VF Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 29, 2013. VF is an apparel and footwear company reporting through product and brand coalitions. Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $2,220.4 | $2,141.8 | $4,832.3 | $4,698.2 |
| Operating income | $201.3 | $164.0 | $559.1 | $478.1 |
| Net income attributable to VF | $138.3 | $155.3 | $408.7 | $370.5 |
| Diluted EPS | $1.24 | $1.40 | $3.66 | $3.31 |
| Gross margin | 48.5% | 46.1% | 48.3% | 45.8% |
| Operating margin | 9.1% | 7.7% | 11.6% | 10.2% |
- Q2 revenue grew about 4%; first-half revenue grew about 3%. Management attributed growth mainly to Outdoor & Action Sports, international markets and direct-to-consumer sales.
- Operating income increased in both periods, while Q2 net income and diluted EPS declined. The prior-year quarter included a $41.7 million gain from the John Varvatos sale and tax benefits that did not recur in Q2 2013. First-half net income and EPS rose despite the absence of that sale gain.
- Management reported record Q2 gross margin, up 240 basis points, citing lower product costs and a mix shift toward higher-margin businesses. Marketing, administrative and general expenses rose as a percentage of revenue, reflecting investment in marketing and direct-to-consumer operations.
- Coalition results were mixed: Q2 Outdoor & Action Sports revenue rose 6% and profit rose 22%; Jeanswear revenue rose 3% and profit 17%; Sportswear revenue rose 14% and profit 42%. Imagewear revenue declined 4%, while Contemporary Brands revenue declined 9% and profit 34%.
Cash flow, debt and liquidity
- First-half operating cash flow was $291.4, versus $73.1 a year earlier. The improvement reflected higher net income and lower working-capital cash use, partly offset by a $100 million discretionary pension contribution.
- Investing activities used $188.5, including $155.5 of capital expenditures; financing activities used $375.7. Cash declined from $597.5 at year-end 2012 to $320.1 at June 29, 2013.
- At June 29, total debt was approximately $1.88 billion, including $46.4 of short-term borrowings, $402.9 of current long-term debt and $1.43 billion of long-term debt. The $400 million two-year notes used to finance the Timberland acquisition are due in Q3 2013 and classified as current.
- Working capital was $1.65 billion; the current ratio was 2.0:1. Debt-to-total-capital was 26.6%, and net debt-to-total-net-capital was 23.1%.
- VF had $1.20 billion available under its $1.25 billion revolving credit facility at period-end. Management said cash, operating cash flow, credit facilities and access to capital markets provide adequate liquidity for obligations, investment and dividends.
Outlook, commentary and risks
- The filing gives no numerical earnings or revenue guidance. Management cited ongoing expectations for high revenue growth and described capital projects supporting that expectation, including facilities, retail stores and technology upgrades.
- VF planned approximately $7.8 million in additional pension contributions during the remainder of 2013. The board declared a quarterly dividend of $0.87 per share, payable September 20, 2013.
- Key disclosed risks include consumer demand and confidence, raw-material costs and availability, fashion trends, margin pressure, customer concentration and financial health, supply-chain and distribution disruptions, foreign exchange, weather, international-market risks, and successful execution and integration of growth initiatives and acquisitions.
- Tax authorities were examining VF and subsidiaries; management did not expect any one examination to materially affect the consolidated statements. Unrecognized tax benefits and related interest totaled $119.8 million; management said about $44.1 million could decrease over the next 12 months, including $15.0 million that would reduce tax expense.
- There were no material changes to previously disclosed legal proceedings or risk factors. A change of control followed by specified below-investment-grade ratings could require repurchase of certain notes at 101% of principal plus accrued interest.
- Unusual comparison items include the 2012 John Varvatos sale gain. First-half 2013 also included $14.4 million in net discrete tax benefits. VF disclosed a nonmaterial out-of-period foreign-currency translation adjustment in other comprehensive income.
Important facts for investors to verify
- Whether revenue and margin gains, particularly in Outdoor & Action Sports and direct-to-consumer, continue to offset weakness in Imagewear and Contemporary Brands.
- Repayment or refinancing of the $400 million notes due in Q3 2013 and the effect on cash, borrowings and interest costs.
- Inventory and working-capital trends: inventories were $1.52 billion at June 29, up from $1.35 billion at December 2012, which management attributed partly to seasonality.
- Cash generation relative to capital expenditures, dividends, share repurchases and pension funding; VF repurchased $281.6 million of stock in the first half.
- Resolution of tax examinations and the timing and income-statement impact of potential reductions in unrecognized tax benefits.