Gildan Activewear Inc. is closing its two Canadian yarn- spinning operations, located in Long Sault, Ontario and in Montreal, Quebec. The majority of the equipment will be transferred to a new yarn-spinning facility in Clarkton, North Carolina, which will be leased and operated by the Company’s yarn-spinning joint-venture with Frontier Spinning Mills.
The Canadian yarn-spinning facilities, which together employ approximately 285 people, are expected to close by the end of March 2005, and the Clarkton facility is planned to be in full operation by the end of Gildan’s 2005 fiscal year.
Glenn J. Chamandy, President and Chief Executive Officer of Gildan Activewear, stated that: “The Company sincerely regrets the impact of the closure of the Canadian yarn-spinning facilities on our dedicated employees and the communities in which we operate. We will ensure that we treat employees fairly and implement measures to alleviate the transition. However, these changes are unavoidable if Gildan wishes to continue to succeed in an increasingly global competitive environment.”
Gildan’s Canadian yarn-spinning facilities provide yarn for its Canadian textile manufacturing operations. In order to be globally cost-competitive, Gildan is expanding its textile operations in Central America and the Caribbean basin, and utilizing its textile operations in Canada to produce shorter-run, higher-value product-lines. This has resulted in lower requirements for commodity yarns from the Canadian yarn-spinning facilities, with the result that they are no longer able to operate at an efficient level of capacity utilization.
Furthermore, under the Caribbean Basin Trade Partnership Act (CBTPA) enacted by the U.S. in 2000, it is not economical for Gildan to utilize yarn from its Canadian yarn-spinning facilities to supply its offshore textile operations, which must use yarn spun in the U.S. in order to be eligible for duty-free access to U.S. markets. Approximately 85% of Gildan’s overall sales are currently made to the U.S. The new Central American Free Trade Agreement (CAFTA), which is expected to be implemented by the U.S. in 2005, will also allow duty-free access from Gildan’s offshore manufacturing hubs for products using regionally-spun yarn, but this new legislation will still not provide for the use of Canadian yarn.
In addition to the impact of lower capacity utilization on Gildan’s Canadian yarn-spinning facilities, their cost structure has also been negatively impacted by the recent appreciation of the Canadian dollar and by the deregulation of electricity costs in the province of Ontario. Electricity is a major input in the cost structure of yarn-spinning operations. The relocation of yarn-spinning to the U.S. will also result in lower transportation costs for both cotton and yarn to be consumed by Gildan’s offshore textile facilities. At current exchange rates, Gildan anticipates that the annual cost saving from the relocation and consolidation of its yarn-spinning operations will be in the order of U.S. $4.0 million after-tax, or U.S. $0.13 per diluted share.
One-time costs arising from the closure are expected to amount to approximately U.S. $7.8 million after-tax, or U.S. $0.26 per diluted share. The closure costs will consist mainly of the loss on disposal of fixed assets that are not being transferred to the new U.S. joint venture facility and severance costs. This special charge will be recognized by Gildan in the second quarter of fiscal 2005.
