VF Corporation - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

VF Corporation and its consolidated subsidiaries (“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 2007, December 2006 and September 2006 relate to the fiscal periods ended on September 29, 2007, December 30, 2006 and September 30, 2006, 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 2006 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 2007 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 29, 2007. For further information, refer to the consolidated financial statements and notes included in VF’s Annual Report on Form 10-K for the year ended December 2006 (“2006 Form 10-K”).

In December 2006, management and the Board of Directors decided to dispose of VF’s intimate apparel business consisting of its domestic and international women’s intimate apparel business units. Accordingly, the consolidated financial statements have been reclassified to present the intimate apparel business as discontinued operations for all periods. General interest expense has not been allocated to the discontinued operations. Amounts presented herein, unless otherwise stated, relate to continuing operations. See Note D.

Other prior year amounts, none of which are material, have been reclassified to conform with the 2007 presentation.

Defined benefit pension plans – In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (“Statement 158”). Statement 158, effective as of December 2006, requires that the funded status of a defined benefit plan, measured as the difference between the fair value of plan assets and projected benefit obligations, be recorded in the balance sheet. Statement 158 also requires that gains and losses for differences between actuarial assumptions and actual results and that unrecognized prior service costs be recorded as components of accumulated other comprehensive income. In accordance with Statement 158, financial statements prior to December 2006 were not restated.

Under the prior accounting rules, VF had been using a September measurement date for valuation of its defined benefit pension plans’ assets and projected benefit obligations for its December year-end balance sheet. Under Statement 158, VF was required to change its September measurement date to a December year-end measurement date by no later than December 2008. VF elected, effective at the beginning of 2007,

to change its plans’ measurement date to December. In accordance with Statement 158, pension expense of 3.8 million, net of $2.4 million income tax effect, for the period October to December 2006 (determined using the September 2006 measurement date) was recorded as a charge to Retained Earnings at the beginning of 2007. Plan assets, projected benefit obligations, adjustments to other comprehensive income, and expense in the 2007 financial statements were determined using the beginning of 2007 measurement date. See Note H.

Accrued income taxes – In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. FIN 48 prescribes the recognition threshold an income tax provision is required to meet before being recorded in the financial statements and provides guidance on classification and disclosures of tax positions. VF adopted FIN 48 at the beginning of 2007 by recording a cumulative effect charge of $2.3 million, net of $0.2 million income tax effect, to Retained Earnings in accordance with the provisions of FIN 48. See Note L.

On January 26, 2007, VF acquired Eagle Creek, Inc. (“Eagle Creek”), maker of Eagle Creek^â brand adventure travel gear that includes accessories, luggage and daypacks. Eagle Creek, with revenues of $30 million in its latest fiscal year, operates as part of the Outdoor Coalition. On February 28, 2007, VF acquired substantially all the operating assets of Majestic Athletic, Inc. (“Majestic”) and related companies. Majestic currently holds on-field uniform rights for all 30 major league baseball teams, including exclusively supplying each team with on-field MLB Authentic Collection™ outerwear, batting practice jerseys, T-shirts, shorts and fleece. Majestic markets baseball-related consumer apparel to numerous wholesale accounts. Majestic, with 2006 revenues of $179 million, operates as part of the Imagewear Coalition’s Activewear division. VF also acquired the specific brand-related assets of a former licensee who had rights to market VF’s The North Face^â brand in China and Nepal (“The North Face – China”). Because the licensing arrangement represented an arms-length contract, no gain or loss was recognized at the acquisition date.

On August 27, 2007, VF acquired lucy activewear, inc. (“lucy activewear”), a rapidly growing chain of retail stores marketing lucy^â brand women’s activewear. On August 31, 2007, VF acquired Seven For All Mankind, LLC (“Seven For All Mankind”), marketer of the rapidly growing 7 For All Mankind^â brand of women’s and men’s premium denim jeanswear and related apparel products in the United States and Europe. The lucy activewear business, with forecasted annual revenues of approximately $57 million, and the Seven For All Mankind business, with forecasted annual revenues of approximately $300 million, together formed the foundation for a new lifestyle-based coalition called Contemporary Brands.

The Eagle Creek, Majestic, lucy activewear and Seven For All Mankind acquisitions are consistent with VF’s goal of acquiring strong lifestyle brands that have high growth potential within their target markets. The acquisition of The North Face — China gives VF control of one of its leading brands in one of the fastest growing markets in the world. These acquisitions are collectively referred to as the “2007 Acquisitions.”

The total cost of the 2007 Acquisitions was $1,074.7 million, including the assumption of $11.5 million of debt. The most significant acquisition, Seven For All Mankind, had a cost of $779.0 million. Management, with assistance from independent valuation specialists, has allocated the purchase price of the 2007 Acquisitions to acquired tangible and intangible assets, and assumed liabilities, based on their respective fair values. The purchase price allocations for acquisitions completed during the first half of the year are substantially complete, except for income tax matters. For acquisitions completed during the third quarter, the valuations of intangible assets, income taxes and certain other items are preliminary. Management expects to complete the purchase price allocations during the fourth quarter of 2007.

Except for Majestic, the purchase price of each acquisition exceeded the fair value of the net tangible and intangible assets acquired. The excess was recorded as Goodwill, which was attributed to expected growth rates and profitability of the acquired businesses, the ability to expand the brands within existing markets or to new markets and expected synergies with existing VF operations. In the Majestic acquisition, the fair value of the net assets acquired exceeded the purchase price by $14.0 million. Since there is contingent consideration based on growth in revenues that may result in the recognition of additional purchase price at the end of 2007, 2008 and 2009, the maximum amount of contingent consideration was recorded as a deferred credit of $1.5 million in Accrued Liabilities and $8.5 million in Other Liabilities. The remaining $4.0 million excess fair value was applied to reduce noncurrent assets on a pro rata basis. When the contingent consideration is known, any amount of payments less than the $10.0 million maximum will be recognized as a pro rata reduction of amounts initially assigned to noncurrent assets. Contingent consideration for Eagle Creek is payable at the end of 2008 and 2009 based on a measure of profitability over those periods. Any contingent consideration earned will be recorded as additional Goodwill.

The Eagle Creek^â, Majestic^â, lucy^â and 7 For All Mankind^â trademarks and tradenames, which management believes have indefinite lives, have been valued at $408.4 million. Amounts assigned to amortizable intangible assets for the 2007 Acquisitions totaled $273.3 million and consisted primarily of $223.5 million of customer relationships and $49.5 million of licensing contracts. Customer relationships are being amortized using accelerated methods over their estimated weighted average useful lives of 19 years, and licensing contracts are being amortized using straight-line and accelerated methods over their estimated weighted average useful lives of 18 years.

Operating results of the 2007 Acquisitions have been included in the consolidated financial statements since their respective acquisition dates.

The following pro forma results of operations assume that the Seven for All Mankind and Majestic acquisitions had occurred at the beginning of 2006. These pro forma amounts should not be relied on as an indication of the results of operations that VF would have achieved had the acquisitions taken place at a different date or of future results that VF might achieve. Pro forma operating results for the other 2007 acquisitions and for the one acquisition in 2006, for periods prior to their respective dates of acquisition, are not provided because these acquisitions, in the aggregate, are not material to VF’s results of operations.

     Sale of Intimate Apparel Business Classified as Discontinued Operations

In December 2006, management and the Board of Directors decided to exit the women’s intimate apparel business. VF entered into a definitive agreement on January 22, 2007 to sell all of its domestic and international women’s intimate apparel business units (formerly referred to as the Intimate Apparel Coalition, a reportable business segment). The transaction is consistent with VF’s stated objective of

focusing on lifestyle businesses having higher growth and profit potential. Accordingly, the financial position, 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 (“Statement 144”).

VF recorded a charge of $42.2 million in 2006, computed in accordance with Statement 144, for the difference between the recorded book value of the intimate apparel business and the expected net sales proceeds. The recorded book value included $32.0 million of foreign currency translation losses, net of income tax benefit, deferred in Accumulated Other Comprehensive Income (Loss). The impact of the $42.2 million charge and a partial pension plan curtailment charge of $5.6 million, less income tax benefit of $10.9 million, resulted in an estimated loss on disposal of $36.8 million ($0.33 per share) in 2006. Included in the determination of the $42.2 million impairment charge was a $17.2 million unrealized gain on an investment in marketable securities of one of our intimate apparel suppliers.

The sale closed on April 1, 2007, with net sales proceeds received in the second quarter of $348.7 million plus $28.8 million related to the business unit’s Cash and Equivalents. The transaction excluded the marketable securities discussed above. Because the anticipated gain on these securities will not be recognized until sold, the loss on disposal was increased by the amount of the unrealized gain included in the recorded 2006 impairment. Accordingly, in the second quarter, the loss on disposal was increased by $24.3 million ($0.21 per share) consisting of (i) a $17.2 million increase to the loss related to the unsold marketable securities, (ii) income tax adjustments of the purchase price allocation and (iii) final determination of the sales price. Since the marketable securities remain unsold at the end of the third quarter, they continue to be classified as available for sale and recorded at market value, with their unrealized appreciation of $10.5 million recorded in Accumulated Other Comprehensive Income. Future changes to the loss on disposal may result from the sale of the marketable securities and the impact, if any, of settling remaining liabilities, including those related to income taxes. All adjustments to the loss on disposal will be recorded when realized.

Summarized operating results for the discontinued intimate apparel business are as follows:

Summarized assets and liabilities of the discontinued intimate apparel business presented in the Consolidated Balance Sheets are as follows:

     Sale of H.I.S^® Brand

On June 29, 2007, VF sold H.I.S^â trademarks and related intellectual property for $11.4 million. H.I.S ^® is a female jeans and casual apparel brand marketed primarily in Germany. Remaining inventories and other operating assets of the H.I.S^â brand (which are not material) are expected to be liquidated through the end of the year. Net foreign currency translation gains totaling $6.0 million on the H.I.S^ânet operating assets, previously deferred in Accumulated Other Comprehensive Income, are being recognized in the Consolidated Statement of Income as the sale and liquidation proceeds are realized. The sale proceeds and recognition of the deferred foreign currency translation gains, less employee termination and other exit costs, resulted in a $0.5 million gain in the third quarter and an $8.0 million gain in the nine months ended September 2007, which was recorded as $2.4 million of additional expense in Cost of Goods Sold and a reduction of $10.4 million in Marketing, Administrative and General Expenses. Revenues of the H.I.S^® brand totaled $21 million in the nine months of 2007 and $34 million and $45 million annually in 2006 and 2005, respectively.

Amortization expense of intangible assets for the third quarter and nine months of 2007 was $7.4 million and $17.7 million, respectively. Estimated amortization expense for the remainder of 2007 is $10.1 million and for the years 2008 through 2011 is $35.2 million, $33.7 million, $30.3 million and $28.3 million, respectively.

     Short-term Borrowings

On August 21, 2007, VF entered into a $400.0 million bridge loan facility with two banks. VF borrowed $350.0 million under the bridge loan facility to reduce commercial paper borrowings that had been used to fund the Seven For All Mankind and lucy activewear acquisitions.

On October 15, 2007, VF issued $600.0 million of senior unsecured long-term notes. See Note O. Proceeds of $592.0 million were used to repay the then-outstanding $250.0 million balance of the bridge loan facility, with the remainder used to repay commercial paper borrowings. Accordingly, $592.0 million of Short-term Borrowings was reclassified as Long-term Debt. The bridge loan facility was then cancelled.

     Long-term Debt

At September 2007, there was $112.7 million outstanding under the revolving credit portion of the international bank credit agreement. Of this amount, $49.3 million was classified as Long-term Debt because VF had the ability and intent to retain that amount as outstanding for the next 12 months and $63.4 million was classified as Current Portion of Long-term Debt, considering its anticipated payment within the next twelve months. This international bank credit agreement was replaced in October 2007 with a facility extending through 2012. See Note O.

As discussed in Note B, VF adopted the balance sheet provisions of Statement 158 at the end of 2006 but continued to use a September 2006 measurement date, as permitted by the prior accounting rules. Effective at the beginning of 2007, VF elected to early adopt the measurement date provisions of Statement 158 by changing its annual measurement date from September to December. Accordingly, VF, along with its independent actuary, prepared a valuation of its pension plans’ assets and benefit obligations as of the beginning of 2007. The following summarizes the funded status of the plans as measured at the beginning of 2007, compared with the funded status as reported in the December 2006 balance sheet (based on the September 30, 2006 valuation):

Amounts included in the Consolidated Balance Sheets for the defined benefit plans are summarized as follows:

VF’s net periodic pension cost contained the following components:

During the nine months of 2007, VF made contributions totaling $4.8 million to fund benefit payments for the Supplemental Executive Retirement Plan (“SERP”). VF currently anticipates making an additional $0.9 million of contributions to fund benefit payments for the SERP during the remainder of 2007. VF is not required under applicable regulations, and does not currently intend, to make a contribution to the qualified pension plan during 2007.

VF’s 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 VF’s reportable business segments. Financial information for VF’s reportable segments is presented below:

Since their dates of acquisition, operating results of Eagle Creek and The North Face — China are included in the Outdoor Coalition, results of Majestic are included in the Imagewear Coalition and results of Seven For All Mankind and lucy activewear are included in the newly-formed Contemporary Brands Coalition.

Common stock outstanding is net of shares held in treasury, and in substance retired, of 10,042,686 at September 2007, 5,775,810 at December 2006 and 5,775,810 at September 2006. In addition, 279,198

shares of VF Common Stock at September 2007, 261,458 shares at December 2006 and 265,863 shares at September 2006 were held in trust for deferred compensation plans. These shares are treated for financial accounting purposes as treasury stock at each of the respective dates.

There are 25,000,000 authorized shares of Preferred Stock, $1 par value. Of these shares, 2,000,000 were designated as Series A, of which none have been issued.

Activity for 2007 in the Common Stock, Additional Paid-in Capital and Retained Earnings accounts is summarized as follows:

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. VF’s comprehensive income was as follows:

Accumulated Other Comprehensive Income (Loss) for 2007 is summarized as follows:

During the first quarter of 2007, VF granted options for 1,708,150 shares of Common Stock at an exercise price of $76.10, equal to the 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 22% to 30%, with a weighted average of 24%; expected term of 4.7 to 7.3 years; expected dividend yield of 3.2%; and risk-free interest rate ranging from 5.2% at six months to 4.8% at 10 years. The resulting weighted average fair value of these options at the date of grant was $16.80 per option.

Also during the first quarter of 2007, VF granted 238,680 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 VF’s performance over that period. The grant date fair value of the restricted stock units was $77.00 per unit.

The effective income tax rate was 33.9% for the first nine months of 2007 and 31.2% for the full year 2006. The prior year rate included the favorable impact from tax audit settlements and utilization of accumulated net operating losses in foreign jurisdictions.

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. With limited exceptions, VF is not subject to examination by tax authorities for years prior to 2001. In the United States, Internal Revenue Service (“IRS”) examinations for tax years 1995 through 1999 are settled, the statutes of limitations have expired for tax years 2000 and 2001, and tax years 2002 and 2003 are in the appeals process with the IRS. VF is under examination by the U.K. Inland Revenue for tax years 2001 through 2004, and settlement discussions are underway. 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.

As discussed in Note B, VF adopted FIN 48 effective at the beginning of 2007. In accordance with the new rules, VF recognized (i) a decrease of $0.5 million in the liability for unrecognized income tax benefits, (ii) a charge of $2.3 million, net of a $0.2 million income tax effect, to Retained Earnings and (iii) a reduction of $2.8 million of Goodwill. As of the beginning of 2007, VF had recognized total liabilities of $113.0 million for unrecognized income tax benefits, which included $11.6 million of interest (net of tax benefit). The total amount of unrecognized tax benefits that, if recognized, would favorably affect income tax expense in future periods was $72.0 million, which included interest of $9.6 million (net of tax benefit).

During the first quarter of 2007, the amount of unrecognized income tax benefits was decreased by $6.2 million due to a favorable audit outcome on certain matters outside of the United States related to an acquired business for years prior to its acquisition by VF. Accordingly, the income tax benefit associated with the decrease in the unrecognized tax benefit was recorded as a reduction of Goodwill associated with the acquisition. Similarly during the second quarter of 2007, the amount of unrecognized tax benefits was reduced by $1.8 million, with a corresponding reduction in deferred income tax assets, due to settlement of a tax audit. Neither of these reductions affected Net Income. During the remainder of 2007, management believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease by an additional $13 million, which includes $10 million that would reduce income tax expense, due primarily to settlement of tax audits and expiration of statutes of limitations.

Earnings per share were computed as follows: