VF Corporation - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

105 Corporate Center Boulevard
Greensboro, North Carolina 27408
(Address of principal executive offices)

(336) 424-6000
(Registrant’s 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):

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 registrant’s Common Stock outstanding.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

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 VF’s 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 women’s 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.

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 VF’s 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.

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 entity’s 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:

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis at September 2008:

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 VF’s 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

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.

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 Splendid^Ò and Ella Moss^Ò 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 marketsLee^Ò 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 VF’s 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 VF’s operating results.

In December 2006, management and the Board of Directors decided to exit VF’s domestic and international women’s 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 unit’s 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.

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

Summarized assets and liabilities of discontinued operations presented in the Consolidated Balance Sheets were as follows:

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.

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

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 VF’s 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.

For internal management and reporting purposes, VF’s 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 VF’s reportable segments. Financial information for VF’s reportable segments is as follows:

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.

Activity for 2008 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 2008 is summarized as follows:

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 VF’s 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.

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.

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.

Earnings per share from continuing operations were computed as follows:

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.

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 VF’s 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 VF’s 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 entity’s financial position, operating results and cash flows. This Statement is effective for financial statements issued for VF’s 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 VF’s 2009 fiscal year, and the expanded disclosures are effective for all recognized intangible assets in VF’s 2009 consolidated financial statements. VF is currently evaluating the impact of adopting FSP 142-3.

VF’s 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.

Highlights of the third quarter of 2008 included:

In December 2006, management and the Board of Directors decided to exit the women’s intimate apparel business. The sale, which closed on April 1, 2007, was consistent with VF’s 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.

     Consolidated Statements of Income

The following table presents a summary of the changes in our Total Revenues from 2007:

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.

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:

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,

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.S^â 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

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.

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:

     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 ofH.I.S^â 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.

     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 Face^â, Vans^â,Kipling^â, Napapijri^â and Eastpak^âbrands. Also, the 2007 acquisitions of Eagle Creek and specific brand-related assets of a former licensee of The North Face^â 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 Majestic^â 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 Nautica^â brand sportswear business declined 10% in the third quarter of 2008 and 11% in the nine month period, driven by the exit of our women’s wholesale sportswear business and challenging overall conditions in the department store channel. These declines were partially offset by significant revenue growth in ourKipling^â and John Varvatos^â 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 women’s 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 Nautica^â brand revenues without comparable expense reduction, plus a charge in the first quarter of 2008 to discontinue our Nautica^â women’s 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 Splendid^â and Ella Moss^â 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 Splendid^â and Ella Moss^âbrands. 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%

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 Outlet’s sale of women’s intimate apparel products obtained from independent suppliers following VF’s 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 VF’s 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.

     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 Splendid^â and Ella Moss^â 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

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: