EX-99.1 2 exhibit99_1.htm 2014-Q2 MD&A exhibit99_1.htm
 
 
 
2014 Second Quarter Shareholder Report
May 1, 2014
 
 
Contents
  
 
MD&A
  
 
1.0 Preface
2
 
2.0 Caution regarding forward-looking statements
2
 
3.0 Our business
4
 
4.0 Strategy and objectives
8
 
5.0 Operating results
9
 
6.0 Financial condition
16
 
7.0 Cash flows
17
 
8.0 Liquidity and capital resources
19
 
9.0 Legal proceedings
20
 
   10.0 Outlook
21
 
   11.0 Financial risk management
21
 
   12.0 Critical accounting estimates and judgments
21
 
   13.0 Accounting policies and new accounting standards not yet applied
21
 
   14.0 Internal control over financial reporting
22
 
   15.0 Risks and uncertainties
22
 
   16.0 Definition and reconciliation of non-GAAP financial measures
23
     
 
Condensed interim consolidated financial statements
26
     
 
Notes to condensed interim consolidated financial statements
30

 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
1.0
 
1.1 Definitions
 
In this Management’s Discussion and Analysis (MD&A), “Gildan”, the “Company”, or the words “we”, “us”, and “our” refer, depending on the context, either to Gildan Activewear Inc. or to Gildan Activewear Inc. together with its subsidiaries.

1.2 Date and approval by the Board of Directors
 
In preparing this MD&A, we have taken into account all information available to us up to May 1, 2014, the date of this MD&A. The unaudited condensed interim consolidated financial statements as at and for the three and six months ended March 30, 2014 and this MD&A were reviewed by Gildan’s Audit and Finance Committee and were approved and authorized for issuance by our Board of Directors on May 1, 2014.

1.3 Accounting framework
 
All financial information contained in this MD&A and in the unaudited condensed interim consolidated financial statements has been prepared in accordance with International Financial Reporting Standards (IFRS), except for certain information discussed in the section entitled “Definition and reconciliation of non-GAAP financial measures”.

1.4 Additional information
 
Additional information about Gildan, including our 2013 Annual Information Form, is available on our website at www.gildan.com, on the SEDAR website at www.sedar.com, and on the EDGAR section of the U.S. Securities and Exchange Commission website (which includes the Annual Report on Form 40-F) at www.sec.gov.
 
This MD&A comments on our operations, financial performance and financial condition as at and for the three and six months ended March 30, 2014. All amounts in this MD&A are in U.S. dollars, unless otherwise noted. For a complete understanding of our business environment, trends, risks and uncertainties and the effect of accounting estimates on our results of operations and financial condition, this MD&A should be read together with the unaudited condensed interim consolidated financial statements as at and for the three and six months ended March 30, 2014, and the related notes, and with our MD&A for the year ended September 29, 2013 (2013 Annual MD&A).

 
2.0  
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
 
Certain statements included in this MD&A constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Canadian securities legislation and regulations, and are subject to important risks, uncertainties and assumptions. This forward-looking information includes, amongst others, information with respect to our objectives and the strategies to achieve these objectives, as well as information with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. In particular, information appearing under the headings “Strategy and objectives” and “Outlook” contain forward looking statements. Forward-looking statements generally can be identified by the use of conditional or forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “project”, “assume”, “anticipate”, “plan”, “foresee”, “believe” or “continue” or the negatives of these terms or variations of them or similar terminology. We refer you to the Company’s filings with the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission, as well as the risks described under the “Financial risk management”, “Critical accounting estimates and judgments” and “Risks and uncertainties” sections of the 2013 Annual MD&A for a discussion of the various factors that may affect the Company’s future results. Material factors and assumptions that were applied in drawing a conclusion or making a forecast or projection are also set out throughout this document.

Forward-looking information is inherently uncertain and the results or events predicted in such forward-looking information may differ materially from actual results or events. Material factors, which could cause
 
QUARTERLY REPORT – Q2 2014  P.2
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
 
actual results or events to differ materially from a conclusion, forecast or projection in such forward-looking information, include, but are not limited to:

·  
our ability to implement our growth strategies and plans, including achieving market share gains, obtaining and successfully introducing new sales programs, increasing capacity, implementing cost reduction initiatives and completing and successfully integrating acquisitions;
·  
the intensity of competitive activity and our ability to compete effectively;
·  
adverse changes in general economic and financial conditions globally or in one or more of the markets we serve;
·  
our reliance on a small number of significant customers;
·  
the fact that our customers do not commit contractually to minimum quantity purchases;
·  
our ability to anticipate changes in consumer preferences and trends;
·  
our ability to manage production and inventory levels effectively in relation to changes in customer demand;
·  
fluctuations and volatility in the price of raw materials used to manufacture our products, such as cotton, polyester fibres, dyes and other chemicals;
·  
our dependence on key suppliers and our ability to maintain an uninterrupted supply of raw materials and finished goods;
·  
the impact of climate, political, social and economic risks in the countries in which we operate or from which we source production;
·  
disruption to manufacturing and distribution activities due to such factors as operational issues, disruptions in transportation logistic functions, labour disruptions, political or social instability, bad weather, natural disasters, pandemics and other unforeseen adverse events;
·  
changes to international trade legislation that the Company is currently relying on in conducting its manufacturing operations or the application of safeguards thereunder;
·  
factors or circumstances that could increase our effective income tax rate, including the outcome of any tax audits or changes to applicable tax laws or treaties;
·  
compliance with applicable environmental, tax, trade, employment, health and safety, anti-corruption, privacy and other laws and regulations in the jurisdictions in which we operate;
·  
our significant reliance on computerized information systems for our business operations, including our JD Edwards Enterprise Resource Planning (ERP) system which is currently being upgraded to the latest system release, Enterprise One;
·  
changes in our relationship with our employees or changes to domestic and foreign employment laws and regulations;
·  
negative publicity as a result of actual, alleged or perceived violations of labour and environmental laws or international labour standards, or unethical labour or other business practices by the Company or one of its third-party contractors;
·  
our dependence on key management and our ability to attract and/or retain key personnel;
·  
changes to and failure to comply with consumer product safety laws and regulations;
·  
adverse changes in third party licensing arrangements and licensed brands;
·  
our ability to protect our intellectual property rights;
·  
changes in accounting policies and estimates;
·  
exposure to risks arising from financial instruments, including credit risk, liquidity risk, foreign currency risk and interest rate risk, as well as risks arising from commodity prices; and
·  
the adverse impact of any current or future legal and regulatory actions.

These factors 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. Forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made, may have on the Company’s business. For example, they do not include the effect of business dispositions, acquisitions, other business transactions, asset write-downs, asset impairment losses or other charges announced or occurring after forward-looking statements are made. The financial impact of such
 
QUARTERLY REPORT – Q2 2014 P.3
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
transactions and non-recurring and other special items can be complex and necessarily depends on the facts particular to each of them.

There can be no assurance that the expectations represented by our forward-looking statements will prove to be correct. The purpose of the forward-looking statements is to provide the reader with a description of management’s expectations regarding the Company’s future financial performance and may not be appropriate for other purposes. Furthermore, unless otherwise stated, the forward-looking statements contained in this report are made as of the date hereof, 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 unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.
 
 
3.1 Overview
 
Gildan is a leading supplier of quality branded basic family apparel, including T-shirts, fleece, sport shirts, underwear and socks. We market our products under a diversified portfolio of company-owned brands, including the Gildan®, Gold Toe® and Anvil® brands and brand extensions, as well as under licensing arrangements for the Under Armour®, Mossy Oak® and New Balance® brands. We distribute our products in the North American and international printwear markets and to U.S. retailers. Gildan® is the leading activewear brand in the printwear market in the U.S. and Canada, and is increasing its penetration in international printwear markets, such as Europe, Mexico and the Asia-Pacific region. In the U.S. retail market, we are one of the largest suppliers of branded athletic, casual and dress socks to a broad spectrum of retailers. We are also developing Gildan® as a consumer brand for activewear and underwear. The Company also manufactures for select leading global athletic and lifestyle consumer brands.

Gildan owns and operates vertically-integrated, large-scale manufacturing facilities which are primarily located in Central America and the Caribbean Basin and are strategically positioned to efficiently service the quick replenishment needs of its customers in the printwear and retail markets. Gildan has over 37,000 employees worldwide and is committed to industry-leading labour and environmental practices at all of its facilities.

3.2 Our operating segments
 
The Company manages and reports its business under two operating segments, Printwear and Branded Apparel, each of which is a reportable segment for financial reporting purposes. Each segment has its own management that is accountable and responsible for the segment’s operations, results and financial performance. These segments are principally organized by the major customer markets they serve. The following summary describes the operations of each of the Company’s operating segments:

3.2.1 Printwear segment
The Printwear segment, headquartered in Christ Church, Barbados, designs, manufactures, sources and distributes undecorated activewear products in large quantities primarily to wholesale distributors in printwear markets in over 30 countries across North America, Europe and the Asia-Pacific region. Through our Printwear segment, we sell mainly activewear products consisting of undecorated or “blank” T-shirts, fleece and sport shirts which are marketed primarily under our own brands, Gildan®, Gildan Performance™ and Anvil®. Through a license arrangement we also sell performance activewear products under the New Balance® brand. Wholesale distributors sell our products to screenprinters and embroiderers who decorate the products with designs and logos. Screenprinters and embroiderers then sell the imprinted activewear to a highly diversified range of end-use markets, including educational institutions, athletic dealers, event merchandisers, promotional product distributors, charity organizations, entertainment promoters, travel and tourism venues and retailers. Our activewear products are used in a variety of daily activities by individuals, including work and school uniforms and athletic team wear, and for various other purposes to convey individual, group and team identity.
 
QUARTERLY REPORT – Q2 2014 P.4
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS
 
3.2.2 Branded Apparel segment
The Branded Apparel segment, headquartered in Charleston, South Carolina, designs, manufactures, sources, and distributes branded family apparel, which includes athletic, casual and dress socks, underwear and activewear products, primarily to U.S. retailers. We market our products primarily under our company-owned and licensed brands, as well as select national retailers’ brands. Although the main focus of the Company’s growth strategy is the continued development of its company-owned brands, the Company is also pursuing the opportunity to grow its sales as a supply chain partner to select targeted global consumer brands, including major sportswear and family entertainment brands for which we manufacture and decorate products.

The following table summarizes the current retail distribution of various product categories under Company-owned and licensed brands:
 
Brand
Primary products
Retail distribution channels
Gildan®
Socks, underwear, activewear
Mass-market, regional department stores, craft channel
Gildan Platinum™
Socks, underwear
Department stores, major national chain
Smart Basics™ a Gildan® brand
Socks, activewear
Dollar store channel
Gold Toe®
Socks, activewear
Department stores, national chains, price clubs
G® a Gold Toe® brand
Socks, underwear, activewear
Department stores, national chains
PowerSox® a Gold Toe® brand
Athletic socks
Sports specialty, national chains, department stores
GT® a Gold Toe® brand
Socks
Mass-market
Silvertoe® a Gold Toe® brand
Socks
National chains
Signature Gold by Goldtoe™
Socks
Mass-market
All Pro® a Gold Toe® brand
Athletic socks
Mass-market
Under Armour® (under license agreement – exclusive in the U.S.)
Athletic socks
Sports specialty, department stores
Mossy Oak® (under license agreement – worldwide distribution rights)
Socks, activewear, underwear, loungewear, thermals
Intended for all channels of distribution

3.3 Our operations
 
3.3.1 Manufacturing
The vast majority of our products are manufactured in facilities that we own and operate. Our vertically-integrated manufacturing operations include capital-intensive yarn-spinning, textile and sock manufacturing facilities, as well as labour-intensive sewing plants. At our yarn-spinning facilities, we convert cotton and other fibres into yarn. In our textile plants, we convert yarn into dyed and cut fabric for activewear and underwear, and at our integrated sock manufacturing facilities, we convert yarn into finished socks. The majority of our sock production does not require sewing as the equipment used in our facilities knit the entire sock with a seamless toe closing operation. We operate sewing facilities in owned or leased premises, where we assemble the cut fabric produced in our textile facilities into finished garments. Our manufacturing operations are primarily based out of our largest manufacturing hub in Central America and a second large hub in the Caribbean Basin, which are strategically located to efficiently service the quick replenishment requirements of our markets. We also own a small vertically-integrated manufacturing facility in Bangladesh for the production of activewear, which mainly serves our international markets. During fiscal 2013, we acquired screenprinting and decorating capabilities to support our sales and growth opportunity as a supply chain partner to leading global athletic and lifestyle consumer brands. While we
 
QUARTERLY REPORT – Q2 2014 P.5
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
internally produce the majority of the products we sell, we also have sourcing capabilities to complement our large scale, vertically-integrated manufacturing.

The following table provides a summary of our manufacturing operations by geographic area:
 
 
United States
Central America
Caribbean Basin
Asia
Yarn-spinning facilities
§Clarkton, NC
§Cedartown, GA
§Salisbury, NC
(2 facilities) – ramp-up in progress in one facility and second facility under development
§Mocksville, NC – under development
      
Textile
facilities
  
§Honduras
-Rio Nance 1 (ramp-up in progress)
-Rio Nance 2
-Rio Nance 5
-Anvil Knitwear Honduras (AKH)
§Dominican Republic
§Bangladesh
Sewing facilities(1)
  
§Honduras (4 facilities)
§Nicaragua (3 facilities)
§Dominican Republic (3 facilities)
§Bangladesh
Sock manufacturing facilities
  
§Honduras
-Rio Nance 3
-Rio Nance 4
    
(1) We also use the services of third-party sewing contractors, primarily in Haiti to support textile production from the Dominican Republic.

Yarn-spinning
We satisfy the vast majority of our yarn requirements, which are mainly cotton-based, by sourcing from third-party U.S. yarn suppliers with which we have supply agreements, as well as from our own yarn-spinning operations in the U.S. A small portion of our yarn requirements is sourced outside of the U.S. During fiscal 2013, we began to execute on a significant yarn-spinning manufacturing initiative in order to support our projected sales growth and planned capacity expansion, and to continue to pursue our business model of investing in global vertically-integrated low-cost manufacturing technology and in product technology, which we believe will provide consistent superior product quality. We acquired the remaining 50% interest of our joint venture in fiscal 2013, which included two open-end yarn-spinning facilities located in Clarkton, NC and Cedartown, GA. We are currently investing in the refurbishment and modernization of these yarn-spinning facilities, which is expected to be completed during fiscal 2014. We are also developing a new yarn-spinning facility in Salisbury, NC for the production of ring-spun yarn, which began production in the second quarter of fiscal 2014. In addition, the Company is investing in the development of two additional yarn-spinning facilities. One of the facilities will be located in Salisbury, NC, adjacent to the ring-spinning facility which recently began operations, and the second facility will be located in Mocksville, NC.

Textile manufacturing
Our newest and largest facility is Rio Nance 5. During fiscal 2012, while ramping up production capacity in Rio Nance 5, we suspended production at the Rio Nance 1 facility in order to modernize and refurbish the facility, which is expected to result in the improvement of the facility’s cost efficiency. Production at Rio Nance 1 restarted in the fourth quarter of fiscal 2013 and production ramp-up is in progress. The Company is also currently reconfiguring and upgrading equipment at the former Anvil manufacturing facility in Honduras to support its growth in more specialized performance and fashion products. In addition, we are currently planning the development of a new textile facility in North-Western Costa Rica, which is strategically located for duty-free, quota-free access to the Company’s major markets in the U.S. The site
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS

is close to the Company’s sewing plants in Nicaragua and accessible to ports on both the Eastern and Western coasts of the country.

Sock manufacturing
At the Rio Nance complex, we have constructed and operate two sock manufacturing facilities. We also source a portion of the sock products we sell from third party contractors.

Sewing
Textiles produced in our facilities in Honduras are assembled at our sewing facilities in Honduras and Nicaragua. Textiles produced at our manufacturing facility in the Dominican Republic are sewn at our sewing facilities in the Dominican Republic and third-party contractor operations in Haiti. Our facility in Bangladesh comprises both textile and sewing production.

3.3.2 Sales, marketing and distribution
Our sales and marketing offices are responsible for customer-related functions, including sales management, marketing, customer service, credit management, sales forecasting and production planning, as well as inventory control and logistics for each of their respective operating segments. We operate two primary distribution centres in the U.S. to service our printwear and retail markets and are currently constructing a new distribution centre in Honduras.

Printwear segment
Our sales and marketing office servicing our global printwear markets is located in Christ Church, Barbados. We distribute our activewear products for the printwear markets primarily out of our main distribution centre in Eden, NC. We also use third-party warehouses in the western United States, Canada, Mexico, Colombia, Europe and Asia to service our customers in these markets.

Branded Apparel segment
Our primary sales and marketing office for our Branded Apparel segment is located in Charleston, SC at the same location as our primary distribution centre servicing our retail customers. In addition, we service retail customers from smaller distribution centres in North Carolina and South Carolina. We also operate 47 retail stores located in outlet malls throughout the United States.

3.3.3 Employees and corporate office
We currently employ over 37,000 employees worldwide. Our corporate head office is located in Montreal, Canada.

3.4 Competitive environment
 
The markets for our products are highly competitive and are served by domestic and international manufacturers or suppliers. Competition is generally based upon price, with reliable quality and service also being critical requirements for success. Our competitive strengths include our expertise in building and operating large-scale, vertically-integrated, strategically-located manufacturing hubs. Our capital investments in manufacturing allow us to operate efficiently and reduce costs, offer competitive pricing, maintain consistent product quality, and a reliable supply chain, which efficiently services replenishment programs with short production/delivery cycle times. Continued innovations in our manufacturing processes have also allowed us to deliver enhanced product features, further improving the value proposition of our product offering to our customers. Consumer brand recognition and appeal are also important factors in the retail market. The Company is focused on further developing its brands and is continuing to make significant investments in advertising to support the further enhancement of its Gildan® and Gold Toe® brands. Our commitment to leading environmental and social responsibility practices is also an important factor for our customers.

3.4.1 Printwear segment
Our primary competitors in North America include major apparel manufacturers such as Fruit of the Loom, Inc. (Fruit of the Loom) and Russell Corporation (Russell), both subsidiaries of Berkshire Hathaway Inc. (Berkshire), as well as Hanesbrands Inc. (Hanesbrands). We also compete with smaller U.S.-based
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS

competitors, including Alstyle Apparel, a division of Ennis Corp., Delta Apparel Inc., American Apparel, Inc., Color Image Apparel, Inc., Next Level Apparel, as well as Central American and Mexican manufacturers. In addition, we compete with private label brands sold by some of our customers. Competitors in the European printwear market include Fruit of the Loom and Russell, as well as competitors that do not have integrated manufacturing operations and source products from suppliers in Asia.

3.4.2 Branded Apparel segment
In the retail channel, we compete primarily with Hanesbrands, Berkshire’s subsidiaries, Fruit of the Loom and Russell, Renfro Corporation and Jockey International, Inc. In addition, we compete with brands of well-established U.S. fashion apparel and sportswear companies, as well as private label brands sold by our customers that source primarily from Asian manufacturers.
 
 
Our growth strategy comprises the following four initiatives:

4.1  
Continue to pursue additional printwear market penetration and opportunities
 
While we have achieved a leadership position in the U.S. and Canadian printwear channels, particularly in the U.S. wholesale distributor channel, through the expansion of our production capacity and the introduction of new products, we continue to pursue additional growth opportunities to increase our penetration in the North American printwear markets. We also intend to continue to expand our presence in targeted international printwear markets such as Europe, Asia-Pacific and Latin America which currently represent less than 10% of the Company’s total consolidated net sales, by expanding distribution and by leveraging our brands.

We are pursuing further market penetration in North America and internationally with our expanded portfolio of brands sold in the printwear channel, each with a different brand positioning. In addition to our leading Gildan® brand, our printwear brand portfolio includes the Anvil® brand which was recently repositioned to focus on contemporary ring-spun niche products featuring fashion fitted styles. As part of our performance product-lines, we market our products under our Gildan Performance™ brand and the licensed New Balance® brand. Both performance brand offerings feature moisture management and anti-microbial properties to enhance long-lasting performance. In addition, we are pursuing further sales growth through continued introduction of new products such as softer T-shirts, the expansion of our performance product lines, new styles tailored for women, a product-line with tear-away labels, enhanced sport shirts offerings and work wear assortments. New product introductions could also allow us to service certain niches of the printwear channel which we do not currently participate in.

4.2  
Continue penetration of retail market as a full-line supplier of branded family apparel
 
We intend to continue to leverage our existing core competencies, successful business model and competitive strengths to grow our sales to U.S. retailers. As in the printwear channel, success factors in penetrating the retail channel include consistent quality, competitive pricing and fast and flexible replenishment, together with a commitment to corporate social responsibility and environmental sustainability. We intend to leverage our current distribution with retailers, our manufacturing scale and expertise and our ongoing marketing investment to support the further development of company-owned and licensed brands to create additional sales growth opportunities in socks, activewear and underwear. The Company is making significant investments in advertising for the further development of its Gildan® and Gold Toe® portfolio of consumer brands.

Although we are primarily focused on further developing our Gildan® and Gold Toe® brands, we are also focused on building our relationships and growing our sales as a supply chain partner to select global athletic and lifestyle brands that are increasingly looking to source from manufacturers that meet rigorous quality and social compliance criteria, with an efficient supply chain strategically located in the Western Hemisphere. Our manufacturing operations combined with our screenprinting and apparel decorating
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS

capabilities allow us to provide a more streamlined sourcing solution for these brands. We believe there is an opportunity to leverage these relationships to expand into other product categories, such as socks, performance products and underwear.

4.3  
Continue to increase capacity to support our planned sales growth and generate manufacturing and distribution cost reductions
 
We plan to continue to increase capacity to support our planned sales growth. We are continuing to seek to optimize our cost structure by adding new low-cost capacity, investing in projects for cost-reduction and further vertical-integration, as well as for additional product quality enhancement.

The resumption of production at Rio Nance 1 and its continued ramp up combined with our planned new textile facility are expected to support our capacity requirements for our planned growth over the next few years. We are also upgrading equipment at the former Anvil facility in Honduras to support our growth in more specialized performance and fashion products. We believe the investments we are making in yarn-spinning facilities, including ring-spun yarn technology, will provide enhanced quality features to our product offering. We are currently targeting to achieve cost savings from our yarn-spinning investments starting in fiscal 2015. We continue to execute our plans to reduce our reliance on high-cost fossil fuels and further reduce our impact on the environment through the investment in biomass projects as an alternate source of natural renewable energy, and other initiatives to increase the efficiency of our energy-intensive equipment and processes, which reflect the Company’s commitment to environmental sustainability.

4.4  
Reinvest cash flow
 
We will continue to evaluate opportunities to reinvest our cash flows generated from operations. We believe we will generate free cash flow after financing our working capital and capital expenditure requirements to support our organic growth. In order to re-invest our free cash flow, we will continue to seek complementary strategic acquisition opportunities which meet our return on investment criteria, based on our risk-adjusted cost of capital. We may also consider share repurchases. In addition, the Company allocates cash towards the payment of a dividend.

We are subject to a variety of business risks that may affect our ability to maintain our current market share and profitability, as well as our ability to achieve our short and long-term strategic objectives. These risks are described under the “Financial risk management” and “Risks and uncertainties” sections of our 2013 Annual MD&A.
 
5.1 Non-GAAP financial measures
 
We use non-GAAP financial measures (non-GAAP measures) to assess our operating performance. Securities regulations require that companies caution readers that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Accordingly, they should not be considered in isolation. We use non-GAAP measures including adjusted net earnings, adjusted diluted EPS, adjusted EBITDA, free cash flow, total indebtedness, and net indebtedness / (cash in excess of total indebtedness) to measure our performance from one period to the next without the variation caused by certain adjustments that could potentially distort the analysis of trends in our operating performance, and because we believe such measures provide meaningful information on the Company’s financial condition and financial performance.

We refer the reader to the section 16.0 entitled “Definition and reconciliation of non-GAAP financial measures” in this MD&A for the definition and complete reconciliation of all non-GAAP measures used and presented by the Company to the most directly comparable IFRS measures.
 
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MANAGEMENT'S DISCUSSION AND ANALYSIS

5.2 Summary of quarterly results
 
The table below sets forth certain summarized unaudited quarterly financial data for the eight most recently completed quarters. This quarterly information is unaudited and has been prepared in accordance with IFRS. The operating results for any quarter are not necessarily indicative of the results to be expected for any period.

(in $ millions, except per share amounts)
  
2014
      
2013
  
2012
Q2
Q1
Q4
Q3(1)
Q2
Q1(2)
Q4
Q3(3)
                 
Net sales
 548.8
 451.4
 626.2
 614.3
 523.0
 420.8
 561.7
 600.2
Net earnings
 79.2
 41.7
 96.8
 115.8
 72.3
 35.3
 89.0
 78.6
Net earnings per share
              
            Basic(4)
 0.65
 0.34
 0.80
 0.95
 0.60
 0.29
 0.73
 0.65
            Diluted(4)
 0.64
 0.34
 0.79
 0.94
 0.59
 0.29
 0.73
 0.64
Total assets
 2,270.1
 2,124.1
 2,043.7
 2,028.0
 2,004.2
 1,921.7
 1,896.4
 1,939.2
Total long-term financial liabilities
 148.0
 64.0
 -
 125.0
 214.0
 177.0
 181.0
 306.0
Weighted average number of
                
     shares outstanding (in ‘000s)
              
            Basic
 121,610
 121,672
 121,555
 121,446
 121,365
 121,455
 121,473
 121,527
            Diluted
 123,157
 123,046
 122,929
 122,759
 122,629
 122,491
 122,322
 122,047
(1) Reflects the acquisition of New Buffalo Shirt Factory Inc. (New Buffalo) from June 21, 2013.
(2) Reflects the acquisition of CanAm Yarns, LLC (CanAm) from October 29, 2012.
(3) Reflects the acquisition of Anvil Holdings, Inc. (Anvil) from May 9, 2012.
(4) Quarterly EPS may not add to year-to-date EPS due to rounding.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

5.2.1 Seasonality and other factors affecting the variability of results and financial condition
Our results of operations for interim periods and for full fiscal years are impacted by the variability of certain factors, including, but not limited to, changes in end-use demand and customer demand, our customers’ decision to increase or decrease their inventory levels, changes in our sales mix, and fluctuations in selling prices and raw material costs. While our products are sold on a year-round basis, our business experiences seasonal changes in demand which results in quarterly fluctuations in operating results. Historically, consolidated net sales have been lowest in the first quarter and highest in the second half of the fiscal year, reflecting the seasonality of our operating segments’ net sales. For our Printwear segment, demand for T-shirts is lowest in the first fiscal quarter, and highest in the third quarter of each fiscal year when distributors purchase inventory for the peak Summer selling season. Demand for fleece is typically highest, in advance of the Fall and Winter seasons, in the third and fourth quarters of each fiscal year. For our Branded Apparel segment, sales are higher during the back-to-school period and the Christmas holiday selling season. Historically, our sales of the Branded Apparel segment have been highest in the fourth quarter.

Historically, the seasonal sales trends of our business have resulted in fluctuations in our inventory levels throughout the year, in particular a build-up of T-shirt inventory levels in the first half of the year.

Our results are also impacted by fluctuations in the price of raw materials and other input costs. Cotton and polyester fibres are the primary raw materials used in the manufacture of our products, and we also use chemicals, dyestuffs and trims which we purchase from a variety of suppliers. Cotton prices are affected by consumer demand, global supply, which may be impacted by weather conditions in any given year, speculation on the commodities market, the relative valuations and fluctuations of the currencies of producer versus consumer countries and other factors that are generally unpredictable. While we enter into contracts in advance of delivery to establish firm prices for the cotton component of our yarn requirements, our realized cotton costs can fluctuate significantly between interim and annual reporting periods. Energy costs in our results of operations are also affected by fluctuations in crude oil, natural gas and petroleum prices, which can also influence transportation costs and the cost of related items used in our business, such as polyester fibres, chemicals, dyestuffs and trims.
 
QUARTERLY REPORT – Q2 2014 P.10
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

Business acquisitions may affect the comparability of results. As noted in the table under “Summary of quarterly results”, the quarterly financial data reflects the acquisition of Anvil from May 9, 2012, the acquisition of the remaining 50% interest in CanAm from October 29, 2012 and the acquisition of New Buffalo from June 21, 2013. The acquisitions of CanAm and New Buffalo did not have a material effect on the Company’s results for fiscal 2014 and fiscal 2013.

Management decisions to consolidate or reorganize operations, including the closure of facilities, may result in significant restructuring costs in an interim or annual period. In addition, the effect of asset write-downs, including provisions for bad debts and slow moving inventories, can affect the variability of our results. The section entitled “Restructuring and acquisition-related costs” in this MD&A contains a discussion of costs related to the Company’s restructuring activities and business acquisitions.

Our reported amounts for net sales, selling, general and administrative expenses (SG&A expenses), and financial expenses/income are impacted by fluctuations in the U.S. dollar versus certain other currencies as described in the “Financial risk management” section of the 2013 Annual MD&A. The Company may periodically use derivative financial instruments to manage risks related to fluctuations in foreign exchange rates.

5.3 Selected financial information

(in $ millions, except per share amounts or otherwise indicated)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Net sales
 548.8
 523.0
 25.8
  
 1,000.2
 943.8
 56.4
Gross profit
 153.2
 151.2
 2.0
  
 272.4
 263.8
 8.6
Selling, general and administrative expenses
 69.3
 73.6
 (4.3)
  
 142.1
 143.0
 (0.9)
Operating income
 83.9
 76.9
 7.0
  
 128.3
 114.7
 13.6
Adjusted EBITDA(1)
 108.1
 101.8
 6.3
  
 176.0
 163.7
 12.3
Net earnings
 79.2
 72.3
 6.9
  
 120.9
 107.6
 13.3
Adjusted net earnings(1)
 79.2
 72.7
 6.5
  
 122.6
 111.8
 10.8
               
Basic EPS(2)
 0.65
 0.60
 0.05
  
 0.99
 0.89
 0.10
Diluted EPS(2)
 0.64
 0.59
 0.05
  
 0.98
 0.88
 0.10
Adjusted diluted EPS(1)(2)
 0.64
 0.59
 0.05
  
 1.00
 0.91
 0.09
               
Gross margin
27.9%
28.9%
(1.0) pp
  
27.2%
28.0%
(0.8) pp
SG&A expenses as a percentage of sales
12.6%
14.1%
(1.5) pp
  
14.2%
15.2%
(1.0) pp
Operating margin
15.3%
14.7%
0.6 pp
  
12.8%
12.2%
0.6 pp
(1) See section 16.0 "Definition and reconciliation of non-GAAP financial measures" in this interim MD&A.
(2) Quarterly EPS may not add to year-to-date EPS due to rounding.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

5.4 Consolidated operating review
 
5.4.1 Net sales
     
Variation
      
Variation
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
$
%
  
YTD 2014
YTD 2013
$
%
                   
Segmented net sales:
                  
    Printwear
 378.5
 368.0
 10.5
2.9%
  
 640.4
 611.7
 28.7
4.7%
    Branded Apparel
 170.3
 155.0
 15.3
9.9%
  
 359.8
 332.1
 27.7
8.3%
Total net sales
 548.8
 523.0
 25.8
4.9%
  
 1,000.2
 943.8
 56.4
6.0%
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The increase in consolidated net sales for the second quarter was primarily attributable to strong unit volume growth in Branded Apparel, increased sales to international printwear markets and the non-recurrence of a distributor inventory devaluation discount in the second quarter of fiscal 2013. The growth
 
QUARTERLY REPORT – Q2 2014 P.11
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

in sales in the second quarter compared to last year was achieved in spite of the impact of colder weather which negatively impacted demand for T-shirts and contributed to soft retail market conditions.

Consolidated net sales for the second quarter of fiscal 2014 were slightly below the Company's guidance provided on February 5, 2014 of sales in excess of $550 million due to the negative impact of unfavourable weather conditions.

The increase in consolidated net sales for the first six months of fiscal 2014 was primarily attributable to higher unit sales volumes in both operating segments and a more favourable printwear product-mix.

5.4.2 Gross profit
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Gross profit
 153.2
 151.2
 2.0
  
 272.4
 263.8
 8.6
Gross margin
27.9%
28.9%
(1.0) pp
  
27.2%
28.0%
(0.8) pp
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The increase in gross profit in the second quarter and for the first six months of fiscal 2014 compared to the same periods last year was due to higher sales in both operating segments. Gross profit as a percentage of sales in the second quarter and for the first six months of fiscal 2014 was down compared to the same periods last year mainly due to higher cotton costs, inflationary cost increases and the impact of transitional manufacturing inefficiencies which are being incurred primarily in sock operations and the former Anvil textile operations to support new programs and the introduction of new products. These factors more than offset the favourable impact of other manufacturing cost reduction projects and slightly higher Printwear net selling prices.

5.4.3 Selling, general and administrative expenses
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
SG&A expenses
 69.3
 73.6
 (4.3)
  
 142.1
 143.0
 (0.9)
SG&A expenses as a percentage of sales
12.6%
14.1%
(1.5) pp
  
14.2%
15.2%
(1.0) pp
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The decrease in SG&A expenses in the second quarter and for the first six months of fiscal 2014 compared to the same periods last year was primarily due to lower variable compensation expenses and the favourable impact of a weaker Canadian dollar on corporate head office expenses. The improvement of SG&A expenses as a percentage of sales also reflected the benefit of volume leverage in the Branded Apparel segment.

5.4.4 Restructuring and acquisition-related costs
Restructuring and acquisition-related costs for the three and six months ended March 30, 2014 were $0.1 million and $2.1 million, compared to $0.8 million and $6.1 million for the same periods last year.

Restructuring and acquisition-related costs for the six months ended March 30, 2014 relate primarily to a loss incurred on the final settlement on the wind-up of the Gold Toe defined benefit pension plan.

For the six months ended March 31, 2013, the Company incurred exit, relocation and other costs of $2.9 million, primarily in connection with the acquisition and integration of Anvil, including a charge of $1.6 million related to lease exit costs. Restructuring and acquisition-related costs for the six months ended March 31, 2013 also included charges related to assets held for sale and property, plant and equipment of $1.2 million, mainly relating to write-downs of the Company’s former U.S. sock knitting and finishing facilities in Fort Payne, Alabama which were closed in prior years in connection with the consolidation of its sock manufacturing operations in Honduras. The Company also incurred a loss on business acquisition achieved in stages of $1.3 million in connection with the acquisition of the remaining 50% interest of CanAm.

QUARTERLY REPORT – Q2 2014 P.12
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

5.4.5 Operating income
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Operating income
 83.9
 76.9
 7.0
  
 128.3
 114.7
 13.6
Operating margin
15.3%
14.7%
0.6 pp
  
12.8%
12.2%
0.6 pp
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The improvement in operating income for the second quarter and the first six months of fiscal 2014 reflected the gross profit increase, reduced SG&A expenses and lower restructuring and acquisition-related costs compared to the same periods last year. Operating margins in fiscal 2014 increased compared to last year mainly as a result of SG&A expense volume leverage.

5.4.6 Financial expenses, net
(in $ millions)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Interest expense on financial liabilities
              
  recorded at amortized cost
 0.4
 1.1
 (0.7)
  
 0.5
 2.1
 (1.6)
Bank and other financial charges
 0.9
 0.9
 -
  
 1.6
 1.8
 (0.2)
Interest accretion on discounted provisions
 0.1
 0.1
 -
  
 0.2
 0.2
 -
Foreign exchange gain
 (1.3)
 (0.4)
 (0.9)
  
 (1.7)
 (0.2)
 (1.5)
Financial expenses, net
 0.1
 1.7
 (1.6)
  
 0.6
 3.9
 (3.3)
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The decrease in net financial expenses for the three and six months ended March 30, 2014 compared to the same periods last year was due to lower interest expense, primarily as a result of lower borrowing levels for the comparative periods from our revolving long-term bank credit facility and lower effective interest rates, as well as higher foreign exchange gains in the current year mainly due to the favourable revaluation of monetary assets and liabilities denominated in foreign currencies.

5.4.7 Income taxes
The Company’s average effective income tax rate, and its average effective income tax rate excluding the impact of restructuring and acquisition-related costs, are calculated as follows:
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Earnings before income taxes
 83.8
 75.3
 8.5
  
 127.7
 110.9
 16.8
Income tax expense
 4.7
 3.0
 1.7
  
 6.8
 3.3
 3.5
Average effective income tax rate
5.6%
4.0%
1.6 pp
  
5.3%
3.0%
2.3 pp
               
Earnings before income taxes and restructuring
            
  and acquisition-related costs
 83.8
 76.1
 7.7
  
 129.8
 117.0
 12.8
Income tax expense excluding tax recoveries
              
  on restructuring and acquisition-related
              
  costs(1)
 4.7
 3.4
 1.3
  
 7.2
 5.2
 2.0
Average effective income tax rate excluding
              
  the impact of restructuring and acquisition-
              
  related costs
5.6%
4.5%
1.1 pp
  
5.5%
4.4%
1.1 pp
(1) Tax recoveries on restructuring and acquisition-related costs are presented in the reconciliation of net earnings to adjusted net
      earnings in section 5.4.8 below.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

For the first six months of fiscal 2014, the average effective income tax rate excluding the impact of restructuring and acquisition-related costs was higher by 1.1 percentage points compared to the same period last year, primarily due to higher operating profits in our Branded Apparel segment. 

QUARTERLY REPORT – Q2 2014 P.13
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

5.4.8 Net earnings, adjusted net earnings, and earnings per share measures
(in $ millions, except per share amounts)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Net earnings
 79.2
 72.3
 6.9
  
 120.9
 107.6
 13.3
Adjustments for:
              
  Restructuring and acquisition-related costs
 -
 0.8
 (0.8)
  
 2.1
 6.1
 (4.0)
  Income tax recovery on restructuring and
              
    acquisition-related costs
 -
 (0.4)
 0.4
  
 (0.4)
 (1.9)
 1.5
Adjusted net earnings(1)
 79.2
 72.7
 6.5
  
 122.6
 111.8
 10.8
Basic EPS (2)
 0.65
 0.60
 0.05
  
 0.99
 0.89
 0.10
Diluted EPS (2)
 0.64
 0.59
 0.05
  
 0.98
 0.88
 0.10
Adjusted diluted EPS(1)(2)
 0.64
 0.59
 0.05
  
 1.00
 0.91
 0.09
(1) See section 16.0 "Definition and reconciliation of non-GAAP financial measures" in this interim MD&A.
(2) Quarterly EPS may not add to year-to-date EPS due to rounding.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

The increase in net earnings and EPS in the second quarter and for the first six months of fiscal 2014 compared to the same periods last year was mainly due to the improvement in operating income and lower net financial expenses, partially offset by higher income tax expenses. Adjusted EPS for the second quarter of fiscal 2014 was at the high end of the Company’s adjusted EPS guidance range of $0.61-$0.64 which was provided on February 5, 2014.

5.5 Segmented operating review
 
     
Variation
      
Variation
(in $ millions, or otherwise indicated)
Q2 2014
Q2 2013
$
%
  
YTD 2014
YTD 2013
$
%
                   
Segmented net sales:
                  
    Printwear
 378.5
 368.0
 10.5
2.9%
  
 640.4
 611.7
 28.7
4.7%
    Branded Apparel
 170.3
 155.0
 15.3
9.9%
  
 359.8
 332.1
 27.7
8.3%
Total net sales
 548.8
 523.0
 25.8
4.9%
  
 1,000.2
 943.8
 56.4
6.0%
                   
Segment operating income:
                  
    Printwear
 92.2
 87.3
 4.9
5.6%
  
 140.4
 133.2
 7.2
5.4%
    Branded Apparel
 13.3
 13.4
 (0.1)
(0.7)%
  
 35.2
 33.1
 2.1
6.3%
Total segment operating income
 105.5
 100.7
 4.8
4.8%
  
 175.6
 166.3
 9.3
5.6%
Corporate and other(1)
 (21.6)
 (23.8)
 2.2
    
 (47.3)
 (51.6)
 4.3
  
Total operating income
 83.9
 76.9
 7.0
9.1%
  
 128.3
 114.7
 13.6
11.9%
(1) Includes corporate head office expenses, restructuring and acquisition-related costs, and amortization of intangible assets,
      excluding software.
  
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.
  

5.5.1 Printwear
 
Net sales
The increase in Printwear segment sales in the quarter was primarily attributable to higher net selling prices mainly due to the non-recurrence of a distributor inventory devaluation discount in the second quarter of fiscal 2013, as well as a more favourable product-mix due to higher sales of fleece and long-sleeve T-shirts. Unit sales volumes in Printwear were essentially flat compared to last year, as higher sales volumes in international markets were offset by lower shipments in the U.S. and Canada, due to the impact of colder weather conditions on seasonal demand for T-shirts.

The increase in Printwear segment sales in the first six months of fiscal 2014 was primarily attributable to higher unit sales and a more favourable product-mix.

QUARTERLY REPORT – Q2 2014 P.14
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

Operating income
The increase in Printwear operating income in the second quarter of fiscal 2014 was mainly due to higher sales. Printwear operating margins were 24.3% compared with 23.7% in the second quarter of last year. The operating margin improvement was mainly due to the non-recurrence of a distributor inventory devaluation discount and increased textile manufacturing efficiencies, partially offset by higher cotton costs and other inflationary cost increases compared to the second quarter of fiscal 2013.

The increase in Printwear operating income for the first six months of fiscal 2014 compared to the same period last year was mainly due to higher sales. Printwear operating margins for the first six months of fiscal 2014 of 21.9% were slightly higher compared to operating margins of 21.8% in the same period last year as a more favourable product-mix and increased textile manufacturing efficiencies more than offset higher cotton costs. Net selling prices including the benefit of the non-recurrence of the distributor inventory devaluation discount in the second quarter of fiscal 2013 were essentially flat compared to last year.

5.5.2 Branded Apparel
 
Net sales
The increase in Branded Apparel segment net sales was primarily due to continuing strong consumer demand for Gildan® branded underwear and increased shipments to global lifestyle brands, partially offset by lower private label product sales. Sales of Gildan® branded programs increased by approximately 50% compared to the second quarter last year. The growth in sales was achieved despite the unfavourable impact of colder weather which contributed to softer retail market conditions.

The increase in Branded Apparel segment net sales in the first six months of fiscal 2014 compared to the same period last year was primarily attributable to higher sales of Company-owned and licensed brand programs, partially offset by a decline in unit sales of private label programs.

Operating income
Branded Apparel operating income for the second quarter of fiscal 2014 was essentially flat compared to the second quarter of last year as increased sales and lower SG&A expenses were offset by short-term manufacturing inefficiencies, inflationary cost increases and higher cotton costs, which the Company has not passed through into higher selling prices in order to drive unit volume growth.

The increase in Branded Apparel operating income for the first six months of fiscal 2014 was mainly due to higher sales and lower SG&A expenses, partially offset by higher cotton costs and the impact of transitional manufacturing inefficiencies. Operating margins for the three and six months ended March 30, 2014 were 7.8% and 9.8%, respectively down from 8.6% and 10.0% in the same periods last year. The positive impact of increased sales volume leverage on SG&A expenses was more than offset by the transitional manufacturing inefficiencies and higher cotton costs.

QUARTERLY REPORT – Q2 2014 P.15
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS
 
6.1 Current assets and current liabilities
 
 
March 30,
September 29,
  
(in $ millions)
2014
2013
Variation
       
Cash and cash equivalents
 58.6
 97.4
 (38.8)
Trade accounts receivable
 295.7
 255.0
 40.7
Income taxes receivable
 3.3
 0.7
 2.6
Inventories
 723.4
 595.8
 127.6
Prepaid expenses and deposits
 12.0
 15.0
 (3.0)
Assets held for sale
 5.8
 5.8
 -
Other current assets
 15.0
 11.0
 4.0
Accounts payable and accrued liabilities
 (275.5)
 (289.4)
 13.9
Total working capital
 838.3
 691.3
 147.0
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
The increase in trade accounts receivable (which are net of accrued sales discounts) was primarily due to a full year’s accrual for sales discounts being offset in trade accounts receivable at the end of the fourth quarter of fiscal 2013, as well as lower promotional discounting during the first six months of fiscal 2014, partially offset by the impact of lower net sales in the second quarter of fiscal 2014 compared to the fourth quarter of fiscal 2013, as net sales are seasonally lower in the first half of each fiscal year.

·  
The increase in inventories is due in part to seasonal factors, as we build inventories in the first half of the year to support our peak sales periods in the second half of the year. The increase in inventories also reflects our year-over-year sales growth, as well as our objective to carry higher levels of inventories to better support our planned sales growth in all of our target geographical markets. In addition, raw materials and work in progress inventories increased primarily as a result of the ramp-up of Rio Nance 1 and higher cotton and yarn inventories at our yarn-spinning facilities.

·  
The decrease in accounts payable and accrued liabilities is mainly due to a transfer from accrued liabilities to contributed surplus, in connection with the purchase of the Company’s common shares on the open market to be used for the partial future settlement of non-Treasury restricted share units, as well as lower accruals for variable compensation expenses.

·  
Working capital was $838.3 million as at March 30, 2014 compared to $691.3 million as at September 29, 2013. The current ratio at the end of the second quarter of fiscal 2014 was 4.0, compared to 3.4 at the end of fiscal 2013.

6.2 Property, plant and equipment, intangible assets and goodwill
 
 
Property, plant
Intangible
  
(in $ millions)
 and equipment
assets
Goodwill
       
Balance, September 29, 2013
 655.9
 247.5
 150.1
  Net capital additions
 140.7
 2.0
 -
  Depreciation and amortization
 (39.9)
 (8.2)
 -
Balance, March 30, 2014
 756.7
 241.3
 150.1
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
Capital additions included expenditures primarily for the Company’s strategy to invest in vertically-integrated yarn manufacturing, as well as expenditures for the continuing ramp-up of Rio Nance 1, the reconfiguration and upgrading of the equipment at the former Anvil manufacturing facility in Honduras,
 
QUARTERLY REPORT – Q2 2014 P.16
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
new sock manufacturing equipment, a new sewing facility in the Dominican Republic, further investments in energy saving projects, and the new distribution centre in Honduras.

·  
Intangible assets are comprised of customer contracts and relationships, trademarks, license agreements, non-compete agreements and computer software. The decrease in intangible assets reflects amortization of $8.2 million, partially offset by the addition of $2.0 million of software.

6.3 Other non-current assets and non-current liabilities
 
 
March 30,
September 29,
  
(in $ millions)
2014
2013
Variation
       
Other non-current assets
 8.1
 8.0
 0.1
       
Long-term debt
 (148.0)
 -
 (148.0)
Deferred income taxes
 (1.8)
 1.4
 (3.2)
Employee benefit obligations
 (15.1)
 (18.5)
 3.4
Provisions
 (15.8)
 (16.3)
 0.5
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
The decrease in deferred income taxes is primarily due to the utilization of tax loss carryforwards in the Branded Apparel segment.

·  
The decrease in employee benefit obligations from the end of fiscal 2013 relates to the funding of the deficit to complete the wind-up of the Gold Toe defined benefit pension plan. The balance of employee benefit obligations of $15.1 million consists primarily of liabilities related to the Company’s statutory severance obligations for its active employees located in the Caribbean Basin and Central America.

·  
See the section entitled “Liquidity and capital resources” in this MD&A for the discussion on long-term debt.

Total assets were $2,270.1 million as at March 30, 2014, compared to $2,043.7 million at the end of fiscal 2013.
 
 
7.1 Cash flows from operating activities
 
(in $ millions)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Net earnings
 79.2
 72.3
 6.9
  
 120.9
 107.6
 13.3
Adjustments to reconcile net earnings to
              
  cash flows from operating activities(1)
 27.2
 28.9
 (1.7)
  
 48.0
 54.8
 (6.8)
Changes in non-cash working capital
              
  balances
 (100.8)
 (76.3)
 (24.5)
  
 (174.6)
 (92.1)
 (82.5)
Cash flows from (used in) operating activities
 5.6
 24.9
 (19.3)
  
 (5.7)
 70.3
 (76.0)
(1) Includes depreciation and amortization of $24.1 million (2013 - $24.1 million) and $45.7 million (2013 - $42.8 million) respectively,
      for the three and six months ended March 30, 2014.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
The decrease in operating cash flows of $76.0 million for the first six months of fiscal 2014 was mainly due to a higher increase in non-cash working capital compared to the same period last year, as explained below.

·  
The increase in non-cash working capital of $174.6 million during the first six months of fiscal 2014, compared to an increase of $92.1 million during the first six months of fiscal 2013, was mainly due to
 
QUARTERLY REPORT – Q2 2014 P.17
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
higher seasonal increases in inventories, reflecting our year-over-year sales growth, as well as our objective to carry higher levels of inventories to better support our planned sales growth in all of our target geographical markets.   

7.2 Cash flows used in investing activities
 
(in $ millions)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Purchase of property, plant and equipment
 (84.0)
 (44.0)
 (40.0)
  
 (142.0)
 (66.9)
 (75.1)
Purchase of intangible assets
 (1.9)
 (0.7)
 (1.2)
  
 (2.0)
 (3.1)
 1.1
Business acquisition achieved in stages,
              
  net of cash acquired
 -
 -
 -
  
 -
 (2.5)
 2.5
Proceeds on disposal of assets held for sale
            
  and property, plant and equipment
 0.4
 0.2
 0.2
  
 1.3
 1.4
 (0.1)
Cash flows used in investing activities
 (85.5)
 (44.5)
 (41.0)
  
 (142.7)
 (71.1)
 (71.6)
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
The increase in cash flows used in investing activities was due to higher capital spending during the first six months of fiscal 2014 compared to the first six months of fiscal 2013.

·  
Capital expenditures during the first six months of fiscal 2014 are described in section 6.2 of this MD&A, and our planned capital expenditures for fiscal 2014 are discussed under the “Liquidity and capital resources” section.
 
7.3 Free cash flow
 
(in $ millions)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Cash flows from (used in) operating activities
 5.6
 24.9
 (19.3)
  
 (5.7)
 70.3
 (76.0)
Cash flows used in investing activities
 (85.5)
 (44.5)
 (41.0)
  
 (142.7)
 (71.1)
 (71.6)
Adjustment for:
              
  Business acquisition
 -
 -
 -
  
 -
 2.5
 (2.5)
Free cash flow(1)
 (79.9)
 (19.6)
 (60.3)
  
 (148.4)
 1.7
 (150.1)
(1) See section 16.0 "Definition and reconciliation of non-GAAP financial measures" in this MD&A.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
The year-over-year decrease in free cash flow of $150.1 million was due to the lower operating cash flows as noted above, as well as higher capital spending during the first six months of fiscal 2014.

7.4 Cash flows used in financing activities
 
(in $ millions)
Q2 2014
Q2 2013
Variation
  
YTD 2014
YTD 2013
Variation
               
Increase in amounts drawn under revolving
              
  long-term bank credit facility
 84.0
 37.0
 47.0
  
 148.0
 33.0
 115.0
Dividends paid
 (26.5)
 (21.9)
 (4.6)
  
 (26.5)
 (21.9)
 (4.6)
Proceeds from the issuance of shares
 1.9
 0.6
 1.3
  
 2.7
 1.4
 1.3
Share repurchases for future settlement of
              
  non-Treasury RSUs
 -
 (5.4)
 5.4
  
 (14.5)
 (9.6)
 (4.9)
Cash flows from financing activities
 59.4
 10.3
 49.1
  
 109.7
 2.9
 106.8
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

·  
Cash flows from financing activities for the first six months of fiscal 2014 reflected an increase in funds drawn on our revolving long-term bank credit facility of $148.0 million, which was used to finance our capital expenditures and the increase in inventories.
 
QUARTERLY REPORT – Q2 2014 P.18
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
·  
During the first six months of fiscal 2014, the Company purchased $14.5 million of its common shares on the open market to be used for the partial future settlement of non-Treasury restricted share units, compared to $9.6 million in the same period last year.
 
 
8.1 Long-term debt and net indebtedness / (cash in excess of total indebtedness)
 
(in $ millions)
March 30, 2014
September 29, 2013
         
Long-term debt and total indebtedness(1)
  
 148.0
  
 -
Cash and cash equivalents
  
 (58.6)
  
 (97.4)
Net indebtedness (cash in excess of total indebtedness)(1)
  
 89.4
  
 (97.4)
(1) See section 16.0 "Definition and reconciliation of non-GAAP financial measures" in this MD&A.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

We have a committed unsecured revolving long-term bank credit facility of $800 million. The facility provides for an annual extension which is subject to the approval of the lenders, and amounts drawn under the facility bear interest at a variable banker’s acceptance or U.S. LIBOR-based interest rate plus a spread ranging from 1% to 2%, such range being a function of the total debt to EBITDA ratio (as defined in the credit facility agreement). In December 2013, the Company amended its revolving long-term bank credit facility to extend the maturity date from January 2018 to January 2019. As at March 30, 2014, $148.0 million (September 29, 2013 - nil) was drawn under the facility and the effective interest rate for the six months ended March 30, 2014 was 1.3%. In addition, an amount of $22.3 million (September 29, 2013 - $7.4 million) has been committed against this facility to cover various letters of credit. The revolving long-term bank credit facility requires the Company to comply with certain covenants including maintenance of financial ratios. The Company was in compliance with all covenants as at March 30, 2014.

Gildan is currently projecting that capital expenditures in fiscal 2014 will be at the high end of the previous forecast range of $300-$350 million provided on February 5, 2014. The fiscal 2014 capital expenditure program is primarily for the Company’s strategy to invest in vertically-integrated yarn manufacturing, as well as expenditures for more underwear knitting equipment at Rio Nance 1 to support the Company's planned growth in underwear, the initial investment in the new textile manufacturing facility, the reconfiguration and upgrading of the equipment at the former Anvil manufacturing facility in Honduras, new sock manufacturing equipment, a new sewing facility in the Dominican Republic, further investments in energy saving projects, and the new distribution centre in Honduras.

We expect that cash flows from operating activities and the unutilized financing capacity under our revolving long-term bank credit facility will continue to provide us with sufficient liquidity for the foreseeable future to fund our organic growth strategy, including anticipated working capital and capital expenditure requirements, to fund dividends to shareholders, if declared, as well as provide us with financing flexibility to take advantage of potential acquisition opportunities which complement our organic growth strategy.

The Company, upon approval from its Board of Directors, may issue or repay long-term debt, issue or repurchase shares, or undertake other activities as deemed appropriate under the specific circumstances.

8.2 Off-balance sheet arrangements and contractual obligations
 
In the normal course of business, we enter into contractual obligations that will require us to disburse cash over future periods. All commitments have been reflected in our consolidated statements of financial position except for purchase obligations, minimum annual lease payments under operating leases which are primarily for premises, as well as minimum royalty payments, which are included in the table of contractual obligations as disclosed in our 2013 Annual MD&A. There have been no significant changes to our contractual obligations since September 29, 2013. As disclosed in note 24 to our 2013 audited annual consolidated financial statements, we have granted financial guarantees, irrevocable standby letters of credit and surety bonds, to third parties to indemnify them in the event the Company and some of its
 
QUARTERLY REPORT – Q2 2014 P.19
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

subsidiaries do not perform their contractual obligations. As at March 30, 2014, the maximum potential liability under these guarantees was $45.3 million, of which $7.5 million was for surety bonds and $37.8 million was for financial guarantees and standby letters of credit.

8.3 Derivative instruments
 
The Company may periodically use derivative financial instruments to manage risks related to fluctuations in exchange rates, interest rates and commodity prices. Derivative financial instruments are not used for speculative purposes. As at March 30, 2014, the Company’s outstanding derivative financial instruments were related to forward foreign exchange contracts in order to minimize the exposure of forecasted cash inflows and outflows in currencies other than the U.S. dollar.

The notional U.S. dollar equivalent of forward foreign exchange contracts outstanding was $81.1 million as at March 30, 2014, compared to $110.5 million as at September 29, 2013, and the corresponding fair value of these contracts that was recognized in the statement of financial position was a net liability of $2.7 million as at March 30, 2014, compared to a net liability of $0.9 million as at September 29, 2013.

8.4 Outstanding share data
 
Our common shares are listed on the New York Stock Exchange (NYSE) and the Toronto Stock Exchange (TSX) under the symbol GIL. As at April 30, 2014 there were 122,261,774 common shares issued and outstanding along with 1,133,739 stock options and 493,703 dilutive restricted share units (Treasury RSUs) outstanding. Each stock option entitles the holder to purchase one common share at the end of the vesting period at a pre-determined option price. Each Treasury RSU entitles the holder to receive one common share from treasury at the end of the vesting period, without any monetary consideration being paid to the Company. However, the vesting of at least 50% of each Treasury RSU grant is contingent on the achievement of performance conditions that are primarily based on the Company’s average return on assets performance for the period compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts, or as determined by the Board of Directors.

8.5 Declaration of dividend
 
The Company paid dividends of $26.5 million during the six months ended March 30, 2014. On May 1, 2014, the Board of Directors declared a quarterly cash dividend of $0.108 per share for an expected aggregate payment of $13.2 million which will be paid on June 9, 2014 on all of the issued and outstanding common shares of the Company, rateably and proportionately to the holders of record on May 15, 2014. This dividend is an “eligible dividend” for the purposes of the Income Tax Act (Canada) and any other applicable provincial legislation pertaining to eligible dividends.

The Board of Directors consider several factors when deciding to declare quarterly cash dividends, including the Company’s present and future earnings, cash flows, capital requirements and present and/or future regulatory and legal restrictions. There can be no assurance as to the declaration of future quarterly cash dividends. Although the Company’s revolving long-term bank credit facility requires compliance with lending covenants in order to pay dividends, these covenants are not currently, and are not expected to be, a constraint to the payment of dividends under the Company’s dividend policy.
 
The Company is a party to claims and litigation arising in the normal course of operations. The Company does not expect the resolution of these matters to have a material adverse effect on the financial position or results of operations of the Company.

QUARTERLY REPORT – Q2 2014 P.20
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS
 
10.0
 
A discussion of management’s expectations as to our outlook for fiscal 2014 is contained in our second quarter earnings results press release dated May 2, 2014 under the section entitled “Outlook”. The press release is available on the SEDAR website at www.sedar.com, on the EDGAR website at www.sec.gov and on our website at www.gildan.com.
 
 
The Company is exposed to risks arising from financial instruments, including credit risk, liquidity risk, foreign currency risk and interest rate risk, as well as risks arising from commodity prices. Please refer to the “Financial risk management” section of the 2013 Annual MD&A for additional disclosure of the Company’s exposure to risks arising from financial instruments and how the Company manages those risks.
 
 
Our significant accounting policies are described in note 3 to our 2013 audited annual consolidated financial statements. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

The following are critical judgments that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements:
·  
Determination of cash-generating units (CGUs)
·  
Income taxes

Key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year are as follows:
·  
Allowance for doubtful accounts
·  
Inventory valuation
·  
Business combinations
·  
Recoverability and impairment of non-financial assets
·  
Measurement of the estimate of expected expenditures for decommissioning and site restoration costs
·  
Income taxes

For a more detailed discussion on these areas requiring the use of management estimates and judgments, readers should refer to note 3 to our 2013 audited annual consolidated financial statements.
 
 
13.1 Accounting policies
 
The Company’s unaudited condensed interim consolidated financial statements for the second quarter of fiscal 2014 were prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB), and International Accounting Standard (IAS) 34, Interim Financial Reporting. The unaudited condensed interim consolidated financial statements were prepared using the same accounting policies as outlined in note 3 of our 2013 audited annual consolidated financial statements, except as noted below.
 
QUARTERLY REPORT – Q2 2014 P.21
 
 
 

MANAGEMENT'S DISCUSSION AND ANALYSIS

On September 30, 2013, the Company adopted the following new or amended accounting standards:
 
·  
IFRS 10, Consolidated Financial Statements
·  
IFRS 11, Joint Arrangements
·  
IFRS 12, Disclosure of Interests in Other Entities
·  
IFRS 13, Fair Value Measurement
·  
IAS 19, Employee Benefits

For a detailed description of these new or amended accounting standards and their impact, please refer to note 2 to the unaudited condensed interim consolidated financial statements.

13.2 New accounting standards and interpretations not yet applied
 
Financial Instruments
In October 2010, the IASB released IFRS 9, Financial Instruments, which is the first part of a three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement. This first part covers classification and measurement of financial assets and financial liabilities. In November 2013, the IASB released IFRS 9, Financial Instruments (2013), which introduces a new hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge accounting. Impairment of financial assets will be addressed in the third part of the project. For a detailed description of IFRS 9 and its applicability, please refer to note 3 to the unaudited condensed interim consolidated financial statements.

Levies
In May 2013, the IASB released IFRIC 21, Levies, which provides guidance on accounting for levies in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. For a detailed description of IFRIC 21, please refer to note 3 to the unaudited condensed interim consolidated financial statements.
 
14.0
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management’s annual evaluation and report on the effectiveness of internal control over financial reporting as of our most recent fiscal year ended September 29, 2013 was included in the 2013 Annual MD&A, and was based on the framework set forth in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on its evaluation under this framework, management concluded that our internal control over financial reporting was effective as of September 29, 2013. There have been no material changes in internal control over financial reporting since September 29, 2013.
 
15.0
RISKS AND UNCERTAINTIES
 
In our 2013 Annual MD&A under the sections “Financial risk management”, “Critical accounting estimates and judgments” and “Risks and uncertainties”, we describe the principal risks that could have a material and adverse effect on our financial condition, results of operations or business, cash flows or the trading price of our common shares, as well as cause actual results to differ materially from our expectations expressed in or implied by our forward-looking statements. The risks listed below are not the only risks that could affect the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our financial condition, results of operations, cash flows or business. The risks described in our 2013 Annual MD&A include risks associated with:

·  
Our ability to implement our strategies and plans
·  
Our ability to compete effectively
·  
Our ability to integrate acquisitions
 
QUARTERLY REPORT – Q2 2014 P.22
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
·  
Adverse changes in general economic conditions
·  
Our reliance on a small number of significant customers
·  
Our customers do not commit to purchase minimum quantities
·  
Our ability to anticipate evolving consumer preferences and trends
·  
Our ability to manage production and inventory levels effectively in relation to changes in customer demand
·  
Fluctuations and volatility in the price of raw materials used to manufacture our products
·  
Our dependence on key suppliers
·  
Climate, political, social and economic risks in the countries in which we operate or from which we source production
·  
We rely on certain international trade agreements and preference programs and are subject to evolving international trade regulations
·  
Factors or circumstances that could increase our effective income tax rate
·  
Compliance with environmental, health and safety regulations
·  
Our significant reliance on our information systems for our business operations
·  
Adverse changes in third party licensing arrangements and licensed brands
·  
Our ability to protect our intellectual property rights
·  
Changes in our relationship with our employees or changes to domestic and foreign employment regulations
·  
Negative publicity as a result of violation in local labour laws or international labour standards, unethical labour and other business practices
·  
Our dependence on key management and our ability to attract and/or retain key personnel
·  
Product safety regulation
·  
Litigation and/or regulatory actions
·  
Data security and privacy breaches

We use non-GAAP measures to assess our operating performance and financial condition. The terms and definitions of the non-GAAP measures used in this report and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure are provided below. The non-GAAP measures are presented on a consistent basis for all periods presented in this MD&A. These non-GAAP measures do not have any standardized meanings prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Accordingly, they should not be considered in isolation.

Adjusted net earnings and adjusted diluted EPS
 
Adjusted net earnings is calculated as net earnings before restructuring and acquisition-related costs, net of related income tax recoveries. Adjusted diluted EPS is calculated as adjusted net earnings divided by the diluted weighted average number of common shares outstanding. Management uses adjusted net earnings and adjusted diluted EPS to measure our performance from one period to the next, without the variations caused by the impacts of the items described above. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in our business performance. Excluding these items does not imply they are necessarily non-recurring.
 
QUARTERLY REPORT – Q2 2014 P.23
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
(in $ millions, except per share amounts)
  
Q2 2014
Q2 2013
  
YTD 2014
YTD 2013
             
Net earnings
  
 79.2
 72.3
  
 120.9
 107.6
Adjustments for:
            
  Restructuring and acquisition-related costs
  
 -
 0.8
  
 2.1
 6.1
  Income tax recovery on restructuring and
            
   acquisition-related costs
  
 -
 (0.4)
  
 (0.4)
 (1.9)
Adjusted net earnings
  
 79.2
 72.7
  
 122.6
 111.8
Basic EPS(1)
  
 0.65
 0.60
  
 0.99
 0.89
Diluted EPS(1)
  
 0.64
 0.59
  
 0.98
 0.88
Adjusted diluted EPS(1)
  
 0.64
 0.59
  
 1.00
 0.91
(1) Quarterly EPS may not add to year-to-date EPS due to rounding.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

Adjusted EBITDA
 
Adjusted EBITDA is calculated as earnings before financial expenses, income taxes and depreciation and amortization and excludes the impact of restructuring and acquisition-related costs. We use adjusted EBITDA, among other measures, to assess the operating performance of our business. We also believe this measure is commonly used by investors and analysts to measure a company’s ability to service debt and to meet other payment obligations, or as a common valuation measurement. We exclude depreciation and amortization expenses, which are non-cash in nature and can vary significantly depending upon accounting methods or non-operating factors such as historical cost. Excluding these items does not imply they are necessarily non-recurring.

(in $ millions)
  
Q2 2014
Q2 2013
  
YTD 2014
YTD 2013
             
Net earnings
  
 79.2
 72.3
  
 120.9
 107.6
Restructuring and acquisition-related costs
  
 -
 0.8
  
 2.1
 6.1
Depreciation and amortization
  
 24.1
 24.1
  
 45.7
 42.8
Financial expenses, net
  
 0.1
 1.6
  
 0.5
 3.9
Income tax expense
  
 4.7
 3.0
  
 6.8
 3.3
Adjusted EBITDA
  
 108.1
 101.8
  
 176.0
 163.7
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

Free cash flow
 
Free cash flow is defined as cash from operating activities including net changes in non-cash working capital balances, less cash flow used in investing activities excluding business acquisitions. We consider free cash flow to be an important indicator of the financial strength and performance of our business, because it shows how much cash is available after capital expenditures to repay debt and to reinvest in our business, to pursue business acquisitions, and/or to redistribute to our shareholders. We believe this measure is commonly used by investors and analysts when valuing a business and its underlying assets.

(in $ millions)
  
Q2 2014
Q2 2013
  
YTD 2014
YTD 2013
             
Cash flows from (used in) operating activities
  
 5.6
 24.9
  
 (5.7)
 70.3
Cash flows used in investing activities
  
 (85.5)
 (44.5)
  
 (142.7)
 (71.1)
Adjustment for:
            
  Business acquisition
  
 -
 -
  
 -
 2.5
Free cash flow
  
 (79.9)
 (19.6)
  
 (148.4)
 1.7
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.

QUARTERLY REPORT – Q2 2014 P.24
 
 
 
 
MANAGEMENT'S DISCUSSION AND ANALYSIS
 
Total indebtedness and net indebtedness / (cash in excess of total indebtedness)
 
Total indebtedness is defined as the total bank indebtedness and long-term debt (including any current portion), and net indebtedness (cash in excess of total indebtedness) is calculated as total indebtedness net of cash and cash equivalents. We consider total indebtedness and net indebtedness (cash in excess of total indebtedness) to be important indicators of the financial leverage of the Company.

(in $ millions)
March 30, 2014
September 29, 2013
         
Long-term debt and total indebtedness
  
 148.0
  
 -
Cash and cash equivalents
  
 (58.6)
  
 (97.4)
Net indebtedness (cash in excess of total indebtedness)
  
 89.4
  
 (97.4)
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.
 
QUARTERLY REPORT – Q2 2014 P.25
 
 
 

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
GILDAN ACTIVEWEAR INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of U.S. dollars) - unaudited
                     
           
March 30,
  
September 29,
         
2014
  
2013
                     
Current assets:
                  
 
Cash and cash equivalents
        
$
 58,591
  
$
 97,368
 
Trade accounts receivable
          
 295,732
    
 255,018
 
Income taxes receivable
          
 3,322
    
 700
 
Inventories (note 4)
          
 723,418
    
 595,794
 
Prepaid expenses and deposits
          
 12,002
    
 14,959
 
Assets held for sale
          
 5,839
    
 5,839
 
Other current assets
          
 15,022
    
 11,034
Total current assets
          
 1,113,926
    
 980,712
                     
Non-current assets:
                  
 
Property, plant and equipment
          
 756,734
    
 655,869
 
Intangible assets
          
 241,264
    
 247,537
 
Goodwill
          
 150,099
    
 150,099
 
Deferred income taxes
          
 -
    
 1,443
 
Other non-current assets
          
 8,077
    
 7,991
Total non-current assets
          
 1,156,174
    
 1,062,939
                     
Total assets
        
$
 2,270,100
  
$
 2,043,651
                     
Current liabilities:
                  
 
Accounts payable and accrued liabilities
        
$
 275,528
  
$
 289,414
Total current liabilities
          
 275,528
    
 289,414
                     
Non-current liabilities:
                  
 
Long-term debt (note 5)
          
 148,000
    
 -
 
Deferred income taxes
          
 1,847
    
 -
 
Employee benefit obligations
          
 15,052
    
 18,486
 
Provisions
          
 15,833
    
 16,325
Total non-current liabilities
          
 180,732
    
 34,811
                     
Total liabilities
          
 456,260
    
 324,225
                     
Equity:
                  
 
Share capital
          
 103,028
    
 107,867
 
Contributed surplus
          
 34,985
    
 28,869
 
Retained earnings
          
 1,677,595
    
 1,583,346
 
Accumulated other comprehensive income
          
 (1,768)
    
 (656)
Total equity attributable to shareholders of the Company
          
 1,813,840
    
 1,719,426
                     
Total liabilities and equity
        
$
 2,270,100
  
$
 2,043,651
                     
                     
See accompanying notes to condensed interim consolidated financial statements.
 
QUARTERLY REPORT – Q2 2014 P.26
 
 
 
 
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
GILDAN ACTIVEWEAR INC.
AND COMPREHENSIVE INCOME
(in thousands of U.S. dollars, except per share data) - unaudited
                       
               
 
Three months ended
  
Six months ended
 
March 30,
  
March 31,
  
March 30,
    
March 31,
   
2014
    
2013
    
2014
    
2013
                       
Net sales
$
 548,795
  
$
 523,040
  
$
 1,000,210
  
$
 943,816
Cost of sales
  
 395,568
    
 371,840
    
 727,784
    
 679,993
                       
Gross profit
  
 153,227
    
 151,200
    
 272,426
    
 263,823
                       
Selling, general and administrative expenses
  
 69,279
    
 73,552
    
 142,091
    
 142,980
Restructuring and acquisition-related costs (note 6)
  
 46
    
 797
    
 2,082
    
 6,139
                       
Operating income
  
 83,902
    
 76,851
    
 128,253
    
 114,704
                       
Financial expenses, net (note 7(b))
  
 60
    
 1,601
    
 528
    
 3,872
Equity earnings in investment in joint venture
  
 -
    
 -
    
 -
    
 (46)
                       
Earnings before income taxes
  
 83,842
    
 75,250
    
 127,725
    
 110,878
                       
Income tax expense
  
 4,655
    
 2,970
    
 6,849
    
 3,310
                       
Net earnings
  
 79,187
    
 72,280
    
 120,876
    
 107,568
                       
Other comprehensive income (loss), net of related
                      
  income taxes (note 9):
                      
    Cash flow hedges
  
 365
    
 2,357
    
 (1,112)
    
 3,104
                       
Comprehensive income
$
 79,552
  
$
 74,637
  
$
 119,764
  
$
 110,672
                       
                       
Earnings per share:
                      
    Basic (note 10)
$
 0.65
  
$
 0.60
  
$
 0.99
  
$
 0.89
    Diluted (note 10)
$
 0.64
  
$
 0.59
  
$
 0.98
  
$
 0.88
                       
                       
See accompanying notes to condensed interim consolidated financial statements.
 
QUARTERLY REPORT – Q2 2014 P.27
 
 
 

 
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
GILDAN ACTIVEWEAR INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Six months ended March 30, 2014 and March 31, 2013
(in thousands or thousands of U.S. dollars) - unaudited

                 
Accumulated
            
                 
other
            
 
Share capital
  
Contributed
  
comprehensive
  
Retained
  
Total
 
Number
  
Amount
  
 surplus
  
income (loss)
  
earnings
  
equity
                                 
Balance, September 29, 2013
 121,626
  
$
 107,867
  
$
 28,869
  
$
 (656)
  
$
 1,583,346
  
$
 1,719,426
                                 
Share-based compensation
 -
    
 -
    
 4,548
    
 -
    
 -
    
 4,548
Shares issued under employee share
                                
  purchase plan
 10
    
 515
    
 -
    
 -
    
 -
    
 515
Shares issued pursuant to exercise of
                                
  stock options
 81
    
 3,084
    
 (893)
    
 -
    
 -
    
 2,191
Shares issued or distributed pursuant to
                                
  vesting of restricted share units
 282
    
 6,043
    
 (6,043)
    
 -
    
 -
    
 -
Share repurchases for future settlement
                                
  of non-Treasury RSUs
 (300)
    
 (14,481)
    
 8,383
    
 -
    
 -
    
 (6,098)
Dividends declared
 -
    
 -
    
 121
    
 -
    
 (26,627)
    
 (26,506)
Transactions with shareholders of the
                                
  Company recognized directly in equity
 73
    
 (4,839)
    
 6,116
    
 -
    
 (26,627)
    
 (25,350)
                                 
Cash flow hedges
 -
    
 -
    
 -
    
 (1,112)
    
 -
    
 (1,112)
Net earnings
 -
    
 -
    
 -
    
 -
    
 120,876
    
 120,876
Comprehensive income
 -
    
 -
    
 -
    
 (1,112)
    
 120,876
    
 119,764
                                 
Balance, March 30, 2014
 121,699
  
$
 103,028
  
$
 34,985
  
$
 (1,768)
  
$
 1,677,595
  
$
 1,813,840
                                 
                                 
Balance, September 30, 2012
 121,386
  
$
 101,113
  
$
 25,579
  
$
 (7,075)
  
$
 1,306,724
  
$
 1,426,341
                                 
Share-based compensation
 -
    
 -
    
 3,805
    
 -
    
 -
    
 3,805
Shares issued under employee share
                                
  purchase plan
 12
    
 433
    
 -
    
 -
    
 -
    
 433
Shares issued pursuant to exercise of
                                
  stock options
 39
    
 1,199
    
 (209)
    
 -
    
 -
    
 990
Shares issued or distributed pursuant to
                                
  vesting of restricted share units
 224
    
 6,537
    
 (6,537)
    
 -
    
 -
    
 -
Share repurchases for future settlement
                                
  of non-Treasury RSUs
 (278)
    
 (9,621)
    
 5,114
    
 -
    
 -
    
 (4,507)
Dividends declared
 -
    
 -
    
 126
    
 -
    
 (22,039)
    
 (21,913)
Transactions with shareholders of the
                                
  Company recognized directly in equity
 (3)
    
 (1,452)
    
 2,299
    
 -
    
 (22,039)
    
 (21,192)
                                 
Cash flow hedges
 -
    
 -
    
 -
    
 3,104
    
 -
    
 3,104
Net earnings
 -
    
 -
    
 -
    
 -
    
 107,568
    
 107,568
Comprehensive income
 -
    
 -
    
 -
    
 3,104
    
 107,568
    
 110,672
                                 
Balance, March 31, 2013
 121,383
  
$
 99,661
  
$
 27,878
  
$
 (3,971)
  
$
 1,392,253
  
$
 1,515,821
                                 
                                 
See accompanying notes to condensed interim consolidated financial statements.
      
 
QUARTERLY REPORT – Q2 2014 P.28
 
 
 

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

GILDAN ACTIVEWEAR INC.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars) - unaudited

   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
     
2014
    
2013
    
2014
    
2013
                         
Cash flows from (used in) operating activities:
                    
 
Net earnings
$
 79,187
  
$
 72,280
  
$
 120,876
  
$
 107,568
 
Adjustments to reconcile net earnings to cash flows
                      
 
  from operating activities (note 11(a))
  
 27,214
    
 28,858
    
 48,049
    
 54,840
     
 106,401
    
 101,138
    
 168,925
    
 162,408
 
Changes in non-cash working capital balances:
                      
 
  Trade accounts receivable
  
 (69,347)
    
 (68,299)
    
 (41,010)
    
 (11,331)
 
  Income taxes
  
 (757)
    
 (3,245)
    
 (2,603)
    
 (2,364)
 
  Inventories
  
 (34,676)
    
 (2,743)
    
 (125,146)
    
 (63,732)
 
  Prepaid expenses and deposits
  
 (363)
    
 (2,043)
    
 2,957
    
 447
 
  Other current assets
  
 1,903
    
 915
    
 (1,446)
    
 (2,679)
 
  Accounts payable and accrued liabilities
  
 2,406
    
 (849)
    
 (7,389)
    
 (12,445)
Cash flows from (used in) operating activities
  
 5,567
    
 24,874
    
 (5,712)
    
 70,304
                         
Cash flows from (used in) investing activities:
                      
 
Purchase of property, plant and equipment
  
 (83,969)
    
 (43,988)
    
 (141,950)
    
 (66,904)
 
Purchase of intangible assets
  
 (1,871)
    
 (681)
    
 (2,013)
    
 (3,074)
 
Business acquisition achieved in stages, net of
                      
 
  cash acquired
  
 -
    
 -
    
 -
    
 (2,467)
 
Proceeds on disposal of assets held for sale and
                      
 
  property, plant and equipment
  
        387
    
 156
    
 1,269
    
 1,371
Cash flows used in investing activities
  
 (85,453)
    
 (44,513)
    
 (142,694)
    
 (71,074)
                         
Cash flows from (used in) financing activities:
                      
 
Increase in amounts drawn under revolving
                      
 
   long-term bank credit facility
  
 84,000
    
 37,000
    
 148,000
    
 33,000
 
Dividends paid
  
 (26,506)
    
 (21,913)
    
 (26,506)
    
 (21,913)
 
Proceeds from the issuance of shares
  
 1,936
    
 594
    
 2,657
    
 1,381
 
Share repurchases for future settlement of
                      
 
  non-Treasury RSUs
  
 -
    
 (5,386)
    
 (14,481)
    
 (9,621)
Cash flows from financing activities
  
 59,430
    
 10,295
    
 109,670
    
 2,847
                         
Effect of exchange rate changes on cash and cash
                      
   equivalents denominated in foreign currencies
  
 (75)
    
 78
    
 (41)
    
 228
Net (decrease) increase in cash and cash equivalents
                      
   during the period
  
 (20,531)
    
 (9,266)
    
 (38,777)
    
 2,305
Cash and cash equivalents, beginning of period
  
 79,122
    
 81,981
    
 97,368
    
 70,410
Cash and cash equivalents, end of period
$
 58,591
  
$
 72,715
  
$
 58,591
  
$
 72,715
                         
Cash paid during the period (included in cash flows from (used in) operating activities):
 
Interest
$
 434
  
$
 1,147
  
$
 518
  
$
 2,250
 
Income taxes
  
 3,085
    
 3,940
    
 6,082
    
 5,073
                         
                         
Supplemental disclosure of cash flow information (note 11)
                      
                         
See accompanying notes to condensed interim consolidated financial statements.

QUARTERLY REPORT – Q2 2014 P.29
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


For the period ended March 30, 2014
(Tabular amounts in thousands or thousands of U.S. dollars except per share data, unless otherwise indicated)
 
 
1. REPORTING ENTITY:

Gildan Activewear Inc. (the "Company") is domiciled in Canada and is incorporated under the Canada Business Corporations Act. Its principal business activity is the manufacture and sale of activewear, socks and underwear. The Company’s fiscal year ends on the first Sunday following September 28 of each year.

The address of the Company’s registered office is 600 de Maisonneuve Boulevard West, Suite 3300, Montreal, Quebec. These condensed interim consolidated financial statements are for the Company’s second quarter of fiscal 2014 as at and for the three and six months ended March 30, 2014 and include the accounts of the Company and its subsidiaries. The Company is a publicly listed entity and its shares are traded on the Toronto Stock Exchange and New York Stock Exchange under the symbol GIL.

2. BASIS OF PREPARATION:

(a)  
Statement of compliance:
 
These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”). The Company applied the same accounting policies in the preparation of these condensed interim consolidated financial statements as those disclosed in note 3 of its most recent annual consolidated financial statements, except as noted below. These condensed interim consolidated financial statements should be read in conjunction with the Company’s 2013 audited annual consolidated financial statements.

These condensed interim consolidated financial statements were authorized for issuance by the Board of Directors of the Company on May 1, 2014.

(b)  
Seasonality of the business:
 
The Company’s revenues and net earnings are subject to seasonal variations. Historically, consolidated net sales have been lowest in the first quarter and highest in the second half of the fiscal year, reflecting the seasonality of our operating segments’ net sales. For our Printwear segment, net sales have historically been higher during the third quarter of the fiscal year. For our Branded Apparel segment, net sales have historically been higher during the fourth quarter of the fiscal year.

(c)  
Initial application of new or amended accounting standards in the reporting period:
 
On September 30, 2013, the Company adopted the following new or amended accounting standards.
 
 
(i)
IFRS 10, Consolidated Financial Statements replaces SIC-12, Consolidation - Special Purpose Entities and parts of IAS 27, Consolidated and Separate Financial Statements. The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in a company’s consolidated financial statements. The standard provides additional guidance to assist in the determination of control where it is difficult to assess. The adoption of IFRS 10 did not have an impact on the Company’s consolidated financial statements.

 
(ii)
IFRS 11, Joint Arrangements supersedes IAS 31, Interests in Joint Ventures and SIC-13, Jointly Controlled Entities - Non-monetary Contributions by Venturers. IFRS 11 focuses on the rights and obligations of a joint arrangement, rather than its legal form as was the case under IAS 31. The adoption of IFRS 11 did not have an impact on the Company’s consolidated financial statements.

 
(iii)
IFRS 12, Disclosure of Interests in Other Entities is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates, and unconsolidated structured entities. As required, the enhanced disclosures will be included in our annual consolidated financial statements for the year ended October 5, 2014.
 
QUARTERLY REPORT – Q2 2014 P.30
 
 
 
 
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
2. BASIS OF PREPARATION (continued):

(c)  
Initial application of new or amended accounting standards in the reporting period (continued):
 
 
(iv)
IFRS 13, Fair Value Measurement improves consistency and reduces complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS. The adoption of IFRS 13 did not result in any measurement adjustments or changes to our valuation techniques to determine fair value. We have included the related quarterly disclosures in note 8 to these condensed interim consolidated financial statements.

 
(v)
IAS 19, Employee Benefits requires, among other changes, entities to compute the financing cost component of defined benefit plans by applying the discount rate used to measure post-employment benefit obligations to the net post-employment benefit obligations (usually, the present value of defined benefit obligations less the fair value of plan assets). Furthermore, the amendments to IAS 19 enhance the disclosure requirements for defined benefit plans, providing additional information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans. The adoption of IAS 19 did not have an impact on recognition or measurement, but will result in additional disclosures in our annual consolidated financial statements for the year ended October 5, 2014.
 
3. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET APPLIED:

Financial instruments
In October 2010, the IASB released IFRS 9, Financial Instruments, which is the first part of a three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement. This first part covers classification and measurement of financial assets and financial liabilities. In November 2013, the IASB released IFRS 9, Financial Instruments (2013), which introduces a new hedge accounting model, together with corresponding disclosures about risk management activity for those applying hedge accounting. Impairment of financial assets will be addressed in the third part of the project.

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9. However, requirements for measuring a financial liability at fair value have changed, as the portion of the changes in fair value related to the entity’s own credit risk must be presented in other comprehensive income rather than in net earnings. The new hedging model represents a significant change in hedge accounting requirements for non-financial risks. It increases the scope of hedged items eligible for hedge accounting and removes the requirements for quantitative thresholds when calculating hedge effectiveness, allowing flexibility in how an economic relationship is demonstrated. This new standard will increase required disclosures about an entity’s risk management strategy, cash flows from hedging activities and the impact of hedge accounting on the consolidated financial statements. In February 2014, the IASB decided that the mandatory effective date for IFRS 9 will be January 1, 2018. The Company intends to early adopt IFRS 9 effective March 31, 2014. The adoption of IFRS 9 is not expected to have an impact on the Company’s consolidated financial statements, and the related disclosures will be included starting in our condensed interim consolidated financial statements for the three and nine months ending July 6, 2014.

Levies
In May 2013, the IASB released IFRIC 21, Levies, which provides guidance on accounting for levies in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The interpretation defines a levy as an outflow of resources from an entity imposed by a government in accordance with legislation, other than income taxes within the scope of IAS 12, Income Taxes, and confirms that an entity recognizes a liability for a levy only when the triggering event specified in the legislation occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be recorded before the specified minimum threshold is reached. IFRIC 21 will be effective for the Company’s fiscal year beginning on October 6, 2014, and is to be applied retrospectively. The Company is currently assessing the impact of the adoption of this interpretation on its consolidated financial statements.
 
QUARTERLY REPORT – Q2 2014 P.31
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
4. INVENTORIES:

         
March 30,
  
September 29,
       
2014
  
2013
                   
Raw materials and spare parts inventories
        
$
 87,293
  
$
 69,508
Work in progress
          
 46,604
    
 36,507
Finished goods
          
 589,521
    
 489,779
         
$
 723,418
  
$
 595,794

5. LONG-TERM DEBT:

The Company has a committed unsecured revolving long-term bank credit facility of $800 million. The facility provides for an annual extension which is subject to the approval of the lenders, and amounts drawn under the facility bear interest at a variable banker’s acceptance or U.S. LIBOR-based interest rate plus a spread ranging from 1% to 2%, such range being a function of the total debt to EBITDA ratio (as defined in the credit facility agreement). In December 2013, the Company amended its revolving long-term bank credit facility to extend the maturity date from January 2018 to January 2019. As at March 30, 2014, $148.0 million (September 29, 2013 - nil) was drawn under the facility, and the effective interest rate for the six months ended March 30, 2014 was 1.3%. In addition, an amount of $22.3 million (September 29, 2013 - $7.4 million) has been committed against this facility to cover various letters of credit. The revolving long-term bank credit facility requires the Company to comply with certain covenants including maintenance of financial ratios. The Company was in compliance with all covenants as at March 30, 2014.

6. RESTRUCTURING AND ACQUISITION-RELATED COSTS:

 
Three months ended
  
Six months ended
 
March 30,
  
March 31,
  
March 30,
  
March 31,
 
2014
  
2013
  
2014
  
2013
                       
Charges related to assets held for sale and property,
                      
  plant and equipment
$
 (92)
  
$
 9
  
$
 (338)
  
$
 1,175
Employee termination and benefit costs
  
 324
    
 138
    
 429
    
 290
Loss on settlement on wind-up of defined benefit
                      
  pension plan
  
 -
    
 -
    
 1,898
    
 -
Exit, relocation and other costs
  
 (186)
    
 508
    
 93
    
 2,898
Remeasurement of contingent consideration in
                      
  connection with a business acquisition
  
 -
    
 142
    
 -
    
 267
Loss on business acquisition achieved in stages
  
 -
    
 -
    
 -
    
 1,321
Acquisition-related transaction costs
  
 -
    
 -
    
 -
    
 188
 
$
 46
  
$
 797
  
$
 2,082
  
$
 6,139

Restructuring and acquisition-related costs for the six months ended March 30, 2014 relate primarily to a loss incurred on the final settlement on the wind-up of the Gold Toe defined benefit pension plan.

For the six months ended March 31, 2013, exit, relocation and other costs relate primarily to costs incurred in connection with the acquisition and integration of Anvil Holdings, Inc., including a charge of $1.6 million related to lease exit costs. Charges related to assets held for sale and property, plant and equipment of $1.2 million during the six months ended March 31, 2013 included write-downs on the Company’s former U.S. sock knitting and finishing facilities in Fort Payne, Alabama which were closed in prior years in connection with the consolidation of its sock manufacturing operations in Honduras. The Company also incurred a loss on business acquisition achieved in stages of $1.3 million in connection with the acquisition of the remaining 50% interest of CanAm Yarns, LLC.
 
QUARTERLY REPORT – Q2 2014 P.32
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

7. OTHER INFORMATION:

(a)
Depreciation and amortization:
 
   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
  
2013
  
2014
  
2013
                         
 
Depreciation of property, plant and equipment
$
 20,387
  
$
 20,373
  
$
 39,853
  
$
 40,731
 
Adjustment for the variation of depreciation of property,
                      
 
  plant and equipment included in inventories
                      
 
  at the beginning and end of the period
  
 (419)
    
 (590)
    
 (2,478)
    
 (6,495)
 
Depreciation of property, plant and equipment included
                      
 
  in net earnings
  
 19,968
    
 19,783
    
 37,375
    
 34,236
 
Amortization of intangible assets, excluding software
  
 3,688
    
 3,901
    
 7,376
    
 7,802
 
Amortization of software
  
 455
    
 390
    
 910
    
 788
 
Depreciation and amortization included in net earnings
$
 24,111
  
$
 24,074
  
$
 45,661
  
$
 42,826
 
 
Property, plant and equipment includes $104.4 million (September 29, 2013 - $114.0 million) of assets not yet utilized in operations. Depreciation on these assets commences when the assets are available for use.
 
(b)
Financial expenses, net:
 
   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
  
2013
  
2014
  
2013
                         
 
Interest expense on financial liabilities recorded at
                      
 
  amortized cost
$
 423
  
$
 1,088
  
$
 524
  
$
 2,109
 
Bank and other financial charges
  
 869
    
 871
    
 1,579
    
 1,827
 
Interest accretion on discounted provisions
  
 80
    
 78
    
 160
    
 155
 
Foreign exchange gain
  
 (1,312)
    
 (436)
    
 (1,735)
    
 (219)
   
$
 60
  
$
 1,601
  
$
 528
  
$
 3,872
 
QUARTERLY REPORT – Q2 2014 P.33
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
8. FAIR VALUE MEASUREMENT:

Financial instruments – carrying amounts and fair values:
 
The carrying amounts and fair values of financial assets and liabilities included in the condensed interim consolidated statements of financial position are as follows:

   
March 30,
  
September 29,
   
2014
    
2013
             
Financial assets
            
Loans and receivables:
            
    Cash and cash equivalents
  
$
 58,591
  
$
 97,368
    Trade accounts receivable
    
 295,732
    
 255,018
    Other current assets
    
 14,878
    
 9,931
    Long-term non-trade receivables included in other
            
      non-current assets
    
 4,158
    
 3,400
Derivative financial instruments designated as effective
            
  hedging instruments included in other current assets
    
 144
    
 1,103
             
Financial liabilities
            
Other financial liabilities:
            
    Accounts payable and accrued liabilities
    
 272,722
    
 287,382
    Long-term debt - bearing interest at variable rates
    
 148,000
    
 -
Derivative financial instruments designated as effective
            
  hedging instruments included in accounts payable
            
  and accrued liabilities
    
 2,806
    
 2,032

Financial instruments whose carrying value approximates fair value
The Company has determined that the fair value of its short-term financial assets and liabilities approximates their respective carrying amounts as at the reporting dates due to the short-term maturities of these instruments, as they bear variable interest-rates or because the terms and conditions are comparable to current market terms and conditions for similar items.

Non-current assets and long-term debt
The fair values of the long-term non-trade receivables included in other non-current assets, and the Company’s interest-bearing financial liabilities also approximate their respective carrying amounts because the interest rates applied to measure their carrying amount approximate current market interest rates.

Derivatives
The derivatives consist of foreign exchange forward contracts where the fair value of the forward contracts is measured using a generally accepted valuation technique which is the discounted value of the difference between the contract’s value at maturity based on the foreign exchange rate set out in the contract and the contract’s value at maturity based on the foreign exchange rate that the counterparty would use if it were to renegotiate the same contract at the measurement date under the same conditions.

The fair values of loans and receivables, other financial liabilities and derivative financial instruments were measured using Level 2 inputs in the fair value hierarchy. In determining the fair value of financial assets and financial liabilities, including derivative financial instruments, the Company takes into account its own credit risk and the credit risk of the counterparties.
 
QUARTERLY REPORT – Q2 2014 P.34
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

9. OTHER COMPREHENSIVE INCOME:
 
 
Three months ended
  
Six months ended
 
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
    
2013
  
2014
  
2013
                       
Net (loss) gain on derivatives designated as cash flow
                      
  hedges
$
 (504)
  
$
 2,372
  
$
 (2,162)
  
$
 2,417
Income taxes
  
 5
    
 (24)
    
 22
    
 (24)
                       
Amounts reclassified from other comprehensive income
                      
  to property, plant and equipment
  
 (481)
    
 -
    
 (907)
    
 -
                       
Amounts reclassified from other comprehensive income
                      
  to net earnings, and included in:
                      
     Net sales
  
 1,119
    
 530
    
 1,455
    
 802
     Cost of sales
  
-
    
 (281)
    
-
    
(281)
     Selling, general and administrative expenses
  
 125
    
 7
    
 113
    
 -
     Financial expenses, net
  
 115
    
 (247)
    
 387
    
 192
     Income taxes
  
 (14)
    
 -
    
 (20)
    
 (2)
Other comprehensive income (loss)
$
 365
  
$
 2,357
  
$
 (1,112)
  
$
 3,104

As at March 30, 2014, accumulated other comprehensive income includes approximately $1.8 million of net losses on derivatives designated as cash flow hedges, which are expected to be reclassified to net earnings and property, plant and equipment within the next twelve months.

10. EARNINGS PER SHARE:

Reconciliation between basic and diluted earnings per share is as follows:

 
Three months ended
  
Six months ended
 
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
    
2013
  
2014
  
2013
                       
Net earnings - basic and diluted
$
 79,187
  
$
 72,280
  
$
 120,876
  
$
 107,568
                       
Basic earnings per share:
                      
    Basic weighted average number of common shares
                      
      outstanding
 121,610
  
 121,365
  
 121,641
  
 121,410
    Basic earnings per share
$
 0.65
  
$
 0.60
  
$
 0.99
  
$
 0.89
                       
Diluted earnings per share:
                      
    Basic weighted average number of common shares
                      
      outstanding
 121,610
  
 121,365
  
 121,641
  
 121,410
    Plus dilutive impact of stock options, Treasury RSUs
                      
      and common shares held in trust
  
 1,547
    
 1,264
    
 1,463
    
 1,144
    Diluted weighted average number of common shares
                      
      outstanding
 123,157
  
 122,629
  
 123,104
  
 122,554
    Diluted earnings per share
$
 0.64
  
$
 0.59
  
$
 0.98
  
$
 0.88

Excluded from the above calculation for the three and six months ended March 30, 2014 are 173,226 stock options (2013 - 271,174) and 5,000 restricted share units (“Treasury RSUs”) (2013 - none) which were deemed to be anti-dilutive.
 
QUARTERLY REPORT – Q2 2014 P.35
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
11. SUPPLEMENTAL CASH FLOW DISCLOSURE:

(a)
Adjustments to reconcile net earnings to cash flows from operating activities:
 
   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
  
2013
  
2014
  
2013
                         
 
Depreciation and amortization (note 7(a))
$
 24,111
  
$
 24,074
  
$
 45,661
  
$
 42,826
 
Loss on business acquisition achieved in stages (note 6)
  
 -
    
 -
    
 -
    
 1,321
 
Restructuring charges related to assets held for sale
                      
 
  and property, plant and equipment (note 6)
  
 (92)
    
 9
    
 (338)
    
 1,175
 
Loss on remeasurement of contingent consideration
  
 -
    
 142
    
 -
    
 267
 
(Gain) loss on disposal of property, plant and equipment
  
 (1,721)
    
 (67)
    
 (804)
    
 206
 
Share-based compensation
  
 2,794
    
 2,106
    
 4,597
    
 3,847
 
Deferred income taxes
  
 2,313
    
 2,220
    
 3,403
    
 1,090
 
Equity earnings in investment in joint venture
  
 -
    
 -
    
 -
    
 (46)
 
Unrealized net gain on foreign exchange and financial
                      
 
  derivatives
  
 (27)
    
 (1,039)
    
 (643)
    
 (869)
 
Adjustment to financial derivatives included in other
                      
 
  comprehensive income, net of amounts reclassified to
                      
 
  net earnings
  
 -
    
 180
    
 -
    
 180
 
Other non-current assets
  
 (1,061)
    
 1,173
    
 (86)
    
 1,429
 
Employee benefit obligations
  
 1,316
    
 (18)
    
 (3,249)
    
 1,162
 
Provisions
  
 (419)
    
 78
    
 (492)
    
 2,252
   
$
 27,214
  
$
 28,858
  
$
 48,049
  
$
 54,840

(b)
Variations in non-cash transactions:
 
   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
  
2013
  
2014
  
2013
                         
 
Dividends declared included in dividends payable
$
 (13,164)
  
$
 (10,849)
  
$
 -
  
$
 -
 
Share repurchases for future settlement of non-Treasury
                      
 
  RSUs included in accounts payable and accrued
                      
 
  liabilities
  
 -
    
 (5,391)
    
 -
    
 -
 
Additions to property, plant and equipment included in
                      
 
  accounts payable and accrued liabilities
  
 (141)
    
 (956)
    
 2,385
    
 (1,361)
 
Addition to property, plant and equipment transferred
                      
 
  from prepaid expenses and deposits and other
                      
 
  non-current assets
  
 -
    
 5,826
    
 -
    
 5,826
 
Proceeds on disposal of property, plant and equipment
                      
 
  included in other current assets
  
 (3,490)
    
 -
    
 (3,490)
    
 -
 
Transfer from accounts payable and accrued liabilities to
                      
 
  to contributed surplus in connection with share
                      
 
  repurchases for future settlement of non-Treasury RSUs
  
 -
    
 -
    
 8,383
    
 5,114
 
Non-cash ascribed value credited to contributed surplus
                      
 
  for dividends attributed to Treasury RSUs
  
 121
    
 126
    
 121
    
 126
 
Non-cash ascribed value credited to share capital from
                      
 
  shares issued or distributed pursuant to vesting of
                      
 
  restricted share units and exercise of stock options
  
 1,713
    
 203
    
 6,936
    
 6,746
 
QUARTERLY REPORT – Q2 2014 P.36
 
 
 

NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

11. SUPPLEMENTAL CASH FLOW DISCLOSURE (continued):

(c)
Cash and cash equivalents:
 
           
March 30,
  
September 29,
         
2014
  
2013
                     
 
Bank balances
        
$
 58,533
  
$
 96,493
 
Term deposits
    
 58
    
 875
           
$
 58,591
  
$
 97,368

12. CONTINGENT LIABILITIES:
 
Claims and litigation
 
The Company is a party to claims and litigation arising in the normal course of operations. The Company does not expect the resolution of these matters to have a material adverse effect on the financial position or results of operations of the Company.

13. SEGMENT INFORMATION:

The Company manages and reports its business as two operating segments, Printwear and Branded Apparel, each of which is a reportable segment for financial reporting purposes. Each segment has its own management that is accountable and responsible for the segment’s operations, results and financial performance. These segments are principally organized by the major customer markets they serve. The following summary describes the operations of each of the Company’s operating segments:

Printwear: The Printwear segment, headquartered in Christ Church, Barbados, designs, manufactures, sources, and distributes undecorated activewear products in large quantities primarily to wholesale distributors in printwear markets in over 30 countries across North America, Europe and the Asia-Pacific region.

Branded Apparel: The Branded Apparel segment, headquartered in Charleston, South Carolina, designs, manufactures, sources, and distributes branded family apparel, which includes athletic, casual and dress socks, underwear and activewear products, primarily to U.S. retailers.

The chief operating decision-maker assesses segment performance based on segment operating income which is defined as operating income before corporate head office expenses, restructuring and acquisition-related costs, and amortization of intangible assets, excluding software. The accounting policies of the segments are the same as those described in note 3 of the Company’s 2013 audited annual consolidated financial statements.
 
QUARTERLY REPORT – Q2 2014 P.37
 
 
 
 
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
13. SEGMENT INFORMATION (continued):

   
Three months ended
  
Six months ended
   
March 30,
  
March 31,
  
March 30,
  
March 31,
   
2014
  
2013
  
2014
  
2013
                         
Segmented net sales:
                      
 
Printwear
$
378,530
  
$
368,002
  
$
640,373
  
$
611,742
 
Branded Apparel
  
170,265
    
155,038
    
359,837
    
332,074
Total net sales
$
548,795
  
$
523,040
  
$
1,000,210
  
$
943,816
                         
Segment operating income:
                      
 
Printwear
$
92,159
  
$
87,307
  
$
140,415
  
$
133,173
 
Branded Apparel
  
13,289
    
13,427
    
35,226
    
33,061
Total segment operating income
$
105,448
  
$
100,734
  
$
175,641
  
$
166,234
                         
Reconciliation to consolidated earnings before income taxes:
                  
 
Total segment operating income
$
105,448
  
$
100,734
  
$
175,641
  
$
166,234
 
Amortization of intangible assets, excluding software
  
(3,688)
    
(3,901)
    
(7,376)
    
(7,802)
 
Corporate expenses
  
(17,812)
    
(19,185)
    
(37,930)
    
(37,589)
 
Restructuring and acquisition-related costs
  
(46)
    
(797)
    
(2,082)
    
(6,139)
 
Financial expenses, net
  
(60)
    
(1,601)
    
(528)
    
(3,872)
 
Equity earnings in investment in joint venture
  
 -
    
 -
    
 -
    
46
Earnings before income taxes
$
83,842
  
$
75,250
  
$
127,725
  
$
110,878

QUARTERLY REPORT – Q2 2014 P.38