Analysis of Results of Operations
Consolidated Statements of Income
The following table presents a summary of the changes in total revenues from 2011:
|
|
|
|
|
|
|
|
|
In millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
|
Total revenues 2011
|
|
$
|
2,750.1
|
|
|
$
|
6,549.0
|
|
Organic growth
|
|
|
165.0
|
|
|
|
551.8
|
|
Acquisition in prior year
|
|
|
335.6
|
|
|
|
930.9
|
|
Disposition in current year
|
|
|
(21.1
|
)
|
|
|
(32.4
|
)
|
Impact of foreign currency translation
|
|
|
(81.2
|
)
|
|
|
(152.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues 2012
|
|
$
|
3,148.4
|
|
|
$
|
7,846.6
|
|
|
|
|
|
|
|
|
|
|
Third quarter and year to date revenue growth was driven by the Outdoor & Action Sports Coalition, which grew by
29% and 41%, respectively, compared to the 2011 periods, due to the acquisition of Timberland and organic growth. The Imagewear and Sportswear Coalitions also contributed to the third quarter revenue growth. The first nine months of 2012 also
reflected revenue growth from the Jeanswear, Sportswear and Imagewear Coalitions. Additional details on revenues are provided in the section titled Information by Business Segment.
Translating a foreign subsidiarys financial statements from its functional currency into the U.S. dollar, VFs reporting currency, has an
impact on VFs reported operating results. A stronger U.S. dollar in relation to the functional currencies where VF conducts its international business (primarily in Europe/euro-based countries) negatively impacted revenue comparisons by $81.2
million and $152.7 million in the third quarter and the first nine months of 2012, respectively, compared with the prior year periods.
The
weighted average translation rate for the euro was $1.25 for the third quarter of 2012 and $1.28 for the first nine months of 2012, compared with $1.41 for both the third quarter and the first nine months of 2011. If the U.S. dollar remains at the
exchange rate in effect at the end of September 2012 ($1.29 per euro), reported revenues for the fourth quarter of 2012 will be negatively impacted compared with the fourth quarter of 2011, when the weighted average translation rate was $1.35 per
euro.
20
The following table presents the percentage relationship to total revenues for components of the
Consolidated Statements of Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
Gross margin (total revenues less cost of goods sold)
|
|
|
46.7
|
%
|
|
|
45.3
|
%
|
|
|
46.2
|
%
|
|
|
46.0
|
%
|
Marketing, administrative and general expenses
|
|
|
29.6
|
%
|
|
|
29.6
|
%
|
|
|
33.3
|
%
|
|
|
32.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17.1
|
%
|
|
|
15.6
|
%
|
|
|
12.9
|
%
|
|
|
13.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin increased in the third quarter in nearly every coalition due to a greater percentage of revenues from higher
gross margin businesses and the impact of lower product costs. The increase in the first nine months of 2012 also reflects the continued shift in the revenue mix towards higher margin businesses, including the Outdoor & Action Sports,
international and direct-to-consumer businesses.
Marketing, administrative and general expenses as a percentage of total revenues were
consistent in the third quarter and were higher in the first nine months of 2012 compared to the 2011 periods. The increase in the first nine months of 2012 was due to higher domestic pension expense and the inclusion of Timberland which has higher
expense ratios. Partially offsetting these increases were lower Timberland acquisition-related costs in 2012, leverage of operating expenses on higher revenues in VFs businesses other than Timberland, and strong management controls over
marketing, administrative and general expenses.
Interest expense increased by $3.2 million in the third quarter of 2012 and $18.2 million in
the first nine months of 2012, from the comparable periods in 2011, due primarily to the issuance of $900 million in term debt in the third quarter of 2011 to provide funding for the Timberland acquisition and higher average levels of commercial
paper borrowings. Outstanding interest-bearing debt averaged $2.5 billion for the first nine months of 2012 and $1.2 billion for the comparable period of 2011. The weighted average interest rates on total outstanding debt were 3.7% and 5.3% for the
first nine months of 2012 and 2011, respectively.
On April 30, 2012, VF sold its ownership in John Varvatos Enterprises, Inc.
(John Varvatos). VF recorded a $42.0 million gain on the sale during the first nine months of 2012 which is included in Other income (expense), net.
The effective income tax rate was 24.2% in the first nine months of 2012, which was slightly higher than the 24.1% effective income tax rate in the first nine months of 2011. The first nine months of 2012
included $8.0 million in tax benefits related to the settlement of prior years tax audits, $6.5 million in tax benefits from the realization of unrecognized tax benefits related to foreign taxes and $11.1 million in tax benefits from the
utilization of a capital loss carryforward, which was triggered by the sale of John Varvatos. The first nine months of 2011 included $6.0 million in net tax benefits related to settlements of prior years tax audits and filings, $2.8 million of
tax benefits related to the realization of unrecognized tax benefits resulting from the expiration of statutes of limitations and $16.8 million in income tax benefits related to the release of valuation allowances in foreign jurisdictions due to
improved profitability in the respective jurisdictions.
The expected 2012 annual effective tax rate should approximate 24.5%, compared with
23.6% for full year 2011. The effective income tax rate for full year 2011 reflected a 3.5% benefit from discrete tax items.
Net income
attributable to VF Corporation for the third quarter of 2012 increased to $381.3 million ($3.42 per share), compared with $300.7 million ($2.69 per share) in the 2011 quarter. The third quarter of 2012 was negatively impacted by (i) $0.18 per
share from foreign currency rate fluctuations, (ii) $0.05 per share from higher pension expense, and (iii) $0.10 per share in acquisition-related costs. The third quarter of 2011 included $0.18 per share in acquisition-related costs. The
remainder of the change in earnings per share during the 2012 quarter resulted from operating performance, as discussed in the Information by Business Segment section below.
Net income attributable to VF Corporation for the first nine months of 2012 increased to $751.8 million ($6.72 per share), compared with $630.8 million ($5.69 per share) in the first nine months of 2011.
The first nine months of 2012 benefited by a $0.32 per share gain on the sale of John Varvatos including a $0.10 per share benefit related to utilizing a tax capital loss carryforward, offset by (i) $0.28 per share from foreign currency rate
fluctuations, (ii) $0.15 per share from higher pension expense and (iii) $0.16 per share in acquisition-related costs. The first nine months of 2011 was favorably impacted by the following benefits that did not recur in 2012:
(i) $0.07 per share from a favorable tax settlement, (ii) $0.07 per share from a gain on a facility closure, and (iii) $0.04 per share from a change in inventory accounting. The first nine months of 2011 also included $0.18 per share
in acquisition-related costs. The remainder of the change in earnings per share during the first nine months of 2012 resulted from operating performance, as discussed in the Information by Business Segment section below.
21
Information by Business Segment
VFs businesses are grouped into product categories, and by brands within those product categories, for management and internal financial reporting purposes. These groupings of businesses within VF
are referred to as coalitions. These coalitions are the basis for VFs reportable business segments.
See Note G to the
Consolidated Financial Statements for a summary of results of operations by coalition, along with a reconciliation of coalition profit to income before income taxes.
The following tables summarize the changes in coalition revenues for the third quarter and first nine months of 2012 from the comparable periods in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
In millions
|
|
Outdoor &
Action Sports
|
|
|
Jeanswear
|
|
|
Imagewear
|
|
|
Sportswear
|
|
|
Contemporary
Brands
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Coalition revenues 2011
|
|
$
|
1,436.8
|
|
|
$
|
727.6
|
|
|
$
|
277.6
|
|
|
$
|
151.8
|
|
|
$
|
126.2
|
|
|
$
|
30.1
|
|
|
$
|
2,750.1
|
|
Organic growth
|
|
|
139.0
|
|
|
|
9.9
|
|
|
|
7.6
|
|
|
|
2.4
|
|
|
|
1.8
|
|
|
|
4.3
|
|
|
|
165.0
|
|
Acquisition in prior year
|
|
|
335.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335.6
|
|
Disposition in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.1
|
)
|
|
|
|
|
|
|
(21.1
|
)
|
Impact of foreign currency translation
|
|
|
(59.1
|
)
|
|
|
(18.7
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
(81.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition revenues 2012
|
|
$
|
1,852.3
|
|
|
$
|
718.8
|
|
|
$
|
284.5
|
|
|
$
|
154.2
|
|
|
$
|
104.2
|
|
|
$
|
34.4
|
|
|
$
|
3,148.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
In millions
|
|
Outdoor &
Action Sports
|
|
|
Jeanswear
|
|
|
Imagewear
|
|
|
Sportswear
|
|
|
Contemporary
Brands
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Coalition revenues 2011
|
|
$
|
2,943.0
|
|
|
$
|
2,020.2
|
|
|
$
|
768.4
|
|
|
$
|
384.0
|
|
|
$
|
356.2
|
|
|
$
|
77.2
|
|
|
$
|
6,549.0
|
|
Organic growth
|
|
|
386.9
|
|
|
|
74.3
|
|
|
|
46.8
|
|
|
|
10.6
|
|
|
|
21.6
|
|
|
|
11.6
|
|
|
|
551.8
|
|
Acquisition in prior year
|
|
|
930.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
930.9
|
|
Disposition in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.4
|
)
|
|
|
|
|
|
|
(32.4
|
)
|
Impact of foreign currency translation
|
|
|
(104.6
|
)
|
|
|
(40.0
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
(152.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition revenues 2012
|
|
$
|
4,156.2
|
|
|
$
|
2,054.5
|
|
|
$
|
813.5
|
|
|
$
|
394.6
|
|
|
$
|
339.0
|
|
|
$
|
88.8
|
|
|
$
|
7,846.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
The following tables summarize the changes in coalition profit for the third quarter and first nine months
of 2012 from the comparable periods in 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
|
|
Outdoor &
|
|
|
|
|
|
|
|
|
|
|
|
Contemporary
|
|
|
|
|
|
|
|
In millions
|
|
Action Sports
|
|
|
Jeanswear
|
|
|
Imagewear
|
|
|
Sportswear
|
|
|
Brands
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Coalition profit 2011
|
|
$
|
320.9
|
|
|
$
|
109.7
|
|
|
$
|
39.7
|
|
|
$
|
18.3
|
|
|
$
|
8.1
|
|
|
$
|
0.0
|
|
|
$
|
496.7
|
|
Organic growth
|
|
|
67.2
|
|
|
|
24.3
|
|
|
|
(2.0
|
)
|
|
|
0.2
|
|
|
|
5.9
|
|
|
|
1.4
|
|
|
|
97.0
|
|
Acquisition in prior year
|
|
|
44.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.1
|
|
Disposition in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
Impact of foreign currency translation
|
|
|
(19.2
|
)
|
|
|
(2.6
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(22.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition profit 2012
|
|
$
|
413.0
|
|
|
$
|
131.4
|
|
|
$
|
37.5
|
|
|
$
|
18.5
|
|
|
$
|
13.4
|
|
|
$
|
1.4
|
|
|
$
|
615.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Outdoor &
|
|
|
|
|
|
|
|
|
|
|
|
Contemporary
|
|
|
|
|
|
|
|
In millions
|
|
Action Sports
|
|
|
Jeanswear
|
|
|
Imagewear
|
|
|
Sportswear
|
|
|
Brands
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Coalition profit 2011
|
|
$
|
554.3
|
|
|
$
|
327.2
|
|
|
$
|
116.9
|
|
|
$
|
37.4
|
|
|
$
|
28.4
|
|
|
$
|
(2.0
|
)
|
|
$
|
1,062.2
|
|
Organic growth
|
|
|
137.2
|
|
|
|
11.9
|
|
|
|
(5.8
|
)
|
|
|
3.3
|
|
|
|
15.1
|
|
|
|
2.1
|
|
|
|
163.8
|
|
Acquisition in prior year
|
|
|
35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35.1
|
|
Disposition in current year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
Impact of foreign currency translation
|
|
|
(29.4
|
)
|
|
|
(3.5
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coalition profit 2012
|
|
$
|
697.2
|
|
|
$
|
335.6
|
|
|
$
|
110.7
|
|
|
$
|
40.7
|
|
|
$
|
40.3
|
|
|
$
|
0.1
|
|
|
$
|
1,224.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following section discusses the change in revenues and profitability by Coalition:
Outdoor & Action Sports:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Coalition revenues
|
|
$
|
1,852.3
|
|
|
$
|
1,436.8
|
|
|
|
28.9
|
%
|
|
$
|
4,156.2
|
|
|
$
|
2,943.0
|
|
|
|
41.2
|
%
|
Coalition profit
|
|
|
413.0
|
|
|
|
320.9
|
|
|
|
28.7
|
%
|
|
|
697.2
|
|
|
|
554.3
|
|
|
|
25.8
|
%
|
Operating margin
|
|
|
22.3
|
%
|
|
|
22.3
|
%
|
|
|
|
|
|
|
16.8
|
%
|
|
|
18.8
|
%
|
|
|
|
|
Global Outdoor & Action Sports revenues increased 29% in the third quarter of 2012. Of this
increase, 23% is related to the addition of Timberland and 6% is related to organic growth (which is net of a 5% negative impact from foreign currency rate fluctuations). Foreign currency rate fluctuations negatively impacted revenue comparisons by
$59.1 million in the third quarter of 2012. The two largest brands in the Outdoor & Action Sports Coalition,
The North Face
®
and
Vans
®
, achieved
global revenue growth of 5% and 21%, respectively, for the third quarter of 2012. Outdoor & Action Sports revenues in the U.S. increased 26% in the third quarter of 2012 with 16 percentage points of the increase coming from the Timberland
acquisition. International revenues for the Coalition rose 32% with 30 percentage points of the increase due to the inclusion of Timberland. In the third quarter of 2012, European revenues increased 24%, composed of a 6% decline in organic revenues
(net of a 12% negative impact from foreign currency rate fluctuations) and a 30% increase related to the addition of Timberland. Coalition revenues in Asia increased 94% in the third quarter of 2012 with 49 percentage points of the growth due to the
inclusion of Timberland. Direct-to-consumer revenues rose 45% in the third quarter of 2012 with 32 percentage points of the growth due to the Timberland acquisition. The direct-to-consumer businesses of
The North Face
®
and
Vans
®
brands increased 10% and 18%, respectively, in the third quarter of 2012. New store openings, comp store growth and an expanding e-commerce business all contributed
to the direct-to-consumer revenue growth.
23
Global Outdoor & Action Sports revenues increased 41% in the first nine months
of 2012. Of this increase, 10% related to organic growth (which is net of a 4% negative impact from foreign currency rate fluctuations) and 31% related to the addition of Timberland. Foreign currency rate fluctuations negatively impacted revenues by
$104.6 million in the first nine months of 2012 compared with the prior year period. Outdoor & Action Sports revenues in the U.S. increased 32% in the first nine months of 2012 with 22 percentage points of the increase coming from the
Timberland acquisition. International revenues rose 51% in the nine month period with 41 percentage points of the increase due to the inclusion of Timberland. European revenues increased 45% in the first nine months of 2012, composed of 6% organic
growth (net of a 10% negative impact from foreign currency rate fluctuations) and 39% related to the addition of Timberland. Coalition revenues in Asia increased 106% in the first nine months of 2012 with 73 percentage points of the growth due to
the inclusion of Timberland. Direct-to-consumer revenues rose 60% in the first nine months of 2012 with 46 percentage points of the growth from the Timberland acquisition. The direct-to-consumer businesses of
The North Face
®
and
Vans
®
brands increased 14% and 18%, respectively, in the first nine months of 2012. New store openings, comp store growth and an expanding e-commerce business all
contributed to the direct-to-consumer revenue growth.
Operating margins were consistent in the third quarter of 2012
compared to 2011. The decrease in operating margin in the first nine months of 2012 compared with 2011 was due to the inclusion of Timberland whose operating margin is below the Coalition average. Excluding Timberland from both the 2012 and 2011
periods, operating margins for the Outdoor & Action Sports Coalition increased to 25.7% from 23.5% in the third quarter and to 20.9% from 19.2% in the first nine months of 2012. The improvement in both periods was primarily driven by
operating margin increases from
The North Face
®
and the
Vans
®
brands.
Jeanswear:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Coalition revenues
|
|
$
|
718.8
|
|
|
$
|
727.6
|
|
|
|
(1.2
|
)%
|
|
$
|
2,054.5
|
|
|
$
|
2,020.2
|
|
|
|
1.7
|
%
|
Coalition profit
|
|
|
131.4
|
|
|
|
109.7
|
|
|
|
19.8
|
%
|
|
|
335.6
|
|
|
|
327.2
|
|
|
|
2.6
|
%
|
Operating margin
|
|
|
18.3
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
16.3
|
%
|
|
|
16.2
|
%
|
|
|
|
|
Global Jeanswear revenues decreased 1% in the third quarter of 2012 compared with 2011 due to
difficult economic conditions in Europe and challenges in the mid-tier channel in the U.S. In addition, foreign currency rate fluctuations negatively impacted revenues by $18.7 million (3%) in the third quarter of 2012. These revenue declines
were partially offset by strong sales in Mexico and Latin America as well as sales of our newest Jeanswear brand,
Rock & Republic
®
. Global Jeanswear revenues increased 2% in the first nine months of 2012 over the prior year period led by revenue growth in the Americas businesses due primarily
to sales of the
Rock & Republic
®
brand and the Western Specialty business, along with strong
growth in Asia. Partially offsetting the revenue increase in the first nine months was a $40.0 million (2%) negative impact from foreign currency rate fluctuations.
The operating margin improved in the third quarter and first nine months of 2012, primarily driven by lower product costs and a significant improvement in European Jeanswear profitability.
Imagewear:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Coalition revenues
|
|
$
|
284.5
|
|
|
$
|
277.6
|
|
|
|
2.5
|
%
|
|
$
|
813.5
|
|
|
$
|
768.4
|
|
|
|
5.9
|
%
|
Coalition profit
|
|
|
37.5
|
|
|
|
39.7
|
|
|
|
(5.5
|
)%
|
|
|
110.7
|
|
|
|
116.9
|
|
|
|
(5.3
|
)%
|
Operating margin
|
|
|
13.2
|
%
|
|
|
14.3
|
%
|
|
|
|
|
|
|
13.6
|
%
|
|
|
15.2
|
%
|
|
|
|
|
The Imagewear Coalition consists of VFs Image business (occupational apparel and uniforms) and Licensed Sports
business (licensed high profile sports and lifestyle apparel). The increase in Coalition revenues for the third quarter of 2012 was driven by the Licensed Sports business and was due primarily to (i) continued momentum in the NFL business and
(ii) an increase in the collegiate business. For the first nine months of 2012, the increase in Coalition revenues was due to the growth in the Licensed Sports business as well as higher revenues in the Image industrial and protective apparel
businesses.
24
The decline in operating margin comparisons for the Imagewear Coalition in both 2012 periods was due to
higher product costs that continued to negatively impact the business.
Sportswear:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Coalition revenues
|
|
$
|
154.2
|
|
|
$
|
151.8
|
|
|
|
1.6
|
%
|
|
$
|
394.6
|
|
|
$
|
384.0
|
|
|
|
2.8
|
%
|
Coalition profit
|
|
|
18.5
|
|
|
|
18.3
|
|
|
|
1.1
|
%
|
|
|
40.7
|
|
|
|
37.4
|
|
|
|
8.8
|
%
|
Operating margin
|
|
|
12.0
|
%
|
|
|
12.1
|
%
|
|
|
|
|
|
|
10.3
|
%
|
|
|
9.7
|
%
|
|
|
|
|
The Sportswear Coalition consists of the
Nautica
®
and
Kipling
®
brands in North America (the
Kipling
®
brand outside of North America is managed by the Outdoor & Action Sports Coalition).
Sportswear revenues increased by 2% in the third quarter and 3% for the first nine months of 2012 compared to the prior year periods. These increases were primarily driven by double-digit growth in direct-to-consumer revenues within the
Kipling
®
and
Nautica
®
brands.
Operating margin
comparisons were essentially flat for the third quarter of 2012. The operating margins improved for the first nine months of 2012 compared to 2011 due to a greater percentage of revenues from the higher margin direct-to-consumer businesses for the
Kipling
®
and
Nautica
®
brands and a declining percentage of sales of lower margin distressed products.
Contemporary Brands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Coalition revenues
|
|
$
|
104.2
|
|
|
$
|
126.2
|
|
|
|
(17.4
|
)%
|
|
$
|
339.0
|
|
|
$
|
356.2
|
|
|
|
(4.8
|
)%
|
Coalition profit
|
|
|
13.4
|
|
|
|
8.1
|
|
|
|
65.4
|
%
|
|
|
40.3
|
|
|
|
28.4
|
|
|
|
41.9
|
%
|
Operating margin
|
|
|
12.9
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
11.9
|
%
|
|
|
8.0
|
%
|
|
|
|
|
Revenues for this Coalition were down 17% and 5% in the third quarter and first nine months of 2012,
respectively, compared to the 2011 periods. The declines in revenues were due to (i) the sale of John Varvatos on April 30, 2012, (ii) a reduction in sales of excess inventories for the
7 For All Mankind
®
brand, and (iii) a 2% negative impact from foreign currency rate fluctuations in both 2012 periods. These
declines were partially offset by revenue growth in the
Splendid
®
and
Ella Moss
®
brands, on a combined basis, of 19% and 21% in the third quarter and first nine months of 2012, respectively. In
addition, revenues from the direct-to-consumer businesses of the
7 For All Mankind
®
,
Splendid
®
and
Ella Moss
®
brands each expanded in the third quarter and first nine months of 2012.
The Coalitions operating margins increased in the third quarter and first nine months of 2012, compared with the 2011 periods, primarily due to a reduction in revenues from the sale of excess
inventories for the
7 For All Mankind
®
brand and a greater percentage of revenues from the higher margin
direct-to-consumer businesses.
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
34.4
|
|
|
$
|
30.1
|
|
|
|
14.3
|
%
|
|
$
|
88.8
|
|
|
$
|
77.2
|
|
|
|
15.0
|
%
|
Operating profit (loss)
|
|
|
1.4
|
|
|
|
0.0
|
|
|
|
|
|
|
|
0.1
|
|
|
|
(2.0
|
)
|
|
|
105.0
|
%
|
Operating margin
|
|
|
4.1
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.1
|
%
|
|
|
(2.6
|
)%
|
|
|
|
|
25
VF Outlet
®
stores in the United States sell VF and other branded products. Revenues and profits of VF products sold in these stores are reported as part of the operating results
of the applicable coalition, while revenues and profits of non-VF products are reported in this Other category.
Reconciliation of Coalition Profit to Income Before Income Taxes:
There are two types of costs necessary to reconcile total coalition profit, as discussed in the preceding paragraphs, to consolidated income before income taxes. These costs are (i) corporate and
other expenses, discussed below, and (ii) interest, net, which was discussed in the previous Consolidated Statements of Income section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars in millions
|
|
Third Quarter
|
|
|
Nine Months
|
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
2012
|
|
|
2011
|
|
|
Percent
change
|
|
|
|
|
|
|
|
|
Corporate and other expenses
|
|
$
|
(76.8
|
)
|
|
$
|
(73.0
|
)
|
|
|
5.2
|
%
|
|
$
|
(164.8
|
)
|
|
$
|
(179.9
|
)
|
|
|
(8.4
|
)%
|
Interest, net
|
|
|
(23.2
|
)
|
|
|
(19.3
|
)
|
|
|
20.2
|
%
|
|
|
(67.9
|
)
|
|
|
(48.7
|
)
|
|
|
39.4
|
%
|
Corporate and other expenses include any corporate headquarters costs and other income or expenses that have not
been allocated to the coalitions for internal management reporting. Other expenses include (i) domestic defined benefit pension plan costs other than service cost, (ii) costs of management information systems and the centralized finance,
supply chain, human resources and customer management and other functions that support worldwide operations, (iii) costs of maintaining and enforcing VF trademarks, and (iv) miscellaneous consolidating adjustments.
The increase in corporate and other expenses in the third quarter of 2012 is primarily due to higher domestic defined benefit pension plan costs. The
decrease in corporate and other expenses in the first nine months of 2012 from the prior year period resulted from a $42.0 million gain on the sale of John Varvatos in the second quarter of 2012, net of higher domestic defined benefit pension plan
costs of $25.1 million and higher levels of corporate spending and information systems costs to support VFs business growth.
Analysis of Financial Condition
Balance Sheets
The table below presents certain September 2012 balance sheet accounts
compared to the December 2011 and September 2011 balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
September 2012
|
|
|
December 2011
|
|
|
September 2011
|
|
|
|
|
|
Accounts receivable
|
|
$
|
1,612.6
|
|
|
$
|
1,120.2
|
|
|
$
|
1,547.7
|
|
Inventories
|
|
|
1,758.7
|
|
|
|
1,453.6
|
|
|
|
1,777.9
|
|
Other current assets
|
|
|
322.9
|
|
|
|
272.8
|
|
|
|
279.4
|
|
Property, plant and equipment
|
|
|
775.5
|
|
|
|
737.5
|
|
|
|
704.9
|
|
Intangible assets and goodwill
|
|
|
4,926.1
|
|
|
|
4,981.9
|
|
|
|
5,055.9
|
|
Short-term borrowings
|
|
|
741.0
|
|
|
|
281.7
|
|
|
|
1,145.8
|
|
Current portion of long-term debt
|
|
|
402.8
|
|
|
|
2.7
|
|
|
|
2.7
|
|
Accounts payable
|
|
|
535.4
|
|
|
|
637.1
|
|
|
|
666.8
|
|
Accrued liabilities
|
|
|
756.6
|
|
|
|
744.5
|
|
|
|
849.2
|
|
Long-term debt
|
|
|
1,429.8
|
|
|
|
1,831.8
|
|
|
|
1,832.4
|
|
Other liabilities
|
|
|
1,339.3
|
|
|
|
1,290.1
|
|
|
|
1,162.2
|
|
The following discussion refers to significant changes in balances at September 2012 compared with December 2011:
Accounts receivable at September 2012 increased over the December 2011 balance due primarily to the seasonality of the business along with
an overall growth in wholesale revenues.
Inventories at September 2012 increased over the December 2011 balance due to the seasonality of the
business partially offset by the impact of managements focus on inventory reduction, including the reduction of Timberlands inventory levels.
26
Other current assets were higher at September 2012 compared to December 2011 primarily due to higher
deferred income tax balances and increased prepaid expenses from the overall growth of VFs businesses.
Property, plant and equipment
was higher at September 2012 than at December 2011, resulting from capital spending in excess of depreciation expense during those periods. Capital spending increased due to an exceptional number of projects, including (i) a new European
headquarters, (ii) a new U.S. headquarters for the Outdoor & Action Sports businesses, (iii) new distribution facilities, and (iv) a higher number of retail store openings than in prior periods.
The increase in short-term borrowings at September 2012 over the December 2011 balance resulted from commercial paper borrowings to support seasonal
working capital needs and share repurchases during 2012. VF expects to pay off all commercial paper by the end of 2012.
The change in
accounts payable between September 2012 and December 2011 was driven by the timing of inventory purchases.
Other liabilities at September
2012 were higher than December 2011 due to an increase in (i) the underfunded status of the defined benefit pension plans, (ii) long-term deferred compensation liabilities, and (iii) deferred income tax balances.
The following discussion refers to significant changes in balances at September 2012 compared with September 2011:
Accounts receivable at September 2012 increased over the September 2011 balance due to an overall growth in wholesale revenues, partially offset by an
increase in balances sold under the accounts receivable sale agreement at September 2012.
Inventories at September 2012 decreased from the
September 2011 balance due to the impact of managements focus on inventory reduction, including the reduction of Timberlands inventory levels since its acquisition in September 2011.
Other current assets were higher at September 2012 compared with September 2011 primarily due to higher deferred income tax balances and increased
prepaid expenses from the overall growth of VFs businesses.
Property, plant and equipment was higher at September 2012 than at
September 2011, resulting from capital spending in excess of depreciation expense during those periods. Capital spending increased due to an exceptional number of projects, including (i) a new European headquarters, (ii) a new U.S.
headquarters for the Outdoor & Action Sports businesses, (iii) new distribution facilities, and (iv) a higher number of retail store openings than in prior periods.
Total intangible assets and goodwill at September 2012 were lower than September 2011 due to amortization expense and fluctuations in foreign currency rates. Additionally, goodwill decreased by $20.0
million as a result of adjustments related to Timberlands final purchase price allocation.
The decrease in short-term borrowings at
September 2012 from the September 2011 balance resulted from repayments of commercial paper, partially offset by additional borrowings to support seasonal working capital needs and share repurchases during 2012.
The change in accounts payable between September 2012 and September 2011 was driven by the timing of inventory purchases.
The decrease in accrued liabilities between September 2011 and September 2012 was due primarily to lower accrued income taxes.
Total long-term debt at September 2012 decreased compared to September 2011 because the scheduled repayment of the two year notes issued to finance the
Timberland acquisition was reclassified to the current portion of long-term debt in the third quarter of 2012.
Other liabilities at September
2012 were higher than September 2011 due to an increase in (i) the underfunded status of the defined benefit pension plans, (ii) long-term deferred compensation liabilities, and (iii) accrued income tax balances. These amounts were
partially offset by lower deferred income tax balances.
27
Liquidity and Cash Flows
The financial condition of VF is reflected in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
|
|
|
December
|
|
|
September
|
|
Dollars in millions
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
Working capital
|
|
$
|
1,563.0
|
|
|
$
|
1,521.9
|
|
|
$
|
1,277.8
|
|
|
|
|
|
Current ratio
|
|
|
1.6 to 1
|
|
|
|
1.9 to 1
|
|
|
|
1.5 to 1
|
|
|
|
|
|
Debt to total capital ratio
|
|
|
34.3
|
%
|
|
|
31.9
|
%
|
|
|
40.1
|
%
|
For the ratio of debt to total capital, debt is defined as short-term and long-term borrowings, and total capital is
defined as debt plus stockholders equity. The ratio of net debt to total net capital, (with net debt defined as debt less cash and equivalents and total net capital defined as total capital less cash and equivalents), was 31.5% at September
2012.
VFs primary source of liquidity is the strong cash flow provided by operating activities on an annual basis. Operating cash flow
is dependent on the level of net income, changes in accounts receivable, investments in inventories and changes in other working capital components. Cash from operations is typically lower in the first half of the year as working capital is built to
service operations in the second half of the year, when a greater percentage of VFs revenues are earned. Cash from operations is highest in the fourth quarter of the year, when accounts receivable are collected from seasonally higher wholesale
sales in the third quarter. In addition, cash flows from the direct-to-consumer businesses are highest in the fourth quarter of the year.
For
the nine months ended September 2012, cash provided by operating activities was $102.6 million, compared with $28.8 million of cash used by operating activities in the comparable 2011 period. Net income and the non-cash adjustments to reconcile net
income to cash provided by operating activities both increased in the first nine months of 2012 compared to the first nine months of 2011, offsetting the negative impact of changes in working capital components in the first nine months of 2012. See
discussion of these working capital changes in the Balance Sheets section above.
VF has an agreement with a financial institution
to sell selected trade accounts receivable on a nonrecourse basis. This agreement allows VF to have up to $237.5 million of accounts receivable held by the financial institution at any point in time. At the end of September 2012, Accounts receivable
in the Consolidated Balance Sheet had been reduced by $154.7 million related to balances sold under this program, an increase of $39.3 million from the amounts sold as of the end of 2011. At the end of September 2011, Accounts receivable in the
Consolidated Balance Sheet had been reduced by $133.9 million related to balances sold under this program, an increase of $21.6 million from the amounts sold as of the end of 2010.
Investing activities in the first nine months of 2012 included capital expenditures, software spending and proceeds from the sale of John Varvatos. Capital spending to support continued growth could reach
$325 million for the full year 2012 due to an exceptional number of projects, including (i) a new European headquarters, (ii) a new U.S. headquarters for the Outdoor & Action Sports businesses, (iii) new distribution
facilities, and (iv) new retail stores. This spending will be funded by operating cash flows.
VF relies on continued strong cash
generation to finance its ongoing operations. In addition, VF has significant liquidity from its available cash balances, credit facilities and strong credit ratings. VF has a credit facility that provides a $1.25 billion senior unsecured revolving
line of credit through December 2016 (the Global Credit Facility). The Global Credit Facility supports VFs issuance of up to $1.25 billion of commercial paper to fund short-term seasonal working capital requirements and provides a
sub-facility for standby letters of credit. Commercial paper borrowings and standby letters of credit issued as of September 2012 were $723.0 million and $21.8 million, respectively, leaving $505.2 million available for borrowing against this
facility at September 2012.
VFs favorable credit agency ratings allow for access to capital at competitive rates. At the end of
September 2012, VFs long-term debt ratings were A minus by Standard & Poors Ratings Services and A3 by Moodys Investors Service, and commercial paper ratings were A-2 and
Prime-2, respectively, by those rating agencies. Both Moodys and Standard & Poors currently have a negative outlook on VFs ratings given the higher debt levels resulting from VFs acquisition
of Timberland. None of VFs long-term debt agreements contain acceleration of maturity clauses based solely on changes in credit ratings. However, if there were a change in control of VF and, as a result of the change in control, the 2013,
2017, 2021 and 2037 notes were rated below investment grade by recognized rating agencies, then VF would be obligated to repurchase the notes at 101% of the aggregate principal amount of notes repurchased, plus any accrued and unpaid interest.
During the first nine months of 2012, VF repurchased 2,012,370 of its shares at a cost of $296.8 million (average price of $147.49 per
share). VF repurchased 70,849 shares at a cost of $6.9 million (average price of $97.97 per share) in the first nine months of 2011.
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The total remaining authorization for share repurchase approved by the VF Board of Directors is 4.5 million shares as of the end of September 2012. VF will continue to evaluate future share
repurchases considering funding required for business acquisitions, VFs common stock price and levels of stock option exercises.
Managements Discussion and Analysis in the 2011 Form 10-K provided a table summarizing VFs contractual obligations and commercial commitments
at the end of 2011 that would require the use of funds. Since the filing of the 2011 Form 10-K, there have been no material changes in the disclosed amounts, except as noted below:
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Inventory purchase obligations representing binding commitments to purchase finished goods, raw materials and sewing labor in the ordinary course of
business increased by approximately $500 million at the end of September 2012 due to the seasonality of VFs businesses.
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Minimum royalty and other commitments decreased by approximately $50 million at the end of September 2012 due to payments made under the agreements.
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Management believes that VFs cash balances and funds provided by operating activities, as well as unused bank credit
lines, additional borrowing capacity and access to debt and equity markets, taken as a whole, provide (i) adequate liquidity to meet all of its current and long-term obligations when due, (ii) adequate liquidity to fund capital
expenditures and to maintain its dividend payout policy and (iii) flexibility to meet investment opportunities that may arise.
Recently Issued Accounting Standards
In
December 2011, the FASB issued guidance enhancing disclosure requirements surrounding the nature of an entitys right of offset associated with its financial instruments and derivative instruments. The new guidance is effective January 2013
with retrospective application required. It is not expected to have a material effect on the consolidated financial statements.
In July 2012,
the FASB issued an update to their accounting guidance regarding indefinite-lived intangible asset impairment testing and whether it is necessary to perform the quantitative impairment test currently required. While the guidance is effective for
annual periods beginning after September 15, 2012, VF will elect an early adoption for the 2012 indefinite-lived intangible asset impairment testing. It is not expected to have an impact on the consolidated financial statements.
Critical Accounting Policies and Estimates
Management has chosen accounting policies that it considers to be appropriate to accurately and fairly report VFs operating results and financial position in conformity with generally accepted
accounting principles in the United States. Accounting policies are applied in a consistent manner. Significant accounting policies are summarized in Note A to the Consolidated Financial Statements included in the 2011 Form 10-K.
The application of these accounting policies requires management to make estimates and assumptions about future events and apply judgments that affect
the reported amounts of assets, liabilities, revenues, expenses, contingent assets and liabilities, and related disclosures. These estimates, assumptions and judgments are based on historical experience, current trends and other factors believed to
be reasonable under the circumstances. Management evaluates these estimates and assumptions and may retain outside consultants to assist in the evaluation. If actual results ultimately differ from previous estimates, the revisions are included in
results of operations in the period in which the actual amounts become known.
The accounting policies that involve the most significant
estimates, assumptions and management judgments used in preparation of the consolidated financial statements, or are the most sensitive to change from outside factors, are discussed in Managements Discussion and Analysis in the 2011 Form 10-K.
There have been no material changes in these policies.
Cautionary Statement on Forward-Looking Statements
From time to time, VF may make oral or written statements, including statements in this quarterly report that constitute forward-looking
statements within the meaning of the federal securities laws. These include statements concerning plans, objectives, projections and expectations relating to VFs operations or economic performance, and assumptions related thereto.
Forward-looking statements are made based on managements expectations and beliefs concerning future events impacting VF and therefore involve a number of risks and uncertainties. Forward-looking statements are not guarantees and actual results
could differ materially from those expressed or implied in the forward-looking statements.
Potential risks and uncertainties that could cause
the actual results of operations or financial condition of VF to differ materially from those expressed or implied by forward-looking statements in this quarterly report on Form 10-Q include, but are not limited to, the
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level of consumer confidence and overall level of consumer demand for apparel; fluctuations in the price, availability and quality of raw materials and contracted products; disruption to
VFs distribution system; disruption and volatility in the global capital and credit markets; VFs reliance on a small number of large customers; the financial strength of VFs customers; VFs response to changing fashion trends;
increasing pressure on margins; VFs ability to implement its growth strategy; VFs ability to grow its international and direct-to-consumer businesses; VFs ability to successfully integrate and grow acquisitions, including the
Timberland acquisition; VFs ability to maintain the strength and security of its information technology systems; stability of VFs manufacturing facilities and foreign suppliers; continued use by VFs suppliers of ethical business
practices; VFs ability to accurately forecast demand for products; continuity of members of VFs management; VFs ability to protect trademarks and other intellectual property rights; maintenance by VFs licensees and
distributors of the value of VFs brands; foreign currency fluctuations; and legal, regulatory, political and economic risks in international markets. More information on potential factors that could affect VFs financial results is
included from time to time in VFs public reports filed with the Securities and Exchange Commission, including VFs Annual Report on Form 10-K.
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