Business Context and Reporting Period
Company: V.F. Corporation (V.F. Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended July 5, 2003
Business Overview: V.F. Corp is a global apparel and footwear company operating through Consumer Apparel, Occupational Apparel, Outdoor Apparel and Equipment, and All Other segments. The company is currently executing a Strategic Repositioning Program and recently announced the acquisition of Nautica Enterprises, Inc.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended July 5, 2003 |
3 Months Ended June 29, 2002 |
6 Months Ended July 5, 2003 |
6 Months Ended June 29, 2002 |
|---|---|---|---|---|
| Net Sales | $1,134,742 | $1,160,256 | $2,384,797 | $2,372,518 |
| Operating Income | $125,613 | $151,926 | $278,372 | $289,200 |
| Income from Continuing Ops | $74,945 | $88,480 | $167,011 | $165,527 |
| Net Income (Loss) | $74,945 | $88,866 | $167,011 | $(359,392) |
| Diluted EPS (Continuing Ops) | $0.68 | $0.79 | $1.51 | $1.45 |
| Cash and Equivalents | $204,977 | $272,199 | $204,977 | $272,199 |
| Long-Term Debt | $602,155 | $702,777 | $602,155 | $702,777 |
| Working Capital | $1,311,421 | $1,143,596 | $1,311,421 | $1,143,596 |
Note: 2002 Net Income for the six-month period includes a non-cash charge of $527.3 million related to the cumulative effect of a change in accounting policy for goodwill (FASB 142).
Material Changes vs. Prior Period
- Revenue: Net sales decreased 2% in the quarter but increased slightly (0.5%) for the six-month period compared to 2002. Foreign currency translation provided a favorable impact of $28 million for the quarter and $67 million for the six months. Unit sales volume declined 5% in the quarter and 4% in the six months, primarily in the U.S.
- Profitability: Income from continuing operations decreased 15% in the quarter ($74.9M vs $88.5M) but increased slightly for the six months ($167.0M vs $165.5M). Gross margins were 37.1% for the quarter and 37.3% for the six months, compared to 37.5% and 36.4% in the prior year periods.
- Cash Flow: Cash used by operating activities was $131.7 million for the six months ended July 5, 2003, a significant shift from the $224.4 million provided by operations in the prior year. This was driven by a $75.0 million pension contribution and increased inventory levels.
- Debt: Long-term debt decreased by approximately $100 million from the prior year due to the early redemption of debentures in September 2002. The debt-to-total capital ratio improved to 27.5% from 31.9%.
Guidance, Outlook, and Risks
- Acquisition of Nautica: On July 7, 2003, V.F. Corp signed a definitive agreement to acquire Nautica Enterprises, Inc. for approximately $579.6 million in cash, plus $11.6 million for employee stock options. A separate agreement to acquire intellectual property rights from David Chu involves payments totaling $104 million over time. Financing will initially utilize cash flow and short-term borrowings of approximately $600 million.
- Share Repurchases: The company purchased 1.7 million shares for $61.4 million in the first six months of 2003. However, the share repurchase program has been suspended due to the pending Nautica acquisition.
- Segment Performance:
- Consumer Apparel: Sales declined 5% in the quarter due to domestic jeanswear weakness (store closings, retailer inventory reduction). International jeanswear sales increased 5%.
- Outdoor Apparel: Sales increased 12% in the quarter, driven by The North Face and Eastpak.
- Occupational Apparel: Sales decreased 10% in the quarter due to weakness in manufacturing and transportation sectors.
- Risks and Contingencies:
- Credit Ratings: Moody's placed V.F. Corp's ratings on review for possible downgrade following the Nautica announcement. Standard & Poor's affirmed its 'A-' rating with a stable outlook.
- Tax Disputes: The IRS has proposed adjustments for tax years 1995-1997. Management believes its positions are compliant and has accrued for probable outcomes.
- Strategic Options: The company is exploring strategic options for its children's playwear business, which could result in a loss of approximately $7 million if sold.
Investor Verification Checklist
- Nautica Acquisition Financing: Verify the company's ability to secure the $600 million in short-term borrowings and the impact on liquidity ratios post-closing.
- Domestic Jeanswear Trends: Monitor the recovery of domestic jeanswear unit shipments and the impact of retailer inventory levels on future sales.
- Inventory Levels: Assess the $1.03 billion inventory balance (up 15% year-over-year) and the company's ability to align inventory with sales volumes without significant markdowns.
- Children's Playwear Disposition: Track the progress of the strategic review for the children's playwear business and potential impairment charges.
- Foreign Currency Exposure: Evaluate the sensitivity of future earnings to fluctuations in the U.S. dollar versus the Euro and other functional currencies.