Gildan Activewear Inc. fourth quarter net earnings were $16.8 million and diluted EPS were 28 cents.
Gildan recorded restructuring and other charges in the quarter totaling $20.0 million after-tax or 33 cents per share. The restructuring and other charges comprised 31 cents per share for the restructuring of the Company's Canadian manufacturing facilities, which was announced on September 27, 2006, and U.S. 2 cents per share to reflect the variable component of Gildan's contractual obligations towards its former Chairman and Co-Chief Executive Officer. Before reflecting the restructuring and other charges, net earnings and diluted EPS for the fourth quarter of fiscal 2006 amounted to U.S. $36.8 million or U.S. $0.61 per share, up respectively 25.6% and 27.1% from net earnings of U.S. $29.3 million and diluted EPS of U.S. $0.48 in the fourth quarter of fiscal 2005. Excluding the impact of the Kentucky Derby Hosiery acquisition in the quarter, which was U.S. $0.01 per share dilutive to EPS, the increase in net earnings and EPS before the restructuring and other charges was primarily due to continuing strong growth in unit sales volumes, favourable manufacturing efficiencies, a higher-valued product-mix for activewear, and lower selling, general and administrative expenses, partially offset by lower selling prices and higher depreciation expense.
Sales in the fourth quarter amounted to $235.2 million, a record for any fiscal quarter, and up 30.2% from $180.7 million in the fourth quarter of last year. The increase in sales revenues was due to $30.0 million of sock sales resulting from the acquisition of Kentucky Derby Hosiery, which was effective from July 6, 2006, a 13.7% increase in unit sales volumes for activewear and the impact of a higher-valued activewear product-mix, partially offset by a close to 3% reduction in unit selling prices for activewear compared to last year.
The growth in activewear unit sales was primarily due to continuing market share penetration in all product categories in the U.S. distributor channel. The table below summarizes the S.T.A.R.S. data for market shares and market growth in the U.S. distributor channel for the calendar quarter and nine months ended September 30, 2006.
Lower overall industry unit sales in the quarter was primarily due to the unusual strength of the market in the fourth quarter of last year, due to purchases in advance of an industry selling price increase which had been announced for October 2005. In the month of October 2006, industry unit shipments as reported by S.T.A.R.S. increased by 5.1% compared with October 2005. Gildan's market share in T-shirts and fleece in October was 46.9% and 35.9%, respectively.
Gross margins in the fourth quarter of fiscal 2006 were 30.6%, versus 32.3% in the fourth quarter of 2005. The decrease in gross margins was entirely attributable to the impact of lower margins from the sale of socks, which do not yet reflect the anticipated cost synergies from the planned rationalization of the Company's sock manufacturing operations. Excluding the impact of Kentucky Derby Hosiery, gross margins in the fourth quarter of fiscal 2006 were 32.5%. The slight increase in gross margins for activewear reflected favourable manufacturing efficiencies and higher-valued product-mix compared to last year, essentially offset by lower selling prices.
Selling, general and administrative expenses in the fourth quarter were U.S. $23.6 million, or 10.1% of sales, compared to U.S. $20.1 million, or 11.1% of sales, in the fourth quarter of last year. The increase in selling, general and administrative expenses was due to the impact of the acquisition of Kentucky Derby Hosiery, higher volume-related distribution costs and professional fees for compliance with Section 404 of the U.S. Sarbanes Oxley Act of 2002, partly offset by the non-recurrence of severance costs incurred in the fourth quarter of fiscal 2005 and lower performance-related compensation costs in the fourth quarter of this fiscal year. The increase of U.S. $1.9 million in depreciation and amortization expenses was due to the Company's continuing investments in capacity expansion, combined with the impact of the Kentucky Derby Hosiery acquisition.
Sales for fiscal 2006 totaled U.S. $773.2 million, up 18.2% from fiscal 2005, due primarily to an increase of 14.5% in activewear unit sales volumes and U.S. $30.0 million of sock sales resulting from the Kentucky Derby Hosiery acquisition, partially offset by lower selling prices.
Net earnings for fiscal 2006 amounted to U.S. $106.8 million and diluted EPS was U.S. $1.76, up respectively 24.2% and 23.1% from U.S. $86.0 million or U.S. $1.43 per share last year. Net earnings for fiscal 2006 included restructuring and other charges of U.S. $20.0 million after-tax or U.S. $0.33 per share. Results for fiscal 2005 included restructuring and other charges of U.S. $7.9 million after-tax or U.S. $0.13 per share primarily for the closure and relocation of the Company's Canadian yarn-spinning operations. Before restructuring and other charges in both years, net earnings and EPS increased respectively by 35.0% and 34.0% to U.S. $126.8 million or U.S. $2.09 per share, compared with net earnings of U.S. $93.9 million or U.S. $1.56 per share in fiscal 2005. The increase in net earnings and EPS compared to fiscal 2005 was primarily due to 14.5% growth in activewear unit sales volumes, lower cotton costs and favourable manufacturing efficiencies, partially offset by an approximate 2.5% reduction in selling prices, higher selling, general and administrative expenses and higher depreciation expenses.
During the fourth quarter of fiscal 2006, the Company generated cash flow of U.S $33.6 million from operating activities, after using U.S. $17.0 million to finance seasonal accounts receivable and U.S. $9.0 million to meet seasonal and replenishment inventory requirements for the sock business and to support transitional outsourcing programs. The Company also used cash of U.S. $26.2 million for capital expenditures for its major capacity expansion projects in Honduras and the Dominican Republic and U.S. $19.9 million for the acquisition of Kentucky Derby Hosiery. In addition, the Company repaid U.S. $21.3 million of the total amount of U.S. $27.4 million of Kentucky Derby Hosiery's debt assumed at the date of the acquisition. For the full fiscal year, Gildan incurred capital expenditures of U.S. $80.2 million. The Company ended the fiscal year with cash and cash equivalents of U.S. $29.0 million, and continues to have significant unused financing capacity to be able to pursue further capacity expansion in excess of its current plans, as well as other potential growth opportunities.
Gildan has increased its diluted EPS guidance for fiscal 2007 from U.S. $2.50 per share to approximately U.S. $2.55 per share, to take account of the projected U.S. $0.05 per share impact of the acquisition of Kentucky Derby Hosiery. The Company's fiscal 2007 guidance continues to include approximately U.S. $0.06 per share of accelerated depreciation to reflect the change in the estimated economic life of the Company's remaining Canadian textile and related manufacturing assets. Prior to this additional depreciation charge, adjusted diluted EPS for fiscal 2007 is projected to be approximately U.S. $2.61.
The Company's updated guidance for fiscal 2007 assumes that the acquisition of Kentucky Derby Hosiery has a negligible impact on EPS until the fourth quarter of the fiscal year. By the end of fiscal 2007, the annualized impact of cost reductions from the integration of Kentucky Derby Hosiery into Gildan is expected to be in excess of U.S. $0.15 per share. The Company continues to be confident that it will achieve annual cost reduction synergies of U.S. $0.30 per share, once the integration process is completed during fiscal 2008 and the Company has achieved a globally competitive cost structure for its sock manufacturing operations.
The Company's guidance for fiscal 2007 assumes growth in sales of approximately 26% compared to fiscal 2006, to approximately U.S. $970 million. Unit sales growth is projected at over 55%, including approximately 25 million dozens of socks. The Company has obtained its first major Gildan branded sock program with a U.S. national mass-market retail account, for delivery starting in the second quarter of fiscal 2007.
Compared with its previous EPS guidance, which the Company initiated on September 27, 2006, the Company is now projecting more favourable cotton costs than originally forecast, particularly in the second half of fiscal 2007, with the benefit of such cost reductions being assumed to be fully passed through into lower selling prices than originally projected. The Company is now projecting a year-over-year reduction in activewear selling prices of approximately 2.5% in fiscal 2007 as it continues to drive further market share penetration and enter the mass-market retail channel.
EPS for the first quarter of fiscal 2007, before the additional depreciation charge, are projected to be the same as in the first quarter of fiscal 2006, at U.S. $0.27 per share. Higher unit sales volume growth in the first quarter is projected to be offset by lower gross margins and higher selling, general and administrative expenses. In particular, the first quarter is impacted by significant year-over-year increases in cotton costs, compared with a low point in cotton prices in the first quarter of last year. Also, the positive impact of unit volume growth is lower than in other quarters, as the first quarter is seasonally the lowest sales volume quarter of the fiscal year.
After the first quarter, in addition to the more significant impact of sales volume growth, gross margins for activewear are expected to increase, both relative to the first quarter as well as to the corresponding quarters in fiscal 2006. In the second half of fiscal 2007, cotton costs are expected to be comparable to the second half of fiscal 2006. Also, throughout fiscal 2007 the Company expects to realize significant manufacturing efficiencies from the continuing ramp-up of the Dominican Republic textile facility and the rationalization of its Canadian textile manufacturing announced on September 27, 2006, which are expected to more than offset the projected 2.5% reduction in selling prices. In addition, gross margins for the sock business are expected to increase in successive quarters as the Company progresses with the integration of Kentucky Derby Hosiery.
Gildan is projecting capital expenditures of approximately U.S. $110 million in fiscal 2007.
Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)
Three months ended Twelve months ended
October 1, October 2, October 1, October 2,
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2006 2005 2006 2005
(unaudited) (unaudited) (audited) (audited)
Sales $235,152 $180,672 $773,190 $653,851
Cost of sales 163,084 122,261 521,095 450,570
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Gross profit 72,068 58,411 252,095 203,281
Selling, general
and administrative
expenses 23,641 20,100 84,388 73,846
Restructuring and
other charges (note 2) 20,386 (110) 20,386 11,776
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Earnings before the
undernoted items 28,041 38,421 147,321 117,659
Depreciation and
amortization 9,072 7,202 32,383 25,615
Interest expense, net 1,039 924 3,067 4,615
Non-controlling interest
in income of
consolidated joint
venture 20 (153) 260 34
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Earnings before
income taxes 17,910 30,448 111,611 87,395
Income tax 1,122 1,251 4,782 1,352
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Net earnings $16,788 $29,197 $106,829 $86,043
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