VF Corporation — Q2 2015 Form 10-Q
Reporting period: Fiscal quarter ended July 4, 2015; results compare the three and six months ended June 2015 with the corresponding 2014 periods. The filing’s financial statements are unaudited. Amounts below are U.S. dollars.
Financial results
- Revenue: Second-quarter total revenue was $2.514 billion, up 5% reported (10% operational growth, offset by a 5% adverse currency impact). First-half revenue was $5.351 billion, up 3% reported.
- Profit and EPS: Q2 net income was $170.8 million versus $157.7 million; diluted EPS was $0.40 versus $0.36, up 11%. First-half net income was $459.5 million versus $454.9 million; diluted EPS was $1.06 versus $1.03.
- Operating performance: Q2 operating income was $223.0 million versus $219.8 million; first-half operating income was $620.9 million versus $623.0 million. Q2 gross margin was 48.3% versus 48.4%, and operating margin was 8.9% versus 9.2%. First-half margins were 48.7% and 11.6%, compared with 48.9% and 12.0%.
- Cash flow: First-half operating cash flow was negative $286.4 million, compared with positive $219.6 million in 2014. Investing cash flow was negative $158.3 million; financing cash flow was positive $169.9 million. Cash declined to $659.8 million from $971.9 million at fiscal year-end.
- Debt and liquidity: At July 4, short-term borrowings were $1.159 billion and long-term debt, including current portion, was about $1.426 billion; cash-adjusted net debt was approximately $1.924 billion. Working capital was $1.751 billion and the current ratio was 1.7:1. Debt to total capital was 34.2%, versus 20.5% at year-end 2014. The $1.75 billion revolving credit facility supported commercial paper; $602.7 million remained available after commercial paper and letters of credit.
- Shareholder returns: VF repurchased 10.0 million shares for $731.5 million in the first half and paid $271.5 million in dividends. The quarterly dividend was $0.32 per share.
Changes versus prior year
- Q2 revenue growth was led by Outdoor & Action Sports, up 9% reported, and direct-to-consumer sales, up 7%. International revenue declined 1% reported, as foreign exchange reduced growth by 14%; international sales were 34% of Q2 revenue.
- First-half coalition revenue growth was strongest in Outdoor & Action Sports, up 5%, and Imagewear, up 4%. Contemporary Brands revenue fell 10% in both Q2 and the first half; its profit fell 87% in Q2 and 72% in the first half, reflecting demand challenges, discounting, and lower expense leverage.
- Currency reduced revenue by $119.1 million in Q2 and $286.8 million in the first half. Excluding currency, management said gross margin improved 30 basis points in both periods, supported by mix shift toward higher-margin businesses, partly offset by higher costs.
- First-half operating cash flow swung downward mainly due to a $250 million discretionary pension contribution, greater working-capital cash use, and lower collections relative to the 53-week 2014 comparison period.
Outlook, commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management cited anticipated third-quarter sales growth as a reason for higher inventory and said cash, operating cash generation, credit facilities, and capital-market access were adequate to meet obligations, fund investment, and maintain the dividend.
- VF entered a new $1.75 billion revolving credit facility expiring in April 2020. Management said it would prioritize acquisitions, followed by dividends and share repurchases.
- Notable items included a $29.5 million first-half discrete tax benefit, which reduced the effective tax rate by 5.1 percentage points; a $16.6 million gain on sale of a VF Outlet location; and a $1.6 million pension settlement charge. VF contributed $261.4 million to defined-benefit plans in the first half and expected about $11.9 million of additional contributions in the remainder of 2015.
- Foreign-currency movements drove substantial other comprehensive loss: first-half OCI loss was $211.4 million, primarily reflecting currency translation. VF also reported $2.5 billion of outstanding foreign-exchange contracts.
- Key disclosed risks include consumer demand and fashion trends, input costs and supplier/distribution disruptions, foreign exchange, margin pressure, customer concentration and customer financial health, execution of international and direct-to-consumer growth, IT security, weather, impairment risk, and tax, legal, regulatory, political, and economic exposures. VF reported no material changes to previously disclosed risk factors or legal proceedings. Its IRS examination of Timberland’s 2011 return remained ongoing; VF disputed proposed adjustments.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying operational growth can persist as currency headwinds continue, particularly in Europe and other international markets.
- Whether Contemporary Brands can stabilize revenue, discounting, and profitability.
- How seasonal inventory growth and working-capital needs affect second-half cash generation and short-term borrowing.
- Whether margins recover after currency effects, direct-to-consumer investment, and higher operating costs.
- The resolution and cash/tax implications of the Timberland tax examination, and the effect of discrete tax benefits on reported earnings.
- The sustainability of substantial share repurchases and dividends alongside pension funding and elevated short-term debt.