VF Corporation — Q2 2009 Form 10-Q
Reporting period: Three and six months ended July 4, 2009; comparisons are with the periods ended June 28, 2008. Unless stated otherwise, amounts are in U.S. dollars. The company cited the global recession and weaker consumer spending as significant headwinds.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Total revenue | $1,485.6 million | $1,677.5 million | $3,211.1 million | $3,523.8 million |
| Operating income | $119.7 million | $163.9 million | $281.2 million | $408.0 million |
| Net income attributable to VF | $75.5 million | $104.0 million | $176.5 million | $253.0 million |
| Diluted EPS | $0.68 | $0.94 | $1.59 | $2.27 |
| Gross margin | 43.9% | 43.8% | 43.0% | 44.5% |
| Operating margin | 8.1% | 9.8% | 8.8% | 11.6% |
- Q2 revenue fell about 11%; management attributed approximately $52 million of the decrease to currency translation and $160 million to organic decline, partly offset by acquisitions. First-half revenue fell about 9%, including a $133 million translation impact.
- Q2 diluted EPS declined about 28%. Management attributed $0.13 per share of the Q2 decline to higher pension expense and $0.03 to currency translation; the first-half impacts were $0.25 and $0.13 per share, respectively.
- Cash provided by operating activities was $84.7 million for the first half, versus $62.3 million a year earlier. Investing used $246.5 million, including $207.2 million for acquisitions; financing provided $161.6 million. Cash ended the period at $385.2 million.
- At July 4, cash was $385.2 million; short-term borrowings were $355.1 million, current long-term debt $3.2 million, and long-term debt $1,139.8 million. Working capital was $1,565.1 million, the current ratio 2.3 to 1, debt-to-total-capital 29.1%, and net debt-to-total-capital 23.4%.
Changes, segments, and notable items
- Q2 revenue declined in Jeanswear, Imagewear, and Sportswear; Contemporary Brands’ reported increase included the Mo Industries acquisition. Outdoor and Action Sports revenue was down 2% reported, but up 2% on a constant-currency basis. Management said its largest brands—Wrangler, The North Face, Lee, and Vans—gained share in most markets where sold.
- Q2 coalition profit increased in Outdoor and Action Sports, but declined in Jeanswear, Imagewear, Sportswear, and Contemporary Brands. Imagewear was pressured by unemployment and weaker licensed-sports apparel demand. Contemporary Brands’ margin was especially weak amid wholesale softness and retail investments.
- VF completed its acquisition of the remaining two-thirds of Mo Industries, owner of Splendid and Ella Moss, in March for $160.8 million plus payment of $52.3 million of debt. The acquisition added $16.0 million of Q2 revenue and $2.9 million of Q2 earnings. Acquisition-related goodwill was $142.8 million.
- Pension cost was a significant unusual pressure: first-half net periodic pension cost was $49.0 million, versus $3.5 million in the prior-year period. $41.5 million of non-service pension costs were recorded in Corporate and Other Expenses.
- The effective tax rate was 27.3% for the first half, down from 31.4%, primarily due to a greater share of income in lower-tax international jurisdictions. Management said unrecognized tax benefits could decline by approximately $15 million over the next 12 months, including $12 million that would reduce tax expense.
Liquidity, outlook, and risks
- Management reported more than $1.0 billion of available liquidity under committed bank credit lines: $688.2 million under the domestic facility and $350.3 million under the international facility. It said no long-term debt payments were due until late 2010 and considered liquidity adequate for obligations, capital spending, dividends, and potential investments.
- Management expected difficult economic conditions to continue throughout 2009 and warned that, at the Q2-end euro exchange rate, Q3 reported revenue would be negatively affected versus 2008. It expected currency transaction effects to ease over time through stabilization, pricing, or sourcing changes, but said extreme movements could not be offset quickly.
- VF expected 2009 capital spending could reach $110 million, funded by operating cash flow. Management said it expected better year-over-year comparisons for Sportswear in the second half, while noting the first half is seasonally low-margin for that business. No consolidated revenue or earnings guidance was provided in the filing text.
- Risks highlighted include weak apparel demand, customer financial health and concentration, margin pressure, currency volatility, credit-market disruption, fashion and demand forecasting, supply-chain and raw-material issues, acquisition integration, and international-market risks. The filing reported no material changes to the risk factors in the 2008 Form 10-K.
- VF declared a $0.59-per-share quarterly dividend payable September 18, 2009. It reported no open-market share repurchases in the first half and said it did not currently intend to repurchase shares in 2009.
Important facts for investors to verify
- Whether revenue, margins, and segment profitability stabilize as consumer demand and retail conditions evolve, particularly in Jeanswear, Imagewear, Sportswear, and Contemporary Brands.
- The persistence and cash implications of elevated pension costs, and the assumptions underlying pension asset values and obligations.
- Mo Industries’ final purchase-price allocation, subsequent performance, and ability to deliver expected growth and synergies.
- Whether operating cash flow and committed credit availability remain sufficient to support seasonal working capital, the dividend, planned capital spending, and debt service.
- The actual impact of currency movements and the outcome of tax audits and other contingencies, including the potential tax benefit described by management.