For the month of: September, 2004	Commission File Number: 1-14830
GILDAN ACTIVEWEAR INC.
(Translation of Registrant's name into English)
725 Montée de Liesse Ville Saint-Laurent, Quebec Canada H4T 1P5
(Address of principal executive offices)

Form 20-F

Form 40-F    X

 

Yes

No   X

Quarterly Report to Shareholders Third quarter ended July 4, 2004

 

Gildan Activewear Inc.
Consolidated Statements of Earnings
(In thousands of U.S. dollars, except per share data)

 

		Three months ended				Nine months ended
		July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Sales		$           168,429		$          143,361		$        387,757		321,976
Cost of sales		117,443		99,388		278,134		225,334
Gross profit		50,986		43,973		109,623		96,642
Selling, general and administrative expenses		15,629		13,280		42,177		36,892
Earnings before interest, income taxes,
depreciation and amortization		35,357		30,693		67,446		59,750
Depreciation and amortization		5,517		4,109		15,698		11,309
Interest expense		1,626		1,733		4,970		4,891
Earnings before income taxes		28,214		24,851		46,778		43,550
Income taxes		1,986		3,021		3,345		4,618
Net earnings		$             26,228		$            21,830		$          43,433		$             38,932
Basic EPS (note 5)		$                 0.89		$                0.74		$              1.47		$                 1.33
Diluted EPS (note 5)		$                 0.88		$                0.73		$              1.46		$                  1.31

 

Consolidated Statements of Retained Earnings
(In thousands of U.S. dollars)

		Three months ended				Nine months ended
		July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Retained earnings, beginning of the period		$             179,450		$             126,191		$             162,245		$             109,089
Net earnings		26,228		21,830		43,433		38,932
Retained earnings, end of the period		$             205,678		$             148,021		$             205,678		$             148,021

See accompanying notes to interim consolidated financial statements.

4

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Quarterly Report to Shareholders Third quarter ended July 4, 2004

Gildan Activewear Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

 

		Three months ended						Nine months ended
		July 4, 2004			July 6, 2003			July 4, 2004			July 6, 2003
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
Cash flows from operating activities:
Net earnings		26,228			21,830			43,433			38,932
Adjustments for:
Depreciation and amortization		5,517			4,109			15,698			11,309
Future income taxes		320			1,123			1,781			2,994
Stock based compensation expense		115			—			299			—
Other		595			360			534			201
		32,775			27,422			61,745			53,436
Net changes in non-cash working capital balances:
Accounts receivable		(9,270	)		(5,386	)		(29,889	)		(19,051	)
Inventories		16,611			11,852			(9,994	)		(6,965	)
Prepaid expenses and deposits		1,931			365			(897	)		(1,568	)
Accounts payable and accrued liabilities		438			881			(2,577	)		8,997
Income taxes payable		1,570			3,206			(195	)		1,797
		44,055			38,340			18,193			36,646
Cash flows from financing activities:
Repayment of long term debt		(19,031	)		(1,101	)		(20,655	)		(3,210	)
Increase in secured debt		—			—			4,125			96
Proceeds from the issuance of shares		48			1,037			1,570			3,345
		(18,983	)		(64	)		(14,960	)		231
Cash flows from investing activities:
Purchase of fixed assets, net of disposals		(9,221	)		(9,473	)		(35,794	)		(30,446	)
(Increase) decrease in other assets		(118	)		73			(190	)		230
		(9,339	)		(9,400	)		(35,984	)		(30,216	)
Effect of exchange rate changes on cash and
cash equivalents		(52	)		(566	)		505			(366	)
Net increase (decrease) in cash and cash
equivalents during the period		15,681			28,310			(32,246	)		6,295
Cash and cash equivalents, beginning of period	$	21,413		$	22,995		$	69,340		$	45,010
Cash and cash equivalents, end of period	$	37,094		$	51,305		$	37,094		$	51,305

See accompanying notes to interim consolidated financial statements.

The third quarter of fiscal 2003 comprised of 14 weeks instead of the normal 13 weeks for a fiscal quarter. The inclusion of the extra week is required in every sixth fiscal year due to the Company’s floating year-end date. It was included in the third quarter of fiscal 2003 since it is seasonally the largest sales quarter in the year.

All amounts in the attached notes are unaudited unless specifically identified.

As a result of a significant portion of its revenues, expenses, assets and liabilities being denominated in U.S. dollars and the increasing international scope of its sales and manufacturing operations, the Company adopted the U.S. dollar as its functional and reporting currency effective October 6, 2003, the commencement of fiscal 2004. All opening assets and liabilities were translated into U.S. dollars using the exchange rate in effect on October 6, 2003. For comparative purposes, historical financial statements and notes thereto up to and including October 5, 2003 have been restated into U.S. dollars in accordance with generally accepted accounting principles.

3. Significant accounting policies:

The following policies have been applied for the first time in fiscal 2004:

In accordance with the transitional options permitted under Section 3870, the Company has elected to early adopt the new recommendations effective the commencement of our 2004 fiscal year and prospectively apply the standard for employee stock awards granted after October 6, 2003. There were no options granted during the three months and nine months ended July 4, 2004. Previously, the Company applied the settlement method of accounting to employee stock options. As required under the standard, the following disclosure is required to report the pro forma net earnings and earnings per share as if the fair value-based method had been used to account for employee stock options granted during our 2003 fiscal year.

3. Significant accounting policies (continued):

(a) Stock-Based Compensation and Other Stock-Based Payments (continued):

	Three months ended						Nine months ended
		July 4, 2004			July 6, 2003			July 4, 2004			July 6, 2003
Net earnings, as reported	$	26,228		$	21,830		$	43,433		$	38,932
Deduct:
Total stock-based employee compensation expense		(37	)		(7	)		(12	)		(156	)
etermined under fair value-based method for all awards
granted in fiscal 2003
Pro forma net earnings	$	26,191		$	21,759		$	43,421		$	38,776

Earnings per share:
Basic:
As reported	$          0.89		$          0.74		$          1.47		$          1.33
Pro forma	0.88		0.74		1.47		1.33
Diluted:
As reported	$          0.88		$          0.73		$          1.46		$          1.31
Pro forma	0.88		0.73		1.46		1.31

No options were cancelled during the three-month period ended July 4, 2004. During the nine months ended July 4, 2004, 52,877 options granted in fiscal 2003 were cancelled which resulted in a recovery of stock-based compensation costs, presented above, since the Company only accounts for forfeitures as they occur.

Restricted Share units
Effective February 2004, the Board of Directors approved an amendment to the Company’s Stock Option Plan (“Plan”) to change the name of the Plan to “Long Term Incentive Plan of the Corporation” and to allow the Board of Directors to grant restricted share units (“RSU”) under the Plan. An RSU is the right of an individual to whom a grant of such unit is made to receive one Class A Subordinate Voting Share at the end of the vesting periods of up to a maximum of 10 years should certain conditions be achieved, which include the employee’s continued employment during that period and achievement of specified performance objectives, if any. Grant levels of RSUs are determined by the Board of Directors on the basis of merit and relative contribution of the participant to the Company. The RSUs may be subject to the attainment of performance objectives established by the Board of Directors at the time of grant. At the end of the vesting period, the Class A Subordinate Voti ng Shares to which a holder of RSUs is entitled will be issued from treasury under the share limit provided in the Plan. The fair value of each RSU is calculated at the date of the grant. Compensation expense relating to the RSU plan is recognized in the financial statements over the vesting period. As of July 4, 2004 there were 94,000 RSUs awarded and outstanding of which none were vested or paid. The compensation expense recorded for the three months ended and nine months ended July 4, 2004, in respect to this Plan was $115,000 and $170,000, respectively.

		July 4, 2004						October 5, 2003						July 6, 2003
								(audited)
		Shares			$			Shares			$			Shares			$
Authorized without limit as to number and without par value:
First preferred shares, issuable in series, non-voting
Second preferred shares, issuable in series, non-voting
Class A subordinated voting shares, participating, one
vote per share
Class B multiple voting shares, participating, eight votes
per share
Issued and outstanding:
Class A subordinate voting shares:
Total outstanding, beginning of period		23,426		$	72,023			22,827		$	67,536			22,827		$	67,536
Conversion of Class B shares into Class A shares (b)		6,094			3,467			—			—			—			—
Shares issued under employee share purchase plan		4			122			5			127			4			91
Shares issued pursuant to exercise of stock options		105			1,448			594			4,360			499			3,254
Total outstanding, end of period		29,629			77,060			23,426			72,023			23,330			70,881
Class B multiple voting shares, beginning of period		6,094			3,467			6,094			3,467			6,094			3,467
Conversion of Class B shares into Class A shares (b)		(6,094	)		(3,467	)		—			—			—			—
		29,629		$	77,060			29,520		$	75,490			29,424		$	74,348

(a) On December 3, 2003, the Board of Directors approved the renewal of the stock repurchase program authorizing the Company to purchase up to a maximum of 200,000 of the Company’s Class A subordinate voting shares in the open market commencing December 22, 2003 and ending December 21, 2004. As at July 4, 2004 no shares have been repurchased under this plan.

5. Earnings per share:

6. Guarantees:

The Company and some of its subsidiaries have granted irrevocable standby letters of credit and surety bonds, issued by highly rated financial institutions, to third parties to indemnify them in the event the Company does not perform its contractual obligations. As at July 4, 2004, the maximum potential liability under these guarantees was $22.1 million of which $10.8 million was surety bonds and $11.3 million was for standby letters of credit and corporate guarantees. The standby letters of credit mature at various dates during fiscal 2005, the surety bonds are automatically renewed on an annual basis and the corporate guarantees mature upon 30 days notice.

	Notional amount				Exchange rate		Maturity	Notional U.S. equivalent
2004:
Sell contracts:
Foreign exchange contracts	Euro/US		€  5,696		1.2202 to 1.2752		July to December 2004		7,051
	GBP/US		£  3,132		1.6660 to 1.8500		July to December 2004		5,437
Buy contracts:
Foreign exchange contracts	CAD/US		$64,640		1.3396 to 1.3885		July 2004 to August 2005		47,614
2003:
Sell contracts:
Foreign exchange contracts	Euro/US		€  4,889		1.0720 to 1.0755		July to November 2003		5,250
Buy contracts:
Foreign exchange contracts	Euro/CAD		€     606		1.5750 to 1.5761		July to August 2003		1,276*

* Exchange rate as at July 6, 2003 was used to translate amount to U.S. dollars.

In addition, as at July 6, 2003, the Company had commitments to sell U.S. $29.6 million for CAD $43.3 million. These contracts matured by August 2003.

The Company manufactures and sells activewear apparel. The Company operates in one business segment.

		Three months ended						Nine months ended
		July 4, 2004			July 6, 2003			July 4, 2004				July 6, 2003
International	$	153,144		$	131,090		$	354,424			$	292,738
Canada	$	15,285		$	12,271		$	33,333			$	29,238
	$	168,429		$	143,361		$	387,757			$	321,976

8. Segmented information (continued):

		July 4, 2004		October 5, 2003		July 6, 2003
				(audited)
Canada		$            83,994		$            93,247		$            98,737
Caribbean basin, Central America and Mexico		91,366		68,570		59,542
United States		24,465		18,532		18,266
		$           199,825		$           180,349		$           176,545

For the nine-month periods ended July 4, 2004 and July 6, 2003 the Company had one individual customer which accounted for between 25% and 30% of total sales.

		Three months ended				Nine months ended
		July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
Depreciation of fixed assets		$                5,328		$                3,966		$              15,158		$              10,784
Interest expense on long-term debt		$                1,554		$                1,820		$                4,960		$                5,097
Foreign exchange (gain) loss		$                    (16	)	$                   533		$                   734		$                   893
Amortization of deferred charges		$                   189		$                   143		$                   540		$                   525

(b) Supplemental cash flow disclosure:

		Three months ended				Nine months ended
		July 4, 2004		July 6, 2003		July 4, 2004		July 6, 2003
Cash paid during the period for:
Interest		$              1,829		$              1,672		$              5,159		$              4,963
Income taxes		347		$                   69		1,137		654

		July 4, 2004	October 5, 2003			July 6, 2003
				(audited)
Non-cash transactions:
Additions to fixed assets included in accounts payable		$              2,285		$              2,348		$              2,492
Cash and cash equivalents consist of:
Cash balances with banks		$            33,994		$            50,672		$            35,437
Short-term investments		3,100		18,668		15,868
		$            37,094		$            69,340		$            51,305

10. Subsequent event:

The cost of fulfilling the Company’s financial obligations to H. Greg Chamandy over the remaining life of his contract will be reflected in the fourth quarter of the current fiscal year. The charge to be recorded for ongoing compensation commitments pursuant to his employment agreement amounts to approximately U.S. $3.0 million or U.S. $0.10 per diluted share, after tax.

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto for the nine months ended July 4, 2004, and with Management’s Discussion and Analysis of the Financial Position and Results of Operations (“MD&A “) in the fiscal 2003 Annual Report, including the section on the risks and uncertainties.

The Company’s accounting policies are in accordance with Canadian generally accepted accounting principles (“GAAP”). These differ in some respects from GAAP in the United States (“US GAAP”). The Company’s financial results are reconciled to US GAAP at the end of its fiscal year in its Annual Report.

For additional information relating to the Company, readers may review the documentation filed by the Company with Canadian Securities Commissions (including the Company’s Annual Information Form) available at www.sedar.com and with the U.S Securities and Exchange Commission (including the Annual Report on 40-F) available at www.sec.gov.

Gildan Activewear Inc. is a vertically integrated manufacturer and marketer of premium quality branded basic activewear for sale principally in the wholesale imprinted activewear segment of the Canadian, U.S., European, and other international markets. Our Company manufactures and sells premium quality 100% cotton and 50% cotton/50% polyester T-shirts, sport shirts and sweatshirts in a variety of weights, sizes, colours and styles. We sell our products as blanks, which are ultimately decorated with designs and logos for sale to consumers. Gildan’s corporate head office is located in Montreal, Canada, and over 9,300 full-time employees work in our facilities worldwide. Our shares are listed on the New York Stock Exchange (GIL) and the Toronto Stock Exchange (GIL.A).

All financial information contained herein is expressed in U.S. dollars unless otherwise stated. Historically, the financial information of the Company has been measured and reported in Canadian dollars. However, effective October 6, 2003, the Company adopted the U.S. dollar as its functional currency since a significant portion of revenues, expenses, assets and liabilities are denominated in U.S. dollars and the Company’s sales and manufacturing operations are increasingly international in scope. Effective the same date, the U.S. dollar was adopted as the Company’s reporting currency. The Company reports its results in accordance with Canadian GAAP. Historical financial information in U.S. dollars has been provided in the Investor Relations section of the Company’s Web Site, which can be accessed at www.gildan.com.

When there is such a change in reporting currency, Canadian and U.S. accounting standards require that prior year comparative financial statements be presented in U.S. dollars, using a translation method that retains the Canadian dollar as the currency of measurement, as described in Note 2 to the interim consolidated financial statements. The application of this method at the beginning of fiscal 2004 involved translating all assets and liabilities using the exchange rate in effect at the end of fiscal 2003. This resulted in a translated value for opening inventories and fixed assets that was approximately $23 million higher than the amount that would have resulted from the application of exchange rates prevailing at the dates these assets were manufactured or acquired. This upward revaluation of inventories and fixed assets has been reflected directly in opening shareholders’ equity as part of the $26.2 million positive balanc e of cumulative translation adjustments. These increases will have a corresponding offsetting negative impact on earnings as these inventories are consumed and fixed assets are depreciated. We have quantified the impact of these higher expenses for the three-month and nine-month period ending July 4, 2004 as part of our discussion and analysis of gross margins, depreciation expense and earnings per share below.

Sales for the three months ended July 4, 2004 were $168.4 million, up 17.4% from $143.4 million for the three months ended July 6, 2003. The increase in net sales for the third quarter of fiscal 2004 were due to an increase in unit sales of 13.5% combined with higher selling prices. Sales for the nine months ended July 4, 2004 were $387.8 million compared to $322.0 million for the nine months ended July 6, 2003, representing an increase of 20.4%. The increase in net sales for the nine-month period ended July 4, 2004 were mainly due to an increase of 19.0% in unit sales combined with a higher valued product mix, slightly offset by lower selling prices.

The third quarter of fiscal 2003 comprised of 14 weeks instead of the normal 13 weeks for a fiscal quarter. The inclusion of the extra week is required in every sixth fiscal year due to the Company’s floating year-end date. It was included in the third quarter of fiscal 2003 since it is seasonally the largest sales quarter in the year. Management estimates that the impact of including the extra week in the third quarter of fiscal 2003 was to add approximately $0.04 to the diluted EPS for the quarter.

During the quarter ended June 30, 2004, U.S. industry shipments of T-shirts from distributors to screen-printers increased by 14.3%, sport shirt shipments increased by 3.4%, and fleece shipments increased 13.8% compared with the third quarter last year. Sales of Gildan T-shirts by distributors grew by 35.9%, while sales of Gildan sport shirts and fleece products increased by 19.6% and 53.9% respectively.

Gildan continued to increase market share in all market segments, compared to the third quarter of fiscal 2003. The Company further increased its market leadership position in the overall T-shirt category, with a share of 29.6%, versus 28.0% a year ago. Gildan continued to increase its penetration in both the sport shirt and fleece segments, where its share increased over the prior year to 23.0% from 19.5% and 16.4% from 12.1%, respectively.

The Company continued to expand its European business and maintained its leading market share position in Canada. Gildan’s unit shipments in Europe increased by 43.7% over the third quarter last year, and shipments in Canada were up by 32.6%. Selling prices in the Canadian market continue to be negatively impacted as a result of the lower landed selling prices for U.S. competitors in the Canadian market, due to the decline in the relative value of the U.S. dollar.

Gross margins were 30.3% compared to 30.7% in the third quarter of fiscal 2003. The slight decline in gross margin percentage was primarily the result of increases in cotton costs and a lower valued product mix, offset by higher overall selling prices and improved manufacturing efficiencies.

Gross margins for the nine months ended July 4, 2004 were $109.6 million or 28.3% compared to $96.6 million or 30.0% for the same period of the prior year. Gross margins were negatively impacted by $3.3 million for the nine months ended July 4, 2004 due to the increased valuation in inventories caused by the change in functional currency, as opening inventories were consumed in the first two quarters of fiscal 2004. Gross margins, excluding the impact of the adjustments due to the change in functional currency, were 29.1% for the nine months ended July 4, 2004 versus 30.0% for the same period last year. The decrease in the gross margin percentage for the nine-month period was mainly due to higher cotton costs offset by improved manufacturing efficiencies. The Company continues to realize reductions in manufacturing and transportation costs from its investment in the Rio Nance textile facility in Honduras.

 

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $15.6 million or 9.3% of sales for the third quarter of fiscal 2004 compared to $13.3 million or 9.3% of sales in the third quarter of fiscal 2003. The increase in the dollar amount of selling, general and administrative expenses is the result of higher volume-related distribution costs combined with losses incurred on the disposal of surplus Canadian yarn-spinning and textile equipment.

For the nine-month period ended July 4, 2004, selling, general and administrative expenses were $42.2 million or 10.9% of sales compared to $36.9 million or 11.5% of sales in the same period of fiscal 2003. The Company expects that for fiscal 2004, selling, general and administrative expenses will be at a similar level as a percentage of sales.

Depreciation and amortization expenses were $5.5 million in the third quarter of fiscal 2004 compared to $4.1 million in the third quarter of fiscal 2003. For the nine-month period, depreciation and amortization expenses were $15.7 million in fiscal 2004 compared to $11.3 million in fiscal 2003. The increase is the result of the Company’s continued investment in capital expenditures to provide for long-term sales growth. Approximately $1.4 million of the increase for the nine months ended July 4, 2004 was caused by the change in functional currency, as a portion of the upward revaluation of opening fixed assets was depreciated during the period.

Interest expense has decreased to $1.6 million in the third quarter of fiscal 2004 from $1.7 million in the third quarter of fiscal 2003 due to the first repayment made in early June on the Company’s Senior Notes. For the nine-month period ended July 4, 2004 interest expense was essentially unchanged at $5.0 million in fiscal 2004 compared to $4.9 million in fiscal 2003.

The income tax rate for the third quarter of 2004 was 7.0%, compared to 12.2% for the third quarter of the prior year, and 7.2% for the nine months ended July 4, 2004 versus 10.6% for the same period of fiscal 2003. Last year’s tax rate was higher due to the significant decline in the U.S. exchange rate during the quarter, which generated an unrealized foreign exchange gain from revaluation of long-term debt denominated in U.S. dollars within Gildan’s Canadian legal entity. Although this gain was fully offset on a pre-tax basis by an exchange loss on conversion of U.S. dollar working capital held by foreign subsidiaries, a higher proportion of overall taxable income was charged at the higher Canadian tax rate in the quarter. The Company expects that the tax rate for fiscal 2004 will remain at current levels.

Net earnings were $26.2 million or $0.88 per share on a diluted basis in the third quarter of fiscal 2004, up respectively $4.4 million and 20.5% from $21.8 million or $0.73 per diluted share in the third quarter of fiscal 2003. The increase in net earnings was the result of a 13.5% increase in unit sales together with higher average selling prices, partially offset by reduced gross margins and an increase in selling, general, administration and depreciation expenses. The results for the third quarter of fiscal 2004 included charges of $0.03 per share which were incurred primarily for asset disposals and write-downs arising primarily from the sale of surplus equipment in the Canadian yarn-spinning and textile operations. Excluding these charges as well as the impact of the change to U.S. dollar functional currency, net earnings were $27.6 million or $0.93 per share on a diluted basis, an increase of $5.8 million and 27.4% over earnings and diluted earnings per share in the third quarter of fiscal 2003.

The Company had previously provided diluted EPS guidance for the third quarter of $0.80 — $0.85. The Company exceeded this guidance as it was able to match production capacity to meet sales demand better than anticipated, therefore increasing unit sales volume. Average selling prices were also higher than anticipated.

For the nine-month period ended July 4, 2004, net earnings were $43.4 million or $1.46 per diluted share compared with $38.9 million or $1.31 per diluted share in the same period of last year. Net earnings before the impact of the U.S. dollar functional currency change were $48.0 million or $1.61 per diluted share, up respectively $9.1 million and 22.9% from the first nine months of fiscal 2003.

 

Quarterly Results

The following table sets forth certain summarized unaudited quarterly financial and other data for the periods presented. The financial data has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such quarterly data. The Company’s revenues and income are subject to seasonal variations. Consequently, the results of operations for any quarter are not necessarily indicative of the results to be expected for any future period.

Fiscal 2004
(in millions, except per share data)		Q1 2004		Q2 2004		Q3 2004
Sales		$                    78.0		$           141.4		$          168.4
Unit sales (Dozen)		4.0		7.6		8.4
Net earnings		$                      2.9		$             14.3		$            26.2
Basic EPS		0.10		0.48		0.89
Diluted EPS		0.10		0.48		0.88
Total assets		427.3		448.9		457.4
Total long-term financial liabilities		79.9		81.2		60.9
Weighted average # of shares outstanding (in thousands)
Basic		29,524		29,576		29,628
Diluted		29,792		29,866		29,859

Fiscal 2003

(in millions, except per share data)		Q1 2003		Q2 2003		Q3 2003		Q4 2003
Sales		$            65.0		$           113.6		$         143.4		$                   109.2
Unit sales (Dozen)		3.3		6.1		7.4		5.8
Net earnings		$              3.7		$            13.4		$            21.8		$                     14.2
Basic EPS		0.13		0.46		0.74		0.48
Diluted EPS		0.13		0.45		0.73		0.48
Total assets		322.6		356.9		409.4		429.7
Total long-term financial liabilities		85.4		87.5		73.8		74.8
Weighted average # of shares outstanding (in thousands)
Basic		28,945		29,160		29,373		29,478
Diluted		29,600		29,715		29,768		29,808

Fiscal 2002

(in millions, except per share data)		Q1 2002		Q2 2002		Q3 2002		Q4 2002
Sales		$               55.7		$               98.1		$              125.2		$              103.3
Unit sales (Dozen)		2.7		5.0		6.4		5.3
Net earnings		$                 1.7		$               10.3		$                17.7		$                12.7
Basic EPS		0.06		0.36		0.62		0.44
Diluted EPS		0.06		0.35		0.60		0.43
Total assets		298.2		307.6		313.6		315.3
Total long-term financial liabilities		115.0		113.5		88.9		85.9
Weighted average # of shares outstanding (in thousands)
Basic		28,208		28,381		28,570		28,807
Diluted		29,098		29,298		29,510		29,540

BALANCE SHEET

As at July 4, 2004, accounts receivable totaled $94.3 million compared to $64.3 million at October 5, 2003 and $76.1 million in the third quarter of the prior year. The increase in receivables compared with October 5, 2003 was due to higher sales due to the seasonality of our business. The increase in accounts receivable from the third quarter of fiscal 2003 is due to an increase in sales of $25.0 million for the quarter. Days’ sales outstanding on trade accounts receivable were 43 days in the third quarter of fiscal 2003 and fiscal 2004 and were 44 days at October 5, 2003. Inventories increased by $10.0 million from $103.5 million at October 5, 2003 to $113.5 million in the third quarter of fiscal 2004. Inventory levels have increased by $19.2 million from the prior year to service anticipated growth in demand for the Company’s products. However, the increase in inventory is below the Company ’s original plan due to the higher than expected unit sales volume for the first nine months of fiscal 2004.

Capital expenditures in the third quarter of fiscal 2004 amounted to $9.2 million, net of approximately $2.5 million of proceeds on the disposition of Canadian textile assets. The major projects include the new textile facility in the Dominican Republic, the expansion of the Rio Nance textile facility and the addition of a new sewing facility in Nicaragua. The Company is also continuing to develop its new manufacturing hub in the Dominican Republic and Haiti. Construction of the first textile facility in the Dominican Republic is on target. In the third quarter of fiscal 2003, the Company invested $9.5 million in fixed assets.

 

 

Subsequent to the end of the third quarter of fiscal 2004, the Company purchased land and buildings in Nicaragua for approximately U.S. $5.0 million. Over the next 18 months the Company intends to construct a major textile facility on this site for the production of fleece, in order to support the Company’s anticipated growth in this product-line in both the wholesale and retail channels. The total capital cost of the project, including the land and buildings, is estimated at approximately U.S. $60 million.

Year-to-date, the Company invested $35.8 million in fixed assets and it now anticipates that net capital expenditures for the full 2004 fiscal year will be in the range of U.S. $65 million – U.S. $70 million due to the additional cost of the Nicaragua property and initial work at this location, partially offset by the proceeds from the sale of surplus equipment from the Company’s Canadian textile operations.

Total assets were $457.4 million at July 4, 2004 compared to $429.7 million at October 5, 2003 and $409.4 million at July 6, 2003. Working capital was $167.2 million at the end of the third quarter of fiscal 2004 compared to $155.0 million at October 5, 2003 and $142.7 million at July 6, 2003.

For the quarter ended July 4, 2004, cash flows from operating activities, including changes in non-cash working capital, was $44.1 million compared with $38.3 million during the same period last year. The increase in the cash flows for the quarter was the result of higher net earnings. Year-to-date, cash flows from operating activities was $18.2 million compared with $36.6 million during the same period last year. The decrease in cash flows was the result of increases in non-cash working capital items partially offset by an increase in net earnings.

Free cash flow, defined as cash flow from operating activities less cash used in investing activities, amounted to $34.7 million for the quarter ended July 4, 2004, an increase of $5.8 million compared to $28.9 million for the same quarter last year. For the nine months ended July 4, 2004 the Company used $17.8 million versus a free cash inflow of $6.4 million for the same period last year. The higher use of funds was due to the financing of higher sales and the ongoing capital requirements to implement the Company’s continuing offshore capacity expansion plans.

The Company ended the third quarter with cash and cash equivalents of $37.1 million. Total indebtedness at July 4, 2004 amounted to $57.0 million compared to $73.6 million at October 5, 2003 and $76.4 million at July 6, 2003. The decline in total indebtedness is mainly due to the Company making its first scheduled principal repayment in the amount of $17.5 million of its senior notes on June 10, 2004. At the end of the third quarter, none of the Company’s $150.0 million CAD revolving bank facility was utilized.

In the normal course of business, the Company enters into contractual obligations that will require it to disburse cash over future periods. The following tables sets forth the Company’s contractual obligations for the following items as at July 4, 2004:

	Payments Due by Period
(in millions)	Total	Balance of Fiscal 2004	Fiscal 2005-2006	Fiscal 2007-2008	After  Fiscal 2008
Long Term Debt	$         56.7	$         0.2	$       37.0	$    19.4	$     0.1
Capital Lease Obligations	0.3	—	0.3	—	—
Operating Leases	12.4	1.0	5.6	3.2	2.6
Purchase Obligations	134.1	67.1	67.0	—	—
Other Long-Term Obligations	63.1	62.1	0.5	0.5	—
Total Contractual Obligations	$    266.6	$    130.4	$       110.4	$    23.1	$     2.7

Management expects that cash flow from its operating earnings, together with its year-end cash balances and unutilized bank facilities, will be sufficient to meet any foreseeable cash needs for the balance of fiscal 2004.

Going forward, the Company continues to expect to achieve its objective of a minimum 15% EPS growth beyond 2004, in addition to achieving 15% — 20% EPS growth in the current fiscal year. The Company continues to be slightly ahead of schedule with its timetable for construction of its Dominican Republic textile facility. As the Company brings this facility on stream, together with its new facility in Nicaragua, and completes the expansion of its Honduran textile facility, it expects to continue to lower its manufacturing costs and to have capacity available to further accelerate its market share penetration in the wholesale distributor channel in fiscal 2005, as well as to implement its plans to enter the retail channel.

For a more detailed discussion of the Company’s outlook, readers should review the outlook section of the fiscal 2003 MD&A in the Annual Report, which is hereby incorporated by reference.

Several of our accounting policies involve significant judgments and uncertainties. The policies with the greatest potential effect on our results of operations and financial position include the estimate of collectability of accounts receivable and the recovery value of obsolete or overstocked inventory. For accounts receivable, we estimate the net collectability, considering both historical and anticipated trends of trade deductions and returns taken by our customers, allowances we provide to our customers and take various steps to mitigate the risk of credit loss, including obtaining partial credit insurance. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected.< /FONT>

CHANGES IN ACCOUNTING POLICIES

Stock-Based Compensation and Other Stock-Based Payments

In November 2003, the Canadian Institute of Chartered Accountants (“CICA”) revised Handbook Section 3870, with respect to the accounting for stock-based compensation and other stock-based payments. The revised recommendations require that beginning January 1, 2004, the fair value-based method be used to account for all transactions whereby goods and services are received in exchange for stock-based compensation and other stock-based payments. Under the fair value-based method, compensation cost is measured at fair value at the date of grant and is expensed over the award’s vesting periods.

During the third quarter of fiscal 2004, $115,000 (2003 – nil) was expensed as compensation expense, with an offset to contributed surplus, due to the issuance of 34,000 Restricted Share Units (RSUs). For the nine months ended July 4, 2004 $299,000 was expensed as compensation expense due to the issuance of 94,000 RSUs and a modification to the vesting period of certain options.

In accordance with the transitional options permitted under Section 3870, the Company has elected to early adopt the new recommendations effective the commencement of our 2004 fiscal year and prospectively apply the standard for employee stock awards granted after October 6, 2003. There were no options granted during the three months and nine months ended July 4, 2004. Previously, the Company applied the settlement method of accounting to employee stock options.

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Quarterly Report to Shareholders Third quarter ended July 4, 2004

RECENT ACCOUNTING PRONOUNCEMENTS

Impairment of Long-Lived Assets

In December 2002, the CICA issued Handbook section 3063, “Impairment of Long-Lived Assets”. Section 3063 provides accounting guidance for the determination of a long-lived asset impairment as well as recognition, measurement and disclosure of the impairment. This section was effective for the Company’s 2004 fiscal year and has not had a material impact on its financial statements.

Asset Retirement Obligations

In March 2003, the CICA issued Handbook Section 3110, “Asset Retirement Obligations”. This section requires that the fair value of an asset retirement obligation be recorded as a liability only when there is a legal obligation associated with a removal activity. This section was effective for the Company’s 2004 fiscal year and has not had a material impact on its financial statements.

FINANCIAL INSTRUMENTS AND OTHER INSTRUMENTS

Foreign currency risk management

A portion of the Company’s sales are denominated in currencies other than U.S. dollars. The Company uses the revenue stream in these non-U.S. dollar currencies as a natural hedge against purchases of fixed assets and expenses denominated in these non-U.S. dollar currencies. From time to time, the Company also uses forward foreign exchange contracts to hedge its foreign exchange exposure on cash flows related to payables, accounts receivable and cash in Canadian dollars, pounds sterling and Euros.

See note 7 to the interim consolidated financial statements for a table which summarizes the Company’s commitments to buy and sell foreign currencies as at July 4, 2004 and July 6, 2003.

A forward foreign exchange contract represents an obligation to buy or sell a foreign currency with a counterparty. Credit risk exists in the event of failure by a counterparty to meet its obligations. The Company reduces this risk by dealing only with highly rated counterparties, normally major European and North American financial institutions.

Credit risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables.

The Company invests available cash in short-term deposits with major North American financial institutions.

Concentration of credit risk with respect to trade receivables is limited due to the Company’s credit evaluation process and, other than for one customer (as disclosed in note 8), to the dispersion of a large number of customers across many geographic areas within Canada, the United States, the United Kingdom and Europe. The Company regularly monitors its credit risk exposure to these and other customers and takes steps to mitigate the risk of loss, including obtaining credit insurance.

The Company’s extension of credit is based on an evaluation of each customer’s financial condition and the Company’s ability to obtain partial credit insurance coverage for certain customers. Allowances are maintained for potential credit losses consistent with the credit risk, historical trends, general economic conditions and other information.

Fair value disclosure

Fair value estimates are made as of a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision.

The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair values as at the balance sheet dates because of the short-term maturity of those instruments.

Interest rate risk

The Company’s exposure to interest rate fluctuations is with respect to the use of its bank facility which bears interest at floating rates.

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Quarterly Report to Shareholders Third quarter ended July 4, 2004

BUSINESS RISKS

In order to be successful, the Company must continuously be aware of global changes and risks affecting its markets and competitive environment. Risk areas include changes in international trade legislation and taxation, changes in cotton prices and currency fluctuations. For a more detailed discussion on potential business risks, readers should review the risks factors section of the Annual Information Form filed by the Company with the Canadian securities commissions and the Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission which are hereby incorporated by reference.

DISCLOSURE OF OUTSTANDING SHARE DATA

As of July 31, 2004 there were 29,629,904 Class A subordinate shares issued and outstanding along with 673,085 options outstanding to acquire Class A subordinate shares.

FORWARD-LOOKING STATEMENTS

Certain statements included in this management discussion and analysis may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We refer you to the Company’s filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission for a discussion of the various factors that may affect the Company’s future results.

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur, which may cause the Company’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements.

We believe that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Furthermore, the forward-looking statements contained in this report are made as of the date of this report, and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. This cautionary statement expressly qualifies the forward-looking statements contained in this report.

The forward-looking statements contained in this report are expressly qualified by this cautionary statement.

 

 

August 4, 2004

 

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