VF Corporation — Form 10-Q Summary
Business context and period. VF Corporation reported for the quarter ended October 1, 2011 (presented as September 2011), and the nine months then ended. VF sells apparel, footwear and related products through brand and product coalitions. A major event was its September 13 acquisition of Timberland.
Financial performance
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Third quarter 2011 | Nine months 2011 |
|---|---|---|
| Total revenues | $2,750.1, up 23% | $6,549.0, up 17% |
| Operating income | $430.1 vs. $354.5 | $893.4 vs. $747.3 |
| Net income attributable to VF | $300.7 vs. $242.8 | $630.8 vs. $517.1 |
| Diluted EPS | $2.69 vs. $2.22 | $5.69 vs. $4.68 |
| Gross margin | 45.3% vs. 46.5% | 46.0% vs. 46.7% |
| Operating margin | 15.6% vs. 15.9% | 13.6% vs. 13.4% |
- Management attributed quarterly revenue growth to 16% organic growth, 7% from Timberland, and favorable currency translation. International revenues increased 44%; Asia revenues increased 64%.
- Higher product costs, not fully offset by pricing, reduced gross margin. Expense leverage on higher revenues helped lower marketing, administrative and general expenses as a share of revenue; Timberland-related costs partly offset that improvement.
- For the nine months, Outdoor & Action Sports revenue rose 28% and coalition profit 21%; Imagewear revenue rose 14% and profit 43%. Jeanswear revenue rose 9%, while quarterly coalition profit declined 7% amid margin pressure from product costs.
Cash flow, debt and liquidity
- Nine-month operating cash flow was negative $28.8, compared with positive $448.6 in 2010, despite higher earnings. Increased receivables and inventory were significant cash uses.
- Investing activities used $2,380.0, including $2,207.1 for acquisitions; financing activities provided $1,936.7. Cash and equivalents fell to $337.4 from $792.2 at year-end 2010.
- At October 1, short-term borrowings were $1,145.8 and long-term debt was $1,832.4, for total debt of approximately $2,978.3. Net debt was approximately $2,641.0. The debt-to-total-capital ratio was 40.1%, versus 20.2% at December 2010; the current ratio was 1.5 and working capital was $1,277.8.
- VF issued $900 million of term debt to help fund Timberland: $500 million of 3.5% fixed-rate notes due 2021 and $400 million of floating-rate notes due 2013. Management expected most period-end short-term borrowings to be repaid by year-end.
- VF reported access to revolving credit and commercial-paper facilities and stated that cash, operating cash flow and borrowing capacity should provide adequate liquidity. Standard & Poor’s changed its outlook to negative following the acquisition; Moody’s outlook was stable.
Acquisition, outlook and other notable items
- Timberland was acquired for approximately $2.3 billion in cash. It contributed $163.6 million of revenue and $7.9 million of earnings in the quarter. Acquisition-related expenses were $26.6 million in the quarter and $30.3 million year to date. The purchase-price allocation was preliminary, including $913.6 million of goodwill; the filing cautioned that expected benefits may take time and are not assured.
- Management estimated a full-year 2011 effective tax rate of approximately 25%. The year-to-date 2011 rate of 24.1% benefited from discrete tax items, including foreign valuation-allowance releases.
- Full-year capital spending could reach $200 million, primarily for facilities, distribution capacity and retail stores. VF raised its quarterly dividend 14% to $0.72 per share; the next payment was declared for December 19, 2011.
- VF changed inventory accounting from LIFO to FIFO effective January 2, 2011. The change increased nine-month net income attributable to VF by $4.9 million, or $0.04 per diluted share; prior-period impact was described as not material.
- Risks include consumer spending and demand, raw-material costs and availability, margin pressure, foreign-exchange movements, customer concentration, supply-chain and information-system continuity, and the ability to integrate and realize benefits from acquisitions. VF said disclosure controls were effective; integration-related control work at Timberland was ongoing.
Important facts for investors to verify
- Whether post-acquisition integration, synergies and Timberland growth meet expectations, and how the preliminary purchase-price allocation changes.
- Whether seasonal receivables and inventory convert to cash and whether short-term borrowings decline as management expected.
- Whether pricing and product-cost trends stabilize gross margins, particularly in Jeanswear and Outdoor & Action Sports.
- How much reported earnings and the expected tax rate depend on discrete tax benefits, acquisition costs and other nonrecurring items.
- Whether VF can fund planned capital spending and dividends while maintaining its targeted liquidity and debt profile.