SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2013
Commission file number: 1-5256
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. employer
identification number)
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 x NO ¨
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 x NO ¨
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 ¨ NO x
On October 26, 2013, there were 110,076,207 shares of the registrant’s common stock outstanding.
VF CORPORATION
Table of Contents
Part I — Financial Information
Item 1 — Financial Statements (Unaudited)
Consolidated Balance Sheets: September 2013, December 2012 and September 2012
Consolidated Statements of Income: Three and nine months ended September 2013 and September 2012
Consolidated Statements of Comprehensive Income: Three and nine months ended September 2013 and September 2012
Consolidated Statements of Cash Flows: Nine months ended September 2013 and September 2012
Consolidated Statements of Stockholders’ Equity: Year ended December 2012 and nine months ended September 2013
Notes to Consolidated Financial Statements
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
Item 4 — Controls and Procedures
Part II — Other Information
Item 1 — Legal Proceedings
Item 1A — Risk Factors
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds
Item 6 — Exhibits
Signatures
2
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
ASSETS
Current assets
Cash and equivalents
Accounts receivable, less allowance for doubtful accounts of: September 2013 – $56,733; December 2012 – $48,998; September 2012 – $55,606
Inventories
Other current assets
Total current assets
Property, plant and equipment
Intangible assets
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term borrowings
Current portion of long-term debt
Accounts payable
Accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Commitments and contingencies
Stockholders’ equity
Preferred Stock, par value $1; shares authorized, 25,000,000; no shares outstanding at September 2013, December 2012 or September 2012
Common Stock, stated value $1; shares authorized, 300,000,000; shares outstanding; September 2013 – 109,805,011; December 2012 – 110,204,734; September 2012 – 109,937,451
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to consolidated financial statements.
3
Consolidated Statements of Income
(In thousands, except per share amounts)
Net sales
Royalty income
Total revenues
Costs and operating expenses
Cost of goods sold
Selling, general and administrative expenses
Operating income
Interest income
Interest expense
Other income (expense), net
Income before income taxes
Income taxes
Net income
Net (income) loss attributable to noncontrolling interests
Net income attributable to VF Corporation common stockholders
Earnings per common share attributable to VF Corporation common stockholders
Basic
Diluted
Cash dividends per common share
4
Consolidated Statements of Comprehensive Income
(In thousands)
Other comprehensive income (loss):
Foreign currency translation
Gains (losses) arising during the period
Less income tax effect
Defined benefit pension plans
Amortization of net deferred actuarial losses
Amortization of prior service cost
Derivative financial instruments
Reclassification to net income for (gains) losses realized
Marketable securities
Other comprehensive income (loss)
Comprehensive income
Comprehensive (income) attributable to noncontrolling interests
Comprehensive income attributable to VF Corporation
5
Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation
Amortization of intangible assets
Other amortization
Stock-based compensation
Provision for doubtful accounts
Pension expense in excess of (less than) contributions
Gain on sale of business
Other, net
Changes in operating assets and liabilities, net of sale of business:
Accounts receivable
Accrued compensation
Accrued income taxes
Other assets and liabilities
Cash provided by operating activities
Investing activities
Capital expenditures
Business acquisition, net of cash acquired
Proceeds from sale of business
Software purchases
Cash used by investing activities
Financing activities
Net increase in short-term borrowings
Payments on long-term debt
Purchases of Common Stock
Cash dividends paid
Proceeds from issuance of Common Stock, net
Tax benefits of stock option exercises
Cash used by financing activities
Effect of foreign currency rate changes on cash and equivalents
Net change in cash and equivalents
Cash and equivalents — beginning of year
Cash and equivalents — end of period
6
Consolidated Statements of Stockholders’ Equity
Balance, December 2011
Dividends on Common Stock
Purchase of treasury stock
Stock compensation plans, net
Common Stock held in trust for deferred compensation plans
Disposition of noncontrolling interests
Balance, December 2012
Balance, September 2013
7
Note A — Basis of Presentation
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 September 2013, December 2012 and September 2012 relate to the fiscal periods ended on September 28, 2013, December 29, 2012 and September 29, 2012, 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 2012 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 and nine months ended September 2013 are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 28, 2013. 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 2012 (“2012 Form 10-K”).
Note B — Disposition
On April 30, 2012, VF sold its 80% ownership in John Varvatos Enterprises, Inc. (“John Varvatos”). VF recorded a $42.0 million gain on the sale which was included in other income (expense), net, during the second quarter of 2012.
Note C — Sale of Accounts Receivable
VF has an agreement with a financial institution to sell selected trade accounts receivable on a recurring, nonrecourse basis. Under the agreement, up to $237.5 million of accounts receivable may be sold to the financial institution and remain outstanding at any point in time. After the sale, VF does not retain any interests in the accounts receivable and removes them from the Consolidated Balance Sheets, but continues to service and collect outstanding accounts receivable on behalf of the financial institution. At September 2013, December 2012 and September 2012, accounts receivable had been reduced by $155.0 million, $127.4 million and $154.7 million, respectively, related to this program. During the first nine months of 2013, VF sold $935.1 million of accounts receivable at their stated amounts, less a funding fee charged by the financial institution. The funding fee is recorded in other income (expense), net, and totaled $1.3 million for the first nine months of 2013. Net proceeds of this program are classified in operating activities in the Consolidated Statements of Cash Flows.
Note D — Inventories
Finished products
Work in process
Materials and supplies
Total inventories
Note E — Property, Plant and Equipment
Land
Buildings and improvements
Machinery and equipment
Property, plant and equipment, at cost
Less accumulated depreciation and amortization
Property, plant and equipment, net
8
Note F — Intangible Assets
Amortization methods
Amortizable intangible assets:
Customer relationships
License agreements
Other
Amortizable intangible assets, net
Indefinite-lived intangible assets:
Trademarks and trade names
Intangible assets, net
Amortization expense for the third quarter and first nine months of 2013 was $11.5 million and $34.5 million, respectively. Estimated amortization expense for the next five years is:
Year
2013
2014
2015
2016
2017
Note G — Goodwill
Changes in goodwill are summarized by business segments as follows:
Currency translation
Accumulated impairment charges as of December 2012 and September 2013 were $43.4 million, $58.5 million and $195.2 million related to Outdoor & Action Sports, Sportswear and Contemporary Brands, respectively.
Note H — Pension Plans
The components of pension cost for VF’s defined benefit plans were as follows:
Service cost – benefits earned during the period
Interest cost on projected benefit obligations
Expected return on plan assets
Amortization of deferred amounts:
Net deferred actuarial losses
Deferred prior service cost
Net periodic pension cost
9
During the first nine months of 2013, VF contributed $113.3 million to its defined benefit plans, which included a $100.0 million discretionary contribution to its domestic defined benefit plan. VF intends to make approximately $6.5 million of additional contributions during the remainder of 2013.
Note I — Business Segment Information
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:
Coalition revenues:
Outdoor & Action Sports
Jeanswear
Imagewear
Sportswear
Contemporary Brands
Total coalition revenues
Coalition profit:
Total coalition profit
Corporate and other expenses
Interest expense, net
Note J — Capital and Accumulated Other Comprehensive Income (Loss)
Common Stock outstanding is net of shares held in treasury which are, in substance, retired. There were 4,250,851 treasury shares at September 2013, 2,530,401 at December 2012 and 2,524,771 at September 2012. 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, 176,416 shares of Common Stock at September 2013, 187,456 shares at December 2012 and 187,226 shares at September 2012 were held in connection with deferred compensation plans. These shares, having a cost of $8.2 million, $8.8 million and $8.6 million at the respective dates, are treated as treasury shares for financial reporting purposes.
The deferred components of other comprehensive income (loss) are reported in accumulated other comprehensive income (loss) in stockholders’ equity, net of related income taxes, as follows:
10
The changes in accumulated other comprehensive income (loss) are as follows:
Balance, June 2013
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net other comprehensive income (loss)
Reclassifications out of accumulated other comprehensive income (loss) are as follows:
Details About Accumulated OtherComprehensive Income (Loss) Components
Amortization of defined benefit pension plans:
Gains and losses on derivative financial instruments:
Foreign exchange contracts
Interest rate contracts
Total reclassifications for the period
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Note K — Stock-based Compensation
During the first nine months of 2013, VF granted options to employees and the Board of Directors to purchase 900,118 shares of common stock at a weighted average exercise price of $162.55 per share. The exercise price of each option granted was equal to the fair market value of VF Common Stock on the option grant date. Employee stock options vest in equal annual installments over three years. Options granted to VF’s Board of Directors become exercisable one year from the date of grant. The grant date fair value of each option award is calculated using a lattice option–pricing valuation model, which incorporates a range of assumptions for inputs as follows:
Expected volatility
Weighted average expected volatility
Expected term (in years)
Dividend yield
Risk-free interest rate
Weighted average grant date fair value
Also during the first nine months of 2013, VF granted 184,267 performance-based restricted stock units to employees that enable them to receive shares of VF Common Stock at the end of a three year period. Each RSU has a potential final value ranging from zero to two shares of VF Common Stock. The number of shares earned by participants, if any, is based on achievement of a three year baseline profitability goal and annually established performance goals set by the Compensation Committee of the Board of Directors. The actual number of shares earned may also be adjusted upward or downward by 25% of the target award, based on how VF’s total stockholder return (“TSR”) over the three year period compares to the TSR for companies included in the Standard & Poor’s 500 Index. Shares are issued to participants in the year following the conclusion of each three year performance period. The weighted average fair market value of VF Common Stock on the date the units were granted was $162.56 per share.
VF granted 4,081 nonperformance-based restricted stock units to members of the Board of Directors during the first nine months of 2013. These units vest upon grant and will be settled in shares of VF Common Stock one year from the date of grant. The fair market value of VF Common Stock at the date the units were granted was $161.95 per share.
VF granted 42,500 nonperformance-based restricted stock units to employees during the first nine months of 2013. These units vest in four years and each RSU entitles the holder to one share of VF Common Stock. The weighted average fair market value of VF Common Stock at the date the units were granted was $156.35 per share.
VF granted 80,000 restricted shares of VF Common Stock to employees during the first nine months of 2013. The weighted average fair market value of VF Common Stock at the date the units were granted was $155.15 per share. These shares will vest in four years, assuming the grantees remain employed through the vesting date.
Note L — Income Taxes
The effective income tax rate for the first nine months of 2013 was 21.7% compared with 24.2% in the first nine months of 2012. The first nine months of 2013 included net discrete tax benefits of $19.0 million, which included $8.3 million of tax benefits related to the extension of certain tax credits and other provisions of the Internal Revenue Code enacted in 2013 which are retroactive to 2012, and $6.9 million of tax benefits related to the realization of previously unrecognized tax benefits and interest. The net discrete tax benefits reduced the effective income tax rate for the first nine months of 2013 by 1.8% compared with a reduction of 2.0% in the first nine months of 2012. The remaining reduction in the effective income tax rate for the first nine months of 2013 compared with the 2012 period related primarily to a higher percentage of income in lower tax rate jurisdictions.
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”) examination for tax years 2007, 2008 and 2009 was completed in 2012. VF has appealed the results of the 2007 to 2009 examination to the IRS Appeals office. Tax years examined prior to 2007 have been effectively settled with the IRS. The IRS is scheduled to begin its examination of VF’s 2010 and 2011 tax returns during the fourth quarter of 2013. The IRS commenced an examination of Timberland’s 2010 and 2011 tax years during 2012. The IRS examination of Timberland’s 2008 and 2009 tax years was settled during 2012. In addition, VF is currently subject to examinations by various state and international tax authorities. Management regularly assesses the potential outcomes of both ongoing and future examinations for the current and prior years to ensure VF’s provision for income taxes is sufficient. The outcome of any one examination is not expected to have a material impact on VF’s consolidated financial statements. Management believes that some of these examinations and negotiations will conclude during the next 12 months.
During the first nine months of 2013, the amount of net unrecognized tax benefits and associated interest increased by $3.2 million to $120.3 million. Management believes that it is reasonably possible that the amount of unrecognized income tax benefits may decrease during the next 12 months by approximately $49.1 million related to the completion of examinations and other settlements with tax authorities and the expiration of statutes of limitations, of which $38.8 million would reduce income tax expense.
12
Note M — Earnings Per Share
Earnings per share – basic:
Net income attributable to VF Corporation
Weighted average common shares outstanding
Earnings per share – diluted:
Incremental shares from stock options and other dilutive securities
Adjusted weighted average common shares outstanding
Outstanding options to purchase 0.1 million and 0.8 million shares of Common Stock for the three month periods ended September 2013 and 2012, respectively, were excluded from the calculations of diluted earnings per share because the effect of their inclusion would have been antidilutive. Outstanding options to purchase 0.3 million and 0.9 million shares of Common Stock for the nine month periods ended September 2013 and 2012, respectively, were excluded from the calculations of diluted earnings per share because the effect of their inclusion would have been antidilutive. In addition, 0.4 million performance-based restricted stock units were excluded from the computation of diluted earnings per share for the three and nine month periods ended September 2013 and September 2012 because these units have not yet been earned in accordance with the vesting requirements of the plan.
Note N — Fair Value Measurements
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. A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
13
The following table summarizes financial assets and financial liabilities that are measured and recorded in the consolidated financial statements at fair value on a recurring basis:
September 2013
Financial assets:
Cash equivalents:
Money market funds
Time deposits
Derivative instruments
Investment securities
Other marketable securities
Financial liabilities:
Deferred compensation
December 2012
The fair value of derivative instruments, which consist of forward foreign exchange contracts, is determined based on observable market inputs, including spot and forward exchange rates for foreign currencies, and considers the credit risk of the Company and its counterparties. Investment securities are held in the Company’s deferred compensation plans and primarily include mutual funds (Level 1) that are valued based on quoted prices in active markets. Investment securities also include collective trust funds (Level 2) that are valued based on the net asset values of the underlying assets.
All other financial assets and financial liabilities are recorded in the consolidated financial statements at cost, except life insurance contracts which are recorded at cash surrender value. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable and accrued liabilities. At September 2013 and December 2012, their carrying values approximated their fair values. Additionally, at September 2013 and December 2012, the carrying value of VF’s long-term debt, including the current portion, was $1,430.1 million and $1,832.0 million, respectively, compared with a fair value of $1,556.0 million and $2,111.4 million at those dates. Fair value for long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
Note O — Derivative Financial Instruments and Hedging Activities
Summary of Derivative Instruments
All of VF’s outstanding derivative instruments are forward foreign currency exchange contracts. Most derivatives meet the criteria for hedge accounting at the inception of the hedging relationship, but a limited number of derivative contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. The notional amounts of outstanding derivative contracts at September 2013, December 2012 and September 2012 totaled $2.1 billion, $1.9 billion and $1.4 billion, respectively, primarily consisting of contracts hedging exposures to the euro, British pound, Canadian dollar, Mexican peso, Japanese yen and Polish zloty. Derivative contracts have maturities up to 24 months.
14
The following table presents outstanding derivatives on an individual contract basis:
Foreign exchange contracts designated as hedging instruments
Foreign exchange contracts dedesignated as hedging instruments
Foreign exchange contracts not designated as hedging instruments
Total derivatives
VF records and presents the fair values of all of its derivative assets and liabilities in the Consolidated Balance Sheets on a gross basis, even though they are subject to master netting agreements. However, if VF were to offset and record the asset and liability balances of all of its forward foreign currency exchange contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Consolidated Balance Sheets as of September 2013, December 2012 and September 2012 would be adjusted from the current gross presentation as detailed in the following table:
Gross amounts presented in the Consolidated Balance Sheets
Gross amounts not offset in the Consolidated Balance Sheets
Net amount
Derivatives are classified as current or noncurrent based on their maturity dates, as follows:
Accrued liabilities (current)
Other assets (noncurrent)
Other liabilities (noncurrent)
Cash Flow Hedge Strategies and Accounting Policies
VF uses derivative contracts primarily to hedge a portion of the exchange risk for its forecasted sales, purchases, production costs and intercompany royalties. The effects of cash flow hedging included in VF’s Consolidated Statements of Income and Consolidated Statements of Comprehensive Income are summarized as follows:
Cash Flow Hedging Relationships
Foreign exchange
15
Location of Gain (Loss)
Total
Derivative Contracts Dedesignated as Hedges
Cash flow hedges of some forecasted sales to third parties have historically been dedesignated as hedges when the sales were recognized. At that time, hedge accounting was discontinued and the amount of unrealized hedging gain or loss was recognized in net sales. These derivatives remained outstanding as an economic hedge of foreign currency exposures associated with the ultimate collection of the related accounts receivable, during which time changes in the fair value of the derivative contracts were recognized directly in earnings. As discussed below in Derivative Contracts Not Designated as Hedges, VF now utilizes separate derivative contracts to manage foreign currency risk related to balance sheet exposures. Accordingly, the third quarter of 2013 is the last period during which dedesignations were recognized related to these cash flow hedges.
For the three and nine month periods ended September 2013, VF recorded net gains of $0.2 million and $1.5 million, respectively, in other income (expense), net, for derivatives dedesignated as hedging instruments. For the three and nine month periods ended September 2012, VF recorded net losses of $0.6 million and $2.4 million, respectively, in other income (expense), net, for dedesignated derivatives.
Derivative Contracts Not Designated as Hedges
VF uses derivative contracts to manage foreign currency exchange risk on intercompany loans, as well as intercompany and third party accounts receivable and payable. These contracts are not designated as hedges, and are recorded at fair value in the Consolidated Balance Sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities. Following is a summary of these hedges included in VF’s Consolidated Statements of Income:
Derivatives Not Designated as Hedges
Other Derivative Information
There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three and nine month periods ended September 2013 and September 2012.
At September 2013, accumulated other comprehensive income (“OCI”) included $11.4 million of net pretax deferred losses for foreign exchange contracts that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on exchange rates in effect when outstanding derivative contracts are settled.
VF entered into interest rate swap derivative contracts in 2011 and 2003 to hedge the interest rate risk for issuance of long-term debt due in 2021 and 2033, respectively. In each case, the contracts were terminated concurrent with the issuance of the debt, and the realized gain or loss was deferred in accumulated OCI. The remaining pretax net deferred loss in accumulated OCI was $36.6 million at September 2013, which will be reclassified into interest expense in the Consolidated Statements of Income over the remaining terms of the associated debt instruments.
Note P — Recently Issued Accounting Standards
In July 2013, the FASB issued an update to their accounting guidance which requires unrecognized tax benefits to be netted with net operating loss or tax credit carryforwards in the Consolidated Balance Sheets if specific criteria are met. The guidance is effective January 2014 for interim and annual periods. The adoption of this accounting guidance is not expected to have an impact on VF’s Consolidated Financial Statements.
16
Note Q — Subsequent Events
On October 16, 2013, VF’s Board of Directors declared a quarterly cash dividend of $1.05 per share, payable on December 20, 2013 to stockholders of record on December 10, 2013.
On October 16, 2013, VF’s Board of Directors approved a 4-for-1 stock split of VF’s Common Stock to be payable in the form of a stock dividend. The stock dividend will be distributed on December 20, 2013 to stockholders of record on December 10, 2013. Upon completion of the split, the number of issued and outstanding shares of VF Common Stock will increase from approximately 110 million to approximately 440 million. Additionally, the Board of Directors amended VF’s Articles of Incorporation to increase the number of authorized shares of Common Stock from 300 million to 1.2 billion and reduce the stated value applicable to the Common Stock from $1.00 per share to $0.25 per share.
Share and per share data presented in the accompanying interim consolidated financial statements have not been adjusted for the stock split. Pro forma share and per share data, giving retroactive effect to the stock split, are as follows (rounded to the nearest cent):
Earnings per common share attributable to VF Corporation common stockholders:
Basic - as reported (pre-stock split)
Basic - pro forma (post-stock split)
Diluted - as reported (pre-stock split)
Diluted - pro forma (post-stock split)
Weighted average shares outstanding:
Cash dividends per common share:
As reported (pre-stock-split)
Pro forma (post-stock-split)
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Overview
Highlights of the Third Quarter of 2013
All per share amounts are presented on a diluted basis.
Analysis of Results of Operations
The following table presents a summary of the changes in total revenues from the comparable periods in 2012:
Total revenues – 2012
Operations
Disposition in prior year
Impact of foreign currency translation
Total revenues – 2013
Third quarter and year to date revenue growth was driven by strength in the Outdoor & Action Sports, international and direct-to-consumer businesses. The sale of John Varvatos Enterprises, Inc. (“John Varvatos”) in April 2012 had a slight negative impact on the nine month revenue growth comparison. Additional details on revenues are provided in the section titled “Information by Business Segment.”
VF’s foreign currency exposure primarily relates to business conducted in euro-based countries. The weighted average translation rate for the euro was $1.33 for the third quarter of 2013 and $1.32 for the first nine months of 2013, compared with $1.25 for the third quarter of 2012 and $1.28 for the first nine months of 2012. Changes in foreign currency translation rates positively impacted total revenue by 1% for the third quarter of 2013 and less than 1% for the first nine months of 2013.
The following table presents the percentage relationships to total revenues for components of the Consolidated Statements of Income:
Gross margin (total revenues less cost of goods sold)
Gross margin increased 90 basis points in the third quarter and 180 basis points in the first nine months of 2013 with improvements in nearly every coalition. The higher gross margins in both periods reflect lower product costs and the continued shift in our revenue mix towards higher margin businesses, including Outdoor & Action Sports, international and direct-to-consumer.
Selling, general and administrative expenses as a percentage of total revenues increased 40 basis points during the third quarter and 70 basis points in the first nine months of 2013, primarily resulting from increased investments in marketing and direct-to-consumer, partially offset by the leverage of operating expenses on higher revenues.
18
Net interest expense decreased by $3.2 million in the third quarter of 2013 and $6.7 million in the first nine months of 2013 from the comparable periods in 2012, due to lower average levels of short-term borrowings, the repayment of $400 million of floating rate notes during the third quarter of 2013 and increased amounts of interest capitalized for significant projects. Total outstanding debt averaged $1.9 billion for the first nine months of 2013 and $2.5 billion for the same period in 2012. The weighted average interest rates on total outstanding debt were 4.4% and 3.7% for the first nine months of 2013 and 2012, respectively.
Other income (expense) in the third quarter of 2013 netted to expense of $1.3 million compared with income of $1.6 million in 2012, and netted to expense of $1.7 million in the first nine months of 2013 compared with income of $44.9 million in 2012. The income in the nine month 2012 period was primarily due to the $42.0 million gain on the sale of John Varvatos.
The effective income tax rate for the first nine months of 2013 was 21.7% compared with 24.2% in the first nine months of 2012. The first nine months of 2013 included net discrete tax benefits of $19.0 million, which included $8.3 million of tax benefits related to the extension of certain tax credits and other provisions of the Internal Revenue Code enacted in 2013 which were retroactive to 2012, and $6.9 million of tax benefits related to the realization of previously unrecognized tax benefits and interest. The net discrete tax benefits reduced the effective income tax rate for the first nine months of 2013 by 1.8% compared with a reduction of 2.0% in the first nine months of 2012. The remaining reduction in the effective income tax rate for the first nine months of 2013 compared with the 2012 period related primarily to a higher percentage of income in lower tax rate jurisdictions.
Net income attributable to VF Corporation for the third quarter of 2013 increased to $433.8 million ($3.89 per share), compared with $381.3 million ($3.42 per share) in the 2012 quarter. The third quarter of 2013 was negatively impacted by $0.02 per share in expenses related to the acquisition of The Timberland Company (“Timberland”) compared with $0.10 per share in the 2012 period. The third quarter of 2013 was positively impacted by $0.10 per share from foreign currency rate fluctuations.
Net income attributable to VF Corporation for the first nine months of 2013 increased to $842.5 million ($7.55 per share), compared with $751.8 million ($6.72 per share) in 2012. The first nine months of 2013 was positively impacted by $0.17 per share from discrete tax benefits and $0.12 per share from foreign currency rate fluctuations, partially offset by a negative impact of $0.07 per share in Timberland acquisition-related expenses. The first nine months of 2012 was positively impacted by $0.18 per share from discrete tax benefits and a $0.32 per share gain on the sale of John Varvatos, partially offset by the negative impact of $0.16 per share in Timberland acquisition-related expenses.
The remainder of the changes in earnings per share during the third quarter and first nine months of 2013 resulted from operating performance, as discussed in the “Information by Business Segment” section below.
Information by Business Segment
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 I to the Consolidated Financial Statements for a summary of results of operations by coalition, along with a reconciliation of coalition profit to income before income taxes.
The following tables present a summary of the changes in coalition revenues for the third quarter and first nine months of 2013 from the comparable periods in 2012:
Coalition revenues – 2012
Coalition revenues – 2013
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The following tables present a summary of the changes in coalition profit for the third quarter and first nine months of 2013 from the comparable periods in 2012:
Coalition profit – 2012
Coalition profit – 2013
The following section discusses the changes in revenues and profitability by coalition:
Outdoor & Action Sports:
Coalition revenues
Coalition profit
Operating margin
Coalition revenues for Outdoor & Action Sports increased 6% in the third quarter of 2013 compared with the 2012 period. The North Face®, Vans® and Timberland® brands achieved global revenue growth of 3%, 16% and 2%, respectively. U.S. revenues for the third quarter increased 5% and were negatively impacted by retailer caution and a calendar shift for key retailers, which pushed approximately $40 million of shipments from the third quarter into the fourth quarter of 2013. International revenues rose 8%, reflecting growth in Europe, Asia Pacific and the Americas (non-U.S.).
Coalition revenues for Outdoor & Action Sports increased 7% in the first nine months of 2013 compared with the 2012 period. The North Face®, Vans® and Timberland® brands achieved global revenue growth of 4%, 18% and 1%, respectively. U.S. revenues for the first nine months increased 6% and were negatively impacted by the aforementioned retailer calendar shift. International revenues rose 9%, reflecting growth in Europe, Asia Pacific and the Americas (non-U.S.).
Direct-to-consumer revenues increased 16% and 14% in the third quarter and first nine months of 2013, respectively, with growth in nearly all brands. New store openings and comparable store growth, including the e-commerce business, contributed to the direct-to-consumer revenue growth.
The decrease in operating margin for the third quarter of 2013 is primarily due to a deleverage of expenses related to the aforementioned retailer calendar shift, as well as incremental marketing investments for the Coalition’s three largest brands - The North Face®, Vans® and Timberland®. Operating margin for the first nine months of 2013 was flat compared to 2012.
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Jeanswear:
Global Jeanswear revenues increased 4% in the third quarter of 2013 compared with the 2012 period, driven by a 5% increase in the Americas region, which included a 7% increase in the Mass business. Jeanswear revenues for the European business increased 11%, primarily due to a 15% increase in the Wrangler®brand revenues. Jeanswear revenues in Asia Pacific decreased 9%, as the Lee® brand continues to be impacted by an industry-wide inventory build-up in China that began during the latter part of 2012.
Global Jeanswear revenues increased 1% during the first nine months of 2013 compared with the 2012 period. This increase was primarily due to a 2% increase in revenues for both the Americas and European regions, offset by a 9% decrease in the Asia Pacific region.
Operating margin increased 290 basis points during the third quarter of 2013 and 350 basis points for the first nine months of 2013. The increase in operating margin for the third quarter and first nine months of 2013 was driven by lower product costs across all regions and improvement in international performance. The Wrangler® and Lee® brands posted improved profitability in nearly every global region for the three and nine month periods.
Imagewear:
Imagewear revenues were flat in the third quarter and decreased 4% during the first nine months of 2013 compared with the 2012 periods. The reduction in revenues for the nine month period is due to an arrangement with a customer that shipped throughout the first nine months of 2012, but did not have significant shipments in 2013 until late in the third quarter, along with general softness in the business.
Operating margin increased 110 basis points during the third quarter of 2013, primarily driven by improved gross margin due to lower product costs. The 20 basis point increase in operating margin for the first nine months of 2013 was due to lower product costs, partially offset by lower shipment and production volumes.
Sportswear:
Sportswear revenues increased 1% and 6% in the third quarter and first nine months of 2013, respectively, compared with the 2012 periods. Third quarter revenues were driven by a 39% increase in sales of the Kipling® brand. Partially offsetting this increase was a 5% decline in Nautica® brand revenues due to a retailer calendar shift in wholesale revenues, which pushed what normally would be third quarter shipments into the fourth quarter of 2013. Revenues for the first nine months of 2013 reflected growth in both the Nautica® and Kipling® brands, primarily driven by the direct-to-consumer businesses of both brands.
The increases in operating margin during the third quarter and first nine months of 2013 are due to a shift in the business mix toward higher margin direct-to-consumer businesses, improvements in the profitability of the wholesale and direct-to-consumer businesses, as well as the leverage of operating expenses on higher revenues.
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Contemporary Brands:
Revenues for Contemporary Brands increased 1% in the third quarter and declined 9% during the first nine months of 2013 compared with the 2012 periods. The absence of John Varvatos accounted for nearly 7% of the decrease in the first nine months of 2013. The remaining decline for the nine month period is primarily attributable to weakness in premium denim in the high-end department store channel, partially offset by higher direct-to-consumer revenues.
Operating margin declines for both the third quarter and first nine months of 2013 are primarily due to lower cost absorption resulting from a decline in sales volume, as well as an increase in investments in marketing and the direct-to-consumer businesses.
Other:
VF Outlet® stores in the United States sell VF and other branded products. Revenues and profits of VF products sold in these stores are reported as part of the operating results of the applicable coalition, while revenues and profits of non-VF products are reported in this Other category.
Reconciliation of Coalition Profit to Income Before Income Taxes:
There are two types of costs necessary to reconcile total coalition profit, as discussed in the preceding paragraphs, to consolidated income before income taxes. These costs are (i) corporate and other expenses, discussed below, and (ii) interest expense, net, which was discussed in the previous “Consolidated Statements of Income” section.
Corporate and other expenses are those that have not been allocated to the coalitions for internal management reporting, including (i) information systems and shared services, (ii) corporate headquarters’ costs and (iii) other income and expenses. Other income and expenses includes costs of corporate programs and initiatives; costs of registering, maintaining and enforcing certain VF trademarks; and miscellaneous costs, the most significant of which is related to the expense of VF’s centrally-managed U.S. defined benefit pension plans. The current year service cost component of pension cost is allocated to the coalitions, while the remaining cost components, totaling $15.2 million and $45.7 million for the third quarter and first nine months of 2013, respectively, and $16.8 million and $50.4 million for the third quarter and first nine months of 2012, respectively, are reported in corporate and other expenses. The increase in corporate and other expenses for the first nine months of 2013 is primarily due to the $42.0 million gain on the sale of John Varvatos, which was recorded as an offset to corporate and other expenses in the first nine months of 2012.
Analysis of Financial Condition
Balance Sheets
The following discussion refers to significant changes in balances at September 2013 compared with December 2012:
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The following discussion refers to significant changes in balances at September 2013 compared with September 2012:
Liquidity and Cash Flows
The financial condition of VF is reflected in the following:
Working capital
Current ratio
Debt to total capital ratio
For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is defined as debt plus stockholders’ equity. The ratio of net debt to total net capital (with net debt defined as debt less cash and equivalents and total net capital defined as total capital less cash and equivalents) was 21.9% at September 2013, 19.6% at December 2012 and 31.5% at September 2012.
In summary, our cash flows were as follows (in millions):
Net cash provided by operating activities
Net cash used by investing activities
Net cash used by financing activities
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Cash Provided by Operating Activities
VF’s primary source of liquidity is the strong cash flow provided by operating activities, which is dependent on the level of net income and changes in working capital. Cash provided by operating activities for the first nine months of 2013 increased to $418.1 million from $102.6 million for the 2012 period. The improvement is due to an increase in net income and a reduction in net cash usage from working capital changes, partially offset by the payment of a $100.0 million discretionary contribution to the defined benefit pension plan in the first quarter of 2013.
Cash Used by Investing Activities
Cash used by investing activities for the first nine months of 2013 increased to $255.3 million from $139.4 million in 2012. VF’s investing activities relate primarily to capital expenditures and software purchases which increased $42.6 million over the 2012 period. The higher level of capital expenditures and software purchases are related to a number of infrastructure projects that support VF’s continued expectations for high revenue growth, as discussed in the “Balance Sheets” section above. The spending is funded by cash flow from operations.
In addition, cash used by investing activities during the first nine months of 2012 was reduced by $68.5 million in proceeds from the sale of John Varvatos.
Cash Used by Financing Activities
Cash used by financing activities in the first nine months of 2013 was $441.7 million, compared with $1.7 million in the first nine months of 2012. This increase was primarily due to the repayment of the $400 million two-year notes issued to finance the acquisition of Timberland and a $49.3 million increase in cash dividends paid.
During the first nine months of 2013 and 2012, VF repurchased 1.7 million and 2.0 million shares, respectively, of its Common Stock in open market transactions. The cost was $281.5 million and $296.8 million with an average price per share of $164.67 and $147.49 for the September 2013 and September 2012 periods, respectively. Under its current authorization from the Board of Directors, VF may repurchase an additional 2.8 million shares. VF will continue to evaluate future share repurchases considering funding required for business acquisitions, VF’s Common Stock price and levels of stock option exercises.
VF relies on continued strong cash generation to finance its ongoing operations. In addition, VF has significant liquidity from its available cash balances and credit facilities. VF maintains a $1.25 billion senior unsecured revolving line of credit (the “Global Credit Facility”), which supports our $1.25 billion U.S. commercial paper program for short-term seasonal working capital requirements. The Global Credit Facility expires in December 2016. Commercial paper borrowings and standby letters of credit issued as of September 2013 were $451.0 million and $17.4 million, respectively, leaving $781.6 million available for borrowing against this facility at September 2013.
VF’s favorable credit agency ratings allow for access to additional liquidity at competitive rates. At the end of September 2013, VF’s long-term debt ratings were ‘A minus’ by Standard & Poor’s Ratings Services and ‘A3’ by Moody’s Investors Service, and commercial paper ratings by those rating agencies were ‘A-2’ and ‘Prime-2’, respectively. None of VF’s long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, if there were a change in control of VF and, as a result of the change in control, the 2017, 2021 and 2037 notes were rated below investment grade by recognized rating agencies, VF would be obligated to repurchase the notes at 101% of the aggregate principal amount, plus any accrued and unpaid interest.
In October 2013, VF’s Board of Directors approved a four-for-one split of VF’s shares of Common Stock to be payable in the form of a stock dividend. Shareholders of record as of the close of business on December 10, 2013 will receive three additional shares of Common Stock for each share of Common Stock they own, payable on December 20, 2013. The New York Stock Exchange is expected to begin reporting the adjusted number of shares outstanding and adjusted per-share stock price on December 23, 2013.
Management’s Discussion and Analysis in the 2012 Form 10-K provided a table summarizing VF’s contractual obligations and commercial commitments at the end of 2012 that would require the use of funds. Since the filing of the 2012 Form 10-K, there have been no material changes in the disclosed amounts, except as noted below:
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Management believes that VF’s cash balances and funds provided by operating activities, as well as its Global Credit Facility, additional borrowing capacity and access to capital markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital expenditures and to maintain the dividend to stockholders at current and expected rates and (iii) flexibility to meet investment opportunities that may arise.
Recently Issued Accounting Standards
In July 2013, the FASB issued an update to their accounting guidance which requires unrecognized tax benefits to be netted with net operating loss or tax credit carryforwards in the Consolidated Balance Sheets if specific criteria are met. The guidance is effective January 2014 for the interim and annual periods. The adoption of this accounting guidance is not expected to have an impact on VF’s Consolidated Financial Statements.
Critical Accounting Policies and Estimates
Management has chosen accounting policies that it considers to be appropriate to accurately and fairly report VF’s operating results and financial position in conformity with generally accepted accounting principles in the United States. Accounting policies are applied in a consistent manner. Significant accounting policies are summarized in Note A to the Consolidated Financial Statements included in the 2012 Form 10-K.
The application of these accounting policies requires management to make estimates and assumptions about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to be reasonable under the circumstances. Management evaluates these estimates and assumptions and may retain outside consultants to assist in the evaluation. If actual results ultimately differ from previous estimates, the revisions are included in results of operations in the period in which the actual amounts become known.
The accounting policies that involve the most significant estimates, assumptions and management judgments used in preparation of the consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Management’s Discussion and Analysis in the 2012 Form 10-K. There have been no material changes in these policies.
Cautionary Statement on Forward-Looking Statements
From time to time, VF may make oral or written statements, including statements in this quarterly report that constitute “forward-looking statements” within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VF’s operations or economic performance, and assumptions related thereto. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. Forward-looking statements are not guarantees and actual results could differ materially from those expressed or implied in the forward-looking statements.
Potential risks and uncertainties that could cause the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, the level of consumer confidence and overall level of consumer demand for apparel; fluctuations in the price, availability and quality of raw materials and contracted products; disruption to VF’s distribution system; disruption and volatility in the global capital and credit markets; VF’s reliance on a small number of large customers; the financial strength of VF’s customers; VF’s response to changing fashion trends; increasing pressure on margins; VF’s ability to implement its growth strategy; VF’s ability to grow its international and direct-to-consumer businesses; VF’s ability to complete, successfully integrate and grow acquisitions, including the Timberland acquisition; VF’s ability to maintain the strength and security of its information technology systems; adverse unseasonable weather conditions; stability of VF’s manufacturing facilities and foreign suppliers; continued use by VF’s suppliers of ethical business practices; VF’s ability to accurately forecast demand for products; continuity of members of VF’s management; VF’s ability to protect trademarks and other intellectual property rights; maintenance by VF’s licensees and distributors of the value of VF’s brands; foreign currency fluctuations; changes in tax liabilities; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect VF’s financial results is included from time to time in VF’s public reports filed with the Securities and Exchange Commission, including VF’s Annual Report on Form 10-K.
There have been no significant changes in VF’s market risk exposures from what was disclosed in Item 7A in the 2012 Form 10-K.
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Disclosure controls and procedures:
Under the supervision of the Chief Executive Officer and Chief Financial Officer, a Disclosure Committee comprising various members of management has evaluated the effectiveness of the disclosure controls and procedures at VF and its subsidiaries as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded as of the Evaluation Date that such controls and procedures were effective.
Changes in internal control over financial reporting:
There have been no changes during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, VF’s internal control over financial reporting.
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Information on VF’s legal proceedings is set forth under Part I, Item 3, “Legal Proceedings,” in the 2012 Form 10-K. There have been no material changes to the legal proceedings from those described in the 2012 Form 10-K.
You should carefully consider the risk factors set forth under Part I, Item 1A, “Risk Factors,” in the 2012 Form 10-K. There have been no material changes to the risk factors from those disclosed in the 2012 Form 10-K.
(c) Issuer purchases of equity securities:
Third Quarter 2013
June 30 – July 27, 2013
July 28 – August 24, 2013
August 25 – September 28, 2013
Item 6 —Exhibits
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Robert K. Shearer
/s/ Scott A. Roe
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