Contents MD&A
Our business 2
Strategy and objectives 6
Operating results 8
Consolidated operating review
Segmented operating review
Financial condition 15
Cash flows 16
Liquidity and capital resources 16
Legal proceedings 19
Outlook 19
Financial risk management 19
Critical accounting estimates and judgments 19
Accounting policies and new accounting standards not yet applied 20
Internal control over financial reporting 20
Risks and uncertainties 21
Definition and reconciliation of non-GAAP measures 21 Caution regarding forward-looking statements 23 Condensed interim consolidated financial statements 25
2013 Third Quarter
Shareholder Report
MANAGEMENT’S DISCUSSION AND ANALYSIS This Management’s Discussion and Analysis (MD&A) comments on Gildan’s financial condition as at June 30, 2013 as well as on its operations and financial performance for the three and nine months ended June 30, 2013, compared to the corresponding periods in the previous year. 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 months and nine months ended June 30, 2013, and the related notes, and with our MD&A for the year ended September 30, 2012 (2012 Annual MD&A). This MD&A is dated July 31, 2013. All amounts in this report are in U.S. dollars, unless otherwise noted.
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 paragraph entitled “Definition and reconciliation of Non-GAAP measures” in this MD&A. The unaudited condensed interim consolidated financial statements 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 July 31, 2013.
Additional information about Gildan, including our 2012 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 document contains forward-looking statements, which are qualified by reference to, and should be read together with, the “Caution regarding forward-looking statements” notice on page 23.
In this MD&A, “Gildan”, the “Company”, or the words “we”, “us”, “our” refer, depending on the context, either to Gildan Activewear Inc. or to Gildan Activewear Inc. together with its subsidiaries.
OUR BUSINESS
OVERVIEW
Gildan is a supplier of quality branded basic family apparel. 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®and New Balance®brands. We design, manufacture and source basic products characterized by low-fashion risk and frequent replenishment, such as T-shirts, fleece, sport shirts, socks and underwear, the majority of which are made of cotton and synthetic fibres. We sell our products to customers requiring an efficient supply chain and consistent product quality for high-volume continuous replenishment programs 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 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. In addition to socks, we are developing Gildan® as a consumer brand for activewear and underwear. The Company also manufactures select activewear programs for leading global athletic and lifestyle consumer brands. Gildan owns and operates vertically-integrated, large-scale manufacturing facilities in Central America and the Caribbean Basin to efficiently service the replenishment needs of its customers in the printwear and retail markets. We also own and operate a facility in Bangladesh to support our sales in Asia and Europe. Gildan has over 33,000 employees worldwide and is committed to industry-leading labour and environmental practices at all of its facilities.
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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. The products sold through our Printwear segment consist mainly of undecorated or “blank” T-shirts, fleece and sport shirts marketed primarily under our Gildan® brand. In fiscal 2012, following the acquisition of Anvil Holdings, Inc. (Anvil), the Anvil® brand and brand extensions were added to our brand portfolio. In addition, the Company has a license agreement with New Balance Athletic Shoe, Inc. (New Balance) to sell New Balance® branded performance activewear products in the printwear distributor channel in the U.S. and Canada. Wholesale distributors buy our products and subsequently sell 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.
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. A significant portion of our Branded Apparel segment sales consist of a variety of styles of socks, sold primarily under various company-owned and licensed brands, as well as select national retailers’ brands. We are also pursuing a strategy to grow our sales of underwear and activewear products in the U.S. retail market. We are increasingly focused on developing the Gildan® brand within multiple retail channels. We have placement of Gildan® branded programs within the mass-retail channel, including our first national Gildan® underwear program with a major U.S. mass-retailer, and we recently launched Gildan Platinum™ in national chains and Smart Basics™ in “dollar” stores. In addition to the Gildan® brand, our portfolio of consumer brands includes: the core Gold Toe® brand, which has high consumer brand recognition and strong consumer loyalty in national chains, department stores, and price clubs; the Gold Toe G® line of socks, underwear and activewear which is targeted at a younger consumer demographic; the SilverToe® brand sold to a national chain; the GT a Gold Toe Brand® which we believe has further potential for development in the mass-market; the PowerSox® athletic performance brand which is distributed mainly through sports specialty retailers and national chains; the Auro® brand for the market; and All Pro®, an athletic sock brand for the mass-market. We also have contractual licensing relationships with Under Armour® and New Balance® as the exclusive U.S. sock licensee for these brands. Furthermore, we also manufacture and distribute activewear products for leading global consumer brands, including major sportswear and family entertainment brands.
OUR OPERATIONS
Manufacturing operations
We have developed a significant manufacturing infrastructure in two main hubs in Central America and the Caribbean Basin, where we have built modern textile and sock manufacturing facilities and have established sewing operations. In addition, we own a small vertically-integrated manufacturing facility for the production of activewear in Bangladesh which mainly serves our international markets.
Central American manufacturing hub
Our largest manufacturing hub is based in Honduras and includes three large-scale vertically-integrated textile facilities for the production of activewear and underwear, Rio Nance 1, Rio Nance 2 and our newest and largest facility, 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
MANAGEMENT’S DISCUSSION AND ANALYSIS is expected to result in the improvement of the facility’s cost efficiency. Production at Rio Nance 1 is currently expected to restart in the fourth quarter of fiscal 2013. As part of the acquisition of Anvil in fiscal 2012, we added a smaller textile facility in Honduras in close proximity to our main complex in Rio Nance. The Company is currently planning to increase the utilization of the former Anvil facility to support its growth in more specialized performance products. Textiles produced in Honduras are assembled at our sewing facilities in Honduras and Nicaragua. At the Rio Nance complex, we have also constructed and operate two large-scale, integrated sock manufacturing facilities, Rio Nance 3 and Rio Nance 4.
Caribbean Basin manufacturing hub
Our Caribbean Basin manufacturing hub includes a vertically-integrated textile facility for the production of activewear fabric in Bella Vista, Dominican Republic. Textiles produced at our manufacturing facility in the Dominican Republic are sewn at third-party contractor operations in Haiti and at our sewing facilities in the Dominican Republic.
While we internally produce the majority of the products we sell, we also have sourcing capabilities to complement Gildan’s large scale, vertically-integrated manufacturing.
Screenprinting/Decorating
We recently acquired screenprinting and apparel decorating capabilities from New Buffalo Shirt Factory Inc. (New Buffalo), as discussed in the Operating results section under the heading “Business acquisitions” of this MD&A. Consequently, we now operate two screenprinting and apparel decorating facilities located in Clarence, NY and in Quimistan, Santa Barbara, Honduras.
Yarn-spinning
We satisfy our yarn requirements primarily by sourcing in the U.S. from third-party yarn suppliers with which we have supply agreements, as well as from our two yarn-spinning facilities in the U.S. previously owned by a joint venture, CanAm Yarns, LLC (CanAm). As part of its strategy to increase the degree of vertical integration in yarn-spinning, the Company acquired the remaining 50% interest of CanAm during the first quarter of fiscal 2013 and is planning to upgrade its two yarn-spinning facilities located in Clarkton, NC and Cedartown, GA. In addition, the Company is developing a new yarn-spinning facility in Salisbury, NC for the production of ring-spun yarn, which will be utilized as part of its product offering in the Branded Apparel segment.
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, and inventory control and logistics for each of their respective operating segments.
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, 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 41 retail stores located in outlet malls throughout the United States.
Employees and corporate office
MANAGEMENT’S DISCUSSION AND ANALYSIS
COMPETITIVE ENVIRONMENT
The market for our products is highly competitive and is 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, 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 making a significant investment in advertising in support of further enhancement of its Gildan® and Gold Toe® brands. Our commitment to leading environmental and social responsibility practices is also an increasingly important factor for our customers.
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), Hanesbrands Inc. (Hanesbrands), smaller U.S.-based manufacturers, including Alstyle Apparel, a division of Ennis Corp. and Delta Apparel Inc., as well as Central American and Mexican manufacturers. We also compete with private label brands sold by some of our distributors. 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.
Branded Apparel segment
In the retail channel, we compete primarily with Hanesbrands, Berkshire’s subsidiaries, Fruit of the Loom and Russell, and Renfro Corporation. 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.
ECONOMIC ENVIRONMENT AND BUSINESS OUTLOOK
After several quarters of improved market conditions in the U.S. printwear channel, we experienced lower than expected demand for T-shirts in the second quarter of fiscal 2013, which we believe was due to cooler seasonal weather conditions compared to the same period last year. During the third quarter, our printwear unit sales volumes increased by 4.1%, which was achieved in spite of production capacity constraints which limited the Company’s ability to fully capitalize on seasonal peak demand for activewear in both North American and international markets. For the fourth quarter of fiscal 2013 we are projecting year-over-year growth in all of our printwear markets. However, there can be no assurance that demand trends will improve as projected.
We believe cooler weather also negatively impacted retail activity during the second quarter compared to last year. In addition, we believe consumer spending during the second quarter was negatively impacted by the later timing of income tax refunds and the increase in payroll taxes in January. During the third quarter of fiscal 2013, the retail demand environment showed some improvement. While we anticipate continuing sales growth in our Branded Apparel segment for the fourth quarter of fiscal 2013 due to our initiatives, including new Gildan® branded programs, it is difficult to assess the health of consumer demand in the market going forward. Growth in the U.S. has been slow and uncertainty about the economy remains, which could negatively affect consumer sentiment and spending.
A discussion of management’s expectations as to our outlook for fiscal 2013 is contained in our third quarter earnings results press release dated August 1, 2013 under the section entitled “Outlook”.
MANAGEMENT’S DISCUSSION AND ANALYSIS
STRATEGY AND OBJECTIVES
Our growth strategy comprises the following initiatives:
1. Maximize printwear channel 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, we continue to pursue additional growth opportunities to increase our penetration in the North American and international printwear markets as we expand our production capacity and introduce new products for these channels.
We are pursuing further market penetration with our expanded portfolio of brands sold in the printwear channel, which in addition to our leading Gildan® brand include the Anvil® brand and the licensed New Balance® brand, each with a different brand position in the channel. In addition, we are pursuing further sales growth through the introduction of new products such as softer T-shirts and sport shirts, new styles tailored for women, a product-line with tear-away labels, performance products, enhanced sport shirts offerings and work wear assortments. New product introductions could also allow us to service certain niches of the printwear channel in which we previously did not participate. Recent product initiatives include our introduction of a basic performance activewear product-line under the Gildan Performance™ brand and the introduction of a New Balance® sports performance line for activewear products. Through innovations in our manufacturing process, our Gildan Performance™ line features moisture management attributes and anti-microbial properties incorporated into the textile production process to ensure long-lasting performance.
We also intend to continue to expand our presence in targeted international printwear markets outside of the U.S. and Canada, which currently represent less than 10% of the Company’s total consolidated sales.
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 using the services of a U.S. branding and marketing agency for the further development of the Gildan® and Gold Toe® portfolio of consumer brands and is making a significant investment in advertising in support of these brands.
We have been making progress with our key initiative to grow the proportion of our sales of Company branded programs. We secured new branded programs for fiscal 2013 with national retail customers and regional retail chains, some of which are replacing existing private label programs. These new program placements, which include underwear, socks and activewear, will provide significant exposure and visibility for the Gildan® brand. During the third quarter of fiscal 2013, the Company began shipment of its first major Gildan® branded underwear program to a U.S. national mass-market retailer. Initial retailer sales of the Gildan® underwear products are in excess of the Company’s expectations. In addition, men’s Gold Toe® branded sock programs also achieved increased market share penetration following the Company’s recent investments in marketing and advertising to further enhance the equity of the brand. The Company’s new Gold Toe G® underwear and activewear programs in the department store and national chain channels targeting a younger consumer demographic are achieving good penetration and success. We are continuing to obtain new placement of branded programs, including the introduction of the Gildan Platinum™ brand in national chains and department stores.
MANAGEMENT’S DISCUSSION AND ANALYSIS Although we are primarily focused on the development of our Gildan® and Gold Toe® brands, we are also focused on building our relationships as a supply chain partner to global athletic and lifestyle brands that are increasingly looking to source large-scale replenishment programs from manufacturers that meet rigorous quality and social compliance criteria and have an efficient supply chain strategically located in the Western Hemisphere. With the acquisition of Anvil, we have strong established relationships servicing major sportswear and family entertainment companies with activewear products. While we pursue further activewear sales growth within this customer segment we believe there is an opportunity to leverage these relationships to expand into other product categories. During the third quarter the Company was successful in securing important new programs for fiscal 2014 with global athletic and lifestyle brands. The acquisition, on June 21, 2013, of New Buffalo provides us with screenprinting and decorating capabilities which will position us to further enhance our sourcing solutions for these brands.
3. Continue to generate manufacturing and distribution cost reductions
We continuously seek to improve our manufacturing and distribution processes and cost structure by developing and investing in projects for capacity expansion, cost-reduction, further vertical-integration, as well as for additional product quality enhancement. During fiscal 2012 and 2013, we ramped up production in our newest facility Rio Nance 5, which is now operating at a more cost-efficient level than our existing textile facilities. We are also in the process of modernizing and refurbishing our Rio Nance 1 facility in order to improve its cost efficiency. The Company is also investing in yarn-spinning capabilities, including the recent acquisition of the remaining 50% interest of its yarn-spinning joint venture CanAm, the upgrade of the existing CanAm facilities, and the investment in a new yarn-spinning facility in the U.S. for the production of ring-spun yarn. The strategic rationale for the Company’s yarn-spinning investment is to increase the degree of vertical integration of yarn-spinning, to support its projected sales growth, and to continue to pursue its business model of investing in global low-cost manufacturing technology and in product technology which will provide consistent superior product quality. The Company’s investment in ring-spun yarn technology will provide enhanced quality features to our product offering, as well as qualify for duty-free access to U.S. markets under the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA-DR), which requires the use of U.S. yarn or yarn spun in other CAFTA-DR member countries. Ring-spun products will be utilized as part of the Company’s branded product offering in the Branded Apparel segment.
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 facilities 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. We also seek to achieve acquisition synergies from the integration of acquired companies into Gildan’s vertical operations.
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. 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 2012 Annual MD&A.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OPERATING RESULTS
BUSINESS ACQUISITIONS
New Buffalo
On June 21, 2013, the Company acquired substantially all of the assets and assumed certain liabilities of New Buffalo and its operating affiliate in Honduras, for cash consideration of $5.8 million, and a balance due of $0.5 million. The transaction also resulted in the effective settlement of $4.0 million of trade accounts receivable from New Buffalo prior to the acquisition. New Buffalo is a leader in screenprinting and apparel decoration, which provides high-quality screenprinting and decoration of apparel for global athletic and lifestyle brands. The rationale for the acquisition of New Buffalo is to complement the further development of the Company’s relationships with the major consumer brands which it supplies, and this customer base is expected to fully utilize the capacity of the New Buffalo facilities. The Company financed the acquisition through the utilization of its revolving long-term bank credit facility. The acquisition of New Buffalo, while strategically significant, is in itself not material to the Company’s results for fiscal 2013. The Company accounted for this acquisition using the acquisition method in accordance with IFRS 3, Business Combinations. The Company has determined the fair value of the assets acquired and liabilities assumed based on management's preliminary best estimate of their fair values and taking into account all relevant information available at that time. The Company has not yet finalized the assessment of the estimated fair values of equipment and identifiable intangible assets acquired, and liabilities assumed, which the Company expects to finalize by the end of fiscal 2013.
CanAm
On October 29, 2012, the Company acquired the remaining 50% interest of CanAm, its jointly-controlled entity, for cash consideration of $11.1 million. The acquisition has been presented in the condensed interim consolidated statement of cash flows as a cash outflow from investing activities of $2.3 million, which represents the cash consideration paid of $11.1 million, net of cash acquired of $8.8 million. The Company financed the acquisition through the utilization of its revolving long-term bank credit facility. CanAm operates yarn-spinning facilities in the U.S. in Cedartown, GA and Clarkton, NC, and all of the output from these facilities is utilized by the Company in its manufacturing operations.
The Company previously accounted for its 50% interest in CanAm using the equity method. The acquisition of the remaining 50% interest was accounted for as a business combination achieved in stages using the acquisition method in accordance with IFRS 3, Business Combinations, and the results of CanAm have been consolidated with those of the Company from the date of acquisition. Prior to the acquisition, the Company had a yarn supply agreement with CanAm which was effectively settled at the date of acquisition and resulted in a loss of $0.4 million. In addition, at the date of acquisition, the previously held interest in CanAm was re-measured to its fair value resulting in a loss of $1.1 million. The re-measurement of the previously held interest in CanAm, and the settlement of the pre-existing relationship are presented as a loss on business acquisition achieved in stages of $1.5 million which is included in restructuring and acquisition-related costs in the condensed interim consolidated statement of earnings and comprehensive income. The acquisition of the remaining interest in CanAm had no impact on net sales, and no significant impact on net earnings for the three and nine months ended June 30, 2013.
The Company has determined the fair value of the assets acquired and liabilities assumed based on management's best estimate of their fair values and taking into account all relevant information available at that time.
NON-GAAP MEASURES
We use non-GAAP measures to assess our operating performance and financial condition. Securities regulations require that companies caution readers that earnings and other measures adjusted to a basis
MANAGEMENT’S DISCUSSION AND ANALYSIS considered in isolation. We use non-GAAP measures including adjusted net earnings, adjusted diluted EPS, EBITDA, free cash flow, total indebtedness, and net 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 entitled “Definition and reconciliation of Non-GAAP 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.
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)
2013 2012 2011
Q3(1) Q2 Q1(2) Q4 Q3(3) Q2 Q1 Q4
Net sales 614.3 523.0 420.8 561.7 600.2 482.6 303.8 481.6
Net earnings (loss) 115.8 72.3 35.3 89.0 78.6 26.9 (46.1) 48.5
Net earnings (loss) per share
Basic(4) 0.95 0.60 0.29 0.73 0.65 0.22 (0.38) 0.40 Diluted(4) 0.94 0.59 0.29 0.73 0.64 0.22 (0.38) 0.40 Total assets 2,028.0 2,004.2 1,921.7 1,896.4 1,939.2 1,854.5 1,806.8 1,858.5 Total long-term financial liabilities 125.0 214.0 177.0 181.0 306.0 333.0 305.0 209.0
Weighted average number of
shares outstanding (in ‘000s)
Basic 121,446 121,365 121,455 121,473 121,527 121,518 121,434 121,548
Diluted 122,759 122,629 122,491 122,322 122,047 121,985 121,434 122,143
(1) Reflects the acquisition of New Buffalo from June 21, 2013. (2) Reflects the acquisition of CanAm from October 29, 2012. (3) Reflects the acquisition of 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.
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 third quarter of the fiscal year, reflecting the seasonality of the Printwear segment net sales, which have historically accounted for a majority of the Company’s consolidated net sales. 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS In the first quarter of fiscal 2012, the Company reported a net loss due to the impact of significantly higher cotton costs, abnormally high levels of seasonal distributor inventory destocking, a distributor inventory devaluation discount of $19 million, and a charge to cost of sales of approximately $9 million relating to extended holiday production downtime in December.
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 weather, consumer demand, 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, 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.
In addition to the significant impact of the consumption during the first half of fiscal 2012 of inventory manufactured with cotton purchased at historically high cotton price levels, the Company reduced selling prices for its printwear products in the first quarter of fiscal 2012, ahead of the consumption of this high-cost inventory. Consequently, gross margins were negatively impacted during this period relative to historical levels due to the misalignment of industry selling prices and the cost of cotton in inventories being consumed. Gross margins in the fourth quarter of fiscal 2012 reflected the return to more normal levels of historical profitability as industry selling prices and the cost of cotton in inventories consumed in the quarter were more closely aligned.
Business acquisitions may affect the comparability of results. The quarterly financial data above 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.
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.
In the third quarter of fiscal 2012, following the transition of production from Rio Nance 1 to Rio Nance 5, the Company suspended production at its Rio Nance 1 facility as it proceeds with plans to modernize and refurbish the facility. Consequently, a non-cash charge of approximately $0.03 per share to write off obsolete equipment at Rio Nance 1 was recorded in the third quarter of fiscal 2012 and results in the second half of that fiscal year also included transitional manufacturing inefficiencies related to the ramp-down of the Rio Nance 1 facility and the ramp-up of Rio Nance 5. Depreciation expense continues to be recorded on idle assets during the temporary closure of Rio Nance 1.
Our reported amounts for sales, selling, general and administrative expenses (SG&A expenses), and net financial expenses are impacted by fluctuations in the U.S. dollar versus certain other currencies as described in the “Financial risk management” section of the 2012 Annual MD&A. The Company may periodically use derivative financial instruments to manage risks related to fluctuations in foreign exchange rates.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CONSOLIDATED OPERATING REVIEW
(in $ millions, except per share amounts) Q3 2013 Q3 2012 Variation YTD 2013 YTD 2012 Variation
Net sales 614.3 600.2 14.1 1,558.1 1,386.6 171.5 Cost of sales 421.0 456.8 (35.8) 1,101.0 1,150.7 (49.7) Gross profit 193.3 143.4 49.9 457.1 235.9 221.2
Selling, general and administrative expenses 69.9 57.2 12.7 212.8 162.0 50.8
Restructuring and acquisition-related costs 1.6 3.6 (2.0) 7.7 5.5 2.2
Operating income 121.8 82.6 39.2 236.6 68.4 168.2
Financial expenses, net 1.5 3.5 (2.0) 5.4 8.5 (3.1)
Equity loss in investment in joint venture - 0.2 (0.2) - 0.2 (0.2)
Earnings before income taxes 120.3 78.9 41.4 231.2 59.7 171.5
Income tax expense 4.6 0.3 4.3 7.9 0.3 7.6
Net earnings 115.7 78.6 37.1 223.3 59.4 163.9
Earnings per share:
Basic 0.95 0.65 0.30 1.84 0.49 1.35
Diluted 0.94 0.64 0.30 1.82 0.49 1.33
Adjusted earnings per share - Diluted (1) 0.95 0.66 0.29 1.86 0.51 1.35
(1) See "Definition and reconciliation of Non-GAAP measures" in this MD&A.
Certain minor rounding variances exist between the condensed interim consolidated financial statements and this summary.
Net sales
Consolidated net sales in the third quarter of fiscal 2013 amounted to $614.3 million, up $14.1 million, or 2.3% from $600.2 million in the third quarter of fiscal 2012. The increase in consolidated net sales compared to last year was due to an increase in Branded Apparel segment sales of $30.5 million driven primarily by increased sales of Gildan® branded underwear and activewear and growth of activewear sales to global athletic and lifestyle brands, partially offset by a decline of $16.3 million in Printwear segment sales due mainly to lower net selling prices which more than offset higher unit sales volumes compared to last year. Consolidated net sales for the third quarter of fiscal 2013 were slightly below the Company’s guidance of approximately $630 million due to production capacity constraints which limited the Company’s ability to fully capitalize on seasonal peak demand for activewear in both North American and international printwear markets, partially offset by lower than projected promotional discounts.
Consolidated net sales for the first nine months of fiscal 2013 were $1,558.1 million, up $171.5 million, or 12.4% from $1,386.6 million for the same period in fiscal 2012. The increase in consolidated net sales compared to last year was due to an increase of $87.3 million in Printwear segment sales due mainly to organic growth in unit sales volumes, offset in part by lower net selling prices, and an increase of $84.2 million in Branded Apparel segment sales reflecting growth in sales of Gildan® branded activewear and underwear to retail customers, partially offset by lower sock sales. In addition, the increase in consolidated net sales reflected the impact of the Anvil acquisition in each of our operating segments.
Gross profit
Consolidated gross profit for the third quarter of fiscal 2013 of $193.3 million was up $49.8 million from consolidated gross profit of $143.5 million during the third quarter of fiscal 2012. As a percentage of sales, gross margins for the third quarter of fiscal 2013 were 31.5%, compared to gross margins of 23.9% in the third quarter of fiscal 2012. The improvement in gross margins was due primarily to lower-cost cotton, increased supply chain and manufacturing efficiencies due primarily to the ramp-up of Rio Nance 5 and cost reduction projects including the biomass project at Rio Nance, the non-recurrence of the write-off of obsolete manufacturing equipment at Rio Nance 1 in the third quarter of fiscal 2012, and a higher-value product-mix for Branded Apparel. These positive factors were partially offset by the impact of lower net
MANAGEMENT’S DISCUSSION AND ANALYSIS selling prices for Printwear, including a distributor inventory devaluation discount of approximately $6 million for the quarter.
Consolidated gross profit for the first nine months of fiscal 2013 of $457.1 million, or 29.3% of sales, increased significantly from consolidated gross profit of $235.9 million or 17.0% of sales in the same period last year. The improvement in gross margins in the first nine months of fiscal 2013 compared to the same period last year was due to significantly lower cotton costs, increased manufacturing efficiencies and more favourable product-mix for Branded Apparel, partially offset by lower net selling prices for printwear.
Selling, general and administrative expenses
SG&A expenses in the third quarter of fiscal 2013 were $69.9 million, or 11.4% of net sales, up $12.7 million compared to $57.2 million, or 9.5% of net sales, in the third quarter of fiscal 2012. For the first nine months of fiscal 2013, SG&A expenses were $212.8 million, or 13.7% of net sales, up $50.8 million compared to $162.0 million, or 11.7% of net sales in the same period last year. The increase in SG&A expenses in the third quarter and for the first nine months of fiscal 2013 compared to the same periods last year continued to reflect increased marketing and advertising expenses, higher variable performance-driven compensation expenses and the impact of the acquisition of Anvil.
Restructuring and acquisition-related costs
Restructuring and acquisition-related costs for the three months and nine months ended June 30, 2013 were $1.6 million and $7.7 million, compared to $3.6 million and $5.5 million for the same respective periods last year. During the first nine months of fiscal 2013, the Company incurred exit, relocation and other costs of $3.7 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 first nine months of fiscal 2013 also included a write-down of $1.2 million, mostly relating to the Company’s 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, and a loss on business acquisition achieved in stages of $1.5 million in connection with the acquisition of CanAm. Restructuring and acquisition-related costs incurred during the nine months ended July 1, 2012 include a net amount of $3.0 million pursuant to the acquisition of Anvil during the third quarter of fiscal 2012, including $1.2 million of acquisition-related transaction costs, and $10.7 million of obligations arising from certain exit and integration activities relating to a restructuring plan that was initiated immediately following the acquisition, net of a purchase gain on business acquisition of $8.9 million. Restructuring and acquisition-related costs incurred during the nine months ended July 1, 2012 also include $1.4 million related to the integration of Gold Toe.
Operating income
During the third quarter of fiscal 2013, the Company reported consolidated operating income of $121.9 million, up $39.3 million compared to operating income of $82.6 million in the third quarter of fiscal 2012. Operating income for the first nine months of fiscal 2013 totalled $236.6 million compared to $68.4 million in the same period last year. Both operating segments contributed to the significant improvement in operating income due primarily to increased sales, lower cotton costs and increased manufacturing efficiencies, partially offset by higher SG&A expenses.
Financial expenses, net
Net financial expenses amounted to $1.5 million in the third quarter and $5.4 million in the first nine months of fiscal 2013, down from $3.5 million and $8.5 million, respectively, in the same periods last year. The decrease in net financial expenses for the third quarter and the first nine months of fiscal 2013 compared to the same periods last year was mainly due to lower interest expense as a result of the reduction of amounts drawn on our revolving long-term bank credit facility, combined with a favourable change of $1.0 million in the fair value of our interest rate swaps.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Income taxes
We recorded income tax expense of $4.6 million in the third quarter and $7.9 million in the first nine months of fiscal 2013, compared to $0.3 million for the corresponding periods last year. The income tax expense for the first nine months of fiscal 2013 included an income tax recovery of $2.8 million related to restructuring and acquisition-related costs, of which $1.1 million related to the reversal of a deferred tax liability in the first quarter associated with the Company’s previously held interest in CanAm, as a result of the acquisition of the remaining 50% interest in CanAm. Excluding the impact of restructuring and acquisition-related costs of $7.7 million and the associated income tax recovery of $2.8 million mentioned above, the income tax expense for the nine months ended June 30, 2013 was $10.7 million reflecting an effective income tax rate of approximately 4.4%. The higher income tax expense for the period was due primarily to the improved profitability of our Branded Apparel segment compared to the same period last year.
Net earnings
Net earnings for the third quarter of fiscal 2013 were $115.8 million or $0.94 per share on a diluted basis, compared to net earnings of $78.6 million or $0.64 per share on a diluted basis, in the third quarter of fiscal 2012. Adjusted net earnings for the third quarter of fiscal 2013 were $116.5 million or $0.95 per share, up 45.3% and 43.9%, respectively, compared to adjusted net earnings of $80.2 million or $0.66 per share in the third quarter of last year. Net earnings in the first nine months of fiscal 2013 were $223.4 million or $1.82 per share on a diluted basis, compared to $59.4 million or $0.49 per share in the first nine months of fiscal 2012. Adjusted net earnings in the first nine months of fiscal 2013 amounted to $228.3 million or $1.86 per share, compared to $62.2 million or $0.51 per share for the same period in fiscal 2012. The increase in the Company’s results compared to last year was driven primarily by the significant improvement in operating income from both the Printwear and Branded Apparel segments and lower financial expenses, partially offset by higher income taxes.
The Company had previously projected adjusted net earnings of $0.92-$0.95 per share for the third quarter, when it reported its second quarter results on May 2, 2013. Lower than projected promotional discounts in Printwear were essentially offset by lower than forecast Printwear sales volumes due to production capacity constraints which limited the Company’s ability to fully capitalize on seasonal peak demand for activewear during the third quarter.
SEGMENTED OPERATING REVIEW
(in $ millions) Q3 2013 Q3 2012 Variation YTD 2013 YTD 2012 Variation
Segment net sales:
Printwear 433.0 449.3 (16.3) 1,044.7 957.4 87.3
Branded Apparel 181.4 150.9 30.5 513.4 429.2 84.2
Total net sales 614.4 600.2 14.2 1,558.1 1,386.6 171.5
Segment operating income:
Printwear 119.2 89.5 29.7 252.4 108.7 143.7
Branded Apparel 27.3 14.2 13.1 60.4 17.7 42.7
Total segment operating income 146.5 103.7 42.8 312.8 126.4 186.4
Corporate and other(1) (24.7) (21.1) (3.6) (76.2) (58.0) (18.2)
Total operating income 121.8 82.6 39.2 236.6 68.4 168.2
(1) Includes corporate head office expenses, restructuring and acquisition-related costs, and amortization of intangible assets, excluding software.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Printwear
Net sales
Printwear segment net sales in the third quarter of fiscal 2013 amounted to $433.0 million, down 3.6% from $449.3 million in the third quarter of fiscal 2012. The decline in sales in the Printwear segment compared to last year was mainly due to lower net selling prices, including the impact of a distributor inventory devaluation discount. On July 31, 2013, the Company announced selling price reductions for certain printwear products and applied the benefit of these selling price reductions to distributor inventories through a distributor inventory devaluation discount, which impacted net sales in the third quarter by approximately $6 million. The lower net selling prices more than offset unit sales volume growth of 4.1% in the quarter, which was achieved in spite of capacity constraints. Printwear segment net sales in the first nine months of fiscal 2013 amounted to $1,044.7 million, up 9.1% from $957.4 million in the same period of fiscal 2012. The increase was primarily due to growth in unit sales of Gildan® branded products and the Anvil acquisition, partially offset by lower net selling prices.
Operating income
The Printwear segment reported operating income of $119.2 million for the third quarter of fiscal 2013, up 33.3% compared to $89.5 million in the third quarter of fiscal 2012. The more favourable results for the Printwear segment were primarily due to the impact of lower cotton costs together with increased manufacturing efficiencies and higher unit sales volumes, partially offset by lower net selling prices and higher SG&A expenses. For the first nine months of fiscal 2013, the Printwear segment reported operating income of $252.4 million, compared to $108.7 million in the same period last year. The improvement in operating income was mainly due to lower cotton costs, higher unit sales volumes, the acquisition of Anvil and increased manufacturing efficiencies, partially offset by lower net selling prices and increased SG&A expenses.
Branded Apparel
Net sales
Branded Apparel segment net sales amounted to $181.4 million for the three months ended June 30, 2013, up 20.1% compared to the third quarter of fiscal 2012. The increase in net sales was due to the impact of new Gildan® branded underwear and activewear programs for retail customers, increased sales to global athletic and lifestyle brands, and slightly higher sock sales compared to the third quarter last year. For the first nine months of fiscal 2013, Branded Apparel sales totalled $513.4 million, up 19.6% compared to $429.2 million in the same period last year. The increase was primarily due to the Anvil acquisition and increased sales of Gildan® branded underwear and activewear to retail customers, partially offset by slightly lower sales of socks compared to last year.
Operating income
The Branded Apparel segment reported operating income of $27.3 million in the third quarter, up 92.6% compared to $14.2 million in the third quarter of fiscal 2012. The improved results for Branded Apparel were primarily due to lower cotton costs, sales volume growth and a higher-valued branded product-mix, partially offset by higher SG&A expenses. Branded Apparel operating income of $60.4 million in the first nine months of fiscal 2013 was up from $17.7 million in the same period last year. The improvement in operating performance was due to lower cotton costs, increased sales, including the acquisition of Anvil and a higher-valued branded product-mix, partially offset by higher SG&A expenses.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
Trade accounts receivable, which are net of accrued sales discounts, amounted to $264.8 million as at June 30, 2013 compared to $260.6 million at the end of fiscal 2012. The increase was due primarily to the impact of higher sales in the third quarter of fiscal 2013 compared to the fourth quarter of fiscal 2012, mostly offset by the impact of a slight decrease in the number of days’ sales outstanding.
Inventories as at June 30, 2013 were $602.0 million compared to $553.1 million at the end of fiscal 2012. The increase was mainly due to an increase in activewear inventory levels, to support expected demand for the fourth quarter. Average unit cost inventories were higher as compared to last year due to a higher-cost inventory mix.
Assets held for sale decreased from $8.0 million as at the end of fiscal 2012 to $5.8 million as at June 30, 2013, due to the disposal and write-down of certain properties related to facilities in the U.S. that were closed in prior years. Total cash proceeds of $1.2 million were realized on the disposal of closed facilities. Property, plant and equipment, which are presented net of accumulated depreciation, amounted to $600.7 million as at June 30, 2013, compared to $552.4 million as at September 30, 2012. The increase of $48.3 million reflects net capital additions of $94.1 million and the inclusion of $13.9 million of property, plant and equipment purchased through business acquisitions, offset by depreciation of $59.7 million. Capital additions included expenditures primarily for the development of our new yarn-spinning facility for the production of ring-spun yarn, the upgrading of the two existing CanAm yarn-spinning facilities, the expansion of sewing and distribution capacity, expenditures for our Rio Nance 1 and Rio Nance 5 textile facilities in Honduras, as well as the purchase of the Company’s corporate aircraft which was previously under an operating lease. Other non-current assets decreased by $5.7 million during the first nine months of fiscal 2013, mainly due to the utilization of advance lease payments in connection with the purchase of the aircraft.
The accounting for the acquisition of the remaining 50% interest in CanAm effectively resulted in the disposal of the Company’s investment in the joint venture, which was previously accounted for using the equity method, and the inclusion of 100% of the assets acquired and liabilities assumed of CanAm in the consolidated statement of financial position of the Company, including the recognition of $2.3 million of goodwill as described in note 4 to the unaudited condensed interim consolidated financial statements. Intangible assets are comprised of customer contracts and relationships, trademarks, license agreements, non-compete agreements and computer software, and amounted to $250.7 million as at June 30, 2013 compared to $260.0 million at the end of fiscal 2012. The decrease of $9.3 million reflects amortization of $12.9 million, partially offset by the addition of $3.6 million of computer software.
Goodwill amounted to $148.5 million as at June 30, 2013 compared to $141.9 million as at the end of fiscal 2012. The increase in goodwill of $6.6 million is due to the goodwill recorded in connection with the acquisitions of CanAm and New Buffalo.
Total assets were $2,028.0 million as at June 30, 2013, compared to $1,896.4 million at the end of fiscal 2012. Working capital was $781.6 million as at June 30, 2013 compared to $659.2 million as at September 30, 2012. The current ratio at the end of the third quarter of fiscal 2013 was 4.2, compared to 3.6 at the end of fiscal 2012.
Accounts payable and accrued liabilities amounted to $241.0 million as at June 30, 2013 compared to $256.4 million at the end of fiscal 2012. The decrease from the end of fiscal 2012 was mainly due to timing of payments, partially offset by higher accruals for variable performance-driven compensation.
Provisions amounted to $15.4 million as at June 30, 2013 compared to $13.0 million at the end of fiscal 2012. The increase from the end of fiscal 2012 was due primarily to a provision of $1.6 million related to lease exit costs incurred in connection with the integration of the acquisition of Anvil.
MANAGEMENT’S DISCUSSION AND ANALYSIS
CASH FLOWS
Cash flows from operating activities were $172.4 million for the three months ended June 30, 2013 compared to $158.3 million for the same period last year. For the first nine months of fiscal 2013, cash flows from operating activities were $242.7 million compared to $48.9 million last year. The increase in year-to-date operating cash flows of $193.8 million was primarily due to the increase in net earnings, and a lower increase in non-cash working capital balances compared with the first nine months of fiscal 2012. The increase in non-cash working capital balances during the first nine months of fiscal 2013 negatively impacted cash flows by $64.3 million compared with a negative impact of $79.0 million during the first nine months of fiscal 2012. For the first nine months of fiscal 2013, the negative impact of the change in non-cash working capital balances on operating non-cash flows was due primarily to increases in activewear inventory levels. For the first nine months of fiscal 2012, the increase in non-cash working capital was mainly due to increases in trade accounts receivable. Decreases in both inventories and accounts payable and accrued liabilities during fiscal 2012 were largely offsetting, and were mainly due to the impact of declining cotton costs.
Cash flows used in investing activities were $28.2 million for the third quarter of fiscal 2013 and $99.3 million for the first nine months of fiscal 2013, compared to $103.3 million and $150.2 million for the same periods last year. Cash flows used relating to business acquisitions were $5.6 million for the third quarter of fiscal 2013 and $8.0 million for the first nine months of fiscal 2013, relating to the acquisitions of New Buffalo and CanAm, compared to $87.4 million for the corresponding periods in fiscal 2012 for the acquisition of Anvil. Excluding the impact of business acquisitions, cash flows used in investing activities were $22.6 million for the third quarter of fiscal 2013 and $91.3 million for the first nine months of fiscal 2013 compared to $16.0 million and $62.8 million for the same periods last year, mostly relating to higher capital spending in fiscal 2013. Capital expenditures during the first nine months of fiscal 2013 are described under the “Financial condition” section of this MD&A, and our planned capital expenditures for the full fiscal year are discussed under the “Liquidity and Capital Resources” section.
We generated free cash flow of $149.8 million in the third quarter of fiscal 2013 and of $151.4 million for the first nine months of fiscal 2013, compared to free cash flow of $142.4 million and negative free cash flow of $13.9 million respectively for the same periods last year. The year-over-year increase in free cash flow of $165.3 million for the first nine months of fiscal 2013 was due to the higher operating cash flows as noted above, partially offset by higher capital spending. Free cash flow is comprised of cash flows from operating activities, including net changes in non-cash working capital balances, less cash flows used in investing activities, excluding business acquisitions. See the heading entitled “Free cash flow” under the section entitled “Definition and reconciliation of Non-GAAP measures” in this MD&A.
Cash flows used in financing activities were $96.6 million in the third quarter of fiscal 2013 and $93.8 million for the first nine months of fiscal 2013, compared to cash flows used in financing activities of $37.4 million and cash flows from financing activities of $68.6 million for the same periods last year. During the first nine months of fiscal 2013, cash flows used in financing activities reflected a net reduction of our revolving long-term bank credit facility of $56.0 million. During the first nine months of fiscal 2012, the increase of $97.0 million of funds drawn on the credit facility was used to finance the acquisition of Anvil. The Company also paid dividends of $32.8 million in the first nine months of fiscal 2013 compared to $27.5 million in the first nine months of fiscal 2012. During the first nine months of fiscal 2013, the Company directed a trustee to purchase $9.6 million of its common shares on the open market to be held in trust and used for the future settlement of non-treasury restricted share units, compared to $1.7 million for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
We have a committed unsecured revolving long-term bank credit facility of $800 million. In November 2012, the Company amended its revolving long-term bank credit facility to extend the maturity date from
MANAGEMENT’S DISCUSSION AND ANALYSIS interest at a variable banker’s acceptance or U.S. LIBOR-based interest rate plus a reduced 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). The amendment also provides for a reduction in undrawn pricing. As at June 30, 2013, $125.0 million (September 30, 2012 - $181.0 million) was drawn under the facility and the effective interest rate for the nine months ended June 30, 2013 was 2.2%, including the cash impact of interest rate swaps. In addition, an amount of $4.8 million (September 30, 2012 - $6.0 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 the maintenance of financial ratios. The Company was in compliance with all covenants as at June 30, 2013.
Total indebtedness was $125.0 million as at June 30, 2013 compared to $181.0 million as at September 30, 2012 and was solely comprised of drawings under the revolving long-term bank credit facility. Net indebtedness decreased to $4.9 million as at June 30, 2013 compared to $110.6 million as at the end of fiscal 2012. Total indebtedness is defined as the total of bank indebtedness and long-term debt (including any current portion), and net indebtedness is calculated as total indebtedness net of cash and cash equivalents as described under the section entitled “Definition and reconciliation of Non-GAAP measures” in this MD&A.
Gildan is currently projecting capital expenditures for fiscal 2013 of approximately $175 million, which is lower than the previous forecast of $200 million, as a result of the timing of the delivery of new equipment. This amount includes planned yarn-spinning investments including expenditures for the development of our new spinning facility for the production of ring-spun yarn and for upgrading the two existing CanAm yarn-spinning facilities. The balance of the fiscal 2013 capital expenditure program is primarily for expansion of textile capacity in Honduras for Rio Nance 5, the refurbishment of Rio Nance 1, the upgrading of equipment at the former Anvil facility, as well as for expansion of distribution capacity, including the construction of a new distribution centre in Honduras and continued investments in biomass projects. Capital expenditures for fiscal 2013 also include the purchase of the Company’s corporate aircraft which was previously under an operating lease.
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, as well as provide us with financial 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.
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 2012 Annual MD&A. There have been no significant changes to our contractual obligations since September 30, 2012. As disclosed in note 25 to our 2012 audited annual consolidated financial statements, we have granted corporate guarantees, irrevocable standby letters of credit and surety bonds to third parties to indemnify them in the event the Company and some of its subsidiaries do not perform their contractual obligations. As at June 30, 2013, the maximum potential liability under these guarantees was $15.4 million, of which $5.3 million was for surety bonds and $10.1 million was for corporate guarantees and standby letters of credit.
