SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
Pursuant to Rule 13a-16 or 15d-16 under
the Securities Exchange Act of 1934
For the month of: June, 2004 | Commission File Number: 1-14830 |
GILDAN ACTIVEWEAR INC. |
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(Translation of Registrant's name into English) |
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725 Montée de Liesse |
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(Address of principal executive offices) |
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Indicate by check mark whether the Registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F | Form 40-F X |
Indicate by check mark whether the Registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes | No X |
If “Yes” is marked, indicate below the file number assigned to the Registrant in connection with Rule 12g3-2(b): 82-_N/A_.
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MESSAGE TO SHAREHOLDERS |
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On behalf of the Board of Directors, we are pleased to provide results for the six months ended April 4, 2004. The Company reported record second quarter net earnings of U.S. $14.3 million, or U.S. $0.48 per diluted share, up 6.7% from U.S. $13.4 million or U.S. $0.45 per diluted share in the second quarter of fiscal 2003. Analyst expectations for the quarter were in the range of U.S. $0.45 - U.S. $0.49 per diluted share. The Companys results for the quarter include increases in cost of sales and depreciation expense due to the upward revaluation of opening inventories and fixed assets required under U.S. and Canadian GAAP to give effect to the change to U.S. functional currency. The gain on revaluation of opening assets was reflected directly in opening shareholders equity. Net earnings for the second quarter of fiscal 2004 were U.S. $15.9 million, or U.S. $0.53 per diluted share, before reflecting the accounting treatment of these adjustments resulting from the change to U.S. functional currency, up 18.7% and 17.8% respectively from the second quarter of fiscal 2003. Compared to last year, the higher second quarter earnings reflected higher unit sales, further manufacturing efficiencies and more favourable product-mix. These factors were partially offset by increased cotton costs, lower selling prices, higher SG&A costs due to the Companys sales growth and higher depreciation expense as a result of the Companys capital investment program.
Sales in the quarter were U.S. $141.4 million, up 24.5% from U.S. $113.6 million in the second quarter of fiscal 2003. The higher sales were due to a 24.6% increase in unit shipments combined with a higher valued product-mix, partially offset by lower selling prices. The higher unit sales reflected continuing market share penetration in all target market segments, together with strong overall industry demand growth in the U.S. wholesale distributor channel. With effect from the beginning of calendar 2004, the Companys largest customer decided to discontinue its participation in the S.T.A.R.S. report by ACNielsen Market Decisions. This report is the basis for market and market share data provided by the Company for the U.S. wholesale distributor channel. As a result, the S.T.A.R.S. market share data for the second quarter of fiscal 2004 excludes the effect of |
sales through our largest customer. On this basis, Gildans share in the T-shirt segment of the U.S. wholesale distributor market increased to 31.2% from 29.1% in the second quarter of fiscal 2003, even though the Company focussed on higher-valued product-lines within the T-shirt category, and continued to not fully participate in highly discounted white T-shirt promotions. During the second quarter, Gildans share of the sport shirt segment increased to 24.4% from 18.4% in the corresponding quarter of last year. Gildan became the leading brand within the sport shirt category during the quarter. Gildans share of the fleece category was 14.3% in the second quarter, up from 10.7% in the second quarter a year ago. The table below summarizes the unit sales growth for the calendar quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 for Gildan and for the industry overall through the U.S. wholesale distributor channel, as reported by S.T.A.R.S. after adjusting the prior period comparatives to exclude sales through our largest customer: |
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Gildan Unit growth |
Industry Unit growth |
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T-shirts |
30.3% |
11.6% |
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Sport shirts | 34.7% |
1.1% |
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Fleece | 39.2% |
13.8% |
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In parallel with the growth realized by Gildan with the S.T.A.R.S. distributors as per the table above, the Company also achieved a comparable rate of growth in its unit sales to its largest distributor during the second fiscal quarter, versus the corresponding quarter of fiscal 2003. |
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Gildans unit shipments in Europe increased by 38.9% over the second quarter last year, and shipments in Canada were up by 10.2%. Selling prices in the Canadian market were negatively impacted as a result of the lower landed selling prices for U.S. competitors in the Canadian market, due to the decline in the relative value of the U.S. dollar. |
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Gross margins in the second quarter were 26.6%, compared with 29.6% in the second quarter of fiscal |
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2003. Before the adjustments due to the change to U.S. functional currency, gross margins in the second quarter of fiscal 2004 were 27.3%. The favourable impact on percentage gross margins of the higher-valued product-mix, continuing manufacturing efficiencies and the non-recurrence of a prior year special charge (the closure of the Montreal sewing plant) was more than offset by the negative effect of higher cotton costs and lower industry selling prices. Promotional pricing activity during the quarter included additional discounts resulting from the higher than projected unit sales growth. Six Months Earnings Net earnings for the first six months of fiscal 2004 were $17.2 million or U.S. $0.58 per diluted share, essentially the same as the first six months of fiscal 2003 when the Company generated net earnings of U.S. $17.1 million or U.S. $0.58 per diluted share. Before the adjustments due to the change to U.S. functional currency, net earnings for the first six months of fiscal 2004 were U.S. $21.4 million, or U.S. $0.72 per share, up 25.1% and 24.1% respectively from the first six months of fiscal 2003.
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channel being in reasonable balance, and higher raw material costs for both cotton and polyester appear to support higher pricing in the second half of the fiscal year. However, it is difficult to predict the outlook for industry pricing with any degree of certainty. Therefore, while the Company is projecting some gross margin improvement in the third and fourth quarter due to reduced promotional activity and a higher proportion of fleece sales in the balance of the year, the Company believes that, based on its short-term capacity constraints in the third quarter and the assumed continuation of aggressive industry pricing competition, it is more realistic to lower its projected EPS growth in the second half of the fiscal year. On this basis, the Company is now projecting EPS for the full fiscal year to be in the range of U.S. $2.05 U.S. $2.15 per diluted share before the U.S. functional currency adjustments, up approximately 15% 20% from fiscal 2003. After reflecting the adjustments resulting from the transition to U.S. functional currency, the Companys revised EPS forecast for fiscal 2004 is U.S. $1.90 $2.00, up approximately 6% 12% from fiscal 2003. The Company now expects to achieve diluted EPS of U.S. $0.80 U.S. $0.85 in the third quarter before functional currency adjustments, up approximately 10% 16% from the third quarter of fiscal 2003, which included an extra week due to the Companys floating fiscal year-end. In the fourth quarter, Gildan now expects diluted EPS of U.S. $0.55 U.S. $0.60 before functional currency adjustments, up approximately 15% 25% from fiscal 2003. The functional currency adjustments in the third and fourth quarter of the fiscal year will be limited to the impact on depreciation expense, and will therefore not be material. |
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Earnings Outlook The Company has previously indicated that it expects its EPS for the full fiscal year to be in the range of U.S. $2.25 U.S. $2.30, up 25.7% 28.5% from fiscal 2003 before the adjustments due to the change to U.S. functional currency. After reflecting the adjustments resulting from the transition to U.S functional currency, the Companys EPS guidance range for fiscal 2004 was U.S. $2.10-$2.15, up 17.3% 20.1% from fiscal 2003. This guidance was based on 15% projected growth in unit sales volumes and modest selling price increases to partially pass through the higher cost of cotton.
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Going forward, Gildan expects to achieve its objective of minimum 15% EPS growth beyond fiscal 2004, in addition to achieving 15% 20% EPS growth in the current fiscal year, even if industry pricing continues to decline. Gildan is slightly ahead of schedule with its timetable for construction of its Dominican Republic textile facility. As the Company brings this facility on stream, it expects to continue to lower its manufacturing costs and to have capacity available to further accelerate its market share penetration in the wholesale distributor channel in fiscal 2005, as well as to implement its plans to enter the retail channel. |
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In the first and second fiscal quarters, the Company has achieved its EPS growth projections by offsetting higher than anticipated promotional pricing activity with higher than projected unit sales volumes. Due to the higher unit sales in the first two quarters, and its resulting lower than planned inventory levels at the second quarter-end, the Company expects to have insufficient capacity in the third quarter to fully satisfy the projected growth in sales reflected in its prior forecast. Therefore, achievement of its original EPS guidance for the full year will depend upon improved selling prices being realized. Many industry fundamentals including strong industry demand, overall inventories within the distributor |
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Cash Flow
In the second fiscal quarter, the Company used U.S. $16.7 million of cash, defined as cash flow from operating activities less cash used in investing activities, due to the seasonal financing of trade receivables (which reflected days sales outstanding of 45 days compared with 48 days a year ago) and the ongoing capital expenditure requirements to implement the Companys continuing offshore capacity expansion plans. |
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As of April 30, 2004, there were 29,627,619 Class A subordinate shares issued and outstanding along with 679,635 options outstanding. On behalf of the Board of Directors, we wish to take this opportunity to thank our shareholders for their continued confidence and support. |
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(s) H. Greg Chamandy (s) Glenn J. Chamandy |
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Gildan Activewear Inc.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
April 4, 2004 |
October 5, 2003 | March 30, 2003 | ||||
(unaudited) | (audited) | (unaudited) | ||||
Current assets: | ||||||
Cash and cash equivalents | $ |
21,413 | $ |
69,340 | $ |
22,995 |
Accounts receivable | 85,386 | 64,260 | 70,180 | |||
Inventories | 130,108 | 103,503 | 97,618 | |||
Prepaid expenses and deposits | 6,677 | 3,849 | 4,481 | |||
Future income taxes | 6,294 | 4,682 | 3,448 | |||
249,878 | 245,634 | 198,722 | ||||
Fixed assets | 195,577 | 180,349 | 155,034 | |||
Other assets | 3,426 | 3,681 | 3,122 | |||
Total assets | $ |
448,881 | $ |
429,664 | $ |
356,878 |
Current liabilities: | ||||||
Accounts payable and accrued liabilities | $ |
63,270 | $ |
67,278 | $ |
60,333 |
Income taxes payable | 2,175 | 3,909 | 675 | |||
Current portion of long-term debt | 19,098 | 19,481 | 3,567 | |||
84,543 | 90,668 | 64,575 | ||||
Long-term debt | 57,029 | 54,077 | 71,696 | |||
Future income taxes | 24,195 | 20,716 | 15,788 | |||
Shareholders' equity: | ||||||
Share capital (note 4) | 77,012 | 75,490 | 73,311 | |||
Contributed surplus | 404 | 220 | 220 | |||
Retained earnings | 179,450 | 162,245 | 126,191 | |||
Cumulative translation adjustment | 26,248 | 26,248 | 5,097 | |||
283,114 | 264,203 | 204,819 | ||||
Total liabilities and shareholders' equity | $ |
448,881 | $ |
429,664 | $ |
356,878 |
See accompanying notes to interim consolidated financial statements.
4
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
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Six months ended |
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April 4, 2004 | March 30, 2003 | April 4, 2004 | March 30, 2003 |
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(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||
Sales | $ 141,369 | $ 113,615 | $ 219,328 | $ 178,615 | ||||
Cost of sales | 103,832 | 80,031 | 160,691 | 125,946 | ||||
Gross profit | 37,537 | 33,584 | 58,637 | 52,669 | ||||
Selling, general and administrative expenses | 15,151 | 13,528 | 26,548 | 23,612 | ||||
Earnings before interest, income taxes, | ||||||||
depreciation and amortization | 22,386 | 20,056 | 32,089 | 29,057 | ||||
Depreciation and amortization | 5,249 | 3,704 | 10,181 | 7,200 | ||||
Interest | 1,755 | 1,713 | 3,344 | 3,158 | ||||
Earnings before income taxes | 15,382 | 14,639 | 18,564 | 18,699 | ||||
Income taxes | 1,049 | 1,228 | 1,359 | 1,597 | ||||
Net earnings | $ 14,333 | $ 13,411 | $ 17,205 | $ 17,102 | ||||
Basic EPS (note 5) | $ 0.48 | $ 0.46 | $ 0.58 | $ 0.59 | ||||
Diluted EPS (note 5) | $ 0.48 | $ 0.45 | $ 0.58 | $ 0.58 |
Consolidated Statements of Retained Earnings
(In thousands of U.S. dollars)
Three months ended |
Six months ended |
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April 4, 2004 | March 30, 2003 | April 4, 2004 | March 30, 2003 | |||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||
Retained earnings, beginning of the period | $ 165,117 |
$ 112,780 |
$ 162,245 |
$ 109,089 |
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Net earnings | 14,333 |
13,411 |
17,205 |
17,102 |
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Retained earnings, end of the period | $ 179,450 |
$ 126,191 |
$ 179,450 |
$ 126,191 |
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See accompanying notes to interim consolidated financial statements.
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Gildan Activewear Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
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April 4, 2004 | March 30, 2003 | April 4, 2004 | March 30, 2003 | |||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||
Cash flows from operating activities: | ||||||||||||
Net earnings | 14,333 | 13,411 | 17,205 | 17,102 | ||||||||
Adjustments for: | ||||||||||||
Depreciation and amortization | 5,249 | 3,704 | 10,181 | 7,200 | ||||||||
Future income taxes | 1,339 | 1,727 | 1,461 | 1,871 | ||||||||
Stock-based compensation expense | 184 | — | 184 | — | ||||||||
Other | (68 | ) | 16 | (61 | ) | (159 | ) | |||||
21,037 | 18,858 | 28,970 | 26,014 | |||||||||
Net changes in non-cash working capital balances: | ||||||||||||
Accounts receivable | (39,820 | ) | (33,657 | ) | (20,619 | ) | (13,665 | ) | ||||
Inventories | 9,140 | 4,505 | (26,605 | ) | (18,817 | ) | ||||||
Prepaid expenses and deposits | (1,710 | ) | (1,551 | ) | (2,828 | ) | (1,933 | ) | ||||
Accounts payable and accrued liabilities | 6,963 | 5,554 | (3,015 | ) | 8,116 | |||||||
Income taxes payable | (1,786 | ) | (1,213 | ) | (1,765 | ) | (1,409 | ) | ||||
(6,176 | ) | (7,504 | ) | (25,862 | ) | (1,694 | ) | |||||
Cash flows from financing activities: | ||||||||||||
Repayment of capital leases and other | ||||||||||||
long-term debt | (453 | ) | (1,103 | ) | (1,624 | ) | (2,109 | ) | ||||
Increase in secured debt | — | — | 4,125 | 96 | ||||||||
Proceeds from the issuance of shares | 1,259 | 1,511 | 1,522 | 2,308 | ||||||||
806 | 408 | 4,023 | 295 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of fixed assets, net of disposals | (10,450 | ) | (9,533 | ) | (26,573 | ) | (20,973 | ) | ||||
(Increase) decrease in other assets | (91 | ) | 131 | (72 | ) | 157 | ||||||
(10,541 | ) | (9,402 | ) | (26,645 | ) | (20,816 | ) | |||||
Effect of exchange rate changes on cash and | ||||||||||||
cash equivalents | (166 | ) | (372 | ) | 557 | 200 | ||||||
Net decrease in cash and cash equivalents | ||||||||||||
during the period | (16,077 | ) | (16,870 | ) | (47,927 | ) | (22,015 | ) | ||||
Cash and cash equivalents, beginning of period | $ | 37,490 | $ | 39,865 | $ | 69,340 | $ | 45,010 | ||||
Cash, end of period | $ | 21,413 | $ | 22,995 | $ | 21,413 | $ | 22,995 | ||||
See accompanying notes to interim consolidated financial statements.
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The accompanying unaudited interim consolidated financial statements have been prepared in accordance with the Canadian generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by Canadian generally accepted accounting principles for complete financial statements, and should be read in conjunction with the Companys annual consolidated financial statements.
All amounts in the attached notes are unaudited unless specifically identified.
As a result of a significant portion of its revenues, expenses, assets and liabilities being denominated in U.S. dollars and the increasing international scope of its sales and manufacturing operations, the Company adopted the U.S dollar as its functional and reporting currency effective October 6, 2003, the commencement of fiscal 2004. All opening assets and liabilities were translated into U.S. dollars using the exchange rate in effect on October 6, 2003. For comparative purposes, historical financial statements and notes thereto up to an including October 5, 2003 have been restated into U.S dollars in accordance with generally accepted accounting principles.
The change in the functional currency for the prior periods resulted in a positive currency translation adjustment of $26.2 million as at October 5, 2003, which is reflected as a separate component of shareholders equity.
3. Significant accounting policies:
The following policies have been applied for the first time in fiscal 2004:
During the second quarter of fiscal 2004, $184,000 (2003 nil) was expensed as compensation expense, with an offset to contributed surplus, due to the issuance of 60,000 Restricted Share Units and a modification to the vesting period of certain options.
In accordance with the transitional options permitted under Section 3870, the Company has elected to early adopt the new recommendations effective the commencement of our 2004 fiscal year and prospectively apply the standard for employee stock awards granted after October 6, 2003. There were no options granted during the three months and six months ended April 4, 2004. Previously, the Company applied the settlement method of accounting to employee stock options. As required under the standard, the following disclosure is required to report the pro forma net earnings and earnings per share as if the fair value-based method had been used to account for employee stock options granted during our 2003 fiscal year.
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3. Significant accounting policies (continued):
(a) Stock-Based Compensation and Other Stock-Based Payments (continued):
Three months ended |
Six months ended |
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April 4, 2004 |
March 30, 2003 |
April 4, 2004 |
March 30, 2003 |
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Net earnings, as reported | $ | 14,333 | 13,411 | 17,205 | 17,102 | |||||
Add (deduct): | ||||||||||
Total stock-based employee compensation (expense) recovery | ||||||||||
determined under fair value based method for all awards | ||||||||||
granted in fiscal 2003 | 107 | (64 | ) | 24 | (85 | ) | ||||
Pro forma net earnings | $ | 14,440 | 13,347 | 17,229 | 17,017 | |||||
Earnings per share: | ||||||||||
Basic: | ||||||||||
As reported | $ | 0.48 | $ |
0.46 | $ | 0.58 | $ |
0.59 | ||
Pro forma | 0.49 | 0.46 | 0.58 | 0.58 | ||||||
Diluted: | ||||||||||
As reported | $ | 0.48 | $ |
0.45 | $ | 0.58 | $ |
0.58 | ||
Pro forma | 0.48 | 0.45 | 0.58 | 0.57 | ||||||
During the second quarter of fiscal 2004, 52,877 options granted in fiscal 2003 were cancelled which would have resulted in a recovery of stock-based compensation costs for the quarter of $107,000 since the Company only accounts for forfeitures as they occur.
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(c) Investment in joint venture:
During the first quarter of fiscal 2004, the Company invested in a 50%/50% owned joint venture with Frontier Spinning Mills, Inc. The new joint venture company acquired the equipment and real estate of an existing yarn-spinning facility in Cedartown, Georgia. The total cost of the acquisition, including Frontiers 50% share in the investment, amounted to $12.5 million. The joint venture is accounted for using the proportionate consolidated method whereby the Companys proportionate share of revenues, expenses, assets and liabilities is included in these financial statements. The Companys 50% proportionate interest in its joint venture did not have a material impact on the consolidated balance sheet, statements of earnings and cash flows.
4. Share capital:
April 4, 2004 |
October 5, 2003 |
March 30, 2003 |
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(audited) |
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Shares |
$ |
Shares |
$ | Shares |
$ | |||||||||||
Authorized without limit as to number and without par value: | ||||||||||||||||
First preferred shares, issuable in series, non-voting | ||||||||||||||||
Second preferred shares, issuable in series, non-voting | ||||||||||||||||
Class A subordinated voting shares, participating, one | ||||||||||||||||
vote per share | ||||||||||||||||
Class B multiple voting shares, participating, eight votes | ||||||||||||||||
per share | ||||||||||||||||
Issued and outstanding: | ||||||||||||||||
Class A subordinate voting shares: | ||||||||||||||||
Total outstanding, beginning of period | 23,426 | $ | 72,023 | 22,827 | $ | 67,536 | 22,827 | $ | 67,536 | |||||||
Conversion of Class B shares into Class A shares (b) | 6,094 | 3,467 | — | — | — | — | ||||||||||
Shares issued under employee share purchase plan | 3 | 85 | 5 | 127 | 3 | 61 | ||||||||||
Shares issued pursuant to exercise of stock options | 104 | 1,437 | 594 | 4,360 | 394 | 2,247 | ||||||||||
Total outstanding, end of period | 29,627 | 77,012 | 23,426 | 72,023 | 23,224 | 69,844 | ||||||||||
Class B multiple voting shares, beginning of period | 6,094 | 3,467 | 6,094 | 3,467 | 6,094 | 3,467 | ||||||||||
Conversion of Class B shares into Class A shares (b) | (6,094 | ) | (3,467 | ) | — | — | — | — | ||||||||
29,627 | $ | 77,012 | 29,520 | $ | 75,490 | 29,318 | $ | 73,311 | ||||||||
(a) On December 3, 2003, the Board of Directors approved the renewal of the stock repurchase program authorizing the Company to purchase up to a maximum of 200,000 of the Companys Class A subordinate voting shares in the open market commencing December 22, 2003 and ending December 21, 2004. As at April 4, 2004 no shares have been repurchased under this plan.
(b) On March 1, 2004, the holders of the Class B multiple voting shares converted all the issued and outstanding shares into Class A subordinate voting shares on a one-for-one basis without any cash or non-cash consideration.
5. Earnings per share:
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended |
Six months ended |
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April 4, | March 30, | April 4, | March 30, | |||||
2004 | 2003 | 2004 | 2003 | |||||
Basic weighted average number of common shares outstanding | 29,576 | 29,160 | 29,550 | 29,053 | ||||
Basic earnings per share | $ 0.48 | $ 0.46 | $ 0.58 | $ 0.59 | ||||
Diluted earnings per share: | ||||||||
Basic weighted average number of common shares outstanding | 29,576 | 29,160 | 29,550 | 29,053 | ||||
Plus impact of stock options | 290 | 555 | 279 | 605 | ||||
Diluted common shares | 29,866 | 29,715 | 29,829 | 29,658 | ||||
Diluted earnings per share | $ 0.48 | $ 0.45 | $ 0.58 | $ 0.58 | ||||
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6. Guarantees:
Significant guarantees that have been provided to third parties are the following:
The Company, including certain of its subsidiaries, have granted irrevocable standby letters of credit and surety bonds, issued by highly rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at April 4, 2004, the maximum potential liability under these guarantees was $12.4 million of which $10.9 million was surety bonds and $1.5 million was for standby letters of credit. The standby letters of credit mature at various dates during 2004 and the surety bonds are automatically renewed on an annual basis. |
As at April 4, 2004, the Company has not recorded a liability with respect to these guarantees, as the Company does not expect to make any payments in excess of what is recorded on the Companys financial statements for the aforementioned items.
7. Financial instruments:
The following table summarizes the Companys commitments to buy and sell foreign currencies as at April 4, 2004 and March 30, 2003:
Notional amount |
Exchange rate | Maturity |
Notional U.S. equivalent | ||||||||
2004: | |||||||||||
Sell contracts: | |||||||||||
Foreign exchange contracts | Euro/US | €10,020 | 1.1740 to 1.2752 | April to December 2004 | $12,127 | ||||||
GBP/US | £ 5,154 | 1.6660 to 1.8500 | April to December 2004 | $ 8,806 | |||||||
Buy contracts: | |||||||||||
Foreign exchange contracts | CAD/US | CAD$ 35,150 | 1.2999 to 1.3475 | April to September 2004 | $26,785 | ||||||
2003: | |||||||||||
Sell contracts: | |||||||||||
Foreign exchange contracts | Euro/US | € 8,854 | 1.0720 to 1.0798 | March to November 2003 | $ 9,524 | ||||||
Buy contracts: | |||||||||||
Foreign exchange contracts | Euro/CAD | € 1,619 | 1.5723 to 1.5761 | May to August 2003 | $ 1,741 | * | |||||
* Exchange rate as at March 30, 2003 was used to translate amount to U.S. dollars
In addition, as at March 30, 2003 the Company had commitments to buy U.S. $9.2 million and sell U.S. $35.5 million for CAD $13.5 million and CAD $52.9 million respectively. These contracts matured by August 2003.
8. Segmented information:
The Company manufactures and sells activewear apparel. The Company operates in one business segment.
Individual customers accounting for greater than 10% of total sales are as follows:
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April 4, 2004 |
March 30, 2003 |
April 4, 2004 |
March 30, 2003 |
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Company A | 30.2 % |
11.5 % |
27.4 % |
11.8 % |
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Company B | — |
14.8 % |
— |
14.7 % |
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8. Segmented information (continued):
Sales were derived from customers located in the following geographic areas:Three months ended |
Six months ended |
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April 4, 2004 |
March 30, 2003 |
April 4, 2004 |
March 30, 2003 |
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International | $ |
129,780 |
$ |
102,851 | $ |
201,280 |
$ |
161,648 | ||
Canada | $ |
11,589 |
$ |
10,764 | $ |
18,048 |
$ |
16,967 | ||
$ |
141,369 |
$ |
113,615 | $ |
219,328 |
$ |
178,615 | |||
April 4, 2004 |
October 5, 2003 | March 30, 2003 | ||||
(audited) | ||||||
Canada | $ 89,596 | $ 93,247 | $ 90,341 | |||
Caribbean basin, Central America and Mexico | 81,701 | 68,570 | 47,883 | |||
United States | 24,280 | 18,532 | 16,810 | |||
$ 195,577 | $ 180,349 | $ 155,034 | ||||
Three months ended |
Six months ended |
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April 4, 2004 |
March 30, 2003 |
April 4, 2004 |
March 30, 2003 |
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Depreciation of fixed assets | $ |
5,075 | $ | 3,563 |
$ |
9,830 |
$ |
6,818 | ||
Interest expense on long-term debt | $ |
1,817 | $ | 1,832 |
$ |
3,406 |
$ |
3,277 | ||
Foreign exchange (gain) loss | $ |
(11 | ) | $ | 953 |
$ |
750 |
$ |
360 | |
Amortization of deferred charges | $ |
174 | $ | 141 |
$ |
351 |
$ |
382 | ||
Three months ended |
Six months ended |
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April 4, 2004 |
March 30, 2003 |
April 4, 2004 |
March 30, 2003 |
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Cash paid during the period for: | |||||||||
Interest | $ |
1,751 | $ |
1,747 | $ |
3,330 | $ |
3,291 |
|
Income taxes | 704 | $ |
486 | 790 | 585 |
||||
April 4, 2004 | October 5, 2003 | March 30, 2003 | ||||
(audited) | ||||||
Non-cash transactions: | ||||||
Additions of fixed assets included in accounts payable | $ 895 | $ 2,348 | $ 1,629 | |||
Cash and cash equivalents consist of: | ||||||
Cash balances with banks | $ 21,413 | $ 50,672 | $ 22,995 | |||
Short-term investments | — | 18,668 | — | |||
$ 21,413 | $ 69,340 | $ 22,995 | ||||
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The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto for the six months ended April 4, 2004, with Managements Discussion and Analysis of the Financial Position and Results of Operations (MD&A) in the fiscal 2003 Annual Report, including the section on the risks and uncertainties.
Gildan Activewear Inc. is a vertically integrated manufacturer and marketer of premium quality branded basic activewear for sale principally in the wholesale imprinted activewear segment of the Canadian, U.S., European, and other international markets. Our Company manufactures and sells premium quality 100% cotton and 50% cotton/50% polyester T-shirts, sport shirts and sweatshirts in a variety of weights, sizes, colours and styles. We sell our products as blanks, which are ultimately decorated with designs and logos for sale to consumers. Gildans corporate head office is located in Montreal, Canada, and over 9,300 full-time employees work in our facilities worldwide. Our shares are listed on the New York Stock Exchange (GIL) and the Toronto Stock Exchange (GIL.A).
All financial information contained herein is expressed in U.S. dollars unless otherwise stated. Historically, the financial information of the Company has been measured and reported in Canadian dollars. However, effective October 6, 2003, the Company adopted the U.S. dollar as its functional currency since a significant portion of revenues, expenses, assets and liabilities are denominated in U.S. dollars and the Companys sales and manufacturing operations are increasingly international in scope. Effective the same date, the U.S. dollar was adopted as the Companys reporting currency. The Company will continue to report its results in accordance with Canadian GAAP. Historical financial information in U.S. dollars has been provided in the Investor Relations section of the Companys Web Site, which can be accessed at www.gildan.com.
Sales for the three months ended April 4, 2004 were $141.4 million, up 24.5% from $113.6 million for the three months ended March 30, 2003. Unit sales for the second quarter were 7.6 million dozens, up 24.6% from last year. Sales for the six months ended April 4, 2004 were $219.3 million compared to $178.6 million for the six months ended March 30, 2003, representing an increase of 22.8%. The increase in sales for the three-month and the six-month periods were due to an increase in unit shipments combined with a higher valued product mix, partially offset by lower selling prices.
During the quarter ended March 31, 2004, U.S.1 industry shipments of T-shirts from distributors
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to screen-printers increased by 11.6%, sport shirt shipments increased by 1.1%, and fleece shipments increased 13.8% compared with the second quarter last year. Sales of Gildan T-shirts by distributors grew by 30.3%, while sales of Gildan sport shirts and fleece products increased by 34.7% and 39.2% respectively.
The Company continued to expand its European business and maintained its leading market share position in Canada. Gildans unit shipments in Europe increased by 38.9% over the second quarter last year, and shipments in Canada were up by 10.2%. Selling prices in the Canadian market were negatively impacted as a result of the lower landed selling prices for U.S. competitors in the Canadian market, due to the decline in the relative value of the U.S. dollar.
Gross margins were 26.6% compared to 29.6% in the second quarter of fiscal 2003. Gross margins for the six months ended April 4, 2004 were $58.6 million or 26.7% compared to $52.7 million or 29.5% for the same period of the prior year. Gross margins decreased by $1.1 million in the quarter and by $3.3 million for the six months ended April 4, 2004 due to the impact of change in functional currency, as opening inventories were consumed. Gross margins, excluding the impact of the adjustments due to the change in functional currency, were 27.3% for the three months ended April 4, 2004 and 28.2% for the six months ended April 4, 2004 versus 29.6% and 29.5% for the same periods last year.
Selling, general and administrative expenses were $15.2 million or 10.7% of sales for the second quarter of fiscal 2004 compared to $13.5 million or 11.9% of sales in the second quarter of fiscal 2003. For the six-month period ended April 4, 2004, selling, general and administrative expenses were $26.5 million or 12.1 % of sales compared to $23.6 million or 13.2% of sales in the same period of fiscal 2003.
Depreciation and amortization expenses were $5.2 million in the second quarter of fiscal 2004 compared to $3.7 million in the second quarter of fiscal 2003. For the six-month period, depreciation and amortization expenses were $10.2 million in fiscal 2004 compared to $7.2 million in fiscal 2003. The increase is the result of the Companys continued investment in capital expenditures to provide for long-term sales growth. Approximately $0.9 million of the increase for the six months ended April 4, 2004 was caused by the change in functional currency, as a portion of the upward revaluation of opening fixed assets was depreciated during the period.
Interest expense has increased to $1.8 million in the second quarter of fiscal 2004 from $1.7 million in the second quarter of fiscal 2003. For the six-month period, interest expense was $3.3 million in fiscal 2004 compared to $3.2 million in fiscal 2003. The increase is the result of the Companys share of interest on long-term debt undertaken by the Companys joint venture.
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Net Earnings
The following table sets forth certain summarized unaudited quarterly financial and other data for the periods presented. The financial data has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such quarterly data. The Companys revenues and income are subject to seasonal variations. Consequently, the results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.
Fiscal 2004
(in millions, except per share data) | Q1 2004 |
Q2 2004 |
||
Sales | $ 78.0 | $ 141.4 | ||
Unit sales (Dozen) | 4.0 | 7.6 | ||
Net earnings | $ 2.9 | $ 14.3 | ||
Basic EPS | 0.10 | 0.48 | ||
Diluted EPS | 0.10 | 0.48 | ||
Total assets | 427,329 | 448,881 | ||
Total long-term financial liabilities | 79,923 | 81,224 | ||
Weighted average # of shares outstanding (in thousands) | ||||
Basic | 29,524 | 29,576 | ||
Diluted | 29,792 | 29,866 |
(in millions, except per share data) | Q1 2003 |
Q2 2003 |
Q3 2003 |
Q4 2003 |
||||
Sales | $ 65.0 | $ 113.6 | $ 143.4 | $ 109.2 | ||||
Unit sales (Dozen) | 3.3 | 6.1 | 7.4 | 5.8 | ||||
Net earnings | $ 3.7 | $ 13.4 | $ 21.8 | $ 14.2 | ||||
Basic EPS | 0.13 | 0.46 | 0.74 | 0.48 | ||||
Diluted EPS | 0.13 | 0.45 | 0.73 | 0.48 | ||||
Total assets | 322,551 | 356,878 | 409,435 | 429,664 | ||||
Total long-term financial liabilities | 85,392 | 87,484 | 73,803 | 74,793 | ||||
Weighted average # of shares outstanding (in thousands) | ||||||||
Basic | 28,945 | 29,160 | 29,373 | 29,478 | ||||
Diluted | 29,600 | 29,715 | 29,768 | 29,808 |
(in millions, except per share data) | Q1 2002 |
Q2 2002 |
Q3 2002 |
Q4 2002 |
||||
Sales | $ 55.7 | $ 98.1 | $ 125.2 | $ 103.3 | ||||
Unit sales (Dozen) | 2.7 | 5.0 | 6.4 | 5.3 | ||||
Net earnings | $ 1.7 | $ 10.3 | $ 17.7 | $ 12.7 | ||||
Basic EPS | 0.06 | 0.36 | 0.62 | 0.44 | ||||
Diluted EPS | 0.06 | 0.35 | 0.60 | 0.43 | ||||
Total assets | 298,234 | 307,589 | 313,641 | 315,266 | ||||
Total long-term financial liabilities | 115,004 | 113,536 | 88,912 | 85,858 | ||||
Weighted average # of shares outstanding (in thousands) | ||||||||
Basic | 28,208 | 28,381 | 28,570 | 28,807 | ||||
Diluted | 29,098 | 29,298 | 29,510 | 29,540 |
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BALANCE SHEET
Capital expenditures in the second quarter amounted to $10.5 million, primarily for the Dominican Republic and the Rio Nance projects. In the second quarter of fiscal 2003, the Company invested $9.5 million in fixed assets. Year-to-date, the Company invested $26.6 million in fixed assets and it now anticipates that capital expenditures for the full year will be approximately $65 million. The major projects include the new textile facility in the Dominican Republic, to be operational in fiscal 2005, the expansion of the Rio Nance textile facility and the addition of a new sewing facility in Nicaragua.
For the quarter ended April 4, 2004, cash flow from operating activities, including changes in non-cash working capital, was a use of cash of $6.2 million compared with a use of cash of $7.5 million during the same period last year. Year-to-date, use of cash from operating activities was $25.9 million compared with a use of cash of $1.7 million during the same period last year. The increase in use of cash was the result of increases in non-cash working capital items.
Total indebtedness at April 4, 2004 amounted to $76.1 million compared to $73.6 million at October 5, 2003 and $75.3 million at March 30, 2003. At the end of the second quarter, none of the Companys $150.0 million CAD revolving bank facility was utilized.
Payments Due by Period |
|||||
(in millions) | Total |
Balance of Fiscal 2004 |
Fiscal 2005-2006 |
Fiscal 2007-2008 |
After Fiscal 2008 |
Long Term Debt | $ 75.6 | $ 18.1 | $ 37.6 | $ 19.5 | $ 0.4 |
Capital Lease Obligations | 0.5 | 0.2 | 0.3 | — | — |
Operating Leases | 10.7 | 1.5 | 4.4 | 2.7 | 2.1 |
Purchase Obligations | 83.9 | 69.3 | 14.6 | — | — |
Other Long-Term Obligations | 47.7 | 47.7 | — | — | — |
Total Contractual Obligations | $ 218.4 | $ 136.8 | $ 56.9 | $ 22.2 | $ 2.5 |
Management expects that cash flow from its operating earnings, together with its year-end cash balances and unutilized bank facilities, will be sufficient to meet any foreseeable cash needs for the balance of fiscal 2004.
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OUTLOOK
In the first and second fiscal quarters, the Company has achieved its EPS growth projections by offsetting higher than anticipated promotional activity and resulting lower selling prices with higher than projected unit sales volumes. In the second half of the year, and especially in the third fiscal quarter, the Company will not have sufficient capacity available to continue to exceed its previous projections for unit sales volume growth.
Going forward, the Company expects to achieve its objective of minimum 15% EPS growth beyond 2004, in addition to achieving 15% 20% EPS growth in the current fiscal year, even if industry pricing continues to decline. Gildan is slightly ahead of schedule with its timetable for construction of its Dominican Republic textile facility. As the Company brings this facility on stream, it expects to continue to lower its manufacturing costs and to have capacity available to further accelerate its market share penetration in the wholesale distributor channel in fiscal 2005, as well as to implement its plans to enter the retail channel.
CRITICAL ACCOUNTING POLICIES
CHANGES IN ACCOUNTING POLICIES
In November 2003, the Canadian Institute of Chartered Accountants (CICA) revised Handbook Section 3870, with respect to the accounting for stock-based compensation and other stock-based payments. The revised recommendations require that beginning January 1, 2004, the fair value-based method be used to account for all transactions whereby goods and services are received in exchange for stock-based compensation and other stock-based payments. Under the fair value method, compensation cost is measured at fair value at the date of grant and is expensed over the awards vesting periods.
In accordance with the transitional options permitted under Section 3870, the Company has elected to early adopt the new recommendations effective the commencement of our 2004 fiscal year and prospectively apply the standard for employee stock awards granted after October 6, 2003. There were no options granted during the three months and six months ended April 4, 2004. Previously, the Company applied the settlement method of accounting to employee stock options.
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RECENT ACCOUNTING PRONOUNCEMENTS
In December 2002, the CICA issued Handbook section 3063, Impairment of Long-Lived Assets. Section 3063 provides accounting guidance for the determination of a long-lived asset impairment as well as recognition, measurement and disclosure of the impairment. This section was effective for the Companys 2004 fiscal year and has not had a material impact on its financial statements.
In March 2003, the CICA issued Handbook Section 3110, Asset Retirement Obligations. This section requires that the fair value of an asset retirement obligation be recorded as a liability only when there is a legal obligation associated with a removal activity. This section was effective for the Companys 2004 fiscal year and has not had a material impact on is financial statements.
For a complete discussion of the risks and significant assumptions used in determining the fair value of the Companys financial instruments, please refer to Note 13 of our 2003 consolidated financial statements in the Annual Report, which is hereby incorporated by reference.
In order to be successful, the Company must continuously be aware of global changes and risks affecting its markets and competitive environment. Risk areas include changes in international trade legislation and taxation, changes in cotton prices and currency fluctuations. For a more detailed discussion on potential business risks, readers should review the risks factors section of the Annual Information Form filed by the Company with the Canadian securities commissions and the Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission which are hereby incorporated by reference.
As of April 30, 2004 there were 29,627,619 Class A subordinate shares issued and outstanding along with 679,635 options outstanding.
Certain statements included in this management discussion and analysis may constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer you to the Companys filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission for a discussion of the various factors that may affect the Companys future results.
We believe that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Furthermore, the forward-looking statements contained in this report are made as of the date of this report, and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement expressly qualifies the forward-looking statements contained in this report.
May 4, 2004
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SIGNATURE
Pursuant to the requirements of the Securitiecs Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GILDAN ACTIVEWEAR INC. |
(Signed) Stéphane Lemay
|
Stéphane Lemay |
Vice-President, Public and Legal Affairs |
Date June 1, 2004 |