VF Corporation — Q2 FY2022 Form 10-Q
Reporting period: Fiscal second quarter ended October 2, 2021; the filing labels the comparative periods September 2021 and September 2020. Fiscal 2022 runs from April 4, 2021 through April 2, 2022. Amounts below are U.S. dollars unless stated otherwise.
Business context and results
VF operates the Outdoor, Active and Work segments. Results are for continuing operations unless noted. The Occupational Workwear business was sold on June 28, 2021, and is presented as discontinued operations. Supreme, acquired in December 2020, is included in Active.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net revenue | $3,198.2 million | $2,608.3 million | $5,392.8 million | $3,684.6 million |
| Operating income | $558.5 million | $319.9 million | $761.4 million | $73.1 million |
| Income from continuing operations | $464.1 million | $243.2 million | $618.0 million | $(34.5) million |
| Diluted EPS from continuing operations | $1.18 | $0.62 | $1.57 | $(0.09) |
| Gross margin | 53.7% | 50.8% | 54.8% | 51.4% |
| Operating margin | 17.5% | 12.3% | 14.1% | 2.0% |
Q2 revenue rose 23%; management attributed growth principally to recovery from the prior-year COVID-19 disruption, with a 2% favorable currency impact and a 4% contribution from Supreme. Six-month revenue rose 46%, including a 3% favorable currency impact and a 6% Supreme contribution. Q2 margin improvement reflected less promotional activity, partly offset by expedited freight costs. Segment Q2 revenue increased 31% in Outdoor, 16% in Active and 18% in Work.
Cash flow, debt and liquidity
- Cash used by continuing operating activities was $177.2 million for the six months, compared with $39.5 million provided in the prior-year period. Management cited weaker working-capital cash generation, partly offset by higher earnings. Seasonal inventory and receivables needs affect first-half cash flow.
- Continuing investing activities provided $1,052.9 million, including $616.5 million of net proceeds from the Occupational Workwear sale and $598.8 million from selling short-term investments. Capital expenditures were $144.6 million.
- Cash and equivalents were $1.36 billion at quarter-end. Debt carrying value, including the current portion, was approximately $5.68 billion; $1.0 billion of notes due in April 2022 was reclassified to current debt. Operating lease liabilities were a further $1.15 billion.
- Working capital was $1.59 billion, the current ratio was 1.5 to 1, and net debt to total capital was 62.0%. VF reported approximately $2.2 billion available under its $2.25 billion Global Credit Facility, no commercial paper outstanding, and compliance with its covenants; the facility requires at least $750 million of liquidity.
- VF paid dividends of $0.98 per share in the first half and declared a $0.50 per-share quarterly dividend payable in December 2021. The share-repurchase program had been reinstated, with approximately $2.8 billion remaining authorization, but no shares were repurchased in the first half.
Material changes and unusual items
- Six-month net income was $788.3 million, including $170.3 million of discontinued-operations income. That amount included an estimated $145.6 million after-tax gain on the Occupational Workwear sale; continuing-operations income was $618.0 million.
- The Supreme acquisition’s contingent consideration liability fell from $207.0 million at March 2021 to $99.0 million at September 2021. The $108.0 million fair-value decrease was recorded as a reduction of SG&A expense in the first half ($35.0 million in Q2); the potential earn-out ranges from zero to $300 million and runs through January 31, 2022.
- Supreme contributed revenue of $99.6 million in Q2 and $245.3 million in the first half. Its reported net income was $6.1 million and $32.4 million, respectively.
- The first-half effective tax rate was 13.1%, versus (78.9)% in the prior-year period, when continuing operations recorded a loss. The prior-year six-month result also included a $42.4 million currency-translation expense related to liquidation of foreign entities.
Outlook, management commentary and risks
The filing provides no specific numeric revenue or earnings guidance. Management said it expected continued disruption from COVID-19 and believed VF had sufficient liquidity and flexibility to meet obligations and execute its strategy, while cautioning that the duration and severity of disruption remained uncertain. The company described a multi-year business-model transformation intended to generate global cost savings over three years and support priority growth initiatives.
Management reported supplier production constraints, port congestion, longer transit times, equipment availability issues and product delays that challenged VF’s ability to meet demand; expedited freight was being used as needed. Retail closures could recur. Inventory purchase obligations increased by approximately $670 million from fiscal year-end, primarily due to seasonality. Other stated risks include consumer demand, competition, foreign exchange, cybersecurity, execution and acquisition integration, and indebtedness.
Contingencies include an unresolved IRS dispute over the timing of income inclusion related to the 2011 Timberland acquisition. VF said it was defending its position and did not expect a material adverse impact, but disclosed potential net interest expense of up to $191.4 million and an estimated $136.3 million increase in tax expense if the IRS prevailed. A separate European Union tax matter concerning Belgium’s excess-profit regime remained unresolved; VF had recorded a €35.0 million tax and interest receivable whose recovery is uncertain.
Important facts for investors to verify
- Whether supply-chain constraints, freight costs and inventory levels affect future sales, margins and working capital.
- How much of reported earnings improvement is recurring versus related to the Workwear sale gain and Supreme contingent-consideration remeasurement.
- The April 2022 $1.0 billion debt maturity, refinancing or repayment plans, and ongoing liquidity and covenant headroom.
- Progress and outcomes in the IRS Timberland dispute and Belgium tax case, including possible cash and tax effects.
- Whether VF’s post-divestiture segment and brand comparisons are comparable with prior periods, given discontinued-operations presentation and the Supreme acquisition.