Gildan Activewear Inc. reported record net earnings of $16.8 million or 56 cents per diluted share for the fourth quarter, up 18.3% and 16.7% from $14.2 million or 48 cents per diluted share a year ago.
The results for the fourth quarter of fiscal 2004 included a special charge of 11 cents per share to reflect the cost of the Company’s contractual commitments to H. Greg Chamandy, who resigned in August as Chairman of the Board, Chairman of the Executive Committee and Co-Chief Executive Officer. Excluding this special charge as well as the impact of adjustments relating to the change to U.S. functional currency, which continue to impact depreciation expense, diluted EPS for the fourth quarter amounted to 69 cents, up 43.8% from last year. The Company had previously provided guidance for the quarter on this basis of 55 cents to 60 cetns per share.
Compared to last year, the higher fourth quarter net earnings primarily reflected higher unit sales and more favorable pricing, as well as continuing manufacturing efficiencies. These factors were partially offset by increased cotton costs, higher SG&A and depreciation expenses, and a charge of approximately $0.07 per diluted share arising from the closure in September of the El Progreso sewing plant in Honduras.
“We are delighted to have delivered such a strong financial performance in the fourth quarter,” commented Glenn J. Chamandy, President and Chief Executive Officer. “We have significantly exceeded our expectations and achieved exceptional earnings growth over solid prior year comparatives. Market conditions continue to be favorable, and we believe we have excellent momentum going into fiscal 2005.”
Sales in the quarter were $145.6 million, up 33.3% from $109.2 million in the fourth quarter of fiscal 2003. The higher sales were due to a 20.4% increase in unit shipments combined with higher selling prices and more favourable product-mix.
The S.T.A.R.S. market and market share data for the U.S. wholesale distributor market for the third quarter of calendar 2004 excludes sales by three large distributors who have discontinued their participation in the report and the value of the report is therefore diminished compared to prior years. With this caveat, the table below summarizes the S.T.A.R.S. data for the quarter ended September 30, 2004, after adjusting the prior period comparatives to exclude sales through distributors no longer participating in the S.T.A.R.S. report:
Gildan Industry Gildan Gildan Unit growth Unit growth Market Share Market Share Q4 2004 vs Q4 2004 vs Q4 2003 Q4 2004 Q4 2003 Q4 2003 29.6% 30.1% T-shirts 17.8% 1.6% 20.7% 23.3% Sport shirts 19.9% 2.3% 16.9% 17.3% Fleece 19.2% 13.0%
Gildan has now added another significant distributor to its U.S. distributor network, in addition to the distributor announced in August. The addition of the two new distributors is expected to result in further significant increases in Gildan’s market share in the U.S. wholesale distributor channel. Gildan’s unit shipments in Europe increased by 39.2% over the fourth quarter last year. Shipments in Canada were slightly higher than last year.
Gross margins in the fourth quarter were 30.9%, compared with 30.4% in the fourth quarter of fiscal 2003. The impact of higher selling prices and more favorable product-mix, together with continuing manufacturing efficiencies, more than offset the effect of higher cotton costs and the impact of the El Progreso closure costs. Excluding the impact of the El Progreso closure, gross margins in the fourth quarter of fiscal 2004 were 31.9%.
A recovery of income taxes was recorded in the fourth quarter, as the special charge for the Company’s contractual obligations to H. Greg Chamandy resulted in a recovery of income taxes from prior quarters in the Canadian operations. Excluding the impact of the special charge, the tax rate for the quarter was 5.5%, compared to 7.6% in the fourth quarter last year.
Full Year Earnings
Net earnings for fiscal 2004 were a record $60.3 million or $2.02 per diluted share, up respectively 13.3% and 12.8% from fiscal 2003 when the Company generated net earnings of $53.2 million or $1.79 per diluted share. Before the special charge for the Company’s contractual obligations to H. Greg Chamandy and the adjustments due to the change to U.S. functional currency, net earnings for fiscal 2004 were $68.5 million, or $2.30 per share, up respectively 28.8% and 28.5% from fiscal 2003.
Return on equity in fiscal 2004 was 21.0%, including the impact of the special charge as well as the impact of the functional currency adjustments on both net earnings and shareholders equity. Before these items, return on equity was 25.5%.
In the fourth fiscal quarter, the Company generated $22.9 million of free cash flow, defined as cash flow from operating activities less cash used in investing activities. For the full year, free cash flow amounted to $5.1 million, after net capital expenditures (capital expenditures net of asset disposals) of $53.7 million. Net capital expenditures were lower than previously indicated due to timing and slight delays in major capital projects. The Company ended the fiscal year with cash and cash equivalents of $60.7 million, and with substantial unused debt capacity, including its Cdn $150 million revolving bank credit facility.
Fiscal 2005 Estimates
The Company expects to achieve diluted EPS of approximately $2.60 in fiscal 2005, on sales of approximately $620 million. This guidance reflects unit sales growth of approximately 20% and the assumption of sequentially lower unit selling prices in the second half of the fiscal year, reflecting the possible flow-through of lower cotton prices. The Company has not previously provided sales and earnings guidance for fiscal 2005. For the first fiscal quarter of fiscal 2005, the Company expects to generate diluted EPS in the range of $0.20-$0.25 per share, up from $0.17 per share from the first quarter of fiscal 2004 before the impact on last year’s earnings of the functional currency adjustment arising from the revaluation of opening inventories.
The Company noted that the combined impact of the two new U.S. distributors is expected to account for the majority of its projected sales growth in fiscal 2005. Further upside in unit sales growth in fiscal 2005 will be limited by capacity constraints. However, the ramp-up of the new textile facilities in the Dominican Republic and Nicaragua is expected to significantly increase production capacity in fiscal 2006, as the Company continues to implement the next phase of its strategic business plan.
The Company expects that cash flow from operating activities in fiscal 2005 will be approximately equivalent to cash requirements for capital expenditures, which are estimated to be in the range of $85-$90 million for the year. The Company intends to use a portion of its surplus cash reserves in June of 2005 to meet the scheduled second principal repayment of its Senior Notes, amounting to $17.5 million.
Shareholder Rights Plan
Gildan also announced that its Board of Directors has approved a shareholder rights plan, which takes effect immediately. The objectives of the plan are to provide the Board and shareholders with adequate time to assess any unsolicited take-over bid for the Company, and where appropriate, give the Board sufficient time to pursue other alternatives for maximizing shareholder value.
Pursuant to the plan, those bids which meet certain requirements will not trigger the rights issued under the plan, and will be considered “permitted bids”. In order to qualify as a “permitted bid”, a bid must be made by way of a formal take-over bid circular delivered to all shareholders. Also, it must remain open for a minimum of 60 days, and must meet various other conditions set out in the plan.
One right has been issued with respect to each outstanding Class A Subordinate Voting Share of Gildan (the only class of voting shares outstanding) at the close of business yesterday. The rights will become exercisable only on the eighth trading day after a person or entity, including any related party, acquires or announces its intention to acquire shares for a total ownership of 20% or more of Gildan’s outstanding shares, without complying with the “permitted bid” provisions of the plan or without approval of Gildan’s Board of Directors. Should such a scenario occur, each right would, upon exercise, entitle a holder, other than the acquiring person or entity and any related party, to purchase treasury shares of Gildan at a 50% discount to the market price of such shares at the time when the rights become exercisable.
The plan comes into effect immediately and has been conditionally approved by the Toronto Stock Exchange. It will be submitted for ratification by shareholders at Gildan’s Annual and Special Meeting of Shareholders to be held on February 2, 2005. The plan will be in effect for three years, with one renewal option, subject to shareholder approval. The Board of Directors may under certain conditions redeem all rights under the plan, or waive its application to specific acquisition offers, where the Board of Directors concludes that the plan has served its purpose.
The plan has not been adopted in response to any specific proposal to acquire control of Gildan, nor is Gildan aware of any such intention. Gildan has been advised that its plan, which is a new generation plan similar to shareholder rights plans adopted by other Canadian companies, is consistent with Canadian corporate practices and addresses institutional investor guidelines.
Gildan Activewear Inc. Consolidated Statements of Earnings (In thousands of U.S. dollars, except per share data) Three months ended Twelve months ended October 3, October 5, October 3, October 5, 2004 2003 2004 2003 ---------- --------- --------- ---------- (unaudited) (unaudited) (audited) (audited) Sales $ 145,611 $ 109,219 $ 533,368 $ 431,195 Cost of sales 100,562 76,007 378,696 301,341 ---------------------- ---------------------- Gross profit 45,049 33,212 154,672 129,854 Selling, general and administrative expenses 20,721 11,511 62,898 48,403 ---------------------- ---------------------- Earnings before interest, income taxes, depreciation and amortization 24,328 21,701 91,774 81,451 Depreciation and amortization 6,577 4,779 22,275 16,088 Interest expense 1,200 1,528 6,170 6,419 ---------------------- ---------------------- Earnings before income taxes 16,551 15,394 63,329 58,944 Income taxes (recovery) expense (267) 1,170 3,078 5,788 ---------------------- ---------------------- Net earnings $ 16,818 $ 14,224 $ 60,251 $ 53,156 ---------------------- ---------------------- ---------------------- ---------------------- Basic EPS $ 0.57 $ 0.48 $ 2.04 $ 1.82 Diluted EPS $ 0.56 $ 0.48 $ 2.02 $ 1.79