e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2008
Commission file number: 1-5256
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
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Pennsylvania
(State or other jurisdiction of
incorporation or organization)
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23-1180120
(I.R.S. employer
identification number) |
105 Corporate Center Boulevard
Greensboro, North Carolina 27408
(Address of principal executive offices)
(336) 424-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)
has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities and Exchange Act of 1934).
YES o NO þ
On October 25, 2008, there were 110,075,616 shares of the registrants Common Stock outstanding.
VF CORPORATION
INDEX
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Page No. |
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Part I Financial Information |
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Item 1 Financial Statements (Unaudited) |
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Consolidated Statements of Income: |
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Three and nine months ended September 2008
and September 2007 |
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3 |
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Consolidated Balance Sheets: |
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September 2008, December 2007
and September 2007 |
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4 |
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Consolidated Statements of Cash Flows: |
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Nine months ended September 2008
and September 2007 |
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5 |
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Notes to Consolidated Financial Statements |
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6 |
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Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations |
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17 |
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Item 3 Quantitative and Qualitative Disclosures about Market Risk |
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26 |
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Item 4 Controls and Procedures |
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26 |
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Part II Other Information |
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Item 1A Risk Factors |
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27 |
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Item 2 Unregistered Sales of Equity Securities and Use of Proceeds |
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27 |
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Item 6 Exhibits |
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28 |
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Signatures |
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29 |
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2
Part I Financial Information
Item 1 Financial Statements (Unaudited)
VF CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
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Three Months Ended September |
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Nine Months Ended September |
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2008 |
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2007 |
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2008 |
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2007 |
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Net Sales |
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$ |
2,185,825 |
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$ |
2,053,136 |
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$ |
5,669,503 |
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$ |
5,207,175 |
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Royalty Income |
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20,802 |
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20,023 |
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60,947 |
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56,996 |
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Total Revenues |
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2,206,627 |
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2,073,159 |
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5,730,450 |
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5,264,171 |
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Costs and Operating Expenses |
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Cost of goods sold |
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1,227,577 |
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1,163,399 |
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3,184,470 |
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2,975,009 |
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Marketing, administrative and general expenses |
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627,839 |
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578,721 |
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1,786,788 |
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1,574,336 |
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1,855,416 |
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1,742,120 |
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4,971,258 |
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4,549,345 |
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Operating Income |
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351,211 |
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331,039 |
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759,192 |
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714,826 |
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Other Income (Expense) |
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Interest income |
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1,435 |
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2,202 |
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4,696 |
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7,494 |
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Interest expense |
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(24,310 |
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(19,349 |
) |
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(69,516 |
) |
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(46,373 |
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Miscellaneous, net |
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(1,950 |
) |
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1,834 |
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950 |
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3,583 |
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(24,825 |
) |
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(15,313 |
) |
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(63,870 |
) |
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(35,296 |
) |
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Income from Continuing Operations Before Income Taxes |
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326,386 |
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315,726 |
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695,322 |
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679,530 |
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Income Taxes |
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92,511 |
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106,409 |
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208,437 |
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230,330 |
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Income from Continuing Operations |
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233,875 |
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209,317 |
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486,885 |
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449,200 |
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Discontinued Operations |
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(2,110 |
) |
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(21,987 |
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Net Income |
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$ |
233,875 |
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$ |
207,207 |
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$ |
486,885 |
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$ |
427,213 |
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Earnings Per Common Share Basic |
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Income from continuing operations |
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$ |
2.14 |
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$ |
1.91 |
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$ |
4.46 |
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$ |
4.06 |
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Discontinued operations |
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(0.02 |
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(0.20 |
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Net income |
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2.14 |
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1.89 |
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4.46 |
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3.86 |
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Earnings Per Common Share Diluted |
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Income from continuing operations |
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$ |
2.10 |
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$ |
1.86 |
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$ |
4.37 |
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$ |
3.96 |
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Discontinued operations |
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(0.02 |
) |
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(0.20 |
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Net income |
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2.10 |
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1.84 |
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4.37 |
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3.76 |
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Weighted Average Shares Outstanding |
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Basic |
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109,106 |
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109,671 |
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109,062 |
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110,689 |
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Diluted |
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111,258 |
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112,424 |
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111,379 |
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113,568 |
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Cash Dividends Per Common Share |
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$ |
0.58 |
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$ |
0.55 |
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$ |
1.74 |
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$ |
1.65 |
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See notes to consolidated financial statements.
3
VF CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
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September |
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December |
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September |
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2008 |
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2007 |
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2007 |
|
ASSETS |
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Current Assets |
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Cash and equivalents |
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$ |
225,957 |
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$ |
321,863 |
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$ |
193,855 |
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Accounts receivable, less allowance for doubtful accounts of: September 2008 -
$59,403, Dec. 2007 - $59,053; September 2007 - $59,793 |
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1,313,919 |
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970,951 |
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1,266,490 |
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Inventories: |
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Finished products |
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1,118,878 |
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911,496 |
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1,082,906 |
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Work in process |
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90,878 |
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87,176 |
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91,701 |
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Materials and supplies |
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132,086 |
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140,080 |
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121,387 |
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1,341,842 |
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1,138,752 |
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1,295,994 |
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Other current assets |
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222,669 |
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213,563 |
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209,422 |
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Current assets of discontinued operations |
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14,861 |
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Total current assets |
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3,104,387 |
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2,645,129 |
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2,980,622 |
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Property, Plant and Equipment |
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1,582,337 |
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1,529,015 |
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1,524,030 |
|
Less accumulated depreciation |
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|
920,760 |
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|
877,157 |
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|
883,304 |
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|
661,577 |
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|
651,858 |
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640,726 |
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Intangible Assets |
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|
1,390,402 |
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|
1,435,269 |
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1,434,904 |
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Goodwill |
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1,323,808 |
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1,278,163 |
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1,265,878 |
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Other Assets |
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|
504,091 |
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|
436,266 |
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373,854 |
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$ |
6,984,265 |
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$ |
6,446,685 |
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$ |
6,695,984 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities |
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Short-term borrowings |
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$ |
413,469 |
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$ |
131,545 |
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$ |
461,043 |
|
Current portion of long-term debt |
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|
3,427 |
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|
3,803 |
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|
67,403 |
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Accounts payable |
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|
418,712 |
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|
509,879 |
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|
413,814 |
|
Accrued liabilities |
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|
577,647 |
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|
488,089 |
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|
606,348 |
|
Current liabilities of discontinued operations |
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|
69 |
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|
1,071 |
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|
267 |
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Total current liabilities |
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|
1,413,324 |
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|
1,134,387 |
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|
1,548,875 |
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Long-term Debt |
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|
1,142,170 |
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|
1,144,810 |
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|
1,186,792 |
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Other Liabilities |
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|
567,769 |
|
|
|
590,659 |
|
|
|
592,524 |
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Commitments and Contingencies |
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Common Stockholders Equity |
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|
Common Stock, stated value $1; shares authorized, 300,000,000; shares
outstanding: Sept. 2008 - 109,827,052; Dec. 2007 - 109,797,984;
Sept. 2007 - 109,736,874 |
|
|
109,827 |
|
|
|
109,798 |
|
|
|
109,737 |
|
Additional paid-in capital |
|
|
1,747,775 |
|
|
|
1,619,320 |
|
|
|
1,601,708 |
|
Accumulated other comprehensive income (loss) |
|
|
78,268 |
|
|
|
61,495 |
|
|
|
(29,634 |
) |
Retained earnings |
|
|
1,925,132 |
|
|
|
1,786,216 |
|
|
|
1,685,982 |
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
3,861,002 |
|
|
|
3,576,829 |
|
|
|
3,367,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,984,265 |
|
|
$ |
6,446,685 |
|
|
$ |
6,695,984 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
4
VF CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September |
|
|
|
2008 |
|
|
2007 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
486,885 |
|
|
$ |
427,213 |
|
Adjustments to reconcile net income to cash used
by operating activities of continuing operations: |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
21,987 |
|
Depreciation |
|
|
77,482 |
|
|
|
69,081 |
|
Amortization of intangible assets |
|
|
29,781 |
|
|
|
17,655 |
|
Other amortization |
|
|
9,862 |
|
|
|
11,352 |
|
Stock-based compensation |
|
|
33,824 |
|
|
|
48,449 |
|
Other, net |
|
|
4,911 |
|
|
|
22,327 |
|
Changes in operating assets and liabilities,
net of acquisitions: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(363,767 |
) |
|
|
(353,469 |
) |
Inventories |
|
|
(193,485 |
) |
|
|
(196,290 |
) |
Accounts payable |
|
|
(93,990 |
) |
|
|
(9,694 |
) |
Accrued compensation |
|
|
(24,259 |
) |
|
|
(11,907 |
) |
Accrued income taxes |
|
|
36,373 |
|
|
|
60,792 |
|
Accrued liabilities |
|
|
52,588 |
|
|
|
86,522 |
|
Other assets and liabilities |
|
|
3,598 |
|
|
|
(28,225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities of continuing operations |
|
|
59,803 |
|
|
|
165,793 |
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
|
|
|
|
(21,987 |
) |
Adjustments to reconcile loss from discontinued operations
to cash used by discontinued operations |
|
|
(1,002 |
) |
|
|
8,816 |
|
|
|
|
|
|
|
|
Cash used by discontinued operations |
|
|
(1,002 |
) |
|
|
(13,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
58,801 |
|
|
|
152,622 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(88,319 |
) |
|
|
(79,085 |
) |
Business acquisitions, net of cash acquired |
|
|
(93,377 |
) |
|
|
(1,054,501 |
) |
Software purchases |
|
|
(7,349 |
) |
|
|
(1,885 |
) |
Sale of property, plant and equipment |
|
|
5,851 |
|
|
|
11,745 |
|
Sale of intimate apparel business |
|
|
|
|
|
|
348,714 |
|
Other, net |
|
|
1,020 |
|
|
|
597 |
|
|
|
|
|
|
|
|
Cash provided used by investing activities of continuing operations |
|
|
(182,174 |
) |
|
|
(774,415 |
) |
Discontinued operations, net |
|
|
|
|
|
|
(243 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities |
|
|
(182,174 |
) |
|
|
(774,658 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Increase in short-term borrowings |
|
|
281,340 |
|
|
|
963,713 |
|
Payments on long-term debt |
|
|
(2,945 |
) |
|
|
(57,971 |
) |
Purchase of Common Stock |
|
|
(149,729 |
) |
|
|
(350,000 |
) |
Cash dividends paid |
|
|
(190,347 |
) |
|
|
(182,831 |
) |
Proceeds from issuance of Common Stock, net |
|
|
63,450 |
|
|
|
77,594 |
|
Tax benefits of stock option exercises |
|
|
22,246 |
|
|
|
15,119 |
|
Other, net |
|
|
(305 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities |
|
|
23,710 |
|
|
|
465,624 |
|
|
|
|
|
|
|
|
|
|
Effect of Foreign Currency Rate Changes on Cash |
|
|
3,757 |
|
|
|
7,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Equivalents |
|
|
(95,906 |
) |
|
|
(149,369 |
) |
|
|
|
|
|
|
|
|
|
Cash and Equivalents Beginning of Year |
|
|
321,863 |
|
|
|
343,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Equivalents End of Period |
|
$ |
225,957 |
|
|
$ |
193,855 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
VF CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note A Basis of Presentation
VF Corporation (and its subsidiaries collectively known as VF) operate and report using a 52/53
week fiscal year ending on the Saturday closest to December 31 of each year. Similarly, the fiscal
third quarter ends on the Saturday closest to September 30. For presentation purposes herein, all
references to periods ended September 2008, December 2007 and September 2007 relate to the fiscal
periods ended on September 27, 2008, December 29, 2007 and September 29, 2007, respectively.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the
information and notes required by accounting principles generally accepted in the United States of
America for complete financial statements. Similarly, the December 2007 consolidated balance sheet
was derived from audited financial statements but does not include all disclosures required by
generally accepted accounting principles. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all normal and recurring adjustments necessary to make a
fair statement of the consolidated financial position, results of operations and cash flows of VF
for the interim periods presented. Operating results for the three months and nine months ended
September 2008 are not necessarily indicative of results that may be expected for any other interim
period or for the year ending January 3, 2009. For further information, refer to the consolidated
financial statements and notes included in VFs Annual Report on Form 10-K for the year ended
December 2007 (2007 Form 10-K).
In April 2007, VF sold its intimate apparel business consisting of its domestic and international
womens intimate apparel business units. Accordingly, the Consolidated Statements of Income and
Consolidated Statements of Cash Flows present the intimate apparel businesses as discontinued
operations for all periods. Similarly, the assets and liabilities of the discontinued operations
have been separately presented in the Consolidated Balance Sheets. Amounts presented herein, unless
otherwise stated, relate to continuing operations. See Note D.
Certain prior year amounts, none of which are material, have been reclassified to conform with the
2008 presentation.
Note B Changes in Accounting Policies
During the first quarter of 2008, VF adopted Financial Accounting Standards Board (FASB)
Statement No. 157, Fair Value Measurements (Statement 157), which clarified the definition of
fair value, established a framework and a hierarchy based on the level of observability and
judgment associated with inputs used in measuring fair value, and expanded disclosures about fair
value measurements. Statement 157 applies whenever other accounting pronouncements require or
permit assets or liabilities to be measured at fair value but does not require any new fair value
measurements. As permitted by FASB Staff Position No. 157-2, Effective Date of FASB Statement No.
157, the disclosure provisions of Statement 157 relating to nonrecurring measurements of
nonfinancial assets and nonfinancial liabilities are deferred until VFs 2009 fiscal year. This
deferral of disclosures applies primarily to nonfinancial assets and nonfinancial liabilities
initially measured at fair value in a business combination or measured at fair value for an
impairment assessment.
6
Fair value is defined in Statement 157 as the price that would be received from the sale of an
asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous
market in an orderly transaction between market participants. In determining fair value, Statement
157 establishes a three-level hierarchy that distinguishes between (i) market data obtained or
developed from independent sources (i.e., observable data inputs) and (ii) a reporting entitys own
data and assumptions that market participants would use in pricing an asset or liability (i.e.,
unobservable data inputs). Financial assets and financial liabilities measured and reported at fair
value are classified in one of the following categories, in order of priority of observability and
objectivity of pricing inputs:
|
|
Level 1 Fair value based on quoted prices in active markets for identical assets or
liabilities. |
|
|
|
Level 2 Fair value based on significant directly observable data (other than Level 1
quoted prices) or significant indirectly observable data through corroboration with observable
market data. Inputs would normally be (i) quoted prices in active markets for similar assets
or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or
liabilities or (iii) information derived from or corroborated by observable market data. |
|
|
|
Level 3 Fair value based on prices or valuation techniques that require significant
unobservable data inputs. Inputs would normally be a reporting entitys own data and judgments
about assumptions that market participants would use in pricing the asset or liability. |
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis at September 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using: |
|
|
|
|
|
|
Quoted Price |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
Total |
|
Markets for |
|
Observable |
|
Unobservable |
|
|
Fair |
|
Identical Assets |
|
Inputs |
|
Inputs |
In thousands |
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
84,050 |
|
|
$ |
84,050 |
|
|
|
|
|
|
|
|
|
Investment securities |
|
|
197,071 |
|
|
|
151,265 |
|
|
$ |
45,806 |
|
|
|
|
|
Derivative instruments |
|
|
4,965 |
|
|
|
|
|
|
|
4,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
3,689 |
|
|
|
|
|
|
|
3,689 |
|
|
|
|
|
Deferred compensation |
|
|
226,472 |
|
|
|
|
|
|
|
226,472 |
|
|
|
|
|
Cash equivalents represent funds held in institutional money market funds. Investment securities,
consisting primarily of mutual funds (classified as Level 1) and a separately managed fixed income
fund (classified as Level 2), are purchased to offset a substantial portion of participant-directed
investment selections representing underlying liabilities to participants in VFs deferred
compensation plans. Liabilities under deferred compensation plans are recorded at amounts payable
to participants, based on the fair value of participant-directed investment selections. Derivative
instruments represent net unrealized gains or losses on foreign currency forward exchange
contracts, which is the net difference between (i) the U.S. dollars to be received or paid at the
contracts settlement date and (ii) the U.S. dollar value of the foreign currency to be sold or
purchased at the current forward exchange rate.
VF also adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (Statement 159) in the first quarter of 2008. Statement 159 permits companies to
measure at fair value eligible financial assets and financial liabilities that were not otherwise
required to be recorded at
7
fair value, with changes in fair value recognized in net income as they occur. Since VF has not elected
to apply fair value accounting to any additional items, the adoption of Statement 159 had no
impact.
In addition, as required beginning in the first quarter of 2008, VF adopted Emerging Issues Task
Force (EITF) 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment
Awards, which requires that the tax benefit related to dividend equivalents declared on restricted
stock units that are expected to vest be recorded as an increase in additional paid-in capital. The
impact of adopting EITF 06-11 was not significant.
Note C Acquisitions
The final valuation of intangible assets for Seven For All Mankind, the largest acquisition in
2007, was completed in 2008, resulting in reductions in the amount assigned to indefinite-lived
trademark intangible assets from $340.0 million to $313.7 million and the amount assigned to
amortizable intangible assets (primarily customer relationships) from $185.0 million to $182.8
million, with offsetting increases in goodwill.
In June 2008, VF acquired one-third of the outstanding equity of Mo Industries Holdings, Inc. (Mo
Industries), a Los Angeles-based company that owns the SplendidÒ and Ella
MossÒ brands of premium sportswear marketed to upscale department and specialty
stores. VF also acquired an option to purchase the remaining shares of Mo Industries, and granted
the other stockholders of Mo Industries an option to require VF to purchase all of their stock,
during the first half of 2009 at a price based on its 2008 earnings. The cost of the investment,
including the related put/call rights, was $77.0 million, with this investment being accounted for
using the equity method of accounting. From the date of acquisition, the equity in net income of Mo
Industries is reported as part of the Contemporary Brands Coalition. If VF were to acquire the
remaining shares in 2009, the purchase price of those shares, plus any net debt assumed, is limited
to a maximum amount of $225 million.
In July 2008, VF acquired 100% ownership of its former 50%-owned joint venture that markets
LeeÒ branded products in Spain and Portugal. The cost of the additional investment
was $25.5 million, consisting of $14.9 million in cash and transfer of certain nonmonetary assets held by
the former joint venture. Management has allocated the purchase price to acquired tangible and
intangible assets, and assumed liabilities, based on their respective fair values. Of the total
consideration, $13.5 million was preliminarily assigned to indefinite-lived and amortizable
intangible assets and $11.9 million was assigned to goodwill, subject to possible refinement during
the fourth quarter. Goodwill arising from the acquisition related to synergies and economies of
scale from combining this business with VFs existing European jeanswear business. The joint
venture was accounted for using the equity method of accounting through July 2008, while the entity
is consolidated for periods since the acquisition of the remaining 50% ownership. Operating results
for all periods are reported as part of the Jeanswear Coalition. Pro forma operating results for
this acquisition are not provided because this acquisition is not material to VFs operating
results.
Note D Sale of Intimate Apparel Business
In December 2006, management and the Board of Directors decided to exit VFs domestic and
international womens intimate apparel business (formerly referred to as the Intimate Apparel
Coalition, a reportable business segment). On April 1, 2007, VF sold the net assets of this
business (except for an investment in marketable securities of an intimate apparel supplier) for
$348.7 million, plus $28.8 million related to the business units Cash and Equivalents. The results
of operations and cash flows of the intimate apparel business are separately presented as
discontinued operations for all periods in accordance with FASB Statement No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Similarly, the assets and liabilities of this
business have been reported as held for sale.
8
Summarized operating results for the discontinued intimate apparel business was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September |
|
|
Ended September |
|
In thousands |
|
2007 |
|
|
2007 |
|
Total revenues |
|
$ |
|
|
|
$ |
196,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income
taxes of $1,669 and $4,859 |
|
$ |
(1,870 |
) |
|
$ |
2,567 |
|
Loss on disposal, without income tax benefit |
|
|
(240 |
) |
|
|
(24,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(2,110 |
) |
|
$ |
(21,987 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
Loss on disposal |
|
|
|
|
|
|
(0.22 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
|
(0.20 |
) |
|
|
|
|
|
|
|
|
|
Earnings per common share diluted |
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
$ |
(0.02 |
) |
|
$ |
0.02 |
|
Loss on disposal |
|
|
|
|
|
|
(0.22 |
) |
Discontinued operations |
|
|
(0.02 |
) |
|
|
(0.20 |
) |
Summarized assets and liabilities of discontinued operations presented in the Consolidated Balance
Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
December |
|
|
September |
|
In thousands |
|
2008 |
|
|
2007 |
|
|
2007 |
|
Investments in marketable securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
69 |
|
|
$ |
1,071 |
|
|
$ |
267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
69 |
|
|
$ |
1,071 |
|
|
$ |
267 |
|
|
|
|
|
|
|
|
|
|
|
9
Note E
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2008 |
|
|
December 2007 |
|
|
|
Weighted |
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
Net |
|
|
|
Average |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Carrying |
|
Dollars in thousands |
|
Life * |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License agreements |
|
22 years |
|
$ |
198,208 |
|
|
$ |
48,654 |
|
|
$ |
149,554 |
|
|
$ |
158,566 |
|
Customer relationships |
|
20 years |
|
|
333,879 |
|
|
|
47,913 |
|
|
|
285,966 |
|
|
|
301,057 |
|
Trademarks and other |
|
7 years |
|
|
12,425 |
|
|
|
6,387 |
|
|
|
6,038 |
|
|
|
5,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible
assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441,558 |
|
|
|
465,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradenames |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
948,844 |
|
|
|
969,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,390,402 |
|
|
$ |
1,435,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amortization of license agreements accelerated and straight-line methods; customer
relationships accelerated methods; trademarks and other accelerated and straight-line methods. |
Amortization expense of intangible assets for the third quarter and nine months of 2008 was $9.8
million and $29.8 million, respectively. Estimated amortization expense for the remainder of 2008
is $8.3 million and for the years 2009 through 2012 is $31.9 million, $29.9 million, $28.4 million
and $26.8 million, respectively.
Note F Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contemporary |
|
|
|
|
In thousands |
|
Jeanswear |
|
|
Outdoor |
|
|
Imagewear |
|
|
Sportswear |
|
|
Brands |
|
|
Total |
|
Balance, December 2007 |
|
$ |
232,068 |
|
|
$ |
564,867 |
|
|
$ |
56,246 |
|
|
$ |
215,767 |
|
|
$ |
209,215 |
|
|
$ |
1,278,163 |
|
2008 acquisition |
|
|
11,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,875 |
|
Adjustments to purchase
price allocation |
|
|
|
|
|
|
(94 |
) |
|
|
|
|
|
|
|
|
|
|
37,465 |
|
|
|
37,371 |
|
Currency translation |
|
|
(6,195 |
) |
|
|
(1,026 |
) |
|
|
|
|
|
|
|
|
|
|
3,620 |
|
|
|
(3,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 2008 |
|
$ |
237,748 |
|
|
$ |
563,747 |
|
|
$ |
56,246 |
|
|
$ |
215,767 |
|
|
$ |
250,300 |
|
|
$ |
1,323,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Note G
Pension Plans
VFs net periodic pension cost contained the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
Nine Months Ended September |
|
In thousands |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service cost benefits earned during the year |
|
$ |
4,162 |
|
|
$ |
5,022 |
|
|
$ |
12,486 |
|
|
$ |
16,642 |
|
Interest cost on projected benefit obligations |
|
|
17,276 |
|
|
|
16,914 |
|
|
|
51,828 |
|
|
|
50,742 |
|
Expected return on plan assets |
|
|
(20,840 |
) |
|
|
(20,652 |
) |
|
|
(62,520 |
) |
|
|
(61,956 |
) |
Settlement loss |
|
|
3,242 |
|
|
|
|
|
|
|
3,242 |
|
|
|
|
|
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
673 |
|
|
|
672 |
|
|
|
2,019 |
|
|
|
2,016 |
|
Actuarial loss |
|
|
254 |
|
|
|
1,323 |
|
|
|
1,180 |
|
|
|
3,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
|
4,767 |
|
|
|
3,279 |
|
|
|
8,235 |
|
|
|
11,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount allocable to discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,612 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost continuing operations |
|
$ |
4,767 |
|
|
$ |
3,279 |
|
|
$ |
8,235 |
|
|
$ |
9,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The settlement loss in the third quarter of 2008 related to recognition of deferred actuarial
losses upon payment of a portion of the retirement benefits accrued under VFs Supplemental
Executive Retirement Plan (SERP). During the first nine months of 2008, VF made contributions
totaling $10.3 million to fund benefit payments for the SERP. VF currently anticipates making an
additional $0.9 million of contributions to fund benefit payments for the SERP during the remainder
of 2008. Due to the overfunded status of the qualified pension plan at
the end of 2007, the latest valuation date, VF is not required under applicable regulations, and does not currently intend, to
make a contribution to the plan during 2008.
Note H Business Segment Information
For internal management and reporting purposes, VFs businesses are grouped principally by product
categories, and by brands within those product categories. These groupings of businesses are
referred to as coalitions. These coalitions represent VFs reportable segments. Financial
information for VFs reportable segments is as follows:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
Nine Months Ended September |
|
In thousands |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Coalition revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeanswear |
|
$ |
743,180 |
|
|
$ |
758,485 |
|
|
$ |
2,101,635 |
|
|
$ |
2,174,691 |
|
Outdoor |
|
|
906,608 |
|
|
|
806,113 |
|
|
|
2,066,351 |
|
|
|
1,791,611 |
|
Imagewear |
|
|
260,099 |
|
|
|
267,470 |
|
|
|
748,384 |
|
|
|
711,046 |
|
Sportswear |
|
|
163,733 |
|
|
|
172,964 |
|
|
|
444,238 |
|
|
|
475,055 |
|
Contemporary Brands |
|
|
100,489 |
|
|
|
32,667 |
|
|
|
284,009 |
|
|
|
32,667 |
|
Other |
|
|
32,518 |
|
|
|
35,460 |
|
|
|
85,833 |
|
|
|
79,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total coalition revenues |
|
$ |
2,206,627 |
|
|
$ |
2,073,159 |
|
|
$ |
5,730,450 |
|
|
$ |
5,264,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeanswear |
|
$ |
122,868 |
|
|
$ |
135,727 |
|
|
$ |
323,499 |
|
|
$ |
366,617 |
|
Outdoor |
|
|
188,621 |
|
|
|
161,305 |
|
|
|
352,762 |
|
|
|
298,012 |
|
Imagewear |
|
|
40,757 |
|
|
|
41,553 |
|
|
|
104,529 |
|
|
|
98,059 |
|
Sportswear |
|
|
16,512 |
|
|
|
17,110 |
|
|
|
31,472 |
|
|
|
45,918 |
|
Contemporary Brands |
|
|
11,674 |
|
|
|
4,854 |
|
|
|
40,617 |
|
|
|
4,854 |
|
Other |
|
|
(994 |
) |
|
|
530 |
|
|
|
(3,008 |
) |
|
|
2,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total coalition profit |
|
|
379,438 |
|
|
|
361,079 |
|
|
|
849,871 |
|
|
|
816,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other expenses |
|
|
(30,177 |
) |
|
|
(28,206 |
) |
|
|
(89,729 |
) |
|
|
(98,039 |
) |
Interest, net |
|
|
(22,875 |
) |
|
|
(17,147 |
) |
|
|
(64,820 |
) |
|
|
(38,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
$ |
326,386 |
|
|
$ |
315,726 |
|
|
$ |
695,322 |
|
|
$ |
679,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note I Capital and Comprehensive Income (Loss)
Common stock outstanding is net of shares held in treasury, and in substance retired. There were
12,198,054 treasury shares at September 2008 and 10,042,686 at December 2007 and September 2007.
The excess of the cost of treasury shares acquired over the $1 per share stated value of Common
Stock is deducted from Retained Earnings. In addition, 242,964 shares of VF Common Stock at
September 2008, 284,103 shares at December 2007, and 279,198 shares at September 2007 were held in
trust for deferred compensation plans. These shares held for deferred compensation plans are
treated for financial reporting purposes as treasury shares at a cost of $9.6 million, $11.8
million and $11.5 million at each of the respective dates.
There are 25,000,000 authorized shares of Preferred Stock, $1 par value, of which none are
outstanding.
12
Activity for 2008 in the Common Stock, Additional Paid-in Capital and Retained Earnings accounts is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
Retained |
|
In thousands |
|
Stock |
|
|
Paid-in Capital |
|
|
Earnings |
|
Balance, December 2007 |
|
$ |
109,798 |
|
|
$ |
1,619,320 |
|
|
$ |
1,786,216 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
486,885 |
|
Cash dividends on Common Stock |
|
|
|
|
|
|
|
|
|
|
(190,347 |
) |
Purchase of treasury stock |
|
|
(2,000 |
) |
|
|
|
|
|
|
(147,729 |
) |
Stock compensation plans, net |
|
|
2,029 |
|
|
|
128,455 |
|
|
|
(9,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 2008 |
|
$ |
109,827 |
|
|
$ |
1,747,775 |
|
|
$ |
1,925,132 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income consists of changes in assets and liabilities that are not included in
Net Income under generally accepted accounting principles but are instead reported within a
separate component of Common Stockholders Equity. VFs comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September |
|
|
Ended September |
|
In thousands |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
233,875 |
|
|
$ |
207,207 |
|
|
$ |
486,885 |
|
|
$ |
427,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
(99,412 |
) |
|
|
50,862 |
|
|
|
(4,923 |
) |
|
|
61,098 |
|
Reclassification to net income during the period
(2007 - Note D) |
|
|
|
|
|
|
(5,622 |
) |
|
|
(1,522 |
) |
|
|
44,569 |
|
Defined benefit pension plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification to net income during the period |
|
|
927 |
|
|
|
2,107 |
|
|
|
3,200 |
|
|
|
5,985 |
|
Settlement loss (Note G) |
|
|
3,242 |
|
|
|
|
|
|
|
3,242 |
|
|
|
|
|
Adjustment of funded status |
|
|
|
|
|
|
|
|
|
|
25,950 |
|
|
|
|
|
Unrealized gains (losses) on derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
10,272 |
|
|
|
(13,136 |
) |
|
|
982 |
|
|
|
(20,949 |
) |
Reclassification to net income during the period |
|
|
3,270 |
|
|
|
5,719 |
|
|
|
17,733 |
|
|
|
6,483 |
|
Unrealized gains (losses) on marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount arising during the period |
|
|
(2,120 |
) |
|
|
(3,027 |
) |
|
|
(6,873 |
) |
|
|
(6,666 |
) |
Income tax expense related to components
of other comprehensive income (loss) |
|
|
15,636 |
|
|
|
(8,201 |
) |
|
|
(21,016 |
) |
|
|
(19,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
(68,185 |
) |
|
|
28,702 |
|
|
|
16,773 |
|
|
|
71,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
165,690 |
|
|
$ |
235,909 |
|
|
$ |
503,658 |
|
|
$ |
498,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Accumulated Other Comprehensive Income (Loss) for 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Defined |
|
|
Derivative |
|
|
|
|
|
|
|
|
|
Currency |
|
|
Benefit |
|
|
Financial |
|
|
Marketable |
|
|
|
|
In thousands |
|
Translation |
|
|
Pension Plans |
|
|
Instruments |
|
|
Securities |
|
|
Total |
|
Balance, December 2007 |
|
$ |
126,171 |
|
|
$ |
(63,975 |
) |
|
$ |
(8,419 |
) |
|
$ |
7,718 |
|
|
$ |
61,495 |
|
Other
comprehensive income (loss) |
|
|
(7,867 |
) |
|
|
19,973 |
|
|
|
11,540 |
|
|
|
(6,873 |
) |
|
|
16,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 2008 |
|
$ |
118,304 |
|
|
$ |
(44,002 |
) |
|
$ |
3,121 |
|
|
$ |
845 |
|
|
$ |
78,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note J
Stock-based Compensation
During the nine months of 2008, VF granted options for 1,395,214 shares of Common Stock at a
weighted average exercise price of $79.41, equal to the fair market value of VF Common Stock on the
date of grant. The options vest in equal annual installments over a three year period. The fair
value of these options was estimated using a lattice valuation model for employee groups having
similar exercise behaviors, with the following assumptions: expected volatility ranging from 23% to
36%, with a weighted average of 27%; expected term of 4.8 to 7.3 years; expected dividend yield of
2.8%; and risk-free interest rate ranging from 2.1% at six months to 3.6% at 10 years. The resulting weighted average fair value of these options
at the date of grant was $18.58 per option.
Also during the nine months of 2008, VF granted 293,735 performance-based restricted stock units.
Participants are eligible to receive shares of VF Common Stock at the end of a three year
performance period. The actual number of shares that will be earned, if any, will be based on VFs
performance over that period. The weighted average grant date fair value of the restricted stock
units was $78.02 per unit.
In addition, VF granted 31,000 shares of restricted VF Common Stock during the nine months of 2008
at a weighted average fair value of $72.38 per share. The shares will vest at various dates through
2014.
Note K Income Taxes
The effective income tax rate was 28.3% for the third quarter and 30.0% for the first nine months
of 2008, compared with 33.7% and 33.9% in the comparable periods of 2007. The lower rate in 2008
was due to reductions of previously accrued amounts that will not be paid due to resolution of the
underlying uncertain income tax positions, as covered below. In addition, results in 2008 included
a higher percentage of income in lower tax jurisdictions outside the United States. The effective
tax rate for the full year 2007 was 32.3%, which included the favorable impact from expiration of
statutes of limitations and tax audit settlements.
VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax
returns in numerous state and foreign jurisdictions. In the United States, Internal Revenue Service
(IRS) examinations for tax years 2002 and 2003 were settled. In 2008, the IRS commenced an
examination of tax years 2004, 2005 and 2006. In the United Kingdom, Inland Revenue examinations
for certain subsidiaries for tax years 2001 to 2006 were settled. Tax years 1998 to 2002 are under
examination by the State of North Carolina, and tax years 2003 to 2005 are under examination by the
State of Alabama. VF is also currently subject to examination by various other taxing authorities.
Management believes that some of these audits and negotiations will conclude during the next 12
months.
14
The amount of unrecognized tax benefits decreased by $15.0 million during the third quarter and by
$18.2 million during the first nine months of 2008, primarily due to favorable settlements of audit
exposures and updated assessments of previously accrued amounts. During the next 12 months,
management believes that it is reasonably possible that the amount of unrecognized tax benefits may
decrease by approximately $9 million due to settlement of audit exposures and expiration of
statutes of limitations, which includes $7 million that would reduce income tax expense.
VF had been granted a lower income tax rate in a foreign subsidiary based on meeting certain
increased investment and employment level requirements. The tax status providing this benefit
expires at the end of 2009. During the second quarter of 2008, VF entered into a new agreement with
the tax authorities of that country, which will result in a slightly higher effective income tax
rate on taxable income in that subsidiary for 2010 through 2014.
Note L Earnings Per Share
Earnings per share from continuing operations were computed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended September |
|
|
Ended September |
|
In thousands, except per share amounts |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
233,875 |
|
|
$ |
209,317 |
|
|
$ |
486,885 |
|
|
$ |
449,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Stock outstanding |
|
|
109,106 |
|
|
|
109,671 |
|
|
|
109,062 |
|
|
|
110,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing
operations |
|
$ |
2.14 |
|
|
$ |
1.91 |
|
|
$ |
4.46 |
|
|
$ |
4.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
233,875 |
|
|
$ |
209,317 |
|
|
$ |
486,885 |
|
|
$ |
449,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Stock outstanding |
|
|
109,106 |
|
|
|
109,671 |
|
|
|
109,062 |
|
|
|
110,689 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and other |
|
|
2,152 |
|
|
|
2,753 |
|
|
|
2,317 |
|
|
|
2,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Stock and
dilutive securities outstanding |
|
|
111,258 |
|
|
|
112,424 |
|
|
|
111,379 |
|
|
|
113,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing
operations |
|
$ |
2.10 |
|
|
$ |
1.86 |
|
|
$ |
4.37 |
|
|
$ |
3.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options to purchase 1.4 million shares of Common Stock were excluded from the
computation of diluted earnings per share for the three and nine months ended September 2008
because the effect of their inclusion would have been antidilutive. Earnings per share for
Discontinued Operations and Net Income in 2007 were computed using the same weighted average shares
described above.
15
Note M Recently Issued Accounting Standards
In December 2007, the FASB issued FASB Statement No. 141(Revised), Business Combinations
(Statement 141(R)), which revises how business combinations are accounted for, both at the
acquisition date and in subsequent periods. Statement 141(R) requires the acquiring entity in a
business combination to (i) measure all assets acquired and liabilities assumed at their fair value
at the acquisition date, (ii) recognize the full fair value of assets acquired and liabilities
assumed in either a full or a partial acquisition, (iii) expense transaction and restructuring
costs and (iv) provide additional disclosures not required under prior rules. Statement 141(R) is
effective for transactions in which VF obtains control of a business beginning in VFs 2009 fiscal
year. The impact on VF of adopting Statement 141(R) will depend on the nature, terms and size of
business combinations completed after the effective date.
In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51 (Statement 160). Statement 160 requires a
company to classify noncontrolling (minority) interests in consolidated subsidiaries as equity
instead of a liability and provides guidance on the accounting for transactions between an entity
and noncontrolling interests. Statement 160, effective for VFs 2009 fiscal year, requires
retroactive adoption of the presentation and disclosure requirements, with all other requirements
to be applied prospectively. Since VF does not have significant noncontrolling interests in
subsidiaries, Statement 160 is not expected to have a significant impact on the consolidated
financial statements.
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (Statement 161). Statement 161
requires expanded disclosures related to (i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedged items are accounted for under Statement 133 and its
related interpretations and (iii) how derivative instruments and related hedged items affect an
entitys financial position, operating results and cash flows. This Statement is effective for
financial statements issued for VFs 2009 fiscal year. VF is currently evaluating the impact of
adopting Statement 161.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors to be considered in developing
renewal or extension assumptions used to determine the useful life of an identified intangible
asset under FASB Statement No. 142, Goodwill and Other Intangible Assets, and requires expanded
disclosure related to the determination of intangible asset useful lives. FSP 142-3 provides
guidance for determining the useful life of recognized intangible assets acquired beginning in VFs
2009 fiscal year, and the expanded disclosures are effective for all recognized intangible assets
in VFs 2009 consolidated financial statements. VF is currently evaluating the impact of adopting
FSP 142-3.
Note N Subsequent Events
VFs Board of Directors declared a quarterly cash dividend of $0.59 per share, an increase of
$0.01, payable on December 19, 2008 to shareholders of record on December 9, 2008.
16
Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
Highlights of the third quarter of 2008 included:
|
|
Revenues and earnings per share for the third quarter were each at record levels. |
|
|
|
Revenues increased 6% over the prior year quarter to $2,206.6 million, with the increase
coming from organic growth in our Outdoor businesses and from acquisitions in the prior year. |
|
|
|
Our direct-to-consumer and international businesses continue to be key drivers of growth,
with these revenues in the quarter rising 12% and 22%, respectively. International revenues
represented 34% of total revenues. |
|
|
|
Gross margin as a percent of revenues rose to 44.4% from 43.9% in the prior year quarter. |
|
|
|
VF acquired 100% ownership of its former 50%-owned joint venture that marketed
LeeÒ branded products in Spain and Portugal (Lee Spain). The cost of the
additional investment was $25.5 million, consisting of $14.9 million in cash and transfer of
certain assets held by the former joint venture. The joint venture had revenues of $35
million in its latest fiscal year. |
Discontinued Operations
In December 2006, management and the Board of Directors decided to exit the womens intimate
apparel business. The sale, which closed on April 1, 2007, was consistent with VFs stated
objective of focusing on lifestyle businesses having higher growth and profit potential. The
results of operations and cash flows of the intimate apparel business are separately presented as
discontinued operations for all periods. Similarly, the assets and liabilities of this business
have been reclassified and reported as held for sale for all periods presented. See Note D to the
Consolidated Financial Statements. Unless otherwise stated, the remaining sections of this
discussion and analysis of financial condition and results of operations relate only to continuing
operations.
Analysis of Results of Operations
Consolidated Statements of Income
The following table presents a summary of the changes in our Total Revenues from 2007:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Nine Months |
|
|
|
2008 |
|
|
2008 |
|
|
|
Compared |
|
|
Compared |
|
(In millions) |
|
with 2007 |
|
|
with 2007 |
|
Total revenues - 2007 |
|
$ |
2,073 |
|
|
$ |
5,264 |
|
Organic growth |
|
|
66 |
|
|
|
167 |
|
Acquisitions in prior year (to anniversary date) |
|
|
60 |
|
|
|
291 |
|
Acquisition in current year |
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues - 2008 |
|
$ |
2,207 |
|
|
$ |
5,730 |
|
|
|
|
|
|
|
|
The increases in Total Revenues were due to strong organic revenue growth within the Outdoor
Coalition, plus inclusion for the full quarter and nine months of the Seven For All Mankind and
lucy businesses (together, the Contemporary Brands Acquisitions) acquired in the third quarter of
2007.
17
Additional details on revenues are provided in the section titled Information by Business
Segment.
During the third quarter and first nine months of 2008, approximately 34% and 33%, respectively, of
Total Revenues were in international markets. In translating foreign currencies into the U.S.
dollar, a weaker U.S. dollar in relation to the functional currencies where VF conducts the
majority of its international business (primarily the European euro countries) benefited revenue
comparisons by $50 million in the third quarter of 2008 and $148 million in the first nine months
of 2008, compared with the 2007 periods. The weighted average translation rate for the euro was
$1.51 per euro for the first nine months of 2008, compared with $1.36 during the first nine months
of 2007. The U.S. dollar has strengthened in recent months, resulting in a translation rate of
$1.47 per euro at the end of September 2008. With the strengthening of the U.S. dollar, it is
likely that reported revenues for the fourth quarter will be negatively impacted compared with
2007.
The following table presents the percentage relationship to Total Revenues for components of our
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
Nine Months Ended September |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Gross margin (total revenues less cost
of goods sold) |
|
|
44.4 |
% |
|
|
43.9 |
% |
|
|
44.4 |
% |
|
|
43.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing, administrative and general
expenses |
|
|
28.5 |
|
|
|
27.9 |
|
|
|
31.2 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
15.9 |
% |
|
|
16.0 |
% |
|
|
13.2 |
% |
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin as a percentage of Total Revenues increased 0.5% in the third quarter of 2008 and 0.9%
in the first nine months of 2008 over the prior year periods. This improvement was driven by
growth in our higher margin lifestyle businesses, with our retail revenue growth being a primary
contributor.
Marketing, Administrative and General Expenses as a percentage of Total Revenues increased 0.6% in
the third quarter of 2008. The third quarter of 2008 included charges for cost reduction actions
and an unremitted value-added tax and duty issue related to a 2007 acquisition, together
representing 0.5% of revenues. In the first nine months of 2008, Marketing, Administrative and
General Expenses as a percentage of Total Revenues increased 1.3% compared with the prior year
period. Approximately 0.3% of the change was attributed to charges for cost reduction actions and
the value-added tax and duty issue in the first nine months of 2008. In addition, approximately
0.4% of the increase was driven by the change in mix of our businesses toward retail operations,
which have higher expense percentages. The remainder of the increase resulted primarily from lower
revenues in our jeanswear and sportswear businesses without comparable expense reduction.
Interest expense increased $5.0 million in the quarter and $23.1 million in the first nine months
of 2008, reflecting higher borrowings. Average interest-bearing debt outstanding totaled $1,450
million for the first nine months of 2008 and $922 million for the comparable period of 2007, with
the increase driven by the issuance of $600.0 million of senior long-term notes in October 2007. The
weighted average interest rate on total outstanding debt decreased to 6.2% for the first nine
months of 2008 from 6.4% for the comparable period of 2007. This decrease was driven by the mix of
our outstanding debt, including the impact of the $600.0 million of senior notes, and lower
short-term rates.
The effective income tax rate was 28.3% in the third quarter and 30.0% for the first nine months of
2008,
18
compared with 33.9% for the first nine months of 2007. The lower rate in the 2008 periods
was due primarily to net favorable income tax adjustments in the third quarter of 2008 and a higher
percentage of income in lower tax jurisdictions outside of the United States. The effective income
tax rate for the third quarter and first nine months of 2008 was based on the expected annual rate,
adjusted for discrete events arising during the respective periods.
Income from Continuing Operations in the quarter increased 12% to $233.9 million, compared with
$209.3 million in the third quarter of 2007. Earnings per share from continuing operations
increased 13% to $2.10 per share from $1.86 per share in the prior year quarter. (All per share
amounts are presented on a diluted basis.) The third quarter of 2008 included a net benefit of
$0.07 per share in unusual items, comprised of $0.14 per share in net favorable income tax
adjustments offset by $0.07 per share from cost reduction actions and for costs related to an
unremitted value-added tax and duty issue. The third quarter also benefited from a $0.06 per share
positive impact from translating foreign currencies into the U.S. dollar. The remaining
improvement in the quarter was driven primarily by profitability in our Outdoor businesses.
Income from Continuing Operations increased 8% to $486.9 million in the first nine months of 2008,
compared with $449.2 million in 2007. Earnings per share from continuing operations increased 10%
to $4.37 per share from $3.96 per share in the first nine months of 2007. Earnings per share in the first nine months of 2007
included a benefit of $0.04 per share from the sale of H.I.Sâ trademarks and intellectual property. Earnings per share
in the first nine months of 2008 included a net benefit of $0.09 per share in unusual
items, comprised of $0.20 per share in net favorable income tax adjustments and favorable tax audit
settlements offset by $0.11 per share from cost reduction actions and for costs related to an
unremitted value-added tax and duty issue. In addition, the 2008 period included a $0.16 per share
positive impact from translating foreign currencies into the U.S. dollar.
Information by Business Segment
VFs businesses are grouped into five product categories, and by brands within those product
categories, for management and internal financial reporting purposes. These groupings of
businesses within VF are referred to as coalitions. These coalitions represent VFs reportable
business segments.
See Note H to the Consolidated Financial Statements for a summary of our results of operations by
coalition, along with a reconciliation of Coalition Profit to Income from Continuing Operations
Before Income Taxes.
The following table presents a summary of the changes in our Total Revenues by coalition for the
third quarter and first nine months of 2008:
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contemporary |
|
|
|
|
(In millions) |
|
Jeanswear |
|
|
Outdoor |
|
|
Imagewear |
|
|
Sportswear |
|
|
Brands |
|
|
Other |
|
Revenues - 2007 |
|
$ |
758 |
|
|
$ |
806 |
|
|
$ |
267 |
|
|
$ |
173 |
|
|
$ |
33 |
|
|
$ |
36 |
|
Organic growth |
|
|
(23 |
) |
|
|
101 |
|
|
|
(7 |
) |
|
|
(9 |
) |
|
|
7 |
|
|
|
(3 |
) |
Acquisition in prior
year
(to anniversary date) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
Acquisition in current
year |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - 2008 |
|
$ |
743 |
|
|
$ |
907 |
|
|
$ |
260 |
|
|
$ |
164 |
|
|
$ |
100 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contemporary |
|
|
|
|
(In millions) |
|
Jeanswear |
|
|
Outdoor |
|
|
Imagewear |
|
|
Sportswear |
|
|
Brands |
|
|
Other |
|
Revenues - 2007 |
|
$ |
2,175 |
|
|
$ |
1,792 |
|
|
$ |
711 |
|
|
$ |
475 |
|
|
$ |
33 |
|
|
$ |
78 |
|
Organic growth |
|
|
(81 |
) |
|
|
260 |
|
|
|
4 |
|
|
|
(31 |
) |
|
|
7 |
|
|
|
8 |
|
Acquisition in prior
year
(to anniversary date) |
|
|
|
|
|
|
14 |
|
|
|
33 |
|
|
|
|
|
|
|
244 |
|
|
|
|
|
Acquisition in current
year |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues - 2008 |
|
$ |
2,102 |
|
|
$ |
2,066 |
|
|
$ |
748 |
|
|
$ |
444 |
|
|
$ |
284 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeanswear:
Jeanswear Coalition revenues declined 2% in the third quarter of 2008. Domestic jeanswear revenues
declined 3% in the quarter, with the mass market business remaining essentially flat and the Lee
and western specialty businesses declining due to a very challenging retail environment, retailers
lowering their inventory levels and consumers moving to lower price points, including private label
products. International jeans revenues were flat in the quarter, which included a $20 million
benefit from foreign currency translation and double-digit revenue increases on a constant-currency
basis in Asia and Latin America. For the nine month period ended September 2008, Jeanswear
Coalition revenues decreased 3%, with domestic revenues declining 8% due to the retail environment
and other factors discussed above. International jeanswear revenues increased 6% in the 2008 nine
month period, reflecting the benefit of foreign currency translation. The Lee Spain acquisition,
completed in July 2008, also added $8 million in revenue to both the third quarter and first nine
months of 2008.
Jeanswear Coalition Profit decreased 9% in the third quarter of 2008, with operating margins
declining from 17.9% in the third quarter of 2007 to 16.5% in the current quarter. The third
quarter of 2008 was negatively impacted by increased promotional activity and a higher proportion
of sales of lower margin new fashion products. In addition, approximately 0.3% of the total 1.4%
margin decline was attributed to actions taken in the third quarter of 2008 to improve our cost
structure. Operating margins for the nine month period also declined from 16.9% in 2007 to 15.4%
in 2008. The nine month period ending September 2007 included a gain on sale of
H.I.Sâ trademarks and intellectual property items that positively impacted
operating margins by 0.4%. The remainder of the declines in both the quarter and nine month period
were driven primarily by decreases in revenues without comparable expense reduction.
20
Outdoor:
Revenues in our Outdoor businesses increased 12% in the third quarter of 2008 and 15% in the nine
month period, compared with prior year periods. These increases were led by strong global unit
volume gains of The North Faceâ, Vansâ,
Kiplingâ, Napapijriâ and Eastpakâ
brands. Also, the 2007 acquisitions of Eagle Creek and specific brand-related assets of a former
licensee of The North Faceâ brand in China and Nepal added $14 million to
revenues in the first nine months of 2008 (prior to the anniversary dates of the respective
acquisitions). Foreign currency translation positively impacted 2008 Outdoor Coalition revenues by
$27 million, or 3%, in the quarter and $80 million, or 4%, in the first nine months.
Operating margins increased in the quarter to 20.8% from 20.0% in the prior year quarter and also
increased in the nine months ended September 2008 to 17.1% from 16.6% in the prior year period.
Operating margins were higher in both 2008 periods due to a higher percentage of products sold in
international markets, where
higher gross margins are realized. Revenue growth and the resulting benefit of improved leverage
of certain operating expenses were offset by increased retail investments.
Imagewear:
Coalition Revenues declined 3% in the third quarter of 2008, with similar decreases in both our
occupational apparel and activewear divisions. Coalition Revenues increased 5% for the nine month
period of 2008 over the prior year period. The Majesticâ brand, acquired on
February 28, 2007, accounted for substantially all of the increase in the nine month period (prior
to the anniversary date of its acquisition).
Operating margins increased to 15.7% from 15.5% in the prior year quarter and also increased in the
nine months ended September 2008 to 14.0% from 13.8% due to lower distribution and selling costs.
Sportswear:
Coalition Revenues declined 5% in the 2008 quarter and 6% in the nine month period of 2008 compared
with the prior year. Revenues in our core Nauticaâ brand sportswear business
declined 10% in the third quarter of 2008 and 11% in the nine month period, driven by the exit of
our womens wholesale sportswear business and challenging overall conditions in the department
store channel. These declines were partially offset by significant revenue growth in our
Kiplingâ and John Varvatosâ businesses in both 2008 periods,
including over 18% growth in each in the third quarter and over 20% growth in each in the nine
month period.
Operating margins improved to 10.1% from 9.9% in the prior year quarter, with third quarter 2008
operating margins negatively impacted by 0.9% from cost reduction actions. The improved operating
performance resulted from the exit of the womens wholesale sportswear business and benefits of
recent cost reduction initiatives. Operating margins declined to 7.1% from 9.7% for the nine month
period due to lower Nauticaâ brand revenues without comparable expense reduction,
plus a charge in the first quarter of 2008 to discontinue our Nauticaâ womens
wholesale sportswear business.
Contemporary Brands:
The Contemporary Brands Coalition was formed in August 2007 with two newly acquired businesses -
Seven For All Mankind and lucy activewear. This coalition in 2008 also includes the earnings from our
one-third equity investment in Mo Industries Holdings, Inc. (Mo Industries), the owner
and marketer of the Splendidâ and Ella Mossâ brands.
The Contemporary Brands Coalition operating margins of 11.6% in the third quarter and 14.3% for the
first nine months of 2008 were driven by the high operating margins of Seven For All Mankind and
our portion of the earnings of the Splendidâ and Ella Mossâ
brands. Operating margins were negatively impacted by 6.2% in the third quarter of 2008 and
2.2% in the nine month period for a $6.2 million charge related to an unremitted value-added tax
and duty matter at Seven For All Mankind. Operating margins were 14.9%
21
during the period of our
ownership in the third quarter of 2007. While not currently profitable, we expect results of our
lucy activewear business to improve as we increase our operating efficiencies.
Other:
The Other business segment includes the VF Outlet business unit of company-operated retail outlet
stores in the United States that sell a broad selection of excess quantities of first quality VF
products and other branded products. Revenues and profits of VF products are reported as part of
the operating results of the applicable coalitions, while revenues and profits of non-VF products
are reported in this business segment. The increase in revenues in the first nine months of 2008
was due to VF Outlets sale of womens intimate apparel products obtained from independent
suppliers following VFs sale of its intimate apparel business in April 2007 (whereas such revenues
prior to April 2007 were reported as part of discontinued operations).
Reconciliation of Coalition Profit to Income from Continuing Operations before Income
Taxes:
There are two types of costs necessary to reconcile total Coalition Profit, as discussed in the
preceding paragraphs, to consolidated Income from Continuing Operations Before Income Taxes. These
costs are (i) Corporate and Other Expenses, discussed below, and (ii) Interest, Net, which was
discussed in the previous Consolidated Statements of Income section.
Corporate and Other Expenses consist of corporate headquarters expenses that are not allocated to
the coalitions and certain other expenses related to but not allocated to the coalitions for
internal management reporting, including development costs for management information systems,
certain costs of maintaining and enforcing VFs trademarks and miscellaneous consolidating
adjustments. The reduction in Corporate and Other Expenses in the nine month period ended
September 2008 over the prior year period resulted primarily from lower stock-based and other
incentive compensation.
Analysis of Financial Condition
Balance Sheets
Accounts Receivable at September 2008 increased 4% over the September 2007 balance, reflecting
higher revenues in the third quarter of 2008. This increase was partially offset by an improvement
in days sales outstanding. Accounts Receivable are higher at September 2008 than at the end of
2007 due to seasonal sales patterns.
Inventories at September 2008 increased 4% over September 2007, which is in line with the
forecasted revenue growth in the fourth quarter of 2008 over the prior year quarter. Inventory
levels at September 2008 increased over December 2007 due to higher seasonal requirements of our
businesses.
Property, Plant and Equipment increased at September 2008 over December 2007 and September 2007
because capital spending, including investments in retail stores, exceeded depreciation expense.
Total Intangible Assets and Goodwill at September 2008 increased over September 2007 as a result of
the Lee Spain acquisition and foreign currency translation, offset in part by amortization. See
Notes C, E and F to the Consolidated Financial Statements.
Other Assets increased at September 2008 over December 2007 and September 2007 due to a $77.0
million investment in shares of the owner of the Splendidâ and Ella
Mossâ brands in the second quarter. In addition, the September 2008 and December
2007 balances included the recognition of the overfunded status of our qualified defined benefit
pension plan (based at both dates on our December 2007 plan valuation), whereas the plan was
underfunded at September 2007 (based on our December 2006 valuation). These increases
22
were offset
in part by lower values of investment securities held for deferred compensation plans at September
2008.
Short-term Borrowings at September 2008 consisted of $362.5 million of domestic commercial paper
borrowings and $51.0 million of international borrowings. Overall, the extent of short-term
borrowings varies throughout the year in relation to working capital requirements and other
investing and financing activities. See the Liquidity and Cash Flows section below for a
discussion of these items. Due to seasonal working capital flows and financing requirements, there
is typically more need for external borrowings at the end of the third quarter than at our fiscal
year-end.
Accounts Payable at September 2008 increased slightly over September 2007 due primarily to
increased
inventory levels discussed above. The Accounts Payable balance at December 2007 was higher than
normal due to the timing of inventory purchases and payments to vendors at the end of 2007.
Accrued Liabilities increased at September 2008 from December 2007 due to (i) an increase in
accrued income taxes resulting from higher profitability and timing of tax payments, (ii) seasonal
increases and growth-related factors in our businesses and (iii) the Lee Spain acquisition in the
third quarter of 2008. The September 2008 balance declined from September 2007 due to changes in
accrued income tax balances, driven by higher estimated income tax payments, partially offset by
the Lee Spain acquisition.
Total Long-term Debt, including the current portion, decreased at September 2008 and December 2007
from the level at September 2007 resulting from repayment of $49.3 million of short-term
international borrowings that had been classified as long-term at September 2007 because of our
intent and ability to retain that amount as outstanding for the following twelve months. These
short-term international borrowings were repaid due to higher cash generation than expected.
Other Liabilities were lower at September 2008 than both December 2007 and September 2007 due to
lower deferred compensation liabilities. Also, Other Liabilities were lower at September 2008 and
December 2007 than September 2007 due to the improved funded status of our defined benefit pension
plans, offset by higher deferred income tax liabilities.
Liquidity and Cash Flows
The financial condition of VF is reflected in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
December |
|
September |
(Dollars in millions) |
|
2008 |
|
2007 |
|
2007 |
Working capital |
|
$ |
1,691.1 |
|
|
$ |
1,510.7 |
|
|
$ |
1,431.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio |
|
|
2.2 to 1 |
|
|
|
2.3 to 1 |
|
|
|
1.9 to 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to total capital ratio |
|
|
28.8 |
% |
|
|
26.4 |
% |
|
|
33.7 |
% |
For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and
total capital is defined as debt plus common stockholders equity. Our ratio of net debt to total
capital, with net debt defined as debt less cash and equivalents, was 25.7% at September 2008.
On an annual basis, VFs primary source of liquidity is its strong cash flow provided by operating
activities. Cash provided by operating activities is primarily dependent on the level of net
income and changes in investments in inventories and other working capital components. Our cash
flow from operations is typically
23
low in the first half of the year as we build working capital to
service our operations in the second half of the year. Cash provided by operating activities is
substantially higher in the fourth quarter of the year as we collect accounts receivable arising
from our higher seasonal wholesale sales in the third quarter. In addition, cash flows from our
direct-to-consumer businesses are significantly higher in the fourth quarter of the year.
For the nine months through September 2008, cash provided by operating activities was $59.8
million, compared with cash provided by operating activities of $165.8 million in the comparable
2007 period. The decrease in cash provided by operating activities was driven by the net change in
operating asset and liability
components, which was a usage of funds of $582.9 million for the nine months ended September 2008,
compared with a usage of funds of $452.3 million for the comparable period ended September 2007.
This additional usage of funds in the first nine months of 2008 was primarily due to an increase in
payments to vendors as a result of a higher than normal accounts payable balance at the end of
2007. See the discussion of accounts payable in the Balance Sheets section above.
To finance our ongoing operations and unusual circumstances that may arise, we rely on our
continued strong cash flow from operations. In addition, VF has liquidity from its available cash
balances and debt capacity, supported by its strong credit rating. At the end of September 2008,
$625.9 million was available for borrowing under VFs $1.0 billion senior unsecured committed
domestic revolving bank credit facility. There was $362.5 million of commercial paper outstanding
and $11.6 million of standby letters of credit issued under this agreement. We have not drawn down
any funds on this facility. Also at the end of September 2008, 250.0 million (U.S. dollar
equivalent of $366.4 million) was available for borrowing under VFs senior unsecured committed
international revolving bank credit facility.
The investing activities in the first nine months of 2008 included the $14.9 million cash component
of the Lee Spain acquisition and $77.0 million purchase of one-third of the shares of Mo
Industries, owner of the SplendidÒ and Ella MossÒ brands. We
have an option to purchase the remaining shares of Mo Industries and have granted the other
stockholders of Mo Industries an option to require us to purchase all of their stock in 2009, with
the purchase price based on their 2008 earnings. If we were to acquire the remaining shares, the
purchase price of those shares, plus any net debt assumed, would be subject to a maximum amount of
$225 million. The other significant investing activity in the first nine months of 2008 was
capital spending, primarily related to retail initiatives. We expect that capital spending could
reach $120 million for the full year of 2008, which will be funded by operating cash flows.
In October 2007, Standard & Poors Ratings Services affirmed its A minus corporate credit rating,
A-2 commercial paper rating and stable outlook for VF. Standard & Poors also assigned its A
minus senior unsecured debt rating to VFs $600.0 million unsecured senior notes issued in October
2007. In August 2007, Moodys Investors Service affirmed VFs long-term debt rating of A3,
commercial paper rating of Prime-2 and stable outlook. Existing long-term debt agreements do
not contain acceleration of maturity clauses based solely on changes in credit ratings. However,
for the $600.0 million of senior notes issued in 2007, if there were a change in control of VF and,
as a result of the change in control, the notes were rated below investment grade by recognized
rating agencies, then VF would be obligated to repurchase the notes at 101% of the aggregate
principal amount of notes repurchased, plus any accrued and unpaid interest.
During the first nine months of 2008, VF purchased 2.0 million shares of its Common Stock in open
market transactions at a cost of $149.7 million (average price of $74.86 per share) and in the
first nine months of 2007 purchased 4.1 million shares at a cost of $350.0 million (average price
of $85.03 per share). Share repurchase activity during the first nine months of 2008 reduced the
total remaining authorization approved by the Board of Directors to 3.2 million shares as of the
end of September 2008. The primary objective of our share repurchase program is to offset, on a
long-term basis, dilution caused by awards under equity compensation plans. We will continue to
evaluate future share repurchases by comparing to the benefits of business acquisitions.
24
Managements Discussion and Analysis in our 2007 Form 10-K provided a table summarizing VFs
contractual obligations and commercial commitments at the end of 2007 that would require the use of
funds. Since the filing of our 2007 Form 10-K, there have been no material changes, except as
noted below, relating to VFs contractual obligations and commercial commitments that will require
the use of funds:
|
|
|
Inventory purchase obligations represent binding commitments to purchase finished goods,
raw materials and sewing labor in the ordinary course of business. These commitments
increased by approximately $20 million at the end of September 2008 to support the growth
of our businesses. |
|
|
|
|
Operating leases represent required minimum lease payments. These commitments increased
by approximately $85 million at the end of September 2008, driven by leases for additional
retail stores. |
|
|
|
|
Minimum royalty and other commitments decreased by approximately $70 million at the end
of September 2008 due to payments made under the agreements. |
During the first nine months and extending into the fourth quarter of 2008, the fair value of
investments in our qualified defined benefit pension plan declined due to disruption in the global
capital and credit markets. Management is continually evaluating current credit market conditions
and, along with its independent actuary, is evaluating the impact of those conditions on our
pension plans assets and liabilities. If our plans investment portfolio does not recover its
losses before our next plan measurement date at the end of 2008 and if the extent of the effects of
any decline in asset values are not offset by the effects of a possible increase in the discount
rate used to value the plans obligations to participants, it is likely that (i) the reduction in
the plans funded status will result in charges to Other Comprehensive Income at December 2008,
(ii) our pension expense in 2009 will increase, and (iii) VF will be required to make funding
contributions to the plan in 2009.
Management believes that VFs cash balances and funds provided by operating activities, as well as
unused committed bank credit lines, additional borrowing capacity and access to equity markets,
taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term
obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain our
dividend payout policy and (iii) flexibility, depending on capital market conditions, to meet
investment opportunities that may arise.
VF does not participate in transactions with unconsolidated entities or financial partnerships
established to facilitate off-balance sheet arrangements or other limited purposes.
Critical Accounting Policies and Estimates
We have chosen accounting policies that we believe are appropriate to accurately and fairly report
VFs operating results and financial position in conformity with accounting principles generally
accepted in the United States. We apply these accounting policies in a consistent manner. Our
significant accounting policies are summarized in Note A to the Consolidated Financial Statements
included in our 2007 Form 10-K.
The application of these accounting policies requires that we make estimates and assumptions about
future events and apply judgments that affect the reported amounts of assets, liabilities,
revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates,
assumptions and judgments are based on historical experience, current trends and other factors
believed to be reasonable under the circumstances. We evaluate these estimates and assumptions and
may retain outside consultants to assist in our evaluation. If actual results ultimately differ
from previous estimates, the revisions are included in results of operations in the period in which
the actual amounts become known.
The accounting policies that involve the most significant estimates, assumptions and management
judgments used in preparation of our consolidated financial statements, or are the most sensitive
to change from outside
25
factors, are discussed in Managements Discussion in our 2007 Form 10-K. There have been no
material changes in these policies, except for those mentioned in Note B to the Consolidated
Financial Statements.
Cautionary Statement on Forward-Looking Statements
From time to time, we may make oral or written statements, including statements in this Quarterly
Report that constitute forward-looking statements within the meaning of the federal securities
laws. These include
statements concerning plans, objectives, projections and expectations relating to VFs operations
or economic performance, and assumptions related thereto. Forward-looking statements are made
based on our expectations and beliefs concerning future events impacting VF and therefore involve a
number of risks and uncertainties. We caution that forward-looking statements are not guarantees
and actual results could differ materially from those expressed or implied in the forward-looking
statements.
Potential risks and uncertainties that could cause the actual results of operations or financial
condition of VF to differ materially from those expressed or implied by forward-looking statements
in this Quarterly Report on Form 10-Q include VFs reliance on a small number of large customers;
the financial strength of VFs customers; changing fashion trends and consumer demand; increasing
pressure on margins; VFs ability to implement its growth strategy; VFs ability to grow its
international and direct-to-consumer businesses; VFs ability to successfully integrate and grow
acquisitions; VFs ability to maintain the strength and security of its information technology
systems; stability of VFs manufacturing facilities and foreign suppliers; continued use by VFs
suppliers of ethical business practices; VFs ability to accurately forecast demand for products;
continuity of members of VFs management; VFs ability to protect trademarks and other
intellectual property rights; maintenance by VFs licensees and distributors of the value of VFs
brands; the overall level of consumer spending; disruption and volatility in the global capital
and credit markets; general economic conditions and other factors affecting consumer confidence;
fluctuations in the price, availability and quality of raw materials and contracted products;
foreign currency fluctuations; and legal, regulatory, political and economic risks in
international markets. More information on potential factors that could affect VFs financial
results is included from time to time in VFs public reports filed with the Securities and Exchange
Commission, including VFs Annual Report on Form 10-K.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes in VFs market risk exposures from what was disclosed in
Item 7A in our 2007 Form 10-K.
Item 4 Controls and Procedures
Disclosure controls and procedures:
Under the supervision of our Chief Executive Officer and Chief Financial Officer, a Disclosure
Committee comprising various members of management has evaluated the effectiveness of the
disclosure controls and procedures at VF and its subsidiaries as of the end of the period covered
by this Quarterly Report (the Evaluation Date). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded as of the Evaluation Date that such controls and
procedures were effective.
Changes in internal control over financial reporting:
There have been no changes during the last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, VFs internal control over financial reporting.
26
Part II Other Information
Item 1A Risk Factors
Except for the item below, there have been no material changes to our risk factors from those
disclosed in
our 2007 Form 10-K.
Global capital and credit markets conditions, and resulting declines in consumer confidence and
spending, could have an adverse effect on VFs operating results. Further, the conditions in the
global capital and credit markets could have an adverse effect on VFs ability to access those
markets.
Volatility and disruption in the global capital and credit markets reached unprecedented levels
during the third quarter of 2008 and extending into the fourth quarter. This market turmoil has
led to failures of major financial institutions, government intervention in the capital markets, a
tightening of business credit and liquidity, a contraction of consumer credit, higher unemployment
and declines in consumer confidence and spending. The economic downturn in the United States and
in many international markets could have an adverse effect on demand for our products and on the
financial condition of some of our wholesale customers. Global economic conditions could continue
to deteriorate and remain weak for an extended period of time, which could have a material adverse
effect on VFs financial condition, results of operations and ability to access the capital and
credit markets.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer purchases of equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
|
|
|
|
Weighted |
|
Shares Purchased |
|
of Shares that May |
|
|
Total Number |
|
Average |
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
of Shares |
|
Price Paid |
|
Announced Plans |
|
Under the Plans or |
Fiscal Period |
|
Purchased |
|
per Share |
|
or Programs |
|
Programs (1) |
June 29 - July 26, 2008 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
3,204,000 |
|
July 27 - August 23, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,204,000 |
|
August 24 - September
27, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,204,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under the Mid-Term Incentive Plan
implemented under VFs 1996 Stock Compensation Plan, VF must withhold from the shares of
Common Stock issuable in settlement of a participants performance-based restricted stock
units the number of shares having an aggregate fair market value equal to any minimum
statutory federal, state and local withholding or other tax that VF is required to
withhold, unless the participant has made other arrangements to pay such amounts. There
were no shares withheld under the Mid-Term Incentive Plan during the third quarter of 2008. |
27
Item 6 Exhibits
10.1 |
|
VF 2004 Mid-Term Incentive Plan, as amended July 14, 2008 |
|
10.2 |
|
The Form of Indemnification Agreement with each of VFs non-employee Directors |
|
10.3 |
|
Executive Deferred Savings Plan II, as amended and restated to be
effective January 1, 2009 |
|
31.1 |
|
Certification of the principal executive officer, Eric C. Wiseman, pursuant to 15
U.S.C. Section 10A, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 |
|
31.2 |
|
Certification of the principal financial officer, Robert K. Shearer,
pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification of the principal executive officer, Eric C. Wiseman,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
32.2 |
|
Certification of the principal financial officer, Robert K. Shearer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
V.F.
CORPORATION |
|
|
(Registrant)
|
|
|
By: |
/s/ Robert K. Shearer
|
|
|
|
Robert K. Shearer |
|
|
|
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer) |
|
|
Date: November 5, 2008 |
|
|
|
By: |
/s/ Bradley W. Batten
|
|
|
|
Bradley W. Batten |
|
|
|
Vice President - Controller
(Chief Accounting Officer) |
|
|
29