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 JUNE 29, 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)
105 CORPORATE CENTER BOULEVARD
GREENSBORO, NORTH CAROLINA 27408
(Address of principal executive offices)
(336) 424-6000
(Registrant's telephone number, including area code)
628 GREEN VALLEY ROAD, SUITE 500
GREENSBORO, NORTH CAROLINA 27408
(Former address of principal executive offices)
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 July 27, 2002, there were 109,392,519 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 and six months ended June 29, 2002 and
June 30, 2001.................................................. 3
Consolidated Balance Sheets - June 29, 2002
December 29, 2001 and June 30, 2001............................ 4
Consolidated Statements of Cash Flows -
Six months ended June 29, 2002 and
June 30, 2001.................................................. 5
Notes to Consolidated Financial Statements..................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........ 20
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.................................. 20
2
VF CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 29 JUNE 30 JUNE 29 JUNE 30
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 1,193,458 $ 1,322,958 $ 2,466,514 $ 2,746,257
COSTS AND OPERATING EXPENSES
Cost of products sold 748,428 876,043 1,580,282 1,818,449
Marketing, administrative
and general expenses 298,195 307,776 605,168 637,445
Other operating (income) expense, net (5,507) 4,198 (10,247) 8,293
----------- ----------- ----------- -----------
1,041,116 1,188,017 2,175,203 2,464,187
----------- ----------- ----------- -----------
OPERATING INCOME 152,342 134,941 291,311 282,070
OTHER INCOME (EXPENSE)
Interest income 1,767 1,508 3,221 3,517
Interest expense (16,493) (24,176) (35,333) (49,101)
Miscellaneous, net 436 (906) 2,932 (1,655)
----------- ----------- ----------- -----------
(14,290) (23,574) (29,180) (47,239)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING POLICY 138,052 111,367 262,131 234,831
INCOME TAXES 49,186 41,986 94,269 87,964
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING POLICY 88,866 69,381 167,862 146,867
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
POLICY FOR GOODWILL -- -- (527,254) --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 88,866 $ 69,381 $ (359,392) $ 146,867
=========== =========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE - BASIC
Income before cumulative effect of change
in accounting policy $ 0.79 $ 0.61 $ 1.47 $ 1.29
Net income (loss) 0.79 0.61 (3.33) 1.29
EARNINGS (LOSS) PER COMMON SHARE - DILUTED
Income before cumulative effect of change
in accounting policy $ 0.79 $ 0.60 $ 1.47 $ 1.27
Net income (loss) 0.79 0.60 (3.33) 1.27
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 109,626 111,571 109,793 111,762
Diluted 112,982 115,375 113,185 115,436
CASH DIVIDENDS PER COMMON SHARE $ 0.24 $ 0.23 $ 0.48 $ 0.46
Note: If the nonamortization provisions of FASB Statement No. 142 had been
applied at the beginning of 2001, income before cumulative effect of change in
accounting policy would have been $78,415 and $164,973 for the second quarter
and six months of 2001, respectively. Basic and diluted earnings per share
before cumulative effect of change in accounting policy would have been $.69 and
$.68, respectively, for the second quarter of 2001 and $1.45 and $1.43,
respectively, for the six months of 2001.
See notes to consolidated financial statements.
3
VF CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 29 DECEMBER 29 JUNE 30
2002 2001 2001
---- ---- ----
ASSETS
CURRENT ASSETS
Cash and equivalents $ 272,199 $ 332,049 $ 100,400
Accounts receivable, less allowances:
June 29 - $54,258; Dec 29 - $62,964;
June 30 - $54,782 652,946 602,334 723,007
Inventories
Finished products 580,237 624,343 851,911
Work in process 183,093 155,446 185,926
Materials and supplies 130,749 133,265 175,649
----------- ----------- -----------
894,079 913,054 1,213,486
Other current assets 185,789 183,983 156,462
----------- ----------- -----------
Total current assets 2,005,013 2,031,420 2,193,355
PROPERTY, PLANT AND EQUIPMENT 1,778,912 1,818,397 1,860,316
Less accumulated depreciation 1,174,686 1,163,705 1,118,751
----------- ----------- -----------
604,226 654,692 741,565
GOODWILL 471,534 1,015,783 1,078,501
OTHER ASSETS 416,360 401,121 394,746
----------- ----------- -----------
$ 3,497,133 $ 4,103,016 $ 4,408,167
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 65,302 $ 77,900 $ 272,325
Current portion of long-term debt 640 696 7,656
Accounts payable 266,051 251,588 290,099
Accrued liabilities 529,424 483,649 426,980
----------- ----------- -----------
Total current liabilities 861,417 813,833 997,060
LONG-TERM DEBT 702,777 904,035 904,469
OTHER LIABILITIES 246,400 228,501 228,006
REDEEMABLE PREFERRED STOCK 41,700 45,631 46,921
DEFERRED CONTRIBUTIONS TO EMPLOYEE
STOCK OWNERSHIP PLAN -- (1,780) (4,769)
----------- ----------- -----------
41,700 43,851 42,152
COMMON SHAREHOLDERS' EQUITY
Common Stock, stated value $1; shares
authorized, 300,000,000; shares
outstanding; June 29 - 109,181,006;
Dec 29 - 109,998,190;
June 30 - 111,468,229 109,181 109,998 111,468
Additional paid-in capital 924,159 884,638 870,274
Accumulated other comprehensive income (loss) (108,871) (103,040) (98,765)
Retained earnings 720,370 1,221,200 1,353,503
----------- ----------- -----------
Total common shareholders' equity 1,644,839 2,112,796 2,236,480
----------- ----------- -----------
$ 3,497,133 $ 4,103,016 $ 4,408,167
=========== =========== ===========
See notes to consolidated financial statements.
4
VF CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
----------------
JUNE 29 JUNE 30
2002 2001
---- ----
OPERATIONS
Net income (loss) $(359,392) $ 146,867
Adjustments to reconcile net income (loss)
to cash provided by operations:
Cumulative effect of change in accounting policy 527,254 --
Restructuring costs 3,266 --
Depreciation 54,562 67,924
Amortization of goodwill -- 18,454
Other, net (3,585) (4,550)
Changes in current assets and liabilities:
Accounts receivable (36,971) (15,509)
Inventories 20,131 (101,780)
Accounts payable 13,283 (43,921)
Other, net 43,672 28,093
--------- ---------
Cash provided by operations 262,220 95,578
INVESTMENTS
Capital expenditures (22,094) (43,547)
Sale of business 23,978 --
Other, net (4,301) 7,251
--------- ---------
Cash invested (2,417) (36,296)
FINANCING
Increase (decrease) in short-term borrowings (11,826) 128,527
Payment of long-term debt (200,956) (106,986)
Purchase of Common Stock (84,850) (72,723)
Cash dividends paid (54,190) (53,163)
Proceeds from issuance of Common Stock 34,530 32,234
Other, net (5,623) (2,225)
--------- ---------
Cash used by financing (322,915) (74,336)
EFFECT OF FOREIGN CURRENCY RATE CHANGES ON CASH 3,262 (3,437)
--------- ---------
NET CHANGE IN CASH AND EQUIVALENTS (59,850) (18,491)
CASH AND EQUIVALENTS - BEGINNING OF YEAR 332,049 118,891
--------- ---------
CASH AND EQUIVALENTS - END OF PERIOD $ 272,199 $ 100,400
========= =========
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 six months ended June 29, 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 (856) (105) (5,596) (6,557)
------- ------- ------- -------
Balance June 29, 2002 $ 1,322 $ -- $ 2,081 $ 3,403
======= ======= ======= =======
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 2,603 9,145 -- 11,748
Noncash charges -- (9,039) -- (9,039)
Cash payments (37,921) (2,412) (7,251) (47,584)
Reduction of accrual (3,911) (136) (847) (4,894)
--------- --------- --------- ---------
Balance June 29, 2002 $ 39,170 $ 2,736 $ 8,464 $ 50,370
========= ========= ========= =========
6
These actions affect approximately 14,200 of the Company's employees. As of June
29, 2002, 13,500 employees have been terminated.
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 (1,179) (301) (728) (2,208)
Reduction of accrual -- -- (203) (203)
------- ------- ------- -------
Balance June 29, 2002 $ 465 $ 148 $ 5,933 $ 6,546
======= ======= ======= =======
The Company's restructuring actions are proceeding as planned. Management
determined that a total of $5.1 million of the 2000 and 2001 accrued
restructuring liabilities was no longer required due to reduced severance
(because employees worked longer than originally planned during the 60 day
notice periods required by the Worker Adjustment Retraining Notification Act of
1988) and other cost savings. In addition, management determined that $3.4
million of restructuring-related inventory and other asset charges were no
longer required. Accordingly, a total of $8.5 million was credited to income, of
which $6.4 million related to ongoing businesses and $2.1 million to the
business exits. We believe that the remaining accruals are adequate to cover the
remaining costs. The majority of the remaining 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 31,142,436 at June 29, 2002, 29,141,452 at December 29, 2001 and
27,140,946 at June 30, 2001. In addition, 254,613 shares of VF Common Stock at
June 29, 2002, 266,203 shares at December 29, 2001 and 302,508 shares at June
30, 2001 are held in trust for deferred compensation plans. These shares 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 1,350,483 shares were outstanding at June
29, 2002, 1,477,930 at December 29, 2001 and 1,519,713 at June 30, 2001.
7
NOTE E - BUSINESS SEGMENT INFORMATION
Outdoor Apparel and Equipment was separately reported as a segment for the first
time at the end of 2001; accordingly, prior year information has been restated.
Financial information for the Company's reportable segments is as follows (in
thousands):
Second Quarter Six Months
-------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Net sales:
Consumer Apparel $ 903,319 $ 970,493 $ 1,891,915 $ 2,049,741
Occupational Apparel 115,805 135,319 236,521 293,736
Outdoor Apparel and Equipment 107,320 115,892 194,929 204,127
All Other 67,014 101,254 143,149 198,653
----------- ----------- ----------- -----------
Consolidated net sales $ 1,193,458 $ 1,322,958 $ 2,466,514 $ 2,746,257
=========== =========== =========== ===========
Segment profit:
Consumer Apparel $ 149,830 $ 135,167 $ 297,166 $ 294,118
Occupational Apparel 15,144 10,781 28,966 24,644
Outdoor Apparel and Equipment 9,995 11,312 14,710 11,873
All Other (1,438) 9,139 1,751 14,286
----------- ----------- ----------- -----------
Total segment profit 173,531 166,399 342,593 344,921
Interest, net (14,726) (22,668) (32,112) (45,584)
Amortization of goodwill -- (9,208) -- (18,454)
Restructuring charges, net 3,910 -- (3,266) --
Corporate and other expenses (24,663) (23,156) (45,084) (46,052)
----------- ----------- ----------- -----------
Income before income taxes and cumulative
effect of change in accounting policy $ 138,052 $ 111,367 $ 262,131 $ 234,831
=========== =========== =========== ===========
Restructuring charges, net of reversals, relate to the following segments (in
thousands):
Second Quarter Six Months
2002 2002
---- ----
Consumer Apparel $ 2,828 $ (882)
Occupational Apparel 316 (3,116)
Outdoor Apparel and Equipment 521 487
All Other 245 245
------- -------
Total $ 3,910 $(3,266)
======= =======
8
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):
Second Quarter Six Months
-------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 88,866 $ 69,381 $(359,392) $ 146,867
Other comprehensive income (loss):
Foreign currency translation adjustments,
net of income taxes 9,460 (1,575) 4,418 (15,166)
Unrealized gains (losses) on marketable
securities, net of income taxes (285) 323 673 83
Derivative hedging contracts,
net of income taxes (11,101) 838 (10,922) 4,193
--------- --------- --------- ---------
Comprehensive income (loss) $ 86,940 $ 68,967 $(365,223) $ 135,977
========= ========= ========= =========
The change in foreign currency translation adjustments in 2002 was due to the
weakening of the U.S. dollar in relation to the euro and other currencies of
European countries where the Company has operations, partially offset by the
strengthening of the U.S. dollar in relation to the Mexican Peso.
We monitor net foreign currency market exposures and may in the ordinary course
of business enter into foreign exchange forward contracts to hedge specific
foreign currency transactions or anticipated cash flows relating to changes in
exchange rates. Use of these financial instruments allows us to reduce the
Company's overall exposure to exchange rate movements, since gains and losses on
these contracts will offset the losses and gains on the transactions being
hedged. With the weakening of the U.S. dollar near the end of the second quarter
of 2002, certain of our international operating businesses have experienced, or
are expected to experience, transaction gains in their operating results. The
Company's hedging practice has resulted in net realized and unrealized hedging
losses that are deferred in Other Comprehensive Income until the underlying
transactions are realized. Accordingly, there is an offsetting hedging liability
recorded in Accrued Liabilities.
9
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) 4,418 673 (10,922) -- (5,831)
--------- --------- --------- --------- ---------
Balance June 29, 2002 $(101,751) $ 1,263 $ (6,730) $ (1,653) $(108,871)
========= ========= ========= ========= =========
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):
Second Quarter Six Months
-------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per share:
Income before cumulative effect of
change in accounting policy $ 88,866 $ 69,381 $167,862 $146,867
Less Preferred Stock dividends and
redemption premium 2,659 1,496 6,079 2,959
-------- -------- -------- --------
Income available for Common Stock $ 86,207 $ 67,885 $161,783 $143,908
======== ======== ======== ========
Weighted average Common
Stock outstanding 109,626 111,571 109,793 111,762
======== ======== ======== ========
Basic earnings per share $ 0.79 $ 0.61 $ 1.47 $ 1.29
======== ======== ======== ========
10
Second Quarter Six Months
-------------- ----------
2002 2001 2002 2001
---- ---- ---- ----
Diluted earnings per share:
Income before cumulative effect of
change in accounting policy $ 88,866 $ 69,381 $167,862 $ 146,867
Increased ESOP expense if Preferred Stock
were converted to Common Stock 172 213 344 413
-------- -------- -------- ---------
Income available for Common Stock
and dilutive securities $ 88,694 $ 69,168 $167,518 $ 146,454
======== ======== ======== =========
Weighted average Common Stock outstanding 109,626 111,571 109,793 111,762
Additional Common Stock resulting from
dilutive securities:
Preferred Stock 2,160 2,420 2,202 2,450
Stock options and other 1,196 1,384 1,190 1,224
-------- -------- -------- ---------
Weighted average Common Stock and
dilutive securities outstanding 112,982 115,375 113,185 115,436
======== ======== ======== =========
Diluted earnings per share $ 0.79 $ 0.60 $ 1.47* $ 1.27
======== ======== ======== =========
* Reduced from $1.48 due to antidilution.
Outstanding options to purchase 5.7 million shares and 5.6 million shares of
Common Stock have been excluded from the computation of diluted earnings per
share for the second quarter and the six months of 2002, respectively, because
the option exercise prices were greater than the average market price of the
Common Stock. Similarly, options to purchase 3.6 million shares and 4.7 million
shares of Common Stock were excluded for the second quarter and six months of
2001, respectively.
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.
11
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 $ 554,373 $ 139,654 $ 110,036 $ 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 279 -- 463 -- 742
----------- ----------- ----------- ----------- -----------
Balance June 29, 2002 $ 304,789 $ 30,111 $ 110,499 $ 26,135 $ 471,534
=========== =========== =========== =========== ===========
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 periods (in thousands, except per
share amounts):
Second Quarter Six Months
2001 2001
---- ----
Reported net income $ 69,381 $ 146,867
Add back goodwill amortization,
net of income taxes 9,034 18,106
----------- -----------
Adjusted net income $ 78,415 $ 164,973
=========== ===========
Basic earnings per share:
Reported net income $ 0.61 $ 1.29
Add back goodwill amortization 0.08 0.16
----------- -----------
Adjusted basic earnings per share $ 0.69 $ 1.45
=========== ===========
Diluted earnings per share:
Reported net income $ 0.60 $ 1.27
Add back goodwill amortization 0.08 0.16
----------- -----------
Adjusted diluted earnings per share $ 0.68 $ 1.43
=========== ===========
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.
12
In April 2002, the FASB issued Statement No. 145. This Statement modifies or
amends several other authoritative pronouncements, including those covering
gains and losses from extinguishment of debt. This statement is not expected
to have a material impact on the financial position, results of operations or
cash flows of the Company.
On June 28, 2002, the FASB issued Statement No. 146, Accounting for Exit and
Disposal Activities, which is required to be adopted for disposal activities
initiated after December 31, 2002. Management is currently evaluating the
effects of this Statement.
NOTE I - SUBSEQUENT EVENT
Subsequent to the end of the second quarter, the Board of Directors declared a
regular quarterly cash dividend of $.24 per share, payable on September 20, 2002
to shareholders of record as of the close of business on September 10, 2002.
13
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 initiated 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 and second quarters of
2002, the Company recorded $7.2 million ($.04 per share) and $4.6 million ($.03
per share), respectively, 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. In addition, during the second quarter we
reversed $6.4 million ($.04 per share) of restructuring charges related to
severance accrual revisions and other lower than expected future closing costs
in our ongoing businesses.
As part of the Strategic Repositioning Program, we decided to exit our Private
Label knitwear and Jantzen swimwear businesses. We had estimated the costs to be
incurred in 2002 during the phaseout of these businesses would be $15 million.
During the second quarter, the net impact on reported results related to these
businesses was a contribution to pretax income of $1.8 million or $.01 per
share. Year-to-date, the impact was a contribution to pretax income of $4.9
million or $.03 per share, including the gain on sale of Jantzen. The Private
Label knitwear business has been winding down since the closure announcement in
the fourth quarter of 2001. The Jantzen swimwear business was sold to Perry
Ellis International, Inc. in March 2002 for a total consideration of $24.0
million, with the Company retaining current season inventories and other working
capital. Shipments have been substantially completed, and 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 to 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 first six months of 2002, cash payments totaled approximately $57
million and cash proceeds of $65 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 second quarter of 2002, VF reported consolidated income of $88.9
million, equal to $.79 per share, compared with $69.4 million or $.60 per share
in the 2001 period. For the first half of 2002, reported income (before the
effect of a change in accounting policy for goodwill) was $167.9 million, equal
to $1.47 per share, compared with $146.9 million or $1.27 per share in 2001.
Excluding the effects of actions related to the Strategic Repositioning Program,
income was $86.6 million, or $.77 per share, in the 2002 quarter and $167.1
million, or $1.47 per share, in the 2002 first half. The nonrecurring items
related to the Strategic
14
Repositioning Program in the quarter and year-to-date periods ended June 29,
2002, and the income statement lines affected by their inclusion, are as follows
(in thousands, except per share amounts):
Second Quarter Six Months
-------------- ----------
Pretax Pretax
Amount EPS Amount EPS
------ --- ------ ---
Earnings per share, excluding nonrecurring items $ .77 $ 1.47
Nonrecurring items:
Restructuring charges $ (4,572) (.03) $ (11,748) (.08)
Reversal of prior years' restructuring charges 6,354 .04 6,354 .04
Gain on sale of closed facilities 1,797 .01
Impact of Private Label knitwear and Jantzen swimwear
businesses to be exited:
Operating results, net of exit costs and expenses and
$2,128 reversal of prior year restructuring charges 1,799 .01 3,494 .02
Gain of sale of Jantzen -- -- 1,363 .01
---------- ----------
Earnings per share, as reported before accounting change $ .79 $ 1.47
========== ==========
Restructuring charges:
Cost of products sold $ (3,334) $ (9,269)
Marketing, administrative and general expenses (1,238) (2,479)
---------- ----------
$ (4,572) $ (11,748)
========== ==========
Reversal of prior years' restructuring charges:
Cost of products sold $ 5,060 $ 5,060
Marketing, administrative and general expenses 1,294 1,294
---------- ----------
$ 6,354 $ 6,354
========== ==========
Gain on sale of closed facilities:
Cost of products sold $ -- $ 1,797
========== ==========
Gain on sale of Jantzen:
Miscellaneous income $ -- $ 1,363
========== ==========
Sales in both the second quarter and first six months of 2002 declined by 10% to
$1,193.5 million in the quarter and to $2,466.5 million in the first half. The
declines were due to unit volume decreases in domestic business units. Sales of
the knitwear and swimwear businesses being liquidated declined by $52 million
compared with the prior year quarter and declined by $76 million compared with
the prior year first half. Excluding the reduction in sales of the businesses
being exited, 2002 sales declined 6% in the quarter and 8% in the first half.
Also, in translating foreign currencies into the U.S. dollar, the stronger U.S.
dollar reduced 2002 sales comparisons by $7 million in the quarter and $18
million in the first half relative to the prior year periods.
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Gross margin was 37.3% of sales in the quarter and 35.9% in the six months of
2002, compared with 33.8% in both 2001 periods. Gross margin improved as the
benefits of the Strategic Repositioning Program are being realized through lower
cost sourcing and improved capacity utilization. The prior year periods included
expenses related to downtime in manufacturing plants, particularly in domestic
jeanswear. There are also lower sales of distressed product in 2002. In
addition, gross margin in the 2002 periods includes the effects of three
nonrecurring items explained in the table above: restructuring charges, reversal
of prior years' restructuring charges and gains on the sale of two closed
facilities. Excluding the combined operating results of the two business exits
and the above nonrecurring items, gross margin was 37.3% in the 2002 quarter and
36.4% in the 2002 first half.
Marketing, administrative and general expenses were 25.0% of sales in the
quarter and 24.5% in the six months of 2002, compared with 23.3% and 23.2% in
the 2001 periods. 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. For the year, we
are planning an increase of 11% in advertising, with the increase focused on the
Company's Lee(R), Wrangler(R), Vanity Fair(R) and Vassarette(R) brands. Accruals
for incentive compensation also increased due to the Company's improved
financial performance in 2002. In addition, 2002 includes nonrecurring
restructuring charges, net of reversal of prior periods' restructuring charges,
as explained in the table above.
Other operating income and expense includes net royalty income. In addition,
this caption in 2001 included $9.2 million of amortization of goodwill in the
quarter and $18.5 million in the six months, 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 12.8% of sales in the second quarter of 2002
and 11.8% in the first six months of 2002, compared with 10.2% and 10.3% in the
2001 periods. Excluding the impact of the (1) nonrecurring items in 2002, (2)
businesses to be exited in both years and (3) the change in accounting for
nonamortization of goodwill in both years, operating margins would have been
12.8% in the quarter and 12.3% in the six months of 2002, compared with 11.8%
and 11.6% in the 2001 periods.
Net interest expense decreased in 2002 due to lower average borrowings.
Miscellaneous income includes a $1.4 million gain on sale of the Jantzen
swimwear business in the first quarter of 2002.
The effective income tax rate (before the cumulative effect of the change in
accounting policy) was 36.0% in 2002 and 37.5% 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.
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 in the first
quarter of 2002. See Note H to the consolidated financial statements for
additional details. Including the effect of this accounting change, the net loss
as reported was $359.4 million ($3.33 per share) in the first half of 2002,
compared with net income of $146.9 million ($1.27 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 7% and 8% in the 2002 second quarter and six months, respectively,
reflecting continued slow consumer spending on apparel and the effects of a
bankruptcy filing by a major customer. Domestic jeanswear sales declined 5% in
the quarter and 8% in the six months 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,
16
however, expect sales in dollars and units to increase in the second half of the
year. Sales in international jeanswear markets declined 3% in the quarter before
unfavorable currency translation effects. For the first half, international
jeanswear sales were flat (excluding currency effects), with an increase in
Europe offset by a decline in Latin America. Domestic intimate apparel sales
declined 7% in the quarter and 6% in the six months due to lower sales in the
mass channel and in private label, offset in part by higher sales of Vanity
Fair(R) and other branded products in the department store channel. The
integration of our Bestform business into our other domestic intimate apparel
business was completed during the second quarter with no business disruptions.
Sales declined at Jantzen swimwear as that business has been held for
disposition since November 2001. Segment profit increased 11% in the quarter and
1% in the first half of 2002. The increase in segment profit occurred at Jantzen
due to favorable consumer response to the 2002 swimwear line and expense control
during this liquidation period, as contrasted with operating losses incurred in
the prior year periods. Elsewhere in Consumer Apparel, overall segment profit
was flat in the quarter but declined in the six months.
The Occupational Apparel segment includes the Company's industrial, career and
safety apparel businesses. Sales decreased 14% in the quarter and 19% in the
first six months of 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 increased in both periods, 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 outerwear, equipment, backpacks and
daypacks. Sales declined in both the 2002 quarter and six months. Segment profit
declined in the quarter but increased in the six months due to increased
profitability in the European businesses. Because of the seasonal nature of the
businesses comprising this segment, the low level of profitability in the first
half of the year is not 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. The sales declines and segment losses reported in
the 2002 periods are due to the Private Label business exit. Excluding results
of the Private Label knitwear business, remaining businesses experienced growth
in both sales and segment profit in the 2002 periods.
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEETS
Accounts receivable at the end of the second quarter of 2002 are lower than at
the same period in 2001 due to lower sales in the 2002 quarter. Receivables are
higher than at the end of 2001 due to seasonal sales patterns. The allowance for
bad debts declined in 2002 due to write-off of accounts receivable related to
the bankruptcy of a major retail customer in the first quarter.
Inventories over the last twelve months declined by over $300 million.
Inventories declined by $19 million in the first six months of 2002. This
included a much lower than normal seasonal increase of $27 million in the
ongoing businesses and a $46 million reduction in the Private Label knitwear and
Jantzen swimwear businesses that are being liquidated. Since most of the
inventory reduction occurred in the second half of 2001, we expect only a modest
further reduction in inventories of continuing businesses by the end of 2002
compared with 2001 year-end levels. However, an improvement in retail market
conditions could require higher inventory levels to properly service retail
customers.
17
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 in 2001.
Accounts payable declined from the prior year level 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 and increased
income tax liabilities resulting from improved operating results. The increases
in accounts payable and in accrued liabilities from the end of 2001 are 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. Short-term borrowings
have been reduced with the Company's strong cash flow from operations over the
last year. Short-term borrowings remaining at June 2002 relate to our
international businesses.
By the end of the second quarter of 2002, 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:
June 29 December 29 June 30
2002 2001 2001
---- ---- ----
(Dollars in millions)
Working capital $ 1,143.6 $1,217.6 $1,196.3
Current ratio 2.3 to 1 2.5 to 1 2.2 to 1
Debt to total capital 31.9% 31.7% 34.6%
The debt to total capital ratio was significantly affected at June 2002 by
repayment of $212 million of debt during the first half of the year and the
cumulative effect of the accounting change for goodwill recorded at the
beginning of 2002. Net of cash, our debt to total capital ratio at June 2002 was
23.2%.
The primary source of liquidity is the Company's cash flow provided by
operations, which was a record $262.2 million in the first half of 2002. Of that
amount, $38 million related to the two businesses being liquidated. Cash
provided by operations in 2002 is expected to surpass $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 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. The Company
maintains a $750.0 million unsecured revolving credit agreement with a group of
banks, of which the total amount is available for borrowing. 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. During the second quarter of 2002, $100.0 million of the
Company's 9.25% debentures due in 2022 became redeemable. If the Company elects
18
to call this debt, any redemption would be funded by existing cash balances or
by issuance of new debt. The call premium, along with the write-off of deferred
issuance costs, would result in an expense of $5.0 million.
Capital expenditures were lower in the first six months of 2002. For the full
year, we expect capital spending to approximate 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 each of the first two quarters of 2002 at a total cost of
$84.9 million. Under its current authorization from the Board of Directors, the
Company may purchase up to an additional 8.0 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.
The Company has received notice of proposed income tax deficiencies from the
Internal Revenue Service ("IRS") for examination of the Company's 1995 to 1997
tax years. Management believes the ultimate outcome of the IRS audits will not
have a material adverse impact on the Company's financial position or results of
operations.
OUTLOOK
Looking ahead to the remainder of 2002:
- - The retail climate remains challenging. However, sales comparisons in the
second half should show improvement over first half results. Excluding the
business exits, we expect sales increases over the prior year levels.
Specifically for the third quarter, we expect reported sales to be about
flat with the prior year period. Excluding sales in both years of the
businesses that are being exited, third quarter sales in ongoing businesses
should increase by about 4%, with increases in most business units.
- - 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 were carried out. Of that amount,
$11.7 million was recorded in the first half 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. The combined impact of these restructuring charges and
business exit costs was originally estimated at $.25 per share. With lower
net costs achieved in the first half, we now expect the net effect of the
restructuring costs and business exits to be less than $.20 per share.
- - We anticipate a 200 basis point improvement in operating margins for the
full year.
- - Assuming no significant acquisitions in the second half, interest expense
for the remainder of the year should continue to decline by at least $2 - 3
million per quarter relative to the prior year periods. This excludes any
call premium expense related to possible redemption of the 2022 debentures.
- - The effective income tax rate is expected to approximate the rate at the
end of six months.
- - To establish an appropriate basis for comparison, had the change in
accounting for goodwill amortization expense ($.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 $.20 per share) and the
write-off of goodwill related to the change in accounting policy,
management expects earnings per share to increase by 12%. For the third
quarter, earnings per share are expected to increase approximately 20% over
the prior year level. This estimate also includes the absence of goodwill
amortization expense in 2002 and excludes the aforementioned nonrecurring
items.
19
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.
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, customers, suppliers and service providers 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 Risk
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 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Statement under oath of the principal executive
officer, Mackey J. McDonald, regarding facts and circumstances
relating to exchange act filings.
Exhibit 99.2 - Statement under oath of the principal financial
officer, Robert K. Shearer, regarding facts and circumstances
relating to exchange act filings.
(b) Reports on Form 8-K - There were no reports on Form 8-K filed for the
three months ended June 29, 2002.
20
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: August 8, 2002
By: /s/ Robert A. Cordaro
--------------------------------
Robert A. Cordaro
Vice President - Controller
(Chief Accounting Officer)
21