VF Corporation — Q3 2012 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 29, 2012; comparisons are with the corresponding 2011 periods. VF reports apparel, footwear and related brands across product coalitions. Timberland, acquired in September 2011, is included in Outdoor & Action Sports, so reported growth includes acquisition effects. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenues | $3,148.4 | $2,750.1 | $7,846.6 | $6,549.0 |
| Operating income | $536.9 | $430.1 | $1,015.0 | $893.4 |
| Net income attributable to VF | $381.3 | $300.7 | $751.8 | $630.8 |
| Diluted EPS | $3.42 | $2.69 | $6.72 | $5.69 |
- Q3 revenue increased 14%; management attributed 2% to organic growth, with the remainder principally reflecting Timberland, partly offset by divestiture and currency effects. Nine-month revenue increased about 20%; organic growth was $551.8 million.
- Q3 gross margin was 46.7%, up from 45.3%; operating margin was 17.1%, up from 15.6%. Nine-month gross margin was 46.2% versus 46.0%, while operating margin declined to 12.9% from 13.6%.
- Q3 diluted EPS rose to $3.42 from $2.69. Management cited $0.44 per share of Timberland accretion, including $0.10 of acquisition-related costs. Nine-month EPS included a $0.32 per-share benefit from the John Varvatos sale, while currency, higher pension expense and acquisition costs were headwinds.
- Operating cash flow for the nine months was $102.6 million, compared with cash used of $28.8 million in 2011. Capital expenditures were $190.3 million versus $98.2 million; reported operating cash flow therefore substantially preceded full-year seasonal cash generation.
- Cash was $304.6 million at quarter-end. Debt comprised $741.0 million of short-term borrowings, $402.8 million current long-term debt and $1,429.8 million long-term debt. Debt to total capital was 34.3%; working capital was $1,563.0 million and the current ratio was 1.6:1.
- Dividends were $0.72 per share in Q3 and $2.16 for the first nine months, compared with $0.63 and $1.89, respectively, in 2011.
Material changes and segment results
- Outdoor & Action Sports led growth: Q3 revenue increased 28.9% to $1,852.3 million and coalition profit increased 28.7% to $413.0 million. Timberland and organic growth contributed; Q3 organic coalition revenue growth was 6% despite currency pressure.
- Jeanswear Q3 revenue declined 1.2%, but coalition profit rose 19.8% to $131.4 million and margin improved to 18.3% from 15.1%, primarily on lower product costs and improved European profitability.
- Imagewear revenue increased 2.5%, while profit fell 5.5% and margin declined to 13.2% from 14.3%, with higher product costs cited.
- Contemporary Brands revenue fell 17.4%, reflecting the John Varvatos disposal, lower excess-inventory sales and currency effects. Profit rose 65.4% and margin improved to 12.9%, partly due to less excess-inventory activity and a higher direct-to-consumer mix.
- Currency translation reduced consolidated revenue by $81.2 million in Q3 and $152.7 million year to date. Q3 international revenue grew 20% as reported, but organic international revenue declined 1%; Asia revenue grew 51%, including Timberland.
Outlook, commentary and risks
- Management expected the 2012 annual effective tax rate to be approximately 24.5%; no full-year revenue or EPS guidance is stated in the supplied filing text.
- Full-year 2012 capital expenditures could reach $325 million, for headquarters, distribution facilities and retail stores; management expected to fund spending from operating cash flow. VF expected to repay all commercial paper by year-end.
- VF reported $723.0 million of commercial paper and $21.8 million of standby letters of credit under its $1.25 billion revolving facility, leaving $505.2 million available. Rating agencies had negative outlooks, citing higher debt following Timberland; management said liquidity was adequate for obligations, investment and dividends.
- Management cautioned that if the U.S. dollar remained at its late-September rate, Q4 reported revenue would face an adverse currency comparison. Key stated risks include consumer demand, margins, raw-material availability and costs, customer concentration and credit, fashion trends, international and currency exposure, execution of growth plans, and integration of acquisitions.
- Unusual items included a $42.0 million gain on the John Varvatos sale and associated $11.1 million tax benefit from use of a capital-loss carryforward. The IRS was examining VF tax years 2007–2009 and Timberland’s 2010 year; management did not expect any one examination to materially affect consolidated results. Unrecognized tax benefits and related interest were $96.1 million; about $2.5 million could decrease within 12 months.
- The board declared a subsequent quarterly dividend of $0.87 per share, payable December 20, 2012. Management reported effective disclosure controls and no material change in internal control over financial reporting; the filing reported no material changes to previously disclosed legal proceedings or risk factors.
Important facts for investors to verify
- Separate organic performance from Timberland acquisition contribution and foreign-exchange effects when assessing revenue and profit growth.
- Monitor working-capital seasonality, inventory, receivables, and the conversion of reported earnings into cash; nine-month operating cash flow was modest relative to net income.
- Review debt maturities and refinancing needs, including the $402.8 million current portion of long-term debt, commercial-paper repayment plans and available revolving-facility capacity.
- Assess the durability of margin gains across coalitions, particularly Imagewear’s cost pressure and the mix-driven improvement in Contemporary Brands.
- Evaluate the sustainability of earnings after the John Varvatos gain and discrete tax benefits, and track pension costs, currency impacts and tax examinations.