Hanesbrands Inc. total net sales in the fiscal second quarter were $1.13 billion, a 4.3% decrease from $1.18 billion in the year-ago quarter.
Results in the quarter and six-month period include items associated with restructuring, the company's spinoff as an independent company, and other actions resulting in both one-time gains and charges. During the six-month transition period, a result of the company changing its fiscal year end from June to December, Hanesbrands operated for approximately one-third of the time as a division of Sara Lee Corporation. Hanesbrands began operating as an independent publicly traded company on Sept. 5, 2006.
“We have successfully completed our first full quarter as an independent company, and we are looking forward to putting the transition period behind us,” Hanesbrands Chief Executive Officer Richard A. Noll said. “We undertook a number of transition actions that went as planned thanks to a tremendous amount of hard work and dedication by employees and our external business partners.
“Regarding performance in the transition period, sales began to soften in the December quarter, but the company's operating profit margin in the six-month period excluding restructuring and special items was on track. Our ability to generate strong cash flow from operations and balance sheet improvements enabled us to pay down long-term debt by more than $106 million and make a voluntary $48 million contribution to reduce our underfunded liability for qualified pension plans.”
Highlights for the quarter and six-month transition period ended Dec. 30, 2006, include:
-- Total net sales in the December quarter were $1.13 billion, a 4.3 percent decrease from $1.18 billion in the year-ago quarter ended Dec. 31, 2005. Total net sales for the six-month period decreased by 3.0 percent to $2.25 billion. The December quarter net sales decrease was primarily a result of weakness in the innerwear segment and the intentional discontinuance of low-margin product lines in the outerwear segment. "In the December quarter, we saw slower sell-through of innerwear products in the mass merchandise and department store retail channels, although we did not experience these issues in the mid-tier channel," Noll said. "Coming out of the transition period, we remain focused on executing our sales and marketing plans in 2007 to achieve our long-term growth goals." -- Operating profit, as measured by generally accepted accounting principles, decreased by 26.2 percent in the six-month period to $190.1 million from $257.5 million a year ago. The profit decline primarily reflected restructuring and related charges for plant closures, nonrecurring spinoff and related costs, and expenses associated with operating as an independent company. The operating profit margin excluding actions was 9.9 percent in the six-month period. Operating profit excluding actions is a non-GAAP measure that Hanesbrands management uses to better assess underlying business performance because it excludes the effect of unusual actions that are not directly related to operations. The unusual actions in the six-month period were restructuring and related charges, nonrecurring spinoff and related costs, and a gain on curtailment of postretirement benefits (see Table 4A for details and reconciliation with reported operating results). -- Net income for the six-month period was $74.1 million, down 60.7 percent from $188.6 million a year ago. The decrease in net income reflected increased interest expense, reduced operating profit and a higher income tax rate. Interest expense increased in the six-month period to $70.8 million from $8.4 million a year ago as a result of debt incurred as part of the spinoff from Sara Lee Corporation. The effective income tax rate for the six-month period was 33.8 percent, up from 24.3 percent a year ago as a result of Hanesbrands' tax structure as an independent company. -- The company improved its capital structure in the December quarter, using cash flow from operations and balance sheet improvements since the end of the September quarter. Better cash management, lower net inventories and improved payables contributed to the company's ability to pay down long-term debt by $106.6 million and make a $48.1 million pension contribution, reducing the company's underfunded liability for qualified pension plans to $173.1 million.
In December, Hanesbrands completed the last significant component of its post-spinoff capital structure with the successful offering of $500 million in floating rate notes. Proceeds from the notes offering were used to repay in full the approximately $500 million in outstanding borrowings under the company's bridge loan facility.
Also in December, Hanesbrands notified retirees and employees that it will phase out premium subsidies for early retiree medical coverage and move to an access-only plan for early retirees by the end of 2007. The company will also eliminate the medical plan for retirees ages 65 and older as a result of coverage available under the expansion of Medicare with Part D drug coverage. The changes will allow the company to remain competitive with prevailing industry practices. The changes resulted in a $28.5 million gain recognized in the December quarter for the curtailment of benefits and is expected to result in the realization of an additional curtailment gain of approximately $35 million in the fourth quarter of fiscal 2007. Since the curtailment gain is an unusual item, it is not included in the measure of operating profit excluding actions that management uses to assess underlying business performance.
In the six-month period, Hanesbrands announced four plant closures and consolidation of three distribution centers as part of its plan to create a lower-cost global supply chain. Of the approximate $53 million in restructuring and related charges expected in order to undertake these actions, the company recognized $32.5 million in restructuring and related charges in the six-month transition period, of which $21.2 million was noncash.
In January 2007, the Hanesbrands board of directors authorized the repurchase of up to 10 million shares of stock, which will give the company a tool to offset dilution for the foreseeable future.
“We entered fiscal 2007 focused on our key improvement strategies,” Noll said. “We are using balance sheet improvements and our consistent cash flow to fund business growth, supply-chain reorganization and debt reduction.
“We are making significant progress in our supply chain strategy to create a global network that is more efficient and effective. We are moving production to lower-cost sites in the Western Hemisphere, and we acquired our first company sewing operation in Asia.
“While driving costs out of our system, we also are increasing the investment in our strongest brands, such as Hanes, Champion, Playtex, and Bali, with new products and advertising. We have a very powerful model to create value, and we are establishing the baseline performance in 2007 from which to achieve our long-term annual growth goals of 1 percent to 3 percent for sales excluding acquisitions, 6 percent to 8 percent for operating profit excluding actions, and double-digit growth for diluted earnings per share excluding actions.”
HANESBRANDS INC.
Condensed Combined and Consolidated Statements of Income
(Dollars in thousands, except per-share amounts)
(Unaudited)
Three Months Ended
-------------------------
December 30, December 31, %
2006 2005 Change
------------ ------------ -------
Net sales:
Innerwear $644,685 $685,195
Outerwear 297,978 298,468
Hosiery 87,359 88,536
International 104,603 103,827
Other 8,585 13,511
------------ ------------
Total segment net sales 1,143,210 1,189,537
Less: Intersegment 11,705 7,659
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Total net sales 1,131,505 1,181,878 -4.3%
Cost of sales 776,782 788,418
------------ ------------
Gross profit 354,723 393,460 -9.8%
As a % of net sales 31.3% 33.3%
Selling, general, and
administrative expenses 285,043 239,939
As a % of net sales 25.2 % 20.3%
Gain on curtailment of
postretirement benefits (28,467) -
Restructuring 1,965 (111)
------------ ------------
Operating profit 96,182 153,632 -37.4%
As a % of net sales 8.5% 13.0%
Other expenses 7,401 -
Interest expense, net 53,184 4,329
------------ ------------
Income before income taxes 35,597 149,303
Income tax expense 11,803 43,291
------------ ------------
Net income $23,794 $106,012 -77.6%
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Earnings per share (1):
Basic $0.25 $1.10
Diluted $0.25 $1.10
Weighted average shares outstanding
(1):
Basic 96,309 96,306
Diluted 96,620 96,306
