SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 30, 2002
Commission file number: 1-5256
----------------------------
V. F. CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1180120
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
628 GREEN VALLEY ROAD, SUITE 500
GREENSBORO, NORTH CAROLINA 27408
(Address of principal executive offices)
(336) 547-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
On April 27, 2002, there were 110,114,918 shares of the registrant's Common
Stock outstanding.
VF CORPORATION
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Statements of Income -
Three months ended March 30, 2002 and
March 31, 2001............................................... 3
Consolidated Balance Sheets - March 30, 2002
December 29, 2001 and March 31, 2001......................... 4
Consolidated Statements of Cash Flows -
Three months ended March 30, 2002 and
March 31, 2001............................................... 5
Notes to Consolidated Financial Statements................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
Item 3 - Quantitative and Qualitative Disclosures about Market Risk...... 17
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders............. 17
Item 6 - Exhibits and Reports on Form 8-K................................. 18
2
VF CORPORATION
Consolidated Statements of Income
(Unaudited)
(In thousands, except share amounts)
THREE MONTHS ENDED
-----------------------------
MARCH 30 MARCH 31
2002 2001
----------- -----------
NET SALES $ 1,273,056 $ 1,423,299
COSTS AND OPERATING EXPENSES
Cost of products sold 831,854 942,406
Marketing, administrative
and general expenses 306,973 329,669
Other operating (income) expense, net (4,740) 4,095
----------- -----------
1,134,087 1,276,170
----------- -----------
OPERATING INCOME 138,969 147,129
OTHER INCOME (EXPENSE)
Interest income 1,454 2,009
Interest expense (18,840) (24,925)
Miscellaneous, net 2,496 (749)
----------- -----------
(14,890) (23,665)
----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING POLICY 124,079 123,464
INCOME TAXES 45,083 45,978
----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING POLICY 78,996 77,486
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY FOR GOODWILL (527,254) --
----------- -----------
NET INCOME (LOSS) $ (448,258) $ 77,486
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income before cumulative effect of change
in accounting policy $ 0.69 $ 0.68
Net income (loss) (4.11) 0.68
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income before cumulative effect of change
in accounting policy $ 0.69 $ 0.67
Net income (loss) (4.11) 0.67
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 109,955 111,954
Diluted 113,377 115,487
CASH DIVIDENDS PER COMMON SHARE $ 0.24 $ 0.23
See notes to consolidated financial statements.
3
VF CORPORATION
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
MARCH 30 DECEMBER 29 MARCH 31
2002 2001 2001
----------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 221,080 $ 332,049 $ 93,680
Accounts receivable, net
March 30 - $54,010; Dec 29 - $62,964;
March 31 - $53,739 700,671 602,334 787,506
Inventories:
Finished products 546,698 624,343 742,135
Work in process 161,969 155,446 188,439
Materials and supplies 124,006 133,265 207,662
----------- ----------- -----------
832,673 913,054 1,138,236
Other current assets 189,381 183,983 148,619
----------- ----------- -----------
Total current assets 1,943,805 2,031,420 2,168,041
PROPERTY, PLANT AND EQUIPMENT 1,800,924 1,818,397 1,846,618
Less accumulated depreciation 1,170,842 1,163,705 1,094,718
----------- ----------- -----------
630,082 654,692 751,900
GOODWILL 470,466 1,015,783 1,085,140
OTHER ASSETS 397,438 401,121 381,387
----------- ----------- -----------
$ 3,441,791 $ 4,103,016 $ 4,386,468
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 66,246 $ 77,900 $ 155,932
Current portion of long-term debt 703 696 111,801
Accounts payable 237,500 251,588 276,378
Accrued liabilities 539,801 483,649 469,077
----------- ----------- -----------
Total current liabilities 844,250 813,833 1,013,188
LONG-TERM DEBT 703,851 904,035 904,724
OTHER LIABILITIES 231,107 228,501 218,173
REDEEMABLE PREFERRED STOCK 43,288 45,631 47,633
DEFERRED CONTRIBUTIONS TO EMPLOYEE
STOCK OWNERSHIP PLAN (298) (1,780) (6,305)
----------- ----------- -----------
42,990 43,851 41,328
COMMON SHAREHOLDERS' EQUITY
Common Stock, stated value $1; shares
authorized, 300,000,000; shares outstanding;
March 29 - 109,902,465; Dec 29 - 109,998,190;
March 31 - 111,690,118 109,902 109,998 111,690
Additional paid-in capital 913,589 884,638 846,112
Accumulated other comprehensive income (loss) (106,945) (103,040) (98,351)
Retained earnings 703,047 1,221,200 1,349,604
----------- ----------- -----------
Total common shareholders' equity 1,619,593 2,112,796 2,209,055
----------- ----------- -----------
$ 3,441,791 $ 4,103,016 $ 4,386,468
=========== =========== ===========
See notes to consolidated financial statements.
4
VF CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
THREE MONTHS ENDED
-------------------------
MARCH 30 MARCH 31
2002 2001
--------- ---------
OPERATIONS
Net income (loss) $(448,258) $ 77,486
Adjustments to reconcile net income (loss)
to cash provided by operations:
Cumulative effect of change in accounting policy 527,254 --
Restructuring costs 7,176 --
Depreciation 26,894 34,354
Amortization of goodwill -- 9,246
Other, net (2,164) 1,367
Changes in current assets and liabilities:
Accounts receivable (95,155) (78,208)
Inventories 72,302 (19,021)
Accounts payable (12,673) (61,948)
Other, net 55,972 75,683
--------- ---------
Cash provided by operations 131,348 38,959
INVESTMENTS
Capital expenditures (12,814) (21,009)
Sale of business 23,978 --
Other, net 5,863 (1,641)
--------- ---------
Cash provided (used) by investments 17,027 (22,650)
FINANCING
Increase (decrease) in short-term borrowings (10,321) 12,078
Payment of long-term debt (200,152) (1,902)
Purchase of Common Stock (41,973) (35,330)
Cash dividends paid (26,927) (26,680)
Proceeds from issuance of Common Stock 25,038 11,423
Other, net (2,402) 799
--------- ---------
Cash used by financing (256,737) (39,612)
EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH (2,607) (1,908)
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (110,969) (25,211)
CASH AND EQUIVALENTS - BEGINNING OF YEAR 332,049 118,891
--------- ---------
CASH AND EQUIVALENTS - END OF PERIOD $ 221,080 $ 93,680
========= =========
See notes to consolidated financial statements.
5
VF CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. Similarly, the 2001 year-end consolidated balance
sheet was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 30, 2002 are not necessarily indicative
of results that may be expected for the year ending January 4, 2003. For further
information, refer to the consolidated financial statements and notes included
in the Company's Annual Report on Form 10-K for the year ended December 29,
2001.
NOTE B - ACQUISITIONS
The Company accrued various restructuring charges in connection with the
businesses acquired in 1999 and 2000. These charges relate to severance, closure
of manufacturing and distribution facilities, and lease and contract termination
costs. Substantially all cash payments related to these actions will be
completed during 2002. Activity in the accrual accounts is summarized as follows
(in thousands):
Facilities Lease and
Exit Contract
Severance Costs Termination Total
--------- ----- ----------- -----
Balance December 29, 2001 $ 2,178 $ 105 $ 7,677 $ 9,960
Cash payments (510) (54) (4,566) (5,130)
------- ----- ------- -------
Balance March 30, 2002 $ 1,668 $ 51 $ 3,111 $ 4,830
======= ===== ======= =======
NOTE C - RESTRUCTURING ACCRUALS
Activity in the restructuring accrual related to the 2001/2002 Strategic
Repositioning Program is summarized as follows (in thousands):
Facilities Lease and
Exit Contract
Severance Costs Termination Total
Balance December 29, 2001 $ 78,399 $ 5,178 $ 16,562 $ 100,139
Accrual for 2002 actions 1,385 5,791 -- 7,176
Less noncash charges -- (5,791) -- (5,791)
Cash payments (20,966) (1,137) (3,363) (25,466)
-------- ------- -------- ---------
Balance March 30, 2002 $ 58,818 $ 4,041 $ 13,199 $ 76,058
======== ======= ======== =========
These actions affect approximately 13,000 of the Company's employees. As of
March 30, 2002, 11,100 employees have been terminated.
6
Activity in the 2000 restructuring accrual is summarized as follows (in
thousands):
Facilities Lease and
Exit Contract
Severance Costs Termination Total
--------- ----- ----------- -----
Balance December 29, 2001 $ 1,644 $ 449 $ 6,864 $ 8,957
Cash payments (716) (116) (336) (1,168)
------- ----- ------- -------
Balance March 30, 2002 $ 928 $ 333 $6,528 $7,789
======= ===== ====== ======
The Company's restructuring actions are proceeding as planned. There have been
no significant adjustments to any assumptions during the first quarter, and we
believe that the remaining accruals are adequate to cover the remaining costs.
The majority of the severance and other cash payments will be made through 2002.
NOTE D - CAPITAL
Common shares outstanding are net of shares held in treasury, and in substance
retired, of 30,141,452 at March 30, 2002, 29,141,452 at December 29, 2001 and
26,142,575 at March 31, 2001. In addition, 245,153, 266,203 and 314,108 shares
of VF Common Stock held in trust for deferred compensation plans are treated for
financial accounting purposes as treasury stock at each of the respective dates.
There are 25,000,000 authorized shares of Preferred Stock, $1 par value. Of
these shares, 2,000,000 were designated as Series A, of which none have been
issued, and 2,105,263 shares were designated and issued as 6.75% Series B
Convertible Preferred Stock, of which 1,401,950 shares were outstanding at March
30, 2002, 1,477,930 at December 29, 2001 and 1,542,766 at March 31, 2001.
NOTE E - BUSINESS SEGMENT INFORMATION
Financial information for the Company's reportable segments is as follows (in
thousands):
First Quarter
---------------------------------
2002 2001
----------- -----------
Net sales:
Consumer Apparel $ 988,596 $ 1,079,248
Occupational Apparel 120,716 158,417
Outdoor Apparel and Equipment 87,609 88,236
All Other 76,135 97,398
----------- -----------
Consolidated net sales $ 1,273,056 $ 1,423,299
=========== ===========
Segment profit:
Consumer Apparel $ 147,336 $ 158,952
Occupational Apparel 13,822 13,863
Outdoor Apparel and Equipment 4,715 561
All Other 3,189 5,147
----------- -----------
Total segment profit 169,062 178,523
Interest, net (17,386) (22,916)
Amortization of goodwill -- (9,246)
Restructuring charges (7,176) --
Corporate and other expenses (20,421) (22,897)
----------- -----------
Income before income taxes and cumulative
effect of change in accounting policy $ 124,079 $ 123,464
=========== ===========
7
Restructuring costs related to the 2001/2002 Strategic Repositioning Program
described above are included in segment profit as follows (in thousands):
First Quarter
2002
-------------
Consumer Apparel $3,710
Occupational Apparel 3,432
Outdoor Apparel and Equipment 34
------
$7,176
======
NOTE F - COMPREHENSIVE INCOME (LOSS)
Comprehensive income consists of net income, plus certain changes in assets and
liabilities that are not included in net income but are instead reported within
a separate component of shareholders' equity under generally accepted accounting
principles. The Company's comprehensive income (loss) was as follows (in
thousands):
First Quarter
----------------------------
2002 2001
--------- --------
Net income (loss) as reported $(448,258) $ 77,486
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income taxes (5,042) (13,591)
Unrealized gains (losses) on marketable
securities, net of income taxes 958 (240)
Derivative hedging contracts, net of
income taxes 179 3,355
--------- --------
Comprehensive income (loss) $(452,163) $ 67,010
========= ========
Accumulated other comprehensive income (loss) for 2002 is summarized as follows
(in thousands):
Foreign Minimum
Currency Marketable Hedging Pension
Translation Securities Contracts Liability Total
----------- ---------- --------- --------- -----
Balance December 29, 2001 $(106,169) $ 590 $4,192 $(1,653) $(103,040)
Other comprehensive income (loss) (5,042) 958 179 -- (3,905)
--------- --------- ------ ------- ---------
Balance March 30, 2002 $(111,211) $1,548 $4,371 $(1,653) $(106,945)
========= ====== ====== ======= =========
8
NOTE G - EARNINGS PER SHARE
Earnings per share, based on income before the cumulative effect of a change in
accounting policy, are computed as follows (in thousands, except per share
amounts):
First Quarter
--------------------------
2002 2001
-------- --------
Basic earnings per share:
Income before cumulative effect of
change in accounting policy $ 78,996 $ 77,486
Less Preferred Stock dividends and
redemption premium 3,420 1,463
-------- --------
Income available for Common Stock $ 75,576 $ 76,023
======== ========
Weighted average Common
Stock outstanding 109,955 111,954
======== ========
Basic earnings per share $ 0.69 $ 0.68
======== ========
Diluted earnings per share:
Income before cumulative effect of
change in accounting policy $ 78,996 $ 77,486
Increased ESOP expense if Preferred Stock
were converted to Common Stock 172 200
-------- --------
Income available for Common Stock
and dilutive securities $ 78,824 $ 77,286
======== ========
Weighted average Common Stock outstanding 109,955 111,954
Additional Common Stock resulting from
dilutive securities:
Preferred Stock 2,243 2,469
Stock options and other 1,179 1,064
-------- --------
Weighted average Common Stock and
dilutive securities outstanding 113,377 115,487
======== ========
Diluted earnings per share $ 0.69 * $ 0.67
======== ========
* Reduced from $.70 due to antidilution.
Outstanding options to purchase 5.7 million shares of Common Stock have been
excluded from the computation of diluted earnings per share for the first
quarter of 2002 because the option exercise prices were greater than the average
market price of the Common Stock. Similarly, options to purchase 5.8 million
shares of Common Stock were excluded for the first quarter of 2001.
NOTE H - CHANGES IN ACCOUNTING POLICIES
Effective at the beginning of the first quarter of 2002, the Company adopted
Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and
Other Intangible Assets. Under this Statement, goodwill and intangible assets
with indefinite useful lives will not be amortized but must be tested at least
annually at the individual reporting unit level to determine if a write-down in
value is required. Other intangible assets will be amortized over their
estimated useful lives. The new Statement also requires an initial test for
write-down of existing goodwill and intangible assets to determine if the
existing carrying value exceeds its fair value.
9
In adopting the Statement, the Company estimated the fair value of its
individual business reporting units on a discounted cash flow basis. Where
there was an indication that the recorded amount of goodwill might be greater
than its fair value, the Company engaged an independent valuation firm to
review those business units and determine the amount of the possible write-down
in value. This evaluation indicated that recorded goodwill related to several
business units exceeded its fair value, resulting from acquisitions where
performance had not met management's original expectations. The fair values of
the net tangible and intangible assets of these business units, and the related
goodwill write-downs, have been measured in accordance with the requirements of
FASB Statement No. 142. The amount of write-down, and the business units
leading to the charges, are summarized by reportable segment as follows:
- - Consumer Apparel segment - $232.1 million: European intimate apparel,
childrenswear and Latin American jeanswear businesses.
- - Occupational Apparel segment - $109.5 million.
- - All Other segment - $185.6 million: Licensed knitwear business.
Accordingly, the Company recorded a noncash charge of $527.3 million ($4.80 per
share), which is recognized as the cumulative effect of a change in accounting
policy in the Consolidated Statement of Income at the beginning of 2002. There
was no income tax effect for this charge.
Activity in the goodwill accounts during 2002 is summarized by business segment
as follows (in thousands):
Outdoor
Consumer Occupational Apparel and All
Apparel Apparel Equipment Other Total
--------- --------- --------- --------- -----------
Balance December 29, 2001 $ 554,771 $ 139,654 $ 109,638 $ 211,720 $ 1,015,783
Change in accounting policy (232,126) (109,543) -- (185,585) (527,254)
Sale of Jantzen (17,737) -- -- -- (17,737)
Currency translation (202) -- (124) -- (326)
--------- --------- --------- --------- -----------
Balance March 30, 2002 $ 304,706 $ 30,111 $ 109,514 $ 26,135 $ 470,466
========= ========= ========= ========= ===========
Also under the new Statement, goodwill amortization, which totaled $36.0 million
($.32 per share) for fiscal year 2001, is no longer required. The following
presents the adjusted income and earnings per share as if goodwill had not been
required to be amortized in the prior year period (in thousands, except per
share amounts):
10
First Quarter
2001
----------
Reported net income $ 77,486
Add back goodwill amortization,
net of income tax effect 9,072
----------
Adjusted net income $ 86,558
==========
Basic earnings per share:
Reported net income $ .68
Add back goodwill amortization .08
----------
Adjusted basic earnings per share $ .76
==========
Diluted earnings per share:
Reported net income $ .67
Add back goodwill amortization .08
----------
Adjusted diluted earnings per share $ .75
==========
The Company adopted FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, at the beginning of 2002. This Statement
establishes accounting standards for the recognition and measurement of
long-lived assets held for use or held for disposal. Also under this Statement,
the historical operating results of the Private Label knitwear and the Jantzen
swimwear business units will be reclassified as discontinued operations
following liquidation of those businesses by the end of the third quarter of
2002.
11
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
STRATEGIC REPOSITIONING PROGRAM
During the fourth quarter of 2001, we enacted a Strategic Repositioning Program.
This consisted of a series of actions to exit underperforming businesses and to
aggressively reduce the Company's overall cost structure by closing higher cost
manufacturing plants, consolidating distribution centers and reducing
administrative functions. The total cost of the approved actions was estimated
at $265 million. The Company recorded pretax charges of $236.8 million ($1.53
per share, with all per share amounts presented on a diluted basis) in the
fourth quarter of 2001, with the balance of the charges estimated at $25 to $30
million to be recorded in 2002. During the first quarter of 2002, the Company
recorded $7.2 million ($.04 per share) of restructuring charges related to these
actions. The remaining charges will be incurred over the balance of 2002 as
plant or other facility closings are announced.
As part of the Strategic Repositioning Program, we are exiting our Private Label
knitwear and Jantzen swimwear businesses. During the quarter, the net impact on
reported results related to these businesses was a contribution to net income of
$1.9 million or $.02 per share. The Private Label knitwear business has been
winding down since the closure announcement in the fourth quarter of 2001. The
textile mill supporting that business was closed in early April 2002, and sewing
of in-process inventories will be completed during the second quarter. The
Jantzen swimwear business was sold to Perry Ellis International, Inc. in March
2002 for a total consideration of $24.0 million. As part of this transaction,
the Company retained substantially all current season inventories and other
working capital. For both of these business units, we will continue to meet
current customer commitments by shipping product into the third quarter.
Liquidation of both business units is expected to be substantially completed by
the end of the third quarter. At that time we expect to reclassify their
operating results and assets and liabilities and present them separately as
discontinued operations in the financial statements.
We expect cash expenses under the Strategic Repositioning Program will
approximate $120 million. We also expect that asset sales and liquidation of
working capital in the businesses to be exited will generate more than $80
million of cash proceeds, leaving a net cash outflow of less than $40 million.
Through the end of the first quarter of 2002, cash payments totaled
approximately $35 million and cash proceeds of $51 million have been received.
Payments required in connection with these restructuring charges are not
expected to have a significant effect on the Company's liquidity. We also expect
that these actions will result in cost reductions of $100 million in 2002, with
an additional $30 million of savings to be achieved in 2003.
See Note C to the consolidated financial statements for additional information
on restructuring charges.
CONSOLIDATED STATEMENTS OF INCOME
For the first quarter of 2002, VF reported consolidated income (before the
effect of a change in accounting policy for goodwill) of $79.0 million, equal to
$.69 per share, compared with $77.5 million or $.67 per share in the 2001
period. Excluding the effects of actions related to the Strategic Repositioning
Program, income increased to $80.5 million, or $.70 per share in the 2002
quarter. The nonrecurring items related to this Program in the 2002 quarter, and
the income statement lines affected by their inclusion, are as follows (in
thousands, except per share amounts):
12
Pretax
Amount EPS
------ -----
Earnings per share, excluding nonrecurring items $.70
Nonrecurring items:
Restructuring charges - $5,935 included in cost of products
sold and $1,241 included in marketing, administrative
and general expenses $(7,176) (.04)
Gain on sale of closed facilities - cost of products sold 1,797 .01
Impact of Private Label knitwear and Jantzen swimwear
businesses to be exited:
Operating results, net of exit costs and expenses 1,695 .01
Gain on sale of Jantzen - miscellaneous income 1,363 .01
----
Earnings per share, as reported before accounting change $.69
====
Sales in the first quarter of 2002 declined 11% to $1,273.1 million. The decline
was due primarily to unit volume decreases in domestic business units. Sales of
the knitwear and swimwear businesses being liquidated declined by $25 million
compared with the prior year quarter. Excluding the reduction in sales of the
businesses being exited, sales declined 9%. Also, in translating foreign
currencies into the U.S. dollar, the stronger U.S. dollar reduced 2002 sales
comparisons by $11 million relative to the prior year period.
Gross margin was 34.7% of sales in 2002, compared with 33.8% in 2001. Gross
margin improved as the benefits of the Strategic Repositioning Program are being
realized, particularly in domestic jeanswear where the prior year period
included expenses related to downtime in manufacturing plants. In addition,
gross margin in the 2002 period includes the effects of two nonrecurring items:
$5.9 million of restructuring charges incurred, net of $1.8 million of gains on
the sale of two closed facilities. Excluding these nonrecurring items, gross
margin was 35.0% in the 2002 quarter.
Marketing, administrative and general expenses were 24.1% of sales in 2002,
compared with 23.2% in 2001. Overall expenses declined due to cost reduction
benefits of the Strategic Repositioning Program. Expenses as a percent of sales
increased due to higher advertising spending on a lower level of sales. In
addition, 2002 includes $1.2 million of nonrecurring restructuring charges.
Other operating income and expense includes net royalty income. In addition,
this caption in 2001 included $9.2 million of amortization of goodwill, which is
not required in 2002 under FASB Statement No. 142, as discussed in Note H to the
consolidated financial statements.
Operating income, as reported, was 10.9% of sales in 2002, compared with 10.3%
in the 2001 period. Excluding the impact of the (1) nonrecurring items in 2002,
(2) businesses to be exited in both periods and (3) the change in accounting for
goodwill amortization in both periods, operating margins would have increased to
11.8% in the 2002 period, compared with 11.3% in 2001.
Net interest expense decreased in 2002 due to lower average borrowings.
Miscellaneous income in 2002 includes a $1.4 million gain on the sale of
Jantzen.
The effective income tax rate (before the cumulative effect of the change in
accounting policy) was 36.3% in 2002 and 37.2% in 2001. The effective rate
declined in 2002 due to the elimination of nondeductible goodwill amortization
expense and an expected lower effective tax rate on foreign earnings.
13
The Company adopted FASB Statement No. 142 effective at the beginning of 2002.
This required change in accounting policy resulted in a nonrecurring noncash
charge of $527.3 million, without tax benefit, or $4.80 per share. See Note H to
the consolidated financial statements for additional details. Including the
effect of this accounting change, the net loss as reported was $448.3 million
($4.11 per share) in the 2002 quarter, compared with net income of $77.5 million
($.67 per share) in the 2001 period.
INFORMATION BY BUSINESS SEGMENT
The Consumer Apparel segment consists of our jeanswear, women's intimate
apparel, swimwear and children's apparel businesses. Overall, segment sales
declined by 8% in 2002 reflecting continued slow consumer spending on apparel
and a lack of jeanswear and intimate apparel shipments for a six week period to
a major domestic customer that filed for bankruptcy. Domestic jeanswear sales
declined 10% reflecting softness in the jeans market, inventory reductions taken
by certain major customers, selected price reductions and pressure from lower
priced private label goods in the mass channel. We do, however, expect more
favorable jeanswear comparisons as the year progresses. Sales were flat in
international jeanswear markets, with an 8% increase in Europe (before
unfavorable currency translation effects) offset by declines in Latin America.
Domestic intimate apparel sales declined 4% in 2002. Sales declined at Jantzen
swimwear as that business has been held for disposition since November 2001.
Segment profit declined 7% in 2002. Segment profit advanced in European
jeanswear, consistent with their higher sales in the quarter, and at Jantzen due
to favorable consumer response to the 2002 swimwear line. Elsewhere, the profit
decline was generally consistent with the overall sales decline.
The Occupational Apparel segment includes the Company's industrial, career and
safety apparel businesses. Sales decreased 24% in 2002 due to (1) ongoing
workforce reductions in the U.S. manufacturing sector that has impacted overall
workwear uniform sales, (2) ongoing consolidation of the industrial laundry
industry, with some of our customers placing greater reliance on their in-house
manufacturing and (3) elimination of workwear product lines that were
discontinued during 2001. Segment profit was flat for the quarter, representing
higher margins earned due to cost reduction efforts on reduced sales volume and
elimination of operating losses on discontinued product lines.
The Outdoor Apparel and Equipment segment consists of the Company's
outdoor-related businesses represented by The North Face branded products
(outerwear and equipment) and the JanSport and Eastpak brands (backpacks and
daypacks). Sales were flat in the 2002 quarter, while profits expanded in the
domestic and European packs businesses. Due to the seasonal nature of the
businesses comprising this segment, the low level of first quarter profitability
is not necessarily indicative of expected full year results.
The All Other segment includes the Company's licensed sportswear and distributor
knitwear businesses, as well as the Private Label knitwear business that is
being liquidated during 2002. Sales declined 22% due to the wind-down of the
Private Label business. Segment profit declined due to losses incurred in the
exit of the Private Label knitwear business.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEETS
Accounts receivable at the end of the first quarter of 2002 are lower than at
the same period in 2001 due to lower sales in the first quarter. Receivables are
higher than at the end of 2001 due to seasonal sales patterns. The allowance for
bad debts declined during the first quarter of 2002 due to write-off of accounts
receivable related to the bankruptcy of a major retail customer.
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Inventories over the last twelve months declined by over $300 million, which
exceeded the goal that we set at the beginning of 2001. Included is a decline of
$80 million in the first quarter, of which $30 million relates to the
liquidation of the Private Label knitwear and Jantzen swimwear businesses.
Looking to the second quarter, we expect to see a similar decline of around $300
million compared with the prior year amount. But if we see an improvement in
business conditions, inventories would move up somewhat, and the amount of
inventory reduction would be somewhat less.
Property, plant and equipment declined over the last year due to depreciation
expense exceeding capital spending and the write-down of assets related to the
2001 restructuring actions.
Goodwill was written down effective at the beginning of 2002 due to adoption of
FASB Statement No. 142; see Note H to the consolidated financial statements for
details. In addition, the balance declined over the last year from write-downs
related to disposition of businesses and amortization expense.
Accounts payable declined due to reduced inventory purchases. The increase in
other accrued liabilities from the prior year relates to restructuring charges
recorded in the fourth quarter of 2001, while the increase from the end of 2001
is due to seasonal patterns.
Long-term debt has been reduced by the early redemption in February 2002 of a
total of $200.0 million of notes due in 2003 and 2004 and by repayment in the
second quarter of 2001 of $100.0 million of notes due at that time. Short-term
borrowings have been reduced with the Company's strong cash flow from operations
over the last year. Remaining short-term balances relate to our international
businesses.
By the end of the first quarter of 2002, substantially all of the ESOP
Convertible Preferred Stock had been allocated to participant accounts in the
401(k) savings plan. Beginning in April 2002, Company matching contributions to
the savings plan are being made in cash instead of Preferred Stock. This change
will not have a significant effect on cash requirements.
LIQUIDITY AND CASH FLOWS
The financial condition of the Company is reflected in the following:
March 30 December 29 March 31
2002 2001 2001
-------- -------- --------
(Dollars in millions)
Working capital $1,099.6 $1,217.6 $1,154.9
Current ratio 2.3 to 1 2.5 to 1 2.1 to 1
Debt to total capital 32.2% 31.7% 34.7%
The debt to total capital ratio was significantly affected at March 2002 by the
cumulative effect of the accounting change recorded at the beginning of 2002.
Net of cash, our debt to total capital ratio at March 2002 was 25.3%.
The primary source of liquidity is the Company's cash flow provided by
operations, which was a record $131.3 million in the first quarter of 2002. Of
that amount, $23 million related to the two businesses being liquidated, with
the majority of the remainder due to reductions in inventories in our ongoing
businesses. Cash provided by operations in 2002 is expected to range from $450
to $500 million.
Since the 2001 Annual Report on Form 10-K, there have been no material changes
relating to the Company's fixed obligations that require the use of
15
funds or other financial commitments that may require the use of funds, other
than the early redemption of $200.0 million of debt in February 2002. With
existing cash balances and cash flow from operations, as well as unused credit
lines and additional borrowing capacity, the Company has substantial liquidity
to meet all of its obligations when due and flexibility to meet investment
opportunities that may arise.
Capital expenditures were lower in the 2002 quarter, but for the full year we
expect capital spending will be comparable with the 2001 level. Capital spending
will be funded by cash flow from operations.
The Company purchased 1.0 million shares of its Common Stock in open market
transactions during the quarter at a cost of $42.0 million. Under its current
authorization from the Board of Directors, the Company may purchase up to an
additional 9.0 million shares. We intend to purchase approximately one million
shares per quarter during 2002, although this rate of repurchase may be adjusted
depending on acquisition opportunities that may arise.
OUTLOOK
Looking ahead to the remainder of 2002:
- - Although the retail climate remains challenging, we are cautiously
optimistic about our prospects for the year. Our outlook for the
remainder of the year remains intact, but reflecting the better than
anticipated first quarter earnings, we now expect that our 2002
earnings will increase from the prior year level (excluding
restructuring charges in both years).
- - We approved an estimated $265 million of restructuring charges in the
fourth quarter of 2001 and expected that $25 to $30 million of those
costs would be recorded in 2002 as the actions are carried out. Of that
amount, $7.2 million was recorded in the first quarter, with the
balance expected to be recorded fairly evenly over the remainder of the
year. In addition, costs and operating losses to be incurred in
liquidation of the Private Label knitwear and Jantzen swimwear
businesses were originally estimated to be $15 million. With the better
operating performance achieved at Jantzen in the first quarter, we now
expect the net effect of these business exits to be less than $15
million. The combined impact of these restructuring charges and
business exit costs is approximately $.25 per share.
To establish an appropriate basis for comparison, had the change in accounting
for goodwill amortization expense ($.32 per share) occurred in 2001 and
excluding restructuring charges ($1.53 per share), earnings for 2001 would have
been $3.00 per share. For the year 2002, excluding the effects of the 2002
restructuring charges and costs related to discontinued businesses (which
together are estimated at $.25 per share) and the write-off of goodwill related
to the change in accounting policy, management expects earnings per share to
increase by 5%.
For the second quarter, the decline in sales should approximate that reported in
the first quarter, while earnings per share are expected to increase 5% over the
prior year level. This estimate also includes the absence of goodwill
amortization expense in 2002 and excludes unusual items. Including the
aforementioned nonrecurring items, reported earnings per share in the second
quarter are expected to be about flat with the prior year.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
From time to time, we 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. This includes statements concerning
plans, objectives, projections and expectations relating to the Company's
operations or economic performance, and assumptions related thereto.
16
Forward-looking statements are made based on our expectations and beliefs
concerning future events impacting the Company and therefore involve a number of
risks and uncertainties. We caution that forward-looking statements are not
guarantees and actual results could differ materially from those expressed or
implied in the forward-looking statements.
Important factors that could cause the actual results of operations or financial
condition of the Company to differ include, but are not necessarily limited to,
the overall level of consumer spending for apparel; changes in trends in the
segments of the market in which the Company competes; competitive conditions in
and financial strength of our suppliers and of our retail customers; actions of
competitors and customers that may impact the Company's business; completion of
software developed by outside vendors and the related implementation of the
Company's common systems project; the ability to execute our restructuring
initiatives and to achieve the anticipated cost savings; the availability of new
acquisitions that increase shareholder value and our ability to integrate new
acquisitions successfully; and the impact of economic changes in the markets
where the Company competes, such as changes in interest rates, currency exchange
rates, inflation rates, recession, and other external economic and political
factors over which we have no control.
Item 3 - Quantitative and Qualitative Disclosures about Market Risks
There have been no significant changes in the Company's market risk exposures
from what was disclosed in Item 7A of the Company's Annual Report on Form 10-K
for the year ended December 29, 2001.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company held on April 23, 2002, the
following four nominees to the Board of Directors were elected to serve until
the 2005 Annual Meeting:
Votes For Votes Withheld
--------- --------------
Juan Ernesto de Bedout 101,588,407 1,400,327
Ursula F. Fairbairn 101,169,165 1,819,569
Barbara S. Feigin 101,933,883 1,054,851
Mackey J. McDonald 101,935,496 1,053,238
There were three additional proposals as follows:
- - The proposal to ratify the selection of PricewaterhouseCoopers LLP as
the Company's independent accountants for the 2002 fiscal year was
approved by the shareholders. The vote was 100,009,403 for, 2,585,966
against and 393,365 abstaining.
- - The proposal requesting that the Board of Directors adopt a policy
stating that the public accounting firm retained by the Company to
provide audit services should not also be retained to provide non-audit
services to the Company was rejected by the shareholders. The vote was
31,054,644 for, 62,589,450 against, 1,206,062 abstaining and 8,138,578
broker nonvotes.
- - The proposal requesting that the Board of Directors take necessary
steps, in compliance with state law and without affecting the unexpired
terms of previously elected directors, to declassify the Board for the
purpose of director elections was approved by the shareholders. The
vote was 51,597,513 for, 42,381,539 against, 869,604 abstaining and
8,140,078 broker nonvotes.
17
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 10 (A) - Deferred Compensation Plan, as amended and
restated as of December 31, 2001
Exhibit 10 (B) - Executive Deferred Savings Plan, as amended
and restated as of December 31, 2001
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
for the three months ended March 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
V.F. CORPORATION
----------------
(Registrant)
By: /s/ Robert K. Shearer
------------------------
Robert K. Shearer
Vice President - Finance
(Chief Financial Officer)
Date: May 10, 2002
By: /s/ Robert A. Cordaro
-----------------------
Robert A. Cordaro
Vice President - Controller
(Chief Accounting Officer)
18