VF Corporation - 10-Q quarterly report FY2011 Q1

 

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 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 Exchange Act). YES o NO þ

On April 30, 2011, there were 109,398,482 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.

See notes to consolidated financial statements.

See notes to consolidated financial statements.

VF Corporation (and its subsidiaries, collectively known as “VF”) uses a 52/53 week fiscal year ending on the Saturday closest to December 31 of each year. For presentation purposes herein, all references to periods ended March 2011, December 2010 and March 2010 relate to the fiscal periods ended on April 2, 2011, January 1, 2011 and April 3, 2010, 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 generally accepted accounting principles (“GAAP”) in the United States of America for complete financial statements. Similarly, the December 2010 consolidated balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the consolidated financial position, results of operations and cash flows of VF for the interim periods presented. Operating results for the three months ended March 2011 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2011. 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 2010 (“2010 Form 10-K”).

Certain prior year amounts, none of which are material, have been reclassified to conform with the 2011 presentation.

VF has historically valued inventories using both the first-in, first out (“FIFO”) and last-in, first-out (“LIFO”) methods. At the end of December 2010, approximately 25% of total inventories were valued using the LIFO method. On January 2, 2011, VF changed its method of accounting for inventories previously on the LIFO method to the FIFO method. This change is preferable because the FIFO inventory valuation (i) better reflects the current value of inventories on our Consolidated Balance Sheets, (ii) provides for a single inventory valuation method for all business units globally, and (iii) enhances comparability with the reporting of our peers.

The effect of retrospectively applying this change in accounting principle on previously reported financial statements was not material and therefore those periods have not been restated. The impact of this change on the Consolidated Statement of Income for the first quarter of 2011 was as follows:

The impact of this change in accounting principle on the Consolidated Balance Sheet as of January 2, 2011 was as follows:

The impact of accounting for inventory on a LIFO instead of FIFO basis, had we not made this change in accounting principle, would not have been material to our financial position, results of operations, cash flows and net earnings per common share attributable to VF Corporation Common Stockholders for the quarter ended March 2011.

Note C — Asset Acquisition

On March 30, 2011, VF paid $55.5 million in cash to acquire the trademarks and related intellectual property of Rock and Republic Enterprises, Inc. (“Rock and Republic”). We have accounted for this transaction as an asset acquisition and recorded the purchase price as an indefinite-lived intangible asset. The total purchase price of these assets is expected to be approximately $57.0 million plus expenses. The final purchase price will be determined after all contingencies have been resolved, which should occur by the end of 2011. Rock and Republic jeanswear and related products will be offered through a licensing and wholesale distribution arrangement with Kohl’s department store. Operating results will be reported as part of the Jeanswear Coalition.

VF has an agreement with a financial institution to sell selected trade accounts receivable on a nonrecourse basis. This agreement allows VF to have up to $237.5 million of accounts receivable held by the financial institution at any point in time. After the sale, VF continues to service and collect these accounts receivable on behalf of the financial institution but does not retain any other interests in the receivables. At the end of March 2011, December 2010 and March 2010, accounts receivable in the Consolidated Balance Sheets had been reduced by $140.1 million, $112.3 million and $116.0 million, respectively, related to balances sold under this program. During the first quarter of 2011, VF sold $259.0 million of accounts receivable at their stated amounts, less a funding fee of $0.5 million, which was recorded in Miscellaneous Expense. Net proceeds of this program are recognized as part of the

change in accounts receivable in cash provided by operating activities in the Consolidated Statements of Cash Flows.

Note E — Intangible Assets

Intangible assets are amortized using the following methods: customer relationships — accelerated methods; license agreements — accelerated and straight-line methods; trademarks and other — straight-line method.

Indefinite-lived intangible assets increased in the first quarter of 2011 due to the $55.5 million acquisition of the Rock and Republic trademark as discussed in Note C.

Amortization of intangible assets for the first quarter of 2011 was $9.8 million and is expected to be $37.4 million for the year 2011. Estimated amortization expense for the years 2012 through 2015 is $34.6 million, $33.0 million, $31.9 million and $30.5 million, respectively.

Balances at December 2010 are net of cumulative impairment charges recorded as follows: Outdoor & Action Sports — $43.4 million, Sportswear — $58.5 million and Contemporary Brands — $195.2 million.

VF’s pension cost was composed of the following components:

During the first quarter of 2011, VF made contributions totaling $4.9 million to its defined benefit pension plans. VF currently anticipates making additional contributions totaling $6.1 million during the remainder of 2011.

VF’s businesses are grouped into product categories, and by brands within those product categories, for internal financial reporting used by management. These groupings of businesses within VF are referred to as “coalitions” and are the basis for VF’s reportable business 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 19,243,471 treasury shares at March 2011, 19,099,644 at December 2010 and 15,518,019 at March 2010. 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, 253,610 shares of VF Common Stock at March 2011, 246,860 shares at December 2010 and 244,069 shares at March 2010 were held in connection with deferred compensation plans. These shares, having a cost of $11.4 million, $10.7 million and $10.2 million at the respective dates, are treated as treasury shares for financial reporting purposes.

There are 25,000,000 authorized shares of Preferred Stock, $1 par value, of which none are outstanding.

Comprehensive income includes net income and specified components of other comprehensive income (“OCI”). OCI consists of changes in assets and liabilities that are not included in net income under GAAP but are instead deferred and accumulated within a separate component of stockholders’ equity in the balance sheet. VF’s comprehensive income is presented in the Consolidated Statements of Comprehensive Income. The deferred components of other comprehensive income (loss) are reported, net of related income taxes, in Accumulated Other Comprehensive Income (Loss) in Stockholders’ Equity, as follows:

During the first quarter of 2011, VF granted options to purchase 925,635 shares of Common Stock at an exercise price of $95.56, equal to the market value of VF Common Stock on the option grant date. 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, with the following assumptions: expected volatility ranging from 27% to 38%, with a weighted average of 34%; expected term of 5.6 to 7.5 years; expected dividend yield of 3.1%; and a risk-free interest rate ranging from 0.2% at six months to 3.5% at 10 years. The resulting weighted average fair value of these options at the grant date was $24.99 per option.

Also during the first quarter of 2011, VF granted 241,751 performance-based restricted stock units that entitle the recipients 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 fair value of VF’s Common Stock at the date the units were granted was $95.23 per share.

VF also granted, during the first quarter of 2011, 19,000 shares of restricted VF Common Stock and 15,000 restricted stock units with a fair value at the grant date of $86.51 per share. These shares and units will vest in 2015, assuming continuation of employment by the grantees through the vesting date.

The effective income tax rate was 22.0% in the first quarter of 2010, compared with 21.9% in the first quarter of 2011. The tax rates in both periods were lowered by discrete items. The first quarter of 2010 included a $13.0 million income tax benefit related to refund claims in a foreign jurisdiction. The first quarter 2011 income tax rate included $8.2 million in tax benefits related to settlements of prior years’ tax audits and $2.8 million of tax benefits related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations. In addition, the first quarter 2011 rate benefited from a higher percentage of income in lower tax rate jurisdictions compared with the 2010 quarter. The effective tax rate for the full year 2010 was 23.6% (24.9% on earnings before the goodwill and intangible asset impairment charge).

VF files a consolidated U.S. federal income tax return, as well as separate and combined income tax returns in numerous states and foreign jurisdictions. In the United States, the Internal Revenue Service (“IRS”) commenced an examination during 2010 of tax years 2007, 2008 and 2009. During the first quarter of 2011, VF settled with the IRS its examination of tax years 2004, 2005 and 2006. VF is currently subject to examination by various state tax authorities. While the outcome of any one examination is not expected to have a material impact on the Company’s consolidated financial statements, the Company regularly assesses the outcomes of both ongoing and future examinations to ensure the Company’s provision for income taxes is sufficient. Management believes that some of these audits and negotiations will conclude during the next 12 months.

During the first three months of 2011, the amount of unrecognized tax benefits and associated interest decreased by $15.4 million, primarily due to the audit settlements during the quarter. Of the $15.4 million net decrease, $8.7 million favorably impacted the effective tax rate in the first quarter. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease during the next 12 months by approximately $8.6 million related to the completion of audits and other settlements with tax authorities and the expiration of statutes of limitations. Of the $8.6 million, $4.9 million would reduce income tax expense.

Outstanding options to purchase 1.0 million and 3.8 million shares of Common Stock for the quarters ended March 2011 and March 2010, respectively, were excluded from the computations of diluted earnings per share because the effect of their inclusion would have been antidilutive. In addition, 0.3 million performance-based restricted stock units were excluded from the computation of diluted earnings per share for each of the quarters ended March 2011 and 2010 because these units are subject to performance-based vesting conditions that had not been achieved by the end of those periods.

Fair value is 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, the accounting standards distinguish 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 a three level hierarchy that prioritizes the inputs used in the valuation process. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:

The fair value measurement level for an asset or liability is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table summarizes the classes of financial assets and financial liabilities measured and recorded at fair value on a recurring basis at the dates indicated:

Derivative instruments represent unrealized gains or losses on foreign currency forward exchange contracts, which are the differences between (i) the functional currency value of the foreign currency to be received or paid at the contracts’ settlement date and (ii) the functional currency value to be sold or purchased at the forward exchange rate at the balance sheet dates.

VF purchases investment securities that substantially mirror the liabilities in VF’s nonqualified deferred compensation plans. These securities, held in an irrevocable trust, consist of mutual funds (classified as Level 1) and a separately managed fixed income fund (classified as Level 2). Fair value of the separately managed fixed income fund included in investment securities is its daily net asset value. Fair value of the deferred compensation liabilities is the amount payable to plan participants, based on the fair value of participant-directed investment selections.

The carrying value of all other financial assets and financial liabilities is their cost, which may differ from fair value. At March 2011 and December 2010, the carrying value of VF’s cash held as demand deposits, accounts receivable, life insurance contracts, short-term borrowings, accounts payable and accrued liabilities approximated their fair value. At March 2011 and December 2010, the carrying

value of VF’s long-term debt, including the current portion, was $938.0 million and $938.6 million, respectively, compared with fair value of $1,026.5 million and $1,025.1 million at those dates. Fair value for long-term debt was estimated based on quoted market prices or values of comparable borrowings.

     Summary of derivative instruments — All of VF’s derivative instruments are forward exchange contracts and meet the criteria for hedge accounting at the inception of the hedging relationship. However, derivative instruments that are cash flow hedges of forecasted cash receipts are dedesignated as hedges near the end of their term and do not qualify for hedge accounting after the date of dedesignation. The notional amounts of outstanding derivative contracts at March 2011, December 2010 and March 2010 totaled $1.4 billion, $1.1 billion and $922 million, respectively, consisting of contracts hedging primarily exposures to the euro, British pound, Mexican peso, Polish zloty and Canadian dollar. Derivative contracts have maturities ranging from one month to 20 months. The following table presents outstanding derivatives on an individual contract basis:

Outstanding derivatives have been included in the Consolidated Balance Sheets and classified as current or noncurrent based on the derivatives’ maturity dates, as follows:

     Fair value hedges — VF enters into derivative contracts to hedge intercompany loans between a domestic company and a foreign subsidiary or between two foreign subsidiaries having different functional currencies. VF’s Consolidated Statements of Income include the following effects related to fair value hedging:

     Cash flow hedges — VF uses derivative contracts to hedge a portion of the exchange risk for its forecasted inventory purchases and production costs and for its forecasted cash receipts arising from sales of inventory. In addition, VF hedges the receipt in its domestic companies of forecasted intercompany royalties from its foreign subsidiaries. As discussed below in “derivative contracts not designated as hedges”, cash flow hedges of forecasted cash receipts are dedesignated as hedges when the sale is recorded, and hedge accounting is not applied after that date.

     The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:

     Net investment hedges — In limited instances, VF may choose to hedge the risk of changes in its investment in foreign subsidiaries. Changes in the fair value of derivatives designated as net investment hedges, except for any ineffective portion, are reported as a component of OCI and deferred in Accumulated OCI, along with the foreign currency translation adjustments on that investment. Upon settlement of net investment hedges, cash flows are classified in investing activities in the Consolidated Statements of Cash Flows. The effects of net investment hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income were not material for the quarters ended March 2011 or March 2010.

There were no significant amounts recognized in earnings related to ineffective hedging during the quarters ended March 2011 or March 2010.

At March 2011, Accumulated OCI included $29.9 million of net deferred pretax losses for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts reclassified to earnings will depend on exchange rates when the outstanding derivative contracts are settled.

In addition, VF entered into an interest rate swap derivative contract in 2003 to hedge the interest rate risk for issuance of long-term debt due in 2033. The contract was terminated concurrent with the issuance of the debt, with the realized gain deferred in Accumulated OCI. The remaining pretax deferred gain of $2.6 million in Accumulated OCI at March 2011 will be reclassified into earnings over the remaining term of the debt.

     Derivative contracts not designated as hedges — As noted in a preceding section, cash flow hedges of forecasted cash receipts are dedesignated as hedges when the sales are recognized. At that time, the amount of unrealized hedging gain or loss is recognized in net sales, and hedge accounting is not applied after the date of dedesignation. These derivatives remain outstanding and serve as an economic hedge of foreign currency exposures related to the ultimate collection of the trade receivables. During the period that hedge accounting is not applied, changes in the fair value of the derivative contracts are recognized directly in earnings. For the three months ended March 2011 and March 2010, VF recorded net losses of less than $1 million in Miscellaneous Income (Expense) for derivatives not designated as hedging instruments, effectively offsetting the net remeasurement gains on the related accounts receivable.

There is no new accounting guidance issued by the FASB but not yet adopted that is expected to have a significant effect on VF’s consolidated financial position, results of operations or disclosures.

VF’s Board of Directors declared a quarterly cash dividend of $0.63 per share, payable on June 20, 2011 to shareholders of record on June 10, 2011.

The following table presents a summary of the changes in our Total Revenues from 2010:

Revenues increased 12% in the first quarter of 2011, led by 16% growth in our Outdoor & Action Sports businesses. In addition, revenues in our Jeanswear, Imagewear, Sportswear and Contemporary Brands businesses increased 9%, 12%, 10% and 8%, respectively, over the 2010 quarter. Additional details on revenues are provided in the section titled “Information by Business Segment.”

The impact of foreign currency translation is created when a foreign entity’s financial statements are translated from its functional currency into the U.S. dollar, VF’s reporting currency. The majority of our international business is conducted in Europe/euro-based countries. However, the current quarter impact of translating these euro-based revenues into the U.S. dollar was minimal as the weighted average translation rate was a slightly stronger $1.37 per euro for the first three months of 2011, compared with $1.38 during the first three months of 2010. Accordingly, the primary reason for the $7 million positive revenue comparison of the 2011 quarter over the 2010 quarter is due to the weaker U.S. dollar in relation to functional currencies other than the euro.

The following table presents the percentage relationship to Total Revenues for components of our Consolidated Statements of Income:

The gross margin percentage in the first quarter of 2011 benefitted by (i) 0.6% from restructuring expenses incurred during the first quarter of 2010 to reduce product costs that did not recur in 2011 and (ii) 0.4% due to a change in inventory accounting policy as discussed in Note B to the Consolidated Financial Statements. These benefits were partially offset by higher product costs that were not fully recovered through pricing actions.

The ratio of Marketing, Administrative and General Expenses as a percentage of Total Revenues in the first quarter of 2011 improved over the 2010 quarter due to increased leverage of operating expenses on higher revenues. This improvement was partially offset by an 18% increase in marketing investments that negatively impacted the current quarter ratio by 0.2% compared with the 2010 quarter.

Interest expense decreased $4.6 million in the first quarter of 2011 from the comparable period in 2010 due to the payment of $200.0 million 8.5% notes that matured in the third quarter of 2010. Average interest-bearing debt outstanding totaled $979 million for the first three months of 2011 and $1,187 million for the comparable period of 2010. The weighted average interest rate on total outstanding debt was 6.3% for the first three months of 2011 and 6.7% for the comparable period of 2010.

VF recognized Miscellaneous Expense of $1.9 million in the first quarter of 2011, compared with Miscellaneous Income of $6.4 million for the comparable 2010 quarter. The change is primarily due to the first quarter of 2010 including a $5.7 million gain from remeasuring our previous 50% investment in the Vans Mexico joint venture as part of acquiring the remaining 50% interest.

The effective income tax rate was 22.0% in the first quarter of 2010, compared with 21.9% in the first quarter of 2011. The tax rates in both periods were lowered by discrete items. The first quarter of 2010 included a $13.0 million income tax benefit related to refund claims in a foreign jurisdiction, representing a reduction in the first quarter 2010 rate of 6.2%. The first quarter 2011 income tax rate included $8.2 million in tax benefits related to settlements of prior years’ tax audits and $2.8 million of tax benefits related to the realization of unrecognized tax benefits resulting from expiration of statutes of limitations, together representing a reduction in the rate of 4.3%. In addition, the first quarter 2011 rate benefited from a higher percentage of income in lower tax rate jurisdictions compared with the 2010 quarter.

The effective tax rate for the full year 2010 was 23.6% (24.9% on earnings before the goodwill and intangible asset impairment charge). The 2010 tax rate included favorable impacts of 2.7% from prior years’ refund claims, tax credits and expirations of statutes of limitations. We expect the 2011 annual effective tax rate to be approximately 25%. This projected 2011 rate includes the favorable impacts of the first quarter 2011 discrete items mentioned above, representing a reduction in the rate of approximately 1.0%. The 2011 full year tax rate is also expected to benefit from a higher percentage of earnings in lower tax rate jurisdictions compared with 2010.

Net Income Attributable to VF Corporation for the first quarter of 2011 increased to $200.7 million, compared with $163.5 million in the 2010 quarter. Earnings Per Share Attributable to VF Corporation increased to $1.82 per share from $1.46 per share. The increase resulted primarily from improved operating performance, as discussed in the “Information by Business Segment” section below. The first quarter of

2011 also benefited by $0.10 per share due to the income tax benefits mentioned above, $0.04 per share from the change in inventory accounting method and $0.02 per share from the impact of translating foreign currencies into a weaker U.S. dollar. The first quarter of 2010 included a benefit of $0.11 per share relating to tax refund claims that was substantially offset by $0.09 per share in restructuring expenses.

VF’s businesses are grouped into 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 are the basis for 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 Before Income Taxes.

The following table presents a summary of the changes in our Total Revenues by coalition for the first quarter of 2011:

The following table presents a summary of the changes in our Coalition Profit by coalition for the first quarter of 2011:

The following section discusses the change in revenues and profitability by coalition: