VF Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; comparative periods ended July 2, 2011. Unaudited interim results. Timberland, acquired in September 2011, is included in 2012 results.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $2,141.8m | $1,840.1m | $4,698.2m | $3,798.9m |
| Operating income | $164.0m | $188.7m | $478.1m | $463.3m |
| Net income attributable to VF | $155.3m | $129.4m | $370.5m | $330.1m |
| Diluted EPS | $1.40 | $1.17 | $3.31 | $2.99 |
| Operating margin | 7.7% | 10.3% | 10.2% | 12.2% |
| Gross margin | 46.1% | 45.9% | 45.8% | 46.6% |
- Q2 revenue rose 16%, comprising 3% organic growth, $239.4m from Timberland, and a negative $48.4m foreign-currency effect; the John Varvatos disposition reduced revenue by $14.4m. First-half revenue rose 24%, including $389.6m organic growth and $595.4m from Timberland, partly offset by currency and the disposition.
- Q2 operating income declined despite higher revenue. First-half operating income increased modestly, while operating margins contracted in both periods. Management cited Timberland’s higher expense ratio, higher pension expense, and first-half product-cost pressure; Q2 gross margin edged up on mix and Jeanswear pricing.
- Net income and EPS benefited materially from the $41.7m pretax gain on the April sale of John Varvatos. Management estimated the gain contributed $0.32 per share, including a $0.10 tax benefit. Timberland contributed $239.4m of Q2 revenue and $595.4m for the first half, but reported pretax losses of $37.2m and $26.3m, respectively.
- Six-month cash provided by operating activities was $73.1m, versus $42.3m used in the prior-year period. Capital expenditures were $119.0m versus $64.0m; cash used in investing was $54.7m. Cash ended at $330.5m, down $10.7m from year-end.
- At June 30, short-term borrowings were $681.8m and long-term debt was $1,830.5m, for total borrowings of about $2.51bn. Debt-to-total-capital was 35.7% (31.9% at December 2011); net debt-to-total-net-capital was 32.6%. The current ratio was 1.9 and working capital was $1.57bn.
- Six-month dividends paid were $158.6m; VF repurchased $299.1m of shares. The declared quarterly dividend remained $0.72 per share.
Business and segment developments
- Outdoor & Action Sports: Q2 revenue increased 45% to $1.04bn, reflecting Timberland and 12% organic growth; coalition profit fell 8% to $82.5m as Timberland’s lower margin weighed on results. The North Face and Vans grew 14% and 25% globally in the quarter. Excluding Timberland, coalition operating margin improved to 13.6% from 12.5%.
- Jeanswear: Q2 revenue declined 3% to $594.0m and profit declined 1%; first-half revenue rose 3%, but profit fell 6%, with higher product costs not fully recovered through pricing.
- Imagewear: Q2 revenue rose 3%, while profit fell 25% as higher product costs compressed margin. Sportswear Q2 revenue declined 2%; Contemporary Brands revenue declined 9% due to the John Varvatos sale, though underlying brands grew.
- International revenue grew 33% in Q2, with Timberland accounting for 26 percentage points of growth. Asia revenue grew 63% and direct-to-consumer revenue grew 37%, both substantially aided by Timberland.
Liquidity, outlook, risks, and unusual items
- Management said operating cash flow is seasonally lower in the first half as working capital is built for the second half. It cited cash, operating cash generation, credit facilities, and borrowing capacity as adequate to meet obligations and fund investment and dividends.
- VF had a $1.25bn revolving credit facility through December 2016. Commercial paper outstanding was $660.0m, with $569.2m of facility availability after letters of credit. Ratings were A-/A3 for long-term debt, but both agencies had a negative outlook, primarily reflecting higher Timberland-related debt.
- Full-year 2012 capital spending could reach $375m, funded by operating cash flows. Management expected a 2012 effective tax rate of approximately 25%, compared with 23.6% for 2011.
- Management warned that a continued strong U.S. dollar would weigh on second-half reported revenue versus 2011. Other stated risks include consumer demand, raw-material costs and availability, margin pressure, customer concentration and financial health, fashion trends, supply and distribution disruptions, acquisition integration and growth, foreign exchange, and international-market risks.
- Other notable items: first-half tax benefits included $8.0m from prior-year audit settlements, $3.5m from foreign tax benefits, and $11.1m from a capital-loss carryforward triggered by the John Varvatos sale. The IRS was examining VF tax years 2007–2009 and began examining Timberland’s 2010 year. Management reported no material change in legal proceedings, risk factors, or internal controls.
Most important facts for investors to verify
- How much reported growth and EPS improvement is repeatable organic performance versus Timberland contributions and the one-time John Varvatos gain.
- Whether Timberland can improve profitability after its reported pretax losses and lower operating margin.
- Whether operating cash generation, working-capital needs, and planned capital spending support dividends and debt reduction.
- How currency movements, product costs, and weaker margins in Jeanswear and Imagewear affect second-half results.
- Debt, commercial-paper use, available credit, and the negative credit-rating outlook following the acquisition and share repurchases.