VF Corporation 2012 Form 10-K Summary
Business context and reporting period
VF Corporation is a global branded apparel, footwear and related-products company. Its five reporting coalitions are Outdoor & Action Sports, Jeanswear, Imagewear, Sportswear and Contemporary Brands. The filing covers the 52-week fiscal year ended December 29, 2012; quarterly figures below identify the fourth quarter separately. Timberland results are included from its September 2011 acquisition, while John Varvatos was sold in April 2012.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenues | $10.880 billion | $9.459 billion |
| Operating income | $1.465 billion | $1.245 billion |
| Net income attributable to VF | $1.086 billion | $888.1 million |
| Diluted EPS | $9.70 | $7.98 |
| Gross margin | 46.5% | 45.8% |
| Operating margin | 13.5% | 13.2% |
| Cash from operations | $1.275 billion | $1.081 billion |
| Capital expenditures | $251.9 million | $170.9 million |
| Cash and equivalents at year-end | $597.5 million | $341.2 million |
| Working capital / current ratio | $1.717 billion / 2.0 | $1.522 billion / 1.9 |
Revenue increased 15%: 6% organic growth and 9% from Timberland; foreign currency translation reduced the comparison by $169.8 million, and the John Varvatos disposition reduced revenue by $58.1 million. Operating cash flow less capital expenditures was approximately $1.023 billion, calculated from the reported figures.
At year-end, the balance sheet reported $12.6 million of short-term borrowings, $402.9 million of current long-term debt and $1.429 billion of long-term debt due beyond one year. Debt to total capital was 26.5%, down from 31.9%; net debt to total net capital was 19.6%, down from 28.2%. The $1.25 billion revolving credit facility, expiring December 2016, was substantially available, subject to $19.7 million of standby letters of credit. A $400 million floating-rate note is due in 2013. Ratings agencies maintained negative outlooks following the Timberland-funded increase in debt.
Material changes and segment performance
- Outdoor & Action Sports revenue rose 28.6% to $5.866 billion, including Timberland; coalition profit increased 23.1% to $1.019 billion. Its operating margin declined to 17.4% from 18.2%, principally reflecting Timberland’s lower margin.
- Jeanswear revenue rose 2.1% to $2.789 billion and coalition profit increased 13.0% to $467.0 million. Domestic growth offset lower international sales, including softness in Europe.
- Imagewear revenue increased 4.9% to $1.076 billion, while coalition profit was nearly flat at $145.1 million; higher product costs weighed on margin.
- Sportswear revenue rose 6.2% to $577.3 million and coalition profit increased 29.7% to $73.0 million.
- Contemporary Brands revenue declined 8.1% to $446.0 million, largely reflecting the John Varvatos sale; excluding that disposition, revenue increased 5%. Coalition profit rose to $49.2 million.
- Direct-to-consumer revenue grew 25% (10% excluding Timberland) and represented 21% of total revenue, versus 19% in 2011. International revenue rose 23% and represented 37% of total.
Fourth-quarter revenue was $3.033 billion, operating income $450.3 million, net income attributable to VF $334.2 million and diluted EPS $2.98, compared with $2.910 billion, $351.4 million, $257.3 million and $2.28, respectively, in fourth-quarter 2011. Results are seasonal; the third quarter generated the largest 2012 share of annual revenue and operating income.
Outlook, management commentary, risks and unusual items
- Management expected approximately 160 additional store openings in 2013 and capital spending of up to $325 million, primarily for global distribution capacity and retail expansion. Management expected to fund capital spending from operating cash flow.
- The indicated annual dividend rate for 2013 was $3.48 per share. Management expected a 2013 effective tax rate of approximately 24%, including an anticipated $8 million tax benefit from legislation enacted in January 2013. No explicit revenue or EPS guidance is provided in the filing text.
- Management described continued growth in lifestyle brands, international markets and direct-to-consumer channels as strategic priorities. It said sourcing needs were met in 2012 and no difficulty was anticipated in 2013, while noting cost increases might not always be offset or passed on.
- John Varvatos’s sale generated a $42.0 million pretax gain, contributing $0.32 per diluted share. Timberland contributed $0.87 per share in 2012, including a $0.25-per-share negative impact from acquisition-related expenses. Foreign currency translation reduced EPS by $0.32 and higher pension expense by $0.19.
- The defined-benefit pension plans were underfunded by $482.9 million at year-end, compared with $402.7 million in 2011. VF made a $100 million discretionary contribution in December 2012 and another $100 million in January 2013. Pension expense was $92.7 million in 2012; management expected approximately $89.1 million in 2013.
- Goodwill and intangible assets totaled approximately $4.927 billion, or 51% of total assets. No impairment was recorded in 2012; the estimated fair value of the 7 For All Mankind trademark exceeded carrying value by approximately 18%, leaving sensitivity to business performance and valuation assumptions.
- Key disclosed risks include consumer-spending and fashion cycles, weather, raw-material and sourcing costs, retailer/customer concentration (Wal-Mart was 8% of revenue), foreign exchange, international operations, competition, acquisition integration, pension funding, and impairment risk. VF reported no pending material legal proceedings beyond routine business litigation.
Important facts for investors to verify
- How much future growth and margin performance depends on Timberland and the Outdoor & Action Sports portfolio, and whether integration costs and margin effects are declining.
- The 2013 maturity and repayment or refinancing plan for the $400 million floating-rate notes, alongside the negative outlooks and total debt position.
- Whether planned store openings and higher capital spending generate returns consistent with management’s growth expectations.
- The pension deficit, future contributions and sensitivity to discount rates and investment returns.
- The assumptions supporting goodwill and trademark valuations, especially for 7 For All Mankind and other significant intangible assets.
- Exposure to currency movements, European demand, customer concentration and sourcing disruptions; also review the reported $1.1 billion of 2013 inventory purchase commitments.