VF Corporation — Q3 2009 Form 10-Q
Business context and reporting period. VF Corporation reported its third quarter and first nine months of fiscal 2009, through October 3, 2009; comparative periods ended September 27, 2008. VF sells apparel and footwear across five business coalitions. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenues | $2,093.8 | $2,206.6 | $5,304.9 | $5,730.5 |
| Operating income | $317.9 | $351.2 | $599.1 | $759.2 |
| Net income attributable to VF | $217.9 | $233.9 | $394.4 | $486.9 |
| Diluted EPS | $1.94 | $2.10 | $3.54 | $4.37 |
| Operating margin | 15.2% | 15.9% | 11.3% | 13.2% |
| Gross margin | 44.3% | 44.4% | 43.5% | 44.4% |
| Cash from operations | Not stated for the quarter | $263.9 | $58.8 |
For the nine months, net income was $393.5 million before attribution of noncontrolling interests. Interest expense was $65.2 million, versus $69.5 million a year earlier. The effective tax rate was 27.0% for the nine-month period, down from 30.0%.
Balance sheet and liquidity
- At October 3, 2009, cash and equivalents were $379.1 million; current assets were $2,928.7 million and current liabilities $1,355.1 million. Working capital was $1,573.7 million and the current ratio was 2.2 to 1.
- Short-term borrowings were $252.2 million; current maturities of long-term debt were $203.1 million; long-term debt was $939.1 million. Total debt was approximately $1.394 billion. Management reported debt-to-total-capital of 26.6% and net-debt-to-total-capital of 20.8%.
- VF reported more than $1.1 billion of available committed credit-line liquidity, including $785.2 million under its domestic facility and €250 million under its international facility. No long-term debt payments were due until late 2010; $200 million of notes due October 2010 had been classified as current.
- Nine-month investing cash use was $270.1 million, including $207.2 million for acquisitions; capital expenditures were $57.7 million. Financing activities used $2.3 million. Cash declined $2.7 million from year-end 2008.
Changes versus comparable periods
- Q3 revenue fell 5.1%; nine-month revenue fell 7.4%. Management attributed the declines to recession-driven volume weakness and currency translation. Currency translation reduced revenue by $50 million in Q3 and $183 million year to date; organic revenue declined $86 million and $300 million, respectively.
- Q3 diluted EPS declined 8%; nine-month diluted EPS declined 19%. Management said higher pension expense reduced EPS by $0.11 in Q3 and $0.36 year to date, while stronger U.S. dollar translation reduced it by $0.06 and $0.19, respectively. The 2008 comparison included a $0.07-per-share net benefit from unusual items, primarily tax benefits partly offset by restructuring charges.
- Gross margin was nearly flat in Q3 but fell 0.9 percentage point for the nine months, reflecting currency transaction effects and discounting. Operating margin declined 0.7 point in Q3 and 1.9 points year to date.
- Operating cash flow improved to $263.9 million from $58.8 million. The filing cites lower working-capital cash use, particularly for inventory, and $57.6 million received from receivables sales; this cash was contributed to the pension plan. The period also included a $100 million pension contribution.
- Inventories were $1.171 billion, 13% below September 2008. Receivables were 16% lower year over year, reflecting lower wholesale sales, receivables sales and improved collection timing.
Management commentary, outlook and risks
- Management said consumer spending showed some improvement and signs of stability in Q3, but expected difficult economic conditions to continue through 2009. It reported market-share gains for Wrangler, The North Face, Lee and Vans in most markets, and 32% Q3 revenue growth in Asia.
- Performance varied by coalition. Outdoor and Action Sports reported flat Q3 revenue and higher operating margin; Jeanswear and Imagewear revenue declined, with Imagewear margins particularly pressured. Sportswear Q3 revenue and margin benefited partly from shipment timing and cost actions. Contemporary Brands’ Q3 revenue growth included the Splendid and Ella Moss acquisition, while its margins declined.
- VF completed its acquisition of the remaining two-thirds of Mo Industries, owner of Splendid and Ella Moss, in March 2009. The acquired business contributed $20.0 million of Q3 revenue and $41.7 million since acquisition; goodwill increased by $142.4 million.
- Management expected 2009 capital spending could reach $110 million, funded by operating cash flows. It declared a $0.60-per-share dividend for December 2009 and said it intended to repurchase another 750,000 shares in Q4, subject to funding needs, share price and option exercises.
- Currency volatility, weak consumer demand, customer financial health and concentration, margin pressure, fashion and demand forecasting, international operations, suppliers, acquisitions and information systems were among the identified risks. Management noted that currency effects on European margins may take time to stabilize or be offset.
- The EPA sued VF Outdoor, Inc., alleging sales of unregistered pesticides in shoes; the requested fine is approximately $1 million. Management said it believed cash, operating funds and credit availability were adequate for obligations, investment and dividends. It also considered an approximately $18 million reduction in unrecognized tax benefits reasonably possible over the next 12 months, including $12 million that would reduce tax expense.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. The filing states no material change in previously disclosed risk factors.
Investor facts to verify
- Whether revenue, margins and earnings recover as economic conditions and consumer demand evolve, particularly in Jeanswear and Imagewear.
- How much operating cash flow reflects sustainable operations versus working-capital timing and the receivables-sale program; the program permits sales up to $105 million.
- The impact of pension costs and funding needs, including the $100 million contribution and the substantial year-over-year increase in pension expense.
- Debt repayment and refinancing needs, especially the $200 million notes due in October 2010, and continuing access to committed credit facilities.
- Integration and performance of Mo Industries and other growth investments, and the outcome of the EPA matter and tax examinations.