VF Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2018, the first quarter of VF’s fiscal 2019 (April 1, 2018–March 30, 2019). The filing compares the quarter with the three months ended July 1, 2017. VF changed its fiscal year-end; this is not calendar-year 2018 Q1.
Business context and results
VF reports four segments: Outdoor, Active, Work and Jeans. Nautica and the Licensing Business are presented as discontinued operations. The quarter included Icebreaker and Altra, acquired in April and June 2018; Williamson-Dickie, acquired in October 2017, contributed to Work.
| Metric | Quarter ended June 2018 | Comparable 2017 period |
|---|---|---|
| Revenue | $2.788 billion, up 23% | $2.269 billion |
| Gross margin | 50.3%, up 70 basis points | 49.6% |
| Operating income | $230.9 million; 8.3% margin | $159.7 million; 7.0% margin |
| Continuing-operations income | $160.0 million; diluted EPS $0.40 | $107.1 million; diluted EPS $0.27 |
| Net income | $160.4 million | $109.9 million |
| Operating cash flow | $277.1 million | $205.6 million |
Revenue growth comprised $225.0 million organic growth, $248.8 million from acquisitions and $45.7 million from favorable currency. Direct-to-consumer revenue rose 22%; e-commerce revenue rose 54%. International revenue increased 27% and was 38% of total revenue. Segment revenue/profit: Active $1.137 billion/$269.2 million; Work $442.6 million/$55.2 million; Jeans $603.8 million/$87.0 million; Outdoor $568.6 million/$(83.5) million. Active growth, led by Vans, was a major earnings driver; Outdoor’s loss widened as the company increased product-development and demand-creation spending.
Cash, debt and liquidity
- June 30 cash and equivalents were $467.9 million. Total debt was approximately $3.473 billion: $1.317 billion short-term and $2.157 billion long-term. Net debt was approximately $3.005 billion.
- Working capital was $1.335 billion and the current ratio was 1.4:1. Debt to total capital was 48.3%.
- Operating cash flow was $277.1 million; investing used $129.2 million and financing used $344.0 million. Investing included $321.4 million net acquisition payments and $288.3 million proceeds from the Nautica sale. Financing included $181.5 million of dividends and a net $214.4 million reduction in short-term borrowings.
- The $2.25 billion revolving credit facility supported the commercial paper program. At quarter-end, commercial paper borrowings were $1.3 billion; approximately $934.6 million remained available under the facility. Management said available liquidity and expected cash generation were adequate for obligations, investment and planned dividends.
Changes, outlook and notable items
- Revenue grew 23% and diluted EPS from continuing operations increased 50%. Gross-margin improvement reflected mix, pricing and currency, partly offset by acquired-business margins, integration costs and product costs. SG&A declined as a share of revenue, but corporate and other expenses rose.
- The effective tax rate was 14.2%, versus 21.2%, reflecting the lower U.S. corporate tax rate and a $6.6 million net discrete tax benefit. Tax Act accounting remained provisional; the company reported a $465.5 million provisional charge in 2017 and continued to evaluate the final tax effects.
- VF adopted ASC 606 on April 1, 2018. Adoption increased opening retained earnings by $2.0 million and changed certain balance-sheet classifications and revenue presentation. Reported quarterly revenue was $9.7 million higher than it would have been without adoption; operating income was $0.5 million higher. Comparative prior-period figures were not restated.
- VF completed the Nautica sale for $289.1 million cash on April 30 and estimated an after-tax sale loss of $38.6 million, subject to adjustments. The quarter’s discontinued-operations income was $0.4 million and included a $5.0 million decrease in the estimated sale loss.
- Quarterly restructuring charges were $10.7 million; management expected additional cost-optimization expense in fiscal 2019. VF froze future accruals under specified U.S. pension plans effective December 31, 2018, recording $9.5 million of curtailment loss and $6.8 million of settlement charges.
- The Board declared a $0.46 per-share quarterly dividend payable September 20, 2018. VF made no open-market share repurchases in the quarter; $4.0 billion remained authorized. The filing gives no specific earnings or revenue forecast.
- Risks highlighted include consumer demand and fashion changes, competition and margin pressure, foreign exchange, supply-chain and IT disruption, acquisition integration, impairment, and tax and regulatory matters. The Timberland and Wrangler RIGGS reporting-unit reviews found no goodwill impairment. Reef also passed impairment testing, but its estimated fair value exceeded carrying value by only 16%, leaving potential sensitivity to forecast and discount-rate assumptions. The Belgium excess-profits tax dispute and a Timberland IRS examination remained unresolved.
Key facts for investors to verify
- How much reported growth and profit improvement is sustainable organically, apart from acquisitions and currency—particularly in Active and Outdoor?
- Whether acquisition integration costs, acquired-business margins and the higher short-term borrowing balance affect subsequent earnings and leverage.
- Whether the company finalizes Tax Act estimates without material additional expense, and the outcome of the Belgium tax appeal and Timberland tax examination.
- Whether Reef’s projected growth and valuation assumptions hold, given the 16% goodwill fair-value cushion and the disclosed risk of future impairment.
- How seasonal inventory, cash conversion and the planned dividend affect liquidity through the remainder of fiscal 2019.