Business Context and Reporting Period
Company: V.F. Corporation (V.F. Corp)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 28, 2002
Business Overview: V.F. Corp is a global apparel and footwear company operating through Consumer Apparel, Occupational Apparel, Outdoor Apparel and Equipment, and All Other segments. The period reflects the implementation of a Strategic Repositioning Program initiated in late 2001 to reduce costs and exit underperforming businesses.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 28, 2002 | 9 Months Ended Sep 28, 2002 | 9 Months Ended Sep 29, 2001 |
|---|---|---|---|
| Net Sales | $1,400,389 | $3,772,907 | $3,986,691 |
| Operating Income | $216,315 | $505,515 | $470,510 |
| Income from Continuing Ops (Pre-Accounting Change) | $128,564 | $294,091 | $249,946 |
| Net Income (Loss) | $128,249 | $(231,143) | $250,427 |
| Diluted EPS (Continuing Ops) | $1.15 | $2.60 | $2.17 |
| Diluted EPS (Net Income) | $1.15 | $(2.20) | $2.17 |
| Cash from Operating Activities | N/A | $387,522 | $320,023 |
| Capital Expenditures | N/A | $(33,774) | $(57,166) |
| Short-term Borrowings | $56,768 | $56,768 | $113,916 |
| Long-term Debt | $602,550 | $602,550 | $904,218 |
| Cash and Equivalents | $254,977 | $254,977 | $133,080 |
Note: Net Income for the nine months ended Sep 28, 2002, includes a non-cash charge of $527.3 million related to the cumulative effect of a change in accounting policy (FASB 142) regarding goodwill.
Material Changes vs. Prior Period
- Revenue: Net sales were flat in the third quarter compared to 2001 but declined 5% for the nine-month period, driven by unit volume decreases in domestic business units and price reductions.
- Profitability: Income from continuing operations increased 25% in the quarter and 18% year-to-date (excluding the goodwill accounting change). Operating margins improved to 15.4% in the quarter and 13.4% year-to-date, up from 13.5% and 11.8% in 2001.
- Goodwill Write-down: A significant non-cash charge of $527.3 million ($4.82 per share) was recorded in the first quarter of 2002 due to the adoption of FASB Statement No. 142, which eliminated goodwill amortization but required a one-time impairment test.
- Debt Reduction: Long-term debt decreased significantly due to the early redemption of $300 million in debt during the first nine months of 2002.
- Discontinued Operations: The Private Label knitwear and Jantzen swimwear businesses were classified as discontinued operations. The Jantzen business was sold for $24.0 million in March 2002.
Guidance, Outlook, and Risks
- Outlook: Management expects fourth-quarter sales to be flat compared to the prior year. Full-year 2002 earnings per share from continuing operations are projected at $3.35, representing a 25% increase over 2001 (excluding restructuring costs and goodwill write-downs).
- Restructuring: The Strategic Repositioning Program is expected to impact 2002 earnings by approximately $0.20 per share, with an estimated $0.18 per share charge anticipated in the fourth quarter due to additional domestic plant closures.
- Dividends: The Board declared an increase in the quarterly cash dividend to $0.25 per share, payable in December 2002.
- Risks and Contingencies:
- Pension Liability: A minimum pension liability of approximately $200 million is expected to be recorded in the 2003 year-end balance sheet due to market declines and lower interest rates, resulting in a $125 million after-tax charge to equity (non-cash).
- Consumer Spending: The retail climate remains challenging with slow consumer spending on apparel.
- Rating Outlook: Moody's changed the rating outlook from "stable" to "negative" due to declines in domestic jeanswear sales volume and operating profitability.
Investor Verification Checklist
- Goodwill Impairment: Verify the specific business units impacted by the $527.3 million goodwill write-down (Consumer Apparel, Occupational Apparel, and All Other segments).
- Restructuring Costs: Confirm the timing and magnitude of the anticipated $0.18 per share restructuring charge in the fourth quarter.
- Pension Funding: Monitor the final actuarial valuation for the defined benefit pension plans to confirm the $200 million minimum liability estimate.
- Discontinued Operations: Review the final liquidation results for the Private Label knitwear business and the integration of remaining Jantzen assets.
- Debt Covenants: Assess the impact of the Moody's "negative" outlook on future borrowing costs and commercial paper availability.