V.F. Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. VF sells branded apparel, footwear and related products through wholesale and direct-to-consumer channels across five reporting coalitions. The September 2011 Timberland acquisition materially changed the company’s scale, brand portfolio and balance sheet.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Total revenue | $9.459 billion | $7.703 billion |
| Operating income | $1.245 billion | $821 million |
| Net income attributable to VF | $888 million | $571 million |
| Diluted EPS | $7.98 | $5.18 |
| Operating margin | 13.2% | 10.7% |
| Gross margin | 45.8% | 46.7% |
| Cash provided by operations | $1.081 billion | $1.001 billion |
| Cash and equivalents at year-end | $341 million | $792 million |
| Working capital / current ratio | $1.522 billion / 1.9 | $1.717 billion / 2.5 |
| Short-term borrowings / long-term debt | $282 million / $1.832 billion | $37 million / $936 million |
| Debt to total capital | 31.9% | 20.2% |
Revenue increased 23%, comprising 14% organic growth and 9% growth from acquisitions. International revenue rose 41% and represented 34% of total revenue; direct-to-consumer revenue rose 29% and represented 19%. Operating margin was 13.5% on management’s adjusted basis, excluding Timberland acquisition expenses, versus 13.3% in 2010 excluding the prior-year impairment charge. Adjusted diluted EPS was $8.20 versus $6.46. These are non-GAAP measures.
Operating cash flow reached a record, but was below net income plus noncash charges in part because operating assets and liabilities used $165 million of cash, principally from receivables growth. Capital expenditures were $171 million; acquisition cash outlay was $2.207 billion. The company paid $286 million in cash dividends.
Fourth-quarter results
Fourth-quarter 2011 revenue was $2.910 billion, operating income $351 million, net income attributable to VF $257 million and diluted EPS $2.28. In fourth-quarter 2010, the corresponding figures were $2.126 billion, $74 million, $54 million and $0.49. The comparison is affected by the $201.7 million goodwill and intangible-asset impairment recorded in Q4 2010, as well as Timberland’s inclusion only from its September 2011 acquisition date.
Material changes and segment performance
- Timberland: Acquired for approximately $2.3 billion on September 13, 2011. It contributed $713 million of revenue and $49 million of pretax earnings after acquisition; VF recorded $33.5 million of acquisition-related expenses. The purchase-price allocation was preliminary.
- Outdoor & Action Sports: Revenue grew 42% to $4.562 billion, including Timberland; coalition profit rose 30% to $828 million. Operating margin was 18.2%, down from 19.9%, reflecting Timberland’s lower margin.
- Jeanswear: Revenue rose 8% to $2.732 billion, but coalition profit declined 4% to $413 million and margin fell to 15.1%, principally from product-cost pressure not fully offset by pricing.
- Imagewear: Revenue rose 13% to $1.025 billion; profit increased 31% to $146 million and margin improved to 14.2%.
- Sportswear: Revenue rose 9% to $544 million; profit increased 8% to $56 million. Margin was broadly stable at 10.4%.
- Contemporary Brands: Revenue rose 11% to $485 million; profit increased to $36 million from $14 million, with margin improving to 7.4% from 3.2%.
Gross margin declined 0.9 percentage points year over year as higher product costs had a 1.9-point net negative impact that pricing did not fully offset. Better mix, including growth in higher-margin international, outdoor and direct-to-consumer businesses, partly cushioned the pressure. VF changed its inventory accounting to FIFO in 2011; management reported a $4.9 million after-tax benefit, or $0.04 per diluted share.
Liquidity, debt and capital allocation
VF issued $900 million of term debt to help fund Timberland: $500 million of 3.50% notes due 2021 and $400 million of floating-rate notes due 2013 (three-month LIBOR plus 0.75%). Acquisition-related short-term borrowings were repaid by year-end, although $247 million of commercial paper remained outstanding. The $1.25 billion revolving credit facility, expiring in December 2016, had $1.229 billion available at year-end. Management said cash, operating cash flow, credit facilities and market access provided adequate liquidity.
VF planned approximately $375 million of capital spending in 2012, funded from operating cash flow, and approximately 130 new retail locations. Retail-store investments were expected to be approximately $86 million. Management planned to repurchase at least 2 million shares in 2012, subject to acquisition funding needs, share price and option exercises. The indicated 2012 annual dividend rate was $2.88 per share.
Outlook, risks and unusual items
- Management expected to offset most higher product costs through pricing, favorable business mix and cost reductions, and reported no anticipated difficulty obtaining raw materials or contracted production in 2012. No clear consolidated 2012 revenue or EPS guidance is provided in the filing text.
- Management expected pension expense to rise to approximately $93 million in 2012, primarily due to amortization of actuarial losses. The pension plans’ underfunding increased to $403 million from $207 million, in part because lower discount rates increased projected obligations.
- Significant risks include economic weakness and lower apparel demand; cotton and other input-cost volatility; competition, fashion and inventory-forecasting risk; reliance on large retailers (top ten customers were 23% of revenue, with Walmart at 9%); international, foreign-exchange and Eurozone exposure; and sourcing, labor-compliance and supply-chain disruption.
- Goodwill and intangible assets totaled approximately $4.982 billion, about 53% of total assets. No impairment was recorded in 2011, but the 7 For All Mankind trademark’s estimated fair value exceeded carrying value by only about 4%, leaving sensitivity to weaker performance or valuation assumptions.
- Contractual obligations totaled approximately $6.865 billion, including $1.201 billion of operating leases, $1.297 billion of inventory obligations and $1.445 billion of interest-payment obligations. VF reported no pending material legal proceedings outside routine litigation.
Most important facts for investors to verify
- How much of the 2011 growth and future profit contribution is sustainable organic growth versus Timberland acquisition effects, and how the acquisition integrates.
- Whether pricing and mix can offset persistent product-cost inflation without weakening demand or margins, especially in Jeanswear.
- Cash conversion, receivables and inventory trends, given year-end cash decline, working-capital use and lower current ratio.
- Debt maturity and refinancing exposure, particularly the $400 million floating-rate notes due in 2013, and progress toward reducing leverage after the acquisition.
- Assumptions supporting pension funding and expense, and the valuation headroom for significant goodwill and trademarks, especially 7 For All Mankind.
- Whether planned 2012 capital spending, store openings, share repurchases and dividend increases remain consistent with liquidity and acquisition priorities.