MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements have been prepared by management and approved by the Board of Directors of the Company. The consolidated financial statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and, where appropriate, reflect management’s best estimates and judgments. Where alternative accounting methods exist, management has chosen those methods deemed most appropriate in the circumstances. Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements within reasonable limits of materiality, and for maintaining a system of internal controls over financial reporting as described in “Management’s annual report on internal control over financial reporting” included in Management’s Discussion and Analysis for the fiscal year ended January 3, 2021. Management is also responsible for the preparation and presentation of other financial information included in the 2020 Annual Report and its consistency with the consolidated financial statements.
The Audit and Finance Committee, which is appointed annually by the Board of Directors and comprised exclusively of independent directors, meets with management as well as with the independent auditors and internal auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the independent auditors’ report. The Audit and Finance Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders. The Audit and Finance Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the independent auditors.
The consolidated financial statements have been independently audited by KPMG LLP, on behalf of the shareholders, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Their report outlines the nature of their audit and expresses their opinion on the consolidated financial statements of the Company. In addition, our auditors have issued a report on the Company’s internal controls over financial reporting as of January 3, 2021. KPMG LLP has direct access to the Audit and Finance Committee of the Board of Directors.
(Signed: Glenn J. Chamandy)
(Signed: Rhodri J. Harries)
Glenn J. Chamandy
Rhodri J. Harries
President and Chief Executive Officer
Executive Vice-President, Chief Financial and Administrative Officer
February 24, 2021
GILDAN 2020 REPORT TO SHAREHOLDERS 60
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Gildan Activewear Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated statements of financial position of Gildan Activewear Inc. (the "Company") as of January 3, 2021 and December 29, 2019, the related consolidated statements of earnings and comprehensive income, changes in equity, and cash flows for the years ended January 3, 2021 and December 29, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 3, 2021 and December 29, 2019, and its financial performance and its cash flows for the years ended January 3, 2021 and December 29, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment and Allocation of Inventory Costs
As discussed in Note 7 to the consolidated financial statements, the inventories balance as of January 3, 2021 was $728.0 million, of which work in process and finished goods represented $603.7 million. As discussed in Note 3(e) to the consolidated financial statements, inventories are stated at the lower of cost, determined on a first-in, first-out basis, and net realizable value. As the Company manages its day-to-day production costs and inventories using a standard costing system, variances arise between these standard costs and the actual manufacturing costs. Adjustments are therefore required at period-end to measure inventories at their actual cost. This involves accumulating manufacturing variances at each stage of the Company’s vertically-integrated manufacturing process and identifying costs to be expensed immediately to cost of sales. Such costs include additional costs incurred as a result of operating below normal capacity and abnormal costs. The Company then applies a variance deferral factor, based primarily on the number of days of inventories on hand, to estimate the variances to be included in ending inventories. The determination of the variance
GILDAN 2020 REPORT TO SHAREHOLDERS 61
CONSOLIDATED FINANCIAL STATEMENTS
deferral factor involves estimation. The combination of automated and non-automated systems and processes using data obtained from different geographical locations results in complexity in accumulation of manufacturing costs and in the identification of costs to be expensed immediately. As discussed in Note 16(c) to the consolidated financial statements, during the year ended January 3, 2021, the Company recorded manufacturing costs to be expensed immediately to cost of sales as a result of the COVID-19 pandemic and the two hurricanes in Central America.
We identified the assessment of costs directly related to the conversion of raw materials to finished goods and the allocation of manufacturing variances to the carrying value of inventories as a critical audit matter. A higher degree of auditor judgment and audit effort was required in testing the costs included in the carrying value of inventories and evaluating the variance deferral factor used in allocating the manufacturing variances given the complexity of the process.
The folllowing are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory costing process, including controls related to: (1) identifying costs to be expensed immediately; and (2) establishing the variance deferral factor. We tested the eligibility of costs for recognition in inventories by: (1) assessing the nature of costs included in inventories by inspecting a sample of transactions recorded as manufacturing costs and tracing them to underlying documentation; (2) analysing manufacturing variances to identify the existence of costs to be expensed immediately; and (3) assessing changes in production activity to identify costs to be expensed immediately. We assessed the variance deferral factor based on days of inventory on hand, which included testing certain of the inputs to the calculation
Evaluation of Net Realizable Value of Finished Goods Inventories
As discussed in Note 7 to the consolidated financial statements, the inventories balance as of January 3, 2021 was $728.0 million, of which $561.2 million relates to finished goods inventories. As discussed in Notes 3(e) and 3(dd) to the consolidated financial statements, inventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price of finished goods in normal sales channels, or where applicable, liquidation channels, less estimated costs of completion and selling expenses. Discontinued, damaged, and excess finished goods inventories are carried at the net realizable value, as those inventories are sold below cost in liquidation channels. In determining net realizable value of finished goods, the Company considers recent recovery rates and current market conditions in these channels. There is estimation uncertainty in relation to the identification of excess finished goods inventories which are based on certain criteria developed by the Company, and in the expected selling prices used in establishing net realizable values for the excess and discontinued finished goods. During the year ended January 3, 2021, the Company recorded write-downs of inventory in the amount of $108.1 million as a result of product line reduction and decline in the net realizable value of certain products due to the current market conditions.
We identified the evaluation of net realizable value of finished goods inventories to be a critical audit matter. A high degree of subjective auditor judgment was required to evaluate the determination of the (1) excess finished goods inventories and (2) the expected selling prices used in the establishing net realizable value for excess and discontinued finished goods.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s inventory valuation process, including controls related to the determination of the (1) excess finished goods inventories and (2) expected selling prices. We evaluated the criteria developed by the Company to identify excess finished goods inventories by assessing the consistent application of the criteria as compared to prior years and in relation to current market conditions and business plans. We also determined whether inventory that met these criteria has been identified by the Company as excess. In addition, we compared the Company’s estimate of the expected selling price used in establishing net realizable value for excess and discontinued finished goods to historical selling prices adjusted for current market conditions and to most recent selling prices.
Assessment of the Carrying Value of Goodwill and Indefinite Life Intangible Assets in the Hosiery Cash Generating Unit (“CGU”)
As discussed in Note 10 to the consolidated financial statements, the goodwill and indefinite life intangible asset balances as of January 3, 2021 in aggregate were $386.2 million, of which $86.1 million related to the Hosiery CGU. As discussed in notes 3(j) and 3(dd) to the consolidated financial statements, the Company performs impairment testing on an annual basis or whenever events or changes in circumstances indicate that the carrying value of a reporting unit might exceed its recoverable amount, which is determined using the fair value less costs of disposal method. The Company’s assessment of the recoverable amount incorporates assumptions including estimated sales volumes, selling prices, gross margins and selling, general and administrative (“SG&A”) expenses in determining the risk-adjusted recurring forecasted earnings before financial expenses, income taxes, depreciation and amortization, and restructuring and acquisition-related costs (“adjusted EBITDA”) and the multiple applied to the adjusted EBITDA (“adjusted EBITDA multiple”). During the year ended January 3, 2021, the Company recorded an impairment charge of $94.0 million in the Hosiery CGU.
GILDAN 2020 REPORT TO SHAREHOLDERS 62
CONSOLIDATED FINANCIAL STATEMENTS
We identified the assessment of the carrying value of goodwill and indefinite life intangible assets in the Hosiery CGU as a critical audit matter. There was a high degree of subjective auditor judgment required to evaluate the above noted assumptions used in determining the recoverable amount. The sensitivity of reasonably possible changes to those assumptions could have a significant impact on the determination of the recoverable amount of the Hosiery CGU and the Company’s assessment of impairment, because the estimated recoverable amount approximated the carrying value as at January 3, 2021.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s impairment assessment process, including controls related to (1) determining the adjusted EBITDA and the assumptions underlying its determination; and (2) identifying comparable peer companies and determining the adjusted EBITDA multiple. We evaluated the adjusted EBITDA for the Hosiery CGU by comparing the Company’s historical adjusted EBITDA forecasts to actual results and by examining the historical trend analysis of both increases and decreases in actual revenue, gross margin and SG&A expenses as compared to the forecasted amounts. We challenged the adjustments made to historical data by evaluating the reasonableness of adjustments through independent corroboration. We involved valuation professionals with specialized skills and knowledge, who assisted in:
•evaluating the adjusted EBITDA multiple used by the Company by comparing to publicly available EBITDA multiples for comparable entities;
•and assessing the recoverable amount by developing a range of recoverable amounts for the Hosiery CGU using possible forecasted adjusted EBITDA amounts and adjusted EBITDA multiples, and comparing to the recoverable amount determined by the Company.
We have served as the Company's auditor since fiscal 1996.
Montréal, Canada
February 24, 2021
GILDAN 2020 REPORT TO SHAREHOLDERS 63
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Gildan Activewear Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Gildan Activewear Inc.’s (the "Company") internal control over financial reporting as of January 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Company as of January 3, 2021 and December 29, 2019, the related consolidated statements of earnings and comprehensive income, changes in equity, and cash flows for the years ended January 3, 2021 and December 29, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying "Management’s annual report on internal control over financial reporting" included in Management’s Discussion and Analysis for the year ended January 3, 2021. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
GILDAN 2020 REPORT TO SHAREHOLDERS 64
CONSOLIDATED FINANCIAL STATEMENTS
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Montréal, Canada
February 24, 2021
GILDAN 2020 REPORT TO SHAREHOLDERS 65
CONSOLIDATED FINANCIAL STATEMENTS
GILDAN ACTIVEWEAR INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of U.S. dollars)
January 3, 2021
December 29, 2019
Current assets:
Cash and cash equivalents (note 5)
$
505,264
$
64,126
Trade accounts receivable (note 6)
196,480
320,931
Income taxes receivable
4,632
—
Inventories (note 7)
727,992
1,052,052
Prepaid expenses, deposits and other current assets
110,105
77,064
Total current assets
1,544,473
1,514,173
Non-current assets:
Property, plant and equipment (note 8)
896,800
994,980
Right-of-use assets (note 9(a))
59,445
73,539
Intangible assets (note 10)
289,901
383,864
Goodwill (note 10)
206,636
227,865
Deferred income taxes (note 18)
17,689
9,917
Other non-current assets
6,004
6,732
Total non-current assets
1,476,475
1,696,897
Total assets
$
3,020,948
$
3,211,070
Current liabilities:
Accounts payable and accrued liabilities
$
343,722
$
406,631
Income taxes payable
—
1,255
Current portion of lease obligations (note 9(b))
15,884
14,518
Total current liabilities
359,606
422,404
Non-current liabilities:
Long-term debt (note 11)
1,000,000
845,000
Lease obligations (note 9(b))
66,580
66,982
Other non-current liabilities (note 12)
35,865
42,190
Total non-current liabilities
1,102,445
954,172
Total liabilities
1,462,051
1,376,576
Commitments, guarantees and contingent liabilities (note 23)
Equity (note 13):
Share capital
183,938
174,218
Contributed surplus
24,936
32,769
Retained earnings
1,359,061
1,628,042
Accumulated other comprehensive income
(9,038)
(535)
Total equity attributable to shareholders of the Company
1,558,897
1,834,494
Total liabilities and equity
$
3,020,948
$
3,211,070
See accompanying notes to consolidated financial statements.
On behalf of the Board of Directors:
(Signed: Glenn J. Chamandy)
(Signed: Russell Goodman)
Glenn J. Chamandy
Russell Goodman
Director
Director
GILDAN 2020 REPORT TO SHAREHOLDERS 66
CONSOLIDATED FINANCIAL STATEMENTS
GILDAN ACTIVEWEAR INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
Fiscal years ended January 3, 2021 and December 29, 2019
(in thousands of U.S. dollars, except per share data)
2020
2019
Net sales (note 25)
$
1,981,276
$
2,823,901
Cost of sales (note 16(c))
1,732,217
2,119,440
Gross profit
249,059
704,461
Selling, general and administrative expenses (note 16(a))
272,306
340,487
Impairment of trade accounts receivable (note 6)
15,453
27,652
Restructuring and acquisition-related costs (note 17)
48,154
47,329
Impairment of goodwill and intangible assets (note 10)
93,989
—
Operating income (loss)
(180,843)
288,993
Financial expenses, net (note 14(c))
48,530
39,168
Earnings (loss) before income taxes
(229,373)
249,825
Income tax recovery (note 18)
(4,091)
(9,984)
Net earnings (loss)
(225,282)
259,809
Other comprehensive income (loss), net of related income taxes:
Cash flow hedges (note 14(d))
(8,503)
(3,917)
Actuarial gain (loss) on employee benefit obligations (note 12(a))
12,142
(1,296)
3,639
(5,213)
Comprehensive income (loss)
$
(221,643)
$
254,596
Earnings (loss) per share (note 19):
Basic
$
(1.14)
$
1.27
Diluted
$
(1.14)
$
1.27
See accompanying notes to consolidated financial statements.
GILDAN 2020 REPORT TO SHAREHOLDERS 67
CONSOLIDATED FINANCIAL STATEMENTS
GILDAN ACTIVEWEAR INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Fiscal years ended January 3, 2021 and December 29, 2019
(in thousands or thousands of U.S. dollars)
Share capital
Contributed surplus
Accumulated other comprehensive income (loss)
Retained earnings
Total equity
Number
Amount
Balance, December 31, 2018
206,732
$
159,858
$
32,490
$
3,382
$
1,740,342
$
1,936,072
Adjustments relating to initial adoption of new accounting standards (note 2(c))
—
—
—
—
(2,176)
(2,176)
Adjusted balance, December 31, 2018
206,732
159,858
32,490
3,382
1,738,166
1,933,896
Share-based compensation
—
—
16,115
—
—
16,115
Shares issued under employee share purchase plan
50
1,651
—
—
—
1,651
Shares issued pursuant to exercise of stock options
443
12,198
(3,374)
—
—
8,824
Shares issued or distributed pursuant to vesting of restricted share units
267
7,415
(13,416)
—
—
(6,001)
Shares repurchased for cancellation (note 13(d))
(8,218)
(6,738)
—
—
(250,495)
(257,233)
Share repurchases for settlement of non-Treasury RSUs (note 13(e))
(262)
(166)
—
—
(6,842)
(7,008)
Dividends declared
—
—
954
—
(111,300)
(110,346)
Transactions with shareholders of the Company recognized directly in equity
(7,720)
14,360
279
—
(368,637)
(353,998)
Cash flow hedges (note 14(d))
—
—
—
(3,917)
—
(3,917)
Actuarial loss on employee benefit obligations (note 12(a))
—
—
—
—
(1,296)
(1,296)
Net earnings
—
—
—
—
259,809
259,809
Comprehensive income (loss)
—
—
—
(3,917)
258,513
254,596
Balance, December 29, 2019
199,012
$
174,218
$
32,769
$
(535)
$
1,628,042
$
1,834,494
Share-based compensation
—
—
1,954
—
—
1,954
Shares issued under employee share purchase plan
73
1,381
—
—
—
1,381
Shares issued pursuant to exercise of stock options
87
2,504
(895)
—
—
1,609
Shares issued or distributed pursuant to vesting of restricted share units
194
6,657
(9,228)
—
—
(2,571)
Shares repurchased for cancellation (note 13(d))
(843)
(744)
—
—
(22,472)
(23,216)
Share repurchases for settlement of non-Treasury RSUs (note 13(e))
(116)
(78)
—
—
(2,480)
(2,558)
Dividends declared
—
—
336
—
(30,889)
(30,553)
Transactions with shareholders of the Company recognized directly in equity
(605)
9,720
(7,833)
—
(55,841)
(53,954)
Cash flow hedges (note 14(d))
—
—
—
(8,503)
—
(8,503)
Actuarial gain on employee benefit obligations (note 12(a))
—
—
—
—
12,142
12,142
Net loss
—
—
—
—
(225,282)
(225,282)
Comprehensive loss
—
—
—
(8,503)
(213,140)
(221,643)
Balance, January 3, 2021
198,407
$
183,938
$
24,936
$
(9,038)
$
1,359,061
$
1,558,897
See accompanying notes to consolidated financial statements.
GILDAN 2020 REPORT TO SHAREHOLDERS 68
CONSOLIDATED FINANCIAL STATEMENTS
GILDAN ACTIVEWEAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal years ended January 3, 2021 and December 29, 2019
(in thousands of U.S. dollars)
2020
2019
Cash flows from (used in) operating activities:
Net earnings (loss)
$
(225,282)
$
259,809
Adjustments to reconcile net earnings to cash flows from operating activities (note 21(a))
297,802
175,548
72,520
435,357
Changes in non-cash working capital balances:
Trade accounts receivable
125,150
(3,515)
Income taxes
(5,747)
2,969
Inventories
320,384
(115,082)
Prepaid expenses, deposits and other current assets
(34,801)
(8,320)
Accounts payable and accrued liabilities
(62,476)
49,621
Cash flows from operating activities
415,030
361,030
Cash flows from (used in) investing activities:
Purchase of property, plant and equipment
(50,670)
(128,676)
Purchase of intangible assets
(7,670)
(11,558)
Business acquisitions
—
(1,300)
Proceeds on disposal of property, plant and equipment
830
5,783
Cash flows used in investing activities
(57,510)
(135,751)
Cash flows from (used in) financing activities:
(Decrease) increase in amounts drawn under revolving long-term bank credit facility
(245,000)
176,000
Proceeds from term loan
400,000
—
Payment of lease obligations
(15,418)
(13,534)
Dividends paid
(30,553)
(110,346)
Proceeds from the issuance of shares
2,854
10,318
Repurchase and cancellation of shares (note 13(d))
(23,216)
(257,233)
Share repurchases for settlement of non-Treasury RSUs (note 13(e))
(2,558)
(7,008)
Withholding taxes paid pursuant to the settlement of non-Treasury RSUs
(2,571)
(6,001)
Cash flows from (used in) financing activities
83,538
(207,804)
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies
80
(6)
Net increase in cash and cash equivalents during the fiscal year
441,138
17,469
Cash and cash equivalents, beginning of fiscal year
64,126
46,657
Cash and cash equivalents, end of fiscal year
$
505,264
$
64,126
Cash paid (included in cash flows from operating activities):
Interest
$
35,648
$
33,149
Income taxes, net of refunds
9,318
10,796
Supplemental disclosure of cash flow information (note 21)
See accompanying notes to consolidated financial statements.
GILDAN 2020 REPORT TO SHAREHOLDERS 69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal years ended January 3, 2021 and December 29, 2019
(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" or "Gildan") is domiciled in Canada and is incorporated under the Canada Business Corporations Act. Its principal business activity is the manufacture and sale of activewear, hosiery and underwear. The Company's fiscal year ends on the Sunday closest to December 31 of each year.
The address of the Company’s registered office is 600 de Maisonneuve Boulevard West, Suite 3300, Montreal, Quebec. These consolidated financial statements are as at and for the fiscal years ended January 3, 2021 and December 29, 2019 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 consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
These consolidated financial statements for the fiscal year ended January 3, 2021 were authorized for issuance by the Board of Directors of the Company on February 24, 2021.
(b) Basis of measurement:
These consolidated financial statements have been prepared on the historical cost basis except for the following items in the consolidated statements of financial position:
•Derivative financial instruments which are measured at fair value;
•Employee benefit obligations related to defined benefit plans which are measured at the present value of the defined benefit obligations, net of advance payments made to employees thereon;
•Liabilities for cash-settled share-based payment arrangements which are measured at fair value, and equity-classified share-based payment arrangements which are measured at fair value at grant date pursuant to IFRS 2, Share-based payment;
•Discontinued, damaged, and excess finished inventories which are carried at the net realizable value;
•Provisions for decommissioning, site restoration costs, and onerous contracts which are measured at the present value of the expenditures expected to be required to settle the obligation; and
•Identifiable assets acquired and liabilities assumed in connection with a business combination which are initially measured at fair value.
These consolidated financial statements are presented in U.S. dollars, which is the Company's functional currency.
(c) Initial application of new or amended accounting standards:
During the year ended January 3, 2021, the Company adopted the following new or amended accounting standards:
Amendments to IFRS 3, Business combinations
In October 2018, the IASB issued amendments to IFRS 3, Business combinations. The amendments clarify the definition of a business, with the objective of assisting entities in determining whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and apply prospectively. Given the prospective application of the amendment, its adoption did not have an impact on the Company’s consolidated financial statements.
GILDAN 2020 REPORT TO SHAREHOLDERS 70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PREPARATION (continued):
(c) Initial application of new or amended accounting standards (continued):
During the year ended December 29, 2019, the Company adopted the following new accounting standards:
Leases
IFRS 16, Leases, specifies how to recognize, measure, present, and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize a right-of-use ("ROU") asset representing its right to use the underlying asset and a liability representing its obligation to make lease payments ("lease obligation"), for all leases unless the Company elects to exclude leases when the lease term is twelve months or less, or the underlying asset has a low monetary value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17.
Effective December 31, 2018 (date of initial application), the Company adopted IFRS 16 using the modified retrospective transition approach. When applying the modified retrospective transition approach, for leases previously classified as operating leases under IAS 17 and IFRIC 4, on initial application, a lessee is permitted to measure the ROU asset, on a lease-by-lease basis, using one of two methods: (1) as if IFRS 16 had always been applied, using the incremental borrowing rate at the date of initial application; or (2) at an amount equal to the lease liability (subject to certain adjustments). The Company applied the first option to certain leases, which resulted in a lower carrying amount of the ROU asset at the date of initial application as compared to the lease liability, for those leases. For the remainder of the leases, the Company recognized the ROU assets based on the corresponding lease liability. In addition, $1.9 million of deferred lease credits (relating to lease inducements) that were recorded in accounts payable and accrued liabilities were derecognized with a corresponding transition adjustment to retained earnings on transition date, as a result of the adoption of IFRS 16, and $1.2 million of prepaid rent that was recorded in prepaid expenses, deposits and other current assets on the consolidated statement of financial position as at December 30, 2018 was transferred to the recognized ROU asset.
As a result of relying on a previous assessment of whether leases are onerous in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the Company applied this practical expedient at the date of initial application, resulting in a reduction of the provisions for onerous leases (previously recorded in other non-current liabilities) of $4.6 million and a corresponding reduction of the carrying amount of the ROU asset for the related leases.
As such, as at December 31, 2018, the Company recorded lease obligations of $87.9 million, ROU assets of $78.1 million, a net investment in a sublease of $2.4 million (recorded in other assets), and a net reduction of $2.2 million on opening retained earnings. When measuring lease liabilities, the Company discounted future lease payments using its incremental borrowing rate as at December 31, 2018. The weighted-average rate applied was 3.89%.
Uncertain Income Tax Treatments
IFRIC 23, Uncertainty Over Income Tax Treatments, clarifies how to apply the recognition and measurement requirements in IAS 12, Income Taxes, when there is uncertainty regarding income tax treatments. The Interpretation addresses whether an entity needs to consider uncertain tax treatments separately, the assumptions an entity should make about the examination of tax treatments by taxation authorities, how an entity should determine taxable profit and loss, tax bases, unused tax losses, unused tax credits, and tax rates, and how an entity considers changes in facts and circumstances in such determinations. The Company adopted IFRIC 23 effective December 31, 2018, and its adoption did not have an impact on the Company’s consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. BASIS OF PREPARATION (continued):
(c) Initial application of new or amended accounting standards (continued):
Interest Rate Benchmark Reform - Phase 1
On September 26, 2019, the IASB published "Interest Rate Benchmark Reform - Phase 1 (Amendments to IFRS 9, IAS 39 and IFRS 7)" as a first reaction to the potential effects the IBOR reform could have on financial reporting. Interbank offered rates ("IBORs") are interest reference rates, such as LIBOR, EURIBOR and TIBOR, that represent the cost of obtaining unsecured funding, in a particular combination of currency and maturity, and in a particular interbank term lending market. The amendments from Phase 1 modified specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the hedging instrument are based will not be altered as a result of interest rate benchmark reform. The Company has floating rate debt with a variable rate of interest linked to U.S. LIBOR as a benchmark for establishing the rate in the amount of $800 million outstanding as at January 3, 2021, a portion of which is hedged with $275 million of floating-to-fixed interest rate swaps that are designated as cash flow hedges as described in note 14(b). The Company early adopted the Phase 1 amendments effective September 30, 2019 (first day of the fourth quarter of fiscal 2019). The amounts included in other comprehensive income in relation to floating-to-fixed interest rate swaps that are designated as cash flow hedges and that are mostly affected by the IBOR reform were not significant at the date of adoption.
3. SIGNIFICANT ACCOUNTING POLICIES:
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, unless otherwise indicated.
(a)Basis of consolidation:
(i) Business combinations:
Business combinations are accounted for using the acquisition method. Accordingly, the consideration transferred for the acquisition of a business is the fair value of the assets transferred and any debt and equity interests issued by the Company on the date control of the acquired company is obtained. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Contingent consideration classified as an asset or a liability that is a financial instrument is subsequently remeasured at fair value, with any resulting gain or loss recognized and included in restructuring and acquisition-related costs in the consolidated statement of earnings and comprehensive income. Acquisition-related costs, other than those associated with the issue of debt or equity securities, are expensed as incurred and are included in restructuring and acquisition-related costs in the consolidated statement of earnings and comprehensive income. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are generally measured initially at their fair values at the acquisition date. The Company recognizes any non-controlling interest in an acquired company either at fair value or at the non-controlling interest’s proportionate share of the acquired company’s net identifiable assets. The excess of the consideration transferred over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred and non-controlling interest recognized is less than the fair value of the net assets of the business acquired, a purchase gain is recognized immediately in the consolidated statement of earnings and comprehensive income and applied as a reduction of restructuring and acquisition-related costs.
(ii) Subsidiaries:
Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries are aligned with the policies adopted by the Company. Intragroup transactions, balances, and unrealized gains or losses on transactions between group companies are eliminated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(a)Basis of consolidation (continued):
(ii) Subsidiaries (continued):
The Company’s principal subsidiaries, their jurisdiction of incorporation, and the Company’s percentage ownership share of each are as follows:
Subsidiary
Jurisdiction of incorporation
Ownership percentage
Gildan Activewear SRL
Barbados
100
%
Gildan Yarns, LLC
Delaware
100
%
Gildan USA Inc.
Delaware
100
%
Gildan Honduras Properties, S. de R.L.
Honduras
100
%
Gildan Apparel (Canada) LP
Ontario
100
%
Gildan Activewear (UK) Limited
United Kingdom
100
%
Gildan Textiles de Sula, S. de R.L.
Honduras
100
%
G.A.B. Limited
Bangladesh
100
%
Gildan Activewear Honduras Textile Company, S. de R.L.
Honduras
100
%
Gildan Activewear (Eden) Inc.
North Carolina
100
%
Gildan Hosiery Rio Nance, S. de R.L.
Honduras
100
%
Gildan Mayan Textiles, S. de R.L.
Honduras
100
%
Gildan Charleston Inc.
Delaware
100
%
Gildan Activewear Dominican Republic Textile Company Inc.
Barbados
100
%
Gildan Honduras Trading, S. de R. L.
Honduras
100
%
Gildan Choloma Textiles, S. de R. L.
Honduras
100
%
The Company has no other subsidiaries representing individually more than 10% of the total consolidated assets and 10% of the consolidated net sales of the Company, or in the aggregate more than 20% of the total consolidated assets and the consolidated net sales of the Company as at and for the fiscal year ended January 3, 2021.
(b)Foreign currency translation:
Monetary assets and liabilities of the Company’s Canadian and foreign operations denominated in currencies other than the U.S. dollar are translated using exchange rates in effect at the reporting date. Non-monetary assets and liabilities denominated in currencies other than U.S. dollars are translated at the rates prevailing at the respective transaction dates. Income and expenses denominated in currencies other than U.S. dollars are translated at average rates prevailing during the year. Gains or losses on foreign exchange are recorded in net earnings and presented in the statement of earnings and comprehensive income within financial expenses.
(c)Cash and cash equivalents:
The Company considers all liquid investments with maturities of three months or less from the date of purchase to be cash equivalents.
(d)Trade accounts receivable:
Trade accounts receivable consist of amounts due from our normal business activities. An allowance for expected credit losses is maintained to reflect an impairment risk for trade accounts receivable based on an expected credit loss model which factors in changes in credit quality since the initial recognition of trade accounts receivable based on customer risk categories. Expected credit losses are also provided for based on collection history and specific risks identified on a customer-by-customer basis. Trade accounts receivable are presented net of allowances for expected credit losses, sales discounts, and sales returns when the Company has a right to offset the amounts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(d)Trade accounts receivable (continued):
The Company may continuously sell trade accounts receivables of certain designated customers to a third-party financial institution in exchange for a cash payment equal to the face value of the sold trade receivables less an applicable discount. The Company retains servicing responsibilities, including collection, for these trade accounts receivables but does not retain any credit risk with respect to any trade accounts receivables that have been sold. All trade accounts receivables sold under the receivables purchase agreement are removed from the consolidated statements of financial position, as the sale of the trade accounts receivables qualify for de-recognition. The net cash proceeds received by the Company are included as cash flows from operating activities in the consolidated statements of cash flows. The difference between the carrying amount of the trade accounts receivables sold under the agreement and the cash received at the time of transfer is recorded in the statement of earnings and comprehensive income within financial expenses.
(e)Inventories:
Inventories are stated at the lower of cost and net realizable value. The cost of inventories is based on the first-in, first-out principle, and reflect the various stages of production that inventories have reached at period-end. Inventory costs include the purchase price and other costs directly related to the acquisition of raw materials and spare parts held for use in the manufacturing process, and the cost of purchased finished goods. Inventory costs also include the costs directly related to the conversion of materials to finished goods, such as direct labour, and a systematic allocation of fixed and variable production overhead, including manufacturing depreciation expense. The allocation of fixed production overhead to the cost of inventories is based on the normal capacity of the production facilities. Additional costs incurred as a result of operating below the normal capacity of the production facilities are excluded from the carrying value of inventories and charged directly to cost of sales. Normal capacity is the average production expected to be achieved during the fiscal year, under normal circumstances. The Company manages its day-to-day production costs and inventories using a standard inventory costing system whereby the cost of a product is determined using pre-established rates for materials, labour and production overhead expenses based on the manufacturing specifications of the product. At period end, the Company assesses whether the variances between the standard costs and the actual costs incurred relate to the conversion of materials to finished goods, or if they represent abnormal costs that should be charged directly to cost of sales. The carrying value of inventories is then adjusted to record the manufacturing variances related to inventories still on hand and manufacturing variances related to inventories that have been sold are charged to cost of sales, through an allocation method which uses an estimated variance deferral factor based on the number of days of inventory on hand based on the most recent past production. The Company's inventory costing process involves a combination of automated and non-automated systems and processes using data obtained from different geographical locations. Net realizable value is the estimated selling price of finished goods in normal sales channels, or where applicable, liquidation channels, less the estimated costs of completion and selling expenses. Raw materials, work in progress, and spare parts inventories are not written down if the finished products in which they will be incorporated are expected to be sold at or above cost.
(f)Assets held for sale:
Non-current assets which are classified as assets held for sale are reported in current assets in the statement of financial position, when their carrying amount is to be recovered principally through a sale transaction rather than through continuing use, and a sale is considered highly probable. Assets held for sale are stated at the lower of their carrying amount and fair value less costs to sell.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(g)Property, plant and equipment:
Property, plant and equipment are initially recorded at cost and are subsequently carried at cost less any accumulated depreciation and any accumulated impairment losses. The cost of an item of property, plant and equipment includes expenditures that are directly attributable to the acquisition or construction of an asset. The cost of self-constructed assets includes the cost of materials and direct labour, site preparation costs, initial delivery and handling costs, installation and assembly costs, and any other costs directly attributable to bringing the assets to the location and condition necessary for the assets to be capable of operating in the manner intended by management. The cost of property, plant and equipment also includes, when applicable, borrowing costs, as well as the initial present value estimate of the costs of decommissioning or dismantling and removing the asset and restoring the site on which it is located at the end of its useful life which is amortized over the remaining life of the underlying asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of other equipment. Subsequent costs are included in an asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits are present and the cost of the item can be measured reliably. When property, plant and equipment are replaced they are fully written down. Gains and losses on the disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognized in the statement of earnings and comprehensive income.
Land is not depreciated. The cost of property, plant and equipment less its residual value, if any, is depreciated on a straight-line basis over the following estimated useful lives:
Asset
Useful life
Buildings and improvements
5 to 40 years
Manufacturing equipment
2 to 20 years
Other equipment
3 to 10 years
Significant components of plant and equipment which are identified as having different useful lives are depreciated separately over their respective useful lives. Depreciation methods, useful lives and residual values, if applicable, are reviewed and adjusted, if appropriate, on a prospective basis at the end of each fiscal year.
Assets not yet utilized in operations include expenditures incurred to date for plant constructions or expansions which are still in process and equipment not yet placed into service as at the reporting date. Depreciation on these assets commences when the assets are available for use.
Borrowing costs
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of the asset. A qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use. Capitalization of borrowing costs ceases when the asset is completed and available for use.
All other borrowing costs are recognized as financial expenses in the consolidated statement of earnings and comprehensive income as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(h)Intangible assets:
Definite life intangible assets are measured at cost less accumulated amortization and any accumulated impairment losses. Intangible assets include identifiable intangible assets acquired and consist of customer contracts and customer relationships, license agreements, trademarks, and non-compete agreements. Intangible assets also include computer software that is not an integral part of the related hardware. Indefinite life intangible assets represent intangible assets which the Company controls which have no contractual or legal expiration date and therefore are not amortized as there is no foreseeable time limit to their useful economic life. An assessment of indefinite life intangible assets is performed annually to determine whether events and circumstances continue to support an indefinite useful life and any change in the useful life assessment from indefinite to finite is accounted for as a change in accounting estimate on a prospective basis. Intangible assets with finite lives are amortized on a straight-line basis over the following estimated useful lives:
Asset
Useful life
Customer contracts and customer relationships
7 to 20 years
License agreements
3 to 10 years
Computer software
4 to 7 years
Trademarks with a finite life
5 years
Non-compete agreements
2 years
Most of the Company's trademarks are not amortized as they are considered to be indefinite life intangible assets.
The costs of information technology projects that are directly attributable to the design and testing of identifiable and unique software products, including internally developed computer software, are recognized as intangible assets when the following criteria are met:
•it is technically feasible to complete the software product so that it will be available for use;
•management intends to complete the software product and use it;
•there is an ability to use the software product;
•it can be demonstrated how the software product will generate probable future economic benefits;
•adequate technical, financial, and other resources to complete the development and to use the software product are available; and
•the expenditures attributable to the software product during its development can be reliably measured.
Other development expenditures that do not meet these criteria are recognized as an expense in the consolidated statement of earnings and comprehensive income as incurred.
(i)Goodwill:
Goodwill is measured at cost less accumulated impairment losses, if any. Goodwill arises on business combinations and is measured as the excess of the consideration transferred and the recognized amount of the non-controlling interest in the acquired business, if any, over the fair value of identifiable assets acquired and liabilities assumed of an acquired business.
(j)Impairment of non-financial assets:
Non-financial assets that have an indefinite useful life such as goodwill and trademarks are not subject to amortization and are therefore tested annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Assets that are subject to amortization are assessed at the end of each reporting period as to whether there is any indication of impairment or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s value in use and fair value less costs of disposal. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case assets are grouped at the lowest levels for which there are separately identifiable cash inflows (i.e. cash-generating units or "CGUs").
GILDAN 2020 REPORT TO SHAREHOLDERS 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(j)Impairment of non-financial assets (continued):
In assessing value in use, the estimated future cash flows expected to be derived from the asset or CGU by the Company are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset and or the CGU. In assessing a CGU’s fair value less costs of disposal, the Company uses the best information available to reflect the amount that the Company could obtain, at the time of the impairment test, from the disposal of the asset or CGU in an arm’s length transaction between knowledgeable, willing parties, after deducting the estimated costs of disposal.
For the purpose of testing goodwill for impairment, goodwill acquired in a business combination is allocated to a CGU or a group of CGUs that is expected to benefit from the synergies of the combination, regardless of whether other assets or liabilities of the acquired company are assigned to those CGUs. Impairment losses recognized are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. Impairment losses are recognized in the statement of earnings and comprehensive income.
Reversal of impairment losses
A goodwill impairment loss is not reversed. Impairment losses on non-financial assets other than goodwill recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
(k)Financial instruments:
The Company initially recognizes financial assets on the trade date at which the Company becomes a party to the contractual provisions of the instrument. Financial assets are initially measured at fair value. If the financial asset is not subsequently accounted for at fair value through profit or loss, then the initial measurement includes transaction costs that are directly attributable to the asset’s acquisition or origination. On initial recognition, the Company classifies its financial assets as subsequently measured at either amortized cost or fair value, depending on its business model for managing the financial assets and the contractual cash flow characteristics of the financial assets.
Financial assets
Financial assets are classified into the following categories and depend on the purpose for which the financial assets were acquired.
Financial assets measured at amortized cost
A financial asset is subsequently measured at amortized cost, using the effective interest method and net of any impairment loss, if:
•The asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
•The contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and/or interest.
The Company currently classifies its cash and cash equivalents, trade accounts receivable, certain other current assets (excluding derivative financial instruments designated as effective hedging instruments), and long-term non-trade receivables as financial assets measured at amortized cost. The Company de-recognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
GILDAN 2020 REPORT TO SHAREHOLDERS 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(k)Financial instruments (continued):
Financial assets measured at fair value
These assets are measured at fair value and changes therein, including any interest or dividend income, are recognized in profit or loss. However, for investments in equity instruments that are not held for trading, the Company may elect at initial recognition to present gains and losses in other comprehensive income. For such investments measured at fair value through other comprehensive income, gains and losses are never reclassified to profit or loss, and no impairment is recognized in profit or loss. Dividends earned from such investments are recognized in profit or loss, unless the dividend clearly represents a repayment of part of the cost of the investment. The Company currently has no significant financial assets measured at fair value other than derivative financial instruments.
Fair value through other comprehensive income (FVOCI)
A debt investment is measured at FVOCI if it is not designated as at fair value through profit or loss, is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and its contractual terms give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding. These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognized in profit or loss. Other net gains and losses are recognized in other comprehensive income (OCI). On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss. On initial recognition of an equity investment that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investments fair value in OCI. This election is made on an investment by investment basis. These assets are subsequently measured at fair value. Dividends are recognized as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognized in OCI and are never reclassified to profit or loss. The Company currently has no financial assets measured at FVOCI.
Financial liabilities
Financial liabilities are classified into the following categories.
Financial liabilities measured at amortized cost
A financial liability is subsequently measured at amortized cost, using the effective interest method. The Company currently classifies accounts payable and accrued liabilities (excluding derivative financial instruments designated as effective hedging instruments), and long-term debt bearing interest at variable and fixed rates as financial liabilities measured at amortized cost.
Financial liabilities measured at fair value
Financial liabilities at fair value are initially recognized at fair value and are remeasured at each reporting date with any changes therein recognized in net earnings. The Company currently has no significant financial liabilities measured at fair value.
The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expired.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
Fair value of financial instruments
Financial instruments measured at fair value use the following fair value hierarchy to prioritize the inputs used in measuring fair value:
•Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
•Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
•Level 3: inputs for the asset or liability that are not based on observable market data.
GILDAN 2020 REPORT TO SHAREHOLDERS 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(k)Financial instruments (continued):
Impairment of financial assets
The Company recognizes loss allowances for expected credit losses on financial assets measured at amortized cost. The Company recognizes a loss allowance at an amount equal to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. Otherwise, the loss allowance for that financial instrument corresponds to an amount equal to twelve-month expected credit losses. The Company uses the simplified method to measure the loss allowance for trade receivables at lifetime expected losses. The Company uses historical trends of default, the timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Losses are recognized in the consolidated statement of income and reflected in an allowance account against trade and other receivables.
(l)Derivative financial instruments and hedging relationships:
The Company enters into derivative financial instruments to hedge its market risk exposures. On initial designation of the hedge, the Company formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Company makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated. For a cash flow hedge of a forecasted transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net earnings.
Derivatives are recognized initially at fair value, and attributable transaction costs are recognized in net earnings as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.
Cash flow hedges
When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognized asset or liability or a highly probable forecasted transaction that could affect net earnings, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and presented in accumulated other comprehensive income as part of equity. The amount recognized in other comprehensive income is removed and included in net earnings under the same line item in the consolidated statement of earnings and comprehensive income as the hedged item, in the same period that the hedged cash flows affect net earnings. When a hedged forecasted transaction subsequently results in the recognition of a non-financial asset or liability, the cash flow hedge reserve is removed from accumulated other comprehensive income and included in the initial cost or carrying amount of the asset or liability. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in net earnings. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecasted transaction is no longer expected to occur, then the balance in accumulated other comprehensive income is recognized immediately in net earnings.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in net earnings, together with any changes in the fair value of the hedged asset, liability or firm commitment that are attributable to the hedged risk. The change in fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in the statement of earnings and comprehensive income or in the statement of financial position caption relating to the hedged item. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively.
GILDAN 2020 REPORT TO SHAREHOLDERS 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(l)Derivative financial instruments and hedging relationships (continued):
Embedded derivatives
Embedded derivatives within a financial liability are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss.
Other derivatives
When a derivative financial instrument is not designated in a qualifying hedge relationship, all changes in its fair value are recognized immediately in net earnings.
(m)Accounts payable and accrued liabilities:
Accounts payable and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Accounts payable and accrued liabilities are classified as current liabilities if payment is due within one year, otherwise, they are presented as non-current liabilities.
(n)Long-term debt:
Long-term debt is recognized initially at fair value and is subsequently carried at amortized cost. Initial facility fees are deferred and treated as an adjustment to the instrument's effective interest rate and recognized as an expense over the instrument's estimated life if it is probable that the facility will be drawn down. However, if it is not probable that a facility will be drawn down for its entire term, then the fees are considered service fees and are deferred and recognized as an expense on a straight-line basis over the commitment period.
(o)Employee benefits:
Short-term employee benefits
Short-term employee benefits include wages, salaries, commissions, compensated absences and bonuses. Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Short-term employee benefit obligations are included in accounts payable and accrued liabilities.
Defined contribution plans
The Company offers group defined contribution plans to eligible employees whereby the Company matches employees' contributions up to a fixed percentage of the employee's salary. Contributions by the Company to trustee-managed investment portfolios or employee associations are expensed as incurred. Benefits are also provided to employees through defined contribution plans administered by the governments in the countries in which the Company operates. The Company’s contributions to these plans are recognized in the period when services are rendered.
Defined benefit plans
The Company maintains a liability for statutory severance obligations for active employees primarily located in the Caribbean Basin and Central America which is payable to the employees in a lump sum payment upon termination of employment. The liability is based on management’s best estimates of the ultimate costs to be incurred to settle the liability and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. Liabilities related to defined benefit plans are included in other non-current liabilities in the consolidated statement of financial position. Service costs, interest costs, and costs related to the impact of program changes are recognized in cost of sales in the consolidated statement of earnings. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized directly to other comprehensive income in the period in which they arise, and are immediately transferred to retained earnings without reclassification to net earnings in a subsequent period.
GILDAN 2020 REPORT TO SHAREHOLDERS 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(p)Provisions:
Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as financial expense. Provisions are included in other non-current liabilities in the consolidated statement of financial position.
Decommissioning and site restoration costs
The Company recognizes decommissioning and site restoration obligations for future removal and site restoration costs associated with the restoration of certain property and plant should it decide to discontinue some of its activities.
Onerous contracts
Provisions for onerous contracts are recognized if the unavoidable costs of meeting the obligations specified in a contractual arrangement exceed the economic benefits expected to be received from the contract. Provisions for onerous contracts are measured at the lower of the cost of fulfilling the contract and the expected cost of terminating the contract.
(q)Share capital:
Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares and stock options are recognized as a deduction from equity, net of any tax effects.
When the Company repurchases its own shares, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. When the shares are cancelled, the excess of the consideration paid over the average stated value of the shares purchased for cancellation is charged to retained earnings.
(r)Dividends declared:
Dividends declared to the Company’s shareholders are recognized as a liability in the consolidated statement of financial position and charged to retained earnings in the period in which the dividends are approved by the Company’s Board of Directors.
(s)Revenue recognition:
The Company derives revenue from the sale of finished goods, which include activewear, hosiery, and underwear. The Company recognizes revenue at a point in time when it transfers control of the finished goods to a customer, which generally occurs upon shipment of the finished goods from the Company’s facilities. In certain arrangements, control is transferred and revenue is recognized upon delivery of the finished goods to the customer’s premises.
Some arrangements for the sale of finished goods provide for customer price discounts, rights of return and/or volume rebates based on aggregate sales over a specified period, which gives rise to variable consideration. At the time of sale, estimates are made for items giving rise to variable consideration based on the terms of the sales program or arrangement. The variable consideration is estimated at contract inception using the most likely amount method and revenue is only recognized to the extent that a significant reversal of revenue is not expected to occur. The estimate is based on historical experience, current trends, and other known factors. New sales incentive programs which relate to sales made in a prior period are recognized at the time the new program is introduced. Sales are recorded net of customer discounts, rebates, and estimated sales returns, and exclude sales taxes. A refund liability is recognized for expected returns in relation to sales made before the end of the reporting period.
Consideration payable to a customer that is not considered a distinct good or service from the customer, such as one-time fees paid to customers for product placement or product introduction, is accounted for as a reduction of the transaction price, and the Company recognizes the reduction of revenue at the later of when Company recognizes revenue for the transfer of the related goods to the customer or when the Company pays or promises to pay the consideration.
GILDAN 2020 REPORT TO SHAREHOLDERS 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(t)Cost of sales and gross profit:
Cost of sales includes all raw material costs, manufacturing conversion costs, including manufacturing depreciation expense, sourcing costs, inbound freight and inter-facility transportation costs, and outbound freight to customers. Cost of sales also includes the cost of purchased finished goods, costs relating to purchasing, receiving and inspection activities, manufacturing administration, third-party manufacturing services, sales-based royalty costs, insurance, inventory write-downs, and customs and duties, as well as net insurance gains as described in note 16c. Gross profit is the result of net sales less cost of sales. The Company’s gross profit may not be comparable to gross profit as reported by other companies, since some entities include warehousing and handling costs, and/or exclude depreciation expense, outbound freight to customers and royalty costs from cost of sales.
(u)Selling, general and administrative expenses:
Selling, general and administrative (“SG&A”) expenses include warehousing and handling costs, selling and administrative personnel costs, advertising and marketing expenses, costs of leased non-manufacturing facilities and equipment, professional fees, non-manufacturing depreciation expense, and other general and administrative expenses. SG&A expenses also include amortization of intangible assets.
(v)Restructuring and acquisition-related costs:
Restructuring and acquisition-related costs are expensed when incurred, or when a legal or constructive obligation exists. Restructuring and acquisition-related costs are comprised of costs directly related to significant exit activities, including the closure of business locations or the relocation of business activities, significant changes in management structure, as well as transaction and integration costs incurred pursuant to business acquisitions. The nature of expenses included in restructuring and acquisition-related costs may include: severance and termination benefits, including the termination of employee benefit plans; gains or losses from the remeasurement and disposal of assets held for sale; write-downs of property, plant and equipment, right-of-use assets, and software related to exit activities; facility exit and closure costs, including the costs of physically transferring inventory and fixed assets to other facilities; costs of integrating the IT systems of an acquired business to Gildan’s existing IT systems; legal, accounting and other professional fees (excluding costs of issuing debt or equity) directly incurred in connection with a business acquisition; purchase gains on business acquisitions; losses on business acquisitions achieved in stages; contingent amounts payable to selling shareholders under their employment agreements pursuant to a business acquisition; and the remeasurement of liabilities related to contingent consideration incurred in connection with a business acquisition.
(w)Cotton and cotton-based yarn procurements:
The Company contracts to buy cotton and cotton-based yarn with future delivery dates at fixed prices in order to reduce the effects of fluctuations in the prices of cotton used in the manufacture of its products. These contracts are not used for trading purposes and are not considered to be financial instruments as they are entered into for purchase and receipt in accordance with the Company’s expected usage requirements, and therefore are not measured at fair value. The Company commits to fixed prices on a percentage of its cotton and cotton-based yarn requirements up to eighteen months in the future. If the cost of committed prices for cotton and cotton-based yarn plus estimated costs to complete production exceed current selling prices, a loss is recognized for the excess as a charge to cost of sales.
(x)Government assistance:
Government assistance is recognized only when there is reasonable assurance the Company will comply with all related conditions for receipt of the assistance. Government assistance, including grants and tax credits, related to operating expenses is accounted for as a reduction to the related expenses. Government assistance, including monetary and non-monetary grants and tax credits related to the acquisition of property, plant and equipment, is accounted for as a reduction of the cost of the related property, plant and equipment, and is recognized in net earnings using the same methods, periods and rates as for the related property, plant and equipment.
(y)Financial expenses (income):
Financial expenses (income) include: interest expense on borrowings, including realized gains and/or losses on interest rate swaps designated for hedge accounting; bank and other financial charges; amortization of debt facility fees, discount on the sales of trade accounts receivable; interest income on funds invested; accretion of interest on discounted provisions; net foreign currency losses and/or gains; and losses and/or gains on financial derivatives that do not meet the criteria for effective hedge accounting.
GILDAN 2020 REPORT TO SHAREHOLDERS 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(z)Income taxes:
Income tax expense is comprised of current and deferred income taxes, and is included in net earnings except to the extent that it relates to a business acquisition, or items recognized directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date, for all temporary differences caused when the tax bases of assets and liabilities differ from those reported in the financial statements. The Company recognizes deferred income tax assets for unused tax losses and deductible temporary differences only to the extent that, in management’s opinion, it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred tax assets are reviewed at each reporting date and are derecognized to the extent that it is no longer probable that the related tax benefit will be realized. Deferred income tax is not recognized for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss at the time of the transaction; and, where the timing of the reversal of a temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill.
In determining the amount of current and deferred income taxes, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. Provisions for uncertain tax positions are measured at the best estimate of the amounts expected to be paid upon ultimate resolution. The Company periodically reviews and adjusts its estimates and assumptions of income tax assets and liabilities as circumstances warrant, such as changes to tax laws, administrative guidance, change in management’s assessment of the technical merits of its positions due to new information, and the resolution of uncertainties through either the conclusion of tax audits or expiration of prescribed time limits within relevant statutes.
(aa) Earnings per share:
Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding for the year. Diluted earnings per share are computed using the weighted average number of common shares outstanding for the period adjusted to include the dilutive impact of stock options and restricted share units. The number of additional shares is calculated by assuming that all common shares held in trust for the purpose of settling non-Treasury restricted share units have been delivered, all dilutive outstanding options are exercised and all dilutive outstanding Treasury restricted share units have vested, and that the proceeds from such exercises, as well as the amount of unrecognized share-based compensation which is considered to be assumed proceeds, are used to repurchase common shares at the average share price for the period. For Treasury restricted share units, only the unrecognized share-based compensation is considered assumed proceeds since there is no exercise price paid by the holder.
GILDAN 2020 REPORT TO SHAREHOLDERS 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(bb) Share-based payments:
Stock options, Stock appreciation rights, Treasury and non-Treasury restricted share units
Stock options, Stock appreciation rights (SARs), Treasury restricted share units, and non-Treasury restricted share units are equity settled share-based payments, which are measured at fair value at the grant date. For stock options and SARs, the compensation cost is measured using the Black-Scholes option pricing model and is expensed over the award's vesting period. For Treasury and non-Treasury restricted share units, compensation cost is measured at the fair value of the underlying common share at the grant date and is expensed over the award's vesting period. Compensation expense is recognized in net earnings with a corresponding increase in contributed surplus. Any consideration paid by plan participants on the exercise of stock options is credited to share capital. Upon the exercise of stock options, the vesting of Treasury restricted share units, and upon delivery of the common shares for settlement of vesting non-Treasury restricted share units or SARs, the corresponding amounts previously credited to contributed surplus are transferred to share capital. The number of non-Treasury restricted share units remitted to the participants upon settlement is equal to the number of non-Treasury restricted share units awarded less units withheld
to satisfy the participants' statutory withholding tax requirements. Stock options and Treasury restricted share units that are dilutive and meet non-market performance conditions as at the reporting date are considered in the calculation of diluted earnings per share, as per note 3(aa) to these consolidated financial statements.
Estimates for forfeitures and performance conditions
The measurement of compensation expense for stock options, SARs, Treasury restricted share units and non-Treasury restricted share units is net of estimated forfeitures. For the portion of Treasury restricted share units and non-Treasury restricted share units that are issuable based on non-market performance conditions, the amount recognized as an expense is adjusted to reflect the number of awards for which the related service and performance conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date.
Deferred share unit plan
The Company has a deferred share unit plan for independent members of the Company’s Board of Directors, who receive a portion of their compensation in the form of deferred share units (“DSUs”). These DSUs are cash settled awards and are initially recognized in net earnings based on fair value at the grant date. The DSU obligation is included in accounts payable and accrued liabilities and is remeasured at fair value, based on the market price of the Company’s common shares, at each reporting date.
Employee share purchase plans
For employee share purchase plans, the Company's contribution, on the employee's behalf, is recognized as compensation expense with an offset to share capital, and consideration paid by employees on purchase of common shares is also recorded as an increase to share capital.
GILDAN 2020 REPORT TO SHAREHOLDERS 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(cc) Leases:
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company recognizes a right-of-use ("ROU") asset and a lease liability at the lease commencement date. The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The ROU asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the ROU asset or the lease term. The lease term includes consideration of an option to renew or to terminate if the Company is reasonably certain to exercise that option. Lease terms range from 1 to 15 years for manufacturing, sales, distribution, and administrative facilities. In addition, the ROU asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Lease payments mainly include fixed, or in substance fixed, payments and variable lease payments that depend on an index or a rate. Variable lease payments that do not depend on an index or rate are not included in the measurement of the lease liability. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, or if the Company changes its assessment of whether it will exercise a purchase, extension, or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the ROU asset, or is recorded in profit or loss if the carrying amount of the ROU asset has been reduced to zero.
The Company has elected to apply the practical expedient not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The lease payments associated with these leases are recognized as an expense on a straight-line basis over the lease term.
(dd) Use of estimates and judgments:
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.
Critical judgments in applying accounting policies:
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")
The identification of CGUs and grouping of assets into the respective CGUs is based on currently available information about actual utilization experience and expected future business plans. Management has taken into consideration various factors in identifying its CGUs. These factors include how the Company manages and monitors its operations, the nature of each CGU’s operations, and the major customer markets they serve. As such, the Company has identified its CGUs for purposes of testing the recoverability and impairment of non-financial assets to be Textile & Sewing and Hosiery.
GILDAN 2020 REPORT TO SHAREHOLDERS 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(dd) Use of estimates and judgments (continued):
Income taxes
The Company’s income tax provisions and income tax assets and liabilities are based on interpretations of applicable tax laws, including income tax treaties between various countries in which the Company operates, as well as underlying rules and regulations with respect to transfer pricing. These interpretations involve judgments and estimates and may be challenged through government taxation audits that the Company is regularly subject to. New information may become available that causes the Company to change its judgment regarding the adequacy of existing income tax assets and liabilities; such changes will impact net earnings in the period that such a determination is made.
Key sources of estimation uncertainty:
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 expected credit losses
The Company makes an assessment of whether accounts receivable are collectable, based on an expected credit loss model which factors in changes in credit quality since the initial recognition of trade accounts receivable based on customer risk categories. Credit quality is assessed by taking into account the financial condition and payment history of the Company's customers, and other factors. Furthermore, these estimates must be continuously evaluated and updated.
In determining its allowance for expected credit losses, the Company applies the simplified approach per IFRS 9, Financial Instruments, and calculates expected credit losses based on lifetime expected credit losses. The Company uses a provision matrix, which segregates its customers by their economic characteristics and allocates expected credit loss rates based on days past due of its trade receivables. Expected credit loss rates are based on the Company’s historical credit loss experience, adjusted for forward-looking factors of the economic environment. In light of the COVID-19 pandemic, the Company’s provision matrix was adjusted, as its historical experience was not reflective of the current market conditions, including the uncertainties present in the current economic environment, such as the financial viability of its debtors and the continuance of the various levels of government support measures that have been announced. Many of our customers experienced a major reduction in their sales and operations during this period and took specific measures to minimize operating losses and preserve liquidity, including requests to extend payment terms on the Company’s previously invoiced shipments at the onset of the COVID-19 pandemic. As a result, previously determined loss rates for the individual days past due categories included in the provision matrix were not reflective of expected losses. Therefore, the Company has applied loss rates to individually significant receivables, or sub-categories of individually significant receivables, based on its evaluation of possible outcomes with respect to the collectability of these amounts at the measurement date. The Company increased its expected credit loss rates by reference to macroeconomic loss factors (such as observed and projected GDP decreases or market default rates) to reflect the additional risk of loss that the current economic conditions would indicate.
For customers in good standing who have not requested extended payment terms on the Company’s previously invoiced shipments, the expected credit loss rates have not been modified. For customers who had initially requested extended payment terms on the Company’s previously invoiced shipments and who continue to be impacted by the current economic environment, an expected loss rate ranging between 2% and 10% has been determined using macroeconomic factors, and depending on the customer's historical payment history, the nature of its operations, and its geographic location. For customers previously in default before the pandemic occurred, a significant loss rate has been determined. A 10% increase in the expected loss rate for all customers with a balance due as at January 3, 2021 would result in an $22 million increase in the allowance for expected credit losses. In the event that new information becomes available to us that would change the Company's assessment of expected loss, the amounts recorded in allowance for expected credit losses will be updated in the period in which the additional information is received. There is no assurance that our current estimates of recoverability will not change significantly as the COVID-19 pandemic and its related business and societal impacts evolve, which may either require a charge to earnings or a reversal of such allowances in subsequent periods based on revised estimates or actual collection experience.
GILDAN 2020 REPORT TO SHAREHOLDERS 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SIGNIFICANT ACCOUNTING POLICIES (continued):
(dd) Use of estimates and judgments (continued):
Allowance for expected credit losses (continued)
The Company is not able to predict changes in the financial condition of its customers, and if circumstances related to its customers’ financial condition deteriorate, the estimates of the recoverability of trade accounts receivable could be materially affected and the Company could be required to record additional allowances. Alternatively, if the Company provides more allowances than needed, a reversal of a portion of such allowances in future periods may be required based on actual collection experience.
Inventory valuation
The cost of inventories may no longer be recoverable if inventories are discontinued, damaged, in excess quantities, or if their selling prices or estimated forecast of product demand decline. Discontinued, damaged, and excess inventories are carried at the net realizable value, as those inventories are sold below cost in liquidation channels. In determining the net realizable value of finished goods, the Company considers recent recovery rates and current market conditions in these channels. The Company regularly reviews inventory quantities on hand, current production plans, and forecasted future sales, and inventories are written-down to net realizable value when it is determined that they are no longer fully recoverable. There is estimation uncertainty in relation to the identification of excess inventories and in the expected selling prices used in establishing the net realizable value. As at January 3, 2021, a 10% decrease or increase in the expected selling prices used to establish the net realizable value of discontinued, damaged, and excess inventories would result in either a decrease or an increase in inventories of approximately $5.3 million, with a corresponding adjustment to cost of sales. If actual market conditions are less favorable than previously projected or if liquidation of the inventory which is no longer deemed fully recoverable is more difficult than anticipated, additional write-downs may be required.
Recoverability and impairment of non-financial assets
The calculation of fair value less costs of disposal or value in use for purposes of measuring the recoverable amount of non-financial assets involves the use of significant assumptions and estimates with respect to a variety of factors, including estimated sales volumes, selling prices, gross margins, SG&A expenses, cash flows, capital expenditures, and the selection of an appropriate earnings multiple or discount rate, all of which are subject to inherent uncertainties and subjectivity. The assumptions are based on annual business plans and other forecasted results, earnings multiples obtained by using market comparables as references, and discount rates which are used to reflect market-based estimates of the risks associated with the projected cash flows, based on the best information available as of the date of the impairment test. Changes in circumstances, such as technological advances, adverse changes in third-party licensing arrangements, changes to the Company’s business strategy, and changes in economic and market conditions can result in actual useful lives and future cash flows that differ significantly from estimates and could result in increased charges for amortization or impairment. Revisions to the estimated useful lives of finite-life non-financial assets or future cash flows constitute a change in accounting estimate and are applied prospectively. There can be no assurance that the estimates and assumptions used in the impairment tests will prove to be accurate predictions of the future. If the future adversely differs from management’s best estimate of key economic assumptions and the associated cash flows materially decrease, the Company may be required to record material impairment charges related to its non-financial assets. Please refer to note 10 for additional details on the recoverability of the Company’s cash-generating units.
Income taxes
The Company has unused available tax losses and deductible temporary differences in certain jurisdictions. The Company recognizes deferred income tax assets for these unused tax losses and deductible temporary differences only to the extent that, in management’s opinion, it is probable that future taxable profit will be available against which these available tax losses and temporary differences can be utilized. The Company’s projections of future taxable profit involve the use of significant assumptions and estimates with respect to a variety of factors, including future sales and operating expenses. There can be no assurance that the estimates and assumptions used in our projections of future taxable income will prove to be accurate predictions of the future, and in the event that our assessment of the recoverability of these deferred tax assets changes in the future, a material reduction in the carrying value of these deferred tax assets could be required, with a corresponding charge to net earnings.
GILDAN 2020 REPORT TO SHAREHOLDERS 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET APPLIED:
Amendments to IAS 1, Presentation of Financial Statements
On January 23, 2020, the IASB issued narrow-scope amendments to IAS 1, Presentation of Financial Statements, to clarify how to classify debt and other liabilities as current or non-current. The amendments (which affect only the presentation of liabilities in the statement of financial position) clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of the reporting period to defer settlement by at least twelve months and make explicit that only rights in place at the end of the reporting period should affect the classification of a liability; clarify that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability; and make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets, or services. The amendments are effective for annual reporting periods beginning on or after January 1, 2023 and are to be applied retrospectively. Earlier application is permitted. The Company is currently evaluating the impact of the amendment on its consolidated financial statements.
Interest Rate Benchmark Reform
On September 26, 2019, the IASB published "Interest Rate Benchmark Reform - Phase 1 (Amendments to IFRS 9, IAS 39 and IFRS 7)" as a first reaction to the potential effects the IBOR reform could have on financial reporting. Interbank offered rates ("IBORs") are interest reference rates, such as LIBOR, EURIBOR and TIBOR, that represent the cost of obtaining unsecured funding, in a particular combination of currency and maturity, and in a particular interbank term lending market. The amendments from Phase 1 modified specific hedge accounting requirements so that entities would apply those hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the hedging instrument are based will not be altered as a result of interest rate benchmark reform. The Company has floating rate debt with a variable rate of interest linked to U.S. LIBOR as a benchmark for establishing the rate in the amount of $800 million outstanding as at January 3, 2021, a portion of which is hedged with $275 million of floating-to-fixed interest rate swaps that are designated as cash flow hedges. The Company early adopted the Phase 1 amendments effective September 30, 2019 (first day of the fourth quarter of fiscal 2019).
On August 27 2020, the IASB published "Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) to address issues relating to the modification of financial assets, financial liabilities and lease liabilities, specific hedge accounting requirements, and disclosure requirements when an existing interest rate benchmark is actually replaced. The amendment introduces a practical expedient for modifications required by the reform (modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis). These modifications are accounted for by updating the effective interest rate. All other modifications are accounted for using the current IFRS requirements. A similar practical expedient is proposed for lessee accounting under IFRS 16. Under the amendments, hedge accounting is not discontinued solely because of the IBOR reform. Hedging relationships (and related documentation) must be amended to reflect modifications to the hedged item, hedging instrument, and hedged risk. Amended hedging relationships should meet all qualifying criteria to apply hedge accounting, including effectiveness requirements. The amendments are effective for annual reporting periods beginning on or after January 1, 2021 and are to be applied retrospectively. Earlier application is permitted. There is no expected impact of the amendment on the Company's consolidated financial statements upon its initial adoption date (January 4, 2021) as the Company has not made any modifications as a direct consequence of the IBOR reform to date. The Company, its lenders, and its counterparties will negotiate the substitution of reference rates in its debt agreements (such as a new widely recognized benchmark rates for newly originated loans) for the calculation of interest rates under its floating rate debt as part of its next extension amendments. In addition, the Company and its counterparties under interest rate swap agreements will negotiate the substitution of reference rates in such agreements at that time. It is too early to determine if any upcoming potential modifications will meet the requirements for the application of the practical expedient.
5. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consisted entirely of bank balances as at January 3, 2021 and December 29, 2019.
GILDAN 2020 REPORT TO SHAREHOLDERS 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. TRADE ACCOUNTS RECEIVABLE:
January 3, 2021
December 29, 2019
Trade accounts receivable
$
215,474
$
328,115
Allowance for expected credit losses
(18,994)
(7,184)
$
196,480
$
320,931
As at January 3, 2021, trade accounts receivables being serviced under a receivables purchase agreement amounted to $145.2 million (December 29, 2019 - $141.0 million). The receivables purchase agreement, which allows for the sale of a maximum of $175 million of accounts receivables at any one time, expires on June 21, 2021, subject to annual extensions. The Company retains servicing responsibilities, including collection, for these trade receivables but has not retained any credit risk with respect to any trade receivables that have been sold. The difference between the carrying amount of the receivables sold under the agreement and the cash received at the time of transfer was $2.0 million for fiscal 2020 (2019 - $3.2 million) and was recorded in bank and other financial charges.
The movement in the allowance for expected credit losses in respect of trade receivables was as follows:
2020
2019
Balance, beginning of fiscal year
$
(7,184)
$
(7,547)
Impairment of trade accounts receivable
(15,453)
(27,652)
Write-off of trade accounts receivable
3,643
28,015
Balance, end of fiscal year
$
(18,994)
$
(7,184)
The impairment of trade accounts receivable for the year ended January 3, 2021 was mainly related to an increase in the estimate of expected credit losses (ECLs) attributable to the heightened credit risk caused by the economic conditions related to the COVID-19 pandemic. The impairment of trade accounts receivable for fiscal 2019 consisted primarily of a $22.3 million charge relating to the receivership and liquidation of one of the Company's U.S. distributor customers.
GILDAN 2020 REPORT TO SHAREHOLDERS 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVENTORIES:
January 3, 2021
December 29, 2019
Raw materials and spare parts inventories
$
124,243
$
152,584
Work in progress
42,590
75,535
Finished goods
561,159
823,933
$
727,992
$
1,052,052
The amount of inventories recognized as an expense and included in cost of sales was $1,677.3 million for fiscal 2020 (2019 - $2,044.9 million), which included an expense of $108.1 million (2019 - $62.9 million) related to the write-down of inventory to net realizable value as a result of product line reductions and the decline in the net realizable value of certain inventories due to current market conditions.
The following items are included in write-downs of inventory to net realizable value:
•$29.2 million (2019 - $47.6 million), related to the Company’s strategic initiative to significantly reduce its imprintables product line stock-keeping unit (SKU) count by exiting all ship to-the-piece activities and discontinuing overlapping and less productive styles and SKUs between brands, which the Company began implementing in the fourth quarter of fiscal 2019. The write-downs relate to changes in estimates as well as the impact of additional SKU reductions.
•$26.0 million in fiscal 2020 related to the Company’s strategic initiative to significantly reduce its retail product line SKU count, which the Company began implementing in the fourth quarter of fiscal 2020.
•$6.2 million in fiscal 2020 for the discontinuance of personal protective equipment (PPE) SKUs.
Refer to note 16 (c) for additional information related to the losses on disposal of damaged inventories related to the two hurricanes which impacted the Company’s operations in Central America in November 2020.
GILDAN 2020 REPORT TO SHAREHOLDERS 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROPERTY, PLANT AND EQUIPMENT:
Land
Buildings and improvements
Manufacturing equipment
Other equipment
Assets not yet utilized in operations
Total
2020
Cost
Balance, December 29, 2019
$
120,478
$
558,847
$
1,149,837
$
171,361
$
37,670
$
2,038,193
Additions
3,812
8,549
10,826
5,657
13,794
42,638
Transfers
—
5,506
28,441
1,361
(35,308)
—
Disposals(1)
(741)
(1,438)
(118,492)
(3,619)
—
(124,290)
Balance, January 3, 2021
$
123,549
$
571,464
$
1,070,612
$
174,760
$
16,156
$
1,956,541
Accumulated depreciation
Balance, December 29, 2019
$
—
$
205,834
$
714,478
$
122,901
$
—
$
1,043,213
Depreciation
—
24,537
70,497
13,418
—
108,452
Disposals(1)
—
(304)
(94,883)
(2,750)
—
(97,937)
Write-downs and impairments
—
21
5,887
105
—
6,013
Balance, January 3, 2021
$
—
$
230,088
$
695,979
$
133,674
$
—
$
1,059,741
Carrying amount, January 3, 2021
$
123,549
$
341,376
$
374,633
$
41,086
$
16,156
$
896,800
(1) Included in disposals for fiscal 2020 are manufacturing equipment with a cost of $106.8 million and accumulated depreciation of $84.2 million that were determined to be unrepairable due to damages resulting from the two hurricanes which impacted the Company’s operations in Central America in November 2020. See note 16 (c) for additional information. Assets not yet utilized in operations include expenditures incurred to date for plant expansions which are still in process and equipment not yet placed into service as at the end of the reporting period.
Land
Buildings and improvements
Manufacturing equipment
Other equipment
Assets not yet utilized in operations
Total
2019
Cost
Balance, December 30, 2018
$
70,957
$
550,885
$
1,085,345
$
159,201
$
57,630
$
1,924,018
Additions
49,791
10,585
37,461
7,663
37,433
142,933
Transfers
—
5,169
43,564
8,660
(57,393)
—
Disposals
(270)
(7,792)
(16,533)
(4,163)
—
(28,758)
Balance, December 29, 2019
$
120,478
$
558,847
$
1,149,837
$
171,361
$
37,670
$
2,038,193
Accumulated depreciation
Balance, December 30, 2018
$
—
$
181,821
$
640,418
$
111,304
$
—
$
933,543
Depreciation
—
25,037
79,335
13,573
—
117,945
Disposals
—
(2,899)
(11,932)
(3,001)
—
(17,832)
Write-downs and impairments
—
1,875
6,657
1,025
—
9,557
Balance, December 29, 2019
$
—
$
205,834
$
714,478
$
122,901
$
—
$
1,043,213
Carrying amount, December 29, 2019
$
120,478
$
353,013
$
435,359
$
48,460
$
37,670
$
994,980
Effective July 1, 2019, the Company revised the estimated useful lives of its yarn-spinning manufacturing equipment based on a re-assessment of their expected use to the Company and recent experience of their economic lives. These assets, which were previously being depreciated on a straight-line basis over 10 years, are now depreciated on a straight-line basis over 15 to 20 years depending on the nature of the equipment. The change in estimate resulted in a reduction of depreciation of approximately $8.5 million in fiscal 2019, of which approximately $1 million was included in cost of sales for the year ended December 29, 2019 as depreciation related to manufacturing equipment is initially included in the cost of inventories, and is charged to cost of sales when the related inventories have been sold. For fiscal 2020, the change in estimate resulted in a reduction of depreciation included in net earnings of approximately $17 million.
As at January 3, 2021, there were contractual purchase obligations outstanding of approximately $17.5 million for the acquisition of property, plant and equipment compared to $21.2 million as of December 29, 2019.
GILDAN 2020 REPORT TO SHAREHOLDERS 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RIGHT-OF-USE ASSETS AND LEASE OBLIGATIONS:
(a)Right-of-use assets:
The following table presents the right-of-use assets for the Company:
2020
2019
Balance, beginning of fiscal year
$
73,539
$
—
Impact of initial adoption of IFRS 16 (note 2(c))
—
78,119
Additions
16,424
10,342
Write-downs, impairments, and accelerated depreciation
(15,862)
(1,627)
Depreciation
(14,656)
(13,295)
Balance, end of fiscal year
$
59,445
$
73,539
(b)Lease obligations:
The Company’s leases are primarily for manufacturing, sales, distribution, and administrative facilities.
The following table presents lease obligations recorded in the statement of financial position:
January 3, 2021
December 29, 2019
Current
$
15,884
$
14,518
Non-current
66,580
66,982
$
82,464
$
81,500
Leases of certain facilities contain extension or termination options exercisable by the Company before the end of the non-cancellable contract period. The Company has applied judgment to determine the lease term for the contracts with renewal and termination options and has included renewal and termination options in the measurement of lease obligations when it is reasonably certain to exercise the options. The Company reassesses whether it is reasonably certain to exercise the options if there is a significant event or a significant change in circumstances within its control which impacts the original assessments made. As at January 3, 2021, potential undiscounted future lease payments related to renewal options not included in the measurement of lease obligations are $55.1 million (December 29, 2019 - $57.5 million).
The following table presents the undiscounted future minimum lease payments under non-cancellable leases (including short term leases) as at January 3, 2021:
January 3, 2021
Less than one year
$
20,561
One to five years
45,691
More than five years
31,025
$
97,277
For the year ended January 3, 2021, expenses relating to short-term leases and leases of low-value assets were $3.8 million (2019 - $3.4 million).
For the year ended January 3, 2021, the total cash outflow for recognized lease obligations (including interest) was $18.6 million (2019 - $16.6 million), of which $15.4 million (2019 - $13.5 million) was included as part of cash outflows from financing activities.
GILDAN 2020 REPORT TO SHAREHOLDERS 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTANGIBLE ASSETS AND GOODWILL:
Intangible assets:
2020
Customer contracts and customer relationships
Trademarks
License agreements
Computer software
Non-compete agreements
Total
Cost
Balance, December 29, 2019
$
224,489
$
226,172
$
72,750
$
69,123
$
1,790
$
594,324
Additions
—
—
46
3,113
—
3,159
Disposals
—
—
—
(7,941)
—
(7,941)
Balance, January 3, 2021
$
224,489
$
226,172
$
72,796
$
64,295
$
1,790
$
589,542
Accumulated amortization
Balance, December 29, 2019
$
101,844
$
2,508
$
61,415
$
42,903
$
1,790
$
210,460
Amortization
10,670
700
2,932
6,104
—
20,406
Disposals
—
—
—
(3,985)
—
(3,985)
Impairments
29,617
43,143
—
—
—
72,760
Balance, January 3, 2021
$
142,131
$
46,351
$
64,347
$
45,022
$
1,790
$
299,641
Carrying amount, January 3, 2021
$
82,358
$
179,821
$
8,449
$
19,273
$
—
$
289,901
2019
Customer contracts and customer relationships
Trademarks
License agreements
Computer software
Non-compete agreements
Total
Cost
Balance, December 30, 2018
$
224,489
$
226,172
$
69,600
$
58,255
$
1,790
$
580,306
Additions
—
—
3,150
11,074
—
14,224
Disposals
—
—
—
(206)
—
(206)
Balance, December 29, 2019
$
224,489
$
226,172
$
72,750
$
69,123
$
1,790
$
594,324
Accumulated amortization
Balance, December 30, 2018
$
89,064
$
1,808
$
57,606
$
36,465
$
1,790
$
186,733
Amortization
12,780
700
3,809
5,206
—
22,495
Disposals
—
—
—
(18)
—
(18)
Write-downs and impairments
—
—
—
1,250
—
1,250
Balance, December 29, 2019
$
101,844
$
2,508
$
61,415
$
42,903
$
1,790
$
210,460
Carrying amount, December 29, 2019
$
122,645
$
223,664
$
11,335
$
26,220
$
—
$
383,864
The carrying amount of internally-generated assets within computer software was $16.1 million as at January 3, 2021 (December 29, 2019 - $21.8 million). Included in computer software as at January 3, 2021 is $1.9 million (December 29, 2019 - $9.9 million) of assets not yet utilized in operations.
Goodwill:
2020
2019
Balance, beginning of fiscal year
$
227,865
$
227,362
Impairment
(21,229)
—
Other
—
503
Balance, end of fiscal year
$
206,636
$
227,865
GILDAN 2020 REPORT TO SHAREHOLDERS 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTANGIBLE ASSETS AND GOODWILL (continued):
Recoverability of cash-generating units:
Goodwill acquired through business acquisitions and trademarks with indefinite useful lives have been allocated to the Company's CGUs as follows:
January 3, 2021
December 29, 2019
Textile & Sewing:
Goodwill
$
206,636
$
206,636
Definite life intangible assets (excluding computer software)
27,869
33,066
Indefinite life intangible assets
93,400
93,400
$
327,905
$
333,102
Hosiery:
Goodwill
$
—
$
21,229
Definite life intangible assets (excluding computer software)
63,230
101,906
Indefinite life intangible assets
86,129
129,272
$
149,359
$
252,407
In assessing whether goodwill and indefinite life intangible assets are impaired, the carrying amounts of the CGUs (including goodwill and indefinite life intangible assets) are compared to their recoverable amounts. The recoverable amounts of CGUs are based on the higher of the value in use and fair value less costs of disposal.
As a result of the adverse impact of the COVID-19 pandemic on the global economic environment and on the Company's market capitalization and considering that the fair value of the Hosiery CGU as at December 29, 2019 (previous annual impairment review for goodwill and indefinite life intangible assets) was only 20% higher than its carrying value, the Company performed an impairment review of the Hosiery CGU as at March 29, 2020, which resulted in an impairment charge of $94.0 million in the first quarter of fiscal 2020, relating to goodwill and intangible assets (both definite and indefinite life) acquired in previous business acquisitions.
The Company performed its annual impairment review for goodwill and indefinite life intangible assets as at January 3, 2021. The estimated recoverable amount for the Textile & Sewing CGU exceeded its carrying amounts and the estimated recoverable amount for the Hosiery CGU approximated its carrying amount. As a result, there was no additional impairment identified.
Recoverable amount
The Company determined the recoverable amounts of the Textile & Sewing and Hosiery CGUs based on the fair value less costs of disposal method. The fair values of the Textile & Sewing and Hosiery CGUs were based on a multiple applied to adjusted EBITDA (as defined in note 24) for the next year, which takes into account financial forecasts approved by senior management. The key assumptions for the fair value less costs of disposal method include estimated sales volumes, selling prices, gross margins, and SG&A expenses in determining forecasted adjusted EBITDA, as well as the multiple applied to forecasted adjusted EBITDA. The adjusted EBITDA multiple was obtained by using market comparables as a reference. The values assigned to the key assumptions represent management’s assessment of future trends and have been based on historical data from external and internal sources. For the Textile & Sewing CGU, no reasonably possible change in the key assumptions used in determining the recoverable amount would result in any impairment of goodwill or indefinite life intangible assets.
GILDAN 2020 REPORT TO SHAREHOLDERS 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INTANGIBLE ASSETS AND GOODWILL (continued):
Recoverability of cash-generating units (continued):
Hosiery CGU
The COVID-19 outbreak, which was declared a pandemic on March 11, 2020 by the World Health Organization led to a rapid deterioration in the global economic environment and triggered a sharp fall in stock markets and enterprise values worldwide. In addition, the Company’s market capitalization declined significantly between March 11, 2020 and March 29, 2020. The measures adopted by the various levels of government across key markets in order to mitigate the spread of COVID-19 significantly affected economic activity and sentiment, disrupting the business operations of companies worldwide, and required many of the Company’s customers to which it sells hosiery products to temporarily close all of their retail locations across the U.S. in mid to late-March. Therefore, as a result of the adverse impact of the COVID-19 pandemic on the global economic environment and on the Company's market capitalization and considering that the fair value of the Hosiery CGU as at December 29, 2019 was only 20% higher than its carrying value, the Company performed an impairment review of the Hosiery CGU as at March 29, 2020. Based on the results of its impairment review of the Hosiery CGU, the Company recorded an impairment charge of $94.0 million in the first quarter of fiscal 2020, relating to goodwill and intangible assets (both definite and indefinite life) acquired in previous business acquisitions. The non-cash write-down of goodwill and intangible assets had no impact on the Company’s liquidity, cash flows from operating activities, or its compliance with debt covenants. The primary cause for the impairment charge was the deterioration in the global economic environment and the resulting decline in the Company’s share price, market capitalization, and forecasted earnings.
The fair value of the Hosiery CGU was based on a multiple applied to risk-adjusted recurring forecasted adjusted EBITDA (see definition of adjusted EBITDA in note 24), which considers financial forecasts approved by senior management. The adjusted EBITDA multiple was obtained by using market comparables as a reference. The key assumptions used in the estimation of the recoverable amount for the Hosiery CGU are the risk-adjusted recurring forecasted adjusted EBITDA and the adjusted EBITDA multiple of 9 (January 3, 2021 test) and 7 (March 29, 2020 test). The most significant assumptions that form part of the risk-adjusted recurring forecasted adjusted EBITDA relate to estimated sales volumes, selling prices, input costs, and SG&A expenses. Management has identified that a reasonably possible change in risk-adjusted recurring forecasted adjusted EBITDA or in the adjusted EBITDA multiple could cause the carrying amount of the Hosiery CGU to exceed its recoverable amount. As at January 3, 2021, a decrease in the adjusted EBITDA multiple by a factor of 1 would result in the estimated recoverable amount being approximately $30 million lower than the carrying amount. The values assigned to the key assumptions represent management’s assessment of future trends and have been based on historical data from external and internal sources.
GILDAN 2020 REPORT TO SHAREHOLDERS 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. LONG-TERM DEBT:
Effective interest rate (1)
Principal amount
Maturity date
January 3, 2021
December 29, 2019
Revolving long-term bank credit facility, interest at variable U.S. LIBOR-based interest rate plus a spread ranging from 1% to 3%(2)
2.3%
$
—
$
245,000
April 2025
Term loan, interest at variable U.S. LIBOR-based interest rate plus a spread ranging from 1% to 3%, payable monthly(3)
2.6%
300,000
300,000
April 2025
Term loan, interest at variable U.S. LIBOR-based interest rate plus a spread ranging from 1.7% to 3%, payable monthly(3)
2.6%
400,000
—
April 2022
Notes payable, interest at fixed rate of 2.70%, payable semi-annually(4)
2.7%
100,000
100,000
August 2023
Notes payable, interest at variable U.S. LIBOR-based interest rate plus a spread of 1.53% payable quarterly(4)
2.7%
50,000
50,000
August 2023
Notes payable, interest at fixed rate of 2.91%, payable semi-annually(4)
2.9%
100,000
100,000
August 2026
Notes payable, interest at variable U.S. LIBOR-based interest rate plus a spread of 1.57% payable quarterly(4)
2.9%
50,000
50,000
August 2026
$
1,000,000
$
845,000
(1)Represents the annualized effective interest rate for the year ended January 3, 2021, including the cash impact of interest rate swaps, where applicable.
(2)The Company’s unsecured revolving long-term bank credit facility of $1 billion provides for an annual extension which is subject to the approval of the lenders. The spread added to the U.S. LIBOR-based variable interest rate is a function of the total net debt to EBITDA ratio (as defined in the credit facility agreement and its amendments). In addition, an amount of $7.2 million (December 29, 2019 - $22.5 million) has been committed against this facility to cover various letters of credit.
(3)The unsecured term loans are non-revolving and can be prepaid in whole or in part at any time with no penalties. The spread added to the U.S. LIBOR-based variable interest rate is a function of the total net debt to EBITDA ratio (as defined in the term loan agreement and their amendments).
(4)The unsecured notes issued for a total aggregate principal amount of $300 million to accredited investors in the U.S. private placement market can be prepaid in whole or in part at any time, subject to the payment of a prepayment penalty as provided for in the Note Purchase Agreement.
In March 2020, the Company amended its unsecured revolving long-term bank credit facility of $1 billion and its unsecured term loan of $300 million, in each case to extend the maturity dates from April 2024 to April 2025. On April 6, 2020, the Company entered into a new unsecured two-year term loan agreement for a total principal amount of $400 million. Under the terms of the revolving long-term bank credit facility, both term loan facilities, and the notes, the Company is required to comply with certain covenants, including maintenance of financial ratios. In addition, as at January 3, 2021, the Company had an additional $60 million available under various undrawn overdraft facilities.
On June 26, 2020, given the rapidly changing environment and level of uncertainty being created by the COVID-19 pandemic and the associated impact on current and future earnings, the Company amended its various loans and note agreements in order to modify its covenants to provide increased financial flexibility.
The amendments effect changes to certain provisions and covenants under the revolving long-term bank credit facility, both term loan facilities, and the privately issued notes during the period beginning March 30, 2020 and ending April 4, 2021 (the “covenant relief period”), as follows:
•An increase in the maximum Total Net Debt to EBITDA Ratio (ratio of the Company’s total debt to EBITDA for the preceding four fiscal quarters) from 3.25 to 1.00 to (i) 3.50 to 1.00 for the fiscal quarter ending September 27, 2020, (ii) 4.50 to 1.00 for the fiscal quarter ending January 3, 2021, (iii) 4.50 to 1.00 for the fiscal quarter ending April 4, 2021, and (iv) 3.50 to 1.00 for the fiscal quarter ending July 4, 2021 and at all times thereafter;
•A decrease in the minimum Interest Coverage Ratio (ratio of the Company’s EBITDA for the preceding four fiscal quarters to its consolidated total interest expense) from 3.50 to 1.00 to 3.00 to 1.00 for all periods;
•The computation of EBITDA for purposes of the Total Net Debt to EBITDA Ratio and Interest Coverage Ratio calculations was adjusted to exclude the financial results of the fiscal quarter ending June 28, 2020 and annualizing the three other fiscal quarters included in the twelve-month measurement period to arrive at a twelve-month trailing EBITDA ending on the date on which the ratios are calculated, and to limit the amount of adjustments made in the computation of EBITDA;
GILDAN 2020 REPORT TO SHAREHOLDERS 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. LONG-TERM DEBT (continued):
•Dividends and share repurchases are not permitted during the covenant relief period, except during the fiscal quarters ending January 3, 2021 and April 4, 2021 if the Total Net Debt to EBITDA Ratio is less than 3.00 to 1.00;
•Maintain a minimum available liquidity of at least $400 million;
•Total investments, capital expenditures, and acquisitions, cannot exceed $100 million in the aggregate during the covenant relief period, unless certain liquidity thresholds are met;
•Sales of assets cannot exceed $25 million;
•Incurrence of new indebtedness cannot exceed $100 million; and
•Inclusion of customary anti-cash hoarding provisions.
During the covenant relief period, the applicable spread added to the variable U.S. LIBOR-based interest rate for the revolving long-term bank credit facility and both term loan facilities will increase by between 50 to 100 basis points per year, varying as a function of the Total Net Debt to EBITDA ratio. Private noteholders will receive an increase of 125 basis points per year (payable quarterly) during the covenant relief period (which is recorded in bank and other financial charges for fiscal 2020), unless the Company is in compliance with its original covenants on the last day of such fiscal quarter. In addition, upfront costs of $3.9 million incurred for the amendments are included in bank and other financial charges for fiscal 2020.
The Company was in compliance with all amended financial covenants at January 3, 2021.
12. OTHER NON-CURRENT LIABILITIES:
January 3, 2021
December 29, 2019
Employee benefit obligation - Statutory severance and pre-notice (a)
$
19,889
$
27,767
Employee benefit obligation - Defined contribution plan (b)
3,736
3,633
Provisions (c)
12,240
10,790
$
35,865
$
42,190
(a) Statutory severance and pre-notice obligations:
2020
2019
Obligation, beginning of fiscal year
$
27,767
$
22,075
Service cost
16,785
14,226
Interest cost
7,305
6,798
Actuarial (gain) loss(1)
(12,142)
1,296
Foreign exchange gain
(253)
(584)
Benefits paid
(19,573)
(16,044)
Obligation, end of fiscal year
$
19,889
$
27,767
(1) The actuarial gain in fiscal 2020 is due to reductions in headcount and changes in the actuarial assumptions used to determine the statutory severance obligations.
Significant assumptions for the calculation of the statutory severance obligations included the use of a discount rate ranging between 9.0% and 11.5% (2019 - between 9.3% and 10.0%) and rates of compensation increases of 7.5% (2019 - between 7.5% and 9.0%). A 1% increase in the discount rates would result in a corresponding decrease in the statutory severance obligations of $3.1 million, and a 1% decrease in the discount rates would result in a corresponding increase in the statutory severance obligations of $3.5 million. A 1% increase in the rates of compensation increases used would result in a corresponding increase in the statutory severance obligations of $3.8 million, and a 1% decrease in the rates of compensation increases used would result in a corresponding decrease in the statutory severance obligations of $3.4 million.
GILDAN 2020 REPORT TO SHAREHOLDERS 97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. OTHER NON-CURRENT LIABILITIES (continued):
(a)Statutory severance and pre-notice obligations (continued):
The cumulative amount of actuarial losses recognized in other comprehensive income as at January 3, 2021 was $12.9 million (December 29, 2019 - $25.1 million) which have been reclassified to retained earnings in the period in which they were recognized.
(b)Defined contribution plan:
During fiscal 2020, defined contribution expenses were $4.5 million (2019 - $6.6 million).
(c)Provisions:
The following table presents the provisions for decommissioning and site restoration costs of the Company:
Total
Balance, December 29, 2019
$
10,790
Changes in estimates made during the fiscal year
1,208
Accretion of interest
242
Balance, January 3, 2021
$
12,240
Provisions as at January 3, 2021 include estimated future costs of decommissioning and site restoration for certain assets located at the Company’s textile and sock facilities for which the timing of settlement is uncertain, but has been estimated to be in excess of twenty years.
13. EQUITY:
(a)Shareholder rights plan:
The Company has a shareholder rights plan which provides the Board of Directors and the shareholders with additional time to assess any unsolicited take-over bid for the Company and, where appropriate, pursue other alternatives for maximizing shareholder value.
(b)Accumulated other comprehensive income ("AOCI"):
Accumulated other comprehensive income includes the changes in the fair value of the effective portion of qualifying cash flow hedging instruments outstanding at the end of the fiscal year.
(c)Share capital:
Authorized:
Common shares, authorized without limit as to number and without par value. First preferred shares, without limit as to number and without par value, issuable in series and non-voting. Second preferred shares, without limit as to number and without par value, issuable in series and non-voting. As at January 3, 2021 and December 29, 2019, none of the first and second preferred shares were issued.
Issued:
As at January 3, 2021, there were 198,407,222 common shares (December 29, 2019 - 199,012,156) issued and outstanding, which are net of 2,897 common shares (December 29, 2019 - 9,206) that have been purchased and are held in trust as described in note 13(e).
GILDAN 2020 REPORT TO SHAREHOLDERS 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. EQUITY (continued):
(d)Normal course issuer bid ("NCIB"):
On February 20, 2019, the Company received approval from the TSX to renew its NCIB commencing on February 27, 2019 to purchase for cancellation up to 10,337,017 common shares, representing approximately 5% of the Company’s issued and outstanding common shares. During the year ended December 29, 2019, the Company repurchased for cancellation a total of 8,217,715 common shares under its NCIB programs for a total cost of $257.2 million. Of the total cost of $257.2 million, $6.7 million was charged to share capital and $250.5 million was charged to retained earnings.
On February 19, 2020, the Company received approval from the TSX to renew its NCIB to purchase for cancellation a maximum of 9,939,154 common shares, representing approximately 5% of the Company’s issued and outstanding common shares. During the year ended January 3, 2021, the Company repurchased for cancellation a total of 843,038 common shares under its NCIB programs for a total cost of $23.2 million. Of the total cost of $23.2 million, $0.7 million was charged to share capital and $22.5 million was charged to retained earnings.
(e)Common shares purchased as settlement for non-Treasury RSUs:
The Company has established a trust for the purpose of settling the vesting of non-Treasury RSUs. For non-Treasury RSUs that are to be settled in common shares in lieu of cash, the Company directs the trustee to purchase common shares of the Company on the open market to be held in trust for and on behalf of the holders of non-Treasury RSUs until they are delivered for settlement, when the non-Treasury RSUs vest. For accounting purposes, the common shares are considered as held in treasury, and recorded as a temporary reduction of outstanding common shares and share capital. Upon delivery of the common shares for settlement of the non-Treasury RSUs, the number of common shares outstanding is increased, and the amount in contributed surplus is transferred to share capital. As at January 3, 2021, a total of 2,897 common shares representing $0.2 million purchased as settlement for non-Treasury RSUs were considered as held in treasury and recorded as a temporary reduction of outstanding common shares and share capital (December 29, 2019 - 9,206 common shares representing $0.2 million).
(f)Contributed surplus:
The contributed surplus account is used to record the accumulated compensation expense related to equity-settled share-based compensation transactions. Upon the exercise of stock options, the vesting of Treasury RSUs, and the delivery of common shares for settlement of vesting non-Treasury RSUs or SARs, the corresponding amounts previously credited to contributed surplus are transferred to share capital, except for the portion of the share-based payment that the Company settles on a net basis when the Company has an obligation under tax laws to withhold an amount for an employee’s tax obligation, in which case the corresponding amounts previously credited to contributed surplus are transferred to accounts payable and accrued liabilities.
GILDAN 2020 REPORT TO SHAREHOLDERS 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS:
Disclosures relating to the nature and extent of the Company’s 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 how the Company manages those risks, are included in the section entitled “Financial risk management” of the Management’s Discussion and Analysis of the Company’s operations, financial performance and financial position as at January 3, 2021 and December 29, 2019. Accordingly, these disclosures are incorporated into these consolidated financial statements by cross-reference.
(a)Financial instruments - carrying amounts and fair values:
The carrying amounts and fair values of financial assets and liabilities included in the consolidated statements of financial position are as follows:
January 3, 2021
December 29, 2019
Financial assets
Amortized cost:
Cash and cash equivalents
$
505,264
$
64,126
Trade accounts receivable
196,480
320,931
Financial assets included in prepaid expenses, deposits and other current assets
88,781
45,950
Long-term non-trade receivables included in other non-current assets
1,435
2,933
Derivative financial assets included in prepaid expenses, deposits and other current assets
4,947
9,816
Financial liabilities
Amortized cost:
Accounts payable and accrued liabilities (1)
$
326,069
$
395,564
Long-term debt - bearing interest at variable rates
800,000
645,000
Long-term debt - bearing interest at fixed rates (2)
200,000
200,000
Derivative financial liabilities included in accounts payable and accrued liabilities
17,653
11,067
(1) Accounts payable and accrued liabilities include balances payable of $27.6 million (December 29, 2019 - $39.6 million) under supply-chain financing arrangements (reverse factoring) with a financial institution, whereby receivables due from the Company to certain suppliers can be collected by the suppliers from a financial institution before their original due date. These balances are classified as accounts payable and accrued liabilities and the related payments as cash flows from operating activities, given the principal business purpose of the arrangement is to provide funding to the supplier and not the Company, the arrangement does not significantly extend the payment terms beyond the normal terms agreed with other suppliers, and no additional deferral or special guarantees to secure the payments are included in the arrangement.
(2) The fair value of the long-term debt bearing interest at fixed rates was $221.3 million as at January 3, 2021 (December 29, 2019 - $206.4 million).
Short-term financial assets and liabilities
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 bearing interest at variable rates
The fair values of the long-term non-trade receivables included in other non-current assets and the Company’s long-term debt bearing interest at variable rates also approximate their respective carrying amounts because the interest rates applied to measure their carrying amounts approximate current market interest rates.
GILDAN 2020 REPORT TO SHAREHOLDERS 100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS (continued):
(a)Financial instruments - carrying amounts and fair values (continued):
Long-term debt bearing interest at fixed rates
The fair value of the long-term debt bearing interest at fixed rates is determined using the discounted future cash flows method and at discount rates based on yield to maturities for similar issuances. The fair value of the long-term debt bearing interest at fixed rates was measured using Level 2 inputs in the fair value hierarchy. In determining the fair value of the long-term debt bearing interest at fixed rates, the Company takes into account its own credit risk and the credit risk of the counterparties.
Derivatives
Derivative financial instruments are designated as effective hedging instruments and consist of foreign exchange and commodity forward, option, and swap contracts, as well as floating-to-fixed interest rate swaps to fix the variable interest rates on a designated portion of borrowings under the term loan and unsecured notes. 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 rate set out in the contract and the contract’s value at maturity based on the rate that the counterparty would use if it were to renegotiate the same contract terms at the measurement date under current conditions. The fair value of the option contracts is measured using option pricing models that utilize a variety of inputs that are a combination of quoted prices and market-corroborated inputs, including volatility estimates and option adjusted credit spreads. The fair value of the interest rate swaps is determined based on market data, by measuring the difference between the fixed contracted rate and the forward curve for the applicable floating interest rates.
The Company also has a total return swap (“TRS”) outstanding that is intended to reduce the variability of net earnings associated with deferred share units, which are settled in cash. The TRS is not designated as a hedging instrument and, therefore, the fair value adjustment at the end of each reporting period is recognized in selling, general and administrative expenses. The fair value of the TRS is measured by reference to the market price of the Company’s common shares, at each reporting date. The TRS has a one-year term, may be extended annually, and the contract allows for early termination at the option of the Company. As at January 3, 2021, the notional amount of TRS outstanding was 284,663 shares (December 29, 2019 - 216,727 shares) and the carrying amount and fair value included in prepaid expenses, deposits and other current assets was $0.4 million (December 29, 2019 - $0.3 million included in prepaid expenses, deposits and other current assets).
Derivative financial instruments were measured using Level 2 inputs in the fair value hierarchy. In determining the fair value of derivative financial instruments the Company takes into account its own credit risk and the credit risk of the counterparties.
During fiscal 2020 and 2019, the Company entered into foreign exchange and commodity forward, option, and swap contracts in order to minimize the exposure of forecasted cash inflows and outflows in currencies other than the U.S. dollar and to manage its exposure to movements in commodity prices, as well as floating-to-fixed interest rate swaps to fix the variable interest rates on a designated portion of borrowings under the term loan and unsecured notes.
The forward foreign exchange contracts were designated as cash flow hedges and qualified for hedge accounting. The forward foreign exchange contracts outstanding as at January 3, 2021 and December 29, 2019 consisted primarily of contracts to reduce the exposure to fluctuations in Canadian dollars, Euros, Australian dollars, Pounds sterling, and Mexican pesos against the U.S. dollar.
The commodity forward, option, and swap contracts were designated as cash flow hedges and qualified for hedge accounting. The commodity contracts outstanding as at January 3, 2021 and December 29, 2019 consisted primarily of forward, collar, and swap contracts to reduce the exposure to movements in commodity prices.
The floating-to-fixed interest rate swaps were designated as cash flow hedges and qualified for hedge accounting. The floating-to-fixed interest rate swaps contracts outstanding as at January 3, 2021 and December 29, 2019 served to fix the variable interest rates on the designated interest payments of a portion of the Company's long-term debt.
The following table summarizes the Company’s floating-to-fixed interest rate swap contracts outstanding (cash flow hedges) as at January 3, 2021:
Carrying and fair value
Notional
Prepaid expenses,
Accounts
amount of
Maturity
Fixed
Floating
deposits and other
payable and
borrowings
date
Pay / Receive
rate
rate
current assets
accrued liabilities
Term Loan(1)
$
150,000
June 17, 2021
Pay fixed rate / receive floating rate
0.96
%
US LIBOR
$
—
$
(630)
25,000
April 6, 2022
Pay fixed rate / receive floating rate
0.27
%
US LIBOR
—
(48)
75,000
April 30, 2023
Pay fixed rate / receive floating rate
2.85
%
US LIBOR
—
(3,800)
50,000
April 30, 2024
Pay fixed rate / receive floating rate
1.51
%
US LIBOR
—
(1,886)
25,000
April 30, 2025
Pay fixed rate / receive floating rate
1.06
%
US LIBOR
—
(755)
25,000
May 30, 2025
Pay fixed rate / receive floating rate
0.47
%
US LIBOR
—
(30)
Unsecured Notes
50,000
August 25, 2023
Pay fixed rate / receive floating rate
1.18
%
US LIBOR
—
(1,330)
50,000
August 25, 2026
Pay fixed rate / receive floating rate
1.34
%
US LIBOR
—
(2,465)
$
—
$
(10,944)
(1) The notional amounts for the interest rate swap contracts maturing in 2023, 2024, and 2025 are extensions to the $150 million interest rate swap contracts originally entered into related to the $300 million term loan.
The following table summarizes the Company’s floating-to-fixed interest rate swap contracts outstanding (cash flow hedges) as at December 29, 2019:
Carrying and fair value
Notional
Prepaid expenses,
Accounts
amount of
Maturity
Fixed
Floating
deposits and other
payable and
borrowings
date
Pay / Receive
rate
rate
current assets
accrued liabilities
Term Loan(1)
$
150,000
June 17, 2021
Pay fixed rate / receive floating rate
0.96
%
US LIBOR
$
1,379
$
—
75,000
April 30, 2023
Pay fixed rate / receive floating rate
2.85
%
US LIBOR
—
(1,817)
50,000
April 30, 2024
Pay fixed rate / receive floating rate
1.51
%
US LIBOR
252
(242)
Unsecured Notes
50,000
August 25, 2023
Pay fixed rate / receive floating rate
1.18
%
US LIBOR
866
—
50,000
August 25, 2026
Pay fixed rate / receive floating rate
1.34
%
US LIBOR
1,179
—
$
3,676
$
(2,059)
(1) The notional amounts for the interest rate swap contracts maturing in 2023 and 2024 are extensions to the $150 million interest rate swap contracts originally entered into related to the $300 million term loan.
The following table summarizes the Company’s hedged items as at January 3, 2021:
Change in
Carrying amount of
value used for
Cash flow
the hedged item
calculating hedge
hedge reserve
Assets
Liabilities
ineffectiveness
(AOCI)
Cash flow hedges:
Foreign currency risk:
Forecast sales
$
—
$
—
$
(4,104)
$
4,104
Forecast expenses
—
—
1,626
(1,626)
Commodity risk:
Forecast purchases
—
—
4,205
(4,205)
Interest rate risk:
Forecast interest payments
—
—
(10,765)
10,765
$
—
$
—
$
(9,038)
$
9,038
No ineffectiveness was recognized in net earnings as the change in value of the hedging instrument used for calculating ineffectiveness was the same or smaller as the change in value of the hedged items used for calculating the ineffectiveness.
The following table summarizes the Company’s hedged items as at December 29, 2019:
Change in
Carrying amount of
value used for
Cash flow
the hedged item
calculating hedge
hedge reserve
Assets
Liabilities
ineffectiveness
(AOCI)
Cash flow hedges:
Foreign currency risk:
Forecast sales
$
—
$
—
$
(972)
$
972
Forecast expenses
—
—
342
(342)
Commodity risk:
Forecast purchases
—
—
(1,416)
1,416
Interest rate risk:
Forecast interest payments
—
—
1,511
(1,511)
$
—
$
—
$
(535)
$
535
No ineffectiveness was recognized in net earnings as the change in value of the hedging instrument used for calculating ineffectiveness was the same or smaller as the change in value of the hedged items used for calculating the ineffectiveness.
GILDAN 2020 REPORT TO SHAREHOLDERS 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS (continued):
(c)Financial expenses, net:
2020
2019
Interest expense on financial liabilities recorded at amortized cost (1)
$
30,205
$
28,659
Bank and other financial charges (2)
14,627
8,010
Interest accretion on discounted lease obligations
3,227
3,141
Interest accretion on discounted provisions
242
287
Foreign exchange loss (gain)
229
(929)
$
48,530
$
39,168
(1) Net of capitalized borrowing costs of $1.6 million (2019 - $1.3 million).
(2) Fiscal 2020 includes upfront costs of $3.9 million for the June 2020 amendments of the loans and notes agreements (note 11).
(d)Hedging components of other comprehensive income (“OCI”):
2020
2019
Net gain (loss) on derivatives designated as cash flow hedges:
Foreign currency risk
$
502
$
4,566
Commodity price risk
(12,699)
(8,213)
Interest rate risk
(12,381)
(10,588)
Income taxes
(5)
(46)
Amounts reclassified from OCI to inventory, related to commodity price risk
9,837
16,656
Amounts reclassified from OCI to net earnings, related to foreign currency risk, interest rate risk, and commodity risk, and included in:
Net sales
(242)
(5,667)
Cost of sales
8,483
(350)
Selling, general and administrative expenses
331
417
Financial expenses, net
(2,358)
(752)
Income taxes
29
60
Cash flow hedging loss
$
(8,503)
$
(3,917)
During fiscal 2020, the Company determined that it no longer met the criteria for hedge accounting for certain commodity forward, option, and swap contracts and certain forward foreign exchange contracts (collectively the "hedging instruments") as the commodity purchases and foreign currency sales which the hedging instruments were respectively hedging, were no longer expected to occur due to economic conditions resulting from the COVID-19 pandemic. Changes in the fair value of such commodity forward, option, and swap contracts and forward foreign exchange contracts resulted in a net loss of $9.0 million, which were transferred out of accumulated other comprehensive income and recognized immediately in net earnings during fiscal 2020.
The change in the time value element of option and swap contracts designated as cash flow hedges to reduce the exposure in movements of commodity prices was not significant for the years ended January 3, 2021 and December 29, 2019. The change in the forward element of derivatives designated as cash flow hedges to reduce foreign currency risk was not significant for the years ended January 3, 2021 and December 29, 2019.
Approximately $2.1 million of net losses presented in accumulated other comprehensive income as at January 3, 2021 are expected to be reclassified to inventory or net earnings within the next twelve months.
GILDAN 2020 REPORT TO SHAREHOLDERS 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHARE-BASED COMPENSATION:
The Company’s Long-Term Incentive Plan (the "LTIP") includes stock options, stock appreciation rights ('SARs'), and restricted share units. The LTIP allows the Board of Directors to grant stock options, SARs, dilutive restricted share units ("Treasury RSUs"), and non-dilutive restricted share units ("non-Treasury RSUs") to officers and other key employees of the Company and its subsidiaries. The number of common shares that are issuable pursuant to the exercise of stock options and the vesting of Treasury RSUs for the LTIP is fixed at 12,000,632. As at January 3, 2021, 117,606 common shares remained authorized for future issuance under this plan.
The exercise price payable for each common share covered by a stock option or SARs is determined by the Board of Directors at the date of the grant, but may not be less than the closing price of the common shares of the Company on the trading day immediately preceding the effective date of the grant. Most stock options vest equally beginning on the second, third, fourth, and fifth anniversary of the grant date. Stock options granted in fiscal 2020 all vest on the third anniversary of the grant date, subject to performance vesting conditions in some cases. SARs granted in fiscal 2020 vest on the third anniversary of the grant date, and all are subject to performance vesting conditions.
Holders of Treasury RSUs and non-Treasury RSUs are entitled to dividends declared by the Company which are recognized in the form of additional equity awards equivalent in value to the dividends paid on common shares. The vesting conditions of the additional equity awards are subject to the same performance objectives and other terms and conditions as the underlying equity awards. The additional awards related to outstanding Treasury RSUs and non-Treasury RSUs expected to be settled in common shares are credited to contributed surplus when the dividends are declared.
(a)Stock options:
Outstanding stock options were as follows:
Stock options issued in Canadian dollars and to be exercised on the TSX:
Number
Weighted exercise price (CA$)
Stock options outstanding, December 30, 2018
1,993
$
33.60
Changes in outstanding stock options:
Exercised
(443)
26.45
Stock options outstanding, December 29, 2019
1,550
35.65
Changes in outstanding stock options:
Exercised
(87)
24.22
Stock options outstanding, January 3, 2021
1,463
$
36.33
Stock options issued in U.S. dollars and to be exercised on the NYSE:
Number
Weighted exercise price (US$)
Stock options outstanding, December 30, 2018
669
$
29.01
Changes in outstanding stock options:
Forfeited
—
—
Stock options outstanding, December 29, 2019
669
29.01
Changes in outstanding stock options:
Granted
1,387
26.43
Stock options outstanding, January 3, 2021
2,056
$
27.27
GILDAN 2020 REPORT TO SHAREHOLDERS 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHARE-BASED COMPENSATION (continued):
(a)Stock options (continued):
As at January 3, 2021, 1,304,338 outstanding options issued in Canadian dollars to be exercised on the TSX were exercisable at the weighted average exercise price of CA$36.73 (December 29, 2019 - 822,394 options at CA$34.02), and 334,448 outstanding options issued in U.S. dollars and to be exercised on the NYSE, were exercisable at the weighted average exercise price of US$29.01 (December 29, 2019 - 167,224 options at US$29.01). For stock options exercised during fiscal 2020, the weighted average share price at the date of exercise was CA$30.48 (2019 - CA$47.24). Based on the Black-Scholes option pricing model, the grant date weighted average fair value of options granted during 2020 was $5.09. The following table summarizes the average values for the assumptions used in the Black-Scholes option pricing model for the stock option grants for fiscal 2020:
2020
Exercise price
US$26.43
Risk-free interest rate
0.39%
Expected volatility
36.47%
Expected life
5 years
Expected dividend yield
2.57%
The following table summarizes information about stock options issued and outstanding and exercisable at January 3, 2021:
Options issued and outstanding
Options exercisable
Exercise prices
Number
Remaining contractual life (yrs)
Number
CA$30.46
126
1
126
CA$33.01
543
3
384
CA$38.01
511
2
511
CA$42.27
283
5
283
1,463
1,304
US$20.77
537
7
—
US$29.01
669
4
334
US$30.00
850
7
—
3,519
1,638
The compensation expense related to stock options included in operating income for fiscal 2020 was $1.8 million (2019 - $2.6 million), and the counterpart has been recorded as contributed surplus. When the underlying shares are issued to the employees, the amounts previously credited to contributed surplus are transferred to share capital.
GILDAN 2020 REPORT TO SHAREHOLDERS 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHARE-BASED COMPENSATION (continued):
(b) Stock appreciation rights ("SARs"):
During the year ended January 3, 2021, 824,406 SARs were granted at the weighted average exercise price of US$30.00 (December 29, 2019 - nil) and remained outstanding with a remaining contractual life of 3 years as at January 3, 2021. Based on the Black-Scholes option pricing model, the grant date weighted average fair value of options granted during 2020 was $5.60. None of the outstanding SARs were exercisable as at January 3, 2021. The compensation expense related to SARs included in operating income for fiscal 2020 was $0.1 million (2019 - nil), and the counterpart has been recorded as contributed surplus. The following table summarizes the assumptions used in the option pricing model for the SARs granted in fiscal 2020:
2020
Exercise price
US$30.00
Risk-free interest rate
0.22%
Expected volatility
43.86%
Expected life
3 years
Expected dividend yield
2.32%
(c) Restricted share units:
A Treasury RSU represents the right of an individual to receive one common share on the vesting date without any monetary consideration being paid to the Company. All Treasury RSUs awarded to date vest within a five-year vesting period. The vesting of at least 50% of each Treasury RSU grant is contingent on the achievement of performance conditions that are based on the Company’s average return on assets performance for the period as compared to the S&P/TSX Capped Consumer Discretionary Index, excluding income trusts.
Outstanding Treasury RSUs were as follows:
Number
Weighted average fair value per unit
Treasury RSUs outstanding, December 30, 2018
106
$
30.82
Changes in outstanding Treasury RSUs:
Granted
18
31.51
Granted for dividends declared
1
34.14
Settled through the issuance of common shares
(11)
25.97
Treasury RSUs outstanding, December 29, 2019
114
31.42
Changes in outstanding Treasury RSUs:
Granted for dividends declared
1
12.58
Settled through the issuance of common shares
(72)
31.65
Treasury RSUs outstanding, January 3, 2021
43
$
30.47
As at January 3, 2021 and December 29, 2019, none of the outstanding Treasury RSUs were vested.
The compensation expense related to Treasury RSUs included in operating income for fiscal 2020 was $0.6 million (2019 - $0.6 million), and the counterpart has been recorded as contributed surplus. When the underlying shares are issued to the employees, the amounts previously credited to contributed surplus are transferred to share capital.
GILDAN 2020 REPORT TO SHAREHOLDERS 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHARE-BASED COMPENSATION (continued):
(c) Restricted share units (continued):
Outstanding non-Treasury RSUs were as follows:
Number
Weighted average fair value per unit
Non-Treasury RSUs outstanding, December 30, 2018
1,374
$
28.52
Changes in outstanding non-Treasury RSUs:
Granted
509
34.89
Granted for additional performance conditions
93
25.57
Granted for dividends declared
26
29.21
Settled - common shares
(256)
25.59
Settled - payment of withholding taxes
(170)
25.59
Forfeited
(154)
29.24
Non-Treasury RSUs outstanding, December 29, 2019
1,422
31.42
Changes in outstanding non-Treasury RSUs:
Granted
967
25.47
Granted for dividends declared
25
12.58
Settled - common shares
(128)
29.06
Settled - payment of withholding taxes
(67)
29.16
Forfeited
(342)
25.70
Non-Treasury RSUs outstanding, January 3, 2021
1,877
$
29.38
Non-Treasury RSUs have the same features as Treasury RSUs, except that their vesting period is a maximum of three years and they can be settled in cash based on the Company’s share price on the vesting date, or through the delivery of common shares purchased on the open market, at the Company's option. Non-Treasury RSUs are settled in common shares purchased on the open market, and to the extent that the Company has an obligation under tax laws to withhold an amount for an employee’s tax obligation associated with the share-based payment the Company settles non-Treasury RSUs on a net basis. Most of the outstanding non-Treasury RSUs awarded to executive officers have vesting conditions that are dependent upon the attainment of strategic performance objectives which are set based on the Company’s long-term strategic plan. A portion of non-Treasury RSU awards which vested in fiscal 2020 were dependent upon the financial performance of the Company relative to a benchmark group of Canadian publicly listed companies. In addition, up to two times the actual number of non-Treasury RSUs awarded can vest if exceptional financial performance is achieved. As at January 3, 2021 and December 29, 2019, none of the outstanding non-Treasury RSUs were vested.
The compensation cost related to non-Treasury RSUs included in operating income for fiscal 2020 was a recovery of $0.5 million (2019 - $12.9 million expense), and the counterpart has been recorded as contributed surplus. When the underlying common shares are delivered to employees for settlement upon vesting, the amounts previously credited to contributed surplus are transferred to share capital.
GILDAN 2020 REPORT TO SHAREHOLDERS 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SHARE-BASED COMPENSATION (continued):
(d) Deferred share unit plan:
The Company has a deferred share unit plan for independent members of the Company’s Board of Directors who must receive at least 50% of their annual board retainers in the form of deferred share units ("DSUs"). The value of these DSUs is based on the Company’s share price at the time of payment of the retainers or fees. Holders of deferred share units are entitled to dividends declared by the Company which are recognized in the form of additional awards equivalent in value to the dividends paid on common shares. DSUs granted under the plan will be redeemable and the value thereof payable in cash only after the director ceases to act as a director of the Company. As at January 3, 2021, there were 301,077 (December 29, 2019 - 234,827) DSUs outstanding at a value of $8.4 million (December 29, 2019 - $6.9 million). This amount is included in accounts payable and accrued liabilities based on a fair value per deferred share unit of $28.01 (December 29, 2019 - $29.55). The DSU obligation is adjusted each quarter based on the market value of the Company’s common shares. The Company includes the cost of the DSU plan in selling, general and administrative expenses, which for fiscal 2020 was $1.8 million (2019 - $1.8 million).
Changes in outstanding DSUs were as follows:
2020
2019
DSUs outstanding, beginning of fiscal year
235
275
Granted
90
48
Granted for dividends declared
2
3
Redeemed
(26)
(91)
DSUs outstanding, end of fiscal year
301
235
(e) Employee share purchase plans:
The Company has employee share purchase plans which allow eligible employees to authorize payroll deductions of up to 10% of their salary to purchase common shares of the Company at a price of 90% of the then current share price as defined in the plans from Treasury. Employees purchasing shares under the plans subsequent to January 1, 2008 must hold the shares for a minimum of two years. The Company has reserved 5,000,000 common shares for issuance under the plans. As at January 3, 2021, 4,520,954 common shares remained authorized for future issuance under the plans. Included as compensation costs in selling, general and administrative expenses is $0.1 million (2019 - $0.2 million) relating to the employee share purchase plans.
16. SUPPLEMENTARY INFORMATION RELATING TO THE NATURE OF EXPENSES:
(a) Selling, general and administrative expenses:
2020
2019
Selling expenses
$
76,327
$
99,419
Administrative expenses
101,492
121,273
Distribution expenses
94,487
119,795
$
272,306
$
340,487
(b) Employee benefit expenses:
2020
2019
Salaries, wages and other short-term employee benefits
$
423,335
$
534,222
Share-based payments
1,954
16,272
Post-employment benefits
44,645
41,864
$
469,934
$
592,358
GILDAN 2020 REPORT TO SHAREHOLDERS 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTARY INFORMATION RELATING TO THE NATURE OF EXPENSES (continued):
(c) Cost of sales:
Included in cost of sales for the year ended January 3, 2021 are the following items:
•$108.4 million of manufacturing costs charged directly to cost of sales during the first nine months of the fiscal year as a result of low production levels due to the temporary suspension of production at most of our manufacturing facilities starting in mid-March 2020 resulting from the COVID-19 pandemic. These manufacturing costs consist mainly of salary and benefits continuation for suspended employees as a result of suspended production, severance for terminated employees, and unabsorbed salary, benefits, and overhead costs, including depreciation.
•$108.1 million of write-downs of inventory to net realizable value as a result of product line reductions and the decline in the net realizable value of certain inventories due to current market conditions as described in note 7.
•$11.3 million for excess commodity contracts with merchants that no longer met the own-use exemption based on a reduction of physical cotton consumption in line with reduced production requirements.
•$9.4 million transfer from accumulated other comprehensive income to cost of sales for certain commodity forward, option, and swap contracts that no longer met the criteria for hedge accounting as the commodity purchases which the hedging instruments were respectively hedging were no longer expected to occur due to reduced production requirements.
•Net gain of $9.6 million related to the two hurricanes which impacted the Company’s operations in Central America in November 2020, consisting of accrued insurance recoveries to date of $111.0 million recorded in cost of sales (of which $50.0 million was received as an advance in December 2020 and included in cash flows from operating activities, and $61.0 million is recorded in prepaid expenses, deposits and other current assets in the statement of financial position), partially offset by of the following related costs:
–losses on disposal of damaged inventory of $41.7 million;
–losses on disposal of unrepairable equipment of $22.6 million; and
–salary and benefits continuation for idle employees while production was interrupted, and equipment repair and clean-up costs of $13.3 million.
–In addition, cost of sales includes unabsorbed salary, benefits, and overhead costs, including depreciation that resulted from the production interruptions related to the two hurricanes of $23.8 million, for which insurance recoveries have not been recognized in fiscal 2020.
The Company has recognized insurance recoveries for items that it has an unconditional contractual right to receive. The final insurance claims related to the two hurricanes will be filed in fiscal 2021.
(d) Government assistance:
During the year ended January 3, 2021 an amount of $9.2 million (2019 - $14.0 million) was recognized in cost of sales in the consolidated statement of earnings and comprehensive income relating to government assistance for production costs, and $3.9 million (2019 - nil) was recognized in SG&A in the consolidated statement of earnings and comprehensive income relating to employment subsidies.
GILDAN 2020 REPORT TO SHAREHOLDERS 112
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. RESTRUCTURING AND ACQUISITION-RELATED COSTS:
Restructuring and acquisition-related costs are presented in the following table, and are comprised of costs directly related to significant exit activities, including the closure of business locations or the relocation of business activities, significant changes in management structure, as well as transaction, exit, and integration costs incurred pursuant to business acquisitions.
2020
2019
Employee termination and benefit costs
$
10,900
$
17,064
Exit, relocation and other costs
13,321
17,190
Net loss on disposal and write-downs of property, plant and equipment, right-of-use assets and software related to exit activities
23,933
13,061
Acquisition-related transaction costs
—
14
$
48,154
$
47,329
Restructuring and acquisition-related costs in fiscal 2020 related to the following: $22.5 million for the closure of a yarn-spinning plant in the U.S., including accelerated depreciation of right-of-use assets and equipment; $10.8 million for the closure of textile manufacturing and sewing operations in Mexico; $5.9 million for the exit of ship-to-the-piece activities, including computer software write-downs and warehouse consolidation costs; $2.4 million for SG&A workforce reductions; and $6.6 million in other costs, including costs incurred to complete restructuring activities that were initiated in fiscal 2019.
Restructuring and acquisition-related costs in fiscal 2019 related to the following: $14.2 million for the closure of textile manufacturing and sewing operations in Mexico; $7.3 million for the consolidation of sewing activities in Honduras; $7.0 million for the closure of a hosiery manufacturing plant in Canada; $9.9 million for the exit of yarn-recycling activities (planned disposal of yarn recycling equipment) and the closure of a yarn-spinning plant in the U.S.; $4.8 million for the exit of ship-to-the-piece activities; and $4.1 million to complete restructuring activities that were initiated in fiscal 2018, including the closure of the AKH textile manufacturing facility and the consolidation of U.S. distribution centres.
GILDAN 2020 REPORT TO SHAREHOLDERS 113
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. INCOME TAXES:
The income tax provision differs from the amount computed by applying the combined Canadian federal and provincial tax rates to earnings before income taxes. The reasons for the difference and the related tax effects are as follows:
2020
2019
Earnings before income taxes
$
(229,373)
$
249,825
Applicable statutory tax rate
26.5
%
26.6
%
Income taxes at applicable statutory rate
(60,784)
66,404
Increase (decrease) in income taxes resulting from:
Effect of different tax rates on earnings of foreign subsidiaries
35,017
(79,229)
Income tax recovery and other adjustments related to prior taxation years
(1,417)
197
Recognition of previously de-recognized tax benefits related to tax losses and temporary differences
(5,150)
(19,211)
Non-recognition of tax benefits related to tax losses and temporary differences
22,451
16,877
Effect of non-deductible expenses and other
5,792
4,978
Total income tax recovery
$
(4,091)
$
(9,984)
Average effective tax rate
1.8
%
(4.0)
%
The Company’s applicable statutory tax rate is the Canadian combined rate applicable in the jurisdictions in which the Company operates.
The details of income tax expense are as follows:
2020
2019
Current income taxes, includes a recovery of $1,511 (2019 - expense of $99) relating to prior taxation years
$
3,633
$
13,639
Deferred income taxes:
Origination and reversal of temporary differences
(25,119)
(21,387)
Recognition of previously de-recognized tax benefits related to tax losses and temporary differences
(5,150)
(19,211)
Non-recognition of tax benefits related to tax losses and temporary differences
22,451
16,877
Adjustments relating to prior taxation years
94
98
(7,724)
(23,623)
Total income tax recovery
$
(4,091)
$
(9,984)
In fiscal 2020, the Company re-recognized $5.2 million (2019 - $19.2 million) of previously de-recognized (in fiscal 2017 pursuant to the organizational realignment plan) deferred income tax assets in the U.S. relating to deferred income tax assets that are now more likely than not to be recovered.
GILDAN 2020 REPORT TO SHAREHOLDERS 114
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. INCOME TAXES (continued):
Significant components of the Company’s deferred income tax assets and liabilities relate to the following temporary differences and unused tax losses:
January 3, 2021
December 29, 2019
Deferred income tax assets:
Non-capital losses
$
99,659
$
99,504
Non-deductible reserves and accruals
28,211
12,502
Property, plant and equipment
15,319
12,439
Other items
7,455
8,259
150,644
132,704
Unrecognized deferred income tax assets
(100,424)
(83,390)
Deferred income tax assets
$
50,220
$
49,314
Deferred income tax liabilities:
Property, plant and equipment
$
(28,643)
$
(30,165)
Intangible assets
(3,888)
(9,232)
Deferred income tax liabilities
$
(32,531)
$
(39,397)
Deferred income taxes
$
17,689
$
9,917
The details of changes to deferred income tax assets and liabilities were as follows:
2020
2019
Balance, beginning of fiscal year, net
$
9,917
$
(12,623)
Recognized in the statements of earnings:
Non-capital losses
155
14,804
Non-deductible reserves and accruals
16,044
1,107
Property, plant and equipment
4,400
2,142
Intangible assets
5,344
1,033
Other
(825)
2,203
Unrecognized deferred income tax assets
(17,394)
2,334
7,724
23,623
Business acquisitions
—
(1,100)
Other
48
17
Balance, end of fiscal year, net
$
17,689
$
9,917
As at January 3, 2021, the Company has tax credits, capital and non-capital loss carryforwards, and other deductible temporary differences available to reduce future taxable income for tax purposes representing a tax benefit of approximately $100.4 million, for which no deferred tax asset has been recognized (December 29, 2019 - $83.4 million), because the criteria for recognition of the tax asset was not met. The tax credits and capital and non-capital loss carryforwards expire between 2027 and 2041. The recognized deferred tax asset related to loss carryforwards is supported by projections of future profitability of the Company.
The Company has not recognized a deferred income tax liability for the undistributed profits of subsidiaries operating in foreign jurisdictions, as the Company currently has no intention to repatriate these profits. If expectations or intentions change in the future, the Company may be subject to an additional tax liability upon distribution of these earnings in the form of dividends or otherwise. As at January 3, 2021, a deferred income tax liability of approximately $57 million would result from the recognition of the taxable temporary differences of approximately $521 million.
GILDAN 2020 REPORT TO SHAREHOLDERS 115
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. EARNINGS (LOSS) PER SHARE:
Reconciliation between basic and diluted earnings (loss) per share is as follows:
2020
2019
Net earnings (loss) - basic and diluted
$
(225,282)
$
259,809
Basic earnings (loss) per share:
Basic weighted average number of common shares outstanding
198,361
204,161
Basic earnings (loss) per share
$
(1.14)
$
1.27
Diluted earnings (loss) per share:
Basic weighted average number of common shares outstanding
198,361
204,161
Plus dilutive impact of stock options, Treasury RSUs, and common
shares held in trust
—
448
Diluted weighted average number of common shares outstanding
198,361
204,609
Diluted earnings (loss) per share
$
(1.14)
$
1.27
Excluded from the above calculation for the year ended January 3, 2021 are 3,519,127 stock options (2019 - 282,737) and 43,485 Treasury RSUs (2019 - 7,500) which were deemed to be anti-dilutive.
20. DEPRECIATION AND AMORTIZATION:
2020
2019
Depreciation of property, plant and equipment (note 8)
$
108,452
$
117,945
Depreciation of right-of-use assets (note 9)
14,656
13,295
Adjustment for the variation of depreciation included in inventories at the beginning and end of the year
3,676
3,059
Amortization of intangible assets, excluding software (note 10)
14,302
17,289
Amortization of software (note 10)
6,104
5,206
Depreciation and amortization included in net earnings
$
147,190
$
156,794
GILDAN 2020 REPORT TO SHAREHOLDERS 116
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. SUPPLEMENTAL CASH FLOW DISCLOSURE:
(a)Adjustments to reconcile net earnings to cash flows from operating activities:
2020
2019
Depreciation and amortization (note 20)
$
147,190
$
156,794
Non cash restructuring charges related to property, plant and equipment, right-of-use assets, and computer software (note 17)
23,933
13,061
Impairment of goodwill and intangible assets (note 10)
93,989
—
Loss on disposal of property, plant and equipment and software
25,909
1,399
Share-based compensation
2,090
16,272
Deferred income taxes (note 18)
(7,724)
(23,623)
Unrealized net (gain) loss on foreign exchange and financial derivatives
8,439
(330)
Timing differences between settlement of financial derivatives and transfer of deferred gains and losses in accumulated OCI to inventory and net earnings
(1,708)
907
Other non-current assets
1,530
5,971
Other non-current liabilities
4,154
5,097
$
297,802
$
175,548
(b)Variations in non-cash transactions:
2020
2019
Additions to property, plant and equipment and intangible assets included in accounts payable and accrued liabilities
$
(13,751)
$
16,144
Proceeds on disposal of property, plant and equipment included in other current assets
(375)
(9)
Additions to right-of-use assets included in lease obligations
16,189
7,753
Impact of initial adoption of new accounting standards (note 2(c))
—
(2,176)
Non-cash ascribed value credited to contributed surplus for dividends attributed to Treasury RSUs
336
954
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
7,552
10,789
GILDAN 2020 REPORT TO SHAREHOLDERS 117
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. RELATED PARTY TRANSACTIONS:
Key management personnel compensation:
Key management personnel includes those individuals that have authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, and is comprised of the members of the executive management team and the Board of Directors. The amount for compensation expense recognized in net earnings for key management personnel was as follows:
2020
2019
Short-term employee benefits
$
7,754
$
5,338
Post-employment benefits
170
204
Share-based payments
1,721
11,066
$
9,645
$
16,608
The amounts included in accounts payable and accrued liabilities for share-based compensation awards to key management personnel were as follows:
January 3, 2021
December 29, 2019
DSUs
$
8,433
$
6,939
Other:
During fiscal 2020, the Company incurred expenses for airplane usage of $0.7 million (2019 - $1.4 million), with a company controlled by the President and Chief Executive Officer of the Company. The payments made are in accordance with the terms of the agreement established and agreed to by the related parties. As at January 3, 2021, the amount in accounts payable and accrued liabilities related to the airplane usage was $0.1 million (December 29, 2019 - $0.7 million).
23. COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES:
(a)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.
(b)Guarantees:
The Company, and some of its subsidiaries, 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 subsidiaries do not perform their contractual obligations. As at January 3, 2021, the maximum potential liability under these guarantees was $54.6 million (December 29, 2019 - $72.6 million), of which $10.5 million was for surety bonds and $44.1 million was for financial guarantees and standby letters of credit (December 29, 2019 - $9.3 million and $63.3 million, respectively).
As at January 3, 2021, the Company has recorded no liability with respect to these guarantees, as the Company does not expect to make any payments for the aforementioned items.
GILDAN 2020 REPORT TO SHAREHOLDERS 118
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. CAPITAL DISCLOSURES:
The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its organic growth strategy and undertake selective acquisitions, while maintaining a strong credit profile and a capital structure that reflects a target ratio of financial leverage as noted below.
The Company’s capital is composed of net debt and shareholders’ equity. Net debt consists of interest-bearing debt less cash and cash equivalents. The Company’s use of capital is to finance working capital requirements, capital expenditures, business acquisition, payment of dividends, as well as share repurchases. The Company currently funds these requirements out of its internally-generated cash flows and with funds drawn from its long-term debt facilities.
The primary measure used by the Company to monitor its financial leverage is its net debt leverage ratio. The Company’s net debt leverage ratio is defined as the ratio of net debt to adjusted EBITDA for the trailing twelve months, on a pro-forma basis to reflect business acquisitions made during the trailing twelve month period, as if they had occurred at the beginning of the trailing twelve month period. 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. Adjusted EBITDA also excludes impairment of goodwill and intangible assets, net insurance gains related to the two hurricanes which impacted the Company’s operations in Central America, the discontinuance of PPE SKUs, the impact of the Company's strategic initiative to significantly reduce its retail product line SKU count which the Company began implementing in the fourth quarter of fiscal 2020, and the impact of adjustments related to the Company’s decision in the fourth quarter of fiscal 2019 to implement a strategic initiative to significantly reduce its imprintables product line SKU count, by exiting all ship to-the-piece activities and discontinuing overlapping and less productive styles and SKUs between brands.
The Company has set a fiscal year-end net debt leverage target ratio of one to two times adjusted EBITDA. As at January 3, 2021, the Company’s net debt leverage ratio was 3.5 times (December 29, 2019 - 1.6 times). Due to the current economic environment resulting from the global COVID-19 pandemic, the Company was not within its target range at the end of fiscal 2020. In light of the current economic environment that is being affected by factors related to the COVID-19 pandemic, including its effect on our business, we have implemented actions to preserve cash and enable us to be well-positioned from a liquidity perspective to manage through the current environment. Actions which specifically relate to our capital allocation framework include deferring non-critical capital expenditures and business acquisitions, suspending share repurchases under our current NCIB program, and suspending our quarterly cash dividend. In addition, the Company secured additional financing on April 6, 2020 and amended its various loans and note agreements on June 26, 2020 as described in note 11 in order to modify its covenants and to provide increased financial flexibility. During the covenant relief period ending April 4, 2021, dividends and share repurchases are not permitted except as described in note 11.
In order to maintain or adjust its capital structure, the Company, upon approval from its Board of Directors, may issue or repay long-term debt, issue shares, repurchase shares, pay dividends or undertake other activities as deemed appropriate under the specific circumstances. The Board of Directors will 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. The Company paid dividends of $30.6 million during the year ended January 3, 2021, representing dividends declared per common share of $0.154. In April 2020, given the severity of the current economic environment resulting from the COVID-19 pandemic, the Company suspended its quarterly cash dividend.
The Company is not subject to any capital requirements imposed by a regulator.
GILDAN 2020 REPORT TO SHAREHOLDERS 119
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. DISAGGREGATION OF REVENUE:
Net sales by major product group were as follows:
2020
2019
Activewear
$
1,498,408
$
2,261,881
Hosiery and underwear
482,868
562,020
$
1,981,276
$
2,823,901
Net sales were derived from customers located in the following geographic areas:
2020
2019
United States
$
1,696,872
$
2,399,239
Canada
76,163
114,815
International
208,241
309,847
$
1,981,276
$
2,823,901
26. ENTITY-WIDE DISCLOSURES:
Following an internal reorganization which took effect on January 1, 2018 and resulted in the consolidation of the Company’s divisional organizational structure, the Company manages its business on the basis of one reportable operating segment.
Property, plant and equipment, right-of-use-assets, intangible assets, and goodwill, are allocated to geographic areas as follows:
January 3, 2021
December 29, 2019
United States
$
431,403
$
478,620
Canada
95,585
129,189
Honduras
323,617
385,209
Caribbean Basin
448,278
532,698
Asia-Pacific
114,785
107,482
Other
39,114
47,050
$
1,452,782
$
1,680,248
Customers accounting for at least 10% of total net sales for the fiscal years ended January 3, 2021 and December 29, 2019 were as follows:
