Gildan Activewear Inc. reported second quarter net earnings of $31.0 million and diluted E.P.S. of 51 cents, up respectively 40.3% and 37.8% from adjusted net earnings of $22.1 million and 37 cents per share in the second quarter of fiscal 2005. Adjusted net earnings for the second quarter of last year exclude a special charge of $7.8 million after-tax, or 13 cents per share, for the closure and relocation of the Company's Canadian yarn-spinning operations. Net earnings and diluted E.P.S. increased respectively by 116.7% and 112.5% over the second quarter of fiscal 2005, after giving effect to the prior year special charge. E.P.S. were in excess of the Company's guidance of 45 cents per share, which it had provided on February 1, 2006, and were a record for the second quarter of a fiscal year.
Compared to the second quarter a year ago, the increase in net earnings and E.P.S. was due to continuing strong growth in unit sales volumes and higher gross margins, partially offset by higher selling, general and administrative and depreciation expenses.
Sales in the second quarter amounted to $183.8 million, up 11.2% from $165.3 million in the second quarter of last year. The increase in sales revenues reflected a 13.9% increase in unit sales volumes, partially offset by the impact of an approximate 1.5% reduction in net selling prices. The higher unit sales were due to continuing market share penetration and 5.9% growth in overall industry unit shipments in the quarter, based on the S.T.A.R.S. report. Although the value of the S.T.A.R.S. report in the first calendar quarter of 2006 continued to be reduced by the non-participation of the Company's largest distributor, it is understood that, with effect from the second calendar quarter, this distributor will participate in S.T.A.R.S., and that historical data will be restated on a comparable basis. The table below summarizes the S.T.A.R.S. data for the calendar quarter ended March 31, 2006.
Gildan Gildan Gildan Industry
Market Share Market Share Unit Growth Unit Growth
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Q2 2006 Q2 2005 Q2 2006 vs. Q2 2006 vs.
Q2 2005 Q2 2005
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38.7% 35.4% All products 9.4% 5.9%
39.6% 36.3% T-shirts 8.7% 5.5%
32.5% 33.1% Sport shirts 3.3% 5.1%
30.5% 23.9% Fleece 28.6% 11.7%
Gross margins in the second quarter were 33.4%, versus 30.1% in the second quarter of 2005. The increase in gross margins was due to more favourable cotton costs and positive manufacturing efficiencies. In addition, margins were positively impacted by the reversal of a prior year reserve of U.S. $1.1 million for litigation related to cotton purchase contracts in fiscal 2001, which has now been resolved in Gildan's favour. These factors were partially offset by the reduction in selling prices, while margins in the quarter also continued to reflect higher energy and transportation costs, as well as start-up costs for the Dominican Republic textile facility and new sewing plants.
Selling, general and administrative expenses in the second quarter were U.S. $20.7 million, or 11.3% of sales, compared to U.S. $18.3 million, or 11.1% of sales, in the second quarter of last year. The increase in selling, general and administrative expenses was due to higher volume-related distribution expenses, the continuing development of the organization to support the Company's ongoing growth strategy, and the impact of the stronger Canadian dollar, partially offset by an adjustment to the reserve for doubtful accounts. The increase of U.S. $1.2 million in depreciation expense was due to the Company's major ongoing investments in capacity expansion, in particular the new Dominican Republic facility.
Sales for the six months ended April 2, 2006 were U.S. $304.1 million, up 10.9% from the corresponding period of last year, due to an increase of 14.3% in unit sales volumes, partially offset by the impact of lower selling prices in the second quarter of fiscal 2006 and unfavourable product-mix in the first quarter.
Net earnings for the first six months of fiscal 2006 were U.S. $47.2 million, or U.S. $0.78 per share, up respectively 54.8% and 52.9% from adjusted net earnings of U.S.$30.5 million and U.S. $0.51 per share in fiscal 2005, before the prior year special charge for the closure of the Canadian yarn-spinning facilities. Net earnings and diluted E.P.S. increased by 107.9% and 105.3% respectively from U.S $22.7 million and U.S. $0.38 per share, after taking account of the special charge in fiscal 2005.
Due to the more favourable than anticipated results for the second quarter, the Company has increased its E.P.S. guidance for the full 2006 fiscal year to approximately U.S. $1.96 per share, compared with its most recent guidance of approximately U.S. $1.90 per share. The revised full year guidance reflects a projected increase of 26% in E.P.S. compared with adjusted net earnings of U.S. $1.55 per share in fiscal 2005, before reflecting the prior year special charge. Sales revenues for the full 2006 fiscal year are projected at approximately U.S. $740 million, representing an increase of approximately 13% over fiscal 2005.
Gildan projects diluted E.P.S. for the third quarter of fiscal 2006 of approximately U.S. $0.63 per share, up approximately 10% from the third quarter of last year, and diluted E.P.S. of approximately U.S. $0.56 per share in the fourth quarter, up approximately 19% from the fourth quarter of fiscal 2005.
The Company's sales and diluted E.P.S. guidance for the second half of the year reflects the assumption of a further 1.5% reduction in selling prices, compared with the second quarter, and an approximate 2% reduction in selling prices compared to the second half of fiscal 2005. Unit sales volumes are projected to increase by approximately 15% compared to the second half of fiscal 2005. However, the impact of lower than previously projected selling prices and unit sales volumes in the second half of the fiscal year is expected to be fully offset by more favourable product-mix, due to a higher proportion of sweatshirts and colour T-shirts, combined with greater than previously assumed manufacturing efficiencies.
During the second quarter, the Company's cash and cash equivalents decreased by U.S. $42.2 million, after utilizing U.S. $51.6 million to finance a seasonal increase in accounts receivable, and after financing capital expenditures of U.S. $23.8 million. Capital expenditures are still expected to total approximately U.S. $90 million for the full fiscal year. In addition, Gildan is progressing with the evaluation of a potential acquisition opportunity in the sock industry. The Company believes that its operating cash flow and unused credit facilities will provide it with sufficient liquidity to finance the potential sock acquisition, as well as its capital expenditures and the next scheduled principal repayment of its U.S. Senior Notes in June 2006.
Gildan also announced today the appointment of William D. Anderson to its Board of Directors. Mr. Anderson has had a successful career as a business leader in Canada spanning over 30 years. Most recently, Mr. Anderson served as Chairman and Chief Executive Officer of Bell Canada International Inc., and previously held the position of Chief Financial Officer of BCE Inc. Prior to joining the Bell Canada organization, Mr. Anderson was a partner with KPMG. As such, he is a Chartered Accountant who further reinforces the financial expertise on Gildan's Board of Directors and Audit Committee. Mr. Anderson currently serves on the Board and Audit Committee of other companies, including Four Seasons Hotels Inc., Sears Canada Inc., and TransAlta Corporation. With the addition of Mr. Anderson, Gildan's Board of Directors now comprises seven members, of which six are independent of management. All Board Committees are composed exclusively of independent directors.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Six months ended
April 2, April 3, April 2, April 3,
2006 2005 2006 2005
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(unaudited) (unaudited) (unaudited) (unaudited)
Sales $183,783 $165,321 $304,093 $274,278
Cost of sales 122,375 115,641 199,790 192,218
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Gross profit 61,408 49,680 104,303 82,060
Selling, general and
administrative
expenses 20,706 18,285 38,769 34,612
Special charge (note 1) - 11,886 - 11,886
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40,702 19,509 65,534 35,562
Depreciation and
amortization 7,712 6,490 15,142 12,370
Interest expense, net 703 1,299 1,269 2,500
Non-controlling interest
in income of consolidated
joint venture 156 115 48 115
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Earnings before income
taxes 32,131 11,605 49,075 20,577
Income tax expense
(recovery) 1,116 (2,707) 1,865 (2,122)
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Net earnings $31,015 $14,312 $47,210 $22,699
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Basic EPS $0.52 $0.24 $0.79 $0.38
Diluted EPS $0.51 $0.24 $0.78 $0.38
Weighted average number of shares outstanding (in thousands)
Basic 60,054 59,617 60,012 59,512
Diluted 60,647 60,086 60,603 59,928
