Gildan Activewear Inc. will close its textile manufacturing facility in Valleyfield, Quebec in December 2006. The closure will also result in the downsizing of the company's knitting facility in Montreal, Quebec. Concurrently, the company also announced the closure and downsizing of sock manufacturing capacity located in Mount Airy, North Carolina and Hillsville, Virginia, which will be undertaken over the next three to four months.
Approximately 155 employees at the Valleyfield facility and approximately 50 employees at the Montreal knitting facility will be affected by the rationalization of the Canadian textile facilities. Approximately 335 positions in the U.S. will be eliminated at this time as a result of the rationalization of the U.S. hosiery operations.
Gildan sincerely regrets the impact of these announcements on its Canadian and U.S. employees, their families and their communities. The Company will treat all employees fairly and will make every effort to alleviate the impact of this transition for the employees whose positions are being eliminated.
Although the Company recognizes that its work force in its Canadian and U.S. operations have many years of experience in textiles and hosiery manufacturing, the relocation of production capacity to the Company's offshore manufacturing hubs in Central America and the Caribbean Basin is required in order to continue to be cost-competitive against Asian imports and other global producers in the intensely competitive North American apparel industry. Gildan has made significant capital investments in new state-of-the-art production capacity in Honduras and the Dominican Republic, where the Company is committed to operate its offshore manufacturing operations in accordance with the highest standards of social responsibility.
In addition to the restructuring of its manufacturing operations, Gildan has also announced that it will close its Canadian distribution centre in Montreal at the end of October 2006. Distribution operations in Canada will be handled by a third party logistics partner, in order to provide greater flexibility in meeting the needs of Gildan's wholesale distributors and retail customers in Canada. Six employees will be affected by the closure of the Montreal distribution centre.
In addition, Gildan updated its earnings guidance for the fourth quarter of fiscal 2006, to take into account restructuring charges resulting from the closures, and initiated its earnings guidance for fiscal 2007.
Fourth Quarter of Fiscal 2006
The highlights of the Company's fiscal 2006 updated EPS guidance are as follows:
1. Before the restructuring charge, the Company continues to be comfortable with its most recent guidance for diluted EPS in the fourth quarter of approximately 58 cents, up 23.4% from EPS of 47 cents in the fourth quarter of fiscal 2005, after adjusting prior year EPS to exclude a gain of a penny per share on the disposal of assets held for sale. 2. The Company continues to expect that the Kentucky Derby Hosiery acquisition will be neither accretive nor dilutive to its EPS in the fourth quarter of fiscal 2006. 3. The Company will record a restructuring charge of approximately 28 cents per share in the fourth quarter of fiscal 2006 to provide for the closure of its Valleyfield textile operations and the impairment in the value of its remaining Canadian textile and related manufacturing assets. Under the Company's tax structure, there is no tax benefit with respect to this restructuring charge. Approximately 24 cents per share of the charge will be non-cash, while the remaining 4 cents per share reflects the cash severance costs associated with the closure of the Valleyfield facility. After reflecting the restructuring charge, the Company projects diluted EPS for the fourth quarter of fiscal 2006 of approximately 30 cents, and full year 2006 EPS of $1.79. The Company will continue to evaluate the long-term viability and global competitiveness of its remaining Canadian manufacturing facilities. 4. The economic impact of the rationalization of the Kentucky Derby Hosiery manufacturing operations in North Carolina and Virginia will be reflected in the purchase price accounting for the acquisition, and is not expected to materially impact operating earnings either in fiscal 2006 or fiscal 2007.
Fiscal 2007
Excluding the impact in fiscal 2007 of the Kentucky Derby Hosiery acquisition, the company is providing initial EPS guidance for fiscal 2007 of approximately $2.50, up 21% from the company's projection of $2.07 in fiscal 2006 before the restructuring charge in the current fiscal year. The Company noted that its guidance for fiscal 2007 does not at this time include the impact of its recent acquisition of Kentucky Derby Hosiery. The Company is progressing well with its plans for the integration of the acquisition, including the rationalization of Kentucky Derby's manufacturing and distribution operations, and remains confident that it will achieve its target of U.S. $0.30 per share accretion once the integration process is completed during fiscal 2008. However, Gildan does not have sufficient visibility at this time to provide guidance for the amount of the accretion benefit to be realized during fiscal 2007. As part of its acquisition integration process, the Company is implementing financial control and reporting disciplines in Kentucky Derby Hosiery, which will enable Gildan to forecast and monitor the operating results of the acquired business with the same level of confidence as it has been able to do for its existing operations. The Company expects to be in a position to update its fiscal 2007 EPS guidance to include the impact of the Kentucky Derby Hosiery acquisition when it announces its results for the 2006 fiscal year on December 7, 2006.
The projected increase in diluted EPS in fiscal 2007 reflects higher unit sales volumes and the impact of manufacturing cost reductions primarily due to the ramp-up of the Dominican Republic textile facility. These positive factors are partially offset by higher cotton costs, lower selling prices, and higher selling, general and administrative and depreciation expenses.
In addition to higher depreciation resulting from recent major investments in capacity expansion projects, the Company's EPS guidance of $2.50 per share also includes an adjustment to depreciation in fiscal 2007 of 6 cents per share, primarily to reflect the change in the assumed economic life of the Company's remaining Canadian textile and related manufacturing assets.
The initial guidance for fiscal 2007 assumes that unit volumes will increase by approximately 16%, not including athletic socks, and that selling prices will decline by approximately 1% on average for the fiscal year. The Company's strategy will be to price aggressively in order to drive continuing volume growth and market share penetration in both the wholesale and retail channels. In addition, the Company will seek to maximize the realization of accretion benefits from the Kentucky Derby Hosiery acquisition during fiscal 2007, while recognizing that a key driver of such benefits will be the ramp-up of its state-of-the-art sock facility in Honduras which will be completed during fiscal 2008.
