V.F. Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended July 3, 2010; comparisons are with the corresponding 2009 periods. Unless otherwise noted, figures are in U.S. dollars. Interim results are unaudited.
Business context and performance
VF reported growth across all business segments in the second quarter. Management highlighted fast-growing Asia and direct-to-consumer operations, including new stores and e-commerce. International markets accounted for approximately 26% of second-quarter revenue and 30% of first-half revenue.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $1,594.1 million | $1,485.6 million | $3,344.0 million | $3,211.1 million |
| Operating income | $169.5 million | $119.7 million | $392.8 million | $281.2 million |
| Net income attributable to VF | $110.8 million | $75.5 million | $274.4 million | $176.5 million |
| Diluted EPS | $1.00 | $0.68 | $2.47 | $1.59 |
| Gross margin | 47.1% | 43.9% | 46.9% | 43.0% |
| Operating margin | 10.6% | 8.1% | 11.7% | 8.8% |
For the first six months, cash provided by operating activities was $308.5 million, versus $84.7 million a year earlier. Investing activities used $90.6 million; financing activities used $375.3 million, including $317.9 million for share repurchases and $131.3 million in dividends. Cash and equivalents ended the period at $540.2 million, down from $731.5 million at year-end 2009.
At July 3, current assets were $2.588 billion and current liabilities $1.112 billion; the current ratio was 2.3 to 1 and working capital was $1.477 billion. Debt to total capital was 24.5%, and net debt to total capital was 15.0%. Borrowings comprised $42.0 million of short-term borrowings, $202.7 million of current long-term debt and $937.2 million of long-term debt. A $200 million note was due October 1, 2010. VF reported $983.3 million available under its domestic revolving facility and $313.6 million under its international facility.
Material changes versus prior periods
- Second-quarter revenue increased about 7%; first-half revenue increased about 4%. Management attributed organic growth primarily to higher unit volume.
- Second-quarter diluted EPS rose 47%. Gross-margin improvement reflected lower product costs, business mix (including direct-to-consumer growth), and lower and more profitable excess-inventory disposals.
- First-half coalition revenue grew in Outdoor & Action Sports, Imagewear, Sportswear and Contemporary Brands; Jeanswear declined 2.9%, principally due to weakness in Europe and the prior exit from its European mass-market business.
- Outdoor & Action Sports revenue rose 11.6% in Q2 and 10.6% for the half; Jeanswear coalition profit increased despite lower first-half revenue. Contemporary Brands revenue rose, but first-half profit declined and margin contracted.
- VF repurchased 4.0 million shares in the first half, compared with none in the prior-year period. Inventories were 10% below June 2009.
Outlook, commentary, risks and unusual items
- Management expected a 25.5% effective tax rate for 2010 and capital expenditures of up to $110 million, primarily for new retail stores. No full-year revenue or EPS guidance is stated in the provided filing text.
- Management warned that, if the U.S. dollar remained at its end-June exchange rate, second-half reported revenue would be negatively affected versus 2009. It also noted recent softening in premium denim that could continue into the second half.
- VF was evaluating, but had not committed to, up to $100 million in additional domestic pension-plan contributions in the remainder of 2010. It anticipated $2.7 million of other pension contributions.
- First-half results included a $5.7 million gain from remeasuring VF’s former 50% Vans Mexico investment and a $13.0 million foreign tax-refund benefit. First-half EPS also reflected first-quarter restructuring costs of $0.09 per share. Lower pension expense contributed $0.05 per share in Q2 and $0.10 for the half.
- Tax authorities were examining various years and jurisdictions. Management said unrecognized tax benefits could decrease by approximately $28.5 million in the next 12 months, including $27.8 million that would reduce tax expense.
- Disclosed risks included consumer demand and economic conditions, margin pressure, raw-material and sourcing risks, reliance on major customers, fashion and demand forecasting, foreign exchange, international operations, acquisitions, suppliers, distribution and brand protection. Management reported no material change to previously disclosed risk factors and no significant change in market-risk exposure.
Important facts for investors to verify
- Whether revenue and margin growth are sustained, particularly in Outdoor & Action Sports, and whether premium-denim softness affects second-half performance.
- How much cash generation depended on working-capital timing and the $38.1 million increase in cash flow associated with receivables sold under VF’s program.
- Repurchase pace, remaining authorization (7.6 million shares at period-end), and the effect of buybacks on liquidity and share count.
- Repayment or refinancing of the $200 million note due October 1, 2010, and continued access to revolving credit.
- Realization of the expected tax benefits, pension funding decisions, and the impact of currency movements on reported results.