VF Corporation — Q1 2012 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2012; the comparison quarter ended April 2, 2011. VF reported through its product coalitions. Timberland, acquired in September 2011 for approximately $2.3 billion, is included in Outdoor & Action Sports. It contributed $356 million of Q1 revenue and $10.9 million of pretax earnings.
Financial results and condition
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $2,556.5 million | $1,958.8 million |
| Operating income | $314.1 million | $274.6 million |
| Net income attributable to VF | $215.2 million | $200.7 million |
| Diluted EPS | $1.91 | $1.82 |
| Gross margin | 45.7% | 47.2% |
| Operating margin | 12.3% | 14.0% |
| Cash used by operating activities | $112.1 million | $32.9 million |
- Revenue rose 31%: $356.0 million came from the Timberland acquisition, $264.6 million from organic growth, partly offset by a $22.9 million adverse currency effect. International revenue increased 45%; Asia revenue increased 65%; direct-to-consumer revenue rose 49%.
- Cash and equivalents were $325.6 million at March 31, 2012, versus $673.0 million a year earlier. Working capital was $1.459 billion and the current ratio 1.8, versus $1.913 billion and 2.8 at March 2011.
- Total debt, including short-term borrowings, was approximately $2.514 billion; short-term borrowings were $680.5 million and long-term debt $1.831 billion. Debt-to-total-capital was 36.1%, versus 19.2% at March 2011; net debt-to-total-capital was 33.0%.
- Q1 operating cash outflow reflected seasonal working-capital needs; working-capital changes used $442.4 million. Investing cash outflow was $32.2 million. Financing provided $126.0 million, including a $397.6 million net increase in short-term borrowings, partly offset by share repurchases and dividends.
- VF repurchased 2.0 million shares for $297.3 million during the quarter; $86.5 million of that amount settled in Q2. The quarterly dividend was $0.72 per share, up from $0.63 a year earlier.
Material changes and management commentary
- Outdoor & Action Sports revenue grew 60%, largely reflecting Timberland; coalition profit increased to $201.7 million, while reported operating margin declined to 16.0% from 18.3%. Excluding Timberland, the coalition margin was 20.3%.
- Jeanswear revenue rose 9%, but coalition profit fell 10% and margin declined to 14.9% from 18.1%, primarily because higher product costs were not fully recovered through pricing.
- Imagewear, Sportswear and Contemporary Brands revenues increased 12%, 10% and 13%, respectively; each reported higher coalition profit.
- Gross margin fell 1.5 percentage points. Management cited unrecovered product-cost increases, mainly in Jeanswear, and a 0.4-point benefit to the prior-year comparison from an inventory-accounting change that did not recur. Timberland and higher domestic pension expense increased selling and administrative expense ratios.
- Net interest expense increased by $7.4 million, primarily due to debt issued to fund Timberland and higher commercial-paper borrowings. Average debt was $2.330 billion versus $979 million; average borrowing rates were 3.9% and 6.3%, respectively.
Outlook, risks and unusual items
- Management expected a 2012 effective tax rate of approximately 25.0%–25.5%, compared with 23.6% for 2011. The Q1 2011 comparison benefited from discrete tax items that did not recur.
- Capital expenditures could reach $375 million for 2012, for facilities, distribution centers and store expansion; management expected to fund this spending from operating cash flow. No specific full-year revenue or EPS guidance is provided in the filing text.
- Management said cash, operating cash generation, credit facilities and borrowing capacity were expected to provide adequate liquidity. The $1.25 billion revolving facility had $574.1 million available at quarter-end. Moody’s and S&P had negative outlooks on VF’s ratings, citing higher debt, principally from Timberland.
- VF identified risks including consumer demand, input costs and margin pressure, customer concentration and credit, fashion trends, acquisition integration, international growth, foreign exchange, suppliers, distribution, and information-security and operational disruptions. Management reported no material changes to previously disclosed risk factors or legal proceedings.
- The IRS was examining VF tax years 2007–2009 and Timberland tax years 2008–2009. Unrecognized tax benefits and related interest were $101.1 million; management said approximately $12.2 million could decrease over the next 12 months, including $12.0 million that would reduce tax expense.
- VF announced the sale of John Varvatos Enterprises in March; it closed April 30, 2012. The board also declared a $0.72 dividend payable in June and approved retirement of 19 million treasury shares after quarter-end.
Most important facts for investors to verify
- How much future growth and profitability depends on Timberland, and whether integration and expected synergies are being achieved.
- Whether Jeanswear pricing can catch up with product-cost inflation and whether consolidated margins recover.
- How seasonal working-capital outflows, share repurchases and planned capital spending affect cash generation, borrowings and liquidity.
- Whether debt reduction improves the negative rating outlook and whether foreign-exchange movements continue to weigh on reported results.
- Progress and outcomes of tax audits, the John Varvatos divestiture, and the assumptions behind management’s tax-rate and capital-expenditure expectations.