VF Corporation — Q3 2015 Form 10-Q
Business context and reporting period
VF Corporation reported its third quarter and first nine months of fiscal 2015. The quarter ended October 3, 2015; comparisons are with the corresponding 2014 periods. VF’s businesses include Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. Results are unaudited.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $3.613 billion | $3.520 billion | $8.964 billion | $8.703 billion |
| Operating income | $642.9 million | $633.1 million | $1.264 billion | $1.256 billion |
| Net income | $459.9 million | $470.5 million | $919.4 million | $925.4 million |
| Diluted EPS | $1.07 | $1.08 | $2.13 | $2.10 |
| Gross margin | 47.9% | 48.3% | 48.3% | 48.7% |
| Operating margin | 17.8% | 18.0% | 14.1% | 14.4% |
- Revenue rose about 3% in both periods, driven by operational growth of 8% in Q3 and 9% year to date, partly offset by unfavorable foreign exchange of $201 million and $488 million, respectively. The stronger U.S. dollar reduced reported revenue growth by 5% in Q3 and 6% year to date.
- Q3 diluted EPS declined 1%; nine-month diluted EPS increased despite slightly lower net income, reflecting fewer weighted-average shares. Q3 cash dividends were $0.32 per share versus $0.2625; nine-month dividends were $0.96 versus $0.7875.
- Gross margin fell 40 basis points in both periods. Foreign exchange reduced margin by 100 basis points in Q3 and 80 basis points year to date; excluding that effect, management said margin improved, citing mix and lower product costs in Q3.
- Outdoor & Action Sports led growth: revenue increased 5% in Q3 and year to date. Contemporary Brands remained weak: revenue fell 16% in Q3 and 12% year to date, while coalition profit declined 88% and 76%, respectively. Management attributed weakness to soft demand, discounting and reduced expense leverage.
Cash flow, debt and liquidity
- Operating cash flow was negative $331.0 million for the first nine months, compared with positive $366.8 million a year earlier. Management cited a $250 million discretionary pension contribution, greater working-capital use and lower collections relative to the prior-year 53-week calendar.
- Investing cash outflow was $237.2 million, including $187.3 million of capital expenditures and $53.1 million of software purchases. Financing cash inflow was $197.8 million, supported by increased short-term borrowing; the company also repurchased $731.9 million of stock and paid $407.7 million in dividends.
- At October 3, cash was $566.6 million; short-term borrowings were $1.285 billion and long-term debt, including the current portion, was about $1.425 billion. Working capital was $2.152 billion, the current ratio 1.8:1, and debt-to-total-capital 33.6% (20.5% at December 2014). Net debt-to-total-net-capital was 28.6%.
- The $1.75 billion revolving credit facility supports the commercial-paper program. Commercial paper borrowings and letters of credit totaled about $1.277 billion, leaving $474.3 million available at quarter-end. Management stated that cash, operating cash flow, credit facilities and capital-market access provide adequate liquidity for obligations, investment and dividends.
Outlook, commentary, risks and unusual items
- The filing provides no specific quantified revenue or earnings guidance. Management noted expected shipment phasing early in Q4 and seasonal working-capital needs; it expects to maintain the dividend at current and expected levels.
- Management cited currency movements, consumer demand, fashion trends, margin pressure, raw-material availability and cost, supply-chain and distribution disruptions, customer concentration and financial health, weather, information-system security, international-market risks, intellectual property and potential asset impairments as risks that could affect results.
- VF contributed $270 million to defined-benefit plans in the first nine months, including a discretionary $250 million contribution, and expected about $3 million of additional contributions for the remainder of 2015. Pension settlement charges were $4.0 million year to date.
- Year-to-date results included a $16.6 million gain from sale of a VF Outlet location and a $29.0 million net discrete tax benefit. The effective tax rate was 23.5%, versus 22.4% a year earlier.
- VF filed a U.S. Tax Court petition concerning proposed IRS adjustments to Timberland’s 2011 tax return. Management said the matter could significantly affect the timing of cash taxes and interest, but did not expect the outcome of any one examination to materially affect consolidated statements. No material changes to previously disclosed legal proceedings or risk factors were reported.
Important facts for investors to verify
- Whether seasonal inventory and receivables convert to cash in the fourth quarter as management expects; inventory was $2.038 billion at quarter-end.
- Whether operating cash flow recovers and short-term borrowings decline, given the higher leverage and limited remaining availability under the revolving facility.
- How currency changes and weak Contemporary Brands performance affect revenue, margins and earnings in subsequent periods.
- Progress and potential cash or interest consequences of the Timberland 2011 tax dispute, and the sustainability of discrete tax benefits.
- Whether the announced dividend level and share-repurchase plans remain supported by cash generation and liquidity.