe United States of personal protective equipment ("PPE") including products such as cloth face coverings and gowns. 27
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•Activewear includes sales inthe United States of basic branded products 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, including PPE in 2020, outsidethe United States , primarily inEurope ,Australasia ,Asia ,Canada andLatin America . Impact of COVID-19 on Our Business As the global impact of COVID-19 continues, our priority has been to protect the health and safety of our employees and customers around the world. To help mitigate the spread of the COVID-19 virus and in response to health advisories and governmental actions and regulations, we have modified our business practices and have implemented health and safety measures that are designed to protect employees in our corporate, retail, distribution and manufacturing facilities around the world. The COVID-19 pandemic has impacted our business operations and financial results for 2020, as described in more detail under "Consolidated Results of Operations - Year EndedJanuary 2, 2021 ("2020") Compared with Year EndedDecember 28, 2019 ("2019")" below, due to decreased customer traffic and temporary retail store closures worldwide. While most of our retail stores were temporarily closed for varying periods of time throughout 2020, most reopened by the end of the second quarter but have experienced, and are expected to continue to experience, reductions in customer traffic, and as a result, net sales. Sales of PPE, used to help mitigate the spread of the COVID-19 virus, partially offset the negative impact of the decline in net sales and earnings due to the COVID-19 pandemic on our financial results. Our e-commerce sites have remained open in all regions and online sales have grown as consumer spending continued to shift towards online shopping experiences due to the changing retail landscape as a result of the COVID-19 pandemic. While many retail stores reopened and some government restrictions were removed or lightened, many locations across the globe have experienced significant recent increases in COVID-19 cases as well as additional government restrictions, and the ultimate impact of the COVID-19 pandemic remains highly uncertain and could continue to have a material adverse impact on our business operations and financial results, including net sales, earnings and cash flows, as a result of: •quarantines, facility closures, event cancellations and other restrictions; •additional temporary closures of our retail stores and retail stores in which our products are sold; •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 wholesale channel sales and increased likelihood of wholesale customer bankruptcy or 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; and •a slowdown in theU.S. and global economies, and an uncertain global economic outlook or a potential credit crisis. During the second quarter of 2020, we recorded$11 million of bad debt charges for customer bankruptcies and$20 million of charges to reserve for increased excess and obsolete inventory related primarily to canceled orders of seasonal inventory. Also during the second quarter of 2020, we completed a quantitative impairment analysis for certain indefinite-lived intangible assets as a result of the significant impact of the COVID-19 pandemic on their performance. Based on this analysis, we recorded impairment charges of$20 million on certain indefinite-lived trademarks and other intangible assets within the European Innerwear business. In the third quarter of 2020, we recorded$49 million of supply chain re-start up charges primarily related to incremental costs incurred, such as freight and sourcing premiums, to expedite product to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic. Additionally, in the fourth quarter of 2020, we recorded a$25 million charge for the impairment of goodwill related to theU.S. Hosiery reporting unit primarily as a result of the significant impact that the COVID-19 pandemic has had on this business. In connection with the annual goodwill impairment testing performed during the third quarter of 2020, we performed a quantitative assessment utilizing an income approach to estimate the fair value of each reporting unit. The most significant assumptions include the weighted average cost of capital, revenue growth rate, terminal growth rate and operating profit margin, all of which are used to estimate the fair value of the reporting units. The tests indicated the reporting units had fair values that exceeded their carrying values. Certain reporting units, including the European Innerwear business andU.S. Hosiery, were considered to be at a higher risk for future impairment if any assumptions used in the estimate of the reporting units' fair values change in the future given their respective fair values exceeded their carrying values by less than 20% and 28
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trends in the associated businesses indicate a declining fair value. In the fourth quarter of 2020, we determined that there was a triggering event associated with ourU.S. Hosiery reporting unit due to a significant decline in performance below management's expectations and loss of a future wholesale hosiery program. Based on the updated quantitative analysis, we recorded impairment charges for the full amount of goodwill related to theU.S. Hosiery reporting unit of$25 million . The estimated fair value of the European Innerwear reporting unit during the annual impairment test exceeded the carrying value by less than 20% and is still viewed as higher risk for future impairment. The goodwill associated with the European Innerwear reporting unit was approximately$105 million as ofJanuary 2, 2021 . Additionally, in connection with the annual impairment testing performed in the third quarter of 2020, we performed a quantitative assessment, utilizing an income approach to estimate the fair value of each indefinite-lived intangible asset. The most significant assumptions include the weighted average cost of capital, revenue growth rate, terminal growth rate and operating profit margin, all of which are used to estimate the fair value of the indefinite-lived intangible assets. The tests indicated the indefinite-lived intangible assets had fair values that exceeded their carrying values and no impairment of trademarks or other identifiable intangible assets was identified as a result of our testing. Certain indefinite-lived trademarks within the European Innerwear business were considered to be at a higher risk for future impairment if any assumptions used in the estimate of the trademarks' fair value change in the future given their respective fair values exceeded their carrying values by less than 20% and trends in the associated businesses indicate a declining fair value. As ofJanuary 2, 2021 , we considered four trademarks within the European Innerwear business to be at a higher risk for future impairment and the carrying value of these four indefinite-lived trademarks was approximately$90 million . We took steps to mitigate the potential risks to us posed by the spread and related circumstances and impacts of COVID-19. We addressed these 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 included, but were not limited to, focusing on channels that continued to generate sales, including mass retail and online; selling PPE, such as cloth face coverings and gowns; operating our manufacturing and distribution facilities on a demand-adjusted basis; reduced discretionary spending such as certain media and marketing expenses; focused working capital management; reduced capital expenditures; suspended our share repurchase program which is currently prohibited under the Senior Secured Credit Facility; reduced 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; issued new debt and amended certain existing debt facilities. See "The novel coronavirus disease (COVID-19) global pandemic has had and is expected to continue to have an adverse impact on our business." in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K. Outlook for the First Quarter of 2021 We estimate our first quarter endedApril 3, 2021 guidance as follows: •Net sales of$1.485 billion to$1.515 billion , approximately$50 million of foreign exchange benefit; •Operating profit of$140 million to$150 million ; •Full Potential plan-related charges of approximately$10 million reflected in operating profit; and •Diluted earnings per share from$0.24 to$0.27 . 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 29
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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 2% of our cost of sales in 2020. 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 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. In 2020, excluding government agencies to which we sold PPE, our top 10 customers accounted for approximately 40% of our total net sales and 43% of our total apparel net sales. Our top customer, Walmart, accounted for 15% of our total net sales and 17% of our total apparel net sales in 2020. 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. 30
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Our Key Business Strategies Our business strategy integrates our brand superiority, industry-leading innovation and low-cost global supply chain to provide higher value products while lowering production costs. We operate in the global innerwear and global activewear apparel categories. These are stable, heavily branded categories where we have a strong consumer franchise based on a global portfolio of industry-leading brands that we have built over multiple decades, through hundreds of millions of direct interactions with consumers. With the arrival of our new Chief Executive Officer in August of 2020, we undertook a comprehensive global business review focused on building consumer-centric growth. The review resulted in our Full Potential plan, which is our multi-year growth strategy that focuses on four pillars to drive growth and enhance long-term profitability and identifies the initiatives to unlock growth. Our four pillars of growth are to grow the Champion brand globally, drive growth in Innerwear with brands and products that appeal to younger consumers, build e-commerce excellence across channels and streamline our global portfolio. In order to deliver this growth and create a more efficient and productive business model, we have launched a multi-year cost savings program intended to substantially self-fund the investments necessary to achieve the Full Potential plan's objectives. We remain highly confident that our strong brand portfolio, world-class supply chain and diverse category and geographic footprint will help us unlock our full potential, deliver long-term growth and create stockholder value. In the fourth quarter of 2020, we began the early implementation of our Full Potential plan including a number of actions to simplify our business and transform our organization to move faster, lower costs and focus on our highest-return growth opportunities. Simplification is critical to our future growth. Specific actions we have initiated as we began to implement our Full Potential plan include portfolio streamlining and SKU rationalization. We are streamlining our portfolio to increase our business focus and improve future returns. As a result of COVID-19 vaccines rolling out around the world along with slowing retail orders and a flood of competitive offerings, our future PPE sales opportunities have been dramatically reduced. Therefore, we do not view PPE as a future growth opportunity for our company. We recorded a charge of$374 million to write down our entire PPE inventory balance to its estimated net realizable value and a charge of$26 million to accrue for vendor commitments for PPE materials. Additionally, we commenced an initiative to reduce 20% of our SKUs in inventory in order to streamline product offerings while also implementing a formal lifecycle management process. As a result, we recorded a charge of$211 million to write down inventory to its estimated net realizable value taking into account our initiatives. These initiatives will position us for long-term growth by driving higher margin sales, lowering costs and improving service to customers. In addition, onFebruary 9, 2021 , as part of our strategic review, we announced that we are exploring strategic alternatives for our European Innerwear business. 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. 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, as permitted under our Senior Secured Credit Facility. 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 domestic and foreign jurisdictions each year. For the year endedJanuary 2, 2021 , 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 31
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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 Cuts and Jobs Act (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 ofJanuary 2, 2021 , we have continued to evaluate our global capital allocation strategy and assertions made 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 ofJanuary 2, 2021 that we intend to remit tothe United States totals approximately$668 million . We intend to use these earnings to pay down debt held inthe United States and execute share repurchases, as permitted under our Senior Secured Credit Facility. The remaining portion of our unremitted foreign earnings will continue to be permanently reinvested to fund working capital requirements and operations abroad. As ofJanuary 2, 2021 , we have accrued for income taxes of$32.9 million in connection with the$668 million 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 income tax provisions. See "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." in Part I, Item 1A. Risk Factors of this Annual Report on Form 10-K.
Consolidated Results of Operations - Year Ended
Years Ended
January 2, December 28, Higher Percent
2021 2019 (Lower) Change
(dollars in thousands)
Net sales $ 6,664,350 $ 6,966,923 $ (302,573) (4.3) %
Cost of sales 4,816,086 4,247,593 568,493 13.4
Gross profit 1,848,264 2,719,330 (871,066) (32.0)
Selling, general and administrative expenses 1,841,763 1,829,600 12,163 0.7
Operating profit 6,501 889,730 (883,229) (99.3)
Other expenses 23,132 31,424 (8,292) (26.4)
Interest expense, net 166,491 178,579 (12,088) (6.8)
Income (loss) before income tax expense (183,122) 679,727 (862,849) NM
Income tax expense (benefit) (107,543) 79,007 (186,550) NM
Net income (loss) $ (75,579) $ 600,720 $ (676,299) NM
Net Sales
Net sales and profit trends across our apparel businesses were adversely
affected by the COVID-19 pandemic in 2020. While many of our retail stores were
temporarily closed for varying periods of time throughout the year, most were
reopened by the end of the second quarter of 2020 as some government
restrictions were removed or lightened. In the second half of 2020, some of our
apparel businesses experienced growth in net sales primarily as a result of
retailers replenishing inventory levels as stores re-opened after temporary
closures due to the COVID-19 pandemic. More recently, many locations across the
globe have experienced significant increases in COVID-19 cases as well as
additional government restrictions, and have experienced and are expected to
continue to experience reductions in traffic and therefore, net sales. The
ultimate impact of the COVID-19 pandemic remains highly uncertain. Our online
sales increased in 2020 as consumer spending continued to shift towards online
shopping experiences due to the changing retail landscape as a result of the
COVID-19 pandemic. During 2020, we sold PPE globally to governments, large
organizations, business-to-business customers and consumers for use to help
mitigate the spread of the COVID-19 virus.
Net sales decreased 4% during 2020 primarily due to the following:
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•The disruption of ourU.S. and International apparel businesses related to the negative effects of the COVID-19 pandemic; and •The exit of our C9 Champion mass program and theDKNY intimate apparel license in 2019 which, together, represented approximately$419 million of net sales in 2019. Partially offset by: •Net sales of PPE of$959 million in 2020; •An incremental$49 million of net sales related to the 53rd week included in our 2020 fiscal year; and •The favorable impact from foreign exchange rates in our International business of approximately$12 million . Operating Profit Operating profit as a percentage of net sales was 0.1% in 2020, representing a decrease from 12.8% in the prior year. Decreased operating profit was the result of lower sales volume in our apparel businesses including the exit of our C9 Champion mass program in 2019, higher manufacturing costs, increased inventory reserves and higher bad debt expense. These decreases were partially offset by cost controls and temporary cost savings initiatives implemented in response to the COVID-19 pandemic. Included in operating profit in 2020 and 2019 were restructuring and other action-related charges of$806 million and$63 million , respectively, including supply chain restructuring charges. In 2020, restructuring and other action-related charges also included charges related to the effects of the COVID-19 pandemic, including asset write-downs, supply chain re-start up charges primarily related to incremental costs incurred, such as freight and sourcing premiums, to expedite product to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic. We also recorded charges in 2020 as part of our Full Potential plan initiatives to streamline our portfolio including charges to write off our PPE inventory and write down inventory as a result of our SKU reduction initiative. Other Highlights Other Expenses - Other expenses decreased$8 million in 2020 compared to 2019 primarily due to lower pension expense and lower funding fees for sales of accounts receivable to financial institutions in 2020. Interest Expense - Interest expense was lower by$12 million in 2020 compared to 2019, primarily driven by the impact of the cross-currency swap contracts entered into inJuly 2019 and a lower weighted average interest rate on our borrowings partially offset by higher outstanding debt balances. Our weighted average interest rate on our outstanding debt was 3.79% during 2020, compared to 4.08% during 2019. Income Tax Expense - Our effective income tax rate was 58.7% and 11.6% for 2020 and 2019, respectively. The higher effective tax rate for 2020 was primarily due to the write-down of certain inventory recognized in high tax rate jurisdictions, includingthe United States , the change in jurisdictional mix of income attributable to the economic impacts of COVID-19 and an income tax benefit recognized in the current year due to our change in estimate of the transition tax liability due as mandated under the Tax Act. During 2020, the Internal Revenue Service closed the examination of the income tax years endedJanuary 2, 2016 andDecember 31, 2016 . The examination resulted in an immaterial adjustment which had been accrued as an uncertain tax benefit in a prior period.
Operating Results by Business Segment - Year Ended
Net Sales
Years Ended
January 2, December 28, Higher Percent
2021 2019 (Lower) Change
(dollars in thousands)
Innerwear $ 2,978,009 $ 2,302,632 $ 675,377 29.3 %
Activewear 1,184,413 1,854,704 (670,291) (36.1)
International 2,309,754 2,529,375 (219,621) (8.7)
Other 192,174 280,212 (88,038) (31.4)
Total $ 6,664,350 $ 6,966,923 $ (302,573) (4.3) %
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Operating Profit and Margin
Years Ended
January 2, December 28, Higher Percent
2021 2019 (Lower) Change
(dollars in thousands)
Innerwear $ 718,923 24.1% $ 515,991 22.4 %
Activewear 67,643 5.7 281,319
15.2 (213,676) (76.0)
International 315,365 13.7 384,784 15.2 (69,419) (18.0) Other (14,025) (7.3) 24,829 8.9 (38,854) NM Corporate (1,081,405) NM (317,193) NM (764,212) (240.9) Total$ 6,501 0.1%$ 889,730 12.8 %$ (883,229) (99.3) % Innerwear Innerwear net sales increased 29% compared to 2019 driven by$801 million of net sales of PPE. This increase was partially offset by a 2% and a 16% decline in net sales in our basics and intimate apparel businesses, respectively, primarily as a result of the negative impact of the COVID-19 pandemic in the first half of 2020. During the second half of 2020, all categories except shapewear within both our basics and intimate apparel businesses experienced growth in net sales primarily as a result of retailers replenishing inventory levels as stores re-opened after temporary closures due to the COVID-19 pandemic. The shapewear category continues to be negatively impacted by the COVID-19 pandemic. In addition, net sales in our Innerwear segment decreased as a result of the exit of the C9 Champion mass program and theDKNY intimate apparel license in 2019. Innerwear operating margin was 24.1%, an increase from 22.4% in 2019. Operating margin enhancement resulted primarily from fixed cost leverage from higher sales and temporary cost reduction initiatives. Activewear Activewear net sales decreased 36% in 2020 compared to the prior year primarily as a result of the negative impact of the COVID-19 pandemic. In addition, the exit of the C9 Champion mass program in 2019 represented approximately$361 million of the net sales decrease in 2020 compared to 2019. Activewear operating margin was 5.7%, representing a decrease from 15.2% in the prior year. The decrease was a result of lower sales, including the exit of the C9 Champion mass program, higher manufacturing costs, increased inventory reserves and higher selling, general and administrative expenses as a percentage of net sales. Lower variable costs as a result of decreased net sales and temporary cost savings initiatives implemented in response to the COVID-19 pandemic reduced selling, general and administrative costs, but not at the same rate as the decline in sales. International Net sales in the International segment decreased 9% as a result of the negative impact of the COVID-19 pandemic partially offset by the favorable impact of foreign currency exchange rates of approximately$12 million . International net sales on a constant currency basis, defined as net sales excluding the impact of foreign currency, decreased 9%. The impact of foreign exchange rates is calculated by applying prior period exchange rates to the current year financial results. Sales of PPE increased International segment net sales by$158 million in 2020. International operating margin was 13.7%, a decrease from 15.2% in 2019, primarily due to decreased sales partially offset by various temporary cost reduction initiatives and selling, general and administrative cost management. Other Other net sales decreased as a result decreased traffic at our retail outlets due to temporary store closures during 2020 as a result of the COVID-19 pandemic and continued declines in hosiery sales inthe United States . Operating margin decreased due to the decrease in sales volume. Corporate Corporate expenses included certain administrative costs including restructuring and other action-related charges. Corporate expenses were higher in 2020 compared to 2019 due to higher restructuring and other action-related charges and higher bad debt expense as a result of charges for bankruptcies partially offset by cost savings initiatives implemented in response to the COVID-19 pandemic. Restructuring and other action-related charges included: •In 2020, COVID-19 related charges of$77 million for the write-down of assets recorded as a result of the ongoing effects of the COVID-19 pandemic and$49 million of supply chain re-start up charges primarily related to 34
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incremental costs incurred, such as freight and sourcing premiums, to expedite product to meet customer demand following the extended shut-down of parts of our manufacturing network as a result of the COVID-19 pandemic. •Charges related to our Full Potential plan. In the fourth quarter of 2020, we began the early implementation of our Full Potential plan including a number of actions to simplify our business including streamlining our portfolio and SKU rationalization. As a result of COVID-19 vaccines rolling out around the world along with slowing retail orders and a flood of competitive offerings, our future PPE sales opportunities have been dramatically reduced. Therefore, we do not view PPE as a future growth opportunity for our company. We recorded a charge of$374 million to write down our entire PPE inventory balance to its estimated net realizable value and a charge of$26 million to accrue for vendor commitments for PPE materials expected to be paid in 2021. Additionally, we commenced an initiative to reduce 20% of our SKUs in inventory in order to streamline product offerings while also implementing a formal lifecycle management process. As a result, we recorded a charge of$211 million to write down inventory to its estimated net realizable value taking into account its initiatives. •Other charges which include: •The write-off of an acquisition tax asset in the fourth quarter of 2020 which was fully offset by a discrete tax benefit included in the "Income tax expense (benefit)" line in our Consolidated Statement of Income. •Supply chain actions to reduce overhead costs. •Program exit charges associated with exiting the C9 Champion mass program and theDKNY intimate apparel license. •Other restructuring costs including action-related costs such as workforce reductions, as well as acquisition and integration charges for smaller acquisitions in 2019.
Years Ended
January 2, December 28,
2021 2019
(dollars in thousands)
Restructuring and other action-related charges included in operating
profit (loss):
Supply chain actions $ 23,538 $ 53,651
Program exit costs 9,856 4,616
Other restructuring costs 18,219 5,219
COVID-19 related charges:
Supply chain re-startup 48,893 -
Bad debt 11,375 -
Inventory 20,485 -
Intangible assets and goodwill 45,492 -
Full Potential plan:
Inventory SKU rationalization 210,904 -
PPE inventory write-off 373,767 -
PPE vendor commitments 26,400 -
Write-off of acquisition tax asset 16,858 -
Total restructuring and other action-related charges included in $
805,787$ 63,486 operating profit (loss) Liquidity and Capital Resources Cash Requirements and Trends and Uncertainties 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. Our primary uses of cash are payments to our employees and vendors in the normal course of business, capital expenditures, maturities of debt and related interest payments, contributions to our pension plans, regular quarterly dividend payments and income tax payments. The rapid expansion of the COVID-19 pandemic resulted in a decline in net sales and earnings in 2020, which had a corresponding impact on our liquidity. We addressed these challenges by preserving our liquidity and managing our cash flow during these unprecedented conditions with preemptive actions to enhance our ability to meet our short-term liquidity needs. Such actions included, but were not limited to, focusing on channels that continued to generate sales, including mass retail and online; selling PPE, such as cloth face coverings and gowns; operating our manufacturing and distribution facilities on a demand-adjusted basis; reduced discretionary spending such as certain media and marketing expenses; focused working capital management; reduced capital expenditures; suspended our share repurchase program which is currently prohibited under the Senior Secured Credit Facility; reduced payroll costs through temporary employee furloughs and pay cuts; working globally to maximize our participation in all eligible government or other initiatives 35
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available to businesses or employees impacted by the COVID-19 pandemic; engaging with landlords to negotiate rent deferrals or other rent concessions; issued new debt and amended certain existing debt facilities. InApril 2020 , given the rapidly changing business environment and level of uncertainty 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. The amendment effects changes to certain provisions and covenants under the Senior Secured Credit Facility during the period beginning with the fiscal quarter endingJune 27, 2020 and continuing through the fiscal quarter endingJuly 3, 2021 (such period of time, the "Covenant Relief Period"), after which our covenants will revert to their original, pre-amendment levels, including: (a) suspension of compliance with the maximum leverage ratio; (b) reduction of the minimum interest coverage ratio from 3.00 to 1.00 to (i) 2.00 to 1.00 for the fiscal quarters endingJune 27, 2020 throughApril 3, 2021 and (ii) 2.25 to 1.00 for the fiscal quarter endingJuly 3, 2021 ; (c) a minimum last twelve months EBITDA covenant of$625 million as ofJune 27, 2020 ,$505 million as ofSeptember 26, 2020 ,$445 million as ofJanuary 2, 2021 ,$435 million as ofApril 3, 2021 and$505 million as ofJuly 3, 2021 ; (d) a minimum liquidity covenant of$300 million , increasing to$400 million upon certain conditions; (e) increased limitations on investments, acquisitions, restricted payments and the incurrence of indebtedness; and (f) anti-cash hoarding provisions. During the Covenant Relief Period, the applicable margin and applicable commitment fee margin will be calculated assuming the leverage ratio is greater than or equal to 4.50 to 1.00. The amendment also permanently amends the definition of "leverage ratio" for purposes of the financial covenant calculation to remove the maximum amount of cash allowed to be netted from the definition of "indebtedness" and to allow for the netting of cash from certain foreign subsidiaries. We expect to maintain compliance with our covenants for at least one year from the issuance of these financial statements based on our current expectations and forecasts. If economic conditions caused by the COVID-19 pandemic worsen and our earnings and operating cash flows do not start to recover as currently estimated by us, this could impact our ability to maintain compliance with our financial covenants and require us to seek additional amendments to our Senior Secured Credit Facility. If we are not able to obtain such necessary additional amendments, this would lead to an event of default and, if not cured timely, our lenders could require us to repay our outstanding debt. In that situation, we may not be able to raise sufficient debt or equity capital, or divest assets, to refinance or repay the lenders. InMay 2020 , we issued$700 million aggregate principal amount of 5.375% Senior Notes which will mature onMay 15, 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. InDecember 2020 , the European Revolving Loan facility matured with no outstanding balance. Based on our current estimate of future earnings and cash flows, we believe we have sufficient cash and available borrowings for at least one year from the issuance of these financial statements based on our current expectations and forecasts. Our primary sources of liquidity are cash generated from global operations and cash available under our Revolving Loan Facility, our Australian Revolving Loan Facility, our Accounts Receivable Securitization Facility and our international credit facilities. We had the following borrowing capacity and available liquidity under our credit facilities as ofJanuary 2, 2021 : As ofJanuary 2, 2021 Borrowing Available Capacity Liquidity (dollars in thousands)
Senior Secured Credit Facility:
Revolving Loan Facility $ 1,000,000 $ 995,824
Australian Revolving Loan Facility 46,111 46,111
Accounts Receivable Securitization Facility(1) 7,985
7,985
Other international credit facilities 118,926 72,037
Total liquidity from credit facilities $ 1,173,022 $1,121,957
Cash and cash equivalents
909,437
Total liquidity $ 2,031,394
(1)Borrowing availability under the Accounts Receivable Securitization Facility
is subject to a quarterly fluctuating facility limit, not to exceed $225 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.
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The following have impacted or may impact our liquidity: •The negative impact of the COVID-19 pandemic on our business as discussed above under "Impact of COVID-19 on Our Business." •During 2020 and prior to the outbreak of COVID-19, we entered into transactions to repurchase approximately 14.5 million shares of our common stock at a total cost of$200 million . AtJanuary 2, 2021 , the remaining repurchase authorization under our current share repurchase program totaled approximately 25.5 million shares. While we may repurchase additional shares of our common stock in the future, the program has been suspended in connection with the amendment to our Senior Secured Credit Facility described above. We did not repurchase any shares of common stock during 2019 or 2018. •We have historically paid a regular quarterly dividend. The declaration of any future dividends and, if declared, the amount of any such dividends, will be subject to our actual future earnings, capital requirements, regulatory restrictions, debt covenants, other contractual restrictions and to the discretion of our Board of Directors. •We have principal and interest obligations under our debt and ongoing financial covenants under those debt facilities, even after taking into account recent amendments. •We have invested in efforts to accelerate worldwide omnichannel and global growth initiatives, as well as marketing and brand building. •As part of our Full Potential plan, we have launched a multi-year cost savings program intended to substantially self-fund the investments necessary to achieve the Full Potential plan's objectives. •Although currently prohibited under our Senior Secured Credit Facility, in the future, we may pursue strategic business acquisitions. •We made a contribution of$25 million to ourU.S. pension plan in 2020 and onJanuary 4, 2021 , we made a contribution of$40 million to ourU.S. pension plan. We have no additional required cash contributions to ourU.S. pension plan in 2021 based on a preliminary calculation by our actuary. We may also elect to make additional voluntary contributions. OurU.S. qualified pension plan was approximately 92% and 91% funded as ofDecember 1, 2020 and 2019, respectively, under the Pension Protection Act funding rules. •We may increase or decrease the portion of the current-year income of our foreign subsidiaries that we remit tothe United States , which could impact our effective income tax rate. We have not changed our reinvestment strategy from the prior year with regards to our unremitted foreign earnings and intend to remit foreign earnings totaling$668 million . •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 2020, we continued to analyze the impacts of the Tax Act and recently issued regulations that have been published to help taxpayers interpret and apply the legislation. As a result of this analysis, we changed our estimate of the tax liability due in connection with the one-time mandatory transition tax and recognized a$38 million income tax benefit in the current period. Additionally in 2020, we made an installment payment on our transition tax liability in the amount of$10 million and have a remaining balance due of$52 million to be paid in installment payments through 2025. •InMay 2020 , we issued$700 million aggregate principal amount of 5.375% Senior Notes. The net proceeds from the issuance were used to repay all outstanding borrowings under our Revolving Loan Facility, pay related fees and expenses, and for general corporate purposes. •As a result of the uncertainty caused by the COVID-19 pandemic, we implemented employee furloughs and pay cuts, as well as reductions in discretionary spending such as certain media and marketing expenses, that have reduced selling, general and administrative costs. 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. 37
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Future Contractual Obligations and Commitments
The following table contains information on our contractual obligations and
commitments as of
Payments Due by Period
Fiscal
At January 2, Fiscal Fiscal 2026 and
2021 Fiscal 2021 2022-2023 2024-2025 Thereafter
(dollars in thousands)
Operating activities:
Interest on debt obligations(1) $ 645,976 $
159,830
478,137 468,287 9,850 - -
Operating lease obligations 568,039 162,225 219,527 103,582 82,705
Marketing and advertising obligations 18,376 15,156 2,160 1,060 -
Defined benefit plan minimum
contributions(2) 40,000 40,000 - - -
Tax obligations(3) 146,266 61,061 27,396 57,809 -
Other long-term obligations(4) 534,038 236,484 134,891 75,534 87,129
Investing activities:
Capital expenditures 9,119 9,119 - - -
Financing activities:
Debt 4,035,724 263,936 600,000 2,271,788 900,000
Notes payable 784 784 - - -
Total $ 6,476,459 $ 1,416,882 $ 1,297,459 $ 2,675,831 $ 1,086,287
(1)Interest obligations on floating rate debt instruments are calculated for
future periods using interest rates in effect at January 2, 2021 .
(2)Represents only the required minimum pension contributions to our U.S.
qualified pension plan in 2021. 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 ended January 2, 2021 and December 28, 2019 was derived from our
consolidated financial statements.
Years Ended
January 2, December 28,
2021 2019
(dollars in thousands)
Operating activities $ 448,469 $ 803,432
Investing activities (41,082) (109,660)
Financing activities 142,169 (824,010)
Effect of changes in foreign exchange rates on cash 31,124 4,429
Change in cash, cash equivalents and restricted cash 580,680 (125,809)
Cash, cash equivalents and restricted cash at beginning of year 329,923
455,732
Cash, cash equivalents and restricted cash at end of year 910,603 329,923
Less restricted cash at end of year 1,166 1,047
Cash and cash equivalents at end of year $
909,437
Operating Activities Our overall liquidity has historically been driven by our cash flow provided by operating activities, which is dependent on net income and changes in our working capital, was negatively impacted by the COVID-19 pandemic in 2020. 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. As compared to the prior year, the lower net cash provided by operating activities was primarily due to lower net income. Cash used by operating activities includes a$25 million and a$26 million contribution to ourU.S. pension plan made in the first quarter of 2020 and 2019, respectively. 38
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Investing Activities The decrease in cash used by investing activities in 2020 compared to 2019 was primarily the result of a decrease in capital investments as we tightly managed spending to help mitigate the negative impact of the COVID-19 pandemic on our business and liquidity and the indemnification escrow payment of$21 million related to theBras N Things acquisition made in 2019. Financing Activities Net cash from financing activities increased primarily as a result of higher borrowings as compared to 2019 resulting from the issuance of$700 million aggregate principal amount of 5.375% Senior Notes inMay 2020 . We increased our borrowings in 2020 primarily to strengthen our cash position and to provide us with additional financial flexibility to manage our business as the COVID-19 pandemic was emerging. Additionally, in the first quarter of 2020, we repurchased shares at a total cost of$200 million . Financing Arrangements InMarch 2020 , we amended the Accounts Receivable Securitization Facility. This amendment primarily decreased the fluctuating facility limit to$225 million (previously$300 million ) and extended the maturity date toMarch 2021 . As a result of the COVID-19 pandemic, inMay 2020 , we amended the Accounts Receivable Securitization Facility which changed certain ratios, inserted a floor and raised pricing, as well as removed certain receivables from being pledged as collateral for the facility, increased limits on other receivables pledged as collateral and required us to maintain the same minimum liquidity covenant contained in the Senior Secured Credit Facility. InApril 2020 , given the rapidly changing business environment and level of uncertainty 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. The net proceeds of$691 million from the issuance were used to repay all outstanding borrowings under our Revolving Loan Facility, pay related fees and expenses, and for general corporate purposes. InDecember 2020 , the European Revolving Loan facility matured with no outstanding balance. We believe our financing structure provides a secure base to support our operations and key business strategies. As ofJanuary 2, 2021 , we were in compliance with all financial covenants under our credit facilities and other outstanding indebtedness. We continue to monitor our covenant compliance carefully. Under the terms of our Senior Secured Credit Facility, we are required to maintain a minimum interest coverage ratio and a maximum leverage ratio. The interest coverage ratio covenant is the ratio of our EBITDA for the preceding four fiscal quarters to our consolidated total interest expense and the leverage ratio covenant is the ratio of our net debt to EBITDA for the preceding four fiscal quarters. EBITDA is defined as earnings before interest, income taxes, depreciation expense and amortization, as computed pursuant to the Senior Secured Credit Facility. We expect to maintain compliance with our covenants for at least one year from the issuance date of these financial statements based upon our current expectations and forecasts, however economic conditions or the occurrence of events discussed above under "Risk Factors" in this Annual Report on Form 10-K could cause noncompliance. For further details regarding our liquidity from our available cash balances and credit facilities see, "Cash Requirements and Trends and Uncertainties 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: 39
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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 - (d) 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 in the "Net sales" line
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 evaluate our receivables on a
collection (pool) basis which are aggregated based on similar risk
characteristics and consider a combination of factors, such as historical
losses, the aging of trade receivables, industry trends, and our customers'
financial strength, credit standing and payment and default history. Changes in
the characteristics of our accounts receivables and the aforementioned factors,
among others, are reviewed quarterly and may lead to adjustments in our
allowance for doubtful accounts. The calculation of the required allowance
involves judgment by our management as to the impact of these and other factors
on 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 in our Consolidated Statements of Income. 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 the "Cost of Sales" line 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
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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. 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 determined to have finite lives over their estimated useful lives, and we do not amortize identifiable intangibles with indefinite lives. As ofJanuary 2, 2021 , the net book value of trademarks and other identifiable intangible assets was$1.6 billion , of which we are amortizing a balance of$166 million . We anticipate that our amortization expense for 2021 will be approximately$34 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. During the second quarter of 2020, we completed a quantitative impairment analysis for certain indefinite-lived intangible assets as a result of the significant impact of the COVID-19 pandemic on their performance. Based on this analysis, we recorded impairment charges of$20 million on certain indefinite-lived trademarks and other intangible assets within the European Innerwear business. In connection with our annual impairment testing performed in the third quarter of 2020, we performed a quantitative assessment, utilizing an income approach to estimate the fair value of each indefinite-lived intangible asset. The most significant assumptions include the weighted average cost of capital, revenue growth rate, terminal growth rate and operating profit margin, all of which are used to estimate the fair value of the indefinite-lived intangible assets. The tests indicated the indefinite-lived intangible assets had fair values that exceeded their carrying values and no impairment of trademarks or other identifiable intangible assets was identified as a result of our testing. Certain indefinite-lived trademarks within the European Innerwear business were considered to be at a higher risk for future impairment if any assumptions used in the estimate of the trademarks' fair value change in the future given their respective fair values exceeded their carrying values by less than 20% and trends in the associated businesses indicate a declining fair value. As ofJanuary 2, 2021 , we considered four trademarks within the European Innerwear business to be at a higher risk for future impairment and the carrying value of these four indefinite-lived trademarks was approximately$90 million .Goodwill As ofJanuary 2, 2021 , we had$1.3 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. In evaluating the recoverability of goodwill in 2020, 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 41
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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. In connection with the annual goodwill impairment testing performed during the third quarter of 2020, we performed a quantitative assessment utilizing an income approach to estimate the fair value of each reporting unit. The most significant assumptions include the weighted average cost of capital, revenue growth rate, terminal growth rate and operating profit margin, all of which are used to estimate the fair value of the reporting units. The tests indicated the reporting units had fair values that exceeded their carrying values. Certain reporting units, including the European Innerwear business andU.S. Hosiery, were considered to be at a higher risk for future impairment if any assumptions used in the estimate of the reporting units' fair values change in the future given their respective fair values exceeded their carrying values by less than 20% and trends in the associated businesses indicate a declining fair value. In the fourth quarter of 2020, we determined that there was a triggering event associated with ourU.S. Hosiery reporting unit due to a significant decline in performance below management's expectations and loss of a future wholesale hosiery program. Based on the updated quantitative analysis, we recorded impairment charges for the full amount of goodwill related to theU.S. Hosiery reporting unit of$25 million . The estimated fair value of the European Innerwear reporting unit during the annual impairment test exceeded the carrying value by less than 20% and is still viewed as higher risk for future impairment. The goodwill associated with the European Innerwear reporting unit was approximately$105 million as ofJanuary 2, 2021 . 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 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 ourU.S. defined benefit plans, we use the full series of spot rates along the Aon AA-Only 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 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 2020 mortality tables are from the Society of Actuaries' Private Plan study published in 2019 (Pri-2012) projected generationally with Scale MP-2020. 42
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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 $ (3) $ 175
1% increase in discount rate 2 (142)
1% decrease in expected investment return 9 N/A
1% increase in expected investment return (9)
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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